Greif, Inc. — Fiscal 2020 Second-Quarter 10-Q
Business context and reporting period. The quarter ended April 30, 2020; the six-month period began November 1, 2019. Greif manufactures industrial and paper packaging, flexible products and related services, and manages timber properties. The filing was signed June 4, 2020. Comparisons are with the periods ended April 30, 2019.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,158.3 million | $1,213.3 million | $2,270.7 million | $2,110.3 million |
| Gross profit / margin | $240.7 million / 20.8% | $248.7 million / 20.5% | $463.3 million / 20.4% | $421.5 million / 20.0% |
| Operating profit | $72.0 million | $90.6 million | $151.2 million | $157.8 million |
| Net income | $15.8 million | $21.1 million | $51.9 million | $56.9 million |
| Net income attributable to Greif | $11.4 million | $13.6 million | $43.7 million | $43.3 million |
| Adjusted EBITDA (non-GAAP) | $181.3 million | $162.0 million | $328.7 million | $268.3 million |
| Operating cash flow | Not separately reported | Not separately reported | $119.3 million | $52.6 million |
- Q2 sales declined $55.0 million, principally from lower average selling prices, the CPG divestiture and currency translation. Adjusted EBITDA increased $19.3 million, attributed primarily to favorable timing of contractual price adjustments, lower SG&A and 11 additional days of Caraustar ownership versus the prior-year quarter. This non-GAAP measure includes adjustments, notably the $38.4 million CPG business disposal loss.
- For the six months, sales rose $160.4 million, chiefly from Caraustar; Greif-attributable net income was broadly flat. Adjusted EBITDA increased $60.4 million, reflecting Caraustar, favorable pass-through timing and reduced SG&A, partly offset by lower volumes.
- Q2 diluted EPS was $0.19 for Class A and $0.29 for Class B, versus $0.23 and $0.34, respectively. Six-month diluted EPS was $0.74 and $1.10, versus $0.74 and $1.09.
- Q2 interest expense, net, was $29.3 million, down from $33.9 million; six-month expense was $60.0 million, up from $45.6 million, primarily due to debt incurred for Caraustar. Q2 income tax expense rose to $26.5 million from $11.5 million, including unfavorable discrete items and nondeductible goodwill related to the CPG sale.
- Six-month operating cash flow was $119.3 million. Capital expenditures were $65.4 million, implying approximately $53.9 million of operating cash flow after those expenditures. Cash ended at $72.4 million, down from $77.3 million at October 31, 2019.
Financial position and material changes
- At April 30, total assets were $5.529 billion and shareholders’ equity was $1.135 billion. Current assets were $1.248 billion and current liabilities $840.5 million.
- Reported long-term debt, net, was $2.595 billion; total debt before deferred financing costs was $2.691 billion, including $83.8 million current. Debt declined from $2.659 billion net at October 31, 2019. The company reported covenant compliance. Its credit agreement requires leverage no greater than 4.75:1, stepping down beginning July 2020, and interest coverage of at least 3.00:1.
- Greif completed the CPG business divestiture on April 1 for $85.0 million before closing adjustments; current net proceeds were $81.6 million. The transaction generated a $38.4 million loss, including $35.6 million of allocated goodwill. The company also recorded $7.7 million of restructuring charges year to date and expected another $18.6 million on open or planned restructuring actions.
- The company adopted lease accounting standard ASC 842 on November 1, 2019. At April 30, operating lease assets were $321.0 million and total lease liabilities were $328.7 million.
- Accumulated other comprehensive loss worsened to $483.4 million, reflecting foreign currency translation losses of $55.4 million and derivative losses of $22.9 million, partly offset by a $23.0 million pension adjustment.
Outlook, commentary and risks
- Greif said operations were designated essential and continued without disruption, but customer and end-market shutdowns weakened demand. Management said results through April 30 had not been significantly affected by COVID-19, while warning the pandemic could materially affect future results, cash flows and financial condition.
- Management anticipated softer industrial demand for the rest of fiscal 2020, more severe in Q3 than Q4. Increased customer stocking in Q2 was expected to reduce subsequent demand until restocking; recovery in affected markets was expected to be gradual and volumes below 2019 levels.
- Management expected steel and resin prices to remain relatively stable, while higher U.S. old corrugated container costs could intensify the Paper Packaging segment’s price-cost squeeze. Fiscal 2020 capital expenditure expectations were reduced to $141–$161 million, excluding timber-property purchases. The filing provides no earnings or revenue guidance.
- Segment results diverged: Rigid Industrial Packaging operating profit rose to $70.5 million from $47.0 million; Paper Packaging recorded an operating loss of $5.5 million versus $30.2 million profit, largely due to the CPG disposal loss; Flexible Products operating profit fell to $4.6 million from $11.2 million.
- Environmental reserves totaled $18.6 million, including $11.2 million for the Lower Passaic River Superfund matter. Greif noted potential additional charges could be material to future earnings. Milwaukee-area environmental investigations and a related odor class action remained unresolved; the company could not estimate a range of possible losses.
- Key risks include the duration and severity of COVID-19, customer demand and raw-material availability or cost, foreign exchange, substantial indebtedness, integration and synergy execution, and environmental and litigation exposures.
Investor verification priorities
- Separate recurring operating performance from the CPG disposal loss and other adjustments underlying reported and adjusted results.
- Track COVID-19 demand trends, customer restocking, and the forecast price-cost impact of old corrugated containers.
- Review debt maturities and refinancing plans for receivables facilities, including the U.S. facility maturing September 2020 and the European facility maturing April 2021, alongside covenant headroom.
- Assess whether planned cost reductions, Caraustar synergies and restructuring actions are achieved, including the announced Mobile, Alabama mill closure.
- Monitor potential environmental and litigation costs, pension funding needs, and the effect of currency and interest-rate movements.