GREIF, INC - Quarter Report: 2010 July (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 31, 2010
Commission File Number 001-00566
![(GREIF LOGO)](https://www.sec.gov/Archives/edgar/data/0000043920/000095012310084929/c05311c0531101.gif)
GREIF, INC.
(Exact name of registrant as specified in its charter)
Delaware | 31-4388903 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
425 Winter Road, Delaware, Ohio | 43015 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code (740) 549-6000
Not Applicable
Former name, former address and former fiscal year, if changed since last report.
Indicate by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer, or a smaller reporting company. See definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The number of shares outstanding of each of the issuers classes of common stock at the close
of business on August 31, 2010:
Class A Common Stock |
24,742,974 shares | |||
Class B Common Stock |
22,412,266 shares |
TABLE OF CONTENTS
Table of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three months ended | Nine months ended | |||||||||||||||
July 31, | July 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As Adjusted)1 | (As Adjusted)1 | |||||||||||||||
Net sales |
$ | 921,333 | $ | 717,567 | $ | 2,467,595 | $ | 2,031,724 | ||||||||
Cost of products sold |
730,294 | 578,140 | 1,970,328 | 1,700,636 | ||||||||||||
Gross profit |
191,039 | 139,427 | 497,267 | 331,088 | ||||||||||||
Selling, general and administrative expenses (2) |
90,461 | 67,374 | 264,511 | 191,503 | ||||||||||||
Restructuring charges |
9,779 | 10,277 | 20,566 | 57,748 | ||||||||||||
Gain on disposal of properties, plants and equipment, net |
(4,875 | ) | (5,256 | ) | (6,904 | ) | (9,810 | ) | ||||||||
Operating profit |
95,674 | 67,032 | 219,094 | 91,647 | ||||||||||||
Interest expense, net |
15,935 | 12,125 | 47,582 | 37,727 | ||||||||||||
Debt extinguishment charge |
| | | 782 | ||||||||||||
Other expense, net |
713 | 4,245 | 4,372 | 4,075 | ||||||||||||
Income before income tax expense and
equity earnings (losses) of
unconsolidated affilitates, net |
79,026 | 50,662 | 167,140 | 49,063 | ||||||||||||
Income tax expense |
14,408 | 11,489 | 31,590 | 9,567 | ||||||||||||
Equity earnings (loss) of unconsolidated affiliates, net of tax |
3,141 | 374 | 3,272 | (221 | ) | |||||||||||
Net income |
67,759 | 39,547 | 138,822 | 39,275 | ||||||||||||
Net income attributable to noncontrolling interests |
1,784 | 1,736 | 5,394 | 2,183 | ||||||||||||
Net income attributable to Greif, Inc. |
$ | 65,975 | $ | 37,811 | $ | 133,428 | $ | 37,092 | ||||||||
Basic earnings per share attributable to Greif, Inc. common shareholders: |
||||||||||||||||
Class A Common Stock |
$ | 1.13 | $ | 0.65 | $ | 2.29 | $ | 0.64 | ||||||||
Class B Common Stock |
$ | 1.70 | $ | 0.98 | $ | 3.43 | $ | 0.96 | ||||||||
Diluted earnings per share attributable to Greif, Inc. common shareholders: |
||||||||||||||||
Class A Common Stock |
$ | 1.12 | $ | 0.65 | $ | 2.28 | $ | 0.64 | ||||||||
Class B Common Stock |
$ | 1.70 | $ | 0.98 | $ | 3.43 | $ | 0.96 |
See accompanying Notes to Consolidated Financial Statements
(1) | In the first quarter of 2010, the Company changed from using a combination of first-in,
first out (FIFO) and last-in, first-out (LIFO) inventory accounting methods to the FIFO
method for all of its businesses. All amounts included herein have been presented on the
FIFO basis. Refer to Note 4 presented in the Notes to Consolidated Financial Statements. |
|
(2) | In the first quarter of 2010, the Company adopted Statement of Financial Accounting
SFAS No. 141(R) (codified under Accounting Standards Codification ASC 805, Business
Combinations), which requires it to expense acquisition costs in the period incurred.
Previously, these costs were capitalized as part of the purchase price of the acquisition.
Under this guidance, the Company recorded $2.8 million and $16.1 million of expenses in the
three-month and nine-month periods ended July 31, 2010. The nine-month period ended July 31, 2010 included $6.1
million for acquisition costs incurred prior to November 1, 2009 that were previously
accumulated to the consolidated balance sheet for acquisitions not consummated by October
31, 2009. Refer to Note 1 presented in the Notes to Consolidated Financial Statements. |
2
Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
July 31, 2010 | October 31, 2009 | |||||||
(As Adjusted)1 | ||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 84,174 | $ | 111,896 | ||||
Trade accounts receivable, less allowance
of $13,117 in 2010 and $12,510 in 2009 |
464,778 | 337,054 | ||||||
Inventories |
353,030 | 238,851 | ||||||
Deferred tax assets |
14,465 | 19,901 | ||||||
Net assets held for sale |
24,789 | 31,574 | ||||||
Prepaid expenses and other current assets |
137,480 | 105,904 | ||||||
1,078,716 | 845,180 | |||||||
Long-term assets |
||||||||
Goodwill |
661,095 | 592,117 | ||||||
Other intangible assets, net of amortization |
150,713 | 131,370 | ||||||
Assets held by special purpose entities |
50,891 | 50,891 | ||||||
Other long-term assets |
100,361 | 112,092 | ||||||
963,060 | 886,470 | |||||||
Properties, plants and equipment |
||||||||
Timber properties, net of depletion |
215,184 | 197,114 | ||||||
Land |
115,933 | 120,667 | ||||||
Buildings |
374,485 | 380,816 | ||||||
Machinery and equipment |
1,195,787 | 1,148,406 | ||||||
Capital projects in progress |
135,289 | 70,489 | ||||||
2,036,678 | 1,917,492 | |||||||
Accumulated depreciation |
(861,196 | ) | (825,213 | ) | ||||
1,175,482 | 1,092,279 | |||||||
Total assets |
$ | 3,217,258 | $ | 2,823,929 | ||||
See accompanying Notes to Consolidated Financial Statements
(1) | In the first quarter of 2010, the Company changed from using a combination of FIFO and
LIFO inventory accounting methods to the FIFO method for all of its businesses. All
amounts included herein have been presented on the FIFO basis. Refer to Note 4 presented in
the Notes to Consolidated Financial Statements. |
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Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
(UNAUDITED)
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS EQUITY
July 31, 2010 | October 31, 2009 | |||||||
(As Adjusted)1 | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 380,890 | $ | 335,816 | ||||
Accrued payroll and employee benefits |
72,318 | 74,475 | ||||||
Restructuring reserves |
17,793 | 15,315 | ||||||
Current portion of long-term debt |
20,000 | 17,500 | ||||||
Short-term borrowings |
50,958 | 19,584 | ||||||
Other current liabilities |
138,304 | 99,407 | ||||||
680,263 | 562,097 | |||||||
Long-term liabilities |
||||||||
Long-term debt |
948,626 | 721,108 | ||||||
Deferred tax liabilities |
158,033 | 161,152 | ||||||
Pension liabilities |
79,366 | 77,942 | ||||||
Postretirement benefit obligations |
26,527 | 25,396 | ||||||
Liabilities held by special purpose entities |
43,250 | 43,250 | ||||||
Other long-term liabilities |
111,877 | 126,392 | ||||||
1,367,679 | 1,155,240 | |||||||
Shareholders equity |
||||||||
Common stock, without par value |
105,070 | 96,504 | ||||||
Treasury stock, at cost |
(117,447 | ) | (115,277 | ) | ||||
Retained earnings |
1,271,435 | 1,206,614 | ||||||
Accumulated other comprehensive loss: |
||||||||
- foreign currency translation |
(19,903 | ) | (6,825 | ) | ||||
- interest rate derivatives |
(1,449 | ) | (1,484 | ) | ||||
- energy and other derivatives |
(93 | ) | (391 | ) | ||||
- minimum pension liabilities |
(78,467 | ) | (79,546 | ) | ||||
Toal Greif, Inc. shareholders equity before noncontrolling interests |
1,159,146 | 1,099,595 | ||||||
Noncontrolling interests |
10,170 | 6,997 | ||||||
Total shareholders equity |
1,169,316 | 1,106,592 | ||||||
Total liabilities and shareholders equity |
$ | 3,217,258 | $ | 2,823,929 | ||||
See accompanying Notes to Consolidated Financial Statements
(1) | In the first quarter of 2010, the Company changed from using a combination of FIFO and
LIFO inventory accounting methods to the FIFO method for all of its businesses. All
amounts included herein have been presented on the FIFO basis. Refer to Note 4 presented in
the Notes to Consolidated Financial Statements. |
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GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For the nine months ended July 31, | 2010 | 2009 | ||||||
(As Adjusted)1 | ||||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 138,822 | $ | 39,275 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation, depletion and amortization |
84,927 | 74,562 | ||||||
Asset impairments |
2,356 | 13,332 | ||||||
Deferred income taxes |
2,317 | (5,182 | ) | |||||
Gain on disposals of properties, plants and
equipment, net |
(6,904 | ) | (9,810 | ) | ||||
Equity (earnings) losses of unconsolidated affiliates |
(3,272 | ) | 221 | |||||
Increase (decrease) in cash from changes in certain assets and liabilities: |
||||||||
Trade accounts receivable |
(83,713 | ) | 78,577 | |||||
Inventories |
(92,845 | ) | 118,947 | |||||
Prepaid expenses and other current assets |
(21,144 | ) | 2,933 | |||||
Accounts payable |
(71,330 | ) | (167,506 | ) | ||||
Accrued payroll and employee benefits |
1,774 | (33,727 | ) | |||||
Restructuring reserves |
2,478 | 3,459 | ||||||
Other current liabilities |
29,981 | (29,382 | ) | |||||
Pension and postretirement benefit liabilities |
2,555 | (3,394 | ) | |||||
Other long-term assets, other long-term liabilities
and other |
31,773 | 6,999 | ||||||
Net cash provided by operating activities |
17,775 | 89,304 | ||||||
Cash flows from investing activities: |
||||||||
Acquisitions of companies, net of cash acquired |
(152,739 | ) | (32,999 | ) | ||||
Purchases of properties, plants and equipment |
(101,046 | ) | (81,400 | ) | ||||
Purchases of timber properties |
(19,500 | ) | (600 | ) | ||||
Proceeds from the sale of properties, plants, equipment and other assets |
13,034 | 14,806 | ||||||
Purchases of land rights and other |
| (9,588 | ) | |||||
Net cash used in investing activities |
(260,251 | ) | (109,781 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of long-term debt |
2,497,953 | 2,738,793 | ||||||
Payments on long-term debt |
(2,259,612 | ) | (2,629,675 | ) | ||||
Proceeds from short-term borrowings, net |
20,554 | 1,125 | ||||||
Dividends paid |
(68,607 | ) | (65,864 | ) | ||||
Acquisitions of treasury stock and other |
(2,696 | ) | (3,145 | ) | ||||
Exercise of stock options |
1,164 | 747 | ||||||
Settlement of derivatives |
29,248 | | ||||||
Debt issuance cost |
| (13,124 | ) | |||||
Net cash provided by financing activities |
218,004 | 28,857 | ||||||
Effects of exchange rates on cash |
(3,250 | ) | (337 | ) | ||||
Net increase (decrease) in cash and cash equivalents |
(27,722 | ) | 8,043 | |||||
Cash and cash equivalents at beginning of period |
111,896 | 77,627 | ||||||
Cash and cash equivalents at end of period |
$ | 84,174 | $ | 85,670 | ||||
See accompanying Notes to Consolidated Financial Statements
(1) | In the first quarter of 2010, the Company changed from using a combination of FIFO and
LIFO inventory accounting methods to the FIFO method for all of its businesses. All
amounts included herein have been presented on the FIFO basis. Refer to Note 4 presented in
the Notes to Consolidated Financial Statements. |
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Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2010
NOTE 1 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The information furnished herein reflects all adjustments which are,
in the opinion of management, necessary for a fair presentation of the consolidated
balance sheets as of July 31, 2010 and October 31, 2009 and the consolidated statements of
operations and cash flows for the three-month and nine-month periods ended July 31, 2010 and 2009
of Greif, Inc. and subsidiaries (the Company). The consolidated financial statements include the
accounts of the Company and all wholly-owned and majority-owned subsidiaries.
The unaudited consolidated financial statements included in the Quarterly Report on Form 10-Q
(this Form 10-Q) should be read in conjunction with the consolidated financial statements and
notes thereto included in the Companys Annual Report on Form 10-K for its fiscal year ended
October 31, 2009 (the 2009 Form 10-K) and the Companys Form 8-K filed on May 27, 2010 (the May
27 Form 8-K) to update certain sections of the 2009 Form 10-K to reflect revised financial
information and disclosures resulting from the application of a change in an accounting principle
from using a combination of the last-in, first-out (LIFO) and the first-in, first-out (FIFO)
inventory accounting methods to the FIFO method for all the Companys businesses effective
November 1, 2009. All references in this Form 10-Q to the 2009 Form 10-K also include the
financial information and disclosures contained in the May 27 Form 8-K. Note 1 of the Notes to
Consolidated Financial Statements from the 2009 Form 10-K is specifically incorporated in this
Form 10-Q by reference. In the opinion of Management, all adjustments necessary for fair
presentation of the consolidated financial statements have been included. Except as disclosed
elsewhere in this Form 10-Q, all such adjustments are of a normal and recurring nature.
The consolidated financial statements have been prepared in accordance with the U.S.
Securities and Exchange Commission (SEC) instructions to Quarterly Reports on Form 10-Q and
include all of the information and disclosures required by accounting principles generally accepted
in the United States (GAAP) for interim financial reporting. The preparation of financial
statements in conformity with GAAP requires management to make certain estimates and assumptions
that affect the amounts reported in the consolidated financial statements and accompanying notes.
Actual amounts could differ from those estimates.
The Companys fiscal year begins on November 1 and ends on October 31 of the following year.
Any references to the year 2010 or 2009, or to any quarter of those years, relates to the fiscal
year or quarter, as the case may be, ending in that year.
Certain and appropriate prior year amounts have been reclassified to conform to the 2010
presentation. In addition, certain prior year financial information has been adjusted to reflect
the Companys change in inventory accounting discussed in Note 4.
Newly Adopted Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standard (SFAS) No. 141(R), (codified under Accounting Standards
Codification (ASC) 805 Business Combinations), which replaces SFAS No. 141. The objective of
SFAS No. 141(R) is to improve the relevance, representational faithfulness and comparability of the
information that a reporting entity provides in its financial reports about a business combination
and its effects. SFAS No. 141(R) establishes principles and requirements for how the acquirer
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase; and determines
what information to disclose to enable users of the financial statements to evaluate the nature and
financial effects of the business combination. SFAS No. 141(R) applies to all transactions or other
events in which an entity (the acquirer) obtains control of one or more businesses (the acquiree),
including those sometimes referred to as true mergers or mergers of equals and combinations
achieved without the transfer of consideration. SFAS No. 141(R) applies to any acquisition entered
into on or after November 1, 2009. The Company adopted the new guidance beginning on November 1,
2009, which impacted the Companys financial position, results of operations or cash flows and
related disclosures.
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Table of Contents
In December 2007, the FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51, (codified under ASC
810 Consolidation). The objective of SFAS No. 160 is to improve the relevance, comparability and
transparency of the financial information that a reporting entity provides in its consolidated
financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 also changes the way the consolidated financial statements are presented,
establishes a single method of accounting for changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss
in net income when a subsidiary is deconsolidated and expands disclosures in the consolidated
financial statements that clearly identify and distinguish between the parents ownership interest
and the interest of the noncontrolling owners of a subsidiary. The provisions of SFAS No. 160 are
to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 160 is
adopted, except for the presentation and disclosure requirements, which are to be applied
retrospectively for all periods presented. The Company adopted the new guidance beginning
November 1, 2009, and the adoption of the new guidance did not impact the Companys financial
position, results of operations or cash flows, other than the related disclosures.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1, Employers Disclosures
About Postretirement Benefit Plan Assets (FSP FAS 132(R)-1) (codified under ASC 715
Compensation Retirement Benefits), to provide guidance on employers disclosures about assets
of a defined benefit pension or other postretirement plan. FSP FAS 132(R)-1 requires employers to
disclose information about fair value measurements of plan assets similar to SFAS No. 157, Fair
Value Measurements. The objectives of the disclosures are to provide an understanding of: (a) how
investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies, (b) the major categories of plan assets, (c)
the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect
of fair value measurements using significant unobservable inputs on changes in plan assets for the
period and (e) significant concentrations of risk within plan assets. The Company adopted the new
guidance beginning November 1, 2009, and the adoption of the new guidance did not impact the
Companys financial position, results of operations or cash flows, other than the related
disclosures.
