Greif(GEF_B) - 2022 Q4 - Annual Report

Business Overview Greif, Inc. is a global industrial packaging leader with three segments: Global Industrial Packaging, Paper Packaging & Services, and Land Management, recently acquiring Lee Container Business Description and Segments Greif, Inc. is a global leader in industrial packaging products and services, operating in over 35 countries. Its business is structured into three reportable segments: Global Industrial Packaging, which offers a wide range of rigid containers and services; Paper Packaging & Services, which produces containerboard and corrugated products in North America; and Land Management, which manages and sells timber from its properties in the southeastern United States - The company is a leading global producer of industrial packaging products (steel, fibre, plastic drums, IBCs) and services, with operations in over 35 countries[12] - The Paper Packaging & Services segment produces and sells containerboard, corrugated sheets, and other related products to customers in North America[17] - The Land Management segment focuses on harvesting and regenerating approximately 175,000 acres of timber properties in the southeastern United States[18] Market and Competition The company operates in highly competitive markets, facing significant competition from both large, vertically integrated companies and smaller players. Key competitive factors include price, design, quality, and service. Greif's strategy involves offering a comprehensive global product line in industrial packaging and focusing on higher-margin, value-added products in niche containerboard markets - The markets for the company's products are highly competitive, with competitive factors including price, design, quality, and service[20] - The company's competitive strategy includes offering a comprehensive line of industrial packaging products globally and concentrating on value-added, higher-margin corrugated products for niche markets[21] Human Capital As of October 31, 2022, Greif employed approximately 12,000 full-time staff globally. The company's "Build to Last Strategy" guides its human capital management, emphasizing health and safety, diversity, equity, and inclusion (DEI), and talent development through programs like Greif University. Approximately 37% of its global workforce is represented by labor unions - As of October 31, 2022, the company had approximately 12,000 full-time employees, with 58% in North America, 27% in EMEA, 9% in Latin America, and 6% in Asia Pacific[36] - The workforce is 15% female and 37% represented by labor unions[36] - The company's "Build to Last Strategy," launched in fiscal 2022, focuses on four key missions, including "creating thriving communities," which encompasses health and safety, DEI, and talent development[29] - Talent development is supported through Greif University, a centralized training platform, and a performance development review process[33][35] Recent Events On December 15, 2022, subsequent to the fiscal year-end, Greif completed the acquisition of Lee Container Corporation, Inc. Lee Container is a manufacturer of high-performance blow molded containers, serving agrochemical and other specialty chemical markets. Its operations will be integrated into Greif's Global Industrial Packaging segment - On December 15, 2022, the company acquired Lee Container Corporation, Inc., a manufacturer of blow molded containers, with the acquired business to be reported within the Global Industrial Packaging segment[37] Risk Factors The company faces significant risks from economic downturns, geopolitical events, intense competition, raw material price volatility, operational challenges, and complex regulatory compliance Market and Economic Risks The company's business is highly sensitive to general economic conditions, with demand historically corresponding to changes in industrial production. Global operations expose Greif to political instability, currency fluctuations, and geopolitical events like the Russian invasion of Ukraine, which has amplified risks related to energy supply in Europe, supply chains, and access to cash from Russia. The ongoing COVID-19 pandemic also continues to present risks through operational disruptions and supply chain bottlenecks - Demand for the company's products is sensitive to changes in general economic and business conditions, and any prolonged downturn could have a material adverse effect[44][46] - Global operations in over 35 countries create exposure to political risks, instability, and currency exchange fluctuations, with the Russian invasion of Ukraine amplifying these risks, particularly concerning energy supply in Europe and access to Russian earnings[47][48] - The COVID-19 pandemic could continue to impact the business