Graphic Packaging(GPK)2023-02-09 20:04Environmental Compliance and Sustainability - The company spent $9 million in 2022 on environmental compliance projects, with estimated spending of $30 million in 2023 and $23 million in 2024, primarily for wastewater treatment system upgrades at the Augusta, Georgia mill[67] - Climate change presents both challenges and opportunities, with potential regulatory costs and increased demand for lower-carbon products and technologies[67] - The company's Vision 2025 outlines plans for sustainable growth, focusing on long-term earnings growth while prioritizing people and the planet[68] Cost and Risk Management - The company faces risks from significant increases in raw material, energy, and transportation costs, which could adversely impact financial results if unable to pass on costs to customers[73] - Productivity improvements and global continuous improvement initiatives are used to reduce costs and build supply chain resilience, though success is subject to operational and economic uncertainties[74] - Changing customer and consumer preferences, including environmental concerns, could impact sales volumes if the company fails to adapt[75] - Competition from other manufacturers and product substitution, driven by price, quality, and environmental concerns, could adversely affect financial results[76] - Approximately 62% of the company's employees are unionized, posing risks of work slowdowns or strikes that could negatively impact financial results[81] - Capital spending on projects may not achieve desired benefits, potentially impacting cash flow and operating results[87] Financial Performance and Metrics - Net sales of $9,440 million in 2022, up from $7,156 million in 2021[233] - Net income attributable to Graphic Packaging Holding Company of $522 million in 2022, compared to $204 million in 2021[233] - Total cash consideration for the AR Packaging acquisition was $1,412 million, with a final purchase price allocation of $1,487 million[321][324] - Net sales from AR Packaging of $1,135 million and a loss from operations of $17 million in 2022[325] - Short-term debt and current portion of long-term debt totaling $53 million in 2022, down from $279 million in 2021[328] - Total assets decreased from $10,457 million in 2021 to $10,328 million in 2022, a decline of 1.2%[240] - Net income increased significantly from $216 million in 2021 to $522 million in 2022, a growth of 141.7%[246] - Cash and cash equivalents decreased from $172 million in 2021 to $150 million in 2022, a decline of 12.8%[240] - Long-term debt decreased from $5,515 million in 2021 to $5,200 million in 2022, a reduction of 5.7%[240] - The company paid cash dividends of $92 million in 2022, compared to $87 million in 2021, an increase of 5.7%[301] - Net cash provided by operating activities increased from $609 million in 2021 to $1,090 million in 2022, a growth of 79%[246] - Capital spending decreased from $775 million in 2021 to $522 million in 2022, a reduction of 32.6%[246] - The company increased its quarterly dividend by 33% to $0.10 per share in September 2022[301] - Retained earnings grew from $66 million in 2021 to $469 million in 2022, an increase of 610.6%[240] - Total equity increased from $1,893 million in 2021 to $2,150 million in 2022, a growth of 13.6%[240] - Net receivables increased to $879 million in 2022 from $859 million in 2021, with trade receivables rising to $804 million from $785 million[309] - Inventories, net grew to $1,606 million in 2022 from $1,387 million in 2021, driven by increases in raw materials ($645 million from $473 million) and work in progress ($218 million from $194 million)[309] - Property, plant and equipment, net decreased slightly to $4,579 million in 2022 from $4,677 million in 2021, with machinery and equipment increasing to $7,383 million from $6,753 million[311] - Cash flow used in operations due to changes in operating assets and liabilities was $218 million in 2022, compared to $229 million in 2021, with significant impacts from inventories ($268 million) and receivables ($184 million)[313] - The company acquired Americraft Carton Inc. for $292 million in July 2021, including seven converting plants, with final purchase price allocation showing $78 million in goodwill[315][319] - AR Packaging was acquired in November 2021, adding 30 converting plants in 13 countries, enhancing the company's European presence and innovation capabilities[320] - Long-term debt excluding current portion decreased to $5,230 million in 2022 from $5,552 million in 2021, with senior secured revolving credit facilities at $634 million[331] - The company redeemed its 4.875% Senior Notes due in 2022 using $250 million drawn from senior secured domestic revolving credit facilities[333] - Graphic Packaging operates as a leading fiber-based consumer packaging provider, serving prominent global brands in beverage, food, and foodservice sectors[249] - The company focuses on innovative, fiber-based packaging solutions, leveraging its low-cost paperboard mills and global packaging network[250] - GPIP purchased 32.5 million partnership units from IP for $500 million in cash during 2020, fully redeeming 18.2 million units[252] - On February 19, 2021, GPIP purchased 9.3 million partnership units from IP for $150 million in cash, and IP exchanged 15.3 million units for GPHC common stock[252] - As of May 21, 2021, IP exchanged its