Recently Issued Accounting Standards
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assetsan
amendment of FASB Statement No. 140 (codified under ASC 860 Transfers and Servicing). The
Statement amends SFAS No. 140 to improve the information provided in financial statements
concerning transfers of financial assets, including the effects of transfers on financial position,
financial performance and cash flows, and any continuing involvement of the transferor with the
transferred financial assets. The provisions of SFAS 166 are effective for the Companys financial
statements for the fiscal year beginning November 1, 2010. The Company is in the process of
evaluating the impact that the adoption of the guidance may have on its consolidated financial
statements and related disclosures. However, the Company does not anticipate a material impact on
the Companys financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(codified under ASC 810 Consolidation). SFAS 167 amends FIN 46(R) to require an enterprise to
perform an analysis to determine whether the enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity. It also amends FIN 46(R) to require
enhanced disclosures that will provide users of financial statements with more transparent
information about an enterprises involvement in a variable interest entity. The provisions of SFAS
167 are effective for the Companys financial statements for the fiscal year beginning November 1,
2010. The Company is in the process of evaluating the impact that the adoption of SFAS No. 167 may
have on its consolidated financial statements and related disclosures. However, the Company does
not anticipate a material impact on the Companys financial position, results of operations or cash
flows.
NOTE 2 ACQUISITIONS, DIVESTITURES AND OTHER SIGNIFICANT TRANSACTIONS
During the first nine months of 2010, the Company completed acquisitions of three rigid
industrial packaging companies and two flexible products companies and made a contingent purchase
price payment related to a 2008 rigid industrial packaging acquisition. The five 2010 acquisitions
consisted of the acquisition of a European rigid industrial packaging company in November 2009, an
Asian rigid industrial packaging company in June 2010, a North American drum reconditioning company
in July 2010, and two European flexible products companies, one in February and the other in June
2010. The aggregate purchase price for the five 2010 acquisitions was less than $200 million. The
European and Asian rigid industrial packaging acquisitions are expected to complement the Companys
existing product lines that together will provide growth opportunities and economies of scale. The
drum reconditioning and flexible products acquisitions expand the
Companys product and service offerings.
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During 2009, the Company completed acquisitions of five rigid industrial packaging companies
and one paper packaging company and made a contingent purchase price payment related to a 2005
acquisition for an aggregate purchase price of $90.8 million. These six acquisitions consisted of
two North American rigid industrial packaging companies in February 2009, the acquisition of a
North American rigid industrial packaging company in June 2009, the acquisition of a rigid
industrial packaging company in Asia in July 2009, the acquisition of a South American rigid
industrial packaging company in October 2009, and the acquisition of a 75 percent interest in a
North American paper packaging company in October 2009. These rigid industrial packaging and paper
packaging acquisitions complemented the Companys existing product lines and provided growth
opportunities and economies of scale. These acquisitions, included in operating results from the
acquisition dates, were accounted for using the purchase method of accounting and, accordingly, the
purchase prices were allocated to the assets purchased and liabilities assumed based upon their
estimated fair values at the dates of acquisition. The estimated fair values of the net assets
acquired were $23.5 million (including $8.4 million of accounts receivable and $4.4 million of
inventory) and liabilities assumed were $20.7 million. Identifiable intangible assets, with a
combined fair value of $34.5 million, including trade-names, customer relationships, and certain
non-compete agreements, have been recorded for these acquisitions. The excess of the purchase
prices over the estimated fair values of the net tangible and intangible assets acquired of $53.5
million was recorded as goodwill. The final allocation of the purchase prices may differ due to
additional refinements in the fair values of the net assets acquired as well as the execution of
consolidation plans to eliminate duplicate operations, in accordance with SFAS No. 141, Business
Combinations. This is due to the valuation of certain other assets and liabilities that are
subject to refinement and therefore the actual fair value may vary from the preliminary estimates.
Adjustments to the acquired net assets resulting from final valuations are not expected to be
significant. The Company is finalizing certain closing date adjustments with the sellers, as well
as the allocation of income tax adjustments.
The Company implemented a restructuring plan for one of the 2009 acquisitions above. The
Companys restructuring activities, which were accounted for in accordance with Emerging Task Force
Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination
(EITF 95-3), primarily included exit costs associated with the consolidation of facilities,
facility relocation, and the reduction of excess capacity. In connection with these restructuring
activities, as part of the cost of the above acquisition, the Company established reserves,
primarily for excess facilities, in the amount of $1.7 million, of which $0.8 million remains in
the restructuring reserve at July 31, 2010.
Had the transactions occurred on November 1, 2008, results of operations would not have
differed materially from reported results.
NOTE 3 SALE OF NON-UNITED STATES ACCOUNTS RECEIVABLE
Pursuant to the terms of a Receivable Purchase Agreement (the RPA) dated October 28, 2004
between Greif Coordination Center BVBA, an indirect wholly-owned subsidiary of Greif, Inc., and a
major international bank, the seller agreed to sell trade receivables meeting certain eligibility
requirements that seller had purchased from other indirect wholly-owned subsidiaries of Greif,
Inc., including Greif Belgium BVBA, Greif Germany GmbH, Greif Nederland BV, Greif Spain SA and
Greif UK Ltd, under discounted receivables purchase agreements and from Greif France SAS under a
factoring agreement. The RPA was amended on October 28, 2005 to include receivables originated by
Greif Portugal Lda, also an indirect wholly-owned subsidiary of Greif, Inc. In addition, on
October 28, 2005, Greif Italia S.P.A., also an indirect wholly-owned subsidiary of Greif, Inc.,
entered into the Italian Receivables Purchase Agreement with the Italian branch of the major
international bank (the Italian RPA) with Greif Italia S.P.A., agreeing to sell trade receivables
that meet certain eligibility criteria to the Italian branch of the major international bank. The
Italian RPA is similar in structure and terms as the RPA. The RPA was amended April 30, 2007 to
include receivables originated by Greif Packaging Belgium NV, Greif Packaging France SAS and Greif
Packaging Spain SA, all wholly-owned subsidiaries of Greif, Inc. The maximum amount of receivables
that may be sold under the RPA and the Italian RPA is 115 million ($149.5 million) at July 31,
2010.
In October 2007, Greif Singapore Pte. Ltd., an indirect wholly-owned subsidiary of Greif,
Inc., entered into the Singapore Receivable Purchase Agreement (the Singapore RPA) with a major
international bank. The maximum amount of aggregate receivables that may be sold under the
Singapore RPA is 15.0 million Singapore Dollars ($11.0 million) at July 31, 2010.
In October 2008, Greif Embalagens Industriais do Brasil Ltda., an indirect wholly-owned
subsidiary of Greif, Inc., entered into agreements (the Brazil Agreements) with Brazilian banks.
There is no maximum amount of aggregate receivables that may be sold under the Brazil Agreements;
however, the sale of individual receivables is subject to approval by the banks.
In May 2009, Greif Malaysia Sdn Bhd., an indirect wholly-owned Malaysian subsidiary of Greif,
Inc., entered into the Malaysian Receivables Purchase Agreement (the Malaysian Agreements) with
Malaysian banks. The maximum amount of the aggregate receivables that may be sold under the
Malaysian Agreements is 15.0 million Malaysian Ringgits ($4.7 million) at July 31, 2010.
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The structure of the transactions provide for a legal true sale, on a revolving basis, of the
receivables transferred from the various Greif, Inc. subsidiaries to the respective banks. The bank
funds an initial purchase price of a certain percentage of eligible receivables based on a formula
with the initial purchase price approximating 75 percent to 90 percent of eligible receivables. The
remaining deferred purchase price is settled upon collection of the receivables. At the balance
sheet reporting dates, the Company removes from accounts receivable the amount of proceeds received
from the initial purchase price since they meet the applicable criteria of SFAS No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(codified under ASC 860 Transfers and Servicing), and continues to recognize the deferred
purchase price in its accounts receivable. The receivables are sold on a non-recourse basis with
the total funds in the servicing collection accounts pledged to the banks between settlement dates.
At July 31, 2010 and October 31, 2009, 85.3 million ($110.8 million) and 77.0 million
($114.0 million), respectively, of accounts receivable were sold under the RPA and Italian RPA. At
July 31, 2010 and October 31, 2009, 8.1 million Singapore Dollars ($5.9 million) and 5.6 million
Singapore Dollars ($4.0 million), respectively, of accounts receivable were sold under the
Singapore RPA. At July 31, 2010 and October 31, 2009, 18.1 million Brazilian Reais ($10.2 million)
and 13.3 million Brazilian Reais ($7.6 million), respectively, of accounts receivable were sold
under the Brazil Agreements. At July 31, 2010 and October 31, 2009, 6.6 million Malaysian Ringgits
($2.1 million) and 6.3 million Malaysian Ringgits ($1.8 million), respectively, of accounts
receivable were sold under the Malaysian Agreements.
At the time the receivables are initially sold, the difference between the carrying amount and
the fair value of the assets sold are included as a loss on sale in the consolidated statements of
operations.
Expenses, primarily related to the loss on sale of receivables, associated with the RPA and
Italian RPA totaled 0.8 million ($1.0 million) and 0.8 million ($1.2 million) for the three
months ended July 31, 2010 and 2009, respectively; and 2.2 million ($2.9 million) and 2.9
million ($3.9 million) for the nine months ended July 31, 2010 and 2009, respectively.
Expenses associated with the Singapore RPA totaled 0.1 million Singapore Dollars ($0.1
million) and 0.1 million Singapore Dollars ($0.1 million) for the three months ended July 31, 2010
and 2009, respectively; and 0.3 million Singapore Dollars ($0.3 million) and 0.3 million Singapore
Dollars ($0.2 million) for the nine months ended July 31, 2010 and 2009, respectively.
Expenses associated with the Brazil Agreements totaled 1.2 million Brazilian Reais ($0.7
million) and 0.9 million Brazilian Reais ($0.4 million) for the three months ended July 31, 2010
and 2009, respectively; and 3.3 million ($1.9 million) and 1.4 million ($0.7 million) for the nine
months ended July 31, 2010 and 2009, respectively.
Expenses associated with the Malaysian Agreements were insignificant for the three months
ended July 31, 2010 and 2009; and 0.1 million Malaysian Ringgits ($0.1 million) for the nine months
ended July 31, 2010 and were insignificant for the nine months ended July 31, 2009.
Additionally, the Company performs collections and administrative functions on the receivables
sold similar to the procedures it uses for collecting all of its receivables, including receivables
that are not sold under the RPA, the Italian RPA, the Singapore RPA, the Brazil Agreements, and the
Malaysian Agreements. The servicing liability for these receivables is not material to the
consolidated financial statements.
NOTE 4 INVENTORIES
On November 1, 2009, the Company elected to adopt the FIFO method of inventory valuation for
all locations, whereas in all prior years inventory for certain U.S. locations was valued using the
LIFO method. The Company believes that the FIFO method of inventory valuation is preferable
because (i) the change conforms to a single method of accounting for all of the Companys
inventories on a U.S. and global basis, (ii) the change simplifies financial disclosures, (iii)
financial statement comparability and analysis for investors and analysts is improved, and (iv) the
majority of the Companys key competitors use FIFO. The comparative consolidated financial
statements of prior periods presented have been adjusted to apply the new accounting method
retrospectively. The change in accounting principle is reported through retrospective application
as described in ASC 250, Accounting Changes and Error Corrections.
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The following consolidated statement of operations line items for the three and nine-month
periods ended July 31, 2009 were affected by the change in accounting principle (Dollars in
thousands):
For the three months ended July 31, 2009 | For the nine months ended July 31, 2009 | |||||||||||||||||||||||
As Originally | As Originally | |||||||||||||||||||||||
Reported | Adjustments | As Adjusted | Reported | Adjustments | As Adjusted | |||||||||||||||||||
Cost of products sold |
$ | 575,018 | $ | 3,122 | $ | 578,140 | $ | 1,674,538 | $ | 26,098 | $ | 1,700,636 | ||||||||||||
Gross profit |
142,549 | (3,122 | ) | 139,427 | 357,186 | (26,098 | ) | 331,088 | ||||||||||||||||
Operating profit |
70,154 | (3,122 | ) | 67,032 | 117,745 | (26,098 | ) | 91,647 | ||||||||||||||||
Income tax expense |
12,691 | (1,202 | ) | 11,489 | 19,617 | (10,050 | ) | 9,567 | ||||||||||||||||
Net income attributable to Greif, Inc. |
$ | 39,731 | $ | (1,920 | ) | $ | 37,811 | $ | 53,139 | $ | (16,047 | ) | $ | 37,092 |
The following consolidated balance sheet line items at October 31, 2009 were affected by
the change in accounting principle (Dollars in thousands):
As Originally | ||||||||||||
Reported | Adjustments | As Adjusted | ||||||||||
Inventory |
$ | 227,432 | $ | 11,419 | $ | 238,851 | ||||||
Total assets |
$ | 2,812,510 | $ | 11,419 | $ | 2,823,929 | ||||||
Deferred tax liabilities |
$ | 156,755 | $ | 4,397 | $ | 161,152 | ||||||
Total liabilities |
$ | 1,712,940 | $ | 4,397 | $ | 1,717,337 | ||||||
Retained earnings |
$ | 1,199,592 | $ | 7,022 | $ | 1,206,614 | ||||||
Total liabilities and shareholders equity |
$ | 2,812,510 | $ | 11,419 | $ | 2,823,929 | ||||||
NOTE 5 NET ASSETS HELD FOR SALE
Net assets held for sale represent land, buildings and land improvements for locations that
have met the criteria of held for sale accounting, as specified by SFAS No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets (codified under ASC 360 Property, Plant, and
Equipment). As of July 31, 2010 and October 31, 2009, there were thirteen and fourteen facilities
held for sale, respectively. The net assets held for sale are being marketed for sale and it is the
Companys intention to complete the facility sales within the upcoming year.
NOTE 6 GOODWILL AND OTHER INTANGIBLE ASSETS
The Company reviews goodwill and indefinite-lived intangible assets for impairment as required by SFAS
No. 142 Goodwill and Other Intangible Assets (codified under ASC 350 Intangibles Goodwill and
Other), either annually or when events and circumstances
indicate an impairment may have occurred. The following table summarizes the changes in the carrying amount of goodwill by segment
for the nine month period ended July 31, 2010 (Dollars in thousands):
Rigid Industrial Packaging | Flexible Products | |||||||||||||||||||
& Services | & Services | Paper Packaging | Land Management | Total | ||||||||||||||||
Balance at October 31, 2009 |
$ | 530,717 | $ | | $ | 61,400 | $ | | $ | 592,117 | ||||||||||
Goodwill acquired |
37,372 | 42,013 | | 150 | 79,535 | |||||||||||||||
Goodwill adjustments |
6,481 | | (1,075 | ) | | 5,406 | ||||||||||||||
Currency translation |
(15,963 | ) | | | | (15,963 | ) | |||||||||||||
Balance at July 31, 2010 |
$ | 558,607 | $ | 42,013 | $ | 60,325 | $ | 150 | $ | 661,095 | ||||||||||
The
goodwill acquired of $79.5 million consisted of preliminary goodwill related to
acquisitions in the Rigid Industrial Packaging & Services and Flexible Products & Services
segments. The goodwill adjustments increased goodwill by $5.4 million and consisted
of a $3.4 million contingent payment relating to a 2008
acquisition, with the balance related to
purchase price adjustments for nine of the 2009 acquisitions.
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The detail of other intangible assets by class as of July 31, 2010 and October 31, 2009 are as
follows (Dollars in thousands):
Gross | Accumulated | Net Intangible | ||||||||||
Intangible Assets | Amortization | Assets | ||||||||||
October 31, 2009: |
||||||||||||
Trademark and patents |
$ | 35,081 | $ | 15,457 | $ | 19,624 | ||||||
Non-compete agreements |
18,842 | 6,143 | 12,699 | |||||||||
Customer relationships |
110,298 | 17,190 | 93,108 | |||||||||
Other |
11,018 | 5,079 | 5,939 | |||||||||
Total |
$ | 175,239 | $ | 43,869 | $ | 131,370 | ||||||
July 31, 2010: |
||||||||||||
Trademark and patents |
$ | 39,868 | $ | 16,640 | $ | 23,228 | ||||||
Non-compete agreements |
18,630 | 6,796 | 11,834 | |||||||||
Customer relationships |
131,954 | 23,771 | 108,183 | |||||||||
Other |
13,340 | 5,872 | 7,468 | |||||||||
Total |
$ | 203,792 | $ | 53,079 | $ | 150,713 | ||||||
Gross
intangible assets increased by $28.5 million for the nine-month period ended July 31, 2010.
The increase in gross intangible assets consisted of $3.0 million in final purchase price
allocations related to the 2009 acquisitions in the Rigid Industrial Packaging & Services and Paper
Packaging segments, $29.9 million in preliminary purchase price allocations related to 2010
acquisitions in the Rigid Industrial Packaging & Services and Flexible Products & Services segments
and a $4.4 million decrease due to currency fluctuations both related to the Rigid Industrial
Packaging & Services and to the Flexible Products & Services segment. Amortization expense for the
nine months ended July 31, 2010 and 2009 was $10.0 million and $8.0 million, respectively.
Amortization expense for the next five years is expected to be $18.1 million in 2011, $17.8 million
in 2012, $14.2 million in 2013, $12.3 million in 2014 and $11.7 million in 2015.
All intangible assets for the periods presented are subject to amortization and are being
amortized using the straight-line method over periods that range from three to 23 years, except for
$12.4 million related to the Tri-Sure trademark and the trade names related to Blagden Express,
Closed-loop, and Box Board, all of which have indefinite lives.
