Greif, Inc. — Form 10-Q Summary
Business context and reporting period
Greif is a global industrial packaging and services company, with reportable segments in Rigid Industrial Packaging & Services, Paper Packaging & Services, Flexible Products & Services, and Land Management. This filing covers the fiscal quarter and six months ended April 30, 2018; the comparable periods ended April 30, 2017.
Financial performance and position
- Second-quarter revenue: $968.3 million, up 9.1% year over year. Management attributed the increase to pricing, containerboard prices, sales volumes in some segments, and $40.9 million of favorable foreign currency translation.
- Second-quarter earnings: Gross profit was $195.3 million versus $181.9 million; gross margin eased to 20.2% from 20.5%. Operating profit rose to $87.7 million from $81.5 million. Net income attributable to Greif was $45.1 million, or $0.77 per Class A share and $1.14 per Class B share, compared with $36.0 million and $0.61/$0.92, respectively.
- First-half results: Revenue was $1.874 billion, up 9.7%; operating profit was $153.2 million versus $147.1 million. Net income attributable to Greif was $101.6 million versus $41.4 million. The comparison includes a $24.6 million pension settlement charge in 2017 and substantial tax effects from U.S. tax reform in 2018.
- Cash flow and investment: Operating cash flow was $4.5 million for the first half, compared with $15.5 million. Investing cash outflow was $51.3 million, including $56.3 million of property, plant and equipment purchases. Cash declined to $108.2 million from $142.3 million at October 31, 2017.
- Debt and liquidity: Debt totaled $1.041 billion before deferred financing costs, up from $959.2 million at fiscal year-end; reported long-term debt was $1.021 billion. The $150 million receivables facility matures in September 2018. Greif reported $670.7 million of available borrowing under its credit agreement, after accounting for outstanding letters of credit, and compliance with debt covenants.
- Other metrics: First-half EBITDA, a non-GAAP measure, was $207.9 million versus $177.4 million. First-half dividends paid to Greif shareholders were $49.3 million. The company reported $10.1 million of first-half restructuring charges and $3.3 million of non-cash asset impairment charges.
Material changes versus the prior comparable period
- Rigid Industrial Packaging & Services remained the largest segment, but its second-quarter operating profit fell to $47.2 million from $56.1 million. Higher raw material, manufacturing and transportation costs, and timing of contractual price pass-throughs pressured margins.
- Paper Packaging & Services improved: second-quarter operating profit rose to $33.0 million from $20.3 million, supported by higher containerboard prices and lower old-corrugated-container costs.
- Flexible Products & Services second-quarter operating profit increased to $5.0 million from $1.8 million, reflecting pricing, product mix, volumes, and improved efficiencies.
- Foreign currency translation contributed to reported revenue growth. First-half net sales included a $71.6 million currency benefit.
- First-half SG&A rose to $206.5 million from $193.6 million; restructuring charges rose to $10.1 million from $4.8 million. First-half interest expense declined to $26.3 million from $33.0 million.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2018 to benefit from stronger demand in key end-use markets. It cautioned that rapidly rising North American raw-material costs, particularly steel, and higher transportation costs could weigh on results until pricing mechanisms catch up. Management also expected Paper Packaging to benefit as announced containerboard price increases were realized and old-corrugated-container costs remained favorable versus 2017.
- Greif forecast fiscal 2018 capital expenditures, excluding timber-property purchases, of approximately $120 million to $140 million. It said operating cash flow and borrowing sources were expected to fund anticipated needs for at least 12 months.
- The first-half income tax expense was $5.5 million on $116.7 million of pretax income. Tax expense included a provisional $69.3 million benefit from remeasuring deferred tax balances under the Tax Cuts and Jobs Act, partly offset by a provisional $35.9 million transition-tax accrual. The company cautioned that final tax accounting could differ, potentially materially.
- Environmental and legal matters included government investigations and notices of violations involving three Milwaukee-area reconditioning facilities, and a related odor class-action lawsuit. Greif said it could not predict outcomes or estimate potential sanctions, remediation costs, or losses. It reported $7.2 million in environmental reserves and a $3.0 million estimated liability for certain employment and benefit lawsuits outside the U.S.
- Other risks include raw-material and energy price volatility, customer and supplier concentration, foreign-exchange and political exposure, pension funding needs, restructuring execution, environmental regulation, and possible impairment of goodwill or long-lived assets. Management reported no material changes to previously disclosed risk factors and stated that disclosure controls were effective.
Important facts for investors to verify
- Whether pricing actions and contractual pass-throughs offset continued steel, other raw-material, and transportation cost inflation.
- The composition and sustainability of earnings growth, particularly the segment-level shift from Rigid Industrial Packaging toward Paper Packaging and Flexible Products.
- Working-capital trends: inventories increased $73.4 million from October 31, 2017, while first-half operating cash flow was only $4.5 million.
- How the September 2018 receivables-facility maturity will be refinanced, and whether debt levels and covenant headroom remain manageable.
- The final tax-reform accounting, potential tax-audit adjustments, and the effect of provisional tax benefits on reported earnings.
- Possible costs or liabilities from Milwaukee-area environmental proceedings and litigation, which the filing says cannot yet be estimated.