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, 20042005
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 1-566
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) |
Registrant’s telephone number, including area code (740) 549-6000
Not Applicable
Former name, former address and former fiscal year, if changed since last report.
Indicated 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. Yesx No¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yesx No¨
The number of shares outstanding of each of the issuer’s classes of common stock at the close of business on April 30, 20042005 was as follows:
Class A Common Stock |
| |
Class B Common Stock |
|
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF OPERATIONSINCOME
(UNAUDITED)
(Dollars in thousands, except per share amounts)
Three months ended April 30, | Six months ended April 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Net sales | $ | 542,189 | $ | 470,807 | $ | 1,011,049 | $ | 905,485 | ||||||||
Costs of products sold | 452,928 | 388,564 | 852,338 | 747,513 | ||||||||||||
Gross profit | 89,261 | 82,243 | 158,711 | 157,972 | ||||||||||||
Selling, general and administrative expenses | 55,745 | 59,000 | 106,770 | 118,501 | ||||||||||||
Restructuring charges | 12,278 | 17,449 | 27,537 | 18,988 | ||||||||||||
Gain on sale of assets | 1,122 | 1,934 | 5,231 | 2,345 | ||||||||||||
Operating profit | 22,360 | 7,728 | 29,635 | 22,828 | ||||||||||||
Interest expense, net | 10,716 | 13,923 | 22,963 | 27,477 | ||||||||||||
Other income, net | 694 | 2,138 | 916 | 2,362 | ||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | 12,338 | (4,057 | ) | 7,588 | (2,287 | ) | ||||||||||
Income tax expense (benefit) | 3,800 | (1,298 | ) | 2,337 | (732 | ) | ||||||||||
Equity in earnings of affiliates and minority interests | (89 | ) | (1,654 | ) | (168 | ) | (2,749 | ) | ||||||||
Income (loss) before cumulative effect of change in accounting principle | 8,449 | (4,413 | ) | 5,083 | (4,304 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | — | — | 4,822 | ||||||||||||
Net income (loss) | $ | 8,449 | $ | (4,413 | ) | $ | 5,083 | $ | 518 | |||||||
Basic and diluted earnings (loss) per share: | ||||||||||||||||
Class A Common Stock (before cumulative effect) | $ | 0.30 | $ | (0.16 | ) | $ | 0.18 | $ | (0.15 | ) | ||||||
Class A Common Stock (after cumulative effect) | $ | 0.30 | $ | (0.16 | ) | $ | 0.18 | $ | 0.02 | |||||||
Class B Common Stock (before cumulative effect) | $ | 0.45 | $ | (0.24 | ) | $ | 0.27 | $ | (0.23 | ) | ||||||
Class B Common Stock (after cumulative effect) | $ | 0.45 | $ | (0.24 | ) | $ | 0.27 | $ | 0.02 |
Three months ended April 30, | Six months ended April 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Net sales | $ | 612,960 | $ | 542,189 | $ | 1,195,524 | $ | 1,011,049 | ||||||||
Cost of products sold | 515,042 | 452,928 | 1,008,880 | 852,338 | ||||||||||||
Gross profit | 97,918 | 89,261 | 186,644 | 158,711 | ||||||||||||
Selling, general and administrative expenses | 56,068 | 55,745 | 115,789 | 106,770 | ||||||||||||
Restructuring charges | 10,621 | 12,278 | 17,807 | 27,537 | ||||||||||||
Gain on sale of assets | 4,194 | 1,122 | 14,538 | 5,231 | ||||||||||||
Operating profit | 35,423 | 22,360 | 67,586 | 29,635 | ||||||||||||
Interest expense, net | 10,693 | 10,716 | 20,786 | 22,963 | ||||||||||||
Debt extinguishment charge | 2,828 | — | 2,828 | — | ||||||||||||
Other income, net | 1,973 | 694 | 1,207 | 916 | ||||||||||||
Income before income tax expense and equity in earnings of affiliates and minority interests | 23,875 | 12,338 | 45,179 | 7,588 | ||||||||||||
Income tax expense | 7,001 | 3,800 | 12,966 | 2,337 | ||||||||||||
Equity in earnings of affiliates and minority interests | (107 | ) | (89 | ) | (310 | ) | (168 | ) | ||||||||
Net income | $ | 16,767 | $ | 8,449 | $ | 31,903 | $ | 5,083 | ||||||||
Basic earnings per share: | ||||||||||||||||
Class A Common Stock | $ | 0.58 | $ | 0.30 | $ | 1.12 | $ | 0.18 | ||||||||
Class B Common Stock | $ | 0.88 | $ | 0.45 | $ | 1.67 | $ | 0.27 | ||||||||
Diluted earnings per share: | ||||||||||||||||
Class A Common Stock | $ | 0.57 | $ | 0.30 | $ | 1.09 | $ | 0.18 | ||||||||
Class B Common Stock | $ | 0.88 | $ | 0.45 | $ | 1.67 | $ | 0.27 |
See accompanying Notes to Consolidated Financial Statements
2
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 30, 2004 | October 31, 2003 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 29,592 | $ | 49,767 | ||||
