Financial Analysis for Graphic Packaging Holding Co

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Introduction

Graphic Packaging Holding is an American company that has specialized in packaging various products. This firm operates in the United States, Canada, Europe, Asia Pacific, Central and South America. The economy within which this firm operates is considered very stable. The United States of America is the leading economy in the world. The growth of economy of this country was shaken in 2008/2009 economic crunch. However, this country has recovered and the growth is positive (Bhat 126). In Canada, the growth of the economy has been positive, especially within the last decade. The European block is another major market for this firm. Europe has formed a seriously economic block. In this block, there are various countries which also act as a single economic block with similar trade tariffs. The economy of this region was also affected in the 2008/2009 economic crunch, but it recovered from it in a shorter period. The economies within which this firm operates are developed economies, with very strong competition in almost every sector.

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Packaging and Containers Industry

Industry Characteristics

The packaging and containers industry is one of the most advanced industries in the United States of American. According to Seitz (98), this industry has experienced a massive growth in the twenty-first century following the emergence of many companies whose products need packaging. For a long time, packaging was not considered important in the packaging industry. A confectionary firm will have an internal department which would be responsible for manufacturing packaging materials. This has however, changed in the twenty-first century. The world has become so sensitive on value of products they buy. For this reason, firms have developed a strategy where they concentrate in what they can produce best, considering the option of contracting other services from other specialized firms. Packaging materials is one such products that many manufacturer buy instead of producing locally. According to Correia (118), the best way of defining characteristics of this company is to first understand the characteristics of firms that use their products. The products of this firm are not used by end-consumer. It is an intermediate product that is used by other firms to package products that is finally sold to consumers. This industry is therefore, dictated upon by other companies

Sales Characteristics

Sales characteristics in this industry varies depending on the kind of customer is focus. Generally, this industry does not experience peak and off-peak seasons because it sells its products to various firms throughout the year. Graphic Packaging Holdings always sells its products to consumers which are actually companies which would finally use the product to package their products. It is during this time that there will be sales for this firm. During this time, the firm should make an effort to ensure that it meets the demand of the customer.

Sources and Uses of Funds

The main source of fund for this firm is from the proceeds of its operations. This firm is profitable, and this profit is always used for various functions within the firm. The firm has been in operation for a very long time, and therefore, having a huge capital base. The funds generated from the above sources are generally used to fund operations of the firm, and also other activities that the firms always conduct periodically.

Causes of Changes in Industry Prospects

This industry is prone to various changes. These changes may affect this firm in various ways. Some of the causes of changes in this industry are technology and emerging trends. Technology brings new ways of doing things, while emerging trends changes the tastes and preferences in the market.

Graphic Packaging Holding

Background and History

Graphic Packaging Holding is one of the leading American packaging and container firms that manufactures and distributes packaging materials to firms within the United States and other countries abroad. During its initial years, the firm experienced massive challenges, especially financial challenges that made it difficult to operate. The firm was however, able to overcome these challenges and stabilize in the American market. The firm was able to make a huge impact within the last three years, running immediately after the economic crunch. The firm is now considered one of the leading packaging firms in the United States, supplying major companies in this country with packaging materials.

Organization of Management

This firm has a normal organizational management structure. At the helm of this firm is the chief executive who reports to the board of directors. Under the chief executive are operational managers heading different departments. Then there are supervisors and the employees in that order.

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Products

This firm has specialized in the production of packaging materials for various products and for various companies. This firm produces packaging materials using different products and in different sizes based on the demand of the customer.

Market and Distribution Channels

Distribution channels will always determine success of a firm or otherwise. When a firm has a huge market, and the product involved is durable, then longer distribution channels may be used. However, when the product is perishable, or when the number of customers is limited, then a shorter distribution channel may be appropriate. For this firm, a longer distribution channel may be used to reach out to a large number of customers. However, for large organizational customers, shorter distribution channels are appropriate for Graphic Packaging Holding.

Competition

There is a massive competition that this firm faces in its operational processes. The main competition comes from other developed packaging firms in this country. There are other packaging firms which have been in this industry for a longer period. Some of the leading competitors include Saint-Gobain, Anchor Glass and O-l.

Production Facilities

This firm has developed its production facilities within its plant. The firm conducts all its production processes within the firm without any outsourcing. The management has installed large production machines that have enabled it to have a leaner workforce.

Promotional Activities

Promotional activities are very important in ensuring that the firm succeeds in the market. This firm has been able to popularize its products using mass and social media. This has helped in giving it a global image.

