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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549-1004
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 2003
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: 333-53603-03
GRAHAM PACKAGING HOLDINGS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2553000
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Pleasant Valley Road
York, Pennsylvania
----------------------------------------
(Address of principal executive offices)
17402
----------
(zip code)
(717) 849-8500
----------------------------------------------------
(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), Yes [X] No [ ]; and (2) has been subject to
such filing requirements for the past 90 days, Yes [ ] No [X].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X].
1
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
PART I. FINANCIAL INFORMATION
Page Number
Item 1: Condensed Consolidated Financial Statements:
CONDENSED CONSOLIDATED BALANCE SHEETS - At September 28, 2003 and
December 31, 2002.................................................. 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - For the Three and
Nine Months ended September 28, 2003 and September 29, 2002........ 4
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) -
For the Year Ended December 31, 2002 and Nine Months ended
September 28, 2003................................................ 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS - For the Nine Months
ended September 28, 2003 and September 29, 2002.................... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS............... 7
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 24
Item 3: Quantitative and Qualitative Disclosures About Market Risk......... 33
Item 4: Controls and Procedures............................................ 34
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K................................... 35
Signature: ................................................................. 36
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 28, December 31,
2003 2002
---- ----
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 7,316 $ 7,299
Accounts receivable, net............................... 113,018 97,933
Inventories............................................ 65,563 62,660
Prepaid expenses and other current assets.............. 19,665 18,289
---------- ----------
Total current assets...................................... 205,562 186,181
Property, plant and equipment, net........................ 610,364 577,962
Goodwill.................................................. 5,577 5,566
Other non-current assets.................................. 46,491 28,602
---------- ----------
Total assets.............................................. $ 867,994 $ 798,311
========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.................. $ 151,866 $ 169,232
Current portion of long-term debt...................... 8,951 7,992
---------- ----------
Total current liabilities................................. 160,817 177,224
Long-term debt............................................ 1,118,463 1,062,635
Other non-current liabilities............................. 19,520 14,655
Minority interest......................................... 5,157 4,104
Commitments and contingent liabilities (see Note 8)....... -- --
Partners' capital (deficit)............................... (435,963) (460,307)
---------- ----------
Total liabilities and partners' capital (deficit)......... $ 867,994 $ 798,311
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Net sales.......................................... $ 243,866 $ 227,123 $ 737,669 $ 695,031
Cost of goods sold................................. 201,078 184,852 599,219 563,391
--------- --------- --------- ---------
Gross profit....................................... 42,788 42,271 138,450 131,640
Selling, general, and administrative expenses...... 17,431 16,839 48,271 45,787
Impairment charges................................. -- 4,266 609 4,266
--------- --------- --------- ---------
Operating income................................... 25,357 21,166 89,570 81,587
Interest expense, net.............................. 21,739 20,253 74,403 61,931
Other expense (income), net........................ 245 221 (571) 176
Minority interest.................................. 338 392 1,053 1,047
--------- --------- --------- ---------
Income before income taxes......................... 3,035 300 14,685 18,433
Income tax provision............................... 1,792 1,378 4,958 2,292
--------- --------- --------- ---------
Net income (loss).................................. $ 1,243 $ (1,078) $ 9,727 $ 16,141
========= ========= ========= =========
Net income (loss) allocated to General Partners...... $ 62 $ (54) $ 486 $ 807
Net income (loss) allocated to Limited Partners...... $ 1,181 $ (1,024) $ 9,241 $ 15,334
See accompanying notes to condensed consolidated financial statements.
4
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited)
Notes and
Interest Accumulated
Receivable for Other
General Limited Ownership Comprehensive
Partners Partners Interests Income (Loss) Total
-------- -------- --------- ------------- -----
(In thousands)
Consolidated balance at January 1, 2002............... $ (21,147) $(406,764) $ (2,443) $ (54,700) $(485,054)
Net income for the year............................. 378 7,184 -- -- 7,562
Changes in fair value of derivatives................ -- -- -- 6,909 6,909
Additional minimum pension liability................ -- -- -- (2,051) (2,051)
Cumulative translation adjustment................... -- -- -- 12,477 12,477
---------
Comprehensive income................................ 24,897
Interest on notes receivable for ownership interests -- -- (150) -- (150)
--------- --------- -------- --------- ---------
Consolidated balance at December 31, 2002............. (20,769) (399,580) (2,593) (37,365) (460,307)
Net income for the period........................... 486 9,241 -- -- 9,727
Changes in fair value of derivatives................ -- -- -- (3,850) (3,850)
Elimination of cash flow hedge accounting for certain
instruments....................................... -- -- -- 4,783 4,783
Additional minimum pension liability................ -- -- -- 237 237
Cumulative translation adjustment................... -- -- -- 13,563 13,563
---------
Comprehensive income................................ 24,460
Interest on notes receivable for ownership interests -- -- (116) -- (116)
--------- --------- -------- --------- ---------
Consolidated balance at September 28, 2003............ $ (20,283) $(390,339) $ (2,709) $ (22,632) $(435,963)
========= ========= ======== ========= =========
See accompanying notes to condensed consolidated financial statements.
5
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
-----------------
September 28, September 29,
2003 2002
---- ----
Operating activities: (In thousands)
Net income..................................................................... $ 9,727 $ 16,141
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization.................................................. 52,555 56,576
Amortization of debt issuance fees............................................. 9,951 3,429
Impairment charges............................................................. 609 4,266
Accretion of Senior Discount Notes............................................. 623 12,429
Elimination of cash flow hedge accounting for certain instruments.............. 4,783 --
Minority interest.............................................................. 1,053 1,047
Foreign currency transaction gain.............................................. (1,020) (13)
Interest receivable for ownership interests.................................... (116) (113)
Changes in operating assets and liabilities, net of sales of businesses:
Accounts receivable.......................................................... (10,481) (15,765)
Inventories.................................................................. (2,314) (544)
Prepaid expenses and other current assets.................................... (874) (1,195)
Other non-current assets and liabilities..................................... (9,656) (812)
Accounts payable and accrued expenses........................................ (21,482) (9,211)
---------- ----------
Net cash provided by operating activities......................................... 33,358 66,235
Investing activities:
Net purchases of property, plant and equipment............................... (70,137) (70,259)
Net proceeds from (expenditures for) sales of businesses..................... 133 (4,167)
---------- ----------
Net cash used in investing activities............................................. (70,004) (74,426)
Financing activities:
Proceeds from issuance of long-term debt....................................... 1,032,570 391,742
Payment of long-term debt...................................................... (976,486) (384,055)
Debt issuance fees............................................................. (20,250) --
---------- ----------
Net cash provided by financing activities......................................... 35,834 7,687
Effect of exchange rate changes................................................... 829 790
---------- ----------
Increase in cash and cash equivalents............................................. 17 286
Cash and cash equivalents at beginning of period.................................. 7,299 9,032
---------- ----------
Cash and cash equivalents at end of period........................................ $ 7,316 $ 9,318
=========== ===========
See accompanying notes to condensed consolidated financial statements.
6
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
of Graham Packaging Holdings Company ("Holdings"), a Pennsylvania limited
partnership, have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X and therefore do not include all of the
information and footnotes required by generally accepted accounting principles
for complete annual financial statements. In the opinion of management, all
adjustments (consisting only of usual recurring adjustments considered necessary
for a fair presentation) are reflected in the condensed consolidated financial
statements. The condensed consolidated balance sheet as of December 31, 2002 is
derived from audited financial statements. The condensed consolidated financial
statements and notes included in this report should be read in conjunction with
the audited consolidated financial statements and notes for the year ended
December 31, 2002. The results of operations for the nine months ended September
28, 2003 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2003.
All entities and assets owned by Holdings are referred to collectively
as the "Company." Graham Packaging Company, L.P. is referred to as the
"Operating Company."
Derivatives
During 2003 the Company entered into four new interest rate swap
agreements, under which the Company receives variable interest based on the
Eurodollar Rate (hereinafter defined) and pays fixed interest at a weighted
average rate of 2.60%, on $400.0 million of term loans. The interest rate swaps
are accounted for as cash flow hedges. The effective portion of the change in
the fair value of the new interest rate swaps is recorded in other comprehensive
income ("OCI") and was an unrealized loss of $5.3 million for the nine months
ended September 28, 2003. Approximately 39% of the amount recorded within OCI is
expected to be recognized as interest expense in the next twelve months. Failure
to properly document the Company's interest rate swaps as effective hedges would
result in income statement recognition of all or part of the cumulative $5.3
million unrealized loss recorded in OCI as of September 28, 2003.
The Company entered into interest rate swap agreements to hedge the
exposure to increasing rates with respect to its prior senior credit agreement.
These interest rate swaps were accounted for as cash flow hedges. In connection
with the closing of the Senior Credit Agreement (as hereinafter defined) on
February 14, 2003 these swaps no longer qualified for hedge accounting. As such,
the Company recorded a non-cash charge of approximately $4.8 million within
interest expense as a result of the reclassification into expense of the
remaining unrealized loss on these interest rate swap agreements. These interest
rate swap agreements expired at various points through September 2003. The
effective portion of the change in fair value of these swaps from January 1,
2003 to February 14, 2003 was recorded in OCI and was an unrealized gain of $1.5
million. The change in fair value of these swaps after February 14, 2003 was
recognized in earnings and resulted in a reduction of interest expense of $4.8
million for the nine months ended September 28, 2003.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. This Statement is effective for contracts entered into or
modified, and for hedging relationships designated after June 30, 2003. Other
provisions of this statement that related to SFAS 133 Implementation Issues
should continue to be applied in accordance with their respective effective
dates. The Company adopted SFAS 149 on July 1, 2003 and the adoption of SFAS 149
did not have a significant impact on its results of operations or financial
position.
