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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-2553000
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2401 Pleasant Valley Road
York, Pennsylvania
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(Address of principal executive offices)
17402
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(zip code)
(717) 849-8500
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(Registrant's telephone number, including area code)
Securities Registered pursuant to Section 12(b) of the Act: None
Securities Registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
There is no established public trading market for any of the general or limited
partnership interests in the registrant. The aggregate market value of the
voting securities held by non-affiliates of the registrant as of March 15, 2005
was $-0-. As of March 15, 2005, the general partnership interests in the
registrant were owned by BCP /Graham Holdings L.L.C. and Graham Packaging
Corporation, and the limited partnership interests in the registrant were owned
by BMP/Graham Holdings Corporation and certain members of the family of Donald
C. Graham and entities controlled by them. See Item 12, "Security Ownership of
Certain Beneficial Owners and Management."
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DOCUMENTS INCORPORATED BY REFERENCE
None.
GRAHAM PACKAGING HOLDINGS COMPANY
INDEX
Page
Number
PART I
Item 1. Business.......................................................... 1
Item 2. Properties........................................................ 15
Item 3. Legal Proceedings................................................. 18
Item 4. Submission of Matters to a Vote of Security Holders............... 18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Registrant Purchases of Equity Securities......................... 19
Item 6. Selected Financial Data........................................... 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations..................................................... 22
Item 7A.Quantitative and Qualitative Disclosures About Market Risk........ 34
Item 8. Financial Statements and Supplementary Data....................... 36
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.............................................. 74
Item 9A.Controls and Procedures........................................... 74
Item 9B.Other Information................................................. 74
PART III
Item 10.Advisory Committee Members, Directors and Executive Officers of the
Registrant........................................................ 75
Item 11.Executive Compensation............................................ 76
Item 12.Security Ownership of Certain Beneficial Owners and Management.... 82
Item 13.Certain Relationships and Related Transactions.................... 83
Item 14.Principal Accounting Fees and Services............................ 89
PART IV
Item 15.Exhibits and Financial Statement Schedules........................ 90
I
PART I
Item 1.Business
Unless the context otherwise requires, all references herein to the
"Company" refer to Graham Packaging Holdings Company ("Holdings") and its
subsidiaries. Graham Packaging Company, L.P. (the "Operating Company") is a
wholly owned subsidiary of Holdings. References to the "Blackstone Investors"
herein refer to Blackstone Capital Partners III Merchant Banking Fund L.P.,
Blackstone Offshore Capital Partners III L.P. and Blackstone Family Investment
Partnership III L.P. References to the "Graham Family Investors" herein refer to
Graham Capital Company, GPC Investments LLC and Graham Alternative Investment
Partners I or affiliates thereof or other entities controlled by Donald C.
Graham and his family.
The Company focuses on the sale of value-added plastic packaging
products principally to large, multinational companies in the food and beverage,
household, personal care/specialty and automotive lubricants categories. The
Company has manufacturing facilities in Argentina, Belgium, Brazil, Canada,
Ecuador, Finland, France, Hungary, Mexico, the Netherlands, Poland, Spain,
Turkey, the United Kingdom, the United States and Venezuela.
On October 7, 2004, the Company acquired the blow molded plastic
container business of Owens-Illinois, Inc. ("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.
All references to "Management" herein shall mean the management of the
Operating Company at the time in question, unless the context indicates
otherwise. In addition, unless otherwise indicated, all sources for all industry
data and statistics contained herein are estimates contained in or derived from
internal or industry sources believed by the Company to be reliable.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in
this Annual Report on Form 10-K, including statements regarding the future
financial position, economic performance and results of operations of the
Company (as defined above), 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations" (Part II, Item 7) and
"Quantitative and Qualitative Disclosures About Market Risk" (Part II, Item 7A),
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 ability to successfully integrate the plastic container
business of Owens-Illinois, Inc. into the Company's business and
operations;
o the Company's ability to achieve expected cost savings in connection with
the acquisition of the plastic container business of Owens-Illinois, Inc.;
1
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 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 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 "--Certain Risks of the Business." 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.
General
Holdings was formed under the name "Sonoco Graham Company" on April 3,
1989 as a Pennsylvania limited partnership. It changed its name to "Graham
Packaging Company" on March 28, 1991 and to "Graham Packaging Holdings Company"
on February 2, 1998. The Operating Company was formed under the name "Graham
Packaging Holdings I, L.P." on September 21, 1994 as a Delaware limited
partnership and changed its name to "Graham Packaging Company, L.P." on February
2, 1998. The predecessor to Holdings, controlled by the predecessors of the
Graham Family Investors, was formed in the mid-1970's as a regional domestic
custom plastic container supplier. The primary business activity of Holdings is
its direct and indirect ownership of 100% of the partnership interests in the
Operating Company.
The principal executive offices of the Company are located at 2401
Pleasant Valley Road, York, Pennsylvania 17402, telephone (717) 849-8500. The
Company maintains a website at www.grahampackaging.com. The Company makes
available on its website, free of charge, its annual reports on Form 10-K and
quarterly reports on Form 10-Q as soon as practical after the Company files
these reports with the U.S. Securities and Exchange Commission.
The Company is organized and managed on a geographical basis in three
operating segments: North America, Europe and South America. Each operating
segment includes four major categories: Food and Beverage, Household, Personal
Care/Specialty and Automotive Lubricants.
The Company is a worldwide leader in the design, manufacture and sale
of technology-based, value-added custom blow molded plastic containers for
branded consumer products. The Company supplies its plastic containers to food
and beverage, household, personal care/specialty and automotive lubricants
categories and at the end of 2004 operated 87 manufacturing facilities
throughout North America, Europe and South America. The Company's primary
strategy is to operate in product categories where it will benefit from the
continuing conversion trend toward value-added plastic packaging in place of
more commodity glass, metal and paperboard packaging. The Company targets
branded consumer product manufacturers for whom customized packaging design is a
critical component in their efforts to differentiate their products to
consumers. The Company initially pursues these attractive product areas with one
or two major consumer products companies in each category that it expects will
lead the conversion to plastic packaging for that category. The Company utilizes
its innovative design, engineering and technological capabilities to deliver
customized, value-added products to its customers in these product categories in
order to distinguish their branded products and increase their sales. The
Company collaborates with its customers through joint initiatives in product
design and cost reduction, and innovative operational arrangements, which
include on-site manufacturing facilities.
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From 1998 through 2004, the Company grew net sales at a compounded
annual growth rate of over 14% as a result of its capital investment and focus
on the high growth food and beverage conversions from glass, paper and metal
containers to plastic packaging and as a result of its acquisition on October 7,
2004 of the blow molded plastic container business of Owens-Illinois, Inc. With
leading positions in each of its core businesses, the Company believes it is
poised to continue to benefit from the current conversion trend towards
value-added plastic packaging, offering it the opportunity to realize attractive
returns on investment.
The Company has an extensive blue-chip customer base that includes
many of the world's largest branded consumer products companies. Nearly 30% of
the Company's manufacturing facilities are located on-site at its customers'
plants, which the Company believes provides a competitive advantage in
maintaining and growing customer relationships. The majority of the Company's
sales are made pursuant to long-term customer purchase orders and contracts,
which typically include resin pass-through provisions allowing for substantially
all increases and decreases in the cost of resin, the Company's major raw
material, to be passed through to its customers, thus substantially mitigating
the effect of resin price movements on the Company's profitability. The
Company's containers are made from various plastic resins, including
polyethylene terephthalate, or PET, high density polyethylene, or HDPE, and
polypropylene, or PP. In 2004, the Company's top 20 customers comprised over 78%
of its net sales and have been its customers for an average of 19 years.
The combination of leading technology, product innovation, efficient
manufacturing operations and strong customer relationships, including on-site
facilities, has enabled the Company to consistently generate strong volume
growth, margins and returns on invested capital.
Food and Beverage. In the food and beverage category, the Company
produces containers for shelf-stable, refrigerated and frozen juices,
non-carbonated juice drinks, teas, sports drinks/isotonics, beer, liquor, yogurt
drinks, nutritional drinks, toppings, sauces, jellies and jams. The Company
focuses on major consumer products companies that emphasize distinctive,
value-added packaging in their selected business lines that are undergoing rapid
conversion to plastic from other packaging materials. Management believes, based
on internal estimates, that the Company is the leading domestic supplier of
plastic containers for hot-fill juice and juice drinks, sports drinks, drinkable
yogurt and smoothies, nutritional supplements, wide-mouth food, dressings,
condiments and beer and holds the leading global position in plastic containers
for yogurt drinks. Management believes the Company is strategically positioned
to benefit from the estimated 60% of the domestic hot-fill food and beverage
market that has yet to convert to plastic as well as other evolving domestic and
international conversion opportunities like snack foods, beer, baby food and
adult nutritional beverages.
From 1998 through 2004, the Company's food and beverage container
sales grew at a compound annual growth rate of 22.3%, benefiting primarily from
the rapid market conversion to plastic containers. As a result of technological
innovations, PET containers can be used in "hot-fill" food and beverage
applications where the container must withstand filling temperatures of over 180
degrees Fahrenheit in an efficient and cost-effective manner. The Company has
been a leader in the conversion of multi-serve juices, and it helped initiate
the conversion of containers for single-serve juice drinks and wide-mouth PET
containers for sauces, jellies and jams. The highly customized hot-fill PET
containers allow for the shipment and display of food and beverage products in a
non-refrigerated state, in addition to possessing the structural integrity to
withstand extreme filling conditions. The Company's oxygen barrier PET container
coating, MonosorbTM oxygen scavenger and multi-layer barrier technologies also
extend the shelf life and protect the quality and flavor of its customers'
products.