remaining 22.8 million partnership units for GPHC common stock, resulting in IP having no ownership interest in GPIP[252] - The Company currently owns 100% of GPIP after IP's final exchange in 2021[253] - Receivables sold and derecognized in 2022 were $3,299 million, compared to $2,947 million in 2021[260] - The Company sold receivables of $1,124 million in 2022 related to supply chain financing arrangements, up from $693 million in 2021[261] - Depreciation expense for 2022 was $463 million, compared to $420 million in 2021 and $414 million in 2020[268] - Amortization expense for 2022 was $90 million, compared to $69 million in 2021 and $62 million in 2020[270] - Goodwill balance at December 31, 2022, was $1,979 million, with $980 million in Americas Paperboard Packaging and $481 million in Europe Paperboard Packaging[276] - Asset retirement obligations at December 31, 2022, were $13 million, primarily related to landfill closure and post-closure costs[278] - Revenue recognized from contracts with customers for the years ended December 31, 2022, 2021, and 2020 was $9,410 million, $7,131 million, and $6,537 million, respectively[283] - Research and development expenses for the years ended December 31, 2022, 2021, and 2020 were $14 million, $10 million, and $10 million, respectively[287] - Total charges associated with business combinations, shutdown and other special charges, and exit activities for the year ended December 31, 2022 were $131 million, compared to $138 million in 2021 and $61 million in 2020[290] - The company's capital investments in 2022 were $430 million ($549 million paid), compared to $899 million ($802 million paid) in 2021[189] - Net sales from operations outside of the U.S. represented approximately 29% of the company's net sales in 2022[192] - The company recorded a net currency translation adjustment loss of $148 million for the year ended December 31, 2022, due to changes in the U.S. dollar exchange rate against other currencies[192] - The company completed the acquisition of AR Packaging on November 1, 2021, for $1,412 million, net of cash acquired of $75 million[198] - Total capital investment for 2023 is expected to be in the range of 7% to 8% of sales[214] - The company's contract assets as of December 31, 2022 and 2021 were $8 million and $17 million, respectively, while contract liabilities were $65 million and $61 million, respectively[285] - The company's valuation allowance against net deferred tax assets as of December 31, 2022 and 2021 was $57 million and $38 million, respectively[210] - The company increased its estimated withdrawal liability for multi-employment benefit plans by $12 million in Q2 2020 and recorded a $4 million reduction in Q4 2020 due to a settlement agreement[297] - The company repurchased $28 million worth of shares in 2022, with an average price of $20.91 per share, and had $119 million remaining for repurchases under the 2019 share repurchase program[300] - GPIL issued $400 million in 0.821% Senior Secured Notes due 2024 and $400 million in 1.512% Senior Secured Notes due 2026 in March 2021, using proceeds to repay term loan borrowings[335] - GPIL extended the maturity of $975 million in senior secured term loans to April 2026 and added $400 million to its senior secured revolving credit facilities under the Fourth Amended and Restated Credit Agreement[336] - GPIL issued $100 million in tax-exempt green bonds in September 2021, with proceeds used to fund the CRB platform optimization project, including a new CRB machine at its Kalamazoo mill[339] - GPIL completed a private offering of $400 million in 3.750% senior unsecured notes due 2030 and €290 million in 2.625% senior unsecured notes due 2029 in November 2021, using proceeds to repay term loans and revolver borrowings[342] - As of December 31, 2022, the company had $1,850 million in total commitments under its Senior Secured Domestic Revolving Credit Facility, with $565 million outstanding and $1,262 million available[346] - Long-term debt maturities for the company as of December 31, 2022, include $752 million due in 2024 and $1,794 million due in 2026, with total long-term debt of $5,097 million[346] - The company incurred total lease costs of $138 million in 2022, including $82 million in operating lease costs and $11 million in finance lease amortization[352] - The company was in compliance with all covenants under its Current Credit Agreement and Indentures as of December 31, 2022[348] - Operating lease right-of-use assets decreased from $258 million in 2021 to $245 million in 2022[354] - Total operating lease liabilities decreased from $266 million in 2021 to $250 million in 2022[354] - Total finance lease liabilities and financing obligations increased from $146 million in 2021 to $170 million in 2022[354] - Weighted average remaining lease term for operating leases increased from 6 years in 2021 to 7 years in 2022[354] - Weighted average discount rate for operating leases increased from 2.74% in 2021 to 3.76% in 2022[354] - Total lease payments for operating leases are $281 million, with imputed interest of $31 million, resulting in a total of $250 million[355] - Total lease payments for finance leases are $257 million, with imputed interest of $87 million, resulting in a total of $170 million[355] - As of December 31, 2022, there were 10.0 million shares remaining available to be granted under the 2014 Plan[358] - RSUs