Graphic Packaging Holding Company — Q1 2015 Form 10-Q
Business context and period. This unaudited report covers the three months ended March 31, 2015. Graphic Packaging provides paper-based consumer packaging and reports one segment, paperboard packaging. Comparisons with Q1 2014 are affected by the 2014 sales of its multi-wall bag and label businesses, as well as subsequent acquisitions.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $1,008.2 million | $1,072.7 million | Down 6.0% |
| Income from operations | $105.3 million | $79.7 million | Up 32.1% |
| Operating margin | 10.4% | 7.4% | Up about 3.0 percentage points |
| Net income attributable to GPHC | $55.1 million | $35.2 million | Up 56.5% |
| Diluted EPS | $0.17 | $0.11 | Up $0.06 |
| Net cash from operating activities | $27.7 million | $29.9 million | Down $2.2 million |
| Capital spending | $60.7 million | $59.3 million | Up $1.4 million |
Gross margin was approximately 18.8%, compared with 17.4% a year earlier. Interest expense declined to $16.9 million from $20.4 million, which management attributed to lower average borrowing rates and debt balances. Income tax expense was $33.6 million; the effective tax rate was affected by the mix of domestic and foreign earnings and losses in jurisdictions with full valuation allowances.
Balance sheet, cash flow and liquidity
- At March 31, cash was $43.4 million, total debt was $2,105.9 million, and shareholders’ equity was $1,014.1 million. Net debt, calculated as total debt less cash, was approximately $2,062.5 million.
- Total debt increased from $1,974.3 million at year-end 2014, largely reflecting revolving-credit borrowings associated with the acquisitions. The company reported $988.4 million available under revolving and other credit facilities.
- Current assets of $1,312.7 million and current liabilities of $677.2 million imply a current ratio of approximately 1.94.
- Operating cash flow was $27.7 million. Working-capital changes used $128.0 million; pension contributions were higher than in the prior-year quarter. Investing activities used $177.4 million, including $116.6 million for acquisitions. Financing activities provided $115.0 million, including net revolving-credit borrowings.
- The company was in compliance with its debt covenants. Its leverage ratio was 2.70 versus a maximum of 4.25; its interest coverage ratio was 10.49 versus a minimum of 3.00.
Material changes and management commentary
- Sales fell by $64.5 million year over year, primarily due to $113.9 million of divestitures and $29.0 million of unfavorable currency effects, partly offset by acquisition-related sales and organic growth. Paperboard packaging sales increased 4.5%; management cited acquisition contributions, higher pricing and beverage-market volume, partly offset by softness in some consumer-product markets and foreign exchange.
- Operating income improved by $25.6 million. Management cited acquisitions, continuous-improvement savings, lower corporate costs and the prior-year impact of severe-weather-related power interruptions. Unfavorable exchange rates and inflation partly offset these factors. The company reported approximately $16 million of incremental cost savings versus Q1 2014.
- The company acquired Rose City in January and certain Cascades Norampac assets in February for approximately $117.6 million in total. Purchase accounting was preliminary; the reported allocation included $61.7 million of goodwill and remained subject to valuation adjustments.
- The board authorized a $250 million share-repurchase program; 279,328 shares were repurchased during the quarter at an average $14.30 per share. A quarterly dividend of $0.05 per share was declared.
Outlook, risks and contingencies
- For 2015, management expected capital investment of $220–$230 million, depreciation and amortization of $275–$285 million, interest expense of $70–$80 million, and pension contributions of $40–$60 million. It also expected $350–$375 million of cash available for net debt reduction, dividends and share repurchases, excluding acquisitions and capital-market activity.
- Key risks include raw-material, labor and energy cost inflation; limited ability to pass costs through; product substitution and competitive pricing; changing consumer demand; foreign-exchange exposure; substantial debt and covenant restrictions; and the ability to realize acquisition, integration and cost-reduction benefits.
- The company had approximately $633 million of U.S. federal net operating losses available to offset taxable income. It cautioned that legal or regulatory matters could affect their use.
- Environmental investigations and remediation obligations could result in future costs; less than $3 million was expected for 2015 Boiler MACT compliance. The company said accrued and reasonably possible environmental losses were not material, while noting that some potential historical-site costs could not be estimated. Ordinary-course lawsuits were not expected to have a material adverse effect.
- Management stated that available operating cash flow, credit facilities and other financing sources should be sufficient for expected needs, but noted that performance and access to financing depend on market, operating and other factors beyond its control.
Important facts for investors to verify
- How much of reported sales and operating-income growth reflects acquisitions, divestitures, currency, price and underlying volume, and whether acquisition synergies are being achieved.
- Whether working-capital cash use and receivables-sale or factoring arrangements affect the sustainability and quality of operating cash flow.
- Progress against 2015 capital-spending, pension-funding, interest-expense and available-cash expectations, alongside debt levels and covenant headroom.
- Final purchase-price allocations for the Cascades and Rose City transactions, including goodwill and any subsequent measurement-period changes.
- Raw-material inflation, customer demand, foreign exchange, environmental obligations and the company’s ability to use its tax-loss carryforwards.