Greif, Inc. — Q3 2010 Form 10-Q
Business context and period: Greif manufactures industrial and flexible packaging, paper packaging, and manages timberland. This filing covers the three and nine months ended July 31, 2010, in the company’s fiscal year. Unless noted, dollar figures below are in millions. Prior-year results were retrospectively adjusted to FIFO inventory accounting; fiscal 2010 also introduced a Flexible Products & Services segment, including acquired Storsack and reclassified multiwall-bag operations.
Financial results and key metrics
| Metric | Three months ended July 31, 2010 | Three months ended July 31, 2009 | Nine months ended July 31, 2010 | Nine months ended July 31, 2009 |
|---|---|---|---|---|
| Net sales | $921.3 | $717.6 | $2,467.6 | $2,031.7 |
| Gross profit | $191.0 | $139.4 | $497.3 | $331.1 |
| Operating profit | $95.7 | $67.0 | $219.1 | $91.6 |
| Net income attributable to Greif | $66.0 | $37.8 | $133.4 | $37.1 |
| Greif diluted EPS, Class A / Class B | $1.12 / $1.70 | $0.65 / $0.98 | $2.28 / $3.43 | $0.64 / $0.96 |
- Q3 gross margin was approximately 20.7%, versus 19.4%; operating margin was 10.4%, versus 9.3%. Nine-month operating profit before restructuring, restructuring-related inventory charges, and acquisition costs was $259.9 million, versus $159.5 million. This is a company-defined non-GAAP measure.
- Q3 sales rose 28%, reflecting 23% higher volume (10% excluding acquisitions) and 5% higher selling prices. Nine-month sales rose 22% (19% excluding foreign currency translation).
- Cash flow: Nine-month operating cash flow was $17.8 million, down from $89.3 million. Investing used $260.3 million, including $152.7 million for acquisitions, $101.0 million for capital expenditures and $19.5 million for timberland purchases. Cash declined $27.7 million to $84.2 million. Operating cash flow less capital expenditures was negative $83.3 million.
- Debt and liquidity: At July 31, total long-term debt including its current portion was $968.6 million; short-term borrowings were $51.0 million. Cash was $84.2 million. The company reported compliance with its credit-facility and note covenants. Current assets were $1,078.7 million and current liabilities $680.3 million. Management said available funding sources were expected to meet anticipated needs for at least 12 months.
- Capital returns and investment: Dividends paid in the first nine months totaled $68.6 million. Capital expenditures, excluding timberland, were expected to be approximately $130 million for fiscal 2010.
Material changes versus the prior comparable period
- Q3 operating profit increased to $95.7 million from $67.0 million; nine-month operating profit rose to $219.1 million from $91.6 million. Higher volumes and prices, acquisitions, improved margins and cost savings contributed. Lower restructuring charges also aided the year-to-date comparison.
- Q3 and nine-month results included $5.5 million and $20.1 million, respectively, of acquisition-related costs. Nine-month restructuring charges were $20.6 million, compared with $57.7 million a year earlier.
- Interest expense rose to $16.0 million in Q3 and $47.6 million year to date, attributed mainly to higher average debt and borrowing costs. Nine-month debt increased versus October 31, 2009, in part to fund acquisitions, dividends and capital expenditures.
- Cash generation weakened despite higher earnings, with significant cash absorbed by working capital and investment. Receivables and inventory increased $127.7 million and $114.2 million, respectively, from October 31, 2009.
- The company completed five acquisitions during the first nine months, with aggregate purchase price below $200 million. Acquisitions expanded rigid industrial packaging and flexible products; Storsack was acquired in the second quarter.
Outlook, commentary, risks and unusual items
- Management expected operating cash flow, receivables financing and borrowing facilities to fund anticipated working capital, capital expenditures, debt repayment and potential acquisitions for at least 12 months. No specific earnings or sales guidance was provided.
- Management attributed improved operating performance to higher demand and selling prices, slight margin expansion, Greif Business System execution, and savings achieved in 2009. It cited raw-material and energy costs, customer demand, pricing, currency and acquisition integration among factors affecting performance.
- A $25.7 million cash benefit from termination of cross-currency swaps ($15.8 million net of tax) was recorded within foreign-currency translation adjustments. Termination of a separate interest-rate swap generated a $3.6 million cash benefit, reflected in long-term debt. These are unusual items and should be distinguished from recurring operating results.
- Environmental remediation liabilities were $31.1 million at July 31, 2010. The company reported no recorded legal liabilities, but noted that claims and proceedings could affect results or liquidity; environmental estimates remain subject to uncertainty.
- Disclosed risks include economic weakness, competition and customer concentration, raw-material and energy price fluctuations, foreign currency and political exposure, acquisition and integration challenges, environmental and product-liability matters, labor disputes, insurance limitations, timber-sales variability, and whether restructuring achieves expected benefits.
- Greif changed to FIFO inventory accounting effective November 1, 2009, and adjusted prior periods retrospectively. It also adopted acquisition accounting guidance that required acquisition costs to be expensed.
Most important facts for investors to verify
- Whether sales growth and margin improvement persist after separating organic volume and pricing effects from acquisitions and currency movements.
- Whether operating cash flow recovers as receivables and inventory grow, and how cash needs are funded alongside acquisition spending, dividends and capital expenditures.
- Debt maturities and refinancing exposure, particularly the $269.0 million scheduled for 2012 and the receivables facility’s purchase commitment subject to earlier termination in December 2010.
- The integration and profitability of Storsack and other acquisitions, including the effects of acquisition-related and integration costs.
- Progress and remaining costs of restructuring, and developments in environmental remediation liabilities and other contingencies.
- The effects of FIFO restatement and the non-GAAP operating-profit measure when comparing results with prior periods.