Greif, Inc. — Q1 Fiscal 2020 Form 10-Q
Business context and period: This filing covers the three months ended January 31, 2020, Greif’s first fiscal quarter. Greif manufactures industrial and paper packaging, flexible products, and manages timberland. Results include Caraustar, acquired in February 2019, and Tholu, acquired in June 2019; the prior-year quarter did not include Caraustar.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,112.4 million | $897.0 million |
| Gross profit / margin | $222.6 million / 20.0% | $172.8 million / 19.3% |
| Operating profit | $79.2 million | $67.2 million |
| Net income | $36.1 million | $35.8 million |
| Net income attributable to Greif | $32.3 million | $29.7 million |
| Adjusted EBITDA | $147.4 million | $106.3 million |
| Net cash from operating activities | $19.5 million | $(9.6) million |
| Cash and cash equivalents, January 31 | $90.8 million | $84.5 million |
| Debt, before deferred financing costs | $2,815.9 million | $2,756.3 million at October 31, 2019 |
Interest expense rose to $30.7 million from $11.7 million, primarily due to debt incurred for the Caraustar acquisition. The company reported $37.6 million of net cash used in investing activities, including $37.5 million of property, plant and equipment purchases and $1.6 million of timber-property purchases, partly offset by proceeds. Capital expenditures excluding timber-property purchases were $24.7 million.
Material changes and segment performance
- Sales increased $215.4 million, primarily from Caraustar. Adjusted EBITDA rose $41.1 million, also primarily from Caraustar, partly offset by lower volumes in certain regions.
- Rigid Industrial Packaging & Services sales declined to $568.7 million from $597.9 million, while operating profit rose to $42.8 million from $23.3 million. Management cited favorable timing of raw-material price pass-throughs and lower SG&A.
- Paper Packaging & Services sales increased to $473.7 million from $217.3 million, largely reflecting Caraustar. Operating profit declined to $32.5 million from $35.3 million; reported gross margin declined to 21.1% from 24.8%.
- Flexible Products & Services sales declined to $63.0 million from $75.1 million, principally due to lower Western Europe volumes; operating profit fell to $2.0 million from $6.0 million.
- Greif adopted the new lease standard on November 1, 2019. Adoption added $301.2 million of operating lease right-of-use assets and $305.8 million of lease liabilities; comparative periods were not restated.
Liquidity, outlook, and risks
At January 31, 2020, Greif had $90.8 million of cash and $2,815.9 million of debt before deferred financing costs. It reported compliance with its credit-agreement covenants. The secured credit agreement sets a maximum leverage ratio of 4.75:1, stepping down beginning July 2020, and a minimum interest-coverage ratio of 3.00:1. Management said operating cash flows and available borrowing facilities were expected to meet anticipated needs for at least 12 months.
Management anticipated continued demand softness in industrial manufacturing, particularly in North America and Asia-Pacific, and relatively stable raw-material prices through the remainder of 2020. It cited near-term macroeconomic volatility and uncertainty about the potential economic effects of coronavirus. Planned 2020 capital expenditures, excluding potential timber-property purchases, were $160 million to $180 million. No specific earnings guidance was provided in the filing text.
On February 26, 2020, Greif agreed to sell its Consumer Packaging Group business for $85 million in cash, expecting to complete the transaction by March 31 and use the proceeds for debt repayment. Other matters to monitor include environmental investigations and litigation involving Milwaukee-area reconditioning facilities, and the acquired Newark subsidiary’s Lower Passaic River environmental liability. Greif had accrued $11.2 million for the Diamond Alkali Superfund Site; it said additional future charges could be material.
Important facts for investors to verify
- How much of the reported sales and Adjusted EBITDA growth reflects Caraustar, and how much reflects underlying performance; Adjusted EBITDA is a non-GAAP measure.
- Whether demand softness, particularly in industrial markets and Western Europe, persists and affects volumes and margins.
- Debt reduction progress, refinancing of receivables facilities, covenant headroom, and the effect of higher interest expense.
- Completion and final proceeds from the Consumer Packaging Group sale, and the intended debt repayment.
- Potential costs or developments from environmental matters, litigation, pension obligations, and coronavirus-related disruption.