GREIF, INC. GENERAL
The terms "Greif," "our company," "we," "us" and "our" as used in this discussion refer toGreif, Inc. and its subsidiaries. Our fiscal year begins onNovember 1 and ends onOctober 31 of the following year. Any references in this Form 10-Q to the years, or to any quarter of those years, relates to the fiscal year or quarter, as the case may be, ended in that year, unless otherwise stated. The discussion and analysis presented below relates to the material changes in financial condition and results of operations for our interim condensed consolidated balance sheets as ofJuly 31, 2020 andOctober 31, 2019 , and for the interim condensed consolidated statements of income for the three and nine months endedJuly 31, 2020 and 2019. This discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements that appear elsewhere in this Form 10-Q and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 (the "2019 Form 10-K"). Readers are encouraged to review the entire 2019 Form 10-K, as it includes information regarding Greif not discussed in this Form 10-Q. This information will assist in your understanding of the discussion of our current period financial results. All statements, other than statements of historical facts, included in this Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected costs, goals, trends and plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "aspiration," "objective," "project," "believe," "continue," "on track" or "target" or the negative thereof or variations thereon or similar terminology. All forward-looking statements made in this Form 10-Q are based on assumptions, expectations and other information currently available to management. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those forecasted, projected or anticipated, whether expressed in or implied by the statements. Such risks and uncertainties that might cause a difference include, but are not limited to, the following: (i) historically, our business has been sensitive to changes in general economic or business conditions, (ii) we may not successfully implement our business strategies, including achieving our growth objectives, (iii) our level of indebtedness could adversely affect our liquidity, limit our flexibility in responding to business opportunities, and increase our vulnerability to adverse changes in economic and industry conditions, (iv) our operations subject us to currency exchange and political risks that could adversely affect our results of operations, (v) the current and future challenging global economy and disruption and volatility of the financial and credit markets may adversely affect our business, (vi) the continuing consolidation of our customer base and suppliers may intensify pricing pressure, (vii) we operate in highly competitive industries, (viii) our business is sensitive to changes in industry demands, (ix) raw material and energy price fluctuations and shortages may adversely impact our manufacturing operations and costs, (x) changes inU.S. trade policies could impact the cost of imported goods into theU.S. , which may materially impact our revenues or increase our operating costs, (xi) the results of theUnited Kingdom's referendum on withdrawal from theEuropean Union may have a negative effect on global economic conditions, financial markets and our business, (xii) geopolitical conditions, including direct or indirect acts of war or terrorism, could have a material adverse effect on our operations and financial results, (xiii) we may encounter difficulties arising from acquisitions, (xiv) in connection with acquisitions or divestitures, we may become subject to liabilities, (xv) the acquisition ofCaraustar Industries, Inc. and its subsidiaries ("Caraustar") subjects us to various risks and uncertainties, (xvi) we may incur additional restructuring costs and there is no guarantee that our efforts to reduce costs will be successful, (xvii) we could be subject to changes our tax rates, the adoption of newU.S. or foreign tax legislation or exposure to additional tax liabilities, (xviii) full realization of our deferred tax assets may be affected by a number of factors, (xix) several operations are conducted by joint ventures that we cannot operate solely for our benefit, (xx) certain of the agreements that govern our joint ventures provide our partners with put or call options, (xxi) our ability to attract, develop and retain talented and qualified employees, managers and executives is critical to our success, (xxii) our business may be adversely impacted by work stoppages and other labor relations matters, (xxiii) we may not successfully identify illegal immigrants in our workforce, (xxiv) our pension and postretirement plans are underfunded and will require future cash contributions and our required future cash contributions could be higher than we expect, each of which could have a material adverse effect on our financial condition and liquidity, (xxv) we may be subject to losses that might not be covered in whole or in part by existing insurance reserves or insurance coverage, (xxvi) our business depends on the uninterrupted operations of our facilities, systems and business functions, including our information technology and other business systems, (xxvii) a security breach of customer, employee, supplier or Company information may have a material adverse effect on our business, financial 34 -------------------------------------------------------------------------------- Table of Contents condition and results of operations, (xxviii) legislation/regulation related to environmental and health and safety matters and corporate social responsibility could negatively impact our operations and financial performance, (xxix) product liability claims and other legal proceedings could adversely affect our operations and financial performance, (xxx) we may incur fines or penalties, damage to our reputation or other adverse consequences if our employees, agents or business partners violate, or are alleged to have violated, anti-bribery, competition or other laws, (xxxi) the current COVID-19 pandemic could have a material adverse effect on our business, financial condition, results of operations and cash flow, (xxxii) changing climate, climate change regulations and greenhouse gas effects may adversely affect our operations and financial performance, (xxxiii) the frequency and volume of our timber and timberland sales will impact our financial performance, (xxxiv) changes inU.S. generally accepted accounting principles ("GAAP") andSecurities and Exchange Commission ("SEC") rules and regulations could materially impact our reported results, (xxxv) if we fail to maintain an effective system of internal control, we may not be able to accurately report financial results or prevent fraud, and (xxxvi) we have a significant amount of goodwill and long-lived assets which, if impaired in the future, would adversely impact our results of operations. The risks described above are not all-inclusive, and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. For a detailed discussion of the most significant risks and uncertainties that could cause our actual results to differ materially from those forecasted, projected or anticipated, see "Risk Factors" in Part I, Item 1A of our most recently filed Form 10-K, updated by Part II Item 1A of this Form 10-Q, and our other filings with theSEC . All forward-looking statements made in this Form 10-Q are expressly qualified in their entirety by reference to such risk factors. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. COVID-19 The impact of COVID-19 on our future results of operations and financial condition are highly uncertain at this time and outside of our control. The scope, duration and magnitude of the effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate. For a discussion of the most significant risks and uncertainties that could impact our results of operations, financial position, liquidity or cash flows as a result of the COVID-19 pandemic, see "Part II-Item 1A-Risk Factors" included in this Form 10-Q. OVERVIEW Business Segments We operate in four reportable business segments:Rigid Industrial Packaging & Services;Paper Packaging & Services ; Flexible Products & Services; and Land Management. In theRigid Industrial Packaging & Services segment, we are a leading global producer of rigid industrial packaging products, such as steel, fibre and plastic drums, rigid intermediate bulk containers, closure systems for industrial packaging products, transit protection products, water bottles and remanufactured and reconditioned industrial containers, and services, such as container life cycle management, filling, logistics, warehousing and other packaging services. We sell our industrial packaging products to customers in industries such as chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agricultural, pharmaceutical and minerals, among others. In thePaper Packaging & Services segment, we produce and sell containerboard, corrugated sheets, corrugated containers, and other corrugated products to customers inNorth America in industries such as packaging, automotive, food and building products. Our corrugated container products are used to ship such diverse products as home appliances, small machinery, grocery products, automotive components, books and furniture, as well as numerous other applications. We also produce and sell coated recycled paperboard and uncoated recycled paperboard, some of which we use to produce and sell industrial products (tubes and cores, construction products, protective packaging, and adhesives). In addition, we also purchase and sell recycled fiber. In the Flexible Products & Services segment, we are a leading global producer of flexible intermediate bulk containers and related