Company Quick10K Filing
Quick10K
Graphic Packaging International
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
8-K 2019-06-25 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-06-11 Other Events, Exhibits
8-K 2019-06-11 Other Events, Exhibits
8-K 2018-08-31 Other Events
8-K 2018-08-15 Officers
8-K 2018-01-01 Enter Agreement, M&A, Off-BS Arrangement, Sale of Shares, Regulation FD, Other Events, Exhibits
EGL Engility Holdings 1,170
UGHL Union Bridge Holdings 150
HOTH Hoth Therapeutics 53
CNAB United Cannabis 43
ZENO Zenosense 13
TOFB Tofutti Brands 12
ALN American Lorain 1
AGP Atlas Growth Partners 0
LAZEX Lazex 0
ALPHA Alpha Energy 0
GPIL 2019-06-30
Part I - Financial Information
Item 1. Financial Statements
Note 1 - General Information
Note 2 - Inventories, Net
Note 3 - Business Combinations
Note 4 - Debt
Note 5 - Leases
Note 6 - Equity Compensation
Note 7 - Pensions and Other Postretirement Benefits
Note 8 - Financial Instruments and Fair Value Measurement
Note 9 - Income Taxes
Note 10 - Environmental and Legal Matters
Note 11 - Related Party Transactions
Note 12 - Segment Information
Note 13 - Accumulated Other Comprehensive Loss
Note 14 - Guarantor Condensed Consolidating Financial Statements
Note 15 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 4. Mine Safety Disclosures
Item 6. Exhibits
EX-31.1 gpil06302019ex311.htm
EX-31.2 gpil06302019ex312.htm
EX-32.1 gpil06302019ex321.htm
EX-32.2 gpil06302019ex322.htm

Graphic Packaging International Earnings 2019-06-30

GPIL 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Document
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from to

COMMISSION FILE NUMBER: 033-80475

GRAPHIC PACKAGING INTERNATIONAL, LLC

(Exact name of registrant as specified in its charter)

Delaware
84-0772929
(State or other jurisdiction of
(I.R.S. employer
incorporation or organization)
identification no.)
 
 
 
 
1500 Riveredge Parkway, Suite 100
 
Atlanta
,
Georgia
30328
(Address of principal executive offices)
(Zip Code)

(770) 240-7200
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer
Accelerated filer
 
Smaller reporting company
 
 
 
 
 
 
 
Non-accelerated filer
(Do not check if a smaller reporting company)
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes   No



 



Table of Contents        


    

Information Concerning Forward-Looking Statements

Certain statements regarding the expectations of Graphic Packaging International, LLC (“GPIL” and, together with its subsidiaries, the “Company”), including, but not limited to, reclassification of loss on derivative instruments, the expected closing of the Artistic Carton Company acquisition, capital investment, depreciation and amortization, interest expense, pension amortization and pension plan contributions 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, 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 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 2018 Annual Report on Form 10-K, and in other filings with the Securities and Exchange Commission.


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TABLE OF CONTENTS

EX-31.1
 
EX-31.2
 
EX-32.1
 
EX-32.2
 
XBRL Content
 



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PART I FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS


GRAPHIC PACKAGING INTERNATIONAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended
Six Months Ended
 
June 30,
June 30,
In millions, except per share amounts
2019
 
2018
2019
 
2018
Net Sales
$
1,552.8

 
$
1,510.9

$
3,058.7

 
$
2,988.3

Cost of Sales
1,265.0

 
1,273.4

2,504.8

 
2,526.9

Selling, General and Administrative
131.8

 
116.3

256.3

 
238.8

Other Expense, Net
1.7

 
2.5

2.9

 
3.4

Business Combinations and Shutdown and Other Special Charges, Net
9.9

 
8.6

16.1

 
17.9

Income from Operations
144.4

 
110.1

278.6

 
201.3

Nonoperating Pension and Postretirement Benefit Income (Expense)

 
4.1

(0.1
)
 
8.3

Interest Expense, Net
(35.5
)
 
(30.3
)
(70.5
)
 
(59.1
)
Loss on Modification or Extinguishment of Debt

 


 
(1.9
)
Income before Income Taxes and Equity Income of Unconsolidated Entity
108.9

 
83.9

208.0

 
148.6

Income Tax Expense
(4.7
)
 
(3.1
)
(8.7
)
 
(5.8
)
Income before Equity Income of Unconsolidated Entity
104.2

 
80.8

199.3

 
142.8

Equity Income of Unconsolidated Entity
0.2

 
0.4

0.4

 
0.7

Net Income
104.4

 
81.2

199.7

 
143.5


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


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GRAPHIC PACKAGING INTERNATIONAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)


 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
In millions
2019
 
2018
 
2019
 
2018
Net Income
$
104.4

 
$
81.2

 
$
199.7

 
$
143.5

Other Comprehensive (Loss) Income, Net of Tax:
 
 
 
 
 
 
 
Derivative Instruments
(7.6
)
 
3.1

 
(8.2
)
 
2.0

Pension and Postretirement Benefit Plans
1.6

 
1.1

 
3.5

 
2.0

Currency Translation Adjustment
(3.2
)
 
