Graphic Packaging Holding Company — FY2015 Form 10-K
Reporting period: Year ended December 31, 2015; the filing also reports fourth-quarter results. The company supplies paperboard packaging, including folding cartons, and paperboard to food, beverage and other consumer-product markets. Its reportable segments are Paperboard Mills, Americas Paperboard Packaging and Europe Paperboard Packaging.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $4,160.2 million | $4,240.5 million |
| Gross profit / gross margin | $789.1 million / 19.0% | $787.2 million / 18.6% |
| Operating income / operating margin | $427.1 million / 10.3% | $227.8 million / 5.4% |
| Net income | $230.1 million | $89.0 million |
| Diluted EPS | $0.70 | $0.27 |
| Cash from operations | $589.2 million | $526.6 million |
| Capital spending paid | $244.1 million | $201.4 million |
| Cash and cash equivalents at year-end | $54.9 million | $81.6 million |
| Total debt, as presented in selected financial data | $1,875.5 million | $1,957.7 million |
FY2015 operating cash flow less capital spending was $345.1 million. Current assets were $1,066.8 million and current liabilities were $732.2 million. The company reported $1,181.1 million available under revolving credit facilities at year-end and was in compliance with debt covenants. Its leverage ratio was 2.40 versus a maximum of 4.25; interest coverage was 11.91 versus a minimum of 3.00. Debt principal was separately reported as $1,889.2 million; the filing’s carrying-value and principal figures differ.
Fourth-quarter 2015 sales were $1,024.9 million, operating income $101.6 million and net income $57.2 million. Segment operating income for the full year was $403.9 million in Americas Paperboard Packaging, $40.8 million in Europe Paperboard Packaging, $12.9 million in Paperboard Mills and negative $30.5 million in Corporate and Other.
Material changes versus the prior year
- Sales decreased $80.3 million, or 1.9%. Acquisitions and new products contributed, but divestitures, unfavorable foreign exchange and lower pricing weighed on reported sales. Excluding 2014 divested-business sales, sales increased $141.3 million.
- Operating income rose $199.3 million, or 87.5%, primarily reflecting the prior-year $171.1 million loss on sale of the multi-wall bag business, cost reductions and lower integration costs. Higher labor and benefits costs, foreign exchange and lower pricing partly offset these gains.
- Net income increased by $141.1 million. Interest expense declined to $67.8 million from $80.7 million, while income tax expense increased to $130.4 million from $45.4 million; the reported effective tax rate was 36.3%.
- Operating cash flow increased $62.6 million, while investing cash outflow rose to $399.8 million, including $163.2 million for North American acquisitions. The company acquired Rose City, Cascades assets and Carded during 2015; it closed the acquired Jonquiere mill and shut down its West Monroe kraft paper machine.
Outlook, commentary and risks
- For 2016, management expected capital investment of $270–$280 million, depreciation and amortization of $290–$310 million (excluding approximately $20 million pension amortization), interest expense of $75–$85 million, and $360–$380 million available for net debt reduction, dividends and repurchases, excluding acquisitions and capital-market activity.
- Management forecast pension contributions of $40–$60 million in its business outlook; the pension note separately estimated $50–$60 million. Investors should verify the applicable estimate.
- Management said cash generated from operations and available credit were expected to support debt service, capital spending, operating needs and dividends, subject to business and market conditions. It also expected continued process-improvement and cost-reduction efforts.
- Key risks include raw-material, labor and energy cost volatility; limited ability to pass cost increases through to customers; competition and substitution by plastic or corrugated packaging; soft demand in some food and beverage categories; acquisition integration; foreign-exchange exposure; facility disruption; cybersecurity; environmental compliance and remediation; and debt, interest-rate and covenant constraints.
- Approximately 34% of debt was subject to variable rates. Pension plan assets were $1,038.9 million against projected benefit obligations of $1,239.0 million at year-end. Environmental and ordinary-course legal contingencies were disclosed; management did not expect currently accrued or reasonably possible environmental losses, or the lawsuits, to have a material consolidated impact, but some future remediation costs could not be estimated.
- The company reported approximately $470 million of U.S. federal net operating losses. Its 2015 cash flow also included proceeds from receivables-sale programs; verify the effect of these programs on the sustainability and timing of operating cash flows.
- After year-end, the company acquired G-Box and agreed to acquire Walter G. Anderson and Colorpak, subject to stated closing conditions. These transactions were not included in FY2015 results.
Important facts for investors to verify
- Reconcile reported debt principal of $1,889.2 million with selected-data total debt of $1,875.5 million and carrying debt on the balance sheet.
- Assess how much of the operating-income increase reflects sustainable productivity improvements versus the prior-year disposal loss and other special items; FY2015 restructuring and special charges were $22.0 million versus $197.6 million in 2014.
- Review the cash-flow contribution and continuing terms of receivables-sale and factoring programs, including deferred proceeds and continuing collection involvement.
- Confirm the final 2016 pension contribution outlook, and monitor pension funding, actuarial assumptions and required cash contributions.
- Evaluate 2016 capital needs, the concentration of debt maturities in 2019, floating-rate exposure, covenant headroom and restrictions on dividends and share repurchases.
- Track acquisition approvals, integration costs, realized synergies and the performance of acquired businesses; assess whether currency movements and demand trends affect reported growth.
- Note that Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; internal controls of the 2015 North American acquisitions were excluded from management’s assessment and the auditor’s control audit.