##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from          to
 COMMISSION FILE NUMBER: 1-13182
 Graphic Packaging Corporation
  Delaware
(State or other jurisdiction of 
incorporation or organization)
    
    58-2205241
(I.R.S. employer
identification no.)814 Livingston Court 
Marietta, Georgia
(Address of principal executive offices)
    
    30067
(Zip Code)
 (770) 644-3000
  þ o
  o þ o
 o þ




---



##### Table of Contents



Information Concerning Forward-Looking Statements
 Certain statements of Graphic Packaging Corporations expectations, including, but not limited to,
statements regarding inflationary pressures, cost savings from its continuous improvement programs
and manufacturing rationalization, price increases, capital spending, depreciation and
amortization, interest expense, debt reduction, the effect of new accounting pronouncements and litigation, in this
report constitute forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. Such statements are based on currently available operating, financial and
competitive information and are subject to various risks and uncertainties that could cause actual
results to differ materially from the Companys historical experience and its present expectations.
These risks and uncertainties include, but are not limited to, inflation of and volatility in raw
material and energy costs, the Companys substantial amount of debt, continuing pressure for lower
cost products, the Companys ability to implement its business strategies, currency translation
movements and other risks of conducting business internationally, and the impact of regulatory and
litigation matters, including those that impact the Companys ability to protect and use its
intellectual property. Undue reliance should not be placed on such forward-looking statements, as
such statements speak only as of the date on which they are made and the Company undertakes no
obligation to update such statements. Additional information regarding these and other risks is
contained in Part II, Item 1A. Risk Factors herein.
 2




---



##### 



TABLE OF CONTENTS
 PART I. FINANCIAL INFORMATION
    
    
    4ITEM 1. FINANCIAL STATEMENTS
    
    
    4ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    18ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
    
    
    29ITEM 4. CONTROLS AND PROCEDURES
    
    
    29PART II  OTHER INFORMATION
    
    
    30ITEM 1. LEGAL PROCEEDINGS
    
    
    30ITEM 1A. RISK FACTORS
    
    
    30ITEM 6. EXHIBITS
    
    
    30SIGNATURES
    
    
    31EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32.1 SECTION 906 CERTIFICATION OF CEOEX-32.2 SECTION 906 CERTIFICATION OF CFO
  3




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in Millions, Except Share Amounts)
(Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005ASSETSCurrent Assets:Cash and Equivalents
    
    $
    4.9
    
    
    $
    12.7Receivables, Net
    
    
    262.2
    
    
    
    216.3Inventories
    
    
    301.0
    
    
    
    298.5Other Current Assets
    
    
    27.5
    
    
    
    26.1Total Current Assets
    
    
    595.6
    
    
    
    553.6Property, Plant and Equipment, Net
    
    
    1,481.1
    
    
    
    1,551.5Goodwill
    
    
    642.7
    
    
    
    642.6Intangible Assets, Net
    
    
    150.5
    
    
    
    157.3Deferred Tax Assets
    
    
    352.6
    
    
    
    350.8Other Assets
    
    
    85.0
    
    
    
    100.2Total Assets
    
    $
    3,307.5
    
    
    $
    3,356.0LIABILITIESCurrent Liabilities:Short Term Debt
    
    $
    16.7
    
    
    $
    11.0Accounts Payable and Other Accrued Liabilities
    
    
    421.1
    
    
    
    409.6Total Current Liabilities
    
    
    437.8
    
    
    
    420.6Long Term Debt
    
    
    1,960.5
    
    
    
    1,967.3Deferred Tax Liabilities
    
    
    476.9
    
    
    
    461.5Other Noncurrent Liabilities
    
    
    215.1
    
    
    
    237.9Total Liabilities
    
    
    3,090.3
    
    
    
    3,087.3SHAREHOLDERS EQUITYPreferred Stock, par value $.01 per share;
50,000,000 shares authorized; no shares issued
or outstanding
    
    
    
    
    
    
    Common Stock, par value $.01 per share;
500,000,000 shares authorized; 200,605,041 and
198,663,007 shares issued and outstanding at
September 30, 2006 and December 31, 2005,
respectively
    
    
    2.0
    
    
    
    2.0Capital in Excess of Par Value
    
    
    1,185.0
    
    
    
    1,169.6Unearned Compensation
    
    
    
    
    
