Graphic Packaging Holding Company — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Graphic Packaging manufactures paper-based packaging, including folding cartons, paperboard, cups, lids and foodservice containers. Comparisons are with Q1 2019 unless otherwise noted. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Net sales | $1,599.1 | $1,505.9 |
| Income from operations | $160.0 | $134.0 |
| Operating margin | 10.0% | 8.9% |
| Net income (loss) attributable to GPHC | $(12.7); $(0.04) per diluted share | $57.9; $0.19 per diluted share |
| Operating cash flow | $(79.3) | $(172.1) |
| Investing cash flow | $(175.8) | $43.2 |
| Financing cash flow | $218.5 | $120.5 |
| Cash and equivalents | $110.2 | $152.9 at Dec. 31, 2019 |
| Total current assets / liabilities | $1,938.3 / $1,044.0 | $1,805.6 / $1,198.7 at Dec. 31, 2019 |
| Long-term debt, balance-sheet amount | $3,434.5 | $2,809.9 at Dec. 31, 2019 |
Sales rose 6.2%; operating income rose 19.4%. Gross profit was $320.8, or approximately 20.1% of sales, compared with $266.1, or 17.7%, a year earlier. The attributable net loss chiefly reflects a $152.5 non-cash pension settlement charge recorded below operating income; the company transferred approximately $713 of remaining obligations under its largest U.S. pension plan to an insurer.
Q1 operating cash use improved from the prior-year period, which management attributed mainly to changes in receivables-sale and securitization programs and improved operations. Capital spending was $153.1, versus $80.0. Cash was also used for the $250 redemption of International Paper’s partnership interest and $119.4 of share repurchases. The company issued $450 of 3.50% senior notes due 2028, using net proceeds to repay part of its revolving-credit borrowings.
Material changes and business drivers
- Sales growth reflected $28.9 from the Quad and Artistic acquisitions, higher prices and volume growth, partly offset by unfavorable foreign exchange. COVID-19 had an estimated net positive Q1 volume impact of approximately 1%, or about $15 in sales, as food and beverage demand increased while some foodservice demand declined.
- Operating income benefited from pricing, cost savings, higher volumes and commodity deflation; offsets included labor and benefits inflation, exit charges, incentive costs and unfavorable currency effects.
- Americas Paperboard Packaging sales increased to $1,123.4 from $1,022.8, and operating income increased to $194.8 from $125.6. Paperboard Mills reported an operating loss of $22.9 versus a $4.0 loss; Europe Paperboard Packaging operating income declined to $12.0 from $19.2.
- On January 29, GPIP paid $250 for 15.1 million partnership units, reducing IP’s GPIP ownership from 21.6% to 18.3%. IP may have further exchange opportunities at 180-day intervals, subject to agreement terms.
- The company repurchased 9.7 million shares at an average $12.87 per share. The quarterly dividend remained $0.075 per share.
Outlook, risks and contingencies
- 2020 capital investment is expected to be approximately $600. Depreciation and amortization is forecast at $455–$465, excluding approximately $5 of pension amortization and $20 of accelerated depreciation related to exit activities. Pension contributions are expected to be $10–$20.
- No revenue or earnings guidance was provided. Management said it did not expect to be a meaningful U.S. federal cash taxpayer until 2024, based on NOLs, other tax attributes, planned capital-project tax benefits and the expected reduction in IP’s investment.
- The company decided to close the White Pigeon, Michigan CRB mill and shut down the West Monroe, Louisiana PM1 containerboard machine, effective June 30, 2020. Q1 exit costs were $17.6. For these actions, expected additional charges included approximately $4 for post-employment benefits and $13–$18 for accelerated depreciation and asset/inventory write-offs. Separately, closures of two smaller CRB mills are expected in 2022 alongside the planned approximately $600 investment in a new Kalamazoo CRB machine; expected exit charges for those mill closures were also disclosed.
- COVID-19 had not materially affected results to date, according to management, but could disrupt operations, supply chains, distribution, customer demand and credit markets. Management may adjust mill outages and downtime to balance supply and demand.
- At March 31, outstanding debt principal was $3,501.9; revolving facilities had $1,405.8 available. The company reported compliance with covenants: leverage ratio 2.96 against a maximum 4.25, and interest coverage 8.24 against a minimum 3.00. Debt covenants, substantial debt, floating-rate exposure, input-cost volatility, competition and environmental obligations remain risks. Ordinary-course litigation was not expected by the company to have a material adverse effect.
- On April 1, after quarter-end, the company acquired Greif’s Consumer Packaging Group assets for approximately $82, subject to a working-capital adjustment.
Important facts for investors to verify
- How much of the operating improvement is recurring versus acquisition-related, pricing, commodity deflation and timing effects.
- The pension settlement’s non-cash accounting impact and any subsequent cash funding or pension obligations.
- COVID-19 effects on foodservice demand, customer volumes, operations and working capital after quarter-end.
- Execution, capital costs and realized savings from the Kalamazoo machine investment and announced mill/machine closures.
- Debt, liquidity and covenant headroom after the IP redemption, repurchases, capital spending and Greif acquisition; also verify the timing and form of any further IP exchanges.