GREIF, INC. GENERAL
The terms "Greif," "our company," "we," "us" and "our" as used in this discussion refer toGreif, Inc. and its subsidiaries. Our fiscal year begins onNovember 1 and ends onOctober 31 of the following year. Any references in unaudited interim condensed consolidated financial statements included in the Quarterly Report on Form 10-Q ("this Form 10-Q") to the years, or to any quarter of those years, relates to the fiscal year or quarter, as the case may be, ended in that year, unless otherwise stated. The discussion and analysis presented below relates to the material changes in financial condition and results of operations for our interim condensed consolidated balance sheets as ofApril 30, 2022 andOctober 31, 2021 , and for the interim condensed consolidated statements of income for the three and six months endedApril 30, 2022 and 2021. This discussion and analysis should be read in conjunction with the interim condensed consolidated financial statements that appear elsewhere in this Form 10-Q and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2021 (the "2021 Form 10-K"). Readers are encouraged to review the entire 2021 Form 10-K, as it includes information regarding Greif not discussed in this Form 10-Q. This information will assist in your understanding of the discussion of our current period financial results. All statements, other than statements of historical facts, included in this Form 10-Q, including without limitation, statements regarding our future financial position, business strategy, budgets, projected costs, goals, trends, and plans and objectives of management for future operations, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "aspiration," "objective," "project," "believe," "continue," "on track" or "target" or the negative thereof or variations thereon or similar terminology. All forward-looking statements made in this Form 10-Q are based on assumptions, expectations and other information currently available to management. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause our actual results to differ materially from those forecasted, projected or anticipated, whether expressed in or implied by the statements. Such risks and uncertainties that might cause a difference include, but are not limited to, the following: (i) historically, our business has been sensitive to changes in general economic or business conditions, (ii) our global operations subject us to political risks, instability and currency exchange that could adversely affect our results of operations, (iii) the COVID-19 pandemic could continue to impact any combination of our business, financial condition, results of operations and cash flows, (iv) the current and future challenging global economy and disruption and volatility of the financial and credit markets may adversely affect our business, (v) the continuing consolidation of our customer base and suppliers may intensify pricing pressure, (vi) we operate in highly competitive industries, (vii) our business is sensitive to changes in industry demands and customer preferences, (viii) raw material, price fluctuations, global supply chain disruptions and inflation may adversely impact our results of operations, (ix) energy and transportation price fluctuations and shortages may adversely impact our manufacturing operations and costs, (x) the frequency and volume of our timber and timberland sales will impact our financial performance, (xi) we may not successfully implement our business strategies, including achieving our growth objectives, (xii) we may encounter difficulties or liabilities arising from acquisitions or divestitures, (xiii) we may incur additional restructuring costs and there is no guarantee that our efforts to reduce costs will be successful, (xiv) several operations are conducted by joint ventures that we cannot operate solely for our benefit, (xv) certain of the agreements that govern our joint ventures provide our partners with put or call options, (xvi) our ability to attract, develop and retain talented and qualified employees, managers and executives is critical to our success, (xvii) our business may be adversely impacted by work stoppages and other labor relations matters, (xviii) we may be subject to losses that might not be covered in whole or in part by existing insurance reserves or insurance coverage and general insurance premium and deductible increases, (xix) our business depends on the uninterrupted operations of our facilities, systems and business functions, including our information technology and other business systems, (xx) a security breach of customer, employee, supplier or our information and data privacy risks and costs of compliance with new regulations may have a material adverse effect on our business, financial condition, results of operations and cash flows, (xxi) we could be subject to changes to our tax rates, the adoption of newU.S. or foreign tax legislation or exposure to additional tax liabilities, (xxii) full realization of our deferred tax assets may be affected by a number of factors, (xxiii) we have a significant amount of goodwill and long-lived assets which, if impaired in the future, would adversely impact our results