GRAPHIC PACKAGING HOLDING COMPANY INTRODUCTION
This management'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: Overview of Business Overview of 2019 Results Results of Operations Financial Condition, Liquidity and Capital Resources Critical Accounting Policies New Accounting Standards Business Outlook OVERVIEW OF BUSINESS The Company's objective is to strengthen its position as a leading provider of paper-based 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's CRB, CUK, and 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's customer relationships, business competencies, and mills and folding carton assets; (iii) to develop and market innovative, sustainable products and applications that benefit from the consumer-led sustainability trends; and (iv) to continue to reduce costs by focusing on operational improvements. The Company'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's Business and Results of Operations
Impact of Inflation/Deflation. The Company'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 year over year by$79.1 million in 2019 and increased year over year by$73.6 million in 2018. The higher costs in 2019 were due to labor and benefit costs ($40.4 million ), wood ($39.6 million ), external board ($12.1 million ), partially offset by lower secondary fiber cost ($10.5 million ), and other costs, net ($2.5 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 2020 and 2021. 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. 22 -------------------------------------------------------------------------------- Table of Contents 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 aSix Sigma process focused on reducing variable and fixed manufacturing and administrative costs. The Company has expanded the continuous improvement initiative to include the deployment of Lean Sigma principles into manufacturing and supply chain services. The Company'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'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's financial results. Competition and Market Factors. As some products can be packaged in different types of materials, the Company's sales are affected by competition from other 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 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's sales historically are driven by consumer buying habits in the markets its customers serve. 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's customers and the Company's introduction of new packaging products also impact its sales. Debt Obligations. The Company had an aggregate principal amount of$2,872.8 million of outstanding debt obligations as ofDecember 31, 2019 . 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's ability to obtain additional financing. Covenants in the Company's Amended and Restated Credit Agreement, the Term Loan Credit Agreement and 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 Amended and Restated Credit Agreement and the Term Loan Credit Agreement also require compliance with a maximum consolidated leverage ratio and a minimum consolidated interest coverage ratio. The Company'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's control. See "Covenant Restrictions" in "Financial Condition, Liquidity and Capital Resources" for additional information regarding the Company's debt obligations. The debt and the restrictions under the Amended and Restated Credit Agreement, the Term Loan Credit Agreement and the Indentures could limit the Company'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. 23 -------------------------------------------------------------------------------- Table of Contents OVERVIEW OF RESULTS This management's discussion and analysis contains an analysis ofNet Sales , Income from Operations and other information relevant to an understanding of the Company's results of operations. On a consolidated basis: •Net Sales in 2019 increased by$130.7 million or 2.2%, to$6,160.1 million from$6,029.4 million in 2018 due to higher selling prices and the Artistic and 2018 Acquisitions discussed below, partially offset by unfavorable foreign currency exchange rates. • Income from Operations in 2019 increased by$75.9 million or 16.6%, to$534.1 million from$458.2 million in 2018 due to the higher selling prices, cost savings through continuous improvement programs, benefits from completed capital projects, and theAugusta, Georgia mill outage in 2018. These increases were partially offset by higher inflation, start-up costs associated with theMonroe, Louisiana folding carton facility, the gain on the sale ofSanta Clara in 2018, increased incentive costs and unfavorable foreign currency exchange rates.
Acquisitions and Dispositions
•OnAugust 1, 2019 , the Company acquired substantially all the assets of Artistic, a diversified producer of folding cartons and CRB. The acquisition included two converting facilities located inAuburn, Indiana andElgin, Illinois (included in theAmericas Paperboard Packaging reportable segment) and one CRB mill located inWhite Pigeon, Michigan (included in the Paperboard Mills reportable segment).
•During 2018, the Company completed the NACP Combination and the 2018
Acquisitions which included PFP and Letica Foodservice, and sold its previously
closed CRB mill site in
•During 2017, the Company completed the 2017 Acquisitions which included Seydaco, Norgraft and Carton Craft.
