GREIF, INC. The terms "Greif," the "Company," "we," "us" and "our" as used in this discussion refer toGreif, Inc. and its subsidiaries. RESULTS OF OPERATIONS The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States ("GAAP"). The preparation of these 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 at the date of our consolidated financial statements. Historical revenues and earnings may or may not be representative of future operating results due to various economic and other factors. 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, including debt extinguishment charges, plus income tax expense, plus depreciation, depletion and amortization, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus acquisition-related costs, plus non-cash impairment charges, plus non-cash pension settlement 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-related costs, plus non-cash asset impairment charges, plus non-cash pension settlement 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 charges, restructuring charges, debt extinguishment charges, acquisition-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 24
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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. The following table sets forth the net sales, operating profit (loss), EBITDA and Adjusted EBITDA for each of our business segments for 2019, 2018 and 2017: Year Ended October 31, (in millions) 2019 2018 2017 Net sales Rigid Industrial Packaging & Services$ 2,490.6 $ 2,623.6 $ 2,522.7 Paper Packaging & Services 1,780.0 898.5 800.9 Flexible Products & Services 297.5 324.2 286.4 Land Management 26.9 27.5 28.2 Total net sales$ 4,595.0 $ 3,873.8 $ 3,638.2 Operating profit (loss): Rigid Industrial Packaging & Services 179.6 183.2 190.1 Paper Packaging & Services 184.3 158.3 93.5 Flexible Products & Services 25.3 19.4 5.8 Land Management 9.9 9.6 10.1 Total operating profit$ 399.1 $ 370.5 $ 299.5 EBITDA: Rigid Industrial Packaging & Services 251.6 249.0 241.9 Paper Packaging & Services 307.0 191.8 115.3 Flexible Products & Services 32.7 25.7 11.1 Land Management 14.2 14.2 14.6 Total EBITDA$ 605.5 $ 480.7 $ 382.9 Adjusted EBITDA: Rigid Industrial Packaging & Services 269.9 273.4 294.9 Paper Packaging & Services 348.3 192.3 126.1 Flexible Products & Services 28.6 25.6 12.3 Land Management 12.1 11.9 12.2 Total Adjusted EBITDA$ 658.9 $ 503.2 $ 445.5 25
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The following table sets forth EBITDA and Adjusted EBITDA, reconciled to net income and operating profit, for our consolidated results for 2019, 2018 and 2017: Year Ended October 31, (in millions) 2019 2018 2017 Net income 194.2 229.5 135.1 Plus: interest expense, net 112.5 51.0 60.1 Plus: debt extinguishment charges 22.0 - - Plus: income tax expense 70.7 73.3
67.2
Plus: depreciation, depletion and amortization expense 206.1 126.9 120.5 EBITDA$ 605.5 $ 480.7 $ 382.9 Net income 194.2 229.5 135.1 Plus: interest expense, net 112.5 51.0 60.1 Plus: debt extinguishment charges 22.0 - - Plus: income tax expense 70.7 73.3
67.2
Plus: non-cash pension settlement charges - 1.3
27.1
Plus: other (income) expense, net 2.6 18.4
12.0
Plus: equity earnings of unconsolidated affiliates, net of tax (2.9 ) (3.0 ) (2.0 ) Operating profit 399.1 370.5
299.5
Less: non-cash pension settlement charges - 1.3
27.1
Less: other (income) expense, net 2.6 18.4
12.0
Less: equity earnings of unconsolidated affiliates, net of tax (2.9 ) (3.0 ) (2.0 ) Plus: depreciation, depletion and amortization expense 206.1 126.9 120.5 EBITDA$ 605.5 $ 480.7 $ 382.9 Plus: restructuring charges 26.1 18.6 12.7 Plus: acquisition-related charges 29.7 0.7
0.7
Plus: non-cash asset impairment charges 7.8 8.3
20.8
Plus: non-cash pension settlement charges - 1.3
27.1
Less: (Gain) loss on disposal of properties, plants, equipment, and businesses, net (10.2 ) (6.4 ) 1.3 Adjusted EBITDA$ 658.9 $ 503.2 $ 445.5 26
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The following table sets forth EBITDA and Adjusted EBITDA for each of our business segments, reconciled to the operating profit for each segment, for 2019 and 2018: Year Ended October 31, (in millions) 2019 2018
2017
Rigid Industrial Packaging & Services Operating profit$ 179.6 $ 183.2 $ 190.1 Less: non-cash pension settlement charges - 1.3
16.7
Less: other (income) expense, net 7.2 17.1
10.5
Less: equity earnings of unconsolidated affiliates, net of tax
(2.9 ) (3.0 ) (2.0 )
Plus: depreciation and amortization expense 76.3 81.2 77.0
EBITDA $ 251.6 $ 249.0 $ 241.9
Plus: restructuring charges 18.8 17.3 11.2
Plus: acquisition-related charges 0.6 0.7 0.5
Plus: non-cash asset impairment charges 2.7 8.3
20.5
Plus: non-cash pension settlement charges - 1.3
16.7
Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net (3.8 ) (3.2 ) 4.1 Adjusted EBITDA$ 269.9 $ 273.4 $ 294.9 Paper Packaging & Services Operating profit$ 184.3 $ 158.3 $ 93.5 Less: non-cash pension settlement charges - -
10.2
Less: other (income) expense, net (3.4 ) 0.7 (0.1 ) Plus: depreciation and amortization expense 119.3 34.2 31.9 EBITDA$ 307.0 $ 191.8 $ 115.3 Plus: restructuring charges 6.2 0.4 0.3 Plus: acquisition-related charges 29.1 -
0.2
Plus: non-cash asset impairment charges 5.1 - - Plus: non-cash pension settlement charges - -
10.2
Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net 0.9 0.1 0.1 Adjusted EBITDA$ 348.3 $ 192.3 $ 126.1 Flexible Products & Services Operating profit (loss)$ 25.3 $ 19.4 $ 5.8 Less: non-cash pension settlement charge - -
0.1
Less: other (income) expense, net (1.2 ) 0.6
1.6
Plus: depreciation and amortization expense 6.2 6.9 7.0 EBITDA$ 32.7 $ 25.7 $ 11.1 Plus: restructuring charges 1.0 0.9 1.2 Plus: non-cash asset impairment charges - -
0.3
Plus: non-cash pension settlement charges - -
0.1
Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net (5.1 ) (1.0 ) (0.4 ) Adjusted EBITDA$ 28.6 $ 25.6 $ 12.3 Land Management Operating profit 9.9 9.6 10.1 Less: non-cash pension settlement charge - -
0.1
Plus: depreciation, depletion and amortization expense 4.3 4.6 4.6 EBITDA$ 14.2 $ 14.2 $ 14.6 Plus: restructuring charges 0.1 - - Plus: non-cash pension settlement charge - -
0.1
Less: (gain) loss on disposal of properties, plants, equipment, and businesses, net (2.2 ) (2.3 ) (2.5 ) Adjusted EBITDA$ 12.1 $ 11.9 $ 12.2 27
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Year 2019 Compared to Year 2018Net Sales Net sales were$4,595.0 million for 2019 compared with$3,873.8 million for 2018. The$721.2 million increase was primarily due to the sales contributed by the acquired Caraustar operations, partially offset by lower volumes in certain regions and the impact of foreign currency translation. Gross Profit Gross profit was$959.9 million for 2019 compared with$788.9 million for 2018. 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 20.9 percent for 2019 compared to 20.4 percent for 2018. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased$110.2 million to$507.4 million for 2019 from$397.2 million for 2018. This increase was primarily due to expenses attributable to the acquired Caraustar operations, partially offset by a reduction in salaries and benefits costs. SG&A expenses were 11.0 percent of net sales for 2019 compared with 10.3 percent of net sales for 2018. Restructuring Charges Restructuring charges were$26.1 million for 2019 compared with$18.6 million for 2018. Restructuring activities and associated costs during 2019 are anticipated to deliver annual run-rate savings of approximately$31.6 million with payback periods ranging from one to three years among the plans. See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Acquisition-related Costs Acquisition-related costs were$29.7 million for 2019 compared with$0.7 million for 2018. The increase was primarily due to expenses incurred in connection with the Caraustar Acquisition and the Tholu Acquisition. See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Impairment Charges There were no goodwill impairment charges for 2019 and 2018. Non-cash asset impairment charges were$7.8 million for 2019 compared with$8.3 million for 2018. In 2019, these charges were primarily related to plant closures. See Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Gain on Disposal of Properties, Plants and Equipment, net The gain on disposal of properties, plants, and equipment, net was$13.9 million and$5.6 million for 2019 and 2018, respectively. See Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Gain on Disposal of Businesses, net The gain on disposal of business, net was$3.7 million for 2019 and$0.8 million for 2018. See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Financial Measures Operating profit was$399.1 million for 2019 compared with$370.5 million for 2018. Net income was$194.2 million for 2019 compared with$229.5 million for 2018. Adjusted EBITDA was$658.9 million for 2019 compared with$503.2 million for 2018. The$155.7 million increase in Adjusted EBITDA was primarily due to the contribution from the acquired Caraustar operations, partially offset by lower volumes in certain regions and a negative impact from foreign currency translation. 28
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Trends
We anticipate demand softness in the industrial manufacturing businesses, particularly inNorth America andWestern Europe , to continue in 2020. Additionally, raw material prices for steel, resin, old corrugated containers, recycled coated and uncoated paperboard are expected to remain relatively stable in 2020. Segment ReviewRigid Industrial 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$2,490.6 million for 2019 compared with$2,623.6 million for 2018. The$133.0 million decrease in net sales was due primarily to decreased volumes in certain regions and the impact of foreign currency translation, partially offset by an increase in selling prices due to strategic pricing decisions. Gross profit was$460.1 million for 2019 compared with$490.8 million for 2018. The$30.7 million decrease in gross profit was primarily due to the same factors that impacted net sales. Gross profit margin decreased to 18.5 percent in 2019 from 18.7 percent in 2018. Operating profit was$179.6 million for 2019 compared with$183.2 million for 2018. The$3.6 million decrease was primarily attributable to the same factors that impacted net sales, partially offset by a decrease in the segment's SG&A expense. The decrease in SG&A expense included a one-time Brazilian tax recovery of approximately$7.0 million . Adjusted EBITDA was$269.9 million for 2019 compared with$273.4 million for 2018. The$3.5 million decrease was primarily due to the same factors that impacted operating profit. Depreciation, depletion and amortization expense was$76.3 million and$81.2 million for 2019 and 2018, respectively.Paper Packaging & Services Key factors influencing profitability in thePaper 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
• Restructuring charges; and
• Acquisition of businesses and facilities.
