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 ofApril 30, 2020 andOctober 31, 2019 , and for the interim condensed consolidated statements of income for the three and six months endedApril 30, 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 and uncoated recycled paperboard, some of which we use to produce and sell industrial products (tubes and cores, construction products, protective packaging, and adhesives) and consumer packaging products (folding cartons, set-up boxes, and packaging services). In addition, we also purchase and sell recycled fiber. However,April 1, 2020 , we completed the divestiture of theConsumer Packaging Group ("CPG") business, and we no longer produce and sell consumer packaging products (folding cartons, set-up boxes, and packaging services). 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 35 -------------------------------------------------------------------------------- Table of Contents consistent cutting schedule, within the limits of market and weather conditions. We also sell, from time to time, timberland and special use land, which consists of surplus land, higher and better use ("HBU") land and development land. As ofApril 30, 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. No material changes to our critical accounting policies, as previously disclosed, have occurred during the first six months of 2020. 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 COVID-19 has materially impacted the global economic environment. In response to the outbreak of COVID-19, governmental authorities throughout the world have implemented numerous measures to try to reduce the spread and impact of the virus, including quarantines, shelter in place, and shutdowns of so-called "nonessential" businesses. Under the guidance issued by theU.S. Department of Homeland Security , and similar designations by governmental authorities throughout the world, the products we manufacture and the services we provide have been deemed "essential" and, as a result, governments in every country in which we do business have allowed our operations to continue without disruption. However, a significant number of our customers or our customer's end use markets are deemed nonessential under some governmental orders or have suspended operations due to a decreased demand for their products resulting from the negative economic conditions. For the markets we serve, for example, we have seen a softening in demand within the textile, automotive, durable goods and lubricant industries offset by an increase in demand, which may be temporary, from the food, pharmaceutical and household goods industries. We have also benefited from increased customer stocking of certain products as a reaction to the uncertainty created by COVID-19. As a results, as ofApril 30, 2020 , we do not believe our financial results have been significantly impacted by COVID-19 for the three and six months endedApril 30, 2020 .
However, we believe that our financial results may be significantly impacted by the effects of COVID-19 for the remainder of 2020. See "Trends" below.
The following comparative information is presented for the three and six months endedApril 30, 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 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 36 -------------------------------------------------------------------------------- Table of Contents (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. Second 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 endedApril 30, 2020 and 2019: Three Months Ended April 30, (in millions) 2020 2019 Net sales: Rigid Industrial Packaging & Services$ 602.6 $ 631.6 Paper Packaging & Services 481.6 497.6 Flexible Products & Services 67.4 77.0 Land Management 6.7 7.1 Total net sales$ 1,158.3 $ 1,213.3 Operating (loss) profit: Rigid Industrial Packaging & Services$ 70.5 $ 47.0 Paper Packaging & Services (5.5) 30.2 Flexible Products & Services 4.6 11.2 Land Management 2.4 2.2 Total operating profit$ 72.0 $ 90.6 EBITDA: Rigid Industrial Packaging & Services$ 89.9 $ 62.5 Paper Packaging & Services 33.5 65.4 Flexible Products & Services 6.1 12.8 Land Management 3.3 3.2 Total EBITDA$ 132.8 $ 143.9 Adjusted EBITDA: Rigid Industrial Packaging & Services$ 92.2 $ 68.9 Paper Packaging & Services 79.1 82.1 Flexible Products & Services 6.9 7.7 Land Management 3.1 3.3 Total Adjusted EBITDA$ 181.3 $ 162.0 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 endedApril 30, 2020 and 2019: Three Months Ended April 30, (in millions) 2020 2019 Net income$ 15.8 $ 21.1 Plus: interest expense, net 29.3 33.9 Plus: debt extinguishment charges - 21.9 Plus: income tax expense 26.5 11.5 Plus: depreciation, depletion and amortization expense 61.2 55.5 EBITDA$ 132.8 $ 143.9 Net income$ 15.8 $ 21.1 Plus: interest expense, net 29.3 33.9 Plus: debt extinguishment charges - 21.9 Plus: income tax expense 26.5 11.5 Plus: other expense, net 1.1 2.3 Plus: equity earnings of unconsolidated affiliates, net of tax (0.7) (0.1) Operating profit 72.0 90.6 Less: other expense, net 1.1 2.3 Less: equity earnings of unconsolidated affiliates, net of tax (0.7) (0.1) Plus: depreciation, depletion and amortization expense 61.2 55.5 EBITDA 132.8 143.9 Plus: restructuring charges 4.4 7.5 Plus: acquisition and integration related costs 4.8 13.8 Plus: non-cash asset impairment charges 1.3 - Plus: incremental COVID-19 costs, net 0.9 - Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net 37.1 (3.2) Adjusted EBITDA$ 181.3 $ 162.0 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 endedApril 30, 2020 and 2019: Three Months Ended April 30, (in millions) 2020 2019 Rigid Industrial Packaging & Services Operating profit$ 70.5 $ 47.0 Less: other expense, net 1.3 3.3 Less: equity earnings of unconsolidated affiliates, net of tax (0.7) (0.1) Plus: depreciation and amortization expense 20.0 18.7 EBITDA 89.9 62.5 Plus: restructuring charges 2.0 4.4 Plus: acquisition and integration related costs - 0.2 Plus: non-cash asset impairment charges 1.3 - Plus: incremental COVID-19 costs, net 0.3 -
Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net
(1.3) 1.8
Adjusted EBITDA $ 92.2 $ 68.9
Paper Packaging & Services
Operating (loss) profit $ (5.5) $ 30.2
Less: other income, net (0.2) (1.0)
Plus: depreciation and amortization expense 38.8 34.2
EBITDA 33.5 65.4
Plus: restructuring charges 1.7 3.0
Plus: acquisition and integration related costs 4.8 13.6
Plus: incremental COVID-19 costs, net 0.5 -
Less: loss on disposal of properties, plants, equipment, and businesses,
net 38.6 0.1
Adjusted EBITDA $ 79.1 $ 82.1
Flexible Products & Services
Operating profit $ 4.6 $ 11.2
Plus: depreciation and amortization expense 1.5 1.6
EBITDA 6.1 12.8
Plus: restructuring charges 0.7 -
Plus: incremental COVID-19 costs, net 0.1 -
Less: gain on disposal of properties, plants, equipment, and businesses,
net - (5.1)
Adjusted EBITDA $ 6.9 $ 7.7
Land Management
Operating profit $ 2.4 $ 2.2
Plus: depreciation, depletion and amortization expense 0.9 1.0
EBITDA 3.3 3.2
Plus: restructuring charges - 0.1
Less: gain on disposal of properties, plants, equipment, and businesses,
net (0.2) -
Adjusted EBITDA $ 3.1 $ 3.3
Net Sales
Net sales were $1,158.3 million for the second quarter of 2020 compared with
$1,213.3 million for the second quarter of 2019. The $55.0 million decrease was
primarily due to lower average net sales prices as a result of raw material
price decreases and corresponding contractual price adjustment mechanisms, the
divestiture of the CPG business, and the impact of foreign currency translation,
partially offset by the additional Caraustar ownership period and strategic
pricing actions. See the "Segment Review" below for additional information on
net sales by segment for the second quarter of 2020.
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Gross Profit
Gross profit was $240.7 million for the second quarter of 2020 compared with
$248.7 million for the second quarter of 2019. The respective reasons for the
improvement or decline in gross profit, as the case may be, for each segment are
described below in the "Segment Review." Gross profit margin was 20.8 percent
for the second quarter of 2020 compared with 20.5 percent for the second quarter
of 2019.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $121.1 million for
the second quarter of 2020 and $140.0 million for the second quarter of 2019.
This decrease was primarily due to a reduction in performance based
compensation, salaries and benefits costs, professional fees, and business
travel. SG&A expenses were 10.5 percent of net sales for the second quarter of
2020 compared with 11.5 percent of net sales for the second quarter of 2019.
Restructuring Charges
Restructuring charges were $4.4 million for the second quarter of 2020 compared
with $7.5 million for the second 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 $4.8 million for the second
quarter of 2020 compared with $13.8 million for the second quarter of 2019. We
completed our acquisition of Caraustar on February 11, 2019 (the "Caraustar
Acquisition") and our acquisition of Tholu B.V. and its wholly owned subsidiary
A. Thomassen Transport B.V. (collectively "Tholu") on June 11, 2019 (the "Tholu
Acquisition"). The decrease in acquisition and integration related costs was
primarily due to reduction of expenses over those incurred in connection with
the Caraustar Acquisition last year. 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 $1.3 million for the second quarter of
2020 compared with zero for the second quarter 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 $1.3 million
and $4.9 million for the second quarter of 2020 and 2019, respectively.
Loss on Disposal of Businesses, net
The loss on disposal of business, net was $38.4 million and $1.7 million for the
second quarter of 2020 and 2019, respectively. This increase was primarily due
to the divestiture of the CPG business. See Note 2 to the Interim Condensed
Consolidated Financial Statements included in Item 1 of this Form 10-Q for
additional information.
Financial Measures
Operating profit was $72.0 million for the second quarter of 2020 compared with
$90.6 million for the second quarter of 2019. Net income was $15.8 million for
the second quarter of 2020 compared with $21.1 million for the second quarter of
2019. Adjusted EBITDA was $181.3 million for the second quarter of 2020 compared
with $162.0 million for the second quarter of 2019. The $19.3 million increase
in Adjusted EBITDA was primarily due to favorable timing on contractual price
adjustment mechanisms, the eleven day additional Caraustar ownership period this
quarter and a reduction in SG&A expense.