7
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
Comprehensive Income
Foreign currency translation adjustments, changes in fair value of
derivatives designated and accounted for as cash flow hedges and additional
minimum pension liability adjustments are included in OCI and added with net
income to determine total comprehensive income, which is displayed in the
Condensed Consolidated Statements of Partners' Capital (Deficit). Cumulative
foreign currency translation loss adjustments totaled $13.6 million and $27.2
million as of September 28, 2003 and December 31, 2002, respectively. Cumulative
losses on derivatives designated and accounted for as cash flow hedges totaled
$5.3 million and $6.2 million as of September 28, 2003 and December 31, 2002,
respectively. Minimum pension liability loss adjustments totaled $3.7 million
and $4.0 million as of September 28, 2003 and December 31, 2002, respectively.
Guarantees
In November 2002, the FASB issued FASB Interpretation No. ("FIN") 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 establishes requirements
for accounting and disclosure of guarantees issued to third parties for various
transactions. The accounting requirements of FIN 45 are applicable to guarantees
issued after December 31, 2002. The disclosure requirements of FIN 45 are
applicable to financial statements issued for periods ending after December 15,
2002. The Company adopted FIN 45 on January 1, 2003 and the adoption of FIN 45
did not have a significant impact on its results of operations or financial
position.
Option Plan
In December 2002, the FASB issued SFAS 148, "Accounting For Stock-Based
Compensation - Transition and Disclosure, An Amendment of FASB Statement No.
123." This Statement amends SFAS 123, "Accounting For Stock-Based Compensation,"
to provide alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of that Statement to
require prominent disclosure about the effects on reported net income of an
entity's accounting policy decisions with respect to stock-based employee
compensation. Finally, this Statement amends Accounting Principles Board Opinion
("APB") 28, "Interim Financial Reporting," to require disclosure about those
effects in interim financial information.
The Company applies APB 25 in accounting for its Option Plan. The
exercise price per Unit was equal to or greater than the fair market value of
each Unit on the dates of the grants and, accordingly, no compensation cost has
been recognized under the provisions of APB 25 for Units granted. Under SFAS
123, compensation cost is measured at the grant date based on the value of the
award and is recognized over the service (or vesting) period. Had compensation
cost for the option plan been determined under SFAS 123, based on the fair
market value at the grant dates, the Company's pro forma net income for the
three and nine months ended September 28, 2003 and September 29, 2002 would have
been reflected as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September,28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Net income (loss), as reported $ 1,243 $ (1,078) $ 9,727 $ 16,141
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (61) (126) (166) (379)
-------- -------- -------- --------
Pro forma net income (loss) $ 1,182 $ (1,204) $ 9,561 $ 15,762
======== ======== ======== ========
On March 31, 2003 the Option Plan was amended to provide for an
additional 100.0 options that may be granted, resulting in an aggregate number
of 631.0 options that may be granted under the Option Plan. On March 31, 2003 an
additional 90.8 options were granted. On August 11, 2003 3.6 options were
forfeited and on August 15, 2003 3.6 options were granted, resulting in an
aggregate number of 621.8 options outstanding.
8
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
Variable Interest Entities
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 establishes accounting and disclosure requirements
for ownership interests in entities that have certain financial or ownership
characteristics (sometimes known as "Special Purpose Entities"). FIN 46 is
applicable for variable interest entities created after January 31, 2003 and
becomes effective in the first fiscal year or interim accounting period ending
after December 15, 2003 for variable interest entities created before February
1, 2003. The Company adopted FIN 46 on June 30, 2003 and the adoption of FIN 46
did not have a significant impact on its results of operations or financial
position.
Financial Instruments
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003, except for mandatorily redeemable
financial instruments of nonpublic entities and mandatorily redeemable
non-controlling interests in subsidiaries. The FASB is addressing certain
implementation issues associated with SFAS 150. On October 29, 2003, the FASB
decided to defer the recognition and measurement provisions of SFAS 150 related
to mandatorily redeemable financial instruments representing non-controlling
interests in subsidiaries included in consolidated financial statements. The
Company will continue to monitor the actions of the FASB and assess the impact,
if any, on its consolidated financial statements. The effective provisions of
SFAS 150 did not have a material impact on the Company's consolidated financial
position and results of operations.
Leases
In May 2003, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF 01-8, "Determining Whether an Arrangement Contains a Lease."
EITF 01-8 provides guidance for determining whether an arrangement contains a
lease that is within the scope of SFAS 13 and is effective for arrangements
initiated after the beginning of the first interim period beginning after May
28, 2003. Arrangements initiated after June 29, 2003 will be accounted for in
accordance with EITF 01-8.
Reclassifications
Certain reclassifications have been made to the 2002 financial
statements to conform to the 2003 presentation.
2. Debt Arrangements
Long-term debt consisted of the following:
September 28, December 31,
2003 2002
---- ----
(In thousands)
Term loans..................................... $ 570,000 $ 502,000
Revolving Credit Facility...................... 43,000 155,500
Foreign and other revolving credit facilities.. 1,733 3,483
Senior Subordinated Notes...................... 325,000 225,000
Senior Discount Notes.......................... 169,000 168,377
Capital leases................................. 13,143 14,400
Other.......................................... 5,538 1,867
---------- ----------
1,127,414 1,070,627
Less amounts classified as current............. 8,951 7,992
---------- ----------
$1,118,463 $1,062,635
========== ==========
On February 14, 2003 the Company refinanced the majority of its prior
credit facilities and entered into a senior credit agreement (the "Senior Credit
Agreement") with a consortium of banks. The Senior Credit Agreement consisted of
two term loans to the Operating Company with initial term loan commitments
totaling $670.0 million (the "Term Loans" or "Term Loan Facilities") and a
$150.0 million revolving credit facility (the "Revolving Credit Facility").
9
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
Interest is payable at (a) the "Alternate Base Rate" (the higher of the Prime
Rate or the Federal Funds Rate plus 0.50%) plus a margin ranging from 1.75% to
3.25%; or (b) the "Eurodollar Rate" (the applicable interest rate offered to
banks in the London interbank eurocurrency market) plus a margin ranging from
2.75% to 4.25%. The unused availability of the Revolving Credit Facility under
the Senior Credit Agreement at September 28, 2003 was $105.2 million. The Senior
Credit Agreement contains certain affirmative and negative covenants as to the
operations and financial condition of the Company, as well as certain
restrictions on the payment of dividends and other distributions to Holdings. On
September 28, 2003 the Company was in compliance with all covenants.
On May 28, 2003 the Company and GPC Capital Corp I issued $100.0
million aggregate principal amount of 8 3/4% Senior Subordinated Notes due 2008
pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes
were issued under the February 2, 1998 Senior Subordinated Indenture. The notes
were issued in exchange for, and in full satisfaction of, $100.0 million
aggregate principal amount of Tranche II term loans then outstanding under the
Company's Senior Credit Agreement.
As a result of the refinancing on February 14, 2003 the Company
incurred debt issuance fees and other related costs of approximately $20
million, of which $0.7 million were expensed and the remaining amount will be
recognized as interest expense over five to seven years based upon the terms of
the related debt instruments. Additionally, $5.5 million of deferred debt
issuance fees associated with the prior senior credit agreement were written
off.
Interest paid during the nine months ended September 28, 2003 and
September 29, 2002, net of amounts capitalized, totaled $64.8 million and $52.1
million, respectively.
3. Inventories
Inventories consisted of the following:
September 28, December 31,
2003 2002
---- ----
(In thousands)
Finished goods...................... $41,508 $43,786
Raw materials and parts............. 24,055 18,874
------- -------
$65,563 $62,660
======= =======
4. Impairment Charges
Due to the Company's commitment to a plan to sell its operations in
Germany, the Company evaluated the recoverability of its assets in Germany. The
Company adjusted the carrying values of these assets to the lower of their
carrying values or their estimated fair values less costs to sell, resulting in
an impairment charge of $0.4 million and $4.3 million for the nine months ended
September 28, 2003 and September 29, 2002, respectively. These assets were
disposed of on March 31, 2003.
Due to a significant change in the ability to utilize certain assets in
the U.S., the Company evaluated the recoverability of these assets. For these
assets to be disposed of, the Company adjusted the carrying values to the lower
of their carrying values or their estimated fair values less costs to sell,
resulting in an impairment charge of $0.2 million for the nine months ended
September 28, 2003.
10
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
5. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
September 28, December 31,
2003 2002
---- ----
(In thousands)
Accounts payable............................ $ 82,828 $ 77,022
Accrued employee compensation and benefits.. 23,675 36,062
Accrued interest............................ 10,379 11,120
Accrued sales allowance..................... 6,783 9,919
Other....................................... 28,201 35,109
-------- --------
$151,866 $169,232
======== ========
For the year ended December 31, 2002, the Company incurred costs of
employee termination benefits in France of $9.0 million, which included the
legal liability of severing 149 employees. For the nine months ended September
28, 2003, the Company incurred additional costs of employee termination benefits
in France of $5.2 million. The Company terminated 147 of these employees as of
September 28, 2003. Substantially all of the cash payments for these termination
benefits are expected to be made by June 30, 2004. In addition, for the nine
months ended September 28, 2003, the Company incurred costs of employee
termination benefits in North America of $2.1 million, which included the legal
liability of severing 39 employees. The Company terminated 38 of these employees
as of September 28, 2003. Substantially all of the cash payments for these
termination benefits are expected to be made by December 31, 2007. The disposal
activities initiated in 2003 were accounted for in accordance with SFAS 146. The
following table reflects a rollforward of these costs, primarily included in
accrued employee compensation and benefits (in thousands):
North
France America
Reduction Reduction
in Force in Force Total
-------- -------- -----
Reserves at December 31, 2002....... $ 9,015 $ -- $ 9,015
Increase in reserves................ 5,177 2,068 7,245
Cash payments....................... (11,590) (279) (11,869)
-------- -------- ---------
Reserves at September 28, 2003...... $ 2,602 $ 1,789 $ 4,391
======== ======== =========
6. Income Taxes
The Company does not pay United States federal income taxes under the
provisions of the Internal Revenue Code, as the applicable income or loss is
included in the tax returns of the partners. For the Company's foreign
operations subject to tax in their local jurisdictions, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and are measured
using enacted tax rates expected to apply to taxable income in the years in
which the temporary differences are expected to reverse. During 2003 and 2002,
some of the Company's various taxable entities incurred additional net operating
losses for which no carryforward benefit has been recognized.