services. Our flexible intermediate bulk containers consist of a polypropylene-based woven fabric that is produced at our production sites, as well as sourced from strategic regional suppliers. Our flexible products are sold globally and service customers and market segments similar to those of ourRigid Industrial Packaging & Services segment. Additionally, our flexible products significantly expand our presence in the agricultural and food industries, among others. In the Land Management segment, we are focused on the active harvesting and regeneration of ourUnited States timber properties to achieve sustainable long-term yields. While timber sales are subject to fluctuations, we seek to maintain a consistent cutting schedule, within the limits of market and weather conditions. We also sell, from time to time, timberland and 35 -------------------------------------------------------------------------------- Table of Contents special use land, which consists of surplus land, higher and better use ("HBU") land and development land. As ofJuly 31, 2020 , we owned approximately 245,000 acres of timber property in the southeasternUnited States . CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these interim condensed consolidated financial statements, in accordance with these principles, require us to make estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of our interim condensed consolidated financial statements. Our critical accounting policies are discussed in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of the 2019 Form 10-K. We believe that the consistent application of these policies enables us to provide readers of the interim condensed consolidated financial statements with useful and reliable information about our results of operations and financial condition. There have been no material changes to our critical accounting policies from the disclosures contained in the 2019 Form 10-K. Recently Issued and Newly Adopted Accounting Standards See Note 1 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for a detailed description of recently issued and newly adopted accounting standards. RESULTS OF OPERATIONS The following comparative information is presented for the three and nine months endedJuly 31, 2020 and 2019. Historical revenues and earnings may or may not be representative of future operating results as a result of various economic and other factors. Items that could have a significant impact on the financial statements include the risks and uncertainties listed in Part I, Item 1A - Risk Factors, of the 2019 Form 10-K, updated by Part II, Item 1A of this Form 10-Q. Actual results could differ materially using different estimates and assumptions, or if conditions are significantly different in the future. The non-GAAP financial measures of EBITDA and Adjusted EBITDA are used throughout the following discussion of our results of operations, both for our consolidated and segment results. For our consolidated results, EBITDA is defined as net income, plus interest expense, net, plus debt extinguishment charges, plus income tax expense, plus depreciation, depletion and amortization, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus acquisition and integration related costs, plus non-cash asset impairment charges, plus incremental COVID-19 costs, net, plus non-cash pension settlement (income) charges, less (gain) loss on disposal of properties, plants, equipment and businesses, net. Since we do not calculate net income by business segment, EBITDA and Adjusted EBITDA by business segment are reconciled to operating profit by business segment. In that case, EBITDA is defined as operating profit by business segment less other (income) expense, net, less equity earnings of unconsolidated affiliates, net of tax, plus depreciation, depletion and amortization expense for that business segment, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus acquisition and integration related costs, plus non-cash asset impairment charges, plus incremental COVID-19 costs, net, plus non-cash pension settlement (income) charges, less (gain) loss on disposal of properties, plants, equipment and businesses, net, for that business segment. We use EBITDA and Adjusted EBITDA as financial measures to evaluate our historical and ongoing operations and believe that these non-GAAP financial measures are useful to enable investors to perform meaningful comparisons of our historical and current performance. In addition, we present ourU.S. and non-U.S. income before income taxes after eliminating the impact of non-cash asset impairment charges, non-cash pension settlement (income) charges, restructuring charges, acquisition and integration related costs and (gains) losses on sales of businesses, net, which are non-GAAP financial measures. We believe that excluding the impact of these adjustments enable investors to perform a meaningful comparison of our current and historical performance that investors find valuable. The foregoing non-GAAP financial measures are intended to supplement and should be read together with our financial results. These non-GAAP financial measures should not be considered an alternative or substitute for, and should not be considered superior to, our reported financial results. Accordingly, users of this financial information should not place undue reliance on the non-GAAP financial measures. 36 -------------------------------------------------------------------------------- Table of Contents Third Quarter Results The following table sets forth the net sales, operating profit, EBITDA and Adjusted EBITDA for each of our business segments for the three months endedJuly 31, 2020 and 2019: Three Months Ended July 31, (in millions) 2020 2019 Net sales: Rigid Industrial Packaging & Services$ 548.5 $ 642.1 Paper Packaging & Services 459.3 530.0 Flexible Products & Services 69.3 74.5 Land Management 5.9 6.0 Total net sales$ 1,083.0 $ 1,252.6 Operating (loss) profit: Rigid Industrial Packaging & Services$ 42.5 $ 54.3 Paper Packaging & Services 13.3 63.1 Flexible Products & Services 4.1 5.0 Land Management 2.0 3.2 Total operating profit$ 61.9 $ 125.6 EBITDA: Rigid Industrial Packaging & Services$ 61.1 $ 74.3 Paper Packaging & Services 50.9 103.2 Flexible Products & Services 5.8 7.1 Land Management 3.2 4.3 Total EBITDA$ 121.0 $ 188.9 Adjusted EBITDA: Rigid Industrial Packaging & Services$ 77.5 $ 82.8 Paper Packaging & Services 72.0 111.0 Flexible Products & Services 7.0 7.2 Land Management 2.9 2.8 Total Adjusted EBITDA$ 159.4 $ 203.8 37
-------------------------------------------------------------------------------- Table of Contents The following table sets forth EBITDA and Adjusted EBITDA, reconciled to net income and operating profit, for our consolidated results for the three months endedJuly 31, 2020 and 2019: Three Months Ended July 31, (in millions) 2020 2019 Net income$ 24.4 $ 67.5 Plus: interest expense, net 29.8 34.5 Plus: debt extinguishment charges - 0.1 Plus: income tax expense 6.9 26.8 Plus: depreciation, depletion and amortization expense 59.9 60.0 EBITDA$ 121.0 $ 188.9 Net income$ 24.4 $ 67.5 Plus: interest expense, net 29.8 34.5 Plus: debt extinguishment charges - 0.1 Plus: income tax expense 6.9 26.8 Plus: other (income) expense, net 1.1 (1.1) Plus: equity earnings of unconsolidated affiliates, net of tax (0.3) (2.2) Operating profit 61.9 125.6 Less: other (income) expense, net 1.1 (1.1) Less: equity earnings of unconsolidated affiliates, net of tax (0.3) (2.2) Plus: depreciation, depletion and amortization expense 59.9 60.0 EBITDA 121.0 188.9 Plus: restructuring charges 19.1 9.1 Plus: acquisition and integration related costs 3.6 5.8 Plus: non-cash asset impairment charges 15.5 - Plus: incremental COVID-19 costs, net 1.0 - Less: gain on disposal of properties, plants, equipment, and businesses, net (0.8) - Adjusted EBITDA$ 159.4 $ 203.8 38
-------------------------------------------------------------------------------- Table of Contents The following table sets forth EBITDA and Adjusted EBITDA for our business segments, reconciled to the operating profit for each segment, for the three months endedJuly 31, 2020 and 2019: Three Months Ended July 31, (in millions) 2020 2019 Rigid Industrial Packaging & Services Operating profit$ 42.5 $ 54.3 Less: other expense, net 1.2 0.8 Less: equity earnings of unconsolidated affiliates, net of tax (0.3) (2.2) Plus: depreciation and amortization expense 19.5 18.6 EBITDA 61.1 74.3 Plus: restructuring charges 15.6 7.0 Plus: acquisition and integration related costs - 0.1 Plus: non-cash asset impairment charges 2.2 - Plus: incremental COVID-19 costs, net - - Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net (1.4) 1.4 Adjusted EBITDA$ 77.5 $ 82.8 Paper Packaging & Services Operating profit$ 13.3 $ 63.1 Less: other (income) expense, net 0.2 (1.2) Plus: depreciation and amortization expense 37.8 38.9 EBITDA 50.9 103.2 Plus: restructuring charges 3.4 2.1 Plus: acquisition and integration related costs 3.6 5.7 Plus: non-cash asset impairment charges 12.4 - Plus: incremental COVID-19 costs, net 0.8 - Less: loss on disposal of properties, plants, equipment, and businesses, net 0.9 - Adjusted EBITDA$ 72.0 $ 111.0 Flexible Products & Services Operating profit$ 4.1 $ 5.0 Less: other income, net (0.3) (0.7) Plus: depreciation and amortization expense 1.4 1.4 EBITDA 5.8 7.1 Plus: restructuring charges 0.1 - Plus: incremental COVID-19 costs, net 0.2 - Plus: non-cash asset impairment charges 0.9 - Less: loss on disposal of properties, plants, equipment, and businesses, net - 0.1 Adjusted EBITDA$ 7.0 $ 7.2 Land Management Operating profit$ 2.0 $ 3.2 Plus: depreciation, depletion and amortization expense 1.2 1.1 EBITDA 3.2 4.3 Plus: restructuring charges - - Less: gain on disposal of properties, plants, equipment, and businesses, net (0.3) (1.5) Adjusted EBITDA$ 2.9 $ 2.8 39
