Graphic Packaging Holding Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022 unless otherwise noted. The company makes fiber-based consumer packaging, including folding cartons, paperboard and foodservice products.
Financial performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net sales | $2.438 billion | $2.245 billion |
| Income from operations | $330 million | $193 million |
| Operating margin | 13.5% | 8.6% |
| Net income | $207 million | $107 million |
| Diluted earnings per share | $0.67 | $0.35 |
| Net cash from operating activities | $60 million | $18 million |
| Capital spending paid | $196 million | $223 million |
Sales rose 9%, primarily on higher pricing, mix, increased fiber-based packaging conversions and the Tama acquisition, partly offset by foreign exchange and lower open-market volumes. Operating income increased 71%; higher pricing, sales and cost savings more than offset $94 million of inflation-related cost increases, foreign exchange, maintenance downtime and other headwinds. Net margin was approximately 8.5%, compared with 4.8%.
Cash from operations improved year over year, but remained below capital spending paid. Cash and cash equivalents were $113 million at March 31, 2023, versus $150 million at year-end 2022. Total current assets were $2.812 billion and current liabilities were $1.735 billion.
Debt, liquidity and capital allocation
Balance-sheet debt, including current debt, was approximately $5.520 billion; the filing reports aggregate principal debt obligations of $5.548 billion. Net interest expense rose to $58 million from $42 million, mainly because of higher interest rates. Approximately 35% of debt carried floating rates. The company had $1.168 billion available under revolving credit facilities and reported compliance with debt covenants: leverage ratio 2.95 versus a maximum of 4.25, and interest coverage ratio 8.37 versus a minimum of 3.00.
The company paid $31 million in dividends and repurchased 1.21 million shares for approximately $29 million. Its quarterly dividend was $0.10 per share. The company stated that operating cash generation and available credit were expected to cover requirements for at least the next 12 months, subject to operating and market conditions.
Segments, transactions and material developments
- Americas Paperboard Packaging sales were $1.544 billion and operating income was $269 million; higher pricing and savings supported income, while inflation and maintenance downtime weighed on results.
- Paperboard Mills sales were $316 million and operating income was $27 million, up from $11 million. Higher pricing and productivity were partly offset by inflation, maintenance downtime and lower open-market volume.
- Europe Paperboard Packaging sales were $532 million and operating income was $26 million, down from $37 million. Inflation, foreign exchange and a Russia-related impairment offset higher pricing and sales.
- The company acquired Tama Paperboard, an Iowa recycled paperboard mill, on January 31 for approximately $100 million, funded with cash and revolving-credit borrowings.
- The company announced an approximately $1 billion investment in a new recycled-paperboard mill in Waco, Texas, and expected to close three smaller mills. On May 2, it separately announced the planned Q2 2023 closure of the Tama mill.
- The planned sale of the company’s Russian operations remained pending. The filing reports an $88 million cumulative pre-tax loss to adjust the disposal group to fair value less costs to sell, including $4 million of Q1 impairment charges. Russian operations accounted for approximately 1% of sales and less than 1% of EBITDA in Q1.
Outlook, risks and contingencies
For 2023, management expected capital investment of 7%–8% of sales, depreciation and amortization of $605–$615 million, and pension contributions of $10–$20 million. It also expected U.S. federal cash taxes to be reduced by approximately $100 million through available tax attributes.
Management highlighted exposure to raw-material, energy and labor inflation, which may not always be recoverable through pricing; consumer demand and product substitution; foreign exchange; interest rates and substantial debt; and execution of cost-reduction and investment plans. The filing states that environmental and ordinary-course legal contingencies were not expected to have a material adverse effect, and that there had been no material change in previously disclosed risk factors. The company was hedging approximately 57% of expected natural-gas usage for the remainder of 2023 and 20% for 2024; a $750 million interest-rate swap position extended to April 2024.
Important facts for investors to verify
- Whether pricing and cost savings can continue to offset inflation, weaker volumes, and maintenance downtime.
- Execution, total cost and expected benefits of the Waco mill investment, planned smaller-mill closures, and the subsequent Tama closure announcement.
- Timing and final proceeds or additional charges associated with the Russian business sale.
- Cash generation relative to capital spending, debt service, dividends and repurchases, including the effect of floating-rate debt.
- Compliance with debt covenants and availability under revolving facilities as investment and borrowing needs evolve.