Greif, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended January 31, 2016; fiscal year ends October 31. Comparisons are with the three months ended January 31, 2015 unless stated otherwise. Amounts are in U.S. dollars.
Business context and results
Greif produces industrial and flexible packaging, paper packaging and related services, and manages timberland. Net sales fell 14.5% to $771.4 million. Management attributed the decline primarily to foreign currency translation (8.8%), lower volumes (3.5%, largely reflecting prior-year divestitures) and lower selling prices (2.2%).
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $771.4 million | $902.3 million |
| Gross profit / margin | $151.3 million / 19.6% | $153.9 million / 17.1% |
| Operating profit | $17.6 million | $65.4 million |
| Net income (loss) | $(9.9) million | $28.2 million |
| Net income (loss) attributable to Greif | $(11.1) million | $30.1 million |
| Greif basic and diluted EPS | Class A $(0.19); Class B $(0.29) | Class A $0.52; Class B $0.76 |
| EBITDA (company-defined, non-GAAP) | $46.9 million | $99.9 million |
| Net cash used in operating activities | $(26.2) million | $(59.9) million |
Gross profit was nearly flat despite lower sales, and gross margin improved. Operating profit and EBITDA declined sharply, primarily due to $38.9 million more in non-cash asset impairment charges and the absence of the prior-year $24.3 million timberland gain; lower SG&A partly offset these factors. SG&A declined to $93.2 million from $111.8 million.
Segments and material changes
- Rigid Industrial Packaging & Services: Sales decreased 17.7% to $534.9 million; operating loss was $2.6 million versus $20.2 million operating profit. Impairments and currency impacts weighed on results; lower production costs and SG&A helped.
- Paper Packaging & Services: Sales were $158.4 million versus $159.2 million. Operating profit declined to $21.2 million from $28.1 million, reflecting lower selling prices and higher production costs.
- Flexible Products & Services: Sales fell 17.3% to $72.9 million. Operating loss narrowed to $3.1 million from $8.8 million, helped by lower material costs, pricing and SG&A reductions.
- Land Management: Sales were $5.2 million versus $5.3 million. Operating profit was $2.1 million versus $25.9 million, principally because there were no timberland gains in the quarter.
Other significant changes included a $39.1 million non-cash impairment charge, $28.3 million of foreign-currency translation losses in other comprehensive income, and a $44.2 million collection of a subordinated note receivable. No acquisitions or divestitures were completed in the quarter.
Cash, debt and liquidity
- Cash and cash equivalents were $65.3 million at January 31, 2016, down from $106.2 million at October 31, 2015. Operating cash use was partly offset by $16.5 million of investing cash inflow, including the $44.2 million note collection; financing activities used $27.1 million.
- Capital expenditures were reported as $23.0 million in MD&A; cash-flow statement purchases of property, plant and equipment were $29.8 million. The filing does not reconcile these figures in the provided text. Management expected fiscal 2016 capital expenditures, excluding timberland purchases and acquisitions, of approximately $99 million to $124 million.
- Long-term debt, including its current portion, was $1,134.3 million; short-term borrowings were an additional $44.1 million. Total assets were $3,162.8 million and total equity was $958.1 million.
- Current assets were $922.3 million and current liabilities $570.0 million. The $673.8 million available under the amended credit agreement was stated to be available without violating covenants. The U.S. receivables facility had a $150 million limit and was due to mature in September 2016.
- Greif reported compliance with its credit agreement covenants at quarter-end. Management expected available operating cash flow and borrowing and receivables facilities to fund anticipated needs for at least 12 months.
Outlook, risks and unusual items
- Management expected fiscal 2016 results to benefit from continued transformation efforts, while facing a sluggish global industrial economy, weaker containerboard prices and continued U.S. dollar strength. No numerical earnings guidance was provided in the filing text.
- Restructuring charges were $2.3 million; $18.2 million of additional costs under approved or developing plans remained expected. The stated focus was rationalizing operations and closing underperforming assets.
- Greif classified $28.0 million of assets and $8.2 million of liabilities as held for sale, intending to complete the sales within 12 months. Associated impairment charges contributed substantially to the quarter’s total impairment.
- The company disclosed errors in accounting and presentation for certain noncontrolling interests, which it deemed not material to prior or current periods and corrected as an out-of-period reclassification. A $19.8 million out-of-period mark to redemption value was charged to retained earnings, not current earnings; redeemable noncontrolling interests were reported at $32.2 million.
- Two material weaknesses in internal control over financial reporting remained unremediated: accounting for international income taxes, and IT general controls involving user access, change management and key reports. Management said the financial statements fairly presented the company’s results, but concluded disclosure controls and procedures were not effective.
- Environmental reserves were $8.1 million. Greif said it did not expect pending litigation to have a material adverse effect, while noting that outcomes and environmental exposures can be uncertain. Other disclosed risks include economic and currency conditions, raw-material costs, restructuring execution, pension funding and potential future impairment.
Important facts for investors to verify
- Whether subsequent quarters confirm operating improvement after excluding the quarter’s impairments and prior-year timberland gain.
- Progress and cash costs of restructuring, planned asset sales and the expected $99 million to $124 million fiscal-year capital expenditure program.
- Debt refinancing and liquidity plans, particularly the 2017 senior notes maturity and September 2016 maturity of the U.S. receivables facility.
- Whether the two disclosed material weaknesses are remediated and whether future filings report control improvements.
- Potential cash obligations for redeemable noncontrolling interests, including the anticipated $6.6 million payment in Q2 2016 and later contractual redemptions.