Graphic Packaging Holding Company — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; comparisons are primarily with 2010. The company supplies paperboard cartons, carriers, packaging machinery and flexible packaging to food, beverage and other consumer-products markets.
Financial performance and liquidity
| Metric | 2011 | 2010 |
|---|---|---|
| Net sales | $4,206.3 million | $4,095.0 million |
| Gross profit / gross margin | $637.5 million / 15.2% | $593.2 million / 14.5% |
| Income from operations / operating margin | $190.3 million / 4.5% | $219.5 million / 5.4% |
| Net income attributable to GPHC | $276.9 million | $10.7 million |
| Diluted earnings per share | $0.73 | $0.03 |
| Cash from operating activities | $387.8 million | $338.1 million |
| Capital spending | $160.1 million | $122.8 million |
| Cash and equivalents at year-end | $271.8 million | $138.7 million |
| Total debt at year-end | $2,365.8 million | $2,579.1 million |
| Total shareholders’ equity | $1,166.7 million | $747.0 million |
Operating cash flow less capital spending was approximately $227.7 million in 2011, versus $215.3 million in 2010. Net income rose sharply mainly because the company recorded a $265.2 million non-cash tax benefit after releasing its U.S. federal and a substantial portion of state deferred-tax valuation allowances; this uplift should not be read as equivalent to recurring operating earnings. Net interest expense fell $29.6 million to $144.9 million.
Paperboard Packaging sales rose 2.5% to $3,503.9 million and operating income increased 13.5% to $344.7 million. Flexible Packaging sales rose 4.0% to $702.4 million, but the segment recorded an $86.1 million operating loss, compared with $18.0 million of income in 2010. The loss included a $96.3 million non-cash goodwill impairment.
Material changes and notable items
- Sales increased 2.7%, primarily from higher pricing and favorable currency movements, partly offset by lower volumes. Input-cost inflation was $150.8 million; management reported $76.1 million of cost savings from improvement programs.
- In the second quarter, GPHC issued 52.5 million shares for net proceeds of $237.7 million, repurchased and retired approximately 7.3 million shares for $32.9 million, prepaid $150.0 million of term loans and acquired Sierra Pacific Packaging for $51.9 million.
- In December, GPHC combined certain bag and plastics businesses with DNK businesses in Graphic Flexible Packaging, LLC. GPHC owns approximately 87% and consolidates the venture; the purchase-price allocation was preliminary.
- Debt declined by approximately $213 million year over year. The company prepaid the remaining $73.3 million of its 9.5% notes due 2013 and paid $25.9 million of DNK debt. A substantial portion of term-loan debt matures in 2014.
- Working capital absorbed cash, especially as inventory increased by $61.8 million. Pension contributions were $64.5 million, up from $47.3 million in 2010.
Outlook, risks and contingencies
For 2012, management expected $60–$80 million of year-over-year operating cost savings, capital investment of $190–$210 million, depreciation and amortization of $250–$280 million, interest expense of $130–$145 million, debt reduction of approximately $200 million and pension contributions of $40–$70 million. Management believed cash generation and available credit would support obligations and operations, while noting this depended on future performance and market conditions.
- Debt was $2,365.8 million; approximately 32% was floating-rate at year-end. The company reported $368.1 million available under its revolving facility, after letters of credit, and compliance with its secured-leverage covenant: 2.47x versus a maximum of 4.75x.
- Key operating risks include raw-material, energy, freight and labor cost inflation; limits on passing costs to customers; weak volumes and competitive substitution; and execution risk for cost savings. Approximately 49% of employees were union-represented, with some contracts expired or approaching expiration.
- Pension plan assets were $754.5 million against projected benefit obligations of $1,069.8 million, a $315.3 million shortfall. Lower discount rates increased the measured obligation and contributed to an $80.4 million pension-related other comprehensive loss in 2011.
- Approximately $1.2 billion of U.S. federal net operating losses may be subject to limitations if an ownership change occurs under Section 382. Environmental investigations, remediation obligations, ordinary-course lawsuits and other contingencies are disclosed; management did not expect the described legal matters or accrued environmental exposures to be material, but some future environmental costs could not be quantified.
- The filing reports an unqualified audit opinion on the financial statements and effective internal control over financial reporting. Controls at acquired entities were excluded from management’s assessment.
Most important facts for investors to verify
- How much of reported 2011 earnings reflects the one-time, non-cash valuation-allowance release, and whether future taxable income supports realization of deferred tax assets.
- Progress on the 2012 debt-reduction and cost-savings targets, and refinancing or repayment plans for the large 2014 term-loan maturity.
- Whether pricing and productivity savings can offset input-cost inflation and weak or declining volumes.
- Operating performance and impairment assumptions for Flexible Packaging, and final purchase accounting for the DNK transaction.
- Future pension funding needs, covenant headroom, and potential exposure from environmental, labor and Section 382 matters.