Net sales were$1,780.0 million for 2019 compared with$898.5 million for 2018. The$881.5 million increase was primarily due to$936.3 million of contribution from the acquired Caraustar operations, partially offset by lower published containerboard prices and decreased volumes. Gross profit was$425.4 million for 2019 compared with$222.5 million for 2018. The increase in gross profit was due primarily to$211.6 million of contribution from the acquired Caraustar operations, partially offset by the same factors that impacted net sales. Gross profit margin was 23.9 percent and 24.8 percent for 2019 and 2018, respectively. 29
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Operating profit was$184.3 million for 2019 compared with$158.3 million for 2018. Adjusted EBITDA was$348.3 million for 2019 compared with$192.3 million for 2018. The increase was due primarily to$163.9 million of contribution from the acquired Caraustar operations, partially offset by the same factors that impacted net sales. Depreciation, depletion and amortization expense was$119.3 million and$34.2 million for 2019 and 2018, respectively. Flexible Products & Services 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$297.5 million for 2019 compared with$324.2 million for 2018. The$26.7 million decrease was primarily due to the impact of foreign currency translation and volume decreases, partially offset by improved product mix. Gross profit was$64.2 million for 2019 compared with$65.2 million for 2018. The decrease was primarily attributable to the same factors that impacted net sales, partially offset by lower manufacturing costs. The increase in gross profit margin to 21.6 percent for 2019 from 20.1 percent for 2018 was primarily due to lower manufacturing costs. Operating profit was$25.3 million for 2019 compared with$19.4 million for 2018. The increase in operating profit was primarily due to a$5.1 million gain on disposal of properties, plants and equipment. Adjusted EBITDA was$28.6 million for 2019 compared with$25.6 million for 2018. The increase was due to a reduction in segment SG&A expense, partially offset by lower gross profit. Depreciation, depletion and amortization expense was$6.2 million for 2019 compared with$6.9 million for 2018, respectively. Land Management As ofOctober 31, 2019 , our Land Management segment consisted of approximately 251,000 acres of timber properties in the southeasternUnited 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 properties, 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.
• 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 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.
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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 ofOctober 31, 2019 , we estimated that there were 18,800 acres inthe United States of special use property, which we expect will be available for sale in the next four to six years. Net sales decreased to$26.9 million for 2019 compared with$27.5 million for 2018. Operating profit increased to$9.9 million for 2019 from$9.6 million for 2018. Adjusted EBITDA was$12.1 million and$11.9 million for 2019 and 2018, respectively. Depreciation, depletion and amortization expense was$4.3 million and$4.6 million for 2019 and 2018, respectively. Other Income Statement Changes Interest Expense, net Interest expense, net was$112.5 million and$51.0 million for 2019 and 2018, respectively. The increase was primarily due to the incremental debt incurred in connection with the Caraustar Acquisition. Debt Extinguishment Charges Debt extinguishment charges were$22.0 million in 2019. There were no debt extinguishment charges in 2018. The increase in debt extinguishment charges was due to the debt extinguishment related to the financing of the Caraustar Acquisition. Other Expense, net Other expense, net was$2.6 million and$18.4 million for 2019 and 2018, respectively. The decrease was primarily due to a reduction in pension costs, largely driven by a one-time$65.0 million contribution we made to ourU.S. defined benefit plan in 2018, as well as reduced foreign currency transaction losses. 31
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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 charges, restructuring charges, and (gains) losses on sales of businesses. Summary Year ended October 31, 2019 2018 Non-U.S. % of Consolidated Net Sales 40.6 % 51.4 % U.S. % of Consolidated Net Sales 59.4 %
48.6 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. 50.4 % 34.1 %
U.S. % of Consolidated I.B.I.T. 49.6 % 65.9 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. before Special Items 44.0 % 36.9 %
U.S. % of Consolidated I.B.I.T. before Special Items 56.0 % 63.1 %
100.0 % 100.0 %
Non-U.S. I.B.I.T. Reconciliation
Year ended
October 31,
2019 2018
Non-U.S. I.B.I.T. $ 132.1 $ 102.3
Non-cash asset impairment charges 2.7
4.6
Non-cash pension settlement charge - 1.3 Restructuring charges 16.3 13.5 Acquisition-related costs 0.5 0.6 (Gain) loss on sale of businesses 2.9 (0.8 ) Total Non-U.S. Special Items 22.4
19.2
Non-U.S. I.B.I.T. before Special Items$ 154.5 $ 121.5 U.S. I.B.I.T. Reconciliation Year ended October 31, 2019 2018 U.S. I.B.I.T.$ 129.9 $ 197.5 Non-cash asset impairment charges 5.1 3.7 Restructuring charges 9.8 5.1 Acquisition-related costs 29.2 0.1 Debt extinguishment charges 22.0 - Loss on sale of businesses 0.8 - Total U.S. Special Items 66.9 8.9 U.S. I.B.I.T. before Special Items$ 196.8 $
206.4
* Income Before Income Tax expense = I.B.I.T.