(30.9
)
 
1.6

 
(10.8
)
Total Other Comprehensive Loss, Net of Tax
(9.2
)
 
(26.7
)
 
(3.1
)
 
(6.8
)
Total Comprehensive Income
$
95.2

 
$
54.5

 
$
196.6

 
$
136.7


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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GRAPHIC PACKAGING INTERNATIONAL, LLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
In millions, except share and per share amounts
June 30,
2019

December 31, 2018
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and Cash Equivalents
$
64.2

 
$
70.5

Receivables, Net
638.0

 
570.3

Inventories, Net
1,099.5

 
1,014.4

Other Current Assets
52.8

 
102.1

Total Current Assets
1,854.5

 
1,757.3

Property, Plant and Equipment, Net
3,199.4

 
3,239.7

Goodwill
1,466.1

 
1,459.7

Intangible Assets, Net
485.4

 
523.8

Other Assets
269.3

 
68.3

Total Assets
$
7,274.7

 
$
7,048.8

 
 
 
 
LIABILITIES
 
 
 
Current Liabilities:
 
 
 
Short-Term Debt and Current Portion of Long-Term Debt
$
58.9

 
$
52.0

Accounts Payable
644.7

 
711.6

Compensation and Employee Benefits
136.7

 
154.4

Other Accrued Liabilities
229.9

 
229.5

Total Current Liabilities
1,070.2

 
1,147.5

Long-Term Debt
2,997.5

 
2,905.1

Deferred Income Tax Liabilities
27.2

 
26.5

Accrued Pension and Postretirement Benefits
109.1

 
107.5

Other Noncurrent Liabilities
268.7

 
116.9

 


 
 
MEMBER'S INTEREST
 
 
 
Member's Interest
3,202.4

 
3,142.6

Accumulated Other Comprehensive Loss
(400.4
)
 
(397.3
)
Total Member's Interest
2,802.0

 
2,745.3

Total Liabilities and Member's Interest
$
7,274.7

 
$
7,048.8


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


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GRAPHIC PACKAGING INTERNATIONAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF MEMBER'S INTEREST
(Unaudited)
 
Member's Interest
Accumulated Other Comprehensive (Loss) Income
Total Member's Interest
In millions, except share amounts
Balances at December 31, 2018
$
3,142.6

$
(397.3
)
$
2,745.3

Net Income
95.3


95.3

Other Comprehensive (Loss) Income, Net of Tax:
 
 
 
Derivative Instruments

(0.6
)
(0.6
)
Pension and Postretirement Benefit Plans

1.9

1.9

Currency Translation Adjustment

4.8

4.8

Distribution of Membership Interest, Net
(88.7
)

(88.7
)
Balances at March 31, 2019
$
3,149.2

$
(391.2
)
$
2,758.0

Net Income
104.4


104.4

Other Comprehensive (Loss) Income, Net of Tax:


 


Derivative Instruments

(7.6
)
(7.6
)
Pension and Postretirement Benefit Plans

1.6

1.6

Currency Translation Adjustment

(3.2
)
(3.2
)
Distribution of Membership Interest, Net
(51.2
)

(51.2
)
Balances at June 30, 2019
$
3,202.4

$
(400.4
)
$
2,802.0


 
Member's Interest
Accumulated Other Comprehensive (Loss) Income
Total Member's Interest
In millions, except share amounts
Balances at December 31, 2017
$
1,917.9

$
(347.8
)
$
1,570.1

NACP Combination
1,234.6


1,234.6

Net Income
62.3


62.3

Other Comprehensive (Loss) Income, Net of Tax:
 
 
 
Derivative Instruments

(1.1
)
(1.1
)
Pension and Postretirement Benefit Plans

0.9

0.9

Currency Translation Adjustment

20.1

20.1

Distribution of Membership Interest, Net
(23.6
)

(23.6
)
Balances at March 31, 2018
$
3,191.2

$
(327.9
)
$
2,863.3

Net Income
81.2


81.2

Other Comprehensive Income (Loss), Net of Tax:
 
 
 
Derivative Instruments

3.1

3.1

Pension and Postretirement Benefit Plans

1.1

1.1

Currency Translation Adjustment

(30.9
)
(30.9
)
Distribution of Membership Interest, Net
(31.9
)

(31.9
)
Balances at June 30, 2018
$
3,240.5

$
(354.6
)
$
2,885.9


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.


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GRAPHIC PACKAGING INTERNATIONAL, LLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Six Months Ended
 
June 30,
In millions
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net Income
$
199.7

 
$
143.5

Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities:
 
 
 
Depreciation and Amortization
227.3

 
221.1

Deferred Income Taxes
0.6

 
(4.0
)
Amount of Postretirement Expense Greater (Less) Than Funding
5.1

 
(1.9
)
Gain on the Sale of Assets

 
(1.5
)
Other, Net
5.9

 
24.5

Changes in Operating Assets and Liabilities
(379.3
)
 
(659.5
)
Net Cash Provided by (Used in) Operating Activities
59.3

 
(277.8
)
 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Capital Spending
(146.2
)
 
(167.3
)
Packaging Machinery Spending
(12.1
)
 
