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4: EX-32.1 Certification -- §906 - SOA'02 HTML 23K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 23K
11: R1 Cover Page HTML 74K
12: R2 Condensed Consolidated Statements of Operations HTML 104K
13: R3 Condensed Consolidated Statements of Comprehensive HTML 103K
Income
14: R4 Condensed Consolidated Balance Sheets HTML 132K
15: R5 Condensed Consolidated Balance Sheets HTML 40K
(Parenthetical)
16: R6 Condensed Consolidated Statements of Equity and HTML 124K
Noncontrolling Interest
17: R7 Condensed Consolidated Statements of Equity and HTML 24K
Noncontrolling Interest (Parenthetical)
18: R8 Condensed Consolidated Statements of Cash Flows HTML 118K
19: R9 Condensed Consolidated Statements of Cash Flows HTML 25K
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20: R10 General Information HTML 83K
21: R11 Inventories, Net HTML 31K
22: R12 Business Combinations HTML 58K
23: R13 Debt HTML 75K
24: R14 Stock Incentive Plans HTML 32K
25: R15 Pensions and Other Postretirement Benefits HTML 49K
26: R16 Financial Instruments and Fair Value Measurement HTML 75K
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28: R18 Environmental and Legal Matters HTML 28K
29: R19 Segment Information HTML 70K
30: R20 Earnings Per Share HTML 43K
31: R21 Changes in Accumulated Other Comprehensive Loss HTML 59K
32: R22 Exit Activities HTML 49K
33: R23 Impairment and Divestiture of Russian Business HTML 37K
34: R24 General Information (Policies) HTML 53K
35: R25 General Information (Tables) HTML 52K
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38: R28 Debt (Tables) HTML 77K
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45: R35 Exit Activities (Tables) HTML 49K
46: R36 Impairment and Divestiture of Russian Business HTML 38K
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47: R37 GENERAL INFORMATION - Narrative (Details) HTML 41K
48: R38 GENERAL INFORMATION - Revenue Recognition HTML 35K
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49: R39 GENERAL INFORMATION - Accounts Receivable and HTML 36K
Allowances (Details)
50: R40 GENERAL INFORMATION - Share Repurchases and HTML 38K
Dividends (Details)
51: R41 GENERAL INFORMATION - Business Combinations and HTML 56K
Shutdown and Other Special Charges, Net (Details)
52: R42 Inventories, Net (Details) HTML 34K
53: R43 BUSINESS COMBINATIONS - Americraft Acquisition HTML 26K
(Details)
54: R44 BUSINESS COMBINATIONS - AR Packaging Acquisition HTML 49K
(Details)
55: R45 BUSINESS COMBINATIONS - AR Packaging Purchase HTML 89K
Price Allocation (Details)
56: R46 BUSINESS COMBINATIONS - AR Packaging Pro Forma HTML 28K
Information (Details)
57: R47 DEBT - Current Debt (Details) HTML 31K
58: R48 DEBT - Long-Term Debt (Details) HTML 99K
59: R49 DEBT - Revolving Credit Facilities (Details) HTML 39K
60: R50 DEBT - Additional Information (Details) HTML 44K
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Pension and Postretirement Expenses (Details)
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Additional Information (Details)
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Additional Information (Details)
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Information (Details)
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Schedule of changes in AOCI (Details)
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Reclassifications Out of AOCI (Details)
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Reserve by Type of Cost (Details)
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Narrative (Details)
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(Exact name of registrant as specified in its charter)
iDelaware
i26-0405422
(State
or other jurisdiction of
(I.R.S. employer
incorporation or organization)
identification no.)
i1500 Riveredge Parkway, Suite 100
iAtlanta,
iGeorgia
i30328
(Address
of principal executive offices)
(Zip Code)
(i770) i240-7200
(Registrant’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
iCommon Stock, $0.01 par value per share
iGPK
iNew
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. iYes☑ 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). iYes☑ 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 accelerated filer,”“accelerated filer,”“smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☑
Accelerated filer
☐
Smaller reporting company
i☐
Non-accelerated
filer
☐
(Do not check if a smaller reporting company)
Emerging growth company
i☐
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 i☐ No ☑
As of October
24, 2022, there were i307,118,078 shares of the registrant’s Common Stock, par value $0.01 per share, outstanding.
Certain statements regarding the expectations of Graphic Packaging Holding Company (“GPHC” and, together with its subsidiaries, the “Company”), including, but not limited to, pension and postretirement healthcare benefit plan contributions, the re-classification of gain from Accumulated Other Comprehensive Loss to earnings, the timing of the sale of its operations in Russia, the deductibility of goodwill from the acquisitions of AR Packaging Group AB for tax purposes, capital investment,
and depreciation and amortization in this report constitute “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on currently available operating, financial and competitive information and are subject to various risks and uncertainties that could cause actual results to differ materially from the Company’s historical experience and its present expectations. These risks and uncertainties include, but are not limited to, 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’s ability to implement its business strategies, including strategic acquisitions, the Company's ability to successfully integrate acquisitions, productivity initiatives and cost reduction plans, the Company’s debt level, currency movements and other risks of conducting business internationally, and the impact of regulatory and litigation matters, including those that could impact the Company’s ability to utilize its 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 2021 Annual Report on Form 10-K, and in other filings with the Securities and Exchange Commission.
Short-Term Debt and Current Portion of Long-Term Debt
$
i300
$
i279
Accounts
Payable
i999
i1,125
Compensation
and Employee Benefits
i265
i211
Interest
Payable
i39
i35
Other Accrued Liabilities
i429
i399
Total
Current Liabilities
i2,032
i2,049
Long-Term
Debt
i5,195
i5,515
Deferred
Income Tax Liabilities
i635
i579
Accrued
Pension and Postretirement Benefits
i112
i139
Other
Noncurrent Liabilities
i250
i282
SHAREHOLDERS’
EQUITY
Preferred Stock, par value $ii0.01/
per share; ii100,000,000/ shares
authorized; iiiino///
shares issued or outstanding
i—
i—
Common
Stock, par value $ii0.01/ per share; ii1,000,000,000/
shares authorized; ii307,380,403/ and ii307,103,551/
shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively
i3
i3
Capital
in Excess of Par Value
i2,046
i2,046
Retained
Earnings
i346
i66
Accumulated
Other Comprehensive Loss
(i439)
(i224)
Total
Graphic Packaging Holding Company Shareholders' Equity
i1,956
i1,891
Noncontrolling
Interest
i2
i2
Total Equity
i1,958
i1,893
Total
Liabilities and Shareholders' Equity
$
i10,182
$
i10,457
The
accompanying notes are an integral part of the Condensed Consolidated Financial Statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 — iGENERAL
INFORMATION
Nature of Business
Graphic Packaging Holding Company (“GPHC” and, together with its subsidiaries, the “Company”) is committed to providing consumer packaging that makes a world of difference. The Company is a leading provider of 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 the largest producer 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’s customers include many of the world’s most widely recognized companies and brands with prominent market positions in beverage, food, foodservice, and other consumer products. The Company strives to provide its customers with 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 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”), Graphic Packaging International Partners, LLC, a Delaware limited liability company formerly known as Gazelle Newco LLC and a wholly- owned subsidiary of the Company (“GPIP”), and Graphic Packaging International, LLC, a Delaware limited liability company formerly known as Graphic Packaging International, Inc. and a direct subsidiary of GPIP (“GPIL”), completed a series of transactions pursuant to an agreement dated October 23, 2017 among the foregoing parties (the “Transaction Agreement”).
Pursuant to the Transaction Agreement (i) a wholly-owned subsidiary of the Company transferred its ownership interest in GPIL to GPIP; (ii) IP transferred its North America Consumer Packaging (“NACP”) business to GPIP, which was then subsequently transferred to GPIL; (iii) GPIP issued membership interests to IP, and IP was admitted as a member of GPIP; and (iv) GPIL assumed certain indebtedness of IP (the "NACP Combination").