    
    (0.1
    )Accumulated Deficit
    
    
    (862.1
    )
    
    
    (800.6
    )Minimum Pension Liability Adjustment
    
    
    (90.0
    )
    
    
    (90.0
    )Accumulated Derivative Instruments (Loss) Gain
    
    
    (9.8
    )
    
    
    5.2Cumulative Currency Translation Adjustment
    
    
    (7.9
    )
    
    
    (17.4
    )Total Shareholders Equity
    
    
    217.2
    
    
    
    268.7Total Liabilities and Shareholders Equity
    
    $
    3,307.5
    
    
    $
    3,356.0
  4




---



##### Table of Contents



GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Millions, Except Per Share Amounts)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net Sales
    
    $
    617.7
    
    
    $
    605.4
    
    
    $
    1,823.6
    
    
    $
    1,811.4Cost of Sales
    
    
    520.0
    
    
    
    506.8
    
    
    
    1,584.0
    
    
    
    1,559.8Selling, General and Administrative
    
    
    49.6
    
    
    
    50.1
    
    
    
    150.2
    
    
    
    151.0Research, Development and Engineering
    
    
    2.7
    
    
    
    2.3
    
    
    
    8.7
    
    
    
    7.8Other Expense (Income), Net
    
    
    1.4
    
    
    
    2.1
    
    
    
    0.9
    
    
    
    12.8Income from Operations
    
    
    44.0
    
    
    
    44.1
    
    
    
    79.8
    
    
    
    80.0Interest Income
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.5
    
    
    
    0.4Interest Expense
    
    
    (43.3
    )
    
    
    (39.2
    )
    
    
    (128.0
    )
    
    
    (115.5
    )Income (Loss) before Income Taxes
and Equity in Net Earnings of
Affiliates
    
    
    0.8
    
    
    
    5.0
    
    
    
    (47.7
    )
    
    
    (35.1
    )Income Tax Expense
    
    
    (5.1
    )
    
    
    (4.8
    )
    
    
    (14.6
    )
    
    
    (14.5
    )Equity in Net Earnings of Affiliates
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.8
    
    
    
    1.0Net (Loss) Income
    
    $
    (4.0
    )
    
    $
    0.6
    
    
    $
    (61.5
    )
    
    $
    (48.6
    )Loss Per Share  Basic
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    (0.31
    )
    
    $
    (0.24
    )Loss Per Share  Diluted
    
    $
    (0.02
    )
    
    $
    0.00
    
    
    $
    (0.31
    )
    
    $
    (0.24
    )Weighted Average Number of Shares
Outstanding  Basic
    
    
    200.5
    
    
    
    200.1
    
    
    
    200.5
    
    
    
    199.7Weighted Average Number of Shares
Outstanding  Diluted
    
    
    200.5
    
    
    
    202.4
    
    
    
    200.5
    
    
    
    199.7
  5




---



##### Table of Contents



GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Amounts in Millions)
(Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net (Loss) Income
    
    $
    (4.0
    )
    
    $
    0.6
    
    
    $
    (61.5
    )
    
    $
    (48.6
    )Other Comprehensive (Loss) Income:Derivative Instruments (Loss) Gain, Net of Tax of $0
    
    
    (7.6
    )
    
    
    13.8
    
    
    
    (15.0
    )
    
    
    25.9Currency Translation Adjustments, Net of Tax of $0
    
    
    (0.5
    )
    
    
    (0.4
    )
    
    
    9.5
    
    
    
    (13.3
    )Comprehensive (Loss) Income
    
    $
    (12.1
    )
    
    $
    14.0
    
    
    $
    (67.0
    )
    
    $
    (36.0
    )
  6




---



##### Table of Contents



GRAPHIC PACKAGING CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Millions)
(Unaudited)
 Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIES:Net Loss
    
    $
    (61.5
    )
    
    $
    (48.6
    )Noncash Items Included in Net Loss:Depreciation and Amortization
    
    
    146.6
    
    
    
    155.2Deferred Income Taxes
    
    
    15.0
    
    
    
    14.1Pension, Postemployment and Postretirement Benefits Expense, Net of Contributions
    
    
    (3.0
    )
    
    
    2.6Amortization of Deferred Debt Issuance Costs
    
    
    6.6
    
    
    
    6.1Impairment Charge
    
    
    3.9
    
    
    