Income Tax Expense We had operations in over 40 countries during 2019. Operations outsidethe United States are subject to additional risks that may not exist, or be as significant, withinthe United States . Because of our global operations in numerous countries we are required to address different and complex tax systems and issues which are constantly changing. 32
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Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities; and revenues and expenses as of the balance sheet date. The numerous tax jurisdictions in which we operate, along with the variety and complexity of the various tax laws, creates a level of uncertainty, and requires judgment when addressing the impact of complex tax issues. Our effective tax rate and the amount of tax expense are dependent upon various factors, including the following: the tax laws of the jurisdictions in which income is earned; the ability to realize deferred tax assets at certain international subsidiaries; negotiation and dispute resolution with taxing authorities in theU.S. and international jurisdictions; and changes in tax laws. The provision for income taxes is computed using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized currently based on the anticipated future tax consequences of changes in the temporary differences between the book and tax bases of assets and liabilities. This method includes an estimate of the future realization of tax benefits associated with tax losses. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those assets are expected to be realized or settled. Income tax expense for 2019 was$70.7 million on$262.0 million of pretax income and for 2018 was$73.3 million on$299.8 million of pretax income. In 2019, the mix of income and losses among various jurisdictions resulted in$7.6 million less tax on$37.8 million less of pretax income. Additionally, the year-over-year increase in our reserve for unrecognized tax benefits due to releases for audit settlements and expirations in the statute of limitations, offset by increases of the reserve due to changes in the measurement of uncertain tax positions, was$3.3 million lower than the 2018 increase in the reserve. Further, the 2019 tax related to unremitted foreign earnings was$0.7 million lower than the amount recorded in 2018. These decreases between the 2019 and 2018 tax amounts were offset by year-over-year increases of$0.8 million in withholding tax expense and$3.6 million for other miscellaneous tax expense items, along with, most significantly, a$18.7 million increase in the 2019 tax expense related to the one-time net provisional tax benefit recognized in 2018 related to the Tax Reform Act. During 2019, there was a$17.8 million net increase in valuation allowances. This increase was a result of a$5.6 million increase to valuation allowances related to net operating losses and other deferred tax assets, an increase of$0.7 million in new valuation allowances, as well as an increase of$13.2 million recorded from the Caraustar Acquisition. These increases were partially offset by a$1.7 million decrease in valuation allowances due to currency translation and pension adjustments. TheSEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118") to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act.SAB 118 also provides for a measurement period that should not extend beyond one year from the Tax Reform Act enactment date. During the first quarter of 2019, we revised our calculation for the transition tax liability by$2.3 million . The provisional calculations related to the Tax Reform Act are now complete. We analyze potential income tax liabilities related to uncertain tax positions inthe United States and international jurisdictions. The analysis of potential income tax liabilities results in estimates of income tax liabilities recognized for uncertain tax positions following the guidance of ASC 740, "Income Taxes." The estimation of potential tax liabilities related to uncertain tax positions involves significant judgment in evaluating the impact of uncertainties in the application of ASC 740 and complex tax laws. We periodically analyze both potential income tax liabilities and existing liabilities for uncertain tax positions resulting in both new reserves and adjustments to existing reserves in light of changing facts and circumstances. This includes the release of existing liabilities for uncertain tax positions based on the expiration of statutes of limitation. During 2019 and 2018, recognition of uncertain tax positions increased primarily due to increases in unrecognized tax benefits related to prior years and the current year, offset by decreases related to lapses in statute of limitations and audit settlements. The ultimate resolution of potential income tax liabilities may result in a payment that is materially different from our current estimates. If our estimates recognized under Account Standards Codification ("ASC") 740 prove to be different than what is ultimately resolved, such resolution could have a material impact on our financial condition and results of operations. While predicting the final outcome or the timing of the resolution of any particular tax matter is subject to various risks and uncertainties, we believe that our tax accounts related to uncertain tax positions are appropriately stated. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information. Equity Earnings of Unconsolidated Affiliates, net of Tax We recorded$2.9 million and$3.0 million of equity earnings of unconsolidated affiliates, net of tax, for 2019 and 2018, respectively. 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 belongs to the noncontrolling interests in those subsidiaries. Net income attributable to noncontrolling 33
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interests was$23.2 million and$20.1 million for 2019 and 2018, respectively. The increase in net income attributable to noncontrolling interests was due primarily to increased earnings of the joint venture ("Flexible Packaging JV") formed in 2010, withDabbagh Group Holdings Company Limited and one of its subsidiaries, originallyNational Scientific Company Limited and nowGulf Refined Packaging forIndustrial Packaging Company LTD. Net Income Attributable toGreif, Inc. Based on the factors noted above, net income attributable toGreif, Inc. decreased$38.4 million to$171.0 million in 2019 from$209.4 million in 2018. Year 2018 Compared to Year 2017Net Sales Net sales were$3,873.8 million for 2018 compared with$3,638.2 million for 2017. The 6.5 percent increase was due primarily to strategic pricing decisions and contractual price changes in ourRigid Industrial Packaging & Services segment, increases in selling prices due to increases in published containerboard pricing and an increase in sales volumes in ourPaper Packaging & Services segment, and strategic pricing decisions and product mix in our Flexible Products & Services segment, partially offset by volume declines due to customer operational interruptions, weather and strategic pricing decisions in ourRigid Industrial Packaging & Services segment. Gross Profit Gross profit was$788.9 million for 2018 compared with$714.7 million for 2017. 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 20.4 percent for 2018 compared to 19.6 percent for 2017. Selling, General and Administrative Expenses SG&A expenses increased 4.6 percent to$397.2 million for 2018 from$379.7 million for 2017. This increase was primarily due to increased health and medical expenses, increased non-income taxes and increased salary expenses. SG&A expenses were 10.3 percent of net sales for 2018 compared with 10.4 percent of net sales for 2017. Restructuring Charges Restructuring charges were$18.6 million for 2018 compared with$12.7 million for 2017. See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Impairment Charges There were no goodwill impairment charges for 2018 compared with$13.0 million for 2017. The 2017 charges were related to the impairment of goodwill within theRigid Industrial Packaging & Services segment. Non-cash asset impairment charges were$8.3 million for 2018 compared with$7.8 million for 2017. In 2018, these charges were primarily related to plant closures and impairments of goodwill allocated to assets held for sale. See Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Gain on Disposal of Properties, Plants and Equipment, net The gain on disposal of properties, plants, and equipment, net was$5.6 million and$0.4 million for 2018 and 2017, respectively. See Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. (Gain) Loss on Disposal of Businesses, net The gain on disposal of business, net was$0.8 million for 2018 and the loss on disposal of business, net was$1.7 million for 2017. See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. Financial Measures Operating profit was$370.5 million for 2018 compared with$299.5 million for 2017. Net income was$229.5 million for 2018 compared with$135.1 million for 2017. Adjusted EBITDA was$503.2 million for 2018 compared with$445.5 million for 2017. The$57.7 million increase in Adjusted EBITDA was primarily due to increased volumes, higher containerboard sales prices and 34
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lower old corrugated containerboard prices in ourPaper Packaging & Services segment, product mix and volume increases in our Flexible Products & Services segment, partially offset by increased raw materials costs in ourRigid Industrial Packaging & Services segment and increased SG&A expenses. Segment ReviewRigid Industrial 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;
• Divestiture of businesses and facilities; and
• Impact of foreign currency translation.
Net sales increased 4.0 percent to$2,623.6 million in 2018 from$2,522.7 million in 2017. The$100.9 million increase in net sales was primarily the result of an increase in selling prices due to strategic pricing decisions, contractual price changes and a$18.9 million impact of foreign currency translation, partially offset by volume declines due to customer operational interruptions, weather and strategic pricing decisions. Gross profit was$490.8 million for 2018 compared with$502.2 million for 2017. The$11.4 million decrease in gross profit was primarily due to increased raw material costs, increased manufacturing expenses and the timing of contractual price changes. Gross profit margin decreased to 18.7 percent in 2018 from 19.9 percent in 2017. Operating profit was$183.2 million for 2018 compared with$190.1 million for 2017. Adjusted EBITDA was$273.4 million for 2018 compared with$294.9 million for 2017. The decrease in Adjusted EBITDA was due to the same factors same factors impacting gross profit.Paper Packaging & Services Key factors influencing profitability in thePaper Packaging & Services segment are: • Selling prices, product mix, customer demand and sales volumes;
• Raw material costs, primarily old corrugated containers;
• Energy and transportation costs; and
• Benefits from executing the Greif Business System.
Net sales increased 12.2 percent to$898.5 million for 2018 compared with$800.9 million for 2017, primarily due to increased published containerboard prices and increased sales volumes. Gross profit was$222.5 million for 2018 compared with$150.9 million for 2017. Gross profit margin was 24.8 percent and 18.8 percent for 2018 and 2017, respectively. The increase in gross profit and gross profit margin was due primarily to higher containerboard sales prices and lower old corrugated container input costs, partially offset by increased transportation costs. Operating profit was$158.3 million for 2018 compared with$93.5 million for 2017. Adjusted EBITDA was$192.3 million for 2018 compared with$126.1 million for 2017. The increase was primarily due to the same factors that impacted gross profit, partially offset by an increase in SG&A expenses due to an increase in allocated corporate costs and an increase in salaries and benefits costs as a result of business performance. Flexible Products & Services Key factors influencing profitability in the Flexible Products & Services segment are: • Selling prices, product mix, customer demand and sales volumes; 35
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• 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 increased 13.2 percent to$324.2 million for 2018 compared with$286.4 million for 2017. The increase was due primarily to product mix, strategic pricing decisions, volume increases, and a$12.3 million impact of foreign currency translation. Gross profit was$65.2 million for 2018 compared with$51.1 million for 2017. The increase was primarily attributable to the same factors that impacted net sales and improved transportation and manufacturing efficiencies, which also contributed to the increase in gross profit margin to 20.1 percent for 2018 from 17.8 percent for 2017. Operating profit was$19.4 million for 2018 compared with$5.8 million for 2017. Adjusted EBITDA was$25.6 million for 2018 compared with$12.3 million for 2017. The increase was primarily related to the same factors impacting gross profit, partially offset by an increase in SG&A expenses due to an increase in allocated corporate costs and an increase in salaries and benefits expenses as a result of business performance. Land Management As ofOctober 31, 2018 , our Land Management segment consisted of approximately 243,000 acres of timber properties in the southeasternUnited 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 special use properties.
