ITEM 1A. RISK FACTORS
Statements contained in this Form 10-K may be “forward-looking” within the meaning of Section 21E of the Exchange Act. Such forward-looking statements are subject to certain risks and uncertainties that could cause our operating results to differ materially from those projected. The following factors, among others, in some cases have affected, and in the future could affect, our actual financial or operational performance, or both.
Risks Related to Market and Economic Factors
Historically, our Business has been Sensitive to Changes in General Economic or Business Conditions.
Our customers generally consist of other manufacturers and suppliers who purchase industrial packaging products and containerboard and related corrugated products for their own containment and shipping purposes. Because we supply a cross
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section of industries, such as chemicals, films, paints and pigments, food and beverage, petroleum, industrial coatings, carpeting, agricultural, pharmaceutical, mineral products, packaging, automotive, construction and building products industries and have operations in many countries, 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. The overall demand and prices for our products and services could decline as a result of a large number of factors outside our control, including economic recessions, the COVID-19 global pandemic and any future pandemics, changes in industrial production processes or consumer preference, changes in laws and regulations, inflation, tariffs, changes in published pricing indices, fluctuations in interest and currency exchange rates and changes in the fiscal or monetary policies of governments in the regions in which we operate. Accordingly, our financial performance is substantially dependent upon the general economic and business conditions existing in these industries and countries where we do business, and any prolonged or substantial economic downturn in the markets in which we operate could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Global Operations Subject us to Currency Exchange and Political Risks that Could Adversely Affect our Results of Operations.
We have operations in over 40 countries with approximately 40.6% of our 2020 sales derived from non-U.S. operations. Management of global operations is extremely complex, and operations outside the United States are subject to additional risks that may not exist, or be as significant, in the United States. As a result of our global operations, we are subject to certain risks that could disrupt our operations or force us to incur unanticipated costs. These risks include the following:
•political, social, economic and labor instability
•war, invasion, civil disturbance or acts of terrorism;
•taking of property by nationalization or expropriation without fair compensation;
•changes in government policies and regulations and enforcement thereof, including selectivity or discrimination in the enforcement thereof;
•loss or non-renewal of treaties or similar agreements with foreign tax authorities and
•difficulties in enforcement of contractual obligations;
•imposition of limitations on conversions of currencies into United States dollars or remittance of dividends and other payments by international subsidiaries;
•imposition or increase of withholding and other taxes on income remittances and other payments by international subsidiaries;
•hyperinflation, currency devaluation or defaults in certain countries;
•impositions or increase of investment and other restrictions or requirements by non-U.S. governments;
•national and regional labor strikes, whether legal or illegal and other labor or social actions;
•restrictive governmental trade policies, customs, tariffs, trade-wars, international boycotts, sanctions, import/export and other trade compliance regulations; and
•financial uncertainties in our major international markets, including uncertainties surrounding the United Kingdom’s withdrawal from the European Union.
We also have indebtedness, agreements to purchase raw materials and agreements to sell finished products that are denominated in Euros, Turkish Lira, Russian Rubles and other currencies. Our operating performance is affected by fluctuations in currency exchange rates by:
•translations into United States dollars for financial reporting purposes of the assets and liabilities of our Non-U.S. operations conducted in local currencies; and
•gains or losses from transactions conducted in currencies other than the operation’s functional currency.
The COVID-19 Pandemic Could Continue to Impact Any Combination of our Business, Financial Condition, Results of Operations and Cash Flows.
The global impact of COVID-19 continues to rapidly evolve and is creating significant economic uncertainty and volatility in the world economy due to the severity of the virus, the duration of the pandemic, and what future actions may be taken by
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governmental authorities to attempt to mitigate the spread and contain potential new outbreaks. As a result, at this time, we cannot reasonably estimate the full impact of the COVID-19 pandemic.
The persistence of the virus and further deterioration of economic conditions, and continued disruption to our customers and their end markets or to the global supply chain due to the COVID-19 pandemic could have a significant negative impact on our financial condition, results of operations and cash flows. The products we manufacture and the services we provide have been deemed “essential” and, as a result, government authorities in every country in which we do business have allowed our operations to continue without significant disruption. In recent months, government restrictions have been relaxed on many businesses, but with recent resurgence of the virus in the Americas and EMEA, governments may seek to re-impose business shut downs and operational restrictions, which could further impact our customers, their end markets, and our suppliers, especially those that are deemed “nonessential” businesses. A lack of demand by our customers or a lack of demand for our customers' products may translate into a lack of demand for our products and in turn could have a material adverse effect on our business, financial condition, results of operations and cash flows.
To attempt to mitigate the financial risks directly related to the COVID-19 pandemic, we have developed and implemented operational plans that we believe will help us be prepared to continue supplying our products and services to our customers. Our primary concern is the health and safety of our workforce. In that regard, we have implemented precautionary measures that are designed to help minimize the risk of our employees being exposed to the virus. Some additional factors we believe could have a material adverse effect on our business, financial condition, results of operations and cash flows include: extended facility closures or operations at reduced capacities if employees are unable to work due to sickness or the need to quarantine; temporary downtime if demand for our products are dramatically reduced; costs of keeping our employees safe at work; loss of key customers; competitive pressures; supplier relationships; delay in cost savings and operating efficiency projects; cyber security threats; potential impact on our internal controls; reactions by federal and state governmental agencies; inflation; and access to capital markets.
The Current and Future Challenging Global Economy and Disruption and Volatility of the Financial and Credit Markets may Adversely Affect our Business.
Current global economic conditions are challenging to our global business operations. Such conditions have had, and may continue to have, a negative impact on our financial results. Future economic downturns, either in the United States, Europe or in other regions in which we do business could negatively affect our business and results of operations. The volatility of the current economic climate, especially in relation to ongoing uncertainties related to the COVID-19 pandemic and geopolitical events around the world, including the imposition of trade tariffs, makes it difficult for us to predict the complete impact of the forgoing matters on our business and results of operations. Due to these current and future economic conditions, our customers may face financial difficulties, disruption in their supply chains, and the unavailability of or reduction in commercial credit that may result in decreased sales by and revenues to our company. Certain of our customers may cease operations or seek bankruptcy protection, which would reduce our cash flows and adversely impact our results of operations. Our customers that are financially viable and not experiencing economic distress may nevertheless elect to reduce the volume of orders for our products or close facilities in an effort to remain financially stable or as a result of the unavailability of commercial credit which would negatively affect our results of operations. We may experience difficulties in servicing, renewing or repaying our outstanding debt due to continued volatility in the global economy. We may also have difficulty accessing the global credit markets if there is a tightening of commercial credit availability, which would result in decreased ability to fund capital-intensive strategic projects.
Further, we may experience challenges in forecasting revenues and operating results due to these global economic conditions. The difficulty in forecasting revenues and operating results may result in volatility in the market price of our common stock.
In addition, the lenders under our senior secured credit agreement and other borrowing facilities described in Item 7 of this Form 10-K under Liquidity and Capital Resources - Borrowing Arrangements and the counterparties with whom we maintain interest rate swap agreements, currency forward contracts and derivatives and other hedge agreements may be unable to perform their lending or payment obligations in whole or in part, or may cease operations or seek bankruptcy protection, which would negatively affect our cash flows and our results of operations.
A downgrade in our credit rating could also impact our ability to effectively finance our operations and could lead to increased borrowing costs and limits on our access to capital.
The equipment that we use in our manufacturing operations is expensive and requires continued maintenance. We require significant capital investment to maintain our equipment. If our existing sources of capital prove insufficient, there can be no assurance that we will be able to obtain capital to finance these expenditures on favorable terms, or at all. Any inability by us to
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maintain our equipment as needed or any inability to obtain capital for expenditures on equipment maintenance on favorable terms could have an adverse effect on our business, financial position and results of operations.
Risks Related to Industry Conditions
The Continuing Consolidation of our Customer Base and Suppliers may Intensify Pricing Pressure.
Over the last few years, many of our large industrial packaging, containerboard and corrugated products customers have acquired, or been acquired by, companies with similar or complementary product lines. In addition, many of our suppliers of raw materials such as steel, resin and paper, have undergone a similar process of consolidation. This consolidation has increased the concentration of our largest customers, resulting in increased pricing pressures from our customers. The consolidation of our largest suppliers has resulted in limited sources of supply and increased cost pressures from our suppliers. Any future consolidation of our customer base or our suppliers could negatively impact our business, financial condition, results of operations and cash flows. This consolidation could be accelerated by the impact of COVID-19 on our customers and suppliers. Furthermore, if one or more of our major customers reduces, delays or cancels substantial orders, if one or more of our major suppliers is unable to timely produce and deliver our orders our business, financial condition, results of operations and cash flows may be materially and adversely affected, particularly for the period in which the reduction, delay or cancellation occurs and also possibly for subsequent periods.
We Operate in Highly Competitive Industries.
Each of our business segments operates in highly competitive industries. The most important competitive factors we face are price, quality and service. To the extent any of our competitors become more successful with respect to any of these key competitive factors, we could lose customers and our sales could decline. In addition, due to the tendency of certain customers to diversify their suppliers, we could be unable to increase or maintain sales volumes with particular customers. Certain of our competitors are substantially larger and have significantly greater financial resources.
In addition, some of our products are made from raw materials that are subject to pronounced price fluctuations, such as steel, which is used in the manufacture of steel drums and containers, old corrugated containers, and oil, which in turn affects the price of resin for plastic drums and containers. Particularly in well-developed markets in Europe and in the United States, any substantial increases in the supply of industrial packaging resulting from capacity increases, the stockpiling of raw materials or other types of opportunistic behavior by our competitors in a period of high raw materials prices, or price wars, could adversely affect our margins and the profitability of our business. Although price is a significant basis of competition in our industry, we also compete on the basis of product reliability, the ability to deliver products on a global scale and our reputation for quality and customer service. If we fail to maintain our current standards for product quality, the scope of our distribution capabilities or our customer relationships, business, financial condition, results of operations and cash flows could be adversely affected.
Negative media reports about us or our businesses, whether accurate or inaccurate, could damage our reputation and relationships with our customers and suppliers, cause customers and suppliers to terminate their relationship with us, or impair our ability to effectively compete, which could adversely affect our business, financial condition, results of operations and cash flows.
Our Business is Sensitive to Changes in Industry Demands and Customer Preferences.