    Other, Net
    
    
    1.3
    
    
    
    4.2Changes in Operating Assets & Liabilities
    
    
    (51.0
    )
    
    
    (62.4
    )Net Cash Provided by Operating Activities
    
    
    57.9
    
    
    
    71.2CASH FLOWS FROM INVESTING ACTIVITIES:Capital Spending
    
    
    (45.0
    )
    
    
    (71.9
    )Change in Other Assets
    
    
    (18.9
    )
    
    
    (14.0
    )Net Cash Used in Investing Activities
    
    
    (63.9
    )
    
    
    (85.9
    )CASH FLOWS FROM FINANCING ACTIVITIES:Borrowing under Revolving Credit Facilities
    
    
    495.8
    
    
    
    396.1Payments on Revolving Credit Facilities
    
    
    (496.8
    )
    
    
    (379.4
    )Other, Net
    
    
    (0.8
    )
    
    
    (0.1
    )Net Cash (Used in) Provided by Financing Activities
    
    
    (1.8
    )
    
    
    16.6Effect of Exchange Rate Changes on Cash
    
    
    
    
    
    
    (0.2
    )Net (Decrease) Increase in Cash and Equivalents
    
    
    (7.8
    )
    
    
    1.7Cash and Equivalents at Beginning of Period
    
    
    12.7
    
    
    
    7.3Cash and Equivalents at End of Period
    
    $
    4.9
    
    
    $
    9.0
  7




---



##### Table of Contents



GRAPHIC PACKAGING CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 NOTE 1  ORGANIZATION AND BASIS OF PRESENTATION
      NOTE 2  ACCOUNTING POLICIES
  Recent
Accounting Pronouncements
 Inventory Costs, an Amendment of ARB No. 43, Chapter 4
 Exchanges of Nonmonetary Assets, an Amendment of
APB Opinion No. 29
 8




---



##### Table of Contents



Accounting Changes and Error Corrections, a replacement
of APB Opinion No. 20 and Statement No. 3
 Accounting for Uncertainty in Income
Taxes  an interpretation of FASB Statement 109
 Fair Value Measurements,
 Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (an amendment of FASB Statements No. 87, 88, 106, and 132(R)
  Accounting for Planned Major
Maintenance Activities
 NOTE 3  STOCK INCENTIVE PLANS
 Stock Options
 Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation Share-Based Payment
 9




---



##### Table of Contents



Three Months
    
    
    Nine MonthsEnded
    
    
    Ended(Amounts in Millions, Except Per Share Amounts)
    
    September 30, 2005
    
    
    September 30, 2005Net Income (Loss), As Reported
    
    $
    0.6
    
    
    $
    (48.6
    )Add: Stock-Based Employee Compensation Expense
Included in Reported Net Loss
    
    
    
    
    
    
    Deduct: Total Stock-Based Employee
Compensation Expense Determined Under Fair
Value Based Method for All Awards
    
    
    (0.8
    )
    
    
    (2.4
    )Adjusted Net Loss
    
    $
    (0.2
    )
    
    $
    (51.0
    )Income (Loss) Per Basic Share-As Reported
    
    $
    0.00
    
    
    $
    (0.24
    )Loss Per Basic Share-As Adjusted
    
    $
    0.00
    
    
    $
    (0.26
    )Income (Loss) Per Diluted Share-As Reported
    
    $
    0.00
    
    
    $
    (0.24
    )Loss Per Diluted Share-As Adjusted
    
    $
    0.00
    
    
    $
    (0.26
    )
     Stock Awards, Restricted Stock Awards and Restricted Stock Units
  10




---



##### Table of Contents



Weighted Avg.Shares
    
    Value Per Share(In thousands)RSUs  Employees
    
    
    2,239
    
    
    $
    2.83Shares  Board of Directors
    
    
    71
    
    
    $
    3.39
     NOTE 4 INVENTORIES
  September 30,
    
    
    December 31,(Amounts in Millions)
    
    2006
    
    
    2005Finished goods
    
    $
    151.6
    
    
    $
    164.2Work in progress
    
    
    26.7
    
    
    
    22.7Raw materials
    
    
    73.7
    
    
    
    67.3Supplies
    
    
    49.0
    
    
    
