Business context and reporting period
Graphic Packaging Holding Company is a global fiber-based consumer packaging producer, with paperboard mills and packaging businesses serving food, beverage, foodservice and other consumer markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $2.349 billion | $2.451 billion | $7.179 billion | $7.054 billion |
| Income from operations | $287 million | $293 million | $884 million | $638 million |
| Net income | $170 million | $193 million | $527 million | $366 million |
| Diluted EPS | $0.55 | $0.62 | $1.70 | $1.18 |
| Operating margin (approx.) | 12.2% | 12.0% | 12.3% | 9.0% |
| Net margin (approx.) | 7.2% | 7.9% | 7.3% | 5.2% |
- Cash flow: Nine-month operating cash flow was $702 million, versus $620 million. Investing cash outflow was $875 million, including $592 million of capital spending and net acquisition spending. Financing cash inflow was $188 million. Cash and cash equivalents were $146 million on the balance sheet at September 30; the cash-flow statement reports $162 million including $16 million classified as held for sale.
- Debt and liquidity: Disclosed aggregate principal debt was $5.608 billion. The balance sheet reported $762 million of short-term debt and current maturities and $4.821 billion of long-term debt. Revolving facilities had $1.067 billion available. The company reported leverage of 2.74x against a maximum of 4.25x and interest coverage of 7.98x against a minimum of 3.00x; it was in covenant compliance.
- Balance sheet: Current assets were $2.858 billion and current liabilities $2.438 billion, for a current ratio of approximately 1.17x. Inventories were $1.741 billion, up from $1.606 billion at year-end 2022. Total equity was $2.541 billion.
- Capital returns: The company paid $92 million in dividends and repurchased $37 million of shares in the first nine months. Its quarterly dividend was $0.10 per share. It reported $582 million available under its two repurchase authorizations.
Material changes versus prior periods
- Third-quarter sales fell 4%, mainly from lower organic and open-market volumes; higher pricing, new products, favorable currency and the Bell acquisition partly offset the decline. Nine-month sales increased 2%, with pricing and new products offsetting lower volumes and unfavorable currency.
- Third-quarter operating income declined 2%, while net income declined 12%. Operating results faced lower volumes, labor and other cost inflation, market downtime, and restructuring and impairment charges; pricing, cost savings, commodity deflation and currency partly offset these pressures. Higher interest expense—$62 million versus $53 million—also weighed on quarterly earnings.
- Nine-month operating income rose 39% and net income rose 44%. Higher pricing and cost savings contributed, while the prior-year period included substantially higher Russia-related impairment charges. Nine-month interest expense increased to $180 million from $143 million.
- Segment results were mixed: third-quarter Americas Paperboard Packaging operating income rose to $286 million from $229 million; Paperboard Mills reported a $36 million operating loss versus $12 million income; Europe Paperboard Packaging operating income was $38 million versus $40 million. Bell contributed to Americas packaging results following its September acquisition.
Outlook, management commentary, risks and unusual items
- Management expects 2023 capital investment of approximately $800 million, depreciation and amortization of $615 million to $625 million, and pension contributions of $10 million to $20 million. The filing provides no full-year revenue or earnings guidance.
- The company expects operating cash flow and revolving-credit availability to fund requirements for the foreseeable future, including at least the next 12 months, while noting there is no assurance. Material uses include capital expenditures, debt service, taxes, working capital, dividends and share repurchases.
- The company is investing approximately $1 billion in a new coated recycled paperboard mill in Waco, Texas, and plans mill and packaging-plant closures and production consolidation. Nine-month restructuring and exit costs were $80 million. The company also expects additional charges for certain mill and folding-carton closures and Waco start-up costs; it expects $5 million to $10 million of further charges for decommissioning the Kalamazoo K3 machine.
- The company acquired Tama Paperboard for approximately $100 million in January and Bell for $264 million in September. Tama’s mill was subsequently closed. It discontinued the Texarkana machine-conversion project and recorded $14 million of charges through September for the project write-off.
- The planned sale of the Russian operations remained pending, with management expecting completion in 2023. The disposal group had an accumulated pretax loss of $93 million, including $2 million of third-quarter impairment; Russia contributed approximately 1% of nine-month sales and less than 1% of EBITDA.
- Key stated risks include raw-material, energy and labor cost volatility; limited ability to pass through cost increases; demand and volume weakness; competition and packaging substitution; execution of cost savings and strategic investments; foreign-exchange exposure; debt and refinancing needs; and environmental, legal and regulatory matters. The company stated there were no material changes to previously disclosed risk factors and did not expect pending ordinary-course litigation to have a material adverse effect.
Important facts for investors to verify
- Progress, cost, timing and expected capacity benefits of the Waco mill investment, as well as the actual cash capital-spending profile.
- Whether planned closures, K3 decommissioning and discontinued Texarkana work generate further charges or savings beyond estimates.
- Bell’s contribution to revenue, margins and cash flow, and the final purchase-price allocation, which remained preliminary.
- Refinancing or repayment plans for the $737 million of long-term debt classified as current, including notes due in 2024, and the impact of floating rates and refinancing costs.
- Completion and final proceeds or costs of the Russian business sale, including any further impairment and tax effects.
- Working-capital movements and reliance on receivables-sale programs: nine-month receivables sold and derecognized were $2.811 billion, while operating cash flow included a $386 million use from changes in operating assets and liabilities.