NOTE 7 RESTRUCTURING CHARGES
During the first nine months of 2010, the Company recorded restructuring charges of $20.7
million, which compares to $57.7 million of restructuring charges during the first nine months of
2009. The restructuring activity for the nine month period ended July 31, 2010 consisted of $11.4
million in employee separation costs, $2.3 million in asset impairments and $6.9 million in other
costs. In addition, during that period there was a restructuring-related inventory charge of $0.1
million recorded in cost of products sold. During the first nine months of 2010, five locations
within the Rigid Industrial Packaging & Services and two locations within the Paper Packaging
segments were closed and the total number of employees severed
was 163. The restructuring activity for the nine month period ended July 31, 2009 consisted of
$29.8 million in employee separation costs, $14.6 million in asset impairments and $13.3 million in
other costs. In addition, during that period there was a restructuring-related inventory charge
for $10.1 million recorded in cost of products sold. During the nine months of 2009, sixteen
company-owned plants in the Rigid Industrial Packaging &
Services segment were closed and the total number of employees severed was 1,178.
During the three months ended July 31, 2010, the Company recorded restructuring charges of
$9.8 million, consisting of $4.7 million in employee separation costs, $2.1 million in asset
impairments, $1.1 million in professional fees, and $1.9 million in other costs. In addition, the
Company recorded $0.1 million in restructuring related inventory charges in cost of products sold.
During this period, two company owned plants in the Rigid Industrial Packaging & Services segment and two company owned
plants in the Paper Packaging segment were closed and the total
number of employees severed was 104. During the three months ended July 31, 2009,
the Company recorded restructuring charges of $10.3 million, consisting of $4.7 million in employee
separation costs, $1.7 million in asset impairments and $3.9 million in other costs. In addition,
the Company recorded $0.9 million in restructuring related inventory charges in cost of products
sold. During the three months of 2009, three company owned plants in the Rigid Industrial Packaging & Services segment were closed
and the total number employees severed was 54.
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For each relevant business segment, costs incurred in 2010 are as follows (Dollars in
thousands):
Three months | ||||||||||||||||
Amounts Expected to | ended July 31, | Nine months ended | Amounts Remaining to | |||||||||||||
be Incurred | 2010 | July 31, 2010 | be Incurred | |||||||||||||
Rigid Industrial Packaging & Services |
||||||||||||||||
Employee separation costs |
$ | 9,241 | $ | 1,959 | $ | 8,657 | $ | 584 | ||||||||
Asset impairments |
832 | 594 | 832 | | ||||||||||||
Professional fees |
4,815 | 1,045 | 2,271 | 2,544 | ||||||||||||
Inventory adjustments |
227 | 94 | 131 | 96 | ||||||||||||
Other restructuring costs |
9,384 | 1,661 | 4,173 | 5,211 | ||||||||||||
24,499 | 5,353 | 16,064 | 8,435 | |||||||||||||
Flexible Products & Services |
||||||||||||||||
Other restructuring costs |
$ | | $ | 45 | $ | 45 | $ | | ||||||||
Paper Packaging |
||||||||||||||||
Employee separation costs |
$ | 2,815 | $ | 2,699 | $ | 2,699 | $ | 116 | ||||||||
Asset impairments |
1,524 | 1,524 | 1,524 | | ||||||||||||
Other restructuring costs |
2,418 | 252 | 365 | 2,053 | ||||||||||||
6,757 | 4,475 | 4,588 | 2,169 | |||||||||||||
$ | 31,256 | $ | 9,873 | $ | 20,697 | $ | 10,604 | |||||||||
Total amounts expected to be incurred above are from open restructuring plans which are
anticipated to be realized in 2010 and 2011 or plans that are being formulated and have not been
announced as of the date of this Form 10-Q.
The following is a reconciliation of the beginning and ending restructuring reserve balances
for the nine month period ended July 31, 2010 (Dollars in thousands):
Cash Charges | Non-cash Charges | |||||||||||||||||||
Employee | ||||||||||||||||||||
Separation | Asset | Inventory | ||||||||||||||||||
Costs | Other Costs | Impairments | write-down | Total | ||||||||||||||||
Balance at October 31, 2009 |
$ | 9,239 | $ | 6,076 | $ | | $ | | $ | 15,315 | ||||||||||
Costs incurred and charged to expense |
11,356 | 6,854 | 2,356 | 131 | 20,697 | |||||||||||||||
Costs paid or otherwise settled |
(9,034 | ) | (6,698 | ) | (2,356 | ) | (131 | ) | (18,219 | ) | ||||||||||
Balance at July 31, 2010 |
$ | 11,561 | $ | 6,232 | $ | | $ | | $ | 17,793 | ||||||||||
NOTE 8 SIGNIFICANT NONSTRATEGIC TIMBERLAND TRANSACTIONS AND CONSOLIDATION OF VARIABLE
INTEREST ENTITIES
On March 28, 2005, Soterra LLC (a wholly owned subsidiary) entered into two real estate
purchase and sale agreements with Plum Creek Timberlands, L.P. (Plum Creek) to sell approximately
56,000 acres of timberland and related assets located primarily in Florida for an aggregate sales
price of approximately $90 million, subject to closing adjustments. In connection with the closing
of one of these agreements, Soterra LLC sold approximately 35,000 acres of timberland and
associated assets in Florida, Georgia and Alabama for $51.0 million, resulting in a pretax gain of
$42.1 million, on May 23, 2005. The purchase price was paid in the form of cash and a $50.9 million
purchase note payable by an indirect subsidiary of Plum Creek (the Purchase Note). Soterra LLC
contributed the Purchase Note to STA Timber LLC (STA Timber), one of the Companys indirect
wholly owned subsidiaries. The Purchase Note is secured by a Deed of Guarantee issued by Bank of
America, N.A., London Branch, in an amount not to exceed $52.3 million (the Deed of Guarantee),
as a guarantee of the due and punctual payment of principal and interest on the Purchase Note.
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The Company completed the second phase of these transactions in the first quarter of 2006. In
this phase, the Company sold 15,300 acres of timberland holdings in Florida for $29.3 million in
cash, resulting in a pre-tax gain of $27.4 million. The final phase of this transaction,
approximately 5,700 acres sold for $9.7 million, occurred on April 28, 2006 and the Company
recognized additional timberland gains in its consolidated statements of operations in the periods
that these transactions occurred resulting in a pre-tax gain of $9.0 million.
On May 31, 2005, STA Timber issued in a private placement its 5.20% Senior Secured Notes due
August 5, 2020 (the Monetization Notes) in the principal amount of $43.3 million. In connection
with the sale of the Monetization Notes, STA Timber entered into note purchase agreements with the
purchasers of the Monetization Notes (the Note Purchase Agreements) and related documentation.
The Monetization Notes are secured by a pledge of the Purchase Note and the Deed of Guarantee. The
Monetization Notes may be accelerated in the event of a default in payment or a breach of the other
obligations set forth therein or in the Note Purchase Agreements or related documents, subject in
certain cases to any applicable cure periods, or upon the occurrence of certain insolvency or
bankruptcy related events. The Monetization Notes are subject to a mechanism that may cause them,
subject to certain conditions, to be extended to November 5, 2020. The proceeds from the sale of
the Monetization Notes were primarily used for the repayment of indebtedness.
In addition, Greif, Inc. and its other subsidiaries have not extended any form of guaranty of
the principal or interest on the Monetization Notes. Accordingly, Greif, Inc. and its other
subsidiaries will not become directly or contingently liable for the payment of the Monetization
Notes at any time.
The Company has consolidated the assets and liabilities of the buyer-sponsored special purpose
entity (the Buyer SPE) involved in these transactions as the result of ASC 810. However, because
the Buyer SPE is a separate and distinct legal entity from the Company, the assets of the Buyer SPE
are not available to satisfy the liabilities and obligations of the Company and its other
subsidiaries and the liabilities of the Buyer SPE are not liabilities or obligations of the Company
and its other subsidiaries.
Assets of the Buyer SPE at July 31, 2010 and October 31, 2009 consist of restricted bank
financial instruments of $50.9 million, respectively. STA Timber had long-term debt of $43.3
million as of July 31, 2010 and October 31, 2009, respectively. STA Timber is exposed to
credit-related losses in the event of nonperformance by the issuer of the Deed of Guarantee. The
accompanying consolidated income statements for the nine-month periods ended July 31, 2010 and 2009
include interest expense on STA Timber debt of $1.7 million and interest income on Buyer SPE
investments of $1.8 million, respectively.
NOTE 9 LONG-TERM DEBT
Long-term debt is summarized as follows (Dollars in thousands):
July 31, 2010 | October 31, 2009 | |||||||
$700 Million Credit Agreement |
$ | 294,007 | $ | 192,494 | ||||
Senior Notes due 2017 |
303,532 | 300,000 | ||||||
Senior Notes due 2019 |
242,158 | 241,729 | ||||||
Trade accounts receivable credit facility |
117,800 | | ||||||
Other long-term debt |
11,129 | 4,385 | ||||||
968,626 | 738,608 | |||||||
Less current portion |
(20,000 | ) | (17,500 | ) | ||||
Long-term debt |
$ | 948,626 | $ | 721,108 | ||||
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$700 Million Credit Agreement
On February 19, 2009, the Company and Greif International Holding B.V., as borrowers, entered
into a $700 million Senior Secured Credit Agreement (the Credit Agreement) with a syndicate of
financial institutions. The Credit Agreement provides for a $500 million revolving multicurrency
credit facility and a $200 million term loan, both maturing in February 2012, with an option to add
$200 million to the facilities with the agreement of the lenders. The $200 million term loan is
scheduled to amortize by $2.5 million each quarter-end for the first four quarters, $5.0 million
each quarter-end for the next eight quarters and $150.0 million on the maturity date. The Credit
Agreement is available to fund ongoing working capital and capital expenditure needs, for general
corporate purposes, to finance acquisitions, and to repay amounts outstanding under the previous
$450 million credit agreement. Interest is based on a Eurodollar rate or a base rate that resets
periodically plus a calculated margin amount. As of July 31, 2010, $294.0 million was outstanding
under the Credit Agreement. The current portion of the Credit Agreement is $20.0 million and the
long-term portion is $274.0 million. The weighted average interest rate on the Credit Agreement was
3.16% for the nine months ended July 31, 2010 and the interest rate was 3.30% at July 31, 2010.
The Credit Agreement contains financial covenants that require the Company to maintain a
certain leverage ratio and a fixed charge coverage ratio. At July 31, 2010, the Company was in
compliance with these covenants.
Senior Notes due 2017
On February 9, 2007, the Company issued $300.0 million of 6.75% Senior Notes due February 1,
2017. Interest on these Senior Notes is payable semi-annually. Proceeds from the issuance of these
Senior Notes were principally used to fund the purchase of previously outstanding 8.875% Senior
Subordinated Notes in a tender offer and for general corporate purposes.
The fair value of these Senior Notes due 2017 was $311.0 million at July 31, 2010 based upon
quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains
certain covenants. At July 31, 2010, the Company was in compliance with these covenants.
Senior Notes due 2019
On July 28, 2009, the Company issued $250.0 million of 7.75% Senior Notes due August 1, 2019.
Interest on these Senior Notes is payable semi-annually. Proceeds from the issuance of Senior Notes
were principally used for general corporate purposes, including the repayment of amounts
outstanding under the Companys revolving multicurrency credit facility, without any permanent
reduction of the commitments.
The fair value of these Senior Notes due 2019 was $257.5 million at July 31, 2010 based upon
quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains
certain covenants. At July 31, 2010, the Company was in compliance with these covenants.
United States Trade Accounts Receivable Credit Facility
On December 8, 2008, the Company entered into a $135.0 million trade accounts receivable
credit facility with a financial institution and its affiliate, with a maturity date of December 8,
2013, subject to earlier termination of their purchase commitment on December 6, 2010, or such
later date to which the purchase commitment may be extended by agreement of the parties. The credit
facility is secured by certain of the Companys trade accounts receivable in the United States and
bears interest at a variable rate based on the applicable commercial paper rate plus a margin or
other agreed-upon rate (1.71% at July 31, 2010). In addition, the Company can terminate the credit
facility at any time upon five days prior written notice. A significant portion of the initial
proceeds from this credit facility was used to pay the obligations under the previous trade
accounts receivable credit facility, which was terminated. The remaining proceeds were and will be
used to pay certain fees, costs and expenses incurred in connection with the credit facility and
for working capital and general corporate purposes. At July 31, 2010, there was $117.8 million
outstanding under the Receivables Facility. The agreement for this receivables financing facility
contains financial covenants that require the Company to maintain a certain leverage ratio and a
fixed charge coverage ratio. At July 31, 2010, the Company was in compliance with these covenants.
Greif Receivables Funding LLC (GRF), an indirect subsidiary of the Company, has participated
in the purchase and transfer of receivables in connection with these credit facilities and is
included in the Companys consolidated financial statements. However, because GRF is a separate and
distinct legal entity from the Company and its other subsidiaries, the assets of GRF are not
available to satisfy the liabilities and obligations of the Company and its other subsidiaries, and
the liabilities of GRF are not the liabilities or obligations of the Company and its other
subsidiaries. This entity purchases and services the Companys trade accounts receivable that are
subject to these credit facilities.
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Other
In addition to the amounts borrowed under the Credit Agreement and proceeds from these Senior
Notes and the United States Trade Accounts Receivable Credit Facility, at July 31, 2010, the
Company had outstanding other debt of $62.1 million, comprised of $11.1 million in long-term debt
and $51.0 million in short-term borrowings, compared to other debt outstanding of $24.0 million,
comprised of $4.4 million in long-term debt and $19.6 million in short-term borrowings, at October
31, 2009.
At July 31, 2010, the current portion of the Companys long-term debt was $20.0 million.
Annual maturities, including the current portion, of long-term debt under the Companys various
financing arrangements were $5.0 million in 2010, $31.1 million in 2011, $269.0 million in 2012,
$117.8 million in 2013 and $545.7 million thereafter.
At July 31, 2010 and October 31, 2009, the Company had deferred financing fees and debt
issuance costs of $11.9 million and $14.9 million, respectively, which are included in other
long-term assets.
NOTE 10 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (codified under ASC
820 Fair Value Measurements and Disclosures). SFAS No. 157 defines fair value, establishes a
framework for measuring fair value in GAAP and expands disclosures about fair value measurements.
Additionally, this guidance established a three-level fair value hierarchy that prioritizes the
inputs used to measure fair value. This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair values are as follows:
Level 1
|
Observable inputs such as unadjusted quoted prices in active markets for identical assets and liabilities. | |
Level 2
|
Observable inputs other than quoted prices in active markets for identical assets and liabilities. | |
Level 3
|
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. |
Recurring Fair Value Measurements
The following table presents the fair values adjustments for those assets and (liabilities)
measured on a recurring basis as of July 31, 2010 (Dollars in thousands):
Fair Value Measurement | Balance sheet | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Location | ||||||||||||||
Interest rate derivatives |
$ | | $ | (2,229 | ) | $ | | $ | (2,229 | ) | Other long-term liabilities | |||||||
Foreign exchange hedges |
| (2,427 | ) | | (2,427 | ) | Other current liabilities | |||||||||||
Energy hedges |
| (143 | ) | | (143 | ) | Other current liabilities | |||||||||||
Total* |
$ | | $ | (4,799 | ) | $ | | $ | (4,799 | ) | ||||||||
* | The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts
payable, current liabilities and short-term borrowings at July 31, 2010 approximate their fair
values because of the short-term nature of these items and are not included in this table. |
Derivatives and Hedging Activity
The Company uses derivatives from time to time to partially mitigate the effect of exposure to
interest rate movements, exposure to currency fluctuations, and energy cost fluctuations. Under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities (codified under ASC
815 Derivatives and Hedging), all derivatives are to be recognized as assets or liabilities in
the balance sheet and measured at fair value. Changes in the fair value of derivatives are
recognized in either net income or in other comprehensive income, depending on the designated
purpose of the derivative.
While the Company may be exposed to credit losses in the event of nonperformance by the
counterparties to its derivative financial instrument contracts, its counterparties are established
banks and financial institutions with high credit ratings. The Company has no reason to believe
that such counterparties will not be able to fully satisfy their obligations under these contracts.
15
Table of Contents
During the next three months, the Company expects to reclassify into earnings a net loss from
accumulated other comprehensive loss of approximately $2.6 million after tax at the time the
underlying hedge transactions are realized.
Cross-Currency Interest Rate Swaps
The Company entered into cross-currency interest rate swap agreements which were designated as a
hedge of a net investment in a foreign operation. Under these swap agreements, the Company received
interest semi-annually from the counterparties in an amount equal to a fixed rate of 6.75% on
$200.0 million and paid interest in an amount equal to a fixed rate of 6.25% on 146.6 million.
During the third quarter of 2010, the Company terminated these swap agreements, including any
future cash flows. The termination of these swap agreements resulted in a cash benefit of $25.7
million ($15.8 million, net of tax) which is included within foreign currency translation adjustments.
At October 31, 2009, the Company had recorded an other comprehensive loss of $14.6 million as a
result of these swap agreements.
