Greif, Inc. — Q3 2011 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2011; comparisons are with the periods ended July 31, 2010. Dollar amounts below are in millions unless noted.
Business context and financial performance
Greif operates in rigid industrial packaging and services, flexible products and services, paper packaging, and land management. Revenue growth reflected acquisitions, higher selling prices that passed through some input-cost increases, and favorable currency translation.
| Metric | Three months 2011 | Three months 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,121.9 | $921.3 | $3,116.5 | $2,467.6 |
| Gross profit | $211.3 | $191.0 | $594.8 | $497.3 |
| Operating profit | $108.0 | $95.7 | $268.0 | $219.1 |
| Net income attributable to Greif | $62.9 | $66.0 | $155.3 | $133.4 |
| Diluted EPS, Class A | $1.07 | $1.12 | $2.65 | $2.28 |
| Diluted EPS, Class B | $1.61 | $1.70 | $3.98 | $3.43 |
| Operating cash flow | Not separately presented for the quarter | $22.7 | $17.8 |
Quarterly sales increased 21.8%, while Greif-attributable net income declined. For the nine months, sales rose 26.3% and Greif-attributable net income rose. Cost of products sold was 81.2% of sales in the quarter and 80.9% year to date, compared with 79.3% and 79.8%, respectively, in 2010. Gross margin was about 18.8% for the quarter and 19.1% year to date, versus 20.7% and 20.2% in the prior periods.
EBITDA before special items, a company-defined non-GAAP measure, was $147.5 million for the quarter (up 6.8%) and $394.4 million year to date (up 15.8%). Operating profit before special items was $117.1 million and $301.6 million, respectively. These measures exclude restructuring, acquisition-related costs and, for 2011, a non-cash intangible impairment.
Liquidity, debt and cash flow
- At July 31, cash was $109.1 million; current assets were $1,375.1 million and current liabilities $872.1 million (current ratio approximately 1.58).
- Recorded borrowings were approximately $1.386 billion, including $1,268.3 million of long-term debt (including its current portion) and $117.4 million of short-term borrowings. Long-term debt increased from $965.6 million at October 31, 2010, primarily to fund acquisitions, capital spending and working capital.
- Nine-month operating cash flow was $22.7 million. Investing activities used $310.9 million, including $185.7 million for acquisitions and $117.8 million for property, plant and equipment. Financing activities provided $282.9 million. Capital expenditures excluding timberland purchases were $117.8 million; management expected approximately $160 million for fiscal 2011.
- The company reported compliance with its credit-agreement and receivables-facility financial covenants at July 31. The $750 million revolving facility and $250 million term loan mature in October 2015; $284.3 million was outstanding under the credit agreement. The $125 million U.S. receivables facility had a purchaser commitment subject to earlier termination in September 2011 unless extended.
- Management said available operating cash flow, receivables facilities and borrowing capacity were expected to meet anticipated needs for at least 12 months.
Material changes and segment performance
- Rigid Industrial Packaging & Services: Quarterly sales rose 17.9%, but operating profit before special items fell to $77.5 million from $79.4 million. Management cited weaker demand late in July, product mix, and difficulty passing through all cost increases; nine-month gross margin also declined.
- Flexible Products & Services: Quarterly sales more than doubled, mainly reflecting 2010 acquisitions. Quarterly operating profit before special items increased to $11.9 million from $5.7 million. Nine-month sales were $404.0 million versus $128.7 million, with the comparison affected by acquisitions and the segment reclassification of multiwall bags in 2010.
- Paper Packaging: Quarterly operating profit before special items fell to $16.9 million from $23.3 million, as higher old corrugated container and transport costs pressured margins. Year-to-date operating profit before special items rose to $56.1 million from $34.8 million.
- Land Management: Quarterly operating profit was $10.7 million versus $2.5 million, reflecting special-use property disposals and a $2.5 million prior-period Canadian property purchase-price adjustment. Property-sale gains make results less indicative of recurring performance.
Greif completed five acquisitions in the first nine months for $185.7 million net of cash acquired. It issued €200 million of 7.375% senior notes due 2021 in July; proceeds partly repaid non-U.S. revolving borrowings. On August 3, 2011, after quarter-end, it acquired a European packaging reconditioning and manufacturing company.
Outlook, commentary, risks and unusual items
- Management cited raw-material and energy cost volatility, demand changes, pricing pressure, foreign exchange and integration of acquisitions as factors affecting results. No specific earnings or revenue guidance was provided.
- Greif recorded a $3.0 million non-cash impairment of legacy trade names after deciding to rebrand certain flexible-products businesses. Restructuring charges were $11.4 million year to date, versus $20.6 million in 2010; $5.3 million of costs remained expected under open or planned restructuring actions.
- Environmental remediation reserves were $25.9 million. The filing notes that lawsuits and other claims, including environmental, product-liability, and safety matters, could affect results or liquidity, although management considered recorded litigation reserves reasonable.
- The effective tax rate increased to 25.4% for the quarter and 24.3% year to date, primarily due to a valuation allowance on deferred tax assets and differing discrete tax items.
- A $24.7 million out-of-period reclassification between noncontrolling interests and accumulated other comprehensive income corrected October 31, 2010 balances; it did not affect total shareholders’ equity or cash flows and was described as immaterial.
- Management identified potential legal and reputational consequences if employees, agents or business partners violate anti-bribery, competition, trade-sanctions or other laws. It also cited economic, customer-consolidation, raw-material, acquisition, labor, environmental and other operating risks.
Important facts for investors to verify
- Whether acquisition-led sales growth converts into sustained margins and cash generation, particularly given higher input costs and weak quarterly cash flow relative to earnings.
- Current availability and renewal status of the U.S. receivables facility, along with covenant headroom, debt maturities and the cost of the new 2021 notes.
- Integration progress, expected costs and returns from acquisitions, restructuring plans, and the flexible-products rebranding.
- The recurring contribution of land-management earnings versus gains from property disposals and the prior-period adjustment.
- Updates to environmental remediation estimates, litigation contingencies, tax valuation allowances, and the subsequent August 3 acquisition.