Industry demand for certain of our industrial packaging products in our United States, European and other international markets has varied in recent years causing competitive pricing pressures for those products. We compete in industries that are capital intensive, which generally leads to continued production as long as prices are sufficient to cover marginal costs. As a result, changes in industry demands (including any resulting industry over-capacity) and increased new capacity for production of industrial packaging products by competitors, may cause substantial price competition and, in turn, negatively impact our business, financial condition, results of operations and cash flows. Additionally, customer preferences are constantly changing based on, among other factors, cost, convenience, health, environmental and social concerns, and customers may choose to use different packaging products other than the products we manufacture as their business models change, or may choose to use alternative materials for their packaging products or simply forego the packaging of certain products entirely. For example, in the United States, sales of fibre drums continue to decline on a year over year basis as some customers select other packaging solutions for their products. Any shift away from packaging products we manufacture or changes in customer preferences may adversely affect our business, financial condition, results of operations and cash flows.
Raw Material, Energy and Transportation Price Fluctuations and Shortages may Adversely Impact our Manufacturing Operations and Costs.
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The principal raw materials used in the manufacture of our products are steel, resin, pulpwood, and recycled pulp from old corrugated containers and recycled coated and uncoated paperboard, used industrial packaging for reconditioning, and containerboard, which we purchase or otherwise acquire in highly competitive, price sensitive markets. These raw materials have historically exhibited price and demand cyclicality. In addition, we manufacture certain component parts for our rigid industrial packaging products and those of some of our competitors. Some of these materials and component parts have been, and in the future may be, in short supply. For example, the availability of these raw materials and component parts and/or our ability to purchase and transport these raw materials and produce and transport these component parts may be unexpectedly disrupted by adverse weather conditions, natural disasters, man-made disasters, a substantial economic downturn in the industries that provide any of those raw materials, or competition for use of raw materials and component parts in other regions or countries. However, we have not recently experienced any significant difficulty in obtaining our principal raw materials or component parts, despite the COVID-19 pandemic. With the economic uncertainty surrounding the COVID-19 pandemic and its severity and duration, we could incur significant raw material prices increases in the future which would likely have an adverse effect on our operating margins. We have long-term supply contracts in place for obtaining a portion of our principal raw materials. The cost of producing our products is also sensitive to the price of energy (including its impact on transport costs). Energy prices, in particular oil and natural gas, have fluctuated in recent years, with a corresponding effect on our production costs. Potential legislation, regulatory action and international treaties related to climate change, especially those related to the regulation of greenhouse gases, may result in significant increases in raw material and energy costs. We are highly reliant on the trucking industry for the transportation of our products. The overall profitability of our operations may be negatively impacted by higher transportation costs as freight carriers raise prices to address the continued shortage of drivers and market tightness. There can be no assurance that we will be able to recoup any past or future increases in the cost of energy, transportation and raw materials.
The Frequency and Volume of our Timber and Timberland Sales Will Impact our Financial Performance.
We have a significant inventory of standing timber and timberland and approximately 18,800 acres of special use properties in the United States as of October 31, 2020. The frequency, demand for and volume of sales of timber, timberland and special use properties will have an effect on our financial condition, results of operations and cash flows. In addition, volatility in the real estate market for special use properties could negatively affect our results of operations.
Risks Related to our Operations
We may not Successfully Implement our Business Strategies, Including Achieving our Growth Objectives.
We may not be able to fully implement our business strategies or realize, in whole or in part within the expected time frames, the anticipated benefits of our growth and other initiatives. Our various business strategies and initiatives are subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control.
In addition, we may incur certain costs to achieve efficiency improvements and growth in our business and we may not meet anticipated implementation timetables or stay within budgeted costs. As these growth initiatives are undertaken, we may not fully achieve our expected cost savings and efficiency improvements or growth rates, or these initiatives could adversely impact our customer retention or our operations. Also, our business strategies may change from time to time in light of our ability to implement our new business initiatives, competitive pressures, economic uncertainties or developments, such as the COVID-19 pandemic, or other factors. A variety of risks could cause us not to realize some or all of the expected benefits of these initiatives. These risks include, among others, delays in the anticipated timing of activities related to such initiatives, strategies and operating plans; increased difficulty and costs in implementing these efforts; and the incurrence of other unexpected costs associated with operating the business. As a result, there can be no assurance that we will realize these benefits. If, for any reason, the benefits we realize are less than our estimates or the implementation of these growth initiatives and business strategies adversely affect our operations or cost more or take longer to effectuate than we expect, or if our assumptions prove inaccurate, our business, financial condition, results of operations and cash flows may be adversely affected.
We may Encounter Difficulties or Liabilities Arising from Acquisitions or Divestitures.
We have invested a substantial amount of capital in acquisitions, joint ventures and strategic investments and we expect that we will continue to do so in the foreseeable future. We are continually evaluating acquisitions and strategic investments that are significant to our business both in the United States and internationally. Acquisitions, joint ventures and strategic investments involve numerous risks, including the failure to identify suitable acquisition candidates, complete acquisitions on acceptable terms and conditions, retain key customers, employees and contracts, the inability to integrate businesses without material disruption, unanticipated costs incurred in connection with integrating businesses, the incurrence of liabilities greater than anticipated or operating results that are less than anticipated, the inability to realize the projected value, and the inability to realize projected synergies. In addition, acquisitions, joint ventures and strategic investments and associated integration
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activities require time and attention of management and other key personnel. There can be no assurance that any acquisitions, joint ventures and strategic investments will be successfully integrated into our operations, that competition for acquisitions will not intensify or that we will be able to complete such acquisitions, joint ventures and strategic investments on acceptable terms and conditions. The costs of unsuccessful acquisition, joint venture and strategic investment efforts may adversely affect our business, financial condition results of operations and cash flows.
Additionally, in connection with any acquisitions or divestitures, we may become subject to contingent liabilities or legal claims, including but not limited to third party liability and other tort claims; claims for breach of contract; employment-related claims; environmental, health and safety liabilities, conditions or damage; permitting, regulatory or other compliance with law issues; or tax liabilities. If we become subject to any of these liabilities or claims, and they are not adequately covered by insurance or an enforceable indemnity or similar agreement from a creditworthy counterparty, we may be responsible for significant out-of-pocket expenditures. These liabilities, if they materialize, could have an adverse effect on our business, financial condition, results of operations and cash flows.
The Acquisition of Caraustar Subjects us to Various Risks and Uncertainties.
The acquisition of Caraustar Industries, Inc. and its subsidiaries ("Caraustar") on February 11, 2019 (the "Caraustar Acquisition") was the largest acquisition in our history. As a result of this acquisition, we are subject to various risks and uncertainties, including the failure to retain key customers, employees and contracts, the inability to integrate businesses without material disruption, unanticipated costs incurred in connection with integrating businesses, the incurrence of liabilities greater than anticipated or operating results that are less than anticipated, the inability to realize the projected value, and the inability to realize projected synergies, cost savings, operating efficiencies and other benefits, especially as a result of the COVID-19 pandemic, we may experience a delay in the anticipated timing and increased difficulty and costs in implementing these efforts. We may encounter difficulties with integrating Caraustar’s operations into our operations, including inconsistencies in standards, systems and controls, which may divert management’s focus and resources from ordinary business activities and opportunities. We may encounter unforeseen internal control, regulatory or compliance issues. Any of the foregoing could adversely affect our business, financial condition, results of operations and cash flows.
We may Incur Additional Restructuring Costs and there is no Guarantee that our Efforts to Reduce Costs will be Successful.
We have restructured portions of our operations from time to time in recent years, particularly following acquisitions of businesses, and periods of economic downturn due to local, regional or global economic conditions. We will continue to implement continuous improvement initiatives necessary or desirable to improve our business portfolio, address underperforming assets and generate additional cash. These initiatives may include selling, general and administrative reductions throughout our Company and have and will likely continue to result in the rationalization of manufacturing facilities.
The rationalization of our manufacturing facilities may result in temporary constraints upon our ability to manufacture the quantity of products necessary to fill orders and thereby complete sales in a timely manner. In addition, system upgrades at our manufacturing facilities that impact ordering, production scheduling and other related manufacturing processes are complex, and could impact or delay production targets. A prolonged delay in our ability to fill orders on a timely basis could affect customer demand for our products and increase the size of our product inventories, causing future reductions in our manufacturing schedules and adversely affecting our results of operations. Moreover, our continuous development and production of new products will often involve the retooling of existing manufacturing facilities. This retooling may limit our production capacity at certain times in the future, which could adversely affect our business, financial condition, results of operations and cash flow. In addition, the expansion and reconfiguration of existing manufacturing facilities could increase the risk of production delays, as well as require significant investments of capital.
While we expect these initiatives to result in significant profit opportunities and savings throughout our organization, our estimated profits and savings are based on several assumptions that may prove to be inaccurate, and as a result, there can be no assurance that we will realize these profits and cost savings or that, if realized, these profits and cost savings will be sustained. Failure to achieve or delays in achieving projected levels of efficiencies and cost savings from such measures, or unanticipated inefficiencies resulting from manufacturing and administrative reorganization actions in progress or contemplated, could adversely affect our business, financial condition, results of operations and cash flows and harm our reputation.
Several Operations are Conducted by Joint Ventures that we Cannot Operate Solely for our Benefit.
Several operations, particularly in developing countries, are conducted through joint ventures, such as a significant joint venture in our Flexible Products & Services segment. In countries that require us to conduct business through a joint venture with a local joint venture partner, the loss of a joint venture partner or a joint venture partner’s loss of its ability to conduct business in
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such country may impact our ability to conduct business in that country. Sanctions that apply to a partner of a joint venture or to a joint venture’s directors or officers could also impact our ability to conduct business through that joint venture.
In joint ventures, we share ownership and, in some instances, management of a company with one or more parties who may or may not have the same goals, strategies, priorities or resources as we do. In general, joint ventures are intended to be operated for the benefit of all co-owners, rather than for our exclusive benefit. Operating a business as a joint venture often requires additional organizational formalities as well as time-consuming procedures for sharing information, accounting and making decisions. In certain cases, our joint venture partners must agree in order for the applicable joint venture to take certain actions, including acquisitions, the sale of assets, budget approvals, borrowing money and granting liens on joint venture property. Our inability to take unilateral action that we believe is in our best interests may have an adverse effect on the financial performance of the joint venture and the return on our investment. In joint ventures, we believe our relationship with our co-owners is an important factor to the success of the joint venture, and if a co-owner changes, our relationship may be adversely affected. In addition, the benefits from a successful joint venture are shared among the co-owners, so that we do not receive all the benefits from our successful joint ventures. Finally, we may be required on a legal or practical basis or both, to accept liability for obligations of a joint venture beyond our economic interest, including in cases where our co-owner becomes bankrupt or is otherwise unable to meet its commitments. For additional information with respect to the joint venture relating to our Flexible Products & Services segment, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations - Variable Interest Entities.
