Greif, Inc. — Q3 2012 Form 10-Q
Business context and reporting period. Greif manufactures industrial packaging, flexible packaging and paper packaging, and manages timber properties. This filing covers the fiscal third quarter and nine months ended July 31, 2012; comparisons are with the corresponding 2011 periods. Unless otherwise indicated, amounts are in millions of dollars. Prior-period financial information was adjusted or restated in certain respects.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,102.8 | $1,121.9 | $3,193.6 | $3,116.5 |
| Gross profit | $202.5 | $211.1 | $587.1 | $594.1 |
| Gross margin | 18.4% | 18.8% | 18.4% | 19.1% |
| Operating profit | $86.1 | $107.6 | $225.7 | $266.8 |
| Net income attributable to Greif | $40.7 | $66.9 | $105.8 | $158.4 |
| Diluted EPS, Class A / Class B | $0.70 / $1.05 | $1.14 / $1.72 | $1.82 / $2.72 | $2.70 / $4.06 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $319.9 | $22.7 |
- Quarterly change: Sales declined about 2%; operating profit fell about 20%, and Greif-attributable net income fell about 39%. Gross margin contracted 0.4 percentage point.
- Nine-month change: Sales increased about 2%, but operating profit declined about 15% and Greif-attributable net income declined about 33%. Adjusted operating profit before special items, a non-GAAP measure, was $253.6 versus $300.4; EBITDA was $341.3 versus $359.5.
- Segment trends: Q3 Flexible Products & Services sales fell to $109.7 from $141.2 and operating profit to $1.4 from $7.7, reflecting weak markets, European network-consolidation issues, lower prices and currency impacts. Rigid Industrial Packaging & Services operating profit fell to $62.1 from $71.6. Paper Packaging improved, with sales of $182.7 and operating profit of $21.0, aided by volume growth and lower recovered-paper costs. Land Management operating profit declined to $1.6 from $10.8, largely because of lower special-property disposal gains.
- Cash flow and investment: Nine-month operating cash flow was $319.9, compared with $22.7 a year earlier. The filing cites working-capital movements, including receivable collections and other items, as contributors; cash flow also reflects receivables-sale programs. Capital expenditures were $107.5 for the nine months, excluding $3.4 of timberland purchases.
- Liquidity and debt: At July 31, cash was $91.7; current assets were $1,147.5 and current liabilities $833.2. Long-term debt was $1,198.2, current maturities $21.9, and short-term borrowings $97.4. Total reported debt across those categories was about $1,317.5, down from about $1,494.9 at October 31, 2011. The company reported compliance with its credit-agreement financial covenants.
Outlook, commentary and material items
- Management said market conditions improved modestly sequentially but more slowly than expected. Continued weakness in Europe and slower-than-anticipated recovery across regions were expected to weigh on rigid and flexible packaging in Q4. It anticipated solid Q4 Paper Packaging performance on expected strong volumes and existing containerboard prices.
- Management expected approximately $145 of 2012 capital expenditures, excluding timberland purchases and acquisitions, including completion of the Saudi Arabian fabric hub. It expected a fiscal 2012 cash tax rate of approximately 20%, despite a 32.6% nine-month effective tax rate. No full-year earnings guidance is stated in the provided filing text.
- Restructuring charges were $22.9 for the nine months, versus $11.4 in 2011. Management expected total costs of $30.0 for open or developing restructuring plans, with $7.1 remaining to be incurred; activities focused on operational rationalization and acquisition integration.
- Internal-control material weakness: Errors in the Brazil rigid-packaging business resulted from deficiencies in the financial close process and oversight. The aggregate prior-period errors of $18.4 would have been material to the current-year income statement, although no individual prior period was materially misstated. Greif corrected/restated affected information, reported disclosure controls were not effective because of the weakness, and said it was implementing remediation and planned testing in Q4.
- Other unusual or contingent items: Environmental reserves were $26.6, with estimated payments extending beyond 2016. Greif said individual-site exposure was not expected to be material, while a series of adverse developments could affect results. Unrecognized tax benefits could decrease by $0 to $48.5 over the next 12 months; actual results may differ. Foreign-currency translation reduced goodwill and contributed to a substantial Q3 comprehensive loss.
- Greif launched a European receivables purchase facility in April, with a maximum outstanding amount of €145 million; the company guaranteed subsidiaries’ performance obligations. Receivables sold under the programs totaled $191.2 at July 31, with $21.5 of deferred purchase price uncollected.
Key facts for investors to verify
- Review the Brazil control remediation and subsequent filings for any further restatements or control findings.
- Assess whether weak demand, currency effects and pressure on rigid and flexible packaging margins continued into Q4.
- Check the quality and repeatability of operating cash flow, including working-capital movements and receivables-sale proceeds.
- Monitor debt maturities, covenant headroom, interest expense and reliance on receivables facilities.
- Track restructuring spending against the $30.0 expected total, Saudi fabric-hub execution, and environmental and tax exposures.
- Compare actual Q4 and full-year results with management’s qualitative outlook and stated capital-spending and cash-tax expectations.