UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30, 2007
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________ to _________
Commission File Number 001-00566
GREIF, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 31-4388903 | |
|
(State or other jurisdiction of incorporation or organization) |
(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.
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 x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuers classes of common stock at the close of business on April 30, 2007 was as follows:
|
Class A Common Stock |
23,613,318 shares | |
|
Class B Common Stock |
22,985,666 shares |
PART I. FINANCIAL INFORMATION
| ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands, except per share amounts)
|
Three months ended April 30, |
Six months ended April 30, |
|||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
|
Net sales |
$ | 815,043 | $ | 620,107 | $ | 1,565,802 | $ | 1,202,423 | ||||||||
|
Cost of products sold |
672,512 | 510,664 | 1,293,185 | 1,003,308 | ||||||||||||
|
Gross profit |
142,531 | 109,443 | 272,617 | 199,115 | ||||||||||||
|
Selling, general and administrative expenses |
77,670 | 62,378 | 152,279 | 121,832 | ||||||||||||
|
Restructuring charges |
4,049 | 10,287 | 6,086 | 15,755 | ||||||||||||
|
Gain (loss) on sale of timberlands |
(382 | ) | 9,238 | (320 | ) | 40,807 | ||||||||||
|
Gain on sale disposal of properties, plants and equipment, net |
3,448 | 5,548 | 8,587 | 7,190 | ||||||||||||
|
Operating profit |
63,878 | 51,564 | 122,519 | 109,525 | ||||||||||||
|
Interest expense, net |
10,046 | 9,794 | 22,080 | 18,967 | ||||||||||||
|
Debt extinguishment charge |
23,479 | | 23,479 | | ||||||||||||
|
Other income (loss), net |
(4,327 | ) | 1,186 | (5,063 | ) | 793 | ||||||||||
|
Income before income tax expense |
26,026 | 42,956 | 71,897 | 91,351 | ||||||||||||
|
Income tax expense |
7,278 | 13,365 | 18,837 | 28,319 | ||||||||||||
|
Equity in earnings (loss) of affiliates and minority interests |
(124 | ) | (898 | ) | (457 | ) | (987 | ) | ||||||||
|
Net income |
$ | 18,624 | $ | 28,693 | $ | 52,603 | $ | 62,045 | ||||||||
|
Basic earnings per share: |
||||||||||||||||
|
Class A Common Stock |
$ | 0.32 | $ | 0.50 | $ | 0.91 | $ | 1.08 | ||||||||
|
Class B Common Stock |
$ | 0.48 | $ | 0.75 | $ | 1.36 | $ | 1.61 | ||||||||
|
Diluted earnings per share: |
||||||||||||||||
|
Class A Common Stock |
$ | 0.32 | $ | 0.49 | $ | 0.89 | $ | 1.06 | ||||||||
|
Class B Common Stock |
$ | 0.48 | $ | 0.75 | $ | 1.36 | $ | 1.61 | ||||||||
See accompanying Notes to Consolidated Financial Statements
1
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
ASSETS
|
April 30,
2007 |
October 31,
2006 |
|||||||
| (Unaudited) | ||||||||
|
Current assets |
||||||||
|
Cash and cash equivalents |
$ | 115,370 | $ | 187,101 | ||||
|
Trade accounts receivable, less allowance of $11,896 in 2007 and $8,575 in 2006 |
350,769 | 315,661 | ||||||
|
Inventories |
247,489 | 205,004 | ||||||
|
Net assets held for sale |
4,663 | 3,374 | ||||||
|
Deferred tax assets |
15,118 | 15,814 | ||||||
|
Prepaid expenses and other current assets |
94,038 | 66,083 | ||||||
| 827,447 | 793,037 | |||||||
|
Long-term assets |
||||||||
|
Long-term notes receivable |
32,008 | 626 | ||||||
|
Goodwill, net of amortization |
407,283 | 286,552 | ||||||
|
Other intangible assets, net of amortization |
136,180 | 63,587 | ||||||
|
Assets held by special purpose entities (Note 8) |
50,891 | 50,891 | ||||||
|
Other long-term assets |
72,786 | 52,359 | ||||||
| 699,148 | 454,015 | |||||||
|
Properties, plants and equipment |
||||||||
|
Timber properties, net of depletion |
193,974 | 195,115 | ||||||
|
Land |
130,053 | 81,768 | ||||||
|
Buildings |
340,127 | 317,110 | ||||||
|
Machinery and equipment |
1,005,870 | 930,924 | ||||||
|
Capital projects in progress |
72,536 | 53,099 | ||||||
| 1,742,560 | 1,578,016 | |||||||
|
Accumulated depreciation |
(696,154 | ) | (637,067 | ) | ||||
| 1,046,406 | 940,949 | |||||||
| $ | 2,573,001 | $ | 2,188,001 | |||||
See accompanying Notes to Consolidated Financial Statements
2
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
LIABILITIES AND SHAREHOLDERS EQUITY
|
April 30,
2007 |
October 31,
2006 |
|||||||
| (Unaudited) | ||||||||
|
Current liabilities |
||||||||
|
Accounts payable |
$ | 317,155 | $ | 301,753 | ||||
|
Accrued payrolls and employee benefits |
53,314 | 65,513 | ||||||
|
Restructuring reserves |
4,274 | 8,391 | ||||||
|
Short-term borrowings |
53,036 | 29,321 | ||||||
|
Other current liabilities |
103,773 | 86,321 | ||||||
| 531,552 | 491,299 | |||||||
|
Long-term liabilities |
||||||||
|
Long-term debt |
723,120 | 481,408 | ||||||
|
Deferred tax liability |
203,987 | 179,329 | ||||||
|
Pension liability |
14,672 | 18,639 | ||||||
|
Postretirement benefit liability |
47,534 | 47,702 | ||||||
|
Liabilities held by special purpose entities (Note 8) |
43,250 | 43,250 | ||||||
|
Other long-term liabilities |
114,842 | 77,488 | ||||||
| 1,147,405 | 847,816 | |||||||
|
Minority interest |
4,952 | 4,875 | ||||||
|
Shareholders' equity |
||||||||
|
Common stock, without par value |
67,747 | 56,765 | ||||||
|
Treasury stock, at cost |
(86,304 | ) | (81,643 | ) | ||||
|
Retained earnings |
933,076 | 901,267 | ||||||
|
Accumulated other comprehensive income (loss): |
||||||||
|
- foreign currency translation |
5,972 | 1,525 | ||||||
|
- interest rate derivatives |
(377 | ) | (1,861 | ) | ||||
|
- energy and other derivatives |
75 | (945 | ) | |||||
|
- minimum pension liability |
(31,097 | ) | (31,097 | ) | ||||
| 889,092 | 844,011 | |||||||
| $ | 2,573,001 | $ | 2,188,001 | |||||
See accompanying Notes to Consolidated Financial Statements
3
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
|
For the six months ended April 30, |
2007 | 2006 | ||||||
|
Cash flows from operating activities: |
||||||||
|
Net income |
$ | 52,603 | $ | 62,045 | ||||
|
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
|
Depreciation, depletion and amortization |
53,276 | 47,999 | ||||||
|
Asset impairments |
939 | 5,525 | ||||||
|
Deferred income taxes |
27,081 | 12,436 | ||||||
|
Gain on disposal of properties, plants and equipment, net |
(8,587 | ) | (7,190 | ) | ||||
|
Loss (gain) on the sale of timberland (Note 8) |
320 | (40,807 | ) | |||||
|
Loss on extinguishment of debt |
23,479 | | ||||||
|
Equity in losses (earnings) of affiliates and minority interests |
457 | 987 | ||||||
|
Increase (decrease) in cash from changes in certain assets and liabilities: |
||||||||
|
Trade accounts receivable |
17,479 | (28,970 | ) | |||||
|
Inventories |
(7,422 | ) | (3,322 | ) | ||||
|
Prepaid expenses and other current assets |
(28,587 | ) | (32,498 | ) | ||||
|
Other long-term assets |
(73,347 | ) | 1,353 | |||||
|
Long-term notes receivable |
(8,159 | ) | 626 | |||||
|
Accounts payable |
(4,844 | ) | 7,578 | |||||
|
Accrued payroll and employee benefits |
(12,874 | ) | (176 | ) | ||||
|
Restructuring reserves |
(4,117 | ) | (3,297 | ) | ||||
|
Other current liabilities |
(1,786 | ) | (10,965 | ) | ||||
|
Pension and postretirement benefit liability |
(4,135 | ) | 2,138 | |||||
|
Other long-term liabilities |
59,931 | 35,032 | ||||||
|
Net cash provided by operating activities |
81,707 | 48,494 | ||||||
|
Cash flows from investing activities: |
||||||||
|
Acquisitions of companies, net of cash acquired |
(311,108 | ) | | |||||
|
Purchases of properties, plants and equipment |
(74,225 | ) | (45,503 | ) | ||||
|