Interest Rate Derivatives
The Company has interest rate swap agreements with various maturities through 2012. These
interest rate swap agreements are used to manage the Companys fixed and floating rate debt mix.
Under these agreements, the Company receives interest monthly from the counterparties based upon a
designated London Interbank Offered Rate (LIBOR) and pays interest based upon a designated fixed
rate over the life of the swap agreements.
The Company has two interest rate derivatives (floating to fixed swap agreements recorded as
cash flow hedges) with a total notional amount of $125 million. Under these swap agreements, the
Company receives interest based upon a variable interest rate from the counterparties (weighted
average of 0.27% at July 31, 2010 and 0.25% at October 31, 2009) and pays interest based upon a
fixed interest rate (weighted average of 1.78% at July 31, 2010 and 2.71% at October 31, 2009).
In the first quarter of 2010, the Company entered into a $100.0 million fixed to floating swap
agreement which was recorded as a fair value hedge. Under this swap agreement, the Company received
interest from the counterparty based upon a fixed rate of 6.75% and paid interest based upon a
variable rate on a semi-annual basis. In the third quarter of 2010, the Company terminated this
swap agreement, including any future cash flows. The termination of this swap agreement resulted in
a cash benefit of $3.6 million ($2.2 million, net of tax)
which is included within long-term debt on the balance sheet.
Foreign Exchange Hedges
At July 31, 2010, the Company had outstanding foreign currency forward contracts in the
notional amount of $148.1 million ($70.5 million at October 31, 2009). The purpose of these
contracts is to hedge the Companys exposure to foreign currency transactions and short-term
intercompany loan balances in its international businesses. The fair value of these contracts at
July 31, 2010 resulted in an immaterial gain recorded in the consolidated statements of operations
and a loss of $2.4 million recorded in other comprehensive income. The fair value of similar
contracts at October 31, 2009 resulted in an immaterial loss in the consolidated statements of
operations.
Energy Hedges
The Company has entered into certain cash flow agreements to mitigate its exposure to cost
fluctuations in natural gas prices through October 31, 2010. Under these hedge agreements, the
Company agrees to purchase natural gas at a fixed price. At July 31, 2010, the notional amount of
these hedges was $3.0 million ($4.0 million at October 31, 2009). The other comprehensive loss on
these agreements was $0.1 million at July 31, 2010 and $0.6 million at October 31, 2009. As a
result of the high correlation between the hedged instruments and the underlying transactions,
ineffectiveness has not had a material impact on the Companys consolidated statements of
operations for the quarter ended July 31, 2010.
Other financial instruments
The estimated fair values of the Companys long-term debt were $991.5 million and $744.9
million compared to the carrying amounts of $968.6 million and $738.6 million at July 31, 2010 and
October 31, 2009, respectively. The current portion of the long-term debt was $20.0 million and
$17.5 million at July 31, 2010 and October 31, 2009, respectively. The fair values of the Companys
long-term obligations are estimated based on either the quoted market prices for the same or
similar issues or the current interest rates offered for debt of the same remaining maturities.
16
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Non-Recurring Fair Value Measurements
The Company has reviewed its non-financial assets and non-financial liabilities for fair value
treatment under the current guidance.
Net Assets Held for Sale
Net assets held for sale are considered level three inputs which include recent purchase
offers, market comparables and/or data obtained from commercial real estate brokers. As of July 31,
2010, the Company has not recognized impairments related to the net assets held for sale.
Long-Lived Assets
As part of the Companys restructuring plans following current and future acquisitions, the
Company may shut down manufacturing facilities during the next few years. The long-lived assets
are considered level three inputs which were valued based on bids received from third parties and
using discounted cash flow analysis based on assumptions that the Company believes market
participants would use. Key inputs included anticipated revenues, associated manufacturing costs,
capital expenditures and discount, growth and tax rates. For the three-month and nine-month periods
ended July 31, 2010, the Company recorded restructuring related expenses of $2.1 million and $2.4
million, respectively on long lived assets with net book values of $3.5 million and $4.0 million,
respectively over the same period.
Goodwill
On an annual basis, the Company performs its impairment tests for goodwill as defined under
SFAS No. 142, (codified under ASC 350 Intangibles-Goodwill and Other). As a result of this
review during 2009, the Company concluded that no impairment existed at that time. As of July 31,
2010, the Company has concluded that no impairment exists.
NOTE 11 STOCK-BASED COMPENSATION
On November 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment (codified
under ASC 718 Compensation Stock Compensation), which requires companies to estimate the fair
value of share-based awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as expense in the Companys
consolidated statements of operations over the requisite service periods. The Company uses the
straight-line single option method of expensing stock options to recognize compensation expense in
its consolidated statements of operations for all share-based awards. Because share-based
compensation expense is based on awards that are ultimately expected to vest, share-based
compensation expense will be reduced to account for estimated forfeitures. SFAS No. 123(R) requires
forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates. No options have been granted in 2010 and 2009.
For any options granted in the future, compensation expense will be based on the grant date fair
value estimated in accordance with the provisions of SFAS No. 123(R). There was no share-based
compensation expense recognized under SFAS No. 123(R) for the first nine months of 2010 or 2009.
NOTE 12 INCOME TAXES
The quarterly effective tax rate was 18.2% and 22.7% in the third quarter of 2010 and 2009,
respectively. The year to date effective tax rate was 18.9% and 19.5% in the nine month periods
ended July 31, 2010 and 2009, respectively. The change in the effective tax rate is primarily due to a change in
the forecasted mix of income in the United States versus outside the United States for the
respective periods as well as an incremental benefit from an alternative fuel credit.
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The Company has estimated the reasonably possible expected net change in unrecognized tax
benefits through July 31, 2011 based on expected settlements or payments of uncertain tax
positions, and lapses of the applicable statutes of limitations of unrecognized tax benefits under
FASB Interpretation No. (FIN) 48, Accounting for Uncertainty in Income Taxes. FIN 48 is an
interpretation of SFAS No. 109, Accounting for Income Taxes, and clarifies the accounting for
uncertainty in income tax positions (codified under
ASC 740 Income Taxes). The Company estimates that the range of possible change in
unrecognized tax benefits within the next 12 months is a decrease of approximately zero to $2.8
million. Actual results may differ materially from this estimate.
The Companys uncertain tax positions for the nine months ended July 31, 2010 were reduced by
approximately $1.7 million due to settlements with tax authorities. There were no other significant
changes in the Companys uncertain tax positions for this period.
NOTE 13 RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The components of net periodic pension cost include the following (Dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
July 31 | July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 2,293 | $ | 1,842 | $ | 6,879 | $ | 5,526 | ||||||||
Interest cost |
3,998 | 4,143 | 11,994 | 12,429 | ||||||||||||
Expected return on plan assets |
(4,524 | ) | (4,398 | ) | (13,572 | ) | (13,194 | ) | ||||||||
Amortization of prior service cost, initial net asset and net actuarial gain |
1,700 | 288 | 5,100 | 864 | ||||||||||||
Net periodic pension costs |
$ | 3,467 | $ | 1,875 | $ | 10,401 | $ | 5,625 | ||||||||
The
Company made $12.2 million in pension contributions in the nine months ended July 31, 2010. The
Company estimates $17.1 million of pension contributions for the entire 2010 fiscal year.
The components of net periodic cost for postretirement benefits include the following (Dollars
in thousands):
Three months ended | Nine months ended | |||||||||||||||
July 31 | July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Service cost |
$ | 1 | $ | | $ | 3 | $ | | ||||||||
Interest cost |
283 | 374 | 849 | 1,122 | ||||||||||||
Amortization of prior service cost and recognized actuarial gain |
(251 | ) | (283 | ) | (753 | ) | (849 | ) | ||||||||
Net periodic cost for postretirement benefits |
$ | 33 | $ | 91 | $ | 99 | $ | 273 | ||||||||
NOTE 14 CONTINGENT LIABILITIES
Various lawsuits, claims and proceedings have been or may be instituted or asserted against
the Company, including those pertaining to environmental, product liability and safety and health
matters. While the amounts claimed may be substantial, the ultimate liability cannot now be
determined because of considerable uncertainties that exist. Therefore, it is possible that results
of operations or liquidity in a particular period could be materially affected by certain
contingencies.
All lawsuits, claims and proceedings are considered by the Company in establishing reserves
for contingencies in accordance with SFAS No. 5, Accounting for Contingencies (codified under
ASC 450 Contingencies). In accordance with the provisions of this standard, the Company accrues
for a litigation-related liability when it is probable that a liability has been incurred and the
amount of the loss can be reasonably estimated. Based on currently available information known to
the Company, the Company had no recorded legal liabilities at
July 31, 2010 and October 31, 2009. The ultimate outcome of any pending matters is not likely to have a material
adverse effect on the Companys financial position or results from operations.
The most significant contingencies of the Company relate to environmental liabilities. The
following is additional information with respect to these matters.
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At July 31, 2010 and October 31, 2009, the Company had recorded liabilities of $31.1 million
and $33.4 million, respectively, for estimated environmental remediation costs. The liabilities
were recorded on an undiscounted basis and are included in other long-term liabilities. At July 31,
2010 and October 31, 2009, the Company had recorded environmental liability reserves of $17.4
million and $17.9 million, respectively, for its blending facility in Chicago, Illinois; $9.3
million and $10.9 million, respectively, for various European drum facilities acquired in November
2006; and $2.8 million and $3.4 million, respectively, related to the Companys facility in Lier,
Belgium. These reserves are principally based on environmental studies and cost estimates provided
by third parties, but also take into account management estimates.
These environmental liabilities were not individually material. The
Company only reserves for those unasserted claims that it believes are probable of being asserted
at some time in the future. The liabilities recorded are based upon an evaluation of currently
available facts with respect to each individual site, including the results of environmental
studies and testing, and considering existing technology, presently enacted laws and regulations,
and prior experience in remediation of contaminated sites. The Company initially provides for the
estimated cost of environmental-related activities when costs can be reasonably estimated. If the
best estimate of costs can only be identified as a range and no specific amount within that range
can be determined more likely than any other amount within the range, the minimum of the range is
accrued.
The estimated liabilities are reduced to reflect the anticipated participation of other
potentially responsible parties in those instances where it is probable that such parties are
legally responsible and financially capable of paying their respective shares of relevant costs.
For sites that involve formal actions subject to joint and several liability, these actions have
formal agreements in place to apportion the liability. The Companys potential future obligations
for environmental contingencies related to facilities acquired in the 2001 Van Leer Industrial
Packaging acquisition may, under certain circumstances, be reduced by insurance coverage and seller
cost sharing provisions. In connection with that acquisition, the Company was issued a 10-year term
insurance policy, which insures the Company against environmental contingencies unidentified at the
acquisition date, subject to a $50.0 million aggregate self-insured retention. Liability for this
first $50.0 million of unidentified environmental contingencies is shared 70 percent by the seller
and 30 percent by the Company if such contingency is identified within 10 years following the
acquisition date. The Company is liable for identified environmental contingencies at the
acquisition date up to an aggregate $10.0 million, and thereafter the liability is shared 70
percent by the Company and 30 percent by the seller.
The Company anticipates that cash expenditures in future periods for remediation costs at
identified sites will be made over an extended period of time. Given the inherent uncertainties in
evaluating environmental exposures, actual costs may vary from those estimated at July 31, 2010.
The Companys exposure to adverse developments with respect to any individual site is not expected
to be material. Although environmental remediation could have a material effect on results of
operations if a series of adverse developments occur in a particular quarter or fiscal year, the
Company believes that the chance of a series of adverse developments occurring in the same quarter
or fiscal year is remote. Future information and developments will require the Company to
continually reassess the expected impact of these environmental matters.
NOTE 15 EARNINGS PER SHARE
Earnings per share
The Company has two classes of common stock and, as such, applies the two-class method of
computing earnings per share as prescribed in SFAS No. 128, Earnings Per Share (codified under
ASC 260 Earnings Per Share). In accordance with guidance, earnings are allocated first to
Class A and Class B Common Stock to the extent that dividends are actually paid and the remainder
allocated assuming all of the earnings for the period have been distributed in the form of
dividends.
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Table of Contents
The following table summarizes the Companys Class A and Class B common and treasury shares at
the specified dates:
Outstanding | ||||||||||||||||
Authorized Shares | Issued Shares | Shares | Treasury Shares | |||||||||||||
July 31, 2010: |
||||||||||||||||
Class A Common Stock |
128,000,000 | 42,281,920 | 24,731,074 | 17,550,846 | ||||||||||||
Class B Common Stock |
69,120,000 | 34,560,000 | 22,412,266 | 12,147,734 | ||||||||||||
October 31, 2009: |
||||||||||||||||
Class A Common Stock |
128,000,000 | 42,281,920 | 24,474,773 | 17,807,147 | ||||||||||||
Class B Common Stock |
69,120,000 | 34,560,000 | 22,462,266 | 12,097,734 |
The following is a reconciliation of the shares used to calculate basic and diluted earnings
per share:
Three months ended | Nine months ended | |||||||||||||||
July 31 | July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Class A Common Stock: |
||||||||||||||||
Basic shares |
24,687,006 | 24,386,195 | 24,623,262 | 24,289,802 | ||||||||||||
Assumed conversion of stock options |
312,895 | 361,572 | 307,577 | 307,566 | ||||||||||||
Diluted shares |
24,999,901 | 24,747,767 | 24,930,839 | 24,597,368 | ||||||||||||
Class B Common Stock: |
||||||||||||||||
Basic and diluted shares |
22,444,488 | 22,462,266 | 22,456,340 | 22,480,187 | ||||||||||||
No stock options were antidilutive for the three or nine months ended July 31, 2010. There
were no stock options that were antidilutive for the three months ended July 31, 2009 and 20,000
stock options that were antidilutive for the nine months ended July 31, 2009.
Dividends per share
The following dividends per share were paid during the periods indicated:
Three Months ended July 31 | Nine Months ended July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Class A Common Stock |
$ | 0.42 | $ | 0.38 | $ | 1.18 | $ | 1.14 | ||||||||
Class B Common Stock |
$ | 0.63 | $ | 0.57 | $ | 1.76 | $ | 1.70 |
Class A Common Stock is entitled to cumulative dividends of 1 cent a share per year after
which Class B Common Stock is entitled to non-cumulative dividends up to one half (1/2) cent per
share per year. Further distribution in any year must be made in proportion of one cent a share for
Class A Common Stock to one and one-half (1 1/2) cents a share for Class B Common Stock. The Class
A Common Stock has no voting rights unless four quarterly cumulative dividends upon the Class A
Common Stock are in arrears or unless changes are proposed to the Companys certificate of
incorporation. The Class B Common Stock has full voting rights. There is no cumulative voting for
the election of directors.
Common stock repurchases
The Companys Board of Directors has authorized the purchase of up to four million shares of
Class A Common Stock or Class B Common Stock or any combination of the foregoing. During the first
nine months of 2010, the Company did not repurchase any shares of Class A Common Stock, but did
purchase 50,000 shares of Class B Common Stock. As of July 31, 2010, the Company had
repurchased 2,883,272 shares, including 1,416,752 shares of Class A Common Stock and 1,466,520
shares of Class B Common Stock, under this program. The total cost of the shares repurchased from
November 1, 2008 through July 31, 2010 was approximately $5.8 million.
20
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NOTE
16 EQUITY EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES, NET OF TAX AND NONCONTROLLING
INTERESTS
Equity earnings (losses) of unconsolidated affiliates, net of tax
Equity earnings (losses) of unconsolidated affiliates, net of tax represent investments in
affiliates in which the Company does not exercise control and has a 20 percent or more voting
interest. Such investments in affiliates are accounted for using the equity method of accounting.
If the fair value of an investment in an affiliate is below its carrying value and the difference
is deemed to be other than temporary, the difference between the fair value and the carrying value
is charged to earnings. The Company has an equity interest in six affiliates, and the equity
earnings of these interests were recorded in net income. Equity earnings (losses) of unconsolidated
affiliates, net of tax for the three months ended July 31, 2010 and 2009 were $3.1 and $0.4 million,
respectively. Equity earnings (losses) of unconsolidated affiliates, net of tax for the nine months ended
July 31, 2010 and 2009 were $3.3 and ($0.2) million, respectively. There were no dividends received
from the Companys equity method affiliates for the nine months ended July 31, 2010 and 2009.
Noncontrolling interests
Noncontrolling interests reflect the portion of earnings or losses of operations that are
majority owned by the Company which are applicable to the noncontrolling interest partners.
Noncontrolling interests for the three months ended July 31, 2010 and 2009 were $1.8 million and $1.7
million, respectively. Noncontrolling interests for the nine months ended July 31, 2010 and 2009
were $5.4 million and $2.2 million, respectively, and were deducted from net income to arrive at
net income attributable to Greif, Inc.
