UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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☒☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2021March 31, 2022
or | | | | | |
☐☐ | 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’sRegistrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Common Stock, $0.01 par value per share | GPK | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
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 ☑☑ No ☐☐
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 ☑☑ No ☐☐
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“large accelerated filer,” “accelerated” “accelerated filer,” “smaller” “smaller reporting company”company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer | ☑☑ | Accelerated filer | ☐☐ | | Smaller reporting company | ☐ ☐ |
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Non-accelerated filer | ☐☐ | (Do not check if a smaller reporting company) | Emerging growth company | ☐ ☐ |
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. ☐☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐☐ No ☑☑
As of July 26, 2021,April 25, 2022, there were 307,048,826308,306,907 shares of the registrant’sregistrant’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”(“GPHC” and, together with its subsidiaries, the “Company”“Company”), including, but not limited to, projected sales, EBITDA and synergies from acquisitions, obtaining adequate wood and fiber supplies, the deductibility of goodwill for tax purposes, the availability of U.S. federal income tax attributes to offset U.S. federal income taxes and the timing related to the Company's future U.S. federal income tax payments, reclassification of loss on derivative instruments, charges associated with coated recycled paperboard mill exit activities, capital investment, depreciation and amortization, interest expense,and pension plan contributions and post-retirement health care benefit payments in this report constitute “forward-looking statements”“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’sCompany’s historical experience and its present expectations. These risks and uncertainties include, but are not limited to, the continuing effects of the COVID-19 pandemic on the Company's operations and business, inflation of and volatility in raw material and energy costs, changes in consumer buying habits and product preferences, competition with other paperboard manufacturers and converters, product substitution, the Company’sCompany’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’sCompany’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’sCompany’s ability to utilize its U.S. federal income tax attributes to offset taxable income or U.S. federal income taxes 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 20202021 Annual Report on Form 10-K, and in other filings with the Securities and Exchange Commission.
TABLE OF CONTENTS
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EX-10.1 | |
EX-21.1 | |
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)
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, | | June 30, | | March 31, | |
In millions, except per share amounts | In millions, except per share amounts | 2021 | | 2020 | | 2021 | | 2020 | In millions, except per share amounts | 2022 | | 2021 | |
Net Sales | Net Sales | $ | 1,737 | | | $ | 1,611 | | | $ | 3,386 | | | $ | 3,210 | | Net Sales | $ | 2,245 | | | $ | 1,649 | | |
Cost of Sales | Cost of Sales | 1,482 | | | 1,349 | | | 2,882 | | | 2,627 | | Cost of Sales | 1,858 | | | 1,400 | | |
Selling, General and Administrative | Selling, General and Administrative | 125 | | | 132 | | | 251 | | | 268 | | Selling, General and Administrative | 181 | | | 126 | | |
Other Expense (Income), Net | 1 | | | (5) | | | 4 | | | 1 | | |
Other (Income) Expense, Net | | Other (Income) Expense, Net | (2) | | | 3 | | |
Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | 34 | | | 20 | | | 46 | | | 39 | | Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | 15 | | | 12 | | |
Income from Operations | Income from Operations | 95 | | | 115 | | | 203 | | | 275 | | Income from Operations | 193 | | | 108 | | |
Nonoperating Pension and Postretirement Benefit Income (Expense) | 1 | | | 0 | | | 3 | | | (151) | | |
Nonoperating Pension and Postretirement Benefit Income | | Nonoperating Pension and Postretirement Benefit Income | 2 | | | 2 | | |
Interest Expense, Net | Interest Expense, Net | (29) | | | (30) | | | (59) | | | (64) | | Interest Expense, Net | (42) | | | (30) | | |
| Income before Income Taxes and Equity Income of Unconsolidated Entity | 67 | | | 85 | | | 147 | | | 60 | | |
Income before Income Taxes | | Income before Income Taxes | 153 | | | 80 | | |
Income Tax Expense | Income Tax Expense | (26) | | | (18) | | | (44) | | | (13) | | Income Tax Expense | (46) | | | (18) | | |
Income before Equity Income of Unconsolidated Entity | 41 | | | 67 | | | 103 | | | 47 | | |
Equity Income of Unconsolidated Entity | 1 | | | 0 | | | 1 | | | 0 | | |
| Net Income | Net Income | 42 | | | 67 | | | 104 | | | 47 | | Net Income | 107 | | | 62 | | |
Net Income Attributable to Noncontrolling Interest | Net Income Attributable to Noncontrolling Interest | (4) | | | (15) | | | (12) | | | (8) | | Net Income Attributable to Noncontrolling Interest | — | | | (8) | | |
Net Income Attributable to Graphic Packaging Holding Company | Net Income Attributable to Graphic Packaging Holding Company | $ | 38 | | | $ | 52 | | | $ | 92 | | | $ | 39 | | Net Income Attributable to Graphic Packaging Holding Company | $ | 107 | | | $ | 54 | | |
| Net Income Per Share Attributable to Graphic Packaging Holding Company — Basic | $ | 0.13 | | | $ | 0.19 | | | $ | 0.32 | | | $ | 0.14 | | |
Net Income Per Share Attributable to Graphic Packaging Holding Company — Diluted | $ | 0.13 | | | $ | 0.19 | | | $ | 0.32 | | | $ | 0.14 | | |
Net Income Per Share Attributable to Graphic Packaging Holding Company — Basic | | Net Income Per Share Attributable to Graphic Packaging Holding Company — Basic | $ | 0.35 | | | $ | 0.20 | | |
Net Income Per Share Attributable to Graphic Packaging Holding Company — Diluted | | Net Income Per Share Attributable to Graphic Packaging Holding Company — Diluted | $ | 0.35 | | | $ | 0.19 | | |
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The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGINGP1ACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended June 30,March 31, |
20212022 |
In millions | Graphic Packaging Holding Company | Noncontrolling Interest | Total |
Net Income | $ | 38 | | $ | 4 | | $ | 42107 | |
Other Comprehensive Income (Loss), Net of Tax: | | | |
| | | |
Derivative Instruments | 2 | | 0 | | 213 | |
Pension and Postretirement Benefit Plans | 10 | | 0 | | 10 (9) | |
Currency Translation Adjustment | 5 | | 1 | | 6 (22) | |
Total Other Comprehensive Income,Loss, Net of Tax | 17 | | 1 | | 18 (18) | |
Total Comprehensive Income | $ | 55 | | $ | 5 | | $ | 6089 | |
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2020 |
| Graphic Packaging Holding Company | Noncontrolling Interest | Redeemable Noncontrolling Interest | Total |
Net Income | $ | 52 | | $ | 15 | | $ | 0 | | $ | 67 | |
Other Comprehensive Income, Net of Tax: | | | | |
Derivative Instruments | 2 | | 0 | | 0 | | 2 | |
Pension and Postretirement Benefit Plans | 0 | | 0 | | 1 | | 1 | |
Currency Translation Adjustment | 12 | | 3 | | 0 | | 15 | |
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Total Other Comprehensive Income, Net of Tax | 14 | | 3 | | 1 | | 18 | |
Total Comprehensive Income | $ | 66 | | $ | 18 | | $ | 1 | | $ | 85 | |
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2021 |
In millions | Graphic Packaging Holding Company | Noncontrolling Interest | | Total |
Net Income | $ | 54 | | $ | 8 | | | $ | 62 | |
Other Comprehensive Income (Loss), Net of Tax: | | | | |
Derivative Instruments | 3 | | 1 | | | 4 | |
Pension and Postretirement Benefit Plans | 10 | | — | | | 10 | |
Currency Translation Adjustment | (4) | | (1) | | | (5) | |
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Total Other Comprehensive Income, Net of Tax | 9 | | — | | | 9 | |
Total Comprehensive Income | $ | 63 | | $ | 8 | | | $ | 71 | |
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Six Months Ended June 30, |
2021 |
In millions | Graphic Packaging Holding Company | Noncontrolling Interest | Total |
Net Income | $ | 92 | | $ | 12 | | $ | 104 | |
Other Comprehensive Income, Net of Tax: | | | |
| | | |
Derivative Instruments | 5 | | 1 | | 6 | |
Pension and Postretirement Benefit Plans | 20 | | 0 | | 20 | |
Currency Translation Adjustment | 1 | | 0 | | 1 | |
| | | |
Total Other Comprehensive Income, Net of Tax | 26 | | 1 | | $ | 27 | |
Total Comprehensive Income | $ | 118 | | $ | 13 | | $ | 131 | |
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2020 |
| Graphic Packaging Holding Company | Noncontrolling Interest | Redeemable Noncontrolling Interest | Total |
Net Income (Loss) | $ | 39 | | $ | 13 | | $ | (5) | | 47 |
Other Comprehensive Income (Loss), Net of Tax: | | | | |
Derivative Instruments | 1 | | 0 | | 0 | | 1 |
Pension and Postretirement Benefit Plans | 114 | | 32 | | 10 | | 156 |
Currency Translation Adjustment | (34) | | (7) | | (1) | | (42) | |
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Total Other Comprehensive Income, Net of Tax | 81 | | 25 | | 9 | | 115 |
Total Comprehensive Income | $ | 120 | | $ | 38 | | $ | 4 | | $ | 162 | |
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 | In millions, except share and per share amounts | June 30, 2021 | | December 31, 2020 | In millions, except share and per share amounts | March 31, 2022 | | December 31, 2021 |
ASSETS | ASSETS | | ASSETS | |
| Current Assets: | Current Assets: | | Current Assets: | |
Cash and Cash Equivalents | Cash and Cash Equivalents | $ | 89 | | | $ | 179 | | Cash and Cash Equivalents | $ | 111 | | | $ | 172 | |
Receivables, Net | Receivables, Net | 593 | | | 654 | | Receivables, Net | 945 | | | 859 | |
Inventories, Net | Inventories, Net | 1,105 | | | 1,128 | | Inventories, Net | 1,504 | | | 1,387 | |
Other Current Assets | Other Current Assets | 90 | | | 59 | | Other Current Assets | 97 | | | 84 | |
| Total Current Assets | Total Current Assets | 1,877 | | | 2,020 | | Total Current Assets | 2,657 | | | 2,502 | |
Property, Plant and Equipment, Net | Property, Plant and Equipment, Net | 3,753 | | | 3,560 | | Property, Plant and Equipment, Net | 4,675 | | | 4,677 | |
Goodwill | Goodwill | 1,478 | | | 1,478 | | Goodwill | 2,006 | | | 2,015 | |
Intangible Assets, Net | Intangible Assets, Net | 409 | | | 437 | | Intangible Assets, Net | 831 | | | 868 | |
Other Assets | Other Assets | 325 | | | 310 | | Other Assets | 374 | | | 395 | |
Total Assets | Total Assets | $ | 7,842 | | | $ | 7,805 | | Total Assets | $ | 10,543 | | | $ | 10,457 | |
| LIABILITIES | LIABILITIES | | LIABILITIES | |
| Current Liabilities: | Current Liabilities: | | Current Liabilities: | |
Short-Term Debt and Current Portion of Long-Term Debt | Short-Term Debt and Current Portion of Long-Term Debt | $ | 20 | | | $ | 497 | | Short-Term Debt and Current Portion of Long-Term Debt | $ | 286 | | | $ | 279 | |
Accounts Payable | Accounts Payable | 837 | | | 825 | | Accounts Payable | 1,028 | | | 1,125 | |
Compensation and Employee Benefits | Compensation and Employee Benefits | 177 | | | 213 | | Compensation and Employee Benefits | 201 | | | 211 | |
| Interest Payable | | Interest Payable | 37 | | | 35 | |
Other Accrued Liabilities | Other Accrued Liabilities | 423 | | | 321 | | Other Accrued Liabilities | 394 | | | 399 | |
Total Current Liabilities | Total Current Liabilities | 1,457 | | | 1,856 | | Total Current Liabilities | 1,946 | | | 2,049 | |
Long-Term Debt | Long-Term Debt | 3,742 | | | 3,147 | | Long-Term Debt | 5,645 | | | 5,515 | |
Deferred Income Tax Liabilities | Deferred Income Tax Liabilities | 403 | | | 540 | | Deferred Income Tax Liabilities | 598 | | | 579 | |
Accrued Pension and Postretirement Benefits | Accrued Pension and Postretirement Benefits | 117 | | | 130 | | Accrued Pension and Postretirement Benefits | 132 | | | 139 | |
Other Noncurrent Liabilities | Other Noncurrent Liabilities | 309 | | | 292 | | Other Noncurrent Liabilities | 271 | | | 282 | |
| | SHAREHOLDERS’ EQUITY | | |
Preferred Stock, par value $0.01 per share; 100,000,000 shares authorized; 0 shares issued or outstanding | 0 | | | 0 | | |
Common Stock, par value $0.01 per share; 1,000,000,000 shares authorized; 307,045,707 and 267,726,373 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively | 3 | | | 3 | | |
SHAREHOLDERS’ EQUITY | | SHAREHOLDERS’ EQUITY | |
Preferred Stock, par value $0.01 per share; 100,000,000 shares authorized; no shares issued or outstanding | | Preferred Stock, par value $0.01 per share; 100,000,000 shares authorized; no shares issued or outstanding | — | | | — | |
Common Stock, par value $0.01 per share; 1,000,000,000 shares authorized; 308,288,288 and 307,103,551 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | | Common Stock, par value $0.01 per share; 1,000,000,000 shares authorized; 308,288,288 and 307,103,551 shares issued and outstanding at March 31, 2022 and December 31, 2021, respectively | 3 | | | 3 | |
Capital in Excess of Par Value | Capital in Excess of Par Value | 2,030 | | | 1,715 | | Capital in Excess of Par Value | 2,038 | | | 2,046 | |
Retained Earnings (Accumulated Deficit) | 1 | | | (48) | | |
Retained Earnings | | Retained Earnings | 150 | | | 66 | |
Accumulated Other Comprehensive Loss | Accumulated Other Comprehensive Loss | (220) | | | (246) | | Accumulated Other Comprehensive Loss | (242) | | | (224) | |
Total Graphic Packaging Holding Company Shareholders' Equity | Total Graphic Packaging Holding Company Shareholders' Equity | 1,814 | | | 1,424 | | Total Graphic Packaging Holding Company Shareholders' Equity | 1,949 | | | 1,891 | |
Noncontrolling Interest | Noncontrolling Interest | 0 | | | 416 | | Noncontrolling Interest | 2 | | | 2 | |
Total Equity | Total Equity | 1,814 | | | 1,840 | | Total Equity | 1,951 | | | 1,893 | |
Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 7,842 | | | $ | 7,805 | | Total Liabilities and Shareholders' Equity | $ | 10,543 | | | $ | 10,457 | |
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY AND REDEEMABLE NONCONTROLLING INTEREST
(Unaudited)
| | | | Common Stock | Capital in Excess of Par Value | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive (Loss) Income | | | Common Stock | Capital in Excess of Par Value | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests | Total Equity |
In millions, except share amounts | In millions, except share amounts | Shares | Amount | Noncontrolling Interest | Total Equity | In millions, except share amounts | Shares | Amount |
Balances at December 31, 2020 | 267,726,373 | | $ | 3 | | $ | 1,715 | | $ | (48) | | $ | (246) | | $ | 416 | | $ | 1,840 | | |
Balances at December 31, 2021 | | Balances at December 31, 2021 | 307,103,551 | | $ | 3 | | $ | 2,046 | | $ | 66 | | $ | (224) | | $ | 2 | | $ | 1,893 | |
Net Income | Net Income | — | | — | | — | | 54 | | — | | 8 | | 62 | | Net Income | — | | — | | — | | 107 | | — | | — | | 107 | |
Other Comprehensive Income (Loss), Net of Tax: | Other Comprehensive Income (Loss), Net of Tax: | | Other Comprehensive Income (Loss), Net of Tax: | |
Derivative Instruments | Derivative Instruments | — | | — | | — | | — | | 3 | | 1 | | 4 | | Derivative Instruments | — | | — | | — | | — | | 13 | | — | | 13 | |
Pension and Postretirement Benefit Plans | Pension and Postretirement Benefit Plans | — | | — | | — | | — | | 10 | | — | | 10 | | Pension and Postretirement Benefit Plans | — | | — | | — | | — | | (9) | | — | | (9) | |
Currency Translation Adjustment | Currency Translation Adjustment | — | | — | | — | | — | | (4) | | (1) | | (5) | | Currency Translation Adjustment | — | | — | | — | | — | | (22) | | — | | (22) | |
| Reduction of IP's Ownership Interest | 15,307,000 | | — | | 70 | | — | | — | | (216) | | (146) | | |
| Dividends Declared | Dividends Declared | — | | — | | — | | (21) | | — | | — | | (21) | | Dividends Declared | — | | — | | — | | (23) | | — | | — | | (23) | |
Distribution of Membership Interest | — | | — | | — | | — | | — | | (4) | | (4) | | |
Recognition of Stock-Based Compensation, Net | Recognition of Stock-Based Compensation, Net | — | | — | | (3) | | — | | — | | — | | (3) | | Recognition of Stock-Based Compensation, Net | — | | — | | (8) | | — | | — | | — | | (8) | |
Issuance of Shares for Stock-Based Awards | Issuance of Shares for Stock-Based Awards | 1,168,394 | | — | | — | | — | | — | | — | | 0 | | Issuance of Shares for Stock-Based Awards | 1,184,737 | | — | | — | | — | | — | | — | | — | |
Balances at March 31, 2021 | 284,201,767 | | $ | 3 | | $ | 1,782 | | $ | (15) | | $ | (237) | | $ | 204 | | $ | 1,737 | | |
Net Income | — | | — | | — | | 38 | | — | | 4 | | 42 | | |
Other Comprehensive Income, Net of Tax: | | |
Derivative Instruments | — | | — | | — | | — | | 2 | | — | | 2 | | |
Pension and Postretirement Benefit Plans | — | | — | | — | | — | | 10 | | — | | 10 | | |
Currency Translation Adjustment | — | | — | | — | | — | | 5 | | 1 | | 6 | | |
Reduction of IP's Ownership Interest | 22,773,072 | | — | | 241 | | — | | — | | (207) | | 34 | | |
| Dividends Declared | — | | — | | — | | (22) | | — | | — | | (22) | | |
Distribution of Membership Interest | — | | — | | — | | — | | — | | (2) | | (2) | | |
Recognition of Stock-Based Compensation, Net | — | | — | | 7 | | — | | — | | — | | 7 | | |
Issuance of Shares for Stock-Based Awards | 70,868 | | — | | — | | — | | — | | — | | 0 | | |
Balances at June 30, 2021 | 307,045,707 | | $ | 3 | | $ | 2,030 | | $ | 1 | | $ | (220) | | $ | 0 | | $ | 1,814 | | |
Balances at March 31, 2022 | | Balances at March 31, 2022 | 308,288,288 | | $ | 3 | | $ | 2,038 | | $ | 150 | | $ | (242) | | $ | 2 | | $ | 1,951 | |
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Table of Contents | | | | | | | | | | | | | | | | | | | | | | | | | |