of operations, (xxiv) our pension and post-retirement plans are underfunded and will require future cash contributions, and our required future cash contributions could be higher than we expect, each of which could have a material adverse effect on our financial condition and liquidity, (xxv) legislation/regulation related to environmental and health and safety matters and corporate social responsibility could negatively impact our operations and financial performance, (xxvi) product liability claims and other legal proceedings could adversely affect our operations and financial performance, (xxvii) we may incur fines or penalties, damage to our reputation or other adverse consequences if our employees, agents or business partners violate, or are alleged to have violated, anti-bribery, competition or other laws, (xxviii) changing climate, global climate change regulations and greenhouse gas effects 26
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may adversely affect our operations and financial performance, (xxix) we may be unable to achieve our greenhouse gas emission reduction targets by 2030. The risks described above are not all-inclusive, and given these and other possible risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. For a detailed discussion of the most significant risks and uncertainties that could cause our actual results to differ materially from those forecasted, projected or anticipated, see "Risk Factors" in Part I, Item 1A of our most recently filed Form 10-K and our other filings with theSecurities and Exchange Commission . All forward-looking statements made in this Form 10-Q are expressly qualified in their entirety by reference to such risk factors. Except to the limited extent required by applicable law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. OVERVIEW Business Segments
We operate in three reportable business segments:
In theGlobal Industrial Packaging segment, we are a leading global producer of industrial packaging products, such as steel, fibre and plastic drums, rigid intermediate bulk containers, closure systems for industrial packaging products, transit protection products, water bottles and remanufactured and reconditioned industrial containers, and services, such as container life cycle management, filling, logistics, warehousing and other packaging services. We sell our industrial packaging products on a global basis to customers in industries such as chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agriculture, pharmaceutical and minerals, among others. In thePaper Packaging & Services segment, we produce and sell containerboard, corrugated sheets, corrugated containers, and other corrugated products to customers inNorth America in industries such as packaging, automotive, food and building products. Our corrugated container products are used to ship such diverse products as home appliances, small machinery, grocery products, automotive components, books and furniture, as well as numerous other applications. We also produce and sell coated recycled paperboard and uncoated recycled paperboard, some of which we use to produce and sell products (tubes and cores, construction products, and protective packaging), which ultimately serve both industrial and consumer markets. In addition, we purchase and sell recycled fiber, and we also produce and sell adhesives. In the Land Management segment, we are focused on the active harvesting and regeneration of ourUnited States timber properties to achieve sustainable long-term yields. While timber sales are subject to fluctuations, we seek to maintain a consistent cutting schedule, within the limits of market and weather conditions. We also sell, from time to time, timberland and special use land, which consists of surplus land, higher and better use ("HBU") land and development land. As ofApril 30, 2022 , we owned approximately 175,000 acres of timber property in the southeasternUnited States , which includes 18,800 acres of special use land. CRITICAL ACCOUNTING POLICIES The discussion and analysis of our financial condition and results of operations are based upon our interim condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these interim condensed consolidated financial statements, in accordance with these principles, require us to make estimates and assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities as of the date of our interim condensed consolidated financial statements. Our critical accounting policies are discussed in Part II, Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations of the 2021 Form 10-K. We believe that the consistent application of these policies enables us to provide readers of the interim condensed consolidated financial statements with useful and reliable information about our results of operations and financial condition. There have been no material changes to our critical accounting policies from the disclosures contained in the 2021 Form 10-K.
Recently Issued and Newly Adopted Accounting Standards
See Note 1 to the interim condensed consolidated financial statements included
in Item 1 of this Form 10-Q for a detailed description of recently issued and
newly adopted accounting standards.
