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.
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 U.S. Generally Accepted Accounting Principles ("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. See "Risk Factors" in Item 1A of this Form 10-K.
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 timberland gains, net, 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, plus (gain) loss on disposal of properties, plants, equipment and businesses, net.
Since we do not calculate net income by reportable segment, EBITDA and Adjusted EBITDA by reportable segment are reconciled to operating profit by reportable segment. In that case, EBITDA is defined as operating profit by reportable 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 reportable segment, and Adjusted EBITDA is defined as EBITDA plus restructuring charges, plus timberland gains, net, plus acquisition and integration related costs, plus non-cash asset impairment charges, plus non-cash pension settlement charges, plus incremental COVID-19 costs, net, plus (gain) loss on disposal of properties, plants, equipment and businesses, net, for that reportable 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. 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.
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The following table sets forth the net sales, operating profit, EBITDA and Adjusted EBITDA for each of our reportable segments for 2022, 2021 and 2020:
Net sales:
Operating profit:
EBITDA:
Adjusted EBITDA:
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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 2022, 2021 and 2020:
Plus: debt extinguishment charges 25.4 — —
Plus: depreciation, depletion and amortization expense 216.6 234.4 242.5
Plus: debt extinguishment charges 25.4 — —
Plus: non-cash pension settlement charges — 9.1 0.3
Plus: other expense, net 8.9 4.8 2.7
Plus: equity earnings of unconsolidated affiliates, net of tax (5.4) (4.2) (1.5)
Less: other expense, net 8.9 4.8 2.7
Less: non-cash pension settlement charges — 9.1 0.3
Less: equity earnings of unconsolidated affiliates, net of tax (5.4) (4.2) (1.5)
Plus: depreciation, depletion and amortization expense 216.6 234.4 242.5
Plus: timberland gains, net — (95.7) —
Plus: acquisition and integration related costs 8.7 9.1 17.0
Plus: non-cash asset impairment charges 71.0 8.9 18.5
Plus: non-cash pension settlement charges — 9.1 0.3
Plus: incremental COVID-19 costs, net — 3.3 2.6
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The following table sets forth EBITDA and Adjusted EBITDA for each of our reportable segments, reconciled to the operating profit for each reportable segment, for 2022, 2021 and 2020:
Global Industrial Packaging
Less: other expense, net 9.5 4.5 4.0
Less: non-cash pension settlement charges — 0.3 0.4
Less: equity earnings of unconsolidated affiliates, net of tax (5.4) (4.2) (1.5)
Plus: depreciation and amortization expense 73.9 83.1 84.5
Plus: restructuring charges 9.1 17.1 28.8
Plus: acquisition and integration related costs 0.4 — —
Plus: non-cash asset impairment charges 69.4 2.7 6.0
Plus: non-cash pension settlement charges — 0.3 0.4
Plus: incremental COVID-19 costs, net — 1.8 0.7
Paper Packaging & Services
Less: other (income) expense, net (0.6) 0.3 (1.3)
Less: non-cash pension settlement charges (income) — 8.8 (0.1)
Plus: depreciation and amortization expense 139.9 148.0 153.5
Plus: restructuring charges 3.9 5.9 9.9
Plus: acquisition and integration related costs 8.3 9.1 17.0
Plus: non-cash asset impairment charges 1.6 5.0 12.5
Plus: non-cash pension settlement charges (income) — 8.8 (0.1)
Plus: incremental COVID-19 costs, net — 1.5 1.9
Land Management
Plus: depreciation and depletion expense 2.8 3.3 4.5
Plus: restructuring charges — 0.1 —
Plus: timberland gains, net — (95.7) —
Plus: non-cash asset impairment charges — 1.2 —
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Year 2022 Compared to Year 2021
Net Sales
Net sales were $6,349.5 million for 2022 compared with $5,556.1 million for 2021. The $793.4 million increase was primarily due to higher average selling prices across the reportable segments, partially offset by lower volumes, foreign currency translation, and the impact to net sales resulting from the divestiture of the Flexibles Product & Services business in the second quarter of 2022 (the "FPS Divestiture"). See the "Segment Review" below for additional information on net sales by reportable segment during 2021.
Gross Profit
Gross profit increased $192.4 million to $1,285.4 million for 2022 from $1,093.0 million for 2021. The respective reasons for changes in gross profit for each reportable segment are described below in the "Segment Review." Gross profit margin was 20.2 percent for 2022 compared to 19.7 percent for 2021.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses increased $15.1 million to $581.0 million for 2022 from $565.9 million for 2021. SG&A expenses were 9.2 percent of net sales for 2022 compared with 10.2 percent of net sales for 2021.
Financial Measures
Operating profit was $621.2 million for 2022 compared with $585.2 million for 2021. Net income was $394.0 million for 2022 compared with $413.2 million for 2021. Adjusted EBITDA was $917.5 million for 2022 compared with $764.2 million for 2021. The respective reasons for the improvement or decline in Adjusted EBITDA, as the case may be, for each reportable segment are described below in the "Segment Review."
Trends
We anticipate that overall customer demand for our Global Industrial Packaging products will continue to weaken through the first quarter and remain soft through the second quarter due to the unsettled macroeconomic environment. In addition, we expect steel prices to continue to decline in Europe and North America through the first quarter, which will continue to compress gross profit margins in the Global Industrial Packaging business segment through the second quarter. During the second half of the year, we expect customer demand to improve and higher priced steel inventory to work through our system, which in turn will improve gross profit margins.
In our Paper Packaging and Services business segment, we anticipate that weakness in customer demand will continue through the first quarter and the beginning of the second quarter and then start to sequentially improve, particularly over the second half of the year. The price of old corrugated containers will remain stable into the second quarter, but then start to increase throughout the year.
We anticipate resin prices and the prices of other direct materials, as well as prices for transportation, labor, and utilities, to remain relatively stable through the year.
We continue to actively monitor the impact and consequences of the invasion of Ukraine by Russia. As of October 31, 2022, our operations in Russia account for approximately 3 percent of our total sales, approximately 6 percent of our operating profit, and approximately 2 percent of our total assets.
Segment Review
Global Industrial Packaging
Key factors influencing profitability in the Global Industrial Packaging reportable 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;
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•Acquisition of businesses and facilities;
•Divestiture of businesses and facilities; and
•Impact of foreign currency translation.
Net sales were $3,652.4 million for 2022 compared with $3,316.7 million for 2021. The $335.7 million increase in net sales was primarily due to higher average sale prices, partially offset by lower volumes, foreign currency translation and the impact to net sales resulting from the FPS Divestiture.
Gross profit was $692.6 million for 2022 compared with $684.1 million for 2021. The $8.5 million increase in gross profit was primarily due to the same factors that impacted net sales, partially offset by higher raw material, utility and transportation costs. Gross profit margin decreased to 19.0 percent in 2022 from 20.6 percent in 2021.
Operating profit was $313.7 million for 2022 compared with $350.2 million for 2021. The $36.5 million decrease was primarily due to the $62.4 million non-cash impairment charge related to the FPS Divestiture, partially offset by the same factors that increased gross profit and a reduction in SG&A expenses. Adjusted EBITDA was $458.2 million for 2022 compared with $453.3 million for 2021. The $4.9 million increase was primarily due to the same factors that impacted gross profit.
Paper Packaging & Services
Key factors influencing profitability in the Paper Packaging & Services reportable segment are:
•Selling prices, product mix, customer demand and sales volumes;
•Raw material costs, primarily old corrugated containers;
•Energy and transportation costs;
•Benefits from executing the Greif Business System;
•Restructuring charges;
•Acquisition of businesses and facilities; and
•Divestiture of businesses and facilities.
Net sales were $2,675.1 million for 2022 compared with $2,218.4 million for 2021. The $456.7 million increase was primarily due to higher average sale prices of containerboard and boxboard, partially offset by lower volumes.