Trade accounts receivable, less allowance of $12,013 in 2004 and $11,225 in 2003 | 306,462 | 294,957 | ||||||
Inventories | 160,407 | 167,157 | ||||||
Net assets held for sale | 14,330 | 6,311 | ||||||
Deferred tax assets | 8,898 | 10,875 | ||||||
Other current assets | 60,393 | 54,390 | ||||||
580,082 | 583,457 | |||||||
Long-term assets | ||||||||
Goodwill, net of amortization | 242,707 | 252,309 | ||||||
Other intangible assets, net of amortization | 28,701 | 30,654 | ||||||
Investment in affiliates | 5,395 | 4,421 | ||||||
Other long-term assets | 64,262 | 47,995 | ||||||
341,065 | 335,379 | |||||||
Properties, plants and equipment | ||||||||
Timber properties, net of depletion | 88,367 | 86,437 | ||||||
Land | 103,183 | 100,615 | ||||||
Buildings | 315,275 | 320,229 | ||||||
Machinery and equipment | 822,212 | 831,815 | ||||||
Capital projects in progress | 44,498 | 36,522 | ||||||
1,373,535 | 1,375,618 | |||||||
Accumulated depreciation | (492,283 | ) | (463,243 | ) | ||||
881,252 | 912,375 | |||||||
$ | 1,802,399 | $ | 1,831,211 | |||||
ASSETS
April 30, 2005 | October 31, 2004 | |||||||
(Unaudited) | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | 52,029 | $ | 38,109 | ||||
Trade accounts receivable – less allowance of $8,972 in 2005 and $11,454 in 2004 | 282,564 | 307,750 | ||||||
Inventories | 222,149 | 191,457 | ||||||
Net assets held for sale | 14,630 | 14,753 | ||||||
Deferred tax assets | 5,738 | 6,636 | ||||||
Other current assets | 66,567 | 53,977 | ||||||
643,677 | 612,682 | |||||||
Long-term assets | ||||||||
Goodwill | 235,853 | 237,803 | ||||||
Other intangible assets, net of amortization | 25,454 | 27,524 | ||||||
Other long-term assets | 56,363 | 54,547 | ||||||
317,670 | 319,874 | |||||||
Properties, plants and equipment | ||||||||
Timber properties, net of depletion | 130,263 | 129,141 | ||||||
Land | 69,522 | 68,349 | ||||||
Buildings | 322,978 | 321,183 | ||||||
Machinery and equipment | 860,804 | 851,800 | ||||||
Capital projects in progress | 42,404 | 37,192 | ||||||
1,425,971 | 1,407,665 | |||||||
Accumulated depreciation | (568,957 | ) | (526,983 | ) | ||||
857,014 | 880,682 | |||||||
$ | 1,818,361 | $ | 1,813,238 | |||||
See accompanying Notes to Consolidated Financial Statements
3
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
April 30, 2004 | October 31, 2003 | |||||||
(Unaudited) | ||||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 158,906 | $ | 158,333 | ||||
Accrued payrolls and employee benefits | 34,603 | 43,126 | ||||||
Restructuring reserves | 18,911 | 15,972 | ||||||
Short-term borrowings | 20,200 | 15,605 | ||||||
Current portion of long-term debt | — | 3,000 | ||||||
Other current liabilities | 66,708 | 76,282 | ||||||
299,328 | 312,318 | |||||||
Long-term liabilities | ||||||||
Long-term debt | 624,114 | 643,067 | ||||||
Deferred tax liability | 159,778 | 159,825 | ||||||
Postretirement benefit liability | 48,683 | 48,504 | ||||||
Other long-term liabilities | 85,930 | 93,047 | ||||||
918,505 | 944,443 | |||||||
Minority interest | 1,532 | 1,886 | ||||||
Shareholders’ equity | ||||||||
Common stock, without par value | 17,975 | 12,207 | ||||||
Treasury stock, at cost | (63,772 | ) | (64,228 | ) | ||||
Retained earnings | 678,353 | 681,043 | ||||||
Accumulated other comprehensive loss: | ||||||||
- foreign currency translation | (10,549 | ) | (15,314 | ) | ||||
- interest rate derivatives | (10,270 | ) | (12,938 | ) | ||||
- minimum pension liability | (28,703 | ) | (28,206 | ) | ||||
583,034 | 572,564 | |||||||
$ | 1,802,399 | $ | 1,831,211 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY
April 30, 2005 | October 31, 2004 | |||||||
(Unaudited) | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | 241,930 | $ | 281,265 | ||||
Accrued payrolls and employee benefits | 41,913 | 49,633 | ||||||
Restructuring reserves | 14,252 | 17,283 | ||||||
Short-term borrowings | 23,506 | 11,621 | ||||||
Other current liabilities | 77,369 | 77,416 | ||||||
398,970 | 437,218 | |||||||
Long-term liabilities | ||||||||
Long-term debt | 466,215 | 457,415 | ||||||
Deferred tax liability | 149,177 | 148,639 | ||||||
Pension liability | 46,420 | 44,036 | ||||||
Postretirement benefit liability | 49,401 | 48,667 | ||||||
Other long-term liabilities | 34,583 | 46,444 | ||||||
745,796 | 745,201 | |||||||
Minority interest | 1,290 | 1,725 | ||||||
Shareholders’ equity | ||||||||
Common stock, without par value | 41,147 | 27,382 | ||||||
Treasury stock, at cost | (69,438 | ) | (65,360 | ) | ||||
Retained earnings | 734,773 | 711,919 | ||||||
