Graphic Packaging Holding Company — FY 2012 Form 10-K
Business context and reporting period. The company supplies paperboard cartons, packaging machinery, labels and flexible packaging to food, beverage and other consumer-product markets. This filing covers the fiscal year ended December 31, 2012; quarterly figures below identify the fourth quarter where relevant. Results are reported in paperboard packaging and flexible packaging.
Financial results and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Net sales | $4,337.1 million | $4,206.3 million |
| Gross profit | $719.6 million; 16.6% of sales | $637.5 million; 15.2% of sales |
| Operating income | $322.4 million; 7.4% of sales | $190.3 million; 4.5% of sales |
| Net income attributable to GPHC | $122.6 million; diluted EPS $0.31 | $276.9 million; diluted EPS $0.73 |
| Cash from operating activities | $468.6 million | $387.8 million |
| Capital spending | $203.3 million | $160.1 million |
| Cash and cash equivalents at year-end | $51.5 million | $271.8 million |
| Total debt at year-end | $2,333.3 million | $2,365.8 million |
FY 2012 operating cash flow less capital spending was approximately $265.3 million. Year-end current assets were $1,203.1 million and current liabilities $752.9 million (current ratio approximately 1.6). Revolver availability was $645.5 million after letters of credit; total availability including international facilities was $651.8 million. Net debt was approximately $2,281.8 million. The company reported compliance with debt covenants: consolidated total leverage ratio 3.24x versus a maximum of 4.75x, and interest coverage ratio 6.72x versus a minimum of 3.00x.
Fourth-quarter 2012 net sales were $1,053.3 million, operating income $63.3 million, net income attributable to GPHC $22.9 million and diluted EPS $0.06.
Material changes versus the prior comparable period
- Sales grew 3.1%, primarily from higher volume, including the DNK combination and new consumer-products business; unfavorable currency movements partly offset growth.
- Operating income rose $132.1 million. The comparison benefited substantially from the $96.3 million non-cash flexible-packaging goodwill impairment recorded in 2011, as well as 2012 cost savings, pricing, volume and some input-cost deflation.
- Net income attributable to GPHC fell to $122.6 million from $276.9 million. The 2011 result included a $265.2 million non-cash tax benefit from releasing deferred-tax valuation allowances; 2012 included $82.5 million of income-tax expense.
- Paperboard packaging sales increased 1.0% to $3,617.0 million, with operating income up 15.5% to $417.3 million. Flexible-packaging sales increased 15.0% to $720.1 million, while the segment still reported a $24.3 million operating loss, improved from a $98.8 million loss in 2011.
- Cash from operations increased, but investing outflow rose to $294.0 million and financing outflow to $396.1 million. The company spent $300.0 million repurchasing approximately 49.2 million shares, funded by incremental term debt; cash fell by $220.3 million over the year.
Outlook, commentary and risks
For 2013, management expected $70–$90 million of year-over-year operating cost savings; capital investment of $215–$235 million; depreciation and amortization of $270–$290 million; interest expense of $110–$120 million; debt reduction of approximately $250 million; and pension contributions of $40–$70 million. These are forward-looking expectations, not guarantees.
The company said 2012 inflation increased costs by $43.1 million, with labor, freight, wood, chemicals and other inputs partly offset by lower secondary-fiber and energy costs. It cited pricing constraints, raw-material and energy volatility, competition and substitute packaging, market softness, currency movements, acquisition integration and the ability to sustain cost savings as key uncertainties. About 50% of debt was floating-rate, although $460 million of interest-rate swaps hedged part of the exposure. Debt agreements restrict additional borrowing, dividends and other actions; no cash dividends had been paid in the prior three years and the company did not intend to pay them at that time.
Other notable matters: Contego and A&R European packaging businesses were acquired on December 31, 2012 for approximately $118 million cash in aggregate, with approximately $37 million of debt assumed. Pension obligations were underfunded by $367.6 million at year-end, and pension expense was $42.5 million in 2012. The company had approximately $954 million of U.S. federal net operating losses, whose use may be limited by ownership changes under Section 382. Environmental investigations and ordinary-course litigation were disclosed; management did not expect the described contingencies to have a material adverse effect, while noting that some future environmental costs could not be estimated. Auditors issued an unqualified opinion on the financial statements and internal controls; acquired European businesses were excluded from management’s internal-control assessment.
Important facts for investors to verify
- How much of the operating-income improvement reflects recurring productivity and pricing, versus the prior-year goodwill impairment comparison and other unusual items?
- Whether management delivers the 2013 savings, capital-spending and debt-reduction targets, and how acquisitions affect results and integration costs.
- Debt maturity and refinancing exposure, floating-rate sensitivity, covenant headroom and the effect of continued low cash balances.
- Whether pension funding needs or adverse asset returns and discount-rate changes increase future cash requirements.
- Whether ownership changes could restrict use of the NOLs, and whether raw-material inflation, demand softness, currency or environmental obligations materially affect results.