Graphic Packaging Holding Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Graphic Packaging provides paperboard and flexible packaging products, primarily for food, beverage, and other consumer markets. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,072.7 | $1,100.5 |
| Income from operations | $79.7 | $85.2 |
| Net income attributable to GPHC | $35.2 | $34.9 |
| Diluted EPS | $0.11 | $0.10 |
| Operating cash flow | $29.9 | $(11.9) |
| Capital spending | $59.3 | $32.9 |
- Sales declined $27.8 million, or 2.5%. Management attributed the decrease mainly to lower volume associated with business and asset sales, partly offset by pricing and favorable exchange rates.
- Gross profit was $187.0 million, or approximately 17.4% of sales, versus $182.9 million, or 16.6%, in Q1 2013. Operating margin was approximately 7.4%, versus 7.7%.
- Operating income fell 6.5%; higher input-cost inflation, severe-weather-related production losses, and unfavorable exchange rates outweighed pricing and cost savings. Net income attributable to GPHC rose slightly, helped by net interest expense declining to $20.4 million from $27.2 million.
- Operating cash flow improved by $41.8 million year over year, principally due to lower inventory and incentive-compensation payments. Cash flow less capital spending was approximately negative $29.4 million, compared with negative $44.8 million in Q1 2013.
- Cash was $34.7 million at quarter-end, down from $52.2 million at December 31, 2013. Current assets were $1,294.2 million and current liabilities $686.9 million; the current ratio was approximately 1.9.
- Total debt was $2,211.2 million, down from $2,253.6 million at year-end; net debt was $2,176.5 million. Revolving credit facilities had $803.6 million of total availability. The company reported compliance with debt covenants.
Segment results and material changes
- Paperboard Packaging: Sales increased 0.6% to $941.8 million; operating income decreased 2.4% to $100.2 million. Pricing and European exchange rates partly offset lower volumes, inflation, weather-related disruption, and divestiture impacts.
- Flexible Packaging: Sales declined 20.4% to $130.9 million, primarily due to the sale of the flexible plastics business and greater internalization of paper. Operating loss widened to $4.5 million from $3.8 million.
- The company completed the sale of its labels business on February 3, 2014. It generated $70.7 million in cash proceeds ($78.8 million total consideration, including $8.1 million noncash consideration) and recorded a $5.9 million loss. Approximately $47 million of goodwill and $17 million of intangible assets were written off. The labels business represented about 1% of consolidated sales.
- Severe winter storms and power outages shut down mills in West Monroe, Louisiana, and Macon, Georgia, causing an estimated $14.5 million in lost production and higher manufacturing and freight costs.
- Management reported approximately $13 million of incremental cost savings from continuous-improvement and manufacturing initiatives. Total inflationary costs were estimated at $18.3 million year over year.
Outlook, risks, and contingencies
- For 2014, management expected capital investment of $185–$205 million, depreciation and amortization of $275–$285 million, interest expense of $85–$95 million, net debt reduction of approximately $350 million excluding acquisitions and divestitures, and pension contributions of $40–$60 million.
- Approximately 43% of debt was subject to floating interest rates. The company had hedged 53% of expected 2014 natural-gas usage. It reported $830 million of U.S. federal net operating losses available to offset future taxable income.
- Risks include raw-material and energy-cost volatility, limits on passing cost increases to customers, competitive and volume pressures, execution of cost-reduction plans, facility disruptions, foreign-exchange movements, and substantial debt and covenant restrictions. The company warned that weaker sales or profitability could pressure future covenant compliance.
- Environmental investigations and remediation may result in costs; the company expected to spend less than $10 million in aggregate in 2014 and 2015 on Boiler MACT compliance. Management considered the reasonably possible losses beyond recorded environmental reserves not material, but some historical-site costs could not be quantified. Ordinary-course lawsuits were not believed likely to have a material adverse effect.
- The company stated that it had adequate expected liquidity for debt service, capital spending, and working capital, while noting that this depended on operating performance, markets, costs, and successful execution of its plans. Forward-looking statements are subject to those and other risks.
Important facts for investors to verify
- Whether reported cost savings and pricing can offset persistent inflation and the effects of weather-related downtime.
- How much of sales and profit trends reflect divestitures, internalization, and underlying demand, particularly in Flexible Packaging.
- Progress against the 2014 capital-spending, pension-contribution, and net-debt-reduction outlook, and the assumptions behind those targets.
- Debt covenant headroom, floating-rate exposure, and liquidity availability if operating results weaken.
- Final proceeds and any additional costs or contingencies associated with the labels-business sale and environmental matters.