Greif, Inc. — FY2011 Form 10-K
Business context and reporting period. Greif manufactures industrial packaging, flexible packaging and paper packaging products and services, and manages timberland. It operates in more than 55 countries across four segments: Rigid Industrial Packaging & Services, Flexible Products & Services, Paper Packaging, and Land Management. Fiscal 2011 ended October 31, 2011; comparisons are with fiscal 2010 unless noted. The filing is an annual report, not a standalone fourth-quarter filing.
Financial results and key metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $4,248.0 million | $3,461.5 million |
| Gross profit | $801.1 million; 18.9% of sales | $703.7 million; 20.3% of sales |
| Operating profit | $337.1 million; 7.9% of sales | $325.4 million; 9.4% of sales |
| Net income attributable to Greif | $176.0 million | $210.0 million |
| Diluted EPS, Class A / Class B | $3.01 / $4.52 | $3.58 / $5.40 |
| Operating cash flow | $172.3 million | $178.1 million |
| Cash and cash equivalents at year-end | $127.4 million | $107.0 million |
| Long-term debt, including current portion | $1,357.6 million | $965.6 million |
- Sales rose 23%, reflecting volume growth (13%, including 11% from acquisitions), higher selling prices (7%) and favorable currency translation (3%).
- Net income attributable to Greif fell 16%. Cost of products sold increased to 81.1% of sales from 79.7%; management cited mix, incomplete recovery of cost increases in rigid packaging, and higher recovered-paper costs.
- EBITDA, a non-GAAP measure, was $467.2 million versus $434.3 million; EBITDA before special items was $526.5 million versus $488.3 million. Operating profit before special items was $396.5 million versus $379.5 million.
- Capital expenditures were $162.4 million, excluding $3.5 million for timberland. Operating cash flow less property, plant and equipment purchases was approximately $9.9 million.
- At year-end, current assets were $1,305.3 million and current liabilities $929.8 million. The $1.0 billion secured credit facility had $644.6 million available to borrow. Management expected identified funding sources to cover anticipated liquidity needs for at least 12 months.
- In addition to long-term debt, short-term borrowings were $137.3 million at year-end. Interest expense, net, increased to $79.6 million from $65.8 million, mainly due to higher average debt following acquisitions and working-capital needs. Greif reported compliance with its credit agreement financial covenants.
Material changes and segment performance
- Rigid Industrial Packaging & Services: Sales increased 17% to $3,014.1 million, but operating profit before special items fell to $261.8 million from $291.1 million. Gross margin declined to 18.7% from 20.9%, principally due to mix and margin pressure.
- Flexible Products & Services: Sales increased to $538.0 million from $233.1 million, primarily reflecting acquisitions. Operating profit before special items rose to $41.2 million from $18.8 million; gross margin was 21.4% versus 21.1%.
- Paper Packaging: Sales rose 8% to $674.9 million and operating profit before special items increased to $74.4 million from $60.6 million. Higher prices and lower energy costs helped, partly offset by a roughly 27% increase in old corrugated container costs.
- Land Management: Sales were $20.9 million versus $16.5 million; operating profit was $19.1 million versus $9.0 million. Results included higher special-use property disposals and a $2.5 million purchase-price adjustment tied to a prior-period expropriation.
- Greif completed eight acquisitions in 2011 for $344.9 million net of cash acquired, all in the rigid packaging segment. Acquisitions contributed to higher sales, goodwill and debt.
- Quarterly data show fourth-quarter 2011 net sales of $1,131.5 million and net income attributable to Greif of $20.8 million, versus $993.9 million and $76.6 million, respectively, in fourth-quarter 2010. Fourth-quarter 2011 included $19.1 million of restructuring charges and $5.2 million of acquisition-related charges.
Outlook, risks and unusual items
- Management forecast approximately $130 million of capital expenditures through October 31, 2012, excluding potential timberland purchases. The filing provides no explicit revenue or earnings guidance.
- Key risks include economic weakness and customer credit stress, especially in Western Europe; competition and pricing pressure; steel, resin, paper and energy cost volatility; foreign-exchange and political risks; acquisition integration; labor disruptions; and environmental, product-liability and climate-related costs.
- Environmental reserves were $29.3 million at year-end, with estimated remediation payments of $8.5 million in 2012 and $11.6 million thereafter. Greif said pending litigation was not expected to have a material adverse effect; it reported no pending material legal proceedings.
- The effective tax rate rose to 29.2% from 16.1%, reflecting the geographic mix of earnings, tax valuation matters and other discrete items. Unrecognized tax benefits were $80.7 million; a possible net decrease over the next 12 months was estimated at $0 to $48.5 million.
- FY2011 included $30.5 million of restructuring charges, $24.4 million of acquisition-related costs and $4.5 million of non-cash asset impairments. The company closed two rigid packaging plants and severed 257 employees as part of restructuring.
- Greif restated prior-period balance sheet and equity information for two errors involving intercompany balances and noncontrolling interests/foreign-currency translation. The corrections did not affect total assets, consolidated net income or cash flows. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective. Controls at certain recently acquired businesses were excluded from the year-end assessment.
Important facts for investors to verify
- Whether rigid packaging margins recover and whether raw-material and energy increases can be passed through to customers.
- Acquisition integration and returns on the $344.9 million spent in 2011, alongside the increase in goodwill and borrowings.
- Debt repayment capacity, covenant headroom, short-term borrowings and the availability and cost of receivables financing.
- The basis and potential cash impact of tax reserves, including the Dutch tax matter and expiring non-U.S. loss carryforwards.
- Environmental reserve assumptions and the timing of remediation payments.
- The restated prior-period figures and any subsequent control changes at businesses excluded from the 2011 internal-control assessment.