(6.1
)
Acquisition of Businesses, Net of Cash Acquired
(2.0
)
 
3.4

Beneficial Interest on Sold Receivables
309.6

 
624.0

Beneficial Interest Obtained in Exchange for Proceeds
(156.9
)
 
(150.9
)
Other, Net
(2.4
)
 
(3.4
)
Net Cash (Used in) Provided by Investing Activities
(10.0
)
 
299.7

 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Payments on Debt
(18.3
)
 
(134.1
)
Proceeds from Issuance of Debt
300.0

 

Borrowings under Revolving Credit Facilities
1,303.4

 
961.1

Payments on Revolving Credit Facilities
(1,495.3
)
 
(779.4
)
Debt Issuance Costs
(4.2
)
 
(7.9
)
Membership Distribution
(141.0
)
 
(57.4
)
Other, Net
(1.0
)
 
1.7

Net Cash Used in Financing Activities
(56.4
)
 
(16.0
)
Effect of Exchange Rate Changes on Cash
0.8

 
(0.8
)
Net (Decrease) Increase in Cash and Cash Equivalents
(6.3
)
 
5.1

Cash and Cash Equivalents at Beginning of Period
70.5

 
44.1

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
64.2

 
$
49.2

 
 
 
 
Non-cash Investing Activities:
 
 
 
Beneficial Interest (Sold) Obtained in Exchange for Trade Receivables
$
(102.2
)
 
$
583.9

Non-cash Investment in NACP Combination

 
1,235.7

Non-cash Investing Activities
$
(102.2
)
 
$
1,819.6

Non-cash Financing Activities:
 
 
 
Non-cash Financing of NACP Combination
$

 
$
660.0

Non-Cash Financing Activities
$

 
$
660.0


The accompanying notes are an integral part of the Condensed Consolidated Financial Statements.

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




NOTE 1 — GENERAL INFORMATION

Nature of Business and Basis of Presentation

On December 29, 2017, Graphic Packaging International, Inc. ("GPII"), the primary operating subsidiary of Graphic Packaging Holding Company, a Delaware corporation (“GPHC”), underwent a statutory conversion and became a Delaware limited liability company. As a result, GPII’s name changed to Graphic Packaging International, LLC.

Graphic Packaging International, LLC ("GPIL" 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 paper-based packaging solutions for a wide variety of products to food, beverage, foodservice and other consumer products companies. The Company operates on a global basis, is one of the largest producers of folding cartons in the United States (“U.S.”) and 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 packaging solutions designed to deliver marketing and performance benefits at a competitive cost by capitalizing on its low-cost paperboard mills and converting facilities, its proprietary carton and packaging designs, and its commitment to quality and service.

On January 1, 2018, GPHC, 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 GPHC (“GPIP”), and 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 GPHC 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"). GPIL is currently wholly-owned by GPIP, which is owned by GPI Holding III, LLC, a limited liability company that is classified as a partnership for U.S. Federal income tax purposes ("GPI Holding”) and IP. GPI Holding is a wholly-owned indirect subsidiary of GPHC and is the managing member of GPIP. For more information regarding the NACP Combination, see "Note 1 — Nature of Business and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements of the Company's 2018 Form 10-K.

The 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 present 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. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with instructions to Form 10-Q and Rule 10-01 of Regulation S-X and do not include all the information required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. Therefore, these Condensed Consolidated Financial Statements should be read in conjunction with GPIL’s Form 10-K for the year ended December 31, 2018. In addition, the preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from those estimates and changes in these estimates are recorded when known.

The Company has reclassified the presentation of certain prior period information to conform to the current presentation. This reclassification had no impact on operating income.

For a summary of the Company’s significant accounting policies, please refer to GPIL’s Annual Report on Form 10-K for the year ended December 31, 2018.

Revenue Recognition

The Company has two primary activities, the manufacturing and converting of 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 12-Segments." All reportable segments and the Australia and Pacific Rim operating segments recognize revenue under the same method, allocate transaction price using similar methods, and have similar economic factors impacting the uncertainty of revenue and related cash flows.

Revenue is recognized on the Company's annual and multi-year supply contracts when the Company satisfies the performance obligation by transferring control over the product or service to a customer, which is generally based on shipping terms and passage of title under the point-in-time method of recognition. For the three months ended June 30, 2019 and 2018, the Company recognized $1,548.1 million and $1,507.8 million, respectively, of revenue from contracts with customers. For the six months ended June 30, 2019 and 2018, the Company recognized $3,049.7 million and $2,976.0 million, respectively, of revenue from contracts with customers.


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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



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.

The Company's contract assets consist primarily of contract renewal incentive payments to customers which are amortized over the period in which performance obligations related to the contract renewal are satisfied. As of June 30, 2019 and December 31, 2018 contract assets were $21.2 million and $19.6 million, respectively. The Company's contract liabilities consist principally of rebates, and as of June 30, 2019 and December 31, 2018 were $40.6 million and $42.5 million, respectively.

The Company did not have a material amount relating to backlog orders at June 30, 2019 or December 31, 2018.