As ofOctober 31, 2018 , we estimated that there were 17,900 acres inthe United States of special use property, which we expect will be available for sale in the next five to seven years. Net sales decreased to$27.5 million for 2018 compared with$28.2 million for 2017. Operating profit decreased to$9.6 million for 2018 from$10.1 million for 2017. Adjusted EBITDA was$11.9 million and$12.2 million for 2018 and 2017, respectively. Depreciation, depletion and amortization expense was$4.6 million for 2018 and 2017. Other Income Statement Changes Interest Expense, net Interest expense, net was$51.0 million and$60.1 million for 2018 and 2017, respectively. The decrease was primarily due to the repayment of our Senior Notes dueFebruary 2017 , lower long-term debt balances, and lower interest rates resulting from the impact of our derivative financial instruments. Other Expense, net Other expense, net was$18.4 million and$12.0 million for 2018 and 2017, respectively. The increase was primarily due to other components of net benefit cost,$5.9 million , which are required to be present outside of income from operations, as a result of our adoption of ASU 2017-07. See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information. 36
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U.S. and Non-U.S. Income before Income Tax Expense Refer to 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 charges, restructuring charges, and (gains) losses on sales of businesses. Summary Year ended October 31, 2018 2017 Non-U.S. % of Consolidated Net Sales 51.4 % 51.1 % U.S. % of Consolidated Net Sales 48.6 %
48.9 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. 34.1 % 42.6 %
U.S. % of Consolidated I.B.I.T. 65.9 % 57.4 %
100.0 % 100.0 %
Non-U.S. % of Consolidated I.B.I.T. before Special Items 36.9 % 43.5 %
U.S. % of Consolidated I.B.I.T. before Special Items 63.1 % 56.5 %
100.0 % 100.0 %
Non-U.S. I.B.I.T. Reconciliation
Year ended
October 31,
2018 2017
Non-U.S. I.B.I.T. $ 102.3 $ 85.2
Non-cash asset impairment charges 4.6
2.2
Goodwill impairment charges -
13.0
Non-cash pension settlement charge 1.3
1.2
Restructuring charges 13.5
10.8
(Gain) loss on sale of businesses (0.8 )
1.7
Total Non-U.S. Special Items 18.6
28.9
Non-U.S. I.B.I.T. before Special Items$ 120.9 $ 114.1 U.S. I.B.I.T. Reconciliation Year ended October 31, 2018 2017 U.S. I.B.I.T.$ 197.5 $ 115.1 Non-cash asset impairment charges 3.7
5.6
Non-cash pension settlement charge - 25.9 Restructuring charges 5.1 1.9 Total U.S. Special Items 8.8 33.4 U.S. I.B.I.T. before Special Items$ 206.3 $
148.5
* Income Before Income Tax expense = I.B.I.T.
Income Tax Expense We had operations in over 40 countries during 2018. Operations outsidethe United States are subject to additional risks that may not exist, or be as significant, withinthe United States . Because of our global operations in numerous countries we are required to address different and complex tax systems and issues which are constantly changing.
Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities; and revenues and expenses as of the balance sheet date. The numerous tax jurisdictions in which we operate, along
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with the variety and complexity of the various tax laws, creates a level of uncertainty, and requires judgment when addressing the impact of complex tax issues. Our effective tax rate and the amount of tax expense are dependent upon various factors, including the following: the tax laws of the jurisdictions in which income is earned; the ability to realize deferred tax assets at certain international subsidiaries; negotiation and dispute resolution with taxing authorities in theU.S. and international jurisdictions; and changes in tax laws. The provision for income taxes is computed using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized currently based on the anticipated future tax consequences of changes in the temporary differences between the book and tax bases of assets and liabilities. This method includes an estimate of the future realization of tax benefits associated with tax losses. Deferred tax assets and liabilities are measured using the currently enacted tax rates that apply to taxable income in effect for the years in which those assets are expected to be realized or settled. Income tax expense for 2018 was$73.3 million on$299.8 million of pretax income and for 2017 was$67.2 million on$200.3 million of pretax income. For 2018, the reduction of the statutory federal corporate income tax rate due to the enactment of the Tax Reform Act, as well as the mix of income and losses among various jurisdictions, resulted in a net tax increase of$18.7 million on pre-tax income of$99.5 million . Additionally, there was an$11.0 million year-over-year increase in tax expense related to changes in the measurement of uncertain tax positions, offset by decreases related to audit settlements and the expiration of the statute of limitations. Further, there was a year-over-year$1.9 million increase in withholding tax expense. These year-over-year tax increases were offset by year-over-year decreases of$5.1 million related to unremitted foreign earnings and$1.2 million for other small tax expense items, along with, most significantly, a$19.2 million decrease in the 2018 tax expense related to the net provisional tax benefit related to the Tax Reform Act. The net provisional tax benefit included tax benefits of$72.0 million resulting from the revaluation of deferred tax assets and liabilities, which were partially offset by$52.8 million of transition tax expense. During 2018, there was a$24.8 million net increase in valuation allowances. This increase was a result of a$30.2 million increase to valuation allowances related to net operating losses and other deferred tax assets, as well as an increase of$0.6 million in new valuation allowances. These increases were partially offset by a$6.0 million decrease in valuation allowances due to currency translation. TheSEC staff issuedSAB 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act.SAB 118 also provides for a measurement period that should not extend beyond one year from the Tax Reform Act enactment date. As ofOctober 31, 2018 , our accounting for the Tax Reform Act was provisional. However, in accordance withSAB 118, we have recorded a reasonable estimate for the following items: a tax benefit related to the revaluation of deferred tax assets and liabilities of$72.0 million ; and a provisional tax expense as a result of the accrual for the transition tax liability of$52.8 million . As a result, the net provisional tax benefit recorded in our consolidated financial statements for the year endedOctober 31, 2018 was$19.2 million . Adjustments to the provisional estimates will be recorded and disclosed prospectively during the measurement period and may differ from these provisional amounts, due to, among other matters, additional analyses, changes in interpretations and assumptions we have made, additional regulatory guidance that may be issued, and actions we may take as a result of the Tax Reform Act. We analyze potential income tax liabilities related to uncertain tax positions inthe United States and international jurisdictions. The analysis of potential income tax liabilities results in estimates of income tax liabilities recognized for uncertain tax positions following the guidance of ASC 740, "Income Taxes." The estimation of potential tax liabilities related to uncertain tax positions involves significant judgment in evaluating the impact of uncertainties in the application of ASC 740 and complex tax laws. We periodically analyze both potential income tax liabilities and existing liabilities for uncertain tax positions resulting in both new reserves and adjustments to existing reserves in light of changing facts and circumstances. This includes the release of existing liabilities for uncertain tax positions based on the expiration of statutes of limitation. During 2018, recognition of uncertain tax positions increased primarily due to increases in unrecognized tax benefits related to prior years and the current year, offset by decreases related to lapse in statute of limitations; whereas in 2017, the uncertain tax positions decreased primarily due to audit and statute of limitations releases attributable to non-US jurisdictions. The ultimate resolution of potential income tax liabilities may result in a payment that is materially different from our current estimates. If our estimates recognized under ASC 740 prove to be different than what is ultimately resolved, such resolution could have a material impact on our financial condition and results of operations. While predicting the final outcome or the timing of the resolution of any particular tax matter is subject to various risks and uncertainties, we believe that our tax accounts related to uncertain tax positions are appropriately stated. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information. 38
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Equity Earnings of Unconsolidated Affiliates, net of Tax We recorded$3.0 million and$2.0 million of equity earnings of unconsolidated affiliates, net of tax, for 2018 and 2017, respectively. 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 belongs to the noncontrolling interests in those subsidiaries. Net income attributable to noncontrolling interests was$20.1 million and$16.5 million for 2018 and 2017, respectively. The increase in net income attributable to noncontrolling interests was due primarily to increased earnings of the Flexible Packaging JV. Net Income Attributable toGreif, Inc. Based on the factors noted above, net income attributable toGreif, Inc. increased$90.8 million to$209.4 million in 2018 from$118.6 million in 2017. OTHER COMPREHENSIVE INCOME CHANGES Other comprehensive income (loss), net of tax for 2019 and 2018 was$(55.9) million and$(21.5) million , respectively. The components of those other comprehensive income changes were as follows: Foreign currency translation In accordance with ASC 830, "Foreign Currency Matters," the assets and liabilities denominated in a foreign currency are translated intoUnited 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, liabilities and operations of our international subsidiaries, are presented in the consolidated statements of changes in equity in accumulated other comprehensive loss. Other comprehensive loss resulting from foreign currency translation for 2019 was$4.5 million . Other comprehensive loss resulting from foreign currency translation for 2018 was$45.5 million . Derivative financial instruments The change in derivative financial instruments, net of tax for 2019 and 2018 was a loss of$26.1 million and income of$7.7 million , respectively. The other comprehensive loss in 2019 resulting from the change in derivative financial instruments, net, was primarily due to an increased portfolio of interest rate swaps and the impact of decreases in market interest rates on the swaps. Minimum pension liability, net The change in minimum pension liability, net of tax for 2019 and 2018 was a loss of$25.3 million and income of$16.3 million , respectively. The other comprehensive loss in 2019 resulting from the change in minimum pension liability, net was primarily due to the Caraustar Acquisition, lower discount rates globally, and lowered expected return on asset assumptions. BALANCE SHEET CHANGES Refer to Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information on acquisition impacts to the 2019 Consolidated Balance Sheet. Working capital changes The$207.5 million increase in accounts receivable to$664.2 million as ofOctober 31, 2019 from$456.7 million as ofOctober 31, 2018 was primarily due to$135.7 million of contribution from the acquired Caraustar operations and changes in our international trade accounts receivables credit facilities. For a discussion of these changes, see "Liquidity and Capital Resources - International Trade Accounts Receivable Credit Facilities" and Note 3 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. The$68.7 million increase in inventories to$358.2 million as ofOctober 31, 2019 from$289.5 million as ofOctober 31, 2018 was primarily due to$84.9 million of contribution from the acquired Caraustar operations, offset by decreased raw material purchases and prices. The$31.4 million increase in accounts payable to$435.2 million as ofOctober 31, 2019 from$403.8 million as ofOctober 31, 2018 was primarily due to$85.1 million of contribution from the acquired Caraustar operations, offset by decreased raw material prices and the timing of payments. 39
