Greif, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended January 31, 2022; comparisons are with the three months ended January 31, 2021. Greif produces industrial packaging and paper packaging products and manages timber properties.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $1,564.3 million | $1,146.5 million |
| Gross profit | $289.7 million | $212.2 million |
| Gross margin | 18.5% | 18.5% |
| Operating profit | $72.0 million | $70.0 million |
| Net income | $18.6 million | $30.9 million |
| Net income attributable to Greif | $10.3 million | $23.4 million |
| Adjusted EBITDA | $196.8 million | $138.5 million |
| Operating cash flow | $22.4 million | $11.5 million |
| Capital expenditures | $44.5 million | $27.4 million |
Sales rose 36% year over year, primarily on higher volumes and selling prices across Global Industrial Packaging and Paper Packaging & Services. Gross profit increased, while gross margin was unchanged. SG&A rose to $151.6 million from $134.3 million, but declined as a share of sales to 9.7% from 11.7%. Diluted EPS was $0.18 for Class A and $0.25 for Class B, versus $0.40 and $0.59, respectively.
Segments and material changes
- Global Industrial Packaging: Sales were $949.1 million versus $659.3 million. Operating profit fell to $31.0 million from $54.0 million, including a $62.4 million non-cash impairment tied to the planned Flexible Products & Services divestiture. Adjusted EBITDA increased to $114.2 million from $79.5 million. Higher raw-material costs partly offset sales and gross-profit gains.
- Paper Packaging & Services: Sales increased to $610.0 million from $480.9 million; operating profit rose to $38.3 million from $14.3 million and Adjusted EBITDA to $80.5 million from $56.1 million. Higher volumes and published prices were partly offset by higher raw-material, transportation and utility costs.
- Land Management: Sales were $5.2 million versus $6.3 million, primarily reflecting reduced timber available after prior-year acreage sales. Operating profit was $2.7 million versus $1.7 million.
Despite higher operating profit, net income declined because of higher income tax expense ($35.6 million versus $6.1 million) and the impairment-related and other quarter-specific effects. The tax increase included $8.9 million of unfavorable discrete items; Greif expects no tax benefit from the $62.4 million impairment. Comprehensive income attributable to Greif was a loss of $2.0 million, including foreign-currency translation losses.
Cash, debt and liquidity
- Operating cash flow was $22.4 million; investing cash outflow was $45.8 million and financing cash inflow was $54.0 million. Cash at period-end was $136.6 million including $16.9 million classified within assets held for sale; the balance sheet reports cash and cash equivalents of $119.7 million.
- Total debt carrying amounts were $2,268.8 million, including $120.3 million current debt; long-term debt, net, was $2,139.1 million. Debt increased from $2,185.4 million at October 31, 2021. The company reported $629.4 million of available capacity under its 2019 revolving credit facility and compliance with its covenants at January 31.
- Working-capital balances included accounts receivable of $816.1 million, inventories of $488.3 million and accounts payable of $619.6 million. Greif stated it expected operating cash flow and available borrowing facilities to cover anticipated liquidity needs for at least 12 months.
- On March 1, 2022, after quarter-end, Greif replaced its 2019 credit agreement with a new agreement providing an $800 million revolver and $1.615 billion in term facilities, with maturities in 2027. It used proceeds to refinance the prior credit agreement and redeem all $500 million of its 6.50% Senior Notes due 2027.
Outlook, risks and unusual items
- Management expected overall customer demand to remain solid through 2022. It anticipated continued increases in many raw-material, transportation, labor and energy costs; steel prices were expected to decline slightly, and resin and old corrugated container prices to remain relatively stable.
- Management cautioned that inflation, supply-chain disruption and labor shortages could affect customers, and that the Russia-Ukraine invasion could affect operations and results. Russia and Ukraine together represented approximately 3% of sales and 1.3% of assets.
- On December 31, 2021, Greif agreed to sell its approximately 50% interest in Flexible Products & Services to its joint-venture partner for approximately $123 million cash, subject to conditions and adjustments. Closing was expected by March 31, 2022. The transaction triggered held-for-sale classification and the $62.4 million impairment.
- Other cited risks include economic and currency volatility, raw-material and energy costs, competition and pricing pressure, execution of restructuring or divestitures, pension funding, environmental matters, litigation, and goodwill or asset impairments. Greif reported $20.4 million of environmental reserves at January 31, 2022 and said adverse developments could require future charges.
Key investor verification points
- Confirm the Flexible Products & Services sale’s closing, final proceeds and any post-closing adjustments.
- Assess the underlying operating trend apart from the impairment, including Global Industrial Packaging profitability and segment Adjusted EBITDA.
- Track the drivers of the unusually high tax expense and whether discrete tax items recur.
- Review cash conversion, working-capital needs and capital spending, and reconcile balance-sheet cash with cash-flow cash, including cash held for sale.
- Review the refinancing terms, debt levels, interest-rate exposure and compliance with the new credit agreement’s covenants.
- Monitor inflation, supply-chain and labor pressures and the potential effects of geopolitical developments on demand, costs and international operations.