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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2019
or
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER: 001-33988
Graphic Packaging Holding Company
(Exact name of registrant as specified in its charter)
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Delaware | 26-0405422 |
(State or other jurisdiction of | (I.R.S. employer |
incorporation or organization) | identification no.) |
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1500 Riveredge Parkway, Suite 100 | |
Atlanta, Georgia | 30328 |
(Address of principal executive offices) | (Zip Code) |
(770) 240-7200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ | Accelerated filer o | Smaller reporting company o |
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Non-accelerated filer o (Do not check if a smaller reporting company) | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
As of April 22, 2019, there were 295,280,408 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
Information Concerning Forward-Looking Statements
Certain statements regarding the expectations of Graphic Packaging Holding Company (“GPHC” and, together with its subsidiaries, the “Company”), including, but not limited to, the availability of net operating losses to offset U.S. federal income taxes and the timing related to the Company's future U.S. federal income tax payments, reclassification of gains on derivative instruments, capital investment, depreciation and amortization, interest expense, pension expense, pension plan contributions, and postretirement health care benefit payments in this report constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations. These risks and uncertainties include, but are not limited to, inflation of and volatility in raw material and energy costs, changes in consumer buying habits and product preferences, competition with other paperboard manufacturers and product substitution, the Company’s ability to implement its business strategies, including strategic acquisitions, the Company's ability to successfully integrate acquisitions, productivity initiatives and cost reduction plans, the Company’s debt level, currency movements and other risks of conducting business internationally, and the impact of regulatory and litigation matters, including those that could impact the Company’s ability to utilize its net operating losses to offset taxable income and those that impact the Company's ability to protect and use its intellectual property. Undue reliance should not be placed on such forward-looking statements, as such statements speak only as of the date on which they are made and the Company undertakes no obligation to update such statements, except as may be required by law. Additional information regarding these and other risks is contained in Part I, "Item 1A., Risk Factors" of the Company's 2018 Annual Report on Form 10-K, and in other filings with the Securities and Exchange Commission.
TABLE OF CONTENTS
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EX-31.1 | |
EX-31.2 | |
EX-32.1 | |
EX-32.2 | |
XBRL Content | |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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| Three Months Ended |
| March 31, |
In millions, except per share amounts | 2019 | | 2018 |
Net Sales | $ | 1,505.9 |
| | $ | 1,477.4 |
|
Cost of Sales | 1,239.8 |
| | 1,253.5 |
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Selling, General and Administrative | 124.7 |
| | 122.7 |
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Other Expense, Net | 1.2 |
| | 0.9 |
|
Business Combinations, Gain on Sale of Assets and Shutdown and Other Special Charges, Net | 6.2 |
| | 26.3 |
|
Income from Operations | 134.0 |
| | 74.0 |
|
Nonoperating Pension and Postretirement Benefit (Expense) Income | (0.1 | ) | | 4.2 |
|
Interest Expense, Net | (35.0 | ) | | (28.8 | ) |
Loss on Modification or Extinguishment of Debt | — |
| | (1.9 | ) |
Income before Income Taxes and Equity Income of Unconsolidated Entity | 98.9 |
| | 47.5 |
|
Income Tax Expense | (21.0 | ) | | (5.1 | ) |
Income before Equity Income of Unconsolidated Entity | 77.9 |
| | 42.4 |
|
Equity Income of Unconsolidated Entity | 0.2 |
| | 0.3 |
|
Net Income | 78.1 |
| | 42.7 |
|
Net Income Attributable to Noncontrolling Interest | (20.2 | ) | | (12.8 | ) |
Net Income Attributable to Graphic Packaging Holding Company | $ | 57.9 |
| | $ | 29.9 |
|
| | | |
Net Income Per Share Attributable to Graphic Packaging Holding Company — Basic | $ | 0.19 |
|
| $ | 0.10 |
|
Net Income Per Share Attributable to Graphic Packaging Holding Company — Diluted | $ | 0.19 |
|
| $ | 0.10 |
|
Cash Dividends Declared Per Share | $ | 0.075 |
| | $ | 0.075 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
|
| | | | | | | | | | | | |
| Three Months Ended |
| March 31, |
In millions | 2019 |
| Graphic Packaging Holding Company | Noncontrolling Interest | Redeemable Noncontrolling Interest | Total |
Net Income | $ | 57.9 |
| $ | 15.6 |
| $ | 4.6 |
| $ | 78.1 |
|
Other Comprehensive (Loss) Income, Net of Tax: | | | | |
Derivative Instruments | (0.4 | ) | (0.1 | ) | — |
| (0.5 | ) |
Pension and Postretirement Benefit Plans | 1.2 |
| 0.2 |
| 0.1 |
| 1.5 |
|
Currency Translation Adjustment | 3.9 |
| 0.9 |
| 0.2 |
| 5.0 |
|
Total Other Comprehensive Income, Net of Tax | 4.7 |
| 1.0 |
| 0.3 |
| 6.0 |
|
Total Comprehensive Income | $ | 62.6 |
| $ | 16.6 |
| $ | 4.9 |
| $ | 84.1 |
|
|
| | | | | | | | | | | | |
| Three Months Ended |
| March 31, |
In millions | 2018 |
| Graphic Packaging Holding Company | Noncontrolling Interest | Redeemable Noncontrolling Interest | Total |
Net Income | $ | 29.9 |
| $ | 9.9 |
| $ | 2.9 |
| $ | 42.7 |
|
Other Comprehensive (Loss) Income, Net of Tax: | | | | |
Derivative Instruments | (0.6 | ) | (0.2 | ) | — |
| (0.8 | ) |
Pension and Postretirement Benefit Plans | 0.5 |
| 0.1 |
| 0.1 |
| 0.7 |
|
Currency Translation Adjustment | 16.0 |
| 3.2 |
| 0.9 |
| 20.1 |
|
Total Other Comprehensive Income, Net of Tax | 15.9 |
| 3.1 |
| 1.0 |
| 20.0 |
|
Total Comprehensive Income | $ | 45.8 |
| $ | 13.0 |
| $ | 3.9 |
| $ | 62.7 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
|
| | | | | | | |
In millions, except share and per share amounts | March 31, 2019 |
| December 31, 2018 |
ASSETS | | | |
| | | |
Current Assets: | | | |
Cash and Cash Equivalents | $ | 62.3 |
| | $ | 70.5 |
|
Receivables, Net | 647.9 |
| | 572.9 |
|
Inventories, Net | 1,072.0 |
| | 1,014.4 |
|
Other Current Assets | 54.7 |
| | 106.0 |
|
