Greif, Inc. — Q2 FY2012 Form 10-Q
Reporting period: Fiscal quarter and six months ended April 30, 2012; comparisons are with the same 2011 periods. Greif provides rigid industrial packaging and services, flexible products, paper packaging, and timberland management. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $1,095.3 | $1,050.7 | $2,088.0 | $1,994.5 |
| Gross profit | $203.1 | $207.3 | $381.8 | $383.4 |
| Gross margin | 18.5% | 19.7% | 18.3% | 19.2% |
| Operating profit | $74.3 | $91.3 | $132.6 | $160.0 |
| Net income attributable to Greif | $36.8 | $50.9 | $60.7 | $92.3 |
| Diluted EPS, Class A / Class B | $0.63 / $0.95 | $0.87 / $1.31 | $1.04 / $1.56 | $1.58 / $2.37 |
| EBITDA (non-GAAP) | $111.3 | $118.6 | $208.5 | $222.3 |
- Sales grew 4% in Q2 and 5% year to date. Q2 volume rose 5%, including an 8% acquisition contribution, while same-structure volume fell 3%; selling prices rose 2% and currency translation reduced sales 3%.
- Operating profit before restructuring and acquisition costs, a non-GAAP measure, was $85.6 in Q2 versus $104.3, and $155.0 for six months versus $184.5.
- Operating cash flow was $168.2 for the first half, compared with cash used of $12.5 in 2011. Investing used $91.3, including $69.5 of PP&E purchases and a $14.3 deferred acquisition payment. Financing used $97.6. Cash ended at $104.9, down from $127.4 at fiscal year-end.
- At April 30, current assets were $1,187.2 and current liabilities $802.7 (current ratio approximately 1.48). Debt comprised $1,304.8 of long-term debt including its current portion, plus $105.2 of short-term borrowings. Combined reported debt was about $1,410, down from about $1,495 at October 31, 2011.
Comparative changes and segment performance
- Profitability declined despite sales growth: Q2 net income attributable to Greif fell about 28%, and first-half net income fell about 34%. Gross margin contracted in both periods, reflecting weaker volumes and pricing pressure, particularly in Europe, as well as a $2.8 prior-period containerboard-trade correction in Paper Packaging.
- Rigid Industrial Packaging & Services sales rose 8% in Q2, but operating profit fell to $54.8 from $66.1; management cited European weakness and lower same-structure volumes. Flexible Products & Services sales fell to $113.9 from $134.8 and the segment recorded a $1.9 operating loss versus $2.0 profit, primarily due to weak European demand.
- Paper Packaging sales rose to $170.6, while operating profit fell to $14.3 from $20.9; the quarter included the $2.8 correction and a $2.4 noncash impairment of properties under contract for sale. Land Management operating profit increased to $7.1 from $2.3, including higher special-use property disposal gains.
- Interest expense rose to $24.1 in Q2 and $47.8 for the first half, principally due to higher debt associated with acquisitions and working capital. The first-half effective tax rate was 28.5%, versus 23.5%; management expects a fiscal 2012 cash tax rate of approximately 20%.
Liquidity, outlook, risks and unusual items
- Management expects operating cash flow, available borrowing capacity and receivables-sale proceeds to fund anticipated working capital, capital spending, debt repayment and other needs for at least 12 months. Expected 2012 capital expenditures, excluding timber purchases and acquisitions, are approximately $145, compared with $162.4 in 2011.
- Management said market conditions improved modestly sequentially, but a slower-than-expected European recovery is expected to continue to weigh on rigid and flexible packaging. It expects contingency actions, acquisition integration and Greif Business System initiatives to contribute to full-year results. No full-year earnings guidance is stated.
- Restructuring charges were $10.1 in Q2 and $19.0 for six months, versus $5.0 and $8.0. Management reported $32.5 of expected costs for open or developing restructuring plans, of which $13.5 remained to be incurred.
- In April, Greif entered a new European receivables purchase facility with a maximum capacity of €145 million (reported as $192.0 at April 30); the company guarantees subsidiary performance obligations. The filing reports $196.3 of receivables sold and held by financial institutions across its programs at quarter-end.
- Environmental reserves were $27.4, with estimated remediation payments of $6.6 in 2012 and $3.4 in 2013. The company said pending litigation was not expected to materially affect consolidated financial statements, while noting outcomes and estimates can differ.
- Other key exposures include economic and customer-demand weakness, raw-material and energy costs, foreign currency and political risks, acquisition integration, restructuring execution, joint-venture interests, and environmental and regulatory matters. Debt covenants were reported in compliance.
- The filing notes prior-period corrections to accumulated foreign-currency translation and noncontrolling interests; the stated corrections did not affect total assets, net income or cash flows.
Investor verification points
- Reconcile the Credit Agreement balance: the debt note lists $342.4 outstanding, while MD&A states $324.4. Confirm the correct amount and available borrowing capacity.
- Assess whether operating cash flow benefited from temporary working-capital releases, and how cash generation compares with planned capital spending, dividends and debt maturities.
- Track European demand, same-structure volumes, segment margins, and whether management’s restructuring and integration initiatives offset ongoing pressure.
- Review the terms, ongoing costs and recourse or guarantee exposure of the new European receivables facility, along with its effect on reported receivables and cash flow.
- Monitor remaining restructuring commitments, environmental remediation estimates, and the timing and impact of the disclosed accounting corrections.