Greif, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended July 31, 2020. Greif manufactures industrial packaging, paper packaging and flexible products, and manages timberland. The quarter was affected by COVID-19, weaker customer demand and the April 2020 divestiture of its Consumer Packaging Group (CPG) business.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,083.0M | $1,252.6M | $3,353.7M | $3,362.9M |
| Gross profit / margin | $219.7M / 20.3% | $279.4M / 22.3% | $683.0M / 20.4% | $700.9M / 20.8% |
| Operating profit | $61.9M | $125.6M | $213.1M | $283.4M |
| Net income | $24.4M | $67.5M | $76.3M | $124.4M |
| Net income attributable to Greif | $20.7M | $62.7M | $64.4M | $106.0M |
| Adjusted EBITDA (non-GAAP) | $159.4M | $203.8M | $488.1M | $472.1M |
Class A and Class B diluted EPS were $0.35 and $0.52 for Q3, respectively, versus $1.06 and $1.59 a year earlier. Nine-month EPS was $1.09 and $1.62, respectively, versus $1.80 and $2.68.
- Cash flow: Nine-month operating cash flow was $254.3M, compared with $194.1M. Investing activities used $14.8M; financing activities used $225.6M. Cash rose to $98.5M from $77.3M at October 31, 2019.
- Debt and liquidity: Total debt before deferred financing costs was $2,646.6M, down from $2,756.3M; long-term debt, net, was $2,535.3M. Greif reported $523.3M of available capacity under its $800M revolving facility and said it was in compliance with debt covenants. Current assets were $1,305.9M and current liabilities $914.9M.
- Capital spending and dividends: Capital expenditures were $86.0M for the first nine months, excluding $4.0M of timber-property investments. Dividends paid to Greif shareholders were $78.2M.
Changes and segment trends
- Q3 sales fell $169.6M year over year, reflecting lower volumes and prices, foreign exchange effects and $54.0M of prior-year CPG sales. Q3 operating profit and attributable net income also declined substantially.
- For the first nine months, sales were nearly flat, but operating profit fell $70.3M. Adjusted EBITDA increased $16.0M, which management attributed mainly to cost reductions, lower performance-based compensation and a full nine months of Caraustar operations.
- Rigid Industrial Packaging & Services: Nine-month sales declined to $1,719.8M, while operating profit rose to $155.8M and Adjusted EBITDA to $232.2M. Lower raw-material costs, pricing and cost actions supported profitability.
- Paper Packaging & Services: Nine-month sales rose to $1,414.6M, primarily from Caraustar, but operating profit declined to $40.3M and Adjusted EBITDA to $229.0M. Results reflected the CPG sale, weaker prices and volumes, higher recovered-fiber costs, and a $37.9M loss on the CPG divestiture.
- Flexible Products & Services: Nine-month sales, operating profit and Adjusted EBITDA declined to $199.7M, $10.7M and $18.0M, respectively, mainly due to lower volumes and prices.
Outlook, risks and unusual items
- Management expected global economic conditions to remain volatile due to COVID-19. It anticipated lower Q4 volumes year over year, continued softness in industrial manufacturing in the Americas, and a slower recovery in central and western Europe. Management noted improving demand in some EMEA and APAC markets.
- Management expected steel and resin costs to remain relatively stable for the rest of 2020, while U.S. old-corrugated-container costs were easing from Q3 levels but remained above the prior year, contributing to a paper-segment price-cost squeeze.
- Full-year 2020 capital expenditures, excluding timber-property investments, were forecast at $120M–$140M, reduced because of pandemic-related uncertainty. The filing provides no numerical earnings or sales guidance.
- Greif recorded $19.1M of Q3 restructuring charges and $15.5M of Q3 non-cash asset impairments, principally related to facility closures and restructuring. Nine-month restructuring charges were $26.8M and impairments $16.9M. The company expected $22.4M of additional costs for open or developing restructuring plans.
- The CPG business was sold for $85.0M before closing adjustments; current net cash proceeds were $81.6M, subject to final adjustments. The sale generated a $37.9M nine-month loss.
- COVID-19 could materially affect future demand, supply availability, costs, operations, cash flows and financial condition; the company said the impact could not yet be predicted. Operations had continued without significant disruption, but the filing discusses risks including renewed restrictions, customer distress, raw-material disruption and added employee-safety costs.
- Other exposures include environmental and legal matters. Greif accrued $11.2M for the Lower Passaic River Superfund site; the company said potential additional costs could be material. Environmental investigations and a class action concerning Milwaukee-area facilities remained unresolved, with outcomes or possible losses not estimable.
Important facts for investors to verify
- Whether pandemic-related demand and customer conditions recover as management expected, and how they affect Q4 volumes and margins.
- Progress on Caraustar integration, restructuring savings and the expected remaining $22.4M of restructuring costs.
- Final CPG sale adjustments and the effect of the divestiture loss and disposed business on future comparisons.
- Debt covenant headroom, refinancing plans for receivables facilities, and the 2021 maturity of the 7.375% senior notes.
- Future costs or outcomes for environmental proceedings and other contingencies, including the Lower Passaic River matter.