GREIF, INC - Quarter Report: 2011 January (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 January 31, 2011
Commission File Number 001-00566
![(GREIF LOGO)](https://www.sec.gov/Archives/edgar/data/0000043920/000095012311022672/c12698c1269801.gif)
GREIF, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
31-4388903 (I.R.S. Employer 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.
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 February 28, 2011:
Class A Common Stock | 24,814,309 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)
(Dollars in thousands, except per share amounts)
Three months ended | ||||||||
January 31, | ||||||||
2011 | 2010 | |||||||
Net sales |
$ | 943,792 | $ | 709,682 | ||||
Cost of products sold |
767,707 | 571,970 | ||||||
Gross profit |
176,085 | 137,712 | ||||||
Selling, general and administrative expenses |
106,453 | 82,382 | ||||||
Restructuring charges |
2,991 | 5,997 | ||||||
(Gain) on disposal of properties, plants and equipment, net |
(2,079 | ) | (1,328 | ) | ||||
Operating profit |
68,720 | 50,661 | ||||||
Interest expense, net |
16,797 | 14,888 | ||||||
Other (income) expense, net |
(1,890 | ) | 2,763 | |||||
Income before income tax expense and
equity earnings of unconsolidated
affilitates, net |
53,813 | 33,010 | ||||||
Income tax expense |
13,238 | 6,668 | ||||||
Equity earnings (losses) of unconsolidated affiliates, net of tax |
522 | (111 | ) | |||||
Net income |
41,097 | 26,231 | ||||||
Net (income) loss attributable to noncontrolling interests |
344 | (1,412 | ) | |||||
Net income attributable to Greif, Inc. |
$ | 41,441 | $ | 24,819 | ||||
Basic earnings per share attributable to Greif, Inc. common shareholders: |
||||||||
Class A Common Stock |
$ | 0.71 | $ | 0.43 | ||||
Class B Common Stock |
$ | 1.06 | $ | 0.63 | ||||
Diluted earnings per share attributable to Greif, Inc. common shareholders: |
||||||||
Class A Common Stock |
$ | 0.71 | $ | 0.43 | ||||
Class B Common Stock |
$ | 1.06 | $ | 0.63 |
See accompanying Notes to Consolidated Financial Statements
2
Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
ASSETS
January 31, 2011 | October 31, 2010 | |||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 117,736 | $ | 106,957 | ||||
Trade accounts receivable, less allowance
of $13,338 in 2011 and $13,117 in 2010 |
475,800 | 480,158 | ||||||
Inventories |
414,794 | 396,572 | ||||||
Deferred tax assets |
17,220 | 19,526 | ||||||
Net assets held for sale |
20,798 | 28,407 | ||||||
Prepaid expenses and other current assets |
142,312 | 134,269 | ||||||
1,188,660 | 1,165,889 | |||||||
Long-term assets |
||||||||
Goodwill |
697,371 | 709,725 | ||||||
Other intangible assets, net of amortization |
170,190 | 173,239 | ||||||
Assets held by special purpose entities |
50,891 | 50,891 | ||||||
Deferred tax assets |
31,987 | 29,982 | ||||||
Other long-term assets |
96,686 | 93,603 | ||||||
1,047,125 | 1,057,440 | |||||||
Properties, plants and equipment |
||||||||
Timber properties, net of depletion |
215,489 | 215,537 | ||||||
Land |
124,299 | 121,409 | ||||||
Buildings |
419,242 | 411,437 | ||||||
Machinery and equipment |
1,325,892 | 1,302,597 | ||||||
Capital projects in progress |
129,538 | 112,300 | ||||||
2,214,460 | 2,163,280 | |||||||
Accumulated depreciation |
(922,475 | ) | (888,164 | ) | ||||
1,291,985 | 1,275,116 | |||||||
Total assets |
$ | 3,527,770 | $ | 3,498,445 | ||||
See accompanying Notes to Consolidated Financial Statements
3
Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS EQUITY
January 31, 2011 | October 31, 2010 | |||||||
Current liabilities |
||||||||
Accounts payable |
$ | 372,632 | $ | 448,310 | ||||
Accrued payroll and employee benefits |
71,979 | 90,887 | ||||||
Restructuring reserves |
18,353 | 20,238 | ||||||
Current portion of long-term debt |
12,500 | 12,523 | ||||||
Short-term borrowings |
87,573 | 60,908 | ||||||
Deferred tax liabilities |
4,829 | 5,091 | ||||||
Other current liabilities |
121,547 | 123,854 | ||||||
689,413 | 761,811 | |||||||
Long-term liabilities |
||||||||
Long-term debt |
1,065,572 | 953,066 | ||||||
Deferred tax liabilities |
183,967 | 180,486 | ||||||
Pension liabilities |
63,288 | 65,915 | ||||||
Postretirement benefit obligations |
22,049 | 21,555 | ||||||
Liabilities held by special purpose
entities |
43,250 | 43,250 | ||||||
Other long-term liabilities |
113,455 | 116,930 | ||||||
1,491,581 | 1,381,202 | |||||||
Shareholders equity |
||||||||
Common stock, without par value |
108,659 | 106,057 | ||||||
Treasury stock, at cost |
(117,280 | ) | (117,394 | ) | ||||
Retained earnings |
1,340,604 | 1,323,477 | ||||||
Accumulated other comprehensive loss: |
||||||||
- foreign currency translation |
14,163 | 44,612 | ||||||
- interest rate derivatives |
(990 | ) | (1,318 | ) | ||||
- energy and other derivatives |
(33 | ) | (187 | ) | ||||
- minimum pension liabilities |
(76,405 | ) | (76,526 | ) | ||||
Total Greif, Inc. shareholders equity |
1,268,718 | 1,278,721 | ||||||
Noncontrolling interests |
78,058 | 76,711 | ||||||
Total shareholders equity |
1,346,776 | 1,355,432 | ||||||
Total liabilities and shareholders equity |
$ | 3,527,770 | $ | 3,498,445 | ||||
See accompanying Notes to Consolidated Financial Statements
4
Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For the three months ended January 31, | 2011 | 2010 | ||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 41,097 | $ | 26,231 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation, depletion and amortization |
33,108 | 29,506 | ||||||
Asset impairments |
487 | 206 | ||||||
Deferred income taxes |
3,520 | 3,023 | ||||||
Gain on disposals of properties, plants and
equipment, net |
(2,079 | ) | (1,328 | ) | ||||
Equity (earnings) losses of unconsolidated affiliates |
(522 | ) | 111 | |||||
Increase (decrease) in cash from changes in certain assets and liabilities: |
||||||||
Trade accounts receivable |
5,936 | 11,790 | ||||||
Inventories |
(17,986 | ) | (20,352 | ) | ||||
Prepaid expenses and other current assets |
(8,431 | ) | (343 | ) | ||||
Accounts payable |
(94,453 | ) | (147,578 | ) | ||||
Accrued payroll and employee benefits |
(18,805 | ) | (27,453 | ) | ||||
Restructuring reserves |
(1,885 | ) | 743 | |||||
Other current liabilities |
543 | (1,513 | ) | |||||
Pension and postretirement benefit liabilities |
(2,133 | ) | 5,773 | |||||
Other long-term assets, other long-term liabilities
and other |
(6,557 | ) | 38,400 | |||||
Net cash used in operating activities |
(68,160 | ) | (82,784 | ) | ||||
Cash flows from investing activities: |
||||||||
Acquisitions of companies, net of cash acquired |
| (58,268 | ) | |||||
Purchases of properties, plants and equipment |
(40,536 | ) | (33,714 | ) | ||||
Purchases of timber properties |
(400 | ) | (100 | ) | ||||
Proceeds from the sale of properties, plants, equipment and other assets |
2,741 | 2,849 | ||||||
Purchases of land rights and other |
(624 | ) | | |||||
Net cash used in investing activities |
(38,819 | ) | (89,233 | ) | ||||
Cash flows from financing activities: |
||||||||
Proceeds from issuance of long-term debt |
847,731 | 740,660 | ||||||
Payments on long-term debt |
(697,257 | ) | (661,484 | ) | ||||
Proceeds from short-term borrowings, net |
27,367 | 13,262 | ||||||
Proceeds (payments of) trade accounts receivable credit facility, net |
(36,800 | ) | 83,400 | |||||
Dividends paid |
(24,314 | ) | (21,931 | ) | ||||
Exercise of stock options |
208 | 47 | ||||||
Net cash provided by financing activities |
116,935 | 153,954 | ||||||
Effects of exchange rates on cash |
823 | (4,424 | ) | |||||
Net increase (decrease) in cash and cash equivalents |
10,779 | (22,487 | ) | |||||
Cash and cash equivalents at beginning of period |
106,957 | 111,896 | ||||||
Cash and cash equivalents at end of period |
$ | 117,736 | $ | 89,409 | ||||
See accompanying Notes to Consolidated Financial Statements
5
Table of Contents
GREIF, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
January 31, 2011
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 January 31, 2011 and
October 31, 2010 and the consolidated statements of operations and cash flows for the three month
periods ended January 31, 2011 and 2010 of Greif, Inc. and subsidiaries (the Company). The
consolidated financial statements include the accounts of the Company, all wholly-owned and
majority-owned subsidiaries and investments in limited liability companies, partnerships and joint
ventures in which it has controlling influence. Non-majority owned entities include investments in
limited liability companies, partnerships and joint ventures in which the Company does not have
controlling influence.
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,
2010 (the 2010 Form 10-K). Note 1 of the Notes to Consolidated Financial Statements from the
2010 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 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 2011 or 2010, 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 2011
presentation.
