Greif, Inc. — First-Quarter Fiscal 2012 10-Q
Reporting period: Three months ended January 31, 2012; comparisons are with the three months ended January 31, 2011, unless stated otherwise. Greif makes rigid and flexible industrial packaging, paper packaging products, and manages timberland. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $992.7 | $943.8 |
| Gross profit / margin | $178.7 / 18.0% | $176.1 / 18.7% |
| Operating profit | $58.3 | $68.7 |
| Net income attributable to Greif | $23.9 | $41.4 |
| Basic and diluted EPS, Class A / Class B | $0.41 / $0.61 | $0.71 / $1.06 |
| Operating cash flow | $7.2 | $(68.2) |
| Capital expenditures, excluding timberland | $40.7 | $40.5 |
| Cash and cash equivalents at period end | $104.0 | $117.7 |
- Sales increased 5%, with reported volume up 3% (including 7% from acquisitions), selling prices up 4%, and foreign currency translation reducing sales by 2%. Same-structure volume declined 4%.
- Gross profit rose slightly, but margin fell to 18.0%. Operating profit declined 15% and net income attributable to Greif declined 42%. Interest expense increased to $23.7 from $16.8.
- EBITDA, a company-defined non-GAAP measure, was $97.2 versus $103.7; EBITDA before restructuring and acquisition-related costs was $108.3 versus $115.2. Operating profit before those special items was $69.4 versus $80.2.
- Operating cash flow improved from the prior-year outflow, but was below capital expenditures; operating cash flow less capital expenditures was approximately negative $33.5. Cash declined $23.4 during the quarter.
Segments and material changes
- Rigid Industrial Packaging & Services: Sales rose to $703.3 from $653.9, but operating profit fell to $32.8 from $46.1. Same-structure volume declined 6%; management cited weak European and Asian results and market pressure.
- Flexible Products & Services: Sales fell to $114.8 from $128.0. Operating profit increased to $2.3 from $1.4, while EBITDA before special items declined to $8.6 from $14.0.
- Paper Packaging: Sales increased to $168.1 from $156.8 and operating profit to $20.2 from $18.1, supported by higher volumes and lower old corrugated container costs.
- Land Management: Sales were $6.5 versus $5.1; operating profit was $3.0 versus $3.1. Special-use property disposals were lower year over year.
- Restructuring charges increased to $8.9 from $3.0. Management said the work primarily related to contingency actions and integration of acquisitions. It reported $25.5 of expected costs under open or developing plans, of which $8.9 had been incurred and $16.6 remained.
- No acquisitions or divestitures were completed in the quarter. Results included $95.6 of revenue and $3.6 of operating profit from acquisitions completed in 2011.
Financial position, liquidity and debt
- At January 31, 2012, total assets were $4,065.6 and shareholders’ equity was $1,391.9. Current assets were $1,235.9 and current liabilities $760.8, implying a current ratio of approximately 1.62.
- Interest-bearing debt was approximately $1,514.0, comprising $1,388.0 of long-term debt, $15.6 current maturities, and $110.4 of short-term borrowings. Cash was $104.0; approximate net debt was $1,410.0. Debt increased from approximately $1,494.9 at October 31, 2011.
- The $1.0 billion credit agreement had $468.0 outstanding and matures in October 2015; its weighted-average interest rate was 2.28% for the quarter. A separate U.S. receivables facility had $112.5 outstanding against a $130.0 commitment. The company reported compliance with applicable financial covenants.
- Long-term debt maturities include $521.2 in 2015. The filing’s liquidity discussion states that operating cash flow, borrowing facilities, notes and receivables-sale proceeds are expected to fund anticipated needs for at least 12 months.
- Capital expenditures were $40.7, excluding $2.6 for timberland. Management expected fiscal 2012 capital expenditures, excluding timberland purchases and acquisitions, of approximately $130, including completion of a fabric hub in Saudi Arabia.
Outlook, risks and unusual items
- Management expected challenging industrial conditions and market pressure, especially in Europe, to continue through the second quarter, followed by gradual improvement in the second half of fiscal 2012. It said contingency actions were helping mitigate the effects.
- Management expected a fiscal 2012 cash tax rate of approximately 20%. The reported effective book tax rate was 29.2%, versus 24.6%, primarily reflecting a shift in global earnings mix and other period-specific tax items.
- Environmental reserves were $27.5 at January 31, with estimated remediation payments extending beyond five years. Greif said adverse developments at individual sites were not expected to be material, while a series of adverse developments could materially affect results.
- Other stated risks include global economic weakness, foreign currency and political exposure, raw-material and energy price changes, customer and supplier consolidation, acquisition integration, restructuring execution, joint-venture limitations, labor, environmental and regulatory matters, and timber-market conditions.
- Greif reported no goodwill impairment indicators at January 31. Goodwill fell by $40.3 during the quarter, primarily from currency translation and purchase-price adjustments. A prior-period error correction affecting historical foreign-currency translation and accounts payable was described as not affecting total assets, net income or cash flows.
Most important facts for investors to verify
- Whether the expected second-half market recovery occurs, particularly in Europe, and whether same-structure volumes stabilize.
- Whether margin and earnings pressure in rigid packaging persists, and whether planned restructuring delivers savings relative to remaining expected costs.
- Cash conversion and liquidity: operating cash flow was only $7.2 against $40.7 of capital expenditures, while debt and interest expense were elevated.
- Capacity to refinance or repay the substantial 2015 debt maturities and continued compliance with credit-facility covenants.
- Execution, funding and returns for the Saudi fabric hub and the company’s other planned capital expenditures.
- Changes in environmental remediation estimates, uncertain tax positions and other contingencies, and the effects of currency, raw-material costs and the consolidated Flexible Products joint venture.