Total Current Assets | 1,836.9 |
| | 1,763.8 |
|
Property, Plant and Equipment, Net | 3,204.8 |
| | 3,239.7 |
|
Goodwill | 1,468.0 |
| | 1,460.6 |
|
Intangible Assets, Net | 507.8 |
| | 523.8 |
|
Other Assets | 273.7 |
| | 71.3 |
|
Total Assets | $ | 7,291.2 |
| | $ | 7,059.2 |
|
| | | |
LIABILITIES | | | |
| | | |
Current Liabilities: | | | |
Short-Term Debt and Current Portion of Long-Term Debt | $ | 49.0 |
| | $ | 52.0 |
|
Accounts Payable | 612.8 |
| | 711.6 |
|
Compensation and Employee Benefits | 121.3 |
| | 154.4 |
|
Other Accrued Liabilities | 239.1 |
| | 254.3 |
|
Total Current Liabilities | 1,022.2 |
| | 1,172.3 |
|
Long-Term Debt | 3,129.8 |
| | 2,905.1 |
|
Deferred Income Tax Liabilities | 475.1 |
| | 462.2 |
|
Accrued Pension and Postretirement Benefits | 108.5 |
| | 107.5 |
|
Other Noncurrent Liabilities | 264.4 |
| | 117.8 |
|
|
|
| | |
Redeemable Noncontrolling Interest (Note 14) | 285.9 |
| | 275.8 |
|
| | | |
SHAREHOLDERS’ EQUITY | | | |
Preferred Stock, par value $.01 per share; 100,000,000 shares authorized; no shares issued or outstanding | — |
| | — |
|
Common Stock, par value $.01 per share; 1,000,000,000 shares authorized; 295,337,812 and 299,891,585 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively | 2.9 |
| | 3.0 |
|
Capital in Excess of Par Value | 1,918.1 |
| | 1,944.4 |
|
Retained Earnings | 13.6 |
| | 10.0 |
|
Accumulated Other Comprehensive Loss | (373.2 | ) | | (377.9 | ) |
Total Graphic Packaging Holding Company Shareholders' Equity | 1,561.4 |
| | 1,579.5 |
|
Noncontrolling Interest | 443.9 |
| | 439.0 |
|
Total Equity | 2,005.3 |
| | 2,018.5 |
|
Total Liabilities and Shareholders' Equity | $ | 7,291.2 |
| | $ | 7,059.2 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2019 |
| Common Stock | Capital in Excess of Par Value | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Income (Loss) | | |
In millions, except share amounts | Shares | Amount | Noncontrolling Interests | Total Equity |
Balances at December 31, 2018 | 299,807,779 |
| $ | 3.0 |
| $ | 1,944.4 |
| $ | 10.0 |
| $ | (377.9 | ) | $ | 439.0 |
| $ | 2,018.5 |
|
Net Income | — |
| — |
| — |
| 57.9 |
| — |
| 15.6 |
| 73.5 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | |
Derivative Instruments | — |
| — |
| — |
| — |
| (0.4 | ) | (0.1 | ) | (0.5 | ) |
Pension and Postretirement Benefit Plans | — |
| — |
| — |
| — |
| 1.2 |
| 0.2 |
| 1.4 |
|
Currency Translation Adjustment | — |
| — |
| — |
| — |
| 3.9 |
| 0.9 |
| 4.8 |
|
Repurchase of Common Stock(a) | (5,033,426 | ) | (0.1 | ) | (27.2 | ) | (32.2 | ) | — |
| — |
| (59.5 | ) |
Dividends Declared | — |
| — |
| — |
| (22.1 | ) | — |
| — |
| (22.1 | ) |
Reclassification of Redeemable Noncontrolling Interest for Share Repurchases | — |
| — |
| — |
| — |
| — |
| (6.7 | ) | (6.7 | ) |
Distribution of Membership Interest | — |
| — |
| — |
| — |
| — |
| (5.0 | ) | (5.0 | ) |
Recognition of Stock-Based Compensation, Net | — |
| — |
| 0.9 |
| — |
| — |
| — |
| 0.9 |
|
Issuance of Shares for Stock-Based Awards | 530,196 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Balances at March 31, 2019 | 295,304,549 |
| $ | 2.9 |
| $ | 1,918.1 |
| $ | 13.6 |
| $ | (373.2 | ) | $ | 443.9 |
| $ | 2,005.3 |
|
(a) Includes 33,263 shares repurchased but not yet settled as of March 31, 2019. | | | |
| | | | | | | |
Three months ended March 31, 2018 |
| Common Stock | Capital in Excess of Par Value | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive Income (Loss) | | |
In millions, except share amounts | Shares | Amount | Noncontrolling Interests | Total Equity |
Balances at December 31, 2017 | 309,715,624 |
| $ | 3.1 |
| $ | 1,683.6 |
| $ | (56.0 | ) | $ | (338.8 | ) | $ | — |
| $ | 1,291.9 |
|
NACP Combination | — |
| — |
| 395.1 |
| — |
| — |
| 439.8 |
| 834.9 |
|
Net Income | — |
| — |
| — |
| 29.9 |
| — |
| 9.9 |
| 39.8 |
|
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | |
Derivative Instruments | — |
| — |
| — |
| — |
| (0.6 | ) | (0.2 | ) | (0.8 | ) |
Pension and Postretirement Benefit Plans | — |
| — |
| — |
| — |
| 0.5 |
| 0.1 |
| 0.6 |
|
Currency Translation Adjustment | — |
| — |
| — |
| — |
| 16.0 |
| 3.2 |
| 19.2 |
|
Dividends Declared | — |
| — |
| — |
| (23.3 | ) | — |
| — |
| (23.3 | ) |
Distribution of Membership Interest | — |
| — |
| — |
| — |
| — |
| (3.6 | ) | (3.6 | ) |
Recognition of Stock-Based Compensation, Net | — |
| — |
| (0.9 | ) | — |
| — |
| — |
| (0.9 | ) |
Issuance of Shares for Stock-Based Awards | 563,903 |
| — |
| — |
| — |
| — |
| — |
| — |
|
Balances at March 31, 2018 | 310,279,527 |
| $ | 3.1 |
| $ | 2,077.8 |
| $ | (49.4 | ) | $ | (322.9 | ) | $ | 449.2 |
| $ | 2,157.8 |
|
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) |
| | | | | | | |
| Three Months Ended |
| March 31, |
In millions | 2019 | | 2018 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net Income | $ | 78.1 |
| | $ | 42.7 |
|
Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities: | | | |
Depreciation and Amortization | 117.1 |
| | 109.8 |
|
Deferred Income Taxes | 12.4 |
| | (3.1 | ) |
Amount of Postretirement Expense Greater (Less) Than Funding | 2.4 |
| | (1.2 | ) |
Gain on the Sale of Assets | — |
| | (1.5 | ) |
Other, Net | 3.3 |
| | 8.9 |
|
Changes in Operating Assets and Liabilities | (385.4 | ) | | (345.7 | ) |
Net Cash Used in Operating Activities | (172.1 | ) | | (190.1 | ) |
| | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Capital Spending | (73.0 | ) | | (88.9 | ) |
Packaging Machinery Spending | (7.0 | ) | | (3.2 | ) |
Acquisition of Businesses, Net of Cash Acquired | (2.0 | ) | | (3.5 | ) |
Beneficial Interest on Sold Receivables | 279.5 |
| | 282.6 |
|
Beneficial Interest Obtained in Exchange for Proceeds | (153.3 | ) | | (138.0 | ) |
Other, Net | (1.0 | ) | | (2.3 | ) |
Net Cash Provided by Investing Activities | 43.2 |
| | 46.7 |
|
| | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Repurchase of Common Stock | (60.0 | ) | | — |
|
Payments on Debt | (9.1 | ) | | (125.0 | ) |
Borrowings under Revolving Credit Facilities | 775.2 |
| | 610.9 |
|
Payments on Revolving Credit Facilities | (548.9 | ) | | (323.5 | ) |
Repurchase of Common Stock related to Share-Based Payments | (4.0 | ) | | (4.0 | ) |
Debt Issuance Costs | — |
| | (7.9 | ) |
Dividends and Distributions Paid to GPIP Partner | (30.1 | ) | | (23.2 | ) |
Other, Net | (2.6 | ) | | — |
|
Net Cash Provided by Financing Activities | 120.5 |
| | 127.3 |
|
Effect of Exchange Rate Changes on Cash | 0.2 |
| | 1.2 |
|
Net Decrease in Cash and Cash Equivalents | (8.2 | ) | | (14.9 | ) |
