Graphic Packaging(GPK) - 2020 Q1 - Quarterly Report

PART I — FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements and detailed notes for the three months ended March 31, 2020, and 2019 Condensed Consolidated Statements of Operations This section presents the company's net sales, income from operations, and net income for the three months ended March 31, 2020, and 2019 Condensed Consolidated Statements of Operations (Three Months Ended March 31) | In millions, except per share amounts | 2020 | 2019 | | :------------------------------------ | :-------- | :-------- | | Net Sales | $ 1,599.1 | $ 1,505.9 | | Income from Operations | 160.0 | 134.0 | | Nonoperating Pension and Postretirement Benefit Expense | (151.6) | (0.1) | | Interest Expense, Net | (33.7) | (35.0) | | (Loss) Income before Income Taxes and Equity Income of Unconsolidated Entity | (25.3) | 98.9 | | Income Tax Benefit (Expense) | 5.4 | (21.0) | | Net (Loss) Income | (19.8) | 78.1 | | Net (Loss) Income Attributable to Graphic Packaging Holding Company | $ (12.7) | $ 57.9 | | Net (Loss) Income Per Share — Basic | $ (0.04) | $ 0.19 | | Net (Loss) Income Per Share — Diluted | $ (0.04) | $ 0.19 | | Cash Dividends Declared Per Share | $ 0.075 | $ 0.075 | Condensed Consolidated Statements of Comprehensive Income This section details the company's total comprehensive income and its components for the three months ended March 31, 2020, and 2019 Total Comprehensive Income (Loss) (Three Months Ended March 31) | In millions | 2020 | 2019 | | :---------- | :------ | :------ | | Net (Loss) Income | $ (19.8) | $ 78.1 | | Total Other Comprehensive Income, Net of Tax | 96.8 | 6.0 | | Total Comprehensive Income (Loss) | $ 77.0 | $ 84.1 | - Other Comprehensive Income (Loss) components for 2020 included derivative instruments ($ (1.4) million), pension and postretirement benefit plans ($155.1 million), and currency translation adjustment ($ (56.9) million)[15] Condensed Consolidated Balance Sheets This section presents the company's assets, liabilities, and equity as of March 31, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets (As of March 31, 2020, and December 31, 2019) | In millions | March 31, 2020 | December 31, 2019 | | :------------------------------------ | :------------- | :---------------- | | Total Current Assets | $ 1,938.3 | $ 1,805.6 | | Property, Plant and Equipment, Net | 3,288.1 | 3,253.8 | | Goodwill | 1,464.1 | 1,477.9 | | Total Assets | $ 7,446.2 | $ 7,289.9 | | Total Current Liabilities | $ 1,044.0 | $ 1,198.7 | | Long-Term Debt | 3,434.5 | 2,809.9 | | Total Liabilities and Shareholders' Equity | $ 7,446.2 | $ 7,289.9 | | Total Equity | $ 2,010.3 | $ 2,058.0 | - Cash and Cash Equivalents decreased from $152.9 million at December 31, 2019, to $110.2 million at March 31, 2020[18] Condensed Consolidated Statements of Equity This section outlines changes in the company's equity, including net loss, other comprehensive income, and stock repurchases Changes in Equity (Three Months Ended March 31, 2020) | In millions, except share amounts | Balances at Dec 31, 2019 | Net Loss | Other Comprehensive (Loss) Income, Net of Tax | Repurchase of Common Stock | Dividends Declared | Redeemable Noncontrolling Interest Redemption Value Mark-up | Tax Effect of IP Redemption | Distribution of Membership Interest | Recognition of Stock-Based Compensation, Net | Issuance of Shares for Stock-Based Awards | Balances at Mar 31, 2020 | | :-------------------------------- | :----------------------- | :------- | :-------------------------------------------- | :------------------------- | :----------------- | :---------------------------------------- | :-------------------------- | :-------------------------------- | :------------------------------------------- | :---------------------------------------- | :----------------------- | | Common Stock Amount | $ 2.9 | — | — | (0.1) | — | — | — | — | — | — | $ 2.8 | | Capital in Excess of Par Value | $ 1,876.7 | — | — | (52.6) | — | 18.1 | 6.8 | — | 3.6 | — | $ 1,852.6 | | Retained Earnings (Accumulated Deficit) | $ 56.4 | (12.7) | — | (71.7) | (21.1) | — | — | — | — | — | $ (49.1) | | Accumulated Other Comprehensive (Loss) Income | $ (365.8) | — | 66.3 | — | — | — | — | — | — | — | $ (299.5) | | Noncontrolling Interests | $ 487.8 | (1.8) | 22.1 | — | — | — | — | (4.6) | — | — | $ 503.5 | | Total Equity | $ 2,058.0 | (14.5) | 96.8 | (124.4) | (21.1) | 18.1 | 6.8 | (4.6) | 3.6 | — | $ 2,010.3 | - The company repurchased 9,667,034 shares of common stock for $124.4 million during the three months ended March 31, 2020[20] Condensed Consolidated Statements of Cash Flows This section summarizes the company's cash flows from operating, investing, and financing activities for the three months ended March 31 Condensed Consolidated Statements of Cash Flows (Three Months Ended March 31) | In millions | 2020 | 2019 | | :------------------------------------ | :------ | :------ | | Net Cash Used in Operating Activities | $ (79.3) | $ (172.1) | | Net Cash (Used in) Provided by Investing Activities | $ (175.8) | $ 43.2 | | Net Cash Provided by Financing Activities | $ 218.5 | $ 120.5 | | Net Decrease in Cash