Newly Adopted Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) amended Accounting Standards
Codification (ASC) 860, Transfers and Servicing. The amendment to ASC 860 requires an
enterprise to evaluate whether the transaction is legally isolated from the Company and whether the
results of the transaction are consolidated within the consolidated financial statements. The
Company adopted the new guidance beginning November 1, 2010, 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 June 2009, the FASB amended ASC 810, Consolidation. The amendment to ASC 810 changed the
methodology for determining the primary beneficiary of a variable interest entity (VIE) from a
quantitative risk and rewards based model to a qualitative determination. It also requires enhanced
disclosures that will provide users of financial statements with more transparent information about
an enterprises involvement in a VIE. Accordingly, the Company evaluated its investments in
entities under the ASC 810 guidance, including the evaluation of (1) whether an entity is a VIE,
(2) whether the enterprise is the VIEs primary beneficiary, and (3) what type of financial
statement disclosures are required. The Company adopted the new guidance beginning November 1,
2010, 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
Effective July 1, 2009, changes to the ASC are communicated through an Accounting Standards Update
(ASU). As of January 31, 2011, the FASB has issued ASUs 2010-01 through 2011-1. The Company has
reviewed each ASU and determined that they will not have a material impact on the Companys
financial position, results of operations or cash flows, other than the related disclosures.
6
Table of Contents
NOTE 2 ACQUISITIONS, DIVESTITURES AND OTHER SIGNIFICANT TRANSACTIONS
# of | Purchase Price, | Operating | Tangible | Intangible | ||||||||||||||||||||||||
Acquisitions | net of Cash | Revenue | Profit | Assets, net | Assets | Goodwill | ||||||||||||||||||||||
Total 2011 Acquisitions |
0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | |||||||||||||||
Total 2010 Acquisitions |
12 | $ | 176,156 | $ | 268,443 | $ | 19,042 | $ | 116,286 | $ | 48,499 | $ | 120,355 |
Note: | Purchase price, net of cash acquired, does not factor payments for earn-out provisions
on prior acquisitions. Revenue and operating profit represent activity only in the year of
acquisition. Goodwill in 2010 excludes an immaterial acquisition in our Land Management segment. |
During the first three months of 2011, the Company completed no acquisitions.
During 2010, the Company completed twelve acquisitions consisting of seven rigid industrial
packaging companies and five flexible products companies and made a contingent purchase price
related to a 2008 acquisition. The seven rigid industrial packaging companies consisted of a
European company purchased in November 2009, an Asian company purchased in June 2010, a North
American drum reconditioning company purchased in July 2010, a North American drum reconditioning
company purchased in August 2010, a European company purchased in August 2010, a 51 percent
interest in a Middle Eastern company purchased in September 2010 and a South American company
purchased in September 2010. The five flexible products companies acquired conduct business
throughout Europe, Asia and North America and were acquired in February, June, August and September
2010. The 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 acquisitions, within our Rigid Industrial Packaging & Services segment, and the
flexible products acquisitions expand the Companys product and service offerings. The estimated
fair value of the net tangible assets acquired was $116.3 million. Identifiable intangible assets,
with a combined fair value of $48.5 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 $120.4 million was recorded as goodwill.
The five flexible products companies were contributed to a joint venture on September 29, 2010. See
Flexible Joint Venture included in Note 8 for additional information on this joint venture. The
aggregate purchase price in the table above represents a reimbursement of $98.2 million received
from the other joint venture partner relating to its investment and reimbursement of certain costs.
Had the transactions occurred on November 1, 2009, 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) 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 Packaging Belgium NV, Greif Spain SA, Greif
Sweden AB, Greif Packaging Norway AS, Greif Packaging France, SAS, Greif Packaging Spain SA, Greif
Portugal Lda and Greif UK Ltd, under discounted receivables purchase agreements and from Greif
France SAS under a factoring agreement. This agreement is amended from time to time to add
additional Greif entities. In addition, 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) agreeing to sell trade receivables that
meet certain eligibility criteria to such branch. The Italian RPA is similar in structure and terms
as the RPA. The maximum amount of receivables that may be financed under the RPA and the Italian
RPA is 115 million ($157.7 million) at January 31, 2011.
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 financed under the Singapore RPA is 15.0 million Singapore Dollars ($11.7 million) at
January 31, 2011.
7
Table of Contents
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 financed 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 financed under the
Malaysian Agreements is 15.0 million Malaysian Ringgits ($4.9 million) at January 31, 2011.
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 ASC 860, Transfers and
Servicing, and continues to recognize the deferred purchase price in its accounts receivable. 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. 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 January 31, 2011 and October 31, 2010, 95.4 million ($130.9 million) and 117.6 million ($162.9
million), respectively, of accounts receivable were sold under the RPA and Italian RPA. At January
31, 2011 and October 31, 2010, 8.1 million Singapore Dollars ($6.3 million) and 6.7 million
Singapore Dollars ($5.4 million), respectively, of accounts receivable were sold under the
Singapore RPA. At January 31, 2011 and October 31, 2010, 32.1 million Brazilian Reais ($19.2
million) and 11.7 million Brazilian Reais ($6.9 million), respectively, of accounts receivable were
sold under the Brazil Agreements. At January 31, 2011 and October 31, 2010, 10.3 million Malaysian
Ringgits ($3.4 million) and 6.3 million Malaysian Ringgits ($2.0 million), respectively, of
accounts receivable were sold under the Malaysian Agreements.
Expenses associated with the RPA and Italian RPA totaled 0.8 million ($1.0 million) and 0.7
million ($1.0 million) for the three months ended January 31, 2011 and 2010, 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 January 31, 2011 and 2010,
respectively.
Expenses associated with the Brazil Agreements totaled 1.0 million Brazilian Reais ($0.6 million)
and 1.1 million Brazilian Reais ($0.6 million) for the three months ended January 31, 2011 and
2010, respectively.
Expenses associated with the Malaysian Agreements totaled 0.2 million Malaysian Ringgits ($0.1
million) and ($0.1 million) for the three months ended January 31, 2011 and 2010, respectively.
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
Inventories are summarized as follows (Dollars in thousands):
January 31, | October 31, | |||||||
2011 | 2010 | |||||||
Finished goods |
$ | 94,248 | $ | 92,469 | ||||
Raw materials and work-in-process |
320,546 | 304,103 | ||||||
$ | 414,794 | $ | 396,572 | |||||
Inventories are stated at the lower of cost or market, utilizing the first-in, first-out
basis.
8
Table of Contents
NOTE 5 NET ASSETS HELD FOR SALE
As of January 31, 2011 and October 31, 2010, there were fourteen and sixteen locations with assets
held for sale, respectively. During the first three months of 2011, we sold one location, added one
location and two locations were placed back in service and depreciation was resumed. 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 following table summarizes the changes in the carrying amount of goodwill by segment for the
three month period ended January 31, 2011 (Dollars in thousands):
Rigid Industrial | Flexible Products & | |||||||||||||||||||
Packaging & Services | Services | Paper Packaging | Land Management | Total | ||||||||||||||||
Balance at October
31, 2010 |
$ | 570,661 | $ | 78,261 | $ | 60,653 | $ | 150 | $ | 709,725 | ||||||||||
Goodwill adjustments |
(695 | ) | (12,067 | ) | | | (12,762 | ) | ||||||||||||
Currency translation |
1,232 | (824 | ) | | | 408 | ||||||||||||||
Balance at January
31, 2011 |
$ | 571,198 | $ | 65,370 | $ | 60,653 | $ | 150 | $ | 697,371 | ||||||||||
The goodwill adjustments decreased goodwill by $12.8 million and consisted in part of $12.1
million of tangible asset valuation adjustments related to three of the 2010 acquisitions within
the FPS segment. Certain business combinations that occurred at or near year end were recorded with
provisional estimates for fair value based on managements best estimate.
The Company reviews goodwill and indefinite-lived intangible assets for impairment by a reporting
as required by ASC 350, Intangibles Goodwill and Other, either annually or when events and
circumstances indicate impairment may have occurred. A reporting unit is the operating segment, or
a business one level below that operating segment if discrete financial information is prepared and
regularly reviewed by segment management. The Companys business segments have been identified as
reporting units and the Company concluded that no impairment or impairment indicators exist at this
time.
The following table summarizes the carrying amount of net intangible assets by class as of January
31, 2011 and October 31, 2010 (Dollars in thousands):
Gross Intangible | Accumulated | Net Intangible | ||||||||||
Assets | Amortization | Assets | ||||||||||
October 31, 2010: |
||||||||||||
Trademark and patents |
$ | 42,878 | $ | 17,184 | $ | 25,694 | ||||||
Non-compete agreements |
20,456 | 7,774 | 12,682 | |||||||||
Customer relationships |
153,131 | 27,091 | 126,040 | |||||||||
Other |
15,235 | 6,412 | 8,823 | |||||||||
Total |
$ | 231,700 | $ | 58,461 | $ | 173,239 | ||||||
January 31, 2011: |
||||||||||||
Trademark and patents |
$ | 43,030 | $ | 17,113 | $ | 25,917 | ||||||
Non-compete agreements |
20,441 | 8,329 | 12,112 | |||||||||
Customer relationships |
153,816 | 29,703 | 124,113 | |||||||||
Other |
15,529 | 7,481 | 8,048 | |||||||||
Total |
$ | 232,816 | $ | 62,626 | $ | 170,190 | ||||||
Gross intangible assets increased by $1.1 million for the three month period ended January 31,
2011. The increase in gross intangible assets consisted of $0.3 million in preliminary purchase
price allocations related to 2010 acquisitions in the Flexible Products & Services segment and a
$0.8 million increase attributable to currency fluctuations. Amortization expense for the three
months ended January 31, 2011 and 2010 was $4.2 million and $3.3 million, respectively.
Amortization expense for the next five years is expected to be $21.7 million in 2011, $21.4 million
in 2012, $17.6 million in 2013, $15.3 million in 2014 and $14.6 million in 2015.