Cash and Cash Equivalents at Beginning of Period | 70.5 |
| | 67.4 |
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 62.3 |
| | $ | 52.5 |
|
| | | |
Non-cash Investing Activities: | | | |
Beneficial Interest (Sold) Obtained in Exchange for Trade Receivables | $ | (142.9 | ) | | $ | 287.5 |
|
Non-cash Investment in NACP Combination | — |
| | 1,235.7 |
|
Non-cash Investing Activities | $ | (142.9 | ) |
| $ | 1,523.2 |
|
Non-cash Financing Activities: | | | |
Non-cash Financing of NACP Combination | $ | — |
| | $ | 660.0 |
|
Non-Cash Financing Activities | $ | — |
|
| $ | 660.0 |
|
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — GENERAL INFORMATION
Nature of Business and Basis of Presentation
Graphic Packaging Holding Company (“GPHC” and, together with its subsidiaries, the “Company”) is committed to providing consumer packaging that makes a world of difference. The Company is a leading provider of paper-based packaging solutions for a wide variety of products to food, beverage, foodservice and other consumer products companies. The Company operates on a global basis, is one of the largest producers of folding cartons in the United States ("U.S.") and holds leading market positions in coated-recycled paperboard ("CRB"), coated unbleached kraft paperboard ("CUK") and solid bleached sulfate paperboard ("SBS").
The Company’s customers include many of the world’s most widely recognized companies and brands with prominent market positions in beverage, food, foodservice, and other consumer products. The Company strives to provide its customers with packaging solutions designed to deliver marketing and performance benefits at a competitive cost by capitalizing on its low-cost paperboard mills and converting facilities, its proprietary carton and packaging designs, and its commitment to quality and service.
On January 1, 2018, GPHC, a Delaware corporation, International Paper Company, a New York corporation (“IP”), Graphic Packaging International Partners, LLC, a Delaware limited liability company formerly known as Gazelle Newco LLC and a wholly owned subsidiary of the Company (“GPIP”), and Graphic Packaging International, LLC, a Delaware limited liability company formerly known as Graphic Packaging International, Inc. and a subsidiary of GPIP (“GPIL”), completed a series of transactions pursuant to an agreement dated October 23, 2017, among the foregoing parties (the “Transaction Agreement”). Pursuant to the Transaction Agreement (i) a wholly owned subsidiary of the Company transferred its ownership interest in GPIL to GPIP; (ii) IP transferred its North America Consumer Packaging (“NACP”) business to GPIP, which was then subsequently transferred to GPIL; (iii) GPIP issued membership interests to IP, and IP was admitted as a member of GPIP; and (iv) GPIL assumed certain indebtedness of IP (the "NACP Combination"). For more information regarding the NACP Combination, see "Note 1 — Nature of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements of the Company's 2018 Form 10-K.
The Company’s Condensed Consolidated Financial Statements include all subsidiaries in which the Company has the ability to exercise direct or indirect control over operating and financial policies. Intercompany transactions and balances are eliminated in consolidation.
In the Company’s opinion, the accompanying Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the interim periods. The Company’s year end Condensed Consolidated Balance Sheet data was derived from audited financial statements. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all the information required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with GPHC’s Form 10-K for the year ended December 31, 2018. In addition, the preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates and changes in these estimates are recorded when known.
The Company has reclassified the presentation of certain prior period information to conform to the current presentation. This reclassification had no impact on operating income.
For a summary of the Company’s significant accounting policies, please refer to GPHC’s Form 10-K for the year ended December 31, 2018.
Revenue Recognition
The Company has two primary activities, the manufacturing and converting of paperboard, from which it generates revenue from contracts with customers. Revenue is disaggregated primarily by geography and type of activity as further explained in "Note 12-Segments." All reportable segments and the Australia and Pacific Rim operating segments recognize revenue under the same method, allocate transaction price using similar methods, and have similar economic factors impacting the uncertainty of revenue and related cash flows.
Revenue is recognized on the Company's annual and multi-year supply contracts when the Company satisfies the performance obligation by transferring control over the product or service to a customer, which is generally based on shipping terms and passage of title under the point-in-time method of recognition. For the three months ended March 31, 2019 and 2018, the Company recognized $1,501.6 million and $1,472.2 million, respectively, of revenue from contracts with customers.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The transaction price allocated to each performance obligation consists of the stand alone selling price, estimates of rebates and other sales or contract renewal incentives, and cash discounts and sales returns ("Variable Consideration") and excludes sales tax. Estimates are made for Variable Consideration based on contract terms and historical experience of actual results and are applied to the performance obligations as they are satisfied. Purchases by the Company’s principal customers are manufactured and shipped with minimal lead time, therefore performance obligations are generally satisfied shortly after manufacturing and shipment. The Company uses standard payment terms that are consistent with industry practice.
The Company's contract assets consist primarily of contract renewal incentive payments to customers which are amortized over the period in which performance obligations related to the contract renewal are satisfied. As of March 31, 2019 and December 31, 2018 contract assets were $22.6 million and $19.6 million, respectively. The Company's contract liabilities consist principally of rebates, and as of March 31, 2019 and December 31, 2018 were $34.3 million and $42.5 million, respectively.
The Company did not have a material amount relating to backlog orders at March 31, 2019 or December 31, 2018.