Capital Allocations
•During 2019, the Company repurchased 10.2 million shares of its outstanding common stock, or approximately$127.9 million , at an average price of$12.55 per share. AtDecember 31, 2019 , the Company had approximately$462 million available for additional repurchases under the 2019 share repurchase program. •During 2019, GPHC declared cash dividends of$87.7 million and paid cash dividends of$88.7 million . RESULTS OF OPERATIONS Year Ended December 31, In millions 2019 2018 2017 Net Sales$ 6,160.1 $ 6,029.4 $ 4,405.6 Income from Operations$ 534.1 $ 458.2 $ 327.9 Nonoperating Pension and Postretirement Benefit (Expense) Income (39.5) 14.9 14.8 Interest Expense, Net (140.6) (123.7) (89.7) Loss on Modification or Extinguishment of Debt - (1.9) -
Income before Income Taxes and Equity Income of Unconsolidated Entity
$ 354.0 $ 347.5 $ 253.0 Income Tax (Expense) Benefit (76.3) (54.7) 45.5 Income before Equity Income of Unconsolidated Entity$ 277.7 $ 292.8 $ 298.5 Equity Income of Unconsolidated Entity 0.4 1.2 1.7 Net Income$ 278.1 $ 294.0 $ 300.2 24
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Table of Contents 2019 COMPARED WITH 2018Net Sales
The components of the change in
Year Ended December 31,
Variances
Foreign
In millions 2018 Price Volume/Mix Exchange 2019 Increase Percent Change
Consolidated $ 6,029.4 $ 131.2 $ 50.2 $ (50.7) $ 6,160.1 $ 130.7 2.2 %
The Company's Net Sales in 2019 increased by $130.7 million or 2.2%, to $6,160.1
million from $6,029.4 million for the same period in 2018, due to higher selling
prices and Net Sales of approximately $115 million from the Artistic and 2018
Acquisitions. These increases were partially offset by modestly lower converting
volumes in the first half of the year and unfavorable foreign currency exchange
rates, primarily the Euro, British Pound and Australian dollar. The higher
selling prices are the results of announced price increases which benefit from
inflationary pass throughs in the converting business as well as open market
sales. Core converting volumes were down, in dry and frozen foods and dairy
products, partially offset by higher global beverage volumes and new product
introductions.
Income from Operations
The components of the change in Income from Operations are as follows:
Year Ended December 31,
Variances
Foreign
In millions 2018 Price Volume/Mix Inflation Exchange Other (a) 2019 Increase Percent Change
Consolidated $ 458.2 $ 131.2 $ (31.2) $ (79.1) $ (6.2) $ 61.2 $ 534.1 $ 75.9 16.6 %
(a) Includes the Company's cost reduction initiatives, expenses related to acquisitions and integration activities, exit activities, gain on sale of assets and shutdown and other special charges.
The Company's Income from Operations for 2019 increased$75.9 million or 16.6%, to$534.1 million from$458.2 million for the same period in 2018 due to the higher selling prices, cost savings through continuous improvement programs, theAugusta, Georgia mill outage in 2018 (approximately$52 million ), and benefits from completed capital projects and synergies. These increases were partially offset by higher inflation, product mix, the gain on the sale of theSanta Clara mill site in 2018, costs to dispose of idle and abandoned assets, costs associated with exit activities, start-up costs associated with theMonroe, Louisiana folding carton facility, increased incentive costs and unfavorable foreign currency exchange rates. Inflation for 2019 increased due to labor and benefit costs ($40.4 million ), wood ($39.6 million ), external board ($12.1 million ), partially offset by lower secondary fiber cost ($10.5 million ), and other costs, net ($2.5 million ).
Nonoperating Pension and Postretirement Benefit
Nonoperating Pension and Postretirement Benefit was an expense of$39.5 million in 2019 versus income of$14.9 million in 2018. The increase in expense was due to a settlement charge of$39.2 million associated with lump sum payments, as well as lower expected return on assets and higher interest costs.
Interest Expense, Net
Interest Expense, Net increased by$16.9 million to$140.6 million in 2019 from$123.7 million in 2018. Interest Expense, Net increased due primarily to higher average debt balances slightly offset by lower average interest rates as compared to the prior year. As ofDecember 31, 2019 , approximately 34% of the Company's total debt was subject to floating interest rates. 25 -------------------------------------------------------------------------------- Table of Contents Income Tax Expense During 2019, the Company recognized Income Tax Expense of$76.3 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of$354.0 million . During 2018, the Company recognized Income Tax Expense of$54.7 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of$347.5 million . The effective tax rate for 2019 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. In addition, during 2019, the Company recorded discrete expense of$4.8 million for a valuation allowance against the net deferred tax assets of the Company's subsidiary inAustralia . The effective tax rate in 2019 is higher than the effective tax rate in 2018 primarily due to the valuation allowance as compared to 2018. During 2018, the Company released its valuation allowance against the net deferred tax assets of its French subsidiary and recorded discrete benefits related to the true up of the effects of the Tax Cuts and Jobs Act enacted in 2017. The Company has available net operating losses ("NOLs") of approximately$32 million forU.S. federal income tax purposes which may be used to offset future taxable income. Based on these NOLs, other tax attributes, tax benefits associated with planned capital projects, and the anticipated reduction in International Paper's investment in GPIP, the Company does not expect to be a meaningfulU.S. federal cash taxpayer until 2024.
