Greif, Inc. — Fiscal 2013 Second-Quarter 10-Q
Reporting period: Quarter and six months ended April 30, 2013. Greif manufactures industrial packaging and operates in four reportable segments: Rigid Industrial Packaging & Services, Flexible Products & Services, Paper Packaging, and Land Management. Dollar amounts are in millions unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,088.9 | $1,098.2 | $2,097.5 | $2,091.0 |
| Gross profit | $202.6 | $205.5 | $389.9 | $382.9 |
| Operating profit | $83.9 | $78.3 | $148.5 | $134.8 |
| Net income | $43.0 | $39.2 | $69.2 | $62.0 |
| Net income attributable to Greif | $40.9 | $39.4 | $65.8 | $61.1 |
| Net cash from operating activities | Not presented separately | Not presented separately | $38.9 | $179.4 |
- Q2 diluted EPS was $0.70 for Class A and $1.05 for Class B, versus $0.67 and $1.01, respectively, a year earlier. Six-month diluted EPS was $1.13 and $1.68, versus $1.05 and $1.57.
- Gross margin was 18.6% in Q2, versus 18.7%; for the six months it was 18.6%, versus 18.3%. Operating profit improved despite slightly lower quarterly sales. EBITDA, a non-GAAP measure, was $122.0 in Q2 versus $115.3, and $223.0 for six months versus $210.7.
- Six-month capital expenditures were $55.5, excluding $0.5 of timberland purchases. Operating cash flow fell by $140.5 year over year; working-capital movements included cash uses from receivables, inventory, deferred purchase price on sold receivables and accounts payable.
- Cash was $85.6 at April 30, 2013, down from $91.7 at October 31, 2012. Total debt was approximately $1,340.2, comprising $1,279.4 of long-term debt including current maturities and $60.8 of short-term borrowings; the filing reports long-term debt net of current portion as $1,269.4.
- Working capital balances included receivables of $471.8 and inventories of $392.5. The company had $682.1 available under its amended revolving credit facility after letters of credit. It reported compliance with the credit agreement’s leverage and interest-coverage covenants.
Changes versus prior periods
- Q2 sales declined 0.8%, reflecting a 0.5% volume increase offset by a 0.5% price decline and 0.8% adverse foreign-currency translation. Six-month sales increased 0.3%, with 1.0% volume growth partly offset by lower prices and currency effects.
- Paper Packaging was the key earnings contributor: Q2 sales rose to $194.5 from $173.4 and operating profit to $25.7 from $17.1; six-month operating profit increased to $53.4 from $37.3. Higher selling prices, volumes and lower raw-material costs supported results.
- Rigid Industrial Packaging & Services Q2 sales and operating profit declined to $773.4 and $53.2, respectively, from $803.0 and $56.0. Lower prices, product mix and currency effects weighed on sales; the segment also cited weaker gross margin in the Americas.
- Flexible Products & Services Q2 operating profit improved to $0.8 from a $1.9 loss, partly because restructuring charges were much lower. However, gross margin was pressured by consolidation and new-facility start-up costs, including the Saudi Arabia fabric hub.
- Land Management Q2 operating profit fell to $4.2 from $7.1, mainly because special-use property disposals generated less gain than in the prior year. Companywide restructuring charges were $1.2 for six months, compared with $19.0.
Outlook, risks and unusual items
- Management said markets were gradually improving despite continuing concerns about Western Europe. For the second half of 2013, it anticipated higher volumes than the prior year, supported by modest global growth and agriculture, relatively stable to declining raw-material costs, and favorable Paper Packaging conditions. It intended to manage costs and use its global footprint to improve full-year profitability.
- Expected 2013 capital expenditures, excluding timberland purchases and acquisitions, were approximately $141. Management said anticipated operating cash flows and borrowing sources were expected to cover working capital, capital expenditures, debt repayment, potential acquisitions and other needs for at least 12 months. No specific earnings guidance was provided.
- The amended credit agreement, entered in December 2012, provides an $800 revolving facility and a $200 term loan, both maturing in December 2017. Debt increased by $94.1 from October 31, 2012; management cited supplier-consignment changes and refinancing of Brazilian short-term debt. A $1.3 debt-extinguishment charge was recorded in the first half.
- Environmental reserves were $26.9; estimated remediation payments include $8.0 in 2013. Management did not expect exposure at any individual site to be material, but noted a series of adverse developments could affect results. The company said pending litigation was not expected to have a material adverse effect. A possible net decrease in unrecognized tax benefits of approximately $17.8–$28.0 over the next 12 months was estimated, subject to uncertainty.
- Foreign-currency translation reduced Q2 comprehensive income; Q2 foreign-currency translation loss was $20.3. Greif also disclosed two continuing material weaknesses in internal control over financial reporting: Brazil close-process oversight and accounting for non-routine or complex transactions. Remediation efforts were underway, but management said the weaknesses had not yet been fully remediated and disclosure controls were ineffective.
- Other identified risks include economic and customer-demand weakness, pricing pressure, raw-material and energy cost changes, currency and political exposure, restructuring execution, joint-venture dependencies, labor and environmental matters, and timber-sale variability.
Important facts for investors to verify
- Whether operating cash flow recovers after the substantial year-over-year decline, and how working capital and receivables-sale programs affect reported cash flow.
- Progress in remediating the two material weaknesses, particularly the Brazil close process and complex-transaction accounting.
- Debt levels, refinancing needs and covenant headroom, including the $187.5 of scheduled long-term debt maturities in 2014 and the company’s reliance on receivables financing.
- Whether Paper Packaging’s improved pricing and input-cost conditions persist, and whether start-up and consolidation costs continue to pressure Flexible Products & Services.
- Execution of the approximately $141 capital-spending plan, the Saudi fabric-hub ramp-up, and the expected second-half volume improvement.
- Developments in environmental remediation, tax disputes and unrecognized tax benefits; compare subsequent disclosures with the estimates and contingencies reported here.