Accounts Receivable and Allowances
The Company has entered into agreements to sell, on a revolving basis, certain trade accounts receivable to third party financial institutions. Transfers under these agreements meet the requirements to be accounted for as sales in accordance with the Transfers and Servicing topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification"). The loss on sale is not material and is included in Other Expense, Net on the Condensed Consolidated Statement of Operations. The following table summarizes the activity under these programs as of March 31, 2019 and 2018, respectively:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
In millions | 2019 | | 2018 |
Receivables Sold and Derecognized | $ | 811.2 |
| | $ | 844.8 |
|
Proceeds Collected on Behalf of Financial Institutions | 504.1 |
| | 833.7 |
|
Net Proceeds Paid to Financial Institutions | (28.8 | ) | | (128.7 | ) |
Deferred Purchase Price(a) | 4.3 |
| | 240.4 |
|
Pledged Receivables | 144.2 |
| | — |
|
(a) Included in Other Current Assets and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure.
The Company has also entered into various factoring and supply chain financing arrangements, which also qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB Codification. For the three months ended March 31, 2019 and 2018, the Company sold receivables of approximately $32 million and $30 million, respectively, related to these factoring arrangements.
Receivables sold under all programs subject to continuing involvement, which consist principally of collection services, at March 31, 2019 and December 31, 2018, were approximately $470 million and $602 million, respectively.
Capital Allocation Plan
On February 21, 2019, the Company's board of directors declared a regular quarterly dividend of $0.075 per share of common stock paid on April 5, 2019 to shareholders of record as of March 15, 2019.
On January 28, 2019 the Company's board of directors authorized an additional share repurchase program to allow the Company to purchase up to $500 million of the Company's issued and outstanding shares of common stock through open market purchases, privately negotiated transactions and Rule 10b5-1 plans (the "2019 share repurchase program"). The previous $250 million share repurchase program was authorized on January 10, 2017 (the "2017 share repurchase program"). During the first three months of 2019, the Company repurchased 5,033,426 shares of its common stock at an average price of $11.82, under the 2017 share repurchase program. The Company did not repurchase any shares of its common stock during the three months ended March 31, 2018. As of March 31, 2019, the Company has approximately $531 million available for additional repurchases under the 2019 share repurchase program and the 2017 share repurchase program.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Business Combinations, Gain on Sale of Assets and Shutdown and Other Special Charges, Net
The following table summarizes the transactions recorded in Business Combinations, Gain on Sale of Assets and Shutdown and Other Special Charges, Net in the Condensed Consolidated Statements of Operations:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
In millions | 2019 | | 2018 |
Charges Associated with Business Combinations | $ | 2.1 |
| | $ | 27.0 |
|
Shutdown and Other Special Charges | 4.1 |
| | 0.8 |
|
Gain on Sale of Assets | — |
| | (1.5 | ) |
Total | $ | 6.2 |
| | $ | 26.3 |
|
On September 30, 2018, the Company acquired substantially all the assets of the foodservice business of Letica Corporation, a subsidiary of RPC Group PLC ("Letica Foodservice"), a producer of paperboard-based cold and hot cups and cartons. The acquisition included two facilities located in Clarksville, Tennessee and Pittston, Pennsylvania. Letica Foodservice is included in the Americas Paperboard Packaging reportable segment.
On June 12, 2018, the Company acquired substantially all the assets of PFP, LLC and its related entity, PFP Dallas Converting, LLC (collectively, "PFP"), a converter focused on the production of paperboard based air filter frames. The acquisition included two facilities located in Lebanon, Tennessee and Lancaster, Texas. PFP is included in the Americas Paperboard Packaging reportable segment.
On January 1, 2018, the Company completed the NACP Combination. The NACP business produces SBS paperboard and paper-based foodservice products. The NACP business included two SBS mills located in Augusta, Georgia and Texarkana, Texas (included in Paperboard Mills reportable segment), three converting facilities in the U.S. (included in Americas Paperboard Packaging reportable segment) and one in the United Kingdom ("U.K.") (included in the Europe Paperboard Packaging reportable segment).
PFP and Letica Foodservice are referred to collectively as the "2018 Acquisitions."
Charges associated with all acquisitions are included in Charges Associated with Business Combinations in the table above.
During 2019, the Company began a three-year program to dismantle and dispose of idle and abandoned assets primarily at the paperboard mills. Expected charges for this program are approximately $40 million. Charges associated with this program are included in Shutdown and Other Special Charges in the table above.
Adoption of New Accounting Standards
Effective January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align the risk management activities and financial reporting for these hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
Effective January 1, 2019, the Company adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendment allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Job Act (“The Act”). The Company adopted the amendment effective January 1, 2019 and elected not to reclassify the income tax effects of The Act from other comprehensive income to retained earnings. The Company’s policy with respect to stranded income tax effects in accumulated other comprehensive income (loss) is to release these effects using the aggregate portfolio approach.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"). The amendments in this ASU require an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The Company adopted ASC 842 effective January 1, 2019, prospectively. The adoption of this standard had a material impact on the Company’s financial position, with no material impact on the results of operations and cash flows (see "Note 5 - Leases").
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Accounting Standards Not Yet Adopted
In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other (Topic 350); Simplifying the Test for Goodwill Impairment which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 of the goodwill impairment model. Step 2 measures a goodwill impairment loss by comparing the implied value of a reporting unit’s goodwill with the carrying amount of that goodwill. An entity would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized is limited to the amount of goodwill allocated to that reporting unit. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017.
NOTE 2 — INVENTORIES, NET
Inventories, Net by major class:
|
| | | | | | | |
In millions | March 31, 2019 | | December 31, 2018 |
Finished Goods | $ | 457.2 |
| | $ | 426.9 |
|
Work in Progress | 104.0 |
| | 102.2 |
|
Raw Materials | 341.4 |
| | 319.9 |
|
Supplies | 169.4 |
| | 165.4 |
|
Total | $ | 1,072.0 |
| | $ | 1,014.4 |
|
NOTE 3 — BUSINESS COMBINATIONS
As disclosed in "Note 1 - General Information," the Company completed the NACP Combination, and the PFP and Letica Foodservice acquisitions in 2018.
The Company paid approximately $129 million for the PFP and Letica Foodservice acquisitions using existing cash and borrowings under its revolving line of credit.
Total consideration for the NACP Combination, including debt assumed of $660 million, was $1.8 billion.
The acquisition accounting for the NACP Combination and PFP acquisition was completed on December 31, 2018.
During the quarter ended March 31, 2019, the acquisition accounting for Letica Foodservice was finalized, resulting in an approximately $5 million reduction in the value of property plant and equipment.
During 2019, Net Sales and Loss from Operations for the Letica Foodservice and PFP acquisitions were $33.8 million and $2.1 million, respectively.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 — DEBT
For more information regarding the Company’s debt, see “Note 5 — Debt” of the Notes to Consolidated Financial Statements of the Company’s 2018 Form 10-K.
