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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 March 31, 2005
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 (Unaudited) -
At March 31, 2005 and December 31, 2004.......................... 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) -
For the three months ended March 31, 2005 and March 28, 2004..... 4
CONDENSED CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
(Unaudited) - For the year ended December 31, 2004 and three months
ended March 31, 2005............................................. 5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
For the three months ended March 31, 2005 and March 28, 2004..... 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)... 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......... 32
Item 4: Controls and Procedures............................................ 33
PART II. OTHER INFORMATION
Item 6: Exhibits........................................................... 34
Signature................................................................... 35
2
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, December 31,
2005 2004
---- ----
(In thousands)
ASSETS
Current assets:
Cash and cash equivalents............................... $ 15,573 $ 22,131
Accounts receivable, net................................ 348,426 249,232
Inventories............................................. 232,142 235,094
Deferred income taxes................................... 51,109 57,500
Prepaid expenses and other current assets............... 34,042 39,546
---------- ----------
Total current assets....................................... 681,292 603,503
Property, plant and equipment, net......................... 1,440,379 1,414,993
Intangible assets.......................................... 82,673 84,190
Goodwill................................................... 322,959 350,784
Other non-current assets................................... 98,656 98,147
---------- ----------
Total assets............................................... $2,625,959 $2,551,617
========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses................... $ 380,764 $ 346,384
Current portion of long-term debt....................... 24,704 25,654
---------- ----------
Total current liabilities.................................. 405,468 372,038
Long-term debt............................................. 2,489,826 2,439,551
Deferred income taxes...................................... 139,009 138,839
Other non-current liabilities.............................. 22,857 21,627
Minority interest.......................................... 14,206 13,662
Commitments and contingent liabilities (see Note 11)....... -- --
Partners' capital (deficit)................................ (445,407) (434,100)
---------- ----------
Total liabilities and partners' capital (deficit).......... $2,625,959 $2,551,617
========== ==========
See accompanying notes to condensed consolidated financial statements.
3
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In thousands)
Net sales..................................................... $620,539 $260,287
Cost of goods sold............................................ 541,000 210,076
-------- --------
Gross profit.................................................. 79,539 50,211
Selling, general and administrative expenses.................. 35,390 17,016
Impairment charges............................................ 1,605 --
-------- --------
Operating income.............................................. 42,544 33,195
Interest expense, net......................................... 42,774 20,876
Other expense (income), net................................... 337 (347)
-------- --------
(Loss) income before income taxes and minority interest....... (567) 12,666
Income tax provision.......................................... 10,426 1,745
Minority interest............................................. 544 379
-------- --------
Net (loss) income............................................. $(11,537) $ 10,542
======== ========
Net (loss) income allocated to general partners............... $ (577) $ 527
Net (loss) income allocated to limited partners............... $(10,960) $ 10,015
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, 2004............... $(20,282) $(390,182) $(2,749) $(8,327) $(421,540)
Net loss for the year............................... (2,032) (38,600) -- -- (40,632)
Changes in fair value of derivatives................ -- -- -- 5,813 5,813
Additional minimum pension liability................ -- -- -- (992) (992)
Cumulative translation adjustment................... -- -- -- 23,414 23,414
---------
Comprehensive loss.................................. (12,397)
Stock compensation expense.......................... -- 8 -- -- 8
Interest on notes receivable for ownership interests -- -- (171) -- (171)
-------- --------- ------- ------- ---------
Consolidated balance at December 31, 2004............. (22,314) (428,774) (2,920) 19,908 (434,100)
Net loss for the period............................. (577) (10,960) -- -- (11,537)
Changes in fair value of derivatives................ -- -- -- 9,744 9,744
Additional minimum pension liability................ -- 7 7
Cumulative translation adjustment................... -- -- -- (9,578) (9,578)
---------
Comprehensive loss.................................. (11,364)
Stock compensation expense.......................... -- 102 -- -- 102
Interest on notes receivable for ownership interests -- -- (45) -- (45)
-------- --------- ------- ------- ---------
Consolidated balance at March 31, 2005................ $(22,891) $(439,632) $(2,965) $20,081 $(445,407)
======== ========= ======= ======= =========
See accompanying notes to condensed consolidated financial statements.
5
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In thousands)
Operating activities:
Net (loss) income................................................ $ (11,537) $ 10,542
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization.................................... 52,887 20,358
Amortization of debt issuance fees............................... 2,597 1,340
Impairment charges............................................... 1,605 --
Stock compensation expense....................................... 102 2
Minority interest................................................ 544 379
Foreign currency transaction loss................................ 386 8
Interest receivable for ownership interests...................... (45) (42)
Changes in operating assets and liabilities, net of acquisition of
a business:
Accounts receivable............................................ (59,478) (23,169)
Inventories.................................................... 2,835 (1,892)
Prepaid expenses and other current assets...................... 13,970 111
Other non-current assets and liabilities....................... 1,945 1,462
Accounts payable and accrued expenses.......................... 34,774 1,542
--------- --------
Net cash provided by operating activities........................... 40,585 10,641
Investing activities:
Purchases of property, plant and equipment....................... (62,556) (29,325)
Proceeds from sale of property, plant and equipment.............. 151 188
Acquisitions of/investments in businesses, net of cash acquired.. (32,961) (40)
--------- --------
Net cash used in investing activities............................... (95,366) (29,177)
Financing activities:
Proceeds from issuance of long-term debt......................... 268,776 91,745
Payment of long-term debt........................................ (219,279) (70,133)
Debt issuance fees............................................... (435) (1,500)
--------- --------
Net cash provided by financing activities........................... 49,062 20,112
Effect of exchange rate changes..................................... (839) (545)
--------- --------
(Decrease) increase in cash and cash equivalents.................... (6,558) 1,031
Cash and cash equivalents at beginning of period.................... 22,131 7,067
--------- --------
Cash and cash equivalents at end of period.......................... $ 15,573 $ 8,098
========= ========
Supplemental disclosures
Non-cash investing and financing activities:
Return of purchase price related to the acquisition of O-I Plastic
(see Note 9) $ 38,900 $ --
See accompanying notes to condensed consolidated financial statements.
6
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (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, 2004 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, 2004. The results of operations for the three months ended March
31, 2005 are not necessarily indicative of the results to be expected for the
full year ending December 31, 2005. Beginning with the quarter ended March 31,
2005, the Company has changed its quarter end dates for financial reporting
purposes to the last calendar day in March, June, September and December.
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."
Since October 7, 2004 the consolidated financial statements of the
Company include the operations of Graham Packaging Acquisition Corp. and
subsidiaries thereof, as a result of the acquisition of the blow molded plastic
container business of Owens-Illinois, Inc. ("O-I Plastic"). (Refer to Note 9 for
a discussion of this acquisition).
Derivatives
During 2003, the Company entered into four 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
rate of 2.60%, on $400.0 million of term loans. During 2004, the Company entered
into four additional forward starting interest rate swap agreements, under which
the Company receives variable interest based on the Eurodollar rate and pays
fixed interest at a weighted average rate of 3.89%, on $700.0 million of term
loans. Also in 2004, the Company entered into an interest rate cap agreement,
under which the Company would receive interest on $200.0 million notional amount
of variable rate debt based on the Eurodollar Rate to the extent the rate
exceeds 4.50% prior to January of 2006. In the second quarter of 2005, the
Company entered into two additional forward starting interest rate swap
agreements, under which the Company receives variable interest based on the
Eurodollar Rate and pays fixed interest at a weighted average rate of 4.27%, on
$150.0 million of term loans. The interest rate swaps are accounted for as cash
flow hedges. The hedges are highly effective as defined in Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." The effective portion of the cash flow
hedges is recorded in other comprehensive income ("OCI") and was an unrealized
gain of $9.7 million for the three months ended March 31, 2005. Approximately
38% of the amount recorded within OCI is expected to be recognized in 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 $13.1 million unrealized gain
recorded in accumulated OCI as of March 31, 2005.
Comprehensive Income (Loss)
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 (loss) to determine total comprehensive income (loss), which is displayed
in the Condensed Consolidated Statements of Partners' Capital (Deficit).
