Greif, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018; fiscal Q4 ended October 31, 2018. This is an annual filing, not a standalone quarterly report. Greif makes industrial packaging, paper packaging and flexible packaging products and services, and manages timberland, operating in more than 40 countries.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $3,873.8 million | $3,638.2 million |
| Gross profit / margin | $788.9 million / 20.4% | $714.7 million / 19.6% |
| Operating profit | $370.5 million | $299.5 million |
| Net income | $229.5 million | $135.1 million |
| Net income attributable to Greif | $209.4 million | $118.6 million |
| Greif diluted EPS, Class A / Class B | $3.55 / $5.33 | $2.02 / $3.02 |
| EBITDA (non-GAAP) | $480.7 million | $382.9 million |
| Cash from operating activities | $253.0 million | $305.0 million |
| Capital expenditures | $139.1 million | $100.1 million |
- Sales rose 6.5%; operating profit increased $71.0 million and EBITDA increased $97.8 million. Greif attributed the operating-profit improvement principally to higher gross profit, lower impairment charges and higher disposal gains, partly offset by greater SG&A and restructuring costs.
- Paper Packaging was the largest profit-growth contributor: sales were $898.5 million versus $800.9 million and operating profit was $158.3 million versus $93.5 million. Higher containerboard prices and lower recovered-paper input costs supported margins.
- Rigid Industrial Packaging sales increased to $2,623.6 million, but operating profit declined to $183.2 million from $190.1 million. Higher raw material and manufacturing costs and timing of contractual price changes weighed on gross profit.
- Flexible Products sales rose to $324.2 million and operating profit improved to $19.4 million from $5.8 million, supported by mix, pricing and improved efficiencies. Land Management operating profit was $9.6 million versus $10.1 million.
- Interest expense declined to $51.0 million from $60.1 million. The effective tax rate was 24.43%; FY2018 included a provisional $19.2 million net tax benefit from U.S. tax reform, comprising a $72.0 million deferred-tax remeasurement benefit partly offset by $52.8 million of transition-tax expense.
Fourth-quarter detail
Q4 FY2018 net sales were $987.7 million, gross profit was $204.8 million, net income was $45.5 million and net income attributable to Greif was $40.1 million. Class A and Class B diluted EPS were $0.67 and $1.03, respectively. The filing reports Q4 restructuring charges of $4.8 million, non-cash asset impairment charges of $4.2 million, pension settlement charges of $0.9 million, a $1.9 million net loss on property and equipment disposals, and a $0.9 million gain on business disposals.
Cash, debt and liquidity
- Cash and cash equivalents were $94.2 million at year-end, down from $142.3 million. Operating cash flow fell to $253.0 million from $305.0 million; the filing cites, among other factors, working-capital needs and pension contributions.
- FY2018 capital spending was $139.1 million, excluding $8.9 million for timber properties. Management expected FY2019 capital expenditures of $130–$150 million, excluding timber-property purchases and investments.
- Total debt including current maturities was $907.6 million, compared with $959.2 million a year earlier; long-term debt, net of current portion and financing costs, was $884.1 million. The $150 million U.S. receivables facility was fully drawn.
- Greif reported $783.3 million available under its senior secured credit agreement at October 31, 2018, after letters of credit, and stated it was in compliance with its debt covenants. The 2019 Senior Notes had $249.1 million outstanding and were intended to be refinanced.
- Greif paid $100.0 million in dividends to shareholders in FY2018. It stated that operating cash flow, borrowing capacity and receivables programs were expected to meet anticipated liquidity needs for at least 12 months.
Outlook, risks and notable items
- Management anticipated choppy global conditions in 2019, with positive North American demand but continued softness in Western Europe, parts of South America and, relatively, China. It expected Paper Packaging to benefit from a full year of 2018 containerboard price increases and announced expansion projects.
- Management expected steel, resin and recovered-paper input prices to be relatively stable in 2019, while currency volatility could remain a headwind for rigid packaging. These outlook statements exclude the proposed Caraustar acquisition.
- On December 20, 2018, Greif agreed to acquire Caraustar for $1.8 billion, subject to adjustments and closing conditions, and expected closing in Q1 calendar 2019. Proposed funding included a $1.2 billion secured term loan, $700 million of planned unsecured notes and $199 million from a secured backstop facility; the transaction and financing were not completed as of the filing.
- Three Milwaukee-area reconditioning facilities operated by Greif’s CLCM joint venture faced federal, state and local environmental investigations and notices of violation. No citations or fines had been issued as of the filing, but potential sanctions and remediation or operational costs could not be estimated clearly. A related putative odor class action was also pending.
- Other risks include cyclicality and economic weakness, intense pricing competition, volatile raw-material and energy costs, tariffs and foreign-exchange exposure, integration and execution risks, pension funding needs, tax uncertainty, and environmental, product-liability and cyber risks. U.S. and non-U.S. pension and postretirement plans were underfunded by $67.6 million and $10.7 million, respectively, at year-end; the company made an $80 million U.S. pension contribution in FY2018.
- Greif closed five plants and severed 322 employees in FY2018; restructuring charges were $18.6 million, with $12.0 million of expected costs remaining under open or contemplated plans. Non-cash asset impairment charges were $8.3 million; no goodwill impairment was recorded in FY2018.
Important facts for investors to verify
- Whether FY2018 earnings growth is repeatable after the provisional tax benefit, pension-settlement differences and other disposal and impairment items.
- Progress on Caraustar closing, financing terms, resulting leverage, integration, customer retention and expected synergies.
- Refinancing and repayment plans for the 2019 Senior Notes and receivables facility, and headroom under credit-agreement covenants.
- Cash conversion, working-capital requirements and whether planned capital expenditures and pension contributions remain within expectations.
- Developments, potential costs and operational consequences relating to the Milwaukee CLCM proceedings and class action.
- Whether forecast demand, pricing, commodity costs and currency conditions align with management’s FY2019 outlook.