GREIF, INC quarterly report, Q2 FY2015

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Greif, Inc. — Q2 FY2015 Form 10-Q

Reporting period: Three and six months ended April 30, 2015; fiscal year ends October 31. Greif operates in rigid industrial packaging and services, paper packaging, flexible products and services, and land management. Financial amounts below are in U.S. dollars unless stated otherwise.

Financial performance

  • Q2 revenue: $915.9 million, down 14.0% from $1,065.5 million. Greif attributed the decline mainly to foreign-exchange translation (-9.2%), lower selling prices (-3.2%), and lower volumes (-1.7%), primarily reflecting divestitures.
  • Q2 earnings and margins: Gross profit was $181.1 million versus $204.3 million; gross margin increased to 19.8% from 19.2%. Operating profit fell to $51.1 million from $79.1 million. Net income attributable to Greif was $20.8 million versus $38.4 million. Class A and Class B diluted EPS were $0.35 and $0.53, respectively, versus $0.65 and $0.98.
  • Q2 EBITDA: $83.3 million, down from $116.3 million. EBITDA is a non-GAAP measure defined in the filing.
  • First-half revenue and earnings: Revenue was $1,818.2 million, down 12.0%; gross profit was $335.0 million versus $390.4 million, and gross margin was 18.4% versus 18.9%. Operating profit was $116.5 million versus $150.5 million; net income attributable to Greif was $50.9 million versus $69.1 million. EBITDA was $183.2 million versus $224.1 million.
  • Segment performance: Q2 rigid industrial packaging operating profit decreased to $25.8 million from $51.2 million; paper packaging increased to $27.1 million from $26.5 million; flexible products remained loss-making but improved to a $5.3 million operating loss from $10.3 million; land management operating profit fell to $3.5 million from $11.7 million, largely because Q2 2014 included timberland gains.
  • Cash flow: First-half operating cash flow was negative $26.5 million, compared with positive $41.5 million in 2014. Capital expenditures were $69.8 million, excluding $25.4 million of timberland purchases. Cash declined to $67.4 million from $85.1 million at October 31, 2014.
  • Liquidity and debt: Current assets were $1,070.6 million and current liabilities $710.3 million at April 30. Long-term debt, including its current portion, totaled $1,153.0 million; short-term borrowings were an additional $63.1 million. The credit agreement had $709.3 million available, including the effect of outstanding letters of credit. Greif reported compliance with its debt covenants.
  • Dividends: Q2 declared dividends were $0.42 per Class A share and $0.63 per Class B share, unchanged from 2014.

Material changes and unusual items

  • Revenue and reported results were pressured by the stronger U.S. dollar, pricing pressure, divestitures and lower sales in flexible products. Overall Q2 volumes were flat after excluding divestitures.
  • First-half results included $24.3 million of timberland gains, compared with $17.1 million a year earlier. Greif also recorded a $9.6 million loss on business disposals, $10.5 million of restructuring charges, and $4.7 million of non-cash asset impairment charges.
  • Greif completed seven divestitures and no material acquisitions in the first half. Divestiture proceeds were $12.5 million, with $7.4 million of notes receivable also recorded. In May, Greif agreed to sell additional rigid-packaging assets for approximately $9 million, with an estimated gain of approximately $4 million, subject to final adjustments.
  • Foreign-currency translation drove a $115.1 million first-half other comprehensive loss and contributed to lower reported goodwill and equity. Total assets declined to $3,420.8 million from $3,667.4 million at October 31, 2014.
  • The effective tax rate was 31.6% for Q2 and 35.6% for the first half. Q2 included discrete tax benefits related to divestitures and tax examinations; first-half tax expense also reflected valuation allowances in several jurisdictions.

Outlook, risks and contingencies

  • Management expected foreign-exchange rates to continue adversely affecting revenue and net income. It anticipated a three-week Riverville mill shutdown in Q3 for upgrades, which would negatively affect FY2015 net income.
  • Greif expected approximately $150 million of 2015 capital expenditures, excluding timberland purchases and acquisitions. Management expected continued restructuring and non-core asset sales to produce additional significant impairment and restructuring charges, while SG&A savings initiatives were expected to benefit the remainder of 2015.
  • Environmental reserves were $9.8 million at April 30, down from $24.7 million at October 31, 2014; the reduction chiefly reflected divestiture of the subsidiary associated with a Chicago facility. Greif stated it did not believe pending litigation would materially adversely affect its financial statements, while noting environmental developments could affect results.
  • Management identified material weaknesses in controls over complex transactions, non-U.S. income-tax accounting, and certain IT access and change-management controls. It said remediation was in progress, targeted for completion by October 31, 2015, but the weaknesses were not yet considered remediated; disclosure controls and internal control over financial reporting were reported ineffective.
  • Other stated risks include economic and market conditions, currency and political exposure, customer and supplier consolidation, competition, raw-material and energy costs, restructuring execution, joint-venture exposure, environmental and legal matters, and potential goodwill impairment. The filing reported no material changes to the risk factors in the prior Form 10-K.

Important facts for investors to verify

  • Whether operating cash flow improves after the first-half working-capital outflow, including the effects of payments and receivables financing.
  • Progress on restructuring, divestitures and planned cost savings, and the resulting cash costs, impairment charges and disposal gains or losses.
  • The impact of currency movements, pricing and demand on segment margins, especially rigid industrial packaging and flexible products.
  • Debt levels, covenant headroom and available borrowing capacity, including short-term borrowings and receivables facilities.
  • Whether management remediates the three disclosed material weaknesses by its target date and demonstrates effective controls through testing.
  • Execution and financial impact of the Riverville shutdown, 2015 capital spending plan, and announced asset sales.