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RESULTS OF OPERATIONS
The following comparative information is presented for the three and six months endedApril 30, 2022 and 2021. Historical revenues and earnings may or may not be representative of future operating results as a result of various economic and other factors. Items that could have a significant impact on the financial statements include the risks and uncertainties listed in Part I, Item 1A - Risk Factors, of the 2021 Form 10-K. Actual results could differ materially using different estimates and assumptions, or if conditions are significantly different in the future. The non-GAAP financial measures of EBITDA and Adjusted EBITDA are used throughout the following discussion of our results of operations, both for our consolidated and segment results. For our consolidated results, EBITDA is defined as net income, plus interest expense, net, plus debt extinguishment charges, plus income tax expense, plus depreciation, depletion and amortization expense, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus integration related costs, plus non-cash asset impairment charges, plus non-cash pension settlement charges, plus incremental COVID-19 costs, net, plus loss (gain) on disposal of properties, plants, equipment and businesses, net, less timberland gains, 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 non-cash pension settlement charges, 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 any restructuring charges, plus integration related costs, plus non-cash asset impairment charges, plus non-cash pension settlement charges, plus incremental COVID-19 costs, net, plus (gain) loss on disposal of properties, plants, equipment and businesses, net, less timberlands gains, 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 restructuring charges, integration related costs, non-cash asset impairment charges, non-cash pension settlement charges, incremental COVID-19 costs, net and (gain) loss on disposal of properties, plants, equipment and businesses, net, timberland gains, net, which are non-GAAP financial measures. We believe that excluding the impact of these adjustments enables investors to perform a meaningful comparison of our current and historical performance that investors find valuable. The foregoing non-GAAP financial measures are intended to supplement, and should be read together with, our financial results. These non-GAAP financial measures should not be considered an alternative or substitute for, and should not be considered superior to, our reported financial results. Accordingly, users of this financial information should not place undue reliance on the non-GAAP financial measures. 28
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Second Quarter Results
The following table sets forth the net sales, operating profit, EBITDA and Adjusted EBITDA for each of our business segments for the three months endedApril 30, 2022 and 2021: Three Months Ended April 30, (in millions) 2022 2021 Net sales: Global Industrial Packaging$ 971.7 $ 798.0 Paper Packaging & Services 689.3 537.0 Land Management 6.3 5.6 Total net sales$ 1,667.3 $ 1,340.6 Operating profit: Global Industrial Packaging$ 108.0 $ 76.4 Paper Packaging & Services 80.1 27.3 Land Management 2.0 96.9 Total operating profit$ 190.1 $ 200.6 EBITDA: Global Industrial Packaging$ 131.8 $ 95.1 Paper Packaging & Services 115.3 64.1 Land Management 2.7 97.6 Total EBITDA$ 249.8 $ 256.8 Adjusted EBITDA: Global Industrial Packaging$ 130.9 $ 106.2 Paper Packaging & Services 117.4 68.3 Land Management 2.7 2.1 Total Adjusted EBITDA$ 251.0 $ 176.6 29
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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 the three months endedApril 30, 2022 and 2021: Three Months Ended April 30, (in millions) 2022 2021 Net income$ 126.7 $ 154.0 Plus: interest expense, net 13.2 26.7 Plus: debt extinguishment charges 25.4 - Plus: income tax expense 29.9 17.3 Plus: depreciation, depletion and amortization expense 54.6 58.8 EBITDA$ 249.8 $ 256.8 Net income$ 126.7 $ 154.0 Plus: interest expense, net 13.2 26.7 Plus: income tax expense 29.9 17.3 Plus: non-cash pension settlement charges - 0.1 Plus: debt extinguishment charges 25.4 - Plus: other (income) expense, net (4.4) 2.8 Plus: equity earnings of unconsolidated affiliates, net of tax (0.7) (0.3) Operating profit 190.1 200.6 Less: non-cash pension settlement charges - 0.1 Less: other (income) expense, net (4.4) 2.8 Less: equity earnings of unconsolidated affiliates, net of tax (0.7) (0.3) Plus: depreciation, depletion and amortization expense 54.6 58.8 EBITDA 249.8 256.8 Plus: restructuring charges 3.7 12.0 Less: timberland gains - (95.7) Plus: integration related costs 2.0 1.8 Plus: non-cash asset impairment charges - 0.2 Plus: non-cash pension settlement charges - 0.1 Plus: incremental COVID-19 costs, net - 1.2 Plus: (gain) loss on disposal of properties, plants, equipment, and businesses, net (4.5) 0.2 Adjusted EBITDA$ 251.0 $ 176.6 30