    44.3Total
    
    $
    301.0
    
    
    $
    298.5
 NOTE 5  ENVIRONMENTAL AND LEGAL MATTERS
    11




---



##### Table of Contents



NOTE 6  BUSINESS SEGMENT INFORMATION
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Amounts in Millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005NET SALES:Paperboard Packaging
    
    $
    591.6
    
    
    $
    585.9
    
    
    $
    1,753.4
    
    
    $
    1,745.2Containerboard/Other
    
    
    26.1
    
    
    
    19.5
    
    
    
    70.2
    
    
    
    66.2Total
    
    $
    617.7
    
    
    $
    605.4
    
    
    $
    1,823.6
    
    
    $
    1,811.4INCOME (LOSS) FROM OPERATIONS:Paperboard Packaging
    
    $
    52.7
    
    
    $
    64.7
    
    
    $
    114.9
    
    
    $
    137.3Containerboard/Other
    
    
    (3.4
    )
    
    
    (3.9
    )
    
    
    (13.2
    )
    
    
    (12.0
    )Corporate
    
    
    (5.3
    )
    
    
    (16.7
    )
    
    
    (21.9
    )
    
    
    (45.3
    )Total
    
    $
    44.0
    
    
    $
    44.1
    
    
    $
    79.8
    
    
    $
    80.0
 NOTE 7  PENSIONS AND OTHER POSTRETIREMENT BENEFITS
  12




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Amounts in Millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service Cost
    
    $
    4.0
    
    
    $
    3.5
    
    
    $
    12.0
    
    
    $
    10.9Interest Cost
    
    
    8.0
    
    
    
    7.5
    
    
    
    24.2
    
    
    
    23.1Expected Return on Plan Assets
    
    
    (7.4
    )
    
    
    (7.9
    )
    
    
    (23.4
    )
    
    
    (23.1
    )Amortizations:Prior Service Cost
    
    
    0.6
    
    
    
    0.8
    
    
    
    1.6
    
    
    
    1.9Actuarial Loss
    
    
    1.8
    
    
    
    0.8
    
    
    
    4.4
    
    
    
    2.5Net Periodic Pension Cost
    
    $
    7.0
    
    
    $
    4.7
    
    
    $
    18.8
    
    
    $
    15.3
  OTHER POSTRETIREMENT BENEFITS
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Amounts in Millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Service Cost
    
    $
    0.3
    
    
    $
    0.3
    
    
    $
    0.9
    
    
    $
    0.8Interest Cost
    
    
    0.6
    
    
    
    0.8
    
    
    
    1.8
    
    
    
    2.3Amortizations:Actuarial Loss
    
    
    
    
    
    
    0.2
    
    
    
    
    
    
    
    0.6Net Periodic Postretirement Benefits Cost
    
    $
    0.9
    
    
    $
    1.3
    
    
    $
    2.7
    
    
    $
    3.7
   NOTE 8  RESTRUCTURING CHARGES
   13




---



##### Table of Contents



AdjustmentsBalance at
    
    
    (Statement of
    
    
    Purchase
    
    
    
    
    
    
    Balance atDecember 31,
    
    
    Operations Impact)
    
    
    Price
    
    
    Cash
    
    
    September 30,(Amounts in Millions)
    
    2005
    
    
    Expense
    
    
    Reversal
    
    
    Allocation
    
    
    Payments
    
    
    2006Equipment
Removal Costs
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Facility Restoration
and Carrying Costs
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    Severance of
Employees and Other
Employee
Termination-Related
Charges
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )
    
    
    Total
    
    $
    1.2
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (1.2
    )
    
    $
    
  AdjustmentsBalance at
    
    
    (Statement of
    
    
    Purchase
    
    
    
    
    
    
    Balance atJanuary 1,
    
    
    Operations Impact)
    
    
    Price
    
    
    Cash
    
    
    December 31,(Amounts in Millions)
    
    2005
    
    
    Expense
    
    
    Reversal
    
    
    Allocation
    
    
    Payments
    
    
    2005Equipment
Removal Costs
    
    $
    0.8
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    (0.8
    )
    
    $
    Facility Restoration
and Carrying Costs
    
    
    0.6
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.6Severance of
Employees and Other
Employee
Termination-Related
Charges
    
    
    3.1
    
    
    
    
    
    
    
    (1.0
    )
    
    
    
    
    
    
    (1.5
    )
    
    
    0.6Total
    
    $
    4.5
    
    
    $
    
    
    
