Graphic Packaging(GPK) - 2020 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements and detailed notes for the periods ended September 30, 2020 and 2019 Condensed Consolidated Statements of Operations This statement outlines net sales, operating income, net income attributable to GPHC, and EPS for Q3 and 9M 2020 and 2019 Condensed Consolidated Statements of Operations | In millions, except per share amounts | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Sales | $ 1,697.7 | $ 1,581.6 | $ 4,907.8 | $ 4,640.3 | | Income from Operations | $ 119.1 | $ 122.7 | $ 393.9 | $ 401.1 | | Net Income Attributable to GPHC | $ 63.7 | $ 52.1 | $ 103.1 | $ 173.8 | | Basic EPS | $ 0.23 | $ 0.18 | $ 0.37 | $ 0.59 | | Diluted EPS | $ 0.23 | $ 0.18 | $ 0.36 | $ 0.59 | Condensed Consolidated Statements of Comprehensive Income This statement details net income, other comprehensive income, and total comprehensive income for Q3 and 9M 2020 and 2019 Condensed Consolidated Statements of Comprehensive Income | In millions | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income | $ 79.3 | $ 70.0 | $ 126.2 | $ 234.2 | | Total Other Comprehensive Income, Net of Tax | $ 35.9 | $ (17.1) | $ 150.1 | $ (19.2) | | Total Comprehensive Income | $ 115.2 | $ 52.9 | $ 276.3 | $ 215.0 | Condensed Consolidated Balance Sheets This statement presents the company's assets, liabilities, and equity as of September 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets | In millions | Sep 30, 2020 | Dec 31, 2019 | | :---------- | :----------- | :----------- | | Total Assets | $ 7,682.0 | $ 7,289.9 | | Total Current Assets | $ 2,018.4 | $ 1,805.6 | | Total Liabilities | $ 5,848.1 | $ 5,231.9 | | Total Current Liabilities | $ 1,719.7 | $ 1,198.7 | | Total Equity | $ 1,833.9 | $ 2,058.0 | Condensed Consolidated Statements of Equity This statement outlines changes in total equity, net income, common stock shares, repurchases, and dividends for the periods presented Condensed Consolidated Statements of Equity | In millions, except share amounts | Balances at Dec 31, 2019 | Balances at Sep 30, 2020 | | :-------------------------------- | :----------------------- | :----------------------- | | Total Equity | $ 2,058.0 | $ 1,833.9 |\n| Net Income Attributable to GPHC | $ 56.4 (Retained Earnings) | $ (52.0) (Accumulated Deficit) |\n| Common Stock Shares Outstanding | 290,246,907 | 272,236,844 |\n| Repurchase of Common Stock (9M 2020) | - | $ (124.4) (Q1), $ (33.1) (Q2), $ (94.1) (Q3) |\n| Dividends Declared (9M 2020) | - | $ (21.1) (Q1), $ (21.3) (Q2), $ (20.6) (Q3) | Condensed Consolidated Statements of Cash Flows This statement summarizes cash flows from operating, investing, and financing activities for the nine months ended September 30, 2020 and 2019 Condensed Consolidated Statements of Cash Flows | In millions | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :---------- | :----------------------------- | :----------------------------- | | Net Cash Provided by Operating Activities | $ 389.2 | $ 300.7 |\n| Net Cash Used in Investing Activities | $ (476.9) | $ (121.4) |\n| Net Cash Used in Financing Activities | $ (7.5) | $ (200.8) |\n| Net Decrease in Cash and Cash Equivalents | $ (97.4) | $ (21.8) |\n| Cash and Cash Equivalents at End of Period | $ 55.5 | $ 48.7 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements, covering accounting policies, transactions, and financial instruments NOTE 1 — General Information This note outlines the company's business, IP's ownership changes, revenue recognition, capital allocation, business combinations, shutdown charges, and new accounting standards - Graphic Packaging Holding Company (GPHC) is a global leader in paper-based packaging solutions, specializing in folding cartons, coated-recycled paperboard (CRB), coated unbleached kraft paperboard (CUK), and solid bleached sulfate paperboard (SBS)[30] - International Paper Company (IP) reduced its ownership interest in GPIP from 21.6% to 18.3% on January 29, 2020, and further to 14.5% on August 13, 2020, through cash purchases of partnership units totaling $500 