During 2020, GPIP purchased i32.5 million
partnership units from IP for $i500 million in cash, fully redeeming the i18.2 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 i9.3 million
partnership units from IP for $i150 million in cash, and IP exchanged i15.3 million partnership units for an equivalent
number of shares of GPHC common stock. On May 21, 2021, IP exchanged its remaining i22.8 million partnership units for an equivalent number of shares of GPHC common stock. As required by the parties' agreement, these shares were immediately sold by IP. As a result, IP had no ownership interest remaining in GPIP as of May 21, 2021.
Prior to September
1, 2022, substantially all the Company’s operations were held through its investment in GPIP. Effective September 1, 2022, as a result of internal restructuring, GPIP is no longer classified as a partnership for U.S. income tax purposes and GPIP’s activities are directly subject to U.S. income tax. The Company no longer holds an interest in an entity classified as a partnership for U.S. income tax purposes.
iThe
Company’s Condensed Consolidated Financial Statements include all subsidiaries in which the Company has the ability to exercise direct or indirect control over operating and financial policies. Intercompany transactions and balances are eliminated in consolidation.
In the Company’s opinion, the accompanying Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary to state fairly the financial position, results of operations and cash flows for the interim periods. The Company’s year-end Condensed
Consolidated Balance Sheet data was derived from audited financial statements. iThe accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all the information required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with the Company's 2021 Annual
Report on Form 10-K for the year ended December 31, 2021.iIn 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.
i
Revenue
Recognition
The Company has itwo 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.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, 2022 and 2021, the Company
recognized $i2,445 million and $i1,775 million,
respectively, of revenue from contracts with customers. For the nine months ended September 30, 2022 and 2021, the Company recognized $i7,035 million and $i5,151 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") and excludes sales tax. Estimates are made for Variable Consideration based on contract terms and historical experience of actual results and are applied to the performance obligations as they are satisfied. Purchases by the Company’s
principal customers are manufactured and shipped with minimal lead time, therefore performance obligations are generally satisfied shortly after manufacturing and shipment. The Company uses standard payment terms that are consistent with industry practice.
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 Expense (Income), Net line item on the Condensed Consolidated Statements
of Operations. iThe following table summarizes the activity under these programs for the nine months ended September 30, 2022 and 2021, respectively:
Nine
Months Ended
September 30,
In millions
2022
2021
Receivables Sold and Derecognized
$
i2,422
$
i2,230
Proceeds
Collected on Behalf of Financial Institutions
i2,230
i2,202
Net
Proceeds Received From Financial Institutions
i212
i39
Deferred
Purchase Price at September 30(a)
i7
i8
Pledged
Receivables at September 30
i161
i154
(a)Included in Other Current Assets on the Condensed Consolidated Balance Sheets and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure.
Receivables sold under all programs subject to continuing involvement, which consists principally of collection services, were $i821 million and $i613 million
as of September 30, 2022 and December 31, 2021, respectively.
The Company also participates in supply chain financing arrangements offered by certain customers that qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB Codification. For the nine months ended September 30, 2022 and 2021, the Company sold receivables of $i824 million
and $i493 million, respectively, related to these arrangements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Share Repurchases and Dividends
During the first nine months of 2022, the Company's board of directors declared three regular quarterly dividends of $i0.075
per share of common stock to shareholders of record as follows:
On September 22, 2022, the Company's board of directors voted to increase the quarterly dividend to $i0.10
per share of common stock, a i33% increase from the prior quarterly dividend of $i0.075. The dividend is payable on January 5, 2023,
to common stockholders of record at the close of business on December 15, 2022.
On January 28, 2019, the Company's board of directors authorized a share repurchase program to allow the Company to purchase up to $i500 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 nine months of 2022, the Company repurchased i1,090,765 shares of its common stock at an average price of $i20.99
under the 2019 share repurchase program. During the nine months ended September 30, 2021, the Company did inot repurchase any shares of its common stock under the 2019 share repurchase program. As of September 30, 2022, the Company has $i124
million available for additional repurchases under the 2019 share repurchase program.
Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net
i
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
Nine Months Ended
September 30,
September
30,
In millions
2022
2021
2022
2021
Charges Associated with Business Combinations(a)
$
i7
$
i25
$
i20
$
i48
Shutdown
and Other Special Charges
(i1)
i5
i1
i20
Exit
Activities(b)
i2
i3
i12
i11
Charges
Associated with a Divestiture(c)
i1
i—
i93
i—
Total
$
i9
$
i33
$
i126
$
i79
(a)
These costs relate to the Americraft Carton, Inc. and AR Packaging Group AB acquisitions (see "Note 3 - Business Combinations").
(b) Relates to the Company's CRB mill and folding carton facility closures (see "Note 13 - Exit Activities").
(c) Relates to the Company's planned divestiture of its Russian business (see "Note 14 - Impairment and Divestiture of Russian Business").
/
2022
In
the second quarter of 2022, the Company began the process of divesting its interests in its two folding carton plants in Russia. Impairment charges associated with this divestiture are included in Charges Associated with a Divestiture in the table above for the three and nine months ended September 30, 2022. For more information, see "Note 14 - Impairment and Divestiture of Russian Business."
In March 2022, the Company announced its decision to close the Norwalk, Ohio folding carton facility and closed the facility in September 2022. Severance charges associated with this project are included in Exit Activities in the table above for
the three and nine months ended September 30, 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. At the time of the announcement, the Company expected to close itwo
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 ione of the itwo
original smaller CRB mills at least through 2022. In the second quarter of 2022, the Company closed the Battle Creek, MI CRB mill. Severance, retention, shutdown costs, and other charges associated with this project are included in Exit Activities in the table above for the three and nine months ended September 30, 2022 and 2021. For more information, see "Note 13 - Exit Activities."
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On May 14, 2021, in connection with the AR Packaging Group AB ("AR Packaging") acquisition, the Company entered into deal contingent foreign exchange forward contracts, with no upfront cash cost, to hedge €i700 million
of the acquisition price. These forward contracts settled October 29, 2021, roughly concurrent with the acquisition of AR Packaging, and are accounted for as derivatives under ASC 815, Derivatives and Hedging. Unrealized gains and losses resulting from these contracts are recognized in earnings. Unrealized losses of $i21 million
and $i38 million resulting from these contracts are recognized in Charges Associated with Business Combinations in the table above for the three and nine months ended September 30, 2021, respectively. For more information, see "Note 1 - General Information"
of the Company's 2021 Annual Report on Form 10-K for the year ended December 31, 2021 and "Note 7 — Financial Instruments and Fair Value Measurement.”
On July 1, 2021, the Company acquired substantially all the assets of Americraft Carton, Inc. (“Americraft”), the largest remaining independent folding carton converter in North America for $i292 million.
The acquisition included iseven converting facilities across the United States and is reported within the Americas Paperboard Packaging reportable segment. Charges associated with this acquisition are included in Charges Associated with Business Combinations in the table above. For more information, see "Note 3 — Business Combinations."
i
Adoption
of New Accounting Standards
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”). 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 September 2022, the FASB issued ASU 2022-04, Liabilities - Supplier Finance Programs (Subtopic 405-50):Disclosure of Supplier Finance Program Obligations, which is intended to enhance the transparency surrounding the use of supplier finance programs. Supplier finance programs may also be referred to as reverse factoring, payables
finance, or structured payables arrangements. The amendments require a buyer that uses supplier finance programs to make annual disclosures about the program’s key terms, the balance sheet presentation of related amounts, the confirmed amount outstanding at the end of the period, and associated rollforward information. Only the amount outstanding at the end of the period must be disclosed in interim periods. The amendments are effective for all entities for fiscal years beginning after December 15, 2022 on a retrospective basis, including interim periods with those fiscal years, except for the requirement to disclose rollforward information, which is effective prospectively for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company will continue evaluating
the impact of this ASU.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. This ASU clarifies that contractual sale restrictions should not be considered in measuring the fair value of equity securities. This ASU is effective for fiscal years beginning after December 15, 2023, including interim periods therein, with early adoption permitted. The Company will continue evaluating the impact of this ASU.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair
Value Hedging – Portfolio Layer Method. This ASU expands and clarifies the portfolio layer method for fair value hedges of interest rate risk. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods therein, with early adoption permitted. The Company will continue evaluating the impact of this ASU.
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 effective 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 ASU.
