Greif, Inc. — Fiscal 2016 Third-Quarter 10-Q
Reporting period: Three and nine months ended July 31, 2016; comparative periods ended July 31, 2015. Greif produces industrial and flexible packaging, paper packaging, and manages timberland.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $845.0m | $930.0m | $2,456.0m | $2,748.2m |
| Gross profit | $176.5m | $166.8m | $501.5m | $501.8m |
| Gross margin | 20.9% | 17.9% | 20.4% | 18.3% |
| Operating profit | $71.6m | $44.2m | $172.0m | $160.7m |
| Net income attributable to Greif | $46.1m | $8.6m | $66.4m | $59.5m |
| Greif EPS, Class A / Class B | $0.78 / $1.18 | $0.15 / $0.22 | $1.13 / $1.69 | $1.02 / $1.51 |
| EBITDA, non-GAAP | $101.2m | $78.0m | $261.2m | $260.9m |
- Cash flow: Nine-month operating cash flow was $158.0m, versus $73.4m. Investing cash flow was positive $4.6m, versus negative $78.8m; financing cash flow was negative $171.2m, versus positive $43.4m. Cash ended at $94.3m, down from $106.2m at October 31, 2015.
- Balance sheet and liquidity: Total assets were $3,183.9m. Current assets were $946.3m and current liabilities $914.3m. Debt listed in the debt note totaled $1,058.9m, including $300.3m of 2017 senior notes classified as current; the balance sheet also reports $55.2m of short-term borrowings. The revolving credit facility had $705.1m available without violating covenants. Greif reported compliance with debt covenants.
- Margins and segments: Q3 Rigid Industrial Packaging operating profit rose to $56.7m from $29.5m. Paper Packaging operating profit fell to $19.1m from $21.5m; Flexible Products narrowed its operating loss to $5.9m from $9.7m; Land Management profit declined to $1.7m from $2.9m. For nine months, Paper Packaging operating profit fell to $64.4m from $76.7m, while Land Management fell to $6.1m from $32.3m.
Material changes and unusual items
- Sales fell 9.1% in Q3 and 10.6% year to date. Management attributed the declines principally to foreign-currency translation and lower volumes, particularly divestitures; Q3 also reflected modestly better pricing and product mix.
- Q3 operating profit improved by $27.4m, with management citing lower impairment charges and the prior-year Venezuela inventory devaluation. The 2015 quarter included a $9.3m Venezuela inventory devaluation charge, partly offset by $3.3m of operating gross margin. Q3 2016 included $4.1m of non-cash impairment charges versus $17.6m a year earlier.
- Nine-month operating profit increased despite essentially flat EBITDA. Results included $44.9m of non-cash asset impairment charges, no timberland gains versus $24.3m in 2015, and restructuring charges of $17.9m versus $26.7m.
- Four nonstrategic businesses were divested in the first nine months of 2016; proceeds were $25.2m. Greif recorded a $4.1m net gain on business disposals. A $44.2m subordinated note receivable was collected during the period.
- Greif recorded $23.6m of impairment when three asset groups were classified as held for sale and a further $14.0m impairment after remeasurement of a previously held-for-sale group. The filing reports $37.6m of impairment on net assets held for sale in its fair-value disclosure.
- Q3 income tax expense was $3.5m versus $18.7m, reflecting tax mix and discrete items; management cautions that tax expense varies with jurisdictional income, valuation allowances, and discrete tax matters.
Outlook, risks, and contingencies
- Management said transformation efforts and operational improvements were expected to benefit fiscal 2016 results, partly offset by a sluggish global industrial economy, a challenged containerboard environment, and weaker-than-expected seasonal agricultural sales. No specific earnings or revenue guidance was provided.
- Expected 2016 capital expenditures, excluding timberland purchases, were $95m–$110m; $71.4m had been spent in the first nine months. Management expected available operating cash flow and borrowing and receivables facilities to meet anticipated needs for at least 12 months.
- The U.S. accounts receivable credit facility, with $75.0m outstanding, was due to mature in September 2016; Greif intended to refinance it on similar terms. Greif also intended to refinance the $300.3m of 6.75% notes due February 2017 before maturity.
- Greif identified material weaknesses in internal controls over international income-tax accounting and IT general controls, including user access, change management, and key reports. Management said these weaknesses had not been remediated as of July 31, 2016; disclosure and financial-reporting controls were therefore not effective.
- Environmental reserves were $9.0m. Management did not believe pending litigation would materially adversely affect the financial statements; it noted that environmental developments could affect results if multiple adverse events occurred together. Pension liabilities were $144.7m, and estimated pension contributions for fiscal 2016 were $12.5m.
- Other risks cited include foreign exchange and political exposure, industrial demand and pricing pressure, raw-material and energy costs, restructuring execution, pension funding, environmental regulation, and possible future impairment of goodwill and long-lived assets.
Important facts for investors to verify
- Whether revenue and volumes stabilize after currency effects and divestitures, and whether weak industrial, containerboard, and agricultural conditions persist.
- How much of reported profit improvement reflects recurring operating performance versus prior-year Venezuela effects, impairment changes, disposals, and other special items.
- Completion and terms of refinancing for the September 2016 receivables facility and the 2017 senior notes; monitor covenant headroom and liquidity.
- Progress in remediating the two material weaknesses in financial reporting controls and whether tax-accounting or IT-control issues lead to further adjustments.
- Cash conversion, capital spending, restructuring costs, held-for-sale asset values, and potential redemption payments to noncontrolling-interest holders.