Purchases of timber properties |
(400 | ) | (36,667 | ) | ||||
|
Increase in notes receivable |
(29,748 | ) | | |||||
|
Proceeds from the sale of properties, plants and equipment |
13,122 | 52,282 | ||||||
|
Net cash used in investing activities |
(402,359 | ) | (29,888 | ) | ||||
|
Cash flows from financing activities: |
||||||||
|
Proceeds from issuance of long-term debt |
1,254,588 | 480,544 | ||||||
|
Payments on long-term debt |
(1,012,876 | ) | (458,685 | ) | ||||
|
Proceeds from short-term borrowings |
46,552 | 11,141 | ||||||
|
Payment of premiums for extinguishment of debt |
(14,303 | ) | | |||||
|
Debt issuance costs |
(2,839 | ) | | |||||
|
Dividends paid |
(20,793 | ) | (13,732 | ) | ||||
|
Acquisitions of treasury stock |
(5,338 | ) | (5,733 | ) | ||||
|
Exercise of stock options |
9,001 | 1,916 | ||||||
|
Net cash provided by financing activities |
253,992 | 15,451 | ||||||
|
Effects of exchange rates on cash |
(5,071 | ) | (4,438 | ) | ||||
|
Net increase (decrease) in cash and cash equivalents |
(71,731 | ) | 29,619 | |||||
|
Cash and cash equivalents at beginning of period |
187,101 | 122,411 | ||||||
|
Cash and cash equivalents at end of period |
$ | 115,370 | $ | 152,030 | ||||
See accompanying Notes to Consolidated Financial Statements
4
GREIF, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
April 30, 2007
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 April 30, 2007 and October 31, 2006 and the consolidated statements of income and cash flows for the three-month and six-month periods ended April 30, 2007 and 2006 of Greif, Inc. and subsidiaries (the Company). These consolidated financial statements 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, 2006 (the 2006 Form 10-K).
The Companys fiscal year begins on November 1 and ends on October 31 of the following year. Any references to the year 2007 or 2006, or to any quarter of those years, relates to the fiscal year or quarter, as the case may be, ending in that year.
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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.
Certain prior year amounts have been reclassified to conform to the 2007 presentation.
Industrial Packaging Acquisitions
During the first quarter of 2007, the Company completed four acquisitions of industrial packaging companies for an aggregate purchase price of $310.7 million. These four acquisitions were Blagden Packaging Group and two tuck-in North American companies in November 2006 as well as one tuck-in North African company in January 2007. These industrial packaging acquisitions are expected to complement the Companys existing product lines that together will provide growth opportunities and scale. These acquisitions, included in operating results from the acquisition dates, were accounted for using the purchase method of accounting and, accordingly, the purchase prices were allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the dates of acquisition. The estimated fair values of the assets acquired were $152.6 million (including $43.5 million of inventory and $61.2 million of accounts receivable) and liabilities assumed were $52.2 million. Identifiable intangible assets, with a combined fair value of $91.5 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 $118.8 million was recorded as goodwill. The final allocation of the purchase prices may differ due to additional refinements in the fair values of the net assets acquired in accordance with SFAS No. 141, Business Combinations.
In the fourth quarter of 2006, the Company completed two acquisitions for an aggregate purchase price of $102.1 million. These two acquisitions were Delta Petroleum Company, Inc. and its subsidiaries (Delta), a blender and packager of lubricants, chemicals and glycol-based products in North America, and an industrial packaging company located in Russia. These acquisitions, included in operating results from the acquisition dates, were accounted for using the purchase method of accounting and, accordingly, the purchase prices were allocated to the assets purchased and liabilities assumed based upon their estimated fair values at the dates of acquisition. The estimated fair values of the assets acquired were $106.4 million (including $25.7 million of inventory and $28.0 million of accounts receivable) and liabilities assumed were $48.4 million. Identifiable intangible assets, with a combined fair value of $17.4 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 $26.7 million was recorded as goodwill. The final allocation of the purchase prices may differ due to additional refinements in the fair values of the net assets acquired in accordance with SFAS No. 141, Business Combinations.
During the second quarter of 2007, we implemented various restructuring plans at certain of the acquired businesses discussed above that were previously in the planning and evaluation stages. As of the consummation date of the acquisitions, management began to assess and formulate plans to close certain acquired locations. The Companys restructuring activities, which were accounted for in accordance with Emerging Issues Task Force Issue No. 95-3, Recognition of Liabilities in Connection with a Purchase Business Combination (EITF 95-3), primarily have included reductions in staffing levels, other exit costs associated with the consolidation of certain management or sales and marketing personnel, and the reduction
5
of excess capacity. In connection with these restructuring activities, as part of the cost of the above acquisitions, the Company established reserves, primarily for severance and excess facilities, in the amount of $0.6, of which $0.2 is restructuring charges, as of the end of the second quarter. These accruals have been recorded as adjustments to acquisition costs (increases to goodwill) pursuant to the provisions of EITF 95-3. These charges primarily reflect severance, other exit costs associated with the consolidation of certain sales and marketing personnel, and the reduction of excess capacity.
Had the transactions occurred on November 1, 2005, results of operations would not have differed materially from reported results.
Stock-Based Compensation Expense
On November 1, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based Payment, which requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards made to employees and directors, including stock options, restricted stock, restricted stock units and participation in the Companys employee stock purchase plan. In adopting SFAS No. 123(R), the Company used the modified prospective application transition method, as of November 1, 2005, the first day of the Companys fiscal year 2006. Share-based compensation expense recognized under SFAS No. 123(R) for the second quarter of 2006 was $0.3 million and none in the second quarter of 2007.
SFAS No. 123(R) requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Companys consolidated statements of income over the requisite service periods. Share-based compensation expense recognized in the Companys consolidated statements of income for the first three months of 2007 and the first six months of 2006 includes compensation expense for share-based awards granted prior to, but not yet vested as of October 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123. No options have been granted in 2007 and 2006. For any options granted in the future, compensation expense will be based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123(R).