Trends
We anticipate demand softness in our industrial manufacturing businesses,
particularly in North America , for the remainder of our fiscal year, although
more severe in our third quarter than in our fourth quarter. The increased
customer stocking due to concerns over COVID-19 that occurred during our second
quarter will result in decreased demand in many of our regions and businesses
until restocking occurs. This will be partially offset by month over month
demand increasing as businesses in end markets that were adversely affected by
COVID-19, including automobile manufacturers and their supply chain and
lubricant,
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paint, chemical and textile manufacturers, resume more normal production levels;
although we believe this will be a slow process and volumes will be
significantly lower on a year over year basis compared to 2019.
We expect raw material prices for steel and resin to remain relatively stable
throughout the remainder of 2020. However, prices for old corrugated containers
in the U.S. have been increasing due to supply shortages caused by the impact of
COVID-19 on the collection of used containers. We expect such prices to peak
during our third quarter and decrease over the remainder of the year to levels
comparable to last year. These increases will continue to intensify the
price-cost squeeze in our Paper Packaging & Services segment.
We also 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.
Segment Review
Rigid 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 the Rigid 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 $602.6 million for the second quarter of 2020 compared with
$631.6 million for the second quarter of 2019. The $29.0 million decrease in net
sales was primarily due to foreign currency translation impact and lower average
sale prices as a result of raw material price decreases and corresponding
contractual price adjustment mechanisms, partially offset by strategic pricing
actions and stronger volumes in certain regions.
Gross profit was $129.3 million for the second quarter of 2020 compared with
$121.0 million for the second quarter of 2019. The $8.3 million increase in
gross profit was primarily due to the lower priced raw materials, the timing of
contractual pass through arrangements, strategic pricing actions, and product
mix shifts. Gross profit margin increased to 21.5 percent from 19.2 percent for
the three months ended April 30, 2020 and 2019, respectively.
Operating profit was $70.5 million for the second quarter of 2020 compared with
operating profit of $47.0 million for the second quarter of 2019. Adjusted
EBITDA was $92.2 million for the second quarter of 2020 compared with $68.9
million for the second quarter of 2019. The increase was primarily due to the
same factors that impacted gross profit and a reduction in the segment's SG&A
expense due to a decrease in performance based compensation, cost reduction
activities, and 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 in North 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 and uncoated recycled paperboard,
some of which we use to produce and sell industrial products (tubes and cores,
construction products, protective packaging, and adhesives) and consumer
packaging products (folding cartons, set-up boxes, and packaging services). In
addition, we also purchase and sell recycled fiber. On April 1, 2020 , we
completed the divestiture
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of the CPG business and we no longer produce and sell consumer packaging
products (folding cartons, set-up boxes, and packaging services). Key factors
influencing profitability in the Paper Packaging & Services segment are:
•Selling prices, product mix, customer demand and sales volumes;
•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 $481.6 million for the second quarter of 2020 compared with
$497.6 million for the second quarter of 2019. The $16.0 million decrease was
primarily due to lower published containerboard and boxboard prices and the
divestment of the CPG business, partially offset by the Company's eleven day
additional ownership period for the quarter compared to 2019. The Company took
approximately 24,000 tons of economic downtime across its containerboard
operations during the quarter.
Gross profit was $94.9 million for the second quarter of 2020 compared with
$108.3 million for the second quarter of 2019. The decrease in gross profit was
primarily due to the same factors that impacted net sales. Gross profit margin
was 19.7 percent and 21.8 percent for the second quarter of 2020 and 2019,
respectively.
Operating (loss) profit was $(5.5) million for the second quarter of 2020
compared with $30.2 million for the second quarter of 2019. The decrease in
operating profit was primarily due to the loss on divestment of the CPG business
due to the allocation of goodwill to the transaction. Adjusted EBITDA was $79.1
million for the second quarter of 2020 compared with $82.1 million for the
second quarter of 2019. The $3.0 million decrease in Adjusted EBITDA was
primarily due to the same factors that impacted net sales and the segment
receiving a greater portion of allocated corporate costs, partially offset by a
reduction in the segment's SG&A expense due to a decrease in performance based
compensation and cost reduction activities.
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 $67.4 million for the second quarter of 2020 compared with $77.0
million for the second quarter of 2019. The $9.6 million decrease was primarily
due to continued demand softness and lower average sale prices primarily as a
result of raw material price decreases and corresponding contractual price
adjustment mechanisms.
Gross profit was $13.9 million for the second quarter of 2020 compared with
$16.6 million for the second quarter of 2019. The decrease was primarily due to
the same factors that impacted net sales, partially offset by the timing of
contractual pass through arrangements for raw material price decreases. The
decrease in gross profit margin to 20.6 percent for the second quarter of 2020
from 21.6 percent for the second quarter of 2019 was primarily due to the same
factors.
