Greif, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended July 31, 2015; comparisons are with the corresponding 2014 periods. Greif produces rigid and flexible industrial packaging, paper packaging, and manages timberland. Amounts are in millions of dollars unless otherwise noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $930.0 | $1,124.0 | $2,748.2 | $3,191.0 |
| Gross profit | $166.8 | $217.7 | $501.8 | $608.1 |
| Gross margin | 17.9% | 19.4% | 18.3% | 19.1% |
| Operating profit | $44.2 | $61.3 | $160.7 | $211.8 |
| Net income attributable to Greif | $8.6 | $13.7 | $59.5 | $82.8 |
| Diluted EPS, Class A / Class B | $0.15 / $0.22 | $0.23 / $0.35 | $1.02 / $1.51 | $1.41 / $2.11 |
| EBITDA (company-defined, non-GAAP) | $77.4 | $98.5 | $260.6 | $322.6 |
| Operating cash flow | Not separately provided | Not separately provided | $73.4 | $116.8 |
Q3 sales fell 17.3%; management attributed the decrease primarily to foreign currency translation (8.8 percentage points), lower selling prices (4.6 points), and volume (3.9 points, largely reflecting divestitures). Nine-month sales declined 13.9%, including an 8.0-point currency impact. Management said volumes were unchanged in both comparisons after excluding divestitures.
For the first nine months, operating cash flow was $73.4, down from $116.8. Purchases of property, plant and equipment were $108.2 (versus $94.0); timberland purchases were a further $38.2. Cash and equivalents were $101.7 at July 31, 2015, versus $85.1 at October 31, 2014.
At July 31, current assets were $1,080.0 and current liabilities $696.4. Total debt was approximately $1,229.7, comprising $1,179.0 of long-term debt including its current portion and $50.7 of short-term borrowings. Long-term debt excluding the current portion was $1,154.9. The company reported $679.5 of available borrowing under its amended credit agreement, after letters of credit, and said it was in compliance with debt covenants. The credit agreement’s leverage and interest-coverage limits were 4.00:1 maximum and 3.00:1 minimum, respectively.
Changes and segment results
- Operating profit fell $17.1 in Q3 and $51.1 for the first nine months. Lower gross profit, currency effects, higher restructuring costs and impairment charges were partly offset by lower SG&A and gains on asset disposals.
- Rigid Industrial Packaging & Services remained the largest segment, but sales declined 19.2% in Q3 and operating profit decreased $13.5. Paper Packaging operating profit fell $6.4 in Q3. Flexible Products & Services continued to report operating losses, though its Q3 loss narrowed to $9.7 from $12.9. Land Management’s nine-month operating profit rose to $32.3 from $26.4, aided by higher timberland-sale gains.
- SG&A declined 24.9% in Q3 and 17.2% year to date, reflecting divestitures, currency translation and cost-reduction efforts. Restructuring charges increased to $16.2 in Q3 and $26.7 year to date, versus $4.2 and $10.5. Greif expected $17.4 of additional costs under open or developing restructuring plans and anticipated completion of current programs by early 2018.
- Total assets declined to $3,415.3 from $3,667.4 at October 31, 2014; total equity declined to $1,092.5 from $1,223.2. Currency translation loss in accumulated other comprehensive income increased to $232.2 from $144.5.
Outlook, risks and unusual items
- Management expected continued currency volatility, a soft global manufacturing environment, deflationary raw-material costs and a strong U.S. dollar to pressure revenue for the remainder of FY2015. Transformation and SG&A savings were expected to help earnings, partly offset by Q4 professional fees and higher medical costs. Expected 2015 capital expenditures, excluding timberland purchases and acquisitions, were approximately $141.
- Greif changed its Venezuelan remeasurement rate to SIMADI, reflecting an approximately 97% devaluation against the previously used official rate. The quarter included $4.9 of remeasurement income, a $9.3 inventory write-down to net realizable value and a $15.0 long-lived-asset impairment; management described the combined effect as a $19.4 non-deductible charge to net income. Remaining net investment in Venezuela was approximately $0.5.
- Q3 non-cash asset impairment charges totaled $17.6; nine-month charges were $22.3. The filing also reported $24.3 of timberland-sale gains year to date, eight business divestitures, and an $8.5 loss on disposal of businesses.
- The effective tax rate was 68.2% in Q3 and 44.3% year to date; management cited earnings mix, non-deductible losses and valuation allowances. Environmental reserves were $8.6 at July 31, down from $24.7 at October 31, 2014, largely following divestiture of the Chicago facility. Greif said pending litigation was not expected to have a material adverse effect.
- Management stated that operating cash flows and available borrowing sources were expected to cover anticipated needs for at least 12 months. Risks discussed include foreign exchange and political exposure, pricing competition, demand and raw-material changes, restructuring execution, environmental matters and debt obligations.
- Disclosure controls and internal control over financial reporting were reported ineffective because of three material weaknesses: accounting for non-routine or complex transactions, non-U.S. income taxes, and IT access and change-management controls. Management was pursuing remediation; timing remained uncertain for the tax weakness.
Most important facts for investors to verify
- Whether subsequent filings show stabilization in sales, gross margins and operating results after currency, pricing and divestiture effects.
- Cash conversion, capital spending and working-capital needs, including the use and renewal of receivables-financing facilities.
- Debt levels, covenant headroom and refinancing or repayment needs, particularly maturities in 2016–2019.
- Execution and remaining costs of restructuring, and whether SG&A savings offset professional and medical expenses.
- Developments in Venezuela and the continuing effect of currency devaluation, impairment and local operating conditions.
- Progress in remediating all three material weaknesses and any subsequent changes to management’s controls assessment.