Graphic Packaging Holding Company — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Graphic Packaging makes fiber-based consumer packaging, paperboard and related products. Results include acquisitions of Americraft (acquired July 2021) and AR Packaging (acquired November 2021).
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $2,245 million | $1,649 million |
| Income from operations | $193 million | $108 million |
| Net income attributable to Graphic Packaging | $107 million | $54 million |
| Diluted EPS | $0.35 | $0.19 |
| Operating cash flow | $18 million | $53 million |
| Cash and cash equivalents, quarter-end | $111 million | $172 million at Dec. 31, 2021 |
- Sales rose 36%; management attributed the increase to $341 million of acquisition-related sales, higher prices, organic growth and mix, partly offset by lower open-market sales and unfavorable foreign exchange.
- Operating income rose 79%. Approximate operating margin increased to 8.6% from 6.5%; net margin attributable to the company was approximately 4.8% versus 3.3%.
- Inflation increased costs by $195 million year over year, including $176 million of commodity inflation and $12 million of labor and benefits inflation. Higher pricing, volume, mix and cost savings more than offset these pressures in operating income.
- Interest expense increased to $42 million from $30 million, mainly because of higher debt balances. About 36% of total debt was floating-rate.
- Operating cash flow fell, mainly due to higher working capital, including receivables associated with higher sales and inventory inflation. Investing cash outflow was $195 million, including $223 million of capital spending paid. Financing cash inflow was $119 million, primarily reflecting net revolving-credit borrowings. Cash declined $61 million during the quarter.
- Current assets were $2,657 million and current liabilities $1,946 million at March 31. Gross debt principal was reported as $5,966 million; balance-sheet short- and long-term debt totaled $5,931 million, net of applicable accounting adjustments. Revolver availability was $1,017 million.
Segments and material changes
| Segment | Sales, Q1 2022 | Operating income (loss), Q1 2022 | Prior-year comparison |
|---|---|---|---|
| Paperboard Mills | $296 million | $11 million | Sales $237 million; operating loss $27 million |
| Americas Paperboard Packaging | $1,422 million | $153 million | Sales $1,169 million; operating income $121 million |
| Europe Paperboard Packaging | $486 million | $37 million | Sales $206 million; operating income $20 million |
Europe’s comparison includes AR Packaging, acquired in November 2021; the company reported $281 million of AR Packaging revenue and $11 million of operating income in Q1 2022. The company also cited improved Paperboard Mills results partly because Q1 2021 included Winter Storm Uri-related costs.
Outlook, risks and unusual items
- For 2022, management expected capital investment of $440 million to $460 million, depreciation and amortization of approximately $580 million, and pension contributions of $10 million to $20 million, excluding a separately described $6 million contribution using an excess plan balance. The filing provides no specific full-year revenue or earnings guidance.
- Management said it did not expect to be a meaningful U.S. federal cash taxpayer until 2024, citing tax attributes and planned capital-project benefits.
- The company announced closure of its Norwalk, Ohio folding-carton facility by the end of May 2022. For the CRB platform optimization and mill closure activities, it expected $15 million to $20 million in post-employment, retention and incentive charges, and $50 million to $55 million in accelerated depreciation and inventory and asset write-offs. Cumulative amounts incurred through March 31 included $15 million of employee-related exit charges, $49 million of accelerated depreciation and $26 million of new-machine start-up charges.
- Risks cited include commodity and energy inflation, supply-chain disruption, COVID-19 and Russia-Ukraine-related impacts, foreign exchange, competition and product substitution, customer pricing limits, execution of acquisitions and cost-saving plans, and substantial debt. Russian converting facilities represented approximately 1% of sales and less than 1% of EBITDA; the company said it was complying with U.S. and EU sanctions.
- At quarter-end, the company reported compliance with debt covenants: leverage ratio 4.37 to 1.00 against a limit below 5.00, and interest coverage ratio 10.20 to 1.00 against a minimum of 3.00. Environmental and ordinary-course legal matters were disclosed; management did not expect the described matters to have a material adverse effect.
- A $10 million tax expense related to releasing tax effects remaining in other comprehensive income after settlement of interest-rate swaps affected Q1 taxes. The company had no interest-rate swaps outstanding at March 31.
Important facts for investors to verify
- How much of sales and operating-income growth reflects acquisitions versus organic volume, pricing and mix, and whether pricing continues to offset inflation.
- Working-capital trends and cash conversion, given operating cash flow of $18 million against $223 million of capital spending paid.
- Debt repayment and refinancing plans, floating-rate exposure, covenant headroom and continued access to revolving facilities.
- Actual closure, restructuring and start-up costs for the Norwalk and CRB projects compared with management’s estimates.
- Whether planned capital investment, cost savings and integration benefits are achieved amid commodity, energy, supply-chain and geopolitical risks.