The Company's largest customers in the food and beverage container
category include, in alphabetical order: Clement-Pappas & Company, Inc.
("Clement-Pappas"), Coca Cola North America ("CCNA"), Group Danone ("Danone"),
H.J. Heinz Company ("Heinz"), Hershey Foods Corporation ("Hershey's"), Ocean
Spray Cranberries, Inc. ("Ocean Spray"), Old Orchard Brands LLC ("Old Orchard"),
PepsiCo, Inc. ("PepsiCo"), The Quaker Oats Company ("Quaker Oats"), Tree Top
Inc. ("Tree Top"), Tropicana Products, Inc. ("Tropicana"), Unilever NV
("Unilever") and Welch Foods, Inc. ("Welch's"). For the years ended December 31,
2004, 2003 and 2002, the Company generated approximately 56.9%, 58.5% and 56.9%,
respectively, of its net sales from food and beverage containers.
Household. In the household container category, the Company is a
leading supplier of plastic containers for products such as liquid fabric care,
dish care and hard-surface cleaners. The 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 has slowed in recent years as liquids have gained a
3
predominant share of these products. The Company's largest customers in this
category include, in alphabetical order: Church & Dwight Co., Inc. ("Church &
Dwight"), Colgate-Palmolive Company ("Colgate-Palmolive"), The Dial Corp.
("Dial"), The Procter and Gamble Company ("Procter & Gamble") and Unilever. For
the years ended December 31, 2004, 2003 and 2002, the Company generated
approximately 20.2%, 19.6% and 20.5%, respectively, of its net sales from
household containers.
Automotive Lubricants. Management believes, based on internal
estimates, that the Company is the leading supplier of one quart/one liter
plastic motor oil containers in the United States, Canada and Brazil. The
Company has been producing automotive lubricants containers since the conversion
to plastic began over 20 years ago and since then has partnered with its
customers to improve product quality and jointly reduce costs through design
improvement, reduced container weight and manufacturing efficiencies. The
Company's joint product design and cost efficiency initiatives with its
customers have also strengthened its service and customer relationships.
Management anticipates automotive lubricants growth opportunities for
the Company in economically developing geographies where the use of motorized
vehicles is growing. The Company also manufactures containers for other
automotive products, such as antifreeze and automatic transmission fluids.
The Company is a supplier of such containers to many of the top
domestic producers of motor oil, including, in alphabetical order: Ashland, Inc.
("Ashland," producer of Valvoline motor oil), BP Lubricants USA Inc. ("BP
Lubricants", an affiliated company of BP plc, producer of Castrol motor oil),
ChevronTexaco Corporation ("ChevronTexaco"), ExxonMobil Corporation
("ExxonMobil") and Shell Oil Products US ("Shell," producer of Shell, Pennzoil
and Quaker State motor oils). For the years ended December 31, 2004, 2003, and
2002, the Company generated approximately 17.8%, 21.9% and 22.6%, respectively,
of its net sales from automotive lubricants containers.
Personal Care/Specialty. Nearly all of the Company's sales in the
personal care/specialty container category were the result of the acquisition of
the blow molded plastic container business of Owens-Illinois, Inc. on October 7,
2004. In the personal care/specialty container category, the Company is a
leading supplier of plastic containers for products such as hair care, skin care
and oral care. The Company's product design, technology development and
decorating capabilities help its customers to build brand awareness for their
products through unique, and frequently changing, packaging design. The Company
believes it has the leading domestic position in plastic containers for hair
care and skin care products. The Company's largest customers in this category
include, in alphabetical order: Procter & Gamble and Unilever. For the year
ended December 31, 2004 the Company generated approximately 5.1% of its net
sales from personal care/specialty containers.
Additional information regarding business segments and product
categories is provided in Note 21 of the Notes to Financial Statements.
Products and Raw Materials
PET containers, which are generally transparent, are utilized for
products where glasslike clarity is valued and shelf stability is required, such
as processed foods, juice, juice drinks and teas. HDPE containers, which are
nontransparent, are utilized to package products such as motor oil, fabric care,
dish care and personal care products and some food products, such as yogurt
drinks, chilled juices and frozen juice concentrates.
PET, HDPE and PP resins constitute the primary raw materials used to
make the Company's products. These materials are available from a number of
suppliers and the Company is not dependent upon any single supplier. Management
believes that the Company maintains an adequate inventory to meet demands, but
there is no assurance that this will be true in the future. The Company's gross
profit has historically been substantially unaffected by fluctuations in resin
prices because industry practice and the Company's customer contracts permit
substantially all changes in resin prices to be passed through to customers
through corresponding changes in product pricing. However, a sustained increase
in resin prices, to the extent that those costs are not passed on to the
end-consumer, would make plastic containers less economical for the Company's
customers and could result in a slower pace of conversions to plastic
containers. The Company operates one of the largest HDPE bottles-to-bottles
recycling plants in the world. The recycling plant is located near the Company's
headquarters in York, Pennsylvania.
4
Customers
Substantially all of the Company's sales are made to major branded
consumer products companies. The Company's customers demand a high degree of
packaging design and engineering to accommodate complex container shapes and
performance and material requirements, in addition to quick and reliable
delivery. As a result, many customers opt for long-term contracts, some of which
have terms up to ten years. A majority of the Company's top twenty customers are
under long-term contracts. The Company's contracts typically contain provisions
allowing for price adjustments based on changes in raw materials and in some
cases the cost of energy and labor, among other factors. In many cases, the
Company is the sole supplier of its customers' custom plastic container
requirements nationally, regionally or for a specific brand. For the year ended
December 31, 2004, the Company had sales to two customers which exceeded 10% of
net sales. The Company's sales were 14.9% and 10.2% of net sales for the year
ended December 31, 2004 to PepsiCo and Danone, respectively. For the year ended
December 31, 2004, the Company's twenty largest customers, who accounted for
over 78% of net sales, were, in alphabetical order:
Customer (1) Category Company Customer Since (1)
------------ -------- --------------------------
Ashland (2) Automotive Lubricants Early 1970s
BP Lubricants (3) Automotive Lubricants Late 1960s
ChevronTexaco Automotive Lubricants Early 1970s
Church & Dwight Household Late 1980s
Clement-Pappas Food and Beverage Mid 1990s
CCNA Food and Beverage Late 1990s
Colgate-Palmolive Household Mid 1980s
Danone Food and Beverage Late 1970s
Dial Household and Personal Care/Specialty Early 1990s
ExxonMobil Automotive Lubricants Early 2000s
Heinz Food and Beverage Early 1990s
Hershey's Food and Beverage Mid 1980s
Ocean Spray Food and Beverage Early 1990s
Old Orchard Food and Beverage Late 1990s
PepsiCo (4) Food and Beverage Early 2000s
Quaker Oats Food and Beverage Late 1990s
Tropicana Food and Beverage Mid 1980s
Procter & Gamble Household and Personal Care/Specialty Late 1950s
Shell (5) Automotive Lubricants Early 1970s
Pennzoil-Quaker State Automotive Lubricants Early 1970s
Tree Top Food and Beverage Early 1990s
Unilever Household, Personal Care/Specialty and Early 1970s
Food and Beverage
Welch's Food and Beverage Early 1990s
(1) These companies include their predecessors, if applicable, and the dates
may reflect customer relationships initiated by predecessors to the Company
or entities acquired by the Company.
(2) Ashland is the producer of Valvoline motor oil.
(3) BP Lubricants is the producer of Castrol motor oil.
(4) PepsiCo includes Quaker Oats and Tropicana.
(5) Shell includes Pennzoil-Quaker State.
International Operations
The Company has significant operations outside the United States in
the form of wholly owned subsidiaries, cooperative joint ventures and other
arrangements. The Company operates 27 manufacturing facilities located in
countries outside of the United States, including Argentina (2), Belgium (1),
Brazil (4), Canada (2), Ecuador (1), Finland (1), France (3), Hungary (1),
Mexico (5), the Netherlands (1), Poland (2), Spain (1), Turkey (1), the United
Kingdom (1) and Venezuela (1).
5
South America. The Company operates four on-site plants and four
off-site plants in South America. In Brazil, the Company has three on-site
plants for the production of motor oil containers, including one for Petrobras
Distribuidora S.A., the national oil company of Brazil. The Company also has an
off-site plant in Brazil for the production of motor oil and agricultural and
chemical containers. In Argentina, the Company has one off-site plant for the
production of tube containers and containers for pharmaceuticals, household and
personal care products and an on-site plant for the production of food and
beverage containers. In Ecuador, the Company has one off-site facility that
manufactures containers for edible oils and returnable containers for beverage
drinks. In Venezuela, the Company has one off-site facility that manufactures
containers for household and personal care products.
Mexico. In December 1999, the Company entered into a joint venture
agreement with Industrias Innopack, S.A. de C.V. to manufacture, sell and
distribute custom plastic containers in Mexico, the Caribbean and Central
America. Pursuant to this joint venture agreement, the Company has an off-site
plant and two on-site plants in Mexico for the production of food and beverage
containers. In addition, the Company operates two off-site facilities located in
Mexico City and Pachuca that manufacture packaging products for all four of the
Company's core product categories.
