GEF

Business Context and Reporting Period

Company: GREIF, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: January 31, 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.

Key Financial Metrics

Note: Total Debt calculated as Short-term borrowings ($114,037) + Long-term debt ($735,774) for Q1 2009.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 21% ($180.0 million) year-over-year, driven by lower sales volumes across all product lines due to the global economic slowdown. Constant currency sales decreased 15%.
• Profitability Compression: Operating profit fell 82% to $17.3 million. This was significantly impacted by the absence of a $29.9 million pre-tax gain on divestitures (Australia and Zimbabwe) recorded in Q1 2008.
• Restructuring Charges: Restructuring charges increased to $27.2 million in Q1 2009 from $10.5 million in Q1 2008. This included $16.0 million in employee separation costs and $4.9 million in asset impairments, primarily to address the economic downturn and close 10 plants in the Industrial Packaging segment.
• Inventory Adjustments: The company recorded $1.8 million in restructuring-related inventory charges and a $5.3 million lower-of-cost-or-market inventory adjustment in Asia.
• Segment Performance:
  • Industrial Packaging: Sales down 21%; Operating loss of $4.5 million (vs. $68.6 million profit in 2008).
  • Paper Packaging: Sales down 23%; Operating profit remained relatively stable at $18.8 million (vs. $19.4 million in 2008) due to higher selling prices and lower input costs.
  • Timber: Sales flat; Operating profit decreased to $3.0 million (vs. $6.2 million in 2008) due to lower gains on 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 accelerating "Greif Business System" initiatives to improve productivity and reduce costs in response to the economic slowdown.
• Liquidity and Debt: On February 19, 2009 (subsequent to the quarter end), the company entered into a new $700 million Senior Secured Credit Agreement to replace its prior facility. As of Jan 31, 2009, the company was in compliance with all financial covenants.
• Risks and Contingencies:
  • Market Conditions: Continued global economic slowdown affecting demand for industrial and paper packaging.
  • Environmental Liabilities: Reserves for environmental liabilities totaled $36.1 million as of Jan 31, 2009.
  • Derivatives: The company holds various interest rate and foreign currency swaps. A net loss of approximately $7.7 million (after tax) is expected to be reclassified into earnings over the next nine months.

Investor Verification Checklist

• Restructuring Execution: Verify the progress of the $21.0 million in remaining restructuring costs anticipated for the rest of 2009 and the impact of closing 10 plants on future capacity.
• 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 entered into in February 2009.
• Inventory Valuation: Assess the sustainability of inventory levels given the $5.3 million write-down in Asia and the $1.8 million restructuring-related inventory charge.
• Divestiture Gains: Note that Q1 2008 results included a one-time $29.9 million gain on divestitures; future comparisons should exclude this non-recurring item.
• Foreign Currency Impact: Monitor the impact of the strengthening U.S. Dollar on international sales and the $28.9 million foreign currency translation adjustment in other comprehensive income.