million[34][35] - Revenue from contracts with customers increased to $1,691.2 million for Q3 2020 (from $1,577.6 million in Q3 2019) and to $4,891.1 million for 9M 2020 (from $4,627.2 million in 9M 2019)[41] Share Repurchase Program Activity | Period | Shares Repurchased | Average Price Per Share | | :----- | :----------------- | :---------------------- | | 9M 2020 | 18,896,538 | $13.31 |\n| 9M 2019 | 10,191,257 | $12.55 | - The company declared three quarterly dividends of $0.075 per share during the first nine months of 2020[50] Business Combinations and Shutdown and Other Special Charges, Net (in millions) | Category | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Business Combinations | $ 0.9 | $ 0.6 | $ (3.1) | $ 3.2 |\n| Shutdown & Other Special Charges | $ 3.7 | $ 4.6 | $ 29.9 | $ 18.1 |\n| Exit Activities | $ 4.4 | $ 3.0 | $ 21.4 | $ 3.0 |\n| Total | $ 9.0 | $ 8.2 | $ 48.2 | $ 24.3 | - In 2020, the company acquired a folding carton facility from Quad/Graphics, Inc. and the Consumer Packaging Group business from Greif, Inc., and closed the White Pigeon, Michigan CRB mill and PM1 containerboard machine in West Monroe, Louisiana[52][55] NOTE 2 — Inventories, Net This note provides a breakdown of the company's inventory by major class, showing an increase in total inventories from December 31, 2019, to September 30, 2020 Inventories, Net (in millions) | In millions | Sep 30, 2020 | Dec 31, 2019 | | :---------- | :----------- | :----------- | | Finished Goods | $ 448.2 | $ 434.8 |\n| Work in Progress | $ 147.2 | $ 123.4 |\n| Raw Materials | $ 380.6 | $ 370.0 |\n| Supplies | $ 177.8 | $ 167.7 |\n| Total | $ 1,153.8 | $ 1,095.9 | NOTE 3 — Business Combinations This note details 2020 acquisitions of a folding carton facility from Quad/Graphics and the Consumer Packaging Group from Greif, plus the finalization of the 2019 Artistic acquisition - Acquired a folding carton facility from Quad/Graphics for approximately $41 million, recording a $6.6 million bargain purchase gain. The acquisition contributed $58.5 million in Net Sales and $0.6 million in Income from Operations in 2020[64] - Acquired the Consumer Packaging Group from Greif, Inc. for approximately $80 million. This acquisition contributed $116.6 million in Net Sales and resulted in a $5.1 million Loss from Operations in 2020[65] NOTE 4 — Debt This note details the company's long-term debt structure, including new senior unsecured notes, revolving credit facilities, and compliance with debt covenants - Issued $450.0 million in 3.50% senior unsecured notes due 2028 on March 6, 2020, and $350.0 million in 3.50% senior unsecured notes due 2029 on August 28, 2020, using proceeds to repay revolving credit facility borrowings[67][68] Long-Term Debt (in millions) | Debt Type | Sep 30, 2020 | Dec 31, 2019 | | :-------- | :----------- | :----------- | | Total Long-Term Debt | $ 3,702.8 | $ 2,863.5 |\n| Less: Current Portion | $ 484.7 | $ 41.1 |\n| Total (Net of Unamortized Costs) | $ 3,196.9 | $ 2,809.9 | Revolving Credit Facilities (in millions) as of Sep 30, 2020 | Facility | Total Commitments | Total Outstanding | Total Available | | :------- | :---------------- | :---------------- | :-------------- | | Senior Secured Domestic | $ 1,450.0 | $ 20.0 | $ 1,409.3 |\n| Senior Secured International | $ 185.5 | $ 93.2 | $ 92.3 |\n| Other International | $ 54.7 | $ 16.2 | $ 38.5 |\n| Total | $ 1,690.2 | $ 129.4 | $ 1,540.1 | - The company was in compliance with all debt covenants as of September 30, 2020[73] NOTE 5 — Stock Incentive Plans This note details the company's active equity compensation plan, providing data on RSUs granted in 2020 and the recognized compensation expense RSUs Granted in First Nine Months of 2020 | Award Type | RSUs Granted | Weighted Average Grant Date Fair Value Per Share | | :--------- | :----------- | :--------------------------------------------- | | Employees | 1,648,026 | $15.40 |\n| Board of Directors | 71,160 | $13.49 | - Compensation expense for stock incentive plans was $26.8 million for 9M 2020, up from $16.1 million for 9M 2019[77] NOTE 6 — Pensions