Graphic Packaging Holding Company — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021. The company makes fiber-based packaging and paperboard for food, beverage, foodservice and other consumer products markets, with Paperboard Mills, Americas Paperboard Packaging and Europe Paperboard Packaging segments.
Financial performance
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Net sales | $7.156 billion | $6.560 billion | Up 9% |
| Income from operations | $407 million | $524 million | Down 22% |
| Operating margin | 5.7% | 8.0% | Down about 2.3 percentage points |
| Net income | $216 million | $203 million | Up 6% |
| Net income attributable to GPHC | $204 million | $167 million | Up 22% |
| Diluted EPS | $0.68 | $0.60 | Up 13% |
| Operating cash flow | $609 million | $825 million | Down $216 million |
Sales growth reflected $344 million from acquisitions, higher prices, organic growth and favorable foreign exchange, partly offset by lower open-market paperboard volume. Higher core converting volumes in beverage and foodservice were offset in part by declines in dry foods and cereal. Operating income was pressured by $386 million of cost inflation, including $330 million in commodities, $47 million in labor and benefits and $9 million in other costs. Pricing, productivity savings and volume gains partly offset those increases. Winter Storm Uri caused $21 million of downtime and mitigation costs, net of insurance recoveries.
Cost of sales was $6.085 billion versus $5.460 billion. Business-combination, shutdown, special and exit charges were $138 million versus $61 million; 2021 included a $48 million loss on deal-contingent foreign-exchange contracts related to AR Packaging. The comparison also reflects a $153 million pension settlement charge in 2020; nonoperating pension and postretirement items were $5 million of income in 2021 versus $151 million of expense in 2020.
Liquidity, debt and capital allocation
- Cash was $172 million at year-end, down from $179 million. Current assets were $2.502 billion and current liabilities $2.049 billion, for a current ratio of approximately 1.22.
- Cash from operations was $609 million; investing cash use was $2.392 billion, including $1.704 billion of net acquisition spending and $802 million of capital spending paid. Financing provided $1.778 billion. Operating cash flow less paid capital spending was approximately negative $193 million.
- Aggregate principal debt was $5.831 billion; balance-sheet short- and long-term debt totaled $5.794 billion. Approximately 31% of debt was floating-rate. The company reported $1.168 billion available under revolving facilities and was compliant with debt covenants. Its leverage ratio was 4.39 versus a maximum of 5.00; interest coverage was 10.85 versus a minimum of 3.00.
- Management said operating cash generation, revolving facilities and other financing sources should cover debt service, capital spending and operating needs, while noting this depends on future conditions and execution.
- GPHC paid $87 million in dividends and made no share repurchases in 2021; $147 million of authorization remained at year-end.
Material changes and notable items
- Acquired Americraft in July for approximately $292 million and AR Packaging in November for $1.412 billion net of cash acquired. Together, these expanded converting capacity in the Americas and Europe. Purchase-price allocations remained preliminary; AR Packaging contributed $176 million in sales and $8 million in operating income after acquisition.
- International Paper exited its remaining GPIP ownership in May 2021 through cash redemption and share exchanges. The transactions triggered tax-basis step-ups and $109 million of Tax Receivable Agreement payments during 2021.
- Capital spending was $802 million paid in 2021, including investment in the Kalamazoo CRB paper-machine project. The company elected to keep one smaller CRB mill operating at least through 2022.
- Americas Paperboard Packaging operating income fell to $456 million from $639 million; Europe Paperboard Packaging rose to $82 million from $66 million. Paperboard Mills’ operating loss improved to $10 million from $110 million, while Corporate and Other costs increased to $121 million from $71 million.
- The company recorded a $574 million U.S. federal taxable loss in 2021 following tax-basis deductions and said it did not expect to be a meaningful U.S. federal cash taxpayer until 2024. The 2021 effective tax rate was 25.7%, compared with 17.0% in 2020.
Outlook, risks and contingencies
- For 2022, management expected total capital investment of $440–$460 million, depreciation and amortization of approximately $580 million, and pension contributions of $10–$20 million, excluding a separately described $6 million contribution funded from excess plan assets. No full-year revenue or earnings guidance was provided in the supplied filing text.
- Management highlighted inflation and volatility in materials, energy, labor and freight, and limits on passing cost increases through to customers. Supply-chain disruption, COVID-19, competition and substitution by plastics or other packaging, changing consumer preferences, acquisition integration, foreign-exchange exposure and interest rates are also risks.
- Environmental compliance and remediation may entail further costs. The company estimated environmental-compliance capital spending of $10 million in 2022 and $47 million in 2023, primarily for wastewater-system upgrades. Management said recorded environmental and ordinary-course legal contingencies were not expected to be material, but some potential historic-site costs were not quantifiable.
- The company expected additional Kalamazoo project exit-related charges, including $15–$20 million for post-employment benefits and incentives, $45–$50 million for accelerated depreciation and write-offs, and approximately $25 million in machine start-up charges. Cumulative charges through year-end 2021 were $15 million, $45 million and $21 million, respectively.
- Goodwill was not impaired in the 2021 annual test. Foodservice and Australia had fair-value headroom of 25% and 21%, respectively. The acquisition valuation for AR Packaging customer relationships and the Foodservice goodwill assessment were identified as critical audit matters. Auditors reported effective internal control; acquired Americraft and AR Packaging were excluded from the control assessment.
Key facts for investors to verify
- Whether price increases and productivity savings can offset continued cost inflation, and how margins trend after the 2021 decline.
- Whether AR Packaging and Americraft deliver the expected synergies, cash generation and returns, given the scale of acquisition spending and preliminary purchase accounting.
- Debt reduction, refinancing needs and covenant headroom, particularly with $263 million of long-term debt principal due in 2022 and substantial maturities in 2024–2026.
- Cash conversion and working-capital needs, including the effects of higher inventories and receivables-sale and factoring programs.
- Execution, costs and expected benefits of the Kalamazoo machine project, and the company’s updated plans for smaller mills and related exit charges.