Greif, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; comparative period is the three months ended January 31, 2013. Greif manufactures industrial and paper packaging, flexible products, and manages timberland. Amounts below are in millions of dollars except per-share data.
Financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $1,034.4 | $1,008.6 |
| Gross profit / margin | $186.6 / 18.0% | $186.7 / 18.5% |
| Operating profit | $72.0 | $64.0 |
| Net income | $30.6 | $24.9 |
| Net income attributable to Greif | $29.5 | $23.6 |
| EPS, Class A / Class B | $0.51 / $0.75 | $0.41 / $0.60 |
| Operating cash flow | ($62.8) | ($68.8) |
| Capital expenditures | $34.5 | $28.5 |
- Sales grew 2.6%, mainly from a 3.7% increase in selling prices; currency translation reduced sales by 1.1%, while consolidated volumes were flat.
- Gross profit was nearly unchanged, and margin declined, which management attributed primarily to adverse North American weather. SG&A decreased to $121.5 from $122.6.
- Operating profit included an $8.7 timberland-sale gain. EBITDA, a company-reported non-GAAP measure, was $106.5 versus $100.4; the increase was primarily attributed to timberland gains and Paper Packaging performance.
- Comprehensive loss attributable to Greif was $3.2, versus comprehensive income of $35.0 a year earlier, reflecting a $33.1 foreign-currency translation loss in other comprehensive income.
Liquidity, debt and balance sheet
- At January 31, cash was $82.0; current assets were $1,114.5 and current liabilities $730.8 (current ratio approximately 1.53).
- Total debt, including current and short-term borrowings, was approximately $1,452.6, up from $1,281.3 at October 31, 2013. Long-term debt was $1,345.8; short-term borrowings were $94.3. The company reported $614.0 available under its amended credit agreement, net of letters of credit, and was in compliance with stated financial covenants.
- Operating cash use reflected working-capital outflows, including inventory ($39.3) and accounts payable ($50.7). Investing cash use was $79.6, including $52.3 for two acquisitions, $34.5 for capital expenditures and $8.0 for timberland purchases. Financing provided $150.7, and cash increased $3.9 to $82.0.
- Management expected FY2014 capital expenditures, excluding timberland purchases and acquisitions, of approximately $150. It stated that anticipated liquidity sources should meet working-capital, capital expenditure, debt repayment, potential acquisition and other needs for at least 12 months.
Material changes and management outlook
- Two acquisitions were completed in November 2013, one in Rigid Industrial Packaging & Services and one in Paper Packaging, for $52.3 net of cash. They contributed $6.0 of sales and $0.9 of operating profit in the quarter.
- Segment operating profit was $29.5 in Rigid Industrial Packaging & Services (down from $31.5), $30.0 in Paper Packaging (up from $27.7), $0.8 in Flexible Products & Services (up from $0.6), and $11.7 in Land Management (up from $4.2). The Land Management increase primarily reflected the timberland gain.
- Management expected a slow economic recovery, moderate volume improvement and upward pressure on raw-material costs. It anticipated strong Paper Packaging performance, gradual volume improvement in Rigid Industrial Packaging, continued utilization and start-up cost challenges in Flexible Products, and further timberland sales. Restructuring plans were being formulated for underperforming operations. No consolidated earnings guidance was provided in the supplied filing text.
- Restructuring charges were $2.6 versus $1.3; $9.7 of costs remained expected under open or developing plans. Environmental reserves were $26.5. Management said pending litigation was not expected to have a material adverse effect, while noting that a series of adverse environmental developments could materially affect results.
- Management identified two continuing material weaknesses in internal control over financial reporting: accounting for non-routine or complex transactions and withholding taxes on subsidiary financing transactions. Remediation was underway, but the weaknesses had not been concluded to be remediated; management said disclosure controls were not effective. Management nevertheless stated that the financial statements fairly presented the company’s results and position in all material respects.
Important facts for investors to verify
- Whether operating cash flow turns positive as working-capital needs and payment timing normalize.
- Debt growth, borrowing availability, covenant compliance and the company’s ability to fund maturities and planned capital spending.
- Underlying segment profitability excluding the $8.7 timberland gain, and the timing and proceeds of anticipated additional timberland-sale phases.
- Progress on both material-weakness remediation efforts and the effect of acquisition integration, restructuring, weather, raw-material costs and currency movements.