7. Rent Expense
The Company is a party to various leases involving real property and
equipment. Total rent expense for operating leases amounted to $5.5 million and
$17.5 million for the three and nine months ended September 28, 2003,
respectively, and $5.6 million and $16.9 million for the three and nine months
ended September 29, 2002, respectively.
11
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
8. Contingencies
The Company is party to various litigation matters arising in the
ordinary course of business. The ultimate legal and financial liability of the
Company with respect to such litigation cannot be estimated with certainty, but
management believes, based on its examination of these matters, experience to
date and discussions with counsel, that ultimate liability from the Company's
various litigation matters will not be material to the business, financial
condition, results of operations or cash flows of the Company.
On July 9, 2002, the Company and Graham Engineering amended the
equipment sales, service and licensing agreement to, among other things,
obligate the Company, retroactive to January 1, 2002 and subject to certain
credits and carry-forwards, to make payments for products and services to Graham
Engineering in the amount of at least $12.0 million per calendar year, or else
pay Graham Engineering a shortfall payment. The Company does not expect to be
required to make a shortfall payment relative to its purchases for 2003.
9. Condensed Guarantor Data
As of September 28, 2003 the Company's indebtedness included $325.0
million of Senior Subordinated Notes Due 2008, which were co-issued by Graham
Packaging Company, L.P. and GPC Capital Corp. I and unconditionally guaranteed
on a senior subordinated basis by Graham Packaging Holdings Company. The
following unaudited condensed consolidating financial statements present the
financial position, results of operations and cash flows of Graham Packaging
Holdings Company, Graham Packaging Company, L.P., non-guarantor subsidiaries and
GPC Capital Corp. I.
12
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF SEPTEMBER 28, 2003
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ -- $ 524 $ 6,792 $ -- $ -- $ 7,316
Accounts receivable, net.......................... -- 66,769 46,249 -- -- 113,018
Inventories....................................... -- 52,804 12,759 -- -- 65,563
Prepaid expenses and other current assets......... -- 6,263 13,402 -- -- 19,665
-------- --------- --------- ------- --------- ----------
Total current assets................................. -- 126,360 79,202 -- -- 205,562
Property, plant and equipment, net................... -- 451,234 159,130 -- -- 610,364
Goodwill............................................. -- 3,939 1,638 -- -- 5,577
Net intercompany..................................... -- 89,120 -- -- (89,120) --
Investment in subsidiaries........................... -- 76,585 -- -- (76,585) --
Other non-current assets............................. 3,211 42,905 375 -- -- 46,491
--------- --------- --------- ------- --------- ----------
Total assets......................................... $ 3,211 $ 790,143 $ 240,345 $ -- $(165,705) $ 867,994
========= ========= ========= ======= ========= ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............. $ 3,886 $ 84,747 $ 63,233 $ -- $ -- $ 151,866
Current portion of long-term debt................. -- 7,394 1,557 -- -- 8,951
--------- --------- --------- ------- --------- ----------
Total current liabilities............................ 3,886 92,141 64,790 -- -- 160,817
Long-term debt....................................... 169,000 945,972 3,491 -- -- 1,118,463
Other non-current liabilities........................ -- 11,324 8,196 -- -- 19,520
Investment in subsidiaries........................... 259,294 -- -- -- (259,294) --
Net intercompany..................................... 6,994 -- 82,126 -- (89,120) --
Minority interest.................................... -- -- 5,157 -- -- 5,157
Commitments and contingent liabilities (see Note 8).. -- -- -- -- -- --
Partners' capital (deficit).......................... (435,963) (259,294) 76,585 -- 182,709 (435,963)
--------- --------- --------- ------- --------- ----------
Total liabilities and partners' capital (deficit).... $ 3,211 $ 790,143 $ 240,345 $ -- $(165,705) $ 867,994
========= ========= ========= ======= ========= ==========
13
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2002
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ -- $ 1,781 $ 5,518 $ -- $ -- $ 7,299
Accounts receivable, net.......................... -- 58,704 39,229 -- -- 97,933
Inventories....................................... -- 51,114 11,546 -- -- 62,660
Prepaid expenses and other current assets......... 8,720 9,569 18,289
--------- --------- --------- ------- --------- ----------
Total current assets................................. -- 120,319 65,862 -- -- 186,181
Property, plant and equipment, net................... -- 439,354 138,608 -- -- 577,962
Goodwill............................................. -- 3,939 1,627 -- -- 5,566
Net intercompany..................................... -- 76,373 -- -- (76,373) --
Investment in subsidiaries........................... -- 58,959 -- -- (58,959) --
Other non-current assets............................. 3,595 23,169 1,838 -- -- 28,602
--------- --------- --------- ------- --------- ----------
Total assets......................................... $ 3,595 $ 722,113 $ 207,935 $ -- $(135,332) $ 798,311
========= ========= ========= ======= ========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses............. $ -- $ 103,685 $ 65,547 $ -- $ -- $ 169,232
Current portion of long-term debt................. -- 6,085 1,907 -- -- 7,992
--------- --------- --------- ------- --------- ----------
Total current liabilities............................ -- 109,770 67,454 -- -- 177,224
Long-term debt....................................... 168,378 893,019 1,238 -- -- 1,062,635
Other non-current liabilities........................ -- 7,855 6,800 -- -- 14,655
Investment in subsidiaries........................... 288,531 -- -- -- (288,531) --
Net intercompany..................................... 6,993 -- 69,380 -- (76,373) --
Minority interest.................................... -- -- 4,104 -- -- 4,104
Commitments and contingent liabilities (see Note 8).. -- -- -- -- -- --
Partners' capital (deficit).......................... (460,307) (288,531) 58,959 -- 229,572 (460,307)
--------- --------- --------- ------- --------- ----------
Total liabilities and partners' capital (deficit).... $ 3,595 $ 722,113 $ 207,935 $ -- $(135,332) $ 798,311
========= ========= ========= ======= ========= ==========
14
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 28, 2003
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
Net sales.......................................... $ -- $ 189,171 $ 54,695 $ -- $ -- $ 243,866
Cost of goods sold................................. -- 155,426 45,652 -- -- 201,078
--------- --------- --------- ------- --------- ----------
Gross profit....................................... -- 33,745 9,043 -- -- 42,788
Selling, general, and administrative expenses...... -- 13,883 3,548 -- -- 17,431
--------- --------- --------- ------- --------- ----------
Operating income................................... -- 19,862 5,495 -- -- 25,357
Interest expense, net.............................. 4,720 16,526 493 -- -- 21,739
Other (income) expense, net........................ -- (85) 330 -- -- 245
Equity in earnings of subsidiaries................. (5,963) (2,542) -- -- 8,505 --
Minority interest.................................. -- -- 338 -- -- 338
--------- --------- --------- ------- --------- ----------
Income (loss) before income taxes.................. 1,243 5,963 4,334 -- (8,505) 3,035
Income tax provision............................... -- -- 1,792 -- -- 1,792
--------- --------- --------- ------- --------- ----------
Net income (loss)................................. $ 1,243 $ 5,963 $ 2,542 $ -- $ (8,505) $ 1,243
========= ========= ========= ======= ========= ==========
15
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2003
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
Net sales.......................................... $ -- $ 581,774 $ 155,895 $ -- $ -- $ 737,669
Cost of goods sold................................. -- 467,527 131,692 -- -- 599,219
--------- --------- --------- ------- --------- ----------
Gross profit....................................... -- 114,247 24,203 -- -- 138,450
Selling, general, and administrative expenses...... -- 36,297 11,974 -- -- 48,271
Impairment charges................................. -- 245 364 -- -- 609
--------- --------- --------- ------- --------- ----------
Operating income................................... -- 77,705 11,865 -- -- 89,570
Interest expense, net.............................. 13,977 59,397 1,029 -- -- 74,403
Other (income) expense, net........................ -- (2,563) 1,992 -- -- (571)
Equity in earnings of subsidiaries................. (23,704) (2,833) -- -- 26,537 --
Minority interest.................................. -- -- 1,053 -- -- 1,053
--------- --------- --------- ------- --------- ----------
Income (loss) before income taxes.................. 9,727 23,704 7,791 -- (26,537) 14,685
Income tax provision............................... -- -- 4,958 -- -- 4,958
--------- --------- --------- ------- --------- ----------
Net income (loss).................................. $ 9,727 $ 23,704 $ 2,833 $ -- $ (26,537) $ 9,727
========= ========= ========= ======= ========= ==========
16
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 29, 2002
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
Net sales.......................................... $ -- $ 178,951 $ 48,172 $ -- $ -- $ 227,123
Cost of goods sold................................. -- 138,480 46,372 -- -- 184,852
--------- --------- --------- ------- --------- ----------
Gross profit....................................... -- 40,471 1,800 -- -- 42,271
Selling, general, and administrative expenses...... -- 13,311 3,528 -- -- 16,839
Impairment charges................................. -- -- 4,266 -- -- 4,266
--------- --------- --------- ------- --------- ----------
Operating income (loss)............................ -- 27,160 (5,994) -- -- 21,166
Interest expense, net.............................. 4,397 15,603 253 -- -- 20,253
Other (income) expense, net........................ -- (33) 254 -- -- 221
Equity in (earnings) loss of subsidiaries.......... (3,319) 8,271 -- -- (4,952) --