and Cash Equivalents | $ (42.7) | $ (8.2) | | Cash and Cash Equivalents at End of Period | $ 110.2 | $ 62.3 | - Capital Spending increased significantly from $73.0 million in Q1 2019 to $146.6 million in Q1 2020[25] - Financing activities in 2020 included proceeds from issuance of debt of $450.0 million and redemption of noncontrolling interest of $250.0 million[25] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements NOTE 1 — GENERAL INFORMATION This note describes Graphic Packaging Holding Company's business as a leading provider of paper-based packaging solutions, details the NACP Combination transaction, and outlines International Paper's (IP) reduction in ownership interest in GPIP. It also covers the company's revenue recognition policies, accounts receivable programs, capital allocation plan, and the adoption of new accounting standards - Graphic Packaging Holding Company is a leading global provider of paper-based packaging solutions for food, beverage, foodservice, and other consumer products, holding leading market positions in CRB, CUK, and SBS paperboard[27] - On January 29, 2020, GPIP purchased 15.1 million partnership units from International Paper (IP) for $250 million in cash, reducing IP's ownership interest in GPIP from 21.6% to 18.3%[31] Revenue from Contracts with Customers (Three Months Ended March 31) | Metric | 2020 (Millions) | 2019 (Millions) | | :----- | :-------------- | :-------------- | | Revenue | $1,594.6 | $1,501.6 | - The company declared a regular quarterly dividend of $0.075 per share of common stock payable on April 5, 2020[44] - During the first three months of 2020, the company repurchased 9,667,034 shares of its common stock at an average price of $12.87 under the 2019 share repurchase program, with approximately $338 million remaining available[45] NOTE 2 — INVENTORIES, NET This note provides a breakdown of the company's inventories, net, by major class as of March 31, 2020, and December 31, 2019, showing an overall increase in inventory value Inventories, Net by Major Class (In millions) | Inventory Class | March 31, 2020 | December 31, 2019 | | :---------------- | :------------- | :---------------- | | Finished Goods | $ 464.7 | $ 434.8 | | Work in Progress | 132.7 | 123.4 | | Raw Materials | 378.0 | 370.0 | | Supplies | 167.6 | 167.7 | | Total | $ 1,143.0 | $ 1,095.9 | NOTE 3 — BUSINESS COMBINATIONS This note details the company's recent acquisition activities, including the purchase of a folding carton facility from Quad/Graphics, Inc. in January 2020 for approximately $42 million, and the finalization of accounting for the Artistic Carton Company acquisition from 2019 - On January 31, 2020, the company acquired a folding carton facility from Quad/Graphics, Inc. for approximately $42 million, allocating $4.0 million to identifiable intangible assets (customer relationships) and $38.1 million to net tangible assets[58][59] - The acquisition accounting for Artistic Carton Company, acquired in 2019 for approximately $53 million, was finalized during the three months ended March 31, 2020[60] NOTE 4 — DEBT This note outlines the company's long-term debt structure, including the issuance of $450.0 million in senior unsecured notes due 2028, and provides a summary of its revolving credit facilities and compliance with debt covenants - On March 6, 2020, GPIL completed a private offering of $450.0 million aggregate principal amount of senior unsecured notes due 2028, bearing interest at an annual rate of 3.50%[61] Long-Term Debt Composition (In millions) | Debt Type | March 31, 2020 | December 31, 2019 | | :-------------------------------------------- | :------------- | :---------------- | | Senior Notes (various maturities/rates) | $ 1,725.0 | $ 1,275.0 | | Senior Secured Term Loan Facilities | 1,387.0 | 1,396.1 | | Senior Secured Revolving Facilities | 243.0 | 52.8 | | Finance Leases | 133.3 | 134.2 | | Other | 5.7 | 5.4 | | Total Long-Term Debt | $ 3,494.0 | $ 2,863.5 | Revolving Credit Facilities (As of March 31, 2020) | Facility Type | Total Commitments (Millions) | Total Outstanding (Millions) | Total Available (Millions) | | :------------------------------------------ | :--------------------------- | :--------------------------- | :------------------------- | | Senior Secured Domestic Revolving Credit Facility | $ 1,450.0 | $ 170.0 | $ 1,262.1 | | Senior Secured International Revolving Credit Facility | 174.6 | 73.0 | 101.6 | | Other International Facilities | 55.7 | 13.6 | 42.1 | | Total | $ 1,680.3 | $ 256.6 | $ 1,405.8 | - As of March 31, 2020, the company was in compliance with all covenants in its Credit Agreement and Indentures[67] NOTE 5 — STOCK INCENTIVE PLANS This note details the company's 2014 Omnibus Stock and Incentive Compensation Plan, under which Restricted Stock Units (RSUs) are granted to employees, and reports the compensation expense recognized for these plans - The company's active equity compensation plan is the Graphic Packaging Holding Company 2014 Omnibus Stock and Incentive Compensation Plan, which allows for grants of stock options, stock appreciation rights, restricted stock, and RSUs[69] RSUs Granted and Compensation