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The following table sets forth EBITDA and Adjusted EBITDA for our business
segments, reconciled to the operating profit for each segment, for the three
months ended
Three Months Ended
April 30,
(in millions) 2022 2021
Global Industrial Packaging
Operating profit $ 108.0 $ 76.4
Less: other (income) expense, net (4.3) 2.8
Less: equity earnings of unconsolidated affiliates, net of tax (0.7) (0.3)
Plus: depreciation and amortization expense 18.8 21.2
EBITDA 131.8 95.1
Plus: restructuring charges 2.7 10.2
Plus: non-cash asset impairment charges - 0.2
Plus: incremental COVID-19 costs, net - 0.5
Plus: (gain) loss on disposal of properties, plants, equipment, and
businesses, net (3.6) 0.2
Adjusted EBITDA $ 130.9 $ 106.2
Paper Packaging & Services
Operating profit $ 80.1 $ 27.3
Less: non-cash pension settlement charges - 0.1
Less: other income, net (0.1) -
Plus: depreciation and amortization expense 35.1 36.9
EBITDA 115.3 64.1
Plus: restructuring charges 1.0 1.7
Plus: integration related costs 2.0 1.8
Plus: non-cash pension settlement charges - 0.1
Plus: incremental COVID-19 costs, net - 0.7
Plus: gain on disposal of properties, plants, equipment, and
businesses, net (0.9) (0.1)
Adjusted EBITDA $ 117.4 $ 68.3
Land Management
Operating profit $ 2.0 $ 96.9
Plus: depreciation, depletion and amortization expense 0.7 0.7
EBITDA 2.7 97.6
Plus: restructuring charges - 0.1
Less: timberland gains - (95.7)
Plus: loss on disposal of properties, plants, equipment, and
businesses, net - 0.1
Adjusted EBITDA $ 2.7 $ 2.1
Net Sales
Net sales were $1,667.3 million for the second quarter of 2022 compared with
$1,340.6 million for the second quarter of 2021. The $326.7 million increase was
primarily due to higher average sale prices and higher published containerboard
and boxboard prices across the Global Industrial Packaging and the Paper
Packaging & Services segments, respectively. See the "Segment Review" below for
additional information on net sales by segment for the second quarter of 2022.
Gross Profit
Gross profit was$338.7 million for the second quarter of 2022 compared with$265.9 million for the second quarter of 2021. The increase was primarily due to the same factors that impacted net sales, partially offset by higher raw material costs. See the "Segment Review" below for additional information on gross profit by segment. Gross profit margin was 20.3 and 19.8 percent for the second quarter of 2022 and 2021, respectively. 31
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Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses were $147.4 million for
the second quarter of 2022 and $146.8 million for the second quarter of 2021.
SG&A expenses were 8.8 percent and 11.0 percent of net sales for the second
quarter of 2022 and 2021, respectively.
Financial Measures
Operating profit was$190.1 million for the second quarter of 2022 compared with$200.6 million for the second quarter of 2021. Net income was$126.7 million for the second quarter of 2022 compared with$154.0 million for the second quarter of 2021. Adjusted EBITDA was$251.0 million for the second quarter of 2022 compared with$176.6 million for the second quarter of 2021. The reasons for the changes in operating profit, net income, and Adjusted EBITDA for each segment are described below in the "Segment Review."
Trends
We anticipate that overall customer demand for our products will continue to be
stable, although inflation, supply chain disruptions, labor shortages,
increasing interest rates and Covid-19 related matters may negatively impact
some of our customers. Global steel prices are forecasted to continue to decline
at a moderate pace. Resin and old corrugated container ("OCC") prices are
expected to remain stable for the remainder of the year, with OCC prices
slightly increasing during the fourth quarter. Further, we anticipate other
direct materials, transportation, labor and energy to continue to see
inflationary pressure through the year.
The foregoing is subject to the impact and consequences of the invasion of
Ukraine by Russia . As described in Part I, Item 1A - Risk Factors, of the 2021
Form 10-K, our global operations subject us to general economic and business
conditions and political, social, economic and labor instability, including war,
invasion and civil disturbance, that could adversely affect our business and
results of operations. In addition, demand for our products and services has
historically corresponded to changes in general economic and business conditions
of the industries and countries in which we operate. However, our operations in
Russia account for approximately 3% of our total sales and approximately 1% of
our total assets. We will continue to actively monitor this situation.
