Graphic Packaging Holding Company — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; fourth-quarter figures are included below where relevant. The company provides paperboard and paper-based packaging for food, beverage, foodservice and consumer-products markets. Its reportable segments are Paperboard Mills, Americas Paperboard Packaging and Europe Paperboard Packaging.
Financial performance
| Metric | 2019 | 2018 | Change / context |
|---|---|---|---|
| Net sales | $6,160.1 million | $6,029.4 million | Up 2.2%; higher prices and acquisitions partly offset by unfavorable foreign exchange. |
| Gross profit | $1,092.6 million | $952.4 million | Gross margin approximately 17.7%, versus 15.8%. |
| Income from operations | $534.1 million | $458.2 million | Up 16.6%; operating margin approximately 8.7%, versus 7.6%. |
| Net income | $278.1 million | $294.0 million | Down 5.4%. |
| Net income attributable to GPHC | $206.8 million | $221.1 million | Diluted EPS was $0.70 versus $0.71. |
| Operating cash flow | $665.8 million | $(373.8) million | 2019 improvement was primarily related to restructuring accounts-receivable sale and securitization programs; comparisons are affected by those programs. |
| Capital spending, including packaging machinery | $352.9 million | $395.2 million | 2019 cash paid for capital spending. |
| Cash and cash equivalents | $152.9 million | $70.5 million | At year-end. |
| Total debt | $2,860.3 million | $2,957.1 million | Balance-sheet amount; aggregate principal debt was reported as $2,872.8 million. |
Liquidity and leverage: Year-end current assets were $1,805.6 million and current liabilities were $1,198.7 million. Approximately $1,602.4 million was available under revolving credit facilities. The company reported compliance with debt covenants: leverage ratio 2.50 against a maximum of 4.25, and interest coverage ratio 7.78 against a minimum of 3.00. About 34% of debt was subject to variable interest rates.
Fourth quarter: Net sales were $1,519.8 million versus $1,509.3 million in Q4 2018; operating income was $133.0 million versus $107.5 million; net income was $43.9 million versus $63.3 million. Q4 2019 diluted EPS was $0.11 versus $0.15. The quarter included an approximately $7 million immaterial prior-period adjustment reducing intangible-asset amortization.
Material changes and notable items
- Operating income rose on higher selling prices, productivity savings, completed capital-project benefits and the absence of the approximately $52 million Augusta mill outage impact reported in 2018. Higher inflation, foreign exchange, start-up costs at the Monroe folding-carton facility and other items partly offset these gains.
- Net income attributable to GPHC declined despite higher operating income, reflecting a $39.2 million pension settlement charge, higher net interest expense ($140.6 million versus $123.7 million) and higher income-tax expense ($76.3 million versus $54.7 million). The 2018 comparison included a $37.1 million gain on sale of the Santa Clara mill site.
- Artistic Carton was acquired in August 2019 for $52.5 million. It contributed $31.2 million of sales and $2.0 million of operating income in 2019; acquisition accounting remained preliminary.
- Americas Paperboard Packaging operating income increased to $477.7 million from $420.1 million; Europe increased to $60.3 million from $46.1 million; Paperboard Mills increased to $33.1 million from $30.6 million.
- Share repurchases were $127.9 million for 10.2 million shares; approximately $462 million of authority remained at year-end. Cash dividends paid were $88.7 million.
Outlook, risks and contingencies
- 2020 capital investment guidance was $600–$625 million. Management expected depreciation and amortization of $455–$465 million, excluding specified pension amortization and accelerated exit-related depreciation, and pension contributions of $10–$20 million. The filing does not provide clear sales or EPS guidance.
- The company announced approximately $600 million of investment in a new Kalamazoo CRB mill and expects to close two smaller CRB mills in 2022 to remain capacity-neutral. 2019 exit-related charges were $14.9 million; further charges were expected for severance, accelerated depreciation and asset write-offs.
- The U.S. pension plan termination process included $150.2 million in 2019 lump-sum payments and a $39.2 million settlement charge. A January 2020 annuity transaction transferred approximately $750 million of remaining obligations; management expected an additional approximately $150 million noncash settlement charge and total 2020 pension expense of about $164 million.
- Key risks include volatile fiber, wood, energy and other input costs; limited ability to pass through inflation; competition and substitution by plastic and other packaging; consumer-demand changes; acquisition integration and execution; foreign-exchange exposure; operational disruptions; environmental compliance and remediation; and substantial debt and interest-rate exposure.
- Environmental capital spending was approximately $7 million in 2019; management estimated approximately $10 million in 2020, $25 million in 2021 and $35 million in 2022, primarily for wastewater upgrades. The company said accrued environmental and ordinary-course legal contingencies were not expected to be material, while noting some future environmental costs cannot be estimated with certainty.
- International Paper reduced its GPIP ownership from 21.6% to 18.3% after a January 2020 $250 million unit purchase. Further exchanges may require GPHC to use cash, shares or both.
Investor verification points
- Assess the sustainability of 2019 operating-margin gains against inflation, weaker converting volumes in some categories and the benefit of the 2018 Augusta outage comparison.
- Reconcile reported operating cash flow with the changing receivables-sale and securitization arrangements and review the extent of ongoing involvement in sold receivables.
- Review funding and execution of the $600 million mill project, projected mill closures, 2020 capital spending and expected start-up and exit costs.
- Evaluate pension-plan settlement charges, funded status, future contributions and the effect of lower discount rates and investment returns.
- Track debt maturities, floating-rate exposure, covenant headroom, available revolver capacity and potential cash or share requirements from International Paper exchanges.
- Consider the preliminary Artistic acquisition accounting, goodwill sensitivity and the auditor’s critical audit matter concerning goodwill impairment. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting; Artistic’s controls were excluded from the internal-control assessment.