Accounts Receivable and Allowances

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, Net on the Condensed Consolidated Statement of Operations. The following table summarizes the activity under these programs as of June 30, 2019 and 2018, respectively:
 
Six Months Ended
 
June 30,
In millions
2019
 
2018
Receivables Sold and Derecognized
$
1,410.2

 
$
1,669.6

Proceeds Collected on Behalf of Financial Institutions
1,077.2

 
1,632.0

Net Proceeds Paid to Financial Institutions
(3.6
)
 
(51.5
)
Deferred Purchase Price(a)
5.2

 
202.4

Pledged Receivables
124.0

 

(a) Included in Other Current Assets and represents a beneficial interest in the receivables sold to the financial institutions, which is a Level 3 fair value measure.

The Company has also entered into various factoring and supply chain financing arrangements, which also qualify for sale accounting in accordance with the Transfers and Servicing topic of the FASB Codification. For the six months ended June 30, 2019 and 2018, the Company sold receivables of approximately $73 million and $57 million, respectively, related to these factoring arrangements.

Receivables sold under all programs subject to continuing involvement, which consist principally of collection services, at June 30, 2019 and December 31, 2018, were approximately $497 million and $602 million, respectively.

Business Combinations and Shutdown and Other Special Charges, Net

The following table summarizes the transactions recorded in Business Combinations and Shutdown and Other Special Charges, Net in the Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
In millions
2019
 
2018
 
2019
 
2018
Charges Associated with Business Combinations
$
0.5

 
$
6.6

 
$
2.6

 
$
16.6

Shutdown and Other Special Charges
9.4

 
2.0

 
13.5

 
2.8

Gain on Sale of Assets

 

 

 
(1.5
)
Total
$
9.9

 
$
8.6

 
$
16.1

 
$
17.9




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Table of Contents
GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



On September 30, 2018, the Company acquired substantially all the assets of the foodservice business of Letica Corporation, a subsidiary of RPC Group PLC ("Letica Foodservice"), a producer of paperboard-based cold and hot cups and cartons. The acquisition included two facilities located in Clarksville, Tennessee and Pittston, Pennsylvania. Letica Foodservice is included in the Americas Paperboard Packaging reportable segment.

On June 12, 2018, the Company acquired substantially all the assets of PFP, LLC and its related entity, PFP Dallas Converting, LLC (collectively, "PFP"), a converter focused on the production of paperboard based air filter frames. The acquisition included two facilities located in Lebanon, Tennessee and Lancaster, Texas. PFP is included in the Americas Paperboard Packaging reportable segment.

On January 1, 2018, the Company completed the NACP Combination. The NACP business produces SBS paperboard and paper-based foodservice products. The NACP business included two SBS mills located in Augusta, Georgia and Texarkana, Texas (included in Paperboard Mills reportable segment), three converting facilities in the U.S. (included in Americas Paperboard Packaging reportable segment) and one in the United Kingdom ("U.K.") (included in the Europe Paperboard Packaging reportable segment).

PFP and Letica Foodservice are referred to collectively as the "2018 Acquisitions."

Charges associated with all acquisitions are included in Charges Associated with Business Combinations in the table above.

During 2019, the Company began a three-year program to dismantle and dispose of idle and abandoned assets primarily at the paperboard mills. Expected charges for this program are approximately $40 million. Charges associated with this program are included in Shutdown and Other Special Charges in the table above.

Adoption of New Accounting Standards

Effective January 1, 2019, the Company adopted Accounting Standards Update ("ASU") No. 2017-12, Derivatives and Hedging (Topic 815); Targeted Improvements to Accounting for Hedging Activities. The amendments in this ASU better align the risk management activities and financial reporting for these hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and presentation of hedge results. The adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.

Effective January 1, 2019, the Company adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendment allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Job Act (“The Act”). The Company adopted the amendment effective January 1, 2019 and elected not to reclassify the income tax effects of The Act from other comprehensive income to retained earnings. The Company’s policy with respect to stranded income tax effects in accumulated other comprehensive loss is to release these effects using the aggregate portfolio approach. 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) ("ASC 842"). The amendments in this ASU require an entity to recognize a right-of-use asset and lease liability for all leases with terms of more than 12 months. Recognition, measurement and presentation of expenses will depend on classification as a finance or operating lease. The amendments also require certain quantitative and qualitative disclosures about leasing arrangements. The Company adopted ASC 842 effective January 1, 2019, prospectively. The adoption of this standard had a material impact on the Company’s financial position, with no material impact on the results of operations and cash flows (see "Note 5 - Leases").
 
Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends the FASB's guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model (known as the "current expected credit loss model") that is based on expected losses rather than incurred losses. ASU 2016-13 is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of adoption on its financial statements.

In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other (Topic 350); Simplifying the Test for Goodwill Impairment which simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 of the goodwill impairment model. Step 2 measures a goodwill impairment loss by comparing the implied value of a reporting unit’s goodwill with the carrying amount of that goodwill. An entity would recognize an impairment charge for the amount by which the carrying amount of a reporting unit exceeds its fair value; however, the loss recognized is limited to the amount of goodwill allocated to that reporting unit. The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment tests performed after January 1, 2017.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This amendment modifies the disclosure requirements on fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of this new guidance.
 