Expense (Three Months Ended March 31) | Metric | 2020 (Millions) | 2019 (Millions) | | :------------------------------------ | :-------------- | :-------------- | | RSUs — Employees (number of units) | 1,610,179 | N/A | | Weighted Average Grant Date Fair Value Per Share | $ 15.45 | N/A | | Compensation Expense for Stock Incentive Plans | $ 12.4 | $ 4.9 | NOTE 6 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS This note discusses the company's defined benefit pension and postretirement health care plans, highlighting the termination process of its largest U.S. pension plan in Q1 2020, which resulted in a significant non-cash settlement charge - In the first quarter of 2020, the company purchased a group annuity contract, transferring approximately $713 million of pension obligation under its largest U.S. pension plan to an insurance company, resulting in a non-cash settlement charge of $152.5 million[75] Pension and Postretirement Expense (Three Months Ended March 31, In millions) | Component of Net Periodic Cost | Pension Benefits 2020 | Pension Benefits 2019 | Postretirement Health Care Benefits 2020 | Postretirement Health Care Benefits 2019 | | :----------------------------- | :-------------------- | :-------------------- | :--------------------------------------- | :--------------------------------------- | | Service Cost | $ 3.9 | $ 3.3 | $ 0.1 | $ 0.1 | | Interest Cost | 4.6 | 11.5 | 0.2 | 0.4 | | Net Settlement/Curtailment Loss | 152.5 | — | — | — | | Net Periodic Cost (Benefit) | $ 155.8 | $ 3.6 | $ (0.2) | $ (0.1) | - The company expects to make pension plan contributions in the range of $10 million to $20 million for the full year 2020[78] NOTE 7 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT This note details the company's use of derivative instruments, including interest rate swaps, natural gas swap contracts, and forward exchange contracts, for risk management purposes, and provides their fair value measurements and impact on the financial statements - The company uses interest rate swaps to manage interest rate risks on its variable rate term loan facility, with notional amounts totaling $350.0 million as of March 31, 2020[80][82] - The company hedges approximately 50% of its expected natural gas usage for the remainder of 2020 and 36% for 2021 using natural gas swap contracts[86] Fair Value of Derivative Instruments (In millions) | Derivative Type | March 31, 2020 (Assets) | December 31, 2019 (Assets) | March 31, 2020 (Liabilities) | December 31, 2019 (Liabilities) | | :------------------------ | :---------------------- | :------------------------- | :--------------------------- | :------------------------------ | | Interest rate contracts | $ — | $ — | $ 11.1 | $ 6.6 | | Foreign currency contracts | 1.1 | — | — | 1.5 | | Commodity contracts | — | — | 2.9 | 3.4 | | Total Derivatives | $ 1.1 | $ — | $ 14.0 | $ 11.5 | Pre-Tax Effect of Derivative Instruments on Statements of Operations (Three Months Ended March 31, In millions) | Derivative Type | 2020 (Gain) Loss | 2019 (Gain) Loss | | :------------------------ | :--------------- | :--------------- | | Commodity Contracts | $ (3.1) | $ 0.1 | | Foreign Currency Contracts | (0.4) | (0.7) | | Interest Rate Swap Agreements | 0.9 | — | | Total | $ (2.6) | $ (0.6) | NOTE 8 — INCOME TAXES This note explains the company's income tax benefit for Q1 2020 compared to an expense in Q1 2019, attributing the effective tax rate differences to noncontrolling interests and the mix of foreign and domestic earnings. It also highlights the company's Net Operating Losses (NOLs) and their impact on future federal cash tax payments Income Tax Benefit (Expense) (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | | :-------------------------------------------- | :------ | :------ | | (Loss) Income before Income Taxes and Equity Income of Unconsolidated Entity | $ (25.3) | $ 98.9 | | Income Tax Benefit (Expense) | $ 5.4 | $ (21.0) | - The effective tax rate for both periods was lower than the statutory rate primarily due to the tax effect of income attributable to noncontrolling interests and the mix of earnings between foreign and domestic tax jurisdictions[101][102] - As of December 31, 2019, the company had approximately $32 million in U.S. federal NOLs and does not expect to be a meaningful U.S. federal cash taxpayer until 2024[103] NOTE 9 — ENVIRONMENTAL AND LEGAL MATTERS This note addresses the company's compliance with environmental, health, and safety laws, and its involvement in legal proceedings. It states that while the company has established reserves for probable and estimable environmental liabilities, these amounts are not material to its consolidated financial position, results of operations, or cash flows, and the outcome of lawsuits is not expected to have a material adverse effect - The company is subject to various environmental, health, and safety laws and regulations, and some facilities are undergoing investigations and remediations[104][105] - Accrued amounts for loss contingencies and reasonably possible losses beyond accrued amounts are not material to the company's consolidated financial position, results