Greif, Inc. — Fiscal 2018 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended July 31, 2018. Greif’s fiscal year ends October 31. Financial amounts are in millions of dollars unless stated otherwise.
Business context and results
Greif manufactures industrial and paper packaging, flexible products, and manages timberland. The company reports four segments: Rigid Industrial Packaging & Services, Paper Packaging & Services, Flexible Products & Services, and Land Management.
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Net sales | $1,012.1 | $961.8 | $2,886.1 | $2,670.1 |
| Gross profit | $217.1 | $187.1 | $584.1 | $532.3 |
| Operating profit | $114.0 | $90.5 | $267.2 | $237.6 |
| Net income attributable to Greif | $67.7 | $43.9 | $169.3 | $85.3 |
| Greif EPS, Class A / Class B | $1.15 / $1.72 | $0.74 / $1.12 | $2.88 / $4.31 | $1.45 / $2.17 |
| EBITDA (non-GAAP) | $142.2 | $116.1 | $350.1 | $293.5 |
Q3 gross margin increased to 21.5% from 19.5%; nine-month gross margin rose to 20.2% from 19.9%. Q3 sales grew 5.2% and nine-month sales 8.1%. Nine-month income was materially supported by a provisional net tax benefit of $33.4 million related to the U.S. Tax Cuts and Jobs Act.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $55.8 million, down from $105.1 million. The period included $85.4 million of pension contributions (including $65.0 million above planned contributions), working-capital outflows, and a $70.6 million cash outflow from pension and postretirement liabilities.
- Investing cash outflow was $85.7 million, including $92.0 million of property, plant and equipment purchases. Financing cash outflow was $9.0 million; cash dividends to Greif shareholders were $74.0 million.
- Cash was $100.9 million at July 31, 2018, versus $142.3 million at October 31, 2017. Current assets were $1,075.2 million and current liabilities $680.2 million.
- Total debt before financing costs was $1,040.1 million, up from $959.2 million at fiscal year-end; long-term debt reported on the balance sheet was $1,020.1 million. The company had $658.8 million available under its 2017 Credit Agreement, after letters of credit, and reported compliance with its debt covenants.
- The $150.0 million U.S. receivables facility matures in September 2018. The $248.8 million of 2019 senior notes and this receivables facility were presented as long-term based on management’s stated intent and ability to refinance.
Material changes and management commentary
- Paper Packaging was the largest Q3 profit-growth contributor: operating profit rose to $44.1 million from $19.4 million, benefiting from higher containerboard prices and lower old corrugated container costs. Flexible Products operating profit rose to $5.8 million from $3.1 million.
- Rigid Industrial Packaging operating profit declined to $62.0 million from $65.3 million in Q3; nine-month operating profit fell to $140.4 million from $164.2 million. Management cited raw-material and manufacturing costs, timing of contractual price pass-throughs, and higher SG&A. European agricultural weakness, a trucking strike, and Brazilian operational inefficiencies also affected results.
- Management expected stronger demand in Q4 and stabilization of North American steel costs, which could help contractual price adjustments catch up. Paper Packaging was expected to benefit from a more favorable price-cost relationship. Transportation costs were expected to remain a headwind, and Flexible Products results were expected to be lower than Q3 due to seasonality and holidays. No full-year earnings guidance is stated in the provided filing text.
- Greif expected fiscal 2018 capital expenditures, excluding timber-property purchases, of approximately $120–$140 million.
Risks, contingencies and unusual items
- Tax accounting remained provisional: the company recorded a $69.3 million benefit from deferred-tax remeasurement and a $35.9 million transition-tax expense. Finalization could materially change those estimates.
- Environmental investigations involving three Milwaukee-area reconditioning facilities and a related property-odor class action were unresolved; the company said it could not predict outcomes or estimate reasonably possible losses. Environmental reserves were $6.7 million.
- Restructuring charges were $13.8 million for the first nine months, with $14.5 million of expected costs remaining under approved or developing plans.
- Argentina was deemed highly inflationary; Greif began applying highly inflationary accounting to its subsidiary from August 1, 2018. The subsidiary represented less than 2% of nine-month sales and less than 1% of total assets.
- Other notable items included $4.1 million of nine-month asset impairments, $7.5 million of gains on property disposals, and significant foreign-currency effects on comprehensive income.
Important facts for investors to verify
- Whether the provisional tax benefit and transition-tax estimate change as the measurement period is completed.
- How Greif refinances the September 2018 receivables facility and 2019 senior notes, and the resulting borrowing costs and liquidity.
- Whether operating cash flow recovers after unusually large pension contributions and working-capital investment.
- Whether price increases and contract pass-throughs offset steel, transportation, and other input-cost pressures, particularly in Rigid Industrial Packaging.
- Developments in the Milwaukee environmental proceedings and class action, and any related financial exposure.