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| Common Stock | Capital in Excess of Par Value | (Accumulated Deficit) Retained Earnings | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interests | Total Equity | | |
In millions, except share amounts | Shares | Amount | |
Balances at December 31, 2020 | 267,726,373 | | $ | 3 | | $ | 1,715 | | $ | (48) | | $ | (246) | | $ | 416 | | $ | 1,840 | | | |
Net Income | — | | — | | — | | 54 | | — | | 8 | | 62 | | | |
Other Comprehensive Income (Loss), Net of Tax: | | | | | | | | | |
Derivative Instruments | — | | — | | — | | — | | 3 | | 1 | | 4 | | | |
Pension and Postretirement Benefit Plans | — | | — | | — | | — | | 10 | | — | | 10 | | | |
Currency Translation Adjustment | — | | — | | — | | — | | (4) | | (1) | | (5) | | | |
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Reduction of IP's Ownership Interest | 15,307,000 | | — | | 70 | | — | | — | | (216) | | (146) | | | |
Dividends Declared | — | | — | | — | | (21) | | — | | — | | (21) | | | |
Distribution of Membership Interest | — | | — | | — | | — | | — | | (4) | | (4) | | | |
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Recognition of Stock-Based Compensation, Net | — | | — | | (3) | | — | | — | | — | | (3) | | | |
Issuance of Shares for Stock-Based Awards | 1,168,394 | | — | | — | | — | | — | | — | | — | | | |
Balances at March 31, 2021 | 284,201,767 | | $ | 3 | | $ | 1,782 | | $ | (15) | | $ | (237) | | $ | 204 | | $ | 1,737 | | | |
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| Common Stock | Capital in Excess of Par Value | Retained Earnings (Accumulated Deficit) | Accumulated Other Comprehensive (Loss) Income | Noncontrolling Interest | Total Equity | | Redeemable Noncontrolling Interest |
In millions, except share amounts | Shares | Amount | |
Balances at December 31, 2019 | 290,246,907 | | $ | 3 | | $ | 1,877 | | $ | 56 | | $ | (367) | | $ | 488 | | $ | 2,057 | | | $ | 304 | |
Net Loss | — | | — | | — | | (13) | | — | | (2) | | (15) | | | (5) | |
Other Comprehensive (Loss) Income, Net of Tax: | | | | | | | | | |
Derivative Instruments | — | | — | | — | | — | | (1) | | — | | (1) | | | — | |
Pension and Postretirement Benefit Plans | — | | — | | — | | — | | 114 | | 32 | | 146 | | | 9 | |
Currency Translation Adjustment | — | | — | | — | | — | | (46) | | (10) | | (56) | | | (1) | |
Repurchase of Common Stock(a) | (9,667,034) | | — | | (53) | | (71) | | — | | — | | (124) | | | — | |
Dividends Declared | — | | — | | — | | (21) | | — | | — | | (21) | | | — | |
Redemption of IP's Ownership Interest | — | | — | | — | | — | | — | | — | | — | | | (250) | |
Redeemable Noncontrolling Interest Redemption Value Adjustment | — | | — | | 18 | | — | | — | | — | | 18 | | | (18) | |
Tax Effect of IP Redemption | — | | — | | 7 | | — | | — | | — | | 7 | | | |
Distribution of Membership Interest | — | | — | | — | | — | | — | | (5) | | (5) | | | (1) | |
Recognition of Stock-Based Compensation, Net | — | | — | | 4 | | — | | — | | — | | 4 | | | — | |
Issuance of Shares for Stock-Based Awards | 788,561 | | — | | — | | — | | — | | — | | 0 | | | — | |
Balances at March 31, 2020 | 281,368,434 | | $ | 3 | | $ | 1,853 | | $ | (49) | | $ | (300) | | $ | 503 | | $ | 2,010 | | | $ | 38 | |
Net Income | — | | — | | — | | 52 | | — | | 15 | | 67 | | | — | |
Other Comprehensive Income, Net of Tax: | | | | | | | | | |
Derivative Instruments | — | | — | | — | | — | | 2 | | — | | 2 | | | — | |
Pension and Postretirement Benefit Plans | — | | — | | — | | — | | — | | — | | — | | | 1 | |
Currency Translation Adjustment | — | | — | | — | | — | | 12 | | 3 | | 15 | | | — | |
Repurchase of Common Stock(b) | (2,622,283) | | — | | (14) | | (19) | | — | | — | | (33) | | | — | |
Redeemable Noncontrolling Interest Redemption Value Adjustment | — | | — | | (5) | | — | | — | | — | | (5) | | | 5 | |
Dividends Declared | — | | — | | | (21) | | — | | . | (21) | | | — | |
Distribution of Membership Interest | — | | — | | — | | — | | — | | (5) | | (5) | | | — | |
Recognition of Stock-Based Compensation, Net | — | | — | | 7 | | — | | — | | — | | 7 | | | — | |
Issuance of Shares for Stock-Based Awards | 93,381 | | — | | — | | — | | — | | — | | 0 | | | — | |
Balances at June 30, 2020 | 278,839,532 | | $ | 3 | | $ | 1,841 | | $ | (37) | | $ | (286) | | $ | 516 | | $ | 2,037 | | | $ | 44 | |
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(a) Includes 410,400 shares repurchased but not yet settled as of March 31, 2020.
(b) Includes 14,436 shares repurchased but not yet settled as of June 30, 2020.
The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
GRAPHIC PACKAGING HOLDING COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) | | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
In millions | In millions | 2021 | | 2020 | In millions | 2022 | | 2021 |
CASH FLOWS FROM OPERATING ACTIVITIES: | CASH FLOWS FROM OPERATING ACTIVITIES: | | CASH FLOWS FROM OPERATING ACTIVITIES: | |
Net Income | Net Income | $ | 104 | | | $ | 47 | | Net Income | $ | 107 | | | $ | 62 | |
| Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | | Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: | |
Depreciation and Amortization | Depreciation and Amortization | 234 | | | 236 | | Depreciation and Amortization | 139 | | | 117 | |
| Deferred Income Taxes | Deferred Income Taxes | 31 | | | (10) | | Deferred Income Taxes | 17 | | | 7 | |
Amount of Postretirement Expense (Less) Greater Than Funding | (10) | | | 157 | | |
Amount of Postretirement Expense Less Than Funding | | Amount of Postretirement Expense Less Than Funding | (5) | | | (11) | |
| Other, Net | Other, Net | 49 | | | 31 | | Other, Net | — | | | 23 | |
Changes in Operating Assets and Liabilities | Changes in Operating Assets and Liabilities | (103) | | | (317) | | Changes in Operating Assets and Liabilities | (240) | | | (145) | |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | 305 | | | 144 | | Net Cash Provided by Operating Activities | 18 | | | 53 | |
| CASH FLOWS FROM INVESTING ACTIVITIES: | CASH FLOWS FROM INVESTING ACTIVITIES: | | CASH FLOWS FROM INVESTING ACTIVITIES: | |
Capital Spending | Capital Spending | (329) | | | (293) | | Capital Spending | (221) | | | (137) | |
Packaging Machinery Spending | Packaging Machinery Spending | (17) | | | (14) | | Packaging Machinery Spending | (2) | | | (9) | |
Acquisition of Businesses, Net of Cash Acquired | 0 | | | (123) | | |
| | Beneficial Interest on Sold Receivables | Beneficial Interest on Sold Receivables | 64 | | | 53 | | Beneficial Interest on Sold Receivables | 31 | | | 33 | |
Beneficial Interest Obtained in Exchange for Proceeds | Beneficial Interest Obtained in Exchange for Proceeds | (5) | | | (5) | | Beneficial Interest Obtained in Exchange for Proceeds | (2) | | | (5) | |
Other, Net | Other, Net | (2) | | | (7) | | Other, Net | (1) | | | (2) | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | (289) | | | (389) | | Net Cash Used in Investing Activities | (195) | | | (120) | |
| CASH FLOWS FROM FINANCING ACTIVITIES: | CASH FLOWS FROM FINANCING ACTIVITIES: | | CASH FLOWS FROM FINANCING ACTIVITIES: | |
| Repurchase of Common Stock | 0 | | | (157) | | |
| Proceeds from Issuance of Debt | Proceeds from Issuance of Debt | 1,225 | | | 450 | | Proceeds from Issuance of Debt | — | | | 1,225 | |
Retirement of Long-Term Debt | Retirement of Long-Term Debt | (1,226) | | | 0 | | Retirement of Long-Term Debt | — | | | (1,221) | |
Payments on Debt | Payments on Debt | (9) | | | (18) | | Payments on Debt | (3) | | | (9) | |
Redemption of Noncontrolling Interest | Redemption of Noncontrolling Interest | (150) | | | (250) | | Redemption of Noncontrolling Interest | — | | | (150) | |
| Borrowings under Revolving Credit Facilities | Borrowings under Revolving Credit Facilities | 1,827 | | | 1,535 | | Borrowings under Revolving Credit Facilities | 1,972 | | | 885 | |
Payments on Revolving Credit Facilities | Payments on Revolving Credit Facilities | (1,691) | | | (1,308) | | Payments on Revolving Credit Facilities | (1,812) | | | (677) | |
| | Repurchase of Common Stock related to Share-Based Payments | Repurchase of Common Stock related to Share-Based Payments | (14) | | | (9) | | Repurchase of Common Stock related to Share-Based Payments | (17) | | | (14) | |
Debt Issuance Costs | Debt Issuance Costs | (14) | | | (7) | | Debt Issuance Costs | — | | | (5) | |
Dividends and Distributions Paid to GPIP Partner | Dividends and Distributions Paid to GPIP Partner | (48) | | | (54) | | Dividends and Distributions Paid to GPIP Partner | (23) | | | (24) | |
Other, Net | Other, Net | (5) | | | (1) | | Other, Net | 2 | | | (5) | |
Net Cash (Used in) Provided by Financing Activities | (105) | | | 181 | | |
Net Cash Provided by Financing Activities | | Net Cash Provided by Financing Activities | 119 | | | 5 | |
| Effect of Exchange Rate Changes on Cash | Effect of Exchange Rate Changes on Cash | (1) | | | (5) | | Effect of Exchange Rate Changes on Cash | (3) | | | (1) | |
| Net Decrease in Cash and Cash Equivalents | Net Decrease in Cash and Cash Equivalents | (90) | | | (69) | | Net Decrease in Cash and Cash Equivalents | (61) | | | (63) | |
Cash and Cash Equivalents at Beginning of Period | Cash and Cash Equivalents at Beginning of Period | 179 | | | 153 | | Cash and Cash Equivalents at Beginning of Period | 172 | | | 179 | |
CASH AND CASH EQUIVALENTS AT END OF PERIOD | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 89 | | | $ | 84 | | CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 111 | | | $ | 116 | |
| Non-cash Investing Activities: | Non-cash Investing Activities: | | Non-cash Investing Activities: | |
Beneficial Interest Obtained in Exchange for Trade Receivables | Beneficial Interest Obtained in Exchange for Trade Receivables | $ | 66 | | | $ | 68 | | Beneficial Interest Obtained in Exchange for Trade Receivables | $ | 28 | | | $ | 30 | |
Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities | Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities | $ | 50 | | | $ | 49 | | Right-of-Use Assets Obtained in Exchange for New Operating Lease Liabilities | $ | 7 | | | $ | 22 | |
Non-cash Financing Activities: | Non-cash Financing Activities: | | Non-cash Financing Activities: | |
| Non-cash Exchange of Stock Issuance for Redemption of Noncontrolling Interest | Non-cash Exchange of Stock Issuance for Redemption of Noncontrolling Interest | $ | (652) | | | $ | 0 | | Non-cash Exchange of Stock Issuance for Redemption of Noncontrolling Interest | $ | — | | | $ | (250) | |
|
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
Graphic Packaging Holding Company (“GPHC”(“GPHC” and, together with its subsidiaries, the “Company”“Company”) is committed to providing consumer packaging that makes a world of difference. The Company is a leading provider of sustainable, fiber-based consumer 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 Europe, and holds leading market positions in coated-recycled paperboard ("CRB"), coated unbleached kraft paperboard ("CUK") and solid bleached sulfate paperboard ("SBS").
The Company’sCompany’s customers include many of the world’sworld’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 innovative sustainable packaging solutions designed to deliver marketing and performance benefits at a competitive cost by capitalizing on its low-cost paperboard mills and converting facilities,plants, 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”(“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”(“GPIP”), and Graphic Packaging International, LLC, a Delaware limited liability company formerly known as Graphic Packaging International, Inc. and a direct subsidiary of GPIP (“GPIL”(“GPIL”), completed a series of transactions pursuant to an agreement dated October 23, 2017, among the foregoing parties (the “Transaction Agreement”“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”(“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").
During 2020, GPIP purchased 32.5 million partnership units from IP for $500 million in cash, fully redeeming the 18.2 million partnership units that were required to be redeemed in cash.
On February 16, 2021, the Company announced that IP had notified the Company of its intent to exchange additional partnership units. Per an agreement between the parties, on February 19, 2021, GPIP purchased 9.3 million partnership units from IP for $150 million in cash, and IP exchanged 15.3 million partnership units for an equivalent number of shares of GPHC common stock.
On May 21, 2021, IP exchanged its remaining 22.8 million partnership units for an equivalent number of shares of GPHC common stock. As a result, IP has no ownership interest remaining in GPIP as of May 21, 2021.
In connection with both the February 19, 2021 and May 21, 2021 exchanges, pursuant to elections under Section 754 of the Internal Revenue Code, the Company expects to obtain an increase with respect to the tax basis in the assets of GPIP and certain of its subsidiaries. As a result, payments pursuant to the Tax Receivable Agreement (“TRA”), executed in connection with the formation of the partnership on January 1, 2018, are required. The TRA provides for the payment by the Company to IP of 50% of the present value of any tax benefits projected to be realized by the Company upon IP’s exchange of its membership interest into GPHC stock. As such, the Company recorded TRA liabilities of $43 million and $65 million, for the February 19, 2021 and May 21, 2021 exchanges, respectively. The TRA liabilities are included in Other Accrued Liabilities as of June 30, 2021, and were recorded through adjustments to Capital in Excess of Par Value during Q1 2021 and Q2 2021. In accordance with the terms of the TRA, the Company expects the liability for the February and May exchanges to be settled during the third quarter and fourth quarter of 2021, respectively. Additionally, the Company recorded an adjustment through Capital in Excess of Par Value to decrease its net domestic Deferred Tax Liability (“DTL”) by $58 million in connection with the February exchange and $109 million in connection with the May exchange. The decrease in the DTL reflects the change in the outside basis difference associated with the Company’s investment in the partnership and includes the impact of the tax basis step up triggered by the exchanges pursuant to Section 754 of the Internal Revenue Code in addition to other changes to book and tax basis as a result of the Company’s increased ownership interest in the partnership.
The Company’sCompany’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. Certain reclassifications have been made to prior year amounts to conform to current year presentation.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In the Company’sCompany’s opinion, the accompanying Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the interim periods. The Company’sCompany’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”GAAP”) for complete financial statements. Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with GPHC’sGPHC’s Form 10-K for the year ended December 31, 2020.2021. 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.
Revenue Recognition
The Company has 2 primary activities, manufacturing and converting 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 10 —- Segment Information." 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 June 30,March 31, 2022 and 2021, and 2020, the Company recognized $1,731$2,238 million and $1,605$1,644 million, respectively, of revenue from contracts with customers. For the six months ended June 30, 2021 and 2020, the Company recognized $3,375 million and $3,200 million, respectively, of revenue from contracts with customers.
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"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’sCompany’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.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 June 30, 2021March 31, 2022 and December 31, 2020,2021, contract assets were $17$15 million and $15$17 million, respectively. The Company's contract liabilities consist principally of rebates, and as of June 30, 2021March 31, 2022 and December 31, 20202021 were $55$53 million and $56$61 million, respectively.
Accounts Receivable and Allowances
Accounts receivable are stated at the amount owed by the customer, net of an allowance for estimated uncollectible accounts, returns and allowances, and cash discounts. The allowance for doubtful accounts is estimated based on historical experience, current economic conditions and the creditworthiness of customers. Receivables are charged to the allowance when determined to be no longer collectible.
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 (Income) Expense, (Income), Net line item on the Condensed Consolidated Statement of Operations. The following table summarizes the activity under these programs for the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, respectively:
| | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
In millions | In millions | 2021 | | 2020 | In millions | 2022 | | 2021 |
Receivables Sold and Derecognized | Receivables Sold and Derecognized | $ | 1,531 | | | $ | 1,357 | | Receivables Sold and Derecognized | $ | 737 | | | $ | 758 | |
Proceeds Collected on Behalf of Financial Institutions | Proceeds Collected on Behalf of Financial Institutions | 1,421 | | | 1,318 | | Proceeds Collected on Behalf of Financial Institutions | 681 | | | 685 | |
Net Proceeds Received From Financial Institutions | Net Proceeds Received From Financial Institutions | 100 | | | 31 | | Net Proceeds Received From Financial Institutions | 64 | | | 62 | |
Deferred Purchase Price at June 30(a) | 11 | | | 10 | | |
Pledged Receivables at June 30 | 158 | | | 261 | | |
Deferred Purchase Price at March 31(a) | | Deferred Purchase Price at March 31(a) | 3 | | | 9 | |
Pledged Receivables at March 31 | | Pledged Receivables at March 31 | 201 | | | 160 | |
(a) Included in Other Current Assets on the Condensed Consolidated Balance Sheet and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure.
