Graphic Packaging Holding Company — FY2014 Form 10-K
Reporting period: Year ended December 31, 2014. Figures are in U.S. dollars; financial amounts are in millions unless otherwise stated.
Business context
Graphic Packaging is a global paper-based consumer packaging producer, with leading positions in U.S. folding cartons, coated unbleached kraft (CUK) and coated-recycled board (CRB). It sells primarily into food, beverage and household product markets. Following the June 2014 sale of its multi-wall bag business, the company reports one segment, Paperboard Packaging. The 2014 portfolio also reflects the February sale of its labels business and the May acquisition of U.K. carton producer Benson for $190.7 million.
Financial performance and liquidity
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $4,240.5 | $4,478.1 | Down 5.3% |
| Gross profit / gross margin | $787.2 / 18.6% | $725.6 / 16.2% | Margin improved |
| Operating income / margin | $227.8 / 5.4% | $341.6 / 7.6% | Down 33.3% |
| Net income | $89.0 | $146.7 | Down 39.3% |
| Diluted EPS | $0.27 | $0.42 | Down 35.7% |
| Operating cash flow | $526.6 | $458.0 | Up $68.6 |
| Capital spending paid | $201.4 | $209.2 | Down $7.8 |
Net interest expense fell to $80.7 million from $101.9 million. The effective tax rate was 34.2%; tax expense included effects of disposed-business goodwill and research-credit carryforwards. Restructuring and other special charges were $197.6 million, versus $13.1 million in 2013; the 2014 total included $180.1 million of losses on asset sales or closures.
At year-end, cash was $81.6 million, total debt was $1,974.3 million (down from $2,253.6 million), and shareholders’ equity was $1,012.3 million. Current assets of $1,220.9 million compared with current liabilities of $676.7 million. The company reported $1,144.0 million available under revolving credit facilities and compliance with its debt covenants: leverage was 2.58x against a maximum of 4.25x, and interest coverage was 9.66x against a minimum of 3.00x. Approximately 37% of debt had variable rates.
Cash flow from operations benefited in part from receivables-sale programs. The company sold approximately $413 million of receivables under its programs in 2014; a separate revolving receivables agreement began in the fourth quarter. The filing reports $231 million sold under that agreement during the quarter, with related amounts collected, funded or receivable from the financial institution at year-end.
Material changes versus prior year
- Total sales fell $237.6 million, primarily reflecting $388.1 million of divestitures, partly offset by Benson, pricing and new products. Paperboard Packaging sales increased 2.2% to $4,024.9 million; Flexible Packaging sales fell to $215.6 million after divestitures.
- Paperboard Packaging operating income rose 16.9% to $413.9 million, supported by pricing, Benson, European synergies and productivity savings. Company-wide operating income fell chiefly because of divestiture-related losses and charges.
- Management reported approximately $60 million of net performance improvements versus 2013, including about $72 million in savings from continuous-improvement and manufacturing initiatives. These gains were offset by $75.6 million of inflationary costs, including labor, energy and externally purchased board.
- The pension funded deficit increased to $273.9 million from $153.2 million, mainly as the projected benefit obligation rose. Other comprehensive loss was $146.1 million, including pension and currency-translation losses.
Outlook, risks and unusual items
For 2015, management expected capital investment of $220–$230 million, depreciation and amortization of $275–$285 million, interest expense of $70–$80 million and pension contributions of $40–$60 million. It estimated $350–$375 million available for net debt reduction, dividends and share repurchases, excluding acquisitions and capital-market activity. These are not revenue or earnings-per-share forecasts.
After year-end, the company acquired Rose City Printing and Packaging and certain Norampac assets for approximately $116 million combined. In February 2015, the board authorized share repurchases of up to $250 million and declared a quarterly dividend of $0.05 per share, subject to debt-agreement restrictions.
Key risks include raw-material, energy and labor inflation; customers’ ability to resist price increases; competition and substitution by plastics or corrugated packaging; demand and consumer-preference changes; execution and integration of acquisitions; foreign-currency exposure; facility disruptions; environmental obligations; and substantial indebtedness. Pension obligations may also require significant cash contributions. Environmental reserves were recorded where losses were probable and estimable; the company expected to spend less than $3 million in 2015 on Boiler MACT compliance. Management said ordinary-course litigation was not expected to have a material adverse effect.
The independent auditor gave an unqualified opinion on the financial statements and internal control over financial reporting. The internal-control assessment and audit excluded Benson, which represented 5% of year-end assets and less than 3% of 2014 sales.
Investor verification priorities
- Separate recurring operating performance from the $197.6 million of special charges and the effects of business sales; review the composition and cash impact of disposal losses.
- Assess whether the 2014 operating-cash-flow increase is sustainable, including the scale and terms of receivables sales and the working-capital effects.
- Review debt maturities, variable-rate exposure, revolver availability and covenant headroom, particularly alongside the 2015 acquisition, dividend and repurchase plans.
- Track pension funding status and assumptions: the deficit rose materially, and management projected $40–$60 million of 2015 pension contributions.
- Evaluate whether pricing and productivity improvements can offset inflation and volume softness in beverage and consumer-product markets, and whether Benson and the subsequent acquisitions deliver expected benefits.