Greif, Inc. — Q1 FY2018 Form 10-Q
Reporting period: Three months ended January 31, 2018; comparisons are to the three months ended January 31, 2017. Greif manufactures industrial and paper packaging, flexible products, and manages timberland.
Financial results
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $905.7 million | $820.9 million |
| Gross profit / margin | $171.7 million / 19.0% | $163.3 million / 19.9% |
| Operating profit | $65.5 million | $65.6 million |
| Net income attributable to Greif | $56.5 million | $5.4 million |
| Basic and diluted EPS | Class A $0.96; Class B $1.44 | Class A $0.10; Class B $0.13 |
| EBITDA (non-GAAP) | $89.5 million | $69.2 million |
| Operating cash flow | $(53.7) million | $(44.1) million |
Revenue increased 10.3%, including $30.7 million of favorable foreign currency translation. EBITDA rose $20.3 million, while operating profit was essentially flat. Gross margin declined 0.9 percentage points. The reported net-income increase was substantially affected by provisional Tax Cuts and Jobs Act accounting, rather than operating improvement alone.
By segment, sales and operating profit were: Rigid Industrial Packaging & Services $615.4 million and $31.2 million (prior year $561.5 million and $42.8 million); Paper Packaging & Services $203.8 million and $27.9 million (prior $182.9 million and $20.0 million); Flexible Products & Services $80.0 million and $3.2 million (prior $69.7 million and $0.6 million); and Land Management $6.5 million and $3.2 million (prior $6.8 million and $2.2 million). Rigid packaging profit weakened on higher raw-material and transportation costs, timing of price pass-throughs, winter slowdown, higher SG&A and restructuring. Paper results improved with pricing and lower input costs.
Cash, debt and liquidity
- Cash was $94.3 million at January 31, down from $142.3 million at October 31, 2017. Operating cash use was driven in part by a $48.0 million inventory cash outflow and other working-capital movements.
- Investing cash use was $23.2 million, including $28.0 million in property, plant and equipment purchases; financing provided $24.5 million. Cash dividends paid to Greif shareholders were $24.5 million.
- Total debt before deferred financing costs was $1,031.8 million, versus $959.2 million at October 31; long-term debt reported on the balance sheet was $1,010.8 million. The company had $687.4 million available under its 2017 Credit Agreement, after letters of credit, and reported covenant compliance.
- The U.S. receivables facility had $147.2 million outstanding against a $150 million maximum and matures September 26, 2018. Greif stated it intends and is able to refinance the obligation on a long-term basis.
- Management said operating cash flows and borrowing facilities should fund anticipated needs for at least 12 months. Expected FY2018 capital expenditures, excluding timberland purchases, were $100–$120 million.
Outlook, material items and risks
- Management anticipated stronger demand, especially in bulk and specialty chemicals, and benefits from announced containerboard price increases. It warned that sharply rising steel and other raw-material costs could pressure FY2018 results until pricing mechanisms catch up; OCC costs were described as favorable but potentially volatile.
- The quarter included a provisional net $29.1 million tax benefit related to tax reform: a $65.0 million benefit from remeasuring deferred taxes, partly offset by a $35.9 million transition-tax expense. Final accounting could differ, possibly materially.
- Restructuring charges were $4.1 million, compared with a $0.3 million benefit in the prior-year quarter; $16.1 million of approved or developing plan costs remained expected. Asset impairment charges were $2.9 million. Property and equipment disposals generated a $4.6 million gain.
- Prior-year results included a $23.5 million pension settlement charge, reclassified outside operating profit under an accounting standard adopted early and retrospectively. This makes year-over-year comparisons, particularly net income and EBITDA, less straightforward.
- Risks include raw-material and energy price volatility, currency exposure, restructuring execution, pension funding, and environmental and legal matters. Milwaukee-area facilities are under environmental investigations; the company could not estimate possible sanctions or remediation costs. A related odor class action is at an early stage, with losses not estimable. Recorded environmental reserves were $8.3 million.
- Greif reported no material changes to its previously disclosed risk factors, effective disclosure controls, and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Confirm the final tax-reform accounting and how much of reported earnings improvement is recurring.
- Track raw-material cost recovery, contractual price-adjustment timing, and Rigid segment margins.
- Assess cash conversion, inventory build, and funding needs against planned capital expenditures and dividends.
- Verify refinancing or repayment plans for the U.S. receivables facility maturing in September 2018.
- Monitor developments and potential costs in the Milwaukee environmental proceedings and related class action.