Equity Income of Unconsolidated Entity
Equity Income of Unconsolidated Entity was
2018 COMPARED WITH 2017
The components of the change in
Year Ended December 31,
Variances
Foreign
In millions 2017 Price Volume/Mix Exchange 2018 Increase Percent Change
Consolidated $ 4,405.6 $ 52.9 $ 1,551.8 $ 19.1 $ 6,029.4 $ 1,623.8 36.9 %
The Company's Net Sales in 2018 increased by $1,623.8 million , or 36.9% to
$6,029.4 million from $4,405.6 million in 2017 due to Net Sales of $1,547.9
million from the NACP Combination and the 2017 Acquisitions and the 2018
Acquisitions, higher selling prices and favorable currency exchange rates,
primarily the Euro and the British Pound. These increases were offset by lower
open market volumes as the Company internalized more paperboard due to the
shutdown of the Santa Clara mill site in the fourth quarter of 2017. Core
volumes were stable due to new product introductions offset by lower beverage
volumes. The higher selling prices are the result of announced price increases
which benefit open market sales as well as inflationary pass throughs in the
converting businesses.
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Income from Operations
The components of the change in Income from Operations are as follows:
Year Ended December 31,
Variances
In millions 2017 Price Volume/Mix(a) Inflation Foreign Exchange Other(b) 2018 Increase Percent Change
Consolidated $ 327.9 $ 52.9 $ 38.2 $ (73.6) $ 1.5 $ 111.3 $ 458.2 $ 130.3 39.7 %
(a) Includes expenses related to the Augusta, Georgia mill outage and inflation
for the NACP Combination of approximately $26 million .
(b) Includes the Company's cost reduction initiatives and expenses related to
business combinations, gain on sale of assets, and shutdown and other special
charges.
The Company's Income from Operations for 2018 increased $130.3 million or 39.7%,
to $458.2 million from $327.9 million for the same period in 2017 due to the
NACP Combination, the 2017 Acquisitions and the 2018 Acquisitions, the higher
selling prices, a gain of $37.1 million from the sale of the Santa Clara mill,
cost savings through continuous improvement and other programs and the impact
related to planned downtime taken in 2017 to upgrade a paper machine in West
Monroe, Louisiana . These increases were partially offset by inflation, the
Augusta, Georgia mill outage (approximately $52 million ), expenses related to
the NACP Combination and integration activities and higher incentive
compensation costs. Inflation for 2018 increased due to freight ($25.9 million ),
labor and benefit costs ($20.9 million ), chemicals ($19.4 million ), external
board ($17.7 million ), and other costs, net ($4.2 million ), partially offset by
lower secondary fiber cost ($14.5 million ).
Interest Expense, Net
Interest Expense, Net increased by$34.0 million to$123.7 million in 2018 from$89.7 million in 2017. Interest Expense, Net increased due primarily to higher average debt balances and interest rates as compared to the prior year. As ofDecember 31, 2018 , approximately 41% of the Company's total debt was subject to floating interest rates.
Income Tax Expense
During 2018, the Company recognized Income Tax Expense of$54.7 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of$347.5 million . During 2017, the Company recognized Income Tax Benefit of$45.5 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of$253.0 million . The effective tax rate for 2018 is lower than the statutory rate primarily due to the tax effect of domestic income attributable to noncontrolling interests as well as the mix and levels of earnings between foreign and domestic tax jurisdictions. In addition, during 2018, the Company recorded discrete benefits of approximately$4 million ,$11 million and$2 million associated with the indirect impacts of the NACP Combination, an adjustment due to the estimated tax effects of the Tax Cuts and Jobs Act (the "Act") and the release of a valuation allowance against the net deferred tax assets of the Company's wholly-owned subsidiary inFrance , respectively.
Equity Income of Unconsolidated Entity
Equity Income of Unconsolidated Entity was
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Segment Reporting
The Company has three reportable segments as follows:
Paperboard Mills includes the nine North American paperboard mills which produce
primarily CRB, CUK, and SBS, which is primarily consumed internally to produce
paperboard packaging for the Americas and Europe Paperboard Packaging segments.
The remaining paperboard is sold externally to a wide variety of paperboard
packaging converters and brokers. The Paperboard Mills segment Net Sales
represent the sale of paperboard only to external customers. The effect of
intercompany transfers to the paperboard packaging segments has been eliminated
from the Paperboard Mills segment to reflect the economics of the integration of
these segments.
Americas Paperboard Packaging includes paperboard packaging folding cartons and
cups, lids, and food containers sold primarily to consumer packaged goods,
quick-service restaurants and foodservice companies serving the food, beverage,
and consumer product markets in the Americas .
Europe Paperboard Packaging includes paperboard packaging, primarily folding
cartons, sold primarily to consumer packaged goods companies serving the food,
beverage and consumer product markets in Europe .
The Company allocates certain mill and corporate costs to the reportable
segments to appropriately represent the economics of these segments. The
Corporate and Other caption includes the
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 in Note 1 in the Notes to Consolidated Financial Statements included herein under "Item 8. Financial Statements and Supplementary Data."