and Other Postretirement Benefits This note outlines the company's pension and postretirement plans, detailing a significant Q1 2020 non-cash settlement charge, employer contributions, and multi-employer plan liabilities - In Q1 2020, the company incurred a $152.5 million non-cash settlement charge by purchasing a group annuity contract to transfer approximately $713 million of pension obligations to an insurance company[80][83] Pension and Postretirement Expense (in millions) | Component | 9M 2020 Pension Benefits | 9M 2019 Pension Benefits | 9M 2020 Postretirement Health Care Benefits | 9M 2019 Postretirement Health Care Benefits | | :-------- | :----------------------- | :----------------------- | :------------------------------------------ | :------------------------------------------ | | Service Cost | $ 11.5 | $ 10.5 | $ 0.4 | $ 0.4 |\n| Interest Cost | $ 10.5 | $ 34.5 | $ 0.7 | $ 0.9 |\n| Net Settlement Loss | $ 152.5 | $ — | $ — | $ — |\n| Net Periodic Cost (Benefit) | $ 163.1 | $ 11.7 | $ (0.4) | $ (0.7) | - Employer contributions to pension plans were $16.0 million for 9M 2020, up from $8.2 million for 9M 2019. Postretirement health care benefit payments were $1.5 million for 9M 2020, down from $2.2 million for 9M 2019[84][85] - Increased estimated withdrawal liability for multi-employer benefit plans by $12.2 million in Q2 2020, bringing the total estimated liability to $42.1 million[86] NOTE 7 — Financial Instruments and Fair Value Measurement This note describes the company's use of derivative instruments for risk management, their fair value measurement, and their impact on financial statements, including long-term debt - The company uses interest rate swaps to manage interest rate risks on variable rate term loan facilities, natural gas swap contracts to hedge commodity price risks, and forward exchange contracts for foreign currency transaction risks[90][91][93] - As of September 30, 2020, the company had hedged approximately 69% of its expected natural gas usage for the remainder of 2020, 37% for 2021, and 10% for 2022[91] Fair Value of Derivative Instruments (in millions) | Derivative Type | Sep 30, 2020 Assets | Dec 31, 2019 Assets | Sep 30, 2020 Liabilities | Dec 31, 2019 Liabilities | | :-------------- | :------------------ | :------------------ | :----------------------- | :----------------------- | | Interest rate contracts | $ — | $ — | $ 7.6 | $ 6.6 |\n| Foreign currency contracts | $ 0.1 | $ — | $ 0.5 | $ 1.5 |\n| Commodity contracts | $ 5.7 | $ — | $ — | $ 3.4 |\n| Total Derivatives | $ 5.8 | $ — | $ 8.1 | $ 11.5 | - The fair value of the company's Long-Term Debt was $3,627.0 million as of September 30, 2020, compared to a carrying amount of $3,562.1 million[102] Effect of Derivative Instruments on Statements of Operations (9M, in millions) | Category | 9M 2020 Gain (Loss) in AOCI | 9M 2019 Gain (Loss) in AOCI | 9M 2020 Gain (Loss) in Operations | 9M 2019 Gain (Loss) in Operations | | :------- | :-------------------------- | :-------------------------- | :-------------------------------- | :-------------------------------- | | Commodity Contracts | $ (15.9) | $ 2.5 | $ (6.8) | $ (0.4) |\n| Foreign Currency Contracts | $ (1.2) | $ (1.5) | $ (0.9) | $ (0.9) |\n| Interest Rate Swap Agreements | $ 5.9 | $ 6.3 | $ 5.1 | $ 0.4 |\n| Total | $ (11.2) | $ 7.3 | $ (2.6) | $ (0.9) | NOTE 8 — Income Taxes This note details the company's income tax expense, effective tax rates, impact of noncontrolling interests and discrete tax benefits, and outlook on future U.S. federal cash tax payments Income Tax Expense (in millions) | Period | Income Tax Expense | Income before Income Taxes and Equity Income | | :----- | :----------------- | :------------------------------------------- | | 9M 2020 | $ 21.2 | $ 146.7 |\n| 9M 2019 | $ 60.9 | $ 294.6 | - The effective tax rate is lower than the statutory rate due to the tax effect of income attributable to noncontrolling interests and the mix of foreign and domestic earnings. Discrete benefits of $7.6 million and $4.1 million were recorded in 9M 2020 related to valuation allowance