As disclosed in "Note 1 - General Information,"the Company completed the Americraft acquisition in 2021. The Company paid approximately
$i292 million, using existing cash and borrowings under its revolving credit facility. During the second quarter of 2022, the Company finalized the acquisition accounting for Americraft.
AR Packaging
On November 1, 2021, the
Company completed the acquisition of 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 i30 converting plants in i13
countries and enhances the Company’s global scale, innovation capabilities, and value proposition for customers throughout Europe and bordering regions.
The total cash consideration for the AR Packaging acquisition was $i1,412 million net of cash acquired of $i75 million,
paid in Euros through the use of deal contingent, foreign exchange forward contracts, purchased through the use of available borrowing capacity on the Company’s Senior Secured Revolving Credit Facilities and the $i400 million Incremental Facility Amendment to the Fourth Amended and Restated Credit Agreement. For more information, see "Note 4 - Debt."
The
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 Paperboard Packaging reportable segment. During the third quarter of 2022, the Company recorded acquisition accounting adjustments of less than $i1 million
to goodwill comprised of adjustments 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 future expected economic benefits, including enhanced revenue growth from expanded capabilities and geographic presence as well as substantial cost savings from reduction of duplicative overhead, streamlined operations and enhanced operational efficiency.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
In millions
Amounts Recognized as of Acquisition Date(a)
Total
Purchase Consideration
$
i1,487
Cash Acquired
i75
Receivables,
Net
i212
Inventories
i166
Other
Current Assets
i12
Property, Plant and Equipment(b)
i529
Intangible
Assets(c)
i447
Other Assets
i76
Total
Assets Acquired
i1,517
Accounts Payable
i109
Compensation
and Employee Benefits
i12
Other Accrued Liabilities
i105
Short-Term
Debt and Current Portion of Long-Term Debt
i9
Long-Term Debt
i17
Deferred
Income Tax Liabilities
i164
Accrued Pension and Postretirement Benefits
i50
Other
Noncurrent Liabilities
i41
Noncontrolling Interests
i2
Total
Liabilities Assumed
i509
Net Assets Acquired
i1,008
Goodwill
i479
Total
Estimated Fair Value of Net Assets Acquired
$
i1,487
(a) The amounts were translated from Euro to USD using the rate at the acquisition date of i1.1539.
(b) Property, Plant and Equipment primarily consists of Machinery and Equipment of $i371 million with a weighted average life of approximately i12
years.
(c) Intangible Assets primarily consists of Customer Relationships of $i439 million with a weighted average life of approximately i15
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.
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 in Q4 2022.
The Condensed Consolidated Statements of Operations include $i291 million of Net Sales and $i19 million
of Income from Operations for AR Packaging for the three months ended September 30, 2022 and $i842 million of Net Sales and $i33 million
of Loss from Operations for the nine months ended September 30, 2022. The nine months ended September 30, 2022 include $i93 million of impairment charges related to the divestiture of its two folding carton plants in Russia. See "Note 14 - Impairment and divestiture of Russian business" for further information.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following unaudited pro forma consolidated financial information for the three and nine months ended September 30, 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. iThese 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)
Pro
Forma Nine Months Ended (unaudited)
September 30,
September 30,
In millions
2022
2021
2022
2021
Net Sales
$
i2,451
$
i2,069
$
i7,054
$
i6,015
Net
Income
$
i193
$
i85
$
i366
$
i114
NOTE
4 — iDEBT
i
Short-Term Debt and Current Portion of Long-Term Debt is comprised of the following:
Senior Notes with interest payable semi-annually at i4.875%, effective rate of i4.88%,
payable in 2022(a)
$
i250
$
i250
Senior
Notes with interest payable semi-annually at i0.821%, effective rate of i0.82%, payable in 2024(b)
i400
i400
Senior
Notes with interest payable semi-annually at i4.125%, effective rate of i4.14%, payable in 2024(a)
i300
i300
Senior
Notes with interest payable semi-annually at i1.512%, effective rate of i1.52%, payable in 2026(b)
i400
i400
Senior
Notes with interest payable semi-annually at i4.75%, effective rate of i4.80%, payable in 2027(b)
i300
i300
Senior
Notes with interest payable semi-annually at i3.50%, effective rate of i3.54%, payable in 2028(b)
i450
i450
Senior
Notes with interest payable semi-annually at i3.50%, effective rate of i3.54%, payable in 2029(b)
i350
i350
Senior
Notes (€i290 million) with interest payable semi-annually at i2.625% , effective rate of i2.66%,
payable in 2029(b)
i284
i330
Senior Notes with interest payable
semi-annually at i3.75% , effective rate of i3.80%, payable in 2030(b)
i400
i400
Green
Bond net of unamortized premium with interest payable at i4.00%, effective rate of i1.72%, payable in 2026(b)
i109
i110
Senior
Secured Term Loan A-2 Facility with interest payable quarterly at i2.67%, effective rate of i2.68% payable in 2028(b)
i425
i425
Senior
Secured Term Loan A-3 Facility with interest payable monthly payable at floating rates (i4.56% at September 30, 2022), effective rate of i4.59%,
payable in 2028(b)
i250
i250
Senior Secured Term Loan Facilities
with interest payable at various dates at floating rates (i4.31% at September 30, 2022) payable through 2026(b)
i533
i543
Senior
Secured Term Loan Facility (€i210 million) with interest payable at various dates at floating rates (i1.82% at September 30, 2022) payable
through 2026(b)
i206
i239
Senior Secured Revolving Facilities
with interest payable quarterly at floating rates (i4.82% at September 30, 2022) payable in 2026(b)(c)
i667
i920
Finance
Leases and Financing Obligations
i168
i146
Other
i16
i9
Total
Long-Term Debt
i5,508
i5,822
Less:
Current Portion
i281
i270
Total
Long-Term Debt Excluding Current Portion
i5,227
i5,552
Less:
Unamortized Deferred Debt Issuance Costs
i32
i37
Total
$
i5,195
$
i5,515
(a)
Guaranteed by GPHC and certain domestic subsidiaries.
(b) Guaranteed by GPIP and certain domestic subsidiaries.
/
(c)The weighted average effective interest rates for the Company’s Senior Secured Revolving Credit Facilities were i3.06%
and i1.63% as of September 30, 2022 and December 31, 2021, respectively.
i
At
September 30, 2022, the Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities:
Senior
Secured International Revolving Credit Facility
i178
i42
i136
Other
International Facilities
i74
i35
i39
Total
$
i2,102
$
i702
$
i1,375
(a)
In accordance with its debt agreements, the Company’s availability under its revolving credit facilities has been reduced by the amount of standby letters of credit issued of $i25 million as of September 30, 2022. These letters of credit are primarily used as security against the Company's self-insurance obligations
and workers’ compensation obligations. These letters of credit expire at various dates through 2022 unless extended.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Covenant Agreements
The
Covenants in the Company's Fourth Amended and Restated Credit Agreement (as amended, the "Current Credit Agreement") and the indentures governing the i4.875% Senior Notes due 2022, i0.821%
Senior Notes due 2024, i4.125% Senior Notes due 2024, i1.512% Senior Notes due 2026, i4.75%
Senior Notes due 2027, i3.50% Senior Notes due 2028, i3.50% Senior Notes due 2029, i2.625%
Senior Notes due 2029 and i3.75% Senior Notes due 2030 (the “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’s ability to respond to changing market conditions, fund its capital spending program, provide for unexpected capital investments or take advantage of business opportunities.
The Company has ione 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”). The 2014 Plan allows for granting shares of stock, options, stock appreciation rights,
restricted stock, restricted stock units (“RSUs”), restricted stock awards (“RSAs”), and other types of stock-based and cash awards. Awards under the 2014 Plan 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’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 September 30, 2022, there were i10.4 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 ithree 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 as deferred compensation for non-employee directors are fully vested but not payable until the distribution date elected by the director. Stock awards issued to non-employee directors as part of their compensation for service on the Board are unrestricted on the grant date.
i
Data concerning RSUs and Stock Awards granted in the first nine months of 2022 is as follows:
Weighted
Average Grant Date Fair Value Per Share
RSUs — Employees and Non-Employee Directors
i1,928,271
$
i20.18
Stock
Awards — Board of Directors
i34,160
$
i20.49
/
During
the nine months ended September 30, 2022 and 2021, $i24 million and $i21
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 nine months ended September 30, 2022 and 2021, ii1.2/
million shares were issued. The shares issued were primarily related to RSUs granted to employees during 2019 and 2018.