Minority interest.................................. -- -- 392 -- -- 392
--------- --------- --------- ------- --------- ----------
(Loss) income before income taxes.................. (1,078) 3,319 (6,893) -- 4,952 300
Income tax provision............................... -- -- 1,378 -- -- 1,378
--------- --------- --------- ------- --------- ----------
Net (loss) income.................................. $ (1,078) $ 3,319 $ (8,271) $ -- $ 4,952 $ (1,078)
========= ========= ========= ======= ========= ==========
17
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2002
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
Net sales.......................................... $ -- $ 544,563 $ 150,468 $ -- $ -- $ 695,031
Cost of goods sold................................. -- 421,786 141,605 -- -- 563,391
--------- --------- --------- ------- --------- ----------
Gross profit....................................... -- 122,777 8,863 -- -- 131,640
Selling, general, and administrative expenses...... -- 34,393 11,394 -- -- 45,787
Impairment charges................................. -- -- 4,266 -- -- 4,266
--------- --------- --------- ------- --------- ----------
Operating income (loss)............................ -- 88,384 (6,797) -- -- 81,587
Interest expense, net.............................. 12,784 47,676 1,471 -- -- 61,931
Other (income) expense, net........................ -- (193) 369 -- -- 176
Equity in (earnings) loss of subsidiaries.......... (28,925) 11,976 -- -- 16,949 --
Minority interest.................................. -- -- 1,047 -- -- 1,047
--------- --------- --------- ------- --------- ----------
Income (loss) before income taxes.................. 16,141 28,925 (9,684) -- (16,949) 18,433
Income tax provision............................... -- -- 2,292 -- -- 2,292
--------- --------- --------- ------- --------- ----------
Net income (loss)................................. $ 16,141 $ 28,925 $ (11,976) $ -- $ (16,949) $ 16,141
========= ========= ========= ======= ========= ==========
18
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 28, 2003
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
Operating activities:
Net cash (used in) provided by operating activities...$ (9,084) $ 33,754 $ 8,688 $ -- $ -- $ 33,358
Investing activities:
Net purchases of property, plant and equipment..... -- (55,146) (14,991) -- -- (70,137)
Acquisition of/investment in a business............ 9,084 (13,801) 4,717 -- -- --
Net (expenditures for) proceeds from sale of
business........................................... -- (76) 209 -- -- 133
--------- ---------- --------- ------- --------- ----------
Net cash provided by (used in) investing activities... 9,084 (69,023) (10,065) -- -- (70,004)
Financing activities:
Proceeds from issuance of long-term debt........... -- 1,026,941 5,629 -- -- 1,032,570
Payment of long-term debt.......................... -- (972,679) (3,807) -- -- (976,486)
Debt issuance fees................................. -- (20,250) -- -- -- (20,250)
--------- ---------- --------- ------- --------- ----------
Net cash provided by financing activities............. -- 34,012 1,822 -- -- 35,834
Effect of exchange rate changes....................... -- -- 829 -- -- 829
--------- ---------- --------- ------- --------- ----------
(Decrease) increase in cash and cash equivalents...... -- (1,257) 1,274 -- -- 17
Cash and cash equivalents at beginning of period...... -- 1,781 5,518 -- -- 7,299
--------- ---------- --------- ------- --------- ----------
Cash and cash equivalents at end of period............$ -- $ 524 $ 6,792 $ -- $ -- $ 7,316
========= ========== ========= ======= ========= ==========
19
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 29, 2002
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ------- ------------ ------------
Operating activities:
Net cash provided by operating activities.............$ -- $ 43,432 $ 22,803 $ -- $ -- $ 66,235
Investing activities:
Net purchases of property, plant and equipment..... -- (50,697) (19,562) -- -- (70,259)
Acquisition of/investment in a business............ -- (5,072) 5,072 -- -- --
Net expenditures for sales of businesses........... -- -- (4,167) -- -- (4,167)
--------- --------- --------- ------- --------- ----------
Net cash used in investing activities................. -- (55,769) (18,657) -- -- (74,426)
Financing activities:
Proceeds from issuance of long-term debt........... -- 223,789 167,953 -- -- 391,742
Payment of long-term debt.......................... -- (212,757) (171,298) -- -- (384,055)
--------- --------- --------- ------- --------- ----------
Net cash provided by (used in) financing activities... -- 11,032 (3,345) -- -- 7,687
Effect of exchange rate changes....................... -- -- 790 -- -- 790
--------- --------- --------- ------- --------- ----------
(Decrease) increase in cash and cash equivalents...... -- (1,305) 1,591 -- -- 286
Cash and cash equivalents at beginning of period...... -- 3,732 5,300 -- -- 9,032
--------- --------- --------- ------- --------- ----------
Cash and cash equivalents at end of period............$ -- $ 2,427 $ 6,891 $ -- $ -- $ 9,318
========= ========= ========= ======= ========= ==========
20
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
10. Comprehensive Income (Loss)
Comprehensive income (loss) for the three and nine months ended
September 28, 2003 and September 29, 2002 was as follows:
Three Months Ended Nine months Ended
------------------ -----------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Net income (loss).................................... $ 1,243 $ (1,078) $ 9,727 $ 16,141
Changes in fair value of derivatives................. 637 325 (3,850) 4,520
Elimination of cash flow hedge accounting for certain
instruments.......................................... -- -- 4,783 --
Additional minimum pension liability................. 3 29 237 (6)
Cumulative translation adjustment.................... (1,002) (4,616) 13,563 4,666
-------- -------- -------- --------
Comprehensive income (loss).......................... $ 881 $ (5,340) $ 24,460 $ 25,321
======== ======== ======== ========
21
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
11. Segment Information
The Company is organized and managed on a geographical basis in three
operating segments: North America (which includes the United States, Canada and
Mexico), Europe and South America. Segment information for the three and nine
months ended September 28, 2003 and September 29, 2002, representing the
reportable segments currently utilized by the chief operating decision maker,
was as follows:
North South
America Europe America Eliminations Total
------- ------ ------- ------------ -----
(a) (b)
(In thousands)
Net sales (c) Three months ended September 28, 2003 $200,372 $ 36,349 $ 7,145 $243,866
Three months ended September 29, 2002 187,746 33,754 5,623 227,123
Nine months ended September 28, 2003 611,103 108,369 18,197 737,669
Nine months ended September 29, 2002 570,661 106,787 17,583 695,031
Operating income Three months ended September 28, 2003 21,548 3,064 745 25,357
(loss) (d) Three months ended September 29, 2002 26,981 (6,452) 637 21,166
Nine months ended September 28, 2003 79,837 8,201 1,532 89,570
Nine months ended September 29, 2002 87,578 (7,885) 1,894 81,587
Depreciation and Three months ended September 28, 2003 18,399 287 401 19,087
amortization (e) Three months ended September 29, 2002 16,771 5,611 366 22,748
Nine months ended September 28, 2003 58,090 3,264 1,152 62,506
Nine months ended September 29, 2002 49,779 8,871 1,355 60,005
Impairment charges Three months ended September 28, 2003 -- -- -- --
Three months ended September 29, 2002 -- 4,266 -- 4,266
Nine months ended September 28, 2003 245 364 -- 609
Nine months ended September 29, 2002 -- 4,266 -- 4,266
Interest expense, net (e) Three months ended September 28, 2003 21,499 170 70 21,739
Three months ended September 29, 2002 20,031 108 114 20,253
Nine months ended September 28, 2003 73,633 519 251 74,403
Nine months ended September 29, 2002 60,576 1,092 263 61,931
Income tax provision Three months ended September 28, 2003 2 1,556 234 1,792
(benefit) Three months ended September 29, 2002 11 1,140 227 1,378
Nine months ended September 28, 2003 153 4,262 543 4,958
Nine months ended September 29, 2002 (375) 2,044 623 2,292
Identifiable assets (c) As of September 28, 2003 970,121 169,037 26,499 (297,663) 867,994
As of December 31, 2002 910,731 153,834 18,463 (284,717) 798,311
Goodwill As of September 28, 2003 3,515 1,298 764 5,577
As of December 31, 2002 3,515 1,333 718 5,566
Capital expenditures, Nine months ended September 28, 2003 60,413 4,481 5,265 (22) 70,137
excluding acquisitions Nine months ended September 29, 2002 63,616 5,366 1,304 (27) 70,259
22
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMEMTS (Unaudited)--Continued
(a) On March 28, 2002, the Company completed the sale of certain assets and
liabilities of its Italian operations. During the 2nd quarter of 2002, the
Company closed its plant in the United Kingdom. On July 31, 2002, the
Company disposed of its operation in Blyes, France. On March 31, 2003, the
Company completed the sale of certain assets and liabilities of its German
operations. During the 2nd quarter of 2003, the Company closed its plant in
Noeux les Mines, France.
(b) To eliminate intercompany balances, which include investments in the
operating segments and inter-segment receivables and payables.
(c) The Company's net sales for Europe include sales in France which totaled
approximately $18.7 million and $17.5 million for the three months ended
September 28, 2003 and September 29, 2002, respectively, and $58.1 million
and $57.0 million for the nine months ended September 28, 2003 and
September 29, 2002, respectively. Identifiable assets in France totaled
approximately $96.1 million and $93.6 million as of September 28, 2003 and
December 31, 2002, respectively.
(d) In the fourth quarter of 2002 the Company changed its measurement method
used to determine reported segment profit or loss by allocating certain
selling, general and administrative costs incurred in North America to
Europe and South America. The effect in the three months ended September
28, 2003 was an increase in operating income for North America of $0.5
million and decreases of $0.4 million and $0.1 million for Europe and South
America, respectively, and the effect in the nine months ended September
28, 2003 was an increase in operating income for North America of $1.5
million and decreases of $1.2 million and $0.3 million for Europe and South
America, respectively.