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Other balance sheet changes The$695.9 million increase in other intangible assets to$776.5 million as ofOctober 31, 2019 from$80.6 million as ofOctober 31, 2018 was primarily due to$725.5 million of contribution from the acquired Caraustar operations and$24.1 million of contribution from the acquired Tholu operations, partially offset by amortization expense of$53.2 million recognized during 2019. For a discussion of these changes, see Note 2 and Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. The$498.4 million increase in properties, plants and equipment, net to$1,690.3 million as ofOctober 31, 2019 from$1,191.9 million as ofOctober 31, 2018 was primarily due to$493.4 million of contribution from the acquired Caraustar operations and capital expenditures, partially offset by depreciation. The$1,774.9 million increase in long-term debt to$2,659.0 million as ofOctober 31, 2019 from$884.1 million as ofOctober 31, 2018 was primarily due to the "2019 Credit Agreement" we entered into and the "Senior Notes due 2027" we issued onFebruary 11, 2019 to fund the purchase price of the Caraustar Acquisition, partially offset by repayments of the "2017 Credit Agreement" and the "Senior Note due 2019". For a discussion of these changes, see "Liquidity and Capital Resources - Borrowing Arrangements" and Note 8 to the Consolidated Financial Statements included in Item 8 of this Form 10-K. The$11.6 million increase in noncontrolling interest to$58.0 million as ofOctober 31, 2019 from$46.4 million as ofOctober 31, 2018 was primarily due to increased earnings of consolidated joint ventures and foreign currency translation. 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, 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 anticipated liquidity needs for at least 12 months. Moreover, as a result of the Tax Reform Act, if distributions from operations outsidethe United States are needed to fund working capital needs, capital expenditures, cash dividends, stock repurchases, or debt payment, there would be noU.S. taxes on such distributions. Capital Expenditures During 2019 and 2018, we invested$156.9 million (excluding$5.4 million for purchases of and investments in timber properties) and$139.1 million (excluding$8.9 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$160.0 million to$180.0 million during the year endingOctober 31, 2020 . 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 our existing receivables facility inthe United States to establish a$275.0 million United States Trade Accounts Receivable Credit Facility (the "U.S. Receivables Facility") with a financial institution. TheU.S. Receivables Facility matures onSeptember 24, 2020 . As ofOctober 31, 2019 ,$254.7 million , net of deferred financing costs of$0.4 million , was outstanding under theU.S. Receivable Facility, which was reported in long-term debt in the consolidated balance sheets because we intend to refinance the 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. 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 ofOctober 31, 2019 , we were in compliance with these covenants. Proceeds of theU.S. Receivables Facility are available for working capital and general corporate purposes. 40
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See Note 8 to the Consolidated Financial Statements included in Item 1 of Part I
of this Form 10-Q for additional disclosures regarding the
International Trade Accounts Receivable Credit Facilities
In 2012,Cooperage Receivables Finance B.V. (the "Main SPV") and Greif Coordination Center BVBA, an indirect wholly owned subsidiary ofGreif, Inc. ("Seller"), entered into the Nieuw Amsterdam Receivables Purchase Agreement (the "European RPA") with affiliates of a major international bank (the "Purchasing Bank Affiliates"). OnApril 17, 2019 , the Main SPV and Seller amended and extended the term of the European RPA throughApril 17, 2020 . OnJune 17, 2019 , the Main SPV and Seller entered into an agreement to replace the European RPA with the Nieuw Amsterdam Receivables Financing Agreement (the "European RFA"). The European RFA, which matures onApril 17, 2020 , provides an accounts receivable financing facility of up to €100.0 million ($111.1 million as ofOctober 31, 2019 ) secured by certain European accounts receivable. As ofOctober 31, 2019 ,$96.4 million was outstanding under the European RFA, which was reported as long-term debt in the consolidated balance sheet 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. During the first quarter of 2019, a parent-level guarantee was added to the European RPA and Singapore RPA (as such term is defined below). During the third quarter of 2019, in conjunction with execution of the European RFA, the parent level guarantee was removed for the European RFA. The$1.9 million outstanding on the Singapore RPA as ofOctober 31, 2019 is reported as short-term debt in the consolidated balance sheet because the agreement expires in 2020 and will not be renewed. Under the previous European RPA, as amended, the maximum amount of receivables that could be sold and outstanding under the European RPA at any time was €100 million ($111.1 million as ofOctober 31, 2019 ). Under the terms of the European RPA, we had the ability to loan excess cash to the Purchasing Bank Affiliates in the form of the subordinated loan receivable. Under the terms of the previous European RPA, we had agreed to sell trade receivables meeting certain eligibility requirements that the Seller had purchased from our other indirect wholly-owned subsidiaries under a factoring agreement. Prior toNovember 1, 2018 , the structure of the transactions provided for a legal true sale, on a revolving basis, of the receivables transferred from our various subsidiaries to the respective Purchasing Bank Affiliates. The purchaser funded an initial purchase price of a certain percentage of eligible receivables based on a formula, with the initial purchase price approximating 75 percent to 90 percent of eligible receivables. The remaining deferred purchase price was settled upon collection of these receivables. InOctober 2007 ,Greif Singapore Pte. Ltd. , an indirect wholly-owned subsidiary of the Seller, entered into the Singapore Receivable Purchase Agreement (the "Singapore RPA") with a major international bank. The maximum amount of aggregate receivables that may be financed under the Singapore RPA is15.0 million Singapore dollars ($11.0 million as ofOctober 31, 2019 ). Under the terms of the Singapore RPA, we have agreed to sell trade receivables in exchange for an initial purchase price of approximately 90 percent of the eligible receivables. The remaining deferred purchase price is settled upon collection of these receivables. Prior toNovember 1, 2018 , we removed from accounts receivable the amount of proceeds received from the initial purchase price since they met the applicable criteria of ASC 860, "Transfers and Servicing," and we continued to recognize the deferred purchase price in other current assets or other current liabilities on our consolidated balance sheets, as appropriate. The receivables were sold on a non-recourse basis with the total funds in the servicing collection accounts pledged to the banks between settlement dates. The cash initially received, along with the deferred purchase price, related to the sale or ultimate collection of the underlying receivables and was not subject to significant other risks given their short-term nature. Therefore, we reflected all cash flows under the accounts receivable sales programs as operating cash flows on our consolidated statements of cash flows. We perform collection and administrative functions on the receivables related to the European RPA, the European RFA and the Singapore RPA (collectively, "Foreign Receivables Facilities"), similar to the procedures we use for collecting all of our receivables. The servicing liability for these receivables is not material to our consolidated financial statements.
See Note 3 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding Foreign Receivables Facilities.
Caraustar Acquisition OnFebruary 11, 2019 , we completed the Caraustar Acquisition. Caraustar is a leader in the production of coated and uncoated recycled paperboard, which is used in a variety of applications that include industrial products (tubes and cores, construction 41
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products, protective packaging, adhesives) and consumer packaging products (folding cartons, set-up boxes, and packaging services) and a diverse mix of specialty products. The total purchase price for this acquisition, net of cash acquired, was$1,834.9 million . We incurred transaction costs of$62.1 million to complete this acquisition. Of this amount,$34.0 million was recognized immediately in the consolidated statements of income and the remaining$28.1 million in transaction costs was capitalized in accordance with ASC 470, "Debt", and is presented as part of the consolidated balance sheet ($20.8 million within Long-Term Debt and$7.3 million within Other Long-Term Assets). We recognized goodwill related to this acquisition of$726.6 million . The goodwill recognized in this acquisition is attributable to the acquired assembled workforce, expected synergies, and economies of scale, none of which qualify for recognition as a separate intangible asset. Caraustar is reported within thePaper Packaging & Services reportable segment to which the goodwill was assigned. The goodwill is not expected to be deductible for tax purposes.
Acquired property, plant and equipment and intangibles will be depreciated and amortized over the estimated useful lives, primarily on a straight-line basis.
