Greif, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 31, 2017, compared with the corresponding 2016 periods. Greif produces rigid and flexible industrial packaging, paper packaging, and timber-related products and services.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $961.8 million | $845.0 million | $2,670.1 million | $2,456.0 million |
| Gross profit | $187.1 million | $176.5 million | $532.3 million | $501.5 million |
| Gross margin | 19.5% | 20.9% | 19.9% | 20.4% |
| Operating profit | $89.5 million | $71.6 million | $212.0 million | $172.0 million |
| Net income attributable to Greif | $43.9 million | $46.1 million | $85.3 million | $66.4 million |
| EPS, Class A / Class B | $0.74 / $1.12 | $0.78 / $1.18 | $1.45 / $2.17 | $1.13 / $1.69 |
| EBITDA (non-GAAP) | $116.1 million | $101.2 million | $293.5 million | $261.2 million |
- Quarterly sales increased 13.8% and operating profit increased 25.0%, but Greif-attributable net income fell about 4.8%. The quarter’s income tax expense rose to $27.2 million from $3.5 million, and income attributable to noncontrolling interests increased to $3.6 million from $0.3 million.
- For the first nine months, sales rose 8.7%, operating profit 23.3%, and Greif-attributable net income 28.5%. Results included $25.6 million of non-cash pension settlement charges, while non-cash asset impairment charges declined to $5.9 million from $44.9 million.
- Quarterly operating improvement reflected higher gross profit and lower restructuring and impairment charges, partly offset by pension settlement charges. The quarter’s gross margin declined year over year despite higher sales.
Segment developments
- Rigid Industrial Packaging & Services: Q3 sales rose 13.0% to $674.4 million and operating profit increased to $64.7 million from $56.7 million. Pricing and higher raw-material index prices supported sales; margin pressure was notable in Asia Pacific and EMEA. For nine months, sales and operating profit increased, with operating profit at $148.9 million versus $113.4 million.
- Paper Packaging & Services: Q3 sales increased to $206.3 million, while operating profit was essentially flat at $19.0 million. Higher volumes were offset by increased input costs, particularly old corrugated containers. Nine-month operating profit fell to $49.6 million from $64.4 million.
- Flexible Products & Services: Q3 operating profit improved to $3.1 million from a $5.9 million loss, driven by pricing, product mix, lower fixed costs, and reduced restructuring and impairment charges. Nine-month operating profit was $5.4 million versus a $11.9 million loss.
- Land Management: Q3 sales increased to $7.2 million and operating profit to $2.7 million, primarily due to higher timber sales.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $105.1 million, down from $158.0 million. Working-capital use included increases in receivables of $55.6 million and inventories of $60.5 million; capital expenditures were $65.1 million and timber-property purchases were $7.3 million.
- Cash and cash equivalents were $94.6 million at July 31, 2017, compared with $103.7 million at October 31, 2016. Current assets were $1,125.0 million and current liabilities $719.1 million.
- Total debt before deferred financing costs was $1,056.9 million, including $150.0 million under the U.S. receivables facility; reported long-term debt was $1,033.7 million. Cash less total debt was approximately $962 million. The new credit agreement had $661.7 million of available borrowing after letters of credit, reported as available without violating covenants.
- The $150.0 million receivables facility matured in September 2017; management intended to renew it on similar terms and classified it as long-term based on intent and ability to refinance. The new credit agreement requires leverage no higher than 4.00:1 (3.75:1 during collateral-release periods) and interest coverage of at least 3.00:1.
- Greif paid $73.9 million in dividends to its shareholders during the first nine months. The board authorized an additional 4 million-share repurchase authorization in June; 2,000 Class B shares were repurchased in July.
Outlook, notable items and risks
- Management expected fiscal 2017 results to benefit from multi-year transformation efforts and an improved global manufacturing environment, while noting slower conditions in some regions, rising raw-material costs, and potential adverse effects from Hurricane Harvey on U.S. Gulf Coast operations. No specific earnings guidance was stated in the filing.
- Management expected fiscal 2017 capital expenditures, excluding timber-property purchases, of approximately $100 million to $115 million. It said available liquidity sources were expected to fund anticipated needs for at least 12 months.
- Quarterly tax expense reflected jurisdictional income mix and discrete items. For the quarter, management cited $13.9 million related to realization of foreign-exchange tax losses in the prior year, as well as tax effects of debt rebalancing and uncertain tax positions. The company also recorded withholding-tax liabilities after revising its assertion on certain foreign earnings; €145 million of related debt was repaid during the quarter, partly using distributed foreign earnings.
- The company completed one material divestiture in the Rigid Industrial Packaging & Services segment and classified four asset groups in that segment as held for sale, with $77.6 million of assets and $14.5 million of liabilities. It intended to complete sales within 12 months.
- Other risks include raw-material and energy price fluctuations, foreign exchange and political risks, restructuring execution, customer and supplier consolidation, pension funding needs, litigation, environmental obligations, joint-venture put rights, and possible future asset impairment. Environmental reserves were $6.9 million; estimated liabilities for specified employee and benefit lawsuits outside the U.S. were $3.8 million and could increase.
Key facts for investors to verify
- Whether pricing actions and customer pass-throughs can offset raw-material inflation and restore gross margins, especially in Paper Packaging and international rigid packaging.
- The actual operational and financial impact of Hurricane Harvey and the durability of transformation-related cost improvements.
- Whether the September 2017 receivables facility was renewed or refinanced, and the company’s covenant headroom and debt-repayment capacity.
- Completion, timing, and proceeds from the held-for-sale asset groups, and any associated impairment or restructuring costs.
- The sustainability of reported earnings after tax effects, pension settlements, impairments, restructuring, and noncontrolling-interest allocations.
- Future pension contributions, joint-venture redemption obligations, tax-audit outcomes, and potential changes in litigation or environmental exposures.