9
Table of Contents
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
The following is a reconciliation of the beginning and ending restructuring reserve balances for
the three month period ended January 31, 2011 (Dollars in thousands):
Non-cash | ||||||||||||||||
Cash Charges | Charges | |||||||||||||||
Employee | ||||||||||||||||
Separation | Other | Asset | ||||||||||||||
Costs | Costs | Impairments | Total | |||||||||||||
Balance at October 31, 2010 |
$ | 12,668 | $ | 7,570 | $ | | $ | 20,238 | ||||||||
Costs incurred and charged to
expense |
1,154 | 1,350 | 487 | 2,991 | ||||||||||||
Costs paid or otherwise settled |
(3,355 | ) | (1,797 | ) | 276 | (4,876 | ) | |||||||||
Balance at January 31, 2011 |
$ | 10,467 | $ | 7,123 | $ | 763 | $ | 18,353 | ||||||||
The focus for restructuring activities in 2011 continues to be on the integration of recent
acquisitions in the Rigid Industrial Packaging & Services, Flexible Products & Services and Paper
Packaging segments. During the first three months of 2011, the Company recorded restructuring
charges of $3.0 million, which compares to $6.0 million of restructuring charges during the first
three months of 2010. The restructuring activity for the three month period ended January 31, 2011
consisted of $1.2 million in employee separation costs, $0.5 million in asset impairments and $1.3
million in other costs. The $1.2 million in employee separation costs relates to the realignment
of the Companys management structure, plant closings and prior year acquisitions. The $1.3
million in other costs relates to professional fees and other administrative costs. The
restructuring activity for the three month period ended January 31, 2010 consisted of $4.3 million
in employee separation costs, $0.2 million in asset impairments and $1.5 million in other costs.
The following is a reconciliation of the total amounts expected to be incurred from open
restructuring plans which are anticipated to be realized in 2011 and 2012 or plans that are being
formulated and have not been announced as of the date of this Form 10-Q (Dollars in thousands):
Amounts Expected to be | Three months ended | Amounts Remaining to | ||||||||||
Incurred | January 31, 2011 | be Incurred | ||||||||||
Rigid Industrial Packaging
& Services |
||||||||||||
Employee separation costs |
$ | 8,237 | $ | 1,080 | $ | 7,157 | ||||||
Other restructuring costs |
13,337 | 1,163 | 12,174 | |||||||||
21,574 | 2,243 | 19,331 | ||||||||||
Flexible Products & Services |
||||||||||||
Employee separation costs |
131 | 58 | 73 | |||||||||
Paper Packaging |
||||||||||||
Employee separation costs |
115 | 16 | 99 | |||||||||
Asset impairments |
487 | 487 | | |||||||||
Other restructuring costs |
1,260 | 187 | 1,073 | |||||||||
1,862 | 690 | 1,172 | ||||||||||
$ | 23,567 | $ | 2,991 | $ | 20,576 | |||||||
10
Table of Contents
NOTE 8 VARIABLE INTEREST ENTITIES
The Company evaluates whether an entity is a VIE whenever reconsideration events occur. The Company
consolidates VIEs for which it is the primary beneficiary. If the Company is not the primary
beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of
accounting. When assessing the determination of the primary beneficiary, the Company considers all
relevant facts and circumstances, including: the power to direct the activities of the VIE that
most significantly impact the VIEs economic performance and the obligation to absorb the expected
losses and/or the right to receive the expected returns of the VIE. The Company performs ongoing
reassessments of all VIEs to determine if the primary beneficiary status is appropriate. As of
January 31, 2011, the Company is the primary beneficiary of the two VIEs, as discussed below.
Significant Nonstrategic Timberland Transactions
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 (the Purchase Note) by an indirect subsidiary of Plum Creek (the Buyer SPE). 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.
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. 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 Buyer SPE is deemed to be a VIE since the assets of the Buyer SPE are not available to satisfy
the liabilities of the Buyer SPE. The Company is the primary beneficiary because it has (1) the
power to direct the activities of the VIE that most significantly impact the VIEs economic
performance, and (2) the obligation to absorb losses of the VIE that could potentially be
significant to the VIE or the right to receive benefits from the VIE that could potentially be
significant to the VIE.
At January 31, 2011 and October 31, 2010, assets of the Buyer SPE consisted of $50.9 million of
restricted bank financial instruments, respectively. For the three month periods ended January 31,
2011 and 2010, the Buyer SPE recorded interest income of $0.6 million, respectively. The Buyer SPE
is a separate and distinct legal entity from the Company however, it has been consolidated into the
operations of the Company.
At January 31, 2011 and October 31, 2010, STA Timber had long-term debt of $43.3 million as of
January 31, 2011 and October 31, 2010, respectively. For the three month periods ended January 31,
2011 and 2010, STA Timber recorded interest expense of $0.6 million, respectively. STA
Timber is exposed to credit-related losses in the event of nonperformance by the issuer of the Deed
of Guarantee.
11
Table of Contents
Flexible Packaging Joint Venture
On September 29, 2010, Greif, Inc. and its indirect subsidiary Greif International Holding Supra
C.V. (Greif Supra,) formed a joint venture (referred to herein as the Flexible Packaging JV)
with Dabbagh Group Holding Company Limited and its subsidiary National Scientific Company Limited
(NSC). The Flexible Packaging JV owns the operations in the Flexible Products & Services segment,
with the exception of the North American multi-wall bag business. The Flexible Packaging JV has
been consolidated into the operations of the Company as of its formation date of September 29,
2010.
The Flexible Packaging JV is deemed to be a VIE since the total equity investment at risk is not
sufficient to permit the legal entity to finance its activities without additional subordinated
financial support. The Company is the primary beneficiary because it has (1) the power to direct
the activities of the VIE that most significantly impact the VIEs economic performance, and (2)
the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the
right to receive benefits from the VIE that could potentially be significant to the VIE.
The economic and business purpose underlying the Flexible Packaging JV is to establish a global
industrial flexible packaging enterprise through a series of targeted acquisitions and major
investments in plant, machinery and equipment. All entities contributed to the Flexible Packaging
JV were existing businesses acquired by Greif Supra and that were reorganized under Pinwheel Asset
Holding B.V. and Pinwheel Trading Holding B.V. (Asset Co. and Trading Co.), respectively. The
Company has 51% ownership in Trading Co. and 49% ownership in Asset Co. However, Greif Supra and
NSC have equal economic interests in the Flexible Packaging JV, notwithstanding the actual
ownership interests in the various legal entities.
All investments, loans and capital contributions are to be shared equally by Greif Supra and NSC
and each partner has committed to contribute capital of up to $150 million and obtain third party
financing for up to $150 million as required.
The following table presents the Flexible Packaging JV total net assets (Dollars in thousands):
January 31, 2011 | Asset Co. | Trading Co. | Flexible Packaging JV | |||||||||
Total assets |
$ | 174,023 | $ | 151,739 | $ | 325,762 | ||||||
Total liabilities |
78,193 | 55,022 | 133,215 | |||||||||
Net assets |
$ | 95,830 | $ | 96,717 | $ | 192,547 | ||||||
October 31, 2010 | Asset Co. | Trading Co. | Flexible Packaging JV | |||||||||
Total assets |
$ | 187,727 | $ | 166,956 | $ | 354,683 | ||||||
Total liabilities |
79,243 | 65,033 | 144,276 | |||||||||
Net assets |
$ | 108,484 | $ | 101,923 | $ | 210,407 | ||||||
Noncontrolling interests attributable to the Flexible Packaging JV for the three months ended
January 31, 2011 were ($1.7) million and were added to net income to arrive at net income
attributable to the Company.
NOTE 9 LONG-TERM DEBT
Long-term debt is summarized as follows (Dollars in thousands):
January 31, 2011 | October 31, 2010 | |||||||
2010 Credit Agreement |
$ | 423,287 | $ | 273,700 | ||||
Senior Notes due 2017 |
303,260 | 303,396 | ||||||
Senior Notes due 2019 |
242,458 | 242,306 | ||||||
Trade accounts receivable
credit facility |
98,200 | 135,000 | ||||||
Other long-term debt |
10,867 | 11,187 | ||||||
1,078,072 | 965,589 | |||||||
Less current portion |
(12,500 | ) | (12,523 | ) | ||||
Long-term debt |
$ | 1,065,572 | $ | 953,066 | ||||
12
Table of Contents
Credit Agreement
On October 29, 2010, the Company obtained a $1.0 billion senior secured credit facility pursuant to
an Amended and Restated Credit Agreement with a syndicate of financial institutions (the 2010
Credit Agreement). The 2010 Credit Agreement provides for a $750 million revolving multicurrency
credit facility and a $250 million term loan, both expiring October 29, 2015, with an option to add
$250 million to the facilities with the agreement of the lenders. The $250 million term loan is
scheduled to amortize by $3.1 million each quarter-end for the first eight quarters, $6.3 million
each quarter-end for the next eleven quarters and $156.3 million on the maturity date. The 2010
Credit Agreement replaced and refinanced the Companys then existing credit agreement that provided
us with a $500 million revolving multicurrency credit facility and a $200 million term loan.
The 2010 Credit Agreement is available to fund ongoing working capital and capital expenditure
needs, for general corporate purposes and to finance acquisitions. Interest is based on a
Eurodollar rate or a base rate that resets periodically plus a calculated margin amount. As of
January 31, 2011, $423.3 million was outstanding under the 2010 Credit Agreement. The current
portion of the 2010 Credit Agreement was $12.5 million and the long-term portion was $410.8
million. The weighted average interest rate on the 2010 Credit Agreement was 2.28% for the three
months ended January 31, 2011.
The 2010 Credit Agreement contains financial covenants that require the Company to maintain a
certain leverage ratio and a fixed charge coverage ratio. At January 31, 2011, 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 $320.5 million at January 31, 2011 based upon
quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains
certain covenants. At January 31, 2011, 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 these 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 $274.4 million at January 31, 2011, based upon
quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains
certain covenants. At January 31, 2011, 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, as purchasers, with a maturity date of
December 8, 2013, subject to earlier termination of the purchasers commitment on September 29,
2011, 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 London Interbank Offered Rate
(LIBOR) plus a margin or other agreed-upon rate (0.82% at January 31, 2011). 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
January 31, 2011, there was $98.2 million outstanding under the credit facility. The agreement for
this credit facility contains financial covenants that require the Company to maintain a certain
leverage ratio and a fixed charge coverage ratio. At January 31, 2011, the Company was in
compliance with these covenants.