The Company participates in supply chain financing arrangements offered by certain customers and has entered into various factoring arrangements that also qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB Codification. For the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, the Company sold receivables of $249$264 million and $151$125 million, respectively, related to these factoring arrangements.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Receivables sold under all programs subject to continuing involvement, which consists principally of collection services, were $727$674 million and $621$613 million as of June 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
Share Repurchases and Dividends
On February 25, 2021 and May 26, 2021,22, 2022, the Company's board of directors declared a regular quarterly dividend of $0.075 per share of common stock payable on April 5, 2021 and July 5, 20212022 to shareholders of record as of March 15, 2021 and June 15, 2021, respectively.2022.
On January 28, 2019, the Company's board of directors authorized a 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"). During the first sixthree months of 2022 and 2021, the Company did not repurchase any shares of its common stock under the 2019 share repurchase program. During the six months ended June 30, 2020, the Company repurchased 12,289,317 shares of its common stock at an average price of $12.82 under the 2019 share repurchase program. As of June 30, 2021,March 31, 2022, the Company has $147 million available for additional repurchases under the 2019 share repurchase program.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net
The following table summarizes the transactions recorded in Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net in the Condensed Consolidated Statements of Operations:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, | | June 30, | | March 31, | |
In millions | In millions | 2021 | | 2020 | | 2021 | | 2020 | In millions | 2022 | | 2021 | |
Charges Associated with Business Combinations(a) | Charges Associated with Business Combinations(a) | $ | 23 | | | $ | (6) | | | $ | 23 | | | $ | (4) | | Charges Associated with Business Combinations(a) | $ | 8 | | | $ | — | | |
Shutdown and Other Special Charges | Shutdown and Other Special Charges | 7 | | | 22 | | | 15 | | | 26 | | Shutdown and Other Special Charges | — | | | 8 | | |
Exit Activities(a)(b) | Exit Activities(a)(b) | 4 | | | 4 | | | 8 | | | 17 | | Exit Activities(a)(b) | 7 | | | 4 | | |
| Total | Total | $ | 34 | | | $ | 20 | | | $ | 46 | | | $ | 39 | | Total | $ | 15 | | | $ | 12 | | |
(a)For more information on these charges, see "Note 3 - Business Combinations."
(b) Relates to the Company's CRB mills, convertingmill and folding carton facility closures and the PM1 containerboard machine exit activities (see "Note 13 —- Exit Activities").
2022
On March 15, 2022, the Company announced its decision to close the Norwalk, Ohio folding carton facility by the end of May 2022. Severance charges associated with this project are included in Exit Activities in the table above for the three months ended March 31, 2022. For more information, see "Note 13 - Exit Activities."
2021
During 2019, the Company announced its plans to invest in a new CRB paper machine in Kalamazoo, Michigan. In conjunction withAt the completiontime of this project,the announcement, the Company currently expectsexpected to close 2 of its smaller CRB Mills in 2022 in order to remain capacity neutral. During the third quarter of 2021, the Company decided to continue to operate 1 of the 2 original smaller CRB mills at least through 2022. Severance, retention, start-up costs, and other charges associated with this project are included in Exit Activities in the table above in the three and six months ended June 30, 2021March 31, 2022 and 2020.2021. For more information, see "Note 13 —- Exit Activities." The Company also expects to incur start-up charges of approximately $15 million for the new CRB paper machine in 2021. These start-up charges are included in Exit Activities 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. Charges related to this program during the three months ended June 30, 2021 and 2020 were $6 million and $2 million, respectively. Charges related to this program during the six months ended June 30, 2021 and 2020 were $9 million and $4 million, respectively. Expected charges for this program for 2021 are approximately $26 million. Charges associated with this program are included in Shutdown and Other Special Charges in the table above.
On May 12, 2021, the Company announced its intent to acquire all of the shares of AR Packaging Group AB ("AR Packaging"), Europe's second largest producer of fiber-based consumer packaging, for approximately $1.45 billion in cash, subject to customary adjustments. The costs associated with this acquisition are included in Charges Associated with Business Combinations in the table above. The $1.45 billion acquisition price will be paid in Euros at close. As such, on May 14, 2021, the Company entered into deal contingent, foreign exchange forward contracts, with no upfront cash cost, to hedge 700 million Euros of the acquisition price. These forward contracts expire if the deal terminates or does not close by May 13, 2022 and are accounted for as derivatives under ASC 815, Derivatives and Hedging. Unrealized gains and losses resulting from these contracts are recognized in earnings and are included in Charges Associated with Business Combinations in the table above. For more information, see "Note 6 — Financial Instruments and Fair Value Measurement."
2020
On January 31, 2020, the Company acquired a folding carton facility from Quad/Graphics, Inc. ("Quad"), a commercial printing company. The converting facility is located in Omaha, Nebraska and is included in the Americas Paperboard Packaging reportable segment. The Company paid $41 million using existing cash and borrowings under its revolving credit facility. The costs associated with this acquisition are included in Charges Associated with Business Combinations in the table above. During the first quarter of 2021, the acquisition accounting for Quad was finalized.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In March 2020, the Company made the decision to close the White Pigeon, Michigan CRB mill and shut down the PM1 containerboard machine in West Monroe, Louisiana. Charges associated with these projects are included in Exit Activities in the table above. For more information, see "Note 13 — Exit Activities."
On April 1, 2020, the Company acquired the Consumer Packaging Group business from Greif, Inc. ("Greif"), a leader in industrial packaging products and services. The acquisition included 7 converting facilities across the United States and will allow the Company to increase its mill-to-converting plant integration over time. The Company paid approximately $80 million using existing cash and borrowings under its revolving credit facility. The costs associated with this acquisition are included in Charges Associated with Business Combinations in the table above. During the second quarter of 2021, the acquisition accounting for Greif was finalized.
In June 2020, the Company made the decision to close certain converting facilities that were acquired from Greif. The Burlington, North Carolina converting facility and the Los Angeles, California converting facility were closed during 2020. Charges associated with these projects are included in Exit Activities in the table above. For more information, see "Note 13 — Exit Activities."
The Company has established estimated liabilities related to the partial or complete withdrawal from certain multi-employment benefit plans for facilities which have been closed. During the second quarter of 2020, the Company increased its estimated withdrawal liability for these plans by $12 million, which is included in Shutdown and Other Special Charges in the table above. For more information, see "Note 5 — Pensions and Other Postretirement Benefits."
During the second quarter of 2020, the Company made one-time payments to front-line production employees and made contributions to local food banks in the communities where our manufacturing operations are located. The charges associated with these payments are included in Shutdown and Other Special Charges in the table above.
Adoption of New Accounting Standards
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. This amendment modifies ASC 740 to simplify the accounting for income taxes. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted this new guidance during the three months ended March 31, 2021. The Company’s adoption did not result in any changes in accounting principle upon transition and the impact to the Company’s overall financial statements is immaterial.
Accounting Standards Not Yet Adopted
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This standard provides temporary optional expedients and exceptions for applying GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”(“SOFR”). The ASU can be adopted after its issuance date through December 31, 2022. The Company adopted this standard in the first quarter of fiscal 2022 with no material impact on the Company's financial position and results of operations.
Accounting Standards Not Yet Adopted
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Acquired Contract Assets and Contract Liabilities. Under the new guidance, the acquirer should determine what contract assets and/or contract liabilities it would have recorded under ASC 606 as of the acquisition date, as if the acquirer had entered into the original contract at the same date and on the same terms as the acquiree. The recognition and measurement of those contract assets and contract liabilities will likely be comparable to what the acquiree has recorded on its books under ASC 606 as of the acquisition date. ASU 2021-08 is currentlyeffective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued. However, adoption in an interim period other than the first fiscal quarter requires an entity to apply the new guidance to all prior business combinations that have occurred since the beginning of the annual period in which the new guidance is adopted. The Company will continue evaluating the impact of this new accounting guidance.ASU.
NOTE 2 —— INVENTORIES, NET
Inventories, Net by major class: | | | | | | | | | | | |
In millions | March 31, 2022 | | December 31, 2021 |
Finished Goods | $ | 530 | | | $ | 528 | |
Work in Progress | 211 | | | 194 | |
Raw Materials | 563 | | | 473 | |
Supplies | 200 | | | 192 | |
Total | $ | 1,504 | | | $ | 1,387 | |
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — BUSINESS COMBINATIONS
Americraft
On July 1, 2021, the Company acquired substantially all of the assets of Americraft Carton Inc. ("Americraft"). The Company paid approximately $292 million, using existing cash and borrowings under its revolving credit facility. The acquisition included 7 converting plants across the United States.
The purchase price for Americraft has been allocated to assets acquired and liabilities assumed based on the fair values as of the acquisition date and is subject to adjustments in subsequent periods as management finalizes its purchase price allocation, including the third-party valuations.Tangible assets and liabilities were valued as of the acquisition date using the indirect and direct methods of the cost approach and intangible assets were valued using a discounted cash flow analysis, which represents a Level 3 measurement. Management believes that the purchase price attributable to goodwill represents the benefits expected as the acquisition was made to continue to expand its product offering, to integrate paperboard from the Company's mills and to further optimize the Company's supply chain footprint. The assigned goodwill, which is deductible for tax purposes, is reported within the Americas Paperboard Packaging reportable segment.
The preliminary purchase price allocation as of March 31, 2022 is as follows:
| | | | | | | | | | | |
In millions | June 30, 2021 | | December 31, 2020Amounts Recognized as of Acquisition Date |
Finished GoodsPurchase Price | $ | 427 | | | $ | 471292 | |
| |
Work in ProgressReceivables, Net | 141 | | | 13322 | |
Raw MaterialsInventories, Net | 355 | | | 34937 | |
SuppliesProperty, Plant and Equipment, Net | 182122 | |
Intangible Assets, Net(a) | 17554 | |
Other Assets | 1 | |
Total Assets Acquired | 236 | |
Current Liabilities | 12 | |
Total Liabilities Assumed | 12 | |
Net Assets Acquired | 224 | |
Goodwill | 68 | |
Total Estimated Fair Value of Net Assets Acquired | $ | 1,105 | | | $ | 1,128292 | |
(a) Intangible Assets, Net, consists of Customer Relationships with a weighted average life of approximately 15 years.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 — DEBTOn November 1, 2021, the Company completed the acquisition of AR Packaging Group AB ("AR Packaging"), Europe's second largest producer of fiber-based consumer packaging, by acquiring all the AR Packaging Group AB shares that were issued and outstanding as of the date of acquisition. The acquisition included 30 converting plants in 13 countries and enhances the Company’s global scale, innovation capabilities, and value proposition for customers throughout Europe and bordering regions.
2021
On March 8, 2021, GPIL completed a private offeringThe total cash consideration for the AR Packaging acquisition was $1,412 million net of $400cash acquired of $75 million, aggregate principal amountpaid in Euros through the use of its 0.821% Senior Secured Notes due 2024 and $400 million aggregate principal amountdeal contingent, foreign exchange forward contracts, purchased through the use of its 1.512% Senior Secured Notes due 2026. The net proceeds were used byavailable borrowing capacity on the Company to repay a portion of the outstanding borrowings under GPIL's term loan credit facilities, which is under its senior secured credit facility.
On April 1, 2021, GPIL entered into a Fourth Amended and Restated Credit Agreement (the “Amended and Restated Credit Agreement”) to extend the maturity date of certain of its Senior Secured Term Loan Facilities andCompany’s Senior Secured Revolving Credit Facilities and to amend certain other terms of the agreement including revised debt covenants and collateral requirements. Under the terms of the agreement, $975 million of the Company’s Senior Secured Term Loan Facilities remains outstanding. The Company added approximately $400 million Incremental Facility Amendment to its Senior Secured Revolving Credit Facilities. $550 million of the Senior Secured Term Loan Facilities and all of the Senior Secured Revolving Credit Facility loans continue to bear interest at a floating rate per annum ranging from LIBOR plus 1.25% to LIBOR plus 2.00%, determined using a pricing grid based upon the Company’s consolidated total leverage ratio from time to time, and the maturity for these loans were extended from January 1, 2023 to April 1, 2026. $425 million of the Senior Secured Term Loan Facilities continue to bear interest at a fixed rate per annum equal to 2.67% and mature on their originally scheduled maturity date of January 14, 2028.
2020
On October 15, 2020, GPIL entered into a new $425 million term loan facility under the ThirdFourth Amended and Restated Credit Agreement with member banks of the Farm Credit System (the "Incremental Term A-2 Facility")(collectively, the "Current Credit Agreement"). The Incremental Term A-2 Facility had a delayed draw feature, and the Company drew the entire facility on January 14, 2021. On January 15, 2021, the Company used the proceeds, together with cash on hand, to redeem its 4.75% Senior Notes due in 2021 at par. The redemption included the outstanding principal amount plus accrued and unpaid interest. The Incremental Term A-2 Facility bears interest at a fixed rate of 2.67% due quarterly, matures January 14, 2028, and does not amortize. As long as the loan is outstanding, GPIL will be eligible to receive an annual patronage credit from the participating banks, which will be paid in cash and stock in the lead member bank. Patronage payable each year is variable and based on the individual financial performance of each of the member banks then participating in the loan.Agreement. For more information, see "Note 4 - Debt."
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-Term DebtThe purchase price was allocated to the assets acquired and liabilities assumed based on the estimated fair values as of the date of acquisition. The excess of the purchase price over the fair value of the net assets acquired was allocated to goodwill, none of which is expected to be deductible for tax purposes, and will be reported within the Europe reportable segment. During the first quarter of 2022, the Company recorded acquisition accounting adjustments of $3 million to goodwill comprised of the following:$3 million to Other Accrued Liabilities. The allocation of purchase price shown below remains preliminary and is subject to further adjustment, pending additional refinement and final completion of valuations, including but not limited to valuations of property and equipment, customer relationships and other intangible assets, and deferred tax liabilities. Goodwill is primarily attributed to synergies from future expected economic benefits, including enhanced revenue growth from expanded capabilities and geographic presence as well as substantial cost savings from duplicative overhead, streamlined operations and enhanced operational efficiency.
| | | | | | | | | | | |
In millions | June 30, 2021 | | December 31, 2020 |
Senior Notes with interest payable semi-annually at 3.50%, effective rateAmounts Recognized as of 3.55%, payable in 2029Acquisition Date(a)
|
Total Purchase Consideration | $ | 3501,487 | |
| |
$Cash Acquired | 35075 | |
Receivables, Net | 212 | |
Inventories | 166 | |
Other Current Assets | 12 | |
Senior Notes with interest payable semi-annually at 3.50%, effective rate of 3.55%, payable in 2028Property, Plant and Equipment(a)(b)
| 450 | | | 450529 | |
Senior Notes with interest payable semi-annually at 4.75%, effective rate of 4.81%, payable in 2027Intangible Assets(a)
| 300 | | | 300 | |
Senior Notes with interest payable semi-annually at 1.512%, effective rate of 1.52%, payable in 2026(a)
| 400 | | | 0 | |
Senior Notes with interest payable semi-annually at 4.125%, effective rate of 4.15%, payable in 2024(b)
| 300 | | | 300 | |
Senior Notes with interest payable semi-annually at 0.821%, effective rate of 0.83%, payable in 2024(a)
| 400 | | | 0 | |
Senior Notes with interest payable semi-annually at 4.875%, effective rate of 4.89%, payable in 2022(b)
| 250 | | | 250 | |
Senior Notes with interest payable semi-annually at 4.75%(b)
| 0 | | | 425 | |
Senior Secured Term Loan A-2 Facility with interest payable quarterly at 2.67%, effective rate of 2.68% payable in 2028(a)
| 425 | | | 0 | |
Senior Secured Term Loan Facilities with interest payable at various dates at floating rates (1.59% at June 30, 2021) payable through 2026(a)
| 550 | | | 1,360 | |
Senior Secured Revolving Facilities with interest payable at floating rates (1.59% at June 30, 2021) payable in 2026(a)(c)
| 220 | | | 84 | |
Finance Leases and Financing Obligations | 137 | | | 139447 | |
Other Assets | 4 | | | 576 | |
Total Long-Term DebtAssets Acquired | 3,786 | | | 3,6631,517 | |
Less:Accounts Payable | 109 | |
Compensation and Employee Benefits | 12 | |
Other Accrued Liabilities | 104 | |
Short-Term Debt and Current Portion of Long-Term Debt | 189 | |
Long-Term Debt | 49417 | |
Deferred Income Tax Liabilities | 164 | |
Accrued Pension and Postretirement Benefits | 50 | |
Other Noncurrent Liabilities | 41 | |
Noncontrolling Interests | 2 | |
Total Long-Term Debt Excluding Current PortionLiabilities Assumed | 3,768 | | | 3,169508 | |
Less: Unamortized Deferred Debt Issuance CostsNet Assets Acquired | 26 | | | 221,009 | |
Goodwill | 478 | |
Total Estimated Fair Value of Net Assets Acquired | $ | 3,742 | | | $ | 3,1471,487 | |
(a) The amounts were translated from Euro to USD using the rate at the acquisition date of 1.1539.
(b) Property, Plant and Equipment primarily consists of Machinery and Equipment of $371 million with a weighted average life of approximately 12 years.
(c) Intangible Assets primarily consists of Customer Relationships of $439 million with a weighted average life of approximately 15 years.
