Graphic Packaging Holding Company — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Graphic Packaging makes paperboard packaging for food, beverage, foodservice and other consumer products markets. Results include the North America Consumer Packaging (NACP) business acquired from International Paper on January 1, 2018; this materially affects comparisons with Q1 2017.
Financial results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,476.0 million | $1,061.5 million |
| Income from operations | $74.0 million | $71.6 million |
| Net income | $42.7 million | $37.0 million |
| Net income attributable to GPHC | $29.9 million | $37.0 million |
| Diluted EPS attributable to GPHC | $0.10 | $0.12 |
| Net cash used in operating activities | $190.1 million | $91.7 million |
- Sales increased 39.0%. Management attributed the increase to $395.3 million from NACP and 2017 acquisitions, favorable exchange rates, and higher prices. Core volumes were stable; lower open-market volumes partly reflected greater internal use of paperboard.
- Operating income rose 3.4%, but operating margin declined to approximately 5.0% from 6.7%. Gross margin was approximately 15.1% versus 16.2%, reflecting cost inflation and the changed business mix.
- Operating income benefited from acquisitions, pricing, productivity initiatives and the prior-year paper-machine downtime comparison. Higher inflation reduced results by $17.8 million; reported special charges were $26.3 million, including $27.0 million of business-combination charges, partly offset by a $1.5 million asset-sale gain.
- Interest expense increased to $28.8 million from $21.3 million, primarily due to higher average debt and rates. The company recorded a $1.9 million loss on debt modification or extinguishment.
- Cash used in operations increased, primarily due to changes in operating assets and liabilities, including higher inventory and deferred purchase price for receivables sold. Capital spending was $92.1 million. Financing provided $127.3 million, including net revolving-credit borrowings.
Financial position and liquidity
- At March 31, 2018, cash was $52.5 million; current assets were $1,825.1 million and current liabilities were $1,003.3 million.
- Balance-sheet debt was $3,099.1 million, including $55.6 million of short-term and current debt and $3,043.5 million of long-term debt. Aggregate principal debt obligations were reported as $3,111.8 million. Approximately 59% of total debt was floating-rate.
- Revolving facilities had $1,044.4 million available. The company was in compliance with its debt covenants: leverage ratio 3.06 against a maximum below 4.25, and interest coverage ratio 10.78 against a minimum of 3.00.
- Receivables-sale programs generated significant liquidity: $844.8 million of receivables were sold and derecognized during the quarter. The filing reports $593 million of receivables sold under programs with continuing involvement at quarter-end.
Material developments, outlook and risks
- The NACP Combination had total consideration of $1.9 billion, including $660 million of assumed debt. Preliminary purchase accounting included $276.4 million of goodwill; final valuations remained subject to adjustment. NACP contributed $359.5 million of sales and $20.9 million of operating income in the quarter.
- IP received a 20.5% interest in GPIP. Some units are exchangeable for GPHC shares or cash after the second anniversary; units not exchangeable for shares are classified as redeemable noncontrolling interest. This structure contributed to the difference between consolidated net income and income attributable to GPHC.
- 2018 outlook: capital investment approximately $380 million; depreciation and amortization $430–$450 million, excluding approximately $6 million of pension amortization; interest expense $125–$135 million; pension contributions $5–$10 million. No sales or earnings guidance was provided in the filing.
- Management said cash from operations, revolving-credit availability and other financing sources should be adequate for expected needs, while noting this depends on operating performance, markets and other factors. The company had approximately $327 million of U.S. federal net operating losses at year-end 2017 and did not expect to be a meaningful U.S. federal cash taxpayer until 2021.
- Key risks include raw-material, energy, freight and labor cost inflation; limited ability to pass costs through; competition and product substitution; consumer demand; acquisition integration; debt and floating-rate exposure; and environmental investigation or remediation. The company said ordinary-course lawsuits were not expected to have a material adverse effect and reported no material change to previously disclosed risk factors.
Important facts for investors to verify
- How much of sales and operating performance growth is sustainable after separating NACP and other acquisition contributions from organic trends.
- Whether cost inflation, especially freight, labor and chemicals, can be offset by pricing and productivity gains.
- Working-capital needs and reliance on receivables sales, including deferred purchase price and continuing involvement.
- Post-acquisition leverage, floating-rate sensitivity, covenant headroom and integration costs.
- Final NACP purchase accounting, exchange or redemption terms for IP’s GPIP units, and the timing and usability of tax benefits.