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Net Sales Net sales were$1,083.0 million for the third quarter of 2020 compared with$1,252.6 million for the third quarter of 2019. The$169.6 million decrease was primarily due to lower volumes and lower average sale prices across the segments, as well as the negative impacts of foreign currency translation and a$54.0 million decrease attributable to the divestedConsumer Packaging Group ("CPG") business. See the "Segment Review" below for additional information on net sales by segment for the third quarter of 2020. Gross Profit Gross profit was$219.7 million for the third quarter of 2020 compared with$279.4 million for the third quarter of 2019. The reasons for the decline in gross profit for each segment are described below in the "Segment Review." Gross profit margin was 20.3 percent for the third quarter of 2020 compared with 22.3 percent for the third quarter of 2019. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses were$120.4 million for the third quarter of 2020 and$138.9 million for the third quarter of 2019. This decrease was primarily due to due to a reduction in performance-based compensation and salaries and benefits costs. SG&A expenses were 11.1 percent of net sales for both the third quarter of 2020 and 2019. Restructuring Charges Restructuring charges were$19.1 million for the third quarter of 2020 compared with$9.1 million for the third quarter of 2019. See Note 4 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information. Acquisition and Integration related Costs Acquisition and integration related costs were$3.6 million for the third quarter of 2020 compared with$5.8 million for the third quarter of 2019. We completed our acquisition of Caraustar onFebruary 11, 2019 (the "Caraustar Acquisition") and our acquisition ofTholu B.V. and its wholly owned subsidiaryA. Thomassen Transport B.V. (collectively "Tholu") onJune 11, 2019 (the "Tholu Acquisition"). The decrease in acquisition and integration related costs was primarily due to less integration-related expenses in 2020 associated with the Caraustar Acquisition. See Note 2 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information. Impairment Charges Non-cash asset impairment charges were$15.5 million for the third quarter of 2020 compared with no such impairment charges for the third quarter of 2019. These impairment charges related to facility closures as part of restructuring activities. Gain on Disposal of Properties, Plants and Equipment, net The gain on disposal of properties, plants and equipment, net was$0.3 million and$1.3 million for the third quarter of 2020 and 2019, respectively. Loss on Disposal of Businesses, net The disposal of business, net was a gain of$0.5 million and a loss of$1.3 million for the third quarter of 2020 and 2019, respectively. Financial Measures Operating profit was$61.9 million for the third quarter of 2020 compared with$125.6 million for the third quarter of 2019. Net income was$24.4 million for the third quarter of 2020 compared with$67.5 million for the third quarter of 2019. Adjusted EBITDA was$159.4 million for the third quarter of 2020 compared with$203.8 million for the third quarter of 2019. The reasons for the decrease in Adjusted EBITDA for each segment are described below in the "Segment Review." Trends We anticipate global macroeconomic conditions to continue to remain volatile throughout the remainder of our fiscal year due to the ongoing direct and indirect economic impacts of COVID-19 on our customers and their customers. 40 -------------------------------------------------------------------------------- Table of Contents While demand for our rigid and flexible industrial products is moderately improving in the EMEA region and improving well in our much smaller APAC region, we believe the recovery will be slower in central and westernEurope . We also expect continued demand softness in our industrial manufacturing businesses inNorth and South America for the remainder of our fiscal year. Overall, volumes will be lower on a fourth quarter over fourth quarter basis compared to 2019. We expect raw material costs for steel and resin to remain relatively stable throughout the remainder of 2020, subject in theU.S. to potential disruption from hurricanes and other weather factors. Costs for old corrugated containers in theU.S. peaked during our third quarter and are decreasing. However, these costs will continue to be higher relative to last year and, together with lower year over year published containerboard and boxboard prices, will continue the price-cost squeeze in ourPaper Packaging & Services segment. Segment ReviewRigid Industrial Packaging & Services Our Rigid Industrial Packaging & Services segment offers a comprehensive line of rigid industrial packaging products, such as steel, fibre and plastic drums, rigid intermediate bulk containers, closure systems for industrial packaging products, transit protection products, water bottles and remanufactured and reconditioned industrial containers, and services, such as container life cycle management, filling, logistics, warehousing and other packaging services. Key factors influencing profitability in theRigid Industrial Packaging & Services segment are: •Selling prices, product mix, customer demand and sales volumes; •Raw material costs, primarily steel, resin, containerboard and used industrial packaging for reconditioning; •Energy and transportation costs; •Benefits from executing the Greif Business System; •Restructuring charges; •Acquisition of businesses and facilities; •Divestiture of businesses and facilities; and •Impact of foreign currency translation. Net sales were$548.5 million for the third quarter of 2020 compared with$642.1 million for the third quarter of 2019. The$93.6 million decrease in net sales was primarily due to lower volumes and lower average sale prices primarily due to contractual price adjustment mechanisms related to raw material price decreases, as well as negative impacts of foreign currency translation. Gross profit was$114.4 million for the third quarter of 2020 compared with$126.5 million for the third quarter of 2019. The$12.1 million decrease in gross profit was primarily due to the same factors as net sales, partially offset by favorably priced raw materials due to opportunistic sourcing and lower manufacturing costs. Gross profit margin was 20.9 percent and 19.7 percent for the three months endedJuly 31, 2020 and 2019, respectively. Operating profit was$42.5 million for the third quarter of 2020 compared with operating profit of$54.3 million for the third quarter of 2019. Adjusted EBITDA was$77.5 million for the third quarter of 2020 compared with$82.8 million for the third quarter of 2019. The$5.3 million decrease in Adjusted EBITDA was primarily due to the same factors that impacted gross profit, partially offset by a reduction in the segment's SG&A expense as well as the segment receiving a smaller portion of allocated corporate costs.Paper Packaging & Services Our Paper Packaging & Services segment produces and sells containerboard, corrugated sheets, corrugated containers, and other corrugated products to customers inNorth America in industries such as packaging, automotive, food and building products. Our corrugated container products are used to ship such diverse products as home appliances, small machinery, grocery products, automotive components, books and furniture, as well as numerous other applications. We also produce and sell coated recycled paperboard and uncoated recycled paperboard, some of which we use to produce and sell industrial products (tubes and cores, construction products, protective packaging, and adhesives). In addition, we also purchase and sell recycled fiber. Key factors influencing profitability in thePaper Packaging & Services segment are: •Selling prices, product mix, customer demand and sales volumes; 41 -------------------------------------------------------------------------------- Table of Contents •Raw material costs, primarily old corrugated containers; •Energy and transportation costs; •Benefits from executing the Greif Business System; •Acquisition of businesses and facilities; •Restructuring charges; and •Divestiture of businesses and facilities. Net sales were$459.3 million for the third quarter of 2020 compared with$530.0 million for the third quarter of 2019. The$70.7 million decrease was primarily due to approximately$54.0 million of prior year net sales attributable to the divested CPG business, lower published containerboard and boxboard prices, and lower volumes. During the quarter, we took approximately 10,000 tons of economic downtime across our containerboard operations, down 14,000 tons sequentially from the 24,000 tons taken in the second quarter 2020. Gross profit was$88.9 million for the third quarter of 2020 compared with$134.7 million for the third quarter of 2019. The decrease in gross profit was primarily due to the same factors that impacted net sales, higher old corrugated container input costs, and product mix, partially offset by lower manufacturing costs. Gross profit margin was 19.4 percent and 25.4 percent for the third quarter of 2020 and 2019, respectively. Operating profit was$13.3 million for the third quarter of 2020 compared with$63.1 million for the third quarter of 2019. Adjusted EBITDA was$72.0 million for the third quarter of 2020 compared with$111.0 million for the third quarter of 2019. The$39.0 million decrease in Adjusted EBITDA was primarily due to the same factors that impacted gross profit and the segment receiving a greater portion of allocated corporate costs, partially offset by a reduction in the segment's SG&A expense. Flexible Products & Services Our Flexible Products & Services