Europe. The Company has an on-site plant in each of Belgium, France,
Hungary, Poland and Spain and seven off-site plants in Finland, France, the
Netherlands, Poland, Turkey and the United Kingdom, for the production of
plastic containers for all four of the Company's core product categories.
Canada. The Company has one off-site facility and one on-site facility
in Canada to service Canadian and northern U.S. customers. Both facilities are
near Toronto. These facilities produce containers for all four of the Company's
core product categories.
See Note 21 to the Notes to the Consolidated Financial Statements.
Competition
The Company faces substantial regional and international competition
across its product lines from a number of well-established businesses. The
Company's primary competitors include Alpla Werke Alwin Lehner GmbH, Amcor
Limited, Ball Corporation, Consolidated Container Company LLC, Constar
International Inc., Pechiney Plastic Packaging, Inc., Plastipak, Inc. and Silgan
Holdings Inc. Several of these competitors are larger and have greater financial
and other resources than the Company. The Company competes principally on the
basis of rapid delivery of products, production quality and price. Management
believes that the Company competes effectively through its ability to provide
superior levels of service, its speed to market and its ability to develop
product innovations and improve its production technology and expertise.
Marketing and Distribution
The Company's sales are made primarily through its own direct sales
force, as well as through selected brokers. Sales activities are conducted from
the Company's corporate headquarters in York, Pennsylvania and from field sales
offices located in Houston, Texas; Levittown, Pennsylvania; Maryland Heights,
Missouri; Saddlebrook New Jersey; Skokie, Illinois; Mississauga, Ontario,
Canada; Rancho Cucamonga, California; Paris, France; Buenos Aires, Argentina;
Sao Paulo, Brazil; and Sulejowek, Poland. The Company's products are typically
delivered by truck, on a daily basis, in order to meet customers' just-in-time
delivery requirements, except in the case of on-site operations. In many cases,
the Company's on-site operations are integrated with its customers'
manufacturing operations so that deliveries are made, as needed, by direct
conveyance to the customers' filling lines.
Superior Product Design and Development Capabilities
The Company's ability to develop new, innovative containers to meet
the design and performance requirements of its customers has established the
Company as a market leader. The Company has demonstrated significant success in
designing innovative plastic containers that require customized features such as
complex shapes, reduced weight, handles, grips, view stripes, pouring features
and graphic-intensive customized labeling, and often must meet specialized
performance and structural requirements such as hot-fill capability, recycled
material usage, oxygen barriers, flavor protection and multi-layering. In
addition to increasing demand for its customers' products, the Company believes
that its innovative packaging stimulates consumer demand and drives further
conversion to plastic packaging. Consequently, the Company's strong design
capabilities have been especially important to its food and beverage customers,
6
who generally use packaging to differentiate and add value to their brands while
spending less on promotion and advertising. The Company has been awarded
significant contracts based on these unique product design capabilities that it
believes set it apart from its competition. Some of the Company's design and
conversion successes over the past few years include:
o hot-fill PET 16 oz. containers with Monosorb(TM) oxygen scavenger for
Tropicana Season's Best brand, PepsiCo's Dole brand and Welch's brand
juices;
o hot-fill PET and PP wide-mouth jars for Ragu pasta sauce, Seneca
applesauce, Welch's jellies and jams and Signature fruit slices;
o HDPE frozen juice container for Welch's and Old Orchard in the largely
unconverted metal and paper-composite can markets;
o a true wide-mouth PET juice carafe for Tropicana's Pure Premium;
o a multi-layer HDPE canister for Frito-Lay's Stax product;
o a multi-layer SurShot(TM) PET container for ketchup, beer and juices;
o Downy Simple Pleasures bottle for Procter & Gamble;
o the Company's Flexa Tube(TM) for Unilever's South American hair care
products; and
o blow molded polypropylene pots for Danone's spoonable yogurts in Europe.
The Company's innovative designs have also been recognized, through
various awards, by a number of customers and industry organizations, including
its ATP panel-free single serve bottle and 64 oz. rectangular hot-fill bottle
(2004 Ameristar Award), Ensure reclosable bottle (2004 Ameristar Award and 2004
Dupont Award), Flexa Tube(TM) (2003 Dupont Award, 2003 Ameristar Award and 2003
Food & Drug Packaging Award), Coca-Cola Quatro bottle (2002 Mexican Packaging
Association) and Sabritas (PepsiCo) Be-Light bottle (2002 Mexican Packaging
Association).
The Company has an advanced multi-layer injection technology, trade
named SurShot(TM). The Company believes that SurShot(TM) is among the best
multi-layer PET technologies available and billions of plastic containers are
produced and sold each year using SurShot(TM) technology. Currently, the Company
is co-developing an advanced 144 cavity SurShot(TM) machine, under its long-term
technical arrangement with Husky Injection Molding Systems Ltd., which will
offer significant production cost advantages. The Company will have exclusive
rights to use this leading edge machine and expects to commercialize 144 cavity
SurShot(TM) machines.
Management believes the Company's design and development capabilities,
particularly in light of the Company's acquisition on October 7, 2004 of the
blow-molded plastic container business and related technologies of
Owens-Illinois, Inc., has positioned the Company as the packaging design,
development and technology leader in the industry. Over the past several years
the Company has received and has filed for numerous patents. See "--Intellectual
Property".
Manufacturing
A critical component of the Company's strategy is to locate
manufacturing facilities on-site, reducing expensive shipping and handling
charges and increasing production and distribution efficiencies. The Company is
a leader in providing on-site manufacturing arrangements, with nearly 30% of its
87 operating manufacturing facilities at the end of 2004 on-site at customer and
vendor facilities. Within these 87 plants, the Company operates over 950
production lines. The Company sometimes dedicates particular production lines
within a plant to better service customers. The plants generally operate 24
hours a day, five to seven days a week, although not every production line is
run constantly. When customer demand requires, the plants run seven days a week.
The Company's manufacturing historically has not been subject to large seasonal
fluctuations.
In the blow molding process used for HDPE applications, resin pellets
are blended with colorants or other necessary additives and fed into the
extrusion machine, which uses heat and pressure to form the resin into a round
hollow tube of molten plastic called a "parison." Bottle molds mounted radially
on a wheel capture the parison as it leaves the extruder. Once inside the mold,
air pressure is used to blow the parison into the bottle shape of the mold.
While certain of the Company's competitors also use wheel technology in their
production lines, the Company has developed a number of proprietary improvements
which Management believes permit the Company's wheels to operate at higher
speeds and with greater efficiency in the manufacture of containers with one or
more special features, such as multiple layers and in-mold labeling.
7
In the stretch blow molding process used for hot-fill PET
applications, resin pellets are fed into an injection molding machine that uses
heat and pressure to mold a test tube shaped parison or "preform." The preform
is then fed into a blow molder where it is re-heated to allow it to be formed
through a stretch blow molding process into a final container. During this
re-heat and blow process, special steps are taken to induce the temperature
resistance needed to withstand high temperatures on customer filling lines.
Management believes that the injection molders and blow molders used by the
Company are widely recognized as the leading technologies for high speed
production of hot-fill PET containers and have replaced less competitive
technologies used initially in the manufacture of hot-fill PET containers.
Other blow molding processes include: various types of extrusion blow
molding for medium- and large-sized HDPE and PP containers; stretch blow molding
for medium-sized PET containers; injection blow molding for personal care
containers in various materials; two-stage PET blow molding for high-volume,
high-performance mono-layer, multi-layer and heat set PET containers; and
proprietary blow molding for drain-back systems and other specialized
applications.
The Company also operates a variety of bottle decorating platforms.
Labeling and decorating is accomplished through in-mold techniques or one of
many post-molding methods. Post-molding methods include pressure sensitive
labelers, rotary full-wrap labelers, silk-screen decoration, heat transfer and
hot stamp. These post-molding methods of decoration or labeling can be in-line
or off-line with the molding machine. Typically, these decoration methods are
used extensively for bottles in the personal care/specialty product category.
The Company has employed various types and styles of automation to
rationalize labor costs, accomplish assembly tasks, increase throughput and
improve quality. Types of automation range from case and tray packers to laser
guided vehicles. Other automation equipment includes box and bulk bottle
palletizers, pick and place robots, automatic in-line leak detection and vision
inspection systems. Assembly automation includes bottle trimming, spout
spinwelding or insertion, tap insertion and tube cutting/welding. Management
believes that there are additional automation opportunities which could further
rationalize labor costs and improve plant efficiency.
The Company maintains a program of quality control with respect to
suppliers, line performance and packaging integrity for its containers. The
Company's production lines are equipped with various automatic inspection
machines that electronically inspect containers. Additionally, product samples
are inspected and tested by Company employees on the production line for proper
dimensions and performance and are also inspected and audited after packaging.
Containers that do not meet quality standards are crushed and recycled as raw
materials. The Company monitors and updates its inspection programs to keep pace
with modern technologies and customer demands. Quality control laboratories are
maintained at each manufacturing facility to test its products.
The Company has highly modernized equipment in its plants, consisting
primarily of rotational wheel systems and shuttle systems, both of which are
used for HDPE and PP blow molding, and injection-stretch blow molding systems
for value-added PET containers. The Company is also pursuing development
initiatives in barrier technologies to strengthen its position in the food and
beverage container business. In the past, the Company has achieved substantial
cost savings in its manufacturing process through productivity and process
enhancements, including increasing line speeds, utilizing recycled products,
reducing scrap and optimizing plastic weight requirements for each product's
specifications.