(e) Includes amortization of debt issuance fees.
Product Net Sales Information
The following is supplemental information on net sales by product
category:
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Food and Beverage................. $142,421 $128,474 $432,447 $397,874
Household and Personal Care......... 47,034 47,319 142,487 143,094
Automotive Lubricants............... 54,411 51,330 162,735 154,063
-------- -------- -------- --------
Total Net Sales..................... $243,866 $227,123 $737,669 $695,031
======== ======== ======== ========
12. Subsequent Event
On September 29, 2003 the Company sold its vacant building located in
Burlington, Ontario, Canada, and as a result expects to incur a gain on the sale
of approximately $3.0 million.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Report on Form 10-Q, including statements regarding the Company's future
financial position, economic performance and results of operations, as well as
the Company's business strategy, budgets and projected costs and plans and
objectives of management for future operations, and the information referred to
under "Quantitative and Qualitative Disclosures About Market Risk" (Part I, Item
3), are forward-looking statements. In addition, forward-looking statements
generally can be identified by the use of forward-looking terminology such as
"may," "will," "expect," "intend," "estimate," "anticipate," "believe," or
"continue" or similar terminology. Although the Company believes that the
expectations reflected in such forward-looking statements are reasonable, such
expectations may prove to have been incorrect. Important factors that could
cause actual results to differ materially from the Company's expectations
include, without limitation:
o the restrictive covenants contained in instruments governing indebtedness
of the Company;
o the high degree of leverage and substantial debt service obligations of the
Operating Company and Holdings;
o the Company's exposure to fluctuations in resin prices and its dependence
on resin supplies;
o risks associated with the Company's international operations;
o the Company's dependence on significant customers and the risk that
customers will not purchase the Company's products in the amounts expected
by the Company under their requirements contracts;
o a decline in the domestic motor oil business;
o risks associated with environmental regulation;
o the possibility that Blackstone's interests will conflict with the
Company's interests;
o the Company's dependence on key management and its labor force and the
material adverse effect that could result from the loss of their services;
o risks associated with possible future acquisitions; and
o the Company's dependence on blow molding equipment providers.
See "Business - Certain Risks of the Business" in Holdings' Annual Report on
Form 10-K for the fiscal year ended December 31, 2002. All forward-looking
statements attributable to the Company, or persons acting on its behalf, are
expressly qualified in their entirety by the cautionary statements set forth in
this paragraph.
Overview
The Company is a worldwide leader in the design, manufacture and sale
of customized blow molded plastic containers for the branded food and beverage,
household and personal care and automotive lubricants markets and currently
operates 56 manufacturing facilities throughout North America, Europe and South
America. The Company's primary strategy is to operate in select markets that
will position it to benefit from the growing conversion to high performance
plastic packaging from more commodity packaging.
Management believes that critical success factors to the Company's
business are its ability to:
o serve the complex packaging demands of its customers which include some of
the world's largest branded consumer products companies;
o forecast trends in the packaging industry across product lines and
geographic territories (including those specific to the rapid conversion of
packaging products from glass, metal and paper to plastic); and
o make the correct investments in plant and technology necessary to satisfy
the two factors mentioned above.
Management believes that the area with the greatest opportunity for
growth continues to be in producing containers for the food and beverage market
because of the continued conversion to plastic packaging, including the demand
for containers for juices, juice drinks, nutritional beverages, sport drinks,
teas, yogurt drinks, snacks and other food products. The Company has established
itself as the market leader in the value-added segment for hot-fill PET
containers. Recently, the Company has been a leading participant in the rapid
growth of the yogurt drinks market where the Company manufactures containers
using polyolefin resins. Since the beginning of 1999, the Company has invested
over $165.0 million in capital expenditures in the polyolefin area of the food
and beverage market. For the year ended December 31, 2002, the Company's sales
of polyolefin containers grew to $171.8 million from $117.7 million in 1999.
24
Excluding business impacted by the European restructuring, the
Company's household and personal care container business continues to grow, as
package conversion trends continue from other packaging forms in some of its
product lines. The Company continues to benefit as liquid fabric care
detergents, which are packaged in plastic containers, capture an increased share
from powdered detergents, which are predominantly packaged in paper-based
containers. The Company has upgraded its machinery to new larger, more
productive blow molders to standardize production lines, improve flexibility and
reduce manufacturing costs.
The Company's North American one quart motor oil container business is
in a mature industry. The Company has been able to partially offset pricing
pressures by renewing or extending contracts, improving manufacturing
efficiencies, line speeds, labor efficiency and inventory management and
reducing container weight and material spoilage. Unit volume in the one quart
motor oil industry decreased approximately 1% in 2002 as compared to 2001;
annual volumes declined an average of approximately 1% to 2% in prior years.
Management believes that the domestic one quart motor oil container business
will continue to decline approximately 2% to 3% annually for the next several
years but believes there are significant volume opportunities for automotive
business in foreign countries, particularly in South America. In 2002, the
Company was awarded 100% of the U.S. one-quart volume requirements for Shell Oil
Company (Shell, Pennzoil and Quaker State branded motor oils). This award
includes supplying from a facility on-site with Shell Oil Company in Newell,
West Virginia. ExxonMobil also awarded the Company in 2002 100% of its one quart
volume requirements for one of its U.S. filling plants, located in Port Allen,
Louisiana. ExxonMobil was not a U.S. customer prior to this award.
The Company currently operates 21 manufacturing facilities outside of
the U.S., either on its own or through joint ventures, in Argentina, Belgium,
Brazil, Canada, France, Hungary, Mexico, Poland, Spain and Turkey. Over the past
few years, the Company has expanded its international operations with the
addition of new plants in France, Belgium, Spain, Poland, Mexico and Argentina.
Changes in international economic conditions require that the Company
continually review its operations and make restructuring changes when it is
deemed appropriate. In the past few years, the Company restructured its
operations as follows.
o In its North American operations in 2001, the Company closed its facility
in Anjou, Quebec, Canada and in 2002 closed another plant in Burlington,
Ontario, Canada. Business from these facilities was consolidated into other
North American facilities as a result of these closures.
o In its European operations, the Company committed to restructuring changes
in the United Kingdom, France, Italy and Germany as follows. During the
latter portion of 2001, the Company committed to a plan to close its plant
in the United Kingdom. This plant was closed during 2002. During the latter
portion of 2001, the Company also committed to a plan to sell or close
certain plants in France. During 2002, one facility in France was sold.
Another facility in France was closed in the second quarter of 2003. During
the latter portion of 2001, the Company committed to a plan to sell or
close its plants in Italy. In 2002, the Company sold both of its plants in
Italy. During the latter portion of 2001, as a part of its European
restructuring plans, the Company committed to a plan to sell or close
certain plants in Germany. On March 31, 2003 the Company sold both of its
plants in Germany.
For the nine months ended September 28, 2003, approximately 85% of the
Company's net sales were generated by the top twenty customers, the majority of
which were under long-term contracts with terms up to ten years; the remainder
of which were customers with whom the Company has been doing business for over
12 years on average. Prices under these arrangements are typically tied to
market standards and, therefore, vary with market conditions. In general, the
contracts are requirements contracts that do not obligate the customer to
purchase any given amount of product from the Company. The Company had sales to
one customer which exceeded 10% of total sales for the nine months ended
September 28, 2003 and September 29, 2002. The Company's sales to this customer
were 14.9% and 17.5% of total sales for the nine months ended September 28, 2003
and September 29, 2002, respectively. The Company also had sales to two other
customers which exceeded 10% of total sales for the nine months ended September
28, 2003. The Company's sales to these customers were 10.8% and 10.2% of total
sales for the nine months ended September 28, 2003. For the nine months ended
September 28, 2003, approximately 77% of the sales to these three customers were
made in North America.
Based on industry data, the following table summarizes average market
prices per pound of polyethylene terephthalate, or PET, and high-density
polyethylene, or HDPE, resins in the U.S. during the three and nine months ended
September 2003 and 2002:
25
Three Months Ended September Nine Months Ended September
---------------------------- ---------------------------
2003 2002 2003 2002
---- ---- ---- ----
PET............ $0.62 $0.59 $0.65 $0.59
HDPE........... 0.49 0.44 0.49 0.40
In general, the Company's dollar gross profit is substantially
unaffected by fluctuations in the prices of PET and HDPE resins, the primary raw
materials for the Company's products, because industry practice and the
Company's agreements with its customers permit substantially all resin price
changes to be passed through to customers by means of corresponding changes in
product pricing. Consequently, the Company believes that cost of goods sold, as
well as certain other expense items, should not be analyzed solely on a
percentage of net sales basis. A sustained increase in resin prices, to the
extent that those costs are not passed on to the end-consumer, would make
plastic containers less economical for the Company's customers and could result
in a slower pace of conversions to plastic containers.
The Company does not pay U.S. federal income taxes under the provisions
of the Internal Revenue Code, as the distributive share of the applicable income
or loss is included in the tax returns of its partners. The Company may make tax
distributions to its partners to reimburse them for such tax obligations, if
any. The Company's foreign operations are subject to tax in their local
jurisdictions. Most of these entities have historically incurred net operating
losses.