Gross profit was $584.5 million for 2022 compared with $401.3 million for 2021. The $183.2 million increase in gross profit was primarily due to the same factors that impacted net sales, partially offset by higher raw material, transportation, labor, and utility costs. Gross profit margin increased to 21.8 percent in 2022 from 18.1 percent in 2021.
Operating profit was $298.5 million for 2022 compared with $131.0 million for 2021. The $167.5 million increase in operating profit was primarily due to the same factors that impacted gross profit, partially offset by higher SG&A expenses. Adjusted EBITDA was $450.5 million for 2022 compared with $302.0 million for 2021. The $148.5 million increase was due primarily to the same factors that impacted operating profit.
Land Management
As of October 31, 2022, our Land Management reportable segment consisted of approximately 175,000 acres of timber properties in the southeastern United States. Key factors influencing profitability in the Land Management reportable 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”).
As of October 31, 2022, 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 increased to $22.0 million for 2022 compared with $21.0 million for 2021.
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Operating profit decreased to $9.0 million for 2022 from $104.0 million for 2021. During 2021, we completed the sale of approximately 69,200 acres of timberlands in southwest Alabama (the "2021 Timberland Sale") which resulted in timberland gains of $95.7 million. Adjusted EBITDA was $8.8 million and $8.9 million for 2022 and 2021, respectively.
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.
We report the sale of timberland property in "timberland gains, net," 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.
Income Tax Expense
We had operations in over 35 countries during 2022. 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.
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The Act includes various tax provisions including a 1 percent excise tax on stock repurchases, various tax credits to incentivize clean energy investments and a corporate minimum tax generally applicable to US corporations with average adjusted financial statement income exceeding $1.0 billion. We have evaluated the IRA provisions and determined they will not have a material impact on our financial positions or cash flows, nor will it materially change any accounting policies, business processes or internal controls.
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 2022 was $137.1 million on $525.7 million of pretax income and for 2021 was $69.6 million on $478.6 million of pretax income. The $67.5 million increase in income tax expense for 2022 was primarily attributable to an increase in pre-tax earnings in 2022 and a net $58.6 million of book losses that were recorded as a result of the disposal of the Flexible Products and other businesses for which limited tax benefits were available. Further, in 2021 we recognized deferred tax assets related to capital losses, which offset capital gains resulting from the sale of timberland.
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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 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 2022, 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 net 2022 activity in uncertain tax positions provided a $2.5 million benefit over the prior year.
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 8 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for further information.
Other Comprehensive Income (Loss) Changes
Foreign currency translation
In accordance with ASC 830, “Foreign Currency Matters,” the assets and liabilities denominated in a foreign currency are translated into United States Dollars at the rate of exchange existing at the end of the current period, and revenues and expenses are translated at average exchange rates over the month in which they are incurred. The cumulative translation adjustments, which represent the effects of translating assets and liabilities of our international operations, are presented in the consolidated statements of changes in equity in accumulated other comprehensive income (loss). During 2022, we completed the FPS Divestiture and $113.1 million of foreign currency translation adjustment was released.
Recent Events
On December 15, 2022, we completed our previously announced acquisition of Lee Container Corporation, Inc. for a purchase price of $300.0 million in cash. The all-cash transaction was funded through our existing credit facility. The operations of the acquired business will be reported in our Global Industrial Packaging business segment. Due to the limited time since we have completed the acquisition, we have not yet completed the initial acquisition accounting for the transaction, including the determination of the fair values of the assets acquired and the liabilities assumed. We anticipate completing the preliminary purchase price allocation in the first fiscal quarter of 2023, which would then be reflected in our January 31, 2023 financial statements. The results of operations of the acquired business will be included in our results from December 15, 2022, the date of the closing of the acquisition.
Year 2021 Compared to Year 2020
Results of our fiscal year 2021 compared to our fiscal year 2020 are included in our Annual Report on Form 10-K for the year ended October 31, 2021, File No. 001-00566 (see Item 7 therein).
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, debt repayment and acquisitions. We anticipate continuing to fund these items in a like manner. We currently expect that operating cash flows, borrowings under our senior secured credit facilities and proceeds from our trade accounts receivable credit facilities will be sufficient to fund our anticipated working capital, capital expenditures, cash dividends, debt repayment, potential acquisitions of businesses and other liquidity needs for at least 12 months.
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Cash Flow
Net cash provided by operating activities $ 657.5 $ 396.0
Net cash (used in) provided by investing activities (28.2) 46.8
Net cash used in financing activities (531.0) (422.9)
Reclassification of cash to assets held for sale — 0.5
Effects of exchange rates on cash (75.8) (1.7)
Net increase in cash and cash equivalents 22.5 18.7
Cash and cash equivalents at beginning of year 124.6 105.9
Cash and cash equivalents at end of year $ 147.1 $ 124.6
Operating Activities
The $140.4 million decrease in accounts receivable to $749.1 million as of October 31, 2022 from $889.5 million as of October 31, 2021 was primarily due to decreases in net sales during the last fiscal quarter of 2022.
The $95.9 million decrease in inventories to $403.3 million as of October 31, 2022 from $499.2 million as of October 31, 2021 was primarily due to decreases in raw material prices and decreased purchases during the last fiscal quarter of 2022, in line with decreased demand.
The $143.2 million decrease in accounts payable to $561.3 million as of October 31, 2022 from $704.5 million as of October 31, 2021 was primarily due to decreased raw material prices and timing of payable settlements.
Investing Activities
During 2022 and 2021, we invested $176.3 million and $140.7 million, respectively, of cash in capital expenditures. These investments exclude $6.7 million and $6.6 million of cash purchases and investments in timber properties during 2022 and 2021, respectively.
During 2022, we received $139.2 million of cash from sale of businesses, primarily from the FPS Divestiture.
During 2021, we sold approximately 69,200 acres of our timberland properties in southwest Alabama to Weyerhaeuser Company for approximately $145.1 million in cash after closing costs, which totaled $4.3 million. Proceeds were applied to debt repayment.
Financing Activities
We paid cash dividends to stockholders of Greif, Inc. in the amount of $111.3 million and $105.8 million for the years ended October 31, 2022 and 2021, respectively. We paid dividends to non-controlling interests in the amount of $17.2 million and $7.8 million for the years ended October 31, 2022 and 2021, respectively.
During 2022, we paid down $189.4 million of long-term debt, net of proceeds. We paid $20.8 million of debt extinguishment charges and debt issuance costs related to our debt refinancing.
During 2022, we paid $86.1 million for the share repurchase program.
During 2021, we paid at maturity the €200.0 million Senior Notes due 2021 in full from the proceeds of the $225.0 million Incremental Term A-3 Loan.
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Financial Obligations
Borrowing Arrangements
Long-term debt is summarized as follows:
2022 Credit Agreement - Term Loans $ 1,565.0 $ —
Accounts receivable credit facilities 311.4 391.1
2022 Credit Agreement - Revolving Credit Facility 41.9 —
2019 Credit Agreement - Revolving Credit Facility — 50.5
Less deferred financing costs 8.3 10.3
2022 Credit Agreement
On March 1, 2022, we and certain of our U.S. subsidiaries entered into a second amended and restated senior secured credit agreement (the “2022 Credit Agreement”) with a syndicate of financial institutions. The 2022 Credit Agreement amended, restated and replaced in its entirety our previous credit agreement, referred to as the "2019 Credit Agreement".
The 2022 Credit Agreement provides for (a) an $800.0 million secured revolving credit facility, consisting of a $725.0 million multicurrency facility and a $75.0 million U.S. dollar facility, maturing on March 1, 2027, (b) a $1,100.0 million secured term loan A-1 facility with quarterly principal installments commencing on July 31, 2022 and continuing through January 31, 2027, with any outstanding principal balance of such term loan A-1 facility being due and payable on maturity on March 1, 2027, and (c) a $515.0 million secured term loan A-2 facility with quarterly principal installments commencing on July 31, 2022 and continuing through January 31, 2027, with any outstanding principal balance of such term loan A-2 being due and payable on maturity on March 1, 2027. The term loan A-2 facility reflects the combination of the outstanding balances of the secured term A-2 and A-3 loans under the 2019 Credit Agreement.