The Company will use the straight-line single option method of expensing stock options to recognize compensation expense in its consolidated statements of income for all share-based awards. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
NOTE 2 RECENT ACCOUNTING STANDARDS
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. It applies to all voluntary changes in accounting principle and requires that they be reported via retrospective application. It is effective for all accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005 (2007 for the Company). The adoption of this statement did not have a material impact on the consolidated financial statements.
In June 2006, the FASB issued FIN No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No. 109, Accounting for Income Taxes, to create a single model to address accounting for uncertainty in tax positions. FIN No. 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company will adopt FIN 48 as of November 1, 2007, as required. The cumulative effect of adopting FIN No. 48 will be recorded in retained earnings and other accounts as applicable. The Company has not determined the effect, if any, the adoption of FIN No. 48 will have on the Companys consolidated financial position and results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No.157 is effective in fiscal years beginning after November 15, 2007 (2008 for the Company). The adoption of this statement is not expected to have a material impact on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Pension and Other Postretirement Plans. This Statement requires recognition of the funded status of a single-employer defined benefit postretirement plan as an asset or liability in its statement of financial position. Funded status is determined as the difference between the fair value of plan assets and the benefit obligation. Changes in that funded status should be recognized in other
6
comprehensive income. This recognition provision and the related disclosures are effective as of the end of the fiscal year ending after December 15, 2006 (2007 for the Company). The Statement also requires the measurement of plan assets and benefit obligations as of the date of the fiscal year-end statement of financial position. This measurement provision is effective for fiscal years ending after December 15, 2008 (2009 for the Company). The effect of this pronouncement on the Companys consolidated financial statements for 2007 is expected to be an increase in the Companys liabilities of $34 million and a decrease in shareholders equity of $34 million.
In February, 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, which allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. Subsequent changes in fair value of these financial assets and liabilities would be recognized in earnings when they occur. SFAS No. 159 further establishes certain additional disclosure requirements. SFAS No. 159 is effective for the Companys financial statements for the fiscal year beginning on November 1, 2008, with earlier adoption permitted. Management is currently evaluating the impact and timing of the adoption of SFAS No. 159 on the Companys consolidated financial statements.
NOTE 3 SALE OF EUROPEAN ACCOUNTS RECEIVABLE
Pursuant to the terms of a Receivable Purchase Agreement (the RPA) dated October 28, 2004 between Greif Coordination Center BVBA (the Seller), an indirect wholly-owned subsidiary of Greif, Inc., and a major international bank (the Buyer), the Seller agreed to sell trade receivables meeting certain eligibility requirements that Seller had purchased from other indirect wholly-owned subsidiaries of Greif, Inc., including Greif Belgium BVBA, Greif Germany GmbH, Greif Nederland BV, Greif Spain SA and Greif UK Ltd, under discounted receivables purchase agreements and from Greif France SAS under a factoring agreement. The RPA was amended on October 28, 2005 to include receivables originated by Greif Portugal Lda, also an indirect wholly-owned subsidiary of Greif, Inc. In addition, on October 28, 2005, Greif Italia S.P.A., also an indirect wholly-owned subsidiary of Greif, Inc., entered into the Italian Receivables Purchase Agreement with the Italian branch of the major international bank (the Italian RPA) with Greif Italia S.P.A., agreeing to sell trade receivables that meet certain eligibility criteria to the Italian branch of the major international bank. The Italian RPA is similar in structure and terms as the RPA.
On April 30, 2007, the RPA was amended and restated and the Italian RPA was amended by the parties thereto. As a result of the amended and restated RPA and the amended Italian RPA: (i) the maximum amount of aggregate receivables that may be sold under the Companys European accounts receivable sales program was increased from 90.0 million to 118.0 million ($160.6 million at April 30, 2007); (ii) Greif Packaging Belgium NV and Greif Packaging Spain S.A., both indirect wholly owned subsidiaries of Greif, Inc., have established discounted receivables purchase agreements with the Seller; and (iii) Greif Packaging France SAS, an indirect wholly owned subsidiary of Greif, Inc., has established a factoring agreement with the Seller.
The structure of the transaction provides for a legal true sale, on a revolving basis, of the receivables transferred from the various Greif, Inc. subsidiaries to Seller and from Seller to Buyer. The Buyer funds an initial purchase price of a certain percentage of eligible receivables based on a formula with the initial purchase price approximating 70 percent to 80 percent of eligible receivables, as defined. The remaining deferred purchase price is settled upon collection of the receivables. At the balance sheet reporting dates, the Company removes from accounts receivable the amount of proceeds received from the initial purchase price since they meet the applicable criteria of SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and continues to recognize the deferred purchase price in its accounts receivable. The receivables are sold on a non-recourse basis with the total funds in the servicing collection accounts pledged to Buyer between the semi-monthly settlement dates. At April 30, 2007, 89.7 million ($122.0 million) of accounts receivable were sold under the RPA and Italian RPA.
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 income. Expenses, primarily related to the loss on sale of receivables, associated with the RPA and Italian RPA totaled 0.6 million ($0.8 million) and 0.3 million ($0.4 million) for the three months ended April 30, 2007 and 2006, respectively. Expenses associated with the RPA and Italian RPA totaled 1.1 million ($1.4 million) and 0.5 million ($0.7 million) for the six months ended April 30, 2007 and 2006, 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 and Italian RPA. The servicing liability for these receivables is not material to the consolidated financial statements.
7
NOTE 4 INVENTORIES
Inventories are summarized as follows (Dollars in thousands):
|
April 30,
2007 |
October 31,
2006 |
|||||||
|
Finished goods |
$ | 76,901 | $ | 53,621 | ||||
|
Raw materials and work-in-process |
204,211 | 186,065 | ||||||
| 281,112 | 239,686 | |||||||
|
Reduction to state inventories on last-in, first-out basis |
(33,623 | ) | (34,682 | ) | ||||
| $ | 247,489 | $ | 205,004 | |||||
NOTE 5 NET ASSETS HELD FOR SALE
Net assets held for sale represent land, buildings and land improvements less accumulated depreciation for locations that meet the classification requirements of net assets held for sale as defined in SFAS No. 144, Accounting for Impairment or Disposal of Long-Lived Assets. As of April 30, 2007, there were six facilities held for sale. The net assets held for sale are being marketed for sale and it is the Companys intention to complete the sales within the upcoming year.
NOTE 6 GOODWILL AND OTHER INTANGIBLE ASSETS
The Company periodically reviews goodwill and indefinite-lived intangible assets for impairment as required by SFAS No. 142, Goodwill and Other Intangible Assets. The Company has concluded that no impairment exists at this time.
Changes to the carrying amount of goodwill for the six-month period ended April 30, 2007 are as follows (Dollars in thousands):
|
Industrial
Packaging & Services |
Paper
Packaging & Services |
Total | |||||||||
|
Balance at October 31, 2006 |
$ | 251,769 | $ | 34,783 | $ | 286,552 | |||||
|
Goodwill acquired |
123,065 | | 123,065 | ||||||||
|
Currency translation |
(2,334 | ) | | (2,334 | ) | ||||||
|
Balance at April 30, 2007 |
$ | 372,500 | $ | 34,783 | $ | 407,283 | |||||
The 2007 goodwill acquired of $123.1 million is preliminary and primarily relates to acquisition of industrial packaging companies in Europe, Asia and North America.