Segment Review
OurGlobal Industrial Packaging segment offers a comprehensive line of industrial packaging products, such as steel, fibre and plastic drums, rigid and flexible intermediate bulk containers, closure systems for industrial packaging products, transit protection products, water bottles and remanufactured and reconditioned industrial containers, and services, such as container life cycle management, filling, logistics, warehousing and other packaging services. Key factors influencing profitability in theGlobal Industrial Packaging 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$971.7 million for the second quarter of 2022 compared with$798.0 million for the second quarter of 2021. The$173.7 million increase in net sales was primarily due to higher average selling prices and product mix, partially offset by lower volumes. Gross profit was$185.3 million for the second quarter of 2022 compared with$170.1 million for the second quarter of 2021. The$15.2 million increase in gross profit was primarily due to the same factors that impacted net sales, partially offset by 32
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higher raw material costs. Gross profit margin was 19.1 percent and 21.3 percent
for the three months ended
Operating profit was$108.0 million for the second quarter of 2022 compared with operating profit of$76.4 million for the second quarter of 2021. The$31.6 million increase is primarily due to the same factors that impacted gross profit. Adjusted EBITDA was$130.9 million for the second quarter of 2022 compared with$106.2 million for the second quarter of 2021. The$24.7 million increase in Adjusted EBITDA was primarily due to the same factors that impacted gross profit.Paper Packaging & Services OurPaper Packaging & Services segment produces and sells containerboard, corrugated sheets, corrugated containers, and other corrugated products to customers inNorth America in industries such as packaging, automotive, food and building products. Our corrugated container products are used to ship such diverse products as home appliances, small machinery, grocery products, automotive components, books and furniture, as well as numerous other applications. We also produce and sell coated recycled paperboard and uncoated recycled paperboard, some of which we use to produce and sell products (tubes and cores, construction products, and protective packaging), which ultimately serve both industrial and consumer markets. In addition, we purchase and sell recycled fiber, and we also produce and sell adhesives. 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;
•Acquisition of businesses and facilities;
•Restructuring charges; and
•Divestiture of businesses and facilities.
Net sales were$689.3 million for the second quarter of 2022 compared with$537.0 million for the second quarter of 2021. The$152.3 million increase was primarily due to higher volumes and higher published containerboard and boxboard prices.
Gross profit was
Operating profit was$80.1 million for the second quarter of 2022 compared with$27.3 million for the second quarter of 2021. The increase was primarily due to the same factors as that impacted gross profit. Adjusted EBITDA was$117.4 million for the second quarter of 2022 compared with$68.3 million for the second quarter of 2021. The$49.1 million increase in Adjusted EBITDA was primarily due to the same factors that impacted gross profit.
Land Management
As of
•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").
Net sales were
Gross profit was
Operating profit decreased to
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In order to maximize the value of our timber property, we continue to review our current portfolio and explore the development of certain of these properties. This process has led us to characterize our property as follows:
•Surplus property, meaning land that cannot be efficiently or effectively managed by us, whether due to parcel size, lack of productivity, location, access limitations or for other reasons;
•HBU property, meaning land that in its current state has a higher market value for uses other than growing and selling timber;
•Development property, meaning HBU land that, with additional investment, may have a significantly higher market value than its HBU market value; and
•Core timberland, meaning land that is best suited for growing and selling timber.
We report the sale of core timberland property in timberland gains, the sale of HBU and surplus property in gain on disposal of properties, plants and equipment, net and the sale of timber and development property under net sales and cost of products sold in our interim condensed consolidated statements of income. All HBU and development property, together with surplus property, is used to productively grow and sell timber until the property is sold. Whether timberland has a higher value for uses other than growing and selling timber is a determination based upon several variables, such as proximity to population centers, anticipated population growth in the area, the topography of the land, aesthetic considerations, including access to lakes or rivers, the condition of the surrounding land, availability of utilities, markets for timber and economic considerations both nationally and locally. Given these considerations, the characterization of land is not a static process, but requires an ongoing review and re-characterization as circumstances change.
As of
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Income Tax Expense
Our quarterly income tax expense was computed in accordance with Accounting
Standards Codification ("ASC") 740-270 "Income Taxes - Interim Reporting." In
accordance with this accounting standard, annual estimated tax expense is
computed based on forecasted annual earnings and other forecasted annual
amounts, including, but not limited to items such as uncertain tax positions and
withholding taxes. Additionally, losses from jurisdictions for which a valuation
allowance has been provided have not been included in the annual estimated tax
rate. Income tax expense each quarter is provided for on a current year-to-date
basis using the annual estimated tax rate, adjusted for discrete taxable events
that occur during the interim period.