Year Ended December 31,
In millions 2019 2018 2017
NET SALES :
Paperboard Mills $ 1,094.8 $ 1,078.1 $ 399.7
689.3 695.9 593.5
Corporate/Other/Eliminations(a) 142.3 157.1 167.3 Total
$ 6,160.1 $ 6,029.4 $ 4,405.6 INCOME (LOSS) FROM OPERATIONS: Paperboard Mills(b)$ 33.1 $ 30.6 $ (35.0) Americas Paperboard Packaging 477.7 420.1 358.2 Europe Paperboard Packaging 60.3 46.1 37.3 Corporate and Other(c) (37.0) (38.6) (32.6) Total$ 534.1 $ 458.2 $ 327.9 (a) Includes revenue from contracts with customers for theAustralia andPacific Rim operating segments. (b) Includes accelerated depreciation related to exit activities in 2019, excludes$29.6 million related to theAugusta, Georgia mill outage in 2018 and includes accelerated depreciation related to shutdown of theSanta Clara mill in 2017. (c) Includes expenses related to business combinations, exit activities, idle and abandoned assets, gain on sale of assets and shutdown and other special charges.
2019 COMPARED WITH 2018
Paperboard Mills -Net Sales increased from prior year due to higher selling prices and higher open market volume of SBS and CRB, due to theWhite Pigeon Mill acquired as part of the Artistic acquisition, partially offset by lower open market volume for CUK. The Company also internalized more CUK and SBS paperboard. 28 -------------------------------------------------------------------------------- Table of Contents Income from Operations increased due to the higher selling prices and productivity improvements, including benefits from capital projects. These increases were partially offset by product mix, inflation, accelerated depreciation related to exit activities and modest market downtime taken for SBS. The higher inflation was primarily due to wood and labor and benefits, partially offset by lower prices for secondary fiber and energy.Americas Paperboard Packaging -Net Sales increased due to higher selling prices and the Artistic and 2018 Acquisitions, partially offset by modestly lower converting volumes in the first half of the year. Certain consumer products, primarily dry and frozen foods and dairy products, experienced decreased volume, which was partially offset by increased volume from new product introductions. Beverage volumes rose across all categories except big beer. Income from Operations increased due to the higher selling prices and productivity improvements partially offset by higher inflation and start-up costs associated with theMonroe, Louisiana folding carton facility. The higher inflation was primarily for labor and benefits and external board.Europe Paperboard Packaging -Net Sales decreased slightly as unfavorable foreign currency exchange rates were partially offset by increased beverage, consumer product and convenience volumes and higher selling prices. The higher volumes reflect the increase in multi-pack beverage and a shift from plastics into paperboard solutions.
Income from Operations increased due to the higher selling prices, the improved volumes and cost savings through continuous improvement programs, partially offset by inflation, primarily labor and benefits and external board, unfavorable foreign currency exchange rates and higher outsourcing costs.
2018 COMPARED WITH 2017
Paperboard Mills - Net sales increased due to the NACP Combination and increased selling prices, partially offset by lower open market volume of CRB and CUK as the Company internalized more paperboard due to the closure of theSanta Clara Mill in the fourth quarter of 2017. During 2018, the Company announced a series of price increases related to its CRB, CUK and SBS open market paperboard. Income from Operations increased due to the NACP Combination, the impact of the 2017 maintenance cold outage inWest Monroe, Louisiana , productivity improvements and the higher selling prices, partially offset by theAugusta, Georgia mill outage, and higher inflation. Inflation increased primarily for chemicals, freight and labor and benefits, partially offset by lower secondary fiber and energy costs.Americas Paperboard Packaging - Net sales increased due to the NACP Combination, the 2017 Acquisitions and the 2018 Acquisitions, higher selling prices and new product introductions, partially offset by lower volume for beverage and certain consumer products. The higher selling prices are inflationary pass throughs related to announced paperboard price increases. Income from Operations increased due to the NACP Combination, the 2017 Acquisitions and the 2018 Acquisitions, the higher selling prices and cost savings through continuous improvement programs, partially offset by higher inflation, primarily for freight, labor and benefits and external board.Europe Paperboard Packaging -Net Sales increased due to the Norgraft acquisition and NACP Combination, favorable foreign currency exchange rates, increased volumes for beverage, consumer and convenience products and higher selling prices. The higher selling prices are related to board inflationary pass throughs.