7
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
The components of accumulated other comprehensive income (loss)
consisted of:
Cumulative
Cash Flow Additional Minimum Translation
Hedges Pension Liability Adjustment Total
------ ----------------- ---------- -----
(In thousands)
Balance at January 1, 2004 $ (2,428) $ (3,283) $ (2,616) $ (8,327)
Change 5,813 (992) 23,414 28,235
--------- --------- -------- --------
Balance at December 31, 2004 3,385 (4,275) 20,798 19,908
Change 9,744 7 (9,578) 173
--------- --------- -------- --------
Balance at March 31, 2005 $ 13,129 $ (4,268) $ 11,220 $ 20,081
========= ========= ======== ========
Option Plans
The Company accounts for equity based compensation to employees using
the intrinsic value method prescribed in Accounting Principles Board Opinion
("APB") 25, "Accounting for Stock Issued to Employees." SFAS 123, "Accounting
for Stock Based Compensation," established accounting and disclosure
requirements using a fair value based method of accounting for equity based
employee compensation plans. The exercise prices of all units were equal to or
greater than the fair market value of the units on the dates of the grants and,
accordingly, no compensation cost has been recognized under the provisions of
APB 25. 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 all option plans been determined under SFAS 123, based
on the fair market value at the grant dates, the Company's pro forma net (loss)
income for the three months ended March 31, 2005 and March 28, 2004 would have
been reflected as follows:
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In thousands)
As reported $ (11,537) $ 10,542
Pro forma (11,839) 10,496
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS 123(R), "Share-Based Payment." SFAS 123(R) revises SFAS 123 and
requires companies to expense the fair value of employee stock options and other
forms of stock-based compensation. Under SFAS 123(R), companies are to (1) use
fair value to measure stock-based compensation awards and (2) cease using the
"intrinsic value" method of accounting, which APB 25 allowed and resulted in no
expense for many awards of stock options for which the exercise price of the
option equaled the price of the underlying stock at the grant date. In addition,
SFAS 123(R) retains the modified grant date model from SFAS 123. Under that
model, compensation cost is measured at the fair value of an award on the grant
date and adjusted to reflect estimated forfeitures and the outcome of certain
conditions. The fair value of an award is not re-measured after its initial
estimation on the grant date (except in the case of a liability award or if the
award is modified). For the Company, SFAS 123(R) will be effective as of the
beginning of the first annual reporting period beginning after December 15,
2005. Therefore, the Company will be required to adopt SFAS 123(R) on January 1,
2006. The Company is currently in the process of assessing the impact of the
adoption of SFAS 123(R) on its results of operations and financial position.
Inventory Cost
In November 2004, the FASB issued SFAS 151, "Inventory Costs - an
amendment of APB No. 43, Chapter 4," which is the result of its efforts to
converge U.S. accounting standards for inventories with International Accounting
Standards. SFAS 151 requires abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spillage) to be recognized as current-period
charges. It also requires that allocation of fixed production overheads to the
costs of conversion be based on the normal capacity of the production
facilities. SFAS 151 will be effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. Therefore, the Company will be
required to adopt SFAS 151 on January 1, 2006. The adoption of SFAS 151 will not
have a significant impact on the Company's results of operations or financial
position.
8
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
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 entity classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement was effective for financial instruments entered into or
modified after May 31, 2003, and otherwise was 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. This statement was
effective for mandatorily redeemable financial instruments on January 1, 2004
for the Company. The adoption of SFAS 150 has not had a significant impact on
the Company's results of operations or financial position for the periods
presented in this quarterly report on Form 10-Q.
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, "Accounting for Leases," 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
have been accounted for in accordance with EITF 01-8.
Reclassifications
Certain reclassifications have been made to the 2004 financial
statements to conform to the 2005 presentation.
2. Debt Arrangements
Long-term debt consisted of the following:
March 31, December 31,
2005 2004
---- ----
(In thousands)
Term loans........................................ $1,796,375 $1,800,000
Revolving Credit Facility......................... 73,000 19,000
Foreign and other revolving credit facilities..... 7,676 7,707
Senior Notes...................................... 250,000 250,000
Senior Subordinated Notes......................... 375,000 375,000
Capital leases.................................... 10,806 11,208
Other............................................. 1,673 2,290
---------- ----------
2,514,530 2,465,205
Less amounts classified as current................ 24,704 25,654
---------- ----------
$2,489,826 $2,439,551
========== ==========
In connection with the acquisition of O-I Plastic (see Note 9) on
October 7, 2004, the Operating Company, Holdings, GPC Capital Corp. I ("CapCo
I") and a syndicate of lenders entered into a new first-lien credit agreement
(the "Credit Agreement") and a new second-lien credit agreement (the
"Second-Lien Credit Agreement" and, together with the Credit Agreement, the
"Credit Agreements")(the "Transactions"). The Credit Agreements consist of a
term loan B to the Operating Company with an initial term loan commitment
totaling $1,450.0 million, a second-lien term loan with an initial term loan
commitment totaling $350.0 million (the "Term Loans" or "Term Loan Facilities")
and a $250.0 million revolving credit facility (the "Revolving Credit
Facility"). The obligations of the Operating Company under the Credit Agreements
9
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
are guaranteed by Holdings and certain other subsidiaries of Holdings. The term
loan B is payable in quarterly installments and requires payments of $14.5
million in each of 2005, 2006, 2007, 2008, 2009 and 2010 and $1,363.0 million in
2011. The second-lien term loan is payable in 2012. The Revolving Credit
Facility expires on October 7, 2010. Interest on the Credit Agreement is payable
at (a) the "Alternate Base Rate" ("ABR") (the higher of the Prime Rate or the
Federal Funds Rate plus 0.50%) plus a margin ranging from 1.25% to 1.75%; or (b)
the "Eurodollar Rate" (the applicable interest rate offered to banks in the
London interbank eurocurrency market) plus a margin ranging from 2.25% to 2.75%.
A commitment fee of 0.50% is due on the unused portion of the revolving loan
commitment. Interest on the Second-Lien Credit Agreement is payable at (a) the
ABR plus a margin of 3.25%; or (b) the "Eurodollar Rate" plus a margin of 4.25%.
In addition, the Credit Agreements contain 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. As of March 31, 2005, the Company was in compliance with all
covenants. The unused availability of the Revolving Credit Facility at March 31,
2005 was $167.9 million.
Substantially all domestic tangible and intangible assets of the
Company are pledged as collateral pursuant to the terms of the Credit
Agreements.
The Transactions also included the issuance of $250.0 million in Senior
Notes of the Operating Company and $375.0 million in Senior Subordinated Notes
of the Operating Company (collectively "the Notes"). The Notes are
unconditionally guaranteed by Holdings and domestic subsidiaries of the
Operating Company and mature on October 7, 2012 (Senior Notes) and October 7,
2014 (Senior Subordinated Notes). Interest on the Senior Notes is payable
semi-annually at 8.50% and interest on the Senior Subordinated Notes is payable
semi-annually at 9.875%.
Cash paid for interest during the three months ended March 31, 2005 and
March 28, 2004, net of amounts capitalized, totaled $16.7 million and $30.5
million, respectively.
3. Inventories
Inventories consisted of the following:
March 31, December 31,
2005 2004
---- ----
(In thousands)
Finished goods............................... $168,662 $161,007
Raw materials and parts...................... 63,480 74,087
-------- --------
$232,142 $235,094
======== ========
4. Impairment Charges
Due to a 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
held and used, the Company determined that the undiscounted cash flows were
below the carrying value of these long-lived assets. Accordingly, the Company
adjusted the carrying values of these long-lived assets to their estimated fair
values, resulting in impairment charges of $1.6 million for the three months
ended March 31, 2005.
5. Intangible Assets
The gross carrying amount and accumulated amortization of the Company's
intangible assets subject to amortization as of March 31, 2005 were as follows:
Gross
Carrying Accumulated Amortization
Amount Amortization Net period (years)
------ ------------ --- --------------
(In thousands)
Patented Technology.................... $ 22,562 $ (1,076) $ 21,486 9 to 13.5 years
Customer Relationships................. 34,303 (1,198) 33,105 3.75 to 20 years
Licensing Agreement.................... 28,000 (1,273) 26,727 11 years
Non-Compete Agreement.................. 1,539 (184) 1,355 1 to 5 years
--------- --------- ---------
Total.................................. $ 86,404 $ (3,731) $ 82,673
========= ========= =========
Amortization expense for the three months ended March 31, 2005 was $1.7
million.