The above fair values of assets acquired and liabilities assumed are preliminary and are based on the information that was available as of the reporting date. The fair values of the tangible assets acquired and liabilities assumed were preliminarily determined using the income and cost approaches. In many cases, the determination of the fair values required estimates about discount rates, future expected cash flows and other future events that are judgmental and subject to change. The fair value measurements were primarily based on significant inputs that are not observable in the market and thus represent a Level 3 measurement of the fair value hierarchy as defined in ASC 820, Fair Value Measurements (“ASC 820”). Intangible assets consisting of customer relationships, technology, and trade names were valued using the discounted cash flow analysis. The significant assumptions used to estimate the value of the customer relationships intangible assets included the discount rate, annual revenue growth rates, customer attrition rates, projected operating expenses, projected EBITDA margins, tax rate, depreciation, and contributory asset charge.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company believes that the information provides a reasonable basis for estimating the fair values of the acquired assets and assumed liabilities, but the potential for measurement period adjustments exists based on the Company’s continuing review of matters related to the acquisition. The Company expects to complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date.
Since the acquisition date, the results of operations for AR Packaging of $281 million of revenue and $11 million of operating income have been included within the consolidated statements of income for the three months ended March 31, 2022.
The following unaudited pro forma consolidated financial information for the three months ended March 31, 2021 combines the results of the Company for fiscal 2021 and the unaudited results of AR Packaging for the corresponding period. The unaudited pro forma consolidated financial information assumes that the Acquisition, which closed on November 1, 2021, was completed on January 1, 2021 (the first day of fiscal 2021).
The pro forma consolidated financial information has been calculated after applying the Company’s accounting policies and includes adjustments for amortization expense of acquired intangible assets, fair value adjustments for acquired inventory, property, plant and equipment and long-term debt.
These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the operating results of the Company that would have been achieved had the Acquisition actually taken place on January 1, 2021. In addition, these results are not intended to be a projection of future results and do not reflect events that may occur after the Acquisition, including but not limited to revenue enhancements, cost savings or operating synergies that the combined Company may achieve as a result of the Acquisition.
| | | | | | | | | |
| Pro Forma Three Months Ended (unaudited) |
| March 31, | |
In millions | 2022 | 2021 | |
Revenue | $ | 2,245 | | $ | 1,923 | | |
Net Income (Loss) | $ | 107 | | $ | (12) | | |
NOTE 4 — DEBT
Short-Term Debt and Current Portion of Long-Term Debt is comprised of the following:
| | | | | | | | |
In millions | March 31, 2022 | December 31, 2021 |
Short Term Borrowings | $ | 14 | | $ | 9 | |
Current Portion of Finance Lease Obligations | 9 | | 7 | |
Current Portion of Long-Term Debt | 263 | | 263 | |
Total | $ | 286 | | $ | 279 | |
| | |
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Long-Term Debt is comprised of the following:
| | | | | | | | |
In millions | March 31, 2022 | December 31, 2021 |
Senior Notes with interest payable semi-annually at 4.875%, effective rate of 4.88%, payable in 2022(a) | $ | 250 | | $ | 250 | |
Senior Notes with interest payable semi-annually at 0.821%, effective rate of 0.82%, payable in 2024(b) | 400 | | 400 | |
Senior Notes with interest payable semi-annually at 4.125%, effective rate of 4.15%, payable in 2024(a) | 300 | | 300 | |
Senior Notes with interest payable semi-annually at 1.512%, effective rate of 1.52%, payable in 2026(b) | 400 | | 400 | |
Senior Notes with interest payable semi-annually at 4.75%, effective rate of 4.80%, payable in 2027(b) | 300 | | 300 | |
Senior Notes with interest payable semi-annually at 3.50%, effective rate of 3.54%, payable in 2028(b) | 450 | | 450 | |
Senior Notes with interest payable semi-annually at 3.50%, effective rate of 3.54%, payable in 2029(b) | 350 | | 350 | |
Senior Notes (€290 million) with interest payable semi-annually at 2.625% , effective rate of 2.66%, payable in 2029(b) | 321 | | 330 | |
Senior Notes with interest payable semi-annually at 3.75% , effective rate of 3.80%, payable in 2030(b) | 400 | | 400 | |
Green Bond net of unamortized premium with interest payable at 4.00%, effective rate of 1.72%, payable in 2026(b) | 110 | | 110 | |
Senior Secured Term Loan A-2 Facility with interest payable quarterly at 2.67%, effective rate of 2.68% payable in 2028(b) | 425 | | 425 | |
Senior Secured Term Loan A-3 Facility with interest payable monthly payable at floating rates (2.48% at March 31, 2022), effective rate of 2.50%, payable in 2028(b) | 250 | | 250 | |
Senior Secured Term Loan Facilities with interest payable at various dates at floating rates (2.23% at March 31, 2022) payable through 2026(b) | 540 | | 543 | |
Senior Secured Term Loan Facility (€210 million) with interest payable at various dates at floating rates (1.75% at March 31, 2022) payable through 2026(b) | 233 | | 239 | |
Senior Secured Revolving Facilities with interest payable quarterly at floating rates (2.47% at March 31, 2022) payable in 2026(b)(c) | 1,062 | | 920 | |
Finance Leases and Financing Obligations | 143 | | 146 | |
Other | 18 | | 9 | |
Total Long-Term Debt | 5,952 | | 5,822 | |
Less: Current Portion | 272 | | 270 | |
Total Long-Term Debt Excluding Current Portion | 5,680 | | 5,552 | |
Less: Unamortized Deferred Debt Issuance Costs | 35 | | 37 | |
Total | $ | 5,645 | | $ | 5,515 | |
(a) Guaranteed by GPIPGPHC and certain domestic subsidiaries.
(b) Guaranteed by GPHCGPIP and certain domestic subsidiaries.
(c) The effective interest rates for the Company’sCompany’s Senior Secured Revolving Credit Facilities were 1.57%2.06% and 2.06%1.63% as of June 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
At June 30, 2021,March 31, 2022, 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)
| $ | 1,850 | | | $ | 143 | | | $ | 1,684 | |
Senior Secured International Revolving Credit Facility | 187 | | | 77 | | | 110 | |
Other International Facilities | 55 | | | 6 | | | 49 | |
Total | $ | 2,092 | | | $ | 226 | | | $ | 1,843 | |
| | | | | | | | | | | | | | | | | |
In millions | Total Commitments | | Total Outstanding | | Total Available |
Senior Secured Domestic Revolving Credit Facility(a) | $ | 1,850 | | | $ | 1,016 | | | $ | 812 | |
Senior Secured International Revolving Credit Facility | 202 | | | 46 | | | 156 | |
Other International Facilities | 81 | | | 32 | | | 49 | |
Total | $ | 2,133 | | | $ | 1,094 | | | $ | 1,017 | |
(a) In accordance with its debt agreements, the Company’sCompany’s availability under its revolving credit facilities has been reduced by the amount of standby letters of credit issued of $23$22 million as of June 30, 2021.March 31, 2022. These letters of credit are primarily used as security against the Company's self-insurance obligations and workers’workers’ compensation obligations. These letters of credit expire at various dates through 2021 and 2022 unless extended.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Covenant Agreements
The Current Credit Agreement and the indentures governing the 3.50%4.875% Senior Notes due 2029, 3.50% Senior Notes due 2028, 4.75% Senior Notes due 2027, 1.512% Senior Notes due 2026,2022, 0.821% Senior Notes due 2024, 4.125% Senior Notes due 2024, and 4.875%1.512% Senior Notes due 20222026, 4.75% Senior Notes due 2027, 3.50% Senior Notes due 2028, 3.50% Senior Notes due 2029, 2.625% Senior Notes due 2029 and 3.75% Senior Notes due 2030 (the "Indentures"“Indentures”), limit the Company's ability to incur additional indebtedness. Additional covenants contained in the Current 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 Indentures, 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’sCompany’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 June 30, 2021,March 31, 2022, the Company was in compliance with the covenants in the Current Credit Agreement and the Indentures.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 4 —5 — STOCK INCENTIVE PLANS
The Company has 1 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”“2014 Plan”). The 2014 Plan allows for granting shares of stock, options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”(“RSUs”), restricted stock awards (“RSAs”(“RSAs”), 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 GPHC’sGPHC’s authorized but unissued shares. Compensation costs are recognized on a straight-line basis over the requisite service period of the award and are adjusted for actual performance for performance-based awards. As of June 30, 2021,March 31, 2022, there were 11.510.4 million shares remaining available to be granted under the 2014 Plan.
Stock Awards, Restricted Stock and Restricted Stock Units
Under the 2014 Plan, all RSUs granted to employees generally vest and become payable in three years from date of grant. RSUs granted to employees generally contain some combination of service and performance objectives based on various financial targets and relative total shareholder return that must be met for the RSUs to vest. RSUs granted to non-employee directors as deferred compensation for non-employee directors are fully vested but not payable until the distribution date elected by the director. Stock awards grantedRSAs issued to non-employee directors as part of their compensation for service on the Board are unrestricted on the grant date.
Data concerning RSUs and RSAs granted in the first sixthree months of 20212022 is as follows:
| | | | | | | | | | | |
| | | Weighted Average Grant Date Fair Value Per Share |
RSUs — Employees and Non-Employee Directors | 1,525,420 | | | $ | 15.86 | |
Stock Awards — Board of Directors | 55,055 | | | $ | 17.80 | |
| | | | | | | | | | | |
| | | Weighted Average Grant Date Fair Value Per Share |
RSUs — Employees and Non-Employee Directors | 1,747,582 | | | $ | 20.04 | |
| | | |
During the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, $18$9 million and $20$11 million, respectively, were charged to compensation expense for stock incentive plans and such amounts are included in Selling, General and Administrative expenses in the Condensed Consolidated Statements of Operations.
During each of the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, 1.2 million and 0.8 million shares were issued, respectively.issued. The shares issued were primarily related to RSUs granted to employees during 2019 and 2018, and 2017, respectively.
NOTE 5 —6 — 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.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pension Expense
The pension expenses related to the Company’sCompany’s plans consisted of the following: | | | Three Months Ended | | Six Months Ended | | | Three Months Ended | |
| | June 30, | | June 30, | | | March 31, | |
In millions | In millions | 2021 | | 2020 | | 2021 | | 2020 | | In millions | 2022 | | 2021 | |
Components of Net Periodic Cost: | Components of Net Periodic Cost: | | | Components of Net Periodic Cost: | | |
Service Cost | Service Cost | $ | 3 | | | $ | 4 | | | $ | 8 | | | $ | 8 | | | Service Cost | $ | 4 | | | $ | 5 | | |
Interest Cost | Interest Cost | 2 | | | 4 | | | 4 | | | 7 | | | Interest Cost | 3 | | | 2 | | |
| Expected Return on Plan Assets | Expected Return on Plan Assets | (4) | | | (5) | | | (9) | | | (12) | | | Expected Return on Plan Assets | (6) | | | (5) | | |
Net Settlement Loss | 0 | | | 0 | | | 0 | | | 153 | | | |
| | Amortization: | Amortization: | | | Amortization: | | |
| Actuarial Loss | Actuarial Loss | 1 | | | 1 | | | 2 | | | 3 | | | Actuarial Loss | 1 | | | 1 | | |
| Net Periodic Cost | Net Periodic Cost | $ | 2 | | | $ | 4 | | | $ | 5 | | | $ | 159 | | | Net Periodic Cost | $ | 2 | | | $ | 3 | | |
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Employer Contributions
TheDuring the first quarter of 2022 and 2021, the Company made contributions of $15$7 million and $1$14 million of contributions to its pension plans, during the first six months of 2021 and 2020 respectively. In the first quarter of 2022 and 2021, the Company made a $6 million and $14 million contribution to its remaining U.S. defined benefit plan by effectively utilizing a portion of the excess balance related to the terminated U.S. defined benefit plan.plan terminated in 2020, respectively. Excluding this $14$6 million transfer,contribution, the Company expects to make contributions in the range of $10 million to $20 million for the full year of 2021. During 2020, the Company made $19 million of contributions to its pension plans.2022.
NOTE 6 —7 — 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 used interest rate swaps 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’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’sCompany’s financial instruments and fair value measurement, see ““Note 10 —- Financial Instruments, Derivatives and Hedging Activities”” and “and“Note 11 —- Fair Value Measurement”” of the Notes to the Consolidated Financial Statements of the Company’s 2020Company’s 2021 Form 10-K.
Interest Rate Risk
The Company usesused 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
As of December 31, 2021, the Company's currentCompany had interest rate swap positions for each period presented aswith a notional value of June 30, 2021:$200 million which matured in January 2022. As of March 31, 2022, the Company had no outstanding interest rate swaps. As discussed in "Note 8 - Income Taxes", a $10 million expense was recorded to release the lingering tax expense remaining in Other Comprehensive Income after the settlement of these swaps.
| | | | | | | | | | | | | | |
Start | End | (In Millions) Notional Amount | Weighted Average Interest Rate |
| | | | |
| | | | |
| | | | |
| | | | |
12/03/2018 | 01/01/2022 | $120.0 | | 2.92% |
12/03/2018 | 01/04/2022 | $80.0 | | 2.79% |
During the first sixthree months of 2021, and 2020, there were 0no amounts of ineffectiveness related to changes in the fair value of interest rate swap agreements. Additionally, there were 0no 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 32%, and 11%9% of its expected natural gas usage for the remainder of 2021 and all of 2022, respectively. 2022.
During the first sixthree months of 20212022 and 2020,2021, there were 0no amounts of ineffectiveness related to changes in the fair value of natural gas swap contracts. Additionally, there were 0no amounts excluded from the measure of effectiveness.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Foreign Currency Risk
The Company entersentered 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 (Income) Expense, (Income), Net or Net Sales, when appropriate.
At June 30, 2021, multiple forward exchange contracts existed that expire on various dates through the remainderAs of 2021. Those purchased forward exchange contracts outstanding at June 30, 2021March 31, 2022 and December 31, 2020, when aggregated and measured in U.S. dollars at contractual rates at June 30, 2021, and December 31, 2020,the Company had notional amounts totaling $45 million and $102 million, respectively.no outstanding forward exchange contracts.
NaNNo amounts were reclassified to earnings during the first six months of 2021 or during 2020 in connection with forecasted transactions that were considered probable of not occurring and there was 0no amount of ineffectiveness related to changes in the fair value of foreign currency forward contracts. Additionally, there were 0no 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 June 30, 2021March 31, 2022 and December 31, 2020,2021, multiple foreign currency forward exchange contracts existed, with maturities ranging up to nine months. Those foreign currency exchange contracts outstanding at June 30, 2021March 31, 2022 and December 31, 2020,2021, when aggregated and measured in U.S. dollars at contractual rates at June 30, 2021March 31, 2022 and December 31, 2020,2021, had net notional amounts totaling $137$108 million and $80$103 million, respectively. Unrealized gains and losses resulting from these contracts are recognized in Other (Income) Expense, (Income), Net and approximately offset corresponding recognized but unrealized gains and losses on the remeasurement of these accounts receivable.
Deal Contingent Hedge
On May 14, 2021, in connection with the AR Packaging acquisition, the Company entered into deal contingent foreign exchange forward contracts, with no upfront cash cost, to hedge 700 million Euros of the acquisition price. These forward contracts expire if the deal terminates or does not close by May 13, 2022 and are accounted for as derivatives under ASC 815, Derivatives and Hedging. Unrealized gains and losses resulting from these contracts are recognized in Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net on the Company’s Condensed Consolidated Statements of Operations. For more information, see "Note 1 — General Information."
Fair Value of Financial Instruments
The Company’sCompany’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 June 30, 2021,March 31, 2022, there has not been any significant impact to the fair value of the Company’sCompany’s derivative liabilities due to its own credit risk. Similarly, there has not been any significant adverse impact to the Company’sCompany’s derivative assets based on evaluation of the Company’s counterparties’Company’s counterparties’ credit risks. The following table summarizesAs of March 31, 2022 and December 31, 2021, the fair value of the Company’s had commodity contract derivative instruments:
| | | | | | | | | | | | | | | | | |
| Derivative Assets(a) | | Derivative Liabilities(b) |
| June 30, | December 31, | | June 30, | December 31, |
In millions | 2021 | 2020 | | 2021 | 2020 |
Derivatives designated as hedging instruments: | | | | | |
Interest rate contracts | $ | 0 | | $ | 0 | | | $ | 3 | | $ | 6 | |
Foreign currency contracts | 1 | | 0 | | | 1 | | 3 | |
Commodity contracts | 5 | | 2 | | | 0 | | 0 | |
Total Derivatives | $ | 6 | | $ | 2 | | | $ | 4 | | $ | 9 | |
(a) Derivative assets, which were included in Other Current Assets, of $5 million and $2 million, are included in Other Current Assets as of June 30, 2021 and December 31, 2020, respectively. Derivative assets of $1 million is included in Other Noncurrent Assets as of June 30, 2021.
(b) Derivative liabilities of $4 million and $9 million are included in Other Accrued Liabilities as of June 30, 2021 and December 31, 2020, respectively.