NOTE 6 — iPENSIONS 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Pension Expense
i
The pension expenses related to the Company’s plans consisted of the following:
Three
Months Ended
Nine Months Ended
September 30,
September 30,
In millions
2022
2021
2022
2021
Components
of Net Periodic Cost:
Service Cost
$
i3
$
i3
$
i10
$
i11
Interest
Cost
i3
i3
i9
i7
Expected
Return on Plan Assets
(i6)
(i6)
(i17)
(i15)
Amortization:
Actuarial
Loss
i1
i2
i3
i4
Net
Periodic Cost
$
i1
$
i2
$
i5
$
i7
/
Employer
Contributions
The Company made $i21 million and $i30 million
of contributions to its pension plans during the first nine months of 2022 and 2021 respectively. In the first quarter of 2022 and 2021, the Company made a $i6 million and $i14 million
contribution to its remaining U.S. defined benefit plan by effectively utilizing the excess balance related to the U.S. defined benefit plan terminated in 2020, respectively. Excluding this $i6 million contribution, the Company expects to make contributions in the range of $i10
million to $i20 million for the full year of 2022.
The Company also made postretirement health care benefit payments of $i1 million
during the first nine months of 2022. The Company expects to make approximately $i2 million contributions to its postretirement health care plans for the full year of 2022.
NOTE 7 — iFINANCIAL
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 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’ fair value are not included in current earnings but are included in Accumulated Other Comprehensive Loss. These changes in fair value will subsequently be reclassified to earnings, contemporaneously with and offsetting changes in the related hedged exposure and presented in the same line of the income statement expected for the hedged item.
For more information regarding the Company’s financial instruments and fair value measurement, see “Note 10 - Financial Instruments, Derivatives and Hedging Activities”and“Note 11 - Fair Value Measurement”
of the Notes to the Consolidated Financial Statements of the Company's 2021 Annual Report on Form 10-K.
Interest Rate Risk
The Company used 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.
As of December 31, 2021, the
Company had interest rate swap positions with a notional value of $i200 million which matured in January 2022. As of September 30, 2022, the Company had ino
outstanding interest rate swaps. As discussed in"Note 8 - Income Taxes", a $i10 million expense was recorded to release the lingering tax expense remaining in Other Comprehensive Income after the settlement of these swaps in the first quarter of 2022.
During the first nine months of 2021, there were ino
amounts of ineffectiveness related to changes in the fair value of interest rate swap agreements. Additionally, there were ino 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 i40%
and i44% of its expected natural gas usage for the remainder of 2022 and 2023, respectively.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During
the first nine months of 2022 and 2021, there were iino/
amounts of ineffectiveness related to changes in the fair value of natural gas swap contracts. Additionally, there were iino/
amounts excluded from the measure of effectiveness.
Foreign Currency Risk
The Company entered into forward exchange contracts to manage risks associated with foreign currency transactions and future variability of cash flows arising from those transactions that may be adversely affected by changes in exchange rates. The contracts are carried at fair value with changes in fair value recognized in Accumulated Other Comprehensive Loss and gains/losses related to these contracts
are recognized in Other Expense (Income), Net or Net Sales, when appropriate.
iiNo/
amounts were reclassified to earnings during 2021 in connection with forecasted transactions that were considered probable of not occurring and there was iino/
amount of ineffectiveness related to changes in the fair value of foreign currency forward contracts. Additionally, there were iino/
amounts excluded from the measure of effectiveness.
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 September 30, 2022 and December 31, 2021, multiple foreign currency forward exchange contracts existed, with maturities ranging up to iithree
months/. Those foreign currency exchange contracts outstanding at September 30, 2022 and December 31, 2021, when aggregated and measured in U.S. dollars at contractual rates at September 30, 2022 and December 31, 2021, had net notional amounts totaling $i111
million and $i103 million, respectively. Unrealized gains and losses resulting from these contracts are recognized in Other 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 €i700 million of the acquisition price. These forward contracts settled October 29, 2021, immediately
prior to the acquisition of AR Packaging and are accounted for as derivatives under ASC 815, Derivatives and Hedging. Unrealized losses of $i21 million and $i38 million
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 the three and nine months ended September 30, 2021, respectively. For more information, see "Note 1 - General Information" of the Company's 2021 Annual Report on Form 10-K for the year ended December 31, 2021.
Fair Value of Financial Instruments
The
Company’s derivative instruments are carried at fair value. The Company has determined that the inputs to the valuation of these derivative instruments are Level 2 in the fair value hierarchy. Level 2 inputs are defined as quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. The Company uses valuation techniques based on discounted cash flow analyses, which reflect the terms of the derivatives and use observable market-based inputs, including forward rates, and uses market price quotations obtained from independent derivatives brokers, corroborated with information obtained from independent pricing service
providers.
As of September 30, 2022, there has not been any significant impact to the fair value of the Company’s derivative liabilities due to its own credit risk. Similarly, there has not been any significant adverse impact to the Company’s derivative assets based on evaluation of the Company’s counterparties’ credit risks. As of September 30, 2022 and December 31, 2021, the Company had commodity
contract derivatives assets, which were included in Other Current Assets on the Condensed Consolidated Balance Sheet, of $i1 million and $i2 million,
respectively
The
fair values of the Company’s other financial assets and liabilities at September 30, 2022 and December 31, 2021 approximately equal the carrying values reported on the Condensed Consolidated Balance Sheets except for Long-Term Debt. The fair value of the Company’s Long-Term Debt (excluding finance leases and deferred financing fees) was $i4,909
million and $i5,715 million as compared to the carrying amounts of $i5,340 million and $i5,676
million as of September 30, 2022 and December 31, 2021, respectively. The fair value of the Company’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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Effect
of Derivative Instruments
i
The pre-tax effect of derivative instruments in cash flow hedging relationships on the Company’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
At
September 30, 2022, the Company expects to reclassify $i1 million of pre-tax gain 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.
i
The pre-tax effect of derivative instruments not designated as hedging instruments on the Company’s Condensed Consolidated
Statements of Operations is as follows:
Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net
i—
i21
i—
i38
Total
$
(i9)
$
i20
$
(i18)
$
i33
/
NOTE
8 — iINCOME TAXES
Prior to September 1, 2022, substantially all the Company’s operations were held through its investment in GPIP, a subsidiary that was classified as a partnership for U.S. income tax purposes and was generally not subject to domestic income tax expense. As a result, prior to September
1, 2022, the consolidated financial statements exclude the domestic tax effect of the earnings attributable to the noncontrolling partner’s interest in GPIP for the portion of any year in which the noncontrolling partner held an interest. Effective September 1, 2022, as a result of internal restructuring, GPIP is no longer classified as a partnership for U.S. income tax purposes and GPIP’s activities are directly subject to U.S. income tax. The Company no longer holds an interest in an entity classified as a partnership for U.S. income tax purposes.
During the nine months ended September 30, 2022, the Company recognized
Income Tax Expense of $i134 million on Income before Income Taxes of $i500
million. The effective tax rate for the nine months ended September 30, 2022 was different than the statutory rate primarily due to the discrete tax impact of the charges associated with the divestiture of the Company’s Russia business that results in no corresponding tax benefit. Additional discrete tax adjustments were recorded during the period, including tax benefits of $i7 million
associated with the recognition of differences between the Company’s outside tax basis in its investment in GPIP and the Company’s inside tax basis in individual assets and liabilities due to the internal restructuring completed during the period, provision to return true-up tax benefits of $i2 million, a tax benefit of $i2 million
related to the remeasurement of deferred taxes due to state law changes, tax expense of $i10 million recorded to release the lingering tax expense remaining in Other Comprehensive Income after the settlement of certain swaps, and a tax benefit of $i2 million
related to excess tax benefits on restricted stock that vested during the period. In addition, the recognition of deferred tax assets and liabilities on unrealized foreign currency activity related to intercompany loans where the entity’s functional currency and the loan denomination currency are different than the tax reporting currency resulted in a decrease in the effective tax rate for the period.