segment offers a comprehensive line of flexible products, such as flexible intermediate bulk containers. Key factors influencing profitability in the Flexible Products & Services segment are: •Selling prices, product mix, customer demand and sales volumes; •Raw material costs, primarily resin; •Energy and transportation costs; •Benefits from executing the Greif Business System; •Restructuring charges; •Divestiture of businesses and facilities; and •Impact of foreign currency translation. Net sales were$69.3 million for the third quarter of 2020 compared with$74.5 million for the third quarter of 2019. The$5.2 million decrease was primarily due to continued lower volumes and lower average sale prices primarily due to contractual price adjustment mechanisms related to raw material price decreases. Gross profit was$14.3 million for the third quarter of 2020 compared with$16.0 million for the third quarter of 2019. The decrease was primarily due to the same factors that impacted net sales, partially offset by favorably priced raw materials due to opportunistic sourcing. Gross profit margin was 20.6 percent and 21.5 percent for the third quarter of 2020 and 2019, respectively. Operating profit was$4.1 million for the third quarter of 2020 compared with$5.0 million for the third quarter of 2019. Adjusted EBITDA was$7.0 million for the third quarter of 2020 compared with$7.2 million for the third quarter of 2019. The decrease in Adjusted EBITDA was primarily due to the same factors that impacted gross profit, partially offset by a reduction in the segment's SG&A expense. Land Management As ofJuly 31, 2020 , our Land Management segment consisted of approximately 245,000 acres of timber properties in the southeasternUnited States . Key factors influencing profitability in the Land Management segment are: •Planned level of timber sales; 42 -------------------------------------------------------------------------------- Table of Contents •Selling prices and customer demand; •Gains on timberland sales; and •Gains on the disposal of development, surplus and HBU properties ("special use property"). In order to maximize the value of our timber property, we continue to review our current portfolio and explore the development of certain of these properties. This process has led us to characterize our property as follows: •Surplus property, meaning land that cannot be efficiently or effectively managed by us, whether due to parcel size, lack of productivity, location, access limitations or for other reasons; •HBU property, meaning land that in its current state has a higher market value for uses other than growing and selling timber; •Development property, meaning HBU land that, with additional investment, may have a significantly higher market value than its HBU market value; and •Core Timberland, meaning land that is best suited for growing and selling timber. We report the sale of timberland property in "timberland gains," the sale of HBU and surplus property in "gain on disposal of properties, plants and equipment, net" and the sale of timber and development property under "net sales" and "cost of products sold" in our interim condensed consolidated statements of income. All HBU and development property, together with surplus property, is used to productively grow and sell timber until the property is sold. Whether timberland has a higher value for uses other than growing and selling timber is a determination based upon several variables, such as proximity to population centers, anticipated population growth in the area, the topography of the land, aesthetic considerations, including access to lakes or rivers, the condition of the surrounding land, availability of utilities, markets for timber and economic considerations both nationally and locally. Given these considerations, the characterization of land is not a static process, but requires an ongoing review and re-characterization as circumstances change. As ofJuly 31, 2020 , we had approximately 18,800 acres of special use property inthe United States . Net sales decreased to$5.9 million for the third quarter of 2020 compared with$6.0 million for the third quarter of 2019. Operating profit decreased to$2.0 million for the third quarter of 2020 compared with$3.2 million for the third quarter of 2019. Adjusted EBITDA was$2.9 million and$2.8 million for the third quarter of 2020 and 2019, respectively. Other Income Statement Changes Interest Expense, net Interest expense, net, was$29.8 million for the third quarter of 2020 compared with$34.5 million for the third quarter of 2019. This decrease was primarily due to reductions in long-term debt balances and declines in variable interest rates as of the end of the third quarter of 2020 compared to the end of the third quarter of 2019.U.S. and Non-U.S. Income before Income Tax Expense See the following tables for details of theU.S. and non-U.S. income before income taxes andU.S. and non-U.S. income before income taxes after eliminating the impact of non-cash asset impairment charges, non-cash pension settlement income, restructuring charges, acquisition and integration related costs, debt extinguishment charges, and (gains) losses on sales of businesses (collectively, "Adjustments"). 43
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Summary
Three Months Ended
July 31,
2020 2019
Non-U.S. % of Consolidated Net Sales 39.1 % 38.7 %
U.S. % of Consolidated Net Sales 60.9 % 61.3 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. 115.4 % 45.0 %
U.S. % of Consolidated I.B.I.T. (15.4) % 55.0 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. before Adjustments 60.1 % 43.8 %
U.S. % of Consolidated I.B.I.T. before Adjustments 39.9 % 56.2 %
100.0 % 100.0 %
Non-U.S. I.B.I.T. Reconciliation
Three Months Ended
July 31,
(in millions) 2020 2019
Non-U.S. I.B.I.T. $ 35.8 $ 41.5
Non-cash asset impairment charges 2.5 -
Restructuring charges 3.0 6.0
Acquisition and integration related costs - 0.1
Gain on sale of businesses, net - (0.1)
Total Non-U.S. Adjustments 5.5 6.0
Non-U.S. I.B.I.T. before Adjustments $ 41.3 $ 47.5
U.S. I.B.I.T. Reconciliation
Three Months Ended
July 31,
(in millions) 2020 2019
U.S. I.B.I.T. $ (4.8) $ 50.6
Non-cash asset impairment charges 13.0 -
Restructuring charges 16.1 3.1
Acquisition and integration related costs 3.6 5.7
Debt extinguishment charges - 0.1
(Gain) Loss on sale of businesses, net (0.5) 1.4
Total U.S. Adjustments 32.2 10.3
U.S. I.B.I.T. before Adjustments $ 27.4 $ 60.9
I.B.I.T. is Income Before Income Tax Expense
Income Tax Expense
Our quarterly income tax expense was computed in accordance with ASC 740-270
"Income Taxes - Interim Reporting." In accordance with this accounting standard,
annual estimated tax expense is computed based on forecasted annual earnings and
other forecasted annual amounts, including, but not limited to items such as
uncertain tax positions and withholding taxes. Additionally, losses from
jurisdictions for which a valuation allowance has been provided have not been
included in the annual estimated tax rate. Income tax expense each quarter is
provided for on a current year-to-date basis using the annual estimated tax
rate, adjusted for discrete taxable events that occur during the interim period.
Income tax expense for the third quarter of 2020 was $6.9 million on $31.0
million of pretax income and income tax expense for the third quarter of 2019
was $26.8 million on $92.1 million of pretax income. The decrease to income tax
expense was
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primarily caused by a reduction in earnings in various jurisdictions, a loss on
the sale of the CPG business within the Paper Packaging & Services segment and
corresponding non-deductible goodwill for tax purposes, and favorable one-time
discrete items of $2.2 million , primarily related to withholding taxes,
recognized in the third quarter of 2020. Income tax expense for the third
quarter of 2019 reflected a provisional net tax benefit of $1.1 million for the
acquisition of Caraustar and other immaterial discrete items which resulted in a
tax benefit of $0.3 million .
We are subject to audits by U.S. federal, state and local tax authorities and
foreign tax authorities. We believe that adequate provisions have been made for
any adjustments that may result from tax examinations. However, the outcome of
tax audits cannot be predicted with certainty. If any issues addressed in the
tax audits are resolved in a manner not consistent with management's
expectations, we could be required to adjust its provision for income taxes in
the period such resolution occurs.
The estimated net decrease in unrecognized tax benefits for the next 12 months
ranges from zero to $13.0 million . Actual results may differ materially from
this estimate.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests represents the portion of
earnings from the operations of our non-wholly owned, consolidated subsidiaries
that belong to the noncontrolling interest in those subsidiaries. Net income
attributable to noncontrolling interests for the third quarter of 2020 and 2019
was $3.7 million and $4.8 million , respectively. The decrease was primarily due
to a decrease in the net operating profit of the Paper Packaging & Services
segment joint venture (referred to herein as the "Paper Packaging JV" or "PPS
VIE") and the Flexible Products & Services segment joint venture that was formed
in 2010 by Greif, Inc. and one of its indirect subsidiaries with Dabbagh Group
Holding Company Limited and one of its subsidiaries (referred to herein as the
"Flexible Packaging JV" or "FPS VIE").
Net Income Attributable to Greif, Inc.
Based on the factors noted above, net income attributable to Greif, Inc. was
$20.7 million for the third quarter of 2020 compared to $62.7 million for the
third quarter of 2019.