Operating profit was $4.6 million for the second quarter of 2020 compared with
$11.2 million for the second quarter of 2019. Adjusted EBITDA was $6.9 million
for the second quarter of 2020 compared with $7.7 million for the second quarter
of 2019. The 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
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As of April 30, 2020 , our Land Management segment consisted of approximately
245,000 acres of timber properties in the southeastern United States . Key
factors influencing profitability in the Land Management segment are:
•Planned level of timber sales;
•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 of April 30, 2020 , we had approximately 18,800 acres of special use property
in the United States .
Net sales decreased to $6.7 million for the second quarter of 2020 compared with
$7.1 million for the second quarter of 2019.
Operating profit increased to $2.4 million for the second quarter of 2020
compared with $2.2 million for the second quarter of 2019. Adjusted EBITDA was
$3.1 million and $3.3 million for the second quarter of 2020 and 2019,
respectively.
Other Income Statement Changes
Interest Expense, net
Interest expense, net, was $29.3 million for the second quarter of 2020 compared
with $33.9 million for the second quarter of 2019. This decrease was primarily
due to lower borrowings.
U.S. and Non-U.S. Income before Income Tax Expense
See the following tables for details of the U.S. and non-U.S. income before
income taxes and U.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").
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Summary
Three Months Ended
April 30,
2020 2019
Non-U.S. % of Consolidated Net Sales 38.8 % 39.0 %
U.S. % of Consolidated Net Sales 61.2 % 61.0 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. 115.1 % 115.3 %
U.S. % of Consolidated I.B.I.T. (15.1) % (15.3) %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. before Adjustments 56.1 % 53.4 %
U.S. % of Consolidated I.B.I.T. before Adjustments 43.9 % 46.6 %
100.0 % 100.0 %
Non-U.S. I.B.I.T. Reconciliation
Three Months Ended
April 30,
(in millions) 2020 2019
Non-U.S. I.B.I.T. $ 47.9 $ 37.5
Non-cash asset impairment charges 1.3 -
Restructuring charges 1.6 1.9
Acquisition and integration related costs - 0.2
Loss on sale of businesses, net - 1.7
Total Non-U.S. Adjustments 2.9 3.8
Non-
U.S. I.B.I.T. Reconciliation
Three Months Ended
April 30,
(in millions) 2020 2019
U.S. I.B.I.T. $ (6.3) $ (5.0)
Restructuring charges 2.8 5.6Acquisition and integration related costs 4.8 13.6 Debt extinguishment charges
- 21.9
Loss on sale of businesses, net 38.4 -
Total U.S. Adjustments 46.0 41.1
U.S. I.B.I.T. before Adjustments $ 39.7 $ 36.1
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 second quarter of 2020 was $26.5 million on $41.6
million of pretax income and income tax expense for the first quarter of 2019
was $11.5 million on $32.5 million of pretax income. The increase to income tax
expense was primarily caused by changes in the expected mix of earnings among
tax jurisdictions, non-deductible goodwill for tax purposes related to the sale
of the CPG business within the Paper Packaging & Services segment, and
unfavorable one-time
44
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Table of Contents
discrete items of $3.0 million that were recognized in this quarter. Income tax
expense for the second quarter of 2019 reflected a provisional net tax benefit
of $6.5 million for the acquisition of Caraustar. Other immaterial discrete
items in the quarter resulted in tax benefit of $1.6 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 $7.9 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 second quarter of 2020 and 2019
was $4.4 million and $7.5 million , respectively. The decrease was primarily due
to a decrease in the net operating profit of 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
$11.4 million for the second quarter of 2020 compared to $13.6 million for the
second 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 $1.3 million
and $0.7 million for the second quarter of 2020 and 2019, respectively.