We have not yet finalized the determination of the fair value of assets acquired and liabilities assumed, including income taxes and contingencies. We expect to finalize these amounts within one year of the acquisition date. The current preliminary estimate of fair value and purchase price allocation were based on information available at the time of closing the acquisition, and we continue to evaluate the underlying inputs and assumptions that are being used in fair value estimates. Accordingly, these preliminary estimates are subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of closing the acquisition. Tholu Acquisition We completed our acquisition of Tholu B.V and its wholly owned subsidiaryA. Thomassen Transport B.V. (collectively "Tholu") onJune 11, 2019 (the "Tholu Acquisition"). Tholu is aNetherlands -based leader in IBC rebottling, reconditioning and distribution. The total purchase price for this acquisition was$52.2 million , net of cash acquired of$2.1 million , of which$25.1 million was paid upon closing and the remaining$29.2 million was deferred according to a set payment schedule. The current portion of the deferred obligation is$2.5 million , recorded in Other Current Liabilities, and the remaining$26.7 million has been recorded in Other Long-Term Liabilities within the consolidated balance sheets. The legal form of the Tholu Acquisition is a joint venture with the former Tholu owner, but due to the economic structure of the transaction, we are deemed to be the 100% economic owner, and under GAAP, we will record and report 100% of all future income or loss. We recognized goodwill related to this acquisition of$22.3 million . The goodwill recognized in this acquisition is attributable to the acquired assembled workforce, economies of scale, vertical integration and new market penetration. Tholu is reported within theRigid Industrial Packaging & Services reportable segment to which the goodwill was assigned. The goodwill is not expected to be deductible for tax purposes.
Acquired property, plant and equipment and intangibles will be depreciated and amortized over the estimated useful lives, primarily on a straight-line basis.
We have not yet finalized the determination of the fair value of assets acquired and liabilities assumed, including income taxes and contingencies. We expect to finalize these amounts within one year of the acquisition date. The current preliminary estimate of fair value and purchase price allocation were based on information available at the time of closing the acquisition, and we continue to evaluate the underlying inputs and assumptions that are being used in fair value estimates. Accordingly, these preliminary estimates are subject to adjustments during the measurement period, not to exceed one year, based upon new information obtained about facts and circumstances that existed as of the date of closing the acquisition. Divestitures For the year endedOctober 31, 2019 , we completed two divestitures of non-U.S. businesses in theRigid Industrial Packaging & Services segment, liquidated two non-strategic non-U.S. business in theRigid Industrial Packaging & Services segment, and deconsolidated one wholly-owned non-U.S. business in theRigid Industrial Packaging & Services segment. The loss on disposal of businesses was$3.7 million for the year endedOctober 31, 2019 . Proceeds from divestitures were$1.5 million for the year endedOctober 31, 2019 . Proceeds from divestitures that were completed in 2015 and collected during the year endedOctober 31, 2019 were$0.8 million . Proceeds from divestitures that were completed in 2016 and collected during the year endedOctober 31, 2019 were$1.6 million . 42
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For the year endedOctober 31, 2018 , we completed no divestitures. We liquidated two non-strategic non-U.S. business in the Flexible Products & Services segment. The gain on disposal of businesses was$0.8 million for the year endedOctober 31, 2018 . Proceeds from divestitures that were completed in 2017 and collected during the year endedOctober 31, 2018 were$0.5 million . Proceeds from divestitures that were completed in 2015 and collected during the year endedOctober 31, 2018 were$0.9 million . We had$2.9 million of notes receivable recorded from the sale of businesses for the year endedOctober 31, 2018 . For the year endedOctober 31, 2017 , we completed two divestitures in theRigid Industrial Packaging & Services segment, deconsolidated one nonstrategic business in the Flexible Products & Services segment and one nonstrategic business in theRigid Industrial Packaging & Services segment, and liquidated two non-U.S. nonstrategic businesses in theRigid Industrial Packaging & Services segment. The loss on disposal of businesses was$1.7 million for the year endedOctober 31, 2017 . Proceeds from divestitures were$5.1 million for the year endedOctober 31, 2017 . Proceeds from divestitures that were completed in fiscal year 2015 and collected during the year endedOctober 31, 2017 were$0.8 million . We had$4.3 million of notes receivable recorded from the sale of businesses for the year endedOctober 31, 2017 . None of the above-referenced divestitures in 2019, 2018, or 2017 qualified as discontinued operations as they do not, individually or in the aggregate, represent a strategic shift that has had a major impact on our operations or financial results. See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for disclosures regarding our acquisitions and divestitures. Borrowing Arrangements Long-term debt is summarized as follows:October 31 ,October 31 , (in millions) 2019
2018
2019 Credit Agreement - Term Loans$ 1,612.2 $ - 2017 Credit Agreement - Term Loan - 277.5 Senior Notes due 2027 494.3 - Senior Notes due 2021 221.7 226.5 Senior Notes due 2019 - 249.1 Accounts receivable credit facilities 351.6
150.0
2019 Credit Agreement - Revolving Credit Facility 76.1
-
2017 Credit Agreement - Revolving Credit Facility - 3.8
Other debt 0.4 0.7
2,756.3 907.6
Less current portion 83.7 18.8
Less deferred financing costs 13.6 4.7
Long-term debt, net $ 2,659.0 $ 884.1
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. The 2019 Credit Agreement amended,
restated and replaced in its entirety the prior $800.0 million senior secured
credit agreement (the "2017 Credit Agreement"), which is described below. Our
obligations under the 2019 Credit Agreement are guaranteed by certain of our
U.S. subsidiaries and certain of our 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 (the
"Revolving Credit Facility"), (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 2019
Credit Agreement with the agreement of the lenders.
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We used borrowings under the 2019 Credit Agreement, together with the net proceeds from the issuance of the Senior Notes dueMarch 1, 2027 (described below), to fund the purchase price of the Caraustar Acquisition, to redeem our$250.0 million Senior Notes dueAugust 1, 2019 (the "Senior Notes due 2019"), to repay outstanding borrowings under the 2017 Credit Agreement, and to pay related fees and expenses. The Revolving Credit Facility is available to fund ongoing working capital and capital expenditures needs and for general corporate purposes. Interest is based on either a Eurodollar rate or a base rate that resets periodically plus a calculated margin amount. 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. The terms of the 2019 Credit Agreement contain restrictive covenants, which limit our ability, among other things, to incur additional indebtedness or issue certain preferred stock, pay dividends, redeem stock or make other distributions, or make certain investments; create restrictions on the ability of our restricted subsidiaries to pay dividends or make other payments to affiliates; create certain liens; transfer or sell certain assets; merge or consolidate; enter into certain transactions with our affiliates; and designate subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications. As ofOctober 31, 2019 , we were in compliance with the covenants and other agreements in the 2019 Credit Agreement. The repayment of this facility is secured by a security interest in our personal property and the personal property of certain of ourU.S. subsidiaries, including equipment and inventory and certain intangible assets, as well as a pledge of the capital stock of substantially all of ourU.S. subsidiaries, and is secured, in part, by the capital stock of the non-U.S. borrowers. However, in the event that we receive and maintain an investment grade rating from eitherMoody's Investors Service, Inc. orStandard & Poor's Financial Services LLC , we may request the release of such collateral. The 2019 Credit Agreement provides for events of default (subject in certain cases to customary grace and cure periods), which include, among others, nonpayment of principal or interest when due, breach of covenants or other agreements in the 2019 Credit Agreement, defaults in payment of certain other indebtedness and certain events of bankruptcy or insolvency.
2017 Credit Agreement
We and certain of our international subsidiaries were borrowers under the 2017 Credit Agreement. The 2017 Credit Agreement provided for an$800.0 million revolving multicurrency credit facility and a$300.0 million term loan. OnFebruary 11, 2019 , proceeds from borrowings under the 2019 Credit Agreement were used to pay the obligations outstanding under the 2017 Credit Agreement.
See Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for disclosures regarding our Credit Agreements over time.
Senior Notes
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. We used the net proceeds from the issuance of the Senior Notes due 2027, together with borrowings under the 2019 Credit Agreement, to fund the purchase price of the Caraustar Acquisition, to redeem all of our Senior Notes due 2019, to repay outstanding borrowings under the 2017 Credit Agreement, and to pay related fees and expenses. The terms of the Senior Notes due 2027 are governed by an Indenture that contains restrictive covenants that limit our ability, among other things, to incur additional indebtedness or issue certain preferred stock, pay dividends, redeem stock or make other distributions, or make certain investments; create certain liens; enter into certain transactions with affiliates; and designate subsidiaries as unrestricted subsidiaries. These covenants are subject to a number of important exceptions and qualifications as set forth in the Indenture. Certain of these covenants will be suspended if the Senior Notes due 2027 achieve investment grade ratings from bothMoody's Investors Service, Inc. andStandard & Poor's Global Ratings and no default or event of default has occurred and is continuing. As ofOctober 31, 2019 , we were in compliance with these covenants. 44
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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 ofOctober 31, 2019 , we were in compliance with these covenants. OnApril 1, 2019 , we redeemed all of our outstanding Senior Notes due 2019, which were issued onJuly 28, 2009 for$250.0 million . The total redemption price for the Senior Notes due 2019 was$253.9 million , which was equal to the aggregate principal amount outstanding of$250.0 million plus a premium of$3.9 million . The payment of the redemption price was funded by our borrowings under the 2019 Credit Agreement.