The fair values of the Company’sCompany’s other financial assets and liabilities at June 30, 2021March 31, 2022 and December 31, 20202021 approximately equal the carrying values reported on the Condensed Consolidated Balance Sheets except for Long-Term Debt. The fair value of the Company’sCompany’s Long-Term Debt (excluding finance leases and deferred financing fees) was $3,692$5,658 million and $3,625$5,715 million as compared to the carrying amounts of $3,649$5,809 million and $3,524$5,676 million as of June 30, 2021March 31, 2022 and December 31, 2020,2021, respectively. The fair value of the Company’sCompany’s Total Debt, including the Senior Notes, is 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.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effect of Derivative Instruments
The pre-tax effect of derivative instruments in cash flow hedging relationships on the Company’sCompany’s Condensed Consolidated Statements of Operations is as follows:
| | | Amount of (Gain) Loss Recognized in Accumulated Other Comprehensive Loss | Location in Statement of Operations | Amount of (Gain) Loss Recognized in Statement of Operations | | Amount of (Gain) Loss Recognized in Accumulated Other Comprehensive Loss | Location in Statement of Operations | Amount of (Gain) Loss Recognized in Statement of Operations |
| | Three Months Ended June 30, | Six Months Ended June 30, | Three Months Ended June 30, | Six Months Ended June 30, | | Three Months Ended March 31, | | Three Months Ended March 31, | |
In millions | In millions | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | 2021 | 2020 | In millions | 2022 | 2021 | | 2022 | 2021 | |
Commodity Contracts | Commodity Contracts | $ | (4) | | $ | 0 | | $ | (5) | | $ | 3 | | Cost of Sales | $ | (1) | | $ | 2 | | $ | (1) | | $ | 5 | | Commodity Contracts | $ | (6) | | $ | (1) | | | Cost of Sales | $ | (3) | | $ | — | | |
Foreign Currency Contracts | Foreign Currency Contracts | 0 | | 0 | | (2) | | (3) | | Other Expense, Net | 0 | | (1) | | 1 | | (1) | | Foreign Currency Contracts | — | | (2) | | | Other (Income) Expense, Net | — | | 1 | | |
Interest Rate Swap Agreements | Interest Rate Swap Agreements | 0 | | 0 | | 0 | | 6 | | Interest Expense, Net | 2 | | 2 | | 3 | | 3 | | Interest Rate Swap Agreements | — | | — | | | Interest Expense, Net | — | | 1 | | |
Total | Total | $ | (4) | | $ | 0 | | $ | (7) | | $ | 6 | | Total | $ | 1 | | $ | 3 | | $ | 3 | | $ | 7 | | Total | $ | (6) | | $ | (3) | | | Total | $ | (3) | | $ | 2 | | |
The pre-tax effect of derivative instruments not designated as hedging instruments on the Company’s Condensed Consolidated Statements of Operations is as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | Six Months Ended June 30, |
In millions | | 2021 | 2020 | 2021 | 2020 |
Foreign Currency Contracts | Other (Income) Expense , Net | $ | (1) | | $ | 4 | | $ | (4) | | $ | (2) | |
Deal Contingent Foreign Exchange Forward | Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | 17 | | 0 | | 17 | | 0 | |
Total | | $ | 16 | | $ | 4 | | $ | 13 | | $ | (2) | |
Accumulated Derivative Instruments (Loss) Income
The following is a rollforward of pre-tax Accumulated Derivative Instruments (Loss) Income which is included in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2021:
| | | | | |
In millions | |
Balance at December 31, 2020 | $ | (7) | |
Reclassification to Earnings | 3 | |
Current Period Change in Fair Value | 7 | |
Balance at June 30, 2021
| $ | 3 | |
At June 30, 2021,March 31, 2022, the Company expects to reclassify $1$5 million of pre-tax gainsgain 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.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The pre-tax effect of derivative instruments not designated as hedging instruments on the Company’s Condensed Consolidated Statements of Operations is as follows:
| | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
In millions | | 2022 | 2021 | | |
Foreign Currency Contracts | Other (Income) Expense , Net | $ | (2) | | $ | (3) | | | |
| | | | | |
| | | | | |
NOTE 7 —8 — INCOME TAXES
Substantially all the Company’sCompany’s operations are held through its 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 noncontrolling partner’spartner’s interest in GPIP for the portion of the year in which the noncontrolling partner held an interest.
During the sixthree months ended June 30, 2021,March 31, 2022, the Company recognized Income Tax Expense of $44$46 million on Income before Income Taxes of $147$153 million. The effective tax rate for the sixthree months ended June 30, 2021March 31, 2022 was higherdifferent than the statutory rate primarily due to discrete tax expense recorded during the period of $8 million, the tax effect of income attributable to noncontrolling interests as well as the mix and levels of earnings between foreign and domestic tax jurisdictions. The Company recorded discreteadjustments, including tax expense of $3$10 million, recorded to release the lingering tax expense remaining in Other Comprehensive Income after the settlement of certain swaps and a tax benefit of $2 million related to the remeasurement of the net deferredexcess tax liability for its UK subsidiaries due to the statutory tax rate increase enactedbenefits on restricted stock that vested during the period. The Company also recorded discrete tax expense of $5 million related to the remeasurement of deferred tax assets for executive compensation as a result of IP’s exchange of its remaining shares in GPIP during the period.
During the sixthree months ended June 30, 2020,March 31, 2021, the Company recognized Income Tax Expense of $13$18 million on Income before Income Taxes of $60$80 million. The effective tax rate for the sixthree months ended June 30, 2020March 31, 2021 was different 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.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As discussed in Note 1, as a result ofIn addition, during the February 19,three months ended March 31, 2021, and May 21, 2021 IP exchanges, the Company recorded an adjustment through Capital in Excessdiscrete benefits of Par Valueapproximately $1 million related to decrease its net domestic DTL by $58 million and $109 million, respectively. The decrease inexcess tax benefits on restricted stock that vested during the DTL reflects the change in the outside basis difference associated with the Company’s investment in the partnership and includes the impact of the tax basis step up triggered by each exchange, pursuant to Section 754 of the Internal Revenue Code in addition to other changes to book and tax basis as a result of the Company’s increased ownership interest in the partnership.period.
NOTE 8 —9 — 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, the recycling of packaging and the health and safety of employees. Compliance initiatives could result in significant costs, which could negatively impact the Company’sCompany’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.
Some of the Company’sCompany’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’sCompany’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’sCompany’s consolidated financial position, results of operations or cash flows.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 10 — SEGMENT INFORMATION
NOTE 9 — 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 six months ended June 30, 2021 for fiber procurement fees and corrugated products were $4 million (related to pass through wood purchases of $81 million) and $13 million, respectively. Payments to IP for the six months ended June 30, 2020 for fiber procurement fees and corrugated products were $6 million (related to pass through wood purchases of $107 million) and $15 million, respectively. As discussed in Note 1, IP has no ownership interest remaining in GPIP as of May 21, 2021.
NOTE 10 — SEGMENT INFORMATION
The Company has 3 reportable segments as follows:
Paperboard Mills includes the 8 North American paperboard mills that produce primarily CRB, CUK, and SBS, which is consumed internally to produce paperboard packaging for the Americas and Europe 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"), 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 including healthcare and beauty primarily 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.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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."
Segment information is as follows:
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, | | June 30, | | March 31, | |
In millions | In millions | 2021 | | 2020 | | 2021 | | 2020 | In millions | 2022 | | 2021 | |
NET SALES: | NET SALES: | | NET SALES: | | |
Paperboard Mills | Paperboard Mills | $ | 244 | | | $ | 234 | | | $ | 481 | | | $ | 503 | | Paperboard Mills | $ | 296 | | | $ | 237 | | |
Americas Paperboard Packaging | Americas Paperboard Packaging | 1,237 | | | 1,154 | | | 2,406 | | | 2,277 | | Americas Paperboard Packaging | 1,422 | | | 1,169 | | |
Europe Paperboard Packaging | Europe Paperboard Packaging | 212 | | | 183 | | | 418 | | | 360 | | Europe Paperboard Packaging | 486 | | | 206 | | |
Corporate/Other/Eliminations(a) | Corporate/Other/Eliminations(a) | 44 | | | 40 | | | 81 | | | 70 | | Corporate/Other/Eliminations(a) | 41 | | | 37 | | |
Total | Total | $ | 1,737 | | | $ | 1,611 | | | $ | 3,386 | | | $ | 3,210 | | Total | $ | 2,245 | | | $ | 1,649 | | |
| (LOSS) INCOME FROM OPERATIONS: | | |
INCOME (LOSS) FROM OPERATIONS: | | INCOME (LOSS) FROM OPERATIONS: | | |
Paperboard Mills(b) | Paperboard Mills(b) | $ | (18) | | | $ | (35) | | | $ | (45) | | | $ | (58) | | Paperboard Mills(b) | $ | 11 | | | $ | (27) | | |
Americas Paperboard Packaging | Americas Paperboard Packaging | 108 | | | 157 | | | 229 | | | 352 | | Americas Paperboard Packaging | 153 | | | 121 | | |
Europe Paperboard Packaging | Europe Paperboard Packaging | 27 | | | 21 | | | 47 | | | 33 | | Europe Paperboard Packaging | 37 | | | 20 | | |
Corporate and Other(b)(c) | Corporate and Other(b)(c) | (22) | | | (28) | | | (28) | | | (52) | | Corporate and Other(b)(c) | (8) | | | (6) | | |
Total | Total | $ | 95 | | | $ | 115 | | | $ | 203 | | | $ | 275 | | Total | $ | 193 | | | $ | 108 | | |
| DEPRECIATION AND AMORTIZATION: | DEPRECIATION AND AMORTIZATION: | | DEPRECIATION AND AMORTIZATION: | | |
Paperboard Mills | Paperboard Mills | $ | 56 | | | $ | 67 | | | $ | 114 | | | $ | 126 | | Paperboard Mills | $ | 61 | | | $ | 58 | | |
Americas Paperboard Packaging | Americas Paperboard Packaging | 41 | | | 41 | | | 83 | | | 80 | | Americas Paperboard Packaging | 43 | | | 42 | | |
Europe Paperboard Packaging | Europe Paperboard Packaging | 11 | | | 9 | | | 22 | | | 19 | | Europe Paperboard Packaging | 29 | | | 11 | | |
Corporate and Other | Corporate and Other | 9 | | | 5 | | | 15 | | | 11 | | Corporate and Other | 6 | | | 6 | | |
Total | Total | $ | 117 | | | $ | 122 | | | $ | 234 | | | $ | 236 | | Total | $ | 139 | | | $ | 117 | | |
(a) Includes revenue from contracts with customers for the Australia and Pacific Rim operating segments.
(b) Includes accelerated depreciation related to exit activities in 2022 and 2021.
(c) Includes expenses related to business combinations, shutdown and other special charges, and exit activities.
NOTE 11 — EARNINGS PER SHARE
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
In millions, except per share data | 2021 | | 2020 | | 2021 | | 2020 |
Net Income Attributable to Graphic Packaging Holding Company | $ | 38 | | | $ | 52 | | | $ | 92 | | | $ | 39 | |
Weighted Average Shares: | | | | | | | |
Basic | 295.1 | | | 279.9 | | | 285.5 | | | 284.4 | |
Dilutive Effect of RSUs | 0.7 | | | 0.6 | | | 1.0 | | | 0.8 | |
Diluted | 295.8 | | | 280.5 | | | 286.5 | | | 285.2 | |
Earnings Per Share — Basic | $ | 0.13 | | | $ | 0.19 | | | $ | 0.32 | | | $ | 0.14 | |
Earnings Per Share — Diluted | $ | 0.13 | | | $ | 0.19 | | | $ | 0.32 | | | $ | 0.14 | |
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 — EARNINGS PER SHARE
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| March 31, | | |
In millions, except per share data | 2022 | | 2021 | | | | |
Net Income Attributable to Graphic Packaging Holding Company | $ | 107 | | | $ | 54 | | | | | |
Weighted Average Shares: | | | | | | | |
Basic | 308.8 | | | 275.8 | | | | | |
Dilutive Effect of RSUs | 0.9 | | | 1.4 | | | | | |
Diluted | 309.7 | | | 277.2 | | | | | |
Earnings Per Share — Basic | $ | 0.35 | | | $ | 0.20 | | | | | |
Earnings Per Share — Diluted | $ | 0.35 | | | $ | 0.19 | | | | | |
(Unaudited)
NOTE 12 —— CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
The following represents changes in Accumulated Other Comprehensive Loss attributable to Graphic Packaging Holding Company by component for the sixthree months ended June 30, 2021:March 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions, net of tax | Derivatives Instruments | | | | Pension and Postretirement Benefit Plans | | Currency Translation Adjustments | | | Total |
Balance at December 31, 2020 | $ | (13) | | | | | $ | (139) | | | $ | (94) | | | | $ | (246) | |
Other Comprehensive Income before Reclassifications | 4 | | | | | 19 | | | 1 | | | | 24 | |
Amounts Reclassified from Accumulated Other Comprehensive Income (a) | 2 | | | | | 1 | | | 0 | | | | 3 | |
Net Current-period Other Comprehensive Income | 6 | | | | | 20 | | | 1 | | | | 27 | |
Less: | | | | | | | | | | |
Net Current-period Other Comprehensive Income Attributable to Noncontrolling Interest | (1) | | | | | 0 | | | 0 | | | | (1) | |
Balance at June 30, 2021 | $ | (8) | | | | | $ | (119) | | | $ | (93) | | | | $ | (220) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
In millions, net of tax | Derivatives Instruments | | | | Pension and Postretirement Benefit Plans | | Currency Translation Adjustments | | | Total |
Balance at December 31, 2021 | $ | (8) | | | | | $ | (94) | | | $ | (122) | | | | $ | (224) | |
Other Comprehensive Income (Loss) before Reclassifications | 5 | | | | | (10) | | | (22) | | | | (27) | |
Amounts Reclassified from Accumulated Other Comprehensive Income (a) | 8 | | | | | 1 | | | — | | | | 9 | |
Net Current-period Other Comprehensive Income (Loss) | 13 | | | | | (9) | | | (22) | | | | (18) | |
| | | | | | | | | | |
| | | | | | | | | | |
Balance at March 31, 2022 | $ | 5 | | | | | $ | (103) | | | $ | (144) | | | | $ | (242) | |
(a) See following table for details about these reclassifications.
The following represents reclassifications out of Accumulated Other Comprehensive Loss for the sixthree months ended June 30, 2021:March 31, 2022:
| | | | | | | | | | | |
In millions | | | |
Details about Accumulated Other Comprehensive Loss Components | Amount Reclassified from Accumulated Other Comprehensive Loss | | Affected Line Item in the Statement Where Net Income is Presented |
Derivatives Instruments: | | | |
Commodity Contracts | $ | (1)(3) | | | Cost of Sales |
Foreign Currency Contracts | 1 | | | Other Expense (Income), Net |
Interest Rate Swap Agreements | 3— | | | Interest Expense, Net |
| $ | 3 (3) | | | Total before Tax |
| (1)11 | | (a) | Tax Expense |
| $ | 28 | | | Total, Net of Tax |
| | | |
Amortization of Defined Benefit Pension Plans: | | | |
| | | |
Actuarial Losses | $ | 21 | | (a) (b) | |
| $ | 21 | | | Total, Net of Tax |
| | | |
| | | |
| | | |
Amortization of Postretirement Benefit Plans:
| | | |
| | | |
Actuarial Gains | $ | (1) | | (a)
| |
| $ | (1) | | | Total, Net of Tax |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
Total Reclassifications for the Period | $ | 39 | | | |
(a) (a)Includes tax expense of $10 million to release the lingering tax effect after settling the interest rate swaps (see "Note 7 - Financial Instruments and Fair Value Measurement" and "Note 8 - Income Taxes").
(b) These accumulated other comprehensive loss components are included in the computation of net periodic pension cost (see ““Note 5 —6 - Pensions and Other Postretirement Benefits").
NOTE 13 — EXIT ACTIVITIES
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 13 — EXIT ACTIVITIES
On March 15, 2022, the Company announced its decision to close the Norwalk, Ohio folding carton facility by the end of May 2022. The Company currently expects to incur charges associated with this exit activity for post-employment benefits, retention bonuses and incentives, which are included in the Severance costs and other line item in the table below for the three months ended March 31, 2022.
During 2019, the Company announced its plans to invest $600 million in a CRB platform optimization project, which included an investment in a new CRB paper machine in Kalamazoo, Michigan. In conjunction withAt the completiontime of this project,the announcement, the Company currently expectsexpected to close 2 of its smaller CRB Millsmills in 2022 in order to remain capacity neutral. During the third quarter of 2021, the Company decided to continue to operate 1 of these smaller CRB mills at least through 2022.
In March 2020, the Company made the decision to close the White Pigeon, Michigan CRB mill and shut down the PM1 containerboard machine in West Monroe, Louisiana. During the second quarter of 2020, the Company closed the White Pigeon, Michigan CRB mill and shut down the PM1 containerboard machine.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In June 2020, the Company made the decision to close certain converting facilities that were acquired from Greif. The Burlington, North Carolina converting facility and the Los Angeles, California converting facility were closed during 2020.
During the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, the Company recorded $18$11 million and $33$9 million of exit costs, respectively, associated with these restructurings. These costs are included in the Corporate and Other caption in "Note 10 — Segment Information." Other costs associated with the start-up of the new CRB paper machine will beare recorded in the period in which they are incurred.
The following table summarizes the costs incurred during the three and six months ended June 30,March 31, 2022 and 2021 and 2020 related to these restructurings:
| | | Three Months Ended | | Six Months Ended | | | Three Months Ended | |
| | June 30, | | June 30, | | | March 31, | |
In millions | In millions | Location in Statement of Operations | 2021 | | 2020 | | 2021 | | 2020 | | In millions | Location in Statement of Operations | 2022 | | 2021 | |
Severance costs and other(a) | Severance costs and other(a) | Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | $ | 4 | | | $ | 3 | | | $ | 8 | | | $ | 7 | | | Severance costs and other(a) | Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | $ | 7 | | | $ | 4 | | |
Accelerated depreciation | Accelerated depreciation | Cost of Sales | 5 | | | 11 | | | 10 | | | 16 | | | Accelerated depreciation | Cost of Sales | 4 | | | 5 | | |
Inventory and asset write-offs | Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net | 0 | | | 1 | | | 0 | | | 10 | | | |
| Total | Total | | $ | 9 | | | $ | 15 | | | $ | 18 | | | $ | 33 | | | Total | | $ | 11 | | | $ | 9 | | |
(a) Costs incurred include activities for post-employment benefits, retention bonuses, incentives and professional services.
The following table summarizes the balance of accrued expenses related to restructuring:
| | | | | |
In millions | Total |
Balance at December 31, 20202021 | $ | 128 | |
Costs incurred | 87 | |
Payments | (6) | |
Adjustments(a)
| (1) | |
Balance at June 30, 2021March 31, 2022 | $ | 1315 | |
(a) Adjustments related to changes in estimates of severance costs.
