Greif, Inc. — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 31, 2011; comparisons are with the three months ended January 31, 2010. Greif’s fiscal year runs November 1 through October 31. Dollar amounts below are in millions unless otherwise noted.
Financial performance
- Revenue: Net sales rose 33.0% to $943.8, from $709.7. Management attributed the increase to higher sales volumes and selling prices, including pass-through of higher input costs, partly offset by foreign-currency translation. Acquisitions made during 2010—particularly in Flexible Products & Services—materially affect comparability.
- Profit and margins: Gross profit increased to $176.1 from $137.7, while gross margin declined to 18.7% from 19.4%. Operating profit increased to $68.7 from $50.7; operating margin was 7.3% versus 7.1%. Operating profit before restructuring and acquisition-related costs, a company-defined non-GAAP measure, rose to $80.3 from $66.7.
- Net income and EPS: Net income attributable to Greif was $41.4, versus $24.8. Diluted EPS was $0.71 for Class A and $1.06 for Class B, compared with $0.43 and $0.63, respectively.
- Cash flow: Operating cash flow was negative $68.2, improving from negative $82.8. Capital expenditures were $40.5, so operating cash flow less capital expenditures was approximately negative $108.7. Financing activities provided $116.9; cash increased $10.8 to $117.7.
- Liquidity: Current assets were $1,188.7 and current liabilities $689.4 at January 31, implying a current ratio of approximately 1.72. Working capital was about $499.2.
- Debt: Short-term borrowings were $87.6, current long-term debt $12.5, and long-term debt $1,065.6—approximately $1,165.6 of total reported borrowings, up from approximately $1,026.5 at October 31, 2010. The company reported compliance with its credit-facility financial covenants.
- Other metrics: SG&A was $106.5, or 11.3% of sales, versus $82.4, or 11.6%. Interest expense was $16.8 versus $14.9. The effective tax rate increased to 24.6% from 20.2%. Dividends paid were $24.3.
Material changes and segment results
- Rigid Industrial Packaging & Services: Sales increased 15.8% to $653.9. Segment operating profit before restructuring and acquisition-related costs fell to $49.8 from $57.5, primarily reflecting lower gross margin from higher raw-material costs and higher employment-related costs.
- Flexible Products & Services: Sales were $128.0 versus $11.3, principally due to 2010 acquisitions. Operating profit before restructuring and acquisition-related costs increased to $8.5 from $2.5; reported operating profit was $1.5 versus a $6.1 loss. The large sales increase is not a like-for-like comparison.
- Paper Packaging: Sales rose 22.2% to $156.8. Operating profit before restructuring charges increased to $18.8 from $3.7, as higher volumes and selling prices improved margins despite higher raw-material costs.
- Land Management: Sales decreased slightly to $5.1 from $5.4; operating profit was $3.1 versus $3.0. Current-quarter results included $1.6 of profit from special-use property sales.
- Restructuring charges declined to $3.0 from $6.0. Acquisition-related costs were $8.5 versus $10.1. Management said restructuring focused on integrating acquisitions, network consolidation, and business realignment.
Outlook, risks and unusual items
- Management expected operating cash flows, receivables-sale proceeds, and available borrowing arrangements to fund anticipated working capital, capital expenditures, debt repayment, potential acquisitions, and other liquidity needs for at least 12 months.
- Capital expenditures, excluding timberland purchases and acquisitions, were expected to be approximately $140 for FY2011. No earnings or revenue guidance was provided in the filing text.
- Management cited raw-material cost volatility—particularly steel, resin, and recovered paper—and energy costs as risks to margins. Higher input costs were partly passed through to customers, but cost of products sold rose to 81.3% of sales from 80.6%.
- Other disclosed risks include uncertain global economic conditions, currency and political exposure, customer and supplier consolidation, acquisition integration and restructuring execution, labor and facility disruptions, environmental and product-liability exposure, and fluctuations in timber and timberland sales.
- Environmental remediation reserves were $25.8 at January 31, 2011. The company said litigation outcomes remain uncertain; it did not expect pending matters, based on currently available information, to have a material adverse effect on its financial position or results, while noting contingencies could affect results or liquidity in a particular period.
- The $135.0 U.S. receivables credit facility had $98.2 outstanding and could be subject to purchaser termination of its commitment in September 2011 unless extended. Foreign receivables-sale programs had a combined maximum financing amount of $174.3; $159.8 of receivables had been sold at quarter-end.
- Foreign-currency translation reduced comprehensive income: the quarter’s foreign-currency translation adjustment was negative $30.4. Greif also expected approximately $2.0 after tax of net losses in accumulated other comprehensive loss to be reclassified into earnings over the next nine months.
Important facts for investors to verify
- How much of sales and earnings growth reflects acquired businesses versus organic volume, pricing, and currency effects, especially in Flexible Products & Services.
- Whether pricing continues to recover raw-material inflation and whether Rigid Industrial Packaging margins stabilize.
- How working-capital needs and capital spending affect cash generation, given negative operating cash flow and higher borrowings this quarter.
- Availability and terms of the U.S. receivables facility beyond its September 2011 purchaser commitment date, and continued covenant compliance.
- Progress and remaining costs of acquisition integration and restructuring, along with environmental and other contingent liabilities.