of operations, or cash flows[106] - The company is a party to lawsuits in the ordinary course of business, but their disposition is not expected to have a material adverse effect on its financial position, results of operations, or cash flows[107] NOTE 10 — RELATED PARTY TRANSACTIONS This note details the payments made to International Paper (IP) for fiber procurement fees and corrugated products as part of agreements related to the NACP Combination Payments to International Paper (Three Months Ended March 31, In millions) | Transaction Type | 2020 | 2019 | | :---------------------- | :---- | :---- | | Fiber Procurement Fees | $ 2.8 | $ 2.8 | | Corrugated Products | $ 7.8 | $ 6.3 | | Transition Services | $ — | $ 0.1 | | Other (unrelated to agreements) | $ — | $ 1.0 | NOTE 11 — SEGMENT INFORMATION This note outlines the company's three reportable segments: Paperboard Mills, Americas Paperboard Packaging, and Europe Paperboard Packaging, providing their net sales and (loss) income from operations for the three months ended March 31, 2020, and 2019 - The company's reportable segments are Paperboard Mills, Americas Paperboard Packaging, and Europe Paperboard Packaging, evaluated primarily based on Income from Operations, as adjusted for depreciation and amortization[110][111][112][113] Segment Net Sales (Three Months Ended March 31, In millions) | Segment | 2020 | 2019 | | :-------------------------- | :-------- | :-------- | | Paperboard Mills | $ 268.5 | $ 275.5 | | Americas Paperboard Packaging | 1,123.4 | 1,022.8 | | Europe Paperboard Packaging | 176.8 | 173.8 | | Corporate/Other/Eliminations | 30.4 | 33.8 | | Total | $ 1,599.1 | $ 1,505.9 | Segment (Loss) Income from Operations (Three Months Ended March 31, In millions) | Segment | 2020 | 2019 | | :-------------------------- | :------- | :------ | | Paperboard Mills | $ (22.9) | $ (4.0) | | Americas Paperboard Packaging | 194.8 | 125.6 | | Europe Paperboard Packaging | 12.0 | 19.2 | | Corporate and Other | (23.9) | (6.8) | | Total | $ 160.0 | $ 134.0 | NOTE 12 — EARNINGS PER SHARE This note presents the basic and diluted earnings per share (EPS) for the three months ended March 31, 2020, and 2019, noting that potentially dilutive Restricted Stock Units (RSUs) were excluded from the 2020 calculation due to their anti-dilutive effect Earnings Per Share (Three Months Ended March 31, In millions, except per share data) | Metric | 2020 | 2019 | | :-------------------------------------------- | :------- | :------ | | Net (Loss) Income Attributable to Graphic Packaging Holding Company | $ (12.7) | $ 57.9 | | Weighted Average Shares: Basic | 288.9 | 297.5 | | Weighted Average Shares: Diluted | 288.9 | 298.2 | | (Loss) Earnings Per Share — Basic | $ (0.04) | $ 0.19 | | (Loss) Earnings Per Share — Diluted | $ (0.04) | $ 0.19 | - 1,085,683 potentially dilutive Restricted Stock Units were excluded from the diluted EPS calculation for Q1 2020 because their effect would have been anti-dilutive[117] NOTE 13 — REDEEMABLE NONCONTROLLING INTEREST This note details the changes in the redeemable noncontrolling interest, primarily due to International Paper's (IP) reduction of its ownership interest in GPIP through a $250 million cash redemption in January 2020 - On January 29, 2020, GPIP purchased 15.1 million partnership units from International Paper (IP) for $250 million in cash, reducing IP's ownership interest in GPIP from 21.6% to 18.3%[120] Redeemable Noncontrolling Interest (In millions) | Metric | Amount | | :-------------------------------------------- | :------ | | Balance at December 31, 2019 | $ 304.3 | | Net Loss Attributable to Redeemable Noncontrolling Interest | (5.3) | | Other Comprehensive Income, Net of Tax | 8.4 | | Redemption of IP's Ownership Interest | (250.0) | | Redeemable Noncontrolling Interest Redemption Value Adjustment | (18.1) | | Distributions of Membership Interest | (1.1) | | Balance at March 31, 2020 | $ 38.2 | NOTE 14 — ACCUMULATED OTHER COMPREHENSIVE LOSS This note provides a rollforward of the pre-tax Accumulated Derivative Instruments (Loss) Income and details the changes in the components of Accumulated Other Comprehensive Loss attributable to GPHC for the three months ended March 31, 2020 Accumulated Other Comprehensive Loss Attributable to GPHC (In millions, net-of-tax) | Component | Balance at Dec 31, 2019 | Net Current-period Other Comprehensive (Loss) Income | Balance at Mar 31, 2020 | | :---------------------------- | :---------------------- | :--------------------------------------------------- | :---------------------- | | Derivatives Instruments | $ (16.6) | $ (1.4) | $ (17.6) | | Pension and Postretirement Benefit Plans | (238.5) | 155.1 | (125.2) | | Currency Translation Adjustments | (110.7) | (56.9) | (156.7) | | Total | $ (365.8) | $ 96.8 | $ (299.5) | - The company expects to reclassify $8.6 million of pre-tax losses from Accumulated Other Comprehensive Loss to earnings in the next twelve months[99] NOTE 15 — EXIT ACTIVITIES This note details the company's plans to close the White Pigeon, Michigan CRB mill and shut down the PM1 containerboard machine in West Monroe, Louisiana, effective June 30, 