Graphic Packaging Holding Company — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing; quarterly figures below identify the fourth quarter where disclosed. Amounts are in U.S. dollars.
Business context and reporting period
Graphic Packaging is a leading consumer-packaging supplier, principally producing folding cartons, paperboard and flexible packaging for food, beverage and other consumer-product customers. It reports Paperboard Packaging and Flexible Packaging segments. In 2013, it sold certain flexible-plastics assets and its uncoated-recycled-board mill; together, the divested businesses represented about 2% of consolidated sales.
Key financial results
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net sales | $4,478.1 million | $4,337.1 million | +3.3% |
| Income from operations | $341.6 million | $322.4 million | +6.0% |
| Net income attributable to Graphic Packaging | $146.6 million | $122.6 million | +$24.0 million |
| Diluted EPS | $0.42 | $0.31 | +$0.11 |
| Operating cash flow | $458.0 million | $468.6 million | −$10.6 million |
| Capital spending | $209.2 million | $203.3 million | +$5.9 million |
| Cash and cash equivalents at year-end | $52.2 million | $51.5 million | +$0.7 million |
| Total debt at year-end | $2,253.6 million | $2,333.3 million | −$79.7 million |
Calculated from reported figures, gross margin was approximately 16.2% versus 16.6% in 2012, and operating margin was approximately 7.6% versus 7.4%. Operating cash flow less capital spending was approximately $248.8 million; this is a simple derived measure, not a company-defined cash-flow metric.
Fourth quarter: Net sales were $1,074.9 million, operating income $63.0 million and net income $45.3 million, compared with $1,053.3 million, $63.3 million and $22.5 million, respectively, in Q4 2012. Net income attributable to the company was $46.0 million, versus $22.9 million.
Segments: Paperboard Packaging sales grew 6.3% to $3,844.3 million, while segment operating income fell 3.6% to $402.2 million. Flexible Packaging sales declined 12.0% to $633.8 million; its operating loss narrowed to $1.3 million from $24.3 million. Corporate operating expense improved to $59.3 million from $70.6 million.
Liquidity and debt: Year-end current assets were $1,232.2 million and current liabilities $711.2 million. The company reported $771.1 million available under revolving credit facilities, net of applicable reductions. Debt was primarily term loans and revolver borrowings, plus 7.875% notes due 2018 and 4.75% notes due 2021. About 44% of total debt was floating-rate. Interest expense declined to $101.9 million from $111.1 million.
Material changes versus the prior comparable period
- Sales rose primarily on European acquisitions completed at the end of 2012, new consumer-product business and open-market sales. Lower flexible-packaging volumes, lower pricing and unfavorable foreign exchange partly offset growth.
- Operating income increased despite $51.9 million of reported year-over-year input-cost inflation. Management cited approximately $66 million of cost savings from continuous-improvement and manufacturing initiatives.
- Paperboard Packaging operating income declined as inflation, pricing, weaker beverage volumes, integration costs and currency effects outweighed cost savings and acquired volume. Flexible Packaging improved mainly due to the divestiture gain and cost savings.
- Operating cash flow decreased, partly due to weaker-than-expected operating results, higher inventory, income-tax payments and incentive compensation. Investing cash outflow was lower, reflecting asset-sale proceeds and the prior-year European acquisitions.
- The company issued $425 million of 4.75% senior notes due 2021 and redeemed $425 million of 9.5% notes due 2017. It recorded a $27.1 million loss on debt modification or extinguishment in 2013.
- The company repurchased and retired approximately 23.9 million shares for $200 million. Selling shareholders also completed secondary offerings; these sales did not represent proceeds to the company.
Outlook, risks and unusual items
- 2014 outlook: Capital investment of $185–$205 million; depreciation and amortization of $275–$285 million; interest expense of $90–$100 million; net debt reduction of approximately $350 million; and pension contributions of $40–$60 million. These are management expectations, not guarantees.
- Management said cash from operations, revolver availability and other financing sources should be adequate for debt service, capital spending and operating needs, subject to economic and operating conditions.
- At year-end, the company reported compliance with its credit-agreement covenants: consolidated total leverage ratio of 3.19x against a maximum of 4.25x, and interest coverage ratio of 7.21x against a minimum of 3.00x. Covenant compliance depends on future performance; default could accelerate debt.
- Key risks include volatile energy, wood, fiber and other input costs; constrained ability to pass on cost increases; competitive and substitute packaging products; market softness; foreign-exchange exposure; high debt and floating rates; acquisition integration; and possible limits on using $892.3 million of U.S. federal net operating losses if an ownership change occurs under Section 382.
- Defined-benefit pension obligations exceeded plan assets by $153.2 million at year-end, down from $367.6 million in 2012. Required contributions and future funded status remain sensitive to investment returns, interest rates and actuarial assumptions.
- Environmental investigations and remediation are ongoing at some current and former sites. The company expected to spend less than $10 million in aggregate in 2014–2015 on Boiler MACT compliance; other potential historical-site costs were not quantifiable. Management did not expect ordinary-course lawsuits to have a material adverse effect.
- 2013 results included a gain on asset sales and a $13.1 million net restructuring, goodwill-impairment and other-special-charge expense. The company reported no goodwill impairment in 2013. The 2013 tax expense included a tax benefit from its conclusion that certain 2009 excise-tax-credit refunds were excludable from taxable income, subject to amended returns.
- No cash dividends were paid in the last three years, and management said it did not intend to pay dividends at that time. Debt documents also restrict dividends.
Most important facts for investors to verify
- Whether 2013 operating-income growth and cost savings are sustainable after considering the asset-sale gain, inflation, pricing and organic volume trends.
- Whether the expected $350 million 2014 net-debt reduction is achievable alongside planned capital investment, pension contributions and operating needs.
- Current revolver availability, floating-rate exposure and covenant headroom, particularly if sales, margins or input costs weaken.
- The Section 382 ownership-change implications for the $892.3 million federal NOL balance, including the effects of share transactions.
- Future pension funding requirements and environmental or other contingent liabilities as estimates and site investigations develop.
Ernst & Young issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also reported effective disclosure controls and internal controls at December 31, 2013.