8
All other intangible assets for the periods presented, except for $9.1 million, related to the Tri-Sure Trademark, Blagden Express Tradename, Closed-loop Tradename and CP Louisiana Tradename, are subject to amortization and are being amortized using the straight-line method over periods that range from two to 20 years. The detail of other intangible assets by class as of April 30, 2007 and October 31, 2006 are as follows (Dollars in thousands):
|
Gross
Intangible Assets |
Accumulated
Amortization |
Net Intangible
Assets |
|||||||
|
April 30, 2007: |
|||||||||
|
Trademark and patents |
$ | 33,911 | $ | 10,336 | $ | 23,575 | |||
|
Non-compete agreements |
27,339 | 5,287 | 22,052 | ||||||
|
Customer relationships |
85,879 | 5,044 | 80,835 | ||||||
|
Other |
13,412 | 3,694 | 9,718 | ||||||
|
Total |
$ | 160,541 | $ | 24,361 | $ | 136,180 | |||
|
October 31, 2006: |
|||||||||
|
Trademark and patents |
$ | 17,290 | $ | 7,992 | $ | 9,298 | |||
|
Non-compete agreements |
5,033 | 3,709 | 1,324 | ||||||
|
Customer relationships |
43,115 | 2,343 | 40,772 | ||||||
|
Other |
15,575 | 3,382 | 12,193 | ||||||
|
Total |
$ | 81,013 | $ | 17,426 | $ | 63,587 | |||
During the first six months of 2007, other intangible assets increased by $75.5 million. The increase in other intangible assets is based on preliminary purchase price allocations related to the acquisition of industrial packaging companies in Europe, Asia and North America. Amortization expense for the six months ended April 30, 2007 was $6.9 million. Amortization expense for the next five years is expected to be $17.2 million in 2008, $14.2 million in 2009, $13.2 million in 2010, $11.8 million in 2011 and $8.1 million in 2012.
NOTE 7 RESTRUCTURING CHARGES
The focus for restructuring activities in 2007 will be on integration of acquisitions in the Industrial Packaging & Services segment and on alignment to market focused strategy and implementation of the Greif Business System in the Paper, Packaging & Services segment. During the first six months of 2007, the Company recorded restructuring charges of $6.0 million, consisting of $1.3 million in employee separation costs, $0.9 million in asset impairments, $1.0 million in professional fees and $2.8 million in other costs. The remaining restructuring charges for the above activities are anticipated to be $8.1 million for the remainder of 2007.
In 2006, the focus was on the final waves of global implementation of the Greif Business System. During the first six months of 2006, the Company recorded restructuring charges of $15.7 million, consisting of $6.8 million in employee separation costs, $5.5 million in asset impairments, $0.3 million of professional fees, and $3.1 million in other costs. One company-owned plant in the Paper, Packaging & Services segment was closed. The Industrial Packaging & Services segment reduced the number of plants in the United Kingdom from five to three. In addition, severance costs were incurred due to the elimination of certain administrative positions.
9
For each business segment, costs incurred in 2007 are as follows (Dollars in thousands):
|
Three months
ended April 30, 2007 |
Six months
ended April 30, 2007 |
Total Amounts
Expected to be incurred |
|||||||
|
Industrial Packaging & Services: |
|||||||||
|
Employee separation costs |
$ | 560 | $ | 893 | $ | 3,395 | |||
|
Asset impairments |
297 | 727 | 2,800 | ||||||
|
Professional fees |
1 | 1 | 5 | ||||||
|
Other restructuring costs |
811 | 1,221 | 4,600 | ||||||
| 1,669 | 2,842 | 10,800 | |||||||
|
Paper, Packaging & Services: |
|||||||||
|
Employee separation costs |
23 | 437 | 450 | ||||||
|
Asset impairments |
212 | 212 | 250 | ||||||
|
Professional fees |
1,035 | 1,035 | 1,100 | ||||||
|
Other restructuring costs |
1,110 | 1,560 | 1,600 | ||||||
| 2,380 | 3,244 | 3,400 | |||||||
| $ | 4,049 | $ | 6,086 | $ | 14,200 | ||||
The following is a reconciliation of the beginning and ending restructuring reserve balances for the six-month period ended April 30, 2007 (Dollars in thousands):
| C ash Charges | Non-cash Charges | |||||||||||||||
|
Employee
Separation Costs |
Other Costs |
Asset
Impairments |
Total | |||||||||||||
|
Balance at October 31, 2006 |
$ | 8,391 | $ | | $ | | $ | 8,391 | ||||||||
|
Costs incurred and charged to expense |
1,330 | 3,817 | 939 | 6,086 | ||||||||||||
|
Costs paid or otherwise settled |
(5,911 | ) | (3,353 | ) | (939 | ) | (10,203 | ) | ||||||||
|
Balance at April 30, 2007 |
$ | 3,810 | $ | 464 | $ | | $ | 4,274 | ||||||||
NOTE 8 SIGNIFICANT NONSTRATEGIC TIMBERLAND TRANSACTIONS AND CONSOLIDATION OF VARIABLE INTEREST ENTITIES
On March 28, 2005, Soterra LLC (a wholly owned subsidiary) entered into two real estate purchase and sale agreements with Plum Creek Timberlands, L.P. (Plum Creek) to sell approximately 56,000 acres of timberland and related assets located primarily in Florida for an aggregate sales price of approximately $90 million, subject to closing adjustments. In connection with the closing of one of these agreements, Soterra LLC sold approximately 35,000 acres of timberland and associated assets in Florida, Georgia and Alabama for $51.0 million, resulting in a pretax gain of $42.1 million, on May 23, 2005. The purchase price was paid in the form of cash and a $50.9 million purchase note payable by an indirect subsidiary of Plum Creek (the Purchase Note). Soterra LLC contributed the Purchase Note to STA Timber LLC (STA Timber), one of the Companys indirect wholly owned subsidiaries. The Purchase Note is secured by a Deed of Guarantee issued by Bank of America, N.A., London Branch, in an amount not to exceed $52.3 million (the Deed of Guarantee), as a guarantee of the due and punctual payment of principal and interest on the Purchase Note. The Company completed the second phase of its previously reported $90 million sale of timberland, timber and associated assets in the first quarter of 2006. In this phase, the Company sold 15,300 acres of timberland holdings in Florida for $29.3 million in cash, resulting in a pre-tax gain of $27.4 million. The final phase of this transaction, approximately 5,700 acres sold for $9.7 million, occurred on April 28, 2006 and the Company recognized additional timberland gains in its consolidated statements of income in the periods that these transactions occurred resulting in a pre-tax gain of $9.0 million.
On May 31, 2005, STA Timber issued in a private placement its 5.20 percent 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
10
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.
The Company has consolidated the assets and liabilities of STA Timber in accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest Entities. Because STA Timber is a separate and distinct legal entity from Greif, Inc. and its other subsidiaries, the assets of STA Timber are not available to satisfy the liabilities and obligations of these entities and the liabilities of STA Timber are not liabilities or obligations of these entities. In addition, Greif, Inc. and its other subsidiaries have not extended any form of guaranty of the principal or interest on the Monetization Notes. Accordingly, Greif, Inc. and its other subsidiaries will not become directly or contingently liable for the payment of the Monetization Notes at any time.