    $
    (1.0
    )
    
    $
    
    
    
    $
    (2.3
    )
    
    $
    1.2
 NOTE 9  DEBT
  September 30,
    
    
    December 31,(Amounts in Millions)
    
    2006
    
    
    2005Senior Notes with interest payable semi-annually at 8.5%, payable in 2011
    
    $
    425.0
    
    
    $
    425.0Senior Subordinated Notes with interest payable semi-annually at 9.5%,
payable in 2013
    
    
    425.0
    
    
    
    425.0Senior Secured Term Loan Facility with interest payable at various dates at
floating rates (7.52% at September 30, 2006 and 6.60% at December 31, 2005)
payable through 2010
    
    
    1,109.0
    
    
    
    1,109.0Senior Secured Revolving Facility with interest payable at various dates at
floating rates (9.25% at September 30, 2006 and 9.25% at December 31, 2005)
payable in 2009
    
    
    5.0
    
    
    
    6.0Other
    
    
    2.5
    
    
    
    3.51,966.5
    
    
    
    1,968.5Less, current portion
    
    
    6.0
    
    
    
    1.2Total
    
    $
    1,960.5
    
    
    $
    1,967.3
  14




---



##### Table of Contents



Minimum CreditMaximum Consolidated
    
    Agreement EBITDA toDebt to Credit Agreement
    
    Consolidated InterestEBITDA Leverage Ratio (a)
    
    Expense Ratio (a)Four Fiscal Quarters Ending2006September 30, 2006
    
    
    6.75 to 1.00
    
    
    
    1.75 to 1.00December 31, 2006
    
    
    6.75 to 1.00
    
    
    
    1.75 to 1.002007March 31, 2007
    
    
    6.50 to 1.00
    
    
    
    1.75 to 1.00June 30, 2007
    
    
    6.50 to 1.00
    
    
    
    1.75 to 1.00September 30, 2007
    
    
    6.50 to 1.00
    
    
    
    1.75 to 1.00December 31, 2007
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.002008March 31, 2008
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.00June 30, 2008
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.00September 30, 2008
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.00December 31, 2008
    
    
    5.50 to 1.00
    
    
    
    2.00 to 1.002009March 31, 2009 and thereafter
    
    
    4.50 to 1.00
    
    
    
    2.90 to 1.00
 15




---



##### Table of Contents



Note:(a)
    
    Credit Agreement EBITDA is calculated in accordance with the definitions contained in
the Companys Senior Secured Credit Agreement, as amended. Credit Agreement EBITDA is
defined as consolidated net income before consolidated interest expense, non-cash expenses
and charges, total income tax expense, depreciation expense, expense associated with
amortization of intangibles and other assets, non-cash provisions for reserves for
discontinued operations, extraordinary, unusual or non-recurring gains or losses or charges
or credits, gain or loss associated with sale or write-down of assets not in the ordinary
course of business, and any income or loss accounted for by the equity method of
accounting.       Twelve Months Ended(Amounts in Millions)
    
    September 30, 2006Net Loss
    
    $
    (104.0
    )Income Tax Expense
    
    
    23.4Interest Expense, Net
    
    
    168.3Depreciation and Amortization
    
    
    196.7Equity in Net Earnings of Affiliates
    
    
    (1.0
    )Pension, Postemployment and Postretirement Benefits Expense
    
    
    31.8Merger Related Expenses
    
    
    4.8Write-Down of Assets
    
    
    4.4Dividends from Equity Investments
    
    
    2.4Credit Agreement EBITDA (a)
    
    $
    326.8
 Twelve Months Ended(Amounts in Millions)
    
    September 30, 2006Interest Expense, Net
    
    $
    168.3Amortization of Deferred Debt Issuance Costs
    
    
    (8.8
    )Credit Agreement Interest Expense Adjustments (b)
    
    
    0.1Consolidated Interest Expense (c)
    
    $
    159.6
 As of(Amounts in Millions)
    
    September 30, 2006Short Term Debt
    
    $
    16.7Long Term Debt
    
    
    1,960.5Total Debt
    
    $
    1,977.2
 16




---



##### Table of Contents



Notes:(a)
    
