Business context and reporting period
Greif, Inc. filed this unaudited Form 10-Q for the quarter ended April 30, 2019, the second quarter of its fiscal year, and for the six months ended that date. Greif produces industrial, paper and flexible packaging products and services, and manages timberland. Results include Caraustar Industries from its February 11, 2019 acquisition; comparisons with 2018 therefore do not reflect a full-period contribution from Caraustar.
Financial performance and condition
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales | $1,213.3 million, up 25.3% from $968.3 million | $2,110.3 million, up 12.6% from $1,874.0 million |
| Gross profit / margin | $248.7 million / 20.5%; prior year $195.3 million / 20.2% | $421.5 million / 20.0%; prior year $367.0 million / 19.6% |
| Operating profit | $90.6 million, versus $87.7 million | $157.8 million, versus $153.2 million |
| Net income | $21.1 million, versus $51.9 million | $56.9 million, versus $112.0 million |
| Net income attributable to Greif | $13.6 million, versus $45.1 million; Class A/B diluted EPS $0.23/$0.34, versus $0.77/$1.14 | $43.3 million, versus $101.6 million; Class A/B diluted EPS $0.74/$1.09, versus $1.73/$2.58 |
| Adjusted EBITDA | $162.0 million, versus $123.3 million | $268.3 million, versus $215.4 million |
| Interest expense, net | $33.9 million, versus $13.0 million | $45.6 million, versus $26.3 million |
For the six months, operating cash flow was $52.6 million, compared with $4.5 million a year earlier. Investing cash use was $1,883.1 million, principally reflecting $1,828.4 million of acquisitions, net of cash acquired. Financing provided $1,826.8 million. Cash decreased $4.4 million to $89.8 million.
At April 30, 2019, current assets were $1,353.1 million and current liabilities $809.4 million. Long-term debt, net of financing costs, was $2,851.8 million; the debt table reports $2,950.4 million of debt before those costs, including $259.3 million in accounts-receivable facilities. Short-term borrowings were an additional $6.9 million. Total debt was substantially higher than at October 31, 2018, principally following acquisition financing.
Material changes versus the prior period
- Caraustar added $293.3 million in sales and $7.7 million in net income attributable to Greif for the three and six months since acquisition. The acquisition was funded with new term and revolving borrowings and $500 million of 6.50% senior notes due 2027; Greif also redeemed its $250 million notes due 2019.
- Revenue and Adjusted EBITDA increased, mainly due to Caraustar and, in some businesses, pricing and operational improvements. Greif-attributable earnings declined sharply, reflecting higher interest and debt-extinguishment costs, acquisition and restructuring costs, and the comparison with 2018, which included a substantial Tax Cuts and Jobs Act tax benefit.
- Q2 Rigid Industrial Packaging sales and Adjusted EBITDA declined amid currency effects and weaker regional volumes. Paper Packaging sales increased substantially with Caraustar, while Q2 gross margin fell year over year, partly due to Caraustar’s lower margin. Flexible Products sales declined, although manufacturing efficiencies supported margins.
- Accounts receivable and inventory increased from October 31, 2018, principally due to acquired Caraustar balances. Goodwill rose to $1,522.6 million and other intangible assets to $778.8 million, largely from the acquisition.
Outlook, risks and unusual items
- Greif expects choppy global economic conditions through 2019. Management anticipated soft containerboard demand for the remainder of the fiscal year; continued softness in Western and Central Europe, China and the U.S. Gulf region for rigid industrial packaging; and volatile steel, resin and recovered-paper prices. Transportation costs were expected to remain relatively stable.
- No numerical earnings or sales guidance is provided in the filing. Greif expected 2019 capital expenditures, excluding timber-property purchases and investments, of approximately $160 million to $180 million. Management stated that available operating cash flows and borrowing sources were expected to cover anticipated liquidity needs for at least 12 months.
- The new credit agreement includes a maximum leverage covenant of 4.75 to 1, stepping down from July 2020 to 4.00 to 1 by July 2023, and a minimum interest coverage covenant of 3.00 to 1. The filing reports covenant compliance for the U.S. receivables facility; verify compliance and headroom under all applicable agreements.
- Greif recorded $21.9 million in Q2 debt-extinguishment charges and $13.8 million in acquisition-related costs. Remaining expected restructuring costs were $24.4 million at April 30, 2019. The Caraustar purchase-price allocation was preliminary and subject to adjustment, including for taxes and contingencies.
- Potential environmental and litigation exposure includes the acquired Newark business’s involvement in the Lower Passaic River Superfund matter. EPA estimated the selected remedy for the lower river reach at approximately $1.38 billion; Greif’s allocable share was undetermined, and the company said a material reserve could be recorded after completing its assessment. Separate Milwaukee-area environmental investigations and a class action also remained unresolved, with losses not estimable.
- Other risks identified include foreign exchange, raw-material price volatility, economic and customer-demand weakness, integration and synergy execution, pension funding, and future restructuring. Greif said there were no material changes to the risk factors in its 2018 Form 10-K.
Important facts for investors to verify
- How much of revenue and Adjusted EBITDA growth is organic versus attributable to Caraustar, and whether the acquisition’s expected synergies are being realized.
- Debt reduction, interest expense, covenant headroom, and refinancing plans for receivables facilities, including the U.S. facility maturing in September 2019.
- Final purchase-price allocation, acquired intangible-asset amortization, and any environmental or other acquired-contingency reserves.
- Progress against the $160 million to $180 million capital-expenditure outlook, restructuring plans, and operating cash conversion.
- Demand, selling prices, raw-material costs, and margin trends across Paper Packaging and Rigid Industrial Packaging, alongside the disclosed regional softness.