Graphic Packaging Holding Company — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The company supplies fiber-based packaging and paperboard products to food, beverage, foodservice and other consumer markets. Unless stated otherwise, amounts are in millions of dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $1,649 | $1,599 | +3% |
| Income from operations | $108 | $160 | −33% |
| Operating margin | 6.6% | 10.0% | Down 3.4 percentage points |
| Net income (loss) attributable to GPHC | $54 | $(13) | Improved |
| Diluted EPS | $0.19 | $(0.04) | Improved |
| Net cash from (used in) operations | $53 | $(79) | Improved |
| Capital spending | $146 | $154 | Down $8 |
Gross profit was $249 million, or approximately 15.1% of sales, compared with $321 million, or 20.1%, a year earlier. Net interest expense was $30 million versus $34 million. Q1 2021 income tax expense was $18 million; Q1 2020 had a $5 million tax benefit. Q1 2020 results included a $153 million non-cash pension settlement charge, making the year-over-year return to net income distinct from the decline in operating income.
At March 31, 2021, cash was $116 million; current assets were $1,911 million and current liabilities were $1,318 million. Debt principal totaled $3,865 million. The company reported $1,371 million available under revolving credit facilities and was in compliance with debt covenants. Covenant leverage was 3.43x against a maximum of 4.25x; interest coverage was 8.83x against a minimum of 3.00x.
Material changes and drivers
- Sales increased $50 million, reflecting $60 million of sales from the 2020 Quad and Greif acquisitions, organic growth and favorable foreign exchange, partly offset by lower paperboard open-market volume, lower prices and one fewer selling day.
- Operating income fell $52 million. Management cited $29 million of Winter Storm Uri downtime and mitigation costs, $47 million of inflation, higher maintenance and downtime, lower open-market paperboard volume, mix, lower pricing and fewer selling days. Cost savings, organic growth, acquisitions and favorable currency partly offset these pressures.
- Inflation included higher labor and benefits ($11 million), freight ($10 million), secondary fiber ($9 million), chemicals ($9 million), energy ($5 million) and external board ($3 million), partly offset by lower wood costs ($4 million).
- Segment sales and operating income: Paperboard Mills $237 million and a $27 million loss (prior-year sales $269 million and loss $23 million); Americas Paperboard Packaging $1,169 million and $121 million income (prior $1,123 million and $195 million); Europe Paperboard Packaging $206 million and $20 million income (prior $177 million and $12 million).
- Operating cash flow improved to $53 million, principally from working-capital changes and increased use of receivables sale and securitization programs. Receivables sold under programs qualifying for sale accounting were $758 million, plus $125 million under factoring arrangements.
Capital, transactions and outlook
- In February, GPIP paid IP $150 million for partnership units, and IP exchanged 15.3 million units for an equivalent number of GPHC shares. IP’s GPIP interest declined to 7.4%. The exchange resulted in a $43 million tax receivable agreement liability, expected to be paid in Q3 2021, and a $58 million reduction in net domestic deferred tax liabilities.
- In March, the company issued $400 million of 0.821% secured notes due 2024 and $400 million of 1.512% secured notes due 2026; proceeds were used to repay term-loan borrowings. It also drew a $425 million term loan at a fixed 2.67% rate, used with cash to redeem its 4.75% notes due 2021.
- After quarter-end, an April 1 credit agreement amendment extended maturities on $550 million of floating-rate term loans and revolving borrowings to April 2026, revised covenants and collateral terms, and added approximately $400 million of revolving commitments.
- On April 27, the company announced an agreement to acquire Americraft Carton for approximately $280 million plus approximately $8 million for recently purchased equipment, subject to working-capital adjustment. The proposed acquisition includes seven facilities, is expected to add approximately $200 million in sales and was expected to close in Q2 or Q3 2021.
- 2021 outlook: capital investment of approximately $700 million; depreciation and amortization of approximately $460 million, excluding specified pension amortization and accelerated exit-related depreciation; pension contributions of $10–$20 million, excluding a $14 million transfer already made. No full-year earnings or sales guidance is stated here. Management did not expect to be a meaningful U.S. federal cash taxpayer until 2024.
- The company expects $15–$20 million of employee-related charges and $50–$60 million of accelerated depreciation and write-offs associated with planned 2022 closures of two smaller CRB mills. It also expects $15 million of 2021 start-up costs for the new Kalamazoo CRB machine. Total 2021 capital investment includes the ongoing $600 million machine project.
Risks and management commentary
Management said COVID-19 had not materially affected the business overall to date, but it remained a source of uncertainty; food and beverage packaging demand benefited while some foodservice demand declined. Principal risks include raw-material, energy and labor inflation; limited ability to pass through cost increases; competition and packaging substitution; consumer-demand shifts; execution of cost savings and acquisitions; foreign-exchange exposure; and the company’s significant debt and restrictive covenants. The company said cash generation and available financing should be adequate for debt service, capital spending and operating needs, while noting that future results and financing conditions are uncertain.
Environmental investigations and remediation obligations may create costs that cannot be estimated with certainty; the company stated that recorded reserves and reasonably possible losses beyond reserves were not material. Ordinary-course lawsuits were not believed likely to have a material adverse effect. No material risk-factor changes from the 2020 Form 10-K were reported. Disclosure controls were deemed effective as of March 31, 2021.
Investor verification points
- Track whether pricing and productivity improvements offset continuing inflation, maintenance costs and any recurring effects from Winter Storm Uri.
- Review cash conversion and working-capital quality, including the extent of reliance on receivables sales and factoring arrangements.
- Monitor debt, covenant headroom, refinancing terms and the planned settlement of the $43 million tax receivable agreement liability.
- Verify the Americraft transaction’s closing, final price and integration results, as well as the costs and schedule of the Kalamazoo machine project and planned mill closures.
- Assess demand by end market, particularly foodservice versus food and beverage, and the company’s ability to manage COVID-19, input-cost and competitive risks.