Graphic Packaging Holding Company — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise. The company supplies paperboard cartons and flexible packaging to food, beverage and other consumer-products markets.
Financial performance
- Q3 revenue: $1,163.0, up 5.3% year over year. Operating income was $105.7, up 15.6%; attributable net income was $44.5 versus $40.1, and diluted EPS was $0.13 versus $0.10. Operating margin was approximately 9.1%, compared with 8.3%.
- First nine months: Revenue of $3,403.2, up 3.6%; operating income of $278.6, up 7.5%; attributable net income of $100.6 versus $99.7; diluted EPS of $0.29 versus $0.25. Operating margin was approximately 8.2%, versus 7.9%.
- Segment results: Q3 Paperboard Packaging sales rose 7.2% to $996.3, while operating income fell 5.4% to $109.1. Flexible Packaging sales declined 5.1% to $166.7; the segment returned to operating income of $8.8 from a $9.4 loss. For nine months, Paperboard Packaging operating income declined to $316.2 from $325.4; Flexible Packaging improved to $3.6 from a loss of $18.3.
- Cash flow: Nine-month operating cash flow was $269.5, down from $288.3. Capital spending was $153.2, up from $128.4; operating cash flow less capital spending was $116.3, versus $159.9. Cash ended at $92.0, up from $51.5 at December 31, 2012.
- Debt and liquidity: Debt totaled $2,232.8, including $83.9 current, and cash less debt was $2,140.8. Total available revolving credit capacity was $812.3. Current assets of $1,270.8 compared with current liabilities of $739.7. The company reported compliance with debt covenants: leverage ratio 3.11x against a maximum of 4.50x for 2013, and interest coverage ratio 6.94x against a minimum of 3.00x.
Material changes and unusual items
- Revenue growth reflected the European acquisitions completed in late 2012, new consumer-product business and open-market sales. These gains were partly offset by weaker flexible-packaging volumes, lower beverage sales, lower pricing and unfavorable currency movements.
- Management reported $45 million of incremental cost savings in the first nine months. However, inflation increased costs by $31.1 million, led by energy, labor, wood and freight.
- On September 30, the company completed the sale of flexible-plastics assets and its uncoated-recycled-board mill, and had announced the Brampton facility closure. These businesses represented approximately 2% of consolidated sales. The sales produced a $20.2 million Q3 gain; the nine-month restructuring and special-charge line was a net credit of $5.1 million. Approximately $10 million of goodwill was written off in connection with the sales.
- The company issued $425 million of 4.75% senior notes due 2021 and redeemed $425 million of 9.5% notes due 2017. The nine-month debt-extinguishment loss was $27.1 million, including redemption and financing-related costs. Credit facilities were also extended to 2018 and amended, including new euro/pound and yen revolving facilities.
- Q3 operating income improvement benefited from the asset-sale gain and cost initiatives; Paperboard Packaging operating income nevertheless declined. Nine-month attributable net income was nearly flat year over year, while the prior-period comparison included a smaller debt-extinguishment loss.
- In 2013, certain shareholders sold shares in secondary offerings. These were shareholder sales, not company equity proceeds; the selling holders’ ownership declined to approximately 35% after the Q3 offering.
Outlook, risks and contingencies
- Management’s 2013 outlook called for capital investment of $215–$235 million; depreciation and amortization of $270–$280 million; interest expense of $100–$110 million; debt reduction of approximately $300 million; and pension contributions of $40–$50 million.
- Management said operating cash flow, revolving-credit availability and other financing sources were expected to meet debt service, capital spending and operating needs, while noting there was no assurance. About 44% of debt was floating-rate.
- Key risks include raw-material and energy inflation, limited ability to pass costs through, competitive pricing and substitution, demand and volume softness, foreign-exchange movements, execution of cost-reduction plans, and substantial leverage and restrictive covenants. Covenant compliance could be pressured by weaker sales, lower prices or higher costs.
- The company cited ordinary-course litigation and environmental investigations/remediation at current and former sites; it did not believe these matters would materially adversely affect its consolidated financial position, results or cash flows. It said no material risk-factor changes had occurred since its 2012 Form 10-K.
Most important facts for investors to verify
- How much of reported operating-income growth reflects the nonrecurring asset-sale gain versus recurring operating improvements.
- Whether the company achieved its full-year debt-reduction, capital-investment, interest-expense and pension-contribution targets.
- Whether the $45 million of reported cost savings can continue to offset inflation and pricing pressure, particularly in Paperboard Packaging.
- Whether flexible-packaging performance and volume stabilize after the asset sales, internalization and Brampton closure.
- Future covenant headroom, refinancing capacity and cash generation given debt of $2.23 billion and floating-rate exposure.