45
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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 six months ended
April 30, 2020 and 2019:
Six Months Ended
April 30,
(in millions) 2020 2019
Net sales:
Rigid Industrial Packaging & Services $ 1,171.3 $ 1,229.5
Paper Packaging & Services 955.3 714.9
Flexible Products & Services 130.4 152.1
Land Management 13.7 13.8
Total net sales $ 2,270.7 $ 2,110.3
Operating profit:
Rigid Industrial Packaging & Services $ 113.3 $ 70.3
Paper Packaging & Services 27.0 65.5
Flexible Products & Services 6.6 17.2
Land Management 4.3 4.8
Total operating profit $ 151.2 $ 157.8
EBITDA:
Rigid Industrial Packaging & Services $ 149.9 $ 105.7
Paper Packaging & Services 106.5 109.4
Flexible Products & Services 9.7 20.7
Land Management 6.2 6.9
Total EBITDA $ 272.3 $ 242.7
Adjusted EBITDA:
Rigid Industrial Packaging & Services $ 154.7 $ 117.6
Paper Packaging & Services 157.0 128.6
Flexible Products & Services 11.0 15.6
Land Management 6.0 6.5
Total Adjusted EBITDA $ 328.7 $ 268.3
46-------------------------------------------------------------------------------- The following table sets forth EBITDA and Adjusted EBITDA, reconciled to net income and operating profit, for our consolidated results for the six months endedApril 30, 2020 and 2019: Six Months Ended April 30, (in millions) 2020 2019 Net income$ 51.9 $ 56.9 Plus: interest expense, net 60.0 45.6 Plus: debt extinguishment charges - 21.9 Plus: income tax expense 37.9 31.5 Plus: depreciation, depletion and amortization expense 122.5 86.8 EBITDA$ 272.3 $ 242.7 Net income$ 51.9 $ 56.9 Plus: interest expense, net 60.0 45.6 Plus: non-cash pension settlement charges (0.1) - Plus: debt extinguishment charges - 21.9 Plus: income tax expense 37.9 31.5 Plus: other expense, net 2.4 2.1 Plus: equity earnings of unconsolidated affiliates, net of tax (0.9) (0.2) Operating profit 151.2 157.8 Less: other expense, net 2.4 2.1 Less: non-cash pension settlement charges (0.1) - Less: equity earnings of unconsolidated affiliates, net of tax (0.9) (0.2) Plus: depreciation, depletion and amortization expense 122.5 86.8 EBITDA$ 272.3 $ 242.7 Plus: restructuring charges 7.7 11.2 Plus: acquisition and integration related costs 9.9 16.4 Plus: non-cash asset impairment charges 1.4 2.1 Plus: non-cash pension settlement charges (0.1) - Plus: incremental COVID-19 costs, net 0.9 - Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net 36.6 (4.1) Adjusted EBITDA$ 328.7 $ 268.3 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 six
months ended
Six Months Ended
April 30,
(in millions) 2020 2019
Rigid Industrial Packaging & Services
Operating profit $ 113.3 $ 70.3
Less: other expense, net 3.9 3.2
Less: equity earnings of unconsolidated affiliates, net of tax (0.9) (0.2)
Plus: depreciation and amortization expense 39.6 38.4
EBITDA $ 149.9 $ 105.7
Plus: restructuring charges 3.8 8.0
Plus: acquisition and integration related costs - 0.3
Plus: non-cash impairment charges 1.4 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 (0.7) 1.5
Adjusted EBITDA $ 154.7 $ 117.6
Paper Packaging & Services
Operating profit $ 27.0 $ 65.5
Less: other income, net (1.4) (0.9)
Less: non-cash pension settlement charges (0.1) -
Plus: depreciation and amortization expense 78.0 43.0
EBITDA $ 106.5 $ 109.4
Plus: restructuring charges 2.7 3.1
Plus: acquisition and integration related costs 9.9 16.1
Plus: non-cash pension settlement charges (0.1) -
Plus: incremental COVID-19 costs, net 0.5 -
Less: loss on disposal of properties, plants and equipment, and
businesses, net 37.5 -
Adjusted EBITDA $ 157.0 $ 128.6
Flexible Products & Services
Operating profit $ 6.6 $ 17.2
Less: other income, net (0.1) (0.2)
Plus: depreciation and amortization expense 3.0 3.3
EBITDA $ 9.7 $ 20.7
Plus: restructuring charges 1.2 -
Plus: incremental COVID-19 costs, net 0.1 -
Less: gain on disposal of properties, plants and equipment, and
businesses, net - (5.1)
Adjusted EBITDA $ 11.0 $ 15.6
Land Management
Operating profit $ 4.3 $ 4.8
Plus: depreciation, depletion and amortization expense 1.9 2.1
EBITDA $ 6.2 $ 6.9
Plus: restructuring charges - 0.1
Less: loss on disposal of properties, plants and equipment, and
businesses, net (0.2) (0.5)
Adjusted EBITDA $ 6.0 $ 6.5
Net Sales
48-------------------------------------------------------------------------------- Net sales were$2,270.7 million for the first six of 2020 compared with$2,110.3 million for the first six of 2019. The$160.4 million increase was primarily due to the sales contributed by the acquired Caraustar operations, partially offset by lower volumes in certain regions, lower average sale prices, the impact of foreign currency translation, and the divestment of the CPG business. See the "Segment Review" below for additional information on net sales by segment during the first six months of 2020. Gross Profit Gross profit was$463.3 million for the first six months of 2020 compared with$421.5 million for the first six 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 20.0 percent for first six months of 2020 and 2019, respectively. Selling, General and Administrative Expenses SG&A expenses were$256.5 million for the first six months of 2020 from$238.1 million for the first six months of 2019. The$18.4 million increase was primarily due to additional expenses attributable to the acquired Caraustar operations and increased amortization of intangible assets resulting from the acquisition of Caraustar, partially offset by decreased performance based compensation and cost reduction activities. SG&A expenses were 11.3 percent of net sales for the first six months of 2020 compared with 11.3 percent of net sales for the first six months of 2019. Restructuring Charges Restructuring charges were$7.7 million for the first six months of 2020 compared with$11.2 million for the first six 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 six months of 2020. Acquisition and