13
Table of Contents
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 this credit facility.
Other
In addition to the amounts borrowed under the 2010 Credit Agreement and proceeds from the Senior
Notes and the United States Trade Accounts Receivable Credit Facility, at January 31, 2011, the
Company had outstanding other debt of $98.3 million, comprised of $10.9 million in long-term debt
and $87.4 million in short-term borrowings, compared to other debt outstanding of $72.1 million,
comprised of $11.2 million in long-term debt and $60.9 million in short-term borrowings, at October
31, 2010.
At January 31, 2011, the current portion of the Companys long-term debt was $12.5 million. Annual
maturities, including the current portion, of long-term debt under the Companys various financing
arrangements were $20.2 million in 2012, $25.0 million in 2013, $123.3 million in 2014, $351.4
million in 2015 and $545.7 million thereafter.
At January 31, 2011 and October 31, 2010, the Company had deferred financing fees and debt issuance
costs of $20.6 million and $21.4 million, respectively, which are included in other long-term
assets.
NOTE 10 FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Financial Instruments
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 ASC
815, Derivatives and Hedging, all derivatives are to be recognized as assets or liabilities on
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.
During the next nine months, the Company expects to reclassify into earnings a net loss from
accumulated other comprehensive loss of approximately $2.0 million after tax at the time the
underlying hedge transactions are realized.
ASC 820, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value in GAAP and expands
disclosures about fair value measurements for financial and non-financial assets and liabilities.
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 1Observable
inputs such as unadjusted quoted prices in active markets for
identical assets and liabilities. |
| Level 2Observable
inputs other than quoted prices in active markets for
identical assets and liabilities. |
| Level 3Unobservable
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 value adjustments for those assets and (liabilities) measured
on a recurring basis as of January 31, 2011 (Dollars in thousands):
Fair Value Measurement | Balance sheet | |||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Location | ||||||||||||||
Interest rate derivatives |
$ | | $ | (1,524 | ) | $ | | $ | (1,524 | ) | Other long-term liabilities | |||||||
Foreign exchange hedges |
| (1,476 | ) | | (1,476 | ) | Other current liabilities | |||||||||||
Energy hedges |
| (50 | ) | | (50 | ) | Other current liabilities | |||||||||||
Total* |
$ | | $ | (3,050 | ) | $ | | $ | (3,050 | ) | ||||||||
* | The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable,
current liabilities and short-term borrowings at January 31, 2011 approximate their fair values
because of the short-term nature of these items and are not included in this table. |
14
Table of Contents
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 the 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 0.26% at January 31, 2011 and October 31, 2010) and pays interest based upon a fixed
interest rate (weighted average of 1.78% at January 31, 2011 and October 31, 2010).
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 long-term debt on the
consolidated balance sheet.
Foreign Exchange Hedges
At January 31, 2011, the Company had outstanding foreign currency forward contracts in the notional
amount of $150.4 million ($252.9 million at October 31, 2010). 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 January 31, 2011
resulted in a loss of $0.2 million recorded in the consolidated statements of operations and a loss
of $1.3 million recorded in other comprehensive income. The fair value of similar contracts at
October 31, 2010 resulted in a gain of $0.8 million in the consolidated statements of operations
and a loss of $2.3 million recorded in other comprehensive income.
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, 2011. Under these hedge agreements, the
Company agrees to purchase natural gas at a fixed price. At January 31, 2011, the notional amount
of these hedges was $1.7 million ($2.4 million at October 31, 2010). The other
comprehensive loss on these agreements was $0.1 million at January 31, 2011 and $0.3 million at
October 31, 2010. As a result of the high correlation between the hedged instruments and the
underlying transactions, ineffectiveness did not have a material impact on the Companys
consolidated statements of operations for the quarter ended January 31, 2011.
Other financial instruments
The estimated fair value of the Companys long-term debt was $1,127.2 million and $1,021.5 million
at January 31, 2011 and October 31, 2010, respectively. The current portion of the long-term debt
was $12.5 million at January 31, 2011 and October 31, 2010. 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.
Non Recurring Fair Value Measurements
The Company has reviewed the fair value adjustments for those assets and (liabilities) measured on
a non-recurring basis as of January 31, 2011 discussed herein.
Net Assets Held for Sale
Net assets held for sale are considered level two inputs which include recent purchase offers,
market comparables and/or data obtained from commercial real estate brokers. As of January 31,
2011, the Company had not recognized any impairment related to net assets held for sale.
Long-Lived Assets
As part of the Companys restructuring plans following recent acquisitions, the Company may shut
down manufacturing facilities during the next few years. The long-lived assets are considered
level two 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. The Company recorded restructuring-related expenses for the period
ended January 31, 2011 of $0.5 million on long lived assets with net book values of $0.6 million.
15
Table of Contents
Goodwill
On an annual basis, the Company performs an impairment test for goodwill. The Company concluded
that no impairment existed at October 31, 2010. There have been no changes during the first
quarter of 2011 that would warrant impairment considerations. The 2011 impairment test will be
performed during the third quarter of 2011, or earlier if specific impairment indicators are
present.
NOTE 11 STOCK-BASED COMPENSATION
Stock-based compensation is accounted for in accordance with 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 an 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. ASC 718 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 stock options were granted in 2011 or 2010. 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 ASC 718.
NOTE 12 INCOME TAXES
The quarterly effective tax rate was 24.6% and 20.2% in the first quarter of 2011 and 2010,
respectively. The change in the effective tax rate is primarily attributable 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 recorded in the first
quarter of 2010.
The Company has estimated the reasonably possible expected net change in unrecognized tax benefits
through January 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 ASC 740,
Income Taxes. ASC 740 clarifies the accounting for uncertainty in income tax positions. 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 $6.0 million. Actual results may differ materially
from this estimate.
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 | ||||||||
January 31 | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 2,239 | $ | 2,293 | ||||
Interest cost |
4,159 | 3,998 | ||||||
Expected return on plan assets |
(4,928 | ) | (4,524 | ) | ||||
Amortization of prior service cost, initial
net asset and net actuarial gain |
2,160 | 1,700 | ||||||
Net periodic pension costs |
$ | 3,630 | $ | 3,467 | ||||
The Company made $3.4 million in pension contributions in the three months ended January 31,
2011. The Company estimates $29.7 million of pension contributions for the entire 2011 fiscal year.
16
Table of Contents
The components of net periodic cost for postretirement benefits include the following (Dollars in
thousands):
Three months ended | ||||||||
January 31 | ||||||||
2011 | 2010 | |||||||
Service cost |
$ | 2 | $ | 1 | ||||
Interest cost |
219 | 283 | ||||||
Amortization of prior service cost and
recognized actuarial gain |
(334 | ) | (251 | ) | ||||
Net periodic cost for postretirement benefits |
$ | (113 | ) | $ | 33 | |||
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.
In accordance with ASC 450, Contingencies, 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 believes that
its reserves for these litigation-related liabilities are reasonable and that 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.
Environmental Reserves
At January 31, 2011 and October 31, 2010, the Company had recorded liabilities of $25.8 million and
$26.2 million, respectively, for estimated environmental remediation costs. The liabilities were
recorded on an undiscounted basis and are included in other long-term liabilities. At January 31,
2011 and October 31, 2010, the Company had recorded environmental liability reserves of $14.3
million and $14.5 million, respectively, for its blending facility in Chicago, Illinois and $10.1
million and $10.3 million, respectively, for various European drum facilities acquired in November
2006 as well as the 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.
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 liabilities, these actions have formal
agreements in place to apportion the liability.
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 January 31, 2011.
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 year, the Company
believes that the chance of a series of adverse developments occurring in the same quarter or 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
The Company has two classes of common stock and, as such, applies the two-class method of
computing earnings per share (EPS) as prescribed in ASC 260, Earnings Per Share. In accordance
with this 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.
The Company calculates Class A EPS as follows: (i) multiply 40% times the average Class A shares
outstanding, then divide that amount by the product of 40% of the average Class A shares
outstanding plus 60% of the average Class B shares outstanding to get a percentage, (ii) divide
undistributed net income attributable to Greif, Inc. by the average Class A shares outstanding,
then (iii) multiply item (i) by item (ii), and finally (iv) add item (iii) to the Class A cash
dividend per share. Diluted shares are factored into the Class A calculation.
17
Table of Contents
The Company calculates Class B EPS as follows: (i) multiply 60% times the average Class B shares
outstanding, then divide that amount by the product of 40% of the average Class A shares
outstanding plus 60% of the average Class B shares outstanding to get a percentage, (ii) divide
undistributed net income attributable to Greif, Inc. by the average Class B shares outstanding,
then (iii) multiply item (i) by item (ii), and finally (iv) add item (iii) to the Class B cash
dividend per share. Class B diluted EPS is identical to Class B basic EPS.
The following table provides EPS information for each period, respectively:
Three months ended | ||||||||
January 31 | ||||||||
(In thousands except per share data) | 2011 | 2010 | ||||||
Numerator |
||||||||
Numerator for basic and diluted EPS - |
||||||||
Net income attributable to Greif, Inc. |
$ | 41,441 | $ | 24,819 | ||||
Cash dividends |
24,314 | 21,931 | ||||||
Undistributed net income attributable
to Greif, Inc. |
$ | 17,127 | $ | 2,888 | ||||
Denominator |
||||||||
Denominator for basic EPS - |
||||||||
Class A common stock |
24,787,857 | 24,545,131 | ||||||
Class B common stock |
22,412,266 | 22,462,266 | ||||||
Denominator for diluted EPS - |
||||||||
Class A common stock |
25,062,556 | 24,907,553 | ||||||
Class B common stock |
22,412,266 | 22,462,266 | ||||||
EPS Basic |
||||||||
Class A common stock |
$ | 0.71 | $ | 0.43 | ||||
Class B common stock |
$ | 1.06 | $ | 0.63 | ||||
EPS Diluted |
||||||||
Class A common stock |
$ | 0.71 | $ | 0.43 | ||||
Class B common stock |
$ | 1.06 | $ | 0.63 | ||||
Dividends per share |
||||||||
Class A common stock |
$ | 0.42 | $ | 0.38 | ||||
Class B common stock |
$ | 0.62 | $ | 0.56 |
Class A Common Stock is entitled to cumulative dividends of one cent a share per year after
which Class B Common Stock is entitled to non-cumulative dividends up to a half-cent a 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 a half 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. 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 three
months of 2011, the Company did not repurchase any shares of Class A Common Stock or Class B Common
Stock. As of January 31, 2011, 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, 2009 through January 31, 2011 was
approximately $2.7 million.