Acquisition

For a long time, this firm struggled to achieve success in this competitive market. It struggled to get enough capital to operate successfully in this competitive industry. The firm has avoided any acquisition, after the initial merger of the two firms that started it.

Historical Financial Statements

The financial statements of this firm show that it has had a positive growth over the past few years. These statements are shown in the analysis below. The statements show that the firm has a healthy growth.

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Notes to Consolidated Financial Statements

Consolidated financial statements of Graphic Packaging Holdings shows that the move by this firm to move to other countries beyond the United States. When the statements from all the regions where this firm operates are consolidated, it clearly shows that this firm has had a positive growth.

Trends in Growth and Variability

Trends of growth and variability of this firm for the last three years shows that this firm is improving is experiencing growth. The financial statements of this firm, especially the balance sheet, show that this firm is experiencing a healthy growth.

Ratio Analysis

Ratio analysis is always important in determining some of the factors within the firm. The ratio analysis for Graphic Packaging Holding shows that this firm is able to meet its short term obligations.

Analysis

Initial Pro Forma Financial Statements

Pro-Forma Income Statement
View: Annual Data 000 000 000
Period Ending Dec 30, 2012 Dec 30, 2011 Dec 30, 2010
Total Revenue 4,337,100 4,206,300 4,095,000
Cost of Revenue 3,617,500 3,568,800 3,501,800
Gross Profit 719,600 637,500 593,200
Operating Expenses
Research Development
Selling General and Administrative 370,800 339,700 318,600
Non Recurring 26,400 107,500 55,100
Others
Total Operating Expenses
Operating Income or Loss 322,400 190,300 219,500
Income from Continuing Operations
Total Other Income/Expenses Net (11,000) (2,100) (8,400)
Earnings Before Interest And Taxes 322,400 190,300 219,500
Interest Expense 111,100 144,900 174,500
Income Before Tax 211,300 45,400 45,000
Income Tax Expense 82,500 (229,800) 27,500
Minority Interest 2,500 1,700
Net Income From Continuing Ops 122,600 276,900 10,700
Non-recurring Events
Discontinued Operations
Extraordinary Items
Effect Of Accounting Changes
Other Items
Net Income 122,600 276,900 10,700
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares 122,600 276,900 10,700

Determination of the Cost of Debt

Cost of Debt (before adjustments of tax) {KD} = (Amount of Interest/Amount of Loan)*100

  • KD (for the year ended 2012) = (111,100/3,636,000)*100 = 3.055
  • KD (for the year ended 2011) = (144,900/3,467,000)*100 = 4.179
  • KD (for the year ended 2010) = (174,500/3,737,600)*100 = 4.669

Determination of the Cost of Equity

Cost of Equity = (dividends per share for next year/current market value of stock) + growth rate of dividends

= (8.375/7.50) + 0.003 = 111.97%

Capital Assets Pricing Model

Capital Asserts Pricing Model (CAPM) is a tool which is used in determining theoretically, the required rate of return of a given assert. It is a model used for pricing of an individual portfolio or security. The following is a formula for calculating CAPM.

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E (Ri) = Rf + βi {E (Rm) – Rf} (Jones 114).

E (Ri) = expected return on capital assert

Rf = risk free rate = 3%

βi = is the sensitivity/ beta coefficient of portfolio = 1.79

E (Rm) = the expected return of the market = 10%

E(Ri) = 0.03 + 1.79{0.1- 0.03}

= 1.790

Determination of the Weighted Cost of Capital

WACC = E/V × Re + D/V × Rd × (1 – Tc) (Khan 98).

Where:

  • Re = Cost of the equity = 7.4%
  • Rd = cost of the debt = 5 %
  • E = market value for firm’s equity = 2.7 %
  • D = market value for firm’s debt = 7.8
  • E/V = percentage of financing which is equity = 7.5%
  • D/V = percentage of financing which is debt =7.9%
  • T/c = corporate tax rate = 25.8%

= 0.075*0.05 + 0.079*0.05*(1- 0.258)

