Graphic Packaging Holding Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. The company makes fiber-based packaging, paperboard, cartons, cups and foodservice containers. Financial amounts are in millions of dollars, except per-share data.
Financial performance
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net sales | $1,737 | $1,611 | $3,386 | $3,210 |
| Operating income | $95 | $115 | $203 | $275 |
| Net income attributable to GPHC | $38 | $52 | $92 | $39 |
| Diluted EPS | $0.13 | $0.19 | $0.32 | $0.14 |
| Operating margin, approximate | 5.5% | 7.1% | 6.0% | 8.6% |
- Q2 sales rose 8%, reflecting volume/mix growth, favorable currency and higher prices. Operating income fell 17%; approximately $81 million of inflation, including freight, chemicals, labor and benefits, outweighed sales growth, pricing, savings and favorable currency.
- First-half sales grew 5%, including $60 million from the 2020 Greif and Quad acquisitions. Operating income declined 26%, reflecting $128 million of inflation, $29 million of Winter Storm Uri downtime and mitigation costs, and weaker open-market volume.
- First-half attributable earnings increased from $39 million to $92 million, but comparison is affected by the $153 million noncash pension settlement charge recorded in 2020. First-half 2021 also included $8 million of discrete tax expense.
- Segment trends were mixed: Q2 Americas Paperboard Packaging operating income declined to $108 million from $157 million; Europe Paperboard Packaging rose to $27 million from $21 million. Paperboard Mills posted an $18 million operating loss, improved from a $35 million loss.
Cash flow, debt and liquidity
- First-half operating cash flow was $305 million, versus $144 million in 2020, helped by working capital and increased receivables-sale activity. Investing cash outflow was $289 million; capital investment was $346 million. Financing cash outflow was $105 million.
- Cash was $89 million at June 30, down from $179 million at year-end 2020. Current assets were $1,877 million and current liabilities $1,457 million.
- Debt principal was $3,788 million; balance-sheet short- and long-term debt totaled approximately $3,762 million. Revolving-credit availability was $1,843 million. The company reported covenant compliance: leverage ratio 3.42 versus a maximum below 4.25, and interest coverage 8.94 versus a minimum of 3.00.
- During the period, the company issued $800 million of low-coupon secured notes and used proceeds to repay term loans; it also refinanced or extended credit facilities. Interest expense was $59 million for the first half, down from $64 million.
- First-half capital spending was higher than the prior year. The company declared a quarterly dividend of $0.075 per share and made no share repurchases in the first half.
Outlook, material events and risks
- 2021 outlook: capital investment of approximately $725 million; depreciation and amortization of approximately $460 million, excluding specified pension amortization and exit-related accelerated depreciation; pension contributions of $10–$20 million, excluding a $14 million transfer/contribution already made. No full-year sales or earnings guidance is stated in the filing.
- The company expects approximately $15 million of 2021 start-up costs for its new Kalamazoo CRB paper machine. It also expects further closure-related costs as part of its $600 million CRB optimization project; charges and accelerated depreciation/write-offs remain subject to estimates disclosed in the filing.
- On May 21, 2021, International Paper exchanged its remaining partnership units for GPHC shares and ceased to own an interest in GPIP. This increased GPHC shares outstanding and generated tax-receivable-agreement liabilities of $108 million for the February and May exchanges, expected to be settled in Q3 and Q4 2021.
- The proposed AR Packaging acquisition was valued at approximately $1.45 billion in cash and remained subject to closing; the company hedged €700 million of the purchase price. After quarter-end, GPHC acquired Americraft assets for $280 million plus $8 million for equipment, subject to a working-capital adjustment.
- Management cited ongoing risks from inflation in raw materials, energy, freight and labor, the ability to pass costs through to customers, competition and packaging substitution, COVID-19-related uncertainty, debt and covenant restrictions, and environmental or legal matters. The company reported no material change to previously disclosed risk factors; ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether pricing and productivity savings can offset continued inflation and restore operating margins.
- Cash conversion and the extent to which improved operating cash flow depends on receivables sales and factoring arrangements.
- Funding, leverage and integration implications of AR Packaging and the post-quarter Americraft acquisition, including any updated transaction status or financing terms.
- Remaining CRB project, mill-closure and start-up costs, and whether the new machine achieves expected productivity benefits.
- Debt covenant headroom, refinancing needs and the timing and amount of tax-receivable-agreement payments.