GRAPHIC PACKAGING INTERNATIONAL CORP - 10-Q Quarterly Report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


x		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended June 30, 2003

OR

o		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: 001-14060

GRAPHIC PACKAGING INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)


Colorado (State or other jurisdiction of incorporation or organization)		84-1208699 (I.R.S. Employer Identification No.)
4455 Table Mountain Drive, Golden, Colorado (Address of principal executive offices)		80403 (Zip Code)

(303) 215-4600
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.


Yes x		No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).


Yes x		No o

There were 36,136,176 shares of common stock outstanding as of August 1, 2003.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of the Shareholders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Exhibit Index
EX-31 Certifications Pursuant to Section 302
EX-32 Certifications Pursuant to Section 906

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)


		Three months ended						Six months ended
		June 30,						June 30,

		2003			2002			2003			2002

Net sales		$	274,994		$	263,917		$	535,877		$	527,641
	Cost of goods sold		242,527			231,022			474,701			460,454

Gross profit			32,467			32,895			61,176			67,187
	Selling, general and administrative expense		18,483			15,808			35,151			30,695
	Merger and acquisition transaction costs		1,331			—			4,029			—

Operating income			12,653			17,087			21,996			36,492
Interest expense			(9,697	)		(12,453	)		(19,113	)		(23,749	)
Loss on early extinguishment of debt			—			—			—			(15,766	)

Income (loss) before income taxes and cumulative effect of change in accounting principle			2,956			4,634			2,883			(3,023	)
Income tax (expense) benefit			(1,212	)		(1,808	)		(1,182	)		1,178

Income (loss) before cumulative effect of change in accounting principle			1,744			2,826			1,701			(1,845	)
Cumulative effect of change in goodwill accounting, net of tax of $0			—			—			—			(180,000	)

Net income (loss)			1,744			2,826			1,701			(181,845	)
Preferred stock dividends declared			2,500			2,500			5,000			5,000

Net income (loss) attributable to common shareholders			($756	)	$	326			($3,299	)		($186,845	)

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share data)


	Three months ended					Six months ended
	June 30,					June 30,

	2003			2002		2003			2002

Net income (loss) attributable to common shareholders per basic and diluted share:
Before cumulative effect of change in accounting principle		($0.02	)	$	0.01		($0.10	)		($0.21	)
Cumulative effect of change in goodwill accounting		—			—		—			(5.55	)

		($0.02	)	$	0.01		($0.10	)		($5.76	)

Weighted average shares outstanding – basic		33,709			32,567		33,648			32,456

Weighted average shares outstanding — diluted		33,709			34,093		33,648			32,456

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(In thousands)


		Three months ended					Six months ended
		June 30,					June 30,

		2003		2002			2003			2002

Net income (loss)		$	1,744	$	2,826		$	1,701			($181,845	)
Other comprehensive income (loss):
	Foreign currency translation adjustments		85		355			(132	)		341
	Recognition of hedge results to interest expense during the period, net of tax of $882 and $1,819, respectively		—		1,421			—			2,928
	Amortization of cancelled interest rate swap, net of tax of $137 and $183, respectively		—		220			—			293
	Change in fair value of cash flow hedges during the period, net of tax of $82 and $130, respectively		—		(132	)		—			(208	)

Other comprehensive income (loss)			85		1,864			(132	)		3,354

Comprehensive income (loss)		$	1,829	$	4,690		$	1,569			($178,491	)

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED BALANCE SHEET
(In thousands, except share data)


				June 30,			December 31,
				2003			2002

ASSETS
Current assets:
Cash and cash equivalents				$	6,959		$	28,626
Accounts receivable, net					76,899			63,546
Inventories:
		Finished			63,693			50,771
		In process			9,754			11,298
		Raw materials			26,924			25,174

Total inventories					100,371			87,243
Other assets					22,589			21,686

			Total current assets		206,818			201,101

Properties, net					399,248			410,592
Goodwill, net					391,803			379,696
Other assets					28,099			29,477

Total assets				$	1,025,968		$	1,020,866

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current maturities of long-term debt				$	3,626		$	3,432
Accounts payable					93,673			82,106
Interest payable					9,958			11,117
Other current liabilities					56,118			58,334

		Total current liabilities			163,375			154,989
Long-term debt					471,512			474,899
Pension liability					43,191			42,310
Other long-term liabilities					42,789			41,630

		Total liabilities			720,867			713,828
Shareholders’ equity
Preferred stock, nonvoting, 20,000,000 shares authorized:
	Series A, $0.01 par value, no shares issued or outstanding Series B, $0.01 par value, 1,000,000 shares issued and outstanding at stated value of $100 per share				100,000			100,000
Common stock, $0.01 par value 100,000,000 shares authorized and 33,723,676 and 33,477,300 issued and outstanding at June 30, 2003, and December 31, 2002, respectively					337			335
Paid-in capital					412,231			416,048
Unearned compensation					(2,112	)		(2,421	)
Retained deficit					(177,511	)		(179,212	)
Accumulated other comprehensive loss					(27,844	)		(27,712	)

		Total shareholders’ equity			305,101			307,038

Total liabilities and shareholders’ equity				$	1,025,968		$	1,020,866

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)