OTHER COMPREHENSIVE INCOME (LOSS) CHANGES
Foreign currency translation
In accordance with ASC 830, "Foreign Currency Matters," the assets and
liabilities denominated in a foreign currency are translated into United States
Dollars at the rate of exchange existing at the end of the current period, and
revenues and expenses are translated at average exchange rates over the month in
which they are incurred. The cumulative translation adjustments, which represent
the effects of translating assets and liabilities of our international
operations, are presented in the interim condensed consolidated statements of
changes in equity in accumulated other comprehensive income (loss).
Minimum pension liability, net
The change in minimum pension liability, net of tax was income of $2.4 million
and $2.3 million for the third quarter of 2020 and 2019, respectively.
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Year-to-Date Results
The following table sets forth the net sales, operating profit, EBITDA and
Adjusted EBITDA for each of our business segments for the nine months ended
July 31, 2020 and 2019:
Nine Months Ended
July 31,
(in millions) 2020 2019
Net sales:
Rigid Industrial Packaging & Services $ 1,719.8 $ 1,871.6
Paper Packaging & Services 1,414.6 1,244.9
Flexible Products & Services 199.7 226.6
Land Management 19.6 19.8
Total net sales $ 3,353.7 $ 3,362.9
Operating profit:
Rigid Industrial Packaging & Services $ 155.8 $ 124.6
Paper Packaging & Services 40.3 128.6
Flexible Products & Services 10.7 22.2
Land Management 6.3 8.0
Total operating profit $ 213.1 $ 283.4
EBITDA:
Rigid Industrial Packaging & Services $ 211.0 $ 180.0
Paper Packaging & Services 157.4 212.6
Flexible Products & Services 15.5 27.8
Land Management 9.4 11.2
Total EBITDA $ 393.3 $ 431.6
Adjusted EBITDA:
Rigid Industrial Packaging & Services $ 232.2 $ 200.4
Paper Packaging & Services 229.0 239.6
Flexible Products & Services 18.0 22.8
Land Management 8.9 9.3
Total Adjusted EBITDA $ 488.1 $ 472.1
46-------------------------------------------------------------------------------- The following table sets forth EBITDA and Adjusted EBITDA, reconciled to net income and operating profit, for our consolidated results for the nine months endedJuly 31, 2020 and 2019: Nine Months Ended July 31, (in millions) 2020 2019 Net income$ 76.3 $ 124.4 Plus: interest expense, net 89.8 80.1 Plus: debt extinguishment charges - 22.0 Plus: income tax expense 44.8 58.3 Plus: depreciation, depletion and amortization expense 182.4 146.8 EBITDA$ 393.3 $ 431.6 Net income$ 76.3 $ 124.4 Plus: interest expense, net 89.8 80.1 Plus: non-cash pension settlement income (0.1) - Plus: debt extinguishment charges - 22.0 Plus: income tax expense 44.8 58.3 Plus: other expense, net 3.5 1.0 Plus: equity earnings of unconsolidated affiliates, net of tax (1.2) (2.4) Operating profit 213.1 283.4 Less: other expense, net 3.5 1.0 Less: non-cash pension settlement income (0.1) - Less: equity earnings of unconsolidated affiliates, net of tax (1.2) (2.4) Plus: depreciation, depletion and amortization expense 182.4 146.8 EBITDA$ 393.3 $ 431.6 Plus: restructuring charges 26.8 20.3 Plus: acquisition and integration related costs 13.5 22.2 Plus: non-cash asset impairment charges 16.9 2.1 Plus: non-cash pension settlement income (0.1) - Plus: incremental COVID-19 costs, net 1.9 - Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net 35.8 (4.1) Adjusted EBITDA$ 488.1 $ 472.1 47
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The following table sets forth EBITDA and Adjusted EBITDA for our business
segments, reconciled to the operating profit for each segment, for the nine
months ended
Nine Months Ended
July 31,
(in millions) 2020 2019
Rigid Industrial Packaging & Services
Operating profit $ 155.8 $ 124.6
Less: other expense, net 5.1 4.0
Less: equity earnings of unconsolidated affiliates, net of tax (1.2) (2.4)
Plus: depreciation and amortization expense 59.1 57.0
EBITDA $ 211.0 $ 180.0
Plus: restructuring charges 19.4 15.0
Plus: acquisition and integration related costs - 0.4
Plus: non-cash impairment charges 3.6 2.1
Plus: non-cash pension settlement charges - -
Plus: incremental COVID-19 costs, net 0.3 -
Less: (gain) loss on disposal of properties, plants and equipment,
and businesses, net (2.1) 2.9
Adjusted EBITDA $ 232.2 $ 200.4
Paper Packaging & Services
Operating profit $ 40.3 $ 128.6
Less: other income, net (1.2) (2.1)
Less: non-cash pension settlement income (0.1) -
Plus: depreciation and amortization expense 115.8 81.9
EBITDA $ 157.4 $ 212.6
Plus: restructuring charges 6.1 5.2
Plus: acquisition and integration related costs 13.5 21.8
Plus: non-cash impairment charges 12.4 -
Plus: non-cash pension settlement income (0.1) -
Plus: incremental COVID-19 costs, net 1.3 -
Less: loss on disposal of properties, plants and equipment, and
businesses, net 38.4 -
Adjusted EBITDA $ 229.0 $ 239.6
Flexible Products & Services
Operating profit $ 10.7 $ 22.2
Less: other income, net (0.4) (0.9)
Plus: depreciation and amortization expense 4.4 4.7
EBITDA $ 15.5 $ 27.8
Plus: restructuring charges 1.3 -
Plus: incremental COVID-19 costs, net 0.3 -
Plus: non-cash impairment charges 0.9 -
Less: gain on disposal of properties, plants and equipment, and
businesses, net - (5.0)
Adjusted EBITDA $ 18.0 $ 22.8
Land Management
Operating profit $ 6.3 $ 8.0
Plus: depreciation, depletion and amortization expense 3.1 3.2
EBITDA $ 9.4 $ 11.2
Plus: restructuring charges - 0.1
Less: gain on disposal of properties, plants and equipment, and
businesses, net (0.5) (2.0)
Adjusted EBITDA $ 8.9 $ 9.3
48--------------------------------------------------------------------------------Net Sales Net sales were$3,353.7 million for the first nine months of 2020 compared with$3,362.9 million for the first nine months of 2019. The$9.2 million decrease was primarily due to lower volumes in certain regions, lower average sale prices, the impact of foreign currency translation, and the divestment of the CPG business, partially offset by the sales contributed by the acquired Caraustar operations. See the "Segment Review" below for additional information on net sales by segment during the first nine months of 2020. Gross Profit Gross profit was$683.0 million for the first nine months of 2020 compared with$700.9 million for the first nine months of 2019. The respective reasons for the improvement or decline in each segment are described below in the "Segment Review." Gross profit margin was 20.4 percent and 20.8 percent for first nine months of 2020 and 2019, respectively. Selling, General and Administrative Expenses SG&A expenses decreased to$376.9 million for the first nine months of 2020 from$377.0 million for the first nine months of 2019. Additional SG&A expenses attributable to the acquired Caraustar operations and increased amortization of intangible assets resulting from the acquisition of Caraustar were offset by decreased performance based compensation and cost reduction activities. SG&A expenses were 11.2 percent of net sales for both the first nine months of 2020 and 2019. Restructuring Charges Restructuring charges were$26.8 million for the first nine months of 2020 compared with$20.3 million for the first nine months of 2019. See Note 4 to the condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional information on the restructuring charges reported during the first nine months of 2020. Acquisition and Integration Related Costs Acquisition and integration related costs were$13.5 million for the first nine months of 2020 compared with$22.2 million for the first nine months of 2019. The decrease in acquisition and integration related costs was primarily due to less integration-related expenses in 2020 associated with the Caraustar Acquisition. See Note 2 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information. Impairment Charges Non-cash asset impairment charges were$16.9 million for the first nine months of 2020 compared with$2.1 million for the first nine months of 2019. See Note 7 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information. Gain on Disposal of Properties, Plants and Equipment, net The gain on disposal of properties, plants and equipment, net was$2.1 million and$7.1 million for the first nine months of 2020 and 2019, respectively. Loss on Disposal of Businesses, net The loss on disposal of business, net was$37.9 million and$3.0 million for the first nine months of 2020 and 2019, respectively. The increase was primarily due to divestiture of the CPG business. Financial Measures Operating profit was$213.1 million for the first nine months of 2020 compared with$283.4 million for the first nine months of 2019. Net income was$76.3 million for the first nine months of 2020 compared with$124.4 million for the first nine months of 2019. Adjusted EBITDA was$488.1 million for the first nine months of 2020 compared