The repayment of this facility is secured by a security interest in our personal property and the personal property of certain of our U.S. subsidiaries, including equipment and inventory and certain intangible assets, as well as a pledge of the capital stock of substantially all of our U.S. subsidiaries, and is secured, in part, by the capital stock of the non-U.S. borrowers. However, in the event that we receive and maintain an investment grade rating from either Moody's Investors Services, Inc. or Standard & Poor's Financial Services LLC, we may request the release of such collateral.
We used the borrowings under the 2022 Credit Agreement on March 1, 2022, to redeem our senior notes due 2027 and to repay and refinance all of the outstanding borrowings under the 2019 Credit Agreement, and will use the borrowings thereunder to fund ongoing working capital and capital expenditure needs and for general corporate purposes, including acquisitions, and to pay related fees and expenses. Interest is based on Secured Overnight Financing Rate ("SOFR") plus a credit spread adjustment, Euro Interbank Offer Rate ("EURIBOR") or a base rate that resets periodically plus, in each case, a calculated margin amount that is based on our leverage ratio. Subject to the terms of the 2022 Credit Agreement, we have an option to add borrowings to the 2022 Credit Agreement with the agreement of the lenders.
As of October 31, 2022, we had $758.1 million of available borrowing capacity under the $800.0 million secured revolving credit facility provided by the 2022 Credit Agreement, as defined in Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. On December 15, 2022, we completed the Lee Container acquisition. The all-cash transaction was funded through Greif's existing credit facility.
The 2022 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 fiscal quarter we will not permit the ratio of (a) our total consolidated indebtedness (less the aggregate amount of our unrestricted cash and cash
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equivalents), 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 4.00 to 1.00; provided that such leverage ratio is subject to (i) a covenant step-up (as defined in the 2022 Credit Agreement) increase adjustment of 0.50 upon the consummation of, and the following three fiscal quarters after, certain specified acquisitions, and (ii) a collateral release decrease adjustment of 0.25x during any collateral release period (as defined in the 2022 Credit Agreement). The interest coverage ratio generally requires that at the end of any fiscal 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, 2022, we were in compliance with the covenants and other agreements in the 2022 Credit Agreement.
Senior Notes due 2027
On March 1, 2022, we redeemed all of our outstanding 6.50% Senior Notes due 2027 for $500.0 million, plus a call premium of $16.3 million, with proceeds from our 2022 Credit Agreement.
United States Trade Accounts Receivable Credit Facility
We have a $300.0 million U.S. Receivables Facility, as defined in Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K, which matures on May 17, 2023. As of October 31, 2022, there was a $215.0 million outstanding balance under the U.S. Receivables Facility that is reported as long-term debt in the 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 renewing the existing agreement or entering into new financing arrangements. The U.S. Receivables Facility also contains events of default and covenants, which are substantially the same as the covenants under the 2022 Credit Agreement. As of October 31, 2022 we were in compliance with these covenants. Proceeds of the U.S. Receivables Facility are available for working capital and general corporate purposes.
International Trade Accounts Receivable Credit Facilities
We have a €100.0 million ($99.6 million as of October 31, 2022) European Receivables Financing Agreement (the "European RFA that matures on April 24, 2023. The $96.4 million outstanding on the European RFA as of October 31, 2022 is reported as long-term debt in the 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 renewing the existing agreement or entering into new financing arrangements. As of October 31, 2022 we were in compliance with the covenants that relate to the European RFA. Proceeds of the European RFA are available for working capital and general corporate purposes.
See Note 5 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding our financial obligations.
Financial Instruments
Interest Rate Derivatives
As of October 31, 2022, we have various interest rate swaps with a total notional amount of $1,150.0 million, amortizing down over the term, in which we receive variable interest rate payments based on SOFR and in return are obligated to pay interest at a weighted average fixed interest rate of 2.50%, plus a spread. These derivatives are designated as cash flow hedges for accounting purposes and will mature between March 11, 2024 and July 15, 2029.
We are actively monitoring the interest rate market and will execute new interest rate swaps as appropriate. Subsequent to October 31, 2022, we entered into $100.0 million of additional interest rate swaps maturing March 1, 2028.
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.
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
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protect the value of certain existing foreign currency assets and liabilities, commitments and anticipated foreign currency cash flows.
As of October 31, 2022 and 2021, we had outstanding foreign currency forward contracts in the notional amount of $132.1 million and $81.8 million, respectively.
Cross Currency Swaps
We have operations and investments in various international locations and are subject to risks associated with changing foreign exchange rates. We have cross currency interest rate swaps that synthetically swap $334.4 million of fixed rate debt to Euro denominated fixed rate debt. We receive a weighted average rate of 1.56%. These agreements are designated as either net investment hedges or cash flow hedges for accounting purposes and will mature between March 6, 2023 and October 5, 2026.
Accordingly, the gain or loss on the net investment hedge derivative instruments is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. The gain or loss on the cash flow hedge derivative instruments is included in the unrealized foreign exchange component of other expense, offset by the underlying gain or loss on the underlying cash flows that are being hedged. 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 6 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional disclosures regarding our financial instruments.
Other Liquidity Considerations
Post-Retirement Benefit Plans
We have no near-term post-retirement benefit plan funding obligations. We intend to make a post-retirement benefit plan contribution of $29.4 million during 2023, which we anticipate will consist of $24.2 million of employer contributions and $5.2 million of benefits paid directly by the employer. See Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding our post-retirement benefit plans.
Contingent Liabilities and Environmental Reserves
Environmental reserves are estimates based on current remediation plans; actual liabilities could significantly differ from the reserve estimates. See Note 10 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K for additional information regarding our contingent liabilities and environmental reserves.
Stock Repurchase Program
In June 2022, the Stock Repurchase Committee of our Board of Directors authorized a program to repurchase up to $150.0 million of shares of our Class A or Class B Common Stock or any combination thereof. On June 23, 2022, we entered into a $75.0 million accelerated share repurchase agreement ("ASR") with Bank of America, N.A. for the repurchase of shares of our Class A Common Stock. In addition, we plan to repurchase an aggregate of $75.0 million of shares of our Class A or Class B Common Stock, or any combination thereof, in open market purchases ("OSR program").
Under the ASR, on June 24, 2022, we made a payment of $75.0 million and received an initial delivery of approximately 80% of the expected share repurchases, or 1,021,451 shares of Class A Common Stock, with any remaining shares expected to be delivered by our second quarter 2023. The ASR has been accounted for as a purchase of shares of Class A Common Stock and a forward purchase contract. The final number of shares of Class A Common Stock to be repurchased will be based on the volume-weighted average price of the shares of our Class A Common Stock during the term of the ASR less a discount. We have treated the shares of Class A Common Stock delivered as treasury shares as of the date the shares were physically delivered in computing the weighted average shares outstanding of Class A Common Stock for both basic and diluted earnings per share. The forward stock purchase contract was determined to be indexed to our own stock and met all of the applicable criteria for equity classification.
We began making repurchases of Class B Common Stock under the OSR program on September 9, 2022, and we may continue to make open market repurchases over the next 12 to 18 months under this program, all in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934. The timing of any such repurchases will depend on market conditions and will be made at our discretion. While we intend to repurchase up to $75.0 million of shares, we are not obligated to
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repurchase any dollar amount or number or class of shares and may suspend or discontinue repurchases at any time. As of October 31, 2022, 170,980 shares of Class B Common Stock had been repurchased under the OSR program.
See Note 11 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 B Common Stock.
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.