Income from Operations increased due to the same factors increasing
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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
Years Ended December 31,
In millions 2019 2018
Net Cash Provided by (Used in) Operating Activities $ 665.8 $ (373.8)
Net Cash (Used in) Provided by Investing Activities $ (224.3) $ 689.1
Net Cash Used In Financing Activities $ (360.8) $ (310.7)
EffectiveJanuary 1, 2018 , the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230); Classification of Certain Cash Receipts and Cash Payments, which required the Company to classify consideration received for beneficial interest obtained for transferring trade receivables as investing activities instead of operating activities. Net cash provided by operating activities in 2019 totaled$665.8 million , compared to$373.8 million used in operating activities in 2018. The increase was due primarily to the restructuring of certain of the Company's accounts receivable sale and securitization programs. Pension contributions in 2019 and 2018 were$11.3 million and$5.8 million , respectively. Net cash used in investing activities in 2019 totaled$224.3 million , compared to$689.1 million provided by investing activities in 2018. Capital spending was$352.9 million and$395.2 million in 2019 and 2018, respectively. In 2019, the Company paid the remaining$2.0 million for theLetica acquisition and paid$52.5 million for the Artistic acquisition, including the working capital true-up. Net beneficial interest decreased as a result of the restructuring of certain of the Company's accounts receivable sale and securitization programs. In the prior year, the Company paid$89.4 million , net of cash acquired, for the 2018 Acquisitions. The Company also received cash from the sale of assets of$49.4 million in 2018. Net cash receipts related to the accounts receivable securitization and sale programs were$187.7 million and$1,131.2 million in 2019 and 2018, respectively. Net cash used in financing activities in 2019 totaled$360.8 million , compared to$310.7 million in 2018. Current year activities include a debt offering of$300 million aggregate principal amount of 4.75% senior notes due 2027. The Company used the net proceeds to repay a portion of its outstanding borrowings under its senior secured revolving credit facility. Additionally, the Company made borrowings under revolving credit facilities primarily for capital spending, repurchase of common stock of$128.8 million and payments on debt of$36.5 million . The Company also paid dividends and distributions of$112.7 million and withheld$4.1 million of restricted stock units to satisfy tax withholding obligations related to the payout of restricted stock units. In the prior year, the Company had net borrowings under revolving credit facilities of$89.4 million , primarily for the 2018 Acquisitions, pension contributions of$5.8 million , and payments on debt of$152.4 million . The Company also paid dividends of$93.1 million and distributions to the GPIL Partner of$17.9 million , repurchased$119.1 million of its common stock, and withheld$4.3 million of restricted stock units to satisfy tax withholding payments related to the payout of restricted stock units. 30 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources The Company's liquidity needs arise primarily from the funding of its capital expenditures, 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 4.75% Senior Notes due 2021, 4.875% Senior Notes due 2022, 4.125% Senior Notes due 2024 and 4.75% Senior Notes due 2027 (the "Notes"), 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" 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.
As of
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 theFinancial Accounting Standards Board ("FASB") Accounting Standards Codification (the "Codification"). The loss on sale is not material and is included in Other Expense, Net line item on the Consolidated Statement of Operations. The following table summarizes the activity under these programs for the year endedDecember 31, 2019 and 2018, respectively: Year Ended December 31, In millions 2019 2018 Receivables Sold and Derecognized$ 2,654.2 $ 3,314.8 Proceeds Collected on Behalf of Financial Institutions 2,254.9 3,153.4 Net Proceeds Received From (Paid to) Financial Institutions 66.5 13.4 Deferred Purchase Price at December 31(a) 0.7 66.9 Pledged Receivables at December 31 177.5 43.0 (a) Included in Other Current Assets and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure. The Company has also entered into various factoring and supply chain financing arrangements which also qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB Codification. For the years endedDecember 31, 2019 and 2018, the Company sold receivables of approximately$238 million and$119 million , respectively, related to these factoring arrangements. Receivables sold under all programs subject to continuing involvement, which consist principally of collection services, were approximately$562 million and$559 million as ofDecember 31, 2019 and 2018, respectively. 31 -------------------------------------------------------------------------------- Table of Contents Covenant Restrictions Covenants contained in the Amended and Restated Credit Agreement, the Term Loan Credit Agreement (collectively, the "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 Credit Agreement, the Company must comply with a maximum Consolidated Total Leverage Ratio covenant and a minimum Consolidated Interest Expense Ratio covenant. The Third Amended and Restated Credit Agreement, which contains the definitions of these covenants, was filed as an exhibit to the Company's Form 8-K filed onJanuary 2, 2018 .
The Credit Agreement requires that the Company maintain a maximum Consolidated
Total Leverage Ratio of less than 4.25 to 1.00. At
The Company must also comply with a minimum Consolidated Interest Expense Ratio of 3.00 to 1.00. AtDecember 31, 2019 , the Company was in compliance with such covenant and the ratio was 7.78 to 1.00. As ofDecember 31, 2019 , the Company's credit was rated BB+ byStandard & Poor's and Ba1 byMoody's Investor Services .Standard & Poor's andMoody's Investor Services' ratings on the Company included a stable outlook.
The Company's capital investments in 2019 were$359.1 million ($352.9 million was paid), compared to$409.2 million ($395.2 million was paid) in 2018. During 2019, the Company had capital spending of$307.8 million for improving process capabilities,$29.3 million for capital spares and$22.0 million for manufacturing packaging machinery.