The Company has also consolidated the assets and liabilities of the buyer-sponsored special purpose entity (the Buyer SPE) involved in these transactions as the result of Interpretation 46R. However, because the Buyer SPE is a separate and distinct legal entity from the Company, the assets of the Buyer SPE are not available to satisfy the liabilities and obligations of the Company and the liabilities of the Buyer SPE are not liabilities or obligations of the Company.
Assets of the Buyer SPE at April 30, 2007 and
October 31, 2006 consist of restricted bank financial instruments of $50.9 million. STA Timber had long-term debt of $43.3 million as of April 30, 2007 and October 31, 2006. STA Timber is exposed to credit-related losses in the event
of nonperformance by the issuer of the Deed of Guarantee, but the Company does not expect that issuer to fail to meet its obligations. The accompanying consolidated income statements for the six month periods ended April 30, 2007 and 2006
NOTE 9 DEBT
Long-term debt is summarized as follows (Dollars in thousands):
|
April 30,
2007 |
October 31, 2006 |
|||||
|
Credit Agreement |
$ | 289,805 | $ | 115,198 | ||
|
Senior Notes |
300,000 | | ||||
|
Senior Subordinated Notes |
2,496 | 242,560 | ||||
|
Trade accounts receivable credit facility |
99,232 | 120,000 | ||||
|
Other long-term debt |
31,587 | 3,650 | ||||
| $ | 723,120 | $ | 481,408 | |||
Credit Agreement
The Company and certain of its international subsidiaries, as borrowers, have entered into a Credit Agreement (the Credit Agreement) with a syndicate of financial institutions that provides for a $450.0 million revolving multicurrency credit facility. The revolving multicurrency credit facility is available for ongoing working capital and general corporate purposes. Interest is based on a euro currency rate or an alternative base rate that resets periodically plus a calculated margin amount. As of April 30, 2007, $289.8 million was outstanding under the Credit Agreement. The weighted average interest rate on the Credit Agreement was 5.16 percent for the six months ended April 30, 2007, and the interest rate was 5.32 percent at April 30, 2007 and 5.85 percent at October 31, 2006.
The Credit Agreement contains certain covenants, which include financial covenants that require the Company to maintain a certain leverage ratio and a minimum coverage of interest expense. At April 30, 2007, the Company was in compliance with these covenants.
Senior Notes
On February 9, 2007, the Company issued $300.0 million of 6.75 percent Senior Notes due February 1, 2017. Interest on the Senior Notes is payable semi-annually. Proceeds from the issuance of Senior Notes were principally used to fund the purchase of the Senior Subordinated Notes in the tender offer and for general corporate purposes.
11
The fair value of the Senior Notes was $303.0 million at April 30, 2007 based on quoted market prices. The Indenture pursuant to which the Senior Notes were issued contains certain covenants. At April 30, 2007, the Company was in compliance with these covenants.
Senior Subordinated Notes
On February 9, 2007, the Company completed a tender offer for its 8.875 percent Senior Subordinated Notes. In the tender offer, the Company purchased $245.6 million aggregate principal amount of the outstanding $248.0 million Senior Subordinated Notes. As a result of this transaction, a debt extinguishment charge of $23.5 million ($14.5 million in cash and $9.0 million in non-cash items, such as write-off of unamortized capitalized debt issuance costs) was recorded. The fair value of the remaining Senior Subordinated Notes was $2.5 million and $256.0 million at April 30, 2007 and October 31, 2006, respectively, based upon quoted market prices. The remaining Senior Subordinated Notes are redeemable at the option of the Company beginning August 1, 2007, at a redemption price of 104.438 percent of principal amount, plus accrued interest, if any.
A description of the guarantees of the Senior Subordinated Notes by the Companys United States subsidiaries is included in Note 18.
Trade Accounts Receivable Credit Facility
On October 31, 2003, the Company entered into a five-year, up to $120.0 million, credit facility with an affiliate of a bank in connection with the securitization of certain of the Companys trade accounts receivable in the United States. 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 (5.86 percent interest rate at April 30, 2007 and 5.87 percent at October 31, 2006). The Company can terminate this facility at any time upon 60 days prior written notice. In connection with this transaction, the Company established Greif Receivable Funding LLC (GRF), which is included in the Companys consolidated financial statements. However, because GRF is a separate and distinct legal entity from the Company, the assets of GRF are not available to satisfy the liabilities and obligations of the Company and the liabilities of GRF are not the liabilities or obligations of the Company. This entity purchases and services the Companys trade accounts receivable that are subject to this credit facility. There was a total of $99.2 million and $120.0 million outstanding under the trade accounts receivable credit facility at April 30, 2007 and October 31, 2006, respectively.
The trade accounts receivable credit facility provides that in the event the Company breaches any of its financial covenants under the Credit Agreement, and the majority of the lenders thereunder consent to a waiver thereof, but the provider of the trade accounts receivable credit facility does not consent to any such waiver, then the Company must within 90 days of providing notice of the breach, pay all amounts outstanding under the trade accounts receivable credit facility.
Other
In addition to the amounts borrowed against the Credit Agreement and proceeds from the Senior Subordinated Notes and the trade accounts receivable credit facility, the Company had outstanding debt of $84.6 million and $33.0 million, comprised of $31.6 million and $3.7 million in long-term debt and $53.0 million and $29.3 million in short-term borrowings, at April 30, 2007 and October 31, 2006, respectively.
NOTE 10 FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable, current liabilities and short-term borrowings at April 30, 2007 and October 31, 2006 approximate their fair values because of the short-term nature of these items.
The estimated fair values of the Companys long-term debt was $726.1 million and $499.2 million as compared to the carrying amounts of $723.1 million and $481.4 million at April 30, 2007 and October 31, 2006, respectively. The fair values of the Companys long-term obligations are estimated based on either the quoted market prices for the same or similar issues or the current interest rates offered for debt of the same remaining maturities.
The Company uses derivatives from time to time to partially mitigate the effect of exposure to interest rate movements, exposure to foreign currency fluctuations, and commodity cost fluctuations. The Company records derivatives based on SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, and related amendments. This Statement requires that all derivatives be recognized as assets or liabilities in the balance sheet and measured at fair value. Changes in the fair value of derivatives are recognized in either net income or in other comprehensive income, depending on the designated purpose of the derivative.
12
The Company had interest rate swap agreements with an aggregate notional amount of $130.0 million at both April 30, 2007 and October 31, 2006 with various maturities through 2008. The interest rate swap agreements are used to fix a portion of the interest on the Companys variable rate debt. Under certain of these agreements, the Company receives interest monthly or quarterly from the counterparties equal to LIBOR and pays interest at a fixed rate of 5.56 percent over the life of the contracts. A liability for the loss on interest rate swap contracts, which represented their fair values, in the amount of $0.6 million and $1.0 million was recorded at April 30, 2007 and October 31, 2006, respectively.
At April 30, 2007, the Company had cross-currency interest rate swaps to hedge its net investment in its European subsidiaries. Under these agreements, the Company receives interest semi-annually from the counterparties equal to a fixed rate of 8.875 percent on $248.0 million and pays interest at a fixed rate of 6.80 percent on 206.7 million. Upon maturity of these swaps on August 1, 2007, the Company will be required to pay 206.7 million to the counterparties and receive $248.0 million from the counterparties. A liability for the loss on these agreements of $33.8 million representing their fair values was recorded at April 30, 2007, and accumulated other comprehensive loss of $33.8 million was recorded at April 30, 2007.