Valuation of Goodwill
We account for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other.” Under ASC 350, 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 Global Industrial Packaging reportable segment consists of four operating segments: Global Industrial Packaging – North America; Global Industrial Packaging – Latin America; Global Industrial Packaging – Europe, Middle East and Africa; Global Industrial Packaging – Asia Pacific. 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.
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.
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
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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 2022.
For all reporting units with goodwill balances, we proceeded directly to the quantitative impairment testing and the fair value exceeded carrying value by at least 29%, so no impairment was deemed to exist. Discount rates and revenue growth rates 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. If in future years, our reporting units' 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, 2022 and 2021:
Goodwill Balance
Global Industrial Packaging
Europe, Middle East and Africa 315.4 364.1
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 2022 Credit Agreement and proceeds from U.S. Receivables Facility and the European RFA, 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 various interest rate swaps with a total notional amount of $1,150.0 million, maturing between March 11, 2024 and July 15, 2029. We receive variable interest rate payments based upon one-month U.S. dollar SOFR, and in return are obligated to pay interest at a weighted average fixed interest rate of 2.50%, plus a spread.
Losses reclassified to earnings under these interest rate swaps were recorded in the amount of $8.4 million, $18.1 million and $16.5 million for the years ended October 31, 2022, 2021 and 2020, respectively.
We have various cross currency interest rate swaps that synthetically swap $334.4 million of fixed rate debt to Euro denominated fixed rate debt. We receive a weighted average rate of 1.56%. These agreements are designated as either net investment hedges or cash flow hedges for accounting purposes and will mature between March 6, 2023 and October 5, 2026.
The gain or loss on the net investment hedge derivative instruments is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. The gain or loss on the cash flow hedge derivative instruments is included in the unrealized foreign exchange component of other expense, offset by the underlying gain or loss on the underlying cash flows that are being hedged. 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.
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Gains on the cross currency swap agreement was recorded in interest expense for the amount of $5.8 million, $2.2 million and $2.4 million for the years ended October 31, 2022, 2021 and 2020, respectively.
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, 2022 and 2021 we had outstanding foreign currency forward contracts in the notional amount of $132.1 million and $81.8 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. These contracts resulted in realized gains (losses) recorded in other expense, net of $(6.2) million, $0.4 million and $(3.2) million for the years ended October 31, 2022, 2021 and 2020, 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 $6.9 million to a net asset of $6.6 million. Conversely, if the U.S. dollar weakened by 10 percent, the fair value of these instruments would decrease by $6.6 million to a net liability of $6.8 million.
Commodity Price Risk
We purchase commodities such as steel, resin, containerboard, pulpwood and energy. We do not currently engage in material hedging of these commodities.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended October 31, (in millions, except per share amounts) 2022 2021 2020
Selling, general and administrative expenses 581.0 565.9 516.0
Timberland gains, net — (95.7) —
Acquisition and integration related costs 8.7 9.1 17.0
Non-cash asset impairment charges 71.0 8.9 18.5
Gain on disposal of properties, plants and equipment, net (8.1) (3.7) (19.2)
(Gain) Loss on disposal of businesses, net (1.4) 0.2 38.8
Debt extinguishment charges 25.4 — —
Non-cash pension settlement charges — 9.1 0.3
Equity earnings of unconsolidated affiliates, net of tax (5.4) (4.2) (1.5)
Net income attributable to noncontrolling interests (17.3) (22.5) (15.5)
Net income attributable to Greif, Inc. $ 376.7 $ 390.7 $ 108.8
Basic earnings per share attributable to Greif, Inc. common shareholders:
Diluted earnings per share attributed to Greif, Inc. common shareholders:
See accompanying Notes to Consolidated Financial Statements.
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GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Other comprehensive income (loss), net of tax:
Foreign currency translation* (27.9) (1.6) (9.8)
Derivative financial instruments 76.4 21.1 (12.0)
Minimum pension liabilities (1.1) 50.4 15.1
Other comprehensive income (loss), net of tax 47.4 69.9 (6.7)
Comprehensive income attributable to noncontrolling interests 10.5 21.4 2.6
Comprehensive income attributable to Greif, Inc. $ 430.9 $ 461.7 $ 115.0
*Year ended October 31, 2022 amount includes $113.1 million release of foreign currency translation from business divestment.
See accompanying Notes to Consolidated Financial Statements.
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GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Current assets
Cash and cash equivalents $ 147.1 $ 124.6
Trade accounts receivable, net of allowance 749.1 889.5
Inventories:
Work-in-process — 1.5
Assets held for sale 1.3 6.9
Long-term assets
Other intangible assets, net of amortization 576.2 648.4
Properties, plants and equipment
Timber properties, net of depletion 226.8 224.6
See accompanying Notes to Consolidated Financial Statements.
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GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accrued payroll and employee benefits 174.4 160.3
Restructuring reserves 12.3 20.3
Current portion of long-term debt 71.1 120.3
Short-term borrowings 5.7 50.5
Liabilities held for sale — 0.9
Current portion of operating lease liabilities 48.9 54.0
Long-term liabilities
Post-retirement benefit obligations 7.2 11.0
Contingent liabilities and environmental reserves 19.0 19.5
Long-term income tax payable 25.6 27.8
Commitments and Contingencies (Note 10)
Redeemable Noncontrolling Interests (Note 15) 15.8 24.1
Equity
Common stock, without par value 173.5 179.3
Accumulated other comprehensive income (loss), net of tax:
Foreign currency translation (316.5) (295.4)
Derivative financial instruments 72.8 (3.6)
Minimum pension liabilities (58.6) (57.5)
Total Greif, Inc. shareholders’ equity 1,761.3 1,514.3
Noncontrolling interests 33.0 61.3
Total liabilities and shareholders’ equity $ 5,469.9 $ 5,815.8
See accompanying Notes to Consolidated Financial Statements.
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GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Timberland gains, net — (95.7) —
Non-cash asset impairment charges 71.0 8.9 18.5
Non-cash pension settlement charges — 9.1 0.3
Gain on disposals of properties, plants and equipment, net (8.1) (3.7) (19.2)
(Gain) loss on disposals of businesses, net (1.4) 0.2 38.8
Unrealized foreign exchange (gain) loss (1.6) 1.0 (4.2)
Deferred income tax expense (benefit) 13.4 (47.2) 16.7
Debt extinguishment charges 22.6 — —
Increase (decrease) in cash from changes in certain assets and liabilities:
Restructuring reserves (6.6) (1.4) 10.2
Pension and post-retirement benefit liabilities (24.7) (11.5) (13.3)
Cash flows from investing activities:
Purchases of properties, plants and equipment (176.3) (140.7) (131.4)
Purchases of and investments in timber properties (6.7) (6.6) (5.4)
Proceeds from the sale of businesses 139.2 2.7 80.9
Proceeds on timberlands — 145.1 —
Collections on receivables held in special purpose entities — 50.9 —
Payments for issuance of loans receivable — (15.0) —
Net cash (used in) provided by investing activities (28.2) 46.8 (25.2)
Cash flows from financing activities:
Proceeds on short-term borrowings, net (36.3) 21.1 17.0
Proceeds from trade accounts receivable credit facility 301.9 106.0 76.8
Payments on trade accounts receivable credit facility (365.3) (23.1) (122.9)
Payments for liabilities held in special purpose entities — (43.3) —
Dividends paid to Greif, Inc. shareholders (111.3) (105.8) (104.3)
Dividends paid to noncontrolling interests (17.2) (7.8) (13.4)
Payments for debt extinguishment and issuance costs (20.8) — —
Payments for share repurchases (71.1) — —
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Forward contract for accelerated share repurchases (15.0) — —
Purchases of redeemable noncontrolling interest (6.5) — —
Net cash used in financing activities (531.0) (422.9) (405.3)
Reclassification of cash to assets held for sale — 0.5 —
Effects of exchange rates on cash (75.8) (1.7) 4.4
Net increase in cash and cash equivalents 22.5 18.7 28.6
Cash and cash equivalents at beginning of year 124.6 105.9 77.3
Cash and cash equivalents at end of year $ 147.1 $ 124.6 $ 105.9
Supplemental information:
Non-cash transactions:
Capital expenditures included in accounts payable $ 24.4 $ 38.7 $ 17.2
Schedule of interest and income taxes paid:
Cash payments for interest expense $ 70.3 $ 104.5 $ 119.9
See accompanying Notes to Consolidated Financial Statements.