release and tax credit adjustments[107] - The company does not expect to be a meaningful U.S. federal cash taxpayer until 2024, leveraging Net Operating Losses (NOLs) and other tax attributes[108] NOTE 9 — Environmental and Legal Matters This note addresses environmental regulations and potential remediation costs, confirming that accrued loss contingencies and current lawsuits are not expected to have a material adverse effect - The company is subject to various environmental, health, and safety laws, with compliance initiatives potentially incurring significant costs. Reserves have been established for probable and estimable liabilities, which are not considered material[109][111] - Legal proceedings arising in the ordinary course of business are not expected to have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[114] NOTE 10 — Related Party Transactions This note details transactions with International Paper Company (IP) for fiber procurement fees and corrugated products, showing changes in payments for 2020 compared to 2019 Payments to IP (in millions) | Category | 9M 2020 | 9M 2019 | | :------- | :------ | :------ | | Fiber Procurement Fees | $ 9.2 | $ 8.6 |\n| Corrugated Products | $ 21.7 | $ 19.7 |\n| Transition Services | $ — | $ 0.1 | NOTE 11 — Segment Information This note defines the company's three reportable segments and provides their net sales, income from operations, and depreciation and amortization for Q3 and 9M 2020 and 2019 - The company operates through three reportable segments: Paperboard Mills (producing CRB, CUK, SBS), Americas Paperboard Packaging (folding cartons, cups, lids, food containers), and Europe Paperboard Packaging (folding cartons)[116][117][118] Segment Net Sales (in millions) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Paperboard Mills | $ 240.9 | $ 279.2 | $ 744.0 | $ 833.9 |\n| Americas Paperboard Packaging | $ 1,214.8 | $ 1,091.1 | $ 3,491.9 | $ 3,176.6 |\n| Europe Paperboard Packaging | $ 193.9 | $ 171.0 | $ 553.7 | $ 522.0 |\n| Total | $ 1,697.7 | $ 1,581.6 | $ 4,907.8 | $ 4,640.3 | Segment (Loss) Income from Operations (in millions) | Segment | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :------ | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Paperboard Mills | $ (34.4) | $ 10.7 | $ (92.6) | $ 19.2 |\n| Americas Paperboard Packaging | $ 140.5 | $ 112.2 | $ 492.4 | $ 363.1 |\n| Europe Paperboard Packaging | $ 15.5 | $ 8.6 | $ 48.2 | $ 43.3 |\n| Total | $ 119.1 | $ 122.7 | $ 393.9 | $ 401.1 | NOTE 12 — Earnings Per Share This note provides basic and diluted earnings per share (EPS) attributable to GPHC, along with weighted average shares outstanding for Q3 and 9M 2020 and 2019 Earnings Per Share Attributable to GPHC | In millions, except per share data | Three Months Ended Sep 30, 2020 | Three Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2019 | | :--------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income Attributable to GPHC | $ 63.7 | $ 52.1 | $ 103.1 | $ 173.8 |\n| Basic EPS | $ 0.23 | $ 0.18 | $ 0.37 | $ 0.59 |\n| Diluted EPS | $ 0.23 | $ 0.18 | $ 0.36 | $ 0.59 | NOTE 13 — Redeemable Noncontrolling Interest This note details the reduction of IP's ownership interest in GPIP through cash redemptions in January and August 2020, leading to full redemption by September 30, 2020 - IP's ownership interest in GPIP decreased from 21.6% to 18.3% on January 29, 2020, and further to 14.5% on August 13, 2020, through cash purchases of partnership units totaling $500 million[125][128] Redeemable Noncontrolling Interest (in millions) | Item | Amount | | :--- | :----- | | Balance at December 31, 2019 | $ 304.3 |\n| Redemption of IP's Ownership Interest | $ (296.1) |\n| Balance at September 30, 2020 | $ — | NOTE 14 — Accumulated Other Comprehensive Loss This note provides a rollforward of Accumulated Other Comprehensive Loss attributable to GPHC for 9M 2020, detailing changes from derivatives, pension plans, and currency translation adjustments Accumulated Other Comprehensive Loss (in millions, net of tax) | Component | Balance at Dec 31, 2019 | Total