Environmental Matters
Some of the Company'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's environmental matters, see Note 14 in
the Notes to Consolidated Financial Statements included herein under "Item 8.,
Financial Statements and Supplementary Data."
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Contractual Obligations and Commitments
A summary of our contractual obligations and commitments as of December 31, 2019
is as follows:
Payments Due by Period
Less than More than
In millions Total 1 Year 1-3 Years 3-5 Years 5 Years
Debt Obligations $ 2,738.6 $ 45.8 $ 617.6 $ 1,771.6 $ 303.6
Operating Leases 225.6 60.8 87.0 47.1 30.7
Finance Leases 220.3 12.5 24.8 24.8 158.2
Interest Payable 513.1 137.0 221.4 63.4 91.3
Purchase Obligations(a) 221.2 57.8 49.5 36.8 77.1
Total Contractual Obligations(b) $ 3,918.8 $
313.9
(a) Purchase obligations primarily consist of commitments for the purchase of fiber and chip processing. (b) Certain amounts included in this table are based on management's estimates and assumptions about these obligations. Because these estimates and assumptions are necessarily subjective, the obligations the Company will actually pay in the future periods may vary from those reflected in the table.
International Operations
For 2019, before intercompany eliminations, net sales from operations outside of theU.S. represented approximately 20% of the Company's net sales. The Company's revenues from export sales fluctuate with changes in foreign currency exchange rates. AtDecember 31, 2019 , approximately 17% of the Company's total assets were denominated in currencies other than theU.S. dollar. The Company has significant operations in countries that use the euro, British pound sterling, the Australian dollar, the Canadian dollar, theMexico peso or the Japanese yen as their functional currencies. The effect of changes in theU.S. dollar exchange rate against these currencies produced a net currency translation adjustment gain of$12.4 million , which was recorded in Other Comprehensive (Loss) Income for the year endedDecember 31, 2019 . The magnitude and direction of this adjustment in the future depends on the relationship of theU.S. dollar to other currencies. The Company pursues a currency hedging program in order to reduce the impact of foreign currency exchange fluctuations on financial results. See "Financial Instruments" below.
Financial Instruments
The Company pursues a currency hedging program which utilizes derivatives to reduce the impact of foreign currency exchange fluctuations on its consolidated financial results. Under this program, the Company has entered into forward exchange contracts in the normal course of business to hedge certain foreign currency denominated transactions. Realized and unrealized gains and losses on these forward contracts are included in the measurement of the basis of the related foreign currency transaction when recorded. The Company also pursues a hedging program that utilizes derivatives designed to manage risks associated with future variability in cash flows and price risk related to future energy cost increases. Under this program, the Company has entered into natural gas swap contracts to hedge a portion of its forecasted natural gas usage for 2020 and 2021. Realized gains and losses on these contracts are included in the financial results concurrently with the recognition of the commodity consumed. In addition, the Company uses interest rate swaps to manage interest rate risks on future interest payments caused by interest rate changes on its variable rate term loan facility. The Company does not hold or issue financial instruments for trading purposes. See "Item 7A., Quantitative and Qualitative Disclosure About Market Risk." CRITICAL ACCOUNTING POLICIES The preparation of financial statements in conformity withU.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's consolidated financial statements are those that are important both to the presentation of the Company's financial condition and results of operations and require significant judgments by management with regard to estimates used. The critical judgments by management relate to pension benefits, retained insurable risks, future cash flows associated with impairment testing for goodwill and long-lived assets, and deferred income taxes. 33 -------------------------------------------------------------------------------- Table of Contents • Pension Benefits
The Company sponsors defined benefit pension plans (the "Plans") for eligible
employees in
The Company's pension expense for defined benefit pension plans was$54.9 million in 2019 compared to$3.3 million in 2018. The 2019 expense includes a$39.2 million charge associated with lump-sum settlements with certain participants. Pension expense is calculated based upon a number of actuarial assumptions applied to each of the defined benefit plans. The weighted average expected long-term rate of return on pension fund assets used to calculate pension expense was 4.74% and 4.86% in 2019 and 2018, respectively. The expected long-term rate of return on pension assets was determined based on several factors, including historical rates of return, input from our pension investment consultants and projected long-term returns of broad equity and bond indices. The Company evaluates its long-term rate of return assumptions annually and adjusts them as necessary. The Company determined pension expense using both the fair value of assets and a calculated value that averages gains and losses over a period of years. Investment gains or losses represent the difference between the expected and actual return on assets. As ofDecember 31, 2019 , the net actuarial loss was$279.9 million . These net losses may increase future pension expense if not offset by (i) actual investment returns that exceed the assumed investment returns, or (ii) other factors, including reduced pension liabilities arising from higher discount rates used to calculate pension obligations, or (iii) other actuarial