    Credit Agreement EBITDA is calculated in accordance with the definitions contained in
the Companys Senior Secured Credit Agreement. Credit Agreement EBITDA is defined as
consolidated net income before consolidated interest expense, non-cash expenses and
charges, total income tax expense, depreciation expense, expense associated with
amortization of intangibles and other assets, non-cash provisions for reserves for
discontinued operations, extraordinary, unusual or non-recurring gains or losses or charges
or credits, gain or loss associated with sale or write-down of assets not in the ordinary
course of business, and any income or loss accounted for by the equity method of
accounting.(b)
    
    Credit agreement interest expense adjustments include the discount from the financing
of receivables.(c)
    
    Consolidated Interest Expense is calculated in accordance with the definitions
contained in the Companys Senior Secured Credit Agreement. Consolidated Interest Expense
is defined as consolidated interest expense minus consolidated interest income plus any
discount from the financing of receivables.   NOTE 10  BRAZIL IMPAIRMENT
 Accounting for the
Impairment or Disposal of Long-Lived Assets,
 17




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 INTRODUCTION
         OVERVIEW OF BUSINESS
  Significant Factors That Impact The Companys Business
 Impact of Inflation.
 Substantial Debt Obligations
 18




---



##### Table of Contents



Commitment to Cost Reduction
 Market Factors.
  OVERVIEW OF THIRD QUARTER 2006 RESULTS
 
    
    Net Sales in the third quarter of 2006 increased by $12.3 million, or 2.0%, to $617.7
million from $605.4 million in the third quarter of 2005 due primarily to increased volume
and pricing for containerboard, improved pricing for North American food and consumer
product cartons and favorable foreign currency exchange rates. These increases were
partially offset by lower North American beverage carton sales.
    
    Income from Operations in the third quarter of 2006 decreased by $0.1 million, or 0.2%,
to $44.0 million from $44.1 million in the third quarter of 2005 as the improved pricing and
worldwide cost reductions and manufacturing improvements were offset by higher inflation,
unfavorable product mix and an impairment charge.
    
    Debt decreased by $20.8 million during the third quarter of 2006 as a result of improved
working capital.
 19




---



##### Table of Contents



RESULTS OF OPERATIONS
 Segment Information
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,
    
    
    September 30,
    
    
    September 30,(Amounts in Millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005NET SALES:Paperboard Packaging
    
    $
    591.6
    
    
    $
    585.9
    
    
    $
    1,753.4
    
    
    $
    1,745.2Containerboard/Other
    
    
    26.1
    
    
    
    19.5
    
    
    
    70.2
    
    
    
    66.2Total
    
    $
    617.7
    
    
    $
    605.4
    
    
    $
    1,823.6
    
    
    $
    1,811.4INCOME (LOSS) FROM OPERATIONS:Paperboard Packaging
    
    $
    52.7
    
    
    $
    64.7
    
    
    $
    114.9
    
    
    $
    137.3Containerboard/Other
    
    
    (3.4
    )
    
    
    (3.9
    )
    
    
    (13.2
    )
    
    
    (12.0
    )Corporate
    
    
    (5.3
    )
    
    
    (16.7
    )
    
    
    (21.9
    )
    
    
    (45.3
    )Total
    
    $
    44.0
    
    
    $
    44.1
    
    
    $
    79.8
    
    
    $
    80.0
 THIRD QUARTER 2006 COMPARED WITH THIRD QUARTER 2005
 Net Sales
  Three Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Three MonthsEnded
    
    Variances
    
    Ended(Amounts in Millions)
    
    September 30, 2005
    
    Price
    
    Volume/Mix
    
    Exchange
    
    Total
    
    September 30, 2006Net Sales
    
    $
    605.4
    
    
    
    10.6
    
    
    
    (0.7
    )
    
    
    2.4
    
    
    
    12.3
    
    
    $
    617.7
 Paperboard Packaging
  Containerboard/Other
  Income from Operations
  Three Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Three MonthsEnded
    
    Variances
    
    Ended(Amounts in Millions)
    
    September 30, 2005
    
    Price
    
    Volume/Mix
    
    Inflation
    
    Exchange
    
    Other (a)
    
    Total
    
    September 30, 2006Income from
Operations
    
    $
    44.1
    
    
    
    10.6
    
    
    
    (5.4
    )
    
    
    (20.5
    )
    
    
    0.1
    
    
    
    15.1
    
    
    
    (0.1
    )
    
    $
    44.0
 20




---



##### Table of Contents



Note:(a)
    