Certain of the Agreements that Govern our Joint Ventures Provide our Partners With Put or Call Options.
The agreements that govern certain of our current joint ventures under certain circumstances provide the joint venture partner with the right to sell their participation in the joint venture to us or the right to acquire our participation in the joint venture. Some of the joint venture agreements provide that the joint venture partner can sell its participation for a certain purchase price calculated on the basis of a fixed multiple. Such put and call rights may result in financial risks for us. In addition, such rights could negatively impact our operations if as a result of their exercise we lose access to members of our management teams that are familiar with local markets or distribution and manufacturing channels.
Our Ability to Attract, Develop and Retain Talented and Qualified Employees, Managers and Executives is Critical to our Success.
Our ability to attract, develop and retain talented and qualified employees, including executives and other key managers, is critical to pursuing our vision of: "In industrial packaging, be the best performing customer service company in the world." We need an engaged workforce to serve our customers, and this becomes more challenging with more office employees working remotely and with production employees working with enhanced health and safety protocols. Hiring and effectively onboarding qualified employees is becoming more challenging due to the COVID-19 pandemic. The retirement of or unforeseen loss of key officers and employees without appropriate succession planning or the ability to develop or hire replacements could hinder our strategic planning and make it difficult to manage our business and meet our objectives, resulting in a material adverse effect on our business, financial condition, results of operations and cash flows.
Our Business may be Adversely Impacted by Work Stoppages and Other Labor Relations Matters.
We are subject to risk of work stoppages and other labor relations matters, with approximately 43% of our employees around the world represented by unions. We have experienced work stoppages and strikes in the past, and there may be work stoppages and strikes in the future. Any prolonged work stoppage or strike at any one of our principal manufacturing facilities could have a negative impact on our business, financial condition, results of operations and cash flows. In addition, upon the expiration of existing collective bargaining agreements, we may not reach new agreements without union action and any such new agreements may not be on terms satisfactory to us.
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.
We are self-insured or carry large deductibles for certain of the claims made under our employee medical and dental insurance programs and for certain of our workers’ compensation claims. We utilize outside actuarial services to establish reserves for estimated costs related to pending claims, administrative fees and claims incurred but not reported. Because establishing reserves is an inherently uncertain process involving estimates, currently established reserves may not be adequate to cover the actual liability for claims made under our employee medical and dental insurance programs and for certain of our workers’ compensation and liability claims. If it is concluded that our estimates are incorrect and our reserves are inadequate for these claims, we will need to increase our reserves, which could adversely affect our financial condition, results of operations and cash flows.
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We have comprehensive liability, fire and extended coverage insurance on our facilities and operations, with policy specifications and insured limits customarily carried for similar properties. However, there are certain types of losses, such as losses resulting from wars, acts of terrorism, windstorm, flood, earthquake or other natural disasters, or pollution, that may be uninsurable or subject to restrictive policy conditions or subject to very large deductibles. In these instances, should a loss occur in excess of insured limits, we could lose capital invested in that property, as well as the anticipated future revenues derived from the manufacturing activities conducted at that property, while remaining obligated for any financial obligations related to the property. Any such loss would adversely impact our business, financial condition, results of operations and cash flows. We purchase insurance policies covering general liability and product liability with substantial policy limits. However, there can be no assurance that any liability claim would be adequately covered by our applicable insurance policies or it would not be excluded from coverage based on the terms and conditions of the policy. This could also apply to any applicable contractual indemnity. We also purchase environmental liability policies where legally required and may elect to purchase coverage in other circumstances in order to transfer all or a portion of environmental liability risk through insurance. However, there can be no assurance that any environmental liability claim would be adequately covered by our applicable insurance policies or that it would not be excluded from coverage based on the terms and conditions of the policy. We do not purchase crop insurance for our timberland holdings, and a forest fire or other event could damage a material amount of timber.
The costs of insurance coverage continue to increase, along with increases in the level of deductibles, and the availability of some insurance coverages is decreasing due to extensive property damage caused by natural disasters, increased cyber security breaches, runaway jury verdicts and other business and employment litigation and losses. Any substantial increases in our insurance premiums or the availability of insurance policies could adversely affect our business, financial condition, results of operations and cash flows.
Our Business Depends on the Uninterrupted Operations of our Facilities, Systems and Business Functions, Including our Information Technology ("IT") and Other Business Systems.
Our business is dependent upon our ability to execute, in an efficient and uninterrupted fashion, necessary business functions, such as accessing key business data, financial information, order processing, invoicing and the operation of IT dependent manufacturing equipment. In addition, a significant portion of the communication between our employees, customers and suppliers around the world depends on our IT systems. As a result of the COVID-19 pandemic, our reliance on our IT systems and Internet usage has increased significantly as substantially more employees are working remotely. A significant interruption or major failure of the Internet, a shut-down of or inability to access one or more of our facilities, a power outage, or a failure of one or more of our IT, telecommunications or other systems would substantially impair our ability to perform daily functions on a timely basis and could result in a material adverse impact on our operations.
We are in the process of implementing a standard IT platform across our business and have successfully completed implementation in over half of our locations. Though there are other locations globally, the locations acquired as part of the Caraustar Acquisition represent the majority of locations in which implementation is still in progress. The transition from many former systems, many of which were acquired in connection with business acquisitions, to a single system will reduce complexity and inefficiencies in monitoring business results and consolidating financial data. The transition could result in adverse business effects. This project has been ongoing for several years requiring significant human and financial resources and is expected to extend into 2022, with work at our Flexible Products & Services operations and former Caraustar operations being completed later in 2021. These projects may be further delayed as a result of the COVID-19 pandemic. There can be no assurance that this project will be successful, and even if successful, there can be no assurance that other difficulties and inefficiencies will not still exist in our systems.
We have established a business continuity plan in an effort to ensure the continuation of core business operations in the event that normal operations could not be performed due to a catastrophic event. While we continue to test and assess our business continuity plan to ensure it meets the needs of our core business operations and addresses multiple business interruption events, there is no assurance that core business operations could be performed upon the occurrence of such an event which may have a material adverse effect on our business, financial condition, results of operations and cash flows.
A Security Breach of Customer, Employee, Supplier or Company Information may have a Material Adverse Effect on our Business, Financial Condition, Results of Operations and Cash Flows.
In the conduct of our business, we collect, use, transmit, store and report data on information systems and interact with customers, vendors and employees. Increased global IT security threats and more sophisticated and targeted computer crime pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data. Despite our security measures, our IT systems and infrastructure may be vulnerable to computer viruses, cyber-attacks, security breaches caused by employee error or malfeasance or other disruptions, especially during the COVID-19 pandemic as significantly more office employees continue to work remotely. Any such threat could compromise our networks and the information stored there
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could be accessed, publicly disclosed, lost or stolen. A security breach of our computer systems could interrupt or damage our operations or harm our reputation, or both. In addition, we could be subject to legal claims or proceedings, liability under laws that protect the privacy of personal information and regulatory penalties if confidential information relating to customers, suppliers, employees or other parties is misappropriated from our computer system. To date, we have seen no material impact on our business or operations from these threats. However, we cannot ensure that our security efforts will prevent unauthorized access or loss of functionality to our or our third-party providers' systems.
The regulatory framework for privacy issues is evolving worldwide, and various government and consumer agencies and public advocacy groups have called for new regulation and changes in industry practices. In May 2018, the EU enacted the General Data Protection Regulation, which provides for significantly increased responsibilities for companies that process EU personal data as well as significant penalties for noncompliance. In July 2020, the EU Courts invalidated the EU-US Privacy Shield as an appropriate transfer mechanism of personal data into the US. As a result, we may be unsuccessful in maintaining legitimate means of transferring and receiving personal data and face a risk of enforcement actions by data protection authorities. Any such enforcement actions could result in substantial costs and a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, outside of the EU, we continue to see increased regulation of data privacy and security, creating a patchwork of U.S. state privacy laws, such as the California Consumer Privacy Act of 2018, and national laws regulating the collection and use of data, as well as security and data breach obligations.
Risks Related to Financial Reporting
Changes in U.S. Generally Accepted Accounting Principles ("GAAP") and SEC Rules and Regulations Concerning the Maintenance of Effective Internal Controls Could Materially Impact our Reported Financial Results.
GAAP and SEC accounting and reporting changes have become more frequent and significant in the past several years. Due to the complexity and scope of our business segments, our joint ventures relationships, conducting business in over 40 countries and operating over 200 production facilities, these changes could have significant effects on our reported results when compared to prior periods and other companies and may even require us to retrospectively adjust prior periods from time to time. Additionally, material changes to the presentation of transactions in the consolidated financial statements could impact key ratios that analysts and credit rating agencies use to rate our company, increase our cost of borrowing and ultimately our ability to access the credit markets in an efficient manner.
The maintenance of effective internal controls is necessary to provide reliable financial reports and to assist in the prevention of fraud. We are required by the SEC rules and regulations to annually evaluate our internal control procedures and to assess the effectiveness of our internal controls. The number of facilities and our global footprint, as well as the acquisition from time to time of privately-held businesses, creates unique challenges for our maintenance of effective internal controls. As described in Item 9A of this Form 10-K, management has concluded that our internal controls over financial reporting were effective as of October 31, 2020. In the past, we have reported material weaknesses in the adequacy of our internal controls, and there is no assurance that, in the future, material weaknesses will not be identified that would cause management to change its current conclusion as to the effectiveness of our internal controls. If we fail to maintain effective internal controls, including as a result of the COVID-19 pandemic, we could report material weaknesses in the future, indicating that there is a reasonable possibility that a material misstatement may not be prevented or detected on a timely basis.
We Could be Subject to Changes in our Tax Rates, the Adoption of New U.S. or Foreign Tax Legislation or Exposure to Additional Tax Liabilities.
The multinational nature of our business subjects us to taxation in the United States and numerous foreign jurisdictions. Due to economic and political conditions, tax rates in various jurisdictions may be subject to significant change. Our future effective tax rates could be affected by changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, or changes in tax laws or their interpretation.
Tax laws are complex and subject to varying interpretations. At this time, we believe we are properly reflecting the provision for taxes on income using all current enacted global tax laws in every jurisdiction in which we operate. However, there can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge.
Full Realization of our Deferred Tax Assets may be Affected by a Number of Factors.
