Graphic Packaging Holding Company — Q2 2022 Form 10-Q
Business context and reporting period. The company supplies fiber-based consumer packaging and paperboard globally. This unaudited quarterly report covers the three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods unless stated otherwise. Results include Americraft, acquired in July 2021, and AR Packaging, acquired in November 2021.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First six months 2022 | First six months 2021 |
|---|---|---|---|---|
| Net sales | $2.358 billion | $1.737 billion | $4.603 billion | $3.386 billion |
| Income from operations | $152 million | $95 million | $345 million | $203 million |
| Net income attributable to GPHC | $66 million | $38 million | $173 million | $92 million |
| Diluted EPS | $0.21 | $0.13 | $0.56 | $0.32 |
| Operating cash flow | Not separately stated in the presented quarterly cash-flow data | $288 million | $305 million |
Q2 sales rose 36%; management attributed the increase to acquisitions, higher prices, fiber-packaging conversions, volume and mix, partly offset by lower open-market sales and unfavorable foreign exchange. Q2 operating income increased 60%, with price, volume, mix and cost savings outweighing inflation and other headwinds, including a $92 million Russia-related impairment. Q2 gross margin was approximately 18.7% versus 14.7%; operating margin was approximately 6.4% versus 5.5%. For the first six months, gross margin was approximately 18.0% versus 14.9%, and operating margin approximately 7.5% versus 6.0%.
Cash flow and investment. First-half operating cash flow declined to $288 million from $305 million, principally due to higher working capital, including receivables from increased sales and inventory affected by inflation. Investing cash outflow was $311 million, including $361 million of capital spending paid; financing cash outflow was $30 million. Cash and cash equivalents were $108 million on the June 30 balance sheet; the cash-flow statement reports $112 million at period end, including $4 million classified as held for sale.
Balance sheet and liquidity. At June 30, total debt was approximately $5.8 billion in principal, including $5.506 billion reported as long-term debt net of current portion and issuance costs, and $292 million of short-term debt/current maturities. Cash was $108 million. The company reported $1.129 billion available under revolving and other international facilities. Current assets were $2.684 billion and current liabilities $2.008 billion. The company was in compliance with debt covenants; leverage ratio was 3.98x against a maximum below 5.00x, and interest coverage was 9.51x against a 3.00x minimum. Approximately 34% of total debt was floating-rate. Q2 net interest expense rose to $48 million from $29 million.
Material changes and notable items
- First-half sales increased 36%, including $682 million attributed to acquisitions; higher pricing and organic growth also contributed. Foreign exchange and lower open-market volumes were offsets.
- First-half cost inflation was $405 million year over year, including $361 million of commodity inflation. Management cited external board, chemicals, energy, fiber, wood and freight among the principal cost increases.
- Russia operations were classified as held for sale as the company began divesting two folding-carton plants. The company recorded $92 million of impairment charges, including $12 million of goodwill impairment; it expects the sale within 12 months. Russian operations represented about 1% of first-half sales and less than 1% of EBITDA.
- The company closed its Battle Creek, Michigan, CRB mill in Q2 and planned to close its Norwalk, Ohio, folding-carton facility by the end of Q3 2022. First-half restructuring-related costs were $17 million.
- Segment operating results reflected strong improvement in Americas Paperboard Packaging; Europe Paperboard Packaging reported a Q2 operating loss of $46 million, including the Russia impairment. Paperboard Mills recorded a Q2 operating loss of $6 million.
- The company repurchased 379,000 shares in the first half at an average $20.46 per share; $139 million remained available under the repurchase authorization. It declared a quarterly dividend of $0.075 per share.
Outlook, risks and contingencies
For 2022, management expected capital investment of $450–$500 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 excess plan balance. The filing provides no clear full-year sales, earnings or cash-flow guidance.
Management said operating cash generation, available credit and other financing sources were expected to cover debt service, capital spending and operating needs, while noting there is no assurance. Key risks include persistent commodity, labor and energy inflation; limited ability to pass cost increases through; supply-chain and foreign-exchange disruption; changing consumer demand and packaging substitution; competition; acquisition integration; and leverage, floating rates and restrictive debt covenants. The company cited COVID-19 and the Russia-Ukraine conflict as potential sources of disruption. It reported ordinary-course litigation and environmental matters, but did not expect them to have a material adverse effect; some future remediation costs cannot be estimated with certainty. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress, timing and final proceeds from the planned sale of the Russian operations, including any further valuation changes or resulting gain or loss.
- Whether pricing and productivity gains can continue to offset inflation, particularly as commodity and labor costs evolve.
- Working-capital trends and operating cash conversion relative to earnings and planned capital investment.
- Debt refinancing, floating-rate exposure and covenant headroom, especially given the company’s substantial debt burden.
- Delivery against the 2022 capital-investment and pension-contribution outlook, and execution of the mill and facility closures.