Graphic Packaging Holding Company — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. The company manufactures consumer packaging primarily from renewable or recycled paperboard and reports Americas Paperboard Packaging, Europe Paperboard Packaging, and Paperboard Manufacturing segments. Amounts below are in millions except per-share data.
Key financial results
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Net sales | $2,259 | $2,438 | -7% |
| Income from operations | $278 | $330 | -16% |
| Operating margin | 12.3% | 13.5% | -1.2 percentage points |
| Net income | $165 | $207 | -20% |
| Diluted EPS | $0.53 | $0.67 | -$0.14 |
| Net cash from operating activities | $3 | $60 | -$57 |
| Capital spending | $331 | $196 | +$135 |
Net sales fell mainly on lower open-market paperboard sales, including bleached paperboard, fewer packaging shipping days and Easter timing, lower pricing, and the 2023 Russia divestiture. Bell, innovation sales growth, and favorable foreign exchange partly offset the decline. Operating income also reflected lower paperboard production and sales, packaging volume and mix, and higher exit-related accelerated depreciation; cost savings and productivity improvements provided offsets. Interest expense was $59, versus $58.
Segment sales and operating income were: Americas Packaging, $1,531 and $281 (prior-year $1,544 and $269); Europe Packaging, $470 and $19 (prior-year $532 and $26); and Paperboard Manufacturing, $223 and a loss of $26 (prior-year $316 and income of $27). The manufacturing segment’s deterioration reflected lower open-market paperboard pricing, production and sales, particularly bleached paperboard.
Financial position, cash flow and liquidity
- Cash was $136 at March 31, 2024, compared with $162 at year-end 2023. Current assets were $2,923 and current liabilities $2,366.
- Short-term debt and current maturities were $756; long-term debt was $4,930. Combined reported debt was approximately $5,686, up from $5,373 at year-end. Approximately 24% of total debt was floating-rate.
- Operating cash flow of $3 and capital spending of $331 imply a simple operating-cash-flow-less-capital-spending deficit of about $328. Investing cash use was $311, while financing provided $287. Cash declined by $26 during the quarter.
- Revolving facilities had $1,195 available at quarter-end. The company reported compliance with debt covenants: leverage ratio 2.83 against a maximum of 4.25, and interest expense ratio 7.68 against a minimum of 3.00.
Material changes and notable items
- On February 20, 2024, the company agreed to sell its Augusta, Georgia paperboard facility to Clearwater Paper for approximately $700 in cash. Closing was expected in Q2 2024, subject to customary conditions. Related assets and liabilities were classified as held for sale; the sale was not treated as discontinued operations.
- The company borrowed $250 through new senior secured term facilities in March, with maturities in 2029, and used the proceeds to repay part of its revolving borrowings. Two senior-note issues totaling $700 are due in 2024.
- Capital spending increased primarily because of construction of the new recycled paperboard facility in Waco, Texas, part of an approximately $1 billion investment announced in 2023. Multiple packaging and paperboard facility closures and network consolidation are ongoing.
- Q1 exit costs were $21, including $12 of accelerated depreciation. The company expects further closure and start-up costs through 2026; it estimates Waco start-up charges of approximately $25–$30 through that year.
- The quarterly dividend was $0.10 per share, with $31 of dividends paid during the quarter. No shares were repurchased under the 2019 repurchase program in Q1.
Outlook, risks and contingencies
No specific revenue or earnings guidance for 2024 is provided in the filing text. Management expects cash from operations, available revolving credit and other financing sources to meet requirements for the foreseeable future, including at least the next 12 months, and identifies proceeds from the Augusta sale as a future liquidity source. The company expects 2024 pension contributions of $10–$20 and postretirement health-care contributions of approximately $2. It had hedged about 65% of expected natural-gas usage for the remainder of 2024.
Management cites exposure to demand and consumer preferences, pricing and competition, raw-material and energy costs, inflation, interest rates, foreign currency, international operations, execution of cost and productivity plans, debt and refinancing needs, and regulatory, litigation and environmental matters. The filing says risk factors were not materially changed from the 2023 Form 10-K. The company considers accrued and reasonably possible environmental losses not material, but says some future investigation or remediation costs cannot currently be estimated. Ordinary-course lawsuits are not expected by management to have a material adverse effect. The company also notes restrictions on moving currency from Russia that affected collection prospects on its vendor loan; it previously recorded a $48 valuation allowance against that receivable.
Investor facts to verify
- Whether the Augusta sale closed as expected, the final proceeds and any resulting debt reduction or other use of cash.
- Progress on refinancing or repayment of the $700 of senior notes due in 2024, and the effect of floating rates on interest expense.
- Whether operating cash generation improves as capital spending on Waco and other projects continues.
- Recovery in open-market paperboard demand, production and pricing, especially in Paperboard Manufacturing.
- Actual closure, restructuring and Waco start-up costs compared with the company’s estimates and timing.