Income tax expense for the second quarter of 2022 was $29.9 million on
$155.9 million of pretax income and income tax expense for the second quarter of
2021 was $17.3 million on $171.0 million of pretax income. The quarterly
increase in income tax expense in 2022 was primarily attributable to an increase
in pre-tax earnings, excluding the gain on the 2021 Timberland Sale and the gain
on sale of the FPS Divestiture (as defined in the next section), the tax impact
of which were recognized discretely. Changes in the expected mix of earnings
among tax jurisdictions, including jurisdictions for which valuation allowances
have been recorded, as well as the timing of recognition of the related tax
expense under ASC 740-270 also contributed to the increase in tax expense in
2022. Favorable discrete items increased in 2022 resulting in an additional net
$2.3 million tax benefit compared to 2021. A net $8.6 million tax decrease was
recognized related to certain assumptions regarding capital losses that are
expected to offset capital gains resulting from the 2021 Timberland Sale. This
decrease was offset by an increase in tax expense of $4.9 million , resulting
from the recognition of certain state basis differences, foreign and U.S. state
tax rate changes and withholding taxes accruals, and an increase in tax expense
of $1.4 million related to other miscellaneous items. Additionally, a
$4.4 million book gain was recorded in the quarter related to the disposal of
business, which there is expected to be no tax impact.
We are subject to audits by U.S. federal, state and local tax authorities and
foreign tax authorities. We believe that adequate provisions have been made for
any adjustments that may result from tax examinations. However, the outcome of
tax audits cannot be predicted with certainty. If any issues addressed in the
tax audits are resolved in a manner not consistent with management's
expectations, we could be required to adjust our provision for income taxes in
the period such resolution occurs.
The estimated net decrease in unrecognized tax benefits for the next 12 months
ranges from zero to $8.0 million . Actual results may differ materially from this
estimate.
Other Comprehensive Income (Loss) Changes
Foreign currency translation
In accordance with ASC 830, "Foreign Currency Matters," the assets and liabilities denominated in a foreign currency are translated 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 and liabilities of our international operations, are presented in the interim condensed consolidated statements of changes in equity in accumulated other comprehensive income (loss). OnApril 1, 2022 , we completed the divestment of our approximately 50% equity interest in the Flexible Products and Services business (the "FPS Divestiture"). From this transaction,$113.1 million of foreign currency translation adjustment was released. 35
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Year-to-Date Results
The following table sets forth the net sales, operating profit, EBITDA and Adjusted EBITDA for each of our business segments for the six months endedApril 30, 2022 and 2021: Six Months Ended April 30, (in millions) 2022 2021 Net sales: Global Industrial Packaging$ 1,920.8 $ 1,457.3 Paper Packaging & Services 1,299.3 1,017.9 Land Management 11.5 11.9 Total net sales$ 3,231.6 $ 2,487.1 Operating profit: Global Industrial Packaging$ 139.0 $ 130.4 Paper Packaging & Services 118.4 41.6 Land Management 4.7 98.6 Total operating profit$ 262.1 $ 270.6 EBITDA: Global Industrial Packaging$ 182.8 $ 170.9 Paper Packaging & Services 191.5 107.0 Land Management 6.2 100.4 Total EBITDA$ 380.5 $ 378.3 Adjusted EBITDA: Global Industrial Packaging$ 245.1 $ 185.7 Paper Packaging & Services 197.9 124.4 Land Management 4.8 5.0 Total Adjusted EBITDA$ 447.8 $ 315.1 36
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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 the six months endedApril 30, 2022 and 2021: Six Months Ended April 30, (in millions) 2022 2021 Net income$ 145.3 $ 184.9 Plus: interest expense, net 30.3 51.9 Plus: debt extinguishment charges 25.4 - Plus: income tax expense 65.5 23.4 Plus: depreciation, depletion and amortization expense 114.0 118.1 EBITDA$ 380.5 $ 378.3 Net income$ 145.3 $ 184.9 Plus: interest expense, net 30.3 51.9 Plus: non-cash pension settlement charges - 8.6 Plus: debt extinguishment charges 25.4 - Plus: income tax expense 65.5 23.4 Plus: other (income) expense, net (2.4) 2.8 Plus: equity earnings of unconsolidated affiliates, net of tax (2.0) (1.0) Operating profit 262.1 270.6 Less: other (income) expense, net (2.4) 2.8 Less: non-cash pension settlement charges - 8.6 Less: equity earnings of unconsolidated affiliates, net of tax (2.0) (1.0) Plus: depreciation, depletion and amortization expense 114.0 118.1 EBITDA$ 380.5 $ 378.3 Plus: restructuring charges 7.2 15.1 Plus: timberland gains - (95.7) Plus: integration related costs 3.6 3.8 Plus: non-cash asset impairment charges 62.4 1.5 Plus: non-cash pension settlement charges - 8.6 Plus: incremental COVID-19 costs, net - 1.8 Plus: (gain) loss on disposal of properties, plants, equipment, and businesses, net (5.9) 1.7 Adjusted EBITDA$ 447.8 $ 315.1 37