We have deferred tax assets, including foreign net operating loss carryforwards and foreign capital loss carryforwards, employee and retiree benefit items, and other accruals not yet deductible for tax purposes. In certain cases, we have established valuation allowances to reduce those deferred tax assets to an amount that is more likely than not to be realized. Our ability to
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use these deferred tax assets depends in part upon our having future taxable income during the periods in which these temporary differences reverse or our ability to carry back any losses created by the deduction of these temporary differences. We expect to realize these assets over an extended period. However, if we were unable to generate sufficient future taxable income in the U.S. and certain foreign jurisdictions, or if there were a significant change in the time period within which the underlying temporary differences became taxable or deductible, we could be required to increase our valuation allowances against our deferred tax assets, which could have an adverse effect on our financial condition, results of operations and cash flows.
Our Level of Indebtedness Could Adversely Affect our Liquidity, Limit our Flexibility in Responding to Business Opportunities, and Increase our Vulnerability to Adverse Changes in Economic and Industry Conditions.
We incurred substantial indebtedness to finance the Caraustar Acquisition. As a result of our level of indebtedness, a substantial portion of our cash flows are dedicated to the payment of principal and interest on our indebtedness. This level of indebtedness also reduces our liquidity; limits our flexibility in responding to new business opportunities; reduces funds available for working capital, capital expenditures and other general corporate purposes; increases our vulnerability to adverse economic and industry conditions; exposes us to the risk of increased interest rates and corresponding increased interest expense, which may be exacerbated by the COVID-19 pandemic; limits our ability to obtain additional financing for working capital, capital expenditures, acquisitions and general corporate or other purposes; and could place us at a competitive disadvantage compared to our competitors who have less debt. In addition, the failure to comply with the financial and other restrictive covenants in our debt instruments could, if not cured or waived, have a material adverse effect on our ability to fulfill our debt obligations and on our business and prospects generally. Further, our debt instruments impose operating and financial restrictions on us, which may limit how we conduct our business and impact our ability to raise additional debt or equity financing to capitalize on available business opportunities.
We have a Significant Amount of Goodwill and Long-lived Assets Which, if Impaired in the Future, Would Adversely Impact our Results of Operations.
Our goodwill would be impaired if the fair value of any particular reporting unit is less than the carrying value of that reporting unit. Impairment of our goodwill would reduce our net income in the period of any such write down. We are required to evaluate goodwill reflected on our balance sheet at least annually, or when circumstances indicate a potential impairment. If we determine that the goodwill is impaired, we would be required to write off a portion or all of the goodwill. The adverse economic impacts of the COVID-19 pandemic and reduced demand for our products may increase the potential of a goodwill impairment. At October 31, 2020, the carrying value of our goodwill was $1,518.4 million.
We may be required to record future impairments of our long-lived assets as we continue to restructure our business. Decisions to sell or close plants could reduce the estimated useful life of an asset group or indicate that the fair value of the asset group is less than the carrying value. We may also experience declines in particular businesses due to competition or other outside forces indicating our long-lived assets are not recoverable. Any resulting impairments will impact net income in the period in which the triggering event, such as permanent or sustaining reduction in cash flows, occurs and could be significant, which could have an adverse effect on our financial condition and results of operations.
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.
We sponsor various pension and similar benefit plans worldwide. Our U.S. and non-U.S. pension and post-retirement plans were underfunded by an aggregate of $108.2 million and $11.6 million, respectively, as of October 31, 2020. We are legally required to make cash contributions to our pension plans in the future, and those cash contributions could be material.
In 2021, we expect, but are not obligated, to make cash contributions and direct benefit payments of approximately $28.7 million and $1.3 million to our U.S. and non-U.S. pension and post-retirement plans, respectively, which we believe will be sufficient to meet the minimum funding requirements under applicable laws. Our future funding obligations for our pension and post-retirement plans depend upon the levels of benefits provided for by these plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, the impact of potential business dispositions, actuarial data and experience, and any changes in government laws and regulations. Accordingly, our future funding requirements for our pension and post-retirement plans could be higher than expected, which could have a material adverse effect on our financial condition and liquidity.
In addition, our pension plans hold a significant amount of equity securities. If the market values of these securities decline, our pension expense and funding requirements will increase, which could have a material adverse effect on our financial condition and liquidity.
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Any decrease in interest rates and asset returns, if and to the extent not offset by contributions, could increase our obligations under our pension plans. If the performance of assets held in these pension plans does not meet our expectations, our cash contributions for these plans could be higher than we expect, which could have a material adverse effect on our financial condition and liquidity.
Risks Related to Regulatory and Legal Costs
Legislation/Regulation Related to Environmental and Health and Safety Matters and Corporate Social Responsibility Could Negatively Impact our Operations and Financial Performance.
We must comply with extensive laws, rules and regulations in the United States and in each of the countries where we conduct business regarding environmental matters, such as air, soil and water quality and waste disposal. We must also comply with extensive laws, rules and regulations regarding safety, health and corporate responsibility matters. There can be no assurance that compliance with existing and new laws, rules and regulations will not require significant expenditures.
In addition, laws, rules and regulations, as well as the interpretation and administration of such laws and regulations by governmental agencies, can change and restrict or prohibit the manner in which we conduct our current operations, require additional permits to engage in some or all of our current operations, or increase the cost of some or all our operations. For example, certain of the remedies being sought by the U.S. EPA and the Wisconsin Department of Natural Resources in the proceedings relating to the CLCM facilities in the Milwaukee, Wisconsin area seek to implement changes in the way certain laws and regulations are interpreted and administered with respect to our reconditioning business. Such changes could adversely affect our business, financial condition, results of operations and cash flows.
We are also subject to transportation safety regulations promulgated by the U.S. Department of Transportation ("DOT") and agencies in other jurisdictions. Both the DOT regulations and standards issued by the United Nations and adopted by various jurisdictions outside the United States set forth requirements related to the transportation of both hazardous and nonhazardous materials in some of our packaging products and subject our company to random inspections and testing to ensure compliance. Failure to comply could result in fines to us and could affect our business, financial condition, results of operations and cash flows.
We are subject to laws, rules and regulations relating to certain raw materials used in our business. For example, certain resins and epoxy-based coatings used in our rigid container business may contain Bisphenol-A ("BPA"), a chemical monomer that can be toxic in sufficient quantities, and is used in several food contact applications. Regulatory agencies in several jurisdictions worldwide have found these materials to be safe for food contact at current levels, but a significant change in regulatory rulings concerning BPA could have an adverse effect on our business. These laws, rules and regulations, as well as resulting claims by individuals and other businesses, could adversely affect our business, financial condition, results of operations and cash flows.
At the EU-level, many laws and regulations are designed to protect human health and the environment. For example, Directive 2004/35/EC concerns obligations to remedy damages to the environment, which could require us to remediate contamination identified at sites we own or use. Other EU directives limit pollution from industrial activities, reduce emissions to air, water and soil, protect water resources, reduce waste, protect employee health and safety and regulate the registration, evaluation, authorization and restriction of chemicals. Failure to comply with these laws, or a change in the applicable legal framework, for example the increased enforcement of environmental regulations in the U.S., China or other countries, could affect our business, financial condition, results of operations and cash flows, in addition to those of our customers.
Our customers in the food industry are subject to increasing laws, rules and regulations relating to food safety. As a result, customers may demand that changes be made to our products or facilities, as well as other aspects of our production processes, that may require the investment of capital. The failure to comply with these requests could adversely affect our relationships with some customers and result in negative effects on our business, financial condition, results of operations and cash flows.
Product Liability Claims and Other Legal Proceedings Could Adversely Affect our Operations and Financial Performance.
We produce products and provide services related to other parties’ products, including sensitive products such as food ingredients, pharmaceutical ingredients and hazardous substances. Incidents involving these product types can involve risk of recall, contamination, spillage, leakage, fires, and explosions, which can threaten individual health, impact the environment and cause the breakdown or failure of equipment or processes and the performance of facilities below expected levels of capacity. If any of our customers have such accidents involving our products, they may bring product liability claims against us. While we have built extensive operational processes to ensure that the design and manufacture of our products meet rigorous quality standards, there can be no assurance that we or our customers will not experience operational process failures that could result in potential product, safety, regulatory or environmental claims and associated litigation. We are also subject to a variety of
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legal proceedings and legal compliance risks in our areas of operation around the globe. Any such claims, whether with or without merit, could be time consuming and expensive to defend and could divert management’s attention and resources. In accordance with customary practice, we maintain insurance against some, but not all, of these potential claims. In the future, we may not be able to maintain insurance at commercially acceptable premium and deductible levels at all. In addition, the levels of insurance we maintain may not be adequate to fully cover any and all losses or liabilities. If any significant judgment or claim is not fully insured or indemnified against, it could have a material adverse impact on our business, financial condition, results of operations and cash flows.
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.
We cannot provide assurance that our internal controls will always protect us from reckless or criminal acts committed by our employees, agents or business partners that would violate U.S. and non-U.S. laws, including anti-bribery, competition, trade sanctions and regulation, and other laws. Any such improper actions could subject us to civil or criminal investigations in the U.S. and in other jurisdictions, could lead to substantial civil or criminal monetary and non-monetary penalties against us or our subsidiaries, and could damage our reputation. Even the allegation or appearance of our employees, agents or business partners acting improperly or illegally could damage our reputation and result in significant expenditures in investigating and responding to such actions.
Changing Climate, Climate Change Regulations and Greenhouse Gas Effects may Adversely Affect our Operations and Financial Performance.
There is continuing concern from members of the scientific community and the general public that emissions of greenhouse gases ("GHG") and other human activities have or will cause significant changes in weather patterns and increase the frequency or severity of weather events, wildfires and flooding. Climate change creates physical and financial risk. Physical risks from climate change include an increase in sea level and changes in weather conditions, such as an increase in precipitation, droughts and extreme weather events. These types of events may adversely impact us, our suppliers, our customers and their ability to purchase our products and our ability to manufacture and transport our products on a timely basis and could result in a material adverse effect on our business, financial condition, results of operations and cash flows.
We believe it is likely that the scientific and political attention to issues concerning the extent and causes of climate change will continue, with the potential for further legislation and regulations that could affect our financial condition, results of operations and cash flows. Foreign, federal, state and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating GHG emissions and energy policies. If such legislation or regulations are enacted, we could incur increased energy, environmental and other costs and capital expenditures to comply with the limitations. Failure to comply with these regulations could result in fines to our company and could affect our business, financial condition, results of operations and cash flows.