10
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
6. Goodwill
The changes in the carrying amount of goodwill were as follows:
North South
America Europe America
Segment Segment Segment Total
------- ------- ------- -----
(In thousands)
Balance at December 31, 2004.......................... $333,174 $ 16,916 $ 694 $350,784
Goodwill acquired during the period................... 9,231* -- -- 9,231
Return of purchase price related to the acquisition
of O-I Plastic (see Note 9)........................... (38,900) -- -- (38,900)
Foreign currency translation and other adjustments.... 2,747 (908) 5 1,844
-------- --------- ------- --------
Balance at March 31, 2005............................. $306,252 $ 16,008 $ 699 $322,959
======== ========= ======= ========
*$9,231 of goodwill associated with the acquisition of certain
Tetra-Pak operations (see Note 9) is included in the North America segment. This
goodwill has not been allocated to the other reporting segments as it is not
practicable to do so until the final allocation of the fair value of assets
acquired and liabilities assumed has been made.
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses consisted of the following:
March 31, December 31,
2005 2004
---- ----
(In thousands)
Accounts payable.............................. $202,789 $191,971
Accrued employee compensation and benefits.... 50,009 51,545
Accrued interest.............................. 42,690 19,015
Other......................................... 85,276 83,853
-------- --------
$380,764 $346,384
======== ========
For the year ended December 31, 2004, the Company incurred costs of
employee termination benefits in the United States, as a result of a redundancy
in corporate staff related to the acquisition of O-I Plastic, of $1.1 million,
which included the legal liability of severing 53 employees, all of which were
terminated as of March 31, 2005. In accordance with EITF 95-3, "Recognition of
Liabilities in Connection with a Purchase Business Combination", these costs
were treated as having been assumed in the purchase business combination of O-I
Plastic and included in the allocation of the acquisition cost. All of the cash
payments for these termination benefits have been made as of March 31, 2005. For
the year ended December 31, 2004, the Company accrued costs of employee
termination benefits in the United States related to plant closures of $3.3
million, in accordance with EITF 95-3. This liability was treated as having been
assumed in the purchase business combination of O-I Plastic and included in the
allocation of the acquisition cost. (Refer to Note 9 for a discussion of this
acquisition). 235 employees of the plants scheduled to be closed have been
terminated as of March 31, 2005. Substantially all of the cash payments for
these termination benefits are expected to be made by December 31, 2005. For the
three months ended March 31, 2005, the Company incurred costs of employee
termination benefits in the United States related to its corporate staff of $1.1
million, which included the legal liability of severing four employees, all of
which were terminated as of March 31, 2005. Substantially all of the cash
payments for these termination benefits are expected to be made by March 31,
2007.
11
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
The following table reflects a rollforward of these costs, primarily
included in accrued employee compensation and benefits (in thousands):
2003 North 2004 United 2005 United
France America States States United States
Reduction Reduction Reduction Reduction Plant
in Force in Force in Force in Force Closures Total
-------- -------- -------- -------- -------- -----
Reserves at December 31, 2004......... $ 631 $ 777 $ 77 $ -- $ 3,294 $ 4,779
Increase in reserves.................. -- -- 1 1,063 -- 1,064
Cash payments......................... (63) (71) (78) (145) (1,302) (1,659)
-------- -------- -------- -------- -------- -------
Reserves at March 31, 2005............ $ 568 $ 706 $ -- $ 918 $ 1,992 $ 4,184
======== ======== ======== ======== ======== =======
8. Income Taxes
Holdings and the Operating Company, as limited partnerships, do not pay
U.S. 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.
However, certain U.S. subsidiaries acquired as part of O-I Plastic are
corporations and are subject to U.S. federal and state income taxes. The
Company's foreign operations are subject to tax in their local jurisdictions.
Deferred income 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.
9. Acquisitions
Purchase of O-I Plastic
On October 7, 2004, the Company acquired O-I Plastic. With 2004 pro
forma sales of $2.2 billion, the Company has essentially doubled in size. The
Company believes that the acquisition has enabled it to:
o enhance its position as the leading supplier in value-added plastic
packaging, by adding breadth and diversity to its portfolio of blue-chip
customers;
o optimize the complementary technology portfolios and product development
capabilities of the Company and O-I Plastic to pursue attractive conversion
opportunities across all product categories;
o begin to realize significant cost savings by eliminating overlapping and
redundant corporate and administrative functions, targeting productivity
improvements at O-I Plastic's facilities, consolidating facilities in
geographic proximity to make them more cost-efficient and rationalizing
plants and individual production lines with unattractive economics and/or
cost structures. It should be noted that there are significant one-time
costs associated with these cost savings; and
o apply its proven business model, management expertise and best practices to
deliver innovative designs and enhanced service levels to its combined
customer base.
The Company acquired O-I Plastic for a total purchase price (including
acquisition-related costs) of $1,191.9 million, subject to certain adjustments.
The acquisition was recorded under the purchase method of accounting and,
accordingly, the results of the acquired operation are included in the financial
statements of the Company beginning on October 7, 2004. The purchase price has
been allocated to assets acquired and liabilities assumed based on estimated
fair values. The purchase price allocation is preliminary pending a final
determination of the purchase price and a final valuation of the assets and
liabilities. The allocated fair value of assets acquired and liabilities assumed
is summarized as follows (in thousands):
12
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
Cash............................................... $ 10,860
Accounts receivable, net........................... 130,343
Inventories........................................ 140,771
Deferred income taxes.............................. 48,239
Prepaid expenses and other current assets.......... 11,312
----------
Total current assets............................... 341,525
Property, plant and equipment...................... 732,057
Intangible assets.................................. 81,000
Goodwill........................................... 297,951
Other non-current assets........................... 1,928
----------
Total.............................................. 1,454,461
Less liabilities assumed........................... 262,535
----------
Net cost of acquisition............................ $1,191,926
==========
The purchase agreement related to O-I Plastic contained a stated
purchase price of $1,200.0 million, which was paid on October 7, 2004, subject
to adjustments based on the level of working capital acquired, indebtedness
assumed and certain other measures. The Company and the sellers resolved certain
of these adjustments to the purchase price in April 2005, resulting in a return
to the Company of $38.9 million, which is reflected in accounts receivable and
as a reduction to goodwill in the Condensed Consolidated Balance Sheet as of
March 31, 2005. In addition, the purchase agreement provides information on
certain net operating loss carryforwards for U.S. federal income tax purposes
("NOL's") that are allocated from the sellers to O-I Plastic. The ultimate
amount of such NOL's will not be known until the sellers complete their federal
income tax returns for 2004; however the purchase agreement provides that the
NOL's will at least equal $100 million. A deferred income tax asset of $39.2
million related to NOL's of $100 million has been included in the purchase price
allocation above.
The finalization of the O-I Plastic purchase price and the NOL's
acquired, as well as the finalization of appraisals, could have a material
impact on the purchase price allocation above. The Company expects to finalize
the purchase price allocation by the fourth quarter of 2005.
Purchase of Certain Tetra-Pak Operations
On March 24, 2005, the Company acquired certain operations from
Tetra-Pak Inc., Tetra Pak Moulded Packaging Systems Limited, Tetra Pak S.R.L.,
Tetra Pak MPS N.V., Tetra Pak LTDA and Tetra Pak Paketleme Sanayi Ve Ticaret
A.S. for a total purchase price (including acquisition-related costs) of $34.2
million, subject to certain adjustments. The acquisition was recorded under the
purchase method of accounting and, accordingly, the results of the acquired
operation are included in the financial statements of the Company beginning on
March 24, 2005. The initial purchase price has been allocated to assets acquired
and liabilities assumed based on estimated fair values. The purchase price
allocation is preliminary pending a final determination of the purchase price
and a final valuation of the assets and liabilities. The initial allocated fair
value of assets acquired and liabilities assumed is summarized as follows (in
thousands):
Accounts receivable, net........................... $ 3,062
Inventories........................................ 1,522
Prepaid expenses and other current assets.......... 13
---------
Total current assets............................... 4,597
Property, plant and equipment...................... 21,363
Goodwill........................................... 9,231
---------
Total.............................................. 35,191
Less liabilities assumed........................... 1,029
---------
Net cost of acquisition............................ $ 34,162
=========
13
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
Pro Forma Information
The following table sets forth unaudited pro forma results of
operations, assuming that all of the above acquisitions had taken place at the
beginning of each period presented:
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In millions)
Net sales $626.0 $551.6
Net (loss) income (10.6) 11.6
These unaudited pro forma results have been prepared for comparative
purposes only and include certain adjustments, such as additional depreciation
and amortization expense as a result of a step-up in the basis of fixed assets
and intangible assets, increased interest expense on acquisition debt and
related tax effects. They do not purport to be indicative of the results of
operations which actually would have resulted had the combinations been in
effect at the beginning of each period presented, or of future results of
operations of the entities.