2020, and outlines the associated exit costs incurred and expected - In March 2020, the company decided to close the White Pigeon, Michigan CRB mill and shut down the PM1 containerboard machine in West Monroe, Louisiana, both effective June 30, 2020[127] Exit Costs Incurred (Three Months Ended March 31, 2020, In millions) | Cost Type | Amount | | :---------------------------- | :----- | | Severance costs and other | $ 4.5 | | Accelerated depreciation | 4.6 | | Inventory and asset write-offs | 8.5 | | Total | $ 17.6 | - For the closure of two smaller CRB Mills in 2022, the company expects to incur $15 million to $20 million in post-employment benefits, retention bonuses, and incentives, and $50 million to $60 million for accelerated depreciation and asset write-offs[132] - For the White Pigeon mill and PM1 machine closures, the company expects approximately $4 million for post-employment benefits and $13 million to $18 million for accelerated depreciation and asset write-offs[133] NOTE 16 — SUBSEQUENT EVENTS This note reports a subsequent event: the acquisition of substantially all the assets of Greif, Inc.'s Consumer Packaging Group business on April 1, 2020, for approximately $82 million - On April 1, 2020, the company acquired substantially all the assets of the Consumer Packaging Group business from Greif, Inc. for approximately $82 million, including seven converting facilities in the United States[134] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance, condition, and future outlook, discussing business objectives, strategies, significant factors impacting the business (including inflation, competition, debt, and COVID-19), and detailed analysis of first-quarter results, liquidity, capital resources, and critical accounting policies Introduction This section outlines the company's business objectives, competitive landscape, debt obligations, and the impact of COVID-19 - The company aims to strengthen its position as a leading provider of paper-based packaging solutions by expanding market share, capitalizing on customer relationships and assets, developing innovative sustainable products, and reducing costs through operational improvements[135][136] - Cost of sales decreased by $2.8 million in Q1 2020 compared to Q1 2019, primarily due to lower energy ($6.7 million), wood ($6.0 million), and secondary fiber costs ($3.8 million), partially offset by higher labor and benefit costs ($12.0 million)[137][153] - The company faces competition from other paperboard manufacturers and substitute products (plastic, shrink film, corrugated containers) and is impacted by consumer buying habits and macroeconomic factors[140][141] - As of March 31, 2020, the company had $3,501.9 million in outstanding debt obligations, which imposes liquidity requirements and covenant restrictions[142] - The COVID-19 pandemic has not materially impacted the company's business, operations, or financial results to date, but it may cause future disruptions to supply chains, operations, and consumer behavior[144] Overview of First Quarter 2020 Results This section provides key financial highlights and drivers for the company's performance in the first quarter of 2020 Key Financial Highlights (Three Months Ended March 31) | Metric | 2020 (Millions) | 2019 (Millions) | Change (Millions) | % Change | | :--------------------- | :-------------- | :-------------- | :---------------- | :------- | | Net Sales | $ 1,599.1 | $ 1,505.9 | $ 93.2 | 6.2% | | Income from Operations | $ 160.0 | $ 134.0 | $ 26.0 | 19.4% | - Net Sales increase was driven by higher selling prices, volume growth, and the Quad and Artistic acquisitions, partially offset by unfavorable foreign currency exchange rates[146] - Income from Operations increase was due to higher selling prices, cost savings, higher volumes, and commodity deflation, partially offset by higher labor and benefits costs, increased exit activity charges, and unfavorable foreign currency exchange rates[146] - The company acquired a folding carton facility from Quad/Graphics, Inc. on January 31, 2020, and Artistic Carton Company on August 1, 2019[146] - The company declared a quarterly dividend of $0.075 per share and repurchased 9,667,034 shares of common stock for $124.4 million in Q1 2020[150] Results of Operations This section analyzes the company's net sales, income from operations, and other financial results for the reporting period Net Sales Consolidated Net Sales increased by 6.2% in Q1 2020, primarily driven by acquisitions, higher selling prices, and volume growth, with a net positive impact from the COVID-19 pandemic Consolidated Net Sales (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | Increase | % Change | | :---------- | :---------- | :---------- | :---------- | :------- | | Net Sales | $ 1,599.1 | $ 1,505.9 | $ 93.2 | 6.2% | Components of Net Sales Change (Three Months Ended March 31, In millions) | 2019 Price | Volume/Mix | Exchange | Total | 2020 | | :--------- | :--------- | :------- | :---- | :--- | | $ 14.1 | $ 89.0 | $ (9.9) | $ 93.2 | $ 1,599.1 | - The increase in Net Sales included $28.9 million from the Artistic and Quad acquisitions. Core converting