with$472.1 million for the first nine months of 2019. The$16.0 million increase in Adjusted EBITDA was primarily due to decreased performance-based compensation, cost reduction activities, as well as having a full nine months of Caraustar activity. Segment ReviewRigid Industrial Packaging & Services 49 -------------------------------------------------------------------------------- Net sales were$1,719.8 million for the first nine months of 2020 compared with$1,871.6 million for the first nine months of 2019. The$151.8 million decrease in net sales was primarily due to lower volumes, lower average sale prices primarily due to contractual price adjustment mechanisms related to raw material price decreases, and negative impacts of foreign currency translation, partially offset by strategic pricing actions. Gross profit was$351.5 million for the first nine months of 2020 compared with$346.1 million for the first nine months of 2019. The$5.4 million increase in gross profit was primarily due to lower priced raw materials, the timing of contractual pass through arrangements, product mix shifts, and strategic pricing actions. Gross profit margin increased to 20.4 percent for the first nine months of 2020 from 18.5 percent for the first nine months of 2019. Operating profit was$155.8 million for the first nine months of 2020 compared with$124.6 million for the first nine months of 2019. Adjusted EBITDA was$232.2 million for the first nine months of 2020 compared with$200.4 million for the first nine months of 2019. The$31.8 million increase in Adjusted EBITDA was due primarily to the same factors that impacted gross profit and a reduction in the segment's SG&A expense due to cost reduction activities, a decrease in performance based compensation, and the segment receiving a smaller portion of allocated corporate costs.Paper Packaging & Services Net sales increased$169.7 million to$1,414.6 million for the first nine months of 2020 compared with$1,244.9 million for the first nine months of 2019, primarily due to contribution from the acquired Caraustar operations, partially offset lower volumes, lower published containerboard and boxboard prices, and the divestment of the CPG business. Gross profit was$283.9 million for the first nine months of 2020 compared with$296.9 million for the first nine months of 2019. Gross profit margin was 20.1 percent and 23.8 percent for the first nine months of 2020 and 2019, respectively. The decrease in gross profit was due primarily to the same factors that impacted net sales, offset by higher old corrugated container input costs and higher manufacturing costs. Operating profit was$40.3 million for the first nine months of 2020 compared with$128.6 million for the first nine months of 2019. The decrease in operating profit was primarily due to the factors discussed above in gross profit, the loss on sale of the CPG divestiture and the segment receiving a greater portion of allocated corporate costs. Adjusted EBITDA was$229.0 million for the first nine months of 2020 compared with$239.6 million for the first nine months of 2019. The$10.6 million decrease in Adjusted EBITDA was due to the same factors that impacted gross profit and the segment receiving a greater portion of allocated corporate costs. Flexible Products & Services Net sales decreased$26.9 million to$199.7 million for the first nine months of 2020 compared with$226.6 million for the first nine months of 2019. The decrease was primarily due to continued lower volumes and lower average sale prices primarily due to contractual price adjustment mechanisms related to raw material price decreases. Gross profit was$40.5 million for the first nine months of 2020 compared with$50.0 million for the first nine months of 2019. The decrease in gross profit was primarily due to lower sales, partially offset by the timing of contractual pass through arrangements for raw material price decreases. Gross profit margin decreased to 20.3 percent for the first nine months of 2020 from 22.1 percent for the first nine months of 2019. Operating profit was$10.7 million for the first nine months of 2020 compared with$22.2 million for the first nine months of 2019. Adjusted EBITDA was$18.0 million for the first nine months of 2020 compared with$22.8 million for the first nine months of 2019. The$4.8 million decrease in Adjusted EBITDA was primarily due to the same factors that impacted net sales, partially offset by a reduction in the segment's SG&A expense due to a decrease in performance based compensation and cost reduction activities. Land Management Net sales decreased to$19.6 million for the first nine months of 2020 compared with$19.8 million for the first nine months of 2019. Operating profit decreased to$6.3 million for the first nine months of 2020 compared with$8.0 million for the first nine months of 2019. Adjusted EBITDA was$8.9 million and$9.3 million for the first nine months of 2020 and 2019, respectively. 50 -------------------------------------------------------------------------------- Other Income Statement Changes Interest expense, net Interest expense, net, was$89.8 million for the first nine months of 2020 compared with$80.1 million for the first nine months of 2019. The increase was primarily due to the incremental debt incurred in connection with the Caraustar Acquisition.U.S. and non-U.S. Income before Income Tax Expense See the following tables for details of theU.S. and non-U.S. income before income taxes andU.S. and non-U.S. income before income taxes after eliminating the impact of non-cash asset impairment charges, non-cash pension settlement income, restructuring charges, acquisition and integration related costs, debt extinguishment charges, and (gains) losses on sales of businesses (collectively, "Adjustments"). Summary Nine Months Ended July 31, 2020 2019 Non-U.S. % of Consolidated Net Sales 38.8 % 41.6 % U.S. % of Consolidated Net Sales 61.2 %
58.4 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. 96.1 % 52.1 %
U.S. % of Consolidated I.B.I.T. 3.9 % 47.9 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. before Adjustments 58.0 % 43.7 %
U.S. % of Consolidated I.B.I.T. before Adjustments 42.0 % 56.3 %
100.0 % 100.0 %
Non-U.S. I.B.I.T. Reconciliation
Nine Months Ended
July 31,
(in millions) 2020 2019
Non-U.S. I.B.I.T. $ 115.2 $ 93.9
Non-cash asset impairment charges 3.9 2.1
Restructuring charges 5.4 11.2
Acquisition and integration related costs - 0.4
Loss on sale of businesses, net - 1.6
Total Non-U.S. Adjustments 9.3 15.3
Non-
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U.S. I.B.I.T. Reconciliation
Nine Months Ended
July 31,
(in millions) 2020 2019
U.S. I.B.I.T. $ 4.7 $ 86.4
Non-cash asset impairment charges 13.0 -
Non-cash pension settlement income (0.1) -
Restructuring charges 21.4 9.1
Acquisition-related costs 13.5 21.8
Debt extinguishment charges - 22.0
Loss on sale of businesses, net 37.9 1.4
Total U.S. Adjustments 85.7 54.3
I.B.I.T. is Income Before Income Tax Expense
Income tax expense
Our year to date income tax expense was computed in accordance with ASC 740-270
"Income Taxes - Interim Reporting." In accordance with this accounting standard,
annual estimated tax expense is computed based on forecasted annual earnings and
other forecasted annual amounts, including, but not limited to items such as
uncertain tax positions and withholding taxes. Additionally, losses from
jurisdictions for which a valuation allowance has been provided have not been
included in the annual estimated tax rate. Income tax expense each quarter is
provided for on a current year-to-date basis using the annual estimated tax
rate, adjusted for discrete taxable events that occur during the interim period.
Income tax expense for the first nine months of 2020 was $44.8 million on
$119.9 million of pretax income and income tax expense for the first nine months
of 2019 was $58.3 million on $180.3 million of pretax income. The decrease to
income tax expense was primarily caused by a reduction of earnings in various
jurisdictions, a loss on the sale of the CPG business within the Paper Packaging
& Services segment and corresponding non-deductible goodwill for tax purposes,
and favorable one-time discrete items of $0.9 million that were recognized in
the period. The first nine months of 2019 reflect an incremental $2.3 million of
tax expense related to the one-time transition tax liability, offset by the tax
effect of foreign currency losses of $1.7 million recognized due to the
permanent reinvestment assertion. Other discrete items included $7.7 million of
tax benefits associated with the Caraustar Acquisition and refinancing costs as
well as $2.3 million of tax expense associated with a foreign subsidiary
divestiture. Other immaterial discrete items in the first nine months of 2019
resulted in a tax benefit of $4.3 million .
