Greif, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended April 30, 2011; Greif’s fiscal year ends October 31. Financial amounts below are in U.S. dollars. The filing is unaudited.
Business context and results
Greif operates in Rigid Industrial Packaging & Services, Flexible Products & Services, Paper Packaging, and Land Management. The company attributed growth to higher volumes, selling-price increases that passed through higher input costs, favorable currency translation, and acquisitions completed in 2010. The prior-year comparison is affected by acquired flexible-packaging businesses and a 2010 segment reclassification of multiwall bags.
| Metric | Three months ended Apr. 30, 2011 | Prior year | Six months ended Apr. 30, 2011 | Prior year |
|---|---|---|---|---|
| Net sales | $1,050.8 million | $836.6 million | $1,994.6 million | $1,546.3 million |
| Gross profit | $207.4 million | $168.5 million | $383.4 million | $306.2 million |
| Operating profit | $91.3 million | $72.8 million | $160.0 million | $123.4 million |
| Operating profit before special items* | $104.3 million | $82.2 million | $184.6 million | $148.9 million |
| Net income attributable to Greif | $50.9 million | $42.6 million | $92.3 million | $67.5 million |
| Basic and diluted EPS, Class A / Class B | $0.87 / $1.31 | $0.73 / $1.10 | $1.58 / $2.37 | $1.16 / $1.73 |
Margins and cost trends: Gross margin was approximately 19.7% for the quarter versus 20.1% a year earlier; cost of products sold rose to 80.3% of sales from 79.9%. For the six months, gross margin was approximately 19.2% versus 19.8%. Management cited product mix and higher steel, resin, and recovered-paper costs, partly offset by productivity and pricing. SG&A was $113.9 million for the quarter and $220.4 million year to date; as a share of sales it was 10.8% and 11.1%, respectively.
Cash flow, balance sheet and liquidity
- Cash flow: Operating activities used $12.5 million in the first half, versus $56.2 million used in the prior-year period. Capital expenditures were $73.7 million, excluding $0.9 million of timberland purchases. Cash ended at $95.5 million, down from $107.0 million at October 31, 2010.
- Working capital: Current assets were $1.261 billion and current liabilities $783.0 million at April 30 (current ratio approximately 1.61). Receivables were $521.4 million and inventories $456.1 million. Management linked higher inventory to purchases ahead of steel cost increases and long lead times; receivables also reflected sales growth and extended customer credit terms.
- Debt: Long-term debt, including current portion, was $1.101 billion; short-term borrowings were $105.7 million. Total debt on those balance-sheet lines was approximately $1.206 billion, up from approximately $1.026 billion at October 31, 2010. The company cited acquisition funding, capital spending, and working-capital needs. Debt included $429.2 million under the credit agreement and $116.1 million under the U.S. receivables facility. Greif reported compliance with applicable financial covenants.
- Receivables financing: Greif reported $191.3 million of non-U.S. receivables sold under various programs at April 30. These sales provide liquidity but incur fees recorded in other expense.
Material changes and segment performance
- Second-quarter sales rose 25.6%; first-half sales rose 29.0%. Operating profit before special items increased 26.9% for the quarter and 24.0% for the first half.
- Rigid Industrial Packaging & Services: Quarterly sales rose 16.9%, but gross margin declined to 19.5% from 21.7%. First-half operating profit before special items fell to $121.0 million from $127.4 million, mainly due to input costs.
- Flexible Products & Services: Quarterly sales were $134.8 million versus $50.5 million; first-half sales were $262.8 million versus $61.7 million, largely reflecting 2010 acquisitions. First-half operating profit before special items rose to $19.0 million from $6.5 million.
- Paper Packaging: Quarterly operating profit before special items increased to $20.4 million from $7.7 million; first-half increased to $39.2 million from $11.4 million, supported by higher sales and improved margins.
- Land Management: First-half operating profit was $5.4 million versus $3.5 million; results included $1.9 million of profit from special-use property sales.
Outlook, commentary and risks
- Management expected operating cash flows, receivables financing, and available borrowing arrangements to be sufficient for anticipated needs for at least 12 months.
- Greif expected fiscal 2011 capital expenditures of approximately $150 million, excluding timberland purchases and acquisitions.
- Restructuring charges were $8.0 million in the first half, focused on integrating recent acquisitions; $7.8 million remained in restructuring reserves at April 30. The filing also described expected costs under open or developing plans.
- Other expense was $7.3 million in the quarter versus $0.9 million a year earlier; management cited receivables-sale fees and foreign-exchange effects. The first-half amount was $5.4 million versus $3.7 million.
- The effective tax rate increased to 22.6% for the quarter and 23.5% for the first half, primarily due to global business mix and the loss of the alternative fuel tax credit.
- Environmental remediation reserves were $26.5 million. Greif said pending litigation reserves were reasonable, while noting that uncertain outcomes could materially affect results or liquidity in a particular period. Other stated risks include economic weakness, raw-material and energy costs, currency and political exposure, acquisition integration, customer and supplier consolidation, competition, and environmental and regulatory matters.
*Operating profit before special items is a company-defined non-GAAP measure excluding restructuring charges, restructuring-related inventory charges, and acquisition-related costs; it should be considered alongside GAAP operating profit.
Important facts for investors to verify
- Whether price increases and productivity can offset continuing steel, resin, and other input-cost pressure, particularly in the rigid-packaging segment.
- How much of reported growth reflects organic volume and pricing versus acquisitions, currency translation, and segment reclassification.
- Whether cash conversion improves, given first-half negative operating cash flow and increased inventory and receivables.
- Debt levels, covenant headroom, refinancing and maturity exposure—including the receivables facility’s purchaser commitment that could terminate in September 2011 unless extended.
- Progress and remaining costs from acquisition integration and restructuring, along with the realization of expected cost savings.
- Potential changes in environmental remediation, litigation, tax, and other contingent liabilities.