Greif, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended April 30, 2014; Greif’s fiscal year ends October 31. Amounts are in U.S. dollars, millions, except per-share data.
Business context and financial performance
Greif makes rigid and flexible industrial packaging, paper packaging products, and manages timberland. It reported four segments: Rigid Industrial Packaging & Services, Paper Packaging, Flexible Products & Services, and Land Management.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,100.7 | $1,088.9 | $2,135.1 | $2,097.5 |
| Gross profit | $204.2 | $202.6 | $390.8 | $389.3 |
| Gross margin | 18.6% | 18.6% | 18.3% | 18.6% |
| Operating profit | $74.6 | $83.9 | $146.6 | $147.9 |
| Net income | $34.5 | $42.3 | $65.1 | $67.2 |
| Net income attributable to Greif | $35.8 | $40.2 | $65.3 | $63.8 |
| Greif EPS, Class A / Class B | $0.61 / $0.92 | $0.69 / $1.03 | $1.12 / $1.67 | $1.09 / $1.63 |
| EBITDA (non-GAAP) | $116.2 | $122.0 | $222.7 | $222.4 |
Quarterly sales rose 1.1%, mainly from higher selling prices, partly offset by unfavorable currency translation. First-half sales increased 1.8%; consolidated volumes were flat and selling prices rose 2.9%. Q2 operating margin was approximately 6.8%, versus 7.7% a year earlier.
Segment developments and period comparisons
- Rigid Industrial Packaging & Services: Q2 sales increased to $784.3 from $773.4, but operating profit fell to $47.2 from $53.2 amid higher SG&A and adverse weather. First-half operating profit declined to $76.7 from $84.7.
- Paper Packaging: Q2 sales and operating profit increased to $205.0 and $26.5, respectively. First-half operating profit rose to $56.5 from $53.4, helped by pricing and volume.
- Flexible Products & Services: Q2 sales fell to $105.3 from $112.4 and the segment recorded a $10.3 operating loss, versus $0.8 profit. First-half operating loss was $9.5, versus $1.4 profit. A prolonged illegal occupation of a Turkish manufacturing facility disrupted production, caused lost sales and higher supply, security, and idle-facility costs.
- Land Management: Q2 operating profit increased to $11.2 from $4.2, and first-half profit to $22.9 from $8.4, primarily due to timberland-sale gains of $8.2 and $16.9, respectively. Timberland sales were absent in the comparable 2013 periods.
Q2 SG&A increased 11.1% to $135.4, or 12.3% of sales versus 11.2%. For the first half, SG&A rose 5.1% to $256.9, or 12.0% of sales versus 11.7%. Restructuring charges were $3.9 in Q2 and $6.5 year to date, largely for employee separations and operational rationalization.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $39.9, compared with $39.0. Investing cash use was $110.5, including $52.3 for acquisitions, $62.0 for capital expenditures, and $33.7 for timberland purchases, partly offset by asset-sale proceeds.
- Financing provided $80.6; dividends paid were $49.1. Cash increased $9.3 to $87.4 from October 31, 2013. Capital expenditures excluding timberland purchases were $62.0; management expected approximately $150 for fiscal 2014.
- At April 30, cash was $87.4, current assets $1,169.5, and current liabilities $805.9 (current ratio approximately 1.45). Inventories were $407.1, up $31.8 since fiscal year-end, partly due to advance purchases for discounts.
- Total reported debt, including short-term borrowings and current maturities, was approximately $1,386.2, versus $1,281.3 at October 31, 2013. Long-term debt was $1,300.8; short-term borrowings were $70.4. The increase in long-term debt was partly related to the two acquisitions.
- The $800 revolving credit facility had $294.9 outstanding and $674.2 available after letters of credit. The separate $170 receivables facility was fully drawn. Greif was in compliance with debt covenants; covenant limits included maximum leverage of 4.00:1 and minimum interest coverage of 3.00:1.
Management said operating cash flow, credit facilities, and receivables-sale proceeds were expected to cover anticipated working capital, capital expenditures, debt repayment, potential acquisitions, and other liquidity needs for at least 12 months.
Outlook, risks and unusual items
- Management anticipated a slow global recovery, moderate sales-volume improvement, and slightly higher raw-material costs in some regions for the balance of fiscal 2014. It expected Rigid Industrial Packaging to benefit from moderate growth, particularly in Europe, and cost savings; it planned actions to reposition Flexible Products for sustainable growth and profitability, pursue selected non-core asset sales, and accelerate restructuring.
- Management expected the final phase of an approximately $90 million timberland-sale contract to close by Q1 2015, with an estimated gain of $22–$24 million.
- An interim goodwill impairment analysis was performed for Flexible Products following the facility occupation; no impairment was recorded. Estimated reporting-unit fair value exceeded carrying value by approximately 23% at April 30.
- Environmental reserves were $26.2. Greif said pending litigation was not expected to have a material adverse effect, while noting environmental remediation could materially affect results if multiple adverse developments occurred together.
- The effective tax rate was 36.2% for Q2 and 35.7% year to date, higher than the prior-year rates of 31.8% and 32.9%, principally due to a shift in earnings toward higher-tax jurisdictions. Q2 included a net $1.0 discrete tax benefit: $2.0 expense in Canada and $3.0 benefit in Brazil.
- Management disclosed three material weaknesses in internal control over financial reporting: non-routine or complex transactions; withholding taxes on subsidiary financing; and preparation and review of a Latin America quarterly reporting package. Remediation was in progress, but controls had not operated long enough to establish effective remediation. Disclosure controls were therefore deemed ineffective. A Brazil intercompany-merger tax item was recorded in Q2 rather than Q1; the company said it was not material to either period.
- Principal stated risks include economic conditions, pricing and competition, raw-material and energy costs, currency and political exposure, acquisition and restructuring execution, labor disruptions, environmental matters, and timber-sale variability.
Important facts for investors to verify
- Progress restoring operations and profitability at the occupied Turkish facility, and whether Flexible Products’ losses and impairment headroom change.
- Debt levels, borrowing availability, covenant compliance, and the sustainability of cash generation given working-capital needs and capital spending.
- Timing, completion, and realized gain on the final timberland-sale phase; assess earnings excluding timberland gains.
- Remediation and independent testing of all three disclosed material weaknesses, and any subsequent control or reporting developments.
- Execution of restructuring and non-core asset-sale plans, and whether the projected 2014 capital expenditures and liquidity expectations remain current.