10. Lease Commitments
The Company is a party to various leases involving real property and
equipment. Total rent expense for operating leases amounted to $12.5 million and
$6.1 million for the three months ended March 31, 2005 and March 28, 2004,
respectively.
11. 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, an affiliated
company, amended the equipment sales, services and license 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 2005.
12. Condensed Guarantor Data
On October 7, 2004 the Operating Company and CapCo I co-issued $250.0
million aggregate principal amount of 8 1/2% Senior Notes due 2012 and $375.0
million aggregate principal amount of 9-7/8% Senior Subordinated Notes due 2014.
The notes were issued under Indentures issued on October 7, 2004. Holdings and
domestic subsidiaries of the Operating Company have fully and unconditionally
guaranteed these notes. Both the Operating Company and CapCo I are 100%-owned
subsidiaries of Holdings.
The following unaudited condensed consolidating financial statements
present the financial position, results of operations and cash flows of
Holdings, the Operating Company, guarantor domestic subsidiaries of the
Operating Company, non-guarantor subsidiaries and CapCo I.
14
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 2005
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ---------- ------- -------------------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ -- $ 2,002 $ 1 $ 13,570 $ -- $ -- $ 15,573
Accounts receivable, net............... -- 120,941 139,795 87,690 -- -- 348,426
Inventories............................ -- 77,247 115,929 38,966 -- -- 232,142
Deferred income taxes.................. -- -- 49,868 1,241 -- -- 51,109
Prepaid expenses and other current
assets................................. -- 11,811 4,100 18,131 -- -- 34,042
---------- ---------- ---------- -------- -------- ----------- ----------
Total current assets...................... -- 212,001 309,693 159,598 -- -- 681,292
Property, plant and equipment, net........ -- 529,454 639,448 271,477 -- -- 1,440,379
Intangible assets......................... -- 1,970 80,670 33 -- -- 82,673
Goodwill.................................. -- 10,940 305,202 6,817 -- -- 322,959
Net intercompany.......................... -- 1,144,759 -- -- -- (1,144,759) --
Investment in subsidiaries................ -- 436,365 212,898 -- -- (649,263) --
Other non-current assets.................. -- 94,723 1,303 2,630 -- -- 98,656
---------- ---------- ---------- -------- -------- ----------- ----------
Total assets.............................. $ -- $2,430,212 $1,549,214 $440,555 $ -- $(1,794,022) $2,625,959
========== ========== ========== ======== ======== =========== ==========
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses.. $ -- $ 168,934 $ 109,277 $102,553 $ -- $ -- $ 380,764
Current portion of long-term debt...... -- 18,025 -- 6,679 -- -- 24,704
---------- ---------- ---------- -------- -------- ----------- ----------
Total current liabilities................. -- 186,959 109,277 109,232 -- -- 405,468
Long-term debt............................ -- 2,488,644 -- 1,182 -- -- 2,489,826
Deferred income taxes..................... -- -- 131,211 7,798 -- -- 139,009
Other non-current liabilities............. -- 12,927 -- 9,930 -- -- 22,857
Investment in subsidiaries................ 258,318 -- -- -- -- (258,318) --
Net intercompany.......................... 187,089 -- 925,689 31,981 -- (1,144,759) --
Minority interest......................... -- -- -- 14,206 -- -- 14,206
Commitments and contingent liabilities.... -- -- -- -- -- -- --
Partners' capital (deficit)............... (445,407) (258,318) 383,037 266,226 -- (390,945) (445,407)
---------- ---------- ---------- -------- -------- ----------- ----------
Total liabilities and partners' capital
(deficit)................................. $ -- $2,430,212 $1,549,214 $440,555 $ -- $(1,794,022) $2,625,959
========== ========== ========== ======== ======== =========== ==========
15
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 2004
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ---------- ------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents.............. $ -- $ 1,080 $ -- $ 21,051 $ -- $ -- $ 22,131
Accounts receivable, net............... -- 68,957 107,515 72,760 -- -- 249,232
Inventories............................ -- 75,965 122,068 37,061 -- -- 235,094
Deferred income taxes.................. -- -- 56,709 791 -- -- 57,500
Prepaid expenses and other current
assets................................. -- 13,808 2,911 22,827 -- -- 39,546
---------- ---------- ---------- -------- -------- ----------- ----------
Total current assets...................... -- 159,810 289,203 154,490 -- -- 603,503
Property, plant and equipment, net........ -- 493,055 649,494 272,444 -- -- 1,414,993
Intangible assets......................... -- 1,843 82,316 31 -- -- 84,190
Goodwill.................................. -- 40,398 303,546 6,840 -- -- 350,784
Net intercompany.......................... -- 1,151,550 -- -- -- (1,151,550) --
Investment in subsidiaries................ -- 423,023 215,748 -- -- (638,771) --
Other non-current assets.................. -- 94,126 1,396 2,625 -- -- 98,147
---------- ---------- ---------- -------- -------- ----------- ----------
Total assets.............................. $ -- $2,363,805 $1,541,703 $436,430 $ -- $(1,790,321) $2,551,617
========== ========== ========== ======== ======== =========== ==========
LIABILITIES
Current liabilities:
Accounts payable and accrued expenses... $ -- $ 140,007 $ 112,260 $ 94,117 $ -- $ -- $ 346,384
Current portion of long-term debt....... -- 18,942 -- 6,712 -- -- 25,654
---------- ---------- ---------- -------- -------- ----------- ----------
Total current liabilities................. -- 158,949 112,260 100,829 -- -- 372,038
Long-term debt............................ -- 2,438,490 -- 1,061 -- -- 2,439,551
Deferred income taxes..................... -- -- 131,194 7,645 -- -- 138,839
Other non-current liabilities............. -- 13,377 -- 8,250 -- -- 21,627
Investment in subsidiaries................ 247,011 -- -- -- -- (247,011) --
Net intercompany.......................... 187,089 -- 921,083 43,378 -- (1,151,550) --
Minority interest......................... -- -- -- 13,662 -- -- 13,662
Commitments and contingent liabilities.... -- -- -- -- -- -- --
Partners' capital (deficit)............... (434,100) (247,011) 377,166 261,605 -- (391,760) (434,100)
---------- ---------- ---------- -------- --------- ----------- ----------
Total liabilities and partners' capital
(deficit)................................. $ -- $2,363,805 $1,541,703 $436,430 $ -- $(1,790,321) $2,551,617
========== ========== ========== ======== ======== =========== ==========
16
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ---------- ------- ------------ ------------
Net sales............................... $ -- $ 243,177 $ 275,667 $116,465 $ -- $ (14,770) $ 620,539
Cost of goods sold...................... -- 214,713 241,216 99,841 -- (14,770) 541,000
---------- ---------- ---------- -------- -------- ----------- ----------
Gross profit............................ -- 28,464 34,451 16,624 -- -- 79,539
Selling, general and administrative
expenses................................ -- 27,572 1,969 5,849 -- -- 35,390
Impairment charges...................... -- 1,605 -- -- -- -- 1,605
---------- ---------- ---------- -------- -------- ----------- ----------
Operating (loss) income................. -- (713) 32,482 10,775 -- -- 42,544
Interest expense, net................... -- 27,027 14,849 898 -- -- 42,774
Other expense, net...................... -- 71 53 213 -- -- 337
Equity in loss (earnings) of subsidiaries 11,537 (16,322) (3,484) -- -- 8,269 --
---------- ---------- ---------- -------- -------- ----------- ----------
(Loss)/income before income taxes and
minority interest ...................... (11,537) (11,489) 21,064 9,664 -- (8,269) (567)
Income tax provision.................... -- 48 6,858 3,520 -- -- 10,426