    Includes the benefits from the Companys cost reduction initiatives, manufacturing
strategies and improvements and the impact of lower depreciation expense, partially offset
by the impairment charge recorded in the Paperboard Packaging segment. Paperboard Packaging
  Containerboard/Other
  Corporate
  FIRST NINE MONTHS OF 2006 COMPARED WITH FIRST NINE MONTHS OF 2005
 Net Sales
  Nine Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded
    
    Variances
    
    Ended(Amounts in Millions)
    
    September 30, 2005
    
    Price
    
    Volume/Mix
    
    Exchange
    
    Total
    
    September 30, 2006Net Sales
    
    $
    1,811.4
    
    
    
    22.3
    
    
    
    (4.6
    )
    
    
    (5.5
    )
    
    
    12.2
    
    
    $
    1,823.6
 Paperboard Packaging
  Containerboard/Other
  21




---



##### Table of Contents



Income from Operations
  Nine Months
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Nine MonthsEnded
    
    Variances
    
    Ended(Amounts in Millions)
    
    September 30, 2005
    
    Price
    
    Volume/Mix
    
    Inflation
    
    Exchange
    
    Other (a)
    
    Total
    
    September 30, 2006Income from
Operations
    
    $
    80.0
    
    
    
    22.3
    
    
    
    (4.4
    )
    
    
    (60.4
    )
    
    
    2.8
    
    
    
    39.5
    
    
    
    (0.2
    )
    
    $
    79.8
 
 Note:(a)
    
    Includes the benefits from the Companys cost reduction initiatives, manufacturing
strategies and the impact of lower depreciation and amortization expense, somewhat offset
by higher manufacturing costs and the impairment charge. Paperboard Packaging
  Containerboard/Other
  Corporate
  INTEREST INCOME, INTEREST EXPENSE, INCOME TAX EXPENSE, AND EQUITY IN NET EARNINGS OF AFFILIATES
 Interest Income
  Interest Expense
  22




---



##### Table of Contents



Income Tax Expense
  Equity in Net Earnings of Affiliates
  FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
  Cash Flows
  Liquidity and Capital Resources
   September 30,
    
    
    December 31,(Amounts in Millions)
    
    2006
    
    
    2005Senior Notes with interest payable semi-annually at 8.5%, payable in 2011
    
    $
    425.0
    
    
    $
    425.0Senior Subordinated Notes with interest payable semi-annually at 9.5%,
payable in 2013
    
    
    425.0
    
    
    
    425.0Senior Secured Term Loan Facility with interest payable at various dates at
floating rates (7.52% at September 30, 2006 and 6.60% at December 31, 2005)
payable through 2010
    
    
    1,109.0
    
    
    
    1,109.0Senior Secured Revolving Facility with interest payable at various dates at
floating rates (9.25% at September 30, 2006 and 9.25% at December 31, 2005)
payable in 2009
    
    
    5.0
    
    
    
    6.0Other
    
    
    2.5
    
    
    
    3.51,966.5
    
    
    
    1,968.5Less, current portion
    
    
    6.0
    
    
    
    1.2Total
    
    $
    1,960.5
    
    
    $
    1,967.3
 23




---



##### Table of Contents



Total Amount of
    
    
    Total Amount
    
    
    Total Amount(Amounts in Millions)
    
    Commitments
    
    
    Outstanding
    
    
    Available (a)Revolving Credit Facility
    
    $
    325.0
    
    
    $
    5.0
    
    
    $
    308.1International Facilities
    
    
    31.9
    
    
    
    11.0
    
    
    
    20.9Total
    
    $
    356.9
    
    
    $
    16.0
    
    
    $
    329.0
 
 Note:(a)
    
    In accordance with its debt agreements, the Companys availability under its Revolving
Credit Facility has been reduced by the amount of standby letters of credit issued of $11.9
million as of September 30, 2006. These letters of credit are used as security against its
self-insurance obligations and workers compensation obligations. These letters of credit
expire at various dates through 2007 unless extended.    Covenant Restrictions
  24




---



##### Table of Contents



Minimum CreditMaximum Consolidated
    
    Agreement EBITDA toDebt to Credit Agreement
    
    Consolidated InterestEBITDA Leverage Ratio
    
    Expense RatioFour Fiscal Quarters Ending2006September 30, 2006
    
    
    6.75 to 1.00
    
    
    
