Business context and reporting period
Graphic Packaging Holding Company filed this Form 10-K for the fiscal year ended December 31, 2020. The company makes paper-based consumer packaging, paperboard, and packaging machinery, serving food, beverage, foodservice, and other consumer-product markets through its Paperboard Mills, Americas Paperboard Packaging, and Europe Paperboard Packaging segments.
Financial performance and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Net sales | $6,559.9 million | $6,160.1 million |
| Gross profit | $1,100.2 million | $1,092.6 million |
| Income from operations | $524.3 million | $534.1 million |
| Net income | $203.3 million | $278.1 million |
| Net income attributable to GPHC | $167.3 million; diluted EPS $0.60 | $206.8 million; diluted EPS $0.70 |
| Cash from operating activities | $824.7 million | $665.8 million |
| Capital spending paid | $646.3 million | $352.9 million |
| Cash and cash equivalents at year-end | $179.0 million | $152.9 million |
| Total debt, balance-sheet carrying amount | $3,644.2 million | $2,860.3 million |
Gross margin was approximately 16.8% versus 17.7% in 2019; operating margin was approximately 8.0% versus 8.7%. Operating cash flow less capital spending paid was approximately $178.4 million, compared with $312.9 million in 2019. Current assets were $2,020.2 million and current liabilities $1,856.6 million at year-end, a current ratio of approximately 1.09.
Material changes versus 2019
- Sales rose 6.5%, reflecting organic growth and $268.6 million in sales from the Greif, Artistic, and Quad acquisitions; lower open-market paperboard volumes, unfavorable foreign exchange, and lower selling prices partly offset the increase.
- Operating income declined 1.8%. Cost inflation, product mix, maintenance, cupstock market downtime, higher depreciation, and increased exit and special charges offset volume growth, cost savings, and commodity deflation.
- Net income fell to $203.3 million from $278.1 million. A $152.5 million nonoperating pension settlement charge was a major factor; it followed the purchase of an annuity transferring approximately $713 million of pension obligations.
- Paperboard Mills reported a $109.9 million operating loss versus $33.1 million of operating income in 2019. Americas Paperboard Packaging operating income increased to $638.5 million from $477.7 million; Europe increased to $65.9 million from $60.3 million.
- Cash from operations increased, while investing cash use rose with higher capital spending and acquisitions. GPHC repurchased $315.6 million of shares and paid $84.7 million in cash dividends. GPIP paid $500 million to redeem part of International Paper’s interest; IP held 15.0% of GPIP at year-end.
Outlook, commentary, risks, and unusual items
- For 2021, management expected total capital investment of $690–$710 million, depreciation and amortization of approximately $460 million excluding specified pension and accelerated-exit depreciation, and pension contributions of $10–$20 million.
- The company said COVID-19 had not materially affected its overall business or results to date, but created continuing uncertainty. At-home food and beverage consumption supported volumes, while foodservice packaging demand, including cups, was weaker.
- The company expects approximately $15 million of start-up charges for the new Kalamazoo CRB paper machine in 2021. In connection with planned 2022 closures of two smaller CRB mills, it expects $15–$20 million of employee-related charges and $50–$60 million of accelerated depreciation and asset or inventory write-offs. It also expected approximately $26 million of 2021 charges for dismantling and disposing of idle assets.
- Management believed operating cash generation, revolving-credit availability, and other financing would be adequate for debt service, capital spending, and working capital, while noting this depends on demand, pricing, input costs, credit markets, and execution. At year-end, approximately 35% of debt was floating-rate; leverage and interest-coverage covenant ratios were 3.07x and 8.89x, respectively, and the company reported compliance.
- Key risks include COVID-19 and supply-chain disruption; raw-material, energy, labor, and freight cost volatility and limited pass-through; competition and packaging substitution; acquisition integration and capital-project execution; foreign-exchange exposure; substantial debt and covenant restrictions; and environmental compliance and remediation. The company reported ordinary-course litigation and environmental matters, but did not expect their disposition or accrued environmental contingencies to have a material adverse effect.
- After year-end, the company drew a $425 million term loan and, with cash on hand, redeemed its $425 million 4.75% notes due 2021 at par in January 2021.
Most important facts for investors to verify
- Whether organic volume, pricing, and margins improve after separating acquisition contributions and temporary pandemic-related demand shifts.
- Cash conversion and capital returns relative to the substantial planned investment program, including progress, cost, and returns from the Kalamazoo mill project.
- Debt balance, maturity schedule, refinancing and interest-rate exposure, covenant headroom, and future International Paper unit exchanges or redemptions.
- The normalization of earnings after the pension settlement, exit charges, asset-disposal program, and other special items.
- Whether the Foodservice and Australia reporting units maintain adequate goodwill valuation headroom; Foodservice goodwill was $42.9 million and its fair value exceeded carrying value by 17% at the 2020 test.