Greif, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended October 31, 2013. This is an annual report, not a standalone fourth-quarter filing; selected Q4 results are noted below. Amounts are in U.S. dollars.
Business context
Greif is a global industrial-packaging producer operating in more than 50 countries. Its four reportable segments are Rigid Industrial Packaging & Services, Flexible Products & Services, Paper Packaging, and Land Management.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $4,353.4 million | $4,269.5 million |
| Gross profit / margin | $832.6 million / 19.1% | $779.6 million / 18.3% |
| Operating profit | $339.6 million | $282.8 million |
| Net income attributable to Greif | $147.3 million | $122.4 million |
| Diluted EPS, Class A / Class B | $2.52 / $3.77 | $2.10 / $3.14 |
| EBITDA (non-GAAP) | $485.7 million | $430.1 million |
| Cash provided by operations | $250.3 million | $473.3 million |
| Cash and cash equivalents at year-end | $78.1 million | $91.5 million |
FY2013 sales increased 2%, primarily from 1.8% higher volumes and 0.5% higher prices, partly offset by a 0.3% foreign-exchange headwind. Operating profit benefited from stronger Paper Packaging and Land Management results and lower restructuring costs, while impairment charges and losses in Flexible Products weighed on results.
Segment results were mixed: Paper Packaging sales rose to $809.5 million and operating profit to $123.8 million; Rigid Industrial Packaging sales were nearly flat at $3,062.1 million, with operating profit of $196.0 million. Flexible Products sales fell to $448.7 million and recorded a $13.1 million operating loss. Land Management operating profit rose to $32.9 million, including $17.5 million of timberland-sale gains.
Liquidity, debt and capital
At October 31, 2013, total assets were $3,882.2 million, current assets $1,094.0 million and current liabilities $801.7 million. Long-term debt, including its current portion, was $1,217.2 million; short-term borrowings were an additional $64.1 million. The company had $753.8 million available under its amended revolving credit facility, net of outstanding letters of credit, and stated that expected liquidity sources should cover needs for at least 12 months. It was in compliance with its credit covenants at year-end.
Capital expenditures were $136.4 million, excluding $9.0 million of timberland purchases. Management expected approximately $153 million of capital expenditures, excluding potential timberland purchases, through October 31, 2014. Cash dividends paid were $98.3 million; annual dividends per share were $1.68 for Class A and $2.51 for Class B.
Material changes, outlook and risks
- Gross margin improved from 18.3% to 19.1%; restructuring charges declined to $8.8 million from $33.4 million.
- Asset impairment charges increased to $30.0 million from $2.6 million, including charges affecting the rigid and flexible packaging businesses.
- Operating cash flow fell to $250.3 million from $473.3 million, with working-capital movements contributing to the decline.
- The effective tax rate increased to 40.0% from 31.7%, attributed principally to the geographic mix of earnings, discrete tax adjustments and nondeductible impairment charges.
- Management anticipated a slow recovery in key markets in FY2014, with moderate volume improvement and upward pressure on raw-material costs. It expected ongoing utilization and start-up cost challenges in Flexible Products, gradual volume improvement in Rigid Packaging, and additional timberland sales. No quantified full-year earnings guidance is provided in the supplied filing text.
- Key risks include economic cyclicality, competitive pricing, raw-material and energy costs, foreign exchange and political exposure, acquisition integration, environmental and legal matters, and pension and tax-estimate uncertainty.
Restatement, controls and unusual items
The company corrected prior-period errors involving withholding taxes on financing transactions and reserves and asset balances in its Brazil rigid-packaging business. The cumulative prior-period errors were $9.6 million; relevant periods were restated. Management reported that the Brazil control weakness was remediated, but two material weaknesses remained at year-end: accounting for non-routine or complex transactions and withholding taxes on subsidiary financing transactions. Management concluded disclosure controls were ineffective, and the auditor issued an adverse opinion on internal control over financial reporting. The auditor’s opinion on the consolidated financial statements was unqualified.
FY2013 Q4 reported net sales of $1,126.2 million and net income attributable to Greif of $36.8 million. The quarter included $3.4 million of restructuring charges, a $17.5 million timberland-sale gain, and $28.2 million of noncash asset impairments. The filing reports no pending material legal proceedings; separately, a subsidiary paid a $225,000 civil penalty under a Pennsylvania environmental consent order in December 2013. Environmental reserves were $26.8 million at year-end.
Most important facts for investors to verify
- Review the restated periods and the nature and remaining remediation status of both material weaknesses in financial reporting controls.
- Assess whether operating cash flow can recover and whether working-capital needs, capital spending, dividends and debt maturities remain adequately funded.
- Track Flexible Products’ utilization, start-up costs, impairments and joint-venture performance; the segment reported a $13.1 million operating loss.
- Separate recurring operating performance from timberland gains and impairment charges, and evaluate the sustainability of FY2013 profit improvement.
- Monitor raw-material inflation, tax-rate variability, environmental reserves and compliance with debt covenants.