Greif, Inc. — Q3 FY2014 Form 10-Q
Reporting period: Three and nine months ended July 31, 2014; fiscal year ends October 31. Comparisons are with the corresponding 2013 periods unless noted. Amounts are in millions of U.S. dollars except per-share data.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,161.1 | $1,129.7 | $3,296.2 | $3,227.2 |
| Gross profit | $216.3 | $217.3 | $607.1 | $606.6 |
| Gross margin | 18.6% | 19.2% | 18.4% | 18.8% |
| Operating profit | $59.6 | $96.7 | $207.4 | $244.6 |
| Net income attributable to Greif | $12.2 | $46.7 | $77.5 | $110.5 |
| Diluted EPS, Class A / Class B | $0.21 / $0.31 | $0.80 / $1.20 | $1.32 / $1.98 | $1.89 / $2.83 |
| EBITDA (non-GAAP) | $97.0 | $132.2 | $319.7 | $354.6 |
Q3 sales grew 2.8%, mainly from a 3.0% increase in selling prices; consolidated volume was flat. For the first nine months, sales rose 2.1%, primarily from higher prices, while consolidated volumes were flat. Q3 SG&A increased 9.5% to $129.4, and the effective tax rate rose to 75.2% from 35.2%; the nine-month rate was 46.4% versus 33.9%.
Operating cash flow was $116.8 for the first nine months, versus $118.7 a year earlier. Investing used $131.7, including $94.0 of capital expenditures, $55.7 of timberland purchases and $53.5 for acquisitions, partly offset by asset-sale proceeds. Financing provided $3.2; cash declined $13.1 to $65.0.
At July 31, cash was $65.0, current assets $1,234.6 and current liabilities $869.8. Long-term debt was $1,228.9, with a $17.5 current portion; short-term borrowings were $77.8. The $800 million revolving facility had $732.8 available after letters of credit, and $170.0 was outstanding under the receivables facility. Greif reported compliance with debt covenants.
Material changes and business drivers
- Q3 operating profit fell $37.1 and nine-month operating profit fell $37.2. The periods included higher impairments and restructuring, increased SG&A, and a $9.1 non-cash loss on a rigid-packaging business sale. Nine-month results also included a $16.9 timberland gain.
- Rigid Industrial Packaging sales increased, but operating profit declined (Q3 $41.3 versus $61.7; nine months $119.2 versus $146.4), reflecting the divestiture loss, impairments, higher costs and SG&A.
- Paper Packaging sales increased, while Q3 operating profit declined to $27.9 from $30.7; nine-month operating profit was broadly flat at $84.4. Higher energy, input, logistics and bad-debt costs weighed on results.
- Flexible Products sales and profitability weakened. The segment reported a Q3 operating loss of $12.9 and a nine-month loss of $22.4, versus approximately break-even and $1.4 profit, respectively, in 2013. The prolonged occupation of a Turkey manufacturing facility disrupted supply and raised costs; impairment and restructuring charges also increased.
- Land Management nine-month operating profit rose to $26.2 from $12.7, primarily because of the $16.9 timberland-sale gain; Q3 operating profit declined to $3.3 from $4.3.
- Balance-sheet changes included increases in receivables and inventory, attributed mainly to collection timing and advance purchases, respectively. Goodwill declined $35.0 to $968.5; long-term debt increased $21.7 from October 31, 2013.
Outlook, risks and unusual items
- Management anticipated a continuing, slow global recovery through the rest of FY2014, with moderate sales-volume improvement and slightly higher raw-material costs in some regions. It expected rigid packaging to benefit from moderate volume growth, particularly in Europe, and cost savings.
- Management planned further Flexible Products actions to reposition the business, including closure of the Saudi Arabia fabric hub in Q4 FY2014, and said it would accelerate restructuring and pursue sales of selected non-core assets. Remaining estimated costs under open or developing restructuring plans were $13.2.
- A final phase of a timberland-sale contract was expected to close by Q1 FY2015, with an estimated gain of approximately $22–$24. On August 7, 2014, Greif also agreed to sell a Flexible Products division for an expected purchase price of approximately $63, subject to final adjustments.
- Management said operating cash flows and available borrowing sources were expected to cover anticipated liquidity needs for at least 12 months. Expected FY2014 capital expenditures, excluding timberland purchases and acquisitions, were approximately $130.
- Three material weaknesses in internal control remained as of July 31: accounting for non-routine or complex transactions; withholding taxes on subsidiary financing; and preparation and review of quarterly reporting information in the Latin America business unit. Management concluded disclosure controls were not effective, while stating the financial statements fairly presented the reported periods.
- Other risks include economic and competitive pressures, currency and political exposure, raw-material and energy costs, execution of acquisitions and restructuring, tax uncertainty, joint-venture limitations, environmental obligations and litigation. Environmental reserves were $25.7; management did not expect pending litigation or individual environmental sites to have a material adverse effect.
Key facts for investors to verify
- Whether Flexible Products can restore operations and margins following the Turkey facility disruption and planned Saudi Arabia closure.
- The assumptions and tax effects associated with held-for-sale assets, the planned Flexible Products sale, and the expected timberland-sale gain.
- Progress in remediating the three disclosed material weaknesses and whether future filings report effective controls.
- Working-capital trends, cash conversion, debt levels, covenant headroom and continued access to receivables and revolving facilities.
- Whether management’s volume, cost and capital-expenditure expectations were achieved; the filing provides no quantified consolidated earnings guidance.