Graphic Packaging Holding Company — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. The company supplies paperboard, cartons and flexible packaging. Results are unaudited.
Financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $1,100.5 million | $1,067.2 million | +3.1% |
| Income from operations | $85.2 million | $71.0 million | +20.0% |
| Operating margin | 7.7% | 6.7% | +1.1 percentage points |
| Net income attributable to GPHC | $34.9 million | $17.2 million | About doubled |
| Diluted EPS | $0.10 | $0.04 | +$0.06 |
| Interest expense, net | $27.2 million | $32.1 million | Down $4.9 million |
| Cash from operating activities | $(11.9) million | $32.5 million | Down $44.4 million |
| Capital spending | $32.9 million | $41.7 million | Down $8.8 million |
Operating margin is calculated from reported sales and operating income. Net margin was approximately 3.2%, versus 1.6% in Q1 2012. The prior-year quarter included an $8.9 million loss on debt modification/extinguishment; none was reported in Q1 2013. Income tax expense rose to $23.7 million from $13.0 million; the filing attributes the effective tax rate chiefly to the mix of domestic and foreign earnings, losses in jurisdictions with valuation allowances, and discrete tax items.
Business trends and period-over-period changes
- Paperboard Packaging: Sales increased 6.0% to $936.1 million; segment operating income rose 16.4% to $102.7 million. Acquisitions, new consumer-product business, open-market sales and cost savings helped; lower pricing, softer demand and unfavorable foreign exchange partly offset gains.
- Flexible Packaging: Sales fell 10.6% to $164.4 million, and the operating loss widened to $3.8 million from $1.4 million. Management cited market softness, lower volume and pricing, inflation, lower production at the Pine Bluff mill and start-up costs at the New Philadelphia facility.
- Consolidated sales benefited from the European acquisitions completed in Q4 2012 and new consumer-product business. Lower flexible-packaging volume, lower pricing and unfavorable exchange rates, primarily in Japan, were offsets.
- Management reported approximately $16 million of incremental year-over-year savings from continuous-improvement and manufacturing initiatives during Q1. It also cited deflation of $0.4 million overall, with lower labor and certain material costs offset by higher wood, freight and other costs.
Cash, debt and liquidity
- At March 31, 2013, cash was $38.8 million, total debt was $2,372.5 million, and debt less cash was $2,333.7 million. Debt was $2,333.3 million at year-end 2012. Cash declined $12.7 million during the quarter.
- Operating cash use reflected working-capital changes of $(136.2) million, including higher inventory, and higher incentive compensation; lower interest payments partly offset the use. Inventory increased to $578.9 million from $531.2 million at year-end.
- Available capacity under revolving facilities was reported as $598.1 million, after letters of credit; total commitments were $1,041.4 million. The current ratio was approximately 1.76, based on reported current assets and liabilities.
- About 51% of total debt was subject to floating interest rates. The company reported compliance with debt covenants: total leverage ratio 3.31x against a maximum of 4.50x for 2013, and interest coverage ratio 7.06x against a minimum of 3.00x.
- On April 2, 2013, the company issued $425 million of 4.75% senior notes due 2021. It expected to use proceeds and cash on hand to redeem the $425 million of 9.5% notes due 2017 on June 15, 2013, paying a redemption premium and accrued interest plus fees and expenses.
- Liquidity was described by management as adequate for debt service, capital expenditure and operating needs based on current expectations, but dependent on performance, market conditions, input costs and successful strategy execution.
Outlook, risks and other material items
- 2013 outlook: $70–$90 million of year-over-year operating cost savings; $215–$235 million of capital investment; $270–$290 million of depreciation and amortization; $105–$115 million of interest expense; approximately $250 million of debt reduction; and $40–$70 million of pension contributions. These are management expectations, not guarantees. No revenue or earnings guidance is provided in the supplied filing text.
- Key risks include volatile raw-material and energy costs, limited ability to pass cost increases through to customers, competitive pricing and substitution, weak end-market demand, foreign-exchange movements, execution of cost programs, and substantial debt and restrictive covenants. A covenant default could accelerate amounts owed; the company warns that future compliance depends on operating results and factors beyond its control.
- The company had approximately $892 million of U.S. federal net operating losses, which it said were being used and may offset future taxable income; legal or regulatory matters could affect the ability to use them. Environmental investigations and remediation obligations remain possible, though management said accrued and reasonably possible losses were not material based on available estimates. Ordinary-course lawsuits were not expected to have a material adverse effect.
- Other notable items: certain shareholders—not the company—sold 32.2 million shares in a March secondary offering at $7.00 per share. The company also acquired the remaining 40% interest in its China joint venture in February. Currency translation reduced other comprehensive income by $15.1 million in Q1.
Important facts for investors to verify
- Whether working-capital needs, especially inventory, reverse and operating cash flow recovers.
- Whether flexible-packaging volume and operating performance improve, and whether paperboard gains persist.
- Progress toward the stated cost-savings, capital-spending and debt-reduction targets.
- Completion and economics of the planned 9.5% note redemption, including premium and fees.
- Debt covenant headroom, floating-rate exposure, and the company’s ability to maintain liquidity under weaker demand or higher input costs.
- Assumptions supporting use of U.S. net operating losses and estimates for environmental contingencies.