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The following table sets forth EBITDA and Adjusted EBITDA for our business
segments, reconciled to the operating profit for each segment, for the six
months ended
Six Months Ended
April 30,
(in millions) 2022 2021
Global Industrial Packaging
Operating profit $ 139.0 $ 130.4
Less: other (income) expense, net (2.4) 2.7
Less: equity earnings of unconsolidated affiliates, net of tax (2.0) (1.0)
Plus: depreciation and amortization expense 39.4 42.2
EBITDA $ 182.8 $ 170.9
Plus: restructuring charges 4.8 13.0
Plus: non-cash impairment charges 62.4 1.5
Plus: incremental COVID-19 costs, net - 0.8
Plus: gain on disposal of properties, plants and equipment, and
businesses, net (4.9) (0.5)
Adjusted EBITDA $ 245.1 $ 185.7
Paper Packaging & Services
Operating profit $ 118.4 $ 41.6
Less: other expense, net - 0.1
Less: non-cash pension settlement charges - 8.6
Plus: depreciation and amortization expense 73.1 74.1
EBITDA $ 191.5 $ 107.0
Plus: restructuring charges 2.4 2.0
Plus: integration related costs 3.6 3.8
Plus: non-cash pension settlement charges - 8.6
Plus: incremental COVID-19 costs, net - 1.0
Plus: loss on disposal of properties, plants and equipment, and
businesses, net 0.4 2.0
Adjusted EBITDA $ 197.9 $ 124.4
Land Management
Operating profit $ 4.7 $ 98.6
Plus: depreciation, depletion and amortization expenses 1.5 1.8
EBITDA $ 6.2 $ 100.4
Plus: restructuring charges - 0.1
Plus: timberland gains - (95.7)
Plus: (gain) loss on disposal of properties, plants and equipment,
and businesses, net (1.4) 0.2
Adjusted EBITDA $ 4.8 $ 5.0
Net Sales
Net sales were $3,231.6 million for the first six months of 2022 compared with
$2,487.1 million for the first six months of 2021. The $744.5 million increase
was primarily due to higher volumes and higher average sale prices across the
Global Industrial Packaging segment and higher volumes and higher published
containerboard and boxboard prices in the Paper Packaging & Services segment.
See the "Segment Review" below for additional information on net sales by
segment during the first six months of 2022.
Gross Profit
Gross profit was$628.4 million for the first six months of 2022 compared with$478.1 million for the first six months of 2021. The increase was primarily due to the same factors that impacted net sales, offset by higher raw material costs. See "Segment Review" below for additional information on gross profit by segment. Gross profit margin was 19.4 percent and 19.2 percent for first six months of 2022 and 2021, respectively. 38
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Selling, General and Administrative Expenses
SG&A expenses increased to$299.0 million for the first six months of 2022 from$281.1 million for the first six months of 2021. SG&A expenses were 9.3 percent and 11.3 percent of net sales for first six months of 2022 and 2021, respectively. The increase in SG&A expenses was primarily due to increased incentive accruals.
Financial Measures
Operating profit was$262.1 million for the first six months of 2022 compared with$270.6 million for the first six months of 2021. Net income was$145.3 million for the first six months of 2022 compared with$184.9 million for the first six months of 2021. Adjusted EBITDA was$447.8 million for the first six months of 2022 compared with$315.1 million for the first six months of 2021. The reasons for the changes in operating profit, net income, and Adjusted EBITDA for each segment are described below in the "Segment Review."
Segment Review
Net sales were$1,920.8 million for the first six months of 2022 compared with$1,457.3 million for the first six months of 2021. The$463.5 million increase in net sales was primarily due to higher volumes, higher average selling prices and product mix. Gross profit was$362.4 million for the first six months of 2022 compared with$300.4 million for the first six months of 2021. The$62.0 million increase in gross profit was primarily due to the same factors that impacted net sales, partially offset by higher raw material costs. Gross profit margin was 18.9 percent and 20.6 percent for the first six months of 2022 and 2021, respectively. Operating profit was$139.0 million for the first six months of 2022 compared with$130.4 million for the first six months of 2021 due to the same factors that impacted gross profit, offset by$62.4 million non-cash impairment charge related to the FPS Divestiture. Adjusted EBITDA was$245.1 million for the first six months of 2022 compared with$185.7 million for the first six months of 2021. The$59.4 million increase in Adjusted EBITDA was primarily due to the same factors that impacted gross profit.