In conjunction with the CRB platform optimization project and closure of 2the smaller CRB Mills,Mill, the Company currently expects to incur charges associated with these exit activities for post-employment benefits, retention bonuses and incentives in the range of $15 million to $20 million and for accelerated depreciation and inventory and asset write-offs in the range of $50 million to $60$55 million. Additionally, the Company expects to incur start-up charges of approximately $15 million for the new CRB paper machine in 2021. Through June 30, 2021,March 31, 2022, the Company has incurred cumulative exit activity charges for post-employment benefits, retention bonuses and incentives of $12$15 million, accelerated depreciation and inventory and asset write-offs of $37$49 million, and start-up charges for the new CRB paper machine of $5$26 million.
For the closures of the White Pigeon, Michigan CRB mill and the shutdown of the PM1 containerboard machine in West Monroe, Louisiana, the Company has incurred cumulative exit activity charges for post-employment benefits of $2 million and accelerated depreciation and inventory and asset write-offs of $17 million through June 30, 2021. The Company does not expect to incur any additional significant charges related to these closures.
NOTE 14 — SUBSEQUENT EVENTS
On July 1, 2021, the Company acquired substantially all the assets of Americraft Carton, Inc. (“Americraft”), a leader in paperboard folding cartons in North America for $280 million plus $8 million for recently purchased equipment subject to customary working capital true-up. The acquisition includes 7 converting facilities across the United States and will be reported within the Americas Paperboard Packaging reportable segment.
On July 22, 2021, the Company entered into a new $250 million term loan facility under the Current Credit Facility with member banks of the Farm Credit System (the “Incremental Term A-3 Facility”). The Incremental Term A-3 Facility bears interest at a floating rate ranging from LIBOR plus 1.50% to LIBOR plus 2.25%, determined using a pricing grid based upon the Company’s consolidated leverage ratio, matures July 22, 2028, and does not amortize. As long as the loan is outstanding, the Company will be eligible to receive an annual patronage credit from the participating banks, which will be paid in cash and stock in the lead member bank. Patronage payable each year is variable and based on the individual financial performance of each of the member banks then participating in the loan.
GRAPHIC PACKAGING HOLDING COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On July 23, 2021, the Company entered into a new €210 million term loan facility (the “Euro Term Loan”) under the Current Credit Agreement, while also increasing the limit under the European Senior Secured Revolving credit facility thereunder by €25 million. The Euro Term Loan has a delayed draw feature and the balance can be drawn in conjunction with the AR Packaging closing through May 12, 2022. The Euro Term Loan bears interest at a floating rate ranging from EURIBOR plus 1.125% to 1.75%, determined using a pricing grid based upon the Company’s consolidated leverage ratio, matures April 1, 2026, and is subject to amortization beginning in year two. The Company also amended the step-up of the maximum Consolidated Total Leverage Ratio for material acquisitions to less than 5.00 to 1.00 through the later of (i) the fourth full quarter after the closing of the AR Packaging transaction and (ii) the quarter ended December 31, 2022 after which the maximum ratio will step back down to 4.25x.
ITEM 2. MANAGEMENT’SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This management’smanagement’s discussion and analysis of financial conditions and results of operations is intended to provide investors with an understanding of the Company's past performance, financial condition and prospects. The following will be discussed and analyzed:
ØOverview of Business
ØØ Overview of Business 2022 Results
ØØ OverviewResults of 2021 Results Operations
ØØ Results of Operations
Ø Financial Condition, Liquidity and Capital Resources
ØØ Critical Accounting Policies
ØØ New Accounting Standards
ØØ Business Outlook
OVERVIEW OF BUSINESS
The Company’sCompany’s objective is to strengthen its position as a leading provider of sustainable fiber-based consumer packaging solutions. To achieve this objective, the Company offers customers its paperboard, cartons, cups, lids, foodservice containers and packaging machines, either as an integrated solution or separately. Cartons, carriers and containers are designed to protect and hold products. Product offerings include a variety of laminated, coated and printed packaging structures that are produced from the Company’sCompany’s coated-recycled paperboard ("CRB"), coated unbleached kraft paperboard ("CUK") and solid bleached sulfate paperboard ("SBS"). Innovative designs and combinations of paperboard, films, foils, metallization, holographics and embossing are customized to the individual needs of the customers.
The Company is implementing strategies (i) to expand market share in its current markets and to identify and penetrate new markets; (ii) to capitalize on the Company’sCompany’s customer relationships, business competencies, and mills and folding carton assets; (iii) to develop and market innovative, sustainable products and applications that benefit from consumer-led sustainability trends; and (iv) to continue to reduce costs by focusing on operational improvements. The Company’sCompany’s ability to fully implement its strategies and achieve its objectives may be influenced by a variety of factors, many of which are beyond its control, such as inflation of raw material and other costs, which the Company cannot always pass through to its customers, and the effect of overcapacity in the worldwide paperboard packaging industry.
Significant Factors That Impact the Company’sCompany’s Business and Results of Operations
COVID-19 Pandemic. Many uncertainties remain regarding the current novel coronavirus (“COVID-19”) pandemic, including the anticipated duration of the pandemic, and the extent of local and worldwide social, political, and economic disruption it may cause. While the COVID-19 pandemic has not materially impacted the Company's overall business, operations, or financial results to date, it may have far-reaching impacts on many aspects of the Company's operations, including impacts on customer and consumer behaviors, business and manufacturing operations, inventory, accounts receivable, the Company’s employees, and the market generally. The Company will continue to assess the evolving impact of the COVID-19 pandemic and intends to make adjustments to its business accordingly, such as to match the Company's supply with demand by adjusting mill maintenance outages and taking market downtime where appropriate.
Impact of Inflation/Deflation. The Company’sCompany’s cost of sales consists primarily of energy (including natural gas, fuel oil and electricity), pine and hardwood fiber, chemicals, secondary fibers, purchased paperboard, aluminum foil, ink, plastic films and resins, depreciation expense and labor. Costs increased in the first sixthree months of 20212022 by $128$195 million, compared to the first sixthree months of 2020. The higher costs in the six months ended June 30, 2021 were due to higher commodity inflation costs ($176 million), labor and benefit costsbenefits ($23 million), freight ($35 million), secondary fiber cost ($10 million), chemicals ($35 million), energy ($10 million), external board ($1012 million) and other costs, net ($57 million).
Commodity inflation was primarily due to external board ($39 million), mill chemicals ($31 million), secondary fiber ($26 million), wood ($23 million), logistics ($21 million), energy ($21 million), converting chemicals ($11 million), and other costs ($4 million). Because the price of natural gas experiences significant volatility, the Company has entered into contracts designed to manage risks associated with future variability in cash flows caused by changes in the price of natural gas. The Company has entered into natural gas swap contracts to hedge prices for a portion of its expected usage for 2021 and all of 2022. Since negotiated sales contracts and the market largely determine the pricing for its products, the Company is at times limited in its ability to raise prices and pass through to its customers any inflationary or other cost increases that the Company may incur.
The Company’s operations and financial results could be adversely impacted by global events outside of the Company’s control, such as the current COVID-19 pandemic and the conflict between Russia and Ukraine. As a result of global events such as the current COVID-19 pandemic and the conflict between Russia and Ukraine, there could be unpredictable disruptions to the Company’s operations that could limit production, reduce its future revenues and negatively impact the Company’s financial condition. These global events may result in supply chain and transportation disruptions to and from our facilities and affected employees could impact the Company’s ability to operate its facilities and distribute products to its customers in a timely fashion. In addition, these global events may result in extreme volatility and disruptions in the capital and credit markets as well as widespread furloughs and layoffs for workers in the broader economy. As of March 31, 2022, the Company’s two converting facilities in Russia provided approximately 1% of the Company’s Net Sales and less than 1% of the Company’s EBITDA. The Company is adhering to all U.S. and EU sanctions, and the two facilities are operating to meet existing multi-national customer contractual commitments where possible. The Company has not made any new investments nor entered into any new contractual customer relationships in Russia and will actively explore all options for the business as contractual commitments expire. Additional information regarding this risk is contained in Part I, "Item 1A., Risk Factors" of the Company's 2021 Annual Report on Form 10-K, and in other filings with the Securities and Exchange Commission.
Commitment to Cost Reduction. In light of continuing margin pressure throughout the packaging industry, the Company has programs in place that are designed to reduce costs, improve productivity and increase profitability. The Company utilizes a global continuous improvement initiative that uses statistical process control to help design and manage many types of activities, including production and maintenance. This includes a Six Sigma process focused on reducing variable and fixed manufacturing and administrative costs and the use of Lean Sigma principles in manufacturing and supply chain processes.
The Company’sCompany’s ability to continue to successfully implement its business strategies and to realize anticipated savings and operating efficiencies is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond the Company’sCompany’s control. If the Company cannot successfully implement the strategic cost reductions or other cost savings plans, it may not be able to continue to compete successfully against other manufacturers. In addition, any failure to generate the anticipated efficiencies and savings could adversely affect the Company’sCompany’s financial results.
Competition and Market Factors. As some products can be packaged in different types of materials, the Company’sCompany’s sales are affected by competition from other manufacturers’manufacturers’ CRB, CUK, SBS, folding box board, and recycled clay-coated news. Additional substitute products also include plastic, shrink film and corrugated containers. In addition, while the Company has long-term relationships with many of its customers, the underlying contracts may be re-bid or renegotiated from time to time, and the Company may not be successful in renewing on favorable terms or at all. The Company works to maintain market share through efficiency, product innovation, service and strategic sourcing to its customers; however, pricing and other competitive pressures may occasionally result in the loss of a customer relationship.
In addition, the Company’sCompany’s sales are driven by consumer buying habits in the markets its customers serve, and recently we haveserve. Recently, the Company has seen net organic sales growth driven by the consumersconsumers' desire for sustainable packaging solutions and increased at home consumption. Changes in consumer dietary habits and preferences, increases in the costs of living, unemployment rates, access to credit markets, as well as other macroeconomic factors, may negatively affect consumer spending behavior. New product introductions and promotional activity by the Company’sCompany’s customers and the Company’sCompany’s introduction of new packaging products also impact its sales.
Debt Obligations. The Company had an aggregate principal amount of $3,788$5,966 million of outstanding debt obligations as of June 30, 2021.March 31, 2022. This debt has consequences for the Company, as it requires a portion of cash flow from operations to be used for the payment of principal and interest, exposes the Company to the risk of increased interest rates and may restrict the Company’sCompany’s ability to obtain additional financing. Covenants in the Company’sCompany’s Fourth Amended and Restated Credit Agreement (as amended, by the Incremental Facility Amendment) (the “Current"Current Credit Agreement”Agreement") and the indentures governing the 4.875% Senior Notes due 2022, 4.125%0.821% Senior Notes due 2024, 0.821%4.125% Senior Notes due 2024, 1.512% Senior Notes due 2026, 4.75% Senior Notes due 2027, 3.50% Senior Notes due 2028, and 3.50% Senior Notes due 2029, 2.625% Senior Notes due 2029 and 3.75% Senior Notes due 2030 (the “Indentures”“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, make other restricted payments and make acquisitions or other investments. The Current Credit Agreement also requires compliance with a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. The Company’sCompany’s ability to comply in future periods with the financial covenants will depend on its ongoing financial and operating performance, which in turn will be subject to many other factors, many of which are beyond the Company’sCompany’s control. See "Covenant Restrictions" in “Financial“Financial Condition, Liquidity and Capital Resources”Resources” for additional information regarding the Company’sCompany’s debt obligations.
The debt and the restrictions under the Current Credit Agreement and the Indentures could limit the Company’sCompany’s flexibility to respond to changing market conditions and competitive pressures. The outstanding debt obligations and the restrictions may also leave the Company more vulnerable to a downturn in general economic conditions or its business, or unable to carry out capital expenditures that are necessary or important to its growth strategy and productivity improvement programs.
OVERVIEW OF SECONDFIRST QUARTER 20212022 RESULTS
This management’smanagement’s discussion and analysis contains an analysis of Net Sales, Income from Operations and other information relevant to an understanding of the Company's results of operations on a Consolidated basis:
••Net Sales for the three months ended June 30, 2021,March 31, 2022 increased $126$596 million or 8%36% to $1,737$2,245 million from $1,611$1,649 million for the three months ended June 30, 2020,March 31, 2021 due to improvedthe acquisitions of Americraft in Q3 2021 and AR Packaging in Q4 2021, higher selling prices, increased volume related to organic sales growth (including from conversions to fiber-based packaging solutions, and new product introductions), higher pricing,mix, partially offset by lower volume of open market sales and favorableunfavorable foreign exchange.
••Income from Operations for the three months ended June 30, 2021 decreased $20March 31, 2022 increased $85 million or 17%79% to $95$193 million from $115$108 million for the three months ended June 30, 2020March 31, 2021 due to unfavorable commodity and other inflation (primarily labor and benefits) offset byhigher pricing, higher volumes from organic sales growth and acquisitions, cost savings from continuous improvement and other programs, and favorable foreign exchange.product mix, offset by unfavorable commodity inflation and other inflation (primarily labor and benefits), lower volume of open market sales, and higher depreciation and amortization.
Acquisitions and Closures
Acquisitions
•On March 15, 2022, the Company announced its decision to close the Norwalk, Ohio folding carton facility by the end of May 2022.
•On January 31, 2020,November 1, 2021, the Company acquired a folding carton facility from Quad/Graphics, Inc. ("Quad"), a commercial printing company.all the shares of AR Packaging, Europe's second largest producer of fiber-based consumer packaging. The acquisition included 30 converting facility is locatedplants in Omaha, Nebraska13 countries and is included inreported within the AmericasEurope Paperboard Packaging reportable segment.
•On April 1, 2020, the Company acquired the Consumer Packaging Group business from Greif, Inc. ("Greif"), a leader in industrial packaging products and services. The acquisition included seven converting facilities across the United States, which are included in the Americas Paperboard Packaging reportable segment.
•On May 12, 2021, the Company announced its intent to acquire all of the shares of AR Packaging Group AB ("AR Packaging"), Europe's second largest producer of fiber-based consumer packaging, for approximately $1.45 billion in cash, subject to customary adjustments. The $1.45 billion acquisition price will be paid in Euros at close. As such, on May 14, 2021, the Company entered into deal contingent, foreign exchange forward contracts, with no upfront cash cost, to hedge 700 million Euros of the acquisition price. These forward contracts expire if the deal terminates or does not close by May 13, 2022 and are accounted for as derivatives under ASC 815, Derivatives and Hedging.
••On July 1, 2021, the Company acquired substantially all the assets of Americraft, Carton, Inc. (“Americraft”), a leader in paperboardthe largest independent folding cartonscarton converter in North America for $280 million plus $8 million for recently purchased equipment subject to customary working capital true-up.America. The acquisition includesincluded seven converting facilitiesplants across the United States and will beis reported within the Americas Paperboard Packaging reportable segment.
Share Repurchases and Dividends
••On May 26, 2021,February 22, 2022, the Company's board of directors declared a regular quarterly dividend of $0.075 per share of common stock payable on JulyApril 5, 20212022 to shareholders of record as of JuneMarch 15, 2021.2022.
••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"). During the first sixthree months of 2022 and 2021, the Company did not repurchase any shares of its common stock under the 2019 share repurchase program. During the six months ended June 30, 2020, the Company repurchased 12,289,317 shares of its common stock at an average price of $12.82 under the 2019 share repurchase program. As of June 30, 2021,March 31, 2022, the Company has $147 million available for additional repurchases under the 2019 share repurchase program.
RESULTS OF OPERATIONS
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, | | June 30, | | March 31, | |
In millions | In millions | 2021 | | 2020 | | 2021 | | 2020 | In millions | 2022 | | 2021 | |
Net Sales | Net Sales | $ | 1,737 | | | $ | 1,611 | | | $ | 3,386 | | | $ | 3,210 | | Net Sales | $ | 2,245 | | | $ | 1,649 | | |
Income from Operations | Income from Operations | 95 | | | 115 | | | 203 | | | 275 | | Income from Operations | 193 | | | 108 | | |
Nonoperating Pension and Postretirement Benefit Income (Expense) | 1 | | | — | | | 3 | | | (151) | | |
Nonoperating Pension and Postretirement Benefit Income | | Nonoperating Pension and Postretirement Benefit Income | 2 | | | 2 | | |
Interest Expense, Net | Interest Expense, Net | (29) | | | (30) | | | (59) | | | (64) | | Interest Expense, Net | (42) | | | (30) | | |
| Income before Income Taxes and Equity Income of Unconsolidated Entity | 67 | | | 85 | | | 147 | | | 60 | | |
Income before Income Taxes | | Income before Income Taxes | 153 | | | 80 | | |
Income Tax Expense | Income Tax Expense | (26) | | | (18) | | | (44) | | | (13) | | Income Tax Expense | (46) | | | (18) | | |
Income before Equity Income of Unconsolidated Entity | 41 | | | 67 | | | 103 | | | 47 | | |
Equity Income of Unconsolidated Entity | 1 | | | — | | | 1 | | | — | | |
| Net Income | Net Income | $ | 42 | | | $ | 67 | | | $ | 104 | | | $ | 47 | | Net Income | $ | 107 | | | $ | 62 | | |
SECONDFIRST QUARTER 20212022 COMPARED WITH SECONDFIRST QUARTER 20202021
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
In millions | 2021 | | 2020 | | Increase | | Percent Change |
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Consolidated | $ | 1,737 | | | $ | 1,611 | | | $ | 126 | | | 8 | % |
The components of the change in Net Sales are as follows:
| | | Three Months Ended June 30, | | Three Months Ended March 31, |
| | | Variances | | | | Variances | |
In millions | In millions | 2020 | | Price | | Volume/Mix | | | Exchange | | Total | | 2021 | In millions | 2021 | Price | Volume/Mix | | Exchange | 2022 | Increase | Percent Change |
| Consolidated | Consolidated | $ | 1,611 | | | $ | 14 | | | $ | 77 | | | | $ | 35 | | | $ | 126 | | | $ | 1,737 | | Consolidated | $ | 1,649 | | $ | 222 | | $ | 385 | | | $ | (11) | | $ | 2,245 | | $ | 596 | | 36 | % |
The Company’sCompany’s Net Sales for the three months ended June 30, 2021March 31, 2022 increased by $126$596 million or 8%36% to $1,737$2,245 million from $1,611$1,649 million for the three months ended June 30, 2020March 31, 2021 due to organic$341 million of net sales growth includingrelated to the acquisitions of Americraft in Q3 2021 and AR Packaging in Q4 2021, higher selling prices, increased volume from conversions to fiber-based packaging solutions and new product introductions, favorableand mix, offset by lower volume of open market sales and unfavorable foreign exchange, primarily the Euro, British Pound Euro, Canadian dollar, and Australian dollar, and higher pricing partially offset by lower open market volume.dollar. Core converting volumes were up and driven by higher volumes in beverage, foodservice packaging including cups, confections, tissue, and global beverage,dairy partially offset by declineslower volumes in dry foods, cereal, tissue, and frozen foods products. and pizza.