NOTE 17 COMPREHENSIVE INCOME
Comprehensive income is comprised of net income and other charges and credits to equity that
are not the result of transactions with the Companys owners. The components of comprehensive
income are as follows (Dollars in thousands):
Three months ended | Nine months ended | |||||||||||||||
July 31 | July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As Adjusted) | (As Adjusted) | |||||||||||||||
Net income |
$ | 67,759 | $ | 39,547 | $ | 138,822 | $ | 39,275 | ||||||||
Other comprehensive income: |
||||||||||||||||
Foreign currency translation adjustment |
79,050 | 8,989 | (13,078 | ) | (29,343 | ) | ||||||||||
Changes in fair value of interest rate derivatives, net of tax |
(1,432 | ) | (178 | ) | 35 | 610 | ||||||||||
Changes in fair value of energy and other derivatives, net of
tax |
309 | 1,300 | 298 | 3,217 | ||||||||||||
Minimum pension liability adjustment, net of tax |
136 | (137 | ) | 1,079 | (728 | ) | ||||||||||
Comprehensive income |
$ | 145,822 | $ | 49,521 | $ | 127,156 | $ | 13,031 | ||||||||
The following is the income tax benefit (expense) for each other comprehensive income line
items:
Three months ended | Nine months ended | |||||||||||||||
July 31 | July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As Adjusted) | (As Adjusted) | |||||||||||||||
Income tax benefit (expense): |
||||||||||||||||
Changes in fair value of interest rate derivatives, net of tax |
771 | 96 | (19 | ) | (328 | ) | ||||||||||
Changes in fair value of energy and other derivatives, net of
tax |
(166 | ) | (700 | ) | (160 | ) | (1,732 | ) | ||||||||
Minimum pension liability adjustment, net of tax |
(30 | ) | 40 | (251 | ) | 176 |
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NOTE 18 BUSINESS SEGMENT INFORMATION
The Company operates in four business segments: Rigid Industrial Packaging & Services,
Flexible Products & Services, Paper Packaging, and Land Management.
Operations in the Rigid Industrial Packaging & Services segment involve the production and
sale of industrial packaging products, such as steel, fiber and plastic drums, intermediate bulk
containers, closure systems for industrial packaging products, transit protection products,
polycarbonate water bottles and reconditioned containers, and
services, such as container lifecycle management, blending, filling and
other packaging services, logistics and warehousing. These products are manufactured and sold in
over 50 countries throughout the world.
Operations in the Flexible Products & Services segment involve the production, global
distribution and sale of flexible intermediate bulk containers as well as industrial and consumer
multiwall bag products, and related services in the North America market. These products are
manufactured in North America, Europe, the Middle East, and Asia and sold throughout the world.
Operations in the Paper Packaging segment involve the production and sale of containerboard
(both semi-chemical and recycled), corrugated sheets, corrugated containers and related services.
These products are manufactured and sold in North America. Operations
related to the Companys industrial and consumer
multiwall bag products have been reclassified from this segment to the Flexible Products &
Services segment.
Operations in the Land Management segment involve the management and sale of timber and
special use properties from approximately 267,000 acres of timber properties in the southeastern
United States. The Company also owns approximately 24,700 acres of timber properties in Canada,
which are not actively managed at this time. In addition, the Company sells, from time to time,
timberland and special use land, which consists of surplus land, higher and better use land, and
development land.
The Companys reportable segments are strategic business units that offer different products.
The accounting policies of the reportable segments are substantially the same as those described in
the Description of Business and Summary of Significant Accounting Policies note (see Note 1) in
the 2009 Form 10-K.
22
Table of Contents
The following segment information is presented for the periods indicated (Dollars in
thousands):
Three months ended | Nine months ended | |||||||||||||||
July 31 | July 31 | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As Adjusted) | (As Adjusted) | |||||||||||||||
Net sales: |
||||||||||||||||
Rigid Industrial Packaging & Services |
$ | 681,709 | $ | 594,236 | $ | 1,883,017 | $ | 1,650,825 | ||||||||
Flexible Products & Services |
66,938 | 9,222 | 128,679 | 29,120 | ||||||||||||
Paper Packaging |
168,758 | 110,971 | 444,548 | 339,522 | ||||||||||||
Land Management |
3,928 | 3,138 | 11,351 | 12,257 | ||||||||||||
Total net sales |
$ | 921,333 | $ | 717,567 | $ | 2,467,595 | $ | 2,031,724 | ||||||||
Operating profit: |
||||||||||||||||
Operating profit, before the impact of restructuring
charges, restructuring-related inventory charges
and acquisition-related costs: |
||||||||||||||||
Rigid Industrial Packaging & Services |
$ | 79,417 | $ | 67,467 | $ | 206,836 | $ | 117,406 | ||||||||
Flexible Products & Services |
5,747 | 1,754 | 12,277 | 5,085 | ||||||||||||
Paper Packaging |
23,337 | 4,578 | 34,784 | 27,095 | ||||||||||||
Land Management |
2,522 | 4,340 | 6,013 | 9,924 | ||||||||||||
Operating profit, before the impact of restructuring
charges, restructuring-related inventory charges and
acquisition-related costs |
111,023 | 78,139 | 259,910 | 159,510 | ||||||||||||
Restructuring charges: |
||||||||||||||||
Rigid Industrial Packaging & Services |
5,259 | 10,022 | 15,933 | 54,760 | ||||||||||||
Flexible Products & Services |
45 | | 45 | | ||||||||||||
Paper Packaging |
4,475 | 245 | 4,588 | 2,828 | ||||||||||||
Land Management |
| 10 | | 160 | ||||||||||||
Total restructuring charges |
9,779 | 10,277 | 20,566 | 57,748 | ||||||||||||
Restructuring-related inventory charges: |
||||||||||||||||
Rigid Industrial Packaging & Services |
94 | 830 | 131 | 10,115 | ||||||||||||
Total restructuring-related inventory charges |
94 | 830 | 131 | 10,115 | ||||||||||||
Acquisition-related costs: |
||||||||||||||||
Rigid Industrial Packaging & Services |
2,587 | | 6,390 | | ||||||||||||
Flexible Products & Services |
2,889 | | 13,729 | | ||||||||||||
Total acquisition-related costs |
5,476 | | 20,119 | | ||||||||||||
Total operating profit |
$ | 95,674 | $ | 67,032 | $ | 219,094 | $ | 91,647 | ||||||||
Depreciation, depletion and amortization expense: |
||||||||||||||||
Rigid Industrial Packaging & Services |
$ | 18,394 | $ | 18,058 | $ | 59,585 | $ | 53,071 | ||||||||
Flexible Products & Services |
902 | 398 | 1,882 | 764 | ||||||||||||
Paper Packaging |
7,801 | 5,818 | 21,611 | 19,220 | ||||||||||||
Land Management |
652 | 770 | 1,850 | 1,905 | ||||||||||||
Total depreciation, depletion and amortization expense |
$ | 27,749 | $ | 25,044 | $ | 84,928 | $ | 74,960 | ||||||||
July 31, 2010 | October 31, 2009 | |||||||
(As Adjusted) | ||||||||
Assets: |
||||||||
Rigid Industrial Packaging & Services |
$ | 1,960,887 | $ | 1,783,821 | ||||
Flexible Products & Services |
177,953 | 15,296 | ||||||
Paper Packaging |
434,813 | 402,787 | ||||||
Land Management |
273,827 | 254,856 | ||||||
Total segments |
2,847,480 | 2,456,760 | ||||||
Corporate and other |
369,778 | 367,169 | ||||||
Total assets |
$ | 3,217,258 | $ | 2,823,929 | ||||
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The following table presents net sales to external customers by geographic area (Dollars in
thousands):
Three months ended July 31, | Nine months ended July 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
(As Adjusted) | (As Adjusted) | |||||||||||||||
Net sales: |
||||||||||||||||
North America |
$ | 465,268 | $ | 374,636 | $ | 1,247,095 | $ | 1,129,996 | ||||||||
Europe, Middle East and Africa |
313,756 | 233,504 | 826,674 | 608,215 | ||||||||||||
Other |
142,309 | 109,427 | 393,826 | 293,513 | ||||||||||||
Total net sales |
$ | 921,333 | $ | 717,567 | $ | 2,467,595 | $ | 2,031,724 | ||||||||
The following table presents total assets by geographic area (Dollars in thousands):
July 31, 2010 | October 31, 2009 | |||||||
(As Adjusted) | ||||||||
Assets: |
||||||||
North America |
$ | 1,960,081 | $ | 1,826,840 | ||||
Europe, Middle East and Africa |
757,489 | 601,841 | ||||||
Other |
499,688 | 395,248 | ||||||
Total assets |
$ | 3,217,258 | $ | 2,823,929 | ||||
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The terms Greif, our company, we, us and our as used in this discussion refer to
Greif, Inc. and its subsidiaries. Our fiscal year begins on November 1 and ends on October 31 of
the following year. Any references in this Form 10-Q to the years 2010 or 2009, or to any quarter
of those years, relates to the fiscal year or quarter, as the case may be, ending in that year.
The discussion and analysis presented below relates to the material changes in financial
condition and results of operations for our consolidated balance sheets as of July 31, 2010 and
October 31, 2009, and for the consolidated statements of
operations for the three and nine months ended
July 31, 2010 and 2009. This discussion and analysis should be read in conjunction with the
consolidated financial statements that appear elsewhere in this Form 10-Q and Managements
Discussion and Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2009 (the 2009 Form 10-K) and our Form
8-K filed on May 27, 2010 (the May 27 Form 8-K) to update certain sections of the 2009 Form 10-K
to reflect revised financial information and disclosures resulting from the application of a change
in an accounting principle from using a combination of the last-in, first-out (LIFO) and the
first-in, first-out (FIFO) inventory accounting methods to the FIFO method for all of our
businesses effective November 1, 2009. All references in this Form 10-Q to the 2009 Form 10-K also
include the financial information and disclosures contained in the May 27 Form 8-K. Readers are
encouraged to review the entire 2009 Form 10-K, as it includes information regarding Greif not
discussed in this Form 10-Q. This information will assist in your understanding of the discussion
of our current period financial results.
All statements, other than statements of historical facts, included in this Form 10-Q,
including without limitation, statements regarding our future financial position, business
strategy, budgets, projected costs, goals and plans and objectives of management for future
operations, are forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward-looking statements generally can be identified by the use of forward-looking terminology
such as may, will, expect, intend, estimate, anticipate, project, believe,
continue, on track or target or the negative thereof or variations thereon or similar
terminology. All forward-looking statements made in this Form 10-Q are based on information
currently available to our management. Although we believe that the expectations reflected in
forward-looking statements have a reasonable basis, we can give no assurance that these
expectations will prove to be correct. Forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to differ materially from those expressed
in or implied by the statements. Such risks and uncertainties that might cause a difference
include, but are not limited to, the following: (i) the current and future challenging global
economy may adversely affect our business, (ii) historically our business has been sensitive to
changes in general economic or business conditions, (iii) our operations are subject to currency
exchange and political risks, (iv) we operate in highly competitive industries, (v) our business is
sensitive to changes in industry demands, (vi) the continuing consolidation of our customer base
24
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may
intensify pricing pressure, (vii) raw material and energy price fluctuations and shortages may adversely impact our manufacturing operations and costs, (viii)
tax legislation initiatives or challenges to our tax positions may adversely impact our financial
results or condition, (ix) we may encounter difficulties arising from our acquisitions or joint
ventures, or both (x) environmental and health and safety matters and product liability claims may
adversely impact our operations or financial performance, (xi) our business may be adversely
impacted by work stoppages and other labor relations disputes, (xii) we may be subject to losses that might
not be covered in whole or in part by existing insurance reserves or insurance coverage, (xiii) the
volatility in the frequency and volume of our timber and timberland sales impacts our financial
performance, and (xiv) our restructuring efforts may not realize the expected benefits. The risks
described above are not all inclusive and given these and other possible risks and uncertainties,
investors should not place undue reliance on forward-looking statements as a prediction of actual
results. For a more detailed discussion of the most significant risks and uncertainties that could
cause Greifs actual results to differ materially from those projected, see Risk Factors in Part
I, Item 1A of the 2009 Form 10-K, updated by Part II, Item 1A of this Form 10-Q. All
forward-looking statements made in this Form 10-Q are expressly qualified in their entirety by
reference to such risk factors. Except to the limited extent required by applicable law, Greif
undertakes no obligation to update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
OVERVIEW
We operate in four business segments: Rigid Industrial Packaging & Services; Flexible
Products & Services; Paper Packaging; and Land Management.
We are a leading global provider of rigid industrial packaging products, such as steel, fibre
and plastic drums, rigid intermediate bulk containers, closure systems for industrial packaging
products, transit protection products, polycarbonate water bottles and reconditioned containers, and
services, such as container lifecycle management, blending, filling and other packaging services, logistics and warehousing. We
sell our industrial packaging products to customers in industries such as chemicals, paints and
pigments, food and beverage, petroleum, industrial coatings, agricultural, pharmaceutical and
mineral, among others.
We are a leading global provider of flexible intermediate bulk containers and North American
provider of industrial and consumer multiwall bag products. Our flexible intermediate bulk
containers consist of a polypropylene-based woven fabric that is partly produced at our fully
integrated production sites, as well as sourced from strategic regional suppliers. Our flexible
products are sold globally and service similar customers and market segments as our Rigid
Industrial Packaging & Services segment. Additionally, our flexible products significantly expand
our presence in the agricultural and food industries, among others. Our industrial and consumer
multiwall bag products are used to ship a wide range of industrial and consumer products, such as
seed, fertilizers, chemicals, concrete, flour, sugar, feed, pet foods, popcorn, charcoal and salt,
primarily for the agricultural, chemical, building products and food industries.
We sell containerboard, corrugated sheets and other corrugated products to customers in North
America in industries such as packaging, automotive, food and building products. Our corrugated
container products are used to ship such diverse products as home appliances, small machinery,
grocery products, building products, automotive components, books and furniture, as well as
numerous other applications. Operations related to our industrial and consumer multiwall bag products have been
reclassified to our Flexible Products & Services segment.
As of July 31, 2010, we owned approximately 267,000 acres of timber properties in the
southeastern United States, which were actively managed, and approximately 24,700 acres of timber
properties in Canada. Our Land Management team is focused on the active harvesting and
regeneration of our United States timber properties to achieve sustainable long-term yields. While
timber sales are subject to fluctuations, we seek to maintain a consistent cutting schedule, within
the limits of market and weather conditions. We also sell, from time to time, timberland and
special use land, which consists of surplus land, higher and better use (HBU) land, and
development land.
In 2003, we began a transformation to become a leaner, more market-focused, performance-driven
company what we call the Greif Business System. We believe the Greif Business System has and
will continue to generate productivity improvements and achieve permanent cost reductions. The
Greif Business System continues to focus on opportunities such as improved labor productivity,
material yield and other manufacturing efficiencies, along with further plant consolidations. In
addition, as part of the Greif Business System, we have launched a strategic sourcing initiative to
more effectively leverage our global spending and lay the foundation for a world-class sourcing and
supply chain capability. In response to the economic slowdown that began at the end of 2008, we
accelerated the implementation of certain Greif Business System initiatives.
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CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based
upon our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP). The preparation of these consolidated
financial statements, in accordance with these principles, require us to make estimates and
assumptions that affect the reported amount of assets and liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities at the date of our consolidated financial
statements.
Our significant accounting policies are discussed in Part II, Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operation of the 2009 Form 10-K. We believe that
the consistent application of these policies enables us to provide readers of the consolidated
financial statements with useful and reliable information about our results of operations and
financial condition. The following accounting policy is important to the portrayal of our results
of operations and financial condition for the three and nine-month periods ended July 31, 2010.
Inventory. At the beginning of fiscal 2010, we changed our method of accounting for
inventories at certain of our U.S. locations from the lower of cost, as determined by the LIFO
method of accounting, or market to the lower of cost, as determined by the FIFO method of
accounting, or market. We believe that this change is preferable because: (1) the change conforms
to a single method of accounting for all of our inventories on a U.S. and global basis, (2) the
change simplifies financial disclosures, (3) financial statement comparability and analysis for
investors and analysts is improved, and (4) the majority of our key competitors use FIFO. The
financial information presented has been adjusted for all prior periods presented as if we had used
FIFO instead of LIFO for each reporting period for all of our operations. The change in accounting
principle is further discussed in Note 4 to the Consolidated Financial Statements included in this
Form 10-Q.
Other Items. Other items that could have a significant impact on the financial statements
include the risks and uncertainties listed in Part I, Item 1ARisk Factors, of the 2009 Form 10-K,
as updated by Part II, Item 1A of this Form 10-Q. Actual results could differ materially using
different estimates and assumptions, or if conditions are significantly different in the future.
RESULTS OF OPERATIONS
The following comparative information is presented for the three-month and nine-month periods
ended July 31, 2010 and 2009. Historically, revenues or earnings may or may not be representative
of future operating results due to various economic and other factors.
The non-GAAP financial measure of operating profit before the impact of restructuring charges,
restructuring-related inventory charges and acquisition-related costs is used throughout the
following discussion of our results of operations. Operating profit before the impact of
restructuring charges, restructuring-related inventory charges and acquisition-related costs is
equal to operating profit plus restructuring charges, restructuring-related inventory charges and
acquisition-related costs. We use operating profit before the impact of restructuring charges,
restructuring-related inventory charges and acquisition-related costs because we believe that this
measure provides a better indication of our operational performance because it excludes
restructuring charges, restructuring-related inventory charges and acquisition-related costs, which
are not representative of ongoing operations, and it provides a more stable platform on which to
compare our historical performance.