gains, including whether such accumulated actuarial losses at each measurement date exceed the "corridor" determined under the Compensation - Retirement Benefits topic of the FASB Codification. The actuarial loss is amortized over the average remaining life expectancy period of employees expected to receive benefits. InJanuary 2020 , following the purchase of a group annuity to transfer the benefit obligation to an insurance company, the Company expects the remaining actuarial loss to be approximately$90 million . The discount rate used to determine the present value of future pension obligations atDecember 31, 2019 was based on a yield curve constructed from a portfolio of high-quality corporate debt securities with maturities ranging from 1 year to 30 years. Each year's expected future benefit payments were discounted to their present value at the spot yield curve rate thereby generating the overall discount rate for the Company's pension obligations. The weighted average discount rate used to determine the pension obligations was 2.69% and 4.14% in 2019 and 2018, respectively. The Company's pension expense is estimated to be approximately$164 million (includes approximately$150 million in settlement charges) in 2020. The estimate is based on a weighted average expected long-term rate of return of 4.12%, a weighted average discount rate of 2.69% and other assumptions. Pension expense beyond 2020 will depend on future investment performance, the Company's contribution to the plans, changes in discount rates and other factors related to covered employees in the plans. If the discount rate assumptions for the Company'sU.S. plans were reduced by 0.25%, pension expense would increase by approximately$1 million and theDecember 31, 2019 projected benefit obligation would increase approximately$28 million . The fair value of assets in the Company's plans was$1,172.4 million atDecember 31, 2019 and$1,186.5 million atDecember 31, 2018 . The projected benefit obligations exceed the fair value of plan assets by$83.0 million and$58.7 million as ofDecember 31, 2019 and 2018, respectively. The accumulated benefit obligation ("ABO") exceeded plan assets by$77.4 million at the end of 2019. At the end of 2018, the ABO exceeded the fair value of plan assets by$53.7 million .
• Retained Insurable Risks
The Company is self-insured for certain losses relating to workers' compensation
claims and employee medical and dental benefits. Provisions for expected losses
are recorded based on the Company's estimates, on an undiscounted basis, of the
aggregate liabilities for known claims and estimated claims incurred but not
reported. The Company has purchased stop-loss coverage or insurance with
deductibles in order to limit its exposure to significant claims. The Company
also has an extensive safety program in place to minimize its exposure to
workers' compensation claims. Self-insured losses are accrued based upon
estimates of the aggregate uninsured claims incurred using certain actuarial
assumptions, loss development factors followed in the insurance industry and
historical experience.
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• Goodwill
The Company evaluates goodwill for potential impairment annually as of
October 1 , as well as whenever events or changes in circumstances suggest that
the fair value of a reporting unit may no longer exceed its carrying amount.
Potential impairment of goodwill is measured at the reporting unit level by
comparing the reporting unit's carrying amount, including goodwill, to the
estimated fair value of the reporting unit. As of October 1, 2019 , the Company
had seven reporting units, five of which had goodwill.
Periodically, the Company may perform a qualitative impairment analysis of
goodwill associated with each of its reporting units to determine if it is more
likely than not that the carrying value of a reporting unit exceeded its fair
value. If the results of the qualitative analysis of any of the reporting units
is inconclusive, or if significant changes in the business have occurred since
the last quantitative impairment assessment, the Company will perform a
quantitative analysis for those reporting units.
As of October 1, 2019 , the Company performed a quantitative impairment test. The
quantitative analysis involves calculating the fair value of each reporting unit
by utilizing a discounted cash flow analysis based on the Company's business
plans, discounted using a weighted average cost of capital and market indicators
of terminal year cash flows based upon a multiple of earnings before interest,
taxes, depreciation and amortization ("EBITDA").
Estimating the fair value of the reporting unit involves uncertainties as it
requires management to consider a number of factors, including but not limited
to, future operating results, business plans, economic projections of revenues
and operating margins, estimated future cash flows, and market data and
analysis, including market capitalization. Fair value determinations are
sensitive to changes in the factors described above. There are inherent
uncertainties related to these factors and judgments used to estimate reporting
unit fair value and the related analysis of potential goodwill impairment.
The variability of the assumptions that management uses to perform the goodwill
impairment test depends on a number of conditions, including uncertainty about
future events and cash flows. Accordingly, the Company's accounting estimates
may materially change from period to period due to changing market factors. If
the Company had used other assumptions and estimates or if different conditions
occur in future periods, future operating results and cash flows could be
materially impacted, and judgments and conclusions about the recoverability of
goodwill could change. The assumptions used in the goodwill impairment testing
process could also be adversely impacted by certain of the risks discussed in
"Item 1A., Risk Factors" and thus could result in future goodwill impairment
charges.