Minority interest....................... -- -- -- 544 -- -- 544
---------- ---------- ---------- -------- -------- ----------- ----------
Net (loss) income....................... $ (11,537) $ (11,537) $ 14,206 $ 5,600 $ -- $ (8,269) $ (11,537)
========== ========== ========== ======== ======== =========== ==========
17
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 28, 2004
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ---------- ------- ------------ ------------
Net sales............................... $ -- $ 202,304 $ 9,243 $ 57,955 $ -- $ (9,215) $ 260,287
Cost of goods sold...................... -- 161,874 9,383 48,034 -- (9,215) 210,076
---------- ---------- ---------- -------- -------- ----------- ----------
Gross profit............................ -- 40,430 (140) 9,921 -- -- 50,211
Selling, general and administrative
expenses................................ -- 12,560 4 4,452 -- -- 17,016
---------- ---------- ---------- -------- -------- ----------- ----------
Operating income (loss)................. -- 27,870 (144) 5,469 -- -- 33,195
Interest expense (income), net.......... 4,670 15,576 (88) 718 -- -- 20,876
Other (income) expense, net............. -- (141) 7 (213) -- -- (347)
Equity in earnings of subsidiaries...... (15,212) (2,800) (282) -- -- 18,294 --
---------- ---------- ---------- -------- -------- ----------- ----------
Income (loss) before income taxes and
minority interest ...................... 10,542 15,235 219 4,964 -- (18,294) 12,666
Income tax provision.................... -- 23 -- 1,722 -- -- 1,745
Minority interest....................... -- -- 379 -- -- 379
---------- ---------- ---------- -------- -------- ----------- ----------
Net income (loss)....................... $ 10,542 $ 15,212 $ 219 $ 2,863 $ -- $ (18,294) $ 10,542
========== ========== ========== ======== ======== =========== ==========
18
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ---------- ------- ------------ ------------
Operating activities:
Net cash provided by operating
activities............................... $ -- $ 21,602 $ 16,356 $ 2,627 $ -- $ -- $ 40,585
Investing activities:
Net purchases of property, plant and
equipment............................... -- (38,669) (16,345) (7,391) -- -- (62,405)
Acquisitions of/investments in
businesses, net of cash acquired....... -- (30,813) (10) (2,138) -- -- (32,961)
---------- ---------- ---------- -------- -------- ----------- ----------
Net cash used in investing activities.... -- (69,482) (16,355) (9,529) -- -- (95,366)
Financing activities:
Proceeds from issuance of long-term debt -- 253,680 -- 15,096 -- -- 268,776
Payment of long-term debt............... -- (204,443) -- (14,836) -- -- (219,279)
Debt issuance fees...................... -- (435) -- -- -- -- (435)
---------- ---------- ---------- -------- -------- ----------- ----------
Net cash provided by financing activities -- 48,802 -- 260 -- -- 49,062
Effect of exchange rate changes.......... -- -- -- (839) -- -- (839)
---------- ---------- ---------- -------- -------- ----------- ----------
Increase (decrease) in cash and cash
equivalents.............................. -- 922 1 (7,481) -- -- (6,558)
Cash and cash equivalents at beginning of
period................................... -- 1,080 -- 21,051 -- -- 22,131
---------- ---------- ---------- -------- -------- ----------- ----------
Cash and cash equivalents at end of
period................................... $ -- $ 2,002 $ 1 $ 13,570 $ - $ -- $ 15,573
========== ========== ========== ======== ======== =========== ==========
19
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
GRAHAM PACKAGING HOLDINGS COMPANY
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 28, 2004
(In thousands)
Graham Graham
Packaging Packaging GPC
Holdings Company, Non- Capital
Company L.P. Guarantors Guarantors Corp. I Eliminations Consolidated
------- ---- ---------- ---------- ------- ------------ ------------
Operating activities:
Net cash (used in) provided by operating
activities............................... $ (9,084) $ 12,245 $ 40 $ 7,440 $ -- $ -- $ 10,641
Investing activities:
Net purchases of property, plant and
equipment.............................. -- (24,187) -- (4,950) -- -- (29,137)
Acquisition of/investment in a business,
net of cash acquired................... 9,084 (9,084) (40) -- -- -- (40)
---------- ---------- ---------- -------- -------- ----------- ----------
Net cash provided by (used in) investing
activities............................... 9,084 (33,271) (40) (4,950) -- -- (29,177)
Financing activities:
Proceeds from issuance of long-term debt -- 90,343 -- 1,402 -- -- 91,745
Payment of long-term debt.............. -- (67,057) -- (3,076) -- -- (70,133)
Debt issuance fees..................... -- ( 1,500) -- -- -- -- (1,500)
---------- ---------- ---------- -------- -------- ----------- ----------
Net cash provided by (used in) financing
activities............................... -- 21,786 -- (1,674) -- -- 20,112
Effect of exchange rate changes.......... -- -- -- (545) -- -- (545)
---------- ---------- ---------- -------- -------- ----------- ----------
Increase in cash and cash equivalents.... -- 760 -- 271 -- -- 1,031
Cash and cash equivalents at beginning of
period................................... -- 847 -- 6,220 -- -- 7,067
---------- ---------- ---------- -------- -------- ----------- ----------
Cash and cash equivalents at end of
period................................... $ -- $ 1,607 $ -- $ 6,491 $ -- $ -- $ 8,098
========== ========== ========== ======== ======== =========== ==========
20
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
13. Comprehensive Income (Loss)
Comprehensive income (loss) for the three months ended March 31, 2005
and March 28, 2004 was as follows:
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In thousands)
Net (loss) income............................. $ (11,537) $ 10,542
Changes in fair value of derivatives.......... 9,744 (3,458)
Additional minimum pension liability.......... 7 12
Cumulative translation adjustment............. (9,578) (4,935)
--------- --------
Comprehensive income (loss)................... $ (11,364) $ 2,161
========= ========
21
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
14. Segment Information
The Company is organized and managed on a geographical basis in three
operating segments: North America, Europe and South America. Segment information
for the three months ended March 31, 2005 and March 28, 2004, representing the
reportable segments currently utilized by the chief operating decision maker,
was as follows:
North South
America Europe America Eliminations Total
------- ------ ------- ------------ -----
(a) (a) (a) (b) (a)
(In thousands)
Net sales (c) (d) Three months ended March 31, 2005 $ 538,687 $ 66,557 $15,295 $ -- $ 620,539
Three months ended March 28, 2004 214,609 36,972 8,764 (58) 260,287
Operating income Three months ended March 31, 2005 35,864 4,677 2,003 -- 42,544
Three months ended March 28, 2004 29,894 3,141 160 -- 33,195
Depreciation and Three months ended March 31, 2005 49,707 4,939 838 -- 55,484
amortization (e) Three months ended March 28, 2004 18,093 3,024 581 -- 21,698
Impairment charges Three months ended March 31, 2005 1,605 -- -- -- 1,605
Three months ended March 28, 2004 -- -- -- -- --
Interest expense, net (e) Three months ended March 31, 2005 42,056 496 222 -- 42,774
Three months ended March 28, 2004 20,245 560 71 -- 20,876
Income tax provision Three months ended March 31, 2005 8,191 1,862 373 -- 10,426
Three months ended March 28, 2004 189 1,212 344 -- 1,745
Identifiable assets (c) (d) As of March 31, 2005 2,681,306 305,723 49,482 (410,552) 2,625,959
(f)
As of December 31, 2004 2,597,442 300,161 46,877 (392,863) 2,551,617
Goodwill (f) As of March 31, 2005 306,252 16,008 699 -- 322,959
As of December 31, 2004 333,174 16,916 694 -- 350,784
Net capital expenditures, Three months ended March 31, 2005 56,342 4,703 1,360 -- 62,405
excluding acquisitions Three months ended March 28, 2004 24,448 3,237 1,452 -- 29,137
(a) On October 7, 2004, the Company acquired O-I Plastic.
