Greif, Inc. — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended April 30, 2016; comparisons are with the corresponding 2015 periods. Greif produces industrial, paper and flexible packaging and manages timberland. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Three months 2016 | Three months 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $839.6 | $915.9 | $1,611.0 | $1,818.2 |
| Gross profit | $173.7 | $181.1 | $325.0 | $335.0 |
| Gross margin | 20.7% | 19.8% | 20.2% | 18.4% |
| Operating profit | $82.8 | $51.1 | $100.4 | $116.5 |
| Net income attributable to Greif | $31.4 | $20.8 | $20.3 | $50.9 |
| Greif Class A / Class B EPS | $0.53 / $0.80 | $0.35 / $0.53 | $0.35 / $0.51 | $0.87 / $1.29 |
| EBITDA (non-GAAP) | $113.1 | $83.0 | $160.0 | $182.9 |
Quarterly sales fell 8.3%, primarily from foreign currency translation (6.1 percentage points), lower volume (0.9 points) and lower selling prices (1.3 points). First-half sales fell 11.4%, reflecting currency (7.4 points), volume (2.2 points) and pricing (1.8 points). The quarter’s higher operating profit included $20.4 million of higher gains on property and business disposals and $14.0 million of lower SG&A. First-half operating profit and EBITDA declined, notably reflecting $36.1 million more non-cash asset impairment charges and $24.3 million less timberland gains than in 2015.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $57.7, versus cash use of $26.5 in 2015. Investing activities provided $25.9, including collection of a $44.2 subordinated note and $23.6 of business-sale proceeds; financing activities used $101.2. Cash declined $16.6 to $89.6.
- Capital expenditures were $44.8 in the first half; timberland purchases and investments were $3.5. Management expects full-year 2016 capital expenditures, excluding timberland, of approximately $99–$124.
- Total debt was $1,094.7, including $317.7 classified as current; cash was $89.6. Current debt includes $300.4 of 6.75% senior notes due February 2017, which Greif intends to refinance before maturity. The U.S. receivables facility, with $126.3 outstanding, matures in September 2016.
- The credit agreement had $721.4 of available borrowing after letters of credit, available without violating covenants. Greif reported compliance with its leverage and interest-coverage covenants at April 30. Management expects available operating cash flow and borrowing sources to meet anticipated needs for at least 12 months.
- Current assets were $928.1 and current liabilities $908.7. Total assets were $3,207.2, compared with $3,315.7 at October 31, 2015.
Segments and material changes
- Rigid Industrial Packaging & Services: Second-quarter sales declined 11.6% to $589.6, but operating profit rose to $59.2 from $25.8, mainly due to disposal gains, lower SG&A, restructuring and impairment charges. First-half sales fell 14.6%, while operating profit increased to $56.6 from $46.0.
- Paper Packaging & Services: Second-quarter sales increased to $167.2 on 10.7% volume growth, partly offset by lower prices; operating profit declined to $24.2 from $27.1 as production costs rose. First-half operating profit fell to $45.4 from $55.2.
- Flexible Products & Services: Second-quarter sales declined to $76.2, while operating loss narrowed to $2.9 from $5.3. First-half operating loss narrowed to $6.0 from $14.1, reflecting transformation and cost-reduction efforts.
- Land Management: First-half operating profit fell to $4.4 from $29.4, chiefly because 2015 included $24.3 of timberland gains and 2016 had none.
Outlook, unusual items and risks
- Management said fiscal 2016 results should benefit from continued transformation, partly offset by a sluggish global industrial economy and a weaker containerboard environment.
- First-half non-cash asset impairment charges were $40.8, including impairment associated with assets held for sale. The filing reports a $21.0 goodwill impairment and $34.7 of impairment to net assets held for sale; these disclosures describe related impairment assessments and should not be added together without reviewing the notes.
- Greif completed three nonstrategic business divestitures in the first half, receiving $23.6; it recorded $2.8 of gains on business disposals. Four asset groups remained classified as held for sale, with sales intended within 12 months.
- Restructuring charges were $7.7 in the first half, with $14.2 of expected remaining costs under approved or developing plans. Greif expected $5.8 of cash payments to redeem a joint-venture interest in the third quarter; other contractual redemption obligations fall in 2017, 2021 and 2022.
- Environmental reserves were $9.3. Management did not expect pending litigation to have a material adverse effect, while noting that adverse environmental developments could affect results. Other disclosed risks include foreign exchange and political exposure, demand and pricing pressure, raw-material and energy costs, pension funding, impairment risk, and execution of restructuring.
- Controls: Management reported that material weaknesses in accounting for international income taxes and in IT general controls (including access and change management) had not been remediated as of April 30. Disclosure controls and internal control over financial reporting were therefore deemed ineffective. Management nevertheless stated the financial statements fairly presented the company’s position and results in all material respects.
- The filing also describes corrections of noncontrolling-interest accounting and presentation errors as an out-of-period reclassification; management concluded the errors were not material to prior or current periods or earnings trends.
Important facts for investors to verify
- Progress and terms for refinancing the $300.4 of 2017 notes, and the September 2016 receivables-facility maturity.
- Whether the operating-profit improvement in the quarter is sustainable apart from disposal gains, lower restructuring and impairment charges, and SG&A reductions.
- Underlying demand, pricing, currency and volume trends by segment, particularly the weaker industrial and containerboard outlook.
- Realization of the $99–$124 capital expenditure plan, expected restructuring costs, and upcoming noncontrolling-interest redemption payments.
- Remediation and testing of the disclosed tax-accounting and IT-control material weaknesses.
- Impairment assumptions and sale progress for assets held for sale, along with the level of future pension contributions and environmental obligations.