Other Comprehensive Income (Loss), Net of Tax (9M 2020) | Balance at Sep 30, 2020 | | :-------- | :---------------------- | :----------------------------------------------------------- | :---------------------- | | Derivatives Instruments | $ (16.6) | $ 8.2 | $ (9.8) |\n| Pension and Postretirement Benefit Plans | $ (238.5) | $ 156.4 | $ (124.1) |\n| Currency Translation Adjustments | $ (110.7) | $ (14.5) | $ (121.6) |\n| Total | $ (365.8) | $ 150.1 | $ (255.5) | - The company expects to reclassify $1.2 million of pre-tax losses from Accumulated Other Comprehensive Loss to earnings in the next twelve months[105] NOTE 15 — Exit Activities This note outlines facility closure plans and costs, including the White Pigeon CRB mill, PM1 containerboard machine, and Greif-acquired converting facilities, plus expected future charges for 2022 mill closures - In 2019, the company announced a $600 million investment in a new CRB paper machine in Kalamazoo, Michigan, expecting to close two smaller CRB mills in 2022 to remain capacity neutral[135] - In 2020, the company closed the White Pigeon, Michigan CRB mill and shut down the PM1 containerboard machine in West Monroe, Louisiana, incurring cumulative exit activity charges of $2.3 million for post-employment benefits and $15.8 million for accelerated depreciation and asset write-offs[136][142] - The Burlington, North Carolina and Los Angeles, California converting facilities (acquired from Greif) were closed in Q3 2020, incurring cumulative exit activity charges of $1.4 million for post-employment benefits and $3.6 million for accelerated amortization of operating lease assets[137][143] Exit Activity Costs Incurred (in millions) | Cost Type | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2020 | | :-------- | :------------------------------ | :----------------------------- | | Severance costs and other | $ 1.3 | $ 8.3 |\n| Accelerated depreciation | $ 4.7 | $ 20.7 |\n| Inventory and asset write-offs | $ 3.1 | $ 13.1 |\n| Total | $ 9.1 | $ 42.1 | - Expected future exit activity charges for the 2022 CRB mill closures are $15-20 million for post-employment benefits and $50-60 million for accelerated depreciation and asset write-offs[141] NOTE 16 — Subsequent Events This note discloses a subsequent event where GPIL entered a new $425 million term loan on October 15, 2020, to refinance its 2021 bond issuance - On October 15, 2020, GPIL entered into a new $425 million term loan with a fixed interest rate of 2.67%, maturing in seven years, to refinance its 2021 4.75% bond issuance[144] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on financial performance, condition, and future outlook, covering business overview, key factors, results of operations, liquidity, capital resources, and critical accounting policies Introduction This introduction outlines the company's strategic goals, the impact of COVID-19, cost of sales drivers, commodity risk management, competitive landscape, and debt obligations - 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 sustainable products, and reducing costs through operational improvements[145][146] - The COVID-19 pandemic has not materially impacted overall business, operations, or financial results to date, but uncertainties remain regarding its duration and potential impacts on customer behavior, operations, and supply chain[147] - Cost of sales increased by $9.1 million in 9M 2020 compared to 9M 2019, driven by higher labor and benefit costs ($34.1 million), secondary fiber cost ($15.1 million), and freight ($3.2 million), partially offset by decreases in wood ($26.8 million) and energy ($10.7 million)[148][175] - The company uses natural gas swap contracts to manage price volatility for a portion of its expected usage through 2022[149] - The company faces competition from other paperboard manufacturers and substitute products (plastic, shrink film, corrugated containers), and its sales are influenced by consumer buying habits and macroeconomic factors[155][156] - Outstanding debt obligations of $3,713.9 million as of September 30, 2020, impose liquidity