As discussed in Critical Accounting Policies, at the beginning of fiscal 2010, we changed
our method of accounting for inventories at certain of our U.S. locations from the LIFO method of
accounting to the FIFO method of accounting. The financial information presented in Results of
Operations has been adjusted for all prior periods presented as if we had used the FIFO method of
accounting instead of the LIFO method of accounting for each reporting period for all of our
operations. Refer to the May 27 Form 8-K which updated certain sections of the 2009 Form 10-K for
revised financial information and disclosures resulting from the application of a change in an
accounting principle from using a combination of the LIFO and the FIFO inventory accounting methods
to the FIFO method for all of our businesses effective November 1, 2009.
In the second quarter of 2010, we acquired Storsack Holding GmbH and its subsidiaries
(Storsack), which is the worlds largest producer of flexible intermediate bulk containers.
Based on an analysis of the qualitative and quantitative standards, Storsacks results are included
in a new reporting segment called Flexible Products & Services. Our multiwall bag operations,
previously included in the Paper Packaging segment, are also included in Flexible Products &
Services. The Industrial Packaging segment has been renamed Rigid Industrial Packaging & Services.
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Third Quarter Results
Overview
Net sales increased 28 percent to $921.3 million in the third quarter of 2010 compared to
$717.6 million in the third quarter of 2009. The 28 percent increase was due to higher sales
volumes (23 percent or 10 percent excluding acquisitions) and higher selling prices (5 percent).
The $203.7 million increase was due to Rigid Industrial Packaging & Services ($87.5 million
increase), Flexible Products & Services ($57.7 million increase), Paper Packaging ($57.8 million
increase) and Land Management ($0.7 million increase).
Operating profit was $95.7 million and $67.0 million in the third quarter of 2010 and 2009,
respectively. Operating profit before the impact of restructuring charges, restructuring-related
inventory charges and acquisition-related costs was $111.1 million for the third quarter of 2010
compared to $78.1 million for the third quarter of 2009. The
$33.0 million increase in operating deficit before the impact of
restructuring charges, restructuringrelated inventory charges
and acquisitionrelated costs was due to
Rigid Industrial Packaging & Services ($11.9 million increase), Flexible Products & Services ($4.0
million increase) and Paper Packaging ($18.9 million increase), partially offset by Land Management
($1.8 million decrease).
The following table sets forth the net sales and operating profit for each of our business
segments (Dollars in thousands):
For the three months ended July 31, | 2010 | 2009 | ||||||
(As Adjusted) | ||||||||
Net Sales |
||||||||
Rigid Industrial Packaging & Services |
$ | 681,709 | $ | 594,236 | ||||
Flexible Products & Services |
66,938 | 9,222 | ||||||
Paper Packaging |
168,758 | 110,971 | ||||||
Land Management |
3,928 | 3,138 | ||||||
Total net sales |
$ | 921,333 | $ | 717,567 | ||||
Operating Profit: |
||||||||
Operating profit, before the impact of
restructuring charges, restructuring-related
inventory charges and
acquisition-related costs: |
||||||||
Rigid Industrial Packaging & Services |
$ | 79,417 | $ | 67,467 | ||||
Flexible Products & Services |
5,747 | 1,754 | ||||||
Paper Packaging |
23,337 | 4,578 | ||||||
Land Management |
2,522 | 4,340 | ||||||
Total operating profit before the impact of
restructuring charges,
restructuring-related inventory charges and
acquisition-related costs: |
$ | 111,023 | $ | 78,139 | ||||
Restructuring charges: |
||||||||
Rigid Industrial Packaging & Services |
$ | 5,259 | $ | 10,022 | ||||
Flexible Products & Services |
45 | | ||||||
Paper Packaging |
4,475 | 245 | ||||||
Land Management |
| 10 | ||||||
Restructuring charges |
$ | 9,779 | $ | 10,277 | ||||
Restructuring-related inventory charges: |
||||||||
Rigid Industrial Packaging & Services |
$ | 94 | $ | 830 | ||||
Acquisition-related costs: |
||||||||
Rigid Industrial Packaging & Services |
$ | 2,587 | $ | | ||||
Flexible Products & Services |
2,889 | | ||||||
Acquisition-related costs |
$ | 5,476 | $ | | ||||
Operating profit: |
||||||||
Rigid Industrial Packaging & Services |
$ | 71,477 | $ | 56,615 | ||||
Flexible Products & Services |
2,813 | 1,754 | ||||||
Paper Packaging |
18,862 | 4,333 | ||||||
Land Management |
2,522 | 4,330 | ||||||
Total operating profit |
$ | 95,674 | $ | 67,032 | ||||
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Segment Review
Rigid Industrial Packaging & Services
Our Rigid Industrial Packaging & Services segment offers a comprehensive line of industrial
packaging products, such as steel, fibre and plastic drums, intermediate bulk containers, closure
systems for industrial packaging products, transit protection products, polycarbonate water
bottles and reconditioned containers, and services, such as container
lifecycle management, blending, filling and other packaging
services, logistics and warehousing. The key factors influencing profitability in the Rigid
Industrial Packaging & Services segment are:
| Selling prices, customer demand and sales volumes; |
||
| Raw material costs, primarily steel, resin and containerboard; |
||
| Energy and transportation costs; |
||
| Benefits from executing the Greif Business System; |
||
| Restructuring charges; |
||
| Contributions from recent acquisitions; |
||
| Divestiture of business units; and |
||
| Impact of foreign currency translation. |
In this segment, net sales were $681.7 million in the third quarter of 2010 compared to $594.2
million in the third quarter of 2009. The 15 percent increase in net sales was due to higher sales
volumes (11 percent or 6 percent excluding acquisitions) and higher selling prices (5 percent) due
to the pass-through of higher input costs, partially offset by the impact of foreign currency
translation (1 percent).
Operating profit was $71.5 million in the third quarter of 2010 and $56.7 million in the third
quarter of 2009. Operating profit before the impact of restructuring charges, restructuring-related
inventory charges and acquisition-related costs increased to $79.4 million in the third quarter of
2010 from $67.5 million in the third quarter of 2009. The
$11.9 million increase in operating profit before the impact of
restructuring charges, restructuring-related inventory charges and
acquisition-related costs was primarily due
to higher sales volumes, slight margin expansion, disciplined execution of the Greif Business
System and further benefits from the permanent cost savings achieved during 2009.
Flexible Products & Services
Our Flexible Products & Services segment offers a comprehensive line of flexible products,
such as flexible intermediate bulk containers and multiwall bags. The key factors influencing
profitability in the Flexible Products & Services segment are:
| Selling prices, customer demand and sales volumes; |
||
| Raw material costs, primarily resin and containerboard; |
||
| Energy and transportation costs; |
||
| Benefits from executing the Greif Business System; |
||
| Contributions from recent acquisitions; and |
||
| Impact of foreign currency translation. |
In this segment, net sales were $66.9 million in the third quarter of 2010 compared to $9.2
million in the third quarter of 2009. The increase was primarily due to the acquisition of Storsack
during the second quarter of 2010. Both periods included our multiwall bag
operations, which were previously included in the Paper Packaging
segment, but which have been
reclassified to conform to the current years presentation.
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Operating profit was $2.8 million in the third quarter of 2010 and $1.8 million in the third
quarter of 2009. Operating profit before the impact of restructuring charges and
acquisition-related costs increased to $5.8 million in the third quarter of 2010 from $1.8 million
in the third quarter of 2009 primarily as a result of the Storsack acquisition in the second
quarter of 2010.
Paper Packaging
Our Paper Packaging segment sells containerboard, corrugated sheets, and corrugated containers
in North America. The key factors influencing profitability in the Paper Packaging segment are:
| Selling prices, customer demand and sales volumes; |
||
| Raw material costs, primarily old corrugated containers; |
||
| Energy and transportation costs; |
||
| Benefits from executing the Greif Business System; |
||
| Contributions from recent acquisitions; and |
||
| Restructuring charges. |
In this segment, net sales were $168.8 million in the third quarter of 2010 compared to $116.0
million in the third quarter of 2009. The 46 percent increase in
net sales was due to higher sales volumes, recent acquisitions and higher selling prices.
Operating profit was $18.9 million and $4.2 million in the third quarter of 2010 and 2009,
respectively. Operating profit before the impact of restructuring charges increased to $23.4
million in the third quarter of 2010 from $4.5 million in the third quarter of 2009 primarily due
to higher sales volumes, improved selling prices, recent acquisitions and disciplined execution of
the Greif Business System.
Land Management
As of July 31, 2010, our Land Management segment consists of approximately 267,000 acres of
timber properties in the southeastern United States, which are actively harvested and regenerated,
and approximately 24,700 acres in Canada. The key factors influencing profitability in the Land
Management segment are:
| Planned level of timber sales; |
||
| Selling prices and customer demand; |
||
| Gains (losses) on sale of timberland; and |
||
| Gains on the sale of special use properties (surplus, HBU, and development properties). |
Net sales were $3.9 million and $3.2 million in the third quarter of 2010 and 2009,
respectively.
Operating profit was $2.5 million and $4.3 million in the third quarter of 2010 and 2009,
respectively. Included in these amounts were profits from the sale of special use properties
(surplus, HBU, and development properties) of $1.3 million and $3.9 million in the third quarters
of 2010 and 2009, respectively.
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Table of Contents
Other Income Statement Changes
Cost of products sold
Cost of products sold, as a percentage of net sales, decreased to 79 percent for the third
quarter of 2010 compared to 81 percent for the third quarter of 2009. The lower cost of products
sold, as a percentage of net sales, was primarily due to higher sales volumes, slight margin
expansion, disciplined execution of the Greif Business System and further benefits from the
permanent cost savings achieved during 2009.
Selling, general and administrative (SG&A) expenses
SG&A expenses were $90.5 million, or 10 percent of net sales, in the third quarter of 2010
compared to $67.3 million, or 9 percent of net sales, in the third quarter of 2009. The increase in
SG&A expenses was primarily due to the inclusion of SG&A of acquired companies, acquisition-related
costs, and higher employment-related costs as compared to the same period in 2009, when normal
increases and certain benefits were curtailed.
Restructuring charges
The focus of the 2010 restructuring activities is primarily related to the business
realignment due to the economic downturn and further implementation
of the Greif Business System.
During the third quarter of 2010, we recorded restructuring charges of $9.7 million, consisting of
$4.7 million in employee separation costs, $2.1 million in asset impairments and $2.9 million in
other costs.
The focus of the 2009 restructuring activities was on business realignment due to the economic
downturn. During the third quarter of 2009, we recorded restructuring charges of $10.3 million,
consisting of $4.7 million in employee separation costs, $1.7 million in asset impairments, and
$3.9 million in other costs.
Gain on disposal of properties, plants and equipment, net
During
the third quarter of 2010, we recorded gains on disposals of properties, plants and
equipment, net of $4.9 million, primarily from gains on the sale of properties in the Rigid
Industrial Packaging & Services segment of $2.0 million,
the sale of equipment in the Paper Packaging segment
of $1.6 million and the sale of special use properties (surplus, HBU, and development properties) in the Land
Management segment of $1.3 million. During the third quarter of
2009, we recorded gains on
disposals of properties, plants and equipment, net of $5.3 million, primarily from gains on the sale
of properties in the Rigid Industrial Packaging & Services segment of $1.4 million and special use
properties (surplus, HBU, and development properties) in the Land Management segment of $3.9
million.
Interest expense, net
Interest expense, net was $16.0 million and $12.1 million for the third quarter of 2010 and
2009, respectively. The increase in interest expense, net was primarily attributable to a higher
amount of average debt outstanding and an increase in our borrowing costs. We refinanced our senior
secured credit facility in February 2009 and also issued new senior notes in July 2009, both at
higher interest rates.
Other expense, net
Other expense, net was $0.7 million and $4.2 million for the third quarter of 2010 and 2009,
respectively. The decrease in other expense, net was primarily due to fees associated with the sale
of non-United States account receivable as well as favorable foreign currency exchange translation
in the third quarter of 2010 compared to the third quarter of 2009.
Income tax expense
The effective tax rate was 18.2% in the third quarter of 2010 compared to an adjusted
effective tax rate of 22.7% in the third quarter of 2009. The change in the effective tax rate was
primarily due to a change in the forecasted mix of income in the United States versus outside the
United States for the respective periods as well as an incremental benefit from an alternative fuel
credit.
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Table of Contents
Equity earnings of unconsolidated affiliates, net of tax
During the third quarter of 2010 and 2009, we recorded equity earnings of unconsolidated
affiliates, net of tax of $3.1 million and $0.4 million, respectively.
Noncontrolling interests
Noncontrolling interests reflect the portion of earnings or losses of operations that are
majority owned by us which are applicable to the noncontrolling interest partners. During the
third quarter of 2010 and 2009, noncontrolling interests were $1.8 million and $1.7 million,
respectively, and were deducted from net income to arrive at net income attributable to us.
Net income
Based on the foregoing, we recorded net income of $65.8 million for the third quarter of 2010
compared to net income of $37.8 million in the third quarter of 2009.
Year-to-Date Results
Overview
Net sales increased 22 percent (19 percent excluding the impact of foreign currency
translation) to $2,467.6 million in the first nine months of 2010 compared to $2,031.7 million in
the first nine months of 2009. The $435.9 million increase was due to Rigid Industrial Packaging &
Services ($232.2 million increase), Flexible Products & Services ($99.6 million increase) and Paper
Packaging ($105.0 million increase), slightly offset by Land Management ($0.9 million decrease).
Operating profit was $219.1 million and $91.7 million in the first nine months of 2010 and
2009, respectively. Operating profit before the impact of restructuring charges,
restructuring-related inventory charges and acquisition-related costs was $259.9 million for the
first nine months of 2010 compared to $159.5 million for the first nine months of 2009. The $100.4
million increase in operating profit before the impact of
restructuring charges, restructuring-related inventory charges and
acquisition-related costs was principally due to higher operating profit in Rigid Industrial Packaging &
Services ($89.4 million increase), Flexible Products & Services ($7.2 million increase) and Paper
Packaging ($7.7 million increase), partially offset by Land Management ($3.9 million decrease).
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The following table sets forth the net sales and operating profit for each of our
business segments (Dollars in thousands):
For the nine months ended July 31, | 2010 | 2009 | ||||||
Net Sales |
||||||||
Rigid Industrial Packaging & Services |
$ | 1,883,017 | $ | 1,650,825 | ||||
Flexible Products & Services |
128,679 | 29,120 | ||||||
Paper Packaging |
444,548 | 339,522 | ||||||
Land Management |
11,351 | 12,257 | ||||||
Total net sales |
$ | 2,467,595 | $ | 2,031,724 | ||||
Operating Profit: |
||||||||
Operating profit, before the impact of
restructuring charges, restructuring-related
inventory charges and acquisition-related
costs: |
||||||||
Rigid Industrial Packaging & Services |
$ | 206,836 | $ | 117,406 | ||||
Flexible Products & Services |
12,277 | 5,085 | ||||||
Paper Packaging |
34,784 | 27,095 | ||||||
Land Management |
$ | 6,013 | $ | 9,924 | ||||
Total operating profit before
the impact of restructuring
charges, restructuring-related
inventory charges and
acquisition related costs: |
$ | 259,910 | $ | 159,510 | ||||
Restructuring charges: |
||||||||
Rigid Industrial Packaging & Services |
$ | 15,933 | $ | 54,760 | ||||
Flexible Products & Services |
45 | | ||||||
Paper Packaging |
4,588 | 2,828 | ||||||
Land Management |
| 160 | ||||||
Restructuring charges |
$ | 20,566 | $ | 57,748 | ||||
Restructuring-related inventory charges: |
||||||||
Rigid Industrial Packaging & Services |
$ | 131 | $ | 10,115 | ||||
Acquisition-related costs: |
||||||||
Rigid Industrial Packaging & Services |
$ | 6,390 | $ | | ||||
Flexible Products & Services |
13,729 | | ||||||
Acquisition-related costs |
$ | 20,119 | $ | | ||||
Operating profit (loss): |
||||||||
Rigid Industrial Packaging & Services |
$ | 184,382 | $ | 52,531 | ||||
Flexible Products & Services |
(1,497 | ) | 5,085 | |||||
Paper Packaging |
30,196 | 24,267 | ||||||
Land Management |
6,013 | 9,764 | ||||||
Total operating profit |
$ | 219,094 | $ | 91,647 | ||||
Segment Review
Rigid Industrial Packaging & Services
Our Rigid Industrial Packaging & Services segment offers a comprehensive line of industrial
packaging products, such as steel, fibre and plastic drums, intermediate bulk containers, closure
systems for industrial packaging products, transit protection products, polycarbonate water
bottles and reconditioned containers, and services, such as container
lifecycle management, blending, filling and other packaging
services, logistics and warehousing. The key factors influencing profitability in the Rigid
Industrial Packaging & Services segment are:
| Selling prices and sales volumes; |
| Raw material costs, primarily steel, resin and containerboard; |
| Energy and transportation costs; |
||
| Benefits from executing the Greif Business System; |
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| Restructuring charges; |
| Contributions from recent acquisitions; |
| Divestiture of business units; and |
| Impact of foreign currency translation. |
In this segment, net sales increased to $1,883.0 million in the first nine months of 2010
compared to $1,650.8 million in the first nine months of 2009 an increase of 14 percent
excluding the impact of foreign currency translation. The increase in net sales was primarily
attributable to the higher sales volumes and higher selling prices due to the pass-through of
higher input costs in most of the Rigid Industrial Packaging & Services businesses.