Results of Operations
The following tables set forth the major components of the Company's
net sales (in millions) and such net sales expressed as a percentage of total
net sales:
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
North America.............. $200.4 82.2% $187.7 82.6% $611.1 82.8% $570.6 82.1%
Europe..................... 36.4 14.9 33.8 14.9 108.4 14.7 106.8 15.4
South America.............. 7.1 2.9 5.6 2.5 18.2 2.5 17.6 2.5
------ ----- ------ ----- ------ ----- ------ -----
Total Net Sales............ $243.9 100.0% $227.1 100.0% $737.7 100.0% $695.0 100.0%
====== ===== ====== ===== ====== ===== ====== =====
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
Food and Beverage........... $142.4 58.4% $128.5 56.6% $432.5 58.6% $397.9 57.2%
Household and Personal Care. 47.1 19.3 47.3 20.8 142.5 19.3 143.1 20.6
Automotive Lubricants....... 54.4 22.3 51.3 22.6 162.7 22.1 154.0 22.2
------ ----- ------ ----- ------ ----- ------ -----
Total Net Sales............. $243.9 100.0% $227.1 100.0% $737.7 100.0% $695.0 100.0%
====== ===== ====== ===== ====== ===== ====== =====
Three Months Ended September 28, 2003 Compared to Three Months Ended September
29, 2002
Net Sales. Net sales for the three months ended September 28, 2003 increased
$16.8 million or 7.4% to $243.9 million from $227.1 million for the three months
ended September 29, 2002. The increase in sales was primarily due to an increase
in resin pricing combined with an 11.6% increase in units sold, principally due
to additional food and beverage container business where units increased by
26.1%. These increases were partially offset by the Company's restructuring
process in Europe which included the sale or closing of seven non-strategic
locations, all of which were sold or closed as of September 28, 2003. Excluding
business impacted by the European restructuring, sales for the three months
ended September 28, 2003 would have increased approximately 9% compared to the
sales for the three months ended September 29, 2002 and unit volume would have
increased approximately 14%. On a geographic basis, sales for the three months
ended September 28, 2003 in North America increased $12.7 million or 6.8% from
26
the three months ended September 29, 2002 and included higher units sold of
5.8%. North American sales in the food and beverage business, the household and
personal care business and the automotive lubricants business contributed $9.8
million, $0.4 million and $2.5 million, respectively, to the increase. Units
sold in North America increased by 21.8% in the food and beverage business,
decreased by 29.4% in the household and personal care business and decreased by
2.5% in the automotive lubricants business. Sales for the three months ended
September 28, 2003 in Europe increased $2.6 million or 7.7% from the three
months ended September 29, 2002. The increase in sales was primarily due to
exchange rate changes and higher unit volume, offset by the European
restructuring. Overall, the European sales reflected a 21.9% increase in units
sold. Exchange rate changes increased sales by approximately $4.2 million.
Excluding business impacted by the European restructuring, sales in Europe for
the three months ended September 28, 2003 would have increased $6.7 million, or
approximately 23%, compared to sales for the three months ended September 29,
2002 and unit volume in Europe would have increased approximately 29% compared
to the same period last year. Sales in South America for the three months ended
September 28, 2003 increased $1.5 million or 26.8% from the three months ended
September 29, 2002, primarily due to exchange rate changes of approximately $0.6
million and a 16.5% increase in unit volume.
Gross Profit. Gross profit for the three months ended September 28, 2003
increased $0.5 million to $42.8 million from $42.3 million for the three months
ended September 29, 2002. Gross profit for the three months ended September 28,
2003 decreased $4.8 million in North America, increased $5.1 million in Europe
and increased $0.2 million in South America, when compared to the three months
ended September 29, 2002. The increase in gross profit resulted primarily from
an increase in unit volume and strong operating performance related to ongoing
business in Europe of $2.4 million, a net reduction of restructuring and
customer consolidation expenses in North America and Europe of $1.3 million, a
net reduction in project costs of $0.9 million and exchange rate gains in Europe
of approximately $0.7 million, offset by a decrease in gross profit related to
ongoing business in North America of $5.1 million.
Selling, General & Administrative Expenses. Selling, general and administrative
expenses for the three months ended September 28, 2003 increased $0.6 million to
$17.4 million from $16.8 million for the three months ended September 29, 2002.
The increase was primarily due to an increase in North America, offset by a
decrease in Europe. The increase in North America was primarily due to an
increase in the allowance for doubtful accounts of $2.3 million related to
potential losses for one of the Company's larger customers, Hi-Country, against
which the Company has filed an involuntary Chapter 7 bankruptcy petition, and an
increase in product development expenses, partially offset by a decrease in
compensation-related expenses. The decrease in Europe was primarily due to a
reduction of non-recurring costs. The non-recurring charges were $2.6 million
and $3.4 million for the three months ended September 28, 2003 and September 29,
2002, respectively, comprised of global reorganization costs ($2.2 million) and
other costs ($0.4 million) for the three months ended September 28, 2003 and
costs related to the postponed equity offering and concurrent transactions ($2.6
million) and global reorganization costs ($0.8 million) for the three months
ended September 29, 2002. Selling, general and administrative expenses as a
percent of sales decreased to 7.1% of sales for the three months ended September
28, 2003 from 7.4% of sales for the three months ended September 29, 2002.
Excluding non-recurring charges, selling, general and administrative expenses as
a percent of sales increased to 6.1% of sales for the three months ended
September 28, 2003 from 5.9% of sales for the three months ended September 29,
2002.
Impairment Charges. Due to the Company's commitment to a plan to sell its
operations in Germany, the Company evaluated the recoverability of its assets in
Germany. The Company adjusted the carrying values of these assets to the lower
of their carrying values or their estimated fair values less costs to sell,
resulting in an impairment charge of $4.3 million for the three months ended
September 29, 2002.
Interest Expense, Net. Interest expense, net increased $1.4 million to $21.7
million for the three months ended September 28, 2003 from $20.3 million for the
three months ended September 29, 2002. The increase was primarily related to
higher LIBOR margins under the Company's New Senior Credit Agreement, partially
offset by a decline in interest rates.
Other expense (income), net. Other expense remained unchanged at $0.2 million
for both the three months ended September 28, 2003 and September 29, 2002.
Minority Interest. Minority interest decreased $0.1 million to $0.3 million in
the three months ended September 28, 2003 from $0.4 million for the three months
ended September 29, 2002.
Income Tax Provision. Income tax provision increased $0.4 million to $1.8
million for the three months ended September 28, 2003 from $1.4 million for the
three months ended September 29, 2002. The increase was primarily related to
27
increased taxable earnings in certain of the Company's European subsidiaries for
the three months ended September 28, 2003 as compared to the three months ended
September 29, 2002.
Net Income (Loss). Primarily as a result of factors discussed above, net income
was $1.2 million for the three months ended September 28, 2003 compared to net
loss of $1.1 million for the three months ended September 29, 2002.
Covenant Compliance EBITDA. Primarily as a result of factors discussed above,
Covenant Compliance EBITDA (as hereinafter defined) decreased $0.7 million or
1.4% to $50.3 million for the three months ended September 28, 2003 from $51.0
million for the three months ended September 29, 2002. A reconciliation from Net
Income (Loss) to Covenant Compliance EBITDA is provided within "--Liquidity and
Capital Resources."
Nine months ended September 28, 2003 Compared to Nine months ended September 29,
2002
Net Sales. Net sales for the nine months ended September 28, 2003 increased
$42.7 million or 6.1% to $737.7 million from $695.0 million for the nine months
ended September 29, 2002. The increase in sales was primarily due to an increase
in resin pricing combined with a 6.9% increase in units sold, principally due to
additional food and beverage container business where units increased by 16.8%.
These increases were partially offset by the Company's restructuring process in
Europe which included the sale or closing of seven non-strategic locations, all
of which were sold or closed as of September 28, 2003. Excluding business
impacted by the European restructuring, sales and unit volume for the nine
months ended September 28, 2003 would have increased approximately 10% compared
to the sales and unit volume for the nine months ended September 29, 2002. On a
geographic basis, sales for the nine months ended September 28, 2003 in North
America increased $40.5 million or 7.1% from the nine months ended September 29,
2002 and included higher units sold of 4.5%. North American sales in the food
and beverage business, the household and personal care business and the
automotive lubricants business contributed $21.3 million, $8.5 million and $10.7
million, respectively, to the increase. Units sold in North America increased by
14.2% in the food and beverage business, decreased by 18.4% in the household and
personal care business and decreased by 1.0% in the automotive lubricants
business. Sales for the nine months ended September 28, 2003 in Europe increased
$1.6 million or 1.5% from the nine months ended September 29, 2002. The increase
in sales was primarily due to exchange rate changes of approximately $16.6
million and an 11.2% increase in units sold, partially offset by the European
restructuring. Excluding business impacted by the European restructuring, sales
in Europe for the nine months ended September 28, 2003 would have increased
$23.1 million, or approximately 28%, compared to sales for the nine months ended
September 29, 2002 and unit volume in Europe would have increased approximately
22% compared to the same period last year. Sales in South America for the nine
months ended September 28, 2003 increased $0.6 million or 3.4% from the nine
months ended September 29, 2002, in part due to an increase in units sold of
6.5% offset by exchange rate changes of approximately $2.8 million.
Gross Profit. Gross profit for the nine months ended September 28, 2003
increased $6.8 million to $138.4 million from $131.6 million for the nine months
ended September 29, 2002. Gross profit for the nine months ended September 28,
2003 decreased $5.9 million in North America, increased $13.2 million in Europe
and decreased $0.5 million in South America, when compared to the nine months
ended September 29, 2002. The increase in gross profit resulted primarily from
an increase in unit volume and strong operating performance related to ongoing
business in Europe of $6.7 million, a net reduction of restructuring and
customer consolidation expenses in North America and Europe of $4.7 million, a
net reduction in project costs of $1.7 million and exchange rate gains in Europe
of approximately $2.5 million, offset by a decrease in gross profit related to
ongoing business in North America of $8.6 million.
Selling, General & Administrative Expenses. Selling, general and administrative
expenses for the nine months ended September 28, 2003 increased $2.5 million to
$48.3 million from $45.8 million for the nine months ended September 29, 2002.