18
Table of Contents
The following table summarizes the Companys Class A and Class B common and treasury shares at the
specified dates:
Authorized | Issued | Outstanding | Treasury | |||||||||||||
Shares | Shares | Shares | Shares | |||||||||||||
January 31, 2011: |
||||||||||||||||
Class A Common Stock |
128,000,000 | 42,281,920 | 24,812,389 | 17,469,531 | ||||||||||||
Class B Common Stock |
69,120,000 | 34,560,000 | 22,412,266 | 12,147,734 | ||||||||||||
October 31, 2010: |
||||||||||||||||
Class A Common Stock |
128,000,000 | 42,281,920 | 24,756,974 | 17,524,946 | ||||||||||||
Class B Common Stock |
69,120,000 | 34,560,000 | 22,412,266 | 12,147,734 |
The following is a reconciliation of the shares used to calculate basic and diluted earnings per
share:
Three months ended | ||||||||
January 31 | ||||||||
2011 | 2010 | |||||||
Class A Common Stock: |
||||||||
Basic shares |
24,787,857 | 24,545,131 | ||||||
Assumed conversion of stock options |
274,699 | 362,422 | ||||||
Diluted shares |
25,062,556 | 24,907,553 | ||||||
Class B Common Stock: |
||||||||
Basic and diluted shares |
22,412,266 | 22,462,266 | ||||||
No stock options were antidilutive for the three month periods ended January 31, 2011 and January
31, 2010, respectively.
NOTE 16 EQUITY EARNINGS (LOSSES) OF UNCONSOLIDATED AFFILIATES, NET OF TAX AND NET INCOME
ATTRIBUTABLE TO 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
seven 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 January 31,
2011 and 2010 were $0.5 and ($0.1) million, respectively. There were no dividends received from the
Companys equity method affiliates for the three months ended January 31, 2011 and 2010.
Net
income (loss) attributable to noncontrolling interests
Net income (loss) attributable to noncontrolling interests represent the portion of earnings or
losses from the operations of the Companys majority owned subsidiaries that are consolidated with
Greif, Inc.s financial statements. Net income (loss) attributable to noncontrolling interests
for the three months ended January 31, 2011 and 2010 were ($0.3) million and $1.4 million,
respectively, and were deducted from net income to arrive at net income attributable to Greif, Inc.
19
Table of Contents
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 | ||||||||
January 31 | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 41,097 | $ | 26,231 | ||||
Other comprehensive income: |
||||||||
Foreign currency translation adjustment |
(30,449 | ) | (16,899 | ) | ||||
Changes in fair value of interest rate derivatives, net of tax |
328 | 683 | ||||||
Changes in fair value of energy and other derivatives, net of
tax |
154 | 178 | ||||||
Minimum pension liability adjustment, net of tax |
121 | 390 | ||||||
Comprehensive income |
$ | 11,251 | $ | 10,583 | ||||
The following is the income tax benefit (expense) for each other comprehensive income line
items:
Three months ended | ||||||||
January 31 | ||||||||
2011 | 2010 | |||||||
Income tax benefit (expense): |
||||||||
Changes in fair value of interest rate derivatives, net of tax |
(177 | ) | (368 | ) | ||||
Changes in fair value of energy and other derivatives, net of
tax |
(83 | ) | (96 | ) | ||||
Minimum pension liability adjustment, net of tax |
(39 | ) | (99 | ) |
The
components of Shareholders Equity from October 31, 2010 to January 31,
2011 (Dollars in thousands):
Accumulated | ||||||||||||||||||||||||||||||||
Non- | Other | |||||||||||||||||||||||||||||||
Capital Stock | Treasury Stock | Retained | Controlling | Comprehensive | Shareholders | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Earnings | interests | Income (Loss) | Equity | |||||||||||||||||||||||||
As of October 31, 2010 |
47,169 | $ | 106,057 | 29,673 | $ | (117,394 | ) | $ | 1,323,477 | $ | 76,711 | $ | (33,419 | ) | $ | 1,355,432 | ||||||||||||||||
Net income |
41,441 | (344 | ) | 41,097 | ||||||||||||||||||||||||||||
Other comprehensive income (loss): |
(34,206 | ) | (34,206 | ) | ||||||||||||||||||||||||||||
Foreign currency translation on
noncontrolling interests |
4,360 | 4,360 | ||||||||||||||||||||||||||||||
Comprehensive income, attributable
to Greif, Inc. |
11,251 | |||||||||||||||||||||||||||||||
Noncontrolling interests and other |
1,691 | 1,691 | ||||||||||||||||||||||||||||||
Dividends paid |
(24,314 | ) | (24,314 | ) | ||||||||||||||||||||||||||||
Stock options exercised |
15 | 176 | (15 | ) | 31 | 207 | ||||||||||||||||||||||||||
Tax benefit of stock options and other |
77 | 77 | ||||||||||||||||||||||||||||||
Long-term incentive shares issued |
40 | 2,349 | (40 | ) | 83 | 2,432 | ||||||||||||||||||||||||||
As of January 31, 2011 |
47,224 | $ | 108,659 | 29,618 | $ | (117,280 | ) | $ | 1,340,604 | $ | 78,058 | $ | (63,265 | ) | $ | 1,346,776 | ||||||||||||||||
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
rigid industrial packaging products, such as steel, fiber and plastic drums, rigid intermediate
bulk containers, closure systems for industrial packaging products, water bottles and reconditioned
containers, and services, such as container lifecycle management, blending, filling and other
packaging services, logistics and warehousing. The Companys rigid industrial packaging products
are sold to customers in industries such as chemicals, paints and pigments, food and beverage,
petroleum, industrial coatings, agricultural, pharmaceutical and mineral, among others.
20
Table of Contents
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. 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.
Operations in the Paper Packaging segment involve the production and sale of containerboard,
corrugated sheets and other corrugated products to customers in North America. The Companys
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 the Companys industrial and consumer
multiwall bag products were reclassified from this segment to the Flexible Products & Services
segment for the first quarter of 2010 results of operations.
Operations in the Land Management segment involve the management and sale of timber and special use
properties from approximately 267,150 acres of timber properties in the southeastern United States,
which are actively managed, and 23,100 acres of timber properties in Canada, which are not actively
managed. The Companys 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, the Company seeks to maintain a consistent cutting schedule, within
the limits of market and weather conditions. The Company also sells, from time to time, timberland
and special use land, which consists of surplus land, higher and better use (HBU) 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
Basis of Presentation and Summary of Significant Accounting Policies note in the 2010 Form 10-K.
21
Table of Contents
The following segment information is presented for the periods indicated (Dollars in thousands):
Three months ended | ||||||||
January 31 | ||||||||
2011 | 2010 | |||||||
Net sales: |
||||||||
Rigid Industrial Packaging & Services |
$ | 653,891 | $ | 564,764 | ||||
Flexible Products & Services |
128,008 | 11,286 | ||||||
Paper Packaging |
156,764 | 128,263 | ||||||
Land Management |
5,129 | 5,369 | ||||||
Total net sales |
$ | 943,792 | $ | 709,682 | ||||
Operating profit: |
||||||||
Operating profit, before the impact of restructuring
charges and acquisition-related costs: |
||||||||
Rigid Industrial Packaging & Services |
$ | 49,816 | $ | 57,459 | ||||
Flexible Products & Services |
8,543 | 2,517 | ||||||
Paper Packaging |
18,830 | 3,739 | ||||||
Land Management |
3,066 | 2,999 | ||||||
Operating profit, before the impact of restructuring
charges and acquisition-related costs |
80,255 | 66,714 | ||||||
Restructuring charges: |
||||||||
Rigid Industrial Packaging & Services |
2,245 | 5,956 | ||||||
Flexible Products & Services |
56 | | ||||||
Paper Packaging |
690 | 41 | ||||||
Total restructuring charges |
2,991 | 5,997 | ||||||
Acquisition-related costs (1): |
||||||||
Rigid Industrial Packaging & Services |
1,509 | 1,436 | ||||||
Flexible Products & Services |
7,035 | 8,620 | ||||||
Total acquisition-related costs |
8,544 | 10,056 | ||||||
Total operating profit |
$ | 68,720 | $ | 50,661 | ||||
Depreciation, depletion and amortization expense: |
||||||||
Rigid Industrial Packaging & Services |
$ | 20,391 | $ | 21,257 | ||||
Flexible Products & Services |
$ | 4,213 | 130 | |||||
Paper Packaging |
$ | 7,702 | 7,185 | |||||
Land Management |
$ | 802 | 934 | |||||
Total depreciation, depletion and amortization expense |
$ | 33,108 | $ | 29,506 | ||||
(1) | As a result of the creation of the Flexible Products & Services segment, acquisition
related costs of $8,620 for the three months ended January 31, 2010 have been reclassified from
the Rigid Industrial Packaging & Services segment to the Flexible Products & Services segment for
comparative purposes. |
The following table presents net sales to external customers by geographic area (Dollars in
thousands):
Three months ended January 31, | ||||||||
2011 | 2010 | |||||||
Net sales: |
||||||||
North America |
$ | 439,848 | $ | 360,920 | ||||
Europe, Middle East and Africa |
345,179 | 224,314 | ||||||
Asia Pacific and Latin America |
158,765 | 124,448 | ||||||
Total net sales |
$ | 943,792 | $ | 709,682 | ||||
22
Table of Contents
The following table presents total assets by segment and geographic area (Dollars in
thousands):
January 31, 2011 | October 31, 2010 | |||||||
Assets: |
||||||||
Rigid Industrial Packaging & Services |
$ | 2,090,843 | $ | 2,058,165 | ||||
Flexible Products & Services |
343,357 | 353,715 | ||||||
Paper Packaging |
427,041 | 435,555 | ||||||
Land Management |
273,745 | 274,352 | ||||||
Total segments |
3,134,986 | 3,121,787 | ||||||
Corporate and other |
392,784 | 376,658 | ||||||
Total assets |
$ | 3,527,770 | $ | 3,498,445 | ||||
Assets: |
||||||||
North America |
$ | 1,754,281 | $ | 1,895,475 | ||||
Europe, Middle East and Africa |
1,159,547 | 1,012,131 | ||||||
Asia Pacific and Latin America |
613,942 | 590,839 | ||||||
Total assets |
$ | 3,527,770 | $ | 3,498,445 | ||||
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 2011 or 2010, 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 January 31, 2011 and October
31, 2010, and for the consolidated statements of operations for the three months ended January 31,
2011 and 2010. 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, 2010 (the 2010 Form 10-K). Readers are encouraged to
review the entire 2010 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) the continuing consolidation
of our customer base and our suppliers may intensify pricing pressure, (v) we operate in highly
competitive industries, (vi) our business is sensitive to changes in industry demands, (vi) raw
material and energy price fluctuations and shortages may adversely impact our manufacturing
operations and costs, (vii) we may encounter difficulties arising from acquisitions, (viii) we may
incur additional restructuring costs and there is no guarantee that our efforts to reduce costs
will be successful, (ix) tax legislation initiatives or challenges to our tax positions may
adversely impact our financial results or condition, (x) several operations are conducted by joint
ventures that we cannot operate solely for our benefit, (xi) our ability to attract, develop and
retain talented employees, managers and executives is critical to our success, (xii) our business
may be adversely impacted by work stoppages and other labor relations matters, (xiii) we may be
subject to losses that might not be covered in whole or in part by existing insurance reserves or
insurance coverage, (xiv) our business depends on the uninterrupted operations of our facilities,
systems and business functions, including our information technology and other business systems,
(xv) legislation/regulation related to climate change and environmental and health and safety
matters and product liability claims could negatively impact our operations and financial
performance, (xvi) changing climate conditions may adversely affect our operations and financial
performance, and (xvii) the frequency and volume of our timber and timberland sales will impact our
financial performance. 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 2010 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.
