Graphic Packaging Holding Company — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Graphic Packaging is a global fiber-based consumer packaging producer, with reportable segments in Paperboard Mills, Americas Paperboard Packaging, and Europe Paperboard Packaging. Its products include folding cartons, foodservice packaging, and paperboard.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $2,392 | $2,358 | $4,830 | $4,603 |
| Income from operations | $267 | $152 | $597 | $345 |
| Net income | $150 | $66 | $357 | $173 |
| Diluted EPS | $0.49 | $0.21 | $1.15 | $0.56 |
| Interest expense, net | $60 | $48 | $118 | $90 |
Q2 operating margin was approximately 11.2% versus 6.4% a year earlier; net margin was approximately 6.3% versus 2.8%. For the first six months, operating margin was approximately 12.4% versus 7.5%, and net margin was approximately 7.4% versus 3.8%.
Q2 sales increased 1%, primarily from higher pricing and new products, partly offset by lower organic sales and open-market volume. For the first half, sales rose 5%; pricing contributed $424 million, while volume/mix and foreign exchange reduced sales by $159 million and $38 million, respectively. Management attributed higher operating income chiefly to pricing, productivity and cost-saving initiatives, and new products. Inflation, particularly labor and benefits, lower volumes, maintenance downtime, foreign exchange, and restructuring-related costs were offsets.
- Cash flow, six months: Operating cash flow was $291 million versus $288 million. Investing cash outflow was $437 million, including $385 million of capital spending and the approximately $100 million Tama acquisition. Financing provided $131 million. Cash flow from operations less capital spending paid was approximately negative $94 million.
- Balance sheet at June 30: Cash and equivalents were $125 million; current assets $2.901 billion and current liabilities $2.137 billion (current ratio approximately 1.36). Total debt was $5.509 billion on the balance sheet; the company reported $5.535 billion of principal debt obligations. Long-term debt was $5.046 billion.
- Debt and liquidity: $1.172 billion was available under revolving credit facilities. About 22% of debt was floating-rate; a $750 million interest-rate swap ran through April 1, 2024. The company was in compliance with debt covenants: leverage ratio 2.84 versus a maximum below 4.25; interest coverage ratio 8.04 versus a minimum of 3.00. Credit ratings were BB+ and Ba1, both with stable outlooks.
Material changes versus the prior comparable period
Q2 operating income increased $115 million, or 76%, and first-half operating income rose $252 million, or 73%. Improvement reflected higher pricing and productivity, while first-half operating income also faced $138 million of higher costs from commodity inflation, labor and benefits, and other costs. Interest expense increased with higher rates, partly offset by lower debt balances.
Segment performance was mixed. Q2 Paperboard Mills sales fell to $252 million from $292 million and the segment recorded a $33 million operating loss, compared with a $6 million loss. Americas Paperboard Packaging sales increased to $1.571 billion from $1.534 billion and operating income to $274 million from $207 million. Europe Paperboard Packaging sales increased to $523 million from $493 million; operating income was $21 million versus a $46 million loss, partly reflecting lower Russia-related impairment charges.
Outlook, management commentary, risks, and unusual items
- Outlook: 2023 capital investment is expected to equal approximately 8% of sales; depreciation and amortization is expected to be $600–$610 million. The company expects pension contributions of $10–$20 million and approximately $2 million of postretirement health-care contributions.
- Strategic investment and restructuring: The company announced an approximately $1 billion new CRB mill in Waco, Texas, with closures of smaller mills. It also announced three folding-carton plant closures by the end of 2023. First-half exit costs were $49 million, including $32 million of accelerated depreciation. Further estimated charges include $20–$25 million for the remaining CRB mill closures and $15–$20 million of related accelerated depreciation and write-offs through 2026; folding-carton closures are expected to generate $5–$10 million each in severance-related costs and accelerated depreciation/write-offs through 2023. Waco start-up charges are expected to total $25–$30 million through 2026.
- Russia divestiture: The sale of the Russian operations was expected to close in 2023. The filing reports a cumulative pre-tax loss of $91 million, including $3 million in Q2 2023; separate prior goodwill impairment was $12 million. Russian operations accounted for approximately 1% of first-half sales and less than 1% of EBITDA. The company will continue evaluating the disposal group for further impairment until sale.
- Capital allocation and transactions after quarter-end: A new $500 million share repurchase authorization was approved July 27, 2023. On July 31, the company agreed to acquire Bell Incorporated for $262.5 million, subject to customary adjustments, approvals, and closing conditions; closing was expected in Q4 2023. The quarterly dividend was $0.10 per share.
- Taxes and risks: The company expected U.S. federal tax attributes to reduce 2023 federal cash taxes by approximately $100 million. Risks include raw-material and energy cost volatility, labor inflation, demand and volume weakness, competition and product substitution, execution of savings and mill investments, foreign exchange, interest rates, leverage, and environmental or legal matters. Management stated liquidity sources should cover requirements for at least the next 12 months, while noting no assurance; it also stated that ordinary-course litigation and recorded environmental contingencies were not expected to have a material adverse effect.
Key facts investors should verify
- Whether pricing and productivity gains can offset inflation and weaker packaging volumes, especially in Paperboard Mills.
- Execution, spending, returns, and timing of the Waco mill project and planned facility closures, including expected restructuring charges.
- Progress and final proceeds or additional impairment from the Russian divestiture.
- Refinancing or repayment plans for the 2024 notes and the effect of floating rates on interest expense and liquidity.
- Cash generation after capital spending, working-capital movements, and reliance on receivables-sale programs.
- Closing, funding, and integration of the Bell acquisition, alongside the new repurchase authorization and ongoing dividends.