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GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Shares Amount Shares Amount
Other comprehensive income (loss):
– Foreign currency translation 3.1 3.1 (12.9) (9.8)
Net income allocated to redeemable noncontrolling interests (0.1) (0.1)
Dividends paid to noncontrolling interests and other (12.0) (12.0)
Shared based compensation — 1.5 — — 1.5 1.5
Restricted stock, executive 3 0.1 (3) — 0.1 0.1
Other comprehensive income (loss):
– Foreign currency translation (0.5) (0.5) (1.1) (1.6)
Net income allocated to redeemable noncontrolling interests (2.4) (2.4)
Dividends paid to noncontrolling interests and other (6.2) (6.2)
Dividends earned on RSU shares (0.6) (0.6) (0.6)
Shared based compensation — 3.9 — — 3.9 3.9
Restricted stock, executive 3 0.1 (3) — 0.1 0.1
Other comprehensive income (loss):
Divestment of noncontrolling interest (23.3) (23.3)
Net income allocated to redeemable noncontrolling interests (0.1) (0.1)
Dividends paid to noncontrolling interests and other (15.4) (15.4)
Dividends earned on RSU shares (1.3) (1.3) (1.3)
Share based compensation — 4.9 — — 4.9 4.9
Restricted stock, executive 3 0.1 (3) — 0.1 0.1
See accompanying Notes to Consolidated Financial Statements.
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GREIF, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business
Greif, Inc. and its subsidiaries (collectively, “Greif,” “our,” or the “Company”), principally manufacture rigid industrial packaging products, such as steel, fibre and plastic drums, rigid intermediate bulk containers, closure systems for industrial packaging products, transit protection products, water bottles and remanufactured and reconditioned industrial containers, and provides services, such as container life cycle management, filling, logistics, warehousing and other packaging services. The Company produces and sells containerboard, corrugated sheets, corrugated containers, and other corrugated products to customers in North America in industries such as packaging, automotive, food and building products. The Company also produces and sells coated recycled paperboard and uncoated recycled paperboard, some of which are used to produce and sell industrial products (tubes and cores, construction products, and protective packaging). In addition, the Company also purchases and sells recycled fiber and produces and sells adhesives used in the Company's paperboard products. In addition, the Company owns timber properties in the southeastern United States which are actively harvested and regenerated. The Company has operations in over 35 countries.
Due to the variety of its products, the Company has many customers buying different products and due to the scope of the Company’s sales, no one customer is considered principal in the total operations of the Company.
The Company supplies a cross section of industries, such as chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agriculture, pharmaceuticals, minerals, packaging, automotive and building products, and makes spot deliveries on a day-to-day basis as its products are required by its customers. The Company does not operate on a backlog to any significant extent and maintains only limited levels of finished goods. Many customers place their orders weekly for delivery during the same week.
The Company’s raw materials are principally steel, resin, containerboard, old corrugated containers, pulpwood, recycled coated and uncoated paperboard and used industrial packaging for reconditioning.
There were approximately 12,000 full time employees of the Company as of October 31, 2022.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greif, Inc., all wholly-owned and majority-owned subsidiaries, joint ventures controlled by the Company or for which the Company is the primary beneficiary and equity earnings of unconsolidated affiliates. All intercompany transactions and balances have been eliminated in consolidation. Investments in unconsolidated affiliates are accounted for using the equity method based on the Company’s ownership interest in the unconsolidated affiliate.
The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain prior year amounts have been reclassified to conform to the current year presentation.
The Company’s fiscal year begins on November 1 and ends on October 31 of the following year. Any references to years or to any quarter of those years, relates to the fiscal year or quarter, as the case may be, ended in that year, unless otherwise stated.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Though actual amounts could significantly or materially differ from estimates, the most significant estimates are related to:
•Expected useful lives assigned to properties, plants and equipment;
•Goodwill and other intangible assets;
•Estimates of fair value;
•Environmental liabilities;
•Pension and post-retirement benefits, including plan assets;
•Income taxes;
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•Net assets held for sale; and
•Contingencies.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
Allowance for Doubtful Accounts
The allowance for doubtful accounts totaled $6.1 million and $6.1 million as of October 31, 2022 and 2021, respectively. The Company recognizes allowances for bad debts based on the length of time receivables are past due with allowance percentages, based on its historical experiences, applied on a graduated scale relative to the age of the receivable amounts. If the Company is aware of a specific customer's inability to meet its financial obligations to the Company, the Company records a specific allowance for bad debts. Amounts deemed uncollectible are written-off against the allowance for doubtful accounts.
Concentration of Credit Risk and Major Customers
The Company maintains cash depository accounts with banks throughout the world and invests in high quality short-term liquid instruments. Such investments are made only in instruments issued by high quality institutions and mature within three months. The Company did not incur any losses related to these investments during the years ended October 31, 2022, 2021, and 2020.
Trade receivables can be potentially exposed to a concentration of credit risk with customers or in particular industries. Such credit risk is considered by management to be limited due to the Company’s many customers, none of which are considered principal in the total operations of the Company, and its geographic scope of operations in a variety of industries throughout the world. The Company does not have an individual customer that exceeds 10 percent of total revenue. In addition, the Company performs ongoing credit evaluations of its customers’ financial conditions and maintains reserves for credit losses. Such losses historically have been within management’s expectations.
Inventory
The Company primarily uses the FIFO method of inventory valuation. Reserves for slow moving and obsolete inventories are provided based on historical experience, inventory aging and product demand. The Company continuously evaluates the adequacy of these reserves and adjusts these reserves as required.
Net Assets Held for Sale
Net assets held for sale represent land, buildings and other assets and liabilities for locations that have met the criteria of “held for sale” accounting, as specified by Accounting Standards Codification ("ASC") 360, “Property, Plant, and Equipment,” at the lower of carrying value or fair value less cost to sell. Fair value is based on the estimated proceeds from the sale of the assets utilizing recent purchase offers, market comparables and/or reliable third party data. The Company's estimate as to fair value is regularly reviewed and assets are subject to changes, such as in the commercial real estate markets and the Company's continuing evaluation as to the asset’s acceptable sale price. The net assets held for sale are being marketed for sale and it is the Company’s intention to complete the sales of these assets within the upcoming year, assuming offers deemed sufficient by management are received as result of marketing efforts. See Note 6 herein for additional information regarding assets and liabilities held for sale.
Goodwill and Indefinite-Lived Intangibles
Goodwill is the excess of the purchase price of an acquired entity over the amounts assigned to tangible and intangible assets and liabilities assumed in the business combination. The Company accounts for goodwill and purchased indefinite-lived intangible assets in accordance with ASC 350, “Intangibles – Goodwill and Other.” Under ASC 350, goodwill and purchased intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. The Company tests for impairment of goodwill and indefinite-lived intangible assets as of August 1, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist.
In accordance with ASC 350, the Company has the option to first assess qualitative factors to determine whether it is necessary to perform the quantitative test for goodwill impairment. If the Company believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. The quantitative test for goodwill impairment is conducted at the reporting unit level by comparing the carrying value of each reporting unit to the estimated fair value of the unit. If the carrying value of a reporting unit exceeds its estimated
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fair value, then the goodwill of the reporting unit is impaired. Goodwill impairment is recognized as the amount that the carrying value exceeds the fair value; not to exceed the balance of goodwill attributable to the reporting unit. When a portion of a reporting unit is disposed of, goodwill is allocated to the gain or loss on that disposition based on the relative fair values of the portion of the reporting unit subject to disposition and the portion of the reporting unit that will be retained.
