GEF

Business Context and Reporting Period

Company: GREIF, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 2009 (Third Quarter of Fiscal Year 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 implementing the "Greif Business System" to drive productivity and cost reductions in response to a global economic slowdown.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 31% in Q3 2009 and 27% for the nine-month period compared to 2008. The decline was driven by lower sales volumes and reduced selling prices across all segments, partially offset by lower raw material costs.
• Profitability: Operating profit dropped 31% in Q3 and 58% for the nine-month period. While lower sales volumes reduced profits, cost reductions from the "Greif Business System" and lower input costs (steel, resin, containerboard) mitigated the impact.
• Restructuring Charges: Significant restructuring charges were recorded due to business realignment and plant closures. Charges totaled $10.3 million in Q3 2009 and $57.7 million for the nine months ended July 31, 2009, compared to $6.6 million and $24.4 million in the respective 2008 periods.
• Segment Performance:
  • Industrial Packaging: Sales down 30% (Q3); operating profit down 34% (Q3). Gross margin improved to 20.7% from 19.8% due to lower input costs.
  • Paper Packaging: Sales down 32% (Q3); operating profit down 33% (Q3). Gross margin improved to 15.0% from 12.9%.
  • Timber: Operating profit increased to $4.3 million in Q3 2009 from $2.2 million in Q3 2008, aided by a special use property sale.
• Debt Structure: In February 2009, the company entered a new $700 million credit agreement, replacing a $450 million facility. In July 2009, the company issued $250 million of 7.75% Senior Notes due 2019.

Guidance, Outlook, and Risks

• Capital Expenditures: The company expects capital expenditures (excluding timberland) to be approximately $95 million to $100 million for fiscal year 2009.
• Restructuring Outlook: Additional restructuring charges of approximately $10 million are anticipated for the remainder of fiscal 2009.
• Liquidity: Management anticipates that operating cash flows, trade receivable facilities, and borrowings under the Credit Agreement and Senior Notes will be sufficient to fund working capital, capital expenditures, and debt repayment for the foreseeable future.
• Risks:
  • Economic Conditions: Continued global economic slowdown affecting demand and pricing.
  • Restructuring Uncertainty: No guarantee that cost-reduction efforts will be successful or that additional restructuring costs will not be incurred.
  • Commodity Prices: Exposure to fluctuations in raw material costs (steel, resin, containerboard) and energy prices.
  • Environmental Liabilities: Reserves of $33.2 million exist for environmental cleanup costs; actual costs may vary from estimates.

Investor Verification Checklist

• Restructuring Execution: Verify the timeline and cost realization of the $57.7 million in restructuring charges and the anticipated $10 million in remaining charges.
• 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.
• Inventory Valuation: Review the $10.1 million restructuring-related inventory charge and the lower-of-cost-or-market adjustments in Asia to assess potential future write-downs.
• Acquisition Integration: Assess the performance of the four industrial packaging companies acquired in the first nine months of 2009 ($33.0 million aggregate purchase price).
• Environmental Reserves: Monitor the $33.2 million environmental reserve, particularly the $18.2 million related to the blending facility, for changes in remediation cost estimates.