through supply chain bottlenecks, increased labor costs, and potential future government-imposed restrictions[56][59] Industry and Competitive Risks Greif faces significant industry risks, including intense pricing pressure from the ongoing consolidation of both its customer base and suppliers. The company operates in highly competitive industries where price, quality, and service are critical. Volatility in raw material prices (such as steel, resin, and OCC), energy costs, and transportation expenses pose a substantial threat to margins and profitability, especially with disruptions from geopolitical events and inflation - Consolidation among both customers and suppliers has intensified pricing pressure and could negatively impact business operations and cash flows[61] - The company operates in highly competitive industries, with key competitive factors being price, quality, customer service, and on-time delivery[62] - Fluctuations in the price of principal raw materials like steel, resin, and OCC, along with global supply chain disruptions and inflation, may adversely impact operating results[68][69] - Energy and transportation price fluctuations, particularly for oil and natural gas in Europe, can significantly impact manufacturing costs and customer demand[70] Operational and Strategic Risks The company faces risks in executing its business strategies, including potential difficulties with acquisitions, divestitures, and cost-saving initiatives. Operational risks also stem from its reliance on joint ventures, the ability to attract and retain talent, and labor relations, with 37% of its workforce unionized. Furthermore, the business is dependent on uninterrupted IT systems, and a security breach or system failure could have a material adverse effect - The company may not successfully implement its business strategies or realize the anticipated benefits of its growth and efficiency initiatives[72][75] - Acquisitions, joint ventures, and divestitures involve numerous risks, including integration challenges, unanticipated costs, and potential liabilities[76] - Approximately 37% of the company's global workforce is represented by unions, creating a risk of work stoppages and other adverse labor relations matters[86] - A security breach of customer, employee, or company data, or failure to comply with evolving data privacy regulations, could materially harm the business[95][98] Financial and Reporting Risks Greif is exposed to financial reporting risks, including changes in tax rates across its multinational operations and the potential for its tax positions to be challenged. The company carries a significant amount of goodwill ($1.46 billion) and long-lived assets, which are subject to impairment risk. Additionally, its pension and post-retirement plans are underfunded, which will require future cash contributions that could be higher than expected - The multinational nature of the business subjects the company to complex and changing tax laws, which could affect its future effective tax rates[100] - The company had $1,464.5 million in goodwill as of October 31, 2022, which could be impaired if the fair value of a reporting unit falls below its carrying value[103] - As of October 31, 2022, the company's U.S. and non-U.S. pension and post-retirement plans were underfunded by an aggregate of $27.2 million and $7.2 million, respectively, requiring future cash contributions[105] Regulatory and Legal Risks The company faces risks from a complex and evolving regulatory landscape. This includes potential impacts from climate change regulations, the challenge of meeting its 2030 greenhouse gas (GHG) emission reduction targets, and compliance with extensive environmental, health, and safety (EHS) laws. Regulations concerning materials like BPA and PFAS could also increase costs. Additionally, the company is exposed to risks from product liability claims, other legal proceedings, and potential violations of anti-bribery and competition laws - New and more restrictive legislation related to climate change and GHG emissions could result in increased energy, environmental, and other costs[111] - The company announced a target to reduce absolute Scope 1 and 2 GHG emissions by 28% by 2030, but achievement is subject to risks and uncertainties, and failure could damage its reputation and customer relationships[114] - The company must comply with extensive EHS laws, and changes in regulations, such as those concerning PFAS or reconditioning processes, could adversely affect operations and financial performance[115][116][118] - Product liability claims and other legal proceedings could be time-consuming and expensive to defend and may not be fully covered by insurance[122] Properties and Legal Proceedings Greif operates 174 global facilities