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests for the first nine months of
2020 and 2019 was $11.9 million and $18.4 million , respectively. This decrease
was primarily due to decreased net operating profit of the Paper Packaging JV
and the Flexible Packaging JV during the first nine months of 2020 compared to
2019.
Net income attributable to Greif, Inc.
Based on the factors noted above, net income attributable to Greif, Inc. was
$64.4 million for the first nine months of 2020 compared to $106.0 million for
the first nine months of 2019.
OTHER COMPREHENSIVE INCOME (LOSS) CHANGES
Foreign currency translation
In accordance with ASC 830, "Foreign Currency Matters," the assets and
liabilities denominated in a foreign currency are translated into United States
Dollars at the rate of exchange existing at the end of the current period, and
revenues and expenses are translated at average exchange rates over the month in
which they are incurred. The cumulative translation adjustments, which represent
the effects of translating assets and liabilities of our international
operations, are presented in the condensed consolidated statements of changes in
equity in accumulated other comprehensive income (loss). The change in foreign
currency translation, net of tax was income of $4.2 million comparative to
expense of $10.4 million for the first nine months of 2020 and 2019,
respectively. This change was primarily due to the strengthening of the dollar
against our most significant currencies.
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Derivative financial instruments
The change in derivative financial instruments, net of tax was a loss of $20.9
million and $20.7 million for the first nine months of 2020 and 2019,
respectively. This change was primarily due to an increased portfolio of
interest rate swaps. See Note 7 to the condensed consolidated financial
statements included in Item 1 of this Form 10-Q for additional information.
Minimum pension liability, net
Change in minimum pension liability, net of tax for the first nine months of
2020 and 2019 was income of $20.6 million and a loss of $2.2 million ,
respectively. This change was primarily due to the remeasurement of defined
benefit plans in the United States as a result of pension events discussed in
Note 10 to the Interim Condensed Consolidated Financial Statements in Item 1 of
this Form 10-Q.
BALANCE SHEET CHANGES
Working Capital changes
The $39.7 million decrease in accounts receivable to $624.5 million as of
July 31, 2020 from $664.2 million as of October 31, 2019 was primarily due to
the divestment of the CPG business and a decrease in net sales.
The $8.6 million decrease in inventories to $349.6 million as of July 31, 2020
from $358.2 million as of October 31, 2019 was primarily due to the divestment
of the CPG business, partially offset by slower inventory turnover.
Accounts payable increased $0.8 million to $436.0 million as of July 31, 2020
from $435.2 million as of October 31, 2019 .
Other balance sheet changes
The $26.7 million increase in other current assets to $127.9 million as of
July 31, 2020 from $101.2 million as of October 31, 2019 was primarily due to an
increase of $27.7 million related to tax receivables.
The $50.3 million decrease in other intangible assets to $726.2 million as of
July 31, 2020 from $776.5 million as of October 31, 2019 was primarily due to
amortization. See Note 3 to the Interim Condensed Consolidated Financial
Statements in Item 1 of this Form 10-Q for additional information.
The $101.5 million decrease in properties, plants and equipment, net to $1,588.8
million as of July 31, 2020 from $1,690.3 million as of October 31, 2019 was
primarily due to depreciation and fixed assets sold in the divestiture of the
CPG business, offset by investment in capital expenditures.
The $56.1 million decrease in accrued payroll and employee benefits to $86.3
million as of July 31, 2020 from $142.4 million as of October 31, 2019 was
primarily due to annual incentive plan payments and a decrease in accrued
performance based compensation.
The $16.0 million increase in current portion of long-term debt to $99.7 million
as of July 31, 2020 from $83.7 million as of October 31, 2019 was primarily due
to annual payments due on the term loan A-1. See Note 6 to the Interim Condensed
Consolidated Financial Statements in Item 1 of this Form 10-Q for additional
information.
The $30.2 million increase in other current liabilities to $173.8 million as of
July 31, 2020 from $143.6 million as of October 31, 2019 was primarily due to an
increase in mark-to-market adjustments on derivative instruments, accruals and
various tax payables.
The $123.7 million decrease in long term debt to $2,535.3 million as of July 31,
2020 from $2,659.0 million as of October 31, 2019 was primarily due to
repayments on term loans and accounts receivable financing facilities. See Note
6 to the Interim Condensed Consolidated Financial Statements in Item 1 of this
Form 10-Q for additional information.
The $39.4 million decrease in pension liabilities to $138.2 million as of
July 31, 2020 from $177.6 million as of October 31, 2019 was primarily due to
the remeasurement of two U.S. pension plans. See Note 10 to the Interim
Condensed Consolidated Financial Statements in Item 1 of this Form 10-Q for
additional information.
The $31.1 million increase in other long term liabilities to $160.0 million as
of July 31, 2020 from $128.9 million as of October 31, 2019 was primarily due to
an increase of $15.3 million related to derivative financial instruments, and an
increase
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of $6.4 million related to taxes. See Note 7 to the Interim Condensed
Consolidated Financial Statements in Item 1 of this Form 10-Q for additional
information on our derivative financial instruments.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are operating cash flows and borrowings under
our senior secured credit facilities, proceeds from the senior notes we have
issued, and proceeds from our trade accounts receivable credit facilities. We
use these sources to fund our working capital needs, capital expenditures, cash
dividends, common stock repurchases and acquisitions. We anticipate continuing
to fund these items in a like manner. We currently expect that operating cash
flows, borrowings under our senior secured credit facilities, and proceeds from
our trade accounts receivable credit facilities will be sufficient to fund our
anticipated working capital, capital expenditures, cash dividends, stock
purchases, debt repayment, potential acquisitions of businesses and other
liquidity needs for at least 12 months.
Capital Expenditures
During the first nine months of 2020 and 2019, we invested $86.0 million
(excluding $4.0 million for purchases of and investments in timber properties)
and $92.9 million (excluding $4.1 million for purchases of and investments in
timber properties), respectively, in capital expenditures.
We anticipate future capital expenditures, excluding the potential purchases of
and investments in timber properties, ranging from $120.0 million to $140.0
million in 2020. This is a reduction in previously stated estimates due to
economic uncertainty from the current COVID-19 pandemic. We anticipate that
these expenditures will replace and improve existing equipment and fund new
facilities.
United States Trade Accounts Receivable Credit Facility
On September 24, 2019 , we amended and restated the existing receivable financing
facility in the United States to establish a $275.0 million United States Trade
Accounts Receivables Credit Facility (the "U.S. Receivables Facility") with
several financial institutions. The U.S. Receivables Facility matures on
September 24, 2020 . As of July 31, 2020 , $223.5 million , net of deferred
financing costs of $0.1 million , was outstanding under the U.S. Receivable
Facility. This was reported in 'Long-term debt' on the interim condensed
consolidated balance sheets because we intend to refinance this obligation on a
long-term basis and have the intent and ability to consummate a long-term
refinancing by exercising the renewal option in the agreement or entering into a
new financing arrangement.
We may terminate the U.S. Receivables Facility at any time upon five days prior
written notice. The U.S. Receivables Facility is secured by certain of our
United States trade accounts receivables and bears interest at a variable rate
based on the London Interbank Offered Rate ("LIBOR") or an applicable base rate,
plus a margin, or a commercial paper rate plus a margin. Interest is payable on
a monthly basis and the principal balance is payable upon termination of the
U.S. Receivables Facility. See Note 1 to the Interim Condensed Consolidated
Financial Statements included in Item 1 of this Form 10-Q for discussion of ASU
2020-04 "Reference Rate Reform" for the our considerations of the impact of
reference rate reform on contracts utilizing LIBOR rates. The U.S. Receivables
Facility also contains events of default and covenants, which are substantially
the same as the covenants under the 2019 Credit Agreement, as defined below. As
of July 31, 2020 , we were in compliance with these covenants. Proceeds of the
U.S. Receivables Facility are available for working capital and general
corporate purposes.