Integration Related Costs Acquisition and integration related costs were$9.9 million for the first six months of 2020 compared with$16.4 million for the first six months of 2019. We completed the Caraustar Acquisition onFebruary 11, 2019 and the Tholu Acquisition onJune 11, 2019 . The decrease in acquisition and integration related costs was primarily due to reduced expenses incurred in the first six months of 2020 relative to the first six months of 2019 in which costs were incurred in connection 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$1.4 million for the first six months of 2020 compared with$2.1 million for the first six 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$1.8 million and$5.8 million for the first six months of 2020 and 2019, respectively. Loss on Disposal of Businesses, net The loss on disposal of business, net was$38.4 million and$1.7 million for the first six months of 2020 and 2019, respectively. The increase was primarily due to divestiture of the CPG business. Financial Measures Operating profit was$151.2 million for the first six months of 2020 compared with$157.8 million for the first six months of 2019. Net income was$51.9 million for the first six months of 2020 compared with$56.9 million for the first six months of 2019. Adjusted EBITDA was$328.7 million for the first six months of 2020 compared with$268.3 million for the first six months of 2019. The$60.4 million increase in Adjusted EBITDA was primarily due to the contribution by the acquired Caraustar operations, favorable timing of contractual pass through arrangements, and a reduction in SG&A expense, partially offset by lower volumes. Segment Review 49 --------------------------------------------------------------------------------Rigid Industrial Packaging & Services Net sales were$1,171.3 million for the first six months of 2020 compared with$1,229.5 million for the first six months of 2019. The$58.2 million decrease in net sales was primarily due to lower average sale prices as a result of raw material price decreases and corresponding contractual price adjustment mechanisms, partially offset by strategic pricing actions. Gross profit was$237.1 million for the first six months of 2020 compared with$219.6 million for the first six months of 2019. The$17.5 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 20.2 percent for the first six months of 2020 from 17.9 percent for the first six months of 2019. Operating profit was$113.3 million for the first six months of 2020 compared with$70.3 million for the first six months of 2019. Adjusted EBITDA was$154.7 million for the first six months of 2020 compared with$117.6 million for the first six months of 2019. The$37.1 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$240.4 million to$955.3 million for the first six months of 2020 compared with$714.9 million for the first six months of 2019, primarily due to contribution from the acquired Caraustar operations, partially offset by decreased volumes, lower published containerboard and boxboard prices, and the divestment of the CPG business. Gross profit was$195.0 million for the first six months of 2020 compared with$162.2 million for the first six months of 2019. Gross profit margin was 20.4 percent and 22.7 percent for the first six months of 2020 and 2019, respectively. The increase in gross profit was due primarily to the same factors that impacted net sales. The decrease in gross profit margin was due primarily to higher manufacturing costs. Operating profit was$27.0 million for the first six months of 2020 compared with$65.5 million for the first six months of 2019. The decrease in operating profit was primarily due to the loss on divestment of the CPG business due to the allocation of goodwill to the transaction. Adjusted EBITDA was$157.0 million for the first six months of 2020 compared with$128.6 million for the first six months of 2019. The$28.4 million increase in Adjusted EBITDA was due to the same factors that impacted net sales and a reduction in the segment's SG&A expense due to a decrease in performance based compensation and cost reduction activities, partially offset by the segment receiving a greater portion of allocated corporate costs. Flexible Products & Services Net sales decreased$21.7 million to$130.4 million for the first six months of 2020 compared with$152.1 million for the first six months of 2019. The decrease was primarily due to continued demand softness and lower average sale prices. Gross profit was$26.2 million for the first six months of 2020 compared with$34.0 million for the first six months of 2019. The decrease was primarily due to the same factors that impacted net sales, partially offset by the timing of contractual pass through arrangements for raw material price decreases. Gross profit margin increased to 20.1 percent for the first six months of 2020 from 22.4 percent for the first six months of 2019. Operating profit was$6.6 million for the first six months of 2020 compared with$17.2 million for the first six months of 2019. Adjusted EBITDA was$11.0 million for the first six months of 2020 compared with$15.6 million for the first six months of 2019. The$4.6 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$13.7 million for the first six months of 2020 compared with$13.8 million for the first six months of 2019. Operating profit increased to$4.3 million for the first six months of 2020 from$4.8 million for the first six months of 2019. Adjusted EBITDA was$6.0 million and$6.5 million for the first six months of 2020 and 2019, respectively. 50 -------------------------------------------------------------------------------- Other Income Statement Changes Interest expense, net Interest expense, net, was$60.0 million for the first six months of 2020 compared with$45.6 million for the first six 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 Six Months Ended April 30, 2020 2019 Non-U.S. % of Consolidated Net Sales 38.7 % 43.2 % U.S. % of Consolidated Net Sales 61.3 %