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20); Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. This amendment removes certain disclosures that are not considered cost beneficial, clarifies certain required disclosures and adds additional disclosures. The guidance is effective for fiscal years ending after December 15, 2020 and would be applied on a retrospective basis. The Company is currently evaluating the impact this guidance will have on its related disclosures.

NOTE 2 — INVENTORIES, NET

Inventories, Net by major class:
In millions
June 30, 2019
 
December 31, 2018
Finished Goods
$
440.3

 
$
426.9

Work in Progress
121.4

 
102.2

Raw Materials
369.0

 
319.9

Supplies
168.8

 
165.4

Total
$
1,099.5

 
$
1,014.4




NOTE 3 — BUSINESS COMBINATIONS

As disclosed in "Note 1 - General Information," the Company completed the NACP Combination, and the PFP and Letica Foodservice acquisitions in 2018.

The Company paid approximately $129 million for the PFP and Letica Foodservice acquisitions using existing cash and borrowings under its revolving line of credit.

Total consideration for the NACP Combination, including debt assumed of $660 million, was $1.8 billion.

The acquisition accounting for the NACP Combination and PFP acquisition was completed on December 31, 2018.

During the quarter ended March 31, 2019, the acquisition accounting for Letica Foodservice was finalized, resulting in an approximately $5 million reduction in the value of property, plant and equipment.

During 2019, Net Sales and Loss from Operations for the Letica Foodservice and PFP acquisitions were $61.3 million and $4.2 million, respectively.



12

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 4 — DEBT

For more information regarding the Company’s debt, see “Note 5 Debt of the Notes to Consolidated Financial Statements of the Company's 2018 Form 10-K.

On June 25, 2019, the Company completed a private offering of $300.0 million aggregate principal amount of its senior unsecured notes due 2027. The Senior Notes will bear interest at an annual rate of 4.75%. The net proceeds were used by the Company to repay a portion of the outstanding borrowings under its revolving credit facility under its senior secured credit facility.

Long-Term Debt is comprised of the following:
In millions
June 30, 2019
 
December 31, 2018
Senior Notes with interest payable semi-annually at 4.75%, effective rate of 4.83%, payable in 2027
$
300.0

 
$

Senior Notes with interest payable semi-annually at 4.125%, effective rate of 4.17%, payable in 2024
300.0

 
300.0

Senior Notes with interest payable semi-annually at 4.875%, effective rate of 4.92%, payable in 2022
250.0

 
250.0

Senior Notes with interest payable semi-annually at 4.75%, effective rate of 4.77%, payable in 2021
425.0

 
425.0

Senior Secured Term Loan Facilities with interest payable at various dates at floating rates (3.89% at June 30, 2019) payable through 2023
1,414.4

 
1,432.6

Senior Secured Revolving Facilities with interest payable at floating rates (3.05% at June 30, 2019) payable in 2023
220.4

 
399.0

Finance Leases
136.4

 
122.9

Other
6.3

 
26.5

Total Long-Term Debt
3,052.5

 
2,956.0

Less: Current Portion
40.8

 
40.3

 
3,011.7

 
2,915.7

Less: Unamortized Deferred Debt Issuance Costs
14.2

 
10.6

Total
$
2,997.5

 
$
2,905.1



At June 30, 2019, the Company and its U.S. and international subsidiaries had the following commitments, amounts outstanding and amounts available under revolving credit facilities:
In millions
Total
Commitments
 
Total
Outstanding
 
Total Available
Senior Secured Domestic Revolving Credit Facility(a)
$
1,450.0

 
$
138.8

 
$
1,292.8

Senior Secured International Revolving Credit Facility
179.9

 
81.6


98.3

Other International Facilities
63.5

 
24.4

 
39.1

Total
$
1,693.4

 
$
244.8

 
$
1,430.2

(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 $18.4 million as of June 30, 2019. 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 2019 and 2020 unless extended.

The Credit Agreement and the 4.75% Senior Notes due 2027 are guaranteed by GPIP and certain domestic subsidiaries, and the 4.75% Senior Notes due 2021, 4.875% Senior Notes due 2022 and 4.125% Senior Notes due 2024 are guaranteed by GPHC. For additional information on the financial statements of GPIP, see "Note 14 - Guarantor Condensed Consolidating Financial Statements."

The Credit Agreement and the indentures governing the 4.75% Senior Notes due 2021, 4.875% Senior Notes due 2022, 4.125% Senior Notes due 2024 and 4.75% Senior Notes due 2027 (the "Indentures") limit the Company's ability to incur additional indebtedness. Additional covenants contained in the 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 Indenture, 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.

As of June 30, 2019, the Company was in compliance with the covenants in the Credit Agreement and the Indentures.



13

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 5 — LEASES

Effective January 1, 2019 the Company adopted ASC 842, which requires recognition of a right-of-use asset and lease liability for all leases at the commencement date based on the present value of lease payments over the lease term. Additional qualitative and quantitative disclosures regarding the Company's leasing arrangements are also required. The Company adopted ASC 842 prospectively and elected the package of transition practical expedients that does not require reassessment of: (1) whether any existing or expired contracts are or contain leases, (2) lease classification and (3) initial direct costs. In addition, the Company has elected other available practical expedients to not separate lease and nonlease components, which consist principally of common area maintenance charges, for all classes of underlying assets and to exclude leases with an initial term of 12 months or less.