Accumulated other comprehensive income (loss): | ||||||||
- foreign currency translation | 13,627 | 5,655 | ||||||
- interest rate derivatives | (4,399 | ) | (7,097 | ) | ||||
- minimum pension liability | (43,405 | ) | (43,405 | ) | ||||
672,305 | 629,094 | |||||||
$ | 1,818,361 | $ | 1,813,238 | |||||
See accompanying Notes to Consolidated Financial Statements
4
GREIF, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For the six months ended April 30, | 2004 | 2003 | 2005 | 2004 | ||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net income | $ | 5,083 | $ | 518 | $ | 31,903 | $ | 5,083 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
Adjustments to reconcile net income to net cash (used in) provided by operating activities: | ||||||||||||||||
Depreciation, depletion and amortization | 52,807 | 43,527 | 50,174 | 52,807 | ||||||||||||
Asset impairments | 2,252 | 1,698 | 3,896 | 2,252 | ||||||||||||
Deferred income taxes | 3,851 | 5,136 | 2,832 | 3,851 | ||||||||||||
Gain on disposals of properties, plants and equipment, net | (5,231 | ) | (2,345 | ) | (14,538 | ) | (5,231 | ) | ||||||||
Equity in earnings of affiliates, net of dividends received, and minority interests | (1,328 | ) | 161 | 310 | (1,328 | ) | ||||||||||
Cumulative effect of change in accounting principle | — | (4,822 | ) | |||||||||||||
Increase (decrease) in cash from changes in certain assets and liabilities: | ||||||||||||||||
Trade accounts receivable | (8,200 | ) | 1,601 | 25,041 | (8,200 | ) | ||||||||||
Inventories | 8,153 | (7,459 | ) | (30,829 | ) | 8,153 | ||||||||||
Other current assets | (5,615 | ) | 12,921 | (12,609 | ) | (5,615 | ) | |||||||||
Other long-term assets | (6,674 | ) | (658 | ) | (200 | ) | (6,674 | ) | ||||||||
Accounts payable | (2,167 | ) | (2,299 | ) | (39,254 | ) | (2,167 | ) | ||||||||
Accrued payroll and employee benefits | (8,423 | ) | (9,797 | ) | (7,720 | ) | (8,423 | ) | ||||||||
Restructuring reserves | 2,939 | 6,018 | (3,031 | ) | 2,939 | |||||||||||
Other current liabilities | (11,502 | ) | (3,932 | ) | (7 | ) | (11,502 | ) | ||||||||
Postretirement benefit liability | 179 | (1,520 | ) | 3,118 | 179 | |||||||||||
Other long-term liabilities | (4,607 | ) | (9,942 | ) | (12,362 | ) | (4,607 | ) | ||||||||
Net cash provided by operating activities | 21,517 | 28,806 | ||||||||||||||
Net cash (used in) provided by operating activities | (3,276 | ) | 21,517 | |||||||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchases of properties, plants and equipment | (28,096 | ) | (22,988 | ) | (26,200 | ) | (28,096 | ) | ||||||||
Proceeds on disposals of properties, plants and equipment | 5,666 | 4,826 | 17,687 | 5,666 | ||||||||||||
Net cash used in investing activities | (22,430 | ) | (18,162 | ) | (8,513 | ) | (22,430 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Payments on long-term debt | (21,952 | ) | (8,220 | ) | ||||||||||||
Proceeds from (payments on) long-term debt | 11,217 | (21,952 | ) | |||||||||||||
Proceeds from short-term borrowings | 4,252 | 7,877 | 12,880 | 4,252 | ||||||||||||
Dividends paid | (7,774 | ) | (7,770 | ) | (9,049 | ) | (7,774 | ) | ||||||||
Acquisitions of treasury stock | (29 | ) | (1,031 | ) | (5,291 | ) | (29 | ) | ||||||||
Exercise of stock options | 6,166 | — | 14,767 | 6,166 | ||||||||||||
Net cash used in financing activities | (19,337 | ) | (9,144 | ) | ||||||||||||
Net cash provided by (used in) financing activities | 24,524 | (19,337 | ) | |||||||||||||
Effects of exchange rates on cash | 75 | (6,704 | ) | 1,185 | 75 | |||||||||||
Net decrease in cash and cash equivalents | (20,175 | ) | (5,204 | ) | ||||||||||||
Net increase (decrease) in cash and cash equivalents | 13,920 | (20,175 | ) | |||||||||||||
Cash and cash equivalents at beginning of period | 49,767 | 25,396 | 38,109 | 49,767 | ||||||||||||
Cash and cash equivalents at end of period | $ | 29,592 | $ | 20,192 | $ | 52,029 | $ | 29,592 | ||||||||
See accompanying Notes to Consolidated Financial Statements
5
GREIF, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
APRIL 30, 20042005
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, 20042005 and October 31, 2003,2004 and the consolidated statements of operationsincome and cash flows for the three-month and six-month periods ended April 30, 20042005 and 2003 and cash flows for the six-month periods ended April 30, 2004 and 2003 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 Company’s Annual Report on Form 10-K for its fiscal year ended October 31, 20032004 (the “2003“2004 Form 10-K”).
