Why Graphic Packaging's leverage rose as net debt fell

Graphic Packaging reduced net debt by $300 million between June and September. Its headline leverage ratio still climbed, as weaker earnings outweighed the smaller debt burden.

The packaging maker has now secured more time under its bank covenants. A November 2 amendment extends relief through September 2028, giving the company more room while it works to rebuild profit.

The cash recovery is substantial. Understanding where it came from helps explain why lower debt has not yet produced a lower leverage ratio.

The earnings denominator shrank

Net debt fell to $5.183 billion from $5.483 billion at June 30. Yet the ratio of net debt to trailing adjusted EBITDA rose to 4.8 times from 4.7 times.

Research by Ticker Byline shows that the comparison reflects a shrinking earnings base: reported trailing adjusted EBITDA fell to $1.081 billion from $1.173 billion over the same period. Debt fell, but the earnings used to measure its weight fell faster.

Adjusted EBITDA measures earnings before interest, taxes, depreciation and amortization, with selected other items removed. The latest quarter produced $289 million, down from $383 million a year earlier, despite nearly flat sales.

Most of the cash improvement came from spending less

Our comparison also shows that lower capital spending supplied $521 million, or about 81%, of the $646 million improvement in nine-month adjusted cash flow. The measure reached $314 million after a $332 million outflow in the comparable period.

GAAP operating cash flow declined to $295 million from $320 million. Higher net cash receipts from sold receivables, classified in investing activities, and larger adjustments for selected cash costs completed the improvement.

The fall in capital spending therefore matters more than the headline cash rebound alone suggests. The smaller group-wide investment bill comes as the Waco paperboard facility moves through its production ramp.

Banks extended the timetable

The new credit amendment raises the permitted bank leverage ratio for March 2027 to 5.25 times from 4.75 times. It then steps down, reaching 4.25 times from December 2028.

The bank calculation differs from the headline ratio. It was 4.44 times at September 30, versus 4.37 times in June. Graphic Packaging reported compliance and described the amendment as a way to reduce risk from uncertain economic conditions.

The latest quarter offered some progress

Quarterly adjusted EBITDA margin improved to 13.2% from 11.3% in June, continuing the sequential improvement management expected in August. The company now targets about $90 million of structural savings this year, up from $85 million previously.

Its approximately $1.05 billion annual adjusted EBITDA outlook follows August's expectation of finishing at the low end of the existing range. Annual adjusted cash-flow guidance remains $600 million to $700 million.

The next test is whether further savings and pricing gains strengthen earnings as cash reduces debt. The Graphic Packaging company profile tracks those targets, the cash-flow bridge and the revised bank limits.