GREIF INC, 10-Q filed on 3/7/2011
Quarterly Report
Document and Entity Informaton
3 Months Ended
Jan. 31, 2011
Feb. 28, 2011
Apr. 30, 2010
Feb. 28, 2011
Apr. 30, 2010
Entity Registrant Name
GREIF INC 
 
 
 
 
Entity Central Index Key
0000043920 
 
 
 
 
Document Type
10-Q 
 
 
 
 
Document Period End Date
2011-01-31 
 
 
 
 
Amendment Flag
FALSE 
 
 
 
 
Document Fiscal Year Focus
2011 
 
 
 
 
Document Fiscal Period Focus
Q1 
 
 
 
 
Current Fiscal Year End Date
10/31 
 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
 
Entity Voluntary Filers
No 
 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
 
Entity Public Float
 
 
1,405,354,258 
 
393,745,476 
Entity Common Stock, Shares Outstanding
 
24,814,309 
 
22,412,266 
 
Consolidated Statements of Operations (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Jan. 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 
Class A Common Stock
 
 
Basic earnings per share attributable to Greif, Inc. common shareholders:
 
 
Basic earnings per share
0.71 
0.43 
Diluted earnings per share attributable to Greif, Inc. common share holders:
 
 
Diluted earnings per share
0.71 
0.43 
Class B Common Stock
 
 
Basic earnings per share attributable to Greif, Inc. common shareholders:
 
 
Basic earnings per share
1.06 
0.63 
Diluted earnings per share attributable to Greif, Inc. common share holders:
 
 
Diluted earnings per share
$ 1.06 
$ 0.63 
Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands
Jan. 31, 2011
Oct. 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 
Total current assets
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 
Total long-term assets
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 
Properties, plants and equipment, gross
2,214,460 
2,163,280 
Accumulated depreciation
(922,475)
(888,164)
Properties, plants and equipment, net
1,291,985 
1,275,116 
Total assets
3,527,770 
3,498,445 
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 
Total current liabilities
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 
Total long-term liabilities
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)
Toal 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 
Consolidated Balance Sheets (Unaudited) (Parenthetical) (USD $)
In Thousands
Jan. 31, 2011
Oct. 31, 2010
Current assets
 
 
Allowance for trade accounts receivable
$ 13,338 
$ 13,117 
Consolidated Statements of Cash Flows (Unaudited) (USD $)
In Thousands
3 Months Ended
Jan. 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 
Basis of Presentation and Summary of Significant Accounting Policies
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 Company’s 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 Company’s 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 Company’s 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 enterprise’s 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 VIE’s 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 Company’s 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 ASU’s 2010-01 through 2011-1. The Company has reviewed each ASU and determined that they will not have a material impact on the Company’s financial position, results of operations or cash flows, other than the related disclosures.
Acquisitions, Divestitures and Other Significant Transactions
ACQUISITIONS, DIVESTITURES AND OTHER SIGNIFICANT TRANSACTIONS
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 Company’s 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 Company’s 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.
Sale of Non-United States Accounts Receivable
SALE OF NON-UNITED STATES ACCOUNTS RECEIVABLE
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.
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.
Inventories
INVENTORIES
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.
Net Assets Held for Sale
NET ASSETS HELD FOR SALE
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 Company’s intention to complete the facility sales within the upcoming year.
Goodwill and Other Intangible Assets
GOODWILL AND OTHER INTANGIBLE ASSETS
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 management’s 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 Company’s 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.
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.
Restructuring Charges
RESTRUCTURING CHARGES
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 Company’s 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  
 
                 
Variable Interest Entities
VARIABLE INTEREST ENTITIES
NOTE 8 — VARIABLE INTEREST ENTITIES
The Company evaluates whether an entity is a VIE whenever reconsideration events occur. The Company consolidates VIE’s 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 VIE’s 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 VIE’s to determine if the primary beneficiary status is appropriate. As of January 31, 2011, the Company is the primary beneficiary of the two VIE’s, 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 Company’s 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 VIE’s 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.
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 VIE’s 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.
Long-Term Debt
LONG-TERM DEBT
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  
 
           
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 Company’s 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 Company’s 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 Company’s 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.
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 Company’s 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 Company’s 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 Company’s long-term debt was $12.5 million. Annual maturities, including the current portion, of long-term debt under the Company’s 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.
Financial Instruments and Fair Value Measurements
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
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 1—Observable inputs such as unadjusted quoted prices in active markets for identical assets and liabilities.
   
Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities.
   
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
Recurring Fair Value Measurements
The following table presents the fair 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.
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 Company’s 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 Company’s 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 Company’s consolidated statements of operations for the quarter ended January 31, 2011.
Other financial instruments
The estimated fair value of the Company’s 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 Company’s 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 Company’s 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.
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.
Stock-Based Compensation
STOCK-BASED COMPENSATION
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 Company’s 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.
Income Taxes
INCOME TAXES
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 Company’s uncertain tax positions for this period.
Plans and Postretirement Health Care and Life Insurance Benefits
PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
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.
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  
 
           
Contingent Liabilities
CONTINGENT LIABILITIES
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 Company’s 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 Company’s 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.
Earnings Per Share
EARNINGS PER SHARE
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.
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 Company’s 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.
The following table summarizes the Company’s 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.
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 AND NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS
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 Company’s 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 Company’s 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.
Comprehensive Income
COMPREHENSIVE INCOME
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 Company’s 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  
 
                                               
Business Segment Information
BUSINESS SEGMENT INFORMATION
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 Company’s 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.
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 Company’s 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 Company’s 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 Company’s 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 Company’s 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.
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  
 
           
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