requirements and covenant restrictions that could limit operational flexibility[157][158] Overview of Third Quarter 2020 Results This section provides a high-level overview of the company's consolidated financial performance for Q3 2020, highlighting changes in net sales and income from operations, and key drivers Consolidated Financial Highlights (Q3 2020 vs Q3 2019) | Metric | Q3 2020 (in millions) | Q3 2019 (in millions) | Change (in millions) | % Change | | :----- | :-------------------- | :-------------------- | :------------------- | :------- | | Net Sales | $ 1,697.7 | $ 1,581.6 | $ 116.1 | 7.3 % |\n| Income from Operations | $ 119.1 | $ 122.7 | $ (3.6) | (2.9)% | - Net Sales increase driven by organic sales growth, acquisitions (Greif, Quad, Artistic), and favorable foreign currency exchange rates, partially offset by lower selling prices and open market paperboard volume[160][166] - Income from Operations decreased due to higher labor and benefit costs, increased market downtime at the uncoated SBS cupstock paper machine, lower selling prices, and higher depreciation and amortization, partially offset by cost savings, higher volumes, commodity deflation, and favorable foreign currency exchange rates[160][168] - Acquisitions in 2020 include Greif's Consumer Packaging Group (seven converting facilities) and Quad/Graphics' folding carton facility in Omaha, Nebraska. The Artistic Carton Company acquisition from 2019 is also noted[160][162] - The company repurchased 18,896,538 shares of common stock for $251.5 million (average price $13.31) in 9M 2020 under the $500 million 2019 share repurchase program, with $211 million remaining available[50][165] Results of Operations This section provides a detailed analysis of the company's consolidated financial results for the third quarter and first nine months of 2020 compared to 2019 Third Quarter 2020 Compared with Third Quarter 2019 This section compares consolidated net sales, income from operations, interest expense, and income tax expense for Q3 2020 versus Q3 2019, highlighting key drivers of change Consolidated Net Sales Change Components (Q3 2020 vs Q3 2019, in millions) | Base (2019) | Price | Volume/Mix | Exchange | Total Increase | Result (2020) | | :---------- | :---- | :--------- | :------- | :------------- | :------------ | | $ 1,581.6 | $ (9.6) | $ 118.8 | $ 6.9 | $ 116.1 | $ 1,697.7 | Consolidated Income from Operations Change Components (Q3 2020 vs Q3 2019, in millions) | Base (2019) | Price | Volume/Mix | Inflation | Exchange | Other | Total Decrease | Result (2020) | | :---------- | :---- | :--------- | :-------- | :------- | :---- | :------------- | :------------ | | $ 122.7 | $ (9.6) | $ 12.2 | $ (9.4) | $ 3.2 | $ — | $ (3.6) | $ 119.1 | - Interest Expense, Net decreased to $32.0 million in Q3 2020 from $35.9 million in Q3 2019, primarily due to lower interest rates, despite higher debt balances[169] - Income Tax Expense decreased to $8.3 million in Q3 2020 from $16.9 million in Q3 2019, influenced by noncontrolling interests and discrete tax benefits of $7.6 million and $4.1 million[170] First Nine Months 2020 Compared with First Nine Months 2019 This section compares consolidated net sales, income from operations, nonoperating pension expense, interest expense, and income tax expense for 9M 2020 versus 9M 2019 Consolidated Net Sales Change Components (9M 2020 vs 9M 2019, in millions) | Base (2019) | Price | Volume/Mix | Exchange | Total Increase | Result (2020) | | :---------- | :---- | :--------- | :------- | :------------- | :------------ | | $ 4,640.3 | $ 9.9 | $ 273.7 | $ (16.1) | $ 267.5 | $ 4,907.8 | Consolidated Income from Operations Change Components (9M 2020 vs 9M 2019, in millions) | Base (2019) | Price | Volume/Mix | Inflation | Exchange | Other | Total Decrease | Result (2020) | | :---------- | :---- | :--------- | :-------- | :------- | :---- | :------------- | :------------ | | $ 401.1 | $ 9.9 | $ 6.3 | $ (9.1) | $ (2.7) | $ (11.6) | $ (7.2) | $ 393.9 | - Nonoperating Pension and Postretirement Benefit expense increased significantly to $150.8 