Graphic Packaging Holding Company — Q1 2012 10-Q
Business context and reporting period. The company supplies paperboard cartons and flexible packaging. This unaudited report covers the three months ended March 31, 2012, compared with Q1 2011; balance-sheet comparisons are with December 31, 2011. Results are reported in paperboard packaging and flexible packaging.
Key financial results
| Metric | Q1 2012 | Q1 2011 or prior date |
|---|---|---|
| Net sales | $1,067.2 million | $1,000.6 million; up 6.7% |
| Income from operations | $71.0 million | $68.6 million; up $2.4 million |
| Net income attributable to GPHC | $17.2 million; $0.04 per diluted share | $26.7 million; $0.08 per diluted share |
| Operating cash flow | $32.5 million | $6.1 million |
| Capital spending | $41.7 million | $36.8 million |
| Cash and cash equivalents | $30.2 million | $271.8 million at Dec. 31, 2011 |
| Total debt | $2,152.5 million | $2,365.8 million at Dec. 31, 2011 |
Gross profit was approximately $169.6 million, or 15.9% of sales, versus $158.2 million, or 15.8%, a year earlier. Operating margin was approximately 6.7%, compared with 6.9%; net margin was approximately 1.6%, compared with 2.7%. Operating cash flow less capital spending was negative $9.2 million. The company reported $2,122.3 million of consolidated indebtedness net of cash. Current assets were $1,138.1 million and current liabilities $665.9 million.
Changes versus Q1 2011
- Sales increased $66.6 million, reflecting $54.0 million of volume/mix and $13.0 million of pricing, partly offset by $0.4 million of unfavorable exchange effects. Growth included acquisitions, new consumer-products business, packaging machinery demand, and negotiated inflation pass-throughs.
- Paperboard packaging sales rose 4.6% to $883.3 million and segment operating income rose 9.6% to $88.2 million. Flexible packaging sales rose 17.8% to $183.9 million, but the segment moved from $2.1 million operating income to a $1.4 million loss.
- Operating income improved modestly as higher volume, pricing, and cost savings were partly offset by $30.7 million of inflation-related cost increases and other expenses. The company cited approximately $18 million of incremental savings from continuous-improvement and manufacturing initiatives.
- Net income declined despite lower net interest expense ($32.1 million versus $39.3 million), primarily as income-tax expense increased to $13.0 million from $2.9 million and the company recorded an $8.9 million debt modification/extinguishment loss. The tax-rate comparison is affected by differing tax items and the prior-year $5.6 million noncash tax-related goodwill amortization expense.
- Operating cash flow improved, mainly due to lower working-capital requirements and improved payment terms. Investing outflow increased slightly; financing outflow reflects the debt refinancing, repayments, and related fees. Cash fell by $241.6 million during the quarter.
Debt, liquidity, outlook, and risks
- On March 16, 2012, the company refinanced with a $2.0 billion credit agreement, including a $1.0 billion revolving facility and a $1.0 billion term loan, both due in 2017. Initial pricing was LIBOR plus 225 basis points, with the margin varying by leverage. The transaction repaid approximately $1.68 billion of term loans due in 2014 and generated the $8.9 million extinguishment/modification charge.
- At March 31, the company reported $503.1 million available under the revolving facility and $7.1 million under international facilities. Approximately 44% of total debt was floating-rate. The company was in compliance with its covenants: leverage ratio 3.36x versus a maximum of 4.75x for 2012, and interest coverage ratio 4.83x versus a minimum of 3.00x.
- Management expected 2012 operating cost savings of $60–$80 million, capital investment of $190–$210 million, depreciation and amortization of $260–$280 million, interest expense of $115–$130 million, net debt reduction of approximately $200 million, and pension contributions of $40–$70 million. It said available cash generation and financing were expected to cover debt service, capital spending, and operating needs, while noting there was no assurance.
- Key risks include raw-material, energy, labor, and freight inflation; limits on passing cost increases to customers; market softness and competitive pricing; execution and integration risks; substantial debt and restrictive covenants; and potential exposure to variable interest rates. The company hedged approximately 30% of expected natural-gas use for the rest of 2012 at a weighted average contractual rate of $2.90 per MMBtu.
- Environmental investigations and remediation may create future costs, but the company stated accrued and reasonably possible losses were not material and some potential costs could not be quantified. Ordinary-course lawsuits were not expected by management to have a material adverse effect. The company had approximately $1.1 billion of U.S. federal net operating losses available to offset future taxable income, subject to applicable limitations and risks.
Important facts for investors to verify
- Whether expected cost savings and pricing actions can offset persistent input-cost inflation, particularly as flexible packaging reported an operating loss.
- Progress toward the approximately $200 million net-debt-reduction target, covenant headroom, and the effect of floating rates on interest expense.
- Working-capital trends and liquidity following the sharp quarterly cash decline, including actual availability under the revolving facility.
- Achievement of 2012 capital-spending, interest-expense, pension-contribution, and savings outlooks.
- Final purchase-price allocation for the DNK transaction, expected in Q2 2012, and any material developments in environmental or legal contingencies.