Business context and reporting period
Graphic Packaging Holding Company is a global paper-based consumer packaging producer. This unaudited Form 10-Q covers the three and six months ended June 30, 2015, compared with the corresponding 2014 periods. The company reports one segment, paperboard packaging, following the 2014 sale of its multi-wall bag business.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1,057.1 million, down 5.3% year over year | $2,065.3 million, down 5.7% |
| Income from operations | $110.2 million, versus a $52.9 million loss | $215.5 million, versus $26.8 million |
| Net income attributable to GPHC | $57.6 million, versus a $40.0 million loss | $112.7 million, versus a $4.8 million loss |
| Diluted EPS | $0.17, versus a loss of $0.12 | $0.34, versus a loss of $0.01 |
- Second-quarter gross profit was $198.0 million (approximately 18.7% of sales), compared with $213.1 million (19.1%) in 2014. Reported operating margin was approximately 10.4%, versus negative 4.7%; the prior-period result included a $164.5 million loss on sale of businesses. Excluding that charge, prior-year operating income was approximately $111.6 million.
- Paperboard packaging sales increased 4.8% in Q2 and 4.6% for the six-month period, supported by acquisitions. Paperboard segment operating income fell 7.6% in Q2 to $110.2 million, but rose 4.5% for the half to $215.5 million.
- Six-month operating cash flow was $177.3 million, up from $153.6 million. Investing cash use was $235.9 million, including $127.0 million of capital spending and $113.6 million net cash paid for acquisitions. Financing provided $26.7 million. Cash declined to $46.8 million from $81.6 million at year-end.
- At June 30, total debt was $2,044.4 million, up from $1,974.3 million at December 31; cash-adjusted net debt was approximately $1,997.6 million. Revolving credit facilities had $1,048.7 million available. Current assets were $1,319.8 million and current liabilities $671.5 million.
- Net interest expense declined to $17.8 million for Q2 and $34.7 million for the first half. Approximately 39.1% of debt bore floating rates. The company reported compliance with debt covenants; leverage was 2.63x against a maximum below 4.25x, and interest coverage was 10.93x against a 3.00x minimum.
Material changes versus prior periods
- Reported earnings improved substantially largely because 2014 included the $164.5 million divestiture loss in Q2 and $170.4 million for the first half. In 2015, restructuring and special charges were $3.9 million for Q2 and $6.1 million for the half.
- Q2 sales declined despite acquisition contributions of about $92 million: the divested multi-wall bag business reduced comparison sales by $107.7 million and unfavorable exchange rates by $28.5 million. Paperboard packaging volume/mix contributed $82.7 million, offset by lower pricing of $6.1 million.
- For the first half, acquisitions contributed about $175 million to paperboard sales; unfavorable exchange rates reduced sales by $57.5 million, while divestitures reduced total sales by $221.6 million. Paperboard operating income benefited from cost savings and the absence of prior-year weather and power-outage impacts, partly offset by inflation, pricing and currency effects.
- Debt increased, principally reflecting acquisition-related revolving borrowings. The company acquired Cascades assets and Rose City in early 2015 for approximately $115 million combined.
Outlook, commentary and risks
- For 2015, management expected capital investment of $230–$240 million, depreciation and amortization of $275–$285 million, interest expense of $65–$75 million, and pension contributions of $40–$60 million. It expected $350–$375 million of cash available for net debt reduction, dividends and repurchases, excluding acquisitions and capital-market activity. No sales or earnings guidance was provided in the filing.
- Management reported approximately $32 million of incremental cost savings in the first half. Inflation increased costs by $9.6 million, mainly labor and benefits and wood; lower energy costs partly offset these increases. Management noted limited ability to pass cost increases through to customers.
- Key business risks include raw-material and energy cost volatility, competition and product substitution, soft demand in certain consumer markets, foreign exchange exposure, execution of acquisitions and cost initiatives, and the company’s significant debt and covenant restrictions. Environmental investigations and remediation may create future costs; expected 2015 Boiler MACT compliance spending was below $3 million. The company did not believe pending ordinary-course litigation or accrued environmental contingencies were material. No material changes to previously disclosed risk factors were reported.
- Shareholders received a $0.05-per-share quarterly dividend. A $250 million repurchase authorization was approved in February; the filing reports $8 million of shares repurchased during 2015 through June.
Important facts for investors to verify
- Assess underlying operating trends separately from the large 2014 divestiture charge and the effects of acquisitions, disposals, currency and pricing.
- Track whether cost savings can offset inflation, lower pricing and soft end-market demand, and whether acquisition integration delivers expected benefits.
- Review debt growth, floating-rate exposure, covenant headroom, liquidity and the company’s ability to fund capital spending while reducing debt and returning cash to shareholders.
- Reconcile the filing’s differing estimates of U.S. federal net operating losses: approximately $551 million in Note 8 versus approximately $511 million in MD&A.
- Monitor working-capital cash use and receivables-sale programs: the company reported $57 million due from the receivables purchaser at quarter-end and approximately $255 million of transferred receivables with continuing involvement.