Long-Term Debt is comprised of the following:
|
| | | | | | | |
In millions | March 31, 2019 | | December 31, 2018 |
Senior Notes with interest payable semi-annually at 4.125%, effective rate of 4.17%, payable in 2024 | $ | 300.0 |
| | $ | 300.0 |
|
Senior Notes with interest payable semi-annually at 4.875%, effective rate of 4.92%, payable in 2022 | 250.0 |
| | 250.0 |
|
Senior Notes with interest payable semi-annually at 4.75%, effective rate of 4.77%, payable in 2021 | 425.0 |
| | 425.0 |
|
Senior Secured Term Loan Facilities with interest payable at various dates at floating rates (3.93% at March 31, 2019) payable through 2023 | 1,423.5 |
| | 1,432.6 |
|
Senior Secured Revolving Facilities with interest payable at floating rates (3.60% at March 31, 2019) payable in 2023 | 622.8 |
| | 399.0 |
|
Capital Lease and Financing Obligations | 127.7 |
| | 122.9 |
|
Other | 31.3 |
| | 26.5 |
|
Total Long-Term Debt | 3,180.3 |
| | 2,956.0 |
|
Less: Current Portion | 40.6 |
| | 40.3 |
|
| 3,139.7 |
| | 2,915.7 |
|
Less: Unamortized Deferred Debt Issuance Costs | 9.9 |
| | 10.6 |
|
Total | $ | 3,129.8 |
| | $ | 2,905.1 |
|
At March 31, 2019, the Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities:
|
| | | | | | | | | | | |
In millions | Total Commitments | | Total Outstanding | | Total Available |
Senior Secured Domestic Revolving Credit Facility(a) | $ | 1,450.0 |
| | $ | 542.0 |
| | $ | 884.8 |
|
Senior Secured International Revolving Credit Facility | 177.4 |
| | 80.8 |
|
| 96.6 |
|
Other International Facilities | 66.3 |
| | 39.7 |
| | 26.6 |
|
Total | $ | 1,693.7 |
| | $ | 662.5 |
| | $ | 1,008.0 |
|
| |
(a) | In accordance with its debt agreements, the Company’s availability under its revolving credit facilities has been reduced by the amount of standby letters of credit issued of $23.2 million as of March 31, 2019. These letters of credit are primarily used as security against its self-insurance obligations and workers’ compensation obligations. These letters of credit expire at various dates through 2019 unless extended. |
The Credit Agreement is guaranteed by GPIP and certain domestic subsidiaries, and the 4.75% Senior Notes due 2021, 4.875% Senior Notes due 2022 and 4.125% Senior Notes due 2024 are guaranteed by GPHC. For additional information on the financial statements of GPIP, see "Note 14 - Guarantor Condensed Consolidating Financial Statements” of the Notes to the Condensed Consolidated Financial Statements of GPIL in its Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 filed with the Securities and Exchange Commission.
The Credit Agreement and the indentures governing the 4.75% Senior Notes due 2021, 4.875% Senior Notes due 2022 and 4.125% Senior Notes due 2024 (the “Indentures”) limit the Company's ability to incur additional indebtedness. Additional covenants contained in the Credit Agreement and the Indentures may, among other things, restrict the ability of the Company to dispose of assets, incur guarantee obligations, prepay other indebtedness, repurchase stock, pay dividends and make other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of the Indenture, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates. Such restrictions could limit the Company’s ability to respond to changing market conditions, fund its capital spending program, provide for unexpected capital investments or take advantage of business opportunities.
As of March 31, 2019, the Company was in compliance with the covenants in the Credit Agreement and the Indentures.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 — LEASES
Effective January 1, 2019 the Company adopted ASC 842, which requires recognition of a right-of-use asset and lease liability for all leases at the commencement date based on the present value of lease payments over the lease term. Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.
The Company determines if a contract is or contains a lease at inception. The Company has operating and finance leases for warehouses, corporate and regional offices, and machinery and equipment. The Company enters into lease contracts ranging from one to 25 years with the majority of leases having terms of three to seven years, many of which include options to extend in various increments. Variable lease costs consist primarily of variable warehousing costs, common area maintenance, taxes, and insurance. The Company’s leases do not have any significant residual value guarantees or restrictive covenants.
As the implicit rate is not readily determinable for most of the Company’s leases agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company's credit spread adjusted for current market factors, including fixed rate swaps, LIBOR, and foreign currency rates.
The components of lease costs are as follows:
|
| | | |
| Three Months Ended |
In millions | March 31, 2019 |
Finance lease costs: | |
Amortization of right-of-use asset | $ | 1.8 |
|
Interest on lease liabilities | 1.9 |
|
Operating lease costs | 16.0 |
|
Short-term lease costs | 3.6 |
|
Variable lease costs | 1.0 |
|
Total lease costs, net | $ | 24.3 |
|
Supplemental cash flow information related to leases was as follows:
|
| | | |
| Three Months Ended |
In millions | March 31, 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | $ | 15.6 |
|
Operating cash flows from finance leases | 1.8 |
|
Financing cash flows from finance leases | 0.8 |
|
Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | 16.0 |
|
Finance leases | 5.6 |
|
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Supplemental balance sheet information related to leases was as follows:
|
| | | | |
In millions, except lease term and discount rate | Balance Sheet Classification | March 31, 2019 |
Operating Leases: | | |
Operating lease right-of-use asset | Other Assets | $ | 199.7 |
|
Current operating lease liabilities | Other Current Liabilities | $ | 53.3 |
|
Noncurrent operating lease liabilities | Other Noncurrent Liabilities | 150.1 |
|
Total operating lease liabilities | | $ | 203.4 |
|
| | |
Finance Leases: | | |
Property, Plant and Equipment | | $ | 132.2 |
|
Accumulated depreciation | | (6.4 | ) |
Property, Plant and Equipment, net | | $ | 125.8 |
|
Current finance lease liabilities | Short-Term Debt and Current Portion of Long-Term Debt | 4.1 |
|
Noncurrent finance lease liabilities | Long-Term Debt | 123.6 |
|
Total finance lease liabilities | | $ | 127.7 |
|
| | |
Weighted Average Remaining Lease Term (Years) | | |
Operating leases | | 5 |
|
Finance leases | | 18 |
|
| | |
Weighted Average Discount Rate | | |
Operating leases | | 4.22 | % |
Finance leases | | 5.54 | % |
Maturities of lease liabilities are as follows:
|
| | | | | | |
In millions | | |
Year ending December 31, | Operating Leases | Finance Leases |
2019 (excluding the three months ended March 31, 2019) | $ | 49.5 |
| $ | 8.8 |
|
2020 | 54.6 |
| 11.6 |
|
2021 | 42.2 |
| 11.7 |
|
2022 | 32.2 |
| 11.3 |
|
2023 | 25.1 |
| 11.4 |
|
Thereafter | 38.9 |
| 157.0 |
|
Total lease payments | 242.5 |
| 211.8 |
|
Less imputed interest | (39.1 | ) | (84.1 | ) |
Total | $ | 203.4 |
| $ | 127.7 |
|
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 — STOCK INCENTIVE PLANS
The Company has one active equity compensation plan from which new grants may be made, the Graphic Packaging Holding Company 2014 Omnibus Stock and Incentive Compensation Plan (the “2014 Plan”). Under the 2014 Plan, the Company may grant stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”) and other types of stock-based and cash awards. Awards under the 2014 Plan generally vest and expire in accordance with terms established at the time of grant. Shares issued pursuant to awards under the 2014 Plan are from the Company’s authorized but unissued shares. Compensation costs are recognized on a straight-line basis over the requisite service period of the award.