(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 $20.1 million and $17.5 million for the three months ended
March 31, 2005 and March 28, 2004, respectively. Identifiable assets in
France totaled approximately $128.9 million and $132.9 million as of March
31, 2005 and December 31, 2004, respectively.
(d) The Company's net sales for North America include sales in Mexico which
totaled approximately $29.9 million and $7.5 million for the three months
ended March 31, 2005 and March 28, 2004, respectively. Identifiable assets
in Mexico totaled approximately $105.7 million and $96.7 million as of
March 31, 2005 and December 31, 2004, respectively. Approximately all of
the North America reportable segment's remaining net sales and identifiable
assets are in the United States.
(e) Includes amortization of debt issuance fees.
(f) Intangible assets and goodwill associated with the acquisitions of O-I
Plastic and the Tetra Pak operations are included in the North America
reportable segment at March 31, 2005 and December 31, 2004 as it is not
practicable to allocate these assets among the reportable segments until
the final determination of the purchase price and related allocation to the
fair value of assets acquired and liabilities assumed has been made.
22
GRAHAM PACKAGING HOLDINGS COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued
Product Net Sales Information
The following is supplemental information on net sales by product
category:
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In thousands)
Food and Beverage........................ $352,611 $154,876
Household.................................. 124,127 49,187
Automotive Lubricants...................... 68,471 56,224
Personal Care/Specialty (1)................ 75,330 --
-------- --------
Total Net Sales............................ $620,539 $260,287
======== ========
(1) Prior to the Acquisition, sales of Personal Care/Specialty containers were
not significant and are included in the Household category.
15. Pension Plans
The components of net periodic pension cost for the Company's U.S.
defined benefit pension plans consisted of the following:
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(In thousands)
Components of net periodic pension cost:
Service cost............................... $2,527 $ 872
Interest cost.............................. 891 761
Expected return on plan assets............. (852) (708)
Net amortization and deferral.............. 438 200
------ ------
Net periodic pension cost.................. $3,004 $1,125
====== ======
The increase in net periodic pension cost in the first three months of
2005 was primarily attributable to higher service and interest costs in 2005 as
a result of significantly higher headcount from the acquisition of O-I Plastic
in the fourth quarter of 2004. This was partially offset by higher expected
returns on plan assets as a result of increased pension contributions in 2004.
The Company previously disclosed in its financial statements for the
year ended December 31, 2004 that it expected to contribute $4.5 million to its
pension plans in 2005. As of March 31, 2005 $3.1 million of contributions to its
U.S. pension plans has been made.
16. Subsequent Event
In March 2005 the Company executed a Purchase and Sale of Equity
Interest and Joint Venture Termination Agreement under which the Company will
terminate the joint venture agreement with Industrias Innopack, S.A. de C.V. and
acquire all of the equity interests held by Industrias Innopack, S.A. de C.V. in
Graham Innopack de Mexico, S. de R.L. de C.V. and the operating companies
thereunder. Closing of this transaction occurred on May 9, 2005, resulting in a
payment by the Company of $13.9 million.
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
All entities and assets owned by Graham Packaging Holdings Company
("Holdings") are referred to collectively as the "Company." Graham Packaging
Company, L.P. is referred to as the "Operating Company."
All statements other than statements of historical facts included in
this Report on Form 10-Q, including statements regarding the future financial
position, economic performance and results of operations of the Company, 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,
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 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 the majority of the Company's sales are made pursuant to requirements
contracts;
o a decline in prices of plastic packaging;
o the Company's ability to develop product innovations and improve the
Company's production technology and expertise;
o infringement on the Company's proprietary technology;
o risks associated with environmental regulation and liabilities;
o the possibility that the Company's majority shareholder'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 the Company's ability to successfully continue to integrate the plastic
container business of Owens-Illinois, Inc.("O-I Plastic") into the
Company's business and operations;
o the Company's ability to continue to achieve expected cost savings in
connection with the acquisition of the plastic container business of
Owens-Illinois, Inc.;
o the restrictive covenants contained in instruments governing the Company's
indebtedness;
o the Company's high degree of leverage and substantial debt service;
o the Company's ability to successfully integrate its business with those of
other businesses that the Company may acquire;
o risks associated with a significant portion of the Company's employees
being covered by collective bargaining agreements; 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, 2004. 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, personal care/specialty and automotive lubricants categories and as
of the end of the first quarter operates 90 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 value-added plastic packaging from more commodity packaging.
24
Management believes that critical success factors to the Company's
business are its ability to:
o develop its own proprietary technologies that provide meaningful
competitive advantage in the marketplace;
o maintain relationships with and 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 investments in plant and technology necessary to satisfy the three
factors mentioned above.
On October 7, 2004, the Company acquired O-I Plastic for approximately
$1.2 billion. Since October 7, 2004 the Company's operations have included the
operations of O-I Plastic. With 2004 pro forma sales of $2.2 billion, the
Company has essentially doubled in size. The Company believes that the
acquisition has enabled it to:
o enhance its position as the leading supplier in value-added plastic
packaging, by adding breadth and diversity to its portfolio of blue-chip
customers;
o optimize the complementary technology portfolios and product development
capabilities of the Company and O-I Plastic to pursue attractive conversion
opportunities across all product categories;
o begin to realize significant cost savings by eliminating overlapping and
redundant corporate and administrative functions, targeting productivity
improvements at O-I Plastic's facilities, consolidating facilities in
geographic proximity to make them more cost-efficient and rationalizing
plants and individual production lines with unattractive economics and/or
cost structures. It should be noted that there are significant one-time
costs associated with these cost savings; and
o apply its proven business model, management expertise and best practices to
deliver innovative designs and enhanced service levels to its combined
customer base.
Management believes that the area with the greatest opportunity for
growth continues to be in producing containers for the food and beverage
category because of the continued conversion to plastic packaging, including the
demand for containers for juices, juice drinks, nutritional beverages, sports
drinks, teas, yogurt drinks, snacks, beer and other food products. Over the past
few years, the Company has experienced an overall mix shift toward smaller
containers, since much of the growth in this area has been in the sale of
smaller sized containers. The Company has established itself as a leader in the
value-added segment for hot-fill PET juice containers. Recently, the Company has
been a leading participant in the rapid growth of yogurt drinks and nutritional
beverages where the Company manufactures containers using polyolefin resins.
From the beginning of 1999 through March 31, 2005, the Company has invested over
$1,225.0 million in capital expenditures, which includes approximately $678.0
million of purchase price allocations related to the O-I Plastic acquisition, in
the food and beverage category. For the year ended December 31, 2004, the
Company's sales of containers for the food and beverage category grew to $769.9
million from $333.4 million in 1999, which includes sales of $107.3 million for
the fourth quarter of 2004 related to O-I Plastic.
The Company's household container category is a stable category whose
growth in prior years was fueled by conversions from powders to liquids for such
products as detergents, household cleaners and automatic dishwashing detergent.
Powdered products are packaged in paper based containers such as fiber wound
cans and paperboard cartons. The pace of these conversions now follows GDP
growth as liquids have gained a predominant share of these products. The
Company's strongest position is in liquid laundry detergents, where the Company
is a leader in plastic container design and manufacture. The Company has
continually upgraded its machinery, principally in the United States, to new,
larger, more productive blow molders in order to standardize production lines,
improve flexibility and reduce manufacturing costs.
The Company's North American one quart motor oil container category is
in a mature industry. Unit volume in the one quart motor oil industry decreased
approximately 4% in 2004 as compared to 2003; annual volumes declined an average
of approximately 1% to 2% in prior years. Management believes that the domestic
one quart motor oil container category will continue to decline approximately 2%
to 4% annually for the next several years but believes that there are
significant volume opportunities for automotive products outside of North
America.
The Company is a leading supplier in the personal care/specialty
category that includes products for the hair care, skin care, oral care and
specialty markets. Management believes that its leading supply position results
from its commitment to and reputation in new product development and container
decoration. In addition, the Company has focused on a flexible manufacturing
system to meet customers' frequently changing requirements. This category, in
general, grows with GDP.
