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July 27, 2021, 4:47 p.m. EDT

10-Q: GRAPHIC PACKAGING HOLDING CO

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

This management's discussion and analysis of financial conditions and results of operations is intended to provide investors with an understanding of the Company's past performance, financial condition and prospects. The following will be discussed and analyzed:

� Overview of Business

� Overview of 2021 Results

� Results of Operations

� Financial Condition, Liquidity and Capital Resources

� Critical Accounting Policies

� New Accounting Standards

� Business Outlook

OVERVIEW OF BUSINESS

The Company's objective is to strengthen its position as a leading provider of sustainable fiber-based consumer packaging solutions. To achieve this objective, the Company offers customers its paperboard, cartons, cups, lids, foodservice containers and packaging machines, either as an integrated solution or separately. Cartons, carriers and containers are designed to protect and hold products. Product offerings include a variety of laminated, coated and printed packaging structures that are produced from the Company's coated-recycled paperboard ("CRB"), coated unbleached kraft paperboard ("CUK") and solid bleached sulfate paperboard ("SBS"). Innovative designs and combinations of paperboard, films, foils, metallization, holographics and embossing are customized to the individual needs of the customers.

The Company is implementing strategies (i) to expand market share in its current markets and to identify and penetrate new markets; (ii) to capitalize on the Company's customer relationships, business competencies, and mills and folding carton assets; (iii) to develop and market innovative, sustainable products and applications that benefit from consumer-led sustainability trends; and (iv) to continue to reduce costs by focusing on operational improvements. The Company's ability to fully implement its strategies and achieve its objectives may be influenced by a variety of factors, many of which are beyond its control, such as inflation of raw material and other costs, and the effect of overcapacity in the worldwide paperboard packaging industry.

Significant Factors That Impact the Company's Business and Results of Operations

COVID-19 Pandemic. Many uncertainties remain regarding the current novel coronavirus ("COVID-19") pandemic, including the anticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. While the COVID-19 pandemic has not materially impacted the Company's overall business, operations, or financial results to date, it may have far-reaching impacts on many aspects of the Company's operations, including impacts on customer and consumer behaviors, business and manufacturing operations, inventory, accounts receivable, the Company's employees, and the market generally. The Company will continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments to its business accordingly, such as to match the Company's supply with demand by adjusting mill maintenance outages and taking market downtime where appropriate.

Impact of Inflation/Deflation. The Company's cost of sales consists primarily of energy (including natural gas, fuel oil and electricity), pine and hardwood fiber, chemicals, secondary fibers, purchased paperboard, aluminum foil, ink, plastic films and resins, depreciation expense and labor. Costs increased in the first six months of 2021 by $128 million, compared to the first six months of 2020. The higher costs in the six months ended June 30, 2021 were due to higher labor and benefit costs ($23 million), freight ($35 million), secondary fiber cost ($10 million), chemicals ($35 million), energy ($10 million), external board ($10 million) and other costs, net ($5 million).

Commitment to Cost Reduction. In light of continuing margin pressure throughout the packaging industry, the Company has programs in place that are designed to reduce costs, improve productivity and increase profitability. The Company utilizes a global continuous improvement initiative that uses statistical process control to help design and manage many types of activities, including production and maintenance. This includes a Six Sigma process focused on reducing variable and fixed manufacturing and administrative costs and the use of Lean Sigma principles in manufacturing and supply chain processes.







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The Company's ability to continue to successfully implement its business strategies and to realize anticipated savings and operating efficiencies is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company's control. If the Company cannot successfully implement the strategic cost reductions or other cost savings plans, it may not be able to continue to compete successfully against other manufacturers. In addition, any failure to generate the anticipated efficiencies and savings could adversely affect the Company's financial results.