Capital expenditures, net of proceeds on sales of fixed assets and
excluding acquisitions, for 2004, 2003 and 2002 were $151.9 million, $91.8
million and $92.4 million, respectively. Management believes that capital
expenditures to maintain and upgrade property, plant and equipment are important
to remain competitive. Management estimates that on average the annual capital
expenditures required to maintain the Company's current facilities are
approximately $60 million per year. For 2005, the Company expects to make
capital expenditures, excluding acquisitions, of approximately $280 million,
which includes approximately $50 million related to the integration of the O-I
acquisition and the realization of certain cost savings.
Ownership
Holdings is currently owned by (i) BMP/Graham Holdings Corporation, a
Delaware corporation (97%-owned by the Blackstone Investors and 3%-owned by the
Management) ("Investor LP"), who owns an 81% limited partnership interest, (ii)
BCP/Graham Holdings L.L.C., a Delaware limited liability company (wholly owned
by BMP/Graham Holdings Corporation) ("Investor GP" and, together with Investor
LP, the "Equity Investors"), who owns a 4% general partnership interest, (iii)
GPC Holdings, L.P., a Pennsylvania limited partnership (indirectly owned by the
8
Graham Family Investors), who owns a 14% limited partnership and (iv) Graham
Packaging Corporation, a Pennsylvania corporation (indirectly owned by the
Graham Family Investors), who owns a 1% general partnership. Certain members of
Management own an aggregate of approximately 3% of the outstanding common stock
of Investor LP, which constitutes approximately a 2.5% interest in Holdings. In
addition, DB Investment Partners, Inc. owns approximately 4.8% of the
outstanding common stock of Investor LP.
Holdings owns a 99% limited partnership interest in the Operating
Company, and GPC Opco GP LLC ("Opco GP"), a wholly owned subsidiary of Holdings,
owns a 1% general partnership interest in the Operating Company. See "Security
Ownership of Certain Beneficial Owners and Management" (Item 12).
GPC Capital Corp. I (CapCo I"), a wholly owned subsidiary of the
Operating Company, and GPC Capital Corp. II ("CapCo II"), a wholly owned
subsidiary of Holdings, were incorporated in Delaware in January 1998. The sole
purpose of CapCo I is to act as co-obligor of the Senior Notes and Senior
Subordinated Notes, as defined herein, and as co-borrower under the Credit
Agreement and Second-Lien Credit Agreement (as defined herein) (see "Certain
Risks of the Business"). CapCo II currently has no obligations under any of the
Company's outstanding indebtedness. CapCo I and CapCo II have only nominal
assets, do not conduct any operations and did not receive any proceeds of the
refinancing. Accordingly, investors in the Notes must rely on the cash flow and
assets of the Operating Company or the cash flow and assets of Holdings, as the
case may be, for payment of the Notes.
Employees
As of December 31, 2004, the Company had approximately 8,600
employees, 7,000 of which were located in North America, 1,100 of which were
located in Europe and 500 of which were located in South America. Approximately
83% of the Company's employees are hourly wage employees, 50% of whom are
represented by various labor unions and are covered by various collective
bargaining agreements that expire between April 2005 and October 2009. In North
America, 84% of the Company's employees are hourly employees, 46% of whom are
represented by various labor unions. In Europe, 79% of the Company's employees
are hourly employees, 93% of whom are represented by various labor unions. In
South America, 83% of the Company's employees are hourly employees, 25% of whom
are represented by various labor unions. Management believes that it enjoys good
relations with the Company's employees.
Environmental Matters
The Company's operations, both in the United States and abroad, are
subject to national, state, provincial and/or local laws and regulations that
impose limitations and prohibitions on the discharge and emission of, and
establish standards for the use, disposal and management of, regulated materials
and waste, and that impose liability for the costs of investigating and cleaning
up, and damages resulting from, present and past spills, disposals or other
releases of hazardous substances or materials. These domestic and international
environmental laws can be complex and may change often; compliance expenses can
be significant and violations may result in substantial fines and penalties. In
addition, environmental laws such as the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, also known as "Superfund" in
the United States, impose strict, and in some cases joint and several, liability
on specified responsible parties for the investigation and cleanup of
contaminated soil, groundwater and buildings, and liability for damages to
natural resources at a wide range of properties. As a result, the Company may be
liable for contamination at properties that it currently owns or operates, as
well as at its former properties or off-site properties where it may have sent
hazardous substances. The Company is not aware of any material noncompliance
with the environmental laws currently applicable to it and is not the subject of
any material claim for liability with respect to contamination at any location.
Based on existing information, Management believes that it is not reasonably
likely that losses related to known environmental liabilities, in aggregate,
will be material to the Company's financial position, results of operations,
liquidity or cash flows. For its operations to comply with environmental laws,
the Company has incurred and will continue to incur costs, which were not
material in fiscal 2004 and are not expected to be material in the future.
A number of governmental authorities, both in the United States and
abroad, have considered, are expected to consider or have passed legislation
aimed at reducing the amount of disposed plastic wastes. Those programs have
included, for example, mandating certain rates of recycling and/or the use of
recycled materials, imposing deposits or taxes on plastic packaging material
and/or requiring retailers or manufacturers to take back packaging used for
their products. That legislation, as well as voluntary initiatives similarly
aimed at reducing the level of plastic wastes, could reduce the demand for
9
certain plastic packaging, result in greater costs for plastic packaging
manufacturers or otherwise impact the Company's business. Some consumer products
companies, including some of the Company's customers, have responded to these
governmental initiatives and to perceived environmental concerns of consumers by
using containers made in whole or in part of recycled plastic. The Company
operates one of the largest HDPE bottles-to-bottle recycling plants in the
world. Management believes that to date the Company has not materially adversely
been affected by these initiatives and developments.
Intellectual Property
The Company holds various patents and trademarks. While in the
aggregate the patents are of material importance to its business, the Company
believes that its business is not dependent upon any one patent or trademark.
The Company also relies on unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain its
competitive position. Others could, however, obtain knowledge of this
proprietary know-how through independent development or other access by legal
means. In addition to its own patents and proprietary know-how, the Company is a
party to licensing arrangements and other agreements authorizing it to use other
proprietary processes, know-how and related technology and/or to operate within
the scope of certain patents owned by other entities. The duration of the
Company's licenses generally ranges from 5 to 17 years. In some cases the
licenses granted to the Company are perpetual and in other cases the term of the
license is related to the life of the patent associated with the license. The
Company also has licensed some of its intellectual property rights to third
parties. See also "Certain Relationships and Related Transactions" (Item 13).
Certain Risks of the Business
Ability to successfully integrate the blow molded plastic container
business of Owens-Illinois, Inc. into the Company's business and operations. On
October 7, 2004, the Company acquired the blow molded plastic container business
of Owens-Illinois, Inc. ("O-I Plastic") (the "Acquisition"). Prior to the
consummation of the Acquisition, the Company and O-I Plastic operated as
separate entities. If the Company cannot, following the Acquisition,
successfully integrate O-I Plastic's operations with its operations, the Company
may experience material negative consequences to its business, financial
condition or results of operations. The integration of companies that have
previously been operated separately involves a number of risks, including, but
not limited to:
o demands on management related to the significant increase in the size of
the business for which they are responsible;
o diversion of management's attention from the management of daily operations
to the integration of the acquired business;
o management of employee relations across facilities;
o difficulties in the assimilation of different corporate cultures and
practices, as well as in the assimilation and retention of dispersed
personnel and operations;
o difficulties and unanticipated expenses related to the integration of
departments, systems (including accounting systems), technologies, books
and records, procedures and controls (including internal accounting
controls, procedures and policies), as well as in maintaining uniform
standards, including environmental management systems;
o expenses of any undisclosed or potential liabilities; and
o ability to maintain the Company's customers and O-I Plastic's customers
after the Acquisition.
Successful integration of O-I Plastic's operations with the Company's
operations will depend on the Company's ability to manage the combined
operations, to realize opportunities for revenue growth presented by broader
product offerings and expanded geographic coverage and to eliminate redundant
and excess costs. If its integration efforts are not successful, the Company may
not be able to maintain the levels of revenues, earnings or operating efficiency
that the Company and O-I Plastic achieved or might have achieved separately.
Subsequent to the Acquisition through the year ending December 31,
2006, the Company expects to make approximately $160 million in net cash
expenditures to realize certain cost savings, of which approximately half of the
expenditures will be in the form of capital expenditures. These expenditures
will relate primarily to severance, systems integration, closing facilities and
relocating production equipment.
10
Ability to achieve expected cost savings in connection with the
acquisition of O-I Plastic. Even if the Company is able to integrate the
operations of O-I Plastic successfully, it does not assure that this integration
will result in the realization of the full benefits of the cost savings or
revenue enhancements that the Company expects to result from this integration or
that these benefits will be achieved within the timeframe that the Company
expects. The cost savings from the Acquisition may be offset by costs incurred
in integrating O-I Plastic's operations, as well as by increases in other
expenses, by operating losses or by problems with the Company's or O-I Plastic's
businesses unrelated to the Acquisition.