Net sales were$1,299.3 million for the first six months of 2022 compared with$1,017.9 million for the first six months of 2021. The$281.4 million increase in net sales was primarily due to higher volumes and higher published containerboard and boxboard prices. Gross profit was$261.6 million for the first six months of 2022 compared with$173.5 million for the first six months of 2021. Gross profit margin was 20.1 percent and 17.0 percent for the first six months of 2022 and 2021, respectively. The$88.1 million increase in gross profit was primarily due to the same factors that impacted net sales, offset by higher raw material, transportation, labor and utility costs. Operating profit was$118.4 million for the first six months of 2022 compared with$41.6 million for the first six months of 2021. The increase in operating profit was due to the same factors that impacted gross profit. Adjusted EBITDA was$197.9 million for the first six months of 2022 compared with$124.4 million for the first six months of 2021. The$73.5 million increase in Adjusted EBITDA was due to the same factors that impacted gross profit.
Land Management
Net sales were
Gross profit was
Operating profit decreased to$4.7 million for the first six months of 2022 compared with$98.6 million for the first six months of 2021. During the first six months of 2021, we completed the 2021 Timberland Sale. Adjusted EBITDA was$4.8 million and$5.0 million for the first six months of 2022 and 2021, respectively. 39
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Income tax expense
Income tax expense for the quarter and year to date was computed in accordance with ASC 740-270 "Income Taxes - Interim Reporting." Under this method, losses from jurisdictions for which a valuation allowance has been provided have not been included in the amount to which the ASC 740-270 rate was applied. Our income tax expense may fluctuate due to changes in estimated losses and income from jurisdictions for which a valuation allowance has been provided, the timing of recognition of the related tax expense under ASC 740-270, and the impact of discrete items in the respective quarter. Income tax expense for the first six months of 2022 was$65.5 million on$208.8 million of pretax income and income tax expense for the first six months of 2021 was$23.4 million on$207.3 million of pretax income. The$42.1 million increase in income tax expense in 2022 was primarily attributable to an increase in pre-tax earnings, excluding the gain on the 2021 Timberland Sale and the gain on sale of the FPS Divestiture, the tax impact of which were recognized discretely. Changes in the expected mix of earnings among tax jurisdictions, including jurisdictions for which valuation allowances have been recorded, as well as the timing of recognition of the related tax expense under ASC 740-270 also attributed to the increase in tax expense in 2022. Additionally, favorable discrete items decreased by$6.6 million . The decrease in favorable discrete adjustments consists of an increase in tax expense of$8.5 million due to tax basis adjustments in certain tangible property and state basis differences; an increase in tax expense of$3.6 million related to withholding taxes accruals and prior year settlement ofU.S. Federal and Canadian income tax audits; and an increase in tax expense of$1.6 million related to other miscellaneous items; offset by a$3.3 million decrease in unrecognized tax liabilities primarily as a result of expiration of the statute of limitations; and a net$3.8 million tax expense decrease related to certain assumptions regarding capital losses that are expected to offset capital gains resulting from the 2021 Timberland Sale. Additionally, a net$60.4 million book deduction was recorded in 2022 related to the FPS Divestiture and other businesses on which there is expected to be no tax benefit.
Other Comprehensive Income (Loss) Changes
Foreign currency translation
In accordance with ASC 830, "Foreign Currency Matters," the assets and liabilities denominated in a foreign currency are translated 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 and liabilities of our international operations, are presented in the interim condensed consolidated statements of changes in equity in accumulated other comprehensive income (loss). OnApril 1, 2022 , we completed the FPS Divestiture and$113.1 million of foreign currency translation adjustment was released.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are operating cash flows and borrowings under our senior secured credit facilities and proceeds from our trade accounts receivable credit facilities. We use these sources to fund our working capital needs, capital expenditures, cash dividends, debt repayment 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, debt repayment, potential acquisitions of businesses and other liquidity needs for at least 12 months.
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