volumes were up in global beverage and dry foods, offset by declines in frozen foods and meat products[149] - The COVID-19 pandemic had a net positive impact on volumes in the quarter of approximately 1%, driving about $15 million in sales due to increased demand for food and beverage packaging[149] Income from Operations Consolidated Income from Operations increased by 19.4% in Q1 2020, driven by higher selling prices, cost savings, increased volumes, and commodity deflation, partially offset by higher exit activity charges and labor costs Consolidated Income from Operations (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | Increase | % Change | | :--------------------- | :------ | :------ | :------- | :------- | | Income from Operations | $ 160.0 | $ 134.0 | $ 26.0 | 19.4% | Components of Income from Operations Change (Three Months Ended March 31, In millions) | 2019 Volume/Mix | Price | Inflation | Exchange | Other | Total | 2020 | | :-------------- | :---- | :-------- | :------- | :---- | :---- | :--- | | $ 14.1 | $ 5.4 | $ 2.8 | $ (8.2) | $ 11.9 | $ 26.0 | $ 160.0 | - Commodity costs decreased by $2.8 million due to lower energy ($6.7 million), wood ($6.0 million), and secondary fiber costs ($3.8 million), partially offset by higher labor and benefit costs ($12.0 million)[153] Nonoperating Pension and Postretirement Benefit Nonoperating Pension and Postretirement Benefit expense significantly increased in Q1 2020 due to a $152.5 million settlement charge related to the transfer of pension obligations Nonoperating Pension and Postretirement Benefit Expense (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | | :-------------------------------------------- | :------- | :------ | | Nonoperating Pension and Postretirement Benefit Expense | $ (151.6) | $ (0.1) | - The increase was primarily due to a $152.5 million settlement charge associated with the purchase of a group annuity contract that transferred approximately $713 million of pension obligation[154] Interest Expense, Net Net interest expense decreased in Q1 2020 compared to Q1 2019, primarily due to lower interest rates, despite higher debt balances Interest Expense, Net (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | | :------------------ | :------ | :------ | | Interest Expense, Net | $ (33.7) | $ (35.0) | - The decrease was primarily due to lower interest rates, partially offset by higher debt balances. Approximately 38% of the company's total debt was subject to floating interest rates as of March 31, 2020[155] Income Tax Expense The company recognized an income tax benefit in Q1 2020, contrasting with an expense in Q1 2019, with effective tax rates influenced by noncontrolling interests and the mix of foreign and domestic earnings. The company does not expect to be a meaningful U.S. federal cash taxpayer until 2024 due to NOLs Income Tax Benefit (Expense) (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | | :-------------------------------------------- | :------ | :------ | | Income Tax Benefit (Expense) | $ 5.4 | $ (21.0) | | (Loss) Income before Income Taxes and Equity Income of Unconsolidated Entity | $ (25.3) | $ 98.9 | - The effective tax rate for both periods differed from the statutory rate primarily due to the tax effect of income attributable to noncontrolling interests and the mix of earnings and levels of earnings between foreign and domestic tax jurisdictions[156][157] - As of December 31, 2019, the company had approximately $32 million of U.S. federal Net Operating Losses (NOLs) and anticipates not being a meaningful U.S. federal cash taxpayer until 2024[158] Segment Reporting This section provides a detailed analysis of the performance of the company's three reportable segments: Paperboard Mills, Americas Paperboard Packaging, and Europe Paperboard Packaging, highlighting the drivers behind their respective net sales and income from operations changes in Q1 2020 compared to Q1 2019 Segment Net Sales (Three Months Ended March 31, In millions) | Segment | 2020 | 2019 | | :-------------------------- | :-------- | :-------- | | Paperboard Mills | $ 268.5 | $ 275.5 | | Americas Paperboard Packaging | 1,123.4 | 1,022.8 | | Europe Paperboard Packaging | 176.8 | 173.8 | | Corporate/Other/Eliminations | 30.4 | 33.8 | | Total | $ 1,599.1 | $ 1,505.9 | Segment (Loss) Income from Operations (Three Months Ended March 31, In millions) | Segment | 2020 | 2019 | | :-------------------------- | :------- | :------ | | Paperboard Mills | $ (22.9) | $ (4.0) | | Americas Paperboard Packaging | 194.8 | 125.6 | | Europe Paperboard Packaging | 12.0 | 19.2 | | Corporate and Other | (23.9) | (6.8) | | Total | $ 160.0 | $ 134.0 | - Paperboard Mills' Net Sales decreased due to lower selling prices, customer mix, and lower open market volume of CUK, offset by higher open market volume of SBS and CRB, and increased internalization of paperboard tons[165] - Americas Paperboard Packaging's Net Sales increased due to higher selling prices, volume growth (global beverage, dry foods, new products), and the Artistic and Quad acquisitions, with a net positive impact from COVID-19[167] - Europe Paperboard Packaging's Net Sales