Graphic Packaging Holding Company — Q2 2012 Form 10-Q
Business and period: Packaging solutions producer serving food, beverage, consumer, industrial and other markets, with paperboard packaging and flexible packaging segments. This unaudited filing covers the quarter and six months ended June 30, 2012; comparisons are with the corresponding 2011 periods.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $1,111.9 million | $1,080.7 million | $2,179.1 million | $2,081.3 million |
| Income from operations | $96.7 million | $76.3 million | $167.7 million | $144.9 million |
| Net income attributable to GPHC | $42.4 million | $32.1 million | $59.6 million | $58.8 million |
| Diluted EPS | $0.11 | $0.08 | $0.15 | $0.16 |
| Operating margin | 8.7% | 7.1% | 7.7% | 7.0% |
Gross profit was $196.4 million in Q2 and $366.0 million in the first half, implying gross margins of approximately 17.7% and 16.8%, respectively. Net sales rose 2.9% in Q2 and 4.7% year to date. Operating income increased 26.7% in Q2 and 15.7% for the first half.
- Segments: Q2 paperboard sales were $928.1 million, up 0.2%, and operating income was $121.9 million, up 28.2%. Flexible packaging sales were $183.8 million, up 19.0%, but the segment posted a $7.5 million operating loss versus a $2.5 million loss. For the first half, paperboard operating income increased to $210.1 million from $175.6 million; flexible packaging losses widened to $8.9 million from $0.4 million.
- Cash flow: First-half operating cash flow was $142.5 million, versus $117.6 million. Capital spending was $80.9 million, versus $70.8 million; operating cash flow less capital spending was $61.6 million, versus $46.8 million. Investing cash use was $69.9 million. Financing cash use was $313.9 million, and cash declined by $240.8 million to $31.0 million.
- Debt and liquidity: Total debt was $2,073.7 million at June 30, down from $2,365.8 million at year-end; cash was $31.0 million. The current portion of debt was $64.3 million and long-term debt was $2,009.4 million. The company reported $589.0 million available across revolving facilities, including international facilities and after letters of credit. Current assets were $1,097.3 million and current liabilities $651.3 million.
- Interest and taxes: First-half net interest expense declined to $59.5 million from $75.9 million, reflecting lower debt and average rates. Income tax expense rose to $41.6 million from $10.3 million; management cited earnings mix, losses in jurisdictions with valuation allowances and discrete items. The company said it used U.S. net operating losses, with approximately $1.1 billion available to offset future taxable income.
Changes, outlook and notable items
- Management attributed improved operating results to continuous-improvement savings, pricing and volume, partly offset by inflation, currency effects and business-development or integration costs. First-half input-cost inflation was $48.8 million, partly offset by lower secondary-fiber and energy costs. Continuous-improvement programs generated approximately $35 million of incremental savings in the first half.
- Flexible packaging sales benefited from the acquisition of the DNK businesses, but market softness, inflation and integration costs weighed on segment profitability. The company recorded $8.7 million of restructuring and special charges in the first half, including costs associated with facility closures. A $8.9 million debt-extinguishment loss related to refinancing was also recorded.
- On March 16, 2012, the company refinanced with a $1.0 billion revolving facility and a $1.0 billion amortizing term loan, both due in 2017. Initial pricing was LIBOR plus 225 basis points, subject to leverage-based adjustment. Approximately $1.53 billion was drawn at closing to help repay about $1.68 billion of existing term loans due in 2014. At June 30, the reported leverage covenant ratio was 3.11x and interest coverage ratio was 5.38x; the company stated it was in compliance.
- 2012 outlook: operating cost savings of $60–$80 million; capital investment of $190–$210 million; depreciation and amortization of $260–$280 million; interest expense of $115–$125 million; net debt reduction of approximately $200–$220 million; and pension contributions of $40–$60 million. These are management expectations, not guarantees.
- Key risks include substantial debt and restrictive covenants, variable-rate exposure (approximately 47.5% of debt), raw-material and energy inflation, limits on passing costs through to customers, demand and competitive pressures, execution of cost-saving plans, foreign-exchange movements, and environmental or litigation matters. The company said environmental and ordinary-course legal matters were not expected to have a material adverse effect, while noting some future remediation costs cannot be estimated. No material risk-factor changes from the 2011 Form 10-K were reported.
Important facts for investors to verify
- Whether the company achieves its 2012 savings and net-debt-reduction targets while funding planned capital spending.
- Whether flexible packaging returns to profitability and whether its integration and facility-closure costs remain contained.
- How inflation, pricing, volume and consumer-market softness affect margins and cash generation.
- Debt-covenant headroom, refinancing terms, floating-rate exposure and access to the reported revolver availability.
- The sustainability of tax benefits from net operating losses and the effect of future tax items.
- Final purchase-price allocation for the DNK transaction, expected to be completed in the third quarter of 2012, and any updates to environmental or legal contingencies.