Competition and Market Factors. As some products can be packaged in different types of materials, the Company's sales are affected by competition from other manufacturers' CRB, CUK, SBS, folding box board, and recycled clay-coated news. Additional substitute products also include plastic, shrink film and corrugated containers. In addition, while the Company has long-term relationships with many of its customers, the underlying contracts may be re-bid or renegotiated from time to time, and the Company may not be successful in renewing on favorable terms or at all. The Company works to maintain market share through efficiency, product innovation, service and strategic sourcing to its customers; however, pricing and other competitive pressures may occasionally result in the loss of a customer relationship.

In addition, the Company's sales are driven by consumer buying habits in the markets its customers serve, and recently we have seen net organic sales growth driven by the consumers desire for sustainable packaging solutions and increased at home consumption. Changes in consumer dietary habits and preferences, increases in the costs of living, unemployment rates, access to credit markets, as well as other macroeconomic factors, may negatively affect consumer spending behavior. New product introductions and promotional activity by the Company's customers and the Company's introduction of new packaging products also impact its sales.

Debt Obligations. The Company had an aggregate principal amount of $3,788 million of outstanding debt obligations as of June 30, 2021. This debt has consequences for the Company, as it requires a portion of cash flow from operations to be used for the payment of principal and interest, exposes the Company to the risk of increased interest rates and may restrict the Company's ability to obtain additional financing. Covenants in the Company's Fourth Amended and Restated Credit Agreement (as amended by the Incremental Facility Amendment) (the "Current Credit Agreement") and the indentures governing the 4.875% Senior Notes due 2022, 4.125% Senior Notes due 2024, 0.821% Senior Notes due 2024, 1.512% Senior Notes due 2026, 4.75% Senior Notes due 2027, 3.50% Senior Notes due 2028 and 3.50% Senior Notes due 2029 (the "Indentures") may, among other things, restrict the ability of the Company to dispose of assets, incur guarantee obligations, prepay other indebtedness, repurchase stock, pay dividends, make other restricted payments and make acquisitions or other investments. The Current Credit Agreement also requires compliance with a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. The Company's ability to comply in future periods with the financial covenants will depend on its ongoing financial and operating performance, which in turn will be subject to many other factors, many of which are beyond the Company's control. See "Covenant Restrictions" in "Financial Condition, Liquidity and Capital Resources" for additional information regarding the Company's debt obligations.

The debt and the restrictions under the Current Credit Agreement and the Indentures could limit the Company's flexibility to respond to changing market conditions and competitive pressures. The outstanding debt obligations and the restrictions may also leave the Company more vulnerable to a downturn in general economic conditions or its business, or unable to carry out capital expenditures that are necessary or important to its growth strategy and productivity improvement programs.

OVERVIEW OF SECOND QUARTER 2021 RESULTS

This management's discussion and analysis contains an analysis of Net Sales, Income from Operations and other information relevant to an understanding of the Company's results of operations on a Consolidated basis:

Net Sales for the three months ended June 30, 2021, increased $126 million or 8% to $1,737 million from $1,611 million for the three months ended June 30, 2020, due to improved volume related to organic sales growth (including from conversions to fiber-based packaging solutions and new product introductions), higher pricing, and favorable foreign exchange.

Income from Operations for the three months ended June 30, 2021 decreased $20 million or 17% to $95 million from $115 million for the three months ended June 30, 2020 due to unfavorable commodity and other inflation (primarily labor and benefits) offset by organic sales growth, cost savings from continuous improvement and other programs, and favorable foreign exchange.

Acquisitions

On January 31, 2020, the Company acquired a folding carton facility from Quad/Graphics, Inc. ("Quad"), a commercial printing company. The converting facility is located in Omaha, Nebraska and is included in the Americas Paperboard Packaging reportable segment.

On April 1, 2020, the Company acquired the Consumer Packaging Group business from Greif, Inc. ("Greif"), a leader in industrial packaging products and services. The acquisition included seven converting facilities across the United States, which are included in the Americas Paperboard Packaging reportable segment.