and manages 175,000 acres of timberland, with no material legal proceedings reported, though a joint venture faces environmental penalties Properties As of October 31, 2022, Greif operated from 174 principal locations globally, of which 107 are owned and 67 are leased. The United States hosts the largest number of facilities at 109. The Global Industrial Packaging segment operates 92 locations, while the Paper Packaging & Services segment has 82. Additionally, the company owns approximately 175,000 acres of timber properties in the southeastern U.S. Principal Operating Locations by Segment (as of Oct 31, 2022) | Segment | Locations | | :--- | :--- | | Global Industrial Packaging | 92 | | Paper Packaging & Services | 82 | | Total | 174 | Locations by Ownership (as of Oct 31, 2022) | Classification | Count | | :--- | :--- | | Owned | 107 | | Leased | 67 | | Total | 174 | - The company owns approximately 175,000 acres of timber properties in the southeastern United States[126] Legal Proceedings The company reports no material pending legal proceedings. However, its U.S. reconditioning joint venture, Container Life Cycle Management LLC (CLCM), has reached a proposed consent decree with the U.S. EPA and the Wisconsin DNR to resolve alleged environmental violations at its Wisconsin facilities. The proposed decree, which is pending court approval, requires CLCM to modify operational practices and pay a civil penalty of approximately $1.6 million - The company is not a party to any pending legal proceedings that are material to its business or financial condition[127] - The company's joint venture, CLCM, has a proposed consent decree with the EPA and WDNR to resolve alleged environmental violations, which includes modifying operational practices and paying civil penalties of approximately $1.6 million, pending court approval[130][422] Market for Common Equity and Shareholder Matters Greif's Class A and B common stock trade on the NYSE, paying quarterly dividends, and the company authorized a $150 million share repurchase program in June 2022 Market and Dividend Information Greif's Class A (GEF) and Class B (GEF.B) Common Stock are traded on the New York Stock Exchange. The company pays quarterly dividends, which in fiscal 2022 amounted to $1.88 per Class A share and $2.81 per Class B share, an increase from the prior year - Class A (GEF) and Class B (GEF.B) Common Stock are listed on the New York Stock Exchange[132] Annual Dividends Per Share | Year | Class A | Class B | | :--- | :--- | :--- | | 2022 | $1.88 | $2.81 | | 2021 | $1.78 | $2.66 | Share Repurchase Program In June 2022, the Board authorized a $150.0 million share repurchase program. This program is split into a $75.0 million accelerated share repurchase (ASR) agreement for Class A stock and a $75.0 million open market repurchase (OSR) program for either class of stock. Under the ASR, an initial 1,021,451 Class A shares were delivered. As of October 31, 2022, 170,980 shares of Class B stock had been repurchased under the OSR program for approximately $11.1 million - In June 2022, a $150.0 million share repurchase program was authorized, split between a $75.0 million Accelerated Share Repurchase (ASR) for Class A stock and a $75.0 million Open Market Share Repurchase (OSR) program[134][220][431] - Under the ASR, an initial delivery of 1,021,451 shares of Class A Common Stock was received on June 24, 2022[135][221][432] - As of October 31, 2022, 170,980 shares of Class B Common Stock had been repurchased under the OSR program[138][223][433] Management's Discussion and Analysis (MD&A) The MD&A details fiscal 2022 financial performance, segment results, liquidity, and critical accounting policies, highlighting increased sales and a major debt refinancing Results of Operations (2022 vs. 2021) For fiscal 2022, net sales increased by 14.3% to $6.35 billion, primarily due to higher average selling prices across all segments, which offset lower volumes. Gross profit rose to $1.29 billion. Operating profit increased to $621.2 million from $585.2 million in 2021. However, net income decreased to $394.0 million from $413.2 million, largely due to higher income tax expense and debt extinguishment charges in 2022. Adjusted EBITDA grew significantly to $917.5 million from $764.2 million in the prior year Consolidated Financial Performance (in millions) | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $6,349.5 | $5,556.1 | +$793.4 | +14.3% | | Gross Profit | $1,285.4 | $1,093.0 | +$192.4 | +17.6% | | Operating Profit | $621.2 | $585.2 | +$36.0 | +6.2% | | Net Income | $394.0 | $413.2 | -$19.2 | -4.6% | | Adjusted EBITDA | $917.5 | $764.2 | +$153.3 | +20.1% | - The increase in net sales was primarily driven by higher average selling prices, which were partially offset by lower