Greif, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Business context and period. Greif manufactures industrial and flexible packaging, paper packaging products, and manages timberland. This unaudited report covers the three and six months ended April 30, 2017; the fiscal year ends October 31.
Financial performance
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Net sales | $887.4 million, up 5.7% from $839.6 million | $1,708.3 million, up 6.0% from $1,611.0 million |
| Gross profit / margin | $181.9 million / 20.5%; prior year $173.7 million / 20.7% | $345.2 million / 20.2%; prior-year margin 20.2% |
| Operating profit | $80.4 million, versus $82.8 million | $122.5 million, versus $100.4 million |
| Net income attributable to Greif | $36.0 million, versus $31.4 million | $41.4 million, versus $20.3 million |
| Diluted EPS | Class A $0.61; Class B $0.92 | Class A $0.71; Class B $1.05 |
| Operating cash flow | Not provided as a quarterly figure | $15.5 million, versus $57.7 million |
Second-quarter EBITDA, a non-GAAP measure, was $108.2 million versus $113.1 million. Six-month EBITDA was $177.4 million versus $160.0 million. Second-quarter interest expense fell to $14.3 million from $19.9 million; six-month expense fell to $33.0 million from $38.4 million. The company declared dividends of $0.42 per Class A share and $0.63 per Class B share for the quarter, unchanged from the prior year.
Liquidity, debt and cash flows
- At April 30, cash was $87.0 million; total debt before deferred financing costs was $1,056.2 million, compared with $974.6 million at October 31, 2016. Debt included $433.9 million under the 2017 Credit Agreement and $150.0 million under the U.S. receivables facility.
- The 2017 Credit Agreement had $650.5 million of available borrowing, after accounting for letters of credit. Greif reported compliance with applicable debt covenants. Its credit agreement generally sets maximum leverage of 4.00:1 (3.75:1 during a collateral release period) and minimum interest coverage of 3.00:1.
- Six-month investing cash outflow was $36.6 million and financing cash inflow was $12.8 million; cash declined $16.7 million. Cash used for property, plant and equipment purchases was $39.7 million, with a further $5.4 million spent on timber properties.
- Management expected operating cash flow and available financing sources to cover anticipated needs for at least 12 months. The $150 million U.S. receivables facility matures in September 2017; the company stated its intent and ability to refinance it on a long-term basis.
Material changes and segment results
- Sales growth reflected strategic pricing and higher index prices in Rigid Industrial Packaging, and higher mill and corrugator volumes in Paper Packaging. The 2016 divestitures and currency translation partly offset growth.
- Rigid Industrial Packaging sales rose 5.9% in the quarter, but operating profit declined to $55.5 million from $59.2 million. Higher selling prices and manufacturing improvements helped gross profit; lower disposal gains, higher allocated costs and other charges weighed on operating profit.
- Paper Packaging sales increased to $188.7 million, while operating profit fell to $19.8 million from $24.2 million. Higher input costs reduced quarterly gross margin to 17.4% from 22.4%.
- Flexible Products returned to quarterly operating profit of $1.8 million from a $2.9 million loss, mainly on lower labor and fixed production costs and reduced restructuring charges. Sales fell, partly reflecting divestiture and currency effects.
- Six-month operating profit increased by $22.1 million. Lower impairment and restructuring charges and improved gross profit contributed, partly offset by a $24.6 million pension settlement charge, reduced disposal gains and higher SG&A. Paper Packaging’s six-month operating profit fell to $30.6 million from $45.4 million.
- Assets held for sale totaled $86.9 million, with $17.3 million of related liabilities. Three asset groups were classified as held for sale, and Greif intended to complete sales within 12 months.
Outlook, risks and unusual items
- Management expected fiscal 2017 results to benefit from continued transformation efforts, while warning that rising raw-material costs could adversely affect results. Planned 2017 capital expenditures, excluding timber-property purchases, were approximately $100–$115 million. The filing provides no specific full-year earnings or revenue guidance.
- A $24.6 million non-cash pension settlement charge was recorded in the first half following an annuity purchase and lump-sum pension payments totaling $88.1 million. Greif also recorded a $3.9 million impairment charge, substantially below the $40.8 million recorded in the comparable 2016 period.
- Greif refinanced its $300 million 6.75% notes that matured in February 2017 with term-loan proceeds. A $300 million interest-rate swap fixed the related borrowing rate at 1.194% before the applicable spread.
- Risks highlighted include economic and industry demand changes, raw-material and energy cost volatility, foreign exchange and political exposure, pricing pressure, execution of transformation and restructuring plans, pension funding needs, environmental matters, and potential impairment of goodwill or long-lived assets. The filing reported no material change to previously disclosed risk factors and no expected material adverse effect from pending litigation.
Important facts for investors to verify
- Whether pricing actions and manufacturing improvements can offset rising material costs, especially in Paper Packaging and regions where steel-cost pass-throughs lag.
- Whether operating cash generation improves from the low first-half level and supports dividends, capital spending and debt service.
- Progress refinancing the U.S. receivables facility before its September 2017 maturity, and ongoing covenant compliance.
- Timing and proceeds from the planned asset sales, and the remaining restructuring costs expected at April 30, 2017 ($19.8 million).
- Effects of the pension settlements, noncontrolling-interest obligations and foreign earnings repatriation on future cash needs and taxes.