See Note 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for disclosures regarding the Senior Notes discussed above.
Financial Instruments Interest Rate Derivatives We have various borrowing facilities which charge interest based on the one-monthU.S. dollar LIBOR rate plus an interest spread. In 2019, we entered into six interest rate swaps related to the debt incurred in connection with the Caraustar Acquisition. See "Borrowing Arrangements - 2019 Credit Agreement". These six interest rate swaps have a total notional amount of$1,300.0 million and amortize to$200.0 million over a five year term. 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% plus an interest spread. 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 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for disclosures regarding our interest rate derivatives.
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
See Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for disclosures regarding our foreign exchange hedges.
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$100.0 million of fixed rate debt to Euro denominated fixed rate debt at a rate of 2.35%. The agreement is designated as a net investment hedge for accounting purposes and will mature onMarch 6, 2023 . Accordingly, the gain or loss on this derivative instrument is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. Interest payments received from the cross currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense, net on the consolidated statements of income. 45
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See Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for disclosures regarding our cross currency swap.
Contractual Obligations As ofOctober 31, 2019 , we had the following contractual obligations: Payments Due by Period Less than 1 (in millions) Total year 1-3 years 3-5 years After 5 years Long-term debt, net of deferred financing costs$ 2,659.0 $ 348.9 $ 495.2 $ 1,033.4 $ 781.5 Short-term borrowings 9.2 9.2 Operating and capital lease obligations 366.3 66.6 108.6 73.3 117.8 Liabilities held by special purpose entities 43.3 - 43.3 Contingent liabilities and environmental reserves 18.7 2.0 2.5 2.2 12.0 Current portion of long-term debt 83.7 83.7 Mandatorily redeemable noncontrolling interests 8.4 -
8.4
Deferred purchase price of Tholu 29.2 2.5 6.8 19.9 Total$ 3,217.8 $ 512.9 $ 664.8 $ 1,128.8 $ 911.3 Environmental reserves are estimates based on current remediation plans; actual liabilities could significantly differ from the reserve estimates. We have no near-term post-retirement benefit plan funding obligations. Because the amount of such obligations in future years is not reasonably estimable, they have been excluded from the contractual obligations table. We intend to make post-retirement benefit plan contributions of$29.0 million during 2020, which consists of$23.7 million of employer contributions and$5.3 million of benefits paid directly by the employer. These contributions are not contractually obligated, and therefore are not included in the table above. Our unrecognized tax benefits under ASC 740, "Income Taxes" have been excluded from the contractual obligations table because of the inherent uncertainty and the inability to reasonably estimate the timing of cash outflows. Stock Repurchase Program and Other Share Acquisitions Our Board of Directors has authorized the purchase of Class A Common Stock or Class B Common Stock or any combination of the foregoing up to 4,703,487 shares as ofOctober 31, 2019 . See Note 14 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding this program and the repurchase of shares of Class A and Class B Common Stock. Effects of Inflation We generally identify hyper-inflationary markets as those markets whose cumulative inflation rate over a three-year period exceeds 100%. During the third quarter of 2018,Argentina was deemed as a hyper-inflationary market and our Argentine operations changed functional currency from Argentine Pesos toU.S. Dollars for GAAP reporting purposes. As a result, non-U.S. Dollar denominated monetary assets and liabilities of our Argentine operations are subject to re-measurement and recorded in Other Expense, Net, within the Consolidated Statements of Income. During 2019, foreign currency losses, net recorded in Other expense, net, related to our Argentine operations were$4.2 million . Inflation did not have a material impact on our operations during 2018. Critical Accounting Policies A summary of our significant accounting policies is included in Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. We believe that the consistent application of these policies enables us to provide readers of the consolidated financial statements with useful and reliable information about our results of operations and financial condition. The following are the accounting policies that we believe are most important to the portrayal of our results of operations and financial condition and require our most difficult, subjective or complex judgments. 46
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Other items that could have a significant impact on the financial statements include the risks and uncertainties listed in Part I, Item 1A - Risk Factors. Actual results could differ materially using different estimates and assumptions, or if conditions are significantly different in the future. Business Combinations. We completed the Caraustar Acquisition onFebruary 11, 2019 , and the Tholu Acquisition onJune 11, 2019 . The Caraustar Acquisition significantly expanded thePaper Packaging & Services segment portfolio. Caraustar's and Tholu's results of operations have been included in our financial results for the period subsequent to their respective acquisition date. Under the acquisition method of accounting, we allocate the fair value of purchase consideration transferred to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition. The fair values assigned, defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between willing market participants, are based on estimates and assumptions determined by management. The excess purchase consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, is recorded as goodwill. When determining the fair value of assets acquired and liabilities assumed, we make significant estimates and assumptions, especially with respect to intangible assets. Our estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. During the measurement period, not to exceed one year from the date of acquisition, we may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of operations. Acquisition costs, such as legal and consulting fees, are expensed as incurred. See Note 2 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding our acquisitions.Goodwill and Indefinite-Lived Intangibles Impairment Testing. We account for goodwill in accordance with ASC 350, "Intangibles -Goodwill and Other." Under ASC 350, purchased goodwill is not amortized, but instead is tested for impairment either annually onAugust 1 or when events and circumstances indicate an impairment may have occurred. Our goodwill impairment assessment is performed by reporting unit. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. However, components are aggregated as a single reporting unit if they have similar economic characteristics. In conducting the annual impairment tests, the estimated fair value of each of our reporting units is compared to its carrying amount including goodwill. If the estimated fair value exceeds the carrying amount, then no impairment exists. If the carrying amount exceeds the estimated fair value an impairment is indicated.The Rigid Industrial Packaging & Services segment consists of five operating segments:Rigid Industrial Packaging & Services -North America ;Rigid Industrial Packaging & Services -Latin America ;Rigid Industrial Packaging & Services -Europe ,Middle East andAfrica ;Rigid Industrial Packaging & Services -Asia Pacific ; andRigid Industrial Packaging & Services - Tri-Sure. Each of those operating segments consists of multiple components that have discrete financial information available that is reviewed by segment management on a regular basis. We have evaluated those components and concluded that they are economically similar and should be aggregated into five separate reporting units. For the purpose of aggregating our components, we review the long-term performance of gross profit margin and operating profit margin. Additionally, we review qualitative factors such as common customers, similar products, similar manufacturing processes, sharing of resources, level of integration, and interdependency of processes across components. We place greater weight on the qualitative factors outlined in ASC 280 "Segment Reporting" and consider the guidance in ASC 350 in determining whether two or more components of an operating segment are economically similar and can be aggregated into a single reporting unit. However, our assessment of the aggregation includes both qualitative and quantitative factors and is based on the facts and circumstances specific to the components. The estimated fair value of the reporting units utilized in the impairment test is based on a discounted cash flow analysis or income approach and market multiple approach. Under this method, the principal valuation focus is on the reporting unit's cash-generating capabilities. The discount rates used for impairment testing are based on our weighted average cost of capital. The use of alternative estimates, peer groups or changes in the industry, or adjusting the discount rate, earnings before interest, taxes, depreciation, depletion and amortization multiples or price earnings ratios used could affect the estimated fair value of the assets and potentially result in impairment. Any identified impairment would result in an adjustment to our results of operations. In performing the test, we first evaluate qualitative factors, such as macroeconomic conditions and our overall financial performance to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. We then evaluate how significant each of the identified factors could be to the fair value or carrying amount of a reporting unit and weigh those factors in totality in forming a conclusion of whether or not it is more likely than not that the fair value of a reporting unit is less than its carrying amount (the Step 0 Test). If necessary, the next step in the goodwill impairment test involves comparing the fair value of each of the reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, an impairment loss would be recognized (not to exceed the carrying amount of goodwill). OurRigid Industrial Packaging & Services -Latin America , Flexible Products & Services and Land 47
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Management reporting units have no goodwill and therefore no impairment test was required. For ourRigid Industrial Packaging & Services -North America ;Rigid Industrial Packaging & Services -Europe ,Middle East andAfrica ;Rigid Industrial Packaging & Services - Tri-Sure; andPaper Packaging & Services reporting units, a Step 0 approach was used and we determined it was not more likely than not that the fair value of the reporting unit was less than its carrying amount. As ofAugust 1, 2019 , the estimated fair value of each of those reporting units was deemed to substantially exceed the carrying amount of assets and liabilities assigned to each reporting unit. For theRigid Industrial Packaging & Services -Asia Pacific reporting unit, we proceeded directly to the quantitative impairment testing. The fair value of the reporting unit exceeded the carrying value by 32%, so no impairment was deemed to exist. Discount rates, growth rates and cash flow projections are the assumptions that are most sensitive and susceptible to change as they require significant management judgment. In addition, certain future events and circumstances, including deterioration of market conditions, higher cost of capital, a decline in actual and expected consumption and demand, could result in changes to those assumptions and judgments. A revision of those assumptions could cause the fair value of the reporting unit to fall below its respective carrying value. As for all of our reporting units, if in future years, the reporting unit's actual results are not consistent with our estimates and assumptions used to calculate fair value, we may be required to recognize material impairments to goodwill. During the fourth quarter of 2017, we performed an assessment of our operating segments and determined that as a result of changes in the way the chief operating decision maker receives and reviews financial information, a realignment of our operating segment and reporting unit structure was necessary. As of our annual goodwill impairment testing date ofAugust 1, 2017 , our reporting units of theRigid Industrial Packaging & Services segment were realigned to consist ofRigid Industrial Packaging & Services -North America ;Rigid Industrial Packaging & Services -Latin America ;Rigid Industrial Packaging & Services -Europe ,Middle East andAfrica ;Rigid Industrial Packaging & Services -Asia Pacific ; andRigid Industrial Packaging & Services - Tri-Sure. As a result of the realignment, goodwill was reassigned to each of theRigid Industrial Packaging & Services reporting units using a relative fair value approach. There were no changes to the reporting units of thePaper Packaging & Services ; Flexible Products & Services; and Land Management segments. No reporting units were aggregated for purposes of conducting the annual impairment test. Due to the realignment of our reporting units in the fourth quarter of 2017, we recorded an impairment charge of$13.0 million , which represented goodwill associated with theRigid Industrial Packaging & Services segment as the carrying amount of theRigid Industrial Packaging & Services -Latin America reporting unit exceeded its fair value. See Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information.
