Greif, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended October 31, 2016. The filing also reports unaudited fourth-quarter results for the three months ended October 31, 2016. Unless stated otherwise, amounts are in U.S. dollars.
Business context
Greif is a global industrial-packaging producer operating in more than 45 countries. Its reportable segments are Rigid Industrial Packaging & Services, Paper Packaging & Services, Flexible Products & Services, and Land Management. FY2016 revenue was generated primarily by industrial packaging and related services; no customer represented more than 10% of revenue.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $3,323.6 million | $3,616.7 million |
| Gross profit / margin | $684.9 million / 20.6% | $669.8 million / 18.5% |
| Operating profit | $225.6 million | $192.8 million |
| Net income attributable to Greif | $74.9 million | $71.9 million |
| EPS, Class A / Class B | $1.28 / $1.90 | $1.23 / $1.83 |
| Operating cash flow | $301.0 million | $206.3 million |
| Capital expenditures | $101.1 million | $141.3 million |
| Cash and cash equivalents | $103.7 million | $106.2 million |
| Long-term debt, including current portion | $974.6 million | $1,146.9 million |
Sales fell 8.1%, primarily from foreign-currency translation (including the Venezuelan remeasurement), lower volume and divestitures, partly offset by pricing and mix. Gross profit, operating profit and EBITDA improved; EBITDA was $345.1 million versus $325.0 million. The gross-margin improvement reflected divestitures of lower-margin businesses, pricing and mix actions, and cost containment. Net income attributable to Greif increased modestly despite a higher effective tax rate of 47.1% versus 42.2%.
At year-end, current assets were $920.3 million and current liabilities were $659.2 million. Short-term borrowings were $51.6 million. Dividends paid to Greif shareholders were $98.7 million; annual dividends per share remained $1.68 for Class A and $2.51 for Class B.
Fourth-quarter results
FY2016 fourth-quarter net sales were $867.6 million, compared with $868.5 million in FY2015 Q4; gross profit was $183.4 million versus $168.0 million. Net income attributable to Greif was $8.5 million versus $12.4 million, with Class A and Class B EPS of $0.14 and $0.22, respectively, versus $0.21 and $0.32. FY2016 Q4 included $9.0 million of restructuring charges, $6.5 million of non-cash asset impairments, $0.8 million of gains on property disposals, and $18.6 million of losses on business disposals.
Segment changes and notable items
- Rigid Industrial Packaging & Services: Sales decreased 10.1% to $2,324.2 million, while operating profit rose to $143.9 million from $86.4 million. Improved margins, pricing and cost actions outweighed currency effects and divestiture-related volume declines.
- Paper Packaging & Services: Sales increased 1.6% to $687.1 million, but operating profit declined to $89.1 million from $109.3 million. Higher recovered-paper input costs and lower selling prices pressured margins.
- Flexible Products & Services: Sales fell 10.7% to $288.1 million. The operating loss narrowed to $15.5 million from $36.6 million through improved margins and cost reductions, but the segment remained loss-making.
- Land Management: Operating profit fell to $8.1 million from $33.7 million, primarily because FY2016 had no timberland-sale gains compared with $24.3 million in FY2015.
FY2016 included $51.4 million of non-cash asset impairments, $26.9 million of restructuring charges, and a $14.5 million net loss on business disposals. Four plants closed and 254 employees were severed during the year. Management estimated approximately $18.2 million of annual run-rate savings from FY2016 restructuring activity and expected current programs to be completed by early 2018.
Outlook, financing and risks
Management expected FY2017 results to benefit from continued transformation efforts, despite a sluggish global industrial economy and a strong U.S. dollar. Planned FY2017 capital expenditures, excluding potential timber-property investments, were $95 million to $105 million. Management stated that expected operating cash flow and available financing were sufficient for anticipated liquidity needs for at least 12 months.
After year-end, Greif entered a new credit agreement providing an $800 million revolving facility and a $300 million delayed-draw term loan, with maturities in November 2021. The term loan was intended to refinance $300 million of 6.75% notes due February 2017. The new agreement includes leverage and interest-coverage covenants; Greif reported compliance as of November 3, 2016. A subsequent $300 million interest-rate swap was expected to fix the rate on that borrowing at 2.944% beginning February 1, 2017.
Key risks include exposure to economic cycles, currency movements, raw-material and energy prices, competitive pricing, execution of restructuring and transformation plans, and acquisition/divestiture outcomes. Pension and postretirement plans were underfunded; the filing cites aggregate underfunding of $149.7 million for U.S. plans and $21.6 million for non-U.S. plans. FY2017 pension contributions were expected to be approximately $21.9 million. Environmental reserves were $6.8 million; the company reported no pending legal proceeding material to its business or financial condition. The filing identifies $786.4 million of goodwill, making future impairment a risk. It also reports that previously identified material weaknesses in IT controls and international tax accounting controls were remediated; management and the auditor concluded internal control over financial reporting was effective at year-end.
Important facts for investors to verify
- Whether FY2017 operating improvements and the stated restructuring savings are achieved, particularly while the Flexible Products segment remains loss-making.
- Execution and cost of the new credit-agreement refinancing, covenant headroom, and the company’s ability to service debt and maintain dividends.
- How much of the sales decline reflects ongoing volume or pricing pressure versus foreign exchange and portfolio divestitures.
- Whether impairment, restructuring and disposal charges recur, and whether reported operating improvement translates into sustainable cash generation.
- Future pension funding needs, tax exposures, and any changes to environmental reserves or other contingencies.