Graphic Packaging cut net debt $350 million in 2014, lowered leverage

By Paul Deckelman

New York, Feb. 5 – Graphic Packaging Holding Co. lowered its net debt by around $350 million in 2014, excluding merger and acquisition and capital market activities, company executives said Thursday.

Topping off what chairman, president and chief executive officer David W. Scheible called “the best fourth quarter in the company’s history,” the Marietta, Ga.-based pure-play global paperboard packaging producer generated free cash flow of over $350 million for the year, “which allowed us to execute our growth strategy, by making strategic investments within the business, and acquisitions to drive sales and earnings, as well as continuing to reduce our debt.”

Leverage ratio comes down

Scheible told analysts on the conference call following the release of its results for the 2014 fourth quarter and fiscal year ended Dec. 31 that Graphic Packaging ended the year with a leverage ratio of net debt as a multiple of trailing 12-month adjusted EBITDA of around 2.66 times, “achieving our targeted range.”

That was an improvement from the 3.28 times leverage measure at the end of 2013.

“The balance sheet and financial flexibility has never been stronger,” the CEO declared, “so we had the wherewithal to invest in the business long-term and to return money to shareholders,” including by the initiation of a 5 cent per share quarterly dividend and a share repurchase plan for up to $250 million of the company’s stock.

The company’s chief financial officer, Stephen R. Scherger, called its cash-flow generation “strong,” with net cash from operations totaling a record $527 million, or 15% more than 2013. The $350 million-plus cash-flow generation figure for the full year excludes M&A and capital market activities, while including a one-time $27 million federal grant related to the company’s expanding its utilization of biomass energy at its paperboard mill in Macon, Ga.

Scherger said that the company ended the year with $1.9 billion of net debt, a reduction of about $130 million during the quarter and $350 million on the year, with the resulting 2.66 times leverage ratio “at the bottom end of our 2.5 to 3.0 times range.”

As of Dec. 31, net debt stood at just under $1.983 billion, consisting of $1.942 billion of long-term debt less the current portion and $32.2 million of short-term debt and current portion debt, less $81.6 million of cash and cash equivalents.

Those figures represented an improvement, both sequentially versus the third quarter ended Sept. 30 and from year-earlier levels.

At the end of the third quarter, net debt stood at $2.024 billion, consisting of $2.011 billion of long-term debt and $68 million of short-term debt, less $20.4 million of balance-sheet cash.

At the end of 2013, net debt was $2.201 billion, consisting of $2.176 billion of long-term debt plus $77.4 million of short-term debt, less $52.2 million of cash and equivalents.

According to the company’s 10-K filing with the Securities and Exchange Commission covering the 2014 fourth quarter and full year, the year-end capital structure included $675 million of junk bonds – $425 million of 4¾% senior notes due 2021 and $250 million of 4 7/8% senior notes due 2022. There was also $1 billion of senior secured term loan debt payable through 2019 at various dates at floating rates, including the 1.7% rate in effect at Dec. 31. And there were $288.4 million of outstanding borrowings against the company’s senior secured revolving credit facility due 2019, which bore interest at a rate of 2% as of Dec. 31.

Q4 debt deals generate savings

Scherger said that during the fourth quarter, “we improved our debt profile though an amend-and-extend of our bank facility and the refinancing of our 7 7/8% 2018 bond with new 4 7/8% bonds maturing in 2022.”

On Oct. 2, the company’s wholly-owned Graphic Packaging International Inc. subsidiary entered into an amended credit agreement with its lenders providing for a $1 billion amortizing term loan facility, a $1.25 billion revolver, a €138 million European revolving credit facility and a ¥2.5 billion Japanese revolving credit facility, all with a final maturity date of Oct. 1, 2019.

While the term loan and the revolver initially bore interest at Libor plus 150 basis points – a 25 bps reduction from the prior credit facility terms – after that the rate will be anywhere from Libor plus 125 bps to 225 bps, depending on the company’s consolidated total leverage ratio. Annual interest-cost savings from the amendment are estimated at some $3 million

Later that same month came a visit to Junkbondland, with Graphic Packaging International pricing a quick-to-market $250 million tranche of the 4 7/8s at par on Oct. 27. Proceeds from that bond deal, along with cash on hand, were used to redeem all $250 million of its 7 7/8s at a price of 103.938% plus accrued and unpaid interest, on Nov. 22. The company projects $7 million of annual interest cost savings from the bond transactions.

“The benefits of these transactions include a $10 million reduction in annual interest expense, extended maturities of one year for the bank agreement and four years on the bonds, enhanced covenants, and enhanced liquidity through an upsized revolver to $1.25 billion,” Scherger said.

He added that as of the end of the year, the company’s average cost of debt was 3.1% and its domestic liquidity, between cash on hand and undrawn revolver availability, was over $1 billion.

Net interest expense was $18.7 million in fourth quarter of 2014, down from $21.5 million in the 2013 fourth quarter, while interest costs for the full year declined to $80.7 million from $101.9 million in 2013, with the reduction due to both lower debt balances and lower overall interest rates.

Issuing guidance for the current 2015 fiscal year, Graphic Packaging expects, among other things, that full-year interest expense will be in a range of $70 million to $80 million. Free cash flow should come in between $350 million and $375 million for the year.

“Considering that the 2014 cash flow figure included $27 million from the biomass test grant, we expect to generate a 5% to10% increase in cash flow year over year,” Scherger said, adding that “this level of cash generation, along with our ample liquidity and leverage, allows us to continue to invest in the business, pursue acquisitions and execute a disciplined capital allocation plan.”

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