Greif, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended July 31, 2019. Greif produces industrial packaging, paper packaging and flexible products, and manages timber properties. Results include Caraustar from February 11, 2019, and Tholu from June 11, 2019.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,252.6m | $1,012.1m | $3,362.9m | $2,886.1m |
| Gross profit | $279.4m | $217.1m | $700.9m | $584.1m |
| Gross margin | 22.3% | 21.5% | 20.8% | 20.2% |
| Operating profit | $125.6m | $114.0m | $283.4m | $267.2m |
| Net income attributable to Greif | $62.7m | $67.7m | $106.0m | $169.3m |
| Adjusted EBITDA | $203.8m | $146.3m | $472.1m | $361.7m |
| Interest expense, net | $34.5m | $12.1m | $80.1m | $38.4m |
Class A and Class B diluted EPS were $1.06 and $1.59, respectively, in Q3, versus $1.15 and $1.72 a year earlier. Nine-month EPS was $1.80 and $2.68, versus $2.88 and $4.31.
- Cash flow: Nine-month operating cash flow was $194.1m, up from $55.8m. Investing used $1,947.9m, including $1,857.9m for acquisitions; financing provided $1,735.4m. Cash declined $18.4m to $75.8m. Capital expenditures on property, plant and equipment were $103.8m; operating cash flow less that spending was approximately $90.3m.
- Liquidity and debt: At July 31, cash was $75.8m, current assets $1,341.8m and current liabilities $837.0m. Debt before deferred financing costs was $2,883.8m, versus $907.6m at October 31, 2018; long-term debt, net, was $2,786.0m. The increase largely reflects financing for Caraustar.
- Dividends: Q3 declared dividends were $0.44 per Class A share and $0.66 per Class B share.
Material changes and management commentary
- Sales growth was primarily driven by Caraustar. Its Q3 sales contribution was $320.3m; nine-month contribution was $613.7m. Tholu’s purchase price, net of cash acquired, was $52.2m.
- Paper Packaging benefited from Caraustar, while Rigid Industrial Packaging faced lower volumes in some regions and foreign-exchange headwinds. Q3 Rigid segment sales fell to $642.1m from $687.6m; Paper Packaging sales rose to $530.0m from $236.0m.
- Despite higher sales and Adjusted EBITDA, attributable net income declined. Higher interest expense reflected acquisition-related debt; nine-month results also included $22.0m of debt-extinguishment charges and higher income-tax expense. The prior-year period included a significant Tax Reform Act benefit.
- Management described global macroeconomic conditions as soft and expected weak industrial demand to continue through the rest of 2019. It anticipated soft containerboard demand and continued weakness in Western and Central Europe, China and the U.S. in rigid packaging.
- Management expected 2019 capital expenditures, excluding timber-property investments, of approximately $150m–$170m, and said available operating cash flow and borrowing facilities were expected to cover anticipated needs for at least 12 months.
Risks, contingencies and unusual items
- Restructuring charges were $20.3m year to date, with $18.1m of expected remaining costs under approved or developing plans. The programs include Caraustar integration and rationalization of underperforming facilities.
- The 2019 credit agreement includes leverage and interest-coverage covenants; Greif reported compliance at July 31. The agreement’s maximum leverage ratio is 4.75:1, stepping down over time, and minimum interest coverage is 3.00:1.
- The $150m U.S. receivables facility matured September 26, 2019; Greif reported the balance as long-term debt based on its intent and ability to refinance. The European receivables financing facility, with $106.4m outstanding, matures in April 2020.
- Greif recorded an $11.2m reserve for the Lower Passaic River Superfund matter acquired with Caraustar. The company noted that a material reserve adjustment or future charge is possible as uncertainties are resolved. Separate Milwaukee-area environmental investigations and a related class action had no estimable loss range disclosed.
- Other key exposures include acquisition integration and provisional purchase-price allocations, pension funding, foreign-exchange and raw-material volatility, customer demand, and potential impairment of substantial goodwill and intangible assets. Caraustar-related goodwill was $769.4m; purchase accounting remained subject to measurement-period adjustments.
Investor verification points
- Assess the acquired businesses’ ongoing contribution to sales, margins and cash generation separately from acquisition-related costs and financing.
- Review debt repayment, interest costs, covenant headroom and refinancing of receivables facilities, including the U.S. facility due in September 2019.
- Track the soft-demand trends and volume and foreign-exchange effects in Rigid and Paper Packaging, alongside integration and restructuring progress.
- Monitor the final Caraustar and Tholu purchase-price allocations and the potential range and timing of environmental liabilities, particularly the Lower Passaic River matter.
- Compare actual capital spending and cash conversion with management’s $150m–$170m 2019 capital-expenditure expectation and its liquidity outlook.