Greif, Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended October 31, 2014; fourth-quarter figures are for the three months ended October 31, 2014. Greif is a global industrial-packaging and services company, with paper packaging, flexible products and timberland businesses. Amounts below are in U.S. dollars; millions unless noted. FY2013 comparatives are restated.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $4,239.1 | $4,219.9 |
| Gross profit / margin | $811.0 / 19.1% | $832.2 / 19.7% |
| Operating profit | $249.3 | $341.6 |
| Net income | $44.9 | $147.5 |
| Net income attributable to Greif | $91.5 | $144.7 |
| Class A / Class B diluted EPS | $1.56 / $2.33 | $2.47 / $3.70 |
| EBITDA, non-GAAP | $395.6 | $486.1 |
| Operating cash flow | $261.8 | $250.3 |
Net sales rose 0.5%, mainly from 2.5% higher prices, partly offset by 0.8% lower volume and a 1.2% unfavorable currency effect. Gross profit and margin declined; operating profit fell $92.3 million, largely reflecting increased impairment charges, higher SG&A, adverse weather and currency effects. FY2014 income tax expense was $115.0 million, an effective rate of 72.8%, versus 40.6% in FY2013; nondeductible goodwill impairment and disposals, valuation allowances and uncertain tax positions contributed.
Cash and equivalents were $85.1 million at year-end. Total reported long-term debt, including current maturities, was $1,105.0 million, down from $1,217.2 million; short-term borrowings were an additional $48.1 million. The company reported $770.2 million available under its revolving credit facility and compliance with its debt covenants. FY2014 capital expenditures were $137.9 million excluding $56.8 million spent on timberland. Management expected approximately $150 million of FY2015 capital expenditures excluding timber purchases.
Segments and fourth-quarter items
- Rigid Industrial Packaging & Services: Sales of $3,077.0 million, up 0.5%; operating profit declined to $170.1 million from $196.8 million.
- Paper Packaging: Sales grew 4.6% to $706.8 million; operating profit increased to $125.8 million from $123.8 million.
- Flexible Products & Services: Sales fell 5.1% to $425.8 million and operating loss widened to $78.6 million. The segment recorded a $50.3 million goodwill impairment; the Turkish facility occupation and closure of the Saudi fabric hub also weighed on results. All segment goodwill was written off.
- Land Management: Sales were $29.5 million, including timberland sale gains of $17.1 million; operating profit was $32.0 million.
FY2014 fourth-quarter sales were $1,048.1 million; consolidated net loss was $35.5 million, while net income attributable to Greif was $8.7 million. The quarter included $70.2 million of non-cash asset impairment charges, $5.6 million of restructuring charges, $2.8 million of gains on property disposals and $21.2 million of gains on business disposals. Across FY2014, Greif closed eight plants and severed 850 employees; anticipated savings from 2014 restructuring activity were approximately $16.8 million, with $9.2 million of additional costs expected.
Outlook, risks and unusual matters
- Management expected FY2015 net sales and net income to remain relatively flat, with a modest global recovery offset by weaker trends in Europe and Latin America. A stronger U.S. dollar was expected to pressure revenue and earnings; a planned approximately two-week shutdown at the Riverville mill for upgrades was also expected to reduce FY2015 net income.
- Management planned further restructuring, facility closures, non-core asset sales and SG&A reductions. Savings and execution remain uncertain.
- In Q4, Greif restated prior periods after identifying errors involving taxes, paper-trading accounting, Venezuela hyperinflation, inventory, fixed assets and other balances. The aggregate prior-period errors, net of tax, were $24.5 million; management said they were not material in any individual prior year but would have been material to FY2014 if left uncorrected. Paper-trading eliminations reduced restated sales by $133.5 million in FY2013 and $140.0 million in FY2012.
- Management identified material weaknesses in controls over complex transactions, income-tax accounting for certain foreign subsidiaries and IT access/change controls. Management said remediation was underway, with completion targeted by October 31, 2015. The auditor issued an adverse opinion on internal control over financial reporting, while issuing an unqualified opinion on the FY2014 financial statements.
- Environmental reserves were $24.7 million. A subsidiary faced an Illinois lawsuit regarding alleged petroleum releases; the state sought penalties, cost reimbursement and injunctive relief, with potential civil penalties of approximately $100,000. Greif said it intended to defend the matter.
- Key ongoing exposures include foreign-exchange movements, cyclical demand and pricing, steel/resin/containerboard and energy costs, customer and supplier concentration, acquisitions, environmental and other legal contingencies, pension obligations and the company’s substantial goodwill balance.
Most important facts for investors to verify
- Review the restatement details and subsequent filings for any further corrections, and assess the consequences of the disclosed material weaknesses and adverse internal-control opinion.
- Track whether the flexible-products turnaround, plant closures and cost-saving plans deliver the expected results after the segment’s goodwill write-off and operating losses.
- Verify FY2015 performance against management’s flat sales and earnings outlook, including currency effects and the Riverville shutdown impact.
- Assess debt maturities, covenant headroom, reliance on receivables financing and the capacity to fund capital expenditures, dividends and restructuring.
- Monitor tax valuation allowances and uncertain tax positions, environmental matters, pension funding and proceeds from planned non-core asset sales.