We, along with other companies in many business sectors, including our customers, are considering and implementing ways to reduce GHG emissions. As a result, our customers may request that changes be made to our products or facilities, as well as other aspects of our production processes, that increase costs and may require the investment of capital. The failure to comply with these requests could adversely affect our relationships with some customers, which in turn could adversely affect our business, financial condition, results of operations and cash flows.
We could face increased costs related to defending and resolving legal claims and other litigation related to climate change and the alleged impact of our operations on climate change.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
The following are our principal operating locations and the products manufactured at such facilities or the use of such facilities. We consider our operating properties to be in satisfactory condition and adequate to meet our present needs. However, we expect to make further additions, improvements and consolidations of our properties to support our business.
Location Products or Use Owned Leased
RIGID INDUSTRIAL PACKAGING & SERVICES:
Algeria Steel drums — 1
Argentina Steel and plastic drums, pails and water bottles 2 1
Belgium Steel and plastic drums 2 —
Brazil Steel and plastic drums, steel lids and closures 5 2
Canada Plastic drums and warehouse 1 1
Chile Steel drums, water bottles and warehouse 1 1
Colombia Steel and plastic drums and water bottles — 1
Costa Rica Steel drums — 1
Czech Republic Steel drums 1 —
Denmark Fibre drums — 1
Egypt Steel drums 1 —
Greece Steel drums 1 —
Guatemala Steel drums 1 —
Hungary Steel drums 1 —
Israel Steel, plastic and fibre drums and intermediate bulk containers — 1
Kenya Steel drums — 1
Malaysia Steel drums 1 1
Mexico Steel, plastic and fibre drums and warehouse 1 2
Morocco Steel and plastic drums 1 —
Nigeria Corporate housing 1 —
Poland Steel drums and water bottles 1 —
Portugal Steel drums 1 —
Saudi Arabia Steel drums — 2
Singapore Steel and plastic drums — 1
South Africa Steel and plastic drums 2 1
Spain Steel drums and intermediate bulk containers 2 1
Sweden Steel and plastic drums and intermediate bulk containers 1 1
Turkey Steel drums 1 —
Ukraine Water bottles and distribution center — 1
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United Kingdom Steel drums and intermediate bulk containers 2 —
Vietnam Steel drums 1 —
Location Products or Use Owned Leased
FLEXIBLE PRODUCTS & SERVICES:
Belgium Manufacturing plant — 1
Brazil General office — 1
Chile General office — 1
China Manufacturing plant — 1
France Manufacturing plant 1 —
Germany General offices and warehouse — 2
India General office — 1
Ireland Distribution center — 1
Mexico Manufacturing plant — 1
Netherlands General offices and warehouse — 1
Romania Manufacturing plants — 2
Turkey Manufacturing plants — 3
Ukraine Manufacturing plant 1 —
United Kingdom Manufacturing plant — 1
United States General offices and warehouse — 2
Vietnam Manufacturing plant — 1
Location Products or Use Owned Leased
PAPER PACKAGING & SERVICES:
Canada Spiral-wound paper tubes and cores and warehouse 2 3
Location Products or Use Owned Leased
LAND MANAGEMENT:
United States General offices 2 2
Location Products or Use Owned Leased
CORPORATE:
Belgium General office — 1
Hungary Shared service center — 1
Netherlands General office — 1
United States Principal and general offices 3 —
We also own a substantial amount of timber properties. Our timber properties consisted of approximately 244,000 acres in the southeastern United States as of October 31, 2020.
ITEM 3. LEGAL PROCEEDINGS
We are not a party to any pending legal proceedings that are material to our business or financial condition.
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From time to time, we have been a party to legal proceedings arising at the country, state or local level involving environmental sites to which we have shipped, directly or indirectly, small amounts of toxic waste, such as paint solvents. As of the filing date of this Form 10-K, we have been classified only as a “de minimis” participant in such proceedings. We are not a party to any legal proceedings involving a governmental authority and arising under any federal, state or local provisions that have been enacted or adopted regulating the discharge of materials into the environment or primarily for the purpose of protecting the environment and involving potential monetary sanctions in excess of $300,000, other than as described below.
In July 2017, the Wisconsin Department of Natural Resources (“WDNR”) issued Notices of Violation to us and CLCM with respect to three reconditioning facilities in the Milwaukee, Wisconsin area that are or were owned by CLCM regarding violations of Wisconsin laws related to hazardous waste, air management and industrial storm water. In November 2017, the United States Environmental Protection Agency (“U.S. EPA”) issued a Notice of Violation to us and CLCM with respect to these same reconditioning facilities regarding violations of the federal Resource Conservation and Recovery Act (“RCRA”), primarily related to the unlawful storage and treatment of hazardous wastes without RCRA licenses and violations of RCRA’s requirements related to hazardous waste determinations and hazardous waste activity notifications, and Wisconsin laws related to hazardous waste. In November 2017, the U.S. EPA issued Notices and Findings of Violations to CLCM with respect to two of these reconditioning facilities regarding violations of the federal Clean Air Act, primarily related to air management, and Wisconsin laws related to air management. The remedies being sought in these proceedings include compliance with the applicable environmental laws and regulations as being interpreted by the U.S. EPA and WDNR and monetary sanctions. We have cooperated with the governmental agencies in these investigations and proceedings. As of the filing date of this Form 10-K, no citations have been issued or fines assessed with respect to any of these proceedings. With respect to one or more of these proceedings, monetary sanctions may be imposed by the U.S. EPA or the WNDR and those monetary sanctions may exceed $300,000 individually or in the aggregate.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of our Class A and Class B Common Stock are listed on the New York Stock Exchange under the symbols GEF and GEF.B, respectively.
Financial information regarding our two classes of common stock, as well as the number of holders of each class and the high, low and closing sales prices for each class for each quarterly period for the two most recent years, is included in Note 17 of the Notes to Consolidated Financial Statements in Item 8 of this Form 10-K.
We pay quarterly dividends of varying amounts computed on the basis described in Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. The annual dividends paid for the last two years are as follows:
2020 Dividends per Share – Class A $1.76; Class B $2.63
2019 Dividends per Share – Class A $1.76; Class B $2.63
The terms of our current secured credit facilities, United States accounts receivable credit facility and the indenture governing our Senior Notes due 2027 limit our ability to make restricted payments, which include dividends and purchases, redemptions and acquisitions of our equity interests. The payment of dividends and other restricted payments are subject to the condition that certain defaults not exist under the terms of our current secured credit facilities, United States accounts receivable credit facility and the indenture governing our Senior Notes due 2027 and, in the event that certain defaults exist, are limited in amount by a formula based, in part, on our consolidated net income. See “Liquidity and Capital Resources – Borrowing Arrangements” in Item 7 of this Form 10-K.
We did not repurchase any shares of our Class A or Class B Common Stock during 2020 or 2019.
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Performance Graph
The following graph compares the performance of shares of our Class A and B Common Stock to that of the Standard and Poor’s 500 Index and our industry group (Peer Index) assuming $100 invested on October 31, 2015 and reinvestment of dividends for each subsequent year. The graph does not purport to represent our value.
The Peer Index comprises the containers and packaging index as shown by Dow Jones.
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ITEM 6. SELECTED FINANCIAL DATA
The five-year selected financial data is as follows:
Year Ended October 31,
Basic earnings per share:
Diluted earnings per share:
Dividends per share:
(1) Includes the results and components of the Caraustar Acquisition from February 11, 2019 through October 31, 2019.
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The terms “Greif,” the “Company,” “we,” “us” and “our” as used in this discussion refer to Greif, Inc. and its subsidiaries.
COVID-19
The impact of COVID-19 on our future results of operations and financial condition is highly uncertain at this time and outside of our control. The scope, duration and magnitude of the effects of COVID-19 are evolving rapidly and in ways that are difficult or impossible to anticipate.
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 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, plus debt extinguishment charges, plus income tax expense, plus depreciation, depletion and amortization, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus acquisition and integration related costs, plus non-cash asset impairment charges, plus non-cash pension settlement (income) charges, plus incremental COVID-19 costs, net, 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 non-cash pension settlement (income) charges, less equity earnings of unconsolidated affiliates, net of tax, plus depreciation, depletion and amortization expense for that business segment, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus acquisition and integration related costs, plus non-cash asset impairment charges, plus non-cash pension settlement (income) charges, plus incremental COVID-19 costs, net, 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 our U.S. and non-U.S. income before income taxes after eliminating the impact of non-cash asset impairment charges, non-cash pension settlement (income) charges, restructuring charges, acquisition and integration related costs, plus incremental COVID-19 costs, net, and (gains) losses on sales of businesses, net, which are non-GAAP financial measures. We believe that excluding the impact of these adjustments enable investors to perform a meaningful comparison of our current and historical performance that investors find valuable. The foregoing non-GAAP financial measures are intended to supplement and should be read together with our financial results. These non-GAAP financial measures should not be considered an alternative or substitute for, and should not be considered superior to, our reported financial results. Accordingly, users of this financial information should not place undue reliance on the non-GAAP financial measures.
