Greif, Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended January 31, 2019. Greif manufactures industrial, paper and flexible packaging and manages timberland. Unless noted otherwise, amounts are in millions of U.S. dollars.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $897.0 | $905.7 |
| Gross profit / margin | $172.8 / 19.3% | $171.7 / 19.0% |
| Operating profit | $67.2 | $65.5 |
| Net income | $35.8 | $60.1 |
| Net income attributable to Greif | $29.7 | $56.5 |
| Class A / Class B diluted EPS | $0.51 / $0.75 | $0.96 / $1.44 |
| Adjusted EBITDA (non-GAAP) | $106.3 | $92.1 |
| Net cash used in operating activities | $9.6 | $53.7 |
| Capital expenditures, excluding timber properties | $26.0 | $28.0 |
Gross margin improved 0.3 percentage points. SG&A declined to $98.1 from $103.6, while restructuring charges were $3.7 versus $4.1. Interest expense fell to $11.7 from $13.3. The net-income comparison was affected notably by taxes: Q1 2019 had $20.0 of tax expense, whereas Q1 2018 had a $15.6 tax benefit, including substantial Tax Reform Act effects.
Segments and material changes
- Rigid Industrial Packaging & Services: Sales decreased 2.8% to $597.9; operating profit fell to $23.3 from $31.2. Management cited regional softness and currency effects, partly offset by pricing. Adjusted EBITDA was $48.7 versus $48.0.
- Paper Packaging & Services: Sales rose 6.6% to $217.3; operating profit increased to $35.3 from $27.9. Higher containerboard prices, lower recovered-paper input costs and improved manufacturing efficiencies supported results. Adjusted EBITDA increased to $46.5 from $36.0.
- Flexible Products & Services: Sales decreased to $75.1 from $80.0, primarily due to softness in parts of Europe and currency effects. Improved efficiencies lifted operating profit to $6.0 from $3.2.
- Land Management: Sales were $6.7 versus $6.5; operating profit declined to $2.6 from $3.2.
Consolidated sales decreased 1.0%, which management attributed mainly to volume declines and softness in certain regions, partly offset by strategic pricing. Adjusted EBITDA increased $14.2, reflecting improved gross profit, SG&A efficiencies and lower other expenses. In Q1 2019, Greif recorded a $2.1 asset impairment and a $0.9 net gain on asset disposals; the corresponding prior-period disposal gain was $4.6.
Liquidity, debt and cash flow
- At January 31, cash was $84.5, current assets $1,110.1 and current liabilities $606.4.
- Reported debt was $1,083.5, including $18.8 current debt; long-term debt, net of financing costs, was $1,060.5. Debt increased from $907.6 at October 31, 2018. The filing cites financing and changes in receivables-program accounting in preparation for the Caraustar acquisition.
- Operating cash use improved to $9.6 from $53.7, but remained negative. Investing cash use was $24.4; financing provided $23.0. Cash declined $9.7 to $84.5.
- Greif stated that expected operating cash flow, credit facilities and receivables facilities should fund anticipated needs for at least 12 months. It expected fiscal 2019 capital expenditures, excluding timber-property purchases, of approximately $170–$190.
- Four forward interest-rate swaps with total notional value of $866.7 were entered into for subsequent borrowing, at a weighted-average fixed rate of 2.50% (effective March 11, 2019).
Outlook, acquisition and risks
Management expected global macroeconomic conditions to remain uneven in 2019. It anticipated continued Paper Packaging growth, but at a slower year-over-year pace; positive North American rigid-packaging demand; and continued softness in Western and Central Europe, parts of South America and China, and the U.S. Gulf region. Currency volatility was expected to weigh on rigid packaging, while steel, resin and transportation costs were expected to be stable to slightly higher.
Greif completed its $1.8 billion cash acquisition of Caraustar on February 11, 2019, after the quarter ended; its results are therefore excluded from Q1 and are to be included from the closing date. To fund the transaction and related uses, Greif issued $500.0 of 6.50% senior notes due 2027 and entered into a new credit agreement providing $800.0 of revolving facilities and term loans of $1,275.0 and $400.0. Greif also intended to redeem its $250.0 of 7.75% senior notes due August 2019. Purchase accounting was not complete when the filing was prepared.
Key exposures include economic and demand conditions, raw-material and energy costs, foreign exchange, acquisition integration and financing, restructuring execution, joint-venture put rights, pensions, environmental regulation and litigation. Greif disclosed environmental investigations involving Milwaukee-area reconditioning facilities and an associated odor-related class action; it could not predict outcomes or estimate possible losses. Recorded environmental reserves were $6.3. Management reported no material changes to previously disclosed risk factors, and stated that disclosure controls were effective.
Investor verification priorities
- Verify Caraustar’s final purchase-price allocation, acquired results and the effect of acquisition financing on leverage, interest expense and covenant headroom.
- Assess the sustainability of operating cash flow and working-capital needs, including the accounting and refinancing of receivables facilities.
- Track segment demand, pricing, margins and cost trends against management’s 2019 commentary and capital-spending expectation.
- Monitor tax expense and remaining Tax Reform Act adjustments, as well as any tax-audit developments.
- Review developments in the Milwaukee environmental matters, related litigation and other contingencies; the filing does not provide a clear estimate of potential losses for those proceedings.