Restrictive Debt Covenants. On October 7, 2004 the Operating Company,
Holdings, 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 Credit Agreement consists of a term loan to the
Operating Company with an initial term loan commitment totaling $1,450.0 million
(the "B Loan") and a $250.0 million revolving credit facility (the "Revolving
Credit Facility"). The Second-Lien Credit Agreement consists of a term loan to
the Operating Company with an initial term loan commitment totaling $350.0
million (the "Second-Lien Loan"). The Credit Agreements and the Indentures for
the Senior Notes and the Senior Subordinated Notes (each as defined herein)
contain a number of significant covenants that, among other things, restrict the
ability of the Company to dispose of assets, repay other indebtedness, incur
additional indebtedness, pay dividends, prepay subordinated indebtedness, incur
liens, make capital expenditures, investments or acquisitions, engage in mergers
or consolidations, engage in transactions with affiliates and otherwise restrict
the activities of the Company. In addition, under the Credit Agreements, the
Operating Company is required to satisfy specified financial ratios and tests.
The ability of the Operating Company to comply with those provisions may be
affected by events beyond the Operating Company's control, and there can be no
assurance that the Operating Company will meet those tests. The breach of any of
these covenants could result in a default under the Credit Agreements and the
lenders could elect to declare all amounts borrowed under the Credit Agreements,
together with accrued interest, to be due and payable and could proceed against
any collateral securing that indebtedness.
Substantial Leverage. The Company is highly leveraged. As of December
31, 2004, the Company had consolidated indebtedness of $2,465.2 million and
partners' deficit of $434.1 million and the Company's annual net interest
expense for 2004 was $140.5 million. As of December 31, 2004, $1,827.9 million
of the Company's total indebtedness was incurred under floating interest rates
arrangements, $600.0 million of which was subject to interest rate swaps and
caps which fixed the interest rate. As a result, as of December 31, 2004,
$1,227.9 million of the Company's indebtedness was subject to floating interest
rates. A 1% increase in interest rates would increase the Company's annual
interest payments on this debt by approximately $12.3 million. Availability
under the Company's Revolving Credit Facility as of December 31, 2004 was $221.9
million (as reduced by $9.1 million of outstanding letters of credit). The
Company intends to fund their operating activities, integration costs and
capital expenditures in part through borrowings under this Revolving Credit
Facility. The Company's Credit Agreements and Indentures permit the Company to
incur additional indebtedness, subject to certain limitations. All loans
outstanding under the Revolving Credit Facility are scheduled to be repaid in
October 2010 and scheduled annual principal repayments for the B Loan under the
Credit Agreement are as follows:
o 2005 - $14.5 million
o 2006 - $14.5 million
o 2007 - $14.5 million
o 2008 - $14.5 million
o 2009 - $14.5 million
o 2010 - $14.5 million
o 2011 - $1,363.0 million
All amounts outstanding under the Second-Lien Credit Agreement are scheduled to
be repaid in April 2012.
The Company's high degree of leverage could have important
consequences to the holders of the Notes, including, but not limited to, the
following: (i) the Company's ability to refinance existing indebtedness or to
obtain additional financing for working capital, capital expenditures,
acquisitions, general corporate purposes or other purposes may be impaired in
the future; (ii) a substantial portion of the Company's cash flow from
operations must be dedicated to the payment of principal and interest on their
indebtedness, thereby reducing the funds available for other purposes, including
capital expenditures necessary for maintenance of the Company's facilities and
for the growth of its business; (iii) some of the Company's borrowings are and
will continue to be at variable rates of interest, which expose the Company to
the risk of increased interest rates; (iv) the Company may be substantially more
11
leveraged than some of its competitors, which may place the Company at a
competitive disadvantage; and (v) the Company's substantial degree of leverage
may hinder its ability to adjust rapidly to changing market conditions and could
make it more vulnerable in the event of a downturn in general economic
conditions or in its business.
Exposure to Fluctuations in Resin Prices and Dependence on Resin
Supplies. The Company depends on large quantities of PET, HDPE and other resins
in manufacturing its products. One of its primary strategies is to grow the
business by capitalizing on the conversion from glass, metal and paper
containers to plastic containers. 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. Historically, the Company
has passed through substantially all increases and decreases in the cost of
resins to its customers through contractual provisions and standard industry
practice; however, if the Company is not able to do so in the future and there
are sustained increases in resin prices, the Company's operating margins could
be affected adversely. Furthermore, if the Company cannot obtain sufficient
amounts of resin from any of its suppliers, or if there is a substantial
increase in oil or natural gas prices, and as a result an increase in resin
prices, the Company may have difficulty obtaining alternate sources quickly and
economically, and its operations and profitability may be impaired.
Risks Associated with International Operations. The Company has
significant operations outside the United States in the form of wholly owned
subsidiaries, cooperative joint ventures and other arrangements. As a result,
the Company is subject to risks associated with operating in foreign countries,
including fluctuations in currency exchange rates, imposition of limitations on
conversion of foreign currencies into dollars or remittance of dividends and
other payments by foreign subsidiaries, imposition or increase of withholding
and other taxes on remittances and other payments by foreign subsidiaries, labor
relations problems, hyperinflation in some foreign countries and imposition or
increase of investment and other restrictions by foreign governments or the
imposition of environmental or employment laws. The Company typically prices its
products in its foreign operations in local currencies. As a result, an increase
in the value of the dollar relative to the local currencies of profitable
foreign subsidiaries can have a negative effect on the Company's profitability.
Exchange rate fluctuations increased comprehensive income by $23.4 million,
$24.5 million and $12.5 million for the years ended December 31, 2004, 2003 and
2002, respectively. The above-mentioned risks in North America, Europe and South
America may hurt the Company's ability to generate revenue in those regions in
the future.
Dependence on Significant Customer. PepsiCo, through its Gatorade,
Tropicana, Dole and Frito-Lay product lines, is the Company's largest customer
and all product lines the Company provides to PepsiCo collectively accounted for
approximately 14.9% of the Company's net sales for the year ended December 31,
2004. For the year ended December 31, 2004, Danone also accounted for 10.2% of
the Company's net sales. The Company is not the sole supplier of plastic
packaging to either of these companies. If either PepsiCo or Danone terminated
its relationship with the Company, it could have a material adverse effect upon
the Company's business, financial position or results of operations.
Additionally, in 2004 the Company's top 20 customers comprised over 78% of its
net sales. If any of the Company's largest customers terminated its relationship
with the Company, the Company would lose a significant source of revenues and
profits. Additionally, the loss of one of the Company's largest customers could
result in the Company having excess capacity if it is unable to replace that
customer. This could result in the Company having excess overhead and fixed
costs and possible impairment of long-lived assets. This could also result in
the Company's selling, general and administrative expenses and capital
expenditures representing increased portions of its revenues.
Customer Requirements. The majority of the Company's sales are made
pursuant to long-term customer purchase orders and contracts, which typically
include resin pass-through provisions allowing for substantially all increases
and decreases in the cost of resin, the Company's major raw material, to be
passed through to its customers, thus substantially mitigating the effect of
resin price movements on the Company's profitability. Customers' purchase orders
and contracts typically vary in length and can be as many as ten years. The
contracts, including those with PepsiCo, generally are requirements contracts
which do not obligate the customer to purchase any given amount of product from
the Company. Prices under these arrangements are tied to market standards and
therefore vary with market conditions. Despite the existence of supply contracts
with its customers, although in the past its customers have not purchased
amounts under supply contracts that in the aggregate are materially lower than
what the Company has expected, the Company faces the risk that in the future
customers will not continue to purchase amounts that meet its expectations.
Reduced Prices. The Company operates in a competitive environment. In
the past, the Company has encountered pricing pressures in its markets and could
experience further declines in prices of plastic packaging as a result of
competition. Although the Company has been able over time to partially offset
pricing pressures by reducing its cost structure and making the manufacturing
process more efficient, the Company may not be able to continue to do so in the
12
future. The Company's business, results of operations and financial condition
may be materially adversely affected by further declines in prices of plastic
packaging and such further declines could lead to a loss of business and a
decline in its margins.
Product Innovations. The Company's success may depend on its ability
to adapt to technological changes in the plastic packaging industry. If the
Company is unable to timely develop and introduce new products, or enhance
existing products, in response to changing market conditions or customer
requirements or demands, its business and results of operations could be
materially and adversely affected.
Proprietary Technology. The Company relies on a combination of patents
and trademarks, licensing agreements and unpatented proprietary know-how and
trade secrets to establish and protect its intellectual property rights. The
Company enters into confidentiality agreements with customers, vendors,
employees, consultants and potential acquisition candidates as necessary to
protect its know-how, trade secrets and other proprietary information. However,
these measures and its patents and trademarks may not afford complete protection
of its intellectual property, and it is possible that third parties may copy or
otherwise obtain and use its proprietary information and technology without
authorization or otherwise infringe on its intellectual property rights. The
Company cannot assure that its competitors will not independently develop
equivalent or superior know-how, trade secrets or production methods. If the
Company is unable to maintain the proprietary nature of its technologies, its
profit margins could be reduced as competitors imitating its products could
compete aggressively against the Company in the pricing of certain products and
its business; thus, results of operations and financial condition may be
materially adversely affected.
The Company is involved in litigation from time to time in the course
of its business to protect and enforce its intellectual property rights, and
third parties from time to time initiate litigation against the Company
asserting infringement or violation of their intellectual property rights. The
Company cannot assure that its intellectual property rights have the value that
the Company believes them to have or that its products will not be found to
infringe upon the intellectual property rights of others. Further, the Company
cannot assure that it will prevail in any such litigation, or that the results
or costs of any such litigation will not have a material adverse effect on its
business. Any litigation concerning intellectual property could be protracted
and costly and is inherently unpredictable and could have a material adverse
effect on the Company's business and results of operations regardless of its
outcome.