Operating profit was $184.4 million in the first nine months of 2010 compared to $52.6 million
in the first nine months of 2009. Operating profit before the impact of restructuring charges,
restructuring-related inventory charges and acquisition-related costs increased to $206.8 million
in the first nine months of 2010 compared to $117.4 million in the first nine months of 2009. The
$89.4 million increase was primarily due to higher sales volumes, slight margin expansion,
disciplined execution of the Greif Business System and further benefits from the permanent cost
savings achieved during 2009.
Flexible Products & Services
Our Flexible Products & Services segment offers a comprehensive line of flexible industrial
packaging products, such as flexible intermediate bulk containers and multiwall bags. The key
factors influencing profitability in the Flexible Products & Services segment are:
| Selling prices, customer demand and sales volumes; |
| Raw material costs, primarily resin and containerboard; |
| Energy and transportation costs; |
| Benefits from executing the Greif Business System; |
| Contributions from recent acquisitions; and |
| Impact of foreign currency translation. |
In this segment, net sales were $128.7 million in the first nine months of 2010 compared to
$29.1 million in the first nine months of 2009. The increase was primarily due to the acquisition
of Storsack during the second quarter of 2010. Both periods include our multiwall bag operations,
which were previously included in the Paper Packaging segment but
which have been reclassified to conform to the
current years presentation.
Operating loss was $1.5 million in the first nine months of 2010 and operating profit was $5.1
million in the first nine months of 2009. Operating profit before the impact of restructuring
charges and acquisition-related costs increased to $12.3 million in the first nine months of 2010
from $5.1 million in the first nine months of 2009 primarily as a result of the Storsack
acquisition in the second quarter of 2010.
Paper Packaging
Our Paper Packaging segment sells containerboard, corrugated sheets, and corrugated containers
in North America. The key factors influencing profitability in the Paper Packaging segment are:
| Selling prices, customer demand and sales volumes; |
||
| Raw material costs, primarily old corrugated containers; |
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| Energy and transportation costs; |
| Benefits from executing the Greif Business System; |
| Contributions from recent acquisition, and |
| Restructuring charges. |
In this segment, net sales were $444.5 million in the first nine months of 2010 compared to
$339.5 million in the first nine months of 2009. The increase in net sales was principally due to
strong volume recovery, recent acquisitions and higher selling prices in the first nine months of
2010 compared to first nine months of 2009.
Operating profit was $30.2 million and $24.3 million in the first nine months of 2010 and
2009, respectively. Operating profit before the impact of restructuring charges increased to $34.8
million in the first nine months of 2010 compared to $27.1 million in the first nine months of
2009. The $7.7 million increase in operating profit before the
impact of restructuring charges was primarily due to higher sales volumes,
improved selling prices, recent acquisitions and disciplined execution of the Greif Business
System.
Land Management
As of July 31, 2010, our Land Management segment consists of approximately 267,000 acres of
timber properties in the southeastern United States, which are actively harvested and regenerated,
and approximately 24,700 acres in Canada. The key factors influencing profitability in the Land
Management segment are:
| Planned level of timber sales; |
| Selling prices and customer demand |
| Gains (losses) on sale of timberland; and |
| Sale of special use properties (surplus, HBU, and development properties). |
Net sales were $11.4 million in the first nine months of 2010 and $12.3 million in the first
nine months of 2009.
Operating profit was $6.0 million and $9.7 million in the first nine months of 2010 and 2009,
respectively. Operating profit before the impact of restructuring charges was $6.0 million in the
first nine months of 2010 compared to $9.9 million in the first nine months of 2009. Included in
these amounts were profits from the sale of special use properties of $4.1 million in the first
nine months of 2010 and $5.4 million in the first nine months of 2009.
Other Income Statement Changes
Cost of products sold
The cost of products sold, as a percentage of net sales, was 80 percent for the first
nine months of 2010 compared to 84 percent for the first nine months of 2009. The lower cost of
products sold as a percentage of net sales were primarily due to higher net sales which were driven
by higher selling prices and lower raw material costs in the Rigid Industrial Packaging & Services
segment on a period over period basis. In addition, we achieved permanent cost savings during 2009
from the execution of our Greif Business System.
SG&A expenses
SG&A expenses were $264.5 million, or 11 percent of net sales, in the first nine months
of 2010 compared to $191.5 million, or 9
percent of net sales, in the first nine months of 2009. The increase in SG&A expense as a percent
of sales was due to the inclusion of SG&A of acquired companies, acquisition-related costs, and
higher employment-related costs as compared to the same period in 2009, when normal increases and
certain benefits were curtailed.
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Restructuring charges
During the first nine months of 2010, we recorded restructuring charges of $20.6 million,
consisting of $11.4 million in employee separation costs, $2.3 million in asset impairments
and $6.9 million in other costs. The focus of the 2010 restructuring activities is on
continued business realignment due to the economic downturn and further implementation of the Greif
Business System.
During the first nine months of 2009, we recorded restructuring charges of $57.7 million,
consisting of $29.8 million in employee separation costs, $13.3 million in asset impairments
and $14.6 million in other costs. The focus of the 2009 restructuring activities was on
business realignment due to the economic downturn and further implementation of the Greif Business
System.
Gain on disposal of properties, plants, and equipment, net
During the first nine months of 2010, we recorded gains on disposals of properties,
plants and equipment, net of $6.9 million, primarily from gains on the sale of properties and
equipment in the Rigid Industrial Packaging & Services segment of $3.5 million, the sale of properties and
equipment in the Paper Packaging segment of $1.3 million, and the sale of special use properties (surplus, HBU,
and development properties) in the Land Management segment of $2.1 million. During the first nine
months of 2009, we recorded gains on disposals of properties, plants and equipment, net of $9.8
million, primarily from gains on the sale of properties in the Rigid Industrial Packaging &
Services segment of $3.0 million, properties in the Paper Packaging segment of $1.3 million, and
special use properties (surplus, HBU, and development properties) in the Land Management segment of
$5.5 million.
Interest expense, net
Interest expense, net was $47.6 million and $37.7 million for the first nine months
of 2010 and 2009, respectively. The increase in interest expense, net was primarily
attributable to higher average debt outstanding and an increase in our borrowing costs. We
refinanced our senior secured credit facility in February 2009 and also issued new senior notes in
July 2009, both at higher interest rates.
Debt extinguishment charge
In the first nine months of 2009, we completed a $700 million senior secured credit facility
which replaced an existing $450 million revolving credit facility. As a result of this transaction,
a debt extinguishment charge of $0.8 million in non-cash items, such as write-off of unamortized
capitalized debt issuance costs, was recorded. There were no debt extinguishment charges in 2010.
Other expense, net
Other expense, net for the first nine months of 2010 and 2009 was $4.4 million and $4.1
million, respectively. The increase in other expense, net was primarily due to fees
associated with the sale of non-United States account receivable.
Income tax expense
The effective tax rate was 18.9% and 19.5% in the first nine months of 2010 and 2009,
respectively. The change in the effective tax rate was primarily due to a change in the forecasted
mix of income in the United States for the respective periods as well as an incremental benefit
from an alternative fuel credit.
Equity earnings (losses) of unconsolidated affiliates, net of tax
Equity earnings of unconsolidated affiliates, net of tax were $3.3 million for the first nine
months of 2010 while equity losses of unconsolidated affiliates, net of tax were $0.2 million for
the first nine months of 2009.
Noncontrolling interests
Noncontrolling interests reflect the portion of earnings or losses of operations that are
majority owned by us which are applicable to the noncontrolling interest partners. Noncontrolling
interests were $5.4 million and $2.2 million during the first nine months of 2010 and 2009,
respectively, and were deducted from net income to arrive at net income attributable to us.
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Net income
Based on the foregoing, we recorded net income of $133.4 million for the first nine
months of 2010 compared to net income of $37.1 million in the first nine months of 2009.
BALANCE SHEET CHANGES
Accounts receivable increased $127.7 million from October 31, 2009 to July 31, 2010 primarily
due to higher sales activity, acquisitions in our Rigid Industrial Packaging & Services segment and
Flexible Products & Services segment, and the impact of foreign currency translation.
Inventories increased $114.2 million from October 31, 2009 to July 31, 2010 primarily due to
acquisitions in our Rigid Industrial Packaging & Services segment and Flexible Products & Services
segment, higher steel and resin costs, and growth in our Latin America and Asia Pacific regions.
Goodwill increased $69.0 million from October 31, 2009 to July 31, 2010 due to acquisitions in
the Rigid Industrial Packaging & Services segment and Flexible Products & Services segment, a
contingent purchase price payment related to a 2008 Rigid Industrial Packaging & Services segment
acquisition and final purchase price adjustments from our 2009 acquisitions less foreign currency
translation adjustments.
Property, plant and equipment increased $119.2 million from October 31, 2009 to July 31, 2010
primarily due to assets acquired through acquisitions and additional capital projects.
Accounts payable increased $45.1 million from October 31, 2009 to July 31, 2010 due to
acquisitions in the Flexible Products & Services segment, seasonality factors and the timing of
payments, which were partially offset by the impact of foreign currency translation.
Short-term borrowings increased $31.4 million from October 31, 2009 to July 31, 2010 due to
acquisitions in the Rigid Industrial Packaging & Services segment and Flexible Products & Services
segment.
Other current liabilities increased $38.9 million from October 31, 2009 to July 31, 2010 due
to acquisitions in the Rigid Industrial Packaging & Services segment and timing of accruals and
payments.
Long-term debt increased $227.5 million through the $700 million credit facility and the trade
accounts receivable credit facility to finance acquisitions, payment of dividends, and continued
capital expenditures.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are operating cash flows, the proceeds from our trade
accounts receivable credit facility, proceeds from the sale of our non-United States accounts
receivable and borrowings under our Credit Agreement and Senior Notes, further discussed below. We
have used these sources to fund our working capital needs, capital expenditures, cash dividends,
common stock repurchases and acquisitions. We anticipate continuing to fund these items in a like
manner. We currently expect that operating cash flows, the proceeds from our trade accounts
receivable credit facility, proceeds from the sale of our non-United States accounts receivable and
borrowings under our Credit Agreement and Senior Notes will be sufficient to fund our currently
anticipated working capital, capital expenditures, debt repayment, potential acquisitions of
businesses and other liquidity needs for at least 12 months.
Capital Expenditures
During the first nine months of 2010, we invested $101.0 million in capital expenditures,
excluding timberland purchases of $19.5 million, compared with capital expenditures of $81.4
million, excluding timberland purchases of $0.6 million, during the same period last year.
We expect capital expenditures, excluding timberland purchases, to be approximately $130
million in 2010. The expenditures will primarily be to replace and improve equipment.
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Business Acquisitions and Divestitures
During the first nine months of 2010, we completed acquisitions of three rigid industrial
packaging companies and two flexible products companies and made a contingent purchase price
payment related to a 2008 rigid industrial packaging acquisition. The five 2010 acquisitions
consisted of the acquisition of a European rigid industrial packaging company in November 2009,
an Asian rigid industrial packaging company in
June 2010, two European flexible products companies, one in
February and the other in June 2010, and a North American drum
reconditioning company in July 2010. The aggregate purchase price for the five 2010 acquisitions
was less than $200 million.
There were $20.1 million of acquisition-related costs recognized in the nine month period
ended July 31, 2010 included in SG&A expenses. This amount included $16.1 million of acquisition
costs previously capitalized as part of the purchase price of acquisitions, of which $6.1 million
was incurred prior to November 1, 2009, the date on which we adopted SFAS No. 141(R) (codified
under ASC 805, Business Combinations). In addition, we recorded post acquisition-related
integration costs of $4.0 million which represented costs associated with integrating acquired
companies, such as costs associated with Greif Business System initiatives, sourcing and supply
chain initiatives, and finance and administrative reorganizations.
Borrowing Arrangements
Credit Agreements
We have a $700 million Senior Secured Credit Agreement (the Credit Agreement) with a
syndicate of financial institutions. The Credit Agreement provides us with a $500.0 million
revolving multicurrency credit facility and a $200.0 million term loan, both maturing in February
2012, with an option to add $200.0 million to the facilities with the agreement of the lenders. The
$200 million term loan is scheduled to amortize by $2.5 million per quarter for the first four
quarters, $5.0 million per quarter for the next eight quarters and $150.0 million on the maturity
date. The Credit Agreement is available to fund ongoing working capital and capital expenditure
needs, to finance acquisitions and for general corporate purposes. Interest is based on either a
Eurodollar rate or a base rate that resets periodically plus a calculated margin amount. There was
$294.0 million outstanding under the Credit Agreement at July 31, 2010.
The Credit Agreement contains certain covenants, which include financial covenants that
require us to maintain a certain leverage ratio and a fixed charge coverage ratio. The leverage
ratio generally requires that at the end of any fiscal quarter we will not permit the ratio of (a)
our total consolidated indebtedness, to (b) our consolidated net income plus depreciation,
depletion and amortization, interest expense (including capitalized interest), income taxes, and
minus certain extraordinary gains and non-recurring gains (or plus certain extraordinary losses and
non-recurring losses) and plus or minus certain other items for the preceding twelve months
(EBITDA) to be greater than 3.5 to 1. The fixed charge coverage ratio generally requires that at
the end of any fiscal quarter we will not permit the ratio of (a) (i) consolidated EBITDA, less
(ii) the aggregate amount of certain cash capital expenditures, and less (iii) the aggregate amount
of Federal, state, local and foreign income taxes actually paid in cash (other than taxes related
to asset sales not in the ordinary course of business), to (b) the sum of (i) consolidated interest
expense to the extent paid or payable in cash during such period and (ii) the aggregate principal
amount of all regularly scheduled principal payments or redemptions or similar acquisitions for
value of outstanding debt for borrowed money, but excluding any such payments to the extent
refinanced through the incurrence of additional indebtedness, to be less than 1.5 to 1. At July 31,
2010, we were in compliance with the covenants under the Credit Agreement.
The terms of the Credit Agreement limit our ability to make restricted payments, which
includes dividends and purchases, redemptions and acquisitions of our equity interests. The
repayment of this facility is secured by a security interest in our personal property and the
personal property of our United States subsidiaries, including equipment and inventory and certain
intangible assets, as well as a pledge of the capital stock of substantially all of our United
States subsidiaries and, in part, by the capital stock of international borrowers. The payment of
outstanding principal under the Credit Agreement and accrued interest thereon may be accelerated
and become immediately due and payable upon the default in our payment or other performance
obligations or our failure to comply with the financial and other covenants in the Credit
Agreement, subject to applicable notice requirements and cure periods as provided in the Credit
Agreement.
See Note 9 to the Consolidated Financial Statements included in Item 1 of Part I of this Form
10-Q for additional disclosures regarding the Credit Agreement.
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Senior Notes
We have issued $300.0 million of our 6.75% Senior Notes due February 1, 2017. Proceeds from
the issuance of these Senior Notes were principally used to fund the purchase of our previously
outstanding senior subordinated notes and for general corporate purposes. These Senior Notes are
general unsecured obligations of Greif, Inc. only, provide for semi-annual payments of interest at a fixed rate
of 6.75%, and do not require any principal payments prior to maturity on February 1, 2017. These
Senior Notes are not guaranteed by any of our subsidiaries and thereby are effectively subordinated
to all of our subsidiaries existing and future indebtedness. The Indenture pursuant to which these
Senior Notes were issued contains covenants, which, among other things, limit our ability to create
liens on our assets to secure debt and to enter into sale and leaseback transactions. These
covenants are subject to a number of limitations and exceptions as set forth in the Indenture. At
July 31, 2010, we were in compliance with these covenants.
We have issued $250.0 million of our 7.75% Senior Notes due August 1, 2019. Proceeds from the
issuance of these Senior Notes were principally used for general corporate purposes, including the
repayment of amounts outstanding under our revolving multicurrency credit facility under the Credit
Agreement, without any permanent reduction of the commitments. These Senior Notes are general
unsecured obligations of Greif, Inc. only, provide for semi-annual payments of interest at a fixed rate of 7.75%,
and do not require any principal payments prior to maturity on August 1, 2019. These Senior Notes
are not guaranteed by any of our subsidiaries and thereby are effectively subordinated to all of
our subsidiaries existing and future indebtedness. The Indenture pursuant to which these Senior
Notes were issued contains covenants, which, among other things, limit our ability to create liens
on our assets to secure debt and to enter into sale and leaseback transactions. These covenants are
subject to a number of limitations and exceptions as set forth in the Indenture. At July 31, 2010,
we were in compliance with these covenants.
See Note 9 to the Consolidated Financial Statements included in Item 1 of Part I of this Form
10-Q for additional disclosures regarding the Senior Notes.