The Company’s determinations of estimated fair value of the reporting units are based on both the market approach and a discounted cash flow analysis utilizing the income approach. Under the market approach, the principal inputs are market prices and valuation multiples for public companies engaged in businesses that are considered comparable to the reporting unit. Under the income approach, the principal inputs are the reporting unit’s cash-generating capabilities and the discount rate. The discount rates used in the income approach are based on a market participant’s weighted average cost of capital. The use of alternative estimates, including different peer groups or changes in the industry, or adjusting the discount rate, earnings before interest, taxes, depreciation, depletion and amortization forecasts or cash flow assumptions used could affect the estimated fair value of the reporting units and potentially result in goodwill impairment. Any identified impairment would result in an expense to the Company’s results of operations. See Note 2 herein for additional information regarding goodwill and other intangible assets.
Other Intangibles
The Company accounts for intangible assets in accordance with ASC 350. Definite lived intangible assets are amortized over their useful lives on a straight-line basis. The useful lives for definite lived intangible assets vary depending on the type of asset and the terms of contracts or the valuation performed. Amortization expense on intangible assets is recorded on the straight-line method over their useful lives as follows:
Years
Customer relationships 5-23
Non-compete agreements 3-10
Other intangibles 7-15
Acquisitions
From time to time, the Company acquires businesses and/or assets that augment and complement its operations. In accordance with ASC 805, “Business Combinations,” these acquisitions are accounted for under the purchase method of accounting. Under this method, the Company allocates the fair value of purchase consideration transferred to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the date of the acquisition. The excess purchase consideration over the aggregate fair value of tangible and intangible assets, net of liabilities assumed, is recorded as goodwill. The Company's estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.
During the measurement period, not to exceed one year from the date of acquisition, the Company may record adjustments to the assets acquired and liabilities assumed, with a corresponding offset to goodwill if new information is obtained related to facts and circumstances that existed as of the acquisition date. After the measurement period, any subsequent adjustments are reflected in the consolidated statements of income. Acquisition costs, such as legal and consulting fees, are expensed as incurred.
The Company classifies costs incurred in connection with acquisitions and their integration as acquisition and integration related costs. These costs are expensed as incurred and consist primarily of transaction costs, legal and consulting fees, integration costs and changes in the fair value of contingent payments (earn-outs) and are recorded within Acquisition and Integration related Costs line item presented on the consolidated income statement. Acquisition transaction costs are incurred during the initial evaluation of a potential targeted acquisition and primarily relate to costs to analyze, negotiate and consummate the transaction as well as financial and legal due diligence activities. Post-acquisition integration activities are costs incurred to combine the operations of an acquired enterprise into the Company’s operations.
The consolidated financial statements include the results of operations from these business combinations from the date of acquisition.
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Internal Use Software
Internal use software is accounted for under ASC 985, “Software.” Internal use software is software that is acquired, internally developed or modified solely to meet the Company’s needs and for which, during the software’s development or modification, a plan does not exist to market the software externally. Costs incurred to develop the software during the application development stage and for upgrades and enhancements that provide additional functionality are capitalized and then amortized over a three-year period. Internal use software is capitalized as a component of machinery and equipment on the consolidated balance sheets.
Long-Lived Assets
Properties, plants and equipment are stated at cost. Depreciation on properties, plants and equipment is provided on the straight-line method over the estimated useful lives of the assets as follows:
Years
Buildings 30
Machinery and equipment 10-15
Depreciation expense was $138.1 million, $164.6 million and $169.1 million in 2022, 2021 and 2020, respectively. Expenditures for repairs and maintenance are charged to expense as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and related allowance accounts. Gains or losses are credited or charged to income as incurred.
The Company capitalizes interest on long-term fixed asset projects using a rate that approximates the weighted average cost of borrowing. For the years ended October 31, 2022, 2021 and 2020, the Company's capitalized interest costs were not material.
The Company tests for impairment of properties, plants and equipment if certain indicators are present to suggest that impairment may exist. Long-lived assets are grouped together at the lowest level, generally at the plant level, for which identifiable cash flows are largely independent of cash flows of other groups of long-lived assets. As events warrant, the Company evaluates the recoverability of long-lived assets, other than goodwill and indefinite-lived intangible assets, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying business. Future decisions to change the Company's manufacturing processes, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could also result in material impairment losses. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value.
As of October 31, 2022, the Company's timber properties consisted of approximately 175,000 acres, all of which were located in the southeastern United States. The Company’s land costs are maintained by tract. Upon acquisition of a new timberland tract, the Company records separate amounts for land, merchantable timber and pre-merchantable timber allocated as a percentage of the values being purchased. The Company begins recording pre-merchantable timber costs at the time the site is prepared for planting. Costs capitalized during the establishment period include site preparation by aerial spray, costs of seedlings, including refrigeration rental and trucking, planting costs, herbaceous weed control, woody release and labor and machinery use. The Company does not capitalize interest costs in the process. Property taxes are expensed as incurred. New road construction costs are capitalized as land improvements and depreciated over a 10 to 20 year period. Road repairs and maintenance costs are expensed as incurred. Costs after establishment of the seedlings, including management costs, pre-commercial thinning costs and fertilization costs, are expensed as incurred. Once the timber becomes merchantable, the cost is transferred from the pre-merchantable timber category to the merchantable timber category in the depletion block.
Merchantable timber costs are maintained by five product classes: pine sawtimber, pine chip-n-saw, pine pulpwood, hardwood sawtimber and hardwood pulpwood, within a depletion block, with each depletion block based upon a geographic district or subdistrict. Currently, the Company has five depletion blocks. These same depletion blocks are used for pre-merchantable timber costs. Each year, the Company estimates the volume of the Company’s merchantable timber for the five product classes by each depletion block and depletion costs recognized upon sales are calculated as volumes sold times the unit costs in the respective depletion block. For the years ended October 31, 2022, 2021 and 2020, the Company's depletion expense was not material.
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Contingencies
Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, product liability and safety and health matters. While the amounts claimed may be substantial, the ultimate liability cannot currently be determined because of the considerable uncertainties that exist.
All lawsuits, claims and proceedings are considered by the Company in establishing reserves for contingencies in accordance with ASC 450, “Contingencies.” In accordance with the provisions of ASC 450, the Company accrues for a litigation-related liability when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Based on currently available information known to the Company, the Company believes that its reserves for these litigation-related liabilities are reasonable and that the ultimate outcome of any pending matters is not likely to have a material effect on the Company’s financial position or results of operations.
Environmental Cleanup Costs
The Company accounts for environmental cleanup costs in accordance with ASC 410, “Asset Retirement and Environmental Obligations.” The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site-by-site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company’s estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs.
Self-insurance
The Company is self-insured for certain of the claims made under its employee medical and dental insurance programs. The Company had recorded liabilities totaling $7.9 million and $7.4 million for estimated costs related to outstanding claims as of October 31, 2022 and 2021, respectively. These costs include an estimate for expected settlements on pending claims, administrative fees and an estimate for claims incurred but not reported. These estimates are based on management’s assessment of outstanding claims, historical analyses and current payment trends. The Company recorded an estimate for the claims incurred, but not reported using an estimated lag period based upon historical information.
The Company has certain deductibles applied to various insurance policies including general liability, product, vehicle and workers’ compensation. The Company maintains net liabilities totaling $24.7 million and $24.0 million for anticipated costs related to general liability, product, vehicle and workers’ compensation claims as of October 31, 2022 and 2021, respectively. These costs include an estimate for expected settlements on pending claims, defense costs and an estimate for claims incurred but not reported. These estimates are based on the Company’s assessment of its deductibles, outstanding claims, historical analysis, actuarial information and current payment trends.