During the nine months ended September 30, 2021, the Company recognized Income Tax Expense of $i64
million on Income before Income Taxes of $i240 million. The effective tax rate for the nine months ended September 30, 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 with and without a valuation allowance. In
addition, during the second quarter, the Company recorded discrete tax expense of $i3 million related to the remeasurement of the net deferred tax liability for its UK subsidiaries due to the statutory tax rate increase enacted and $i5 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 Company also recorded a discrete tax benefit of $i7 million related to tax credit and other provision to return adjustments related to the 2020 U.S. federal income tax return during the third quarter.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 — iENVIRONMENTAL 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’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’s current and former facilities are the subject of environmental investigations and remediations resulting from historic operations and the release of hazardous substances or other constituents. Some current and former facilities have a history of industrial usage for which investigation and remediation obligations may be imposed in the future or for which indemnification claims may be asserted against the Company. Also, closures or sales of facilities may necessitate investigation and may result in remediation activities at those facilities.
The
Company has established reserves for those facilities or issues where a liability is probable and the costs are reasonably estimable. The Company believes that the amounts accrued for its loss contingencies, and the reasonably possible loss beyond the amounts accrued, are not material to the Company’s consolidated financial position, results of operations or cash flows. The Company cannot estimate with certainty other future compliance, investigation or remediation costs. Some costs relating to historic usage that the Company considers to be reasonably possible of resulting in liability are not quantifiable at this time.
The Company will continue to monitor environmental issues at each of its facilities, as well as regulatory developments, and will revise its accruals, estimates and disclosures relating to past, present and future operations, as additional information is obtained.
Legal Matters
The Company is a party to a number of lawsuits arising in the ordinary conduct of its business. Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company does not believe that disposition of these lawsuits will have a material adverse
effect on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 10 — iSEGMENT INFORMATION
The
Company has ithree reportable segments as follows:
Paperboard Mills includes the iseven
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.
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."
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i
Segment
information is as follows:
Three Months Ended
Nine Months Ended
September 30,
September 30,
In millions
2022
2021
2022
2021
NET
SALES:
Paperboard Mills
$
i345
$
i251
$
i933
$
i732
Americas
Paperboard Packaging
i1,577
i1,291
i4,533
i3,697
Europe
Paperboard Packaging
i488
i198
i1,467
i616
Corporate/Other/Eliminations(a)
i41
i42
i121
i123
Total
$
i2,451
$
i1,782
$
i7,054
$
i5,168
INCOME
(LOSS) FROM OPERATIONS:
Paperboard Mills(b)
$
i12
$
i14
$
i17
$
(i31)
Americas
Paperboard Packaging
i229
i107
i589
i336
Europe
Paperboard Packaging(c)
i40
i17
i31
i64
Corporate
and Other(d)
i12
(i17)
i1
(i45)
Total
$
i293
$
i121
$
i638
$
i324
DEPRECIATION
AND AMORTIZATION:
Paperboard Mills
$
i60
$
i61
$
i183
$
i175
Americas
Paperboard Packaging
i43
i47
i129
i130
Europe
Paperboard Packaging
i27
i8
i84
i30
Corporate
and Other
i7
i6
i19
i21
Total
$
i137
$
i122
$
i415
$
i356
(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 impairment charges of $i93 million related to Russia through Q3 2022. See "Note 14 - Impairment and divestiture
of Russian business" for further information.
(d) Includes expenses related to business combinations, shutdown and other special charges, and exit activities.
/
NOTE 11 — iEARNINGS
PER SHARE
i
Three
Months Ended
Nine Months Ended
September 30,
September 30,
In millions, except per share data
2022
2021
2022
2021
Net Income Attributable to Graphic Packaging Holding Company
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 12 — iCHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
i
The
following represents changes in Accumulated Other Comprehensive Loss attributable to Graphic Packaging Holding Company by component for the nine months ended September 30, 2022:
(a)
Includes tax expense of $i10 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 6 - Pensions and Other Postretirement
Benefits").
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
13 — iEXIT ACTIVITIES
In March 2022, the Company announced its decision to close the Norwalk, Ohio folding carton facility and closed the facility in September 2022. The Company has incurred 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 and nine months ended September 30, 2022.
During 2019, the Company announced its plans to invest in a new CRB paper machine in Kalamazoo, Michigan. At the time of the announcement, the Company expected to close itwo
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 ione of the itwo
original smaller CRB mills at least through 2022. In the second quarter of 2022, the Company closed the Battle Creek, MI CRB mill. The Company has incurred 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 and nine months ended September 30, 2022 and 2021.
During the nine months ended September 30, 2022 and 2021, the
Company recorded $i19 million and $i25 million of exit costs, respectively, associated with these restructurings. Other costs associated with the start-up of the new CRB paper machine are recorded
in the period in which they are incurred.
i
The following table summarizes the costs incurred during the three and nine months ended September 30, 2022 and 2021 related to these restructurings:
Three
Months Ended
Nine Months Ended
September 30,
September 30,
In millions
Location in Statement of Operations
2022
2021
2022
2021
Severance
Costs and Other(a)
Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net
$
i—
$
i3
$
i1
$
i11
Asset
Write-Offs and Start-Up Costs(b)
Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net
i2
i—
i11
i—
Accelerated
Depreciation
Cost of Sales
i—
i4
i7
i14
Total
$
i2
$
i7
$
i19
$
i25
(a)
Costs incurred include activities for post-employment benefits, retention bonuses, incentives and professional services (see "Note 1 - Business Combinations, Shutdown and Other Special Charges and Exit Activities, net").
(b) Costs incurred include non-cash write-offs for items such as supplies and inventory.
/
i
The
following table summarizes the balance of accrued expenses related to restructuring:
In conjunction with the CRB platform optimization project and closure of the Battle Creek, MI CRB Mill, the
Company incurred charges associated with these exit activities through September 30, 2022 for post-employment benefits, retention bonuses and incentives of $i15 million, and accelerated depreciation and inventory and asset write-offs of $i52 million.
NOTE 14 — iIMPAIRMENT AND DIVESTITURE OF RUSSIAN BUSINESS
In the second quarter of 2022, the Company began the process of the divesting its interests in its two
folding carton facilities in Russia (the “Disposal Group”), which met the criteria to be considered a business, through a sale of i100% of the Disposal Group’s outstanding shares. The Company expects the sale to be complete within the next 12 months. The assets and liabilities to be disposed of in connection with this transaction met the held for sale
criteria as of September 30, 2022.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The carrying value of the net assets held for sale, inclusive of the cumulative translation adjustment balance attributable to the business, was greater than their fair value, less costs to sell, resulting in a pre-tax loss of $i81 million,
which is included in the Business, Combinations, Shutdown and Other Special Charges, and Exit Activities, Net in the Condensed Consolidated Statement of Operations. The assets related to the sale, inclusive of the valuation allowance, and liabilities related to the sale were classified as Other current assets and Other accrued liabilities, respectively, within the Condensed Consolidated Balance Sheet as of September 30, 2022. Excluded from the assets classified as held for sale within the Condensed Consolidated Balance Sheet is an intercompany note receivable totaling $i30 million
from the Company to the Disposal Group. The intercompany note will be sold as part of the transaction and, thus, should be considered when calculating the carrying value of the Disposal Group and the allowance to adjust the carrying value to the fair value less costs to sell. Upon consummation of the sale of the Disposal Group, the Company will reclassify this note from intercompany to the applicable liability line item in the Condensed Consolidated Balance Sheet as it will represent a liability to an external third party. The cumulative translation adjustment attributable to the business of $i10 million
is included within Accumulated Other Comprehensive Income within the Condensed Consolidated Balance Sheet as of September 30, 2022. Goodwill totaling $i12 million associated with the Disposal Group was determined to be impaired as of September 30, 2022. The pre-tax impairment loss for this impairment is included in the Business, Combinations, Shutdown and Other Special Charges, and Exit Activities, Net in the Condensed
Consolidated Statement of Operations.
As the sale of the Disposal Group is not considered a strategic shift that will have a major effect on the Company’s operations or financial results, it was not reported as discontinued operations. The Company will continue to evaluate the Disposal Group for future impairments until it is sold. The Disposal Group is reported within the Europe Paperboard Packaging segment.
i
The
following table summarizes the Company’s assets and liabilities held for sale by major class:
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
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:
ØOverview
of Business
ØOverview of Third Quarter 2022 Results
ØResults of Operations
ØFinancial Condition, Liquidity and Capital Resources
ØCritical Accounting Policies
ØNew Accounting Standards
ØBusiness
Outlook
OVERVIEW OF BUSINESS
The Company’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’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’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’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 for the nine months ended September 30, 2022 by $595 million, compared to the first nine months of 2021 due to higher commodity inflation costs ($523 million), labor and benefits ($36 million) and other costs, net ($36 million). Commodity inflation was primarily due to external board ($133 million), mill chemicals ($99 million), energy ($93 million), wood ($55 million), secondary fiber ($51 million), freight ($46 million), converting chemicals ($33 million) and other costs ($13 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 2022 and 2023. Since negotiated sales contracts and the market largely determine the pricing for its products, the Company has historically
at times been 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 COVID-19 pandemic and the conflict between Russia and Ukraine. As a result of global events such as the 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. During the second quarter, the Company began the process of selling its two folding carton plants in Russia (the "Russian Operations"), which it expects
to complete within the next 12 months. The Company is adhering to all U.S., U.K., and EU sanctions, and the two plants are currently operating to meet existing customer contractual commitments where possible. For the nine months ended September 30, 2022, the Company's Russian Operations provided approximately 1% of the Company’s Net Sales and approximately 1% of the Company’s EBITDA. Refer to "Note 14 - Impairment and Divestiture of Russian Business" in the Notes to Condensed Consolidated Financial Statements for additional information
and 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’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, 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’s sales are driven by consumer buying habits in the markets its customers serve. Recently, the Company has seen net organic sales growth driven by the consumers' desire for sustainable fiber-based packaging solutions. 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 $5,527 million of outstanding debt obligations as of September 30, 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’s ability to obtain additional financing. Covenants in the Company’s Fourth Amended and Restated
Credit Agreement (as amended, the "Current Credit Agreement") and the indentures governing the 4.875% Senior Notes due 2022, 0.821% Senior Notes due 2024, 4.125% Senior Notes due 2024, 1.512% Senior Notes due 2026, 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”) 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’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 Current 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.
This management’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 September 30, 2022 increased $669 million or 38% to $2,451 million from $1,782 million for the three months ended September 30, 2021 due to the acquisition of AR Packaging in Q4
2021, higher selling prices, increased volume from conversions to fiber-based packaging solutions and higher volume of open market sales partially offset by unfavorable foreign exchange.
•Income from Operations for the three months ended September 30, 2022 increased $172 million or 142% to $293 million from $121 million for the three months ended September 30, 2021 due to higher pricing, higher volumes from organic sales growth and acquisitions, higher volume of open market sales, the positive contribution to volume and performance of the new CRB machine in Kalamazoo, Michigan and product mix, partially offset by unfavorable commodity inflation and other inflation (primarily labor and benefits), unfavorable foreign exchange, and higher depreciation and amortization.
Acquisitions
and Dispositions
•In September 2022, the Company closed its Norwalk, Ohio carton facility, which it had announced to close in March 2022.
•In May 2022, the Company committed to sell its two folding carton plants in Russia and classified the facilities as held for sale resulting in impairment charges of $93 million through the third quarter of 2022 including $12 million of goodwill impairment.
•In May 2022, the
Company closed the Battle Creek, MI CRB mill.
•On November 1, 2021, the Company acquired all the shares of AR Packaging Group AB ("AR Packaging"), Europe's second largest producer of fiber-based consumer packaging. The acquisition included 30 converting plants in 13 countries and is reported within the Europe Paperboard Packaging reportable segment.
•On July 1, 2021, the Company acquired substantially all the assets of Americraft Carton, Inc. (“Americraft”), the largest
independent folding carton converter in North America. The acquisition included seven converting plants across the United States and is reported within the Americas Paperboard Packaging reportable segment.
•On September 22, 2022the Company's board of directors voted to increase the quarterly dividend to $0.10 per share of common stock, a 33% increase from the prior quarterly dividend of $0.075. The dividend is payable on January 5, 2023, to common stockholders of record at the close of business on December 15, 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 nine months of 2022, the Company repurchased 1,090,765 shares of its common stock at an average price of $20.99 under the 2019 share repurchase program. During the nine months ended September 30, 2021, the Company did not repurchase any shares of its common stock under the 2019 share repurchase
program. As of September 30, 2022, the Company has $124 million available for additional repurchases under the 2019 share repurchase program.
Nonoperating Pension and Postretirement Benefit Income
2
1
5
4
Interest Expense, Net
(53)
(29)
(143)
(88)
Income
before Income Taxes and Equity Income of Unconsolidated Entity
242
93
500
240
Income Tax Expense
(49)
(20)
(134)
(64)
Income before Equity Income of Unconsolidated Entity
193
73
366
176
Equity
Income of Unconsolidated Entity
—
—
—
1
Net Income
$
193
$
73
$
366
$
177
THIRD QUARTER 2022 COMPARED WITH THIRD QUARTER
2021
Net Sales
The components of the change in Net Sales are as follows:
Three Months Ended September 30,
Variances
In
millions
2021
Price
Volume/Mix
Exchange
2022
Increase
Percent Change
Consolidated
$
1,782
$
334
$
380
$
(45)
$
2,451
$
669
38
%
The
Company’s Net Sales for the three months ended September 30, 2022 increased by $669 million or 38% to $2,451 million from $1,782 million for the three months ended September 30, 2021 due to $290 million of net sales related to the acquisition of AR Packaging in Q4 2021, higher selling prices, increased volume from conversions to fiber-based packaging solutions, new product introductions and higher volume of open market sales, partially offset by unfavorable foreign exchange, primarily the Euro, British Pound, Canadian dollar, Japanese Yen, and Australian dollar. Core converting volumes were up driven by cereal, dry foods, and frozen pizza, partially offset by lower volumes in frozen foods and bakery.
Income from Operations
The
components of the change in Income from Operations are as follows:
Three Months Ended September 30,
Variances
In
millions
2021
Price
Volume/Mix
Inflation
Exchange
Other (a)
2022
Increase
Percent Change
Consolidated
$
121
$
334
$
41
$
(190)
$
(19)
$
6
$
293
$
172
142
%
(a)
Includes the Company's cost reduction initiatives, planned mill maintenance costs, expenses related to acquisitions and integration activities, exit activities and shutdown and other special charges.
Income from Operations for the three months ended September 30, 2022 increased $172 million or 142% to $293 million from $121 million for the three months ended September 30, 2021 due to higher pricing, higher volumes from organic sales growth and acquisitions, higher volume of open market sales, the positive contribution to volume and performance of the new CRB machine in Kalamazoo, Michigan and mix, partially offset by unfavorable commodity inflation and other inflation (primarily labor and benefits), unfavorable
foreign exchange and higher depreciation and amortization.
Inflation increased for the three months ended September 30, 2022 by $190 million compared to the first three months of 2021 primarily due to higher commodity inflation costs ($162 million), other costs, net ($15 million) and labor and benefits ($13 million). Commodity inflation was primarily due to external board ($50 million), energy ($37 million), mill chemicals ($35 million), wood ($13 million), converting chemicals ($11 million), freight ($7 million), other costs ($5 million), and secondary fiber ($4 million).
Interest Expense, Net
Interest
Expense, Net was $53 million and $29 million for the three months ended September 30, 2022 and 2021, respectively. Interest Expense, Net increased due to higher debt balances and interest rates. As of September 30, 2022, approximately 31% of the Company’s total debt was subject to floating interest rates.
During the three months ended September 30, 2022, the Company recognized Income Tax Expense of $49 million on Income before Income Taxes of $242 million. The effective tax rate for the three months ended September 30, 2022 is different from the statutory rate primarily due to discrete tax benefits of $7 million associated with the recognition of differences between the Company’s outside tax basis in its investment in GPIP and the Company’s inside tax basis in individual assets and liabilities due to the internal restructuring
that was completed during the quarter, provision to return tax benefit of $2 million. In addition, the recognition of deferred tax assets and liabilities on unrealized FX activity related to intercompany loans where the entity functional currency and the loan denomination is different than the tax reporting currency, resulted in an increase in the effective tax rate for the period.