On May 12, 2021, the Company announced its intent to acquire all of the shares of AR Packaging Group AB ("AR Packaging"), Europe's second largest producer of fiber-based consumer packaging, for approximately $1.45 billion in cash, subject to customary adjustments. The $1.45 billion acquisition price will be paid in Euros at close. As such, on May 14, 2021, the Company entered into deal contingent, foreign exchange forward contracts, with no upfront cash cost, to hedge 700 million Euros of the acquisition price. These forward contracts expire if the deal terminates or does not close by May 13, 2022 and are accounted for as derivatives under ASC 815, Derivatives and Hedging. Table of Contents

On July 1, 2021, the Company acquired substantially all the assets of Americraft Carton, Inc. ("Americraft"), a leader in paperboard folding cartons in North America for $280 million plus $8 million for recently purchased equipment subject to customary working capital true-up. The acquisition includes seven converting facilities across the United States and will be reported within the Americas Paperboard Packaging reportable segment.

Share Repurchases and Dividends

On May 26, 2021, the Company's board of directors declared a regular quarterly dividend of $0.075 per share of common stock payable on July 5, 2021 to shareholders of record as of June 15, 2021.

On January 28, 2019, the Company's board of directors authorized an additional share repurchase program to allow the Company to purchase up to $500 million of the Company's issued and outstanding shares of common stock through open market purchases, privately negotiated transactions and Rule 10b5-1 plans (the "2019 share repurchase program"). During the first six months of 2021, the Company did not repurchase any shares of its common stock under the 2019 share repurchase program. During the six months ended June 30, 2020, the Company repurchased 12,289,317 shares of its common stock at an average price of $12.82 under the 2019 share repurchase program. As of June 30, 2021, the Company has $147 million available for additional repurchases under the 2019 share repurchase program.







        RESULTS OF OPERATIONS
                                                                     Three Months Ended                     Six Months Ended
                                                                          June 30,                              June 30,
         In millions                                                2021                2020              2021              2020
        Net Sales                                             $    1,737             $ 1,611          $   3,386          $ 3,210
        Income from Operations                                        95                 115                203              275
        Nonoperating Pension and Postretirement Benefit
        Income (Expense)                                               1                   -                  3             (151)
        Interest Expense, Net                                        (29)                (30)               (59)             (64)
        Income before Income Taxes and Equity Income of
        Unconsolidated Entity                                         67                  85                147               60
        Income Tax Expense                                           (26)                (18)               (44)             (13)
        Income before Equity Income of Unconsolidated Entity          41                  67                103               47
        Equity Income of Unconsolidated Entity                         1                   -                  1                -
        Net Income                                            $       42             $    67          $     104          $    47
        








        SECOND QUARTER 2021 COMPARED WITH SECOND QUARTER 2020
        Net Sales
                                                       Three Months Ended June 30,
                                                                                           Percent
                   In millions               2021               2020        Increase       Change
                   Consolidated      $     1,737              $ 1,611      $     126           8  %
        


The components of the change in Net Sales are as follows:







                                                        Three Months Ended June 30,
                                                                    Variances
                 In millions         2020           Price      Volume/Mix          Exchange      Total       2021
                 Consolidated   $   1,611          $  14      $        77         $     35      $ 126      $ 1,737
        


The Company's Net Sales for the three months ended June 30, 2021 increased by $126 million or 8% to $1,737 million from $1,611 million for the three months ended June 30, 2020 due to organic sales growth including from conversions to fiber-based packaging solutions and new product introductions, favorable foreign exchange, primarily the British Pound, Euro, Canadian dollar, and Australian dollar, and higher pricing partially offset by lower open market volume. Core converting volumes were up and driven by foodservice packaging including cups and global beverage, offset by declines in dry foods, cereal, tissue, and frozen foods products.

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Jul 27, 2021

COMTEX_390522311/2041/2021-07-27T16:46:53

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