increased due to higher pricing and increased volumes (beverage and convenience), partially offset by unfavorable foreign currency exchange rates[171] Financial Condition, Liquidity and Capital Resources This section assesses the company's cash flows, liquidity, capital resources, and ability to meet future financial obligations Cash Flows This section analyzes the company's cash flow activities for Q1 2020, noting a decrease in cash used in operating activities, an increase in cash used in investing activities, and an increase in cash provided by financing activities Cash Flow Summary (Three Months Ended March 31, In millions) | Cash Flow Activity | 2020 | 2019 | | :---------------------------------- | :-------- | :-------- | | Net Cash Used in Operating Activities | $ (79.3) | $ (172.1) | | Net Cash (Used in) Provided by Investing Activities | $ (175.8) | $ 43.2 | | Net Cash Provided by Financing Activities | $ 218.5 | $ 120.5 | - The decrease in Net Cash Used in Operating Activities was primarily due to restructuring of accounts receivable sale and securitization programs and improved operations[173] - Investing activities included $153.1 million in capital spending and $42 million for the Quad acquisition in 2020[174] - Financing activities in 2020 included a $450 million debt offering, $250 million redemption of noncontrolling interest, $119.4 million for common stock repurchases, and $26.7 million in dividends and distributions[175] Liquidity and Capital Resources The company believes its cash generated from operations, revolving credit facilities, and other financing sources will be adequate to meet its debt service obligations, capital expenditure programs, and ongoing operating and working capital needs - The company's liquidity needs primarily arise from funding capital expenditures, debt service, operating costs, working capital, share repurchases, and dividend payments[176] - Cash generated from operations, available revolving credit facilities, and other financing sources are expected to be adequate to meet future obligations[176] Accounts Receivable Programs This section details the company's revolving accounts receivable sale and factoring arrangements with third-party financial institutions, which are accounted for as sales Accounts Receivable Program Activity (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | | :-------------------------------- | :------ | :------ | | Receivables Sold and Derecognized | $ 610.2 | $ 811.2 | | Proceeds Collected | 608.8 | 504.1 | | Net Proceeds Paid | (4.7) | (28.8) | | Deferred Purchase Price at March 31 | 6.7 | 4.3 | | Pledged Receivables at March 31 | 263.5 | 144.2 | - The company sold approximately $72 million and $37 million in receivables related to factoring arrangements for the three months ended March 31, 2020, and 2019, respectively[179] Covenant Restrictions This section outlines the company's debt covenants, including the maximum Consolidated Total Leverage Ratio and minimum Consolidated Interest Expense Ratio, and confirms compliance as of March 31, 2020 - The Credit Agreement requires a maximum Consolidated Total Leverage Ratio of less than 4.25 to 1.00; the company's ratio was 2.96 to 1.00 at March 31, 2020[183] - The company must maintain a minimum Consolidated Interest Expense Ratio of 3.00 to 1.00; its ratio was 8.24 to 1.00 at March 31, 2020[183] - As of March 31, 2020, the company was in compliance with all covenants in the Credit Agreement and Indentures[183] Capital Investment Capital investment in Q1 2020 significantly increased compared to Q1 2019, primarily driven by planned asset upgrades at U.S. mills, including the new CRB paper machine in Kalamazoo, MI, and integration of acquisitions Capital Investment (Three Months Ended March 31, In millions) | Metric | 2020 | 2019 | | :---------------- | :------ | :----- | | Capital Investment | $ 153.1 | $ 80.0 | - Investments were primarily for planned asset upgrades at U.S.-based mills, including the new CRB paper machine in Kalamazoo, MI, and continued investments for acquisition integration[185] Environmental Matters The company has established reserves for probable and estimable environmental investigations and remediations, which are not considered material to its consolidated financial position, results of operations, or cash flows - The company has established reserves for environmental liabilities where a liability is probable and costs are reasonably estimable, and these amounts are not material to its consolidated financial position, results of operations, or cash flows[186] Critical Accounting Policies This section highlights the company's critical accounting policies requiring significant judgment and complex estimations - The company's critical accounting policies are detailed in its 2019 Form 10-K, requiring significant judgment and complex estimations[189] - Annual goodwill impairment tests as of October 1, 2019, concluded no impairment, with all reporting units having fair values exceeding carrying values. The company continues to assess the impact of COVID-19 on goodwill[190] New Accounting Standards This section refers to Note 1 for a discussion of recent