Greif, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended October 31, 2019. Greif manufactures industrial packaging, paper packaging and flexible products, and manages timberland. The fiscal fourth quarter ended October 31, 2019.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $4,595.0 million | $3,873.8 million |
| Gross profit / margin | $959.9 million / 20.9% | $788.9 million / 20.4% |
| Operating profit | $399.1 million | $370.5 million |
| Net income | $194.2 million | $229.5 million |
| Net income attributable to Greif | $171.0 million | $209.4 million |
| Adjusted EBITDA | $658.9 million | $503.2 million |
| Operating cash flow | $389.5 million | $253.0 million |
| Capital expenditures, excluding timber purchases | $156.9 million | $139.1 million |
Sales and Adjusted EBITDA rose primarily because of the Caraustar acquisition, completed February 11, 2019; Caraustar contributed $936.3 million of FY2019 sales. The acquisition-related increase in depreciation, interest and transaction costs contributed to lower reported net income despite higher sales and operating profit. Net income attributable to Greif fell 18% year over year. The gross margin improved, while SG&A increased to $507.4 million from $397.2 million.
Fourth quarter: Sales were $1,232.1 million versus $987.7 million in Q4 FY2018; gross profit was $259.0 million versus $204.8 million; and net income attributable to Greif was $65.0 million versus $40.1 million. Class A diluted EPS was $1.09 versus $0.67; Class B was $1.65 versus $1.03.
Segments and material changes
- Paper Packaging & Services: Sales increased to $1,780.0 million from $898.5 million, reflecting Caraustar. Adjusted EBITDA rose to $348.3 million from $192.3 million. Lower published containerboard prices and lower volumes partly offset acquisition contributions.
- Rigid Industrial Packaging & Services: Sales declined to $2,490.6 million from $2,623.6 million amid lower regional volumes and currency effects, partly offset by pricing. Adjusted EBITDA decreased to $269.9 million from $273.4 million.
- Flexible Products & Services: Sales decreased to $297.5 million from $324.2 million, while Adjusted EBITDA increased to $28.6 million from $25.6 million, aided by lower SG&A and manufacturing costs.
- Land Management: Sales were $26.9 million versus $27.5 million; operating profit was $9.9 million versus $9.6 million. Greif owned approximately 251,000 acres of timberland.
Debt, liquidity and capital allocation
Total debt, including current maturities, rose to $2,756.3 million at year-end from $907.6 million, mainly to finance Caraustar and refinance existing obligations. Cash was $77.3 million, compared with $94.2 million. Net interest expense increased to $112.5 million from $51.0 million, and Greif recorded $22.0 million of debt-extinguishment charges. The company issued $500 million of 6.50% senior notes due 2027 and entered into a new credit agreement, including an $800 million revolving facility. Greif reported compliance with its debt covenants at year-end.
Management said operating cash flow, credit facilities and receivables financing should fund anticipated needs for at least 12 months. FY2020 capital expenditures, excluding timber purchases, were estimated at $160–$180 million. FY2019 dividends were $1.76 per Class A share and $2.63 per Class B share; no shares were repurchased in 2018 or 2019.
Outlook, risks and unusual items
- Management expected softness in industrial manufacturing demand, particularly in North America and Western Europe, to continue in 2020; it expected key raw-material prices to remain relatively stable. No specific FY2020 earnings guidance is provided in the filing text.
- FY2019 restructuring charges were $26.1 million; management estimated approximately $31.6 million of annual run-rate savings from the related activities. Twelve plants were closed and 430 employees were severed during the year. A further $24.7 million of costs remained to be incurred under open or planned restructuring activity.
- Key risks include acquisition integration and realization of Caraustar synergies, higher debt and interest burden, economic and demand cyclicality, raw-material, energy, freight and foreign-exchange fluctuations, and pension funding needs. Management expected approximately $27.7 million of U.S. and non-U.S. pension contributions in 2020, plus $1.3 million of direct post-retirement benefit payments.
- Environmental matters include investigations involving three Milwaukee-area reconditioning facilities and a related private class action; outcomes and possible costs were not estimable. The company recorded an $11.2 million reserve for the Lower Passaic River/Diamond Alkali site following the Caraustar acquisition; total environmental reserves were $18.7 million.
- Greif expected to recognize $275–$325 million of right-of-use assets and lease liabilities upon adopting the lease standard on November 1, 2019, with no expected material effect beyond balance-sheet recognition. The preliminary Caraustar and Tholu purchase-price allocations remained subject to measurement-period adjustments.
- Management and the auditor concluded internal control over financial reporting was effective as of October 31, 2019, but Caraustar and Tholu—about 29% of assets and 21% of revenue—were excluded from the assessment because they were recently acquired.
Important facts for investors to verify
- Whether Caraustar integration, cost savings and cash generation support returns commensurate with the acquisition price and additional debt.
- Debt maturities, variable-rate exposure, covenant headroom and refinancing plans, especially for near-term receivables facilities and the 2021 notes.
- Developments and potential financial exposure from the Milwaukee environmental proceedings, related lawsuit and Lower Passaic River remediation allocation.
- Progress against restructuring savings and capital-spending plans, alongside the expected demand softness and raw-material assumptions for 2020.
- Final acquisition valuations and the treatment of acquired operations in future internal-control assessments.