At April 30, 2007, the Company had outstanding foreign currency forward contracts in the notional amount of $36.3 million ($45.2 million at October 31, 2006). 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 April 30, 2007 resulted in a gain of $0.1 million recorded in the consolidated statement of income and a favorable $1.9 million recorded in the consolidated balance sheet. The fair value of similar contracts at October 31, 2006 resulted in a loss of $0.1 million recorded in the consolidated statement of income and a favorable $2.1 million recorded in the consolidated balance sheet.
The Company has entered into certain cash flow hedges to mitigate its exposure to cost fluctuations in natural gas prices through October 31, 2008. The fair value of the energy hedges was in a favorable position of $0.1 million ($0.1 million net of tax) at April 30, 2007, compared to an unfavorable position of $1.5 million ($0.9 million net of tax) at October 31, 2006. As a result of the high correlation between the hedged instruments and the underlying transactions, ineffectiveness has not had a material impact on the Companys consolidated statements of income for the quarter ended April 30, 2007.
The Company has entered into certain cash flow hedges to mitigate its exposure to cost fluctuations in Old Corrugated Containers (OCC) prices through October 31, 2007. The fair value of these hedges was not significant at April 30, 2007. As a result of the high correlation between the hedged instruments and the underlying transactions, ineffectiveness has not had a material impact on the Companys consolidated statements of income for the quarter ended April 30, 2007.
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.
The fair values of all derivative financial instruments are estimated based on current settlement prices of comparable contracts obtained from dealer quotes or published market prices. The values represent the estimated amounts the Company would pay or receive to terminate the agreements at the reporting date.
During the next six months, the Company expects to reclassify into earnings a net gain from accumulated other comprehensive income (loss) of approximately $0.8 million after tax at the time the underlying hedge transactions are realized.
NOTE 11 CAPITAL STOCK
Class A Common Stock is entitled to cumulative dividends of 1 cent a share per year after which Class B Common Stock is entitled to non-cumulative dividends up to one half cent per share per year. Further distribution in any year must be made in proportion of one cent a share for Class A Common Stock to one and 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 or unless changes are proposed to the Companys certificate of incorporation. The Class B Common Stock has full voting rights. There is no cumulative voting for the election of directors.
13
The following table summarizes the Companys Class A and Class B common and treasury shares at the specified dates:
|
Authorized
Shares |
Issued Shares |
Outstanding
Shares |
Treasury Shares | |||||
|
April 30, 2007: |
||||||||
|
Class A Common Stock |
128,000,000 | 42,281,920 | 23,613,318 | 18,668,602 | ||||
|
Class B Common Stock |
69,120,000 | 34,560,000 | 22,985,666 | 11,574,334 | ||||
|
October 31, 2006: |
||||||||
|
Class A Common Stock |
128,000,000 | 42,281,920 | 23,268,306 | 19,013,614 | ||||
|
Class B Common Stock |
69,120,000 | 34,560,000 | 23,031,066 | 11,528,934 |
On February 26, 2007, shareholders approved an increase in the number of the Companys authorized shares to 128,000,000 shares of Class A Common Stock and 69,120,000 shares of Class B Common Stock. Subsequent to the aforementioned approval, the Companys Board of Directors authorized a 2-for-1 stock split of the Companys Class A Common Stock and Class B Common Stock. The split was payable on April 11, 2007 to shareholders of record on March 19, 2007. The stock split means that each holder of Class A Common Stock as of the close of business on March 19, 2007 received on April 11, 2007 one additional share of Class A Common Stock for every share they held of Class A Common Stock and each holder of Class B Common Stock as of the close of business on March 19, 2007 received on April 11, 2007 one additional share of Class B Common Stock for every share they held of Class B Common Stock. The day on which such shares began trading on the New York Stock Exchange reflecting the stock split was April 12, 2007.
All references to the number of shares and per share amounts in the Consolidated Financial Statements are presented on a post-split basis.
NOTE 12 STOCK OPTIONS
In 2001, the Company adopted the 2001 Management Equity Incentive and Compensation Plan (the 2001 Plan). The provisions of the 2001 Plan allow the awarding of incentive and nonqualified stock options and restricted and performance shares of Class A Common Stock to key employees. The maximum number of shares that may be issued each year is determined by a formula that takes into consideration the total number of shares outstanding and is also subject to certain limits. In addition, the maximum number of incentive stock options that will be issued under the 2001 Plan during its term is 5,000,000 shares.
Prior to 2001, the Company had adopted a Nonstatutory Stock Option Plan (the 2000 Plan) that provides the discretionary granting of nonstatutory options to key employees, and an Incentive Stock Option Plan (the Option Plan) that provides the discretionary granting of incentive stock options to key employees and nonstatutory options for non-employees. The aggregate number of the Companys Class A Common Stock options that may be granted under the 2000 Plan and Option Plan may not exceed 400,000 shares and 2,000,000 shares, respectively.
Under the terms of the 2001 Plan, the 2000 Plan and the Option Plan, stock options are granted at exercise prices equal to the market value of the common stock on the date options are granted and become fully vested two years after date of grant. Options expire 10 years after date of grant.
In 2005, the Company adopted the 2005 Outside Directors Equity Award Plan (the 2005 Directors Plan), which provides the granting of stock options, restricted stock or stock appreciation rights to directors who are not employees of the Company. Prior to 2005, the Directors Stock Option Plan (the Directors Plan) provided the granting of stock options to directors who are not employees of the Company. The aggregate number of the Companys Class A Common Stock options that may be granted may not exceed 200,000 shares under each of these plans. Under the terms of both plans, options are granted at exercise prices equal to the market value of the common stock on the date options are granted and become exercisable immediately. Options expire 10 years after date of grant.
No stock options were granted during 2007 and 2006.
14
Stock option activity was as follows (Shares in thousands):
|
Six month ended April 30, 2007 |
Year ended October 31, 2006 |
|||||||||
| Shares |
Weighted
Average Exercise Price |
Shares |
Weighted
Average Exercise Price |
|||||||
|
Beginning balance |
1,634 | $ | 15.62 | 1,958 | $ | 15.34 | ||||
|
Granted |
| | | |||||||
|
Forfeited |
| | | |||||||
|
Exercised |
356 | $ | 15.59 | 324 | $ | 13.94 | ||||
|
Ending balance |
1,278 | $ | 15.63 | 1,634 | $ | 15.62 | ||||
As of April 30, 2007, outstanding stock options had exercise prices and contractual lives as follows:
|
Range of Exercise Prices |
Number
Outstanding |
Weighted-
Average Remaining Contractual Life |
||
|
$9 - $ 14 |
606,374 | 5 | ||
|
$14 - $ 24 |
471,518 | 4 | ||
|
$24 - $ 33 |
199,846 | 8 |
All outstanding options were exercisable at April 30, 2007 and 1,415,644 options were
NOTE 13 DIVIDENDS PER SHARE
The following dividends per share were paid during the periods indicated:
|
Three months ended
April 30 |
Six months ended
April 30 |
|||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
|
Class A Common Stock |
$ | 0.18 | $ | 0.12 | $ | 0.36 | $ | 0.24 | ||||
|
Class B Common Stock |
$ | 0.27 | $ | 0.18 | $ | 0.54 | $ | 0.36 | ||||
NOTE 14 CALCULATION OF EARNINGS PER SHARE
The Company has two classes of common stock and, as such, applies the two-class method of computing earnings per share as prescribed in SFAS No. 128, Earnings Per Share. In accordance with the Statement, 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.