During the three months ended September 30, 2021, the Company recognized Income Tax Expense of $20 million on Income before Income Taxes of $93 million. The effective tax rate for the three months ended September 30, 2021 is different than the statutory rate primarily due to the mix and levels of earnings between foreign and
domestic tax jurisdictions with and without a valuation allowance, and due to discrete tax benefits recorded during the period of $7 million related to tax credit and other return to provision adjustments related to the 2020 U.S. federal income tax return.
The Company utilized its remaining U.S. federal net operating loss 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 and 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 NINE MONTHS OF 2022 COMPARED WITH FIRST NINE MONTHS OF 2021
Net Sales
The components of the change in Net Sales are as follows:
Nine
Months Ended September 30,
Variances
In millions
2021
Price
Volume/Mix
Exchange
2022
Increase
Percent Change
Consolidated
$
5,168
$
833
$
1,145
$
(92)
$
7,054
$
1,886
36
%
The
Company’s Net Sales for the nine months ended September 30, 2022 increased by $1,886 million or 36% to $7,054 million from $5,168 million for the nine months ended September 30, 2021 due to net sales of $972 million from acquisitions including Americraft in the third quarter of 2021 and AR Packaging in the fourth quarter of 2021, higher selling prices, increased volume from conversions to fiber-based packaging solutions and new product introductions and higher volume of open market sales, partially offset by unfavorable foreign exchange, primarily the Euro, British Pound, Australian dollar, Japanese Yen, and Canadian dollar. Core converting volumes were up driven by higher volumes in cereal, dry foods, tissue and frozen pizza partially offset by lower volumes in bakery, frozen foods and pet food.
Income
from Operations
The components of the change in Income from Operations are as follows:
Nine Months Ended September 30,
Variances
In
millions
2021
Price
Volume/Mix
Inflation
Exchange
Other (a)
2022
Increase
Percent Change
Consolidated
$
324
$
833
$
152
$
(595)
$
(33)
$
(43)
$
638
$
314
97
%
(a)
Includes the Company's cost reduction initiatives, planned mill maintenance costs, expenses related to acquisitions and integration activities, exit activities and shutdown and other special charges.
Income from Operations for the nine months ended September 30, 2022 increased $314 million or 97% to $638 million from $324 million for the nine months ended September 30, 2021 due to higher pricing, higher volumes from organic sales growth and acquisitions, higher volume of open market sales, the positive contribution to volume and performance of the new CRB machine in Kalamazoo, Michigan and mix, partially offset by unfavorable commodity inflation and other inflation (primarily labor and benefits), higher
depreciation and amortization, and $93 million of impairment charges related to the Company's commitment to sell its Russian operations.
Inflation increased for the nine months ended September 30, 2022 by $595 million compared to the first nine months of 2021 due to higher commodity inflation costs ($523 million), labor and benefits ($36 million) and other costs, net ($36 million). Commodity inflation was primarily due to external board ($133 million), mill chemicals ($99 million), energy ($93 million), wood ($55 million), secondary fiber ($51 million), freight ($46 million), converting chemicals ($33 million) and other costs ($13 million).
Interest Expense, Net was $143 million and $88 million for the nine months ended September 30, 2022 and 2021, respectively. Interest Expense, Net increased due to higher debt balances and interest rates.
Income Tax Expense
During the nine months ended September 30, 2022 and 2021,
the Company recognized Income Tax Expense of $134 million and $64 million, respectively, on Income before Income Taxes and Equity Income of Unconsolidated Entity of $500 million and $240 million, respectively. The effective tax rate for the nine months ended September 30, 2022 is different than the statutory rate primarily due to the impairment charges associated with the Company’s Russia business that results in no corresponding tax benefit. Additionally, discrete tax adjustments were recorded during the period, including discrete tax benefits of $7 million associated with the recognition of differences between the Company’s outside tax basis in its investment
in GPIP and the Company’s inside tax basis in individual assets and liabilities due to the internal restructuring that was completed during the period, provision to return tax benefit of $2 million, a tax benefit of $2 million recorded to reflect the decrease in the state statutory tax rate, tax expense of $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 excess tax benefits on restricted stock that vested during the period. In addition, the recognition of deferred tax assets and liabilities on unrealized foreign currency activity related to intercompany loans where the entity's functional currency and the loan denomination currency are different than the tax reporting currency resulted in a decrease in the effective tax rate for the period.
The
effective tax rate for the nine months ended September 30, 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 with and without a valuation allowance. In addition, during the second quarter, 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 and $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
Company also recorded a discrete tax benefit of $7 million related to tax credit and other provision to return adjustments related to the 2020 U.S. federal income tax return during the third quarter.
Segment Reporting
The Company has three reportable segments as follows:
Paperboard Mills includes the seven 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'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 products, 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
Nine Months Ended
September 30,
September 30,
In millions
2022
2021
2022
2021
NET SALES:
Paperboard
Mills
$
345
$
251
$
933
$
732
Americas Paperboard Packaging
1,577
1,291
4,533
3,697
Europe
Paperboard Packaging
488
198
1,467
616
Corporate/Other/Eliminations(a)
41
42
121
123
Total
$
2,451
$
1,782
$
7,054
$
5,168
INCOME
(LOSS) FROM OPERATIONS:
Paperboard Mills(b)
$
12
$
14
$
17
$
(31)
Americas Paperboard Packaging
229
107
589
336
Europe
Paperboard Packaging(c)
40
17
31
64
Corporate and Other(d)
12
(17)
1
(45)
Total
$
293
$
121
$
638
$
324
(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 impairment charges of $93 million related to Russia incurred through Q3 2022. See "Note 14 - Impairment and divestiture of Russian business" in the Notes to Condensed Consolidated Financial Statements for further information.
(d) Includes expenses related to business combinations, shutdown and other special charges, and exit activities.
2022
COMPARED WITH 2021
Third Quarter 2022 Compared to Third Quarter 2021
Paperboard Mills
Net Sales increased from prior year due to higher selling prices, mix and higher open market volume. The Company also internalized more paperboard tons.
Income from Operations decreased due to commodity inflation, partly offset by higher prices, higher open market volume and the positive contribution to volume and performance of the new CRB paper machine in Kalamazoo, Michigan. The commodity inflation was primarily due to higher prices for chemicals, energy, wood, secondary fiber, and freight.
Americas Paperboard Packaging
Net Sales increased due to higher pricing, organic sales growth, including conversions to our fiber-based packaging solutions, mix and new product introductions. Higher volumes in cereal, dry foods, and frozen pizza were partially offset by lower volumes in frozen foods and bakery. In beverage, volumes were relatively flat, primarily due to increases in big beer and soft drinks offset by craft beer and specialty beverages.
Income from Operations increased 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 partially offset by commodity inflation
mix and other inflation (primarily labor and benefits). The commodity inflation was primarily due to higher prices for external board, chemicals, energy and freight, partially offset by secondary fiber.
Europe Paperboard Packaging
Net Sales increased due to the acquisition of AR Packaging on November 1, 2021 as well as higher prices, organic sales growth at AR Packaging, including conversions to fiber-based packaging, partially offset by lower core converting volumes in certain market segments and unfavorable foreign currency exchange rates.
Income from Operations increased primarily due to higher pricing, the acquisition of AR Packaging and organic growth from this business,
and cost savings from continuous improvement and other programs, partially offset by commodity inflation primarily related to external board and freight, unfavorable foreign currency exchange rates, and lower core converting volumes in certain market segments.
First Nine Months of 2022 Compared to First Nine Months of 2021
Paperboard Mills
Net
Sales increased from prior year due to higher pricing, mix and higher open market volume. The Company also internalized more paperboard tons.
Income from Operations increased due to downtime and mitigation costs related to Winter Storm Uri in Q1 2021, higher prices, higher open market volume and the positive contribution to volume and performance of the new CRB paper machine in Kalamazoo, Michigan, partially offset by commodity inflation. The commodity inflation was primarily due to higher prices for chemicals, energy, secondary fiber, wood, and 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, mix and new product introductions. Higher volumes in cereal, dry foods, tissue, and frozen pizza were partially offset by lower volumes in bakery, frozen foods, and pet food.In beverage, volumes were relatively flat primarily due to increases in soft drink and big beer offset by craft beer and specialty beverages.
