Business Context and Reporting Period
Company: GREIF, INC.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended April 30, 2009
Business Overview: Greif operates in three segments: Industrial Packaging (steel, fiber, plastic drums, and services), Paper Packaging (containerboard, corrugated containers), and Timber (management and sale of timber properties). The company is a large accelerated filer incorporated in Delaware.
Key Financial Metrics
| Metric (Dollars in thousands) | 3 Months Ended Apr 30, 2009 |
3 Months Ended Apr 30, 2008 |
6 Months Ended Apr 30, 2009 |
6 Months Ended Apr 30, 2008 |
|---|---|---|---|---|
| Net Sales | $647,897 | $918,019 | $1,314,157 | $1,764,311 |
| Gross Profit | $114,081 | $159,168 | $214,636 | $307,492 |
| Operating Profit | $30,328 | $81,471 | $47,590 | $175,672 |
| Net Income | $12,142 | $48,654 | $13,408 | $109,341 |
| Operating Cash Flow | (Not provided for 3 months) | (Not provided for 3 months) | $(52,918) | $(50,473) |
| Cash and Equivalents | $66,775 | $96,978 | $66,775 | $96,978 |
| Total Debt (Long-term + Short-term) | $886,024 | (Not provided) | $886,024 | (Not provided) |
Note: Total Debt for April 30, 2009, is calculated as Long-term debt ($828,162) plus Short-term borrowings ($57,862).
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 29% in the second quarter and 26% year-to-date compared to 2008. The decline was driven by lower sales volumes across all segments due to the global economic slowdown. Constant currency decreases were 20% (Q2) and 21% (YTD).
- Profitability Compression: Operating profit dropped significantly, from $81.5 million to $30.3 million in Q2, and from $175.7 million to $47.6 million YTD. This was primarily due to volume declines and increased restructuring charges.
- Restructuring Charges: The company recorded $20.3 million in restructuring charges in Q2 2009 and $47.5 million YTD, compared to $7.3 million and $17.8 million in the respective 2008 periods. These charges relate to business realignment, plant closures (13 plants closed YTD), and employee separations (1,124 employees severed YTD).
- Inventory Charges: An additional $9.3 million in restructuring-related inventory charges was recorded in Cost of Products Sold YTD, primarily related to closed facilities in Asia.
- Segment Performance:
- Industrial Packaging: Sales down 30% (Q2); Operating profit down $44.3 million (Q2) due to volume and restructuring.
- Paper Packaging: Sales down 28% (Q2); Operating profit remained relatively stable ($14.3M vs $13.3M) due to lower raw material costs offsetting volume declines.
- Timber: Sales down 58% (Q2); Operating profit down $8.0 million (Q2) due to lower timber sales and special use property sales.
Guidance, Outlook, and Risks
- Outlook: Management expects capital expenditures (excluding timberland) to be approximately $85 million for fiscal 2009. The company is implementing "Greif Business System" initiatives, including hiring freezes and curtailed discretionary spending, to mitigate the economic downturn.
- Liquidity: The company entered into a new $700 million Senior Secured Credit Agreement in February 2009, replacing a $450 million facility. As of April 30, 2009, $234.6 million was available under this agreement. Management believes operating cash flows and borrowing capacity are sufficient to fund working capital and debt obligations.
- Risks and Contingencies:
- Economic Conditions: Continued global economic slowdown impacting demand for industrial and paper packaging.
- Environmental Liabilities: Reserves for environmental liabilities totaled $32.8 million as of April 30, 2009, primarily related to a blending facility in Chicago and Blagden facilities.
- Legal Proceedings: Various lawsuits and claims exist regarding environmental, product liability, and safety matters, though management believes reserves are adequate and outcomes are not likely to be materially adverse.
Investor Verification Checklist
- Restructuring Execution: Verify the timeline and cost realization of the remaining ~$25 million in restructuring charges anticipated for the remainder of 2009.
- Debt Covenants: Confirm continued compliance with the leverage ratio (max 3.5:1) and fixed charge coverage ratio (min 1.5:1) under the new $700 million Credit Agreement.
- Inventory Valuation: Review the adequacy of inventory reserves, particularly regarding the $9.3 million charge related to Asian facilities and the LIFO impact.
- Environmental Reserves: Monitor the $32.8 million environmental reserve, specifically the remediation progress and cost estimates for the Chicago blending facility.
- Segment Margins: Track the ability of the Industrial Packaging segment to recover gross margins, which fell to 16.7% in Q2 2009 from 18.1% in Q2 2008.