The Company’s fiscal year begins on November 1 and ends on October 31 of the following year. Any references to the year 20042005 or 2003,2004, 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 20042005 presentation.
6
Stock-Based Compensation
At April 30, 2004,2005, the Company had various stock-based compensation plans as described in Note 10 to the Notes to Consolidated Financial Statements in the 20032004 Form 10-K. The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock option plans. If compensation cost would have been determined based on fair values at the date of grant under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” pro forma net income (loss) and earnings (loss) per share would have been as follows (Dollars in thousands, except per share amounts):
Three months ended April 30, | Six months ended April 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||
Net income (loss) as reported | $ | 8,449 | $ | (4,413 | ) | $ | 5,083 | $ | 518 | |||||
Deduct total stock option expense determined under fair value method, net of tax | 767 | 1,022 | 1,456 | 1,974 | ||||||||||
Pro forma net income (loss) | $ | 7,682 | $ | (5,435 | ) | $ | 3,627 | $ | (1,456 | ) | ||||
Basic and diluted earnings (loss) per share: | ||||||||||||||
Class A Common Stock: | ||||||||||||||
As reported | $ | 0.30 | $ | (0.16 | ) | $ | 0.18 | $ | 0.02 | |||||
Pro forma | $ | 0.27 | $ | (0.19 | ) | $ | 0.13 | $ | (0.05 | ) | ||||
Class B Common Stock: | ||||||||||||||
As reported | $ | 0.45 | $ | (0.24 | ) | $ | 0.27 | $ | 0.02 | |||||
Pro forma | $ | 0.41 | $ | (0.29 | ) | $ | 0.19 | $ | (0.08 | ) |
Three months ended April 30, | Six months ended April 30, | |||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||
Net income as reported | $ | 16,767 | $ | 8,449 | $ | 31,903 | $ | 5,083 | ||||
Deduct total stock option expense determined under fair value method, net of tax | 331 | 467 | 604 | 944 | ||||||||
Pro forma net income | $ | 16,436 | $ | 7,982 | $ | 31,299 | $ | 4,139 | ||||
Earnings per share: | ||||||||||||
Class A Common Stock: | ||||||||||||
Basic – as reported | $ | 0.58 | $ | 0.30 | $ | 1.12 | $ | 0.18 | ||||
Basic – pro forma | $ | 0.57 | $ | 0.28 | $ | 1.10 | $ | 0.15 | ||||
Diluted – as reported | $ | 0.57 | $ | 0.30 | $ | 1.09 | $ | 0.18 | ||||
Diluted – pro forma | $ | 0.56 | $ | 0.28 | $ | 1.07 | $ | 0.15 | ||||
Class B Common Stock: | ||||||||||||
Basic – as reported | $ | 0.88 | $ | 0.45 | $ | 1.67 | $ | 0.27 | ||||
Basic – pro forma | $ | 0.86 | $ | 0.42 | $ | 1.63 | $ | 0.22 | ||||
Diluted – as reported | $ | 0.88 | $ | 0.45 | $ | 1.67 | $ | 0.27 | ||||
Diluted – pro forma | $ | 0.86 | $ | 0.42 | $ | 1.63 | $ | 0.22 |
6
NOTE 2 —– RECENT ACCOUNTING STANDARDS
In December 2003,2004, the Financial Accounting Standards Board (“FASB”) issued a revision to SFAS No. 132, “Employers Disclosures about Pensions and Other Postretirement Benefits.” The123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This revision relateswill require the Company to employers’ disclosures about pension plans and other postretirement benefit plans. It does not altermeasure the measurement or recognition provisionscost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the originalaward. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS No. 132. It requires additional disclosures regarding assets, obligations, cash flows123R was effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, based on a new rule by the Securities and net periodic benefit costsExchange Commission, companies are allowed to implement SFAS No. 123R at the beginning of pension planstheir next fiscal year instead of the next reporting period that begins after June 15, 2005 (November 1, 2005 for the Company). SFAS No. 123R will apply to all awards granted after the required effective date and other defined benefit postretirement plans. Excluding certain disclosure requirements,to awards modified, repurchased or canceled after that date. As of the revised Statementrequired effective date, the Company will apply SFAS No. 123R using a modified version of prospective application. Under this transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123R for either recognition or pro forma disclosures. For periods before the required effective date, the Company has elected not to apply a modified version of retrospective application under which financial statements with fiscal years ended after December 15, 2003. Interim period disclosuresfor prior periods are effective for interim periods beginning after December 15, 2003 and have been included in Note 14 to the Notes to Consolidated Financial Statements in this Form 10-Q.