25
As of the end of the first quarter the Company operated 30
manufacturing facilities outside of the United States, either on its own or
through joint ventures, in Argentina, Belgium, Brazil, Canada, Ecuador, Finland,
France, Hungary, Mexico, the Netherlands, Poland, Spain, Turkey, the United
Kingdom and Venezuela. 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, as well as the acquisition of O-I Plastic
on October 7, 2004 which included plants in Ecuador, Finland, Mexico, the
Netherlands, the United Kingdom and Venezuela and the acquisition of certain
Tetra-Pak operations on March 24, 2005 which included plants in Brazil, Belgium
and Turkey.
For the three months ended March 31, 2005, 73.2% 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 which the Company has been doing business for over 13 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 three months ended March 31, 2005 and
March 28, 2004. The Company's sales to this customer were 19.3% and 15.6% of
total sales for the three months ended March 31, 2005 and March 28, 2004,
respectively. For the three months ended March 31, 2005, approximately 98% and
2% of the sales to this customer were made in North America and Europe,
respectively. The Company also had sales to one other customer which exceeded
10% of total sales for the three months ended March 28, 2004. The Company's
sales to this customer were 12.1% of total sales for the three months ended
March 28, 2004.
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 United States during the three months ended
March 2005 and 2004:
Three Months Ended
March
-----
2005 2004
---- ----
PET........................ $0.77 $0.64
HDPE....................... 0.63 0.53
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 its cost of goods sold,
as well as 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.
Holdings and the Operating Company, as limited partnerships, do not pay
U.S. 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.
However, certain U.S. subsidiaries acquired as part of O-I Plastic are
corporations and are subject to U.S. federal and state income taxes. The
Company's foreign operations are subject to tax in their local jurisdictions.
Deferred income 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.
26
Results of Operations
The following tables set forth the major components of the Company's
net sales and such net sales expressed as a percentage of total net sales:
Three Months Ended
------------------
March 31, March 28
2005 2004
---- ----
(Dollars in millions)
North America................ $538.7 86.8% $214.6 82.5%
Europe....................... 66.5 10.7 37.0 14.2
South America................ 15.3 2.5 8.7 3.3
------ ----- ------ -----
Total Net Sales........... $620.5 100.0% $260.3 100.0%
====== ===== ====== =====
Three Months Ended
------------------
March 31, March 28,
2005 2004
---- ----
(Dollars in millions)
Food and Beverage............ $352.6 56.8% $154.9 59.5%
Household.................... 124.1 20.0 49.2 18.9
Automotive Lubricants........ 68.5 11.0 56.2 21.6
Personal Care/Specialty (1) 75.3 12.2 -- --
------ ------ ------ -----
Total Net Sales........... $620.5 100.0% $260.3 100.0%
====== ===== ====== =====
(1) Prior to the acquisition of O-I Plastic, sales of Personal Care/Specialty
containers were not significant and are included in the Household category.
Three Months Ended March 31, 2005 Compared to Three Months Ended March 28, 2004
Net Sales. Net sales for the three months ended March 31, 2005
increased $360.2 million, or 138.4%, to $620.5 million from $260.3 million for
the three months ended March 28, 2004. The increase in sales was primarily due
to the acquisition of O-I Plastic, which accounted for $303.6 million, as well
as an increase in resin pricing. Container units sold increased 81.7%. On a
geographic basis, sales for the three months ended March 31, 2005 in North
America increased $324.1 million, or 151.0%, from the three months ended March
28, 2004, including sales for O-I Plastic of $283.7 million, and included higher
container units sold of 116.6%. North American sales in the food and beverage
category, the household category, the automotive lubricants category and the
personal care/specialty category contributed $172.8 million, $68.1 million,
$10.0 million and $73.2 million, respectively, to the increase. Container units
sold in North America increased 104.4% in the food and beverage category,
increased 96.4% in the household category and decreased 4.9% in the automotive
lubricants category. Sales for the three months ended March 31, 2005 in Europe
increased $29.5 million, or 79.7%, compared to sales for the three months ended
March 28, 2004. The increase in sales was primarily due to the acquisition of
O-I Plastic, which accounted for $17.1 million, and favorable exchange rate
changes of approximately $4.1 million. Container units sold in Europe increased
27.2% compared to the same period last year. Sales in South America for the
three months ended March 31, 2005 increased $6.6 million, or 75.9%, from the
three months ended March 28, 2004, in part due to the acquisition of O-I
Plastic, which accounted for $2.8 million, and favorable exchange rate changes
of approximately $0.8 million. Container units sold in South America increased
84.1% compared to the same period last year.
Gross Profit. Gross profit for the three months ended March 31, 2005
increased $29.3 million to $79.5 million from $50.2 million for the three months
ended March 28, 2004. Gross profit for the three months ended March 31, 2005
increased $24.6 million, $2.7 million and $2.0 million in North America, Europe
and South America, respectively, when compared to the three months ended March
28, 2004. The net increase in gross profit resulted primarily from an increase
in unit volume, principally as a result of the acquisition of O-I Plastic, of
$30.2 million and a favorable impact from changes in foreign currency exchange
rates of $1.0 million, offset by a net increase of expenses related to the
acquisition of O-I Plastic and restructuring expenses of $0.9 million and a net
increase in project costs of $1.0 million.
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the three months ended March 31, 2005 increased
$18.4 million to $35.4 million from $17.0 million for the three months ended
March 28, 2004. The increase was primarily due to the acquisition of O-I
Plastic. Non-recurring charges were $6.6 million and $0.1 million for the three
27
months ended March 31, 2005 and March 28, 2004, respectively, comprised of
expenses relating to the acquisition of O-I Plastic, global reorganization costs
and other costs. Selling, general and administrative expenses as a percent of
sales decreased to 5.7% of sales for the three months ended March 31, 2005 from
6.5% of sales for the three months ended March 28, 2004.
Impairment Charges. Impairment charges were $1.6 million for the three
months ended March 31, 2005 as compared to no impairment charges for the three
months ended March 28, 2004. Due to a change in the ability to utilize certain
assets in the Unites States, the Company evaluated the recoverability of these
assets. For these assets to be held and used, the Company determined that the
undiscounted cash flows were below the carrying value of these long-lived
assets. Accordingly, the Company adjusted the carrying values of these
long-lived assets to their estimated fair values, resulting in impairment
charges of $1.6 million for the three months ended March 31, 2005.
Interest Expense, Net. Interest expense, net increased $21.9 million to
$42.8 million for the three months ended March 31, 2005 from $20.9 million for
the three months ended March 28, 2004. The increase was primarily related to
significantly higher debt levels in the first quarter of 2005 following the
refinancing on October 7, 2004 in connection with the acquisition of O-I
Plastic.
Other Expense (Income), Net. Other expense, net was $0.3 million for
the three months ended March 31, 2005 as compared to other income, net of $0.3
million for the three months ended March 28, 2004, primarily due to higher
foreign exchange losses.
Income Tax Provision. Income tax provision increased $8.7 million to
$10.4 million for the three months ended March 31, 2005 from $1.7 million for
the three months ended March 28, 2004. The increase was primarily related to
taxable earnings in certain of the Company's domestic subsidiaries for the three
months ended March 31, 2005 as compared to the three months ended March 28,
2004.
Minority Interest. Minority interest increased $0.1 million to $0.5
million for the three months ended March 31, 2005 from $0.4 million for the
three months ended March 28, 2004 due to an increase related to the Company's
joint venture in Mexico.
Net (Loss) Income. Primarily as a result of factors discussed above,
net loss was $11.5 million for the three months ended March 31, 2005 compared to
net income of $10.5 million for the three months ended March 28, 2004.
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 $9.6 million and $4.9 million for the three months ended March 31,
2005 and March 28, 2004, respectively.
Derivatives
During 2003, the Company entered into four 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
rate of 2.60%, on $400.0 million of term loans. During 2004, the Company entered
into four additional forward starting interest rate swap agreements, under which
the Company receives variable interest based on the Eurodollar rate and pays
fixed interest at a weighted average rate of 3.89%, on $700.0 million of term
loans. Also in 2004, the Company entered into an interest rate cap agreement,
under which the Company would receive interest on $200.0 million notional amount
of variable rate debt based on the Eurodollar Rate to the extent the rate
exceeds 4.50% prior to January of 2006. In the second quarter of 2005, the
Company entered into two additional forward starting interest rate swap
agreements, under which the Company receives variable interest based on the
Eurodollar Rate and pays fixed interest at a weighted average rate of 4.27%, on
$150.0 million of term loans. The interest rate swaps are accounted for as cash
flow hedges. The hedges are highly effective as defined in Statement of
Financial Accounting Standards ("SFAS") 133, "Accounting for Derivative
Instruments and Hedging Activities." The effective portion of the cash flow
hedges is recorded in other comprehensive income ("OCI") and was an unrealized
28
gain of $9.7 million for the three months ended March 31, 2005. Approximately
38% of the amount recorded within OCI is expected to be recognized in 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 $13.1 million unrealized gain
recorded in accumulated OCI as of March 31, 2005.