volumes, negative foreign currency translation, and the divestiture of the Flexibles Product & Services business[153] - Income tax expense increased by $67.5 million in 2022, primarily due to higher pre-tax earnings and limited tax benefits on losses from business disposals[181] Segment Review In fiscal 2022, the Paper Packaging & Services segment was the primary driver of profit growth, with operating profit more than doubling to $298.5 million due to higher selling prices. The Global Industrial Packaging segment's operating profit decreased to $313.7 million, mainly due to a $62.4 million impairment charge from a divestiture, despite higher sales. The Land Management segment's operating profit fell to $9.0 million from $104.0 million in 2021, as the prior year included a significant $95.7 million gain from a timberland sale Segment Operating Profit (in millions) | Reportable Segment | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Global Industrial Packaging | $313.7 | $350.2 | $225.4 | | Paper Packaging & Services | $298.5 | $131.0 | $71.0 | | Land Management | $9.0 | $104.0 | $8.5 | - Global Industrial Packaging's operating profit decreased by $36.5 million, primarily due to a $62.4 million non-cash impairment charge related to the FPS Divestiture[164] - Paper Packaging & Services' operating profit increased by $167.5 million, driven by higher average sale prices for containerboard and boxboard, which offset higher input costs[167] - Land Management's operating profit decreased significantly as 2021 results included a $95.7 million gain from the sale of approximately 69,200 acres of timberlands[174] Liquidity and Capital Resources The company's primary liquidity sources are cash from operations and credit facilities. In fiscal 2022, net cash from operating activities was $657.5 million. A major financing event was the March 2022 refinancing, where the company entered a new $2.415 billion credit agreement ($800M revolver, $1.615B term loans) to redeem its 2027 Senior Notes and replace its previous credit facility. Total long-term debt decreased from $2.19 billion in 2021 to $1.92 billion at the end of fiscal 2022 Cash Flow Summary (in millions) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | 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) | - On March 1, 2022, the company entered into a new senior secured credit agreement, providing for an $800.0 million revolving credit facility and $1,615.0 million in term loans[197][198][342] - The company used borrowings from the new credit agreement to redeem all of its outstanding 6.50% Senior Notes due 2027 for $500.0 million plus a $16.3 million call premium[200][205][347] - Total long-term debt, including current portion, decreased to $1,918.7 million as of October 31, 2022, from $2,185.4 million as of October 31, 2021[196][341] Critical Accounting Policies The company identifies the valuation of goodwill as one of its most critical accounting policies due to the significant judgments and estimates involved. Goodwill is tested for impairment annually on August 1st or more frequently if impairment indicators arise. The fair value of each reporting unit is determined using a combination of a discounted cash flow analysis (income approach) and a market multiple approach. For the 2022 annual test, the fair value of all reporting units with goodwill exceeded their carrying values by at least 29%, resulting in no impairment charge - The valuation of goodwill is a critical accounting policy, requiring impairment testing annually on August 1 or when impairment indicators are present[226] - Fair value for goodwill testing is estimated using a discounted cash flow analysis and a market multiple approach, which rely on sensitive management assumptions like discount rates and growth rates[229] - In the 2022 annual test, no goodwill impairment was recorded as the fair value of each reporting unit exceeded its carrying value by at least 29%[232] Market Risk Disclosures Greif manages market risks from interest rates, foreign currency, and commodity prices using derivative instruments like interest rate swaps, cross-currency swaps, and forward contracts Interest Rate Risk The company manages interest rate risk on its variable-rate debt through interest rate swap agreements. As of October 31, 2022, it had swaps with a total notional amount of $1,150.0 million, effectively converting a portion of its floating-rate debt to a weighted average fixed rate of 2.50% plus a spread. These swaps mature between 2024 and 2029 - As of October 31, 2022, the company had interest rate swaps with a total notional amount of $1,150.0 million to manage interest rate variability on its debt[235][236][357] Currency and Commodity Risk Due to its international operations, Greif is subject to