Greif, Inc. — Q1 Fiscal 2015 Form 10-Q
Business context and reporting period. The quarter ended January 31, 2015 (fiscal Q1). Greif produces industrial packaging, paper packaging and flexible packaging products, and manages timberland. Comparisons are with the three months ended January 31, 2014; balance-sheet comparisons are with October 31, 2014. Amounts are in millions of dollars except per-share data.
Key financial metrics
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $902.3 | $1,001.5 |
| Gross profit / margin | $153.9 / 17.1% | $186.1 / 18.6% |
| Operating profit | $65.4 | $71.4 |
| Net income | $28.2 | $31.8 |
| Net income attributable to Greif | $30.1 | $30.7 |
| EBITDA (company-defined, non-GAAP) | $99.9 | $107.8 |
| Operating cash flow | $(59.9) | $(62.8) |
Class A and Class B diluted EPS were $0.52 and $0.76, respectively, versus $0.53 and $0.78. Dividends declared per share were unchanged at $0.42 for Class A and $0.62 for Class B.
Cash and cash equivalents were $55.8 at quarter-end, down from $85.1 at October 31. Capital expenditures were $39.2 and timber-property purchases were $25.4. Total debt was approximately $1,206.5, including $1,148.0 of long-term debt (current portion included) and $58.5 of short-term borrowings. The company reported $724.4 of available borrowing under its amended credit agreement, after letters of credit, and compliance with its debt covenants. Current assets were $1,072.1 and current liabilities $729.0.
Material changes versus the prior comparable period
- Sales fell 9.9%; management attributed the decline principally to foreign-currency translation (5.7%), lower volumes (2.8%, mainly divestitures and facility closures), and lower reported selling prices (1.4%). Excluding divestitures and closures, company volumes were flat and selling prices were higher.
- Gross profit declined $32.2 and gross margin fell 1.5 percentage points. SG&A decreased to $111.8 from $121.3, but rose as a share of sales to 12.4% from 12.1%.
- Operating profit decreased $6.0 despite $15.9 more in timberland gains. Land Management operating profit rose to $25.9 from $11.4; Rigid Industrial Packaging fell to $20.2 from $29.2; Paper Packaging to $28.1 from $30.0; and Flexible Products shifted to an $8.8 loss from $0.8 profit.
- Flexible Products results were pressured by freight costs, inventory write-downs amid falling resin prices and elevated inventory, and costs and inefficiencies associated with transitioning to an in-house workforce. Its sales also reflected the 2014 sale of the multiwall packaging business.
- Other comprehensive loss was $69.0, driven mainly by $74.6 of foreign-currency translation loss. Goodwill decreased $43.5, primarily from currency movements.
- Debt increased: long-term debt rose to $1,127.8 from $1,087.4, while cash declined. Operating cash use remained substantial; working-capital movements included lower accounts payable and higher inventory.
Outlook, commentary, risks and unusual items
- Management anticipated a modest global economic recovery in fiscal 2015, with U.S. strength offset by weaker trends, particularly in Europe and Latin America. It expected U.S.-dollar strength to continue pressuring revenue and net income.
- An approximately two-week third-quarter shutdown of the Riverville mill for upgrades was expected to negatively affect 2015 net income. Management expected fiscal 2015 capital expenditures of approximately $150, excluding timberland purchases and acquisitions.
- Management said ongoing restructuring, facility closures and non-core asset sales could result in significant impairment and restructuring charges during the remainder of 2015. A March 3, 2015 subsequent-event announcement described U.S. and German plant consolidations, with estimated restructuring costs of $10–$15; potential related impairment had not yet been estimated.
- Timberland sale gains were $24.3, versus $8.4 a year earlier, and materially supported operating profit. The final phase of an approximately $90 million multi-phase timberland sale contract closed in the quarter.
- Environmental reserves were $23.9 at January 31. Management did not expect pending litigation to have a material adverse effect, while noting that unfavorable developments could affect estimates and results.
- The filing identified three material weaknesses in internal control over financial reporting: accounting for non-routine or complex transactions, income taxes at certain foreign subsidiaries, and IT access/change-management controls. Management targeted remediation by October 31, 2015, but stated controls were not yet effective and successful remediation was not assured.
- Other disclosed risks include foreign exchange and political exposure, competition and customer pricing pressure, raw-material and energy cost volatility, restructuring execution, environmental and legal matters, and the company’s significant goodwill. Management said liquidity sources were expected to meet needs for at least 12 months.
Important facts for investors to verify
- Whether sales, volumes and segment margins stabilize after currency effects, divestitures and facility closures.
- Whether Flexible Products recovers from its operating loss and the cited freight, inventory and labor-transition costs.
- Cash generation, working-capital requirements, debt levels and covenant headroom, particularly given negative quarterly operating cash flow.
- Actual restructuring and impairment charges, including costs from the announced U.S. and German consolidations, and progress against the remediation timetable for all three material weaknesses.
- How much future operating profit depends on timberland gains and whether other non-core asset sales proceed as planned.