Stock Awards, Restricted Stock and Restricted Stock Units
Under the 2014 Plan, all RSUs generally vest and become payable in three years from date of grant. RSUs granted to employees contain some combination of service, performance and market objectives based on various financial targets and relative total shareholder return that must be met for the shares to vest.
Data concerning RSUs granted in the first three months of 2019 is as follows:
|
| | | | | | |
| RSUs | | Weighted Average Grant Date Fair Value Per Share |
RSUs — Employees | 1,992,718 |
| | $ | 12.28 |
|
During the three months ended March 31, 2019 and 2018, $4.9 million and $3.1 million, respectively, were charged to compensation expense for stock incentive plans.
During the three months ended March 31, 2019 and 2018, 0.5 million and 0.6 million shares were issued, respectively. The shares issued were primarily related to RSUs granted during 2016 and 2015, respectively.
NOTE 7 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company maintains both defined benefit pension plans and postretirement health care plans that provide medical and life insurance coverage to eligible salaried and hourly retired employees in North America and their dependents. The Company maintains international defined benefit pension plans which are either noncontributory or contributory and are funded in accordance with applicable local laws. Pension or termination benefits are based primarily on years of service and the employee's compensation.
Pension and Postretirement Expense
The pension and postretirement expenses related to the Company’s plans consisted of the following:
|
| | | | | | | | | | | | | | | |
| Pension Benefits | Postretirement Health Care Benefits |
| Three Months Ended | | Three Months Ended |
| March 31, | | March 31, |
In millions | 2019 | | 2018 | | 2019 | | 2018 |
Components of Net Periodic Cost: | | | | | | | |
Service Cost | $ | 3.3 |
| | $ | 4.6 |
| | $ | 0.1 |
| | $ | 0.2 |
|
Interest Cost | 11.5 |
| | 10.5 |
| | 0.4 |
| | 0.3 |
|
Administrative Expenses | 0.1 |
| | 0.1 |
| | — |
| | — |
|
Expected Return on Plan Assets | (13.8 | ) | | (16.0 | ) | | — |
| | — |
|
Amortization: | | | | | | | |
Prior Service Cost (Credit) | — |
| | 0.1 |
| | (0.1 | ) | | (0.1 | ) |
Actuarial Loss (Gain) | 2.5 |
| | 1.4 |
| | (0.5 | ) | | (0.5 | ) |
Net Periodic Cost (Benefit) | $ | 3.6 |
| | $ | 0.7 |
| | $ | (0.1 | ) | | $ | (0.1 | ) |
Employer Contributions
The Company made contributions of $0.6 million and $1.3 million to its pension plans during the first three months of 2019 and 2018, respectively. The Company expects to make contributions of approximately $10 million for the full year 2019. During 2018, the Company made $5.8 million of contributions to its pension plans.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company made postretirement health care benefit payments of $0.5 million and $0.5 million during the first three months of 2019 and 2018, respectively. The Company estimates its postretirement health care benefit payments for the full year 2019 to be approximately $2 million. During 2018, the Company made postretirement health care benefit payments of $1.9 million.
NOTE 8 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT
The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging topic of the FASB Codification and those not designated as hedging instruments under this guidance. The Company uses interest rate swaps, natural gas swap contracts, and forward exchange contracts. These derivative instruments are designated as cash flow hedges and, to the extent they are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in current earnings but are included in Accumulated Other Comprehensive Loss. These changes in fair value will subsequently be reclassified to earnings, contemporaneously with and offsetting changes in the related hedged exposure, and presented in the same line of the income statement expected for the hedged item.
For more information regarding the Company’s financial instruments and fair value measurement, see “Note 9 — Financial Instruments, Derivatives and Hedging Activities” and “Note 10 — Fair Value Measurement” of the Notes to Consolidated Financial Statements of the Company’s 2018 Form 10-K.
Interest Rate Risk
The Company uses interest rate swaps to manage interest rate risks on future interest payments caused by interest rate changes on its variable rate term loan facility. Changes in fair value will subsequently be reclassified into earnings as a component of Interest Expense, Net as interest is incurred on amounts outstanding under the term loan facility. The following table summarizes the Company's current interest rate swap positions for each period presented as of March 31, 2019:
|
| | | | |
Start | End | (In Millions) Notional Amount | Weighted Average Interest Rate |
04/03/2018 | 01/01/2020 | $150.0 | | 2.25% |
04/03/2018 | 10/01/2020 | $150.0 | | 2.36% |
12/03/2018 | 01/01/2022 | $120.0 | | 2.92% |
12/03/2018 | 01/04/2022 | $80.0 | | 2.79% |
During the first three months of 2019 and 2018, there were no amounts of ineffectiveness related to changes in the fair value of interest rate swap agreements. Additionally, there were no amounts excluded from the measure of effectiveness.
Commodity Risk
To manage risks associated with future variability in cash flows and price risk attributable to purchases of natural gas, the Company enters into natural gas swap contracts to hedge prices for a designated percentage of its expected natural gas usage. Such contracts are designated as cash flow hedges. The contracts are carried at fair value with changes in fair value recognized in Accumulated Other Comprehensive Loss and resulting gain or loss reclassified into Cost of Sales concurrently with the recognition of the commodity consumed. The Company has hedged approximately 50% and 20% of its expected natural gas usage for the remainder of 2019 and all of 2020, respectively.
During the first three months of 2019 and 2018, there were no amounts of ineffectiveness related to changes in the fair value of natural gas swap contracts. Additionally, there were no amounts excluded from the measure of effectiveness.
Foreign Currency Risk
The Company enters into forward exchange contracts to manage risks associated with foreign currency transactions and future variability of cash flows arising from those transactions that may be adversely affected by changes in exchange rates. The contracts are carried at fair value with changes in fair value recognized in Accumulated Other Comprehensive Loss and gains/losses related to these contracts are recognized in Other Expense, Net or Net Sales, when appropriate.
At March 31, 2019, multiple forward exchange contracts existed that expire on various dates through the remainder of 2019. Those purchased forward exchange contracts outstanding at March 31, 2019 and December 31, 2018, when aggregated and measured in U.S. dollars at contractual rates at March 31, 2019 and December 31, 2018, had notional amounts totaling $38.1 million and $51.6 million, respectively.