million in 9M 2020 from $0.1 million in 9M 2019, primarily due to a $152.5 million settlement charge from transferring pension obligations[177] - Interest Expense, Net decreased to $96.4 million in 9M 2020 from $106.4 million in 9M 2019, driven by lower interest rates[178] - Income Tax Expense decreased to $21.2 million in 9M 2020 from $60.9 million in 9M 2019, due to noncontrolling interests and discrete tax benefits[179] Segment Reporting This section analyzes net sales and income from operations for the Paperboard Mills, Americas, and Europe Paperboard Packaging segments for Q3 and 9M 2020 and 2019 - Paperboard Mills: Net Sales decreased in both Q3 and 9M 2020 due to lower selling prices, customer mix, and reduced open market volume (partially from White Pigeon Mill closure and increased internalization). Loss from Operations increased due to these factors, partially offset by productivity improvements and commodity deflation[186][187][192][193] - Americas Paperboard Packaging: Net Sales increased in both Q3 and 9M 2020 due to acquisitions (Greif, Artistic, Quad), organic sales growth (global beverage, dry foods, frozen foods), and new product introductions, despite lower selling prices and unfavorable foreign currency. Income from Operations increased due to higher volumes, cost savings, and commodity deflation, partially offset by non-commodity inflation and lower selling prices[188][189][194][195] - Europe Paperboard Packaging: Net Sales increased in both Q3 and 9M 2020 due to higher pricing and increased volumes (especially beverage), partially offset by unfavorable mix. Income from Operations increased due to higher selling prices, increased volumes, and commodity deflation, partially offset by higher labor and benefits costs and unfavorable mix[190][196] Financial Condition, Liquidity and Capital Resources This section discusses the company's cash flow activities, liquidity, and capital resources, covering operating cash flow, capital spending, debt, covenant compliance, and accounts receivable programs Cash Flow Summary (9M, in millions) | Activity | 9M 2020 | 9M 2019 | | :------- | :------ | :------ | | Net Cash Provided by Operating Activities | $ 389.2 | $ 300.7 |\n| Net Cash Used in Investing Activities | $ (476.9) | $ (121.4) |\n| Net Cash Used in Financing Activities | $ (7.5) | $ (200.8) | - Operating cash flow increased primarily due to restructuring of accounts receivable sale and securitization programs and improved operations[198] - Investing activities used more cash in 9M 2020 ($476.9 million) compared to 9M 2019 ($121.4 million), mainly due to higher capital spending ($425.7 million vs $229.9 million) and acquisitions (Quad and Greif for $41 million and $80 million, respectively)[199] - Financing activities used less cash in 9M 2020 ($7.5 million) compared to 9M 2019 ($200.8 million), reflecting new debt offerings ($800 million) used to repay revolving credit, partially offset by $500 million redemption of IP's ownership interest and $247.3 million in common stock repurchases[200] - The company believes cash from operations, revolving credit facilities, and other financing will be adequate to meet debt service, capital expenditures, and operating costs[201] Accounts Receivable Sale Programs (9M, in millions) | Metric | 9M 2020 | 9M 2019 | | :----- | :------ | :------ | | Receivables Sold and Derecognized | $ 2,077.2 | $ 2,033.1 |\n| Net Proceeds Received From Financial Institutions | $ 37.0 | $ 37.9 |\n| Pledged Receivables at Sep 30 | $ 267.4 | $ 93.1 | - The company was in compliance with its maximum Consolidated Total Leverage Ratio (3.20 to 1.00, limit 4.25 to 1.00) and minimum Consolidated Interest Expense Ratio (8.85 to 1.00, limit 3.00 to 1.00) as of September 30, 2020[207] - Capital investment for 9M 2020 was $425.7 million, up from $229.9 million in 9M 2019, primarily for asset upgrades at U.S. mills (including the new CRB paper machine) and acquisition integration[209] Critical Accounting Policies This section refers to the 2019 Form 10-K for critical accounting policies, specifically noting the