Income from Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, |
In millions | 2021 | | 2020 | | Decrease | | Percent Change |
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Consolidated | $ | 95 | | | $ | 115 | | | $ | (20) | | | (17)% |
The components of the change in Income from Operations are as follows:
| | | Three Months Ended June 30, | | Three Months Ended March 31, | |
| | | Variances | | | | Variances | |
In millions | In millions | 2020 | | Price | | Volume/Mix | | | | Inflation | | Exchange | | Other (a) | | Total | | 2021 | In millions | 2021 | Price | Volume/Mix | | Inflation | Exchange | Other (a) | 2022 | Increase | Percent Change |
| Consolidated | Consolidated | $ | 115 | | | $ | 14 | | | $ | 23 | | | | | $ | (81) | | | $ | 3 | | | $ | 21 | | | $ | (20) | | | $ | 95 | | Consolidated | $ | 108 | | $ | 222 | | $ | 49 | | | $ | (195) | | $ | 2 | | $ | 7 | | $ | 193 | | $ | 85 | | 79 | % |
(a) Includes the Company's cost reduction initiatives, planned mill maintenance costs, mill market downtime costs, expenses related to acquisitions and integration activities, exit activities and shutdown and other special charges.
Income from Operations for the three months ended June 30, 2021 decreased $20March 31, 2022 increased $85 million or 17%79% to $95$193 million from $115$108 million for the three months ended June 30, 2020March 31, 2021 due to unfavorable commoditydue to higher pricing, higher volumes from organic sales growth and other inflation (primarily labor and benefits) and lower open market volume offset byacquisitions, mix, cost savings from continuous improvement and other programs, organicoffset by unfavorable commodity inflation and other inflation (primarily labor and benefits), lower volume of open market sales, growth,and higher pricesdepreciation and favorable foreign exchange. amortization.
Inflation increased for the three months ended June 30,March 31, 2022 by $195 million, compared to the first three months of 2021 by $81 million due to higher commodity inflation of $67 million,costs ($176 million), labor and benefits of $12 million,($12 million) and other inflation of $2 million.costs, net ($7 million). Commodity inflation was primarily due to freight ($25 million), chemicals ($25 million), external board ($739 million), mill chemicals ($31 million), secondary fiber ($26 million), wood ($23 million), logistics ($21 million), energy ($521 million), and secondary fiberconverting chemicals ($211 million), and other commodity costs net ($34 million).
Interest Expense, Net
Interest Expense, Net was $29$42 million and $30 million for the three months ended June 30,March 31, 2022 and 2021, and 2020, respectively. Interest Expense, Net decreasedincreased due to higher debt balances, partly offset by lower effective interest rates as compared to the same period in the prior year.rates. As of June 30, 2021,March 31, 2022, approximately 16%36% of the Company’sCompany’s total debt was subject to floating interest rates.
Income Tax Expense
During the three months ended June 30, 2021,March 31, 2022, the Company recognized Income Tax Expense of $26$46 million on Income before Income Taxes of $67$153 million. The effective tax rate for the three months ended June 30, 2021March 31, 2022 is higher thandifferent from the statutory rate primarily due to discrete tax expense recorded during the period of $8 million, the tax effect of income attributable to noncontrolling interests as well as the mix and levels of earnings between foreign and domestic tax jurisdictions. The Company recorded discreteadjustments including tax expense of $3$10 million recorded to release the lingering tax expense remaining in Other Comprehensive Income after the settlement of certain swaps and a tax benefit of $2 million related to the remeasurement of the net deferredexcess tax liability for its UK subsidiaries due to the statutory tax rate increase enactedbenefits on restricted stock that vested during the period. The Company also recorded discrete tax expense of $5 million related to the remeasurement of deferred tax assets for executive compensation as a result of IP’s exchange of its remaining shares in GPIP during the period.
During the three months ended June 30, 2020,March 31, 2021, the Company recognized Income Tax Expense of $18 million on Income before Income Taxes of $85$80 million. The effective tax rate for the three months ended is different 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. jurisdictions with and without a valuation allowance. In addition, during the three months ended March 31, 2021, the Company recorded discrete benefits of approximately $1 million related to excess tax benefits on restricted stock that vested during the period.
The Company utilized its remaining U.S. federal net operating lossesloss carryforwards during 2020. However, as a result of deductions associated with the step-up in tax basis of certain assets as a result of International Paper’s exit from the GPIL partnership, the Company generated a taxable loss of $574 million during 2021 that can be carried forward for U.S. federal income tax purposes indefinitely. As such, based on the net operating loss generated in 2021 as well as future tax benefits associated with planned capital projects deductions associated with the increase in tax basis recorded as a result of the February 19, 2021 and May 21, 2021 share exchanges with IP, as well as tax credit carryforwards, which are available to offset future U.S. federal income tax, the Company does not expect to be a meaningful U.S. federal cash taxpayer until 2024.
FIRST SIX MONTHS 2021 COMPARED WITH FIRST SIX MONTHS 2020
Net Sales
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
In millions | 2021 | | 2020 | | Increase | | Percent Change |
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Consolidated | $ | 3,386 | | | $ | 3,210 | | | $ | 176 | | | 5 | % |
The components of the change in Net Sales are as follows:
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| Six Months Ended June 30, |
| | | Variances | | |
In millions | 2020 | | Price | | Volume/Mix | | | Exchange | | Total | | 2021 |
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Consolidated | $ | 3,210 | | | $ | 11 | | | $ | 110 | | | | $ | 55 | | | $ | 176 | | | $ | 3,386 | |
The Company’s Net Sales for the six months ended June 30, 2021 increased by $176 million or 5% to $3,386 million from $3,210 million for the six months ended June 30, 2020 due to net sales of $60 million from the Greif and Quad acquisitions in 2020, organic sales growth including conversions to our fiber-based packaging solutions and new product introductions, higher selling prices, and favorable foreign exchange rates, primarily the British Pound, Euro, Canadian dollar, and the Australian dollar partially offset by a decline in open market sales. The higher selling prices are the result of announced price increases, which benefit from market and inflationary pass throughs in the converting business. Core converting volumes were up primarily in foodservice packaging including cups, global beverage, pet care, and frozen foods offset by declines in tissue, dry foods, and cereal products.
Income from Operations
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
In millions | 2021 | | 2020 | | Decrease | | Percent Change |
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Consolidated | $ | 203 | | | $ | 275 | | | $ | (72) | | | (26)% |
The components of the change in Income from Operations are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| | | Variances | | |
In millions | 2020 | | Price | | Volume/Mix | | | | Inflation | | Exchange | | Other (a) | | Total | | 2021 |
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Consolidated | $ | 275 | | | $ | 11 | | | $ | 20 | | | | | $ | (128) | | | $ | 7 | | | $ | 18 | | | $ | (72) | | | $ | 203 | |
(a) Includes the Company's cost reduction initiatives, expenses related to acquisitions and integration activities, exit activities and shutdown and other special charges.
Income from Operations for the six months ended June 30, 2021 decreased $72 million or 26% to $203 million from $275 million for the six months ended June 30, 2020. Decreases were due to $29 million of Winter Storm Uri related downtime and mitigation costs in the first quarter of 2021, unfavorable commodity and other inflation (primarily labor and benefits), and lower volumes of our open market sales partially offset by cost savings from continuous improvement and other programs, organic sales growth, acquisitions of Greif and Omaha in 2020, and favorable foreign exchange.
Inflation increased for the six months ended June 30, 2021 by $128 million primarily due to higher commodity inflation of $101 million, higher labor and benefits of $23 million, and other inflation of $4 million. Commodity inflation was primarily due to higher freight ($35 million), chemicals ($35 million), secondary fiber cost ($10 million), external board ($10 million), energy ($10 million), and other commodity costs, net ($1 million).
Nonoperating Pension and Postretirement Benefit
Nonoperating Pension and Postretirement Benefit was income of $3 million for the six months ended June 30, 2021 versus an expense of $151 million in 2020. The decrease was due to a settlement charge of $153 million incurred during the first quarter of 2020 associated with the Company's purchase of a group annuity contract that transferred the remaining pension benefit obligation under the largest U.S. Plan of $713 million to an insurance company.
Interest Expense, Net
Interest Expense, Net was $59 million and $64 million for the six months ended June 30, 2021 and 2020, respectively. Interest Expense, Net decreased due to higher debt balances offset by lower effective interest rates as compared to the same period in the prior year.
Income Tax Expense
During the six months ended June 30, 2021 and 2020, the Company recognized Income Tax Expense of $44 million and $13 million, respectively, on Income before Income Taxes and Equity Income of Unconsolidated Entity of $147 million and $60 million, respectively.
The effective tax rate for the six months ended June 30, 2021 is different than the statutory rate primarily due to discrete tax expense recorded during the period of $8 million as well as the tax effect of income attributable to noncontrolling interests as well as the mix and levels of earnings between foreign and domestic tax jurisdictions. The Company recorded discrete tax expense of $3 million related to the remeasurement of the net deferred tax liability for its UK subsidiaries due to the statutory tax rate increase enacted during the period. The Company also recorded discrete tax expense of $5 million related to the remeasurement of deferred tax assets for executive compensation as a result of IP’s exchange of its remaining shares in GPIP during the period.
The effective tax rate for the six months ended June 30, 2020 was different 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.
Segment Reporting
The Company has three reportable segments as follows:
Paperboard Mills includes the eight North American paperboard mills that produce primarily CRB, CUK, and SBS, which is consumed internally to produce paperboard packaging for the Americas and Europe Packaging segments. The remaining paperboard is sold externally to a wide variety of paperboard packaging converters and brokers. The Paperboard Mills segmentsegment's 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") 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 including healthcare and beauty primarily 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" in the Notes to Condensed Consolidated Financial Statements.
| | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, | | June 30, | | March 31, | |
In millions | In millions | 2021 | | 2020 | | 2021 | | 2020 | In millions | 2022 | | 2021 | |
NET SALES: | NET SALES: | | NET SALES: | | |
Paperboard Mills | Paperboard Mills | $ | 244 | | | $ | 234 | | | $ | 481 | | | $ | 503 | | Paperboard Mills | $ | 296 | | | $ | 237 | | |
Americas Paperboard Packaging | Americas Paperboard Packaging | 1,237 | | | 1,154 | | | 2,406 | | | 2,277 | | Americas Paperboard Packaging | 1,422 | | | 1,169 | | |
Europe Paperboard Packaging | Europe Paperboard Packaging | 212 | | | 183 | | | 418 | | | 360 | | Europe Paperboard Packaging | 486 | | | 206 | | |
Corporate/Other/Eliminations(a) | Corporate/Other/Eliminations(a) | 44 | | | 40 | | | 81 | | | 70 | | Corporate/Other/Eliminations(a) | 41 | | | 37 | | |
Total | Total | $ | 1,737 | | | $ | 1,611 | | | $ | 3,386 | | | $ | 3,210 | | Total | $ | 2,245 | | | $ | 1,649 | | |
| (LOSS) INCOME FROM OPERATIONS: | | |
INCOME (LOSS) FROM OPERATIONS: | | INCOME (LOSS) FROM OPERATIONS: | | |
Paperboard Mills(b) | Paperboard Mills(b) | $ | (18) | | | $ | (35) | | | $ | (45) | | | $ | (58) | | Paperboard Mills(b) | $ | 11 | | | $ | (27) | | |
Americas Paperboard Packaging | Americas Paperboard Packaging | 108 | | | 157 | | | 229 | | | 352 | | Americas Paperboard Packaging | 153 | | | 121 | | |
Europe Paperboard Packaging | Europe Paperboard Packaging | 27 | | | 21 | | | 47 | | | 33 | | Europe Paperboard Packaging | 37 | | | 20 | | |
Corporate and Other(b)(c) | Corporate and Other(b)(c) | (22) | | | (28) | | | (28) | | | (52) | | Corporate and Other(b)(c) | (8) | | | (6) | | |
Total | Total | $ | 95 | | | $ | 115 | | | $ | 203 | | | $ | 275 | | Total | $ | 193 | | | $ | 108 | | |
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(a) Includes revenue from contracts with customers for the Australia and Pacific Rim operating segments.
(b) Includes accelerated depreciation related to exit activities in 2022 and 2021.
(c) Includes expenses related to business combinations, exit activities, and shutdown and other special charges.charges, and exit activities.
First Quarter 2022 Compared to First Quarter 2021
2021 COMPARED WITH 2020Paperboard Mills
Second Quarter 2021 Compared to Second Quarter 2020
Paperboard Mills
Net Sales increased from prior year due to higher selling prices and mix partially offset by lower open market volume. Lower open market volume was primarily due to the shut down of the PM1 containerboard machine in West Monroe, Louisiana and the closure of the White Pigeon, Michigan CRB mill, both in 2020, offset by higher open market volume of SBS. The Company also internalized more paperboard tons.
LossIncome from Operations decreasedincreased due to downtime and mitigation costs related to Winter Storm Uri in Q1 2021, higher prices, productivity improvements, including benefits from capital projects and mix of open market volume offset by commodity inflation, lower open market volume, and higher labor and benefitslevels of maintenance costs. The commodity inflation was primarily due to higher prices for chemicals, freight, secondary fiber, wood, chemicals, energy and energy. freight.
Americas Paperboard Packaging
Net Sales increased due to higher pricing, the Americraft acquisition in Q3 2021, organic sales growth including conversions to our fiber-based packaging solutions, and new product introductions, increased pricing, and favorable foreign currency exchange rates.introductions. Higher volumes in beverage, foodservice packaging including cups, confections, tissue, and global beveragedairy were offset by declineslower volumes in dry foods, cereal, tissue, and frozen foods products.and pizza. In beverage, volumes increased primarily in most categories includingbig beer and soft drinks offset by craft and specialty and big beer partially offset by soft drink.specialty.
Income from Operations decreasedincreased due to higher selling prices, higher core converting volume and increased volume from conversions to our fiber based packaging solutions, cost savings from continuous improvement and other programs offset by commodity inflation and other inflation (primarily labor and benefits) offset by higher volumes including from organic sales growth, higher selling prices and cost savings through continuous improvement and other programs.. The commodity inflation was primarily due to higher prices for freight, chemicals, secondary fiber, external board, freight, and energy.chemicals offset by secondary fiber.
Europe Paperboard Packaging
Net Sales increased due to increasedthe acquisition of AR Packaging on November 1, 2021 as well as higher prices and new product introductions including Keel Clip and PaperSeal offset by mix, lower core converting volumes, led by beverage and convenience, mix, and favorableunfavorable foreign currency exchange rates.
Income from Operations increased due to cost savings through continuous improvement and other programs, increased volumes, andhigher pricing, mix, offset by commodity inflation and higher labor and benefits costs.
First Six Months of 2021 Compared to First Six Months of 2020
Paperboard Mills
Net Sales decreased from prior year due to lower open market volume and mix offset by higher selling prices. Lower open market volume was primarily due to the closure of the White Pigeon, Michigan CRB mill and shut down of the PM1 containerboard machine in West Monroe, Louisiana, both in 2020, and one fewer production and selling day due to leap year. The Company also internalized more paperboard tons.
Loss from Operations decreased due to the impacts of productivity improvements, including benefits from capital projects, and higher prices offset by increased downtime and mitigation costs related to Winter Storm Uri, commodity inflation, and lower open market volume. The commodity inflation was primarily due to higher prices for chemicals, secondary fiber, freight and energy.
Americas Paperboard Packaging
Net Sales increased due to the Greif and Quad acquisitions, new product introductions, organic sales growth including conversions to our paperboard packaging solutions, and favorable foreign currency exchange rates. Higher volumes in foodservice packaging including cups, global beverage, and frozen foods were offset by declines in tissue, dry foods, and cereal products. In beverage, volumes increased in all categories including craft and specialty, big beer, and soft drinks.
Income from Operations decreased due to commodity inflation, other inflation (primarily labor and benefits), downtime and mitigation costs related to Winter Storm Uri, higher levels of maintenance and downtime costs, and one fewer selling day due to leap year, offset by higher volumes including from organic sales growth and acquisitions, cost savings through continuous improvement and other programs, and higher selling prices. The commodity inflation was primarily due to higher prices for freight, chemicals, secondary fiber, external board, and energy.
Europe Paperboardthe acquisition of AR Packaging
Net Sales increased due to increased volumes led by beverage and convenience, mix, and favorable foreign currency exchange rates.
Income from Operations increased due to cost savings through continuous improvement and other programs, increased volumes, and mix offset by commodity inflation and higher labor and benefits costs.
lower core converting volumes.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
The Company broadly defines liquidity as its ability to generate sufficient funds from both internal and external sources to meet its obligations and commitments. In addition, liquidity includes the ability to obtain appropriate debt and equity financing and to convert into cash those assets that are no longer required to meet existing strategic and financial objectives. Therefore, liquidity cannot be considered separately from capital resources that consist of current or potentially available funds for use in achieving long-range business objectives and meeting debt service commitments.