15
The following is a reconciliation of the average shares used to calculate basic and diluted earnings per share:
|
Three months ended
April 30 |
Six months ended April 30 |
|||||||
| 2007 | 2006 | 2007 | 2006 | |||||
|
Class A Common Stock: |
||||||||
|
Basic shares |
23,638,578 | 23,086,186 | 23,532,346 | 23,085,252 | ||||
|
Assumed conversion of stock options |
666,170 | 629,854 | 675,821 | 620,034 | ||||
|
Diluted shares |
24,304,748 | 23,716,040 | 24,208,167 | 23,705,286 | ||||
|
Class B Common Stock: |
||||||||
|
Basic and diluted shares |
23,016,580 | 23,060,974 | 23,023,824 | 23,069,132 | ||||
There were no stock options that were antidilutive for the three-month and six-month periods ended April 30, 2007 and no stock options and 12,000 stock options that were antidilutive for the three-month and six-month periods ended April 30, 2006, respectively.
NOTE 15 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, net of tax, are as follows (Dollars in thousands):
|
Three months ended April 30 |
Six months ended April 30 |
|||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||
|
Net income |
$ | 18,624 | $ | 28,693 | $ | 52,603 | $ | 62,045 | ||||||
|
Other comprehensive income (loss): |
| |||||||||||||
|
Foreign currency translation adjustment |
16,400 | (7,847 | ) | 4,447 | (4,903 | ) | ||||||||
|
Change in fair value of interest rate derivatives, net of tax |
1,049 | 452 | 1,484 | 877 | ||||||||||
|
Changes in fair value of energy and other derivatives, net of tax |
681 | 74 | 1,020 | (508 | ) | |||||||||
|
Minimum pension liability adjustment, net of tax |
| | | (2 | ) | |||||||||
|
Comprehensive income |
$ | 36,754 | $ | 21,372 | $ | 59,554 | $ | 57,509 | ||||||
NOTE 16 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 April 30 |
Six months ended April 30 |
|||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
|
Service cost |
$ | 3,419 | $ | 3,629 | $ | 6,838 | $ | 7,258 | ||||||||
|
Interest cost |
6,827 | 6,208 | 13,654 | 12,417 | ||||||||||||
|
Expected return on plan assets |
(7,767 | ) | (7,361 | ) | (15,534 | ) | (14,723 | ) | ||||||||
|
Amortization of prior service cost, initial net asset and net actuarial gain |
1,309 | 1,533 | 2,618 | 3,066 | ||||||||||||
| $ | 3,788 | $ | 4,009 | $ | 7,576 | $ | 8,018 | |||||||||
The Company made $8.3 million in pension contributions in the first half of 2007. Based on minimum funding requirements, $16.3 million of pension contributions are estimated for the entire 2007 fiscal year.
16
The components of net periodic cost for postretirement benefits include the following (Dollars in thousands):
|
Three months ended April 30 |
Six months ended April 30 |
|||||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||||
|
Service cost |
$ | 11 | $ | 8 | $ | 22 | $ | 17 | ||||||||
|
Interest cost |
527 | 586 | $ | 1,054 | 1,171 | |||||||||||
|
Amortization of prior service cost and recognized actuarial gain |
(269 | ) | (163 | ) | $ | (538 | ) | (326 | ) | |||||||
| $ | 269 | $ | 431 | $ | 538 | $ | 862 | |||||||||
NOTE 17 BUSINESS SEGMENT INFORMATION
The Company operates in three business segments: Industrial Packaging & Services; Paper, Packaging & Services; and Timber.
Operations in the Industrial Packaging & Services segment offer a comprehensive line of products and services, including steel, fibre, and plastic drums, intermediate bulk containers, closure systems for industrial packaging products, polycarbonate water bottles, blending and packaging services, logistics and warehousing. These products are manufactured and sold in over 40 countries throughout the world.
Operations in the Paper, Packaging & Services segment involve the production and sale of containerboard, both semi-chemical and recycled, corrugated sheets, corrugated containers and multiwall bags and related services. These products are manufactured and sold in North America.
In the Timber segment, the Company is focused on the active harvesting and regeneration of its United States timber properties (approximately 264,450 acres of timberland were owned at April 30, 2007) to achieve sustainable long-term yields. The Company also owns approximately 36,700 acres of timberland in Canada, which are not actively managed at this time. Timber management is focused on the active harvesting and regeneration of the Companys timber properties to achieve sustainable long-term yields on the Companys timberland. While timber sales are subject to fluctuations, the Company seeks to maintain a consistent cutting schedule, within the limits of available merchantable acreage of timber, 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 Description of Business and Summary of Significant Accounting Policies note (see Note 1) in the 2006 Form 10-K.
17
The following segment information is presented for the periods indicated (Dollars in thousands):
|
Three months ended April 30, |
Six months ended April 30, |
|||||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||||
|
Net sales: |
||||||||||||||
|
Industrial Packaging & Services |
$ | 647,345 | $ | 459,008 | $ | 1,229,049 | $ | 888,728 | ||||||
|
Paper, Packaging & Services |
163,662 | 156,483 | 328,488 | 303,522 | ||||||||||
|
Timber |
4,036 | 4,616 | 8,265 | 10,173 | ||||||||||
|
Total net sales |
$ | 815,043 | $ | 620,107 | $ | 1,565,802 | $ | 1,202,423 | ||||||
|
Operating profit: |
||||||||||||||
|
Operating profit, before the impact of restructuring charges and timberland gains (losses): |
||||||||||||||
|
Industrial Packaging & Services |
$ | 54,261 | $ | 34,205 | $ | 90,346 | $ | 58,445 | ||||||
|
Paper, Packaging & Services |
10,678 | 14,425 | 28,717 | 18,682 | ||||||||||
|
Timber |
3,370 | 3,983 | 9,862 | 7,346 | ||||||||||
|
Operating profit, before the impact of restructuring charges and timberland gains (losses): |
$ | 68,309 | $ | 52,613 | $ | 128,925 | $ | 84,473 | ||||||
|
Restructuring charges: |
||||||||||||||
|
Industrial Packaging & Services |
$ | 1,670 | $ | 8,265 | $ | 2,843 | $ | 12,487 | ||||||
|
Paper, Packaging & Services |
2,379 | 2,022 | 3,243 | 3,258 | ||||||||||
|
Timber |
| | | 10 | ||||||||||
|
Total restructuring charges |
4,049 | 10,287 | 6,086 | 15,755 | ||||||||||
|
Timberland gains (losses): |
||||||||||||||
|
Timber |
(382 | ) | 9,238 | (320 | ) | 40,807 | ||||||||
|
Total |
$ | 63,878 | $ | 51,564 | $ | 122,519 | $ | 109,525 | ||||||
|
Depreciation, depletion and amortization expense: |
||||||||||||||
|
Industrial Packaging & Services |
$ | 18,603 | $ | 15,143 | $ | 36,255 | $ | 30,225 | ||||||