56.8 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. 89.4 % 59.4 %
U.S. % of Consolidated I.B.I.T. 10.6 % 40.6 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. before Adjustments 57.0 % 43.6 %
U.S. % of Consolidated I.B.I.T. before Adjustments 43.0 % 56.4 %
100.0 % 100.0 %
Non-U.S. I.B.I.T. Reconciliation
Six Months Ended
April 30,
(in millions) 2020 2019
Non-U.S. I.B.I.T. $ 79.5 $ 52.4
Non-cash asset impairment charges 1.4 2.1
Restructuring charges 2.4 5.2
Acquisition and integration related costs - 0.3
Loss on sale of businesses, net - 1.7 Total Non-U.S. Adjustments 3.8 9.3
Non-
U.S. I.B.I.T. Reconciliation
Six Months Ended
April 30,
(in millions) 2020 2019
U.S. I.B.I.T. $ 9.4 $ 35.8
Non-cash pension settlement income (0.1) -
Restructuring charges 5.3 6.0
Acquisition-related costs 9.9 16.1
Debt extinguishment charges - 21.9
Loss on sale of businesses, net 38.4 -
Total U.S. Adjustments 53.5 44.0
51
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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 six months of 2020 was $37.9 million on
$88.9 million of pretax income and income tax expense for the first six months
of 2019 was $31.5 million on $88.2 million of pretax income. The increase to
income tax expense was primarily caused by changes in the expected mix of
earnings among tax jurisdictions, non-deductible goodwill for tax purposes
related to the sale of the CPG business within the Paper Packaging & Services
segment, and unfavorable one-time discrete items of $1.2 million that were
recognized in the period. The first six 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 tax effect of foreign currency losses of $1.7 million recognized due
to a change in the permanent reinvestment assertion. Other discrete items
included $6.6 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 six
months of 2019 resulted in a tax benefit of $4.0 million .
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests for the first six months of
2020 and 2019 was $8.2 million and $13.6 million , respectively. This decrease
was primarily due to decreased net operating profit of the Flexible Packaging JV
during the first six 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
$43.7 million for the first six months of 2020 compared to $43.3 million for the
first six 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 loss of $55.4 million and $9.5 million for
the first six months of 2020 and 2019, respectively. This change was primarily
due to the strengthening of the dollar against significant currencies.
Derivative financial instruments
The change in derivative financial instruments, net of tax was a loss of $22.9
million and $15.7 million for the first six 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 six months of 2020
and 2019 was income of $23.0 million and a loss of $0.1 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-10Q.
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Table of Contents
BALANCE SHEET CHANGES Working Capital changes The$23.7 million decrease in accounts receivable to$640.5 million as ofApril 30, 2020 from$664.2 million as ofOctober 31, 2019 was primarily due to the divestment of the CPG business and a decrease in net sales. The$19.2 million decrease in inventories to$339.0 million as ofApril 30, 2020 from$358.2 million as ofOctober 31, 2019 was primarily due to the divestment of the CPG business and decreased raw material purchases. The$16.9 million decrease in accounts payable to$418.3 million as ofApril 30, 2020 from$435.2 million as ofOctober 31, 2019 was primarily due to the divestment of the CPG business and decreased raw material purchases and prices. Other balance sheet changes The$43.1 million decrease in goodwill to$1,474.7 million as ofApril 30, 2020 from 1,517.8 million as ofOctober 31, 2019 was primarily due to the divestment of the CPG business. See Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 of this Form-10Q for additional information. The$36.3 million decrease in other intangible assets to$740.2 million as ofApril 30, 2020 from$776.5 million as ofOctober 31, 2019 was primarily due to amortization. See Note 3 to the Interim Condensed Consolidated Financial Statements in Item 1 of this Form-10Q for additional information. The$94.2 million decrease in properties, plants and equipment, net to$1,596.1 million as ofApril 30, 2020 from$1,690.3 million as ofOctober 31, 2019 was primarily due to depreciation and fixed assets sold in the divestiture of the CPG business. The$56.0 million decrease in accrued payroll and employee benefits to$86.4 million as ofApril 30, 2020 from$142.4 million as ofOctober 31, 2019 was primarily due to annual incentive plan payments and a decrease in accrued performance based compensation. The$63.9 million decrease in long term debt to$2,595.1 million as ofApril 30, 2020 from$2,659.0 million as ofOctober 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-10Q for additional information. The$39.5 million decrease in pension liabilities to$138.1 million as ofApril 30, 2020 from$177.6 million as ofOctober 31, 2019 was primarily due to the remeasurement of twoU.S. pension plans. See Note 10 to the Interim Condensed Consolidated Financial Statements in Item 1 of this Form-10Q for additional information. The$24.7 million increase in other long term liabilities to$153.6 million as ofApril 30, 2020 from$128.9 million as ofOctober 31, 2019 was primarily due to an increase of$15.6 million related to derivative financial instruments, and an increase of$6.8 million related to taxes. See Note 7 to the Interim Condensed Consolidated Financial Statements in Item 1 of this Form-10Q 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 six months of 2020 and 2019, we invested$65.4 million (excluding$2.8 million for purchases of and investments in timber properties) and$63.6 million (excluding$2.3 million for purchases of and investments in timber properties), respectively, in capital expenditures. 