The Company determines if a contract is or contains a lease at inception. The Company has operating and finance leases for warehouses, corporate and regional offices, and machinery and equipment. The Company enters into lease contracts ranging from one to 25 years with the majority of leases having terms of three to seven years, many of which include options to extend in various increments. Variable lease costs consist primarily of variable warehousing costs, common area maintenance, taxes, and insurance. The Company’s leases do not have any significant residual value guarantees or restrictive covenants.

As the implicit rate is not readily determinable for most of the Company’s leases agreements, the Company uses an estimated incremental borrowing rate to determine the initial present value of lease payments. These discount rates for leases are calculated using the Company's credit spread adjusted for current market factors, including fixed rate swaps, LIBOR, and foreign currency rates.

The components of lease costs are as follows:

 
Three Months Ended
 
Six Months Ended
In millions
June 30, 2019
 
June 30, 2019
Finance lease costs:
 
 
 
Amortization of right-of-use asset
$
1.8

 
$
3.6

Interest on lease liabilities
1.9

 
3.8

Operating lease costs
16.0

 
32.0

Short-term lease costs
2.9

 
6.5

Variable lease costs
1.1

 
2.1

Total lease costs, net
$
23.7

 
$
48.0



Supplemental cash flow information related to leases was as follows:

 
Six Months Ended
In millions
June 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
31.3

Operating cash flows from finance leases
3.8

Financing cash flows from finance leases
1.9

Right-of-use assets obtained in exchange for lease obligations:
 
Operating leases
41.6

Finance leases
15.5



14

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)




Supplemental balance sheet information related to leases was as follows:

In millions, except lease term and discount rate
Balance Sheet Classification
June 30, 2019
Operating Leases:
 
 
     Operating lease right-of-use asset
Other Assets
$
200.7

Current operating lease liabilities
Other Current Liabilities
$
53.7

Noncurrent operating lease liabilities
Other Noncurrent Liabilities
150.6

     Total operating lease liabilities
 
$
204.3

 
 
 
Finance Leases:
 
 
Property, Plant and Equipment
 
$
142.1

Accumulated depreciation
 
(8.3
)
    Property, Plant and Equipment, net
 
$
133.8

Current finance lease liabilities
Short-Term Debt and Current Portion of Long-Term Debt
$
4.3

Noncurrent finance lease liabilities
Long-Term Debt
132.1

     Total finance lease liabilities
 
$
136.4

 
 
 
Weighted Average Remaining Lease Term (Years)
 
 
     Operating leases
 
5

     Finance leases
 
18

 
 
 
Weighted Average Discount Rate
 
 
     Operating leases
 
3.68
%
     Finance leases
 
5.62
%


Maturities of lease liabilities are as follows:

In millions
 
 
Year ending December 31,
Operating Leases
Finance Leases
2019 (excluding the six months ended June 30, 2019)
$
31.9

$
6.2

2020
54.1

12.5

2021
41.8

12.6

2022
32.6

12.2

2023
24.4

12.4

Thereafter
39.5

170.6

Total lease payments
224.3

226.5

    Less imputed interest
(20.0
)
(90.1
)
Total
$
204.3

$
136.4





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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 6 — EQUITY COMPENSATION

The Company compensates its employees with grants of restricted stock units (“RSUs”) under the Graphic Packaging Holding Company 2014 Omnibus Stock and Incentive Compensation Plan (the “2014 Plan”). Compensation costs related to the grants are recognized in the Consolidated Statements of Operations with a corresponding adjustment to Member's Interest. Under the 2014 Plan, GPHC may also grant to the Company's employees stock options, stock appreciation rights, restricted stock, and other types of stock-based and cash awards. Awards under the 2014 Plan generally vest and expire in accordance with terms established at the time of grant. Shares issued pursuant to awards under the 2014 Plan are from GPHC's authorized but unissued shares. Compensation costs are recognized on a straight-line basis over the requisite service period of the award.

Stock Awards, Restricted Stock and Restricted Stock Units

Under the 2014 Plan, all RSUs generally vest and become payable in three years from date of grant. RSUs granted to employees generally contain some combination of service and performance objectives based on various financial targets and relative total shareholder return that must be met for the RSUs to vest. Stock awards granted to non-employee directors as part of their compensation for service on the Board are unrestricted on the grant date.

Data concerning RSUs granted in the first six months of 2019 is as follows:
 
RSUs
 
Weighted Average
Grant Date Fair
Value Per Share
RSUs — Employees
2,108,045

 
$
12.29

Stock Awards - Board of Directors
74,760

 
$
12.84



During the six months ended June 30, 2019 and 2018, $10.8 million and $8.0 million, respectively, were charged to compensation expense for stock incentive plans.

During the six months ended June 30, 2019 and 2018, 0.5 million and 0.6 million GPHC shares were issued, respectively. The shares issued were primarily related to RSUs granted during 2016 and 2015, respectively.


