Graphic Packaging Holding Company — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The company supplies paper-based packaging, principally folding cartons and paperboard, to food, beverage and other consumer-products markets. Unless noted, amounts are in millions of U.S. dollars.
Financial performance and position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,070.0 | $1,050.0 | $3,135.3 | $3,239.4 |
| Income from operations | $110.0 | $112.3 | $325.5 | $139.1 |
| Operating margin | 10.3% | 10.7% | 10.4% | 4.3% |
| Net income attributable to GPHC | $60.2 | $53.0 | $172.9 | $48.2 |
| Diluted EPS | $0.18 | $0.16 | $0.52 | $0.15 |
| Interest expense, net | $16.5 | $20.4 | $51.2 | $62.0 |
Margins are calculated from reported sales and operating income. Q3 sales increased 1.9%, while operating income declined 2.0%; net income attributable to GPHC rose 14%. Nine-month sales fell 3.2%, but increased 3.6% excluding the prior-year divestitures. The sharp year-over-year increase in nine-month operating income largely reflects the absence of $170.7 million in prior-year asset-sale losses, including losses associated with the label and multi-wall bag businesses.
- Cash flow, nine months: Operating cash flow was $351.0, versus $331.2 in 2014. Investing used $294.1, including $181.7 of capital spending and $113.6 for acquisitions. Financing used $52.6. Cash was $81.5 at September 30, essentially unchanged from year-end 2014.
- Liquidity and debt: Current assets were $1,349.6 and current liabilities $692.8 (current ratio approximately 1.95). Total debt was $1,994.2, versus $1,974.3 at year-end; cash-adjusted debt was approximately $1,912.7. Revolving facilities had $1,090.0 available. The company reported compliance with debt covenants; leverage ratio was 2.54 against a maximum of 4.25, and interest coverage was 11.47 against a minimum of 3.00.
- Other balance-sheet items: Receivables were $483.2 and inventories $569.3. Pension and postretirement obligations were $246.8. The company had approximately $455 million of U.S. federal net operating losses, subject to applicable limitations.
Changes and management commentary
- Q3 sales benefited from approximately $64 million of North American acquisition sales and new products, offset by unfavorable currency, lower pricing and weaker consumer-product volumes. Q3 operating income was pressured by currency, pricing and inflation, especially labor and benefits; cost savings, acquisitions and improved performance partly offset these pressures.
- For the first nine months, acquisition sales of approximately $239 million and volume/mix gains were offset by currency impacts, lower pricing and divestitures. Soft demand affected selected consumer categories, including cereal, frozen and dry foods. Beverage volumes were broadly flat.
- Management reported $43.6 million of incremental cost savings in the first nine months. Inflation increased costs by $14.7 million, principally labor and benefits and wood, partly offset by lower energy and other costs.
- Reporting segments were revised effective September 30, 2015 to Paperboard Mills, North America Consumer Packaging, Americas Beverage Packaging and Europe Packaging, with other activities and shared costs reported as Other.
Outlook, capital allocation and risks
- 2015 guidance: capital investment of $230–$240 million; depreciation and amortization of $275–$285 million; interest expense of $67–$73 million; and pension contributions of $45–$60 million. Management expected $340–$350 million of cash available for net debt reduction, dividends and repurchases, excluding M&A and capital-market activity.
- The board authorized a $250 million share-repurchase program in February 2015. The company reported $23 million of repurchases through September and declared quarterly dividends of $0.05 per share. Dividends paid in the first nine months totaled $32.9 million.
- North American acquisitions—Rose City and certain Cascades assets—closed in January and February for approximately $114.6 million in final preliminary purchase-price allocation. Subsequent to quarter-end, the company acquired Carded Graphics assets and agreed to acquire G-Box, subject to closing conditions and regulatory review.
- Principal risks include raw-material and energy cost volatility, limits on passing costs through to customers, competition and product substitution, consumer-demand shifts, foreign exchange, acquisition execution, indebtedness and covenant restrictions. Approximately 37.5% of debt was floating-rate; interest-rate and commodity exposure was partly hedged.
- Environmental investigations and remediation could result in future costs; the company said accrued and reasonably possible losses were not material, while some potential costs were not quantifiable. Expected 2015 Boiler MACT compliance spending was less than $3 million. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material change in previously disclosed risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether underlying volume, pricing and currency trends support earnings growth apart from acquisitions and prior-year divestiture-related charges.
- How much operating cash generation depends on receivables sales and factoring arrangements; receivables transferred with continuing involvement were approximately $294 million at quarter-end.
- Debt repayment capacity, floating-rate exposure, covenant headroom and the availability of revolving credit under different operating conditions.
- Whether the 2015 capital-investment and cash-availability outlook remains achievable alongside pension funding, dividends, repurchases and additional acquisitions.
- Acquisition integration, preliminary purchase accounting and the expected returns from the completed and proposed transactions.
- Use and limitations of the U.S. NOLs, and possible environmental or other contingent liabilities not presently quantifiable.