In December 2003, the FASB issued a revision to Interpretationadjusted by SFAS No. 46, “Consolidation of Variable Interest Entities.” This Interpretation defines when a business enterprise must consolidate a variable interest entity. The Interpretation provisions are effective for variable interest entities commonly referred to as special-purpose entities for periods ending after March 15, 2004. The Company does not have any material unconsolidated variable interest entities as of April 30, 2004 that would require consolidation.123R. Adoption of SFAS No. 123R is expected to result in compensation cost of approximately $1.0 million in the subsequent provisionsconsolidated statements of the Interpretation did not have a material impact on the Company’s financial positionincome in 2006, assuming no additional stock options are granted during 2005 or results of operations.2006.
7
NOTE 3 —– SALE OF EUROPEAN ACCOUNTS RECEIVABLE
To further reduce borrowing costs, the Company entered into an arrangement to sell on a regular basis up to €55 million ($70.8 million at April 30, 2005) of certain outstanding accounts receivable of its European subsidiaries to a major international bank. At April 30, 2005, €42.9 million ($55.2 million) of accounts receivable were sold under this arrangement. The Company will continue to service these accounts receivable, although no interests have been retained. The acquiring international bank has full title and interest to the accounts receivable, will be free to further dispose of the accounts receivable sold to it and will be fully entitled to receive and retain for its own account the total collections of such accounts receivable. These accounts receivable have been removed from the balance sheet since they meet the applicable criteria of SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”
NOTE 4 – INVENTORIES
Inventories are summarized as follows (Dollars in thousands):
April 30, 2004 | October 31, 2003 | April 30, 2005 | October 31, 2004 | |||||||||||||
Finished goods | $ | 53,626 | $ | 44,894 | $ | 66,446 | $ | 60,615 | ||||||||
Raw materials and work-in-process | 138,132 | 153,482 | 190,993 | 168,477 | ||||||||||||
191,758 | 198,376 | 257,439 | 229,092 | |||||||||||||
Reduction to state inventories on last-in, first-out basis | (31,351 | ) | (31,219 | ) | (35,290 | ) | (37,635 | ) | ||||||||
$ | 160,407 | $ | 167,157 | $ | 222,149 | $ | 191,457 | |||||||||
NOTE 4 —5 – NET ASSETS HELD FOR SALE
Net assets held for sale represent land, buildings and land improvements less accumulated depreciation for locations that have been closed.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, 2004,2005, there were 1610 facilities held for sale. The net assets held for sale are being marketed for sale and it is the Company’s intention to complete thethese sales within the upcoming year.
NOTE 5 —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 performed the required impairment tests and has concluded that no impairment exists at this time.
8
Changes to the carrying amount of goodwill for the six-month period ended April 30, 20042005 are as follows (Dollars in thousands):
Industrial Packaging & Services | Paper, Packaging & Services | Total | |||||||||
Balance at October 31, 2003 | $ | 220,619 | $ | 31,690 | $ | 252,309 | |||||
Goodwill acquired | 8 | 1,697 | 1,705 | ||||||||
Goodwill adjustment | (8,879 | ) | — | (8,879 | ) | ||||||
Currency translation | (2,428 | ) | — | (2,428 | ) | ||||||
Balance at April 30, 2004 | $ | 209,320 | $ | 33,387 | $ | 242,707 | |||||
The goodwill acquired relates to refinements to the allocation of the investment in CorrChoice, Inc. in the Paper, Packaging & Services segment.
Industrial Packaging & Services | Paper, Packaging & Services | Total | |||||||||
Balance at October 31, 2004 | $ | 204,975 | $ | 32,828 | $ | 237,803 | |||||
Goodwill adjustments | (1,510 | ) | — | (1,510 | ) | ||||||
Currency translation | (440 | ) | — | (440 | ) | ||||||
Balance at April 30, 2005 | $ | 203,025 | $ | 32,828 | $ | 235,853 | |||||
The goodwill adjustment was recorded during the second quarter of 2005 to recognize the cash surrender value of reinsurance contracts that are useda deferred tax asset related to fund pension payments in Europe. The adjustment, which relates to the Van Leer Industrial Packaging prior to its acquisition was recordedby the Company in the second quarter of 2004.2001.