|
Paper, Packaging & Services |
7,170 | 7,201 | 14,398 | 15,210 | ||||||||||
|
Timber |
1,331 | 981 | 2,623 | 2,564 | ||||||||||
|
Total depreciation, depletion and amortization expense |
$ | 27,104 | $ | 23,325 | $ | 53,276 | $ | 47,999 | ||||||
|
April 30,
2007 |
October 31,
2006 |
|||||||||||||
|
Assets: |
||||||||||||||
|
Industrial Packaging & Services |
$ | 1,780,011 | $ | 1,340,553 | ||||||||||
|
Paper, Packaging & Services |
239,448 | 248,364 | ||||||||||||
|
Timber |
251,490 | 250,310 | ||||||||||||
|
Total segments |
2,270,949 | 1,839,227 | ||||||||||||
|
Corporate and other |
302,052 | 348,774 | ||||||||||||
|
Total assets |
$ | 2,573,001 | $ | 2,188,001 | ||||||||||
The following table presents net sales to external customers by geographic area (Dollars in thousands):
|
Three months ended April 30, |
Six months ended April 30, |
|||||||||||
| 2007 | 2006 | 2007 | 2006 | |||||||||
|
Net sales: |
||||||||||||
|
North America |
$ | 442,671 | $ | 366,338 | $ | 872,559 | $ | 705,479 | ||||
|
Europe |
261,528 | 167,079 | 473,560 | 323,108 | ||||||||
|
Other |
110,844 | 86,690 | 219,683 | 173,836 | ||||||||
|
Total net sales |
$ | 815,043 | $ | 620,107 | $ | 1,565,802 | $ | 1,202,423 | ||||
18
The following table presents total assets by geographic area (Dollars in thousands):
|
April 30,
2007 |
October 31,
2006 |
|||||
|
Assets: |
||||||
|
North America |
$ | 1,469,919 | $ | 1,474,095 | ||
|
Europe |
853,290 | 482,505 | ||||
|
Other |
249,792 | 231,401 | ||||
| $ | 2,573,001 | $ | 2,188,001 | |||
NOTE 18 SUMMARIZED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Senior Subordinated Notes, more fully described in Note 9 Debt, are fully guaranteed, jointly and severally, by the Companys United States subsidiaries (Guarantor Subsidiaries). The Companys non-United States subsidiaries are not guaranteeing the Senior Subordinated Notes (Non-Guarantor Subsidiaries). Presented below are summarized condensed consolidating financial statements of Greif, Inc. (the Parent), which includes certain of the Companys operating units, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis. These summarized condensed consolidating financial statements are prepared using the equity method. Separate financial statements for the Guarantor Subsidiaries are not presented based on managements determination that they do not provide additional information that is material to investors. As discussed in Note 9, substantially all (99 percent) of the Senior Subordinated Notes outstanding were redeemed on February 9, 2007 pursuant to the Companys tender offer. The remaining Senior Subordinated Notes are redeemable at the option of the Company beginning August 1, 2007, at a redemption price of 104.438 percent of principal amount, plus accrued interest, if any.
19
Condensed Consolidating Statements of Operations
For the six months ended April 30, 2007
| Parent |
Guarantor
Subsidiaries |
Non-Guarantor
Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
|
Net sales |
$ | 1,030 | $ | 942,087 | $ | 806,647 | $ | (183,962 | ) | $ | 1,565,802 | ||||||||
|
Cost of products sold |
264 | 813,045 | 663,838 | (183,962 | ) | 1,293,185 | |||||||||||||
|
Gross profit |
766 | 129,042 | 142,809 | | 272,617 | ||||||||||||||
|
Selling, general and administrative expenses |
690 | 66,952 | 84,637 | | 152,279 | ||||||||||||||
|
Restructuring charges |
| 3,938 | 2,148 | | 6,086 | ||||||||||||||
|
Gain on sale of assets |
| 6,757 | 1,510 | | 8,267 | ||||||||||||||
|
Operating profit |
76 | 64,909 | 57,534 | | 122,519 | ||||||||||||||
|
Interest expense, net |
16,400 | 1,618 | 4,062 | | 22,080 | ||||||||||||||
|
Debt extinguishment charge |
23,479 | | 23,479 | ||||||||||||||||
|
Other income (expense), net |
1,763 | (15,359 | ) | 8,076 | | (5,520 | ) | ||||||||||||
|
Income before income taxes and equity in earnings of affiliates |
(38,040 | ) | 47,932 | 61,548 | | 71,440 | |||||||||||||
|
Income taxes |
(10,086 | ) | 12,558 | 16,365 | | 18,837 | |||||||||||||
|
Equity in earnings of affiliates |
80,556 | | | (80,556 | ) | | |||||||||||||
|
Net income (loss) |
$ | 52,602 | $ | 35,374 | $ | 45,183 | $ | (80,556 | ) | $ | 52,603 | ||||||||
Condensed Consolidating Statement of Operations
Six months ended April 30, 2006
| Parent |
Guarantor
Subsidiaries |
Non-Guarantor
Subsidiaries |
Eliminations | Consolidated | |||||||||||||||
|
Net sales |
$ | 2,555 | $ | 661,641 | $ | 578,130 | $ | (39,903 | ) | $ | 1,202,423 | ||||||||
|
Cost of products sold |
1,670 | 565,149 | 476,392 | (39,903 | ) | 1,003,308 | |||||||||||||
|
Gross profit |
885 | 96,492 | 101,738 | | 199,115 | ||||||||||||||
|
Selling, general and administrative expenses |
579 | 62,773 | 58,480 | | 121,832 | ||||||||||||||
|
Restructuring charges |
(36 | ) | 5,417 | 10,373 | 1 | 15,755 | |||||||||||||
|
Gain on sale of assets |
| 45,407 | 2,590 | | 47,997 | ||||||||||||||
|
Operating profit |
342 | 73,709 | 35,475 | (1 | ) | 109,525 | |||||||||||||
|
Interest expense, net |
14,468 | 2,244 | 2,180 | 75 | 18,967 | ||||||||||||||
|
Other income (expense), net |
7 | (8,066 | ) | 7,866 | (1 | ) | (194 | ) | |||||||||||
|
Income before income taxes and equity in earnings of affiliates |
(14,119 | ) | 63,399 | 41,161 | (77 | ) | 90,364 | ||||||||||||
|
Income taxes |
(4,377 | ) | 19,654 | 13,066 | (24 | ) | 28,319 | ||||||||||||
|
Equity in earnings of affiliates |
71,787 | | | (71,787 | ) | | |||||||||||||
|
Net income (loss) |
$ | 62,045 | $ | 43,745 | $ | 28,095 | $ | (71,840 | ) | $ | 62,045 | ||||||||
20
Condensed Consolidating Balance Sheets
As of April 30, 2007
21
Condensed Consolidating Balance Sheets
As of October 31, 2006
| Parent |
Guarantor
Subsidiaries |
Non-Guarantor
Subsidiaries |
Eliminations | Consolidated | |||||||||||||
|
ASSETS |
|||||||||||||||||
|
Current assets |
|||||||||||||||||
|
Cash and cash equivalents |
$ | | $ | 1,507 | $ | 185,594 | $ | | $ | 187,101 | |||||||
|
Trade accounts receivable |
55,729 | 59,916 | 200,016 | | 315,661 | ||||||||||||
|
Inventories |
301 | 81,388 | 123,315 | | 205,004 | ||||||||||||
|
Other current assets |
279,062 | 28,978 | 62,282 | (285,051 | ) | 85,271 | |||||||||||
| 335,092 | 171,789 | 571,207 | (285,051 | ) | 793,037 | ||||||||||||
|
Long-term assets |
|||||||||||||||||
|
Goodwill and other intangible assets |
| 253,576 | 96,563 | | 350,139 | ||||||||||||
|
Assets held by special purpose entities (Note 8) |
| 50,891 | | | 50,891 | ||||||||||||
|
Other long-term assets |
|||||||||||||||||