23
Table of Contents
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, 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 January 31, 2011, we owned approximately 267,150 acres of timber properties in the
southeastern United States, which are actively managed, and approximately 23,100 acres of timber
properties in Canada, which are not actively managed. 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.
24
Table of Contents
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 2010 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.
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 2010 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 period ended January 31,
2011 and 2010. Historically, revenues and earnings may or may not be representative of future
operating results attributable to various economic and other factors.
In the second quarter of 2010, we acquired one of the worlds largest producer of flexible
intermediate bulk containers. As a result of this acquisition, we created a new reporting segment
called the Flexible Products & Services segment in the second quarter of 2010. The results of our
multiwall bag operations, previously included in the Paper Packaging segment, have been
reclassified and included in the Flexible Products & Services segment for all historical periods.
The Industrial Packaging segment has been renamed the Rigid Industrial Packaging & Services
segment.
The non-GAAP financial measure of operating profit before the impact of restructuring charges and
acquisition-related costs is used throughout the following discussion of our results of operations.
Operating profit before the impact of restructuring charges and acquisition-related costs is equal
to operating profit plus restructuring charges and acquisition-related costs. We use operating
profit before the impact of restructuring charges and acquisition-related costs because we believe
that this measure provides a better indication of our operational performance because it excludes
restructuring charges and acquisition-related costs, which are not representative of ongoing
operations, and provides a more stable platform on which to compare our historical performance.
25
Table of Contents
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 January 31, | 2011 | 2010 | ||||||
Net Sales |
||||||||
Rigid Industrial Packaging & Services |
$ | 653,891 | $ | 564,764 | ||||
Flexible Products & Services |
128,008 | 11,286 | ||||||
Paper Packaging |
156,764 | 128,263 | ||||||
Land Management |
5,129 | 5,369 | ||||||
Total net sales |
$ | 943,792 | $ | 709,682 | ||||
Operating Profit: |
||||||||
Operating profit, before the impact of restructuring charges and acquisition-related costs: |
||||||||
Rigid Industrial Packaging & Services |
$ | 49,816 | $ | 57,459 | ||||
Flexible Products & Services |
8,543 | 2,517 | ||||||
Paper Packaging |
18,830 | 3,739 | ||||||
Land Management |
3,066 | 2,999 | ||||||
Total operating profit before the impact of restructuring charges and
acquisition-related costs: |
$ | 80,255 | $ | 66,714 | ||||
Restructuring charges: |
||||||||
Rigid Industrial Packaging & Services |
$ | 2,245 | $ | 5,956 | ||||
Flexible Products & Services |
56 | | ||||||
Paper Packaging |
690 | 41 | ||||||
Restructuring charges |
$ | 2,991 | $ | 5,997 | ||||
Acquisition-related costs (1): |
||||||||
Rigid Industrial Packaging & Services |
$ | 1,509 | $ | 1,436 | ||||
Flexible Products & Services |
7,035 | 8,620 | ||||||
Acquisition-related costs |
$ | 8,544 | $ | 10,056 | ||||
Operating profit: |
||||||||
Rigid Industrial Packaging & Services |
$ | 46,062 | $ | 50,067 | ||||
Flexible Products & Services |
1,452 | (6,103 | ) | |||||
Paper Packaging |
18,140 | 3,698 | ||||||
Land Management |
3,066 | 2,999 | ||||||
Total operating profit |
$ | 68,720 | $ | 50,661 | ||||
(1) | As a result of the creation of the Flexible Products & Services segment,
acquisition related costs of $8,620 for the three months ended January 31, 2010 have been
reclassified from the Rigid Industrial Packaging & Services segment to the Flexible Products & Services segment for comparative purposes. |
First Quarter Results
Net Sales
Net sales were $943.8 million in the first quarter of 2011 compared to $709.7 million in the first
quarter of 2010. The 33.0 percent increase was due to higher sales volumes and higher selling
prices due to the pass-through of higher raw material costs, partially offset by foreign currency
translation. The $234.1 million increase was due to Rigid Industrial Packaging & Services ($89.1
million increase), Flexible Products & Services ($116.7 million increase) and Paper Packaging
($28.5 million increase), partially offset by Land Management ($0.2 million decrease).
Operating Costs
Cost of products sold, as a percentage of net sales, increased to 81.3 percent for the first
quarter of 2011 compared to 80.6 percent for the first quarter of 2010. The higher cost of
products sold as a percentage of net sales was primarily due to a shift in product mix and higher
raw material costs, especially steel, resin and old corrugated container costs, which were
partially offset by lower conversion costs due to improved productivity.
26
Table of Contents
Selling, general & administrative (SG&A) expenses were $106.5 million, or 11.3 percent of net
sales, in the first quarter of 2011 compared to $82.4 million, or 11.6 percent of net sales, in the
first quarter of 2010. The dollar increase in SG&A expenses was primarily due to the SG&A expenses
of acquired companies and higher employment-related costs as compared to the same period in 2010.
Restructuring Charges
Restructuring charges were $3.0 and $6.0 for the first quarter of 2011 and 2010, respectively.
Restructuring charges for the first quarter 2011 consisted of $1.2 million in employee separation
costs, $0.5 million in asset impairments and $1.3 million in other costs. The focus of the first
quarter 2011 restructuring activities was on network consolidation of acquisitions in the Flexible
Products & Services segment and business realignment in Asia Pacific.
Restructuring charges for the first quarter 2010 consisted of $4.3 million in employee separation
costs, $0.2 million in asset impairments and $1.5 million in other costs. The focus of the first
quarter 2010 restructuring activities was related to business realignment, acquisition-related
integration, and further implementation of Greif Business System.
Refer to Note 7 to the Consolidated Financial Statements included in Item I of Part I of this Form
10-Q for additional disclosures regarding our restructuring activities.
Acquisition-Related Costs
Acquisition-related costs included in SG&A expenses were $8.5 million and $10.1 million for the
first quarter of 2011 and 2010, respectively. Acquisition-related costs for the first quarter of
2010 included $10.1 million of costs which would have been
previously capitalized as part of the purchase price of acquisitions. A total of $6.1 million of
the first quarter 2010 acquisition-related costs were incurred prior to November 1, 2009, the date
on which we adopted ASC 805, Business Combinations. In addition, we recorded post
acquisition-related integration costs of $6.1 million in the first quarter of 2011, which
represented costs associated with integrating acquired companies, such as costs associated with
implementing the Greif Business System, sourcing and supply chain initiatives, and finance and
administrative reorganizations.
Operating Profit
Operating profit was $68.7 million and $50.7 million in the first quarter of 2011 and 2010,
respectively. Operating profit before the impact of restructuring charges and acquisition-related
costs was $80.3 million for the first quarter of 2011 compared to $66.7 million for the first
quarter of 2010. The $13.6 million increase in operating profit before the impact of restructuring
charges and acquisition-related costs was due to Flexible Products & Services ($6.0 million
increase), Paper Packaging ($15.1 million increase) and Land Management ($0.1 million increase),
partially offset by Rigid Industrial Packaging & Services ($7.6 million decrease).
Segment Review
Rigid Industrial Packaging & Services
Our Rigid Industrial Packaging & Services segment offers a comprehensive line of rigid industrial
packaging products, such as steel, fibre and plastic drums, rigid intermediate bulk containers,
closure systems for industrial packaging products, water bottles and reconditioned containers. In
addition, this segment offers a wide variety of 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 facilities; and |
| Impact of foreign currency translation. |
27
Table of Contents
In this segment, net sales were $653.9 million in the first quarter of 2011 compared to $564.8
million in the first quarter of 2010. The 15.8 percent increase in net sales was due to higher
sales volumes and higher selling prices due to the pass-through of higher input costs, partially
offset by the impact of foreign currency translation.