United States Trade Accounts Receivable Credit Facility
We have a $135.0 million trade accounts receivable facility (the Receivables Facility) with
a financial institution and its affiliate (the Purchasers). The Receivables Facility matures in
December 2013, subject to earlier termination by the Purchasers of their purchase commitment in
December 2010. In addition, we can terminate the Receivables Facility at any time upon five days
prior written notice. The Receivables Facility is secured by certain of our United States trade
receivables and bears interest at a variable rate based on the commercial paper rate, or
alternatively, the LIBOR, plus a margin. Interest is payable on a monthly
basis and the principal balance is payable upon termination of the Receivables Facility. The
Receivables Facility contains certain covenants, including financial covenants for leverage and
fixed charge ratios identical to the Credit Agreement. Proceeds of the Receivables Facility are
available for working capital and general corporate purposes. At July 31, 2010, $117.8 million was
outstanding under the Receivables Facility.
See Note 9 to the Consolidated Financial Statements included in Item 1 of Part I of this Form
10-Q for additional disclosures regarding this credit facility.
Sale of Non-United States Accounts Receivable
Certain of our international subsidiaries have entered into discounted receivables purchase
agreements and factoring agreements (the RPAs) pursuant to which trade receivables generated from
certain countries other than the United States and which meet certain eligibility requirements are
sold to certain international banks or their affiliates. The structure of these transactions
provides for a legal true sale, on a revolving basis, of the receivables transferred from our
various subsidiaries to the respective banks. The banks fund an initial purchase price of a certain
percentage of eligible receivables based on a formula with the initial purchase price approximating
75 percent to 90 percent of eligible receivables. The remaining deferred purchase price is settled
upon collection of the receivables. At the balance sheet reporting dates, we remove from accounts
receivable the amount of proceeds received from the initial purchase price since they meet the
applicable criteria of SFAS No. 140, Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities (codified under ASC 860 Transfers and Servicing), and continue to
recognize the deferred purchase price in our accounts receivable. The receivables are sold on a
non-recourse basis with the total funds in the servicing collection accounts pledged to the
respective banks between the settlement dates. The maximum amount of aggregate receivables that may
be sold under our various RPAs was $165.2 million at July 31, 2010. At July 31, 2010, total
accounts receivable of $129.0 million were sold under the various RPAs.
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At the time the receivables are initially sold, the difference between the carrying amount and
the fair value of the assets sold are included as a loss on sale and classified as other expense
in the consolidated statements of operations. Expenses associated with the various RPAs totaled
$1.8 million for the three months ended July 31, 2010. Additionally, we perform collections and
administrative functions on the receivables sold similar to the procedures we use for collecting
all of our receivables. The servicing liability for these receivables is not material to the
consolidated financial statements.
See Note 3 to the Consolidated Financial Statements included in Item 1 of Part I of this Form
10-Q for additional information regarding these various RPAs.
Other
In addition to the amounts borrowed against the Credit Agreement and proceeds from the Senior
Notes and the United States trade accounts receivable credit facility, at July 31, 2010, we had
outstanding other debt of $62.1 million, comprised of $11.1 million in long-term debt and $51.0
million in short-term borrowings.
At July 31, 2010, annual maturities, including current portion, of our long-term debt under
our various financing arrangements were $5.0 million in 2010, $31.1 million in 2011, $269.0 million
in 2012, $117.8 million in 2013 and $545.7 million thereafter.
At July 31, 2010 and October 31, 2009, we had deferred financing fees and debt issuance costs
of $11.9 million and $14.9 million, respectively, which were included in other long-term assets.
Financial Instruments
Cross-Currency Interest Rate Swaps
We entered into cross-currency interest rate swap agreements which were designated as a hedge
of a net investment in a foreign operation. Under these swap agreements, we received interest
semi-annually from the counterparties in an amount equal to a fixed rate of 6.75% on $200.0 million
and paid interest in an amount equal to a fixed rate of 6.25% on 146.6 million. During the third
quarter of 2010, we terminated these swap agreements, including any future cash flows. The
termination of these swap agreements resulted in a cash benefit of
$25.7 million ($15.8 million, net of tax) which is included
within foreign currency translation adjustments. At October 31,
2009, we had recorded an other comprehensive loss of
$14.6 million as a result of these swap agreements.
Interest Rate Derivatives
We have interest rate swap agreements with various maturities through 2012. These interest
rate swap agreements are used to manage our fixed and floating rate debt mix. Under these swap
agreements, we receive interest monthly from the counterparties based on LIBOR, and we pay interest based upon a designated fixed rate over the
life of the swap agreements.
We have two interest rate derivatives (floating to fixed swap agreements recorded as cash flow
hedges) with a total notional amount of $125 million. Under these swap agreements, we receive
interest based upon a variable interest rate from the counterparties (weighted average of 0.27% at
July 31, 2010 and 0.25% at October 31, 2009) and pays interest based upon a fixed interest rate
(weighted average of 1.78% at July 31, 2010 and 2.71% at October 31, 2009).
In the first quarter of 2010, we entered into a $100.0 million fixed to floating swap
agreement which was recorded as a fair value hedge. Under this swap agreement, we received interest
from the counterparty based upon a fixed rate of 6.75% and paid interest based upon a variable rate
on a semi-annual basis. In the third quarter of 2010, we terminated this swap agreement, including
any future cash flows. The termination of this swap agreement
resulted in a cash benefit of $3.6 million ($2.2 million,
net of tax) which is included within long-term debt on the balance
sheet.
Foreign Exchange Hedges
At July 31, 2010, we had outstanding foreign currency forward contracts in the notional amount
of $148.1 million ($70.5 million at October 31, 2009). The purpose of these contracts is to hedge
our exposure to foreign currency transactions and short-term intercompany loan balances in our
international businesses. The fair value of these contracts at July 31, 2010 resulted in an
immaterial gain recorded in the consolidated statements of operations and a loss of $2.4 million
recorded in other comprehensive income. The fair
value of similar contracts at October 31, 2009 resulted in an immaterial loss recorded in the
consolidated statements of operations.
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Energy Hedges
We have entered into certain cash flow hedge agreements to mitigate our exposure to cost
fluctuations in natural gas prices through October 31, 2010. Under these hedge agreements, we have
agreed to purchase natural gas at a fixed price. At July 31, 2010, the notional amount of these
hedge agreements was $3.0 million ($4.0 million at October 31, 2009). The other
comprehensive loss on these hedge agreements was $0.1 million at July 31, 2010 and $0.6 million at
October 31, 2009. As a result of the high correlation between the hedged instruments and the
underlying transactions, ineffectiveness has not had a material impact on the our consolidated
statements of operations for the quarter ended July 31, 2010.
Contractual Obligations
As of July 31, 2010, we had the following contractual obligations (Dollars in millions):
Payments Due by Period | ||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | ||||||||||||||||
Long-term debt |
$ | 1,310.3 | $ | 13.0 | $ | 540.2 | $ | 79.3 | $ | 677.8 | ||||||||||
Current portion of long-term debt |
20.0 | 5.0 | 15.0 | | | |||||||||||||||
Short-term borrowing |
54.1 | 51.8 | 2.3 | | | |||||||||||||||
Capital lease obligations |
0.4 | 0.1 | 0.2 | 0.1 | | |||||||||||||||
Operating leases |
6.9 | 0.6 | 3.9 | 2.0 | 0.4 | |||||||||||||||
Liabilities held by special purpose entities |
67.3 | 0.6 | 4.5 | 2.2 | 60.0 | |||||||||||||||
Total |
$ | 1,459.0 | $ | 71.1 | $ | 566.1 | $ | 83.6 | $ | 738.2 | ||||||||||
Note: Amounts presented in the contractual obligation table include interest.
Our unrecognized tax benefits under FIN 48, Accounting for Uncertainty in Income Taxes
(codified under ASC 740 Income Taxes) have been excluded from the contractual obligations table
because of the inherent uncertainty and the inability to reasonably estimate the timing of cash
outflows.
Significant Nonstrategic Timberland Transactions
In connection with a 2005 timberland transaction with Plum Creek Timberlands, L.P. (Plum
Creek), Soterra LLC (one of our wholly-owned subsidiaries) received cash and a $50.9 million
purchase note payable by an indirect subsidiary of Plum Creek (the Purchase Note). Soterra LLC
contributed the Purchase Note to STA Timber LLC (STA Timber), one of our indirect wholly-owned
subsidiaries. The Purchase Note is secured by a Deed of Guarantee issued by Bank of America, N.A.,
London Branch, in an amount not to exceed $52.3 million (the Deed of Guarantee). STA Timber has
issued in a private placement 5.20% Senior Secured Notes due August 5, 2020 (the Monetization
Notes) in the principal amount of $43.3 million. The Monetization Notes are secured by a pledge of
the Purchase Note and the Deed of Guarantee. Greif, Inc. and its other subsidiaries have not
extended any form of guaranty of the principal or interest on the Monetization Notes. Accordingly,
Greif, Inc. and its other subsidiaries will not become directly or contingently liable for the
payment of the Monetization Notes at any time. See Note 8 to the Consolidated Financial Statements
included in Item 1 of this Form 10-Q for additional information regarding these transactions.
RECENT ACCOUNTING STANDARDS
Newly Adopted Accounting Standards
In December 2007, the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R),
(codified under ASC 805 Business Combinations), which replaces SFAS No. 141. The objective of
SFAS No. 141(R) is to improve the relevance, representational faithfulness and comparability of the
information that a reporting entity provides in its financial reports about a business combination
and its effects. SFAS No. 141(R) establishes principles and requirements for how the acquirer
recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed
and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. SFAS No. 141(R) applies to all transactions or other events in which
an entity (the acquirer) obtains control of
one or more businesses (the acquiree), including those
sometimes referred to as true mergers or mergers of equals and combinations achieved without
the transfer of consideration. SFAS No. 141(R) applies to any acquisition entered into on or after
November 1, 2009. We adopted the new guidance beginning on November 1, 2009, which impacted our
financial position, results of operations, cash flows and related disclosures.
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In December 2007, the FASB issued SFAS No. 160, Accounting and Reporting of Noncontrolling
Interests in Consolidated Financial Statements, an amendment of ARB No. 51, (codified under ASC
810 Consolidation). The objective of SFAS No. 160 is to improve the relevance, comparability and
transparency of the financial information that a reporting entity provides in its consolidated
financial statements. SFAS No. 160 amends ARB No. 51 to establish accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 also changes the way the consolidated financial statements are presented,
establishes a single method of accounting for changes in a parents ownership interest in a
subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss
in net income when a subsidiary is deconsolidated and expands disclosures in the consolidated
financial statements that clearly identify and distinguish between the parents ownership interest
and the interest of the noncontrolling owners of a subsidiary. The provisions of SFAS No. 160 are
to be applied prospectively as of the beginning of the fiscal year in which SFAS No. 160 is
adopted, except for the presentation and disclosure requirements, which are to be applied
retrospectively for all periods presented. We adopted the new guidance beginning November 1, 2009,
and the adoption of the new guidance did not impact our financial position, results of operations
or cash flows, other than the related disclosures.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1, Employers Disclosures
About Postretirement Benefit Plan Assets (FSP FAS 132(R)-1) (codified under ASC 715
Compensation Retirement Benefits), to provide guidance on employers disclosures about assets
of a defined benefit pension or other postretirement plan. FSP FAS 132(R)-1 requires employers to
disclose information about fair value measurements of plan assets similar to SFAS No. 157, Fair
Value Measurements. The objectives of the disclosures are to provide an understanding of: (a) how
investment allocation decisions are made, including the factors that are pertinent to an
understanding of investment policies and strategies, (b) the major categories of plan assets, (c)
the inputs and valuation techniques used to measure the fair value of plan assets, (d) the effect
of fair value measurements using significant unobservable inputs on changes in plan assets for the
period and (e) significant concentrations of risk within plan assets. We adopted the new guidance
beginning November 1, 2009, and the adoption of the new guidance did not impact our financial
position, results of operations or cash flows, other than the related disclosures.
Recently Issued Accounting Standards
In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assetsan
amendment of FASB Statement No. 140 (codified under ASC 860 Transfers and Servicing). The
Statement amends SFAS No. 140 to improve the information provided in financial statements
concerning transfers of financial assets, including the effects of transfers on financial position,
financial performance and cash flows, and any continuing involvement of the transferor with the
transferred financial assets. The provisions of SFAS 166 are effective for our financial statements
for the fiscal year beginning November 1, 2010. We are in the process of evaluating the impact that
the adoption of the guidance may have on our consolidated financial statements and related
disclosures. However, we do not anticipate a material impact on our financial position, results of
operations or cash flows.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R)
(codified under ASC 810 Consolidation). SFAS 167 amends FIN 46(R) to require an enterprise to
perform an analysis to determine whether the enterprises variable interest or interests give it a
controlling financial interest in a variable interest entity. It also amends FIN 46(R) to require
enhanced disclosures that will provide users of financial statements with more transparent
information about an enterprises involvement in a variable interest entity. The provisions of SFAS
167 are effective for our financial statements for the fiscal year beginning November 1, 2010. We
are in the process of evaluating the impact, if any, that the adoption of SFAS No. 167 may have on
our consolidated financial statements and related disclosures. However, we do not anticipate a
material impact on our financial position, results of operations or cash flows.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has not been a significant change in the quantitative and qualitative disclosures about
our market risk from the disclosures contained in the 2009 Form 10-K.
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ITEM 4. CONTROLS AND PROCEDURES
With the participation of our principal executive officer and principal financial officer,
Greifs management has evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)), as of the end of the period covered by this report. Based upon that evaluation, our
principal executive officer and principal financial officer have concluded that, as of the end of
the period covered by this report:
| Information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission; |
| Information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow timely decisions
regarding required disclosure; and |
| Our disclosure controls and procedures are effective. |
There has been no change in our internal controls over financial reporting that occurred
during the most recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
There have been no other material changes in our risk factors from those disclosed in the 2009 Form
10-K under Part I, Item 1A Risk Factors.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Class A Common Stock
Maximum Number (or | ||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares Purchased as | Value) of Shares that | |||||||||||||||
Total Number | Part of Publicly | May Yet Be | ||||||||||||||
of Shares | Average Price | Announced Plans or | Purchased under the | |||||||||||||
Period | Purchased | Paid Per Share | Programs (1) | Plans or Programs (1) | ||||||||||||
November 2009 |
| | 1,166,728 | |||||||||||||
December 2009 |
| | 1,166,728 | |||||||||||||
January 2010 |
| | 1,166,728 | |||||||||||||
February 2010 |
| | 1,166,728 | |||||||||||||
March 2010 |
| | 1,166,728 | |||||||||||||
April 2010 |
| | 1,166,728 | |||||||||||||
May 2010 |
| | 1,166,728 | |||||||||||||
June 2010 |
| | 1,116,728 | |||||||||||||
July 2010 |
| | 1,116,728 |
Issuer Purchases of Class B Common Stock
Maximum Number (or | ||||||||||||||||
Total Number of | Approximate Dollar | |||||||||||||||
Shares Purchased as | Value) of Shares that | |||||||||||||||
Total Number | Part of Publicly | May Yet Be | ||||||||||||||
of Shares | Average Price | Announced Plans or | Purchased under the | |||||||||||||
Period | Purchased | Paid Per Share | Programs (1) | Plans or Programs (1) | ||||||||||||
November 2009 |
| | 1,166,728 | |||||||||||||
December 2009 |
| | 1,166,728 | |||||||||||||
January 2010 |
| | 1,166,728 | |||||||||||||
February 2010 |
| | 1,166,728 | |||||||||||||
March 2010 |
| | 1,166,728 | |||||||||||||
April 2010 |
| | 1,166,728 | |||||||||||||
May 2010 |
| | 1,166,728 | |||||||||||||
June 2010 |
50,000 | 53.92 | 50,000 | 1,116,728 | ||||||||||||
July 2010 |
| | 1,116,728 |
(1) | Our Board of Directors has authorized a stock repurchase program which permits us to purchase
up to 4.0 million shares of our Class A Common Stock or Class B Common Stock, or any
combination thereof. As of July 31, 2010, the maximum number of shares that may yet be
purchased was 1,116,728 shares, which may be any combination of Class A Common Stock or Class
B Common Stock. |
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ITEM 6. EXHIBITS
(a.) Exhibits |
Exhibit No. | Description of Exhibit | |
10.1
|
Fourth Amendment (dated as of June 22, 2010) to the Transfer and Administration Agreement dated as of December 8, 2008, by and among Greif Receivables Funding LLC, Greif Packaging LLC, YC SUSI Trust, as Conduit Investor and Uncommitted Investor, and Bank of America National Association, as Agent, Managing Agent, an Administrator and a Committed Investor. | |
10.2
|
Formation Agreement dated as of June 14, 2010, by and among Greif, Inc. and Greif International Holding Supra C.V. and National Scientific Company Limited and Dabbagh Group Holding Company Limited. | |
31.1
|
Certification of Chief Executive Officer Pursuant to Rule 13a 14(a) of the Securities Exchange Act of 1934. | |
31.2
|
Certification of Chief Financial Officer Pursuant to Rule 13a 14(a) of the Securities Exchange Act of 1934. | |
32.1
|
Certification of Chief Executive Officer required by Rule 13a 14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
32.2
|
Certification of Chief Financial Officer required by Rule 13a 14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States Code. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly
caused this report to be signed on its behalf by the undersigned thereto duly authorized.
Greif, Inc. (Registrant) |
||||
Date: September 9, 2010 | /s/ Donald S. Huml | |||
Donald S. Huml, | ||||
Executive Vice President and Chief Financial Officer (Duly Authorized Signatory) |
||||
44