Environmental Liabilities. The Company is subject to a variety of
national, state, foreign, provincial and/or local laws and regulations that
impose limitations and prohibitions on the discharge and emission of, and
establish standards for the use, disposal and management of, regulated materials
and waste, and that impose liability for the costs of investigating and cleaning
up, and damages resulting from, present and past spills, disposals or other
releases of hazardous substances or materials. These domestic and international
environmental laws can be complex and may change often, the compliance expenses
can be significant and violations may result in substantial fines and penalties.
In addition, environmental laws such as the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, also known as
"Superfund" in the United States, impose strict, and in some cases joint and
several, liability on specified responsible parties for the investigation and
cleanup of contaminated soil, groundwater and buildings, and liability for
damages to natural resources at a wide range of properties. As a result, the
Company may be liable for contamination at properties that it currently owns or
operates, as well as at its former properties or off-site properties where it
may have sent hazardous substances. As a manufacturer, the Company has an
inherent risk of liability under environmental laws, both with respect to
ongoing operations and with respect to contamination that may have occurred in
the past on its properties or as a result of its operations. The Company could,
in the future, incur a material liability resulting from the costs of complying
with environmental laws or any claims concerning noncompliance, or liability
from contamination.
The Company cannot predict what environmental legislation or
regulations will be enacted in the future, how existing or future laws or
regulations will be administered or interpreted, or what environmental
conditions may be found to exist at its facilities or at third party sites for
which the Company is liable. Enactment of stricter laws or regulations, stricter
interpretations of existing laws and regulations or the requirement to undertake
the investigation or remediation of currently unknown environmental
contamination at its own or third party sites may require the Company to make
additional expenditures, some of which could be material.
In addition, a number of governmental authorities, both in the United
States and abroad, have considered, or are expected to consider, legislation
aimed at reducing the amount of plastic wastes disposed. Programs have included,
for example, mandating certain rates of recycling and/or the use of recycled
materials, imposing deposits or taxes on plastic packaging material and
requiring retailers or manufacturers to take back packaging used for their
products. Legislation, as well as voluntary initiatives similarly aimed at
reducing the level of plastic wastes, could reduce the demand for certain
13
plastic packaging, result in greater costs for plastic packaging manufacturers
or otherwise impact the Company's business. Some consumer products companies,
including some of the Company's customers, have responded to these governmental
initiatives and to perceived environmental concerns of consumers by using
containers made in whole or in part of recycled plastic. Future legislation and
initiatives could adversely affect the Company in a manner that would be
material.
Control by Blackstone. The Blackstone Investors indirectly control
approximately 85% of the partnership interests in Holdings. Pursuant to the
Fifth Amended and Restated Limited Partnership Agreement (the "Holdings
Partnership Agreement") by and among the Graham Family Investors, Graham
Packaging Corporation, BCP/Graham Holdings L.L.C. and BMP/Graham Holdings
Corporation, holders of a majority of the partnership interests generally have
the sole power, subject to certain exceptions, to take actions on behalf of
Holdings, including the appointment of management and the entering into of
mergers, sales of substantially all assets and other extraordinary transactions.
For example, the Blackstone Investors could cause the Company to make
acquisitions that increase the amount of its indebtedness or to sell
revenue-generating assets, impairing the Company's ability to make payments
under its debt agreements. Additionally, the Blackstone Investors are in the
business of making investments in companies and may from time to time acquire
and hold interests in businesses that compete directly or indirectly with the
Company. The Blackstone Investors may also pursue acquisition opportunities that
may be complementary to the Company's business, and as a result, those
acquisition opportunities may not be available to the Company.
Dependence on Key Personnel. The success of the Company depends to a
large extent on a number of key employees, and the loss of the services provided
by them could have a material adverse effect on the Company's ability to operate
its business and implement its strategies effectively. In particular, the loss
of the services provided by David L. Andrulonis, G. Robinson Beeson, John E.
Hamilton, Peter T. Lennox, Roger M. Prevot, Ashok Sudan, Philip R. Yates or Paul
Young, among others, could have a material adverse effect on the management of
the Company. The Company does not maintain "key" person insurance on any of its
executive officers.
Risks Associated with Possible Future Acquisitions. The Company's
future growth may be a function, in part, of acquisitions of other consumer
goods packaging businesses. To the extent that it grows through acquisitions,
the Company will face the operational and financial risks commonly encountered
with that type of a strategy. The Company would also face operational risks,
such as failing to assimilate the operations and personnel of the acquired
businesses, disrupting the Company's ongoing business, dissipating the Company's
limited management resources and impairing relationships with employees and
customers of the acquired business as a result of changes in ownership and
management. Additionally, the Company has incurred indebtedness to finance past
acquisitions, and would likely incur additional indebtedness to finance future
acquisitions, as permitted under the Credit Agreements and the Notes, in which
case it would also face certain financial risks associated with the incurring of
additional indebtedness to make an acquisition, such as reducing its liquidity,
access to capital markets and financial stability.
Additionally, the types of acquisitions the Company will be able to
make are limited by the Company's Credit Agreements, which limit the amount that
the Company may pay for an acquisition to $120 million plus additional amounts
based on an unused available capital expenditure limit, certain proceeds from
new equity issuances and other amounts.
Labor Relations. Approximately 3,600 of the Company's approximately
8,600 employees are covered by collective bargaining agreements with various
international and local labor unions. The Company's union agreements typically
have a term of three or four years and thus regularly expire and require
negotiation in the course of the Company's business. Over the next twelve
months, collective bargaining agreements covering approximately 1,500 employees
will expire. Management believes that the Company enjoys good relations with its
employees, and there have been no significant work stoppages in the past 3
years. Upon the expiration of any of the Company's collective bargaining
agreements, however, the Company may be unable to negotiate new collective
bargaining agreements on terms favorable to the Company, and the Company's
business operations may be interrupted as a result of labor disputes or
difficulties and delays in the process of renegotiating the Company's collective
bargaining agreements. A work stoppage at one or more of the Company's
facilities could have a material adverse effect on its business, results of
operations and financial condition.
Blow Molding Equipment. Access to blow molding technology is important
to the Company's ability to expand its operations. Prior to the Acquisition, the
Company's primary blow molding technology was supplied by Graham Engineering and
the Sidel Group or by the Company's own machinery rebuilding and refurbishing
operations. Following the Acquisition, the Company has access to a broader array
of blow molding equipment and suppliers. However, if the Company fails to access
this new blow molding equipment or these suppliers, the Company's ability to
expand its operations may be materially and adversely affected unless
alternative sources of technology could be arranged.
14
Item 2. PropertiesItem 2. Properties
At the end of 2004, the Company owned or leased 88 plants, and
operated 87 plants, located in Argentina, Belgium, Brazil, Canada, Ecuador,
Finland, France, Hungary, Mexico, the Netherlands, Poland, Spain, Turkey, the
United Kingdom, the United States and Venezuela. Twenty-six of the Company's
plants are located on-site at customer and vendor facilities. Certain operations
in Mexico are pursuant to a joint venture arrangement in which the Company owns
a majority interest. The Company believes that its plants, which are of varying
ages and types of construction, are in good condition, are suitable for its
operations and generally are expected to provide sufficient capacity to meet its
requirements for the foreseeable future.
The following table sets forth the location of the Company's principal
plants and administrative facilities, their approximate current square footage,
whether on-site or off-site and whether leased or owned.