Income from Operations increased dueto higher pricing, higher core converting volume and increased volume from conversions to our fiber based packaging solutions, mix, and cost savings from continuous improvement and other programs, partially offset by commodity inflation and other inflation (primarily labor and benefits). The commodity inflation was primarily due to higher
prices for external board, chemicals, freight, and energy offset by secondary fiber.
Europe Paperboard Packaging
Net Sales increased due to the acquisition of AR Packaging on November 1, 2021 as well as higher prices, organic sales growth at AR Packaging and new product introductions, partially offset by lower core converting volumes in certain market segments, and unfavorable foreign currency exchange rates.
Income from Operations decreased primarily due to impairment charges of $93 million related to the Company's classification of its Russian operations as held for sale in the second
quarter. Refer to "Note 14 - Impairment and Divestiture of Russian Business" in the Notes to Condensed Consolidated Financial Statements for additional information. Excluding these impairment charges, Income from Operations increased due to the acquisition of AR Packaging on November 1, 2021, higher pricing, mix, and cost savings through continuous improvement and other programs, partially offset by commodity inflation primarily related to external board and freight, lower core converting volumes in certain market segments and unfavorable foreign currency exchange rates.
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
Nine
Months Ended
September 30,
In millions
2022
2021
Net Cash Provided by Operating Activities
$
620
$
459
Net Cash Used in Investing Activities
$
(367)
$
(792)
Net
Cash (Used In) Provided by Financing Activities
$
(331)
$
223
Net cash provided by operating activities for the first nine months of 2022 totaled $620 million compared to $459 million for the same period in 2021. The favorable increase was mainly due to improved income from operations. Pension contributions for the first nine months of 2022 and 2021 were $21 million and $30 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
the excess balance related to U.S. defined benefit plan terminated in 2020.
Net cash used in investing activities for the first nine months of 2022 totaled $367 million compared to $792 million for the same period in 2021. Capital spending was $445 million and $588 million in 2022 and 2021, respectively. For more information on the completion of the K2 project, please see the Capital Investment section below. In 2021 the Company paid $292 million for the Americraft acquisition. Net cash receipts related to the accounts receivable securitization and sale programs were $81 million and $91 million in 2022 and 2021, respectively.
Net cash used in financing activities for the first nine months of 2022 totaled $331 million compared to net cash provided by of $223 million for the same period in 2021. Current year activities include borrowings under revolving credit facilities primarily for capital spending, repurchase of common stock of $22 million and payments on debt of $10 million. The Company also paid dividends of $69 million and withheld $18 million of shares 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 used the proceeds, together with cash on
hand, to redeem the 4.75% Senior Notes due in 2021, and a debt drawing of $250 million Incremental Term A-3 Facility, 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 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. Additionally, the Company had an offering of $100 million aggregate principal amount of tax-exempt green bonds, with the net proceeds of $111 million used to reimburse GPIL for a portion of its CRB platform optimization project. The
Company also paid $150 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, redemption of IP's ownership interest and payments on debt of $13 million. The Company also paid dividends and distributions of $71 million and withheld $15 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 4 - Debt” in the Notes to Condensed Consolidated Financial Statements, the Senior Notes issued by GPIL (the “Issuer”) are guaranteed by certain domestic subsidiaries (the “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 Guarantors"). GPIL's remaining subsidiaries (the “Nonguarantor
Subsidiaries”) include all of GPIL’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”), 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.
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 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” 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 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 Expense (Income), Net line item on the Condensed Consolidated Statements of Operations. The following table summarizes the activity under these programs for the nine months ended September 30, 2022 and 2021, respectively:
Nine Months Ended
September 30,
In
millions
2022
2021
Receivables Sold and Derecognized
$
2,422
$
2,230
Proceeds Collected on Behalf of Financial Institutions
2,230
2,202
Net Proceeds Received From Financial Institutions
212
39
Deferred
Purchase Price at September 30(a)
7
8
Pledged Receivables at September 30
161
154
(a)Included in Other Current Assets on the Condensed Consolidated Balance Sheets and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure.
Receivables sold under all programs subject to continuing
involvement, which consists principally of collection services, were $821 million and $613 million as of September 30, 2022 and December 31, 2021, respectively.
The Company also participates in supply chain financing arrangements offered by certain customers that qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB Codification. For the nine months ended September 30, 2022 and 2021, the Company sold receivables of $824 million and $493 million,
respectively, related to these arrangements.
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 Current 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.
Due to the completion of a material acquisition, the Current Credit Agreement requires that the Company maintain a maximum Consolidated Total Leverage Ratio of less than 5.00 to 1.00. At September 30, 2022, the Company was in compliance with such covenant and the ratio was 3.49
to 1.00.
The Company must also comply with a minimum Consolidated Interest Expense Ratio of 3.00 to 1.00. At September 30, 2022, the Company was in compliance with such covenant and the ratio was 8.79 to 1.00.
As of September 30,
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’s capital investment in the first nine months of 2022 was $313 million ($445 million was paid) compared to $643 million ($588 million was paid) in the first nine months of 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, Michigan 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.
Interest 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 $10 million for the nine months ended September 30, 2022 and 2021, respectively.
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 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’s condensed 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 Company’s most critical accounting policies, which require significant judgment or involve complex estimations,
are described in the Company's 2021 Annual Report on Form 10-K for the year ended December 31, 2021.
The Company performed its annual goodwill impairment tests as of October 1, 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 25% and 21%, respectively, whereas all other reporting units exceeded by more than 30%. The Foodservice
and Australia reporting units had goodwill totaling $43 million and $13 million, respectively at September 30, 2022.
In the second quarter of 2022, the Company began the process of divesting its interests in its two folding carton plants in Russia. The Company reviewed the goodwill assigned to these facilities for impairment and recorded a $12 million non-cash impairment charge, thereby reducing the carrying value of goodwill for these facilities to zero. This charge was recorded within Business Combinations, Shutdown and Other Special Charges, and Exit Activities, Net in the Company's
Condensed Statements of Operations within its European Paperboard Packaging reporting unit. The carrying amount of the European Paperboard Packaging reporting unit goodwill was $442 million as of September 30, 2022. Refer to "Note 14 - Impairment and Divestiture of Russian Business" in the Notes to Condensed Consolidated Financial Statements for additional information.
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.
•Depreciation
and amortization expense of approximately $560 million, including pension amortization and excluding $7 million of accelerated depreciation related to exit activities.
•Pension plan contributions between $10 million and $20 million, excluding $6 million reflected as a contribution to the remaining U.S defined benefit plan that effectively utilized the excess balance related to the U.S. defined benefit 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 the Company's 2021 Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant developments with respect to derivatives or exposure to market risk during the first nine months of 2022. For a discussion of the Company’s Financial Instruments, Derivatives and Hedging Activities, see the
Company's 2021 Annual Report on Form 10-K for the year ended December 31, 2021 and “Management’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’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’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’s disclosure controls and procedures were effective as of September 30, 2022.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30,
2022 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The
Company is a party to a number of lawsuits arising in the ordinary conduct of its business. Although the timing and outcome of these lawsuits cannot be predicted with certainty, the Company does not believe that disposition of these lawsuits will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. For more information see "Note 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 the Company's 2021 Annual Report on Form 10-K for the year ended December 31, 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 third quarter of 2022, the Company purchased shares of its common stock under the 2019 program through a broker in the open market as follows:
Issuer
Purchases of Equity Securities
Period (2022)
Total Number of Shares Purchased
Average Price Paid for Shares
Total Number of Shares Purchased as Part of the Publicly Announced Plan or Program
Maximum Number of Shares That May Yet Be Purchased Under the Publicly Announced Program(a)
July
1, through July 31,
274,265
$
21.05
67,120,575
5,977,695
August 1, through August 31,
105,500
$
22.51
67,226,075
5,865,684
September
1, through September 30,
332,000
$
21.04
67,558,075
6,263,656
Total
711,765
$
21.26
(a)
Based on the closing price of GPHC's common stock as of the end of each period
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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.