granted to employees in 2022 had a weighted-average grant date fair value of $20.19, up from $16.14 in 2021[360] - The unrecognized expense related to RSUs at December 31, 2022 is approximately $40 million, expected to be recognized over a weighted average period of 2 years[360] Intellectual Property and Innovation - The company's future success depends on its ability to develop new products and protect intellectual property, including technologies like Fridge Vendor and KeelClip[86] Legal and Contractual Agreements - Third Supplemental Indenture dated June 25, 2019, involving Graphic Packaging International, LLC and U.S. Bank, National Association, related to the 3.5% Senior Notes due 2028[509] - Fourth Supplemental Indenture dated March 6, 2020, involving Graphic Packaging International, LLC and U.S. Bank National Association, related to the 3.5% Senior Notes due 2028[509] - Fifth Supplemental Indenture dated August 20, 2020, involving Graphic Packaging International, LLC and U.S. Bank National Association, related to the 3.5% Senior Notes due 2029[509] - Sixth Supplemental Indenture dated March 8, 2021, involving Graphic Packaging International, LLC and U.S. Bank, N.A., related to the 3.5% Senior Notes due 2029[509] - Seventh Supplemental Indenture dated November 19, 2021, involving Graphic Packaging International, LLC and U.S. Bank, National Association, related to the 3.5% Senior Notes due 2029[509] - Eighth Supplemental Indenture dated November 19, 2021, involving Graphic Packaging International, LLC, U.S. Bank, National Association, and Elavon Financial Services DAC, related to the 3.5% Senior Notes due 2029[509] - Fourth Amended and Restated Credit Agreement dated April 1, 2021, involving Graphic Packaging International, LLC and Bank of America, N.A., as Administrative Agent[511] - Share Purchase Agreement dated May 12, 2021, involving Sarcina Holdings S.a.r.l. and Graphic Packaging International Europe Holdings B.V.[511] - Consent and Waiver Agreement dated May 19, 2021, involving Graphic Packaging International Partners, LLC and International Paper Company[511] - Directors' Non-Qualified Deferred Compensation Plan effective January 1, 2021[511] Hedging and Financial Instruments - The company has entered into natural gas swap contracts to hedge a portion of its forecasted natural gas usage for 2023, with realized gains and losses included in financial results concurrently with the recognition of the commodity consumed[193] - The company has no outstanding interest rate swaps as of December 31, 2022[218] - The company has previously used forward exchange contracts to manage risks associated with foreign currency transactions, with changes in fair value recognized in Accumulated Other Comprehensive Loss[221] - No outstanding forward exchange contracts as of December 31, 2022 and 2021, with multiple contracts expiring in 2020[222] - The company drew €210 million from a delayed draw term loan facility and issued €290 million in senior unsecured notes in 2021, designated as a net investment hedge[224] - Foreign currency forward exchange contracts totaling $111 million in net notional amounts as of December 31, 2022[225] - Realized losses of $48 million from deal contingent foreign exchange forward contracts in 2021[226] - Natural gas swap contracts with a net liability of $12 million as of December 31, 2022[227] Impairment and Valuation - The company concluded that all reporting units with goodwill have a fair value exceeding their carrying value, with the Foodservice and Europe reporting units exceeding by 83% and 42%, respectively[205] - The company recorded a $12 million non-cash impairment charge for goodwill related to its folding carton plants in Russia, reducing the carrying value of goodwill for these facilities to zero[206] - The company classified its two folding carton plants in Russia as held for sale and recorded a non-cash impairment charge of $84 million in 2022, in addition to the $12 million goodwill impairment[207] Depreciation, Amortization, and Pension - The company expects depreciation and amortization expense, including pension amortization, to be approximately $570 million in 2023[216] - The company anticipates pension plan contributions to be between $15 million and $25 million in 2023[216] Tax and Deferred Income - The company has not provided for deferred U.S. income taxes on outside basis differences of approximately $44 million in its other international subsidiaries due to the intention to indefinitely reinvest these earnings outside the U.S.[212] - The company has elected to recognize global intangible low-taxed income (GILTI) as a period cost as incurred, with no deferred taxes recognized for basis differences expected to impact the amount of the GILTI inclusion upon reversal[213] Shareholder and Equity Information - The company repurchased $28 million worth of shares in 2022, with an average price of $20.91 per share, and had $119 million remaining for repurchases under the 2019 share repurchase program[300] - As of December 31, 2022, there were 10.0 million shares remaining available to be granted under the 2014 Plan[358] - RSUs granted to employees in 2022 had a weighted-average grant date fair value of $20.19, up from $16.14 in 2021[360] - The unrecognized expense related to RSUs at December 31, 2022 is approximately $40 million, expected to be recognized over a weighted average period of 2 years[360]