Income Taxes
Income taxes are accounted for under ASC 740, “Income Taxes.” In accordance with ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be settled or realized. Valuation allowances are established when management believes it is more likely than not that some portion of the deferred tax assets will not be realized.
The Company’s effective tax rate is impacted by the amount of income generated in each taxing jurisdiction, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which the Company operates. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions.
Tax benefits from uncertain tax positions are recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. The amount recognized is measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties.
A number of years may elapse before a particular matter, for which the Company has established a reserve, is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, the Company believes that its reserves reflect
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the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution.
Restructuring Charges
The Company accounts for all exit or disposal activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.” Under ASC 420, a liability is measured at its fair value and recognized as incurred.
For termination costs associated with employees who are involuntarily terminated under the terms of a one-time benefit arrangement, the Company recognizes liabilities and associated costs as of announcement date unless the employees are required to stay for a certain period of time after restructuring announcement and ratable recognition between the announcement date and termination date is materially different from announcement date recognition. For termination costs associated with a non-lease contract and costs incurred without economic benefit as a result of restructuring activities, the Company recognizes liabilities and associated costs as of contract termination date. Facility exit and employee relocation costs are recognized and measured at their respective fair value in the period in which the liability is incurred. The liability is not recognized before it is incurred, even if the costs are incremental to other operating costs and will be incurred as a direct result of a plan.
Revenue Recognition
Revenue is measured as the amount of consideration the Company expects to be entitled to in exchange for transferring goods or providing services. Customer payment terms are typically less than one year and as such, transaction prices are not adjusted for the effects of a significant financing component. Standalone selling prices for each performance obligation are generally stated in the contract. Variable consideration in the form of volume rebates is estimated based on contract terms and historical experience of actual results limited to the amount which is probable will not result in reversal of cumulative revenue recognized when the variable consideration is resolved. Taxes collected from customers and remitted to governmental authorities are excluded from net sales.
For the vast majority of revenues, contracts with customers are either a purchase order or the combination of a purchase order with a master supply agreement. A performance obligation is considered an individual unit sold. The Company does not bundle products. Prices negotiated with each individual customer are representative of the stand-alone selling price of the product. The Company typically satisfies the performance obligation at a point in time when control is transferred to customers. The point in time when control of goods is transferred is largely dependent on delivery terms.
Contract liabilities relate primarily to prepayments received from the Company’s customers before revenue is recognized and from volume rebates to customers. These amounts are included in other current liabilities in the consolidated balance sheets. The Company does not have any material contract assets. Freight charged to customers is included in net sales in the statement of income.
The Company's contracts with customers are broadly similar in nature throughout its reportable segments, but the amount, timing and uncertainty of revenue and cash flows may vary in each reportable segment due to geographic factors. See Note 13 herein for additional disclosures of revenue disaggregated by geography for each reportable segment.
Shipping and Handling Fees and Costs
The Company includes shipping and handling fees and costs in cost of products sold.
Other Expense, net
Other expense, net primarily represents foreign currency transaction gains and losses, non-service cost components of net periodic post-retirement benefit costs and other infrequent non-operating items.
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 period-end, and revenues and expenses are translated at average exchange rates.
The cumulative translation adjustments, which represent the effects of translating assets and liabilities of the Company’s international operations, are presented in the consolidated statements of changes in shareholders’ equity in accumulated other comprehensive income (loss). Transaction gains and losses on foreign currency transactions denominated in a currency other
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than an entity’s functional currency are credited or charged to income. The amounts included in other expense, net related to foreign currency transaction losses were not material for the years ended October 31, 2022, 2021 and 2020.
Derivative Financial Instruments
In accordance with ASC 815, “Derivatives and Hedging,” the Company records all derivatives in the consolidated balance sheet as either assets or liabilities measured at fair value. Dependent on the designation of the derivative instrument, changes in fair value are recorded to earnings or shareholders’ equity through other comprehensive income (loss).
The Company may from time to time use interest rate swap agreements to hedge against changing interest rates. For interest rate swap agreements designated as cash flow hedges, the net gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The Company's interest rate swap agreements effectively convert a portion of floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense.
The Company's cross currency interest rate swap agreements synthetically swap United States ("U.S.") dollar denominated fixed rate debt for Euro denominated fixed rate debt and are designated as either net investment hedges or cash flow hedges for accounting purposes. The gain or loss on the net investment hedge derivative instruments is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. The gain or loss on the cash flow hedge derivative instruments is included in the unrealized foreign exchange component of other expense, offset by the underlying gain or loss on the underlying cash flows that are being hedged. 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.
The Company enters into currency forward contracts to hedge certain currency transactions and short-term intercompany loan balances with its international businesses. Such contracts limit the Company’s exposure to both favorable and unfavorable currency fluctuations. These contracts are adjusted to reflect market value as of each balance sheet date, with the resulting changes in fair value being recognized in other expense, net.
Any derivative contract that is either not designated as a hedge, or is so designated but is ineffective, has its changes to market value recognized in earnings immediately. If a cash flow or fair value hedge ceases to qualify for hedge accounting, the contract would continue to be carried on the balance sheet at fair value until settled and have the adjustments to the contract’s fair value recognized in earnings. If a forecasted transaction were no longer probable to occur, amounts previously deferred in accumulated other comprehensive income (loss) would be recognized immediately in earnings.
Variable Interest Entities
The Company evaluates whether an entity is a variable interest entity (“VIE”) and determines if the primary beneficiary status is appropriate on a quarterly basis. The Company consolidates VIEs for which it is the primary beneficiary. If the Company is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of accounting. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including: the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; the obligation to absorb the expected losses; and/or the right to receive the expected returns of the VIE.
Fair Value
The Company uses ASC 820, “Fair Value Measurements and Disclosures” to account for fair value. ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about assets and liabilities measured at fair value. Additionally, this standard established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair values are as follows:
•Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets and liabilities.
•Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities.
•Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
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The Company presents various fair value disclosures in Note 6 and Note 9 of the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K.
Newly Adopted Accounting Standards
In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes", which is intended to simplify accounting for income taxes. This ASU is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years, with early adoption permitted. The Company adopted this ASU on November 1, 2021. The adoption of this guidance did not have a material impact on the Company's financial position, results of operations, comprehensive income, cash flows or disclosures.
Recently Issued Accounting Standards
There have been no new accounting pronouncements issued since the filing of the 2021 Form 10-K.
NOTE 2 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill by reportable segment for the years ended October 31, 2022 and 2021:
(in millions) Global Industrial Packaging (1) PaperPackaging & Services Total
Goodwill allocated to divestitures and businesses held for sale (0.4) — (0.4)
Goodwill adjustments (0.2) — (0.2)
Currency translation (2.6) 0.2 (2.4)
(1)Accumulated goodwill impairment loss was $63.3 million as of October 31, 2022, 2021 and 2020, related to the Global Industrial Packaging reportable segment.
The Company reviews goodwill by reporting unit and indefinite-lived intangible assets for impairment as required by ASC 350, “Intangibles – Goodwill and Other,” either annually August 1, or whenever events and circumstances indicate impairment may have occurred. A reporting unit is the operating segment, or a business unit one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. The components are aggregated into reporting units for purposes of goodwill impairment testing to the extent they share similar qualitative and quantitative characteristics.
The Company performed its annual goodwill impairment test as of August 1, 2022. The fair value of the Company's goodwill reporting units exceeded the carrying value, resulting in no impairment. Discount rates and revenue growth rates 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 these assumptions and judgments. A revision of these assumptions could cause the fair value of the reporting unit to fall below its respective carrying value. As for all of the Company's reporting units, if in future years, the reporting unit's actual results are not consistent with the Company's estimates and assumptions used to calculate fair value, the Company may be required to recognize material impairments to goodwill.