8
All other intangible assets for the periods presented, except for $3.4 million, net, related to the Tri-Sure Trademark, 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, 20042005 and October 31, 20032004 are as follows (Dollars in thousands):
Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | Gross Intangible Assets | Accumulated Amortization | Net Intangible Assets | |||||||||||||
April 30, 2004: | ||||||||||||||||||
April 30, 2005: | ||||||||||||||||||
Trademarks and patents | $ | 18,077 | $ | 5,359 | $ | 12,718 | $ | 18,077 | $ | 6,727 | $ | 11,350 | ||||||
Non-compete agreements | 9,525 | 6,911 | 2,614 | 9,525 | 8,561 | 964 | ||||||||||||
Customer relationships | 6,582 | 230 | 6,352 | 7,425 | 748 | 6,677 | ||||||||||||
Other | 10,417 | 3,400 | 7,017 | 10,417 | 3,954 | 6,463 | ||||||||||||
Total | $ | 44,601 | $ | 15,900 | $ | 28,701 | $ | 45,444 | $ | 19,990 | $ | 25,454 | ||||||
October 31, 2003: | ||||||||||||||||||
October 31, 2004: | ||||||||||||||||||
Trademarks and patents | $ | 18,077 | $ | 4,675 | $ | 13,402 | $ | 18,077 | $ | 6,043 | $ | 12,034 | ||||||
Non-compete agreements | 9,525 | 5,985 | 3,540 | 9,525 | 7,731 | 1,794 | ||||||||||||
Customer relationships | 6,582 | 47 | 6,535 | 7,425 | 458 | 6,967 | ||||||||||||
Other | 10,417 | 3,240 | 7,177 | 10,417 | 3,688 | 6,729 | ||||||||||||
Total | $ | 44,601 | $ | 13,947 | $ | 30,654 | $ | 45,444 | $ | 17,920 | $ | 27,524 | ||||||
During the first six months of 2004,2005, there were no significant acquisitions of other intangible assets. Amortization expense for the six months ended April 30, 2005 and 2004 was $2.1 million and 2003 was $2.0 million.million, respectively. Amortization expense for the next five years is expected to be $4.0 million in 2004, $3.6$3.7 million in 2005, $2.9$3.0 million in 2006, $2.5 million in 2007, $2.5 million in 2008 and $2.4 million in 2008.
In accordance with the transition provisions of SFAS No. 141, “Business Combinations,” the Company recorded a $4.8 million gain as a cumulative effect of change in accounting principle for its remaining unamortized negative goodwill upon the adoption of SFAS No. 142 in the first quarter of 2003.2009.
NOTE 6 —7 – INVESTMENT IN AFFILIATES
The Company has investmentsan investment in Socer-Embalagens, Lda. (25%) and Balmer Lawrie-Van Leer (40%) that areis accounted for under the equity method. During the third quarter of 2004, the Company’s investment in Socer-Embalagens, Lda. (25%), which was previously accounted for under the equity method, was sold. The Company’s share of earnings for these affiliates is included in income as earned.
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The summarized unaudited financial information below represents the combined results of those entities accounted for by the equity method (Dollars in thousands):
Three months ended April 30, | Six months ended April 30, | Three months ended April 30, | Six months ended April 30, | |||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
Net sales | $ | 4,259 | $ | 4,036 | $ | 8,191 | $ | 7,395 | $ | 3,784 | $ | 4,259 | $ | 7,522 | $ | 8,191 | ||||||||
Gross profit | $ | 928 | $ | 850 | $ | 1,806 | $ | 1,600 | $ | 592 | $ | 928 | $ | 1,176 | $ | 1,806 | ||||||||
Net income | $ | 157 | $ | 174 | $ | 296 | $ | 274 | $ | 276 | $ | 157 | $ | 549 | $ | 296 |
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NOTE 7 —8 – RESTRUCTURING CHARGES
During 2003, the Company began its transformation initiatives, initially referred to as the performance improvement plan, which are expectedcontinue to enhance long-term organic sales growth, andgenerate productivity improvements and achieve permanent cost reductions. As a result, the Company incurred restructuring charges of $60.7 million in 2003 and incurred $27.5$54.1 million in 2004, and $14.0 million during the first six months of 2004. The2005 related to the transformation initiatives. As previously disclosed, the Company anticipates incurring additionalexpects a total of $15 million to $20 million in restructuring charges in 2005 related to transformation activities already begun prior to October 31, 2004. However, the Company is continuing to evaluate future rationalization options based on the progress of approximately $17.5 million to $22.5 million during the remainder of 2004.transformation initiatives to-date.