Gross profit margin for the Rigid Industrial Packaging & Services segment was 18.6 percent in the
first quarter of 2011 compared to 20.5 percent in first quarter of 2010. This decrease in gross
profit margin was primarily due to higher raw material costs, which were partially offset by higher
sales volume, higher selling prices and increased productivity.
Operating profit was $46.1 million in the first quarter of 2011 and $50.1 million in the first
quarter of 2010. Operating profit before the impact of restructuring charges and
acquisition-related costs decreased to $49.8 million in the first quarter of 2011 from $57.5
million in the first quarter of 2010. The $7.7 million decrease in operating profit before the
impact of restructuring charges and acquisition-related costs was primarily due to the lower gross
profit margin and an increase in employment-related costs for this segment. Also included in
operating profit is a loss on the sale of property, plant and equipment of $0.6 million in the
first quarter of 2011 and a gain on the sale of property, plant and equipment of $1.0 million in
the first quarter of 2010.
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 $128.0 million in the first quarter of 2011 compared to $11.3
million in the first quarter of 2010. The increase was primarily due to flexible intermediate bulk
container acquisitions throughout 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.
Gross profit margin for the Flexible Products & Services segment was 19.1 percent in the first
quarter of 2011 compared to 34.7 percent in the first quarter of 2010. This decrease in gross
profit margin was primarily due to the change in product mix caused by the 2010 acquisitions.
Operating profit was $1.5 million in the first quarter of 2011 compared to an operating loss of
$6.1 million in the first quarter of 2010. Operating profit before the impact of restructuring
charges and acquisition-related costs increased to $8.5 million in the first quarter of 2011 from
$2.5 million in the first quarter of 2010 primarily due to the 2010 acquisitions.
28
Table of Contents
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; |
| Divestiture of facilities; and |
| Restructuring charges. |
In this segment, net sales were $156.8 million in the first quarter of 2011 compared to $128.3
million in the first quarter of 2010. The 22.2 percent increase in net sales was due to higher
sales volumes and higher selling prices for all of the segments products.
Gross profit margin for the Paper Packaging segment was 18.1 percent in the first quarter of 2011
compared to 11.4 percent in the first quarter of 2010. This increase in gross profit margin is
primarily driven by higher volumes and higher selling prices partially offset by higher raw material costs, especially old
corrugated containers.
Operating profit was $18.1 million and $3.7 million in the first quarter of 2011 and 2010,
respectively. Operating profit before the impact of restructuring charges increased to $18.8
million in the first quarter of 2011 from $3.7 million in the first quarter of 2010 primarily due
to the higher gross profit margin for this segment. Also included in operating profit is a gain on
the sale of property, plant and equipment of $1.2 million and $0.0 million in the first quarter of
2011 and 2010, respectively.
Land Management
As of January 31, 2011, our Land Management segment consists of approximately 267,150 acres of
timber properties in the southeastern United States, which are actively harvested and regenerated,
and approximately 23,100 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). |
In this segment, net sales were $5.1 million and $5.4 million in the first quarter of 2011 and
2010, respectively. While timber sales are subject to fluctuations, we seek to maintain a
consistent cutting schedule, within the limits of market and weather conditions.
Gross profit margin for the Land Management segment was 40.4 percent in the first quarter of 2011
compared to 60.1 percent in the first quarter of 2010. This decrease in gross profit margin is
primarily driven by a change in product and service mix.
Operating profit was $3.1 million and $3.0 million in the first quarter of 2011 and 2010,
respectively. Included in these amounts were profits from the sale of special use properties of
$1.6 million and $0.3 million in the first quarter of 2011 and 2010, respectively. Also included
in operating profit is a gain on the sale of property, plant and equipment of $1.6 million and $0.3
million in the first quarter of 2011 and 2010, respectively.
29
Table of Contents
In order to maximize the value of our timber property, we continue to review our current portfolio
and explore the development of certain of these properties in Canada and the United States. This
process has led us to characterize our property as follows:
| Surplus property, meaning land that cannot be efficiently or effectively managed by us,
whether due to parcel size, lack of productivity, location, access limitations or for other
reasons. |
| HBU property, meaning land that in its current state has a higher market value for uses
other than growing and selling timber. |
| Development property, meaning HBU land that, with additional investment, may have a
significantly higher market value than its HBU market value. |
| Timberland, meaning land that is best suited for growing and selling timber. |
We report the sale of surplus and HBU property in our consolidated statements of income under gain
on disposals of properties, plants and equipment, net and report the sale of development property
under net sales and cost of products sold. All HBU and development property, together with
surplus property, continues to be used by us to productively grow and sell timber until sold.
Whether timberland has a higher value for uses other than growing and selling timber is a
determination based upon several variables, such as proximity to population centers, anticipated
population growth in the area, the topography of the land, aesthetic considerations, including
access to lakes or rivers, the condition of the surrounding land, availability of utilities,
markets for timber and economic considerations both nationally and locally. Given these
considerations, the characterization of land is not a static process, but requires an ongoing
review and re-characterization as circumstances change.
At January 31, 2011, we estimated that there were approximately 57,600 acres in Canada and the
United States of special use property, which we expect will be available for sale in the next five
to seven years.
Other Income Statement Changes
Interest expense, net
Interest expense, net was $16.8 million and $14.9 million for the first quarter of 2011 and 2010,
respectively. The increase in interest expense was primarily attributable to higher debt levels
resulting from the 2010 acquisitions.
Other (income) expense, net
Other income, net was $1.9 million for the first quarter of 2011 compared to other expense, net of
$2.8 million for the first quarter of 2010. The increase was primarily attributable to fees
associated with the sale of non-United States account receivable as well as favorable impact of
foreign currency exchange translation in the first quarter of 2011 compared to the first quarter of
2010.
Income tax expense
The effective tax rate was 24.6 percent in the first quarter of 2011 compared to an effective tax
rate of 20.2 percent in the first quarter of 2010. The increase was primarily due to a change in
the global business mix and the 2010 alternative fuel tax credit.
Equity earnings (losses) of unconsolidated affiliates, net of tax
During the first quarter of 2011 and 2010, we recorded equity earnings (losses) of unconsolidated
affiliates, net of tax of $0.5 million and ($0.1) million, respectively.
Net
income (loss) attributable to 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 first quarter
of 2011 and 2010, noncontrolling interests were a $0.3 million loss and a $1.4 million gain,
respectively, and were deducted from net income to arrive at net income attributable to us.
Net income attributable to Greif, Inc.
Based on the foregoing, we recorded net income of $41.4 million for the first quarter of 2011
compared to net income of $24.8 million in the first quarter of 2010.
30
Table of Contents
BALANCE SHEET CHANGES
Inventories increased $18.2 million from October 31, 2010 to January 31, 2011 primarily
attributable to steel cost inflation and purchases in anticipation of steel cost increases and long
lead times at certain locations.
Properties, plants and equipment net increased $16.9 million from October 31, 2010 to January 31,
2011 primarily attributable to assets acquired through acquisitions and additional capital
projects, partially offset by depreciation expense.
Goodwill decreased by $12.4 million from October 31, 2010 to January 31, 2011 primarily
attributable to 2010 acquisitions in the Flexible Products & Services segment. Certain business
combinations that occurred at or near year-end were recorded with provisional estimates for fair
value based on managements best estimate.
Accounts payable decreased by $87.4 million from October 31, 2010 to January 31, 2011 primarily
attributable to timing of payments and seasonality factors.
Other current liabilities decreased $23.3 million from October 31, 2010 to January 31, 2011
primarily attributable to the timing of accruals and payments, partially offset by higher accrued
interest expense resulting from higher debt levels.
Short-term borrowings increased $26.6 million from October 31, 2010 to January 31, 2011 primarily
attributable to increased working capital requirements.
Long-term debt increased $112.5 million from October 31, 2010 to January 31, 2011 primarily
attributable to normal seasonal working capital increases, including raw material cost inflation,
capital expenditures and typical year-end cash payments, such as performance-based incentives.
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 three months of 2011, we invested $40.5 million in capital expenditures, excluding
timberland purchases of $0.4 million, compared with capital expenditures of $33.7 million,
excluding timberland purchases of $0.1 million, during the same period last year.
We expect capital expenditures, excluding timberland purchases and acquisitions, to be
approximately $140 million in 2011. The expenditures will replace and improve existing equipment
and fund new facilities.
Acquisitions, Divestitures and Other Significant Transactions
During the first three months of 2011, we completed no acquisitions.
During the first three months of 2010, we acquired one European rigid industrial packaging company.
This rigid industrial packaging acquisition complemented our current businesses and provides growth
opportunities in Scandinavia.
31
Table of Contents
Borrowing Arrangements
2010 Credit Agreement
On October 29, 2010, we and two of our international subsidiaries, as borrowers, obtained a $1.0
billion senior secured credit facility pursuant to an Amended and Restated Credit Agreement (the
2010 Credit Agreement) with a syndicate of financial institutions. The 2010 Credit Agreement
replaced our then existing credit agreement that provided a $500 million revolving multicurrency
credit facility and a $200 million term loan. The 2010 Credit Agreement provides us with a $750
million revolving multicurrency credit facility and a $250 million term loan, both expiring October
29, 2015, with an option to add $250 million to the facilities with the agreement of the lenders.
The $250 million term loan is scheduled to amortize by the payment of principal in the amount of
$3.1 million each quarter-end for the first eight quarters, $6.3 million each quarter-end for the
next eleven quarters and $156.3 million on the maturity date. The revolving credit facility under
the 2010 Credit Agreement is available to fund ongoing working capital and capital expenditure
needs, for general corporate purposes and to finance acquisitions. Interest is based on a
Eurodollar rate or a base rate that resets periodically plus an agreed upon margin amount. As of
January 31, 2011, a total of $423.3 million was outstanding under the 2010 Credit Agreement. The
weighted average interest rate on the 2010 Credit Agreement was 2.28% for the three months ended
January 31, 2011.