53 -------------------------------------------------------------------------------- Table of Contents We anticipate future capital expenditures, excluding the potential purchases of and investments in timber properties, ranging from$141.0 million to$161.0 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 OnSeptember 24, 2019 , we amended and restated the existing receivable financing facility inthe United States to establish a$275.0 million United States Trade Accounts Receivables Credit Facility (the "U.S. Receivables Facility") with several financial institutions. TheU.S. Receivables Facility matures onSeptember 24, 2020 . As ofApril 30, 2020 ,$246.5 million , net of deferred financing costs of$0.3 million , was outstanding under theU.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 theU.S. Receivables Facility at any time upon five days prior written notice. TheU.S. Receivables Facility is secured by certain of ourUnited 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 theU.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 Company's considerations of the impact of reference rate reform on contracts utilizing LIBOR rates. TheU.S. Receivables Facility also contains certain covenants and events of default, which are substantially the same as the covenants under the 2019 Credit Agreement. As ofApril 30, 2020 , we were in compliance with these covenants. Proceeds of theU.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 OnApril 17, 2020 ,Cooperage Receivables Finance B.V. and Greif Coordination Center BVBA, an indirect wholly owned subsidiary ofGreif, 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 ($108.2 million as ofApril 30, 2020 ) secured by certain European accounts receivable. The$89.7 million outstanding on the European RFA as ofApril 30, 2020 is reported as 'Long-term debt' on the interim condensed consolidated balance sheets because we intend to refinance these obligations on a long-term basis and have the intent and ability to consummate a long-term refinancing by exercising the renewal option in the respective agreement or entering into new financing arrangements. See Note 6 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information. Borrowing Arrangements Long-term debt is summarized as follows:April 30 ,October 31 , (in millions) 2020
2019
2019 Credit Agreement - Term Loans$ 1,570.3 $ 1,612.2 Senior Notes due 2027 494.7 494.3 Senior Notes due 2021 216.1 221.7 Accounts receivable credit facilities 336.2
351.6
2019 Credit Agreement - Revolving Credit Facility 73.7 76.1
Other debt 0.2 0.4
2,691.2 2,756.3
Less: current portion 83.8 83.7
Less: deferred financing costs 12.3 13.6
Long-term debt, net $ 2,595.1 $ 2,659.0
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2019 Credit Agreement OnFebruary 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 ourU.S. subsidiaries 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 onFebruary 11, 2024 , (b) a$1,275.0 million secured term loan A-1 facility with quarterly principal installments commencing onApril 30, 2019 and continuing through maturity onJanuary 31, 2024 , and (c) a $400.0 million secured term loan A-2 facility with quarterly principal installments commencing onApril 30, 2019 and continuing through maturity onJanuary 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. 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 onJuly 31, 2020 to 4.00 onJuly 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 ofApril 30, 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 OnFebruary 11, 2019 , we issued$500.0 million of 6.50% Senior Notes dueMarch 1, 2027 (the "Senior Notes due 2027"). Interest on the Senior Notes due 2027 is payable semi-annually commencing onSeptember 1, 2019 . Our obligations under the Senior Notes due 2027 are guaranteed by ourU.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 bothMoody's Investors Service, Inc. and Standard & Poor's Global Ratings and no default or event of default has occurred and is continuing. As ofApril 30, 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. Senior Notes due 2021 Our Luxembourg subsidiary has issued €200.0 million of 7.375% Senior Notes dueJuly 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 byGreif, Inc. The Senior Notes due 2021 are governed by an Indenture that contains various covenants. As ofApril 30, 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 monthU.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 Company's considerations of the impact of reference rate reform on contracts utilizing LIBOR rates. In 2020, the Company entered into four forward starting interest rate swaps with a total notional amount of$200.0 million effectiveJuly 15, 2021 . The Company receives variable rate interest payments based upon one monthU.S. dollar LIBOR, and in return the Company is obligated to pay interest at a weighted-average interest rate of 0.90% plus a spread. 55 -------------------------------------------------------------------------------- Table of Contents 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 ofApril 30, 2020 is$1,000.0 million . We receive variable rate interest payments based upon one monthU.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 monthU.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 ofApril 30, 2020 , andOctober 31, 2019 , we had outstanding foreign currency forward contracts in the notional amount of$193.5 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. OnMarch 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 onMarch 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. See Note 7 to the Interim Condensed Consolidated Financial Statements included in Item 1 of this Form 10-Q for additional information. 56
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