As part of the transformation initiatives, the Company closed two company-owned plants (Industrial Packaging & Services segment) during the first six months of 2005 and four company-owned plants (three in the Industrial Packaging & Services segment and one in the Paper, Packaging & Services segment) during the first six months ended April 30,of 2004. All of the plants arewere located in North America. In addition, corporate and administrative staff reductions have continuedbeen made throughout the world. As a result of the transformation initiatives, during the first six months of 2005, the Company recorded restructuring charges of $14.0 million, consisting of $7.0 million in employee separation costs, $0.1 million in asset impairments, $2.3 in professional fees directly related to the transformation initiatives and $4.6 million in other restructuring costs. During the second quarter of 2005, the Company also recorded $3.8 million of restructuring charges related to the impairment of two facilities, which are currently held for sale, that were closed during previous restructuring programs. During the first six months of 2004, the Company recognized pre-taxrecorded restructuring charges of $27.5 million, consisting of $9.0 million in employee separation costs, $2.3 million in asset impairments, $12.1 million in professional fees directly related to the transformation initiatives and $16.2$4.1 million in other costs, which were primarily for consulting services in connection with the transformation initiatives.restructuring costs. The asset impairment charges, which relaterelated to the write-down to fair value of buildings and equipment, arewere based on recent buy offers, market comparables and/or data obtained from the Company’s commercial real estate broker.
A total of approximately 9221,500 employees have been or will be terminated in connection with the transformation initiatives, 3151,445 of which werehave been terminated during the six months endedas of April 30, 2004. 2005.
For each of the Company’s business segments, amountssegment, costs incurred in the second quarter of 2004,2005, the cumulative amounts incurred from the start of the transformation initiatives through April 30, 20042005 and the
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total amountscosts expected to be incurred in connection with the transformation initiatives are as follows (Dollars in thousands):
Amounts Incurred | Cumulative Incurred to | Total Amounts Expected to be Incurred | Amounts Incurred in | Cumulative Incurred to | Total Amounts Expected to be Incurred | |||||||||||||
Industrial Packaging & Services: | ||||||||||||||||||
Employee separation costs | $ | 1,511 | $ | 36,684 | $ | 45,084 | $ | 6,630 | $ | 51,173 | $ | 51,173 | ||||||
Asset impairments | 75 | 8,173 | 10,973 | 153 | 9,821 | 9,821 | ||||||||||||
Other costs | 7,955 | 24,630 | 31,230 | |||||||||||||||
Professional fees | 1,684 | 24,021 | 25,654 | |||||||||||||||
Other restructuring costs | 4,362 | 20,713 | 24,513 | |||||||||||||||
9,541 | 69,487 | 87,287 | 12,829 | 105,728 | 111,161 | |||||||||||||
Paper, Packaging & Services: | ||||||||||||||||||
Employee separation costs | 567 | 6,939 | 6,939 | 406 | 7,409 | 7,409 | ||||||||||||
Asset impairments | — | 4,262 | 4,262 | — | 5,340 | 5,340 | ||||||||||||
Other costs | 2,098 | 7,102 | 7,102 | |||||||||||||||
Professional fees | 566 | 5,742 | 6,291 | |||||||||||||||
Other restructuring costs | 235 | 4,121 | 4,121 | |||||||||||||||
2,665 | 18,303 | 18,303 | 1,207 | 22,612 | 23,161 | |||||||||||||
Timber: | ||||||||||||||||||
Employee separation costs | — | 147 | 147 | 6 | 160 | 160 | ||||||||||||
Asset impairments | — | 36 | 36 | — | 39 | 39 | ||||||||||||
Other costs | 72 | 307 | 307 | |||||||||||||||
Professional fees | 19 | 224 | 242 | |||||||||||||||
Other restructuring costs | 3 | 162 | 162 | |||||||||||||||
72 | 490 | 490 | 28 | 585 | 603 | |||||||||||||
Total | $ | 12,278 | $ | 88,280 | $ | 106,080 | $ | 14,064 | $ | 128,925 | $ | 134,925 | ||||||
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Following is a reconciliation of the beginning and ending restructuring reserve balances for the six-month period ended April 30, 20042005 (Dollars in thousands):
Balance at October 31, 2003 | Costs Incurred and Charged to Expense | Costs Paid or Otherwise Settled | Balance at April 30, 2004 | Balance at October 31, 2004 | Costs Incurred and Charged to Expense | Costs Paid or Otherwise Settled | Balance at April 30, 2005 | |||||||||||||||||
Cash charges: | ||||||||||||||||||||||||
Employee separation costs | $ | 13,289 | $ | 9,033 | $ | 10,619 | $ | 11,703 | $ | 15,230 | $ | 6,316 | $ | 8,928 | $ | 12,618 | ||||||||
Other costs | 2,482 | 16,252 | 11,526 | 7,208 | ||||||||||||||||||||
Other restructuring costs | 2,053 | 7,595 | 8,014 | 1,634 | ||||||||||||||||||||
15,771 | 25,285 | 22,145 | 18,911 | 17,283 | 13,911 | 16,942 | 14,252 | |||||||||||||||||
Non-cash charges: | ||||||||||||||||||||||||
Asset impairments | 201 | 2,252 | 2,453 | — | — | 3,896 | 3,896 | — | ||||||||||||||||
Total | $ | 15,972 | $ | 27,537 | $ | 24,598 | $ | 18,911 | $ | 17,283 | $ | 17,807 | $ | 20,838 | $ | 14,252 | ||||||||