The following table sets forth the net sales, operating profit (loss), EBITDA and Adjusted EBITDA for each of our business segments for 2020, 2019 and 2018:
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Net sales:
Operating profit:
Rigid Industrial Packaging & Services $ 209.9 $ 179.6 $ 183.2
EBITDA:
Rigid Industrial Packaging & Services $ 284.6 $ 251.6 $ 249.0
Adjusted EBITDA:
Rigid Industrial Packaging & Services $ 297.5 $ 269.9 $ 273.4
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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 2020, 2019 and 2018:
Plus: debt extinguishment charges — 22.0 —
Plus: depreciation, depletion and amortization expense 242.5 206.1 126.9
Plus: debt extinguishment charges — 22.0 —
Plus: non-cash pension settlement charges 0.3 — 1.3
Plus: other expense, net 2.7 2.6 18.4
Plus: equity earnings of unconsolidated affiliates, net of tax (1.5) (2.9) (3.0)
Less: other expense, net 2.7 2.6 18.4
Less: non-cash pension settlement charges 0.3 — 1.3
Less: equity earnings of unconsolidated affiliates, net of tax (1.5) (2.9) (3.0)
Plus: depreciation, depletion and amortization expense 242.5 206.1 126.9
Plus: acquisition and integration related costs 17.0 29.7 0.7
Plus: non-cash asset impairment charges 18.5 7.8 8.3
Plus: non-cash pension settlement charges 0.3 — 1.3
Plus: incremental COVID-19 costs, net 2.6 — —
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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 2020, 2019 and 2018:
Rigid Industrial Packaging & Services
Less: other expense, net 5.3 7.2 17.1
Less: non-cash pension settlement charges 0.4 — 1.3
Less: equity earnings of unconsolidated affiliates, net of tax (1.5) (2.9) (3.0)
Plus: depreciation and amortization expense 78.9 76.3 81.2
Plus: acquisition and integration related costs — 0.6 0.7
Plus: non-cash asset impairment charges 5.1 2.7 8.3
Plus: non-cash pension settlement charges 0.4 — 1.3
Plus: incremental COVID-19 costs, net 0.1 — —
Paper Packaging & Services
Less: other (income) expense, net (1.3) (3.4) 0.7
Less: non-cash pension settlement charges (0.1) — —
Plus: depreciation and amortization expense 153.5 119.3 34.2
Plus: restructuring charges 9.9 6.2 0.4
Plus: acquisition and integration related costs 17.0 29.1 —
Plus: non-cash asset impairment charges 12.5 5.1 —
Plus: non-cash pension settlement charges (0.1) — —
Plus: incremental COVID-19 costs, net 1.9 — —
Flexible Products & Services
Less: other (income) expense, net (1.3) (1.2) 0.6
Plus: depreciation and amortization expense 5.6 6.2 6.9
Plus: restructuring charges 2.8 1.0 0.9
Plus: non-cash asset impairment charges 0.9 — —
Plus: incremental COVID-19 costs, net 0.6 — —
Land Management
Operating profit $ 8.5 $ 9.9 $ 9.6
Plus: depreciation, depletion and amortization expense 4.5 4.3 4.6
Plus: restructuring charges — 0.1 —
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Year 2020 Compared to Year 2019
Net Sales
Net sales were $4,515.0 million for 2020 compared with $4,595.0 million for 2019. The $80.0 million decrease was primarily due to decreased volumes and sale prices across the segments, the impact to net sales resulting from the Consumer Packaging Group ("CPG") divestiture, and the negative impacts of foreign currency translation, partially offset by a full year contribution from the acquired Caraustar operations.
Gross Profit
Gross profit was $914.7 million for 2020 compared with $959.9 million for 2019. The respective reasons for the improvement or decline in gross profit, as the case may be, for each segment are described below in the "Segment Review." Gross profit margin was 20.3 percent for 2020 compared to 20.9 percent for 2019.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased $8.6 million to $516.0 million for 2020 from $507.4 million for 2019. SG&A expenses were 11.4 percent of net sales for 2020 compared with 11.0 percent of net sales for 2019.
Restructuring Charges
Restructuring charges were $38.7 million for 2020 compared with $26.1 million for 2019. The increase in restructuring charges was primarily due to increased strategic restructuring efforts within the Rigid Industrial Packaging & Services segment. See Note 4 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information.
Acquisition and Integration Related Costs
Acquisition and integration related costs were $17.0 million for 2020 compared with $29.7 million for 2019. The decrease was primarily due to fewer expenses incurred in connection with the Caraustar Acquisition and related integration activities.
Impairment Charges
There were no goodwill impairment charges for 2020 and 2019.
Non-cash asset impairment charges were $18.5 million for 2020 compared with $7.8 million for 2019. In 2020, these charges were primarily related to plant closures. See Note 7 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 $19.2 million and $13.9 million for 2020 and 2019, respectively.
Loss on Disposal of Businesses, net
The loss on disposal of business, net was $38.8 million for 2020 and $3.7 million for 2019. The current year disposal of business, net was primarily due to goodwill allocated to the divestiture of the CPG business. 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 $304.9 million for 2020 compared with $399.1 million for 2019. Net income was $124.3 million for 2020 compared with $194.2 million for 2019. Adjusted EBITDA was $642.6 million for 2020 compared with $658.9 million for 2019. The respective reasons for the improvement or decline in Adjusted EBITDA, as the case may be, for each segment are described below in the "Segment Review."
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Trends
We anticipate demand growth in the industrial manufacturing businesses but continued lingering uncertainty in the global economy to continue in early 2021. Raw material prices for old corrugated containers are expected to increase, while prices for steel, resin and recycled coated and uncoated paperboard are expected to remain relatively stable after the first quarter of 2021. Additionally, we expect higher transportation and insurance costs due to tighter market conditions and higher incentive accruals to impact costs of goods sold and SG&A.
Segment Review
Rigid Industrial Packaging & Services
Key factors influencing profitability in the Rigid Industrial Packaging & Services segment are:
•Selling prices, product mix, customer demand and sales volumes;
•Raw material costs, primarily steel, resin, containerboard and used industrial packaging for reconditioning;
•Energy and transportation costs;
•Benefits from executing the Greif Business System;
•Restructuring charges;
•Acquisition of businesses and facilities;
•Divestiture of businesses and facilities; and
•Impact of foreign currency translation.
Net sales were $2,298.9 million for 2020 compared with $2,490.6 million for 2019. The $191.7 million decrease in net sales was due primarily to decreased volumes and decreased average sale prices driven by contractual price adjustment mechanisms related to raw material price decreases, as well as negative impacts of foreign currency translation.
Gross profit was $465.3 million for 2020 compared with $460.1 million for 2019. The $5.2 million increase in gross profit was primarily due to lower priced raw materials, the timing of contractual pass through arrangements, product mix shifts, and strategic pricing actions. Gross profit margin increased to 20.2 percent in 2020 from 18.5 percent in 2019.
Operating profit was $209.9 million for 2020 compared with $179.6 million for 2019. The $30.3 million increase was primarily attributable to a decrease in the segment's SG&A expenses due to strategic cost management efforts. Adjusted EBITDA was $297.5 million for 2020 compared with $269.9 million for 2019. The $27.6 million increase was primarily due to the same factors that impacted operating profit. Depreciation and amortization expense was $78.9 million and $76.3 million for 2020 and 2019, respectively.
Paper Packaging & Services
Key factors influencing profitability in the Paper Packaging & Services segment are:
•Selling prices, product mix, customer demand and sales volumes;
•Raw material costs, primarily old corrugated containers;
•Energy and transportation costs;
•Benefits from executing the Greif Business System;
•Acquisition of businesses and facilities;
•Restructuring charges; and
•Divestiture of businesses and facilities.
Net sales were $1,916.9 million for 2020 compared with $1,780.0 million for 2019. The $136.9 million increase was primarily due to full year contribution from the acquired Caraustar operations, partially offset by lower published containerboard and boxboard prices, decreased volumes, and the impact to net sales resulting from the CPG divestiture.
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Gross profit was $382.7 million for 2020 compared with $425.4 million for 2019. The decrease in gross profit was primarily due to the same factors that impacted net sales and higher old corrugated container input costs. Gross profit margin decreased 20.0 percent in 2020 from 23.9 percent 2019.
Operating profit was $71.0 million for 2020 compared with $184.3 million for 2019. The decrease in operating profit was primarily due to the factors discussed above in gross profit, the loss on sale of the CPG divestiture and the segment receiving a greater portion of allocated corporate costs. Adjusted EBITDA was $306.4 million for 2020 compared with $348.3 million for 2019. The decrease was due primarily to the same factors that impacted gross profit and the segment receiving a greater portion of allocated corporate costs. Depreciation and amortization expense was $153.5 million and $119.3 million for 2020 and 2019, 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 $272.9 million for 2020 compared with $297.5 million for 2019. The $24.6 million decreased was primarily due to continued lower volumes and lower average sale prices primarily as a result of raw material price decreases and corresponding contractual price adjustment mechanisms.
Gross profit was $57.5 million for 2020 compared with $64.2 million for 2019. The decrease was primarily attributable to the same factors that impacted net sales. Gross profit margin decreased to 21.1 percent in 2020 from 21.6 percent in 2019.
Operating profit was $15.5 million for 2020 compared with $25.3 million for 2019. The decrease in operating profit was primarily due to the same factors that impacted gross profit, partially offset by a reduction in segment SG&A expenses. Adjusted EBITDA was $26.8 million for 2020 compared with $28.6 million for 2019. The decrease was due to lower gross profit. Depreciation and amortization expense was $5.6 million for 2020 compared with $6.2 million for 2019.
Land Management
As of October 31, 2020, our Land Management segment consisted of approximately 244,000 acres of timber properties in the southeastern United States. Key factors influencing profitability in the Land Management segment are:
•Planned level of timber sales;
•Selling prices and customer demand;
•Gains on timberland sales; and
•Gains on the disposal of development, surplus and HBU properties (“special use property”).
In order to maximize the value of our timber 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; and
•Core Timberland, meaning land that is best suited for growing and selling timber.
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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.
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 October 31, 2020, we estimated that there were 18,800 acres in the 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 $26.3 million for 2020 compared with $26.9 million for 2019.
Operating profit decreased to $8.5 million for 2020 from $9.9 million for 2019.
Adjusted EBITDA was $11.9 million and $12.1 million for 2020 and 2019, respectively. Depreciation, depletion and amortization expense was $4.5 million and $4.3 million for 2020 and 2019, respectively.
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U.S. and Non-U.S. Income before Income Tax Expense
See the following tables for details of the U.S. and non-U.S. income before income taxes and U.S. and non-U.S. income before income taxes after eliminating the impact of non-cash asset impairment charges, non-cash pension settlement income, restructuring charges, acquisition and integration related costs, debt extinguishment charges, and losses on sales of businesses (collectively, "Adjustments").
Summary
Year endedOctober 31,
Non-U.S. % of Consolidated Net Sales 38.9 % 40.6 %
U.S. % of Consolidated Net Sales 61.1 % 59.4 %
Non-U.S. % of Consolidated I.B.I.T. 86.3 % 50.4 %
U.S. % of Consolidated I.B.I.T. 13.7 % 49.6 %
Non-U.S. % of Consolidated I.B.I.T. before Adjustments 60.0 % 44.0 %
U.S. % of Consolidated I.B.I.T. before Adjustments 40.0 % 56.0 %
Non-U.S. I.B.I.T. Reconciliation
Year endedOctober 31,
Non-cash asset impairment charges 5.5 2.7
Non-cash pension settlement charge 0.4 —
Restructuring charges 12.0 16.3
Acquisition and integration related costs 0.1 0.5
Loss on sale of businesses 0.9 2.9
Total Non-U.S. Adjustments 18.9 22.4
Non-U.S. I.B.I.T. before Adjustments $ 179.5 $ 154.5
U.S. I.B.I.T. Reconciliation
Year endedOctober 31,
Non-cash asset impairment charges 13.0 5.1
Non-cash pension settlement charge (0.1) —
Restructuring charges 26.7 9.8
Acquisition and integration related costs 16.9 29.2
Debt extinguishment charges — 22.0
Loss on sale of businesses 37.9 0.8
Total U.S. Adjustments 94.4 66.9
U.S. I.B.I.T. before Adjustments $ 119.9 $ 196.8
* Income Before Income Tax expense = I.B.I.T.
