Graphic Packaging Holding Company — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The company produces paperboard packaging, including folding cartons, for food, beverage and consumer-products markets. Comparisons are with the three months ended March 31, 2015, unless otherwise noted. Amounts are in millions of dollars except per-share data.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $1,034.0 | $1,008.2 | +$25.8, or 2.6% |
| Income from operations | $107.2 | $105.3 | +$1.9, or 1.8% |
| Operating margin | 10.4% | 10.4% | Approximately flat |
| Interest expense, net | $16.9 | $16.9 | Flat |
| Income before tax and equity income | $90.3 | $88.4 | +$1.9 |
| Income tax expense | $33.2 | $33.6 | -$0.4 |
| Net income | $57.5 | $55.1 | +$2.4 |
| Diluted earnings per share | $0.18 | $0.17 | +$0.01 |
| Cash dividends declared per share | $0.05 | $0.05 | Unchanged |
Net sales growth reflected acquisitions and higher beverage sales, partly offset by lower pricing and unfavorable foreign exchange. Management attributed the modest operating-income improvement to cost savings, acquisitions and deflation, partly offset by lower pricing, unfavorable exchange rates and higher special charges. Net sales included $43.4 million from the 2016 Acquisitions. The filing attributes $8.0 million of sales reduction to price, $42.5 million of increase to volume/mix and $8.7 million of reduction to foreign exchange.
Cash flow, liquidity and debt
- Operating cash flow was $58.4, versus $27.7 in Q1 2015. Changes in operating assets and liabilities used $104.8 of cash; management also cited improved operations and receivables sales as contributors to the increase.
- Investing cash outflow was $392.9, including $99.0 of capital spending and $288.5 net cash paid for the 2016 Acquisitions. Operating cash flow less capital spending was negative $40.6, before acquisitions and other investing items.
- Financing cash inflow was $353.3, including $430.1 of net revolving-credit borrowings, primarily for acquisitions. The company also repurchased $43.5 of common stock, paid $16.3 of dividends and made $6.3 of debt payments.
- Cash was $75.6 at March 31, 2016, up from $54.9 at December 31, 2015. Current assets were $1,190.2 and current liabilities $670.8; the current ratio was approximately 1.77.
- Total debt in the debt note was $2,306.3, compared with $1,878.4 at year-end; long-term debt was $2,267.7. The filing’s MD&A separately cites outstanding debt obligations of $2,301.0; the text does not explain the difference. Approximately 46.4% of debt was floating-rate.
- Revolving credit facilities had $757.5 of reported availability at quarter-end. The company reported compliance with debt covenants: leverage ratio 2.78 versus a maximum below 4.25, and interest coverage ratio 12.59 versus a minimum of 3.00. Ratings were BB+ at S&P and Ba1 at Moody’s, both with stable outlooks.
Material changes and business developments
- Completed acquisitions of G-Box, Walter G. Anderson and Metro during Q1. The company paid approximately $288 million net of cash acquired; purchase accounting remained preliminary. Management cited growth in North American food and beverage, integration of company paperboard and supply-chain optimization as strategic aims.
- Colorpak, a folding-carton supplier in Australia and New Zealand, had shareholder and regulatory approval; closing was expected in Q2 2016.
- Americas Paperboard Packaging sales rose to $785.2 from $754.0, and operating income increased to $115.3 from $100.7. Europe sales and operating income were broadly flat. Paperboard Mills sales declined to $101.1 from $103.4, while its operating loss narrowed to $2.2 from $2.9.
- The company repurchased 3.7 million shares at an average $12.12 per share during the quarter; approximately $142 million remained under the $250 million authorization.
- Cost of sales decreased by $3.0 overall, with lower chemical, energy, purchased-paperboard and freight costs partly offset by $5.1 of higher labor and benefit costs. Business-combination and other special charges rose to $10.5 from $2.2.
Outlook, risks and contingencies
- 2016 capital investment guidance: $270–$280, principally maintenance and process capability improvements (approximately $255) and capital spares (approximately $20).
- Other 2016 expectations: depreciation and amortization of $290–$310, excluding purchase-accounting effects from the 2016 Acquisitions; interest expense of $75–$85, including $4–$5 non-cash debt-cost amortization; and $360–$380 of cash flow available for net debt reduction, dividends and share repurchases, excluding M&A and capital-market activity.
- Expected 2016 pension contributions were $40–$60; $10.2 had been contributed in Q1. The company had approximately $470 of U.S. federal NOLs at year-end 2015, expected $225–$275 to remain at year-end 2016, and did not expect to be a meaningful U.S. federal cash taxpayer until 2019.
- Natural-gas hedges covered approximately 60% of expected remaining 2016 usage and 30% of 2017 usage. Interest-rate, commodity and currency movements remain relevant risks; management said there were no significant developments in market-risk exposure during the quarter.
- Risks include raw-material and energy volatility, inability to pass cost increases through to customers, pricing and substitution competition, consumer demand changes, execution of acquisitions and cost programs, foreign exchange, and debt obligations and covenants. Management believed operating cash flow and available financing would be adequate for anticipated needs, while noting this was not assured.
- Environmental investigations and remediation obligations may arise at current or former facilities; the company said accrued and reasonably possible losses were not material, but some potential costs could not be estimated. Ordinary-course litigation was not expected by management to have a material adverse effect. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Colorpak closed as expected and how the 2016 acquisitions performed, including final purchase-price allocations and integration costs.
- Whether operating cash generation and working-capital trends support the company’s cash-flow outlook, particularly given receivables-sale programs and the quarter’s negative operating-cash-flow-less-capex result.
- Debt growth, floating-rate exposure, covenant headroom and the apparent difference between total debt in the debt note and debt obligations cited in MD&A.
- Progress against 2016 capital-spending, cash-flow, interest-expense and pension-contribution guidance.
- Whether pricing, foreign exchange, consumer-product softness and commodity or labor costs affect margins and segment results in subsequent quarters.