currency risk. It uses foreign currency forward contracts and cross-currency swaps to mitigate this exposure. As of October 31, 2022, it had forward contracts with a notional value of $132.1 million and cross-currency swaps synthetically converting $334.4 million of USD debt to Euro-denominated debt. The company is also exposed to commodity price risk for materials like steel and resin but does not currently engage in material hedging for these commodities - The company uses cross-currency interest rate swaps to synthetically swap $334.4 million of fixed-rate USD debt to Euro-denominated fixed-rate debt[238][364] - As of October 31, 2022, the company had outstanding foreign currency forward contracts with a notional amount of $132.1 million to hedge foreign currency transactions[214][241][361] - The company is exposed to commodity price risk for materials such as steel, resin, and containerboard but does not currently engage in material hedging of these commodities[243] Financial Statements and Supplementary Data This section presents Greif's consolidated financial statements for fiscal 2022, including detailed notes on goodwill, debt, segment performance, and the auditor's unqualified opinion Consolidated Financial Statements For the fiscal year ended October 31, 2022, Greif reported net sales of $6.35 billion and net income attributable to the company of $376.7 million, or $6.30 per diluted Class A share. Total assets stood at $5.47 billion, with total liabilities of $3.66 billion and total shareholders' equity of $1.79 billion. Net cash provided by operating activities was strong at $657.5 million FY 2022 Key Financial Data (Consolidated) | Metric | Amount (in millions) | | :--- | :--- | | Income Statement: | | | Net Sales | $6,349.5 | | Operating Profit | $621.2 | | Net Income Attributable to Greif, Inc. | $376.7 | | Balance Sheet (at year-end): | | | Total Assets | $5,469.9 | | Total Liabilities | $3,659.8 | | Total Shareholders' Equity | $1,794.3 | | Cash Flow Statement: | | | Net Cash from Operating Activities | $657.5 | | Net Cash from Investing Activities | $(28.2) | | Net Cash from Financing Activities | $(531.0) | Notes to Consolidated Financial Statements The notes provide detailed explanations of the company's financial results and policies. Key disclosures include the acquisition of Lee Container subsequent to year-end, the divestiture of the Flexible Packaging joint venture, a major debt refinancing in March 2022, details on restructuring activities, and the annual goodwill impairment test which resulted in no impairment. The notes also break down performance by business segment and geography Note 2: Goodwill and Other Intangible Assets As of October 31, 2022, the company's goodwill balance was $1.46 billion, a decrease from $1.52 billion in 2021, primarily due to currency translation. The Paper Packaging & Services segment held the largest portion of goodwill at $767.9 million. The annual impairment test conducted on August 1, 2022, concluded that the fair value of all reporting units exceeded their carrying value, resulting in no impairment charge Goodwill Balance by Reportable Segment (in millions) | Segment | Oct 31, 2022 | Oct 31, 2021 | | :--- | :--- | :--- | | Global Industrial Packaging | $696.6 | $747.3 | | Paper Packaging & Services | $767.9 | $768.1 | | Total | $1,464.5 | $1,515.4 | - The annual goodwill impairment test as of August 1, 2022, resulted in no impairment[321] Note 3: Restructuring Charges In fiscal 2022, Greif recorded $13.0 million in restructuring charges, a decrease from $23.1 million in 2021. These charges were related to optimizing operations in the Paper Packaging segment and rationalizing assets in the Global Industrial Packaging segment. The activities resulted in the closure or divestiture of seventeen plants and the severance of 132 employees Restructuring Charges (in millions) | Year | Employee Separation Costs | Other Costs | Total | | :--- | :--- | :--- | :--- | | 2022 | $6.3 | $6.7 | $13.0 | | 2021 | $14.9 | $8.2 | $23.1 | - Restructuring activities in 2022 involved the closure or divestiture of seventeen plants and the severance of 132 employees[326] Note 5: Long-Term Debt As of October 31, 2022, total long-term debt was $1.92 billion. A significant event in 2022 was the refinancing on March 1, where the company entered a new credit agreement with $1.615 billion in term loans and an $800 million revolving credit facility. Proceeds were used to redeem the $500 million 6.5% Senior Notes due 2027 and repay the previous credit facility. The company also utilizes a $300 million U.S. and a €100 million European receivables financing facility Long-Term Debt Summary (in millions) | Debt Instrument | Oct 31, 2022 | Oct 31, 2021 | | :--- | :--- | :--- | | 2022 Credit Agreement - Term Loans | $1,565.0 | $— | | 2019 Credit Agreement - Term Loans | $— | $1,247.3 | | Senior Notes due 2027 | $— | $495.9 | | Accounts receivable credit facilities | $311.4 | $391.1 | | Revolving Credit Facility | $41.9 | $50.5 | | Total Debt | $1,918.7 | $2,185.4 | - On March 1, 2022, the company entered into a new credit agreement and used the proceeds to redeem its Senior Notes due 2027, incurring debt extinguishment charges[342][344][347] Note 13: Business Segment Information The company's operations are detailed across its three reportable segments. For fiscal 2022, Global Industrial Packaging generated $3.65 billion in sales, Paper Packaging & Services generated $2.68 billion, and Land Management generated $22.0 million. The United States was the largest geographic market, accounting for $3.94 billion (62%) of total net sales Net Sales by Segment (FY 2022, in millions) | Segment | Net Sales | | :--- | :--- | | Global Industrial Packaging | $3,652.4 | | Paper Packaging & Services | $2,675.1 | | Land Management | $22.0 | | Total | $6,349.5 | Operating Profit by Segment (FY 2022, in millions) | Segment | Operating Profit | | :--- | :--- | | Global Industrial Packaging | $313.7 | | Paper Packaging & Services | $298.5 | | Land Management | $9.0 | | Total | $621.2 | Note 16: Subsequent Events Subsequent to the fiscal year-end, on December 15, 2022, Greif completed its acquisition of Lee Container Corporation, Inc. The all-cash transaction was for a purchase price of $300.0 million and was funded through the company's existing credit facility. The initial purchase price allocation is expected to be completed in the first fiscal quarter of 2023 - On December 15, 2022, the company completed the acquisition of Lee Container Corporation, Inc. for a purchase price of $300.0 million in cash[453][454] Auditor's Report The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the company's consolidated financial statements for the year ended October 31, 2022, stating they are presented fairly in all material respects. The auditor also identified the valuation of goodwill for the Paper Packaging & Services and Global Industrial Packaging Asia Pacific reporting units as a critical audit matter, due to the significant management estimates and assumptions involved - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements as of October 31, 2022[456] - The valuation of goodwill for the Paper Packaging & Services (PPS) and Global Industrial Packaging Asia Pacific (GIP APAC) reporting units was identified as a Critical Audit Matter due to the significant estimates involved[461][463] Controls and Procedures Management affirmed the effectiveness of internal control over financial reporting as of October 31, 2022, a conclusion independently audited and confirmed by Deloitte & Touche LLP Management's Report on Internal Control Management is responsible for establishing and maintaining adequate internal control over financial reporting. Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of October 31, 2022. The company's independent auditor, Deloitte & Touche LLP, also audited and issued an unqualified opinion on the effectiveness of the internal controls - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[468] - Based on an assessment using the criteria in "Internal Control - Integrated Framework (2013)" issued by COSO, management concluded that the company's internal control over financial reporting was effective as of October 31, 2022[471] - The independent registered public accounting firm, Deloitte & Touche LLP, audited the internal control over financial reporting and issued an unqualified opinion on its effectiveness as of October 31, 2022[472][473] Corporate Governance and Other Information This section outlines information on Greif's directors, executive officers, corporate governance practices, and the adoption of a code of ethics for financial officers Directors, Officers, and Corporate Governance Information regarding the company's directors, executive officers, audit committee, and code of ethics is provided. Most detailed information, including biographies, compensation, and security ownership, is incorporated by reference from the company's Definitive Proxy Statement for the 2023 Annual Meeting of Stockholders. The Board has adopted a code of ethics for its principal financial officers, which is available on the company's website - Information regarding directors, executive officers, and executive compensation is incorporated by reference from the 2023 Proxy Statement[481][486] - The Board of Directors has determined that Mr. Robert M. Patterson is an "Audit Committee Financial Expert"[482] - The company has adopted a code of ethics for its principal executive and financial officers, which is available on its website[485]