Greif, Inc. — FY2012 Form 10-K
Reporting period: Fiscal year ended October 31, 2012. Fiscal fourth-quarter figures are for the three months ended October 31, 2012; the filing is an annual report, not a standalone quarterly filing. Unless noted otherwise, amounts are in millions of U.S. dollars.
Business context
Greif is a global producer of industrial packaging, flexible packaging and paper packaging, and also manages and sells timber and land. It reports four segments: Rigid Industrial Packaging & Services, Flexible Products & Services, Paper Packaging, and Land Management. Operations span more than 50 countries.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $4,269.5 | $4,248.2 |
| Gross profit / margin | $779.7 / 18.3% | $798.4 / 18.8% |
| Operating profit | $284.5 | $330.7 |
| Net income attributable to Greif | $126.1 | $177.5 |
| diluted EPS, Class A / Class B | $2.17 / $3.24 | $3.04 / $4.56 |
| EBITDA (non-GAAP) | $431.7 | $460.8 |
| Operating cash flow | $473.4 | $172.3 |
| Capital expenditures, excluding timberland | $166.0 | $162.4 |
Sales rose about 1%, but operating profit fell $46.2 million and net income attributable to Greif fell $51.4 million. Annual operating and net margins were approximately 6.7% and 3.0%, respectively. Operating cash flow increased substantially, aided in part by working-capital improvements; cash declined to $91.7 million from $127.4 million.
At October 31, 2012, total assets were $3,856.9 million, current assets $1,064.0 million, and current liabilities $862.0 million. Long-term debt, including current maturities, was $1,200.3 million; short-term borrowings were $77.1 million. Debt balances declined versus 2011, while net interest expense increased to $89.9 million from $76.0 million. The filing states that available operating cash flows and borrowing sources were expected to cover anticipated needs for at least 12 months.
Annual dividends were $1.68 per Class A share and $2.51 per Class B share, unchanged from 2011. The credit agreement restricts dividends and other share repurchases subject to specified conditions.
Fourth-quarter results
FY2012 fourth-quarter net sales were $1,075.6 million, gross profit $194.6 million, net income $29.6 million and net income attributable to Greif $26.5 million. Compared with FY2011 fourth quarter, sales declined from $1,131.6 million and gross profit from $205.0 million, while net income attributable to Greif increased from $20.8 million. Q4 2012 included $10.5 million of restructuring charges and $3.2 million of acquisition-related charges.
Material changes and segment performance
- Rigid Industrial Packaging & Services: Sales increased 2% to $3,075.6 million, but operating profit fell to $186.7 million from $219.9 million. Management cited market pressure and higher conversion costs; segment volume on a same-structure basis was weaker amid challenging markets.
- Flexible Products & Services: Sales fell 16% to $453.3 million and the segment recorded a $1.0 million operating loss versus $16.9 million profit. Lower volumes, restructuring-related costs, product mix and startup costs at the Saudi Arabia fabric hub were cited.
- Paper Packaging: Sales rose 6% to $713.8 million and operating profit increased to $83.5 million from $74.9 million, helped by higher volume and lower recovered-paper costs.
- Land Management: Sales increased to $26.8 million, while operating profit declined to $15.3 million from $19.0 million. The prior year included a $2.5 million gain related to an earlier property expropriation.
Across the company, gross profit declined, SG&A increased to $469.4 million, and restructuring charges rose to $33.4 million from $30.5 million. Foreign currency translation reduced FY2012 sales by about 3%; same-structure volumes decreased 2%.
Outlook, risks and unusual items
- Management expected continued weakness in Rigid and Flexible Packaging in the first quarter of FY2013, reflecting slow recovery across regions and continued European weakness. It anticipated solid Paper Packaging performance, supported by expected strong volumes and then-current containerboard prices.
- Management expected benefits from contingency actions, acquisition integration and Greif Business System initiatives in FY2013. It anticipated approximately $140 million of capital expenditures through October 31, 2013, excluding potential timberland purchases. No full-year earnings guidance is provided in the supplied filing text.
- In December 2012, after fiscal year-end, Greif amended and restated its $1.0 billion secured credit agreement. The new facilities comprise an $800 million revolving facility and a $200 million term loan, both maturing in December 2017, with leverage and interest-coverage covenants.
- FY2012 results and comparative periods were restated after errors involving Latin America operations, tax matters and joint-venture financing structures. The aggregate prior-period errors, net of tax, were $25.6 million; the filing says the errors were not material to any individual prior year but would have been material to FY2012 if left uncorrected.
- Management identified material weaknesses in internal controls over financial reporting related to the Brazil close and oversight process and accounting for non-routine or complex transactions. Management said remediation efforts were underway, but the controls had not been in place long enough to conclude the Brazil weakness was fully remediated. The auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting.
- Environmental reserves were $27.5 million, with estimated remediation payments of $8.6 million in 2013 and additional payments thereafter. Management did not expect any individual site exposure to be material, while acknowledging estimates are uncertain. Other key risks include economic and industry cyclicality, raw-material and energy prices, foreign exchange, acquisitions, competition, pension obligations and legal or regulatory matters.
Key facts investors should verify
- Review the restatement disclosures and assess whether the identified accounting and internal-control weaknesses have been remediated in subsequent filings.
- Track whether Rigid and Flexible Packaging volumes, margins and the Saudi fabric hub improved as management expected.
- Reconcile operating cash flow and working-capital movements, including the role of receivables sales, against underlying cash generation.
- Monitor debt, interest expense, covenant headroom, refinancing needs and the restrictions on dividends and repurchases.
- Assess the assumptions and potential cash timing behind environmental reserves, pension liabilities and deferred tax assets.