NOTE 7 — PENSIONS AND OTHER POSTRETIREMENT BENEFITS

The Company maintains both defined benefit pension plans and postretirement health care plans that provide medical and life insurance coverage to eligible salaried and hourly retired employees in North America and their dependents. The Company maintains international defined benefit pension plans which are either noncontributory or contributory and are funded in accordance with applicable local laws. Pension or termination benefits are based primarily on years of service and the employee's compensation.

Pension and Postretirement Expense

The pension and postretirement expenses related to the Company’s plans consisted of the following:

 
Pension Benefits
 
Postretirement Health Care Benefits
 
Three Months Ended
 
Six Months Ended
 
Three Months Ended
Six Months Ended
 
June 30,
 
June 30,
 
June 30,
June 30,
In millions
2019
 
2018
 
2019
 
2018
 
2019
 
2018
 
2019
 
2018
Components of Net Periodic Cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service Cost
$
3.7

 
$
4.6

 
$
7.0

 
$
9.2

 
$
0.2

 
$
0.1

 
$
0.3

 
$
0.3

Interest Cost
11.5

 
10.5

 
23.0

 
21.0

 
0.3

 
0.3

 
0.6

 
0.6

Administrative Expenses
0.1

 
0.1

 
0.2

 
0.2

 

 

 

 

Expected Return on Plan Assets
(13.7
)
 
(15.9
)
 
(27.5
)
 
(31.9
)
 

 

 

 

Amortization:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Prior Service Cost (Credit)

 
0.1

 

 
0.2

 
(0.1
)
 

 
(0.1
)
 
(0.1
)
Actuarial Loss (Gain)
2.6

 
1.4

 
5.1

 
2.8

 
(0.7
)
 
(0.4
)
 
(1.2
)
 
(0.9
)
Net Periodic Cost (Benefit)
$
4.2

 
$
0.8

 
$
7.8

 
$
1.5

 
$
(0.3
)
 
$

 
$
(0.4
)
 
$
(0.1
)



16

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Employer Contributions

The Company made contributions of $1.1 million and $2.0 million to its pension plans during the first six months of 2019 and 2018, respectively. The Company expects to make contributions of approximately $10 million for the full year 2019. During 2018, the Company made $5.8 million of contributions to its pension plans.

The Company made postretirement health care benefit payments of $1.2 million and $1.3 million during the first six months of 2019 and 2018, respectively. The Company estimates its postretirement health care benefit payments for the full year 2019 to be approximately $2 million. During 2018, the Company made postretirement health care benefit payments of $1.9 million.


NOTE 8 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENT

The Company enters into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments under the Derivatives and Hedging topic of the FASB Codification and those not designated as hedging instruments under this guidance. The Company uses interest rate swaps, natural gas swap contracts, and 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 9 — Financial Instruments, Derivatives and Hedging Activities and Note 10 — Fair Value Measurement” of the Notes to Consolidated Financial Statements of the Company's 2018 Form 10-K.

Interest Rate Risk

The Company uses interest rate swaps to manage interest rate risks on future interest payments caused by interest rate changes on its variable rate term loan facility. Changes in fair value will subsequently be reclassified into earnings as a component of Interest Expense, Net as interest is incurred on amounts outstanding under the term loan facility. The following table summarizes the Company's current interest rate swap positions for each period presented as of June 30, 2019:

Start
End
(In Millions)
Notional Amount
Weighted Average Interest Rate
04/03/2018
01/01/2020
$150.0
 
2.25%
04/03/2018
10/01/2020
$150.0
 
2.36%
12/03/2018
01/01/2022
$120.0
 
2.92%
12/03/2018
01/04/2022
$80.0
 
2.79%



During the first six months of 2019 and 2018, there were no amounts of ineffectiveness related to changes in the fair value of interest rate swap agreements. Additionally, there were no 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 48% and 47% of its expected natural gas usage for the remainder of 2019 and all of 2020, respectively.

During the first six months of 2019 and 2018, there were no and minimal amounts of ineffectiveness related to changes in the fair value of natural gas swap contracts, respectively. Additionally, there were no amounts excluded from the measure of effectiveness.

Foreign Currency Risk

The Company enters 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, Net or Net Sales, when appropriate.


17

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



At June 30, 2019, multiple forward exchange contracts existed that expire on various dates through the remainder of 2019. Those purchased forward exchange contracts outstanding at June 30, 2019 and December 31, 2018, when aggregated and measured in U.S. dollars at contractual rates at June 30, 2019 and December 31, 2018, had notional amounts totaling $23.4 million and $51.6 million, respectively.

No amounts were reclassified to earnings during the first six months of 2019 or during 2018 in connection with forecasted transactions that were considered probable of not occurring and there was no amount of ineffectiveness related to changes in the fair value of foreign currency forward contracts. Additionally, there were no amounts excluded from the measure of effectiveness.