    1.75 to 1.00December 31, 2006
    
    
    6.75 to 1.00
    
    
    
    1.75 to 1.002007March 31, 2007
    
    
    6.50 to 1.00
    
    
    
    1.75 to 1.00June 30, 2007
    
    
    6.50 to 1.00
    
    
    
    1.75 to 1.00September 30, 2007
    
    
    6.50 to 1.00
    
    
    
    1.75 to 1.00December 31, 2007
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.002008March 31, 2008
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.00June 30, 2008
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.00September 30, 2008
    
    
    6.00 to 1.00
    
    
    
    1.85 to 1.00December 31, 2008
    
    
    5.50 to 1.00
    
    
    
    2.00 to 1.002009March 31, 2009 and thereafter
    
    
    4.50 to 1.00
    
    
    
    2.90 to 1.00
       25




---



##### Table of Contents



Twelve Months Ended(Amounts in Millions)
    
    September 30, 2006Net Loss
    
    $
    (104.0
    )Income Tax Expense
    
    
    23.4Interest Expense, Net
    
    
    168.3Depreciation and Amortization
    
    
    196.7Equity in Net Earnings of Affiliates
    
    
    (1.0
    )Pension, Postemployment and Postretirement Benefits Expense
    
    
    31.8Merger Related Expenses
    
    
    4.8Write-Down of Assets
    
    
    4.4Dividends from Equity Investments
    
    
    2.4Credit Agreement EBITDA (a)
    
    $
    326.8
 Twelve Months Ended(Amounts in Millions)
    
    September 30, 2006Interest Expense, Net
    
    $
    168.3Amortization of Deferred Debt Issuance Costs
    
    
    (8.8
    )Credit Agreement Interest Expense Adjustments (b)
    
    
    0.1Consolidated Interest Expense (c)
    
    $
    159.6
 As of(Amounts in Millions)
    
    September 30, 2006Short Term Debt
    
    $
    16.7Long Term Debt
    
    
    1,960.5Total Debt
    
    $
    1,977.2
 
 Notes:(a)
    
    Credit Agreement EBITDA is calculated in accordance with the definitions contained in
the Companys Senior Secured Credit Agreement. Credit Agreement EBITDA is defined as
consolidated net income before consolidated interest expense, non-cash expenses and
charges, total income tax expense, depreciation expense, expense associated with
amortization of intangibles and other assets, non-cash provisions for reserves for
discontinued operations, extraordinary, unusual or non-recurring gains or losses or charges
or credits, gain or loss associated with sale or write-down of assets not in the ordinary
course of business, and any income or loss accounted for by the equity method of
accounting.(b)
    
    Credit agreement interest expense adjustments include the discount from the financing
of receivables.(c)
    
    Consolidated Interest Expense is calculated in accordance with the definitions
contained in the Companys Senior Secured Credit Agreement. Consolidated Interest Expense
is defined as consolidated interest expense minus consolidated interest income plus any
discount from the financing of receivables.   26




---



##### Table of Contents



Capital Investment
  Environmental Matters
     27




---



##### Table of Contents



CRITICAL ACCOUNTING POLICIES
   NEW ACCOUNTING STANDARDS
  BUSINESS OUTLOOK
       28




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  29




---



##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A. RISK FACTORS
  
 ITEM 6. EXHIBITS
  ExhibitNumber
    
    Description31.1
    
    Certification required by Rule 13a-14(a).31.2
    
    Certification required by Rule 13a-14(a).32.1
    
    Certification required by Section 1350 of Chapter 63 of Title 18
of the United States Code.32.2
    
    Certification required by Section 1350 of Chapter 63 of Title 18
of the United States Code.
 30




---



##### Table of Contents



SIGNATURES
  GRAPHIC PACKAGING CORPORATION
 /s/ STEPHEN A. HELLRUNG
    
    Senior Vice President, GeneralStephen A. Hellrung
    
    Counsel
and Secretary
    
    November 2, 2006/s/ DANIEL J. BLOUNT
    
    Senior Vice President and Chief FinancialDaniel J. Blount
    
    Officer
(Principal Financial Officer)
    
    November 2, 2006/s/ DEBORAH R. FRANK
    
    Vice President and ControllerDeborah R. Frank
    
    (Principal
Accounting Officer)
    
    November 2, 2006
 31