				Six months ended

							June 30,
				2003			2002

Cash flows from operating activities:
	Net income (loss)			$	1,701			($181,845	)
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
		Depreciation			31,201			30,716
		Amortization of debt issuance costs			1,152			1,945
		Loss on early extinguishment of debt			—			15,766
		Goodwill impairment			—			180,000
		Compensation expense settled in stock			1,422			2,237
		Change in current assets and current liabilities, net of effects of acquisition:
			Accounts receivable		(13,353	)		(14,935	)
			Inventory		(11,511	)		(5,554	)
			Other current assets		(903	)		5,833
			Accounts payable		9,967			(11,337	)
			Interest payable		(1,159	)		8,610
			Other current liabilities		(2,216	)		8,540
		Other			2,172			423

Net cash provided by operating activities					18,473			40,399

Cash flows from investing activities:
		Capital expenditures			(13,956	)		(15,454	)
		Acquisition of J.D. Cahill Co. assets			(18,088	)		—

Net cash used in investing activities					(32,044	)		(15,454	)

Cash flows from financing activities:
		Proceeds from borrowings			139,547			613,100
		Repayment of debt			(142,740	)		(619,343	)
		Preferred stock dividends paid			(5,000	)		(5,000	)
		Debt issuance costs			—			(15,922	)
		Common stock issuance and other			97			436

Net cash used in financing activities					(8,096	)		(26,729	)

Cash and cash equivalents:
	Net decrease in cash and cash equivalents				(21,667	)		(1,784	)
	Balance at beginning of period				28,626			6,766

	Balance at end of period			$	6,959		$	4,982

See Notes to Consolidated Financial Statements.

GRAPHIC PACKAGING INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Significant Accounting Policies

Nature of Operations and Basis of Presentation: Graphic Packaging International Corporation (the Company or GPIC) is a manufacturer of packaging products used by consumer product companies as primary packaging for their end-use products.

The consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. A description of the Company’s accounting policies and other financial information is included in the audited financial statements filed with the Securities and Exchange Commission in the Company’s Form 10-K/A for the year ended December 31, 2002.

In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to fairly state the financial position of the Company at June 30, 2003, and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be achieved for the full fiscal year and cannot be used to indicate financial performance for the entire year.

Certain prior year amounts have been reclassified to conform with the current year presentation.

Segment Information: The Company’s reportable segments are based on its method of internal reporting, which is based on product category. The Company has one reportable segment – Packaging. In addition, the Company’s holdings and operations outside the United States are nominal. Therefore, no additional segment information is provided herein.

Goodwill Accounting: SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective on January 1, 2002 for the Company. This statement establishes new accounting and reporting standards that, among other things, eliminate amortization of goodwill and certain intangible assets with indefinite useful lives. The Company does not have any intangible assets with indefinite useful lives; however, as required by the new standard, the Company’s goodwill will be evaluated annually for impairment using a fair-value based approach and, if there is impairment, the carrying amount of goodwill will be written down to its implied fair value. Management re-evaluated the Company’s goodwill for impairment upon signing the merger agreement discussed in Note 5 below. Management determined that the Company’s goodwill is not impaired.

Effective January 1, 2002, the Company assigned the carrying value of its goodwill, totaling $560 million, to one reporting unit. Management completed the transitional impairment testing of the Company’s goodwill and determined that the Company’s goodwill was impaired by $180 million at January 1, 2002. The fair value of the goodwill was derived using the discounted cash flow method. The transitional impairment loss is reflected as a cumulative effect of change in accounting principle in the accompanying statement of operations. Future impairments of goodwill, if any, will be charged to operating income in the period in which impairment arises.

Of the $560 million carrying value of goodwill at December 31, 2001, $418 million was deductible for Federal income tax purposes and $142 million was not deductible. The $180 million goodwill impairment charge consists of approximately $131 million of deductible goodwill and approximately $49 million of non-deductible goodwill. The $131 million tax deductible portion of the impairment charge resulted in a deferred tax benefit/asset of approximately $50 million. The Company recorded a 100% valuation allowance against the approximately $50 million deferred tax asset resulting from recognition of the transitional goodwill impairment loss. Therefore, the cumulative effect of change in accounting principle reflected in the accompanying statement of operations is net of $0 tax benefit.

Stock-Based Compensation: The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation expense has been recognized for stock options or the employee stock purchase plan as all options were granted at the market price. If the Company had elected to recognize compensation cost based on the fair value of the stock options at grant date as allowed by SFAS No. 123, “Accounting for Stock-Based Compensation,” pre-tax compensation expense of $0.3 million and $0.4 million would have been recorded for the quarterly periods ended June 30, 2003 and 2002, respectively; and $1.6 million and $0.8 million would have been recorded for the six month periods ended June 30, 2003 and 2002, respectively. Net loss attributable to common shareholders and loss per share would have been reduced to the pro forma amounts indicated below:


		Three Months Ended June 30,						Six Months Ended June 30,

		2003			2002			2003			2002

					(in thousands, except per share data)
Net income (loss) attributable to common shareholders, as reported			($756	)	$	326			($3,299	)		($186,845	)
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(177	)		(244	)		(944	)		(488	)

Pro forma net income (loss) attributable to common shareholders			($933	)	$	82			($4,243	)		($187,333	)

Income (loss) per share—basic and diluted:
	As reported		($0.02	)	$	0.01

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