Derivatives not Designated as Hedges

The Company enters into forward exchange contracts to effectively hedge substantially all of its accounts receivables resulting from sales transactions and intercompany loans denominated in foreign currencies in order to manage risks associated with variability in cash flows that may be adversely affected by changes in exchange rates. At June 30, 2019 and December 31, 2018, multiple foreign currency forward exchange contracts existed, with maturities ranging up to three months . Those foreign currency exchange contracts outstanding at June 30, 2019 and December 31, 2018, when aggregated and measured in U.S. dollars at exchange rates at June 30, 2019 and December 31, 2018, had net notional amounts totaling $90.8 million and $62.2 million, respectively. Unrealized gains and losses resulting from these contracts are recognized in Other Expense, Net and approximately offset corresponding recognized but unrealized gains and losses on the remeasurement of these accounts receivable.

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 June 30, 2019, 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. The following table summarizes the fair value of the Company’s derivative instruments:

 
Derivative Assets(a)
Derivative Liabilities(b)
 
June 30,
December 31,
June 30,
December 31,
In millions
2019
2018
2019
2018
Derivatives designated as hedging instruments:
 
 
 
 
Interest rate contracts
$
0.2

$
0.8

$
7.8

$
2.7

Foreign currency contracts
0.3


0.2

0.5

Commodity contracts


2.8

0.2

Total Derivatives
$
0.5

$
0.8

$
10.8

$
3.4


(a) 
Derivative assets of $0.5 million and $0.7 million are included in Other Current Assets as of June 30, 2019 and December 31, 2018, respectively. Derivative assets of $0.1 million are included in Other Assets as of December 31, 2018.

(b) 
Derivative liabilities of $6.0 million and $1.3 million are included in Other Accrued Liabilities as of June 30, 2019 and December 31, 2018, respectively. Derivative liabilities of $4.8 million and $2.1 million are included in Other Noncurrent Liabilities as of June 30, 2019 and December 31, 2018, respectively.

The fair values of the Company’s other financial assets and liabilities at June 30, 2019 and December 31, 2018 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 $2,951.8 million and $2,762.5 million as compared to the carrying amounts of $2,916.1 million and $2,833.1 million as of June 30, 2019 and December 31, 2018, respectively. The fair value of the Company’s Total Debt, including the Senior Notes, are 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.
  

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



Effect of Derivative Instruments

The pre-tax effect of derivative instruments in cash flow hedging relationships in the Company’s Condensed Consolidated Statements of Operations is as follows:

 
Amount of Loss (Gain) Recognized in Accumulated Other Comprehensive Loss
Location in Statement of Operations
Amount of Loss (Gain) Recognized in Statement of Operations
 
 Three Months Ended June 30,
Six Months Ended June 30,
 Three Months Ended June 30,
Six Months Ended June 30,
In millions
2019
2018
2019
2018
2019
2018
2019
2018
Commodity Contracts
$
3.6

$
(0.3
)
$
2.7

$
(0.9
)
Cost of Sales
$
(0.1
)
$
(0.2
)
$
0.1

$
(0.4
)
Foreign Currency Contracts
0.2

(2.4
)
(0.9
)
(0.3
)
Other Expense, Net

0.6

(0.7
)
1.0

Interest Rate Swap Agreements
3.8


5.8

(0.7
)
Interest Expense, Net
0.1

(0.1
)
0.1

(0.4
)
Total
$
7.6

$
(2.7
)
$
7.6

$
(1.9
)
 
$

$
0.3

$
(0.5
)
$
0.2



The effect of derivative instruments not designated as hedging instruments on the Company’s Condensed Consolidated Statements of Operations is as follows:

 
 
 Three Months Ended June 30,
Six Months Ended June 30,
In millions
 
2019
2018
2019
2018
Foreign Currency Contracts
Other Expense, Net
$
1.5

$
4.9

$
1.4

$
3.9



Accumulated Derivative Instruments Income (Loss)

The following is a rollforward of pre-tax Accumulated Derivative Instruments Income (Loss) which is included in the Company’s Condensed Consolidated Balance Sheet as of June 30, 2019:

In millions
 
Balance at December 31, 2018
$
(1.9
)
Reclassification to Earnings
(0.5
)
Current Period Change in Fair Value
(7.6
)
Balance at June 30, 2019
$
(10.0
)


At June 30, 2019, the Company expects to reclassify $5.2 million of loss 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.


NOTE 9 — INCOME TAXES

The Company is classified as a disregarded entity for U.S. income tax purposes and is generally not subject to domestic income tax expense. As a result, the consolidated financial statements exclude the tax effect of domestic earnings with the exception of state income tax for certain states that directly tax the operations of disregarded entities. The consolidated financial statements include the local country tax effect of foreign earnings generated by the Company’s wholly-owned international subsidiaries. During the six months ended June 30, 2019, the Company recognized Income Tax Expense of $4.7 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of $108.9 million. During the six months ended June 30, 2018, the Company recognized Income Tax Expense of $5.8 million on Income before Income Taxes and Equity Income of Unconsolidated Entity of $148.6 million.



19

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GRAPHIC PACKAGING INTERNATIONAL, LLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)



NOTE 10 — ENVIRONMENTAL AND LEGAL MATTERS

Environmental Matters

The Company is subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those governing discharges to air, soil and water, the management, treatment and disposal of hazardous substances, solid waste and hazardous wastes, the investigation and remediation of contamination resulting from historical site operations and releases of hazardous substances, 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.