Size On-Site
Location (Square Feet) or Off-Site Leased/Owned
-------- ------------- ----------- ------------
U.S. Packaging Facilities(1)
1. Findlay, Ohio 406,800 Off-Site Owned
2. York, Pennsylvania 395,554 Off-Site Owned
3. St. Louis, Missouri (2) 327,992 Off-Site Leased
4. Maryland Heights, Missouri 308,961 Off-Site Owned
5. Henderson, Nevada 298,407 Off-Site Owned
6. Vandalia, Illinois 277,500 Off-Site Owned
7. Rockwall, Texas 241,000 Off-Site Owned
8. Modesto, California 238,000 Off-Site Owned
9. Hazleton, Pennsylvania 218,384 On-Site Leased
10. Holland, Michigan 218,168 Off-Site Leased
11. Fremont, Ohio 210,883 Off-Site Owned
12. Bedford, New Hampshire 210,510 Off-Site Owned
13. York, Pennsylvania 210,370 Off-Site Leased
14. Tolleson, Arizona 209,468 Off-Site Owned
15. Cartersville, Georgia 208,000 Off-Site Owned
16. Florence (Food and Beverage), Kentucky 203,000 Off-Site Owned
17. Edison, New Jersey 194,000 Off-Site Owned
18. Hazleton (Food and Beverage), Pennsylvania 185,080 Off-Site Owned
19. Harrisonburg, Virginia 180,000 Off-Site Owned
20. La Mirada, California (2) 177,000 Off-Site Leased
21. Selah, Washington 170,553 Off-Site Owned
22. Atlanta, Georgia 165,000 On-Site Leased
23. Kansas City, Missouri 162,000 Off-Site Leased
24. Belvidere, New Jersey 160,000 Off-Site Owned
25. Florence (Shuttle), Kentucky 153,600 Off-Site Owned
26. Montgomery, Alabama 150,143 Off-Site Leased
27. Emigsville, Pennsylvania 148,300 Off-Site Leased
28. Levittown, Pennsylvania 148,000 Off-Site Leased
29. Evansville, Indiana 146,720 Off-Site Leased
30. Rancho Cucamonga, California (2) 143,063 Off-Site Leased
31. Iowa City, Iowa 140,896 Off-Site Owned
32. Cincinnati, Ohio 130,000 Off-Site Owned
33. Woodridge, Illinois 129,850 Off-Site Leased
15
Size On-Site
Location (Square Feet) or Off-Site Leased/Owned
-------- ------------- ----------- ------------
34. Baltimore, Maryland 128,500 Off-Site Owned
35. Santa Ana, California 127,680 Off-Site Owned
36. Chicago, Illinois 125,500 Off-Site Owned
37. Muskogee, Oklahoma 125,000 Off-Site Leased
38. Cincinnati, Ohio 111,669 Off-Site Leased
39. Atlanta, Georgia 111,600 Off-Site Leased
40. Jefferson, Louisiana 109,407 Off-Site Leased
41. Casa Grande, Arizona 100,000 Off-Site Leased
42. Oakdale, California 97,934 On-Site Leased
43. Bradford, Pennsylvania 90,350 Off-Site Leased
44. Kissimmee, Florida(3) 80,000 Off-Site Owned
45. Berkeley, Missouri 75,000 Off-Site Owned
46. Alta Vista, Virginia 62,900 Off-Site Owned
47. Cambridge, Ohio 57,000 On-Site Leased
48. Port Allen, Louisiana 56,721 On-Site Leased
49. Shreveport, Louisiana(2) 56,400 On-Site Leased
50. Richmond, California 55,256 Off-Site Leased
51. Houston, Texas 52,500 Off-Site Owned
52. Newell, West Virginia 50,000 On-Site Leased
53. Lakeland, Florida 49,000 Off-Site Leased
54. New Kensington, Pennsylvania(2) 48,000 On-Site Leased
55. N. Charleston, South Carolina 45,000 On-Site Leased
56. Darlington, South Carolina 43,200 On-Site Leased
57. Bradenton, Florida 33,605 On-Site Leased
58. Vicksburg, Mississippi 31,200 On-Site Leased
59. Bordentown, New Jersey 30,000 On-Site Leased
60. West Jordan, Utah 25,573 On-Site Leased
Canadian Packaging Facilities
61. Mississauga, Ontario 78,416 Off-Site Owned
62. Toronto, Ontario(2) 5,000 On-Site *
Mexican Packaging Facilities
63. Mexico City 292,000 Off-Site Owned
64. Pachuca 167,500 Off-Site Owned
65. Mexicali(4) 59,700 Off-Site Leased
66. Irapuato 58,130 On-Site *
67. Tlaxcala 5,400 On-Site *
16
Size On-Site
Location (Square Feet) or Off-Site Leased/Owned
-------- ------------- ----------- ------------
European Packaging Facilities
68. Assevent, France 186,000 Off-Site Owned
69. Chalgrove, England 132,000 Off-Site Leased
70. Ryttyla, Finland 129,000 Off-Site Owned
71. Etten-Leur, Netherlands 124,450 Off-Site Leased
72. Sulejowek, Poland 83,700 Off-Site Owned
73. Meaux, France 80,000 Off-Site Owned
74. Aldaia, Spain 75,350 On-Site Leased
75. Istanbul, Turkey 50,000 Off-Site Owned
76. Villecomtal, France 22,790 On-Site Leased
77. Rotselaar, Belgium 15,070 On-Site Leased
78. Bierun, Poland 10,652 On-Site Leased
79. Nyirbator, Hungary 5,000 On-Site Leased
South American Packaging Facilities
80. Sao Paulo, Brazil 70,290 Off-Site Leased
81. Guayaquil, Ecuador 68,500 Off-Site Owned
82. Valencia, Venezuela 56,000 Off-Site Owned
83. Buenos Aires, Argentina 33,524 Off-Site Owned
84. Rio de Janeiro, Brazil 25,840** On-Site Owned/Leased
85. Longchamps, Argentina 21,530** On-Site Owned/Leased
86. Rio de Janeiro, Brazil 16,685 On-Site Leased
87. Rio de Janeiro, Brazil 11,000 On-Site *
Graham Recycling
88. York, Pennsylvania 44,416 Off-Site Owned
Administrative Facilities
o York, Pennsylvania 83,373 N/A Leased
o York, Pennsylvania - Technology Center 80,500 N/A Leased
o Blyes, France 9,741 N/A Leased
o Rueil, Paris, France 4,300 N/A Leased
o Mexico City, Mexico 360 N/A Leased
(1) Substantially all of the Company's domestic tangible and intangible assets
are pledged as collateral pursuant to the terms of the Credit Agreements.
(2) The Company has announced the closing of these facilities. The St. Louis,
La Mirada and New Kensington plants have ceased production. The remaining
three are expected to cease production later in 2005.
(3) The Kissimmee plant is currently idle. However, the plant still has
manufacturing assets and is located near both Tropicana and Quaker Oats.
(4) This facility is leased by Industrias Graham Innopack S.de.R.L. de C.V., in
which Graham Packaging Latin America, LLC holds a 50% interest.
* The Company operates these on-site facilities without leasing the space it
occupies.
** The building is owned and the land is leased.
17
Item 3. Legal ProceedingsItem
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.
Item 4.Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of 2004.
18
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Registrant Purchases of Equity Securities Item 5. Market for
Registrant's Common Equity and Related Stockholder Matters
Because Holdings is a limited partnership, equity interests in
Holdings take the form of general and limited partnership interests. There is no
established public trading market for any of the general or limited partnership
interests in Holdings.
There are two owners of general partnership interests in Holdings:
Investor GP and Graham Packaging Corporation. The limited partnership interests
in Holdings are owned by Investor LP and the Graham Family Investors. See Item
12, "Security Ownership of Certain Beneficial Owners and Management."
Opco GP is the sole owner of a general partnership interest in the
Operating Company, and Holdings is the sole owner of a limited partnership
interest in the Operating Company.
The Operating Company owns all of the outstanding capital stock of
CapCo I. Holdings owns all of the outstanding capital stock of CapCo II.
Under the Credit Agreements, the Operating Company is subject to
restrictions on the payment of dividends and 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
Investor LP held by then present or former officers or employees of
Holdings, the Operating Company or their Subsidiaries (as defined therein)
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.
On October 7, 2004, the Operating Company and CapCo I consummated an
offering of $250.0 million aggregate principal amount 8 1/2% Senior Notes due
2012 (the "Senior Notes"). On the same date the Operating Company and CapCo I
also consummated an offering of $375.0 million aggregate principal amount 9-7/8%
Senior Subordinated Notes due 2014 (the "Senior Subordinated Notes," and
together with the Senior Notes, the "Notes"). The Notes were issued pursuant to
Rule 144A under the Securities Act of 1933, as amended ("Securities Act"). The
Notes are fully and unconditionally guaranteed by Holdings.
19
Item 6. Selected Financial Data
The following tables set forth the selected historical consolidated
financial data and other operating data of the Company for and at the end of
each of the years in the five-year period ended December 31, 2004, which are
derived from the Company's audited financial statements. The following tables
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" (Item 7) and the financial
statements included under Item 8.
Year Ended December 31,
-----------------------
2004 (1) 2003 2002 2001 2000
---- ---- ---- ---- ----
(In millions)
STATEMENT OF OPERATIONS DATA:
Net sales (2) $ 1,353.0 $ 978.7 $ 906.7 $ 923.1 $ 842.6
Gross profit (2) 192.5 183.0 164.1 151.9 134.5
Selling, general and administrative expenses 87.4 66.9 63.8 58.2 56.2
Impairment charges (3) 7.0 2.5 5.1 38.0 21.1
Special charges and unusual items (4) -- -- -- 0.2 1.1
--------- -------- --------- --------- ---------
Operating income 98.1 113.6 95.2 55.5 56.1
Interest expense, net (5) 140.5 96.6 81.8 98.5 101.7
Other (income) expense, net (1.1) (0.3) 0.1 0.2 0.2
Income tax (benefit) provision (6) (2.1) 6.8 4.0 0.3 0.4
Minority interest 1.4 0.8 1.7 0.5 (0.6)
---------- -------- --------- --------- ----------
Net (loss) income $ (40.6) $ 9.7 $ 7.6 $ (44.0) $ (45.6)
========== ======== ========= ========== ==========
As of December 31,
------------------
2004 (1) 2003 2002 2001 2000
----- ---- ---- ---- ----
(In millions)
BALANCE SHEET DATA:
Total assets $ 2,551.6 $ 876.1 $ 798.3 $ 758.6 $ 821.3
Total debt 2,465.2 1,097.4 1,070.6 1,052.4 1,060.2
Partners' capital (deficit) (434.1) (421.5) (460.3) (485.1) (464.4)
Year Ended December 31,
-----------------------
2004 (1) 2003 2002 2001 2000
----- ---- ---- ---- ----
(In millions)
OTHER FINANCIAL DATA:
Cash flows provided by (used in):
Operating activities $ 107.5 $ 85.7 $ 92.4 $ 52.5 $ 90.9
Investing activities (1,382.5) (95.9) (96.6) (77.2) (164.7)
Financing activities 1,288.4 8.2 1.3 24.3 78.4
Depreciation and amortization (7) 114.4 71.8 75.8 71.7 66.2
Net capital expenditures (excluding acquisitions) 151.9 91.8 92.4 74.3 163.4
Investments (including acquisitions) 1,230.6 4.1 -- 0.2 0.1
Ratio of earnings to fixed charges (8) -- 1.2x 1.1x -- --
(1) On October 7, 2004, the Company acquired O-I Plastic for $1,230.8 million,
including direct costs of the acquisition, subject to certain adjustments.