The 2010 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
(adjusted EBITDA) to be greater than 3.75 to 1 (or 3.5 to 1, during any collateral release
period). The fixed charge coverage ratio generally requires that at the end of any fiscal quarter
we will not permit the ratio of (a) (i) our adjusted EBITDA, less (ii) the aggregate amount of
certain of our cash capital expenditures, and less (iii) the aggregate amount of our 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) our consolidated interest
expense to the extent paid or payable in cash and (ii) the aggregate principal amount of all of our
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, during the applicable
trailing twelve month period. On January 31, 2011, we were in compliance with these two covenants.
The terms of the 2010 Credit Agreement limit our ability to make restricted payments, which
include dividends and purchases, redemptions and acquisitions of our equity interests. The
repayment of amounts borrowed under the 2010 Credit Agreement are secured by a security interest in
the personal property of Greif, Inc. and certain 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. The repayment of amounts borrowed under the
2010 Credit Agreement will also be secured, in part, by capital stock of the non-U.S. subsidiaries
that are parties to the 2010 Credit Agreement and their non-U.S. parent companies, following the
completion of a corporate reorganization. However, in the event that we receive and maintain an
investment grade rating from either Moodys Investors Service, Inc. or Standard & Poors
Corporation, we may request the release of such collateral. The payment of outstanding
principal under the 2010 Credit Agreement and accrued interest thereon may be accelerated and
become immediately due and payable upon our default in its payment or other performance obligations
or its failure to comply with the financial and other covenants in the 2010 Credit Agreement,
subject to applicable notice requirements and cure periods as provided in the 2010 Credit
Agreement.
Refer to Note 9 to the Consolidated Financial Statements included in Item I of Part I of this Form
10-Q for additional disclosures regarding the 2010 Credit Agreement.
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., 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 matters, 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 January 31, 2011, we were in compliance with these covenants.
32
Table of Contents
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., 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 matters, 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
January 31, 2011, we were in compliance with these covenants.
Refer to 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
September 2011. 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 London Interbank Offered Rate plus a
margin or other agreed-upon rate. 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 January 31, 2011, $98.2 million was outstanding under the
Receivables Facility.
Refer to 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 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 financed under our various RPAs was $174.3
million at January 31, 2011. At January 31, 2011, total accounts receivable of $159.8 million were
sold under the various RPAs.
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 January 31, 2011. 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.
Refer to 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 under the 2010 Credit Agreement and proceeds from the Senior
Notes and the United States trade accounts receivable credit facility, at January 31, 2011, we had
outstanding other debt of $98.3 million, comprised of $10.9 million in long-term debt and $87.4
million in short-term borrowings.
33
Table of Contents
At January 31, 2011, annual maturities, including current portion, of our long-term debt under our
various financing arrangements were $20.2 million in 2012, $25.0 million in 2013, $123.3 million in
2014, $351.4 million in 2015 and $545.7 million thereafter.
At January 31, 2011 and October 31, 2010, we had deferred financing fees and debt issuance costs of
$20.6 million and $21.4 million, respectively, which were included in other long-term assets.
Financial Instruments
Interest Rate Derivatives
We have interest rate swap agreements with various maturities through January 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 upon a designated 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 0.26% at
January 31, 2011 and October 31, 2010) and pays interest based upon a fixed interest rate (weighted
average of 1.78% at January 31, 2011 and October 31, 2010).
In the third quarter of 2010, we terminated a $100.0 million fixed to floating swap, including any
future cash flows, which had been 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. The termination of this swap agreement resulted in a
cash gain of $3.6 million.
Foreign Exchange Hedges
At January 31, 2011 we had outstanding foreign currency forward in the notional amount of $150.4
million ($252.9 million at October 31, 2010). 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 January 31, 2011 resulted in a loss
of $0.2 million recorded in the consolidated statements of operations and a loss of $1.3 million
recorded in other comprehensive income. The fair value of similar contracts at October 31, 2010
resulted in a gain of $0.8 million in the consolidated statements of operations and a loss of $2.3
million recorded in other comprehensive income.
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, 2011. Under these hedge agreements, we have
agreed to purchase natural gas at a fixed price. At January 31, 2011, the notional amount of these
hedges was $1.7 million ($2.4 million at October 31, 2010). The other comprehensive loss
on these agreements was $0.1 million at January 31, 2011 and $0.3 million at October 31, 2010. As a
result of the high correlation between the hedged instruments and the underlying transactions,
ineffectiveness has not had a material impact on our consolidated statements of operations for the
quarter ended January 31, 2011.
34
Table of Contents
Contractual Obligations
As of January 31, 2011, 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 |
$ | 1,431.8 | $ | 49.8 | $ | 317.8 | $ | 440.1 | $ | 624.1 | ||||||||||
Current portion of long-term debt |
12.5 | 9.4 | 3.1 | | | |||||||||||||||
Short-term borrowing |
92.7 | 91.4 | 1.3 | | | |||||||||||||||
Capital lease obligations |
10.9 | 1.2 | 4.0 | 5.7 | | |||||||||||||||
Operating leases |
8.7 | 2.6 | 3.8 | 2.1 | 0.2 | |||||||||||||||
Liabilities held by special purpose entities |
67.3 | 1.7 | 4.5 | 2.2 | 58.9 | |||||||||||||||
Total |
$ | 1,623.9 | $ | 156.1 | $ | 334.5 | $ | 450.1 | $ | 683.2 | ||||||||||
Note: | Amounts presented in the contractual obligation table include interest. |
Our unrecognized tax benefits 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.
Stock Repurchase Program and Other Share Acquisitions
None.
VARIABLE INTEREST ENTITIES
We evaluate whether an entity is a variable interest entity (VIE) whenever reconsideration events
occur. We consolidate VIEs for which it is the primary beneficiary. If we are not the primary
beneficiary and an ownership interest is held, the VIE is accounted for under the equity method of
accounting. When assessing the determination of the primary beneficiary, we consider all relevant
facts and circumstances, including: the power to direct the activities of the VIE that most
significantly impact the VIEs economic performance and the obligation to absorb the expected
losses and/or the right to receive the expected returns of the VIE. We perform ongoing
reassessments of all VIEs to determine if the primary beneficiary status is appropriate. As of
January 31, 2011, we are the primary beneficiary of each VIE and consolidated the results of each
VIE, as discussed below.
Significant Nonstrategic Timberland Transactions
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 (the Purchase Note) by an indirect subsidiary of Plum Creek (the Buyer SPE). 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), as a
guarantee of the due and punctual payment of principal and interest on the Purchase Note.
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. 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 Buyer SPE is a separate and distinct legal entity from us; however the Buyer
SPE has been consolidated into our operations.
The Buyer SPE is deemed to be a VIE since the assets of the Buyer SPE are not available to satisfy
the liabilities of the Buyer SPE. We are the primary beneficiary because we have (1) the power to
direct the activities of the VIE that most significantly impact the VIEs economic performance, and
(2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or
the right to receive benefits from the VIE that could potentially be significant to the VIE.
35
Table of Contents
Flexible Packaging Joint Venture
On September 29, 2010, Greif, Inc. and its indirect subsidiary Greif International Holding Supra
C.V. formed a joint venture (referred to herein as the Flexible Packaging JV) with Dabbagh Group
Holding Company Limited and its subsidiary National Scientific Company Limited. The Flexible
Packaging JV owns the operations in the Flexible Products & Services segment, with the exception of
the North American multi-wall bag business. The Flexible Packaging JV has been consolidated into
our operations as of its formation date of September 29, 2010.
The Flexible Packaging JV is deemed to be a VIE since the total equity investment at risk is not
sufficient to permit the legal entity to finance its activities without additional subordinated
financial support. We are the primary beneficiary because we have (1) the power to direct the
activities of the VIE that most significantly impact the VIEs economic performance, and (2) the
obligation to absorb losses of the VIE that could potentially be significant to the VIE or the
right to receive benefits from the VIE that could potentially be significant to the VIE.
RECENT ACCOUNTING STANDARDS
Newly Adopted Accounting Standards
In June 2009, the FASB amended ASC 860, Transfers and Servicing. The amendment to ASC 860
requires an enterprise to evaluate whether the transaction is legally isolated from us and whether
the results of the transaction are consolidated within the consolidated financial statements. We
adopted the new guidance beginning November 1, 2010, 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 June 2009, the FASB amended ASC 810, Consolidation. The amendment to ASC 810 changed the
methodology for determining the primary beneficiary of a VIE from a quantitative risk and rewards
based model to a qualitative determination. It also requires enhanced disclosures that will provide
users of financial statements with more transparent information about an enterprises involvement
in a VIE. Accordingly, we reevaluated our investments in entities under the ASC 810 guidance,
including the evaluation of (1) whether an entity is a VIE, (2) whether the enterprise is the VIEs
primary beneficiary, and (3) what type of financial statement disclosures are required. We adopted
the new guidance beginning November 1, 2010, 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
Effective July 1, 2009, changes to the Codification are communicated through an Accounting
Standards Update (ASU). As of January 31, 2011, the FASB has issued ASUs 2010-01 through 2011-1.
We have reviewed each ASU and determined that they will not have a material impact on our financial
position, results of operations or cash flows, other than the related disclosures.
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 2010 Form 10-K.
ITEM 4. | CONTROLS AND PROCEDURES |
With the participation of our principal executive officer and principal financial officer, our
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. |
36
Table of Contents
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 2010 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 2010 |
| | 1,116,728 | |||||||||||||
December 2010 |
| | 1,116,728 | |||||||||||||
January 2011 |
| | 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 2010 |
| | 1,116,728 | |||||||||||||
December 2010 |
| | 1,116,728 | |||||||||||||
January 2011 |
| | 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 January 31, 2011, 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. |
ITEM 6. | EXHIBITS |
(a.) Exhibits |
Exhibit No. | Description of Exhibit | |||
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. |
37
Table of Contents
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: March 7, 2011 | /s/ Robert M. McNutt | |||
Robert M. McNutt, | ||||
Senior Vice President and Chief Financial Officer (Duly Authorized Signatory) |
38