The increase was primarily due to an increase in North America, offset by
decreases in Europe and South America. The increase in North America was
primarily due to an increase in the allowance for doubtful accounts of $2.3
million related to potential losses for one of the Company's larger customers,
Hi-Country, against which the Company has filed an involuntary Chapter 7
bankruptcy petition, expansion into Mexico and an increase in product
development expenses, partially offset by a decrease in compensation-related
expenses. The decrease in Europe was primarily due to reductions in
non-recurring charges, expatriate-related costs and costs related to locations
in Europe that were sold during 2002 and 2003, partially offset by an increase
in expenses due to exchange rates. The non-recurring charges were $3.7 million
and $4.5 million for the nine months ended September 28, 2003 and September 29,
2002, respectively, comprised primarily of global reorganization costs ($3.1
million) and other costs ($0.6 million) for the nine months ended September 28,
2003 and costs related to the postponed equity offering and concurrent
transactions ($2.6 million) and global reorganization costs ($1.9 million) for
the nine months ended September 29, 2002. Selling, general and administrative
28
expenses as a percent of sales decreased to 6.5% of sales for the nine months
ended September 28, 2003 from 6.6% of sales for the nine months ended September
29, 2002. Excluding non-recurring charges, selling, general and administrative
expenses as a percent of sales increased to 6.0% of sales for the nine months
ended September 28, 2003 from 5.9% of sales for the nine months ended September
29, 2002.
Impairment Charges. Due to the Company's commitment to a plan to sell its
operations in Germany, the Company evaluated the recoverability of its assets in
Germany. The Company adjusted the carrying values of these assets to the lower
of their carrying values or their estimated fair values less costs to sell,
resulting in an impairment charge of $0.4 million and $4.3 million for the nine
months ended September 28, 2003 and September 29, 2002, respectively. These
assets were disposed of on March 31, 2003.
Due to a significant change in the ability to utilize certain assets in the
U.S., the Company evaluated the recoverability of these assets. For these assets
to be disposed of, the Company adjusted the carrying values to the lower of
their carrying values or their estimated fair values less costs to sell,
resulting in an impairment charge of $0.2 million for the nine months ended
September 28, 2003.
Interest Expense, Net. Interest expense, net increased $12.5 million to $74.4
million for the nine months ended September 28, 2003 from $61.9 million for the
nine months ended September 29, 2002. The increase was primarily related to the
refinancing of the Company's prior Senior Credit Agreement, which resulted in
the write-off of debt issuance fees of $6.2 million, and higher LIBOR margins
under the Company's New Senior Credit Agreement, partially offset by a decline
in interest rates.
Other expense (income), net. Other income was $0.6 million for the nine months
ended September 28, 2003 as compared to other expense of $0.2 million for the
nine months ended September 29, 2002. The higher income was primarily due to
higher foreign exchange gains in the nine months ended September 28, 2003 as
compared to the nine months ended September 29, 2002.
Minority Interest. Minority interest increased $0.1 million to $1.1 million for
the nine months ended September 28, 2003 from $1.0 million for the nine months
ended September 29, 2002.
Income Tax Provision. Income tax provision increased $2.7 million to $5.0
million for the nine months ended September 28, 2003 from $2.3 million for the
nine months ended September 29, 2002. The increase was primarily related to
increased taxable earnings in certain of the Company's European subsidiaries for
the nine months ended September 28, 2003 as compared to the nine months ended
September 29, 2002.
Net Income (Loss). Primarily as a result of factors discussed above, net income
was $9.7 million for the nine months ended September 28, 2003 compared to net
income of $16.1 million for the nine months ended September 29, 2002.
Covenant Compliance EBITDA. Primarily as a result of factors discussed above,
Covenant Compliance EBITDA (as hereinafter defined) increased $2.5 million or
1.6% to $155.9 million for the nine months ended September 28, 2003 from $153.4
million for the nine months ended September 29, 2002. A reconciliation from Net
Income (Loss) to Covenant Compliance EBITDA is provided within "--Liquidity and
Capital Resources."
Effect of Changes in Exchange Rates
In general, the Company's results of operations are affected by changes
in foreign exchange rates. Subject to market conditions, the Company prices its
products in its foreign operations in local currencies. As a result, a decline
in the value of the U.S. dollar relative to the local currencies of profitable
foreign subsidiaries can have a favorable effect on the profitability of the
Company, and an increase in the value of the U.S. dollar relative to the local
currencies of profitable foreign subsidiaries can have a negative effect on the
profitability of the Company. Exchange rate fluctuations decreased comprehensive
income by $1.0 million and increased comprehensive loss by $4.6 million for the
three months ended September 28, 2003 and September 29, 2002, respectively, and
increased comprehensive income by $13.6 million and $4.7 million for the nine
months ended September 28, 2003 and September 29, 2002, respectively.
Derivatives
During 2003 the Company entered into four new interest rate swap
agreements, under which the Company receives variable interest based on the
Eurodollar Rate (the applicable interest rate offered to banks in the London
interbank eurocurrency market) and pays fixed interest at a weighted average
29
rate of 2.60%, on $400.0 million of term loans. The interest rate swaps are
accounted for as cash flow hedges. The effective portion of the change in the
fair value of the new interest rate swaps is recorded in other comprehensive
income ("OCI") and was an unrealized loss of $5.3 million for the nine months
ended September 28, 2003. Approximately 39% of the amount recorded within OCI is
expected to be recognized as interest expense in the next twelve months. Failure
to properly document the Company's interest rate swaps as effective hedges would
result in income statement recognition of all or part of the cumulative $5.3
million unrealized loss recorded in OCI as of September 28, 2003.
The Company entered into interest rate swap agreements to hedge the
exposure to increasing rates with respect to its prior senior credit agreement.
These interest rate swaps were accounted for as cash flow hedges. In connection
with the closing of the Senior Credit Agreement (as hereinafter defined) on
February 14, 2003 these swaps no longer qualified for hedge accounting. As such,
the Company recorded a non-cash charge of approximately $4.8 million within
interest expense as a result of the reclassification into expense of the
remaining unrealized loss on these interest rate swap agreements. These interest
rate swap agreements expired at various points through September 2003. The
effective portion of the change in fair value of these swaps from January 1,
2003 to February 14, 2003 was recorded in OCI and was an unrealized gain of $1.5
million. The change in fair value of these swaps after February 14, 2003 was
recognized in earnings and resulted in a reduction of interest expense of $4.8
million for the nine months ended September 28, 2003.
In April 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities
under SFAS 133. This Statement is effective for contracts entered into or
modified, and for hedging relationships designated after June 30, 2003. Other
provisions of this statement that related to SFAS 133 Implementation Issues
should continue to be applied in accordance with their respective effective
dates. The Company adopted SFAS 149 on July 1, 2003 and the adoption of SFAS 149
did not have a significant impact on its results of operations or financial
position.
Liquidity and Capital Resources
In the nine months ended September 28, 2003, the Company funded,
through its various borrowing arrangements and operating activities, $70.0
million of investing activities, consisting of $70.1 million of capital
expenditures, offset by $0.1 million of proceeds from the sale of the German
operations.
The Company's Senior Credit Agreement currently consists of one term
loan to the Operating Company with an initial term loan commitment totaling
$570.0 million and a revolving loan facility to the Operating Company totaling
$150.0 million. The unused availability of the revolving credit facility under
the Senior Credit Agreement at September 28, 2003 was $105.2 million. The
obligations of the Operating Company under the Senior Credit Agreement are
guaranteed by Holdings and certain other subsidiaries of Holdings. The term loan
is payable in quarterly installments and requires payments of $2.0 million in
2003, $4.0 million in 2004, $20.0 million in 2005, $45.0 million in 2006, $45.0
million in 2007, $200.0 million in 2008, $200.0 million in 2009 and $54.0
million in 2010. The Company expects to fund scheduled debt repayments from cash
from operations and unused lines of credit. The revolving loan facility expires
on the earlier of February 14, 2008 and the Term Loan maturity date. The term
loan and revolving loan facility will become due on July 15, 2007 if the $325.0
million of Senior Subordinated Notes due 2008 have not been refinanced by
January 15, 2007. The term loan will become due on July 15, 2008 if the Senior
Discount Notes have not been refinanced by January 15, 2008. On September 28,
2003 the Company was in compliance with all covenants.
On May 28, 2003 the Company and GPC Capital Corp I issued $100.0
million aggregate principal amount of 8 3/4% Senior Subordinated Notes due 2008
pursuant to Rule 144A under the Securities Act of 1933, as amended. The notes
were issued under the February 2, 1998 Senior Subordinated Indenture. The notes
were issued in exchange for, and in full satisfaction of, $100.0 million
aggregate principal amount of Tranche II term loans then outstanding under the
Company's Senior Credit Agreement.
The Company's other indebtedness included the issuance of $325.0
million of Senior Subordinated Notes due 2008 (including the $100.0 million
add-on issued May 28, 2003) and the issuance of $169.0 million aggregate
principal amount at maturity of Senior Discount Notes due 2009 which yielded
gross proceeds of $100.6 million. At September 28, 2003, the aggregate accreted
value of the Senior Discount Notes was $169.0 million. The Senior Subordinated
Notes are unconditionally guaranteed on a senior subordinated basis by Holdings
and mature on January 15, 2008, with interest payable on $250.0 million at a
fixed rate of 8.75% and with interest payable on $75.0 million at LIBOR plus
3.625%. The Senior Discount Notes mature on January 15, 2009, with cash interest
payable semi-annually beginning July 15, 2003 at 10.75%. The effective interest
rate to maturity on the Senior Discount Notes is 10.75%.
30
At September 28, 2003, the Company's total indebtedness was $1,127.4
million.
The Senior Credit Agreement and Indentures contain a number of
significant covenants that, among other things, restrict the ability of the
Company to dispose of assets, repay other indebtedness, incur additional
indebtedness, pay dividends, prepay subordinated indebtedness, incur liens, make
capital expenditures, investments or acquisitions, engage in mergers or
consolidations, engage in transactions with affiliates and otherwise restrict
the Company's activities. In addition, under the Senior Credit Agreement, the
Operating Company is required to satisfy specified financial ratios and tests.