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NOTE 8 —9 – LONG-TERM DEBT
Long-term debt is summarized as follows (Dollars in thousands):
April 30, 2004 | October 31, 2003 | ||||||
$550 million Amended and Restated Senior Secured Credit Agreement | $ | 299,565 | $ | 308,783 | |||
8 7/8% Senior Subordinated Notes | 251,251 | 251,380 | |||||
Trade accounts receivable credit facility | 72,972 | 85,406 | |||||
Other long-term debt | 326 | 498 | |||||
624,114 | 646,067 | ||||||
Current portion | — | (3,000 | ) | ||||
$ | 624,114 | $ | 643,067 | ||||
April 30, 2005 | October 31, 2004 | |||||
Credit Agreement | $ | 129,390 | $ | — | ||
Senior Secured Credit Agreement | — | 81,398 | ||||
8 7/8 percent Senior Subordinated Notes | 249,867 | 253,960 | ||||
Trade accounts receivable credit facility | 86,958 | 103,857 | ||||
Other long-term debt | — | 18,200 | ||||
$ | 466,215 | $ | 457,415 | |||
$550Credit Agreement
As of March 2, 2005, the Company and certain of its international subsidiaries, as borrowers, entered into a $350 million AmendedCredit Agreement (the “Credit Agreement”) with a syndicate of financial institutions, as lenders, Deutsche Bank AG, New York Branch, as administrative agent, Deutsche Bank Securities Inc., as joint lead arranger and Restated sole book-runner, KeyBank National Association, as joint lead arranger and syndication agent and National City Bank, Fleet National Bank and ING Capital LLC, as co-documentation agents. The Credit Agreement provides for a $350 million revolving multicurrency credit facility. The revolving multicurrency credit facility is available for ongoing working capital and general corporate purposes and to refinance amounts outstanding under the Senior Secured Credit Agreement, which is described in the next section. Interest is based on a Eurocurrency rate or an alternative base rate that resets periodically plus a calculated margin amount. As a result, a debt extinguishment charge of $2.8 million was recorded during the second quarter of 2005.
On March 3, 2005, $189.4 million was borrowed under the revolving multicurrency credit facility in order to prepay the obligations outstanding under the Senior Secured Credit Agreement and certain costs and expenses incurred in connection with the Credit Agreement. As of April 30, 2005, $129.4 million was outstanding under the revolving multicurrency credit facility.
Senior Secured Credit Agreement
On August 23, 2002, the Company and certain of its non-United Statesinternational subsidiaries entered into a $550 million Amended and Restated Senior Secured Credit Agreement (the “Senior Secured Credit Agreement”) with a syndicate of lenders.lenders, which was replaced on March 2, 2005, as described above. A portion of the proceeds from the Senior Secured Credit Agreement was used to refinance amounts outstanding under the Company’s then existing $900 million senior secured credit agreement. The Amended and Restated Senior Secured Credit Agreement originally provided for a $300 million term loan and a $250 million revolving multicurrency credit facility. The revolving multicurrency credit facility iswas available for working capital and general corporate purposes, and has been permanently reduced to $240 million.purposes. On February 11, 2004, the Company amended its term loan
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under the Amended and Restated Senior Secured Credit Agreement. As a result of the amendment, the term loan was increased from its balance then outstanding of $226 million to $250 million and the applicable margin was lowered by 50 basis points while maintaining the existing maturity schedule. The incremental borrowings under the term loan were used to reduce borrowings under the revolving multicurrency credit facility. The term loanfacility, which was permanently reduced to $230 million. Interest was based on either a London InterBank Offered Rate (“LIBOR”) or an alternative base rate that was reset periodically reduces through its maturity date of August 23, 2009 and the revolving multicurrency credit facility matures on February 28, 2006.plus a calculated margin amount.
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8 7/8% Senior Subordinated Notes
On July 31, 2002, the Company issued Senior Subordinated Notes in the aggregate principal amount of $250 million, receiving net proceeds of approximately $248 million before expenses. At April 30, 2004,2005, the outstanding balance of $251.3$249.9 million included gains on fair value hedges the Company hashad in place to hedge interest rate risk. Interest on the Senior Subordinated Notes is payable semi-annually at the annual rate of 8.875%.8.875 percent. The Senior Subordinated Notes do not have required principal payments prior to maturity on August 1, 2012. However, the Senior Subordinated Notes are redeemable at the option of the Company beginning August 1, 2007, at the redemption prices set forth below (expressed as percentages of principal amount), plus accrued interest, if any, to the redemption date:
Year | Redemption Price | ||
2007 | 104.438 | % | |
2008 | 102.958 | % | |
2009 | 101.479 | % | |
2010 and