Graphic Packaging Holding Company — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in millions of dollars except per-share data. The company supplies paper-based packaging, primarily folding cartons and paperboard products.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,050.0 | $1,163.0 | $3,239.4 | $3,403.2 |
| Income from operations | $112.3 | $105.7 | $139.1 | $278.6 |
| Net income attributable to GPHC | $53.0 | $44.5 | $48.2 | $100.6 |
| Diluted EPS | $0.16 | $0.13 | $0.15 | $0.29 |
| Net cash provided by operating activities | Not provided separately | Not provided separately | $331.2 | $269.5 |
- Gross margin was approximately 19.3% in Q3 versus 15.5% a year earlier; operating margin was approximately 10.7% versus 9.1%. For the nine-month period, gross margin was approximately 18.6% versus 16.2%, while operating margin was approximately 4.3% versus 8.2%.
- Q3 interest expense was $20.4, down from $23.5. Nine-month interest expense was $62.0, down from $80.4. The filing attributes the decrease to lower average debt and interest rates.
- At September 30, cash was $55.2; current assets were $1,299.1 and current liabilities $706.3. Total debt was $2,079.2, down from $2,253.6 at year-end 2013. Revolving-credit availability was $968.4.
- Nine-month capital spending was $151.4. Cash used in investing was $135.3 and cash used in financing was $190.3. Cash ended the period at $55.2.
Material changes and unusual items
- Q3 sales fell 9.7%, mainly because of divestitures that reduced sales by $162.3; this was partly offset by Benson acquisition sales, higher pricing, product gains and favorable exchange rates. Paperboard Packaging sales rose 2.8% to $1,050.0.
- Q3 operating income rose 6.2% to $112.3, reflecting higher pricing and performance improvements, partly offset by inflation and divested operations. The company reported $70.0 of cost inflation for the first nine months, while continuous-improvement programs delivered approximately $57 of incremental savings.
- Nine-month operating income declined 50.1%. Results included $185.7 in restructuring and other special charges, principally a $170.7 loss on asset sales or shutdowns, including the multi-wall bag business sale. The flexible packaging segment recorded a $179.5 operating loss, including a $164.5 loss on the multi-wall bag sale.
- The company sold its labels business in February and its multi-wall bag business in June 2014, and acquired U.K.-based Benson Group in May for $190.7. Effective July 1, it reported one segment, paperboard packaging. The nine-month comparison also reflects the sale of flexible plastics and an uncoated recycled board mill.
- Q3 tax expense was $39.3 on pretax income of $91.9; the filing cites earnings mix, losses in jurisdictions with valuation allowances, nondeductible goodwill write-offs and other discrete items. The company reported approximately $811 of U.S. federal net operating losses.
Liquidity, outlook and risks
- The company was in compliance with debt covenants at quarter-end: consolidated total leverage ratio 2.79 to 1.00 against a maximum below 4.25, and interest coverage ratio 9.26 to 1.00 against a minimum of 3.00. Approximately 40.2% of debt was floating-rate.
- Management expected 2014 capital investment of $195–$205, depreciation and amortization of $265–$275, interest expense of $80–$85, net debt reduction of approximately $350 excluding acquisitions, divestitures, debt and capital-market activity, and pension contributions of $40–$60.
- On October 2, 2014, after quarter-end, the company extended revolving-credit and term-loan maturities to October 1, 2019, added approximately $250 to revolving capacity, reduced the term loan by approximately $169, and lowered applicable margins.
- Key risks include inflation and volatility in raw-material and energy costs, limited ability to pass costs through, competitive and pricing pressure, demand softness, execution of cost-reduction plans, facility disruptions, foreign-exchange exposure, leverage and covenant compliance, and environmental obligations. Management said ordinary-course lawsuits were not expected to have a material adverse effect; it estimated approximately $5 of Boiler MACT compliance spending during 2014 and 2015. No material risk-factor changes from the 2013 Form 10-K were reported.
Important facts for investors to verify
- How much of reported earnings and cash generation reflects ongoing paperboard operations versus divestitures, sale losses, acquisition effects and other special items.
- Whether pricing and productivity savings can continue to offset inflation, and whether demand and volumes recover in softer end markets.
- Progress against the stated net-debt reduction and capital-spending outlook, including the effects of the post-quarter-end credit amendment.
- Future cash needs for pension contributions, environmental compliance and remediation, and the potential impact of floating-rate debt and covenant restrictions.
- The final purchase-price allocation and operating contribution from Benson; the filing described its allocation as preliminary.