No amounts were reclassified to earnings during the first three months of 2019 or during 2018 in connection with forecasted transactions that were considered probable of not occurring and there was no amount of ineffectiveness related to changes in the fair value of foreign currency forward contracts. Additionally, there were no amounts excluded from the measure of effectiveness.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Derivatives not Designated as Hedges
The Company enters into forward exchange contracts to effectively hedge substantially all of its accounts receivables resulting from sales transactions and intercompany loans denominated in foreign currencies in order to manage risks associated with variability in cash flows that may be adversely affected by changes in exchange rates. At March 31, 2019 and December 31, 2018, multiple foreign currency forward exchange contracts existed, with maturities ranging up to eighteen months . Those foreign currency exchange contracts outstanding at March 31, 2019 and December 31, 2018, when aggregated and measured in U.S. dollars at exchange rates at March 31, 2019 and December 31, 2018, had net notional amounts totaling $84.5 million and $62.2 million, respectively. Unrealized gains and losses resulting from these contracts are recognized in Other Expense, Net and approximately offset corresponding recognized but unrealized gains and losses on the remeasurement of these accounts receivable.
Fair Value of Financial Instruments
The Company’s derivative instruments are carried at fair value. The Company has determined that the inputs to the valuation of these derivative instruments are Level 2 in the fair value hierarchy. Level 2 inputs are defined as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. The Company uses valuation techniques based on discounted cash flow analyses, which reflect the terms of the derivatives and use observable market-based inputs, including forward rates, and uses market price quotations obtained from independent derivatives brokers, corroborated with information obtained from independent pricing service providers.
As of March 31, 2019, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to its own credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on evaluation of the Company’s counterparties’ credit risks. The following table summarizes the fair value of the Company’s derivative instruments:
|
| | | | | | | | | | | | |
| Derivative Assets | Derivative Liabilities |
| March 31, | December 31, | March 31, | December 31, |
In millions | 2019 | 2018 | 2019 | 2018 |
Derivatives designated as hedging instruments: | | | | |
Interest rate contracts | $ | 0.4 |
| $ | 0.8 |
| $ | 4.3 |
| $ | 2.7 |
|
Foreign currency contracts | 0.6 |
| — |
| 0.1 |
| 0.5 |
|
Commodity contracts | 0.9 |
| — |
| — |
| 0.2 |
|
Total Derivatives | $ | 1.9 |
| $ | 0.8 |
| $ | 4.4 |
| $ | 3.4 |
|
The fair values of the Company’s other financial assets and liabilities at March 31, 2019 and December 31, 2018 approximately equal the carrying values reported on the Condensed Consolidated Balance Sheets except for Long-Term Debt. The fair value of the Company’s Long-Term Debt (excluding capital leases and deferred financing fees) was $3,054.0 million and $2,762.5 million as compared to the carrying amounts of $3,052.6 million and $2,833.1 million as of March 31, 2019 and December 31, 2018, respectively. The fair value of the Company’s Total Debt, including the Senior Notes, are based on quoted market prices (Level 2 inputs). Level 2 valuation techniques for Long-Term Debt are based on quotations obtained from independent pricing service providers.
Effect of Derivative Instruments
The pre-tax effect of derivative instruments in cash flow hedging relationships in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018 is as follows:
|
| | | | | | | | | | | | | |
| Amount of Loss (Gain) Recognized in Accumulated Other Comprehensive Loss | Location in Statement of Operations | Amount of Loss (Gain) Recognized in Statement of Operations |
| Three Months Ended March 31, | Three Months Ended March 31, |
In millions | 2019 | 2018 | 2019 | 2018 |
Commodity Contracts | $ | (0.9 | ) | $ | (0.6 | ) | Cost of Sales | $ | 0.1 |
| $ | (0.2 | ) |
Foreign Currency Contracts | (1.1 | ) | 2.1 |
| Other Expense, Net | (0.7 | ) | 0.4 |
|
Interest Rate Swap Agreements | 2.0 |
| (0.7 | ) | Interest Expense, Net | — |
| (0.3 | ) |
Total | $ | — |
| $ | 0.8 |
| | $ | (0.6 | ) | $ | (0.1 | ) |
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effect of derivative instruments not designated as hedging instruments on the Company’s Condensed Consolidated Statements of Operations for the years ended March 31, 2019 and 2018 is as follows:
|
| | | | | | | |
| | Three Months Ended March 31, |
In millions | | 2019 | 2018 |
Foreign Currency Contracts | Other Expense, Net | $ | (0.1 | ) | $ | (1.0 | ) |
Accumulated Derivative Instruments Income (Loss)
The following is a rollforward of pre-tax Accumulated Derivative Instruments Income (Loss) which is included in the Company’s Condensed Consolidated Balance Sheet as of March 31, 2019:
|
| | | |
In millions | |
Balance at December 31, 2018 | $ | (1.9 | ) |
Reclassification to Earnings | (0.6 | ) |
Current Period Change in Fair Value | — |
|
Balance at March 31, 2019 | $ | (2.5 | ) |
At March 31, 2019, the Company expects to reclassify $0.5 million of gains in the next twelve months from Accumulated Other Comprehensive Loss to earnings, contemporaneously with and offsetting changes in the related hedged exposure. The actual amount that will be reclassified to future earnings may vary from this amount as a result of changes in market conditions.
NOTE 9 — INCOME TAXES
Substantially all of the Company’s operations are held through its majority investment in GPIP, a subsidiary that is classified as a partnership for U.S. income tax purposes and is generally not subject to domestic income tax expense. As a result, the consolidated financial statements exclude the domestic tax effect of the earnings attributable to the minority partner’s interest in GPIP.
During the three months ended March 31, 2019, the Company recognized Income Tax Expense of $21.0 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of $98.9 million. The effective tax rate for the three months ended March 31, 2019 is lower than the statutory rate primarily due to the tax effect of income attributable to noncontrolling interests as well as the mix and levels of earnings between foreign and domestic tax jurisdictions.
During the three months ended March 31, 2018, the Company recognized Income Tax Expense of $5.1 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of $47.5 million. The effective tax rate for the three months ended March 31, 2018 was lower than the statutory rate primarily due to the tax effect of income attributable to non-controlling interests as well as the mix and levels of earnings between foreign and domestic tax jurisdictions. In addition, the Company recorded a discrete benefit of approximately $4 million during the three months ended March 31, 2018 to reflect indirect impacts of the NACP Combination.
As of December 31, 2018, the Company had approximately $168 million of Net Operating Losses (“NOLs”) for U.S. federal income tax purposes which may be used to offset future taxable income. Based on these NOLs and other tax benefits, the Company does not expect to be a meaningful U.S. federal cash taxpayer until 2021.
NOTE 10 — ENVIRONMENTAL AND LEGAL MATTERS
Environmental Matters
The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the investigation and remediation of contamination resulting from historical site operations and releases of hazardous substances, and the health and safety of employees. Compliance initiatives could result in significant costs, which could negatively impact the Company’s consolidated financial position, results of operations or cash flows. Any failure to comply with environmental or health and safety laws and regulations or any permits and authorizations required thereunder could subject the Company to fines, corrective action or other sanctions.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Some of the Company’s current and former facilities are the subject of environmental investigations and remediations resulting from historic operations and the release of hazardous substances or other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations may be imposed in the future or for which indemnification claims may be asserted against the Company. Also, closures or sales of facilities may necessitate investigation and may result in remediation activities at those facilities.
