Graphic Packaging Holding Company — Q2 2016 Form 10-Q
Reporting period: Unaudited quarter and six months ended June 30, 2016. The company provides paperboard packaging for food, beverage and other consumer products markets.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $1,103.2 million | $1,057.1 million | $2,137.2 million | $2,065.3 million |
| Income from operations | $105.6 million | $110.2 million | $212.8 million | $215.5 million |
| Net income | $77.8 million | $57.6 million | $135.3 million | $112.7 million |
| Diluted EPS | $0.24 | $0.17 | $0.42 | $0.34 |
- Q2 sales rose 4.4%; operating income fell 4.2%. Operating margin was approximately 9.6%, versus 10.4% a year earlier.
- First-half sales rose 3.5%; operating income declined 1.3%. Operating margin was approximately 10.0%, versus 10.4%.
- Net income increased despite lower operating income, helped by a $22.4 million discrete tax benefit related to an IRS agreement and use of previously expired net operating loss carryforwards. Q2 tax expense was $10.1 million, compared with $35.1 million in Q2 2015.
- Net interest expense was $18.2 million in Q2 and $35.1 million for the first half, modestly higher year over year, primarily due to higher average debt.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $247.0 million, up from $177.3 million. Investing cash outflow was $517.7 million, including $328.9 million for acquisitions and $186.0 million in capital investment. Financing cash inflow was $253.5 million. Cash declined by $16.2 million to $38.7 million.
- At June 30, total debt was $2,250.6 million, including $61.8 million of short-term debt and current maturities; long-term debt was $2,212.9 million. Debt increased from $1,878.4 million at year-end 2015, primarily reflecting acquisition funding. Cash less total debt was approximately $2,211.9 million.
- Current assets were $1,169.0 million and current liabilities $726.3 million. Revolving credit facilities had $805.9 million available, net of applicable reductions.
- The company reported compliance with debt covenants: leverage ratio 2.75 versus a maximum of 4.25; interest coverage ratio 12.73 versus a minimum of 3.00. About 50.4% of debt was floating-rate.
- Share repurchases totaled $79.7 million and dividends paid were $32.4 million in the first half. The quarterly dividend was $0.05 per share; approximately $105 million remained under the $250 million repurchase authorization.
Changes and operating drivers
- Q2 sales benefited from acquisitions and higher beverage volumes, partly offset by lower pricing, unfavorable currency, weaker volume in some consumer products and asset closures. Acquisition-related sales were $73.1 million in Q2.
- Operating income was pressured by approximately $15 million of downtime to upgrade the West Monroe, Louisiana paper machine, inflation, lower pricing and unfavorable currency. Productivity savings and acquisitions partly offset these items.
- The company completed four 2016 acquisitions: Colorpak, Metro Packaging & Imaging, Walter G. Anderson and G-Box. Consideration was approximately $329 million net of acquired cash, with approximately $31 million of assumed debt. Purchase accounting remained preliminary.
- Americas Paperboard Packaging improved, supported by acquisitions and operating performance. Paperboard Mills and Europe Paperboard Packaging operating income declined year over year.
Outlook, risks and contingencies
- 2016 capital investment guidance: $280–$290 million. Depreciation and amortization guidance: $290–$310 million, excluding purchase-accounting effects from the 2016 acquisitions.
- Management expected 2016 interest expense of $70–$80 million and $360–$380 million of cash flow available for net debt reduction, dividends and repurchases, excluding M&A and capital-market activity. Expected pension contributions were $40–$60 million.
- The company expected to have $245–$295 million of U.S. federal NOLs remaining at year-end 2016 and did not expect to become a meaningful U.S. federal cash taxpayer until 2019, based on NOLs and other tax benefits.
- Key exposures include raw-material and energy cost volatility, pricing and product substitution, consumer demand, competition, foreign exchange, acquisition integration, floating-rate debt, covenant restrictions and the ability to realize cost savings. The company hedged approximately 67% of expected natural-gas use for the remainder of 2016 and 29% for 2017.
- Environmental investigations and ordinary-course lawsuits were disclosed; management said accrued and reasonably possible environmental losses were not material and did not expect the lawsuits to have a material adverse effect. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether the $22.4 million tax benefit and the IRS agreement’s treatment of prior-year NOLs affect future cash taxes as expected.
- Whether acquisition integration and purchase accounting deliver the anticipated growth, savings and returns, given the increase in debt.
- Whether operating performance, working capital and receivables-sale activity support the $360–$380 million cash-flow outlook.
- Whether capital spending remains within guidance and whether debt, interest-rate exposure and covenant headroom remain manageable.
- Whether pricing, inflation, foreign exchange and product-volume trends continue to pressure operating margins.