annual goodwill impairment tests and ongoing assessment due to COVID-19 - The company's critical accounting policies are detailed in its 2019 Form 10-K[213] - Annual goodwill impairment tests as of October 1, 2019, showed no impairment, with fair values exceeding carrying values by more than 50% for most reporting units, and 32% and 17% for Foodservice and Australia, respectively. The impact of COVID-19 on goodwill will be assessed in the October 1, 2020, impairment tests[214] New Accounting Standards This section refers to Note 1 for a discussion of recent accounting pronouncements impacting the company - Recent accounting pronouncements are discussed in Note 1 — General Information[215] Business Outlook This section provides the company's financial expectations for full year 2020, including total capital investment, depreciation and amortization, and pension plan contributions - Total capital investment for 2020 is expected to be approximately $625 million[216] - Depreciation and amortization expense for 2020 is expected to be approximately $455 million, excluding $6 million of pension amortization and $26 million of accelerated depreciation related to exit activities[217] - Pension plan contributions for 2020 are expected to be between $15 million and $20 million[217] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK This section refers to the 2019 Form 10-K for market risk disclosures and notes no significant developments regarding derivatives or market risk exposure during 9M 2020 - No significant developments regarding derivatives or exposure to market risk occurred during the first nine months of 2020[218] ITEM 4. CONTROLS AND PROCEDURES This section confirms the effectiveness of disclosure controls and procedures as of September 30, 2020, and reports no material changes in internal control over financial reporting during the fiscal quarter - The company's disclosure controls and procedures were effective as of September 30, 2020[219] - No material changes in internal control over financial reporting occurred during the fiscal quarter ended September 30, 2020[220] PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS This section states that legal proceedings are not expected to have a material adverse effect on the company's financial position, results of operations, or cash flows - Legal proceedings are not expected to have a material adverse effect on the company's consolidated financial position, results of operations, or cash flows[223] ITEM 1A. RISK FACTORS This section highlights the potential adverse impact of the COVID-19 pandemic on financial results, operations, supply chain, and consumer buying habits, with no other material changes from prior risk factors - The COVID-19 pandemic could cause unpredictable disruptions to operations, supply chain, and transportation, and negatively impact consumer buying habits, thereby adversely affecting financial results[224] - No other material changes from the risk factors previously disclosed in the 2019 Form 10-K[225] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section details the company's share repurchase activity during the third quarter of 2020 under its 2019 share repurchase program Issuer Purchases of Equity Securities (Q3 2020) | Period (2020) | Total Number of Shares Purchased | Average Price Paid Per Share | Maximum Number of Shares That May Yet Be Purchased Under the Program | | :------------ | :------------------------------- | :--------------------------- | :----------------------------------------------------------------- | | July 1-31 | 702,110 | $ 14.29 | 21,127,142 |\n| August 1-31 | 2,698,194 | $ 14.45 | 18,278,081 |\n| September 1-30 | 3,206,917 | $ 14.01 | 14,945,674 |\n| Total | 6,607,221 | | | ITEM 4. MINE SAFETY DISCLOSURES This section indicates that there are no mine safety disclosures to report ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including supplemental indentures, certifications, and XBRL content SIGNATURES This section contains the required signatures for the Form 10-Q, confirming its submission by authorized officers