The Company has established reserves for those facilities or issues where a liability is probable and the costs are reasonably estimable. The Company believes that the amounts accrued for its loss contingencies, and the reasonably possible loss beyond the amounts accrued, are not material to the Company’s consolidated financial position, results of operations or cash flows. The Company cannot estimate with certainty other future compliance, investigation or remediation costs. Some costs relating to historic usage that the Company considers to be reasonably possible of resulting in liability are not quantifiable at this time. The Company will continue to monitor environmental issues at each of its facilities, as well as regulatory developments, and will revise its accruals, estimates and disclosures relating to past, present and future operations, as additional information is obtained.
Legal Matters
The Company is a party to a number of lawsuits arising in the ordinary conduct of its business. Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company does not believe that disposition of these lawsuits will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 11 — RELATED PARTY TRANSACTIONS
In connection with the NACP Combination, the Company entered into agreements with IP for transition services, fiber procurement fees and corrugated products and ink supply. Payments to IP for the three months ended March 31, 2019 under these agreements were $0.1 million, $2.8 million (related to pass through wood purchases of approximately $62 million) and $6.3 million, respectively. Payments to IP for the three months ended March 31, 2018 under these agreements were $7.5 million, $3.0 million (related to pass through wood purchases of approximately $47 million) and $7.4 million, respectively. In addition, approximately $0.6 million and $3.0 million of payments were made for purchases unrelated to these agreements for the three months ended March 31, 2019 and 2018, respectively.
NOTE 12 — SEGMENT INFORMATION
On January 1, 2018, the Company aggregated the three converting plants from the NACP Combination with America's Converting operating segment into one reportable segment. The Company has three reportable segments as follows:
Paperboard Mills includes the eight North American paperboard mills which produce primarily CRB, CUK, and SBS, which is consumed internally to produce paperboard packaging for the Americas and Europe Paperboard Packaging segments. The remaining paperboard is sold externally to a wide variety of paperboard packaging converters and brokers. The Paperboard Mills segment Net Sales represent the sale of paperboard only to external customers. The effect of intercompany transfers to the paperboard packaging segments has been eliminated from the Paperboard Mills segment to reflect the economics of the integration of these segments.
Americas Paperboard Packaging includes paperboard packaging, primarily folding cartons, sold primarily to Consumer Packaged Goods ("CPG") companies, and cups, lids and food containers sold primarily to foodservice companies and quick-service restaurants ("QSR"), all serving the food, beverage, and consumer product markets in the Americas.
Europe Paperboard Packaging includes paperboard packaging, primarily folding cartons, sold primarily to CPG companies serving the food, beverage and consumer product markets in Europe.
The Company allocates certain mill and corporate costs to the reportable segments to appropriately represent the economics of these segments. The Corporate and Other caption includes the Pacific Rim and Australia operating segments and unallocated corporate and one-time costs.
These segments are evaluated by the chief operating decision maker based primarily on Income from Operations, as adjusted for depreciation and amortization. The accounting policies of the reportable segments are the same as those described above in "Note 1 - General Information."
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment information is as follows:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
In millions | 2019 | | 2018 |
NET SALES: | | | |
Paperboard Mills | $ | 275.5 |
| | $ | 278.4 |
|
Americas Paperboard Packaging | 1,022.8 |
| | 990.8 |
|
Europe Paperboard Packaging | 173.8 |
| | 174.6 |
|
Corporate/Other/Eliminations(a) | 33.8 |
| | 33.6 |
|
Total | $ | 1,505.9 |
| | $ | 1,477.4 |
|
| | | |
INCOME (LOSS) FROM OPERATIONS: | | | |
Paperboard Mills | $ | (4.0 | ) | | $ | (6.7 | ) |
Americas Paperboard Packaging | 125.6 |
| | 112.0 |
|
Europe Paperboard Packaging | 19.2 |
| | 14.7 |
|
Corporate and Other(b) | (6.8 | ) | | (46.0 | ) |
Total | $ | 134.0 |
| | $ | 74.0 |
|
| | | |
DEPRECIATION AND AMORTIZATION: | | | |
Paperboard Mills | $ | 56.2 |
| | $ | 51.5 |
|
Americas Paperboard Packaging | 43.7 |
| | 41.0 |
|
Europe Paperboard Packaging | 11.8 |
| | 12.5 |
|
Corporate and Other | 5.4 |
| | 4.8 |
|
Total | $ | 117.1 |
| | $ | 109.8 |
|
| |
(a) | Includes Revenue from contracts with customers for the Australia and Pacific Rim operating segments, which is not material. |
| |
(b) | Includes expenses related to business combinations, gain on sale of assets and shutdown and other special charges. |
For more information regarding the Company’s business segments, see “Note 15 — Business Segment and Geographic Area Information” of the Notes to Consolidated Financial Statements of the Company’s 2018 Form 10-K.
NOTE 13 — EARNINGS PER SHARE
|
| | | | | | | |
| Three Months Ended |
| March 31, |
In millions, except per share data | 2019 | | 2018 |
Net Income Attributable to Graphic Packaging Holding Company | $ | 57.9 |
| | $ | 29.9 |
|
Weighted Average Shares: | | | |
Basic | 297.5 |
|
| 310.6 |
|
Dilutive Effect of RSUs | 0.7 |
| | 0.7 |
|
Diluted | 298.2 |
|
| 311.3 |
|
Income Per Share — Basic | $ | 0.19 |
| | $ | 0.10 |
|
Income Per Share — Diluted | $ | 0.19 |
| | $ | 0.10 |
|
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 14 — REDEEMABLE NONCONTROLLING INTEREST
For information regarding the Company's Redeemable Noncontrolling Interest, see "Note 14 — Redeemable Noncontrolling Interest" of the Notes to Consolidated Financial Statements of the Company's 2018 Form 10-K.
At March 31, 2019, the redeemable noncontrolling interest was determined as follows:
|
| | | |
In millions | |
Balance at December 31, 2018 | $ | 275.8 |
|
Net Income Attributable to Redeemable Noncontrolling Interest | 4.6 |
|
Other Comprehensive Loss, Net of Tax | 0.3 |
|
Reclassification to Redeemable Noncontrolling Interest for Share Repurchases(a)
| 6.7 |
|
Distributions of Membership Interest | (1.5 | ) |
Balance at March 31, 2019 | $ | 285.9 |
|
(a) Represents reclassification of 887,543 common units from Equity to Redeemable Noncontrolling Interest as a result of the Company's repurchase of common outstanding shares during the first quarter of 2019.
Redeemable Noncontrolling Interest is recorded at the greater of carrying amount or redemption value at the end of each period. The redemption value is determined by the closing price of the Company's common stock.
NOTE 15 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The changes in the components of Accumulated Other Comprehensive Income (Loss) attributable to GPHC for the three months ended March 31, 2019 are as follows(a):
|
| | | | | | | | | | | | | | | |
In millions | Derivatives Instruments | | |