Graphic Packaging Holding Company — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The company supplies paperboard, cartons, packaging machinery and flexible packaging to food, beverage and other consumer-products markets.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,139.7 million | $1,111.9 million | $2,240.2 million | $2,179.1 million |
| Income from operations | $87.7 million | $96.7 million | $172.9 million | $167.7 million |
| Net income attributable to GPHC | $21.2 million | $42.4 million | $56.1 million | $59.6 million |
| Diluted earnings per share | $0.06 | $0.11 | $0.16 | $0.15 |
| Operating margin, approximate | 7.7% | 8.7% | 7.7% | 7.7% |
Q2 operating income declined 9.3%, despite sales growth of 2.5%. The quarter included a $25.9 million debt-extinguishment loss; the company reported $32.1 million of pretax income before that charge. For the first half, the debt loss was also $25.9 million, compared with $8.9 million in 2012. Net income attributable to GPHC fell 5.9% for the first half, while reported EPS rose from $0.15 to $0.16 as weighted-average diluted shares declined from 397.2 million to 350.9 million.
Segments and year-over-year changes
- Paperboard Packaging: Q2 sales rose 4.7% to $972.1 million, principally from the European acquisitions, new consumer-product business and open-market sales. Segment operating income fell 14.4% to $104.4 million, pressured by pricing, inflation, integration costs and foreign exchange. First-half sales increased 5.3% to $1,908.2 million, while operating income decreased 1.4% to $207.1 million.
- Flexible Packaging: Q2 sales declined 8.8% to $167.6 million, chiefly due to lower volume and internalization of paper; the operating loss narrowed to $1.4 million from $7.5 million. First-half sales declined 9.7% to $332.0 million and the operating loss improved to $5.2 million from $8.9 million.
- For the first six months, management reported $16.8 million of inflation-related cost increases, led by energy and wood. Continuous-improvement and manufacturing initiatives generated approximately $33 million of incremental savings versus the first half of 2012.
Cash flow, debt and liquidity
- First-half operating cash flow was $109.9 million, down from $142.5 million. Capital spending was $84.6 million, up from $80.9 million; operating cash flow less capital spending was approximately $25.3 million versus $61.6 million.
- Cash was $33.1 million at June 30, 2013, down from $51.5 million at year-end. Current assets were $1,256.7 million and current liabilities $716.8 million.
- Total debt was $2,323.2 million, including $87.2 million current debt; cash-adjusted debt was $2,290.1 million. Revolving and international facilities had $646.9 million of reported availability, including the effect of $27.0 million in standby letters of credit.
- In April, the company issued $425 million of 4.75% notes due 2021 and in June redeemed $425 million of 9.5% notes due 2017 at 104.75% of principal. The refinancing reduced the coupon but generated the $25.9 million extinguishment charge. First-half interest expense was $56.9 million versus $59.5 million.
- At June 30, the company reported covenant ratios of 3.29x total leverage and 6.83x interest coverage and stated it was in compliance. Approximately 47% of debt was floating-rate. Credit ratings were BB+ (S&P) and Ba2 (Moody’s), both with stable outlooks.
Outlook, risks and other notable items
- Management’s 2013 outlook: $70–$90 million of year-over-year operating cost savings; capital investment of $215–$235 million; depreciation and amortization of $270–$280 million; interest expense of $100–$110 million; debt reduction of approximately $250 million; and pension contributions of $40–$60 million.
- Management cautioned that cost inflation, limited ability to pass through higher costs, pricing and volume pressure, competition, foreign exchange, execution of cost initiatives and substantial debt could affect results and covenant compliance. Debt agreements restrict, among other matters, additional borrowing, dividends and certain transactions.
- The company had approximately $859 million of U.S. federal net operating losses available to offset future taxable income; its ability to use tax attributes is subject to risks, including regulatory and litigation matters.
- Environmental investigations and remediation obligations exist at some current and former facilities. The company said recorded reserves and reasonably possible losses beyond accruals were not material, while noting that some potential future costs could not be estimated. Ordinary-course lawsuits were not believed likely to have a material adverse effect.
- Certain shareholders sold 15 million shares in a Q2 secondary offering at $7.73 per share; selling holders’ ownership declined from approximately 44% to 39%. This was a shareholder sale, not an issuance of proceeds to the company. Management reported effective disclosure controls and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether the planned $70–$90 million savings and approximately $250 million debt reduction are achieved, and how these affect covenant headroom.
- Whether energy, wood, labor and other input-cost inflation can be offset by productivity savings or pricing, particularly in paperboard packaging.
- Whether flexible-packaging volume and margins stabilize, given continued softness and internalization effects.
- Actual full-year capital spending, pension contributions, cash generation and working-capital requirements versus management’s outlook.
- Potential environmental, legal, tax-attribute and acquisition-related impacts, including final purchase-price allocation for the European acquisitions.