Amounts shown under the caption "Investments (including acquisitions)"
include cash paid, net of cash acquired, in the acquisition. This
transaction was accounted for under the purchase method of accounting.
Results of operations are included since the date of the acquisition.
(2) Net sales increase or decrease based on fluctuations in resin prices.
Consistent with industry practice and/or as permitted under the Company's
agreements with its customers, substantially all resin price changes are
passed through to customers by means of corresponding changes in product
pricing. Therefore, the Company's dollar gross profit has been
substantially unaffected by fluctuations in resin pricing. However, 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.
20
(3) The Company evaluated the recoverability of its long-lived and other assets
in selected locations, due to indicators of impairment, and recorded
impairment charges of $7.0 million, $2.5 million, $5.1 million, $28.9
million and $16.3 million for the years ended December 31, 2004, 2003,
2002, 2001 and 2000, respectively. Goodwill is reviewed for impairment on
an annual basis. The resulting impairment charges recognized, based on a
comparison of the related net book value of the location to projected
discounted future cash flows of the location, were $9.1 million and $4.8
million for the years ended December 31, 2001 and 2000, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Results of Operations" (Item 7) for a further discussion.
(4) Includes compensation costs related to the Recapitalization (as defined
therein).
(5) The years ended December 31, 2004 and 2003 include the effects of the
refinancing of the Company's prior senior credit agreements, which resulted
in the write-off of debt issuance fees of $20.9 million and $6.6 million,
respectively, and the write-off of tender and call premia of $15.2 million
for the year ended December 31, 2004, associated with the redemption of the
Company's prior senior subordinated notes and senior discount notes.
(6) As a limited partnership, Holdings is not subject to U.S. federal income
taxes or most state income taxes. Instead, taxes are assessed to Holdings'
partners based on their distributive share of the income of Holdings.
Certain U.S. subsidiaries acquired as part of O-I Plastic are corporations
subject to U.S. federal and state income taxes. The Company's foreign
operations are subject to tax in their local jurisdictions.
(7) Depreciation and amortization excludes amortization of debt issuance fees,
which is included in interest expense, net, and impairment charges.
(8) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as earnings before income taxes, minority interest,
income from equity investees and extraordinary items, plus fixed charges
and amortization of capitalized interest less interest capitalized. Fixed
charges include interest expense on all indebtedness, interest capitalized,
amortization of debt issuance fees and one third of rental expense on
operating leases representing that portion of rental expense deemed to be
attributable to interest. Earnings were insufficient to cover fixed charges
by $41.7 million, $44.2 million and $49.1 million for the years ended
December 31, 2004, 2001 and 2000, respectively.
21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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
currently operates 87 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.
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 December 31, 2004, the Company has invested
over $1,160.0 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 one quarter's
worth of sales related to the O-I Plastic acquisition.
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
22
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.
As of the end of 2004 the Company operated 27 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. On March 30, 2001, the Company increased its interest in Masko
Graham, the Company's Polish operation, from 50% to 51%, and again on December
29, 2003 from 51% to approximately 58%. The Company purchased the remaining 42%
interest on April 15, 2004.
Changes in international economic conditions require that the Company
continually review its operations and make restructuring changes when
appropriate. In its North American operations in 2002, the Company closed its
facility in Burlington, Ontario, Canada. Business from this facility was
consolidated into other North American facilities as a result of this closure.
In its European operations, during the latter portion of 2001, the Company
committed to a plan to sell or close certain plants in the United Kingdom,
France, Italy and Germany. The Company closed its plant in the United Kingdom in
2002, sold one plant in France in 2002, closed another plant in France in 2003,
sold both of its plants in Italy in 2002 and sold both of its plants in Germany
in 2003.
(See "--Results of Operations" for a discussion of impairment charges.)
For the year ended December 31, 2004, 78.6% 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 19 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 in each of the years ended December 31, 2004, 2003
and 2002. The Company's sales to this customer were 14.9%, 14.6% and 16.4% of
total sales for the years ended December 31, 2004, 2003 and 2002, respectively.
The Company also had sales to one other customer which exceeded 10% of total
sales in each of the years ended December 31, 2004 and 2003. The Company's sales
to this customer were 10.2% and 11.2% of total sales for the years ended
December 31, 2004 and 2003, respectively. For the year ended December 31, 2004,
approximately 70%, 29% and 1% of the sales to these two customers were made in
North America, Europe and South America, respectively. The Company also had
sales to a third customer of 10.6% of total sales for the year ended December
31, 2003.
Based on industry data, the following table summarizes average market
prices per pound of PET and HDPE resins in the United States during 2004, 2003
and 2002:
Year
----
2004 2003 2002
---- ---- ----
PET $0.73 $0.64 $0.58
HDPE 0.60 0.50 0.41
23
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.
The Company does not pay U.S. federal income taxes under the
provisions of the Internal Revenue Code, as the distributive share of the
applicable income or loss is included in the tax returns of its partners. The
Company may make tax distributions to its partners to reimburse them for such
tax obligations, if any. Certain U.S. subsidiaries acquired as part of O-I
Plastic are corporations subject to U.S. federal and state income taxes. The
Company's foreign operations are subject to tax in their local jurisdictions.
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:
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
(Dollars in millions)
North America $1,136.1 84.0% $809.6 82.7% $745.0 82.2%
Europe 173.4 12.8 143.9 14.7 138.5 15.3
South America 43.5 3.2 25.2 2.6 23.2 2.5
-------- ----- ------ ----- ------ -----
Total Net Sales $1,353.0 100.0% $978.7 100.0% $906.7 100.0%
======== ===== ====== ===== ====== =====
Year Ended December 31,
-----------------------
2004 2003 2002
---- ---- ----
(Dollars in millions)
Food and Beverage $ 769.9 56.9% $573.0 58.5% $515.4 56.9%
Household 274.0 20.2 191.6 19.6 186.0 20.5
Automotive Lubricants 240.6 17.8 214.1 21.9 205.3 22.6
Personal Care/Specialty (1) 68.5 5.1 -- -- -- --
-------- ----- ------ ----- ------ -----
Total Net Sales $1,353.0 100.0% $978.7 100.0% $906.7 100.0%
======== ===== ====== ===== ====== =====
(1) Prior to the Acquisition, sales of Personal Care/Specialty containers were
not significant and are included in the Household category.
2004 Compared to 2003
Net Sales. Net sales for the year ended December 31, 2004 increased
$374.3 million, or 38.2%, to $1,353.0 million from $978.7 million for the year
ended December 31, 2003. The increase in sales was primarily due to the
acquisition of O-I Plastic, which accounted for $246.1 million, as well as an
increase in resin pricing. Units sold increased 33.5%, principally due to
additional food and beverage container business where units increased 37.1%. On
a geographic basis, sales for the year ended December 31, 2004 in North America
increased $326.5 million, or 40.3%, from the year ended December 31, 2003,
including net sales for O-I Plastic of $227.5 million, and included higher units
sold of 41.4%. North American sales in the food and beverage category, the
household category, the automotive lubricants category and the personal
care/specialty category contributed $169.0 million, $73.5 million, $16.9 million
and $67.1 million, respectively, to the increase. Units sold in North America
increased 49.3% in the food and beverage category, increased 16.8% in the
household category and decreased 2.8% in the automotive lubricants category.
Sales for the year ended December 31, 2004 in Europe increased $29.5 million, or
20.5%, compared to sales for the year ended December 31, 2003. The increase was
primarily due to the acquisition of O-I Plastic, which accounted for $16.0
million, and favorable exchange rate changes of approximately $14.7 million.
Units sold in Europe increased 17.8% compared to the same period last year.
Sales in South America for the year ended December 31, 2004 increased $18.3
million, or 72.6%, from the year ended December 31, 2003, primarily due to a
95.7% increase in units sold and favorable exchange rate changes of
approximately $1.3 million.
24
Gross Profit. Gross profit for the year ended December 31, 2004
increased $9.5 million to $192.5 million from $183.0 million for the year ended
December 31, 2003. Gross profit for the year ended December 31, 2004 decreased
$0.4 million in North America, and increased $7.1 million and $2.8 million in
Europe and South America, respectively, when compared to the year ended December
31, 2003. The net increase in gross profit resulted primarily from an increase
in unit volume, as a result of both the acquisition of O-I Plastic and the
Company's organic growth, of $24.6 million and a favorable impact from changes
in foreign currency exchange rates of $2.8 million, offset by a net increase of
expenses related to the acquisition of O-I Plastic and restructuring expenses of
$11.0 million ($14.1 million for North America, $(3.4) million for Europe and
$0.3 million for South America) and a net increase in project costs of $6.9
million ($6.5 million for North America, $0.7 million for Europe and $(0.3)
million for South America).
Selling, General & Administrative Expenses. Selling, general and
administrative expenses for the year ended December 31, 2004 increased $20.5
million to $87.4 million from $66.9 million for the year ended December 31,
2003. The increase was primarily due to the acquisition of O-I Plastic.
Non-recurring charges were $10.1 million and $4.3 million for the years ended
December 31, 2004 and 2003, 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
6.5% of sales for the year ended December 31, 2004 from 6.8% of sales for the
year ended December 31, 2003.
Impairment Charges. During 2004, the Company evaluated the
recoverability of its long-lived assets in the following locations (with th