accounting pronouncements impacting the company - For a discussion of recent accounting pronouncements impacting the company, refer to Note 1 - General Information in the Notes to Condensed Consolidated Financial Statements[191] Business Outlook This section provides the company's financial projections for capital investment, depreciation, and pension contributions for 2020 - Total capital investment for 2020 is expected to be approximately $600 million[192] - Depreciation and amortization expense for 2020 is expected to be between $455 million and $465 million, excluding approximately $5 million of pension amortization and $20 million of accelerated depreciation related to exit activities[192] - Pension plan contributions for 2020 are expected to be between $10 million and $20 million[192] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This section refers to the company's 2019 Form 10-K for a comprehensive discussion of market risks and notes that there have been no significant developments regarding derivatives or market risk exposure during the first three months of 2020 - For a discussion of market risks, refer to Part II, 'Item 7A, Quantitative and Qualitative Disclosure about Market Risk' in GPHC's Form 10-K for the year ended December 31, 2019[193] - There have been no significant developments with respect to derivatives or exposure to market risk during the first three months of 2020[193] ITEM 4. CONTROLS AND PROCEDURES This section addresses the effectiveness of the company's disclosure controls and procedures and reports on any changes in internal control over financial reporting Disclosure Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures as of March 31, 2020 - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[194] Changes in Internal Control over Financial Reporting This section reports no material changes in the company's internal control over financial reporting during the quarter - There was no change in the company's internal control over financial reporting that materially affected, or is likely to materially affect, internal control over financial reporting during the fiscal quarter ended March 31, 2020[195] PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section states that the company is involved in various lawsuits arising in the ordinary course of business, but their disposition is not expected to have a material adverse effect on its consolidated financial position, results of operations, or cash flows - The company is a party to a number of lawsuits arising in the ordinary conduct of its business[198] - The disposition of these lawsuits is not believed to have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[198] ITEM 1A. RISK FACTORS This section highlights the potential adverse impacts of the COVID-19 pandemic on the company's operations, supply chain, employees, and consumer buying habits, while noting no other material changes from the risk factors previously disclosed in the 2019 Form 10-K - The COVID-19 pandemic could cause unpredictable disruptions to operations, supply chain, and transportation, potentially impacting the company's ability to operate facilities and distribute products[199] - The pandemic's volatility and economic disruption may negatively impact consumer buying habits, which could adversely affect the company's financial results[199] - Other than the noted impacts of COVID-19, there have been no material changes from the risk factors disclosed in the company's 2019 Annual Report on Form 10-K[200] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the company's share repurchase activities under the 2019 share repurchase program during the first quarter of 2020 - The company purchases shares of its common stock under the 2019 share repurchase program, authorized for up to $500 million[201] Issuer Purchases of Equity Securities (Q1 2020) | Period (2020) | Total Number of Shares Purchased | Average Price Paid Per Share | | :---------------------------- | :------------------------------- | :--------------------------- | | January 1, through January 31, | — | $ — | | February 1, through February 29, | 1,469,100 | $ 13.58 | | March 1, through March 31, | 8,197,934 | $ 12.74 | | Total | 9,667,034 | $ 12.87 | ITEM 4. MINE SAFETY DISCLOSURES This section states that there are no mine safety disclosures to report - No mine safety disclosures are applicable[203] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including a non-participating single premium group annuity contract, various certifications, and XBRL content - Exhibits include a Non-Participating Single Premium Group Annuity Contract, certifications required by Rule 13a-14(a) and Section 1350 of Chapter 63 of Title 18 of the United States Code, and XBRL content[204] SIGNATURES This section contains the signatures of the Executive Vice President and Chief Financial Officer, and the Senior Vice President and Chief Accounting Officer, certifying the accuracy of the report - The report is signed by Stephen R. Scherger, Executive Vice President and Chief Financial Officer, and Charles D. Lischer, Senior Vice President and Chief Accounting Officer, on April 21, 2020[207]