The following table summarizes the carrying amount of goodwill by reporting unit
for the year ended
Goodwill
Balance
(in millions) October 31, 2019 October 31, 2018Rigid Industrial Packaging & Services North America $ 252.9 $ 252.8 Europe, Middle East and Africa 313.0 297.1 Asia Pacific 88.6 88.8 Tri-Sure 77.2 77.8 Paper Packaging & Services 786.1 59.5 Total $ 1,517.8 $ 776.0 *The Rigid Industrial Packaging & Services :Latin America , Flexible Products & Services, and Land Management reporting units have no goodwill balance at either reporting period. We test for impairment of indefinite-lived intangible assets during the fourth quarter of each year as ofAugust 1 , or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist. Income Taxes. Preparation of our financial statements requires the use of estimates and assumptions that affect the reported amounts of our assets and liabilities and revenues and expenses. The multitude of tax jurisdictions in which we operate requires significant judgment when applying the complex tax regulations to estimate our global tax position. Our effective tax rate and the amount of taxes we pay are dependent upon various factors, including the following: the laws and regulations, and varying tax rates of the country tax jurisdictions in which income is earned; the recognition of permanent book/tax basis differences realized through acquisitions, divestitures and asset impairments; the ability to realize long term deferred tax assets at certain international 48
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subsidiaries; negotiation and dispute resolution with taxing authorities in theU.S. and non-U.S. jurisdictions arising from federal, state and local country tax audits; and changes in tax laws, regulations, administrative rulings and common law. See Note 11 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information. Pension and Post-retirement Benefits. Pension and post-retirement assumptions are significant inputs to the actuarial models that measure pension and post-retirement benefit obligations and related effects on operations. Two assumptions - discount rate and expected return on assets - are important elements of plan expense and asset/liability measurement. We evaluate these critical assumptions at least annually on a plan and country-specific basis. At least annually, we evaluate other assumptions involving demographic factors, such as retirement age, mortality and turnover, and update them to reflect our experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. Accumulated and projected benefit obligations are measured as the present value of future cash payments. We discount those cash payments using the weighted average of market-observed yields for high quality fixed income securities with maturities that correspond to the payment of benefits. Lower discount rates increase present values and subsequent-year pension expense; higher discount rates decrease present values and subsequent-year pension expense. Our weighted discount rates for consolidated pension plans atOctober 31, 2019 , 2018 and 2017 were 2.74%, 3.48% and 3.01%, respectively, reflecting market interest rates. To develop the expected long-term rate of return on assets assumption, we use a generally consistent approach worldwide. The approach considers various sources, primarily inputs from a range of advisers, inflation, bond yields, historical returns and future expectations for returns for each asset class, as well as the target asset allocation of each pension portfolio. This rate is gross of any investment or administrative expenses. Assets in our principal pension plans gained approximately 15.3% in 2019. Based on our analysis of future expectations of asset performance, past return results, and our current and expected asset allocations, we have assumed a 4.64% long-term expected return on those assets for cost recognition in 2020. This is a change from the 4.12%, 4.53% and 5.39% long-term expected return we had assumed in 2019, 2018 and 2017, respectively. Changes in key assumptions for our consolidated pension and post-retirement plans would have the following effects. • Discount rate - A 25 basis point increase in discount rate would decrease
pension and post-retirement cost in the following year by
would decrease the pension and post-retirement benefit obligation at
year-end by about $39.2 million .
• Expected return on assets - A 50 basis point decrease in the expected
return on assets would increase pension and post-retirement cost in the
following year by $4.7 million .
Further discussion of our pension and post-retirement benefit plans and related
assumptions is contained in Note 12 of the Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K.
Revenue Recognition. We generate substantially all of our revenue by providing
our customers with industrial packaging products serving a variety of end
markets. We may enter into fixed term sale agreements, including multi-year
master supply agreements which outline the terms under which we do business. We
also sell to certain customers solely based on purchase orders. As master supply
agreements do not typically include fixed volumes, customers generally purchase
products pursuant to purchase orders or other communications that are short-term
in nature. We have concluded for the vast majority of our revenues that our
contracts with customers are either a purchase order or the combination of a
purchase order with a master supply agreement.
A performance obligation is considered an individual unit sold. Contracts or
purchase orders with customers could include a single type of product or it
could include multiple types or specifications of products. Regardless, the
contracted price with the customer is agreed at the individual product level
outlined in the customer contracts or purchase orders. We do not bundle prices.
Negotiations with customers are based on a variety of factors including the
level of anticipated contractual volume, geographic location, complexity of the
product, key input costs and a variety of other factors. We have concluded that
prices negotiated with each individual customer are representative of the
stand-alone selling price of the product.
We typically satisfy the obligation to provide packaging to customers at a point
in time when control is transferred to customers. The point in time when control
of goods is transferred is largely dependent on delivery terms. Revenue is
recorded at the time of shipment for delivery terms designated shipping point.
For sales transactions designated destination, revenue is recorded when the
product is delivered to the customer's delivery site. Purchases by our customers
are generally manufactured and shipped with minimal lead time; therefore,
performance obligations are generally settled shortly after manufacturing and
shipment.
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We manufacture certain products that have no alternative use to us once they are printed or manufactured to customer specifications; however, in the majority of cases, we do not have an enforceable right to payment that includes a reasonable profit for custom products at all times in the manufacturing process, and therefore revenue is recognized at the point in time at which control transfers. As revenue recognition is dependent upon individual contractual terms, we will continue our evaluation of any new or amended contracts entered into. Revenue is measured as the amount of consideration we expect to be entitled to in exchange for transferring goods or providing services. Standalone selling prices for each performance obligation are generally stated in the contract. When we offer variable consideration in the form of volume rebates to customers, we estimate the amount of revenue to which we expect to be entitled to based on contract terms and historical experience of actual results, and include the estimate in the transaction price, limited to the amount which is probable will not result in reversal of cumulative revenue recognized when the variable consideration is resolved. We provide prompt pay discounts to certain customers if invoices are paid within a predetermined period. Prompt payment discounts are treated as a reduction of revenue and are determinable within a short period of the sale. Contract liabilities relate primarily to prepayments received from our customers before revenue is recognized and volume rebates to customers. These amounts are included in other current liabilities in the consolidated balance sheets. We do not have any material contract assets. Our contracts generally include standard commercial payment terms generally acceptable in each region. Customer payment terms are typically less than one year and as such, we have applied the practical expedient to exclude consideration of significant financing components from the determination of transaction price. Taxes collected from customers and remitted to governmental authorities are excluded from net sales. Costs to obtain a contract are generally immaterial, but we have elected the practical expedient to expense these costs as incurred if the amortization period of the capitalized cost would be one year or less. We have applied the practical expedient to exclude disclosure of remaining performance obligations as our contracts typically have a term of one year or less. Freight charged to customers is included in net sales in the income statement. For shipping and handling activities performed after a customer obtains control of the goods, we have elected to account for these costs as activities to fulfill the promise to transfer the goods; therefore, these activities are not assessed as separate performance obligations. Our contracts with customers are broadly similar in nature throughout our reportable segments, but the amount, timing and uncertainty of revenue and cash flows may vary in each reportable segment due to geographic factors. See Note 16 to the Consolidated Financial Statements for additional disclosures of revenue disaggregated by geography for each reportable segment. Recent Accounting Standards See Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for a detailed description of recently issued and newly adopted accounting standards.
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