Covenant compliance EBITDA is used to determine the Company's compliance with
many of these covenants.
Covenant compliance EBITDA is not intended to represent cash flow
from operations as defined by generally accepted accounting principles and
should not be used as an alternative to net income as an indicator of operating
performance or to cash flow as a measure of liquidity. Covenant compliance
EBITDA is calculated in the Senior Credit Agreement and Indentures by adding
minority interest, extraordinary items, interest expense, interest income,
income taxes, depreciation and amortization expense, impairment charges, the
ongoing $1.0 million per year fee paid pursuant to the Blackstone monitoring
agreement, non-cash equity income in earnings of joint ventures, other non-cash
charges, Recapitalization expenses, special charges and unusual items and
certain other charges to net income (loss).
The breach of covenants in the Senior Credit Agreement that are tied to
ratios based on covenant compliance EBITDA could result in a default under that
agreement and the lenders could elect to declare all amounts borrowed due and
payable. Any such acceleration would also result in a default under the
Company's indentures. Additionally, under the Company's debt agreements, the
ability of the Company to engage in activities such as incurring additional
indebtedness, making investments and paying dividends is also tied to ratios
based on covenant compliance EBITDA. The Senior Credit Agreement requires that
the Operating Company maintain a covenant compliance EBITDA to cash interest
ratio starting at a minimum of 2.25x and a net debt to covenant compliance
EBITDA ratio starting at a maximum of 5.50x, in each case for the most recent
four quarter period. The ability of the Operating Company to incur additional
debt and make certain restricted payments under the Indentures is tied to a
covenant compliance EBITDA to interest expense ratio of 1.75 to 1, except that
the Operating Company may incur certain debt and make certain restricted
payments without regard to the ratio, such as up to $650 million under the
Senior Credit Agreement and investments equal to 10% of the Operating Company's
total assets.
While covenant compliance EBITDA and similar measures are frequently
used as measures of operations and the ability to meet debt service
requirements, these terms are not necessarily comparable to other similarly
titled captions of other companies due to the potential inconsistencies in the
method of calculation. Covenant compliance EBITDA is calculated as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
---- ---- ---- ----
(In millions)
Net income (loss)........................................... $ 1.2 $ (1.1) $ 9.7 $ 16.1
Interest expense, net....................................... 21.7 20.3 74.4 61.9
Income tax expense.......................................... 1.8 1.4 5.0 2.3
Depreciation and amortization............................... 17.8 21.6 52.6 56.6
Impairment charges.......................................... -- 4.3 0.6 4.3
Fees paid pursuant to the Blackstone monitoring agreement... 0.2 0.2 0.7 0.7
Minority interest........................................... 0.3 0.4 1.1 1.0
Certain other charges (1)(2)................................ 7.3 3.9 11.8 10.5
------ ------ ------ ------
Covenant compliance EBITDA.................................. $ 50.3 $ 51.0 $155.9 $153.4
====== ====== ====== ======
(1) The three and nine months ended September 28, 2003 include global
reorganization costs ($6.8 million and $11.2 million, respectively) and
other costs ($0.5 million and $0.6 million, respectively). The three and
nine months ended September 29, 2002 include costs related to the postponed
equity offering and concurrent transactions ($2.6 million in each period),
global reorganization costs ($1.3 million and $7.8 million, respectively)
and other costs ($0.0 million and $0.1 million, respectively).
(2) Does not include project startup costs, which are included in the
calculation of covenant compliance EBITDA under the Senior Credit Agreement
and Indentures. These startup costs were $0.7 million and $1.6 million for
the three months ended September 28, 2003 and September 29, 2002,
respectively, and $1.9 million and $3.6 million for the nine months ended
September 28, 2003 and September 29, 2002, respectively.
31
Substantially all domestic tangible and intangible assets of the
Company are pledged as collateral pursuant to the terms of the Senior Credit
Agreement.
As market conditions warrant, the Company and its major equityholders,
including Blackstone Capital Partners III Merchant Bank Fund L.P. and its
affiliates, may from time to time repurchase debt securities issued by the
Company, in privately negotiated or open market transactions, by tender offer or
otherwise.
Management believes that capital investment to maintain and upgrade
property, plant and equipment is important to remain competitive. Management
estimates that on average the annual capital expenditures required to maintain
the Company's facilities are approximately $25 million per year. Additional
capital expenditures beyond this amount will be required to expand capacity.
Capital expenditures for the nine months ended September 28, 2003 were $70.1
million.
For the fiscal year 2003, the Company expects to incur approximately
$110.0 million of capital investments and for the fiscal year 2004, the Company
expects to incur approximately $135.0 million of capital investments. However,
total capital investments will depend on the size and timing of growth related
opportunities. The Company's principal sources of cash to fund ongoing
operations and capital requirements have been and are expected to continue to be
net cash provided by operating activities and borrowings under the Senior Credit
Agreement. Management believes that these sources will be sufficient to fund the
Company's ongoing operations and its foreseeable capital requirements. The
owners of the 49% minority interest in Masko Graham have indicated their
intentions of exercising their put option for the Company to buy their 49%
interest, and therefore, included in the $110.0 million estimate of capital
investments for 2003 is $16.0 million related to this buyout option. This amount
is estimated and is subject to a defined formula which is based upon several
factors, but Management feels this amount is a reasonable estimate for this
buyout option. If these owners do not exercise their put option in 2003, the
$16.0 million related to this buyout option may occur, instead, in 2004.
On July 9, 2002, the Company and Graham Engineering amended the
equipment sales, service and licensing agreement to, among other things,
obligate the Company, retroactive to January 1, 2002 and subject to certain
credits and carry-forwards, to make payments for products and services to Graham
Engineering in the amount of at least $12.0 million per calendar year, or else
pay Graham Engineering a shortfall payment. The Company does not expect to be
required to make a shortfall payment relative to its purchases for 2003.
Under the Senior Credit Agreement, the Operating Company is subject to
restrictions on the payment of dividends or other distributions to Holdings;
provided that, subject to certain limitations, the Operating Company may pay
dividends or other distributions to Holdings:
o in respect of overhead, tax liabilities, legal, accounting and other
professional fees and expenses;
o to fund purchases and redemptions of equity interests of Holdings or
BMP/Graham Holdings Corporation held by then present or former officers or
employees of Holdings, the Operating Company or their subsidiaries or by
any employee stock ownership plan upon that person's death, disability,
retirement or termination of employment or other circumstances with annual
dollar limitations; and
o to finance the payment of cash interest on the Senior Discount Notes or any
notes issued pursuant to a refinancing of the Senior Discount Notes.
Subsequent Event
On September 29, 2003 the Company sold its vacant building located in
Burlington, Ontario, Canada, and as a result expects to incur a gain on the sale
of approximately $3.0 million.
32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See the information set forth in Item 7A of Holdings' Annual Report on
Form 10-K for the fiscal year ended December 31, 2002 for complete quantitative
and qualitative disclosures about market risk. The following table provides
disclosure as of September 28, 2003 for financial instruments that have
experienced material changes in fair value since December 31, 2002.
Fair Value
Expected Maturity Date of Interest Rate Swap Agreements at September 28, 2003 September 28,
-----------------------------------------------------------------------------
2003 2004 2005 2006 2007 Thereafter Total 2003
---- ---- ---- ---- ---- ---------- ----- ----
(Dollars in thousands)
Derivatives matched against liabilities:
Pay fixed swaps -- -- -- $ 400,000 -- -- $ 400,000 $(5,304)
Pay rate -- -- -- 2.60% -- -- 2.60%
Receive rate -- -- -- 1.51% -- -- 1.51%
33
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of
the end of the period covered by this report, have concluded that as of
such date the Company's disclosure controls and procedures were adequate
and effective to ensure that material information relating to Holdings
would be made known to them by others within the company.
(b) Changes in Internal Controls
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect Holdings' disclosure controls
and procedures subsequent to the date of their evaluation, nor were there
any significant deficiencies or material weaknesses in Holdings' internal
controls. As a result, no corrective actions were required or undertaken.
34
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1 Certification required by Rule 15d-14(a).
Exhibit 31.2 Certification required by Rule 15d-14(a).
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were required to be filed during the quarter
ended September 28, 2003.
35
SIGNATURE
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.
Dated: November 12, 2003
GRAHAM PACKAGING HOLDINGS COMPANY
(Registrant)
By: BCP/Graham Holdings L.L.C.,
its General Partner
By: /s/ John E. Hamilton
-----------------------------------
John E. Hamilton
Chief Financial Officer
(chief accounting officer and duly authorized officer)
36
Exhibit 31.1
CERTIFICATION
I, Philip R. Yates, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Graham Packaging
Holdings Company;
2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 12, 2003
By: /s/ Philip R. Yates
-----------------------------------
Philip R. Yates
Chief Executive Officer
37
Exhibit 31.2
CERTIFICATION
I, John E. Hamilton, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Graham Packaging
Holdings Company;
2) Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: November 12, 2003
By: /s/ John E. Hamilton
-----------------------------------
John E. Hamilton
Chief Financial Officer
38
Exhibit 32.1
CERTIFICATION
In connection with the Quarterly Report of Graham Packaging Holdings
Company on Form 10-Q for the period ended September 28, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Philip
R. Yates, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Graham
Packaging Holdings Company.
Date: November 12, 2003
By: /s/ Philip R. Yates
-----------------------------------
Philip R. Yates
Chief Executive Officer
39
Exhibit 32.2
CERTIFICATION
In connection with the Quarterly Report of Graham Packaging Holdings
Company on Form 10-Q for the period ended September 28, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, John E.
Hamilton, certify, pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of Graham
Packaging Holdings Company.
Date: November 12, 2003
By: /s/ John E. Hamilton
-----------------------------------
John E. Hamilton
Chief Financial Officer
40