Cash Flows | | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
In millions | In millions | 2021 | | 2020 | In millions | 2022 | | 2021 |
Net Cash Provided by Operating Activities | Net Cash Provided by Operating Activities | $ | 305 | | | $ | 144 | | Net Cash Provided by Operating Activities | $ | 18 | | | $ | 53 | |
Net Cash Used in Investing Activities | Net Cash Used in Investing Activities | $ | (289) | | | $ | (389) | | Net Cash Used in Investing Activities | $ | (195) | | | $ | (120) | |
Net Cash (Used in) Provided by Financing Activities | $ | (105) | | | $ | 181 | | |
Net Cash Provided by Financing Activities | | Net Cash Provided by Financing Activities | $ | 119 | | | $ | 5 | |
Net cash provided by operating activities for the first sixthree months of 20212022 totaled $305$18 million compared to $144$53 million for the same period in 2020.2021. The favorable increasedecrease was mainlyprimarily due to improvedhigher working capital compared to the prior year period driven by the Company’s increased utilization of itsbalances including accounts receivable salefrom higher sales and securitization programs during 2021.inventory due to inflation. Pension contributions for the first sixthree months of 2022 and 2021 and 2020 were $15$7 million and $1$14 million, respectively. In the first quarter of 2022 and 2021, the Company made a $6 million and $14 million contribution to its remaining U.S. defined benefit plan by effectively utilizing a portion of the excess balance related to the terminated U.S. defined benefit plan.plan terminated in 2020.
Net cash used in investing activities for the first sixthree months of 20212022 totaled $289$195 million, compared to $389$120 million for the same period in 2020.2021. Capital spending was $346$223 million and $307$146 million in 20212022 and 2020, respectively. In 2020, the Company paid $41 million and $82 million for the Quad and Greif acquisitions,2021, respectively. Net cash receipts related to the accounts receivable securitization and sale programs were $59$29 million and $48$28 million in 2022 and 2021, and 2020, respectively. For more information on the completion of the K2 project, please see the Capital Investment section below.
Net cash used in financing activities for the first six months of 2021 totaled $105 million, compared to $181 million provided by financing activities for the first three months of 2022 totaled $119 million, compared to $5 million for the same period in 2020.2021. Current year activities include borrowings under revolving credit facilities primarily for capital spending and payments on debt of $3 million. The Company also paid dividends of $23 million and withheld $17 million of restricted stock units to satisfy tax withholding obligations related to the payout of restricted stock units. In the prior year period, the Company had a debt drawing of $425 million Incremental Term A-2 Facility and the use ofused the proceeds, together with cash on hand, to redeem the 4.75% Senior Notes due in 2021. Other current year activities includes2021, an offering of $400 million aggregate principal amount of 0.821% Senior Notes due 2024, and an offering of $400 million aggregate principal amount of 1.512% Senior Notes due 2026. The net proceeds of $800$796 million were used by the Company to repay a portion of the outstanding borrowings under GPIL's term loan credit facilities, which is under its senior secured credit facility. The Company also paid $150 million toward the redemption of IP's ownership interest in GPIP. Additionally,In the prior year period, the Company also made borrowings under revolving credit facilities primarily for capital spending, redemption of IP's ownership interest and payments on debt of $9 million. The Company also paid dividends and distributions of $48$24 million and withheld $14 million of restricted stock units to satisfy tax withholding obligations related to the payout of restricted stock units. In the prior year period, the Company had a debt offering of $450 million aggregate principal amount of 3.50% Senior Notes due 2028. The Company also paid $250 million toward the redemption of IP's ownership interest in GPIP. In the prior year period, the Company also made borrowings under revolving credit facilities primarily for capital spending, repurchase of common stock and payments on debt of $18 million. The Company also paid dividends and distributions of $54 million and withheld $9 million of restricted stock units to satisfy tax withholding payments related to the payout of restricted stock units.
Supplemental Guarantor Financial Information
As discussed in ““Note 1 – General Information” in the Notes to Condensed Consolidated Financial Statements, on May 21, 2021, IP exchanged its remaining 22.8 million partnership units for an equivalent number of shares of GPHC common stock. As a result, IP has no ownership interest remaining in GPIP as of May 21, 2021, and GPIL is no longer subject to separate SEC filing requirements. As such, the Company has included Supplemental Guarantor disclosures that were previously included in the GPIL SEC filings effective June 30, 2021.
As further discussed in “Note 3 –4 - Debt”” in the Notes to Condensed Consolidated Financial Statements, the Senior Notes issued by GPIL (the “Issuer”“Issuer”) are guaranteed by certain domestic subsidiaries (the “Subsidiary Guarantors”“Subsidiary Guarantors”), which consist of all material 100% owned subsidiaries of GPIL other than its foreign subsidiaries and in certain instances by the Company (a Parent guarantee) (collectively "the Gurantors"Guarantors"). GPIL's remaining subsidiaries (the “Nonguarantor Subsidiaries”“Nonguarantor Subsidiaries”) include all of GPIL’sGPIL’s foreign subsidiaries and immaterial domestic subsidiaries. The Subsidiary Guarantors are jointly and severally, fully and unconditionally liable under the guarantees.
Other than tax related items, the results of operations, assets, and liabilities for GPHC and GPIL are substantially the same. Therefore, the summarized financial information below is presented on a combined basis, consisting of the Issuer and Subsidiary Guarantors (collectively, the “Obligor Group”“Obligor Group”), and is presented after the elimination of: (i) intercompany transactions and balances among the Issuer and Subsidiary Guarantors, and (ii) equity in earnings from and investments in the Nonguarantor Subsidiaries.
| | | | | |
In millions | SixThree Months Ended June 30, 2021March 31, 2022 |
SUMMARIZED STATEMENTS OF OPERATIONS | |
Net Sales(a) | $ | 2,8351,663 | |
Cost of Sales | 2,4211,388 | |
Income from Operations | 164157 | |
Net Income | 100107 | |
(a) Includes Net Sales to Nonguarantor Subsidiaries of $274$135 million.
| | | | | | | | | | | |
In millions | June 30, 2021 | | December 31, 2020 |
SUMMARIZED BALANCE SHEET | | | |
Current assets (excluding intercompany receivable from Nonguarantor) | $ | 1,066 | | | $ | 1,131 | |
Noncurrent assets | 5,385 | | | 5,033 | |
Intercompany receivables from Nonguarantor | 330 | | | 334 | |
Current liabilities | 1,017 | | | 1,513 | |
Noncurrent liabilities | 4,020 | | | 3,411 | |
| | | | | | | | | | | |
In millions | March 31, 2022 | | December 31, 2021 |
SUMMARIZED BALANCE SHEET | | | |
Current assets (excluding intercompany receivable from Nonguarantor) | $ | 1,352 | | | $ | 1,235 | |
Noncurrent assets | 5,883 | | | 5,888 | |
Intercompany receivables from Nonguarantor | 1,248 | | | 1,258 | |
Current liabilities | 1,331 | | | 1,472 | |
Noncurrent liabilities | 5,842 | | | 5,713 | |
Liquidity and Capital Resources
The Company's liquidity needs arise primarily from the funding of its capital expenditures and acquisitions, debt service on its indebtedness, ongoing operating costs, working capital, share repurchases and dividend payments. Principal and interest payments under the term loan facilities and the revolving credit facilities, together with principal and interest payments on the Company's 3.50% Senior Notes due 2029, 3.50% Senior Notes due 2028, 4.75% Senior Notes due 2027, 1.512% Senior Notes due 2026, 0.821% Senior Notes due 2024, 4.125% Senior Notes due 2024, and 4.875% Senior Notes due 2022 (the "Notes"),Indentures, represent liquidity requirements for the Company. Based upon current levels of operations, anticipated cost savings and expectations as to future growth, the Company believes that cash generated from operations, together with amounts available under its revolving credit facilities and other available financing sources, will be adequate to permit the Company to meet its debt service obligations, necessary capital expenditure program requirements and ongoing operating costs and working capital needs, although no assurance can be given in this regard. The Company's future financial and operating performance, ability to service or refinance its debt and ability to comply with the covenants and restrictions contained in its debt agreements (see “Covenant Restrictions”“Covenant Restrictions” below) will be subject to future economic conditions, including conditions in the credit markets, and to financial, business and other factors, many of which are beyond the Company's control, and will be substantially dependent on the selling prices and demand for the Company's products, raw material and energy costs, and the Company's ability to successfully implement its overall business and profitability strategies. Refer to "Note 3 —4 - Debt" in the Notes to Condensed Consolidated Financial Statements for additional information on the Company's availability under its revolving credit facilities.
Accounts receivable are stated at the amount owed by the customer, net of an allowance for estimated uncollectible accounts, returns and allowances, and cash discounts. The allowance for doubtful accounts is estimated based on historical experience, current economic conditions and the creditworthiness of customers. Receivables are charged to the allowance when determined to be no longer collectible.
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 (Income) Expense, (Income), Net line item on the Condensed Consolidated Statement of Operations. The following table summarizes the activity under these programs for the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, respectively:
| | | Six Months Ended | | Three Months Ended |
| | June 30, | | March 31, |
In millions | In millions | 2021 | | 2020 | In millions | 2022 | | 2021 |
Receivables Sold and Derecognized | Receivables Sold and Derecognized | $ | 1,531 | | | $ | 1,357 | | Receivables Sold and Derecognized | $ | 737 | | | $ | 758 | |
Proceeds Collected on Behalf of Financial Institutions | Proceeds Collected on Behalf of Financial Institutions | 1,421 | | | 1,318 | | Proceeds Collected on Behalf of Financial Institutions | 681 | | | 685 | |
Net Proceeds Received From Financial Institutions | Net Proceeds Received From Financial Institutions | 100 | | | 31 | | Net Proceeds Received From Financial Institutions | 64 | | | 62 | |
Deferred Purchase Price at June 30(a) | 11 | | | 10 | | |
Pledged Receivables at June 30 | 158 | | | 261 | | |
Deferred Purchase Price at March 31(a) | | Deferred Purchase Price at March 31(a) | 3 | | | 9 | |
Pledged Receivables at March 31 | | Pledged Receivables at March 31 | 201 | | | 160 | |
(a) Included in Other Current Assets on the Condensed Consolidated Balance Sheet and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure.
The Company participates in supply chain financing arrangements offered by certain customers and has entered into various factoring arrangements that also qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB CodificationCodification. For the sixthree months ended June 30,March 31, 2022 and 2021, and 2020, the Company sold receivables of $249$264 million and $151$125 million, respectively, related to these factoring arrangements.
Receivables sold under all programs subject to continuing involvement, which consists principally of collection services, were $727$674 million and $621$613 million as of June 30, 2021March 31, 2022 and December 31, 2020,2021, respectively.
Covenant Restrictions
Covenants contained in the Current Credit Agreement and the Indentures may, among other things, limit the ability to incur additional indebtedness, restrict the ability of the Company to dispose of assets, incur guarantee obligations, prepay other indebtedness, repurchase shares, pay dividends and make other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of the indentures under which the Notes are issued, engage in mergers or consolidations, change the business conducted by the Company and its subsidiaries, and engage in certain transactions with affiliates. Such restrictions, together with disruptions in the credit markets, 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.
Under the terms of the Current Credit Agreement, the Company must comply with a maximum Consolidated Total Leverage Ratio covenant and a minimum Consolidated Interest Expense Ratio covenant. The Fourth Amended and RestatedCurrent Credit Agreement, which contains the definitions of these covenants, was filed as an exhibit to the Company's Form 8-K filed on April 1, 2021.
TheDue to the completion of the material acquisition, the Current Credit Agreement requires that the Company maintain a maximum Consolidated Total Leverage Ratio of less than 4.255.00 to 1.00. At June 30, 2021,March 31, 2022, the Company was in compliance with such covenant and the ratio was 3.424.37 to 1.00.
The Company must also comply with a minimum Consolidated Interest Expense Ratio of 3.00 to 1.00. At June 30, 2021,March 31, 2022, the Company was in compliance with such covenant and the ratio was 8.9410.20 to 1.00.
As of June 30, 2021,March 31, 2022, the Company's credit was rated BB+ by Standard && Poor's and Ba1 by Moody's Investor Services. Standard && Poor's and Moody's Investor Services' ratings on the Company included a stable outlook.
Capital Investment
The Company’sCompany’s capital investment in the first sixthree months of 20212022 was $346$125 million ($223 million was paid) compared to $307$178 million ($146 million was paid) in the first sixthree months of 2020.2021. The capital investments were primarily due to planned asset upgrades at the U.S.-based mills, including the new CRB paper machine in Kalamazoo, MIMichigan discussed in "Note 13 —- Exit Activities" in the Notes to Condensed Consolidated Financial Statements and continued investments made as part of the integration of acquisitions.
Environmental MattersInterest is capitalized on assets under construction for one year or longer with an estimated spending of $1 million or more. The capitalized interest is recorded as part of the asset to which it relates and is amortized over the asset’s estimated useful life. Capitalized interest was $4 million and $3 million in the first three months ended March 31, 2022 and 2021, respectively.
Environmental Matters
Some of the Company’sCompany’s current and former facilities are the subject of environmental investigations and remediations resulting from historical 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 further investigation and may result in remediation at those facilities. The Company has established reserves for those facilities or issues where liability is probable and the costs are reasonably estimable.
For further discussion of the Company’sCompany’s environmental matters, see "Note 8 —9 - Environmental and Legal Matters" in the Notes to Condensed Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from these estimates, and changes in these estimates are recorded when known. The critical accounting policies used by management in the preparation of the Company’sCompany’s condensed consolidated financial statements are those that are important both to the presentation of the Company’sCompany’s financial condition and results of operations and require significant judgments by management with regard to estimates used.
The Company’sCompany’s most critical accounting policies, which require significant judgment or involve complex estimations, are described in GPHC’sGPHC’s Form 10-K for the year ended December 31, 2020.2021.
The Company performed its annual goodwill impairment tests as of October 1, 2020.2021. The Company concluded that all reporting units with goodwill have a fair value that exceeds their carrying value, and thus goodwill was not impaired. The Foodservice and Australia reporting units had fair values that exceed their respective carrying values by 17%25% and 37%21%, respectively, whereas all other reporting units exceeded by more than 45%30%. The Foodservice and Australia reporting units had goodwill totaling $43 million and $15 million, respectively at June 30, 2021. While theMarch 31, 2022. The Company does not believe it is likely that there will be material changes in the impact onassumptions or estimates used to calculate the business to date of the COVID-19 pandemic has triggered the need to perform an impairment test on goodwill,reporting unit values. Therefore, the Company will continue to assess the impact on its business and will perform its annual goodwill impairment tests as of October 1, 2021. 2022.
NEW ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements impacting the Company, see "Note 1 —- General Information" in the Notes to Condensed Consolidated Financial Statements.
BUSINESS OUTLOOK
Total capital investment for 20212022 is expected to be approximately $725in the range of $440 million to $460 million.
The Company also expects the following in 2021:2022:
••Depreciation and amortization expense of approximately $460$580 million, excluding $5 million ofincluding pension amortization and $24excluding $5 million of accelerated depreciation related to exit activities.
••Pension plan contributions between $10 million and $20 million, excluding $14$6 million reflected as a contribution to the remaining U.S defined benefit plan that effectively utilized a portion of the excess balance related to the terminated U.S. defined benefit plan.plan terminated in 2020.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
For a discussion of certain market risks related to the Company, see Part II, ““Item 7A, Quantitative and Qualitative Disclosure about Market Risk””, in GPHC’sGPHC’s Form 10-K for the year ended December 31, 2020.2021. There have been no significant developments with respect to derivatives or exposure to market risk during the first sixthree months of 2021.2022. For a discussion of the Company’sCompany’s Financial Instruments, Derivatives and Hedging Activities, see GPHC’sGPHC’s Form 10-K for the year ended December 31, 20202021 and ““Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations —- Financial Condition, Liquidity and Capital Resources.””
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company’sCompany’s management has carried out an evaluation, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’sCompany’s disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended. Based upon such evaluation, management has concluded that the Company’sCompany’s disclosure controls and procedures were effective as of June 30, 2021.March 31, 2022.
Changes in Internal Control over Financial Reporting
There was no change in the Company’sCompany’s internal control over financial reporting that occurred during the fiscal quarter ended June 30, 2021March 31, 2022 that has materially affected, or is reasonably likely to materially affect, the Company’sCompany’s internal control over financial reporting.
PART II —— OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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’sCompany’s consolidated financial position, results of operations or cash flows. For more information see "Note 8 —9 - Environmental and Legal Matters" in the Notes to Condensed Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There have been no material changes from the risk factors previously disclosed in GPHC’sGPHC’s Form 10-K for the year ended December 31, 2020.2021.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company purchases shares of its common stock from time to time pursuant to the 2019 share repurchase program announced on January 28, 2019. Management is authorized to purchase up to $500 million of the Company's issued and outstanding common stock per the 2019 share repurchase program. During the secondfirst quarter of 2021,2022, the Company did not repurchase any shares of its common stock. As of June 30, 2021,March 31, 2022, 66.5 million shares had been repurchased as part of a publicly announced program. The maximum number of shares that may be purchased under the 2019 share repurchase program in the future is 8.17.3 million based on the closing price of the Company's common stock as of June 30, 2021.March 31, 2022.
ITEM 4. MINE SAFETY DISCLOSURES
None.
ITEM 6. EXHIBITS | | | | | |
Exhibit Number | Description |
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10.1* | |
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21.1 | |
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31.1 | |
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32.1 | |
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32.2 | |
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101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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101.LAB | XBRL Taxonomy Extension Label Linkbase |
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101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document (included in Exhibit 101). |
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* Executive compensation plan or agreement
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
GRAPHIC PACKAGING HOLDING COMPANY
(Registrant)
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/s/ STEPHEN R. SCHERGER | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | July 27, 2021April 26, 2022 |
Stephen R. Scherger |
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/s/ CHARLES D. LISCHER | Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) | July 27, 2021April 26, 2022 |
Charles D. Lischer |