Graphic Packaging Holding Company — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. The company provides fiber-based packaging and paperboard products for food, beverage, foodservice and consumer-product markets.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,782 | $1,698 | $5,168 | $4,908 |
| Income from operations | $121 | $119 | $324 | $394 |
| Net income attributable to GPHC | $73 | $64 | $165 | $103 |
| Diluted earnings per share | $0.24 | $0.23 | $0.56 | $0.36 |
| Interest expense, net | $29 | $32 | $88 | $96 |
- Q3 revenue rose 5%; reported operating margin was approximately 6.8%, versus 7.0% a year earlier. Nine-month operating margin was approximately 6.3%, versus 8.0%.
- Q3 operating income increased 2%, while nine-month operating income declined 18%. Nine-month results included $229 million of higher inflation costs and $23 million of Winter Storm Uri downtime and mitigation costs, net of insurance recoveries.
- Operating cash flow for the first nine months was $459 million, compared with $389 million. Investing cash outflow was $792 million, including $588 million of capital investment and $292 million for Americraft. Financing cash inflow was $223 million. Cash declined $112 million to $67 million.
- Capital investment exceeded operating cash flow by approximately $129 million for the nine-month period, calculated using reported capital spending of $588 million.
- At September 30, total debt was approximately $4.15 billion on a principal basis; cash was $67 million. The company reported $1.827 billion available under revolving credit facilities. Its leverage covenant ratio was 3.65x against a maximum of 4.25x, and its interest coverage ratio was 9.64x against a minimum of 3.00x. The company reported compliance with debt covenants.
Changes and business drivers
- Q3 sales growth reflected $54 million from the Americraft acquisition, higher pricing, fiber-based packaging conversions, new products, mix and favorable currency, partly offset by lower core converting and open-market volumes.
- Nine-month sales increased 5%, supported by acquisitions, organic growth, pricing and foreign exchange. Americas Paperboard Packaging sales rose to $3.697 billion from $3.492 billion, while its operating income fell to $336 million from $493 million. Europe Paperboard Packaging operating income increased to $64 million from $48 million. Paperboard Mills reduced its operating loss to $31 million from $93 million.
- Inflation was a significant margin headwind: nine-month costs increased $229 million, including $189 million of commodity inflation, $35 million of labor and benefits, and $5 million of other costs. Q3 inflation was $101 million.
- Nine-month net income attributable to GPHC increased to $165 million from $103 million, while operating income fell. The comparison was affected by a $153 million pension settlement charge recorded in 2020.
Transactions, outlook and risks
- Americraft was acquired on July 1, 2021 for approximately $292 million, subject to working-capital adjustment; it added seven U.S. converting facilities.
- The company expected to complete its approximately $1.45 billion cash acquisition of AR Packaging in early November 2021. It had hedged €700 million of the purchase price with deal-contingent foreign-exchange forwards.
- IP exchanged its remaining partnership interest for GPHC shares in May 2021 and no longer held an interest in GPIP. The company recorded a $66 million Tax Receivable Agreement liability related to that exchange and expected to settle it in Q4 2021.
- 2021 outlook included approximately $775 million of capital investment, approximately $460 million of depreciation and amortization (excluding specified pension and exit-related items), and pension contributions of $15–$20 million, excluding a $14 million contribution already made using excess plan assets. The filing did not provide clear full-year revenue or earnings guidance.
- The Kalamazoo CRB machine project continued; the company expected approximately $15 million of 2021 start-up charges. It revised its mill plan to keep one smaller CRB mill operating at least through 2022. Expected project-related exit costs included $15–$20 million for post-employment benefits and incentives and $50–$55 million for accelerated depreciation and asset write-offs.
- Key risks cited include raw-material, freight, energy and labor inflation; limits on passing cost increases through to customers; competition and changing consumer preferences; COVID-19 uncertainty; debt and covenant constraints; and environmental compliance or remediation. The company said ordinary-course litigation was not expected to have a material adverse effect. It reported no material change in previously disclosed risk factors.
- After quarter-end, GPIL entered into a $400 million delayed-draw term facility, expected to fund October 29, 2021, with maturity tied to later bond or similar financing or 15 months after funding.
Important facts for investors to verify
- Whether pricing and cost-reduction measures can offset persistent inflation and restore operating margins.
- AR Packaging’s closing, funding structure, integration costs and effect on leverage; also track the subsequent $400 million delayed-draw facility.
- Capital spending execution and cash generation, given nine-month capital investment exceeded operating cash flow.
- Actual costs and timing for the Kalamazoo machine, related mill plans, and the Tax Receivable Agreement payment.
- Debt covenant headroom, refinancing needs and liquidity assumptions, including reliance on receivables-sale and factoring programs.