GREIF, INC annual report, FY2011

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

MetricFY2011FY2010
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.