Liquidity and Capital Resources
In the three months ended March 31, 2005, the Company funded, through
its various borrowing arrangements and operating activities, $95.4 million of
investing activities, consisting of $62.4 million of net capital expenditures,
$32.6 million for the purchase of certain Tetra-Pak operations and $0.4 million
related to the acquisition of O-I Plastic.
In connection with the acquisition of O-I Plastic on October 7, 2004,
the Operating Company, Holdings, GPC Capital Corp. I ("CapCo I") and a syndicate
of lenders entered into a new first-lien credit agreement (the "Credit
Agreement") and a new second-lien credit agreement (the "Second-Lien Credit
Agreement" and, together with the Credit Agreement, the "Credit Agreements")
(the "Transactions"). The Credit Agreements currently consist of a term loan B
to the Operating Company with an initial term loan commitment totaling $1,450.0
million, a second-lien term loan with an initial term loan commitment totaling
$350.0 million and a revolving credit facility to the Operating Company totaling
$250.0 million. The unused availability of the revolving credit facility under
the Credit Agreement at March 31, 2005 was $167.9 million. The term loan B is
payable in quarterly installments and requires payments of $14.5 million in each
of 2005, 2006, 2007, 2008, 2009 and 2010 and $1,363.0 million in 2011. The
Company expects to fund scheduled debt repayments from cash from operations and
unused lines of credit. The revolving credit facility expires on October 7,
2010. The second-lien term loan is payable on April 7, 2012. The obligations of
the Operating Company under the Credit Agreements are guaranteed by Holdings and
certain other subsidiaries of Holdings. As of March 31, 2005, the Company was in
compliance with all covenants.
The Transactions also included the issuance of $250.0 million in Senior
Notes of the Operating Company and $375.0 million in Senior Subordinated Notes
of the Operating Company (collectively "the Notes"). The Notes are
unconditionally guaranteed by Holdings and domestic subsidiaries of the
Operating Company and mature on October 7, 2012 (Senior Notes) and October 7,
2014 (Senior Subordinated Notes). Interest on the Senior Notes is payable
semi-annually at 8.50% and interest on the Senior Subordinated Notes is payable
semi-annually at 9.875%.
At March 31, 2005, the Company's total indebtedness was $2,514.5
million.
The Credit Agreements and Notes contain a number of significant
covenants that, among other things, restrict the Company's ability 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 Credit Agreements, the Company is required to satisfy
specified financial ratios and tests beginning with the first quarter of 2005.
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 Credit Agreements and Indentures by adding minority
interest, extraordinary items, interest expense, interest income, income taxes,
depreciation and amortization expense, impairment charges, the ongoing $5.0
million per year fees paid to certain of the partners of Holdings under existing
agreements, non-cash equity in earnings of joint ventures, other non-cash
charges, the Recapitalization expenses, special charges and unusual items and
certain other charges to net income (loss).
For the three months ended March 31, 2005, covenant compliance EBITDA
was $118.9 million, including certain required adjustments in accordance with
the Company's Credit Agreements of $11.0 million. All of the components of
covenant compliance EBITDA for this period, to the extent applicable, are
derived from information presented in the Company's financial statements
included elsewhere in this Quarterly Report on Form 10-Q, other than the
aforementioned $11.0 million of required adjustments and other non-cash charges
and certain other charges (which includes expenses related to the acquisition of
O-I Plastic, global reorganization costs, project costs and other costs) of
$10.0 million.
29
The breach of covenants in the Credit Agreements that are tied to
ratios based on covenant compliance EBITDA could result in a default under those
agreements and the lenders could elect to declare all amounts borrowed due and
payable. Any such acceleration would also result in a default under the Notes.
Additionally, under the debt agreements, the Company's ability 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
Credit Agreement requires that the Company maintain a covenant compliance EBITDA
to cash interest ratio starting at a minimum of 1.90x and a net debt to covenant
compliance EBITDA ratio starting at a maximum of 6.75x, in each case for the
most recent four quarter period. The Second-Lien Credit Agreement requires that
the Company maintain a covenant compliance EBITDA to cash interest ratio
starting at a minimum of 1.65x and a net debt to covenant compliance EBITDA
ratio starting at a maximum of 7.35x, in each case for the most recent four
quarter period. For the four quarters ended March 31, 2005, Graham Packaging
Company, L.P.'s covenant compliance EBITDA was $457.8 million, which includes
$146.1 million of certain required adjustments in accordance with the Company's
Credit Agreements. The covenant compliance EBITDA to cash interest ratio and net
debt to covenant compliance EBITDA ratio were 2.93x and 5.46x, respectively. The
ability of the Operating Company to incur additional debt and make certain
restricted payments under its Notes is tied to a covenant compliance EBITDA to
interest expense ratio of 2.0 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 $2.2 billion under the Credit Agreements and investments equal to
7.5% of the Operating Company's total assets.
Substantially all of the Company's domestic tangible and intangible
assets are pledged as collateral pursuant to the terms of the Credit Agreements.
Under the Credit Agreements, 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; and
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.
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.
Capital expenditures, net of proceeds on sales of fixed assets and
excluding acquisitions, for the three months ended March 31, 2005 were $62.4
million. 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 current facilities are approximately $60.0 million per year.
Additional capital expenditures beyond this amount will be required to expand
capacity or improve the cost structure.
For the fiscal year 2005, the Company expects to incur approximately
$280.0 million of capital investments, excluding the purchase of the remaining
49% interest in Graham Innopack de Mexico S. de R.L. de C.V., the acquisition of
certain Tetra-Pak operations and the return of any purchase price related to the
acquisition of O-I Plastic. Approximately $50.0 million of these investments are
to realize certain cost savings related to the acquisition of O-I Plastic.
However, total capital investments for 2005 will depend on the size and timing
of growth related opportunities. 2005 capital investments include restructuring
expenditures which are excluded from the capital expenditure covenant in the
Credit Agreement. 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 Credit
Agreement. Management believes that these sources will be sufficient to fund the
Company's ongoing operations and its foreseeable capital requirements.
On July 9, 2002, the Company and Graham Engineering, an affiliated
company, amended the equipment sales, services and license 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 2005.
30
Subsequent Event
In March 2005 the Company executed a Purchase and Sale of Equity
Interest and Joint Venture Termination Agreement under which the Company will
terminate the joint venture agreement with Industrias Innopack, S.A. de C.V. and
acquire all of the equity interests held by Industrias Innopack, S.A. de C.V. in
Graham Innopack de Mexico, S. de R.L. de C.V. and the operating companies
thereunder. Closing of this transaction occurred on May 9, 2005, resulting in a
payment by the Company of $13.9 million.
31
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table provides disclosure as of March 31, 2005 for
financial instruments that have experienced material changes in fair value since
December 31, 2004.
Fair Value
Expected Maturity Date of Interest Rate Swap Agreements at March 31, 2005 March 31,
-------------------------------------------------------------------------
2005 2006 2007 2008 2009 Thereafter Total 2005
---- ---- ---- ---- ---- ---------- ----- ----
(Dollars in thousands) (1)
Derivatives matched
against liabilities:
Pay fixed swaps -- $400,000 $500,000 $ 200,000 -- -- -- $13,129
Pay rate -- 2.60% 3.90% 3.87% -- -- --
Receive rate -- 3.79% 4.55% 4.55% -- -- --
(1) Swaps maturing in 2007 and 2008 are forward starting at expiration of
existing swaps; therefore totals are not applicable.
32
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 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 material weaknesses in Holdings' internal controls. As a result, no
corrective actions were required or undertaken.
33
PART II OTHER INFORMATION
Item 6. 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.
34
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned,
thereunto duly authorized.
Dated: May 13, 2005
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)
35