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The following table summarizes the carrying amount of net intangible assets by class as of October 31, 2022 and 2021:
(in millions) GrossIntangibleAssets AccumulatedAmortization Net IntangibleAssets
Indefinite lived:
Trademarks and patents $ 7.9 $ — $ 7.9
Definite lived:
Trademarks and patents 8.3 4.6 3.7
Non-compete agreements 0.4 0.4 —
Indefinite lived:
Trademarks and patents $ 13.4 $ — $ 13.4
Definite lived:
Non-compete agreements 0.7 0.6 0.1
Gross intangible assets decreased by $78.8 million for the year ended October 31, 2022. The decrease was attributable to the write-off of $59.6 million fully-amortized assets, $11.6 million of currency fluctuations, $4.6 million impairment of indefinite lived intangibles and $3.0 million of asset disposals.
Amortization expense was $58.2 million, $66.9 million and $69.1 million for the years ended October 31, 2022, 2021 and 2020, respectively. Amortization expense for the next five years is expected to be $55.4 million in 2023, $52.2 million in 2024, $50.2 million in 2025, $50.1 million in 2026 and $49.9 million in 2027.
Definite lived intangible assets for the periods presented are subject to amortization and are being amortized using the straight-line method over periods that are contractually or legally determined, or over the period a market participant would benefit from the asset. Indefinite lived intangibles of approximately $7.9 million as of October 31, 2022, related primarily to the Tri-Sure trademark and trade names related to Box Board and Pachmas, are not amortized, but rather are tested for impairment at least annually.
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NOTE 3 – RESTRUCTURING CHARGES
The following is a reconciliation of the beginning and ending restructuring reserve balances for the years ended October 31, 2022 and 2021:
(in millions) EmployeeSeparationCosts Other Costs Total
Costs incurred and charged to expense 14.9 8.2 23.1
Costs paid or otherwise settled (14.2) (10.2) (24.4)
Costs incurred and charged to expense 6.3 6.7 13.0
Costs paid or otherwise settled (13.7) (7.3) (21.0)
The focus for restructuring activities in 2022 was to optimize and integrate operations in the Paper Packaging & Services reportable segment and to rationalize operations and close underperforming assets in the Global Industrial Packaging reportable segment. During the year ended October 31, 2022, the Company recorded restructuring charges of $13.0 million, as compared to $23.1 million of restructuring charges recorded during the year ended October 31, 2021. The restructuring activity for the year ended October 31, 2022 consisted of $6.3 million in employee separation costs and $6.7 million in other restructuring costs, primarily consisting of professional fees and other fees associated with restructuring activities. There were seventeen plants closed or divested in 2022, and a total of 132 employees severed throughout 2022 as part of the Company’s restructuring efforts.
The focus for restructuring activities in 2021 was to optimize and integrate operations in the Paper Packaging & Services reportable segment and to rationalize operations and close underperforming assets in the Global Industrial Packaging reportable segment. During 2021, the Company recorded restructuring charges of $23.1 million, consisting of $14.9 million in employee separation costs and $8.2 million in other restructuring costs, primarily consisting of professional fees and other fees associated with restructuring activities. There were five plants closed or divested and a total of 177 employees severed throughout 2021 as part of the Company’s restructuring efforts.
The focus for restructuring activities in 2020 was to optimize and integrate operations in the Paper Packaging & Services reportable segment related to the acquisition of Caraustar Industries, Inc. and its subsidiaries ("Caraustar") on February 11, 2019 (the “Caraustar Acquisition”), and continue to rationalize operations and close underperforming assets in the Global Industrial Packaging segments. During 2020, the Company recorded restructuring charges of $38.7 million, consisting of $26.4 million in employee separation costs and $12.3 million in other restructuring costs, primarily consisting of professional fees incurred for services specifically associated with employee separation and relocation. There were sixteen plants closed or divested and a total of 658 employees severed throughout 2020 as part of the Company’s restructuring efforts.
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The following is a reconciliation of the total amounts expected to be incurred from open restructuring plans or plans that are being formulated and have not been announced as of the filing date of this Form 10-K. Remaining amounts expected to be incurred were $7.4 million as of October 31, 2022:
Global Industrial Packaging:
Employee separation costs $ 8.4 $ 4.9 3.5
Other restructuring costs 5.9 4.2 1.7
Paper Packaging & Services:
Employee separation costs 2.4 1.4 1.0
Other restructuring costs 3.7 2.5 1.2
NOTE 4 – CONSOLIDATION OF VARIABLE INTEREST ENTITIES
Flexible Packaging Joint Venture
On September 29, 2010, Greif, Inc. and one of its indirect subsidiaries formed a joint venture (referred to herein as the “Flexible Packaging JV” or "FPS VIE") with Dabbagh Group Holding Company Limited and one of its subsidiaries, originally National Scientific Company Limited and later Gulf Refined Packaging for Industrial Packaging Company LTD ("GRP"). The Flexible Packaging JV owned the operations in the Company's flexible packaging business, which was included in Global Industrial Packaging reportable segment. The Flexible Packaging JV was consolidated into the operations of the Company from the date of its formation until the date of its divestiture, as described below.
On January 3, 2022, the Company entered into a definitive agreement to divest its approximately 50 percent equity interest in the Flexible Packaging JV (the "FPS Divestiture"). On April 1, 2022, the Company completed the FPS Divestiture for $123.0 million. As a result of the FPS Divestiture, the Company received net cash proceeds of $131.6 million, including $24.4 million of cash and cash equivalents resulting from the deconsolidation of the Flexible Packaging JV. The FPS Divestiture resulted in a loss of $0.6 million on sale of business.
The Flexible Packaging JV was deemed to be a VIE since the total equity investment at risk was not sufficient to permit the legal entity to finance its activities without additional subordinated financial support. The major factors that led to the conclusion that the Company was the primary beneficiary of this VIE was that (1) the Company had the power to direct the most significant activities due to its ability to direct the operating decisions of the FPS VIE, which power was derived from the significant CEO discretion over the operations of the FPS VIE combined with the Company's sole and exclusive right to appoint the CEO of the FPS VIE, and (2) the significant variable interest through the Company's equity interest in the FPS VIE.
The economic and business purpose underlying the Flexible Packaging JV was to establish a global industrial flexible products enterprise through a series of targeted acquisitions and major investments in plant, machinery and equipment. All entities contributed to the Flexible Packaging JV were existing businesses acquired by an indirect subsidiary of the Company and that were reorganized under Greif Flexibles Asset Holding B.V. and Greif Flexibles Trading Holding B.V. (“Asset Co.” and “Trading Co.”), respectively. The Company had a 51 percent ownership in Trading Co. and a 49 percent ownership in Asset Co. However, the Company and GRP had equal economic interests in the Flexible Packaging JV, notwithstanding the actual ownership interests in the various legal entities.
Paper Packaging Joint Venture
On April 20, 2018, Greif, Inc. and one of its indirect subsidiaries formed a joint venture (referred to herein as the “Paper Packaging JV” or "PPS VIE") with a third party. The Paper Packaging JV has been consolidated into the operations of the Company since its formation date of April 20, 2018.
The Paper Packaging JV is deemed to be a VIE as the equity investors at risk, as a group, lack the characteristics of a controlling financial interest. The structure of the Paper Packaging JV has governing provisions that are the functional equivalent of a limited partnership whereby the Company is the managing member that makes all the decisions related to the
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activities that most significantly affect the economic performance of the PPS VIE. In addition, the third party does not have any substantive kick-out rights or substantive participating rights in the Paper Packaging JV. The major factors that led to the conclusion that the Paper Packaging JV is a VIE was that all limited partnerships are considered to be VIE’s unless the limited partners have substantive kick-out rights or substantive participating rights.
The following table presents the Paper Packaging JV total net assets:
Cash and cash equivalents $ 6.7 $ 5.9
Properties, plants and equipment, net 27.8 31.1
Other assets — 0.5
Accounts payable 3.3 3.4
Other liabilities 2.4 1.7
Total liabilities $ 5.7 $ 5.1