= 0.00375 + 0.00293

= 0.00668

=6.68%

Intermediate Pro forma Financial Statements

Pro-Forma Cash Flow
View: Annual Data
Period Ending Dec 30, 2012 Dec 30, 2011 Dec 30, 2010
Net Income 122,600 276,900 10,700
Operating Activities, Cash Flows Provided By or Used In
Depreciation 273,000 285,400 297,000
Adjustments To Net Income 92,600 (152,000) 27,100
Changes In Accounts Receivables
Changes In Liabilities
Changes In Inventories
Changes In Other Operating Activities (17,100) (20,800) 3,300
Total Cash Flow From Operating Activities 468,600 387,800 338,100
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures (203,300) (160,100) (122,800)
Investments
Other Cash flows from Investing Activities (90,700) (51,700) 100
Total Cash Flows From Investing Activities (294,000) (211,800) (122,700)
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
Sale Purchase of Stock (310,700) 204,800
Net Borrowings (70,900) (246,700) (216,700)
Other Cash Flows from Financing Activities 13,200 (300) 200
Total Cash Flows From Financing Activities (396,100) (42,200) (227,400)
Effect Of Exchange Rate Changes 1,200 (700) 900
Change In Cash and Cash Equivalents (220,300) 133,100 (11,100)

Financing Decision

The above financial statements may determine the financial decision to be made on the firm. The financial decisions are always based on the financial statement, for they always determine the way forward for the firm.

External Opinion

External opinions may come from various stakeholders who are not directly associated with the operations of the firm. External opinions may be important in defining the path that the management should take.

Internal Opinion

Internal opinion will come from internal stakeholders. These are individuals who have actively percolated in the operations of the firm. Their opinions are important in helping the firm improve in the market.

Final Pro Forma Financial Statements

Pro-Forma Balance Sheet
View: Annual Data
Period Ending Dec 30, 2012 Dec 30, 2011 Dec 30, 2010
Assets
Current Assets
Cash And Cash Equivalents 51,500 271,800 138,700
Short Term Investments
Net Receivables 602,000 526,900 410,200
Inventory 531,200 474,200 417,300
Other Current Assets 18,400 35,200 47,400
Total Current Assets 1,203,100 1,308,100 1,013,600
Long Term Investments
Property Plant and Equipment 1,706,600 1,631,700 1,641,500
Goodwill 1,164,800 1,135,700 1,205,200
Intangible Assets 499,200 535,900 576,600
Accumulated Amortization
Other Assets 47,100 38,300 47,700
Deferred Long Term Asset Charges
Total Assets 4,620,800 4,649,700 4,484,600
Liabilities
Current Liabilities
Accounts Payable 673,100 615,400 569,700
Short/Current Long Term Debt 79,800 30,100 26,000
Other Current Liabilities
Total Current Liabilities 752,900 645,500 595,700
Long Term Debt 2,253,500 2,335,700 2,553,100
Other Liabilities 494,300 424,000 347,700
Deferred Long Term Liability Charges 137,000 63,000 241,100
Minority Interest (1,700) (1,200)
Negative Goodwill
Total Liabilities 3,636,000 3,467,000 3,737,600
Stockholders’ Equity
Misc Stocks Options Warrants 10,800 14,800
Redeemable Preferred Stock
Preferred Stock
Common Stock 3,400 3,900 3,400
Retained Earnings (633,200) (731,400) (1,008,300)
Treasury Stock
Capital Surplus 1,915,100 2,177,500 1,965,200
Other Stockholder Equity (311,300) (282,100) (213,300)
Total Stockholder Equity 974,000 1,167,900 747,000
Net Tangible Assets (690,000) (503,700) (1,034,800)

Sensitivity Analysis

Sensitivity analysis is always an important aspect of financial statements. In the above analysis, βi = is the sensitivity/ beta coefficient of portfolio = 1.79. This is a positive value.

Summary and Conclusion

It is evident from the series of financial statements that Graphic Packaging Holdings Company has experienced a positive growth in the market. It is important to note however, that there has been competition that has affected its operations and success in this industry. Competition is healthy, but some forms of competition are not healthy. Stiff market competition that involves price wars may have direct negative impact on the firm. This firm’s financial statements for the last three years show that the firm has been able to experience a marked improvement in its financial position. The balance sheet shown in the pro-forma balance sheet shows that for the last three years, this firm has been in a position to increase its capital. This is directly related to the massive effort put by various stakeholders of this firm, and a healthy external environment in which the firm operates.

Works Cited

Bhat, Sudhindra. Financial Management: Principles and Practice. New Delhi: Excel Books, 2008. Print.

Correia, Carlos. Financial Management. Cape Town: Juta, 2007. Print.

Jones, Linda. Training Needs Analysis. Oxfordshire: Henley Distance Learning, 2009. Print.

Khan, Jain. Financial Management. New Delhi: Tata McGraw-Hill, 2007. Print.

Seitz, Neil. Financial Analysis: A Programmed Approach. Reston, Va: Reston Publishers, 2009. Print.

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