See Note 6 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
International Trade Accounts Receivable Credit Facilities
On April 17, 2020 , Cooperage Receivables Finance B.V. and Greif Coordination
Center BVBA, an indirect wholly owned subsidiary of Greif, Inc. , amended and
restated the Nieuw Amsterdam Receivables Financing Agreement (the "European
RFA"). The European RFA provides an accounts receivable financing facility of up
to €100.0 million ($117.9 million as of July 31, 2020 ) secured by certain
European accounts receivable. The $77.7 million outstanding on the European RFA
as of July 31, 2020 is reported as 'Long-term debt' on the interim condensed
consolidated balance sheets because we intend to refinance these obligations on
a long-term basis and have the intent and ability to consummate a long-term
refinancing by exercising the renewal option in the respective agreement or
entering into new financing arrangements.
See Note 6 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
Borrowing Arrangements
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Long-term debt is summarized as follows:
July 31 , October 31 ,
(in millions) 2020 2019
2019 Credit Agreement - Term Loans$ 1,549.4 $ 1,612.2 Senior Notes due 2027 494.9 494.3 Senior Notes due 2021 235.5 221.7 Accounts receivable credit facilities 301.2
351.6
2019 Credit Agreement - Revolving Credit Facility 65.4 76.1
Other debt 0.2 0.4
2,646.6 2,756.3
Less: current portion 99.7 83.7
Less: deferred financing costs 11.6 13.6
Long-term debt, net $ 2,535.3 $ 2,659.0
2019 Credit Agreement
On February 11, 2019 , we and certain of our subsidiaries entered into an amended
and restated senior secured credit agreement (the "2019 Credit Agreement") with
a syndicate of financial institutions. Our obligations under the 2019 Credit
Agreement are guaranteed by certain of our U.S. and non-U.S. subsidiaries.
The 2019 Credit Agreement provides for (a) an $800.0 million secured revolving
credit facility, consisting of a $600.0 million multicurrency facility and a
$200.0 million U.S. dollar facility, maturing on February 11, 2024 , (b) a
$1,275.0 million secured term loan A-1 facility with quarterly principal
installments commencing on April 30, 2019 and continuing through maturity on
January 31, 2024 , and (c) a $400.0 million secured term loan A-2 facility with
quarterly principal installments commencing on April 30, 2019 and continuing
through maturity on January 31, 2026 . In addition, we have an option to add an
aggregate of $700.0 million to the secured revolving credit facility under the
2019 Credit Agreement with the agreement of the lenders. As of July 31, 2020 , we
had $523.3 million of available borrowing capacity under the $800.0 million
secured revolving credit facility provided by the 2019 Credit Agreement. The
available borrowing capacity is determined by the lesser of the available
capacity or the amount that could be borrowed without causing the Company's
leverage ratio to exceed 4.50 to 1.00.
The 2019 Credit Agreement contains certain covenants, which include financial
covenants that require us to maintain a certain leverage ratio and an interest
coverage ratio. The leverage ratio generally requires that, at the end of any
quarter, we will not permit the ratio of (a) our total consolidated
indebtedness, to (b) our consolidated net income plus depreciation, depletion
and amortization, interest expense (including capitalized interest), income
taxes, and minus certain extraordinary gains and non-recurring gains (or plus
certain extraordinary losses and non-recurring losses) and plus or minus certain
other items for the preceding twelve months (as used in this paragraph only,
"EBITDA") to be greater than 4.75 to 1.00 and stepping down annually by 0.25
increments beginning on July 31, 2020 to 4.00 on July 31, 2023 . The interest
coverage ratio generally requires that, at the end of any quarter, we will not
permit the ratio of (a) our consolidated EBITDA, to (b) our consolidated
interest expense to the extent paid or payable, to be less than 3.00 to 1.00,
during the applicable preceding twelve month period. As of July 31, 2020 , we
were in compliance with the covenants and other agreements in the 2019 Credit
Agreement.
See Note 6 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
Senior Notes due 2027
On February 11, 2019 , we issued $500.0 million of 6.50% Senior Notes due
March 1, 2027 (the "Senior Notes due 2027"). Interest on the Senior Notes due
2027 is payable semi-annually commencing on September 1, 2019 . Our obligations
under the Senior Notes due 2027 are guaranteed by our U.S. subsidiaries that
guarantee the 2019 Credit Agreement, as described above. The Senior Notes due
2027 are governed by an Indenture that contains various covenants. Certain of
these covenants will be suspended if the Senior Notes due 2027 achieve
investment grade ratings from both Moody's Investors Service, Inc. and Standard
& Poor's Global Ratings and no default or event of default has occurred and is
continuing. As of July 31, 2020 , we were in compliance with these covenants.
See Note 6 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
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Senior Notes due 2021
Our Luxembourg subsidiary has issued €200.0 million of 7.375% Senior Notes due
July 15, 2021 (the "Senior Notes due 2021"). Interest on the Senior Notes due
2021 is payable semi-annually. The Senior Notes due 2021 are guaranteed on a
senior basis by Greif, Inc. The Senior Notes due 2021 are governed by an
Indenture that contains various covenants. As of July 31, 2020 , we were in
compliance with these covenants.
See Note 6 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
Interest Rate Derivatives
We have various borrowing facilities which charge interest based on the one
month U.S. dollar LIBOR rate plus an interest spread. Refer to Note 1 to the
Interim Condensed Consolidated Financial Statements included in Item 1 of this
Form 10-Q for discussion of ASU 2020-04 "Reference Rate Reform" for the our
considerations of the impact of reference rate reform on contracts utilizing
LIBOR rates.
In 2020, we entered into four forward starting interest rate swaps with a total
notional amount of $200.0 million effective July 15, 2021 . We receive variable
rate interest payments based upon one month U.S. dollar LIBOR, and in return we
are obligated to pay interest at a weighted-average interest rate of 0.90% plus
a spread.
In 2019, we entered into six interest rate swaps with a total notional amount of
$1,300.0 million that amortize to $200.0 million over a five year term. The
outstanding notional amount as of July 31, 2020 is $1,000.0 million . We receive
variable rate interest payments based upon one month U.S. dollar LIBOR, and in
return we are obligated to pay interest at a weighted-average interest rate of
2.49%.
In 2017, we entered into an interest rate swap with a notional amount of $300.0
million and received variable rate interest payments based upon one month U.S.
dollar LIBOR, and in return we are obligated to pay interest at a fixed rate of
1.19% plus an interest spread.
These derivatives are designated as cash flow hedges for accounting purposes.
Accordingly, the gain or loss on these derivative instruments are reported as a
component of other comprehensive income and reclassified into earnings in the
same line item associated with the forecasted transactions and in the same
period during which the hedged transaction affects earnings.
See Note 7 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
Foreign Exchange Hedges
We conduct business in international currencies and are subject to risks
associated with changing foreign exchange rates. Our objective is to reduce
volatility associated with foreign exchange rate changes to allow management to
focus its attention on business operations. Accordingly, we enter into various
contracts that change in value as foreign exchange rates change to protect the
value of certain existing foreign currency assets and liabilities, commitments
and anticipated foreign currency cash flows.
As of July 31, 2020 , and October 31, 2019 , we had outstanding foreign currency
forward contracts in the notional amount of $143.3 million , and $275.0 million ,
respectively.
See Note 7 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
Cross Currency Swap
We have operations and investments in various international locations and are
subject to risks associated with changing foreign exchange rates. On March 6,
2018 , we entered into a cross currency interest rate swap agreement that
synthetically swaps $100.0 million of fixed rate debt to Euro denominated fixed
rate debt at a rate of 2.35%. The agreement is designated as a net investment
hedge for accounting purposes and will mature on March 6, 2023 . Accordingly, the
gain or loss on this derivative instrument is included in the foreign currency
translation component of other comprehensive income until the net investment is
sold, diluted, or liquidated. Interest payments received for the cross currency
swap are excluded from the net investment hedge effectiveness assessment and are
recorded in interest expense, net on the interim condensed consolidated
statements of income.
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See Note 7 to the Interim Condensed Consolidated Financial Statements included
in Item 1 of this Form 10-Q for additional information.
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