Greif, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended January 31, 2017. Greif manufactures industrial, paper and flexible packaging and manages timberland. Comparisons are with the three months ended January 31, 2016; balance-sheet comparisons are with October 31, 2016. Amounts are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 FY2017 | Q1 FY2016 / prior balance date |
|---|---|---|
| Net sales | $820.9 | $771.4 |
| Gross profit; gross margin | $163.3; 19.9% | $151.3; 19.6% |
| Operating profit | $42.1 | $17.6 |
| Net income (loss) | $8.0 | ($9.9) |
| Net income (loss) attributable to Greif | $5.4 | ($11.1) |
| EPS attributable to Greif | Class A $0.10; Class B $0.13 | Class A ($0.19); Class B ($0.29) |
| EBITDA, company-defined non-GAAP | $69.2 | $46.9 |
| Net cash from operating activities | ($44.1) | ($26.2) |
| Cash and cash equivalents | $106.8 | $103.7 at Oct. 31, 2016 |
| Total assets | $3,199.3 | $3,153.0 at Oct. 31, 2016 |
| Long-term debt | $1,074.8 | $974.6 at Oct. 31, 2016 |
Cash used in investing activities was $20.9; financing activities provided $72.7. Operating cash outflow included working-capital uses, notably inventory ($36.8) and accounts payable ($26.0), as well as a $23.1 increase in deferred purchase price on receivables sold. Current assets were $1,037.1 and current liabilities $620.3. Short-term borrowings were $38.9. The company declared dividends of $0.42 per Class A share and $0.62 per Class B share; $24.5 of dividends was paid to Greif shareholders during the quarter.
Material changes and segment results
- Sales rose 6.4%, principally from strategic pricing and higher index prices in Rigid Industrial Packaging & Services, and greater mill and sheet-feeder volumes in Paper Packaging & Services. Divestitures and foreign currency translation partly offset growth in the rigid segment.
- Operating profit increased $24.5. Greif cited improved gross profit and $37.2 lower non-cash impairment charges versus prior year, partly offset by a $23.5 pension settlement charge and higher SG&A.
- Rigid Industrial Packaging & Services: Sales $561.5, up 5.0%; operating profit $28.7 versus a $2.6 loss. Pricing, production-cost improvements and lower impairment charges helped; Asia Pacific margins fell amid steel-cost increases ahead of price pass-throughs.
- Paper Packaging & Services: Sales $182.9 versus $158.4, but operating profit fell to $10.8 from $21.2. Higher input costs, lower containerboard index prices and a $9.2 pension settlement charge weighed on results.
- Flexible Products & Services: Sales declined to $69.7 from $72.9, primarily due to a divestiture; operating profit improved to $0.5 from a $3.1 loss on better production costs and pricing/volume decisions.
- Land Management: Sales were $6.8 versus $5.2; operating profit was $2.1 in both periods. Greif reported approximately 245,000 acres of timberland.
Outlook, liquidity, risks and unusual items
- Management expected fiscal 2017 results to benefit from continued transformation efforts, while a strong U.S. dollar was expected to adversely affect results. No numerical earnings or revenue guidance was provided.
- Expected fiscal 2017 capital expenditures, excluding timber-property purchases, were $95–$110. Greif said available operating cash flow and borrowing/receivables facilities were expected to cover anticipated needs for at least 12 months, including working capital, capital expenditures, dividends and debt repayment.
- A new senior secured credit agreement replaced the prior agreement in November 2016. As of January 31, $204.0 was outstanding under it and $581.6 of borrowing capacity was available without violating covenants; Greif reported covenant compliance. On February 1, 2017, a $300.0 term loan repaid the 6.75% senior notes due that date. A $300.0 interest-rate swap then fixed the borrowing rate on that amount at 2.944%.
- The $101.7 U.S. receivables facility matures in September 2017. Greif also sells eligible non-U.S. receivables under programs with stated limits. These arrangements support liquidity but entail ongoing reliance on financing and receivables-sale capacity.
- A $23.5 non-cash pension settlement charge followed an annuity purchase and lump-sum payments totaling $84.3. Pension-related other comprehensive income was $28.1, in part reflecting plan remeasurement.
- Greif changed its assertion on certain foreign unremitted earnings, recording deferred tax liabilities on pre-2017 earnings and expecting to accrue liabilities on certain future earnings. The filing does not provide a clear amount for this tax effect. Tax expense was $11.8 on $19.8 of pretax income.
- Assets held for sale increased to $86.2, with related liabilities of $15.6; the company intended to complete sales within 12 months. One nonstrategic Flexible Products business was deconsolidated at a $0.5 loss. Restructuring reserves were $6.2, with $17.8 of further costs expected under approved or developing plans.
- Management said pending litigation was not expected to have a material adverse effect; environmental reserves were $7.0. Principal disclosed risks include economic and customer demand sensitivity, competition and pricing pressure, raw-material and energy costs, currency and political exposure, execution of transformation and restructuring, pension funding, joint-venture obligations, taxes, environmental matters, and potential impairment of goodwill or long-lived assets.
Important facts for investors to verify
- Whether sales pricing and volume gains can offset currency headwinds and raw-material cost increases, particularly steel and paper inputs.
- Whether the improvement in operating profit persists after accounting for prior-year impairment comparisons and the current-period pension settlement charge.
- Operating cash conversion and working-capital trends, including inventory build, receivables-sale activity and the September 2017 maturity of the U.S. receivables facility.
- Debt levels, covenant headroom, refinancing outcomes and the effect of the term-loan repayment and interest-rate swap after quarter-end.
- Execution and proceeds from planned disposals of held-for-sale assets, and the costs and benefits of remaining restructuring plans.
- The amount and timing of tax liabilities arising from the revised treatment of foreign earnings, and future pension funding requirements.