Graphic Packaging Holding Company — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Graphic Packaging is a global producer of fiber-based consumer packaging, paperboard, cartons, and foodservice packaging. Comparisons are with the corresponding 2021 periods unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.451 billion | $1.782 billion | $7.054 billion | $5.168 billion |
| Income from operations | $293 million | $121 million | $638 million | $324 million |
| Net income attributable to GPHC | $193 million | $73 million | $366 million | $165 million |
| Diluted EPS | $0.62 | $0.24 | $1.18 | $0.56 |
| Operating margin | 11.9% | 6.8% | 9.0% | 6.3% |
Sales rose 38% in Q3 and 36% year to date. Management attributed growth to higher selling prices, organic volume and mix, open-market sales, and the AR Packaging acquisition; unfavorable foreign exchange partly offset growth. Operating income increased 142% in Q3 and 97% year to date. Pricing, volume, product mix, and the new Kalamazoo CRB machine more than offset inflation and other headwinds.
Cash flow and investment: Nine-month operating cash flow was $620 million, versus $459 million; capital spending paid was $445 million, versus $588 million. Investing cash outflow was $367 million, compared with $792 million, including the prior-year $292 million Americraft acquisition. Financing cash outflow was $331 million, versus $223 million of inflow in 2021. Cash and equivalents were $82 million at September 30, compared with $172 million at year-end 2021.
Debt and liquidity: Principal debt was $5.527 billion; balance-sheet short- and long-term debt totaled $5.495 billion. The company had $1.375 billion available under revolving facilities. Approximately 31% of total debt was floating-rate. Net interest expense was $53 million in Q3 and $143 million year to date, up from $29 million and $88 million, respectively, reflecting higher debt balances and interest rates. The company was in compliance with debt covenants: leverage ratio 3.49 against a maximum below 5.00, and interest coverage 8.79 against a 3.00 minimum.
Material developments and unusual items
- Costs increased $595 million year to date, including $523 million of commodity inflation, $36 million of labor and benefits inflation, and $36 million of other net costs. Q3 inflation was $190 million year over year. Management noted that the ability to pass cost increases to customers is not assured.
- The planned sale of two Russian folding-carton plants generated $93 million of impairment charges through Q3, including $12 million of goodwill impairment. The sale was expected within 12 months of the filing; Russia represented approximately 1% of sales and EBITDA year to date. The company will continue assessing the disposal group for impairment until sale.
- The Norwalk, Ohio carton facility closed in September, and the Battle Creek, Michigan CRB mill closed in May. The company also continued work on the Kalamazoo CRB machine and related capacity optimization.
- Effective September 1, 2022, an internal restructuring changed GPIP from partnership to corporate tax status, making its activities directly subject to U.S. income tax. Nine-month income tax expense was $134 million on $500 million of pretax income.
- AR Packaging, acquired in November 2021, contributed $291 million of Q3 sales and $19 million of Q3 operating income. Its year-to-date reported operating result included the Russia impairment.
- The quarterly dividend increased 33%, from $0.075 to $0.10 per share, beginning with the January 2023 payment. The company repurchased 1.09 million shares year to date at an average $20.99; $124 million remained available under the repurchase authorization.
Outlook, risks, and contingencies
For 2022, management expected capital investment of $500–$525 million, depreciation and amortization of approximately $560 million (excluding $7 million of accelerated exit-related depreciation), and pension contributions of $10–$20 million excluding a separate $6 million contribution funded from an existing plan balance. The filing provides no specific revenue or earnings guidance. Management said operating cash generation and available financing were expected to meet debt service, capital spending, and operating needs, while noting this depends on market conditions and execution.
Key risks include persistent commodity, energy, labor, and freight inflation; limited ability to pass costs through; demand and consumer-spending changes; competition and material substitution; foreign-exchange movements; acquisition integration and cost-savings execution; debt and floating-rate exposure; and continuing global supply-chain disruption, including effects of COVID-19 and the Russia-Ukraine conflict. Environmental investigations and ordinary-course litigation are disclosed; management did not expect their resolution to have a material adverse effect. No material changes to the previously reported risk factors were identified, and management reported effective disclosure controls.
Investor verification priorities
- Track realized pricing, organic converting volumes, and whether price increases continue to offset input-cost inflation.
- Confirm timing, proceeds, and any further impairment or other costs from the Russian business sale.
- Monitor debt, floating-rate interest costs, covenant headroom, and the use of revolving-credit availability.
- Compare cash generation with capital-investment plans and assess the effect of receivables-sale programs on reported cash flow.
- Assess AR Packaging integration, the Kalamazoo machine ramp-up, and savings from facility closures and optimization.
- Verify the impact of the tax-status change and the assumptions behind management’s 2022 capital-spending and depreciation outlook.