The Company performed its annual goodwill impairment tests as of October 1,
2019 . 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
discount rate used for each reporting unit ranged from 7.5% to 8.0%, and we
utilized an EBITDA multiple of 8.5 times to calculate terminal period cash
flows. The Foodservice and Australia reporting units had fair values that exceed
their respective carrying values by 32% and 17%, respectively, whereas all other
reporting units exceeded by more than 50%. If we had concluded that it was
appropriate to increase the discount rate we used by 100 basis points to
estimate the fair value of our respective reporting units, the fair value of
each reporting unit would have continued to exceed its carrying amount. The
Foodservice and Australia reporting units had goodwill totaling $43.0 million
and $14.4 million , respectively. The Company does not believe it is likely that
there will be material changes in the assumptions or estimates used to calculate
the reporting unit fair values.
• Recovery of Long-Lived Assets
The Company evaluates the recovery of its long-lived assets by analyzing
operating results and considering significant events or changes in the business
environment that may have triggered impairment. The Company reviews long-lived
assets (including property, plant and equipment and intangible assets) for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such long-lived assets may not be fully recoverable by
undiscounted cash flows. Measurement of the impairment loss, if any, is based on
the fair value of the asset, which is determined by an income, cost or market
approach.
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• Deferred Income Taxes and Potential Assessments
According to the Income Taxes topic of the FASB Codification, a valuation
allowance is required to be established or maintained when, based on currently
available information and other factors, it is more likely than not that all or
a portion of a deferred tax asset will not be realized. The FASB Codification
provides important factors in determining whether a deferred tax asset will be
realized, including whether there has been sufficient taxable income in recent
years and whether sufficient income can reasonably be expected in future years
in order to utilize the deferred tax asset. The Company has evaluated the need
to maintain a valuation allowance for deferred tax assets based on its
assessment of whether it is more likely than not that deferred tax benefits
would be realized through the generation of future taxable income. Appropriate
consideration was given to all available evidence, both positive and negative,
in assessing the need for a valuation allowance. In determining whether a
valuation allowance is required, many factors are considered, including the
specific taxing jurisdiction, the carryforward period, reversals of existing
taxable temporary differences, cumulative pretax book earnings, income tax
strategies and forecasted earnings for the entities in each jurisdiction.
As of December 31, 2019 , the Company has recorded a valuation allowance of $41.1
million against its net deferred tax assets in certain foreign jurisdictions and
against domestic deferred tax assets related to certain federal tax credit
carryforwards, certain state net operating loss carryforwards and certain state
tax credit carryforwards. As of December 31, 2018 , a total valuation allowance
of $36.3 million was recorded.
As of December 31, 2019 , the Company has only provided for deferred U.S. income
taxes attributable to future withholding tax expense related to the Company's
equity investment in the joint venture, Rengo Riverwood Packaging, Ltd. During
2019, the Company changed its assertion related to certain earnings of its
Canadian subsidiary, Graphic Packaging International Canada, ULC. The Company
continues to assert that it is permanently reinvested in the cumulative earnings
of its Canadian subsidiary in excess of the amount of cash that is on-hand and
available for distribution after consideration of working capital needs and
other debt settlement, however, with respect to the excess cash on hand, the
Company asserts that it is not permanently reinvested. Due to the deemed
taxation of all post-1986 earnings and profits required by the Act, as well as
the amount of paid up capital available in Canada from which the Company can
distribute earnings without incurring withholding tax, the Company has
determined that no deferred tax liability should be recorded related to the
outside basis difference of approximately $31.6 million .
The Company has not provided for deferred U.S. income taxes on approximately $35
million of its undistributed earnings in international subsidiaries because of
the Company's intention to indefinitely reinvest these earnings outside the U.S.
The Company's assertion remains unchanged, despite the deemed taxation of all
post-1986 earnings and profits required by the Act. The determination of the
amount of the unrecognized deferred U.S. income tax liability (primarily
withholding tax in certain jurisdictions and some state tax) on the unremitted
earnings or any other associated outside basis difference is not practicable
because of the complexities associated with the calculation.
The Company has elected to recognize global intangible low-taxed income ("GILTI") as period cost as incurred, therefore there are no deferred taxes recognized for basis differences that are expected to impact the amount of the GILTI inclusion upon reversal.
NEW ACCOUNTING STANDARDS
For a discussion of recent accounting pronouncements impacting the Company, see
Note 1 in the Notes to Consolidated Financial Statements included herein under
"Item 8., Financial Statements and Supplementary Data."
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BUSINESS OUTLOOK
Total capital investment for 2020 is expected to be in the range of
The Company also expects the following in 2020, subject to finalization of acquisition accounting for the Artistic acquisition:
• Depreciation and amortization expense between$455 million and$465 million , excluding approximately$5 million of pension amortization and$20 million of accelerated depreciation related to exit activities.
• Pension plan contributions between
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