Income Tax Expense
We had operations in over 40 countries during 2020. Operations outside the United States are subject to additional risks that may not exist, or be as significant, within the 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.
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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; negotiation and dispute resolution with taxing authorities in the U.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 2020 was $63.3 million on $186.1 million of pretax income and for 2019 was $70.7 million on $262.0 million of pretax income. For 2020, the mix of income and losses among various jurisdictions resulted in a net tax decrease of $17.0 million on $75.9 million less of pretax income, which was offset by additional tax expense of $7.5 million related to non-deductible goodwill allocated to the CPG divestiture. Various other items resulted in a net tax increase of $2.1 million.
Included in the net tax decrease of $17.0 million noted in the previous paragraph was a $28.4 million net decrease in valuation allowances. This decrease was primarily due to the ability to utilize foreign tax credits for which a valuation allowance had previously been provided. The release of the valuation allowance related to foreign tax credits resulted in the reduction of the valuation allowance and a tax benefit of $21.5 million. Other decreases in the valuation allowances related to foreign jurisdictions resulted in an additional decrease of $6.9 million. The valuation allowance activity resulted in an overall decrease in the valuation allowance account from 2019 to 2020 of $34.7 million. Offsetting these amounts was tax expense of $31.0 million as a result of a one-time elimination related to an intra-company sale. This one-time activity was the primary driver that resulted in an overall net increase in permanent items for 2019 to 2020 of $28.3 million
We analyze potential income tax liabilities related to uncertain tax positions in the 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 2020, lapses in the statute of limitations, which were partially offset by the recognition of new uncertain tax position liabilities recorded during the current year, resulted in an overall net decrease in our uncertain tax position liability.
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 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information.
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 $15.5 million and $23.2 million for 2020 and 2019, respectively. The decrease in net income attributable to noncontrolling interests was due primarily to decreased earnings of the joint venture ("Flexible Packaging JV") formed in 2010, with Dabbagh Group Holdings Company Limited and one of its subsidiaries, originally National Scientific Company Limited and now Gulf Refined Packaging for Industrial Packaging Company LTD.
Year 2019 Compared to Year 2018
Results of year 2019 compared to year 2018 are included in our Annual Report on Form 10-K for the year ended October 31, 2019, File No. 001-00566 (see Item 7 therein).
OTHER COMPREHENSIVE INCOME CHANGES
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Other comprehensive loss, net of tax for 2020 and 2019 was $6.7 million and $55.9 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 into United States Dollars at the rate of exchange existing at the end of the current period, and revenues and expenses are translated at average exchange rates over the month in which they are incurred. The cumulative translation adjustments, which represent the effects of translating assets, 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 2020 and 2019 was $9.8 million and $4.5 million, respectively.
Derivative Financial Instruments
The change in derivative financial instruments, net of tax for 2020 and 2019 was a loss of $12.0 million and a loss of $26.1 million, respectively. The other comprehensive loss in 2020 resulting from the change in derivative financial instruments, net, was primarily due to decreases in market interest rates on the swaps.
Minimum Pension Liability, net
The change in minimum pension liability, net of tax for 2020 and 2019 was an income of $15.1 million and loss of $25.3 million, respectively. The other comprehensive income in 2020 resulting from the change in minimum pension liability, net was primarily due to higher actual returns compared to assumptions on plan assets and amortization of prior net plan losses.
BALANCE SHEET CHANGES
Working Capital Changes
The $27.6 million decrease in accounts receivable to $636.6 million as of October 31, 2020 from $664.2 million as of October 31, 2019 was primarily due to the CPG divestiture and decrease in net sales.
The $64.6 million decrease in inventories to $293.6 million as of October 31, 2020 from $358.2 million as of October 31, 2019 was primarily due to the CPG divestiture and strong demand at the end of the year.
The $15.5 million increase in accounts payable to $450.7 million as of October 31, 2020 from $435.2 million as of October 31, 2019 was primarily due to the timing of payments, offset by the CPG divestiture.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are operating cash flows and borrowings under our senior secured credit facilities, proceeds from the senior notes we have issued, and proceeds from our trade accounts receivable credit facilities. We use these sources to fund our working capital needs, capital expenditures, cash dividends, common stock repurchases and acquisitions. We anticipate continuing to fund these items in a like manner. We currently expect that operating cash flows, borrowings under our senior secured credit facilities, and proceeds from our trade accounts receivable credit facilities will be sufficient to fund our anticipated working capital, capital expenditures, cash dividends, stock purchases, debt repayment, potential acquisitions of businesses and other liquidity needs for at least 12 months.
Capital Expenditures
During 2020 and 2019, we invested $131.4 million (excluding $5.4 million for purchases of and investments in timber properties) and $156.9 million (excluding $5.4 million for purchases of and investments in timber properties), respectively, in capital expenditures.
United States Trade Accounts Receivable Credit Facility
On September 24, 2020, we amended our existing receivables facility in the United States (the "U.S. Receivables Facility") to decrease the available financing amount from $275.0 million to $250.0 million. The U.S. Receivables Facility matures on September 24, 2021. As of October 31, 2020, $232.8 million, net of deferred financing costs of $0.2 million, was outstanding under the U.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.
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We may terminate the U.S. Receivables Facility at any time upon five days prior written notice. The U.S. Receivables Facility is secured by certain of our United States trade accounts receivables and bears interest at a variable rate based on the London Interbank Offered Rate (“LIBOR”) or an applicable base rate, plus a margin, or a commercial paper rate plus a margin. Interest is payable on a monthly basis and the principal balance is payable upon termination of the U.S. Receivables Facility. The U.S. Receivables Facility also contains certain covenants and events of default, which are substantially the same as the covenants under the 2019 Credit Agreement. See "Borrowing Arrangements - 2019 Credit Agreement" below for a description of these covenants. As of October 31, 2020, we were in compliance with these covenants. Proceeds of the U.S. Receivables Facility are available for working capital and general corporate purposes.
See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding the U.S. Receivables Facility.
International Trade Accounts Receivable Credit Facilities
On April 17, 2020, Cooperage Receivables Finance B.V. and Greif Coordination Center BVBA, an indirect wholly owned subsidiary of Greif, Inc., amended and restated the Nieuw Amsterdam Receivables Financing Agreement (the "European RFA"). The European RFA provides an accounts receivable financing facility of up to €100.0 million ($117.5 million as of October 31, 2020) secured by certain European accounts receivable. The $77.2 million outstanding on the European RFA as of October 31, 2020 is reported as 'Long-term debt' on the interim condensed consolidated balance sheets because we intend to refinance these obligations on a long-term basis and have the intent and ability to consummate a long-term refinancing by exercising the renewal option in the respective agreement or entering into new financing arrangements.
See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding the European RFA.
Borrowing Arrangements
Long-term debt is summarized as follows:
Accounts receivable credit facilities 310.0 351.6
2019 Credit Agreement - Revolving Credit Facility — 76.1
Other debt — 0.4
Less deferred financing costs 11.1 13.6
2019 Credit Agreement
On February 11, 2019, we and certain of our subsidiaries entered into an amended and restated senior secured credit agreement (the “2019 Credit Agreement”) with a syndicate of financial institutions. Our obligations under the 2019 Credit Agreement are guaranteed by certain of our U.S. and non-U.S. subsidiaries.
The 2019 Credit Agreement provides for (a) an $800.0 million secured revolving credit facility, consisting of a $600.0 million multicurrency facility and a $200.0 million U.S. dollar facility, maturing on February 11, 2024, (b) a $1,275.0 million secured term A-1 loan 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 A-2 loan with quarterly principal installments commencing on April 30, 2019 and continuing through maturity on January 31, 2026. In addition, we have an option to add an aggregate of $700.0 million to the secured revolving credit facility under the 2019 Credit Agreement with the agreement of the lenders. As of October 31, 2020, we had $538.1 million of available borrowing capacity under the $800.0 million secured revolving credit facility provided by the 2019 Credit Agreement. The available borrowing capacity is determined by the lesser of the available capacity or the amount that could be borrowed without causing the Company's leverage ratio to exceed 4.50 to 1.00.
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On November 13, 2020, we and certain of our U.S. subsidiaries entered into an incremental term loan agreement (the "Incremental Term A-3 Loan Agreement") with a syndicate of farm credit institutions. The Incremental Term A-3 Loan Agreement constitutes an amendment to the 2019 Credit Agreement. The Incremental Term A-3 Loan Agreement provides for a loan commitment in the aggregate principal amount of $225.0 million that must be funded in a single draw on a business day occurring on or before July 15, 2021 (the "Incremental Term A-3 Loan"). The Incremental Term A-3 Loan matures on July 15, 2026, with quarterly installments of principal payable on the last day of each of our fiscal quarters commencing with the first such date to occur after the funding date. The Incremental Term A-3 has, for all material purpose, the identical terms and provisions as the term A-1 and the term A-2 loans under the 2019 Credit Agreement, discussed above. Our obligations with respect to the Incremental Term A-3 Loan will constitute obligations under the 2019 Credit Agreement and will be secured and guaranteed with the other obligations as provided under the 2019 Credit Facility on a pari passu basis. We intend to draw upon Incremental Term A-3 Loan prior to July 15, 2021, and use the loan proceeds to pay all of the outstanding principal of and interest on the Senior Notes due 2021, discussed below.
The 2019 Credit Agreement contains certain covenants, which include financial covenants that require us to maintain a certain leverage ratio and an interest coverage ratio. The leverage ratio generally requires that, at the end of any quarter, we will not permit the ratio of (a) our total consolidated indebtedness, to (b) our consolidated net income plus depreciation, depletion and amortization, interest expense (including capitalized interest), income taxes, and minus certain extraordinary gains and non-recurring gains (or plus certain extraordinary losses and non-recurring losses) and plus or minus certain other items for the preceding twelve months (as used in this paragraph only, “EBITDA”) to be greater than 4.75 to 1.00 and stepping down annually by 0.25 increments beginning on July 31, 2020 to 4.00 on July 31, 2023. The current leverage ratio covenant requirement was 4.50 as of October 31, 2020. The interest coverage ratio generally requires that, at the end of any quarter, we will not permit the ratio of (a) our consolidated EBITDA, to (b) our consolidated interest expense to the extent paid or payable, to be less than 3.00 to 1.00, during the applicable preceding twelve month period. As of October 31, 2020, we were in compliance with the covenants and other agreements in the 2019 Credit Agreement.
See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional disclosures regarding the 2019 Credit Agreement.
Senior Notes
On February 11, 2019, we issued $500.0 million of 6.50% Senior Notes due March 1, 2027 (the "Senior Notes due 2027"). Interest on the Senior Notes due 2027 is payable semi-annually commencing on September 1, 2019. Our obligations under the Senior Notes due 2027 are guaranteed by our U.S. subsidiaries that guarantee the 2019 Credit Agreement, as described above. The Senior Notes due 2027 are governed by an Indenture that contains various covenants. Certain of these covenants will be suspended if the Senior Notes due 2027 achieve investment grade ratings from both Moody’s Investors Service, Inc. and Standard & Poor’s Global Ratings and no default or event of default has occurred and is continuing. As of October 31, 2020, we were in compliance with these covenants.
Our Luxembourg subsidiary has issued €200.0 million of 7.375% Senior Notes due July 15, 2021 (the "Senior Notes due 2021"). Interest on the Senior Notes due 2021 is payable semi-annually. The Senior Notes due 2021 are guaranteed on a senior basis by Greif, Inc. The Senior Notes due 2021 are governed by an Indenture that contains various covenants. As of October 31, 2020, we were in compliance with these covenants. As discussed above, we intend to draw upon the Incremental Term A-3 Loan prior to July 15, 2021, and use the loan proceeds to pay all of the outstanding principal of and interest on the Senior Notes due 2021.
See Note 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional disclosures regarding the Senior Notes discussed above.
Financial Instruments
Interest Rate Derivatives
We have various borrowing facilities which charge interest based on the one-month U.S. dollar LIBOR rate plus a spread. Refer to Note 1 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for discussion of ASU 2020-04 "Reference Rate Reform" for the our considerations of the impact of reference rate reform on contracts utilizing LIBOR rates.
In 2020, we entered into four forward starting interest rate swaps with a total notional amount of $200.0 million effective July 15, 2021. We receive variable rate interest payments based upon one-month U.S. dollar LIBOR, and in return we are obligated to pay interest at a weighted-average interest rate of 0.90% plus a spread.
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In 2019, we entered into six interest rate swaps with a total notional amount of $1,300.0 million that amortize to $200.0 million over a five-year term. The outstanding notional amount was $600.0 million as of October 31, 2020. We receive variable rate interest payments based upon one-month U.S. dollar LIBOR, and in return we are obligated to pay interest at a weighted-average interest rate of 2.49%.
In 2017, we entered into an interest rate swap with a notional amount of $300.0 million and received variable rate interest payments based upon one-month U.S. dollar LIBOR, and in return we are obligated to pay interest at a fixed rate of 1.19% plus a spread.
These derivatives are designated as cash flow hedges for accounting purposes. Accordingly, the gain or loss on these derivative instruments are reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transactions and in the same period during which the hedged transaction affects earnings.
See Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional 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 October 31, 2020, and 2019, we had outstanding foreign currency forward contracts in the notional amount of $268.6 million and $275.0 million, respectively.
See Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional 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. On March 6, 2018, we entered into a cross currency interest rate swap agreement that synthetically swaps $100.0 million of fixed rate debt to Euro denominated fixed rate debt at a rate of 2.35%. The agreement is designated as a net investment hedge for accounting purposes and will mature on March 6, 2023. Accordingly, the gain or loss on this derivative instrument is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. Interest payments received 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.
See Note 7 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional disclosures regarding our cross currency swap.
Contractual Obligations
As of October 31, 2020, we had the following contractual obligations:
Payments Due by Period
(in millions) Total Less than 1year 1-3 years 3-5 years After 5 years
Short-term borrowings 28.4 28.4
Liabilities held by special purpose entities 43.3 43.3
Current portion of long-term debt 123.1 123.1
Mandatorily redeemable noncontrolling interests 8.4 — 5.0 3.4
Deferred purchase price of Tholu 28.1 3.3 24.8
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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 $30.0 million during 2021, which consists of $24.7 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 repurchase of Class A Common Stock or Class B Common Stock or any combination of the foregoing. As of October 31, 2020, the remaining number of shares that could be repurchased under this authorization was 4,703,487 shares. See Note 12 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 to U.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 2020, foreign currency losses, net recorded in Other expense, net, related to our Argentine operations were $2.8 million. Inflation did not have a material impact on our operations during 2020.
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.
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.
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 on August 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 we record an impairment of goodwill equal to the amount by which the carrying value exceeds the fair value of the reporting unit, not to exceed the recorded amount of goodwill.
The Rigid Industrial Packaging & Services reportable 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 and Africa; Rigid Industrial Packaging & Services – Asia Pacific; and Rigid Industrial Packaging & Services – Tri-Sure. Each of these operating segments also qualify as a component that has discrete financial information available that is reviewed by segment management on a regular basis. As such, these components also represent our reporting units for purposes of goodwill impairment testing.
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The Paper Packaging & Services reportable segment is also an operating segment. This operating segment 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 single reporting unit. 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 a market participant’s 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). We did not utilize any Step 0 tests in 2020.
For our Rigid Industrial Packaging & Services - North America; Rigid Industrial Packaging & Services - Europe, Middle East and Africa; Rigid Industrial Packaging & Services - Asia Pacific; Rigid Industrial Packaging & Services - Tri-Sure; and Paper Packaging & Services reporting unit, we proceeded directly to the quantitative impairment testing. The fair value of each reporting unit was substantially in excess of its respective carrying value, with a minimum cushion of 27% for the Paper Packaging & Services reporting unit, so no impairment was deemed to exist. Discount rates, revenue growth rates and other 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.
The following table summarizes the carrying amount of goodwill by reporting unit for the year ended October 31, 2020 and 2019:
Goodwill Balance
Rigid Industrial Packaging & Services
Europe, Middle East and Africa 331.4 313.0
We test for impairment of indefinite-lived intangible assets during the fourth quarter of each year as of August 1, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist.
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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are subject to interest rate risk related to our financial instruments that include borrowings under the 2019 Credit Agreement and proceeds from our Senior Notes, U.S. Receivables Facility and the European RFA (collectively, "Accounts Receivables Facilities"), and cross currency and interest rate swap agreements. We do not enter into financial instruments for trading or speculative purposes. The interest rate swap agreements have been entered into to manage our exposure to variability in interest rates.
We have six interest rate swap agreements with an aggregate notional amount of $600.0 million as of October 31, 2020. Under these agreements, we receive variable rate interest payments based upon one month U.S. dollar LIBOR, and in return we are obligated to pay interest at a weighted-average interest rate of 2.49%, plus an interest spread.
We have another interest rate swap agreement with an aggregate notional amount of $300.0 million as of October 31, 2020. Under this agreement, we receive interest monthly from the counterparties equal to LIBOR and pay interest at a fixed rate over the life of the contracts.
(Losses)/Gains reclassified to earnings under these interest rate swaps were recorded in the amount of $(16.5) million, $3.0 million and $1.8 million for the years ended October 31, 2020, 2019 and 2018, respectively.
We have 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 gain or loss on this derivative instrument is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. Interest payments received for the cross currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense, net on the consolidated statements of income. A gain on the cross currency swap agreement was recorded in interest expense for the amount of $2.4 million, $2.4 million and $1.6 million for the years ended October 31, 2020, 2019 and 2018, respectively.
The tables below provide information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For our 2019 Credit Agreement, Senior Notes and Accounts Receivables Facilities, the tables present scheduled amortizations of principal and the weighted average interest rate by contractual maturity dates as of October 31, 2020 and 2019.
The fair values of our 2019 Credit Agreement, Senior Notes and Accounts Receivables Facilities are based on rates available to us for debt of the same remaining maturity as of October 31, 2020 and 2019.
Financial Instruments
As of October 31, 2020 (Dollars in millions)
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Expected Maturity Date
2019 Credit Agreement:
Senior Notes due 2021:
Scheduled maturity $ 235 $ — — — — — $ 235 $ 242
Average interest rate 7.38 % — — — — — 7.38 %
Senior Notes due 2027:
Scheduled maturity — — — — — $ 500 $ 500 $ 524
Average interest rate — — — — — 6.50 % 6.50 %
Receivables Facilities:
Scheduled maturity $ 310 — — — — — $ 310 $ 310
Weighted average interest rate 2.06 % — — — — — 2.06 %
(1) Variable rate specified is based on LIBOR or an alternative base rate plus a calculated margin as of October 31, 2020. The rates presented are not intended to project our expectations for the future.
As of October 31, 2019 (Dollars in millions)
Expected Maturity Date
2019 Credit Agreement:
Senior Notes due 2021:
Scheduled maturity — $ 222 — — — — $ 222 $ 248
Average interest rate — 7.38 % — — — — 7.38 %
Senior Notes due 2027:
Scheduled maturity — — — — — $ 500 $ 500 $ 538
Average interest rate — — — — — 6.50 % 6.50 %
Receivables Facility:
Scheduled maturity $ 352 — — — — — $ 352 $ 352
Weighted average interest rate 2.00 % — — — — — 2.00 %
(1) Variable rate specified is based on LIBOR or an alternative base rate plus a calculated margin as of October 31, 2019. The rates presented are not intended to project our expectations for the future.
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Currency Risk
As a result of our international operations, our operating results are subject to fluctuations in currency exchange rates. The geographic presence of our operations mitigates this exposure to some degree. Additionally, our transaction exposure is somewhat limited because we produce and sell a majority of our products in local currency within most countries in which we operate.
As of October 31, 2020, and 2019 we had outstanding foreign currency forward contracts in the notional amount of $268.6 million and $275.0 million, respectively. The purpose of these contracts is to hedge our exposure to foreign currency transactions and short-term intercompany loan balances in our international businesses. The fair value of these contracts resulted in realized (losses) gains recorded in other expense, net of $(3.2) million, $4.6 million and $(9.2) million for the years ended October 31, 2020, 2019 and 2018, respectively.
A sensitivity analysis (with respect only to these instruments) to changes in the foreign currencies hedged indicates that if the U.S. dollar strengthened by 10 percent, the fair value of these instruments would increase by $3.1 million to a net asset of $2.9 million. Conversely, if the U.S. dollar weakened by 10 percent, the fair value of these instruments would decrease by $4.4 million to a net liability of $4.6 million.
Commodity Price Risk
We purchase commodities such as steel, resin, containerboard, pulpwood and energy. We do not currently engage in material hedging of commodities, although in the past we have sometimes engaged in hedges in natural gas. There were no commodity hedging contracts outstanding as of October 31, 2020 and 2019.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME