Graphic Packaging Holding Company — Q3 2020 Form 10-Q
Business context and reporting period. The company produces paperboard and paper-based packaging, including cartons, cups, lids and food containers. This unaudited report covers the quarter and nine months ended September 30, 2020, with comparisons to the same 2019 periods.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,697.7 million | $1,581.6 million | $4,907.8 million | $4,640.3 million |
| Income from operations | $119.1 million | $122.7 million | $393.9 million | $401.1 million |
| Net income attributable to GPHC | $63.7 million | $52.1 million | $103.1 million | $173.8 million |
| Diluted EPS attributable to GPHC | $0.23 | $0.18 | $0.36 | $0.59 |
| Operating cash flow | Not separately provided for the quarter | $389.2 million | $300.7 million |
- Q3 sales rose 7.3%, supported by organic growth, acquisitions and favorable foreign exchange; lower selling prices and lower open-market paperboard volume partly offset gains. Operating income fell 2.9%.
- For the nine months, sales rose 5.8%, while operating income declined 1.8%. Net income attributable to GPHC fell substantially, principally reflecting a $152.5 million noncash pension settlement charge in Q1 2020.
- Q3 operating margin was approximately 7.0%, compared with 7.8% in Q3 2019. Nine-month operating margin was approximately 8.0%, compared with 8.6% in 2019.
- Nine-month operating cash flow improved, which management attributed mainly to changes in receivables-sale and securitization programs and improved operations. Investing cash outflow was $476.9 million, including $425.7 million of capital investment and acquisition spending. Financing cash outflow was $7.5 million.
- At September 30, cash was $55.5 million; current assets were $2.018 billion and current liabilities $1.720 billion. Total debt principal was $3.714 billion. Revolver availability was reported at $1.540 billion. The company was in compliance with debt covenants; leverage was 3.20x against a maximum of 4.25x, and interest coverage was 8.85x against a minimum of 3.00x.
Material changes and unusual items
- International Paper’s GPIP ownership fell from 21.6% to 14.5% after two 2020 redemptions totaling $500 million in cash. Redeemable noncontrolling interest was zero at quarter-end.
- The company issued $450 million of 3.50% senior notes due 2028 and $350 million of 3.50% senior notes due 2029, using proceeds to repay revolving-credit borrowings.
- 2020 acquisitions included Quad’s Omaha facility and Greif’s Consumer Packaging Group. The acquired businesses contributed sales, while Greif’s acquired business recorded an operating loss during 2020.
- The company repurchased 18.9 million shares for an average $13.31 per share during the first nine months, spending $247.3 million in cash-flow terms. Approximately $211 million remained under the repurchase authorization at September 30.
- Exit and shutdown charges included the White Pigeon CRB mill and West Monroe PM1 closure, plus two Greif facility closures. Nine-month exit activity charges were $42.1 million; a separate $12.2 million increase in multi-employer plan withdrawal liability was also recorded.
- By segment, Americas Paperboard Packaging operating income increased to $140.5 million in Q3 from $112.2 million. Paperboard Mills reported a $34.4 million Q3 operating loss versus $10.7 million income a year earlier.
Outlook, management commentary and risks
- Management said COVID-19 had not materially affected the overall business or results to date, but remained a source of uncertainty. Food and beverage packaging volumes benefited, while foodservice demand was weaker; the company took market downtime at its uncoated SBS cupstock machine.
- 2020 outlook: capital investment of approximately $625 million; depreciation and amortization of approximately $455 million, excluding specified pension amortization and exit-related accelerated depreciation; and pension contributions of $15 million to $20 million.
- The company expects to invest approximately $600 million in a new Kalamazoo CRB paper machine and currently expects to close two smaller CRB mills in 2022. For those future closures, it expects $15 million to $20 million of employee-related exit charges and $50 million to $60 million of accelerated depreciation and asset/inventory write-offs.
- Based on tax attributes, planned capital projects and anticipated reduction in IP’s GPIP interest, management did not expect to be a meaningful U.S. federal cash taxpayer until 2024.
- Management cited risks from COVID-19, raw-material and energy cost volatility, price competition, substitution by other packaging materials, customer demand and contract renewals, execution of acquisitions and cost-saving plans, foreign exchange, leverage and debt covenants. The company said ordinary-course lawsuits and accrued environmental matters were not expected to have a material adverse effect, while noting some future environmental costs cannot be estimated with certainty.
- Subsequent event: a $425 million term loan was arranged in October 2020, expected to fund in January 2021, to refinance 2021 notes. It bears fixed interest of 2.67% and matures seven years after funding.
Investor verification points
- Assess whether the acquired businesses, particularly Greif, deliver sustained operating contribution and integration benefits.
- Track paperboard mill profitability, cupstock downtime, pricing and the balance between food/beverage and foodservice demand.
- Verify capital spending, new-machine execution and projected costs and timing for the 2022 mill closures.
- Monitor debt, covenant headroom, refinancing of the 2021 notes and continued liquidity, including reliance on receivables-sale programs.
- Separate recurring earnings and cash generation from the pension settlement, shutdown charges, tax benefits, share repurchases and IP ownership redemptions.