Graphic Packaging(GPK) - 2022 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended June 30, 2022, reflect significant growth in Net Sales and Income from Operations, primarily driven by acquisitions and higher pricing, which were partially offset by commodity inflation and impairment charges related to the divestiture of its Russian business. The balance sheet shows an increase in inventories and stable total assets, while cash flow from operations saw a slight decrease due to higher working capital needs Condensed Consolidated Statements of Operations | Metric | Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $2,358 million | $1,737 million | $4,603 million | $3,386 million | | Income from Operations | $152 million | $95 million | $345 million | $203 million | | Net Income Attributable to GPHC | $66 million | $38 million | $173 million | $92 million | | Diluted EPS | $0.21 | $0.13 | $0.56 | $0.32 | Condensed Consolidated Balance Sheets | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $2,684 million | $2,502 million | | Inventories, Net | $1,533 million | $1,387 million | | Total Assets | $10,397 million | $10,457 million | | Long-Term Debt | $5,506 million | $5,515 million | | Total Equity | $1,892 million | $1,893 million | Condensed Consolidated Statements of Cash Flows | Metric (Six Months Ended June 30) | 2022 | 2021 | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $288 million | $305 million | | Net Cash Used in Investing Activities | ($311) million | ($289) million | | Net Cash Used In Financing Activities | ($30) million | ($105) million | | Net Decrease in Cash and Cash Equivalents | ($60) million | ($90) million | Notes to Condensed Consolidated Financial Statements - The company completed the acquisition of AR Packaging Group AB on November 1, 2021, for a total cash consideration of $1,412 million, net of cash acquired. This acquisition is reported within the Europe reportable segment[60][61] - In Q2 2022, the company began divesting its two Russian folding carton plants, resulting in a goodwill impairment charge of $12 million and a further loss of $80 million to adjust the carrying value of net assets to fair value less costs to sell[127][129] | Segment | Net Sales (Q2 2022) | Income from Ops (Q2 2022) | Net Sales (H1 2022) | Income from Ops (H1 2022) | | :--- | :--- | :--- | :--- | :--- | | Paperboard Mills | $292M | ($6M) | $588M | $5M | | Americas Paperboard Packaging | $1,534M | $207M | $2,956M | $360M | | Europe Paperboard Packaging | $493M | ($46M) | $979M | ($9M) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 36% year-over-year increase in Q2 Net Sales to acquisitions, higher pricing, and favorable product mix, which more than offset lower open market sales and unfavorable foreign exchange. Income from Operations grew 60% despite significant commodity inflation of $210 million in the quarter and a $92 million impairment charge from the planned Russia divestiture. The company maintains adequate liquidity through cash from operations and available credit facilities, and remains in compliance with all debt covenants. The business outlook for 2022 anticipates capital investments between $450 million and $500 million Overview of Second Quarter 2022 Results - Net Sales for Q2 2022 increased by 36% ($621 million) YoY to $2,358 million, driven by acquisitions (Americraft and AR Packaging), higher selling prices, and increased volume from conversions to fiber-based packaging[145] - Income from Operations for Q2 2022 grew 60% ($57 million) YoY to $152 million. This growth was achieved despite commodity and other inflation, and a $92 million impairment charge related to the planned sale of its Russian operations[145] Results of Operations | Change in Net Sales (Q2 2022 vs Q2 2021) | Amount (in millions) | | :--- | :--- | | 2021 Net Sales | $1,737 | | Price | +$379 | | Volume/Mix | +$278 | | Foreign Exchange | -$36 | | 2022 Net Sales | $2,358 | | Change in Income from Operations (Q2 2022 vs Q2 2021) | Amount (in millions) | | :--- | :--- | | 2021 Income from Operations | $95 | | Price | +$278 | | Volume/Mix | +$61 | | Inflation | -$210 | | Foreign Exchange | -$16 | | Other | -$56 | | 2022 Income from Operations | $152 | - For the first six months of 2022, commodity inflation, labor, and other costs increased by $405 million compared to the same period in 2021. Key drivers were external board ($83M), mill chemicals ($63M), energy ($56M), and secondary fiber ($47M)[157] Financial Condition, Liquidity and Capital Resources - Net cash from operating activities decreased to $288 million in H1 2022 from $305 million in H1 2021, primarily due to higher working capital balances[179] - As of June 30, 2022, the company was in compliance with its debt covenants, with a Consolidated Total Leverage Ratio of 3.98 to 1.00 (below the maximum of 5.00 to 1.00) and a Consolidated Interest Expense Ratio of 9.51 to 1.00 (above the minimum of 3.00 to 1.00)[192] - Capital investment in the first six months of 2022 was $241 million ($361 million paid), compared to $395 million ($346 million paid) in the same period of 2021[194] Business Outlook - The company expects total capital investment for the full year 2022 to be in the range of $450 million to $500 million[203] - For 2022, the company anticipates depreciation and amortization of approximately $560 million and pension plan contributions between $10 million and $20 million[204] Quantitative and Qualitative Disclosure about Market Risk The company reports no significant changes in its market risk exposures or derivative instruments during the first six months of 2022 compared to what was disclosed in its 2021 Annual Report on Form 10-K - There have been no significant developments with respect to derivatives or exposure to market risk during the first six months of 2022[205] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 30, 2022. No material changes to internal control over financial reporting occurred during the quarter - Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[206] - There were no changes in internal control over financial reporting during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[207] PART II — OTHER INFORMATION Legal Proceedings The company is involved in various lawsuits arising from the ordinary course of business but does not believe their outcomes will have a material adverse effect on its financial position, results, or cash flows - The company does not believe that the disposition of ongoing lawsuits will have a material adverse effect on its consolidated financial position, results of operations, or cash flows[210] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's 2021 Annual Report on Form 10-K - No material changes from the risk factors previously disclosed in the Company's 2021 Annual Report on Form 10-K have occurred[211] Unregistered Sales of Equity Securities and Use of Proceeds During the second quarter of 2022, the company repurchased 379,000 shares of its common stock at an average price of $20.46 per share as part of its previously announced $500 million share repurchase program | Period (2022) | Total Shares Purchased | Average Price Paid | | :--- | :--- | :--- | | April | 0 | N/A | | May | 43,000 | $21.47 | | June | 336,000 | $20.34 | | Q2 Total | 379,000 | $20.46 |