Greif, Inc. — Q3 Fiscal 2013 Form 10-Q
Reporting period: Three and nine months ended July 31, 2013; balance-sheet comparisons are against October 31, 2012. Amounts are in U.S. dollars, millions except per-share data. The filing’s 2012 comparative figures reflect restatements described below.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,129.7 | $1,102.9 | $3,227.2 | $3,193.9 |
| Gross profit | $217.3 | $202.2 | $606.6 | $585.0 |
| Operating profit | $96.7 | $84.8 | $244.6 | $218.7 |
| Net income attributable to Greif | $46.7 | $37.5 | $110.5 | $96.6 |
| Class A / Class B diluted EPS | $0.80 / $1.20 | $0.64 / $0.96 | $1.89 / $2.83 | $1.66 / $2.48 |
| EBITDA (non-GAAP) | $132.2 | $124.0 | $354.6 | $333.9 |
- Q3 sales rose 2.4%; management attributed the increase mainly to a 1.2% improvement in selling prices and 1.0% higher volumes. Gross margin increased to 19.2% from 18.3%.
- Nine-month sales rose 1.0%, with volumes up 1.8% and selling prices down 0.6%. Gross margin improved to 18.8% from 18.3%.
- Paper Packaging was the principal earnings driver: Q3 operating profit grew to $30.7 from $21.0, and nine-month profit to $84.1 from $58.3. Flexible Products remained weak, with Q3 operating profit immaterial and nine-month EBITDA down to $9.3 from $14.3.
- Net interest expense declined to $19.2 in Q3 and $62.2 year to date, reflecting lower average interest rates. Other expense was $4.0 in Q3 and $7.9 year to date, mainly due to foreign-exchange losses and, year to date, higher Venezuelan hyperinflation adjustments.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $118.7, down from $334.2 in 2012. Working-capital movements included cash uses from receivables ($49.1), inventory ($32.0) and accounts payable ($28.9); the filing also reports a $14.5 use related to deferred purchase price on sold receivables.
- Investing cash outflow was $68.5, including $82.6 of property, plant and equipment purchases. Financing cash outflow was $42.2. Cash ended at $94.9, versus $91.5 at October 31, 2012.
- At July 31, current assets were $1,134.3 and current liabilities $818.9; working capital was approximately $315.4. Trade receivables were $489.2 and inventories $399.8.
- Long-term debt, including its current portion, was $1,250.8; short-term borrowings were $65.5. Gross debt on this basis was approximately $1,316.3, versus $1,276.4 at October 31, 2012. Long-term debt increased partly because of supplier-consignment changes, Brazilian refinancing and additional receivables-facility borrowings.
- The amended credit agreement had $277.6 outstanding and $715.3 available at quarter-end, after letters of credit. The company reported compliance with its financial covenants. A separate $130.0 U.S. receivables facility was fully drawn and matures in September 2014.
- Management said operating cash flow and available borrowing and receivables-sale facilities were expected to cover anticipated needs for at least 12 months. 2013 capital expenditures, excluding timberland purchases and acquisitions, were expected to be approximately $141.
Material changes, outlook and risks
- Outlook: Management expected modest sales growth and generally stable raw-material costs in Q4 2013. Rigid packaging faced challenging conditions and a delayed agricultural season; flexible products faced capacity-utilization pressure from new facilities; paper packaging conditions were expected to remain favorable. The company continued plans to unlock value in Land Management.
- Restructuring: Nine-month charges fell to $5.4 from $22.9. Remaining expected costs on open or developing plans were $6.5 at July 31, 2013.
- Restatement: The company corrected prior-period errors involving withholding taxes on intercompany financing and improperly stated reserves and asset balances in its Brazilian rigid-packaging business. The aggregate prior-period errors were $9.6; management said they were not material individually in prior years but would have been material to the current-year statements. Prior periods presented were restated.
- Internal controls: Management identified three material weaknesses as of July 31: the Brazil financial close and oversight process; accounting for non-routine or complex transactions; and withholding taxes on subsidiary financing. Remediation was underway, but controls had not operated long enough to establish effectiveness. Management concluded disclosure controls and procedures were not effective.
- Other items: On August 5, 2013, after quarter-end, Greif paid $46.6 of deferred consideration for an acquisition completed in 2011. Environmental reserves were $27.0. Management did not expect pending litigation to materially affect the consolidated financial statements; it noted environmental remediation could affect results if multiple adverse developments occurred together.
- Key risks: The filing highlights economic and demand conditions, competitive and pricing pressure, raw-material and energy volatility, foreign-exchange and political exposure, restructuring execution, tax positions, joint-venture interests, labor, environmental and regulatory matters, business continuity, and timber-sale variability.
Important facts for investors to verify
- Review the restated comparative periods and the nature, allocation and potential recurrence of the $9.6 prior-period errors.
- Track remediation and independent testing of all three reported material weaknesses, especially in Brazil and subsidiary-financing tax accounting.
- Reconcile the sharp year-over-year decline in operating cash flow with working-capital needs and the company’s receivables-sale programs.
- Assess debt maturities, facility availability, covenant headroom and the effect of the $46.6 post-quarter acquisition payment.
- Monitor flexible-products utilization and new-facility costs, paper-packaging pricing and margins, and whether the Q4 outlook was achieved.
- Confirm the timing and cash impact of restructuring, environmental remediation and estimated tax-benefit changes; the filing estimates a $17.8–$28.0 net decrease in unrecognized tax benefits over the next 12 months, subject to uncertainty.