Graphic Packaging Holding Company — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unaudited results. The company supplies paper-based packaging, including folding cartons and paperboard, to food, beverage and other consumer-products markets.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $1,061.5 million | $1,034.0 million | Up 2.7% |
| Income from operations | $75.5 million | $107.2 million | Down 29.6% |
| Net income | $37.0 million | $57.5 million | Down 35.7% |
| Diluted EPS | $0.12 | $0.18 | Down $0.06 |
| Operating cash flow | $28.4 million | $58.4 million | Down $30.0 million |
| Capital investment | $76.1 million | $103.0 million | Down $26.9 million |
- Approximate gross margin was 16.5%, compared with 20.1%; operating margin was 7.1%, compared with 10.4%; net margin was 3.5%, compared with 5.6%.
- Interest expense increased to $21.3 million from $16.9 million, primarily due to higher average debt and interest rates. About 36% of debt carried floating rates.
- Cash and equivalents were $37.4 million at quarter-end, down from $59.1 million at year-end 2016. Current assets were $1,145.3 million and current liabilities $757.4 million.
- Management reported outstanding debt obligations of $2,267.9 million. Revolving facilities had $1,121.4 million available. The company was compliant with debt covenants: leverage ratio 2.97x against a maximum of 4.25x; interest coverage ratio 9.81x against a minimum of 3.00x.
- Operating cash flow less reported capital investment was negative $47.7 million. Investing cash use was $77.3 million; financing provided $25.9 million, including net revolving-credit borrowings of $103.7 million.
Material changes and segment results
- Sales rose $27.5 million, principally from $61.5 million of sales from 2016 acquisitions and new products, partly offset by lower pricing and unfavorable foreign exchange. Price reduced sales by $13.8 million; foreign exchange by $14.9 million; volume/mix added $56.2 million.
- Operating income fell $31.7 million. Management cited higher inflation ($24.2 million), approximately $18 million of planned downtime for a West Monroe, Louisiana paper-machine upgrade, acquisition-related depreciation and amortization, lower pricing and unfavorable currency effects. Cost savings partially offset these pressures.
- Americas Paperboard Packaging operating income was $89.4 million versus $113.5 million; Paperboard Mills recorded a $12.3 million operating loss versus a $1.2 million loss; Europe Paperboard Packaging income was $7.0 million versus $9.1 million. Segment structure was reorganized in January 2017, and prior periods were recast.
- Q1 2016 included $288.5 million of acquisition spending; Q1 2017 had no business acquisitions. The 2016 acquisitions included G-Box, WG Anderson, Metro and Colorpak.
Outlook, commentary and risks
- For 2017, management expected capital investment of approximately $250 million, depreciation and amortization of $300–$320 million, interest expense of $80–$90 million, and $380–$400 million of cash flow available for net debt reduction, dividends and share repurchases, excluding acquisitions and capital-market activity.
- Expected 2017 pension contributions were $30–$40 million. Management expected the company not to be a meaningful U.S. federal cash taxpayer until 2019, citing tax-loss carryforwards; it projected $285–$335 million of NOLs remaining at year-end 2017.
- The board authorized a new $250 million share-repurchase program in January. The company repurchased 2.96 million shares in the quarter at an average $12.98, completed the prior program, and had approximately $230 million remaining under the new program. The quarterly dividend was raised to $0.075 per share.
- Key risks include raw-material, energy, labor and freight inflation; limited ability to pass through cost increases; competition and packaging substitution; consumer-demand changes; foreign exchange; execution of cost-saving and acquisition strategies; and debt, floating-rate exposure and covenant restrictions. Environmental investigations and ordinary-course lawsuits were disclosed; management did not expect currently accrued or reasonably possible losses to be material, while some future environmental costs could not be estimated.
- Management believed operating cash, revolving availability and other financing sources would cover debt service, capital spending and working-capital needs, but gave no assurance. Credit ratings were BB+ from S&P and Ba1 from Moody’s, both with stable outlooks.
Important facts for investors to verify
- Whether pricing, inflation and planned mill downtime continue to pressure operating margins, and whether cost savings offset those pressures.
- How much of sales growth and future performance reflects acquired businesses versus organic volume, pricing and currency effects.
- Progress against the $250 million capital-investment plan and the $380–$400 million cash-flow outlook; clarify the company’s cash-flow measure and assumptions.
- Debt balances, floating-rate exposure, revolver availability, covenant headroom and the effect of ongoing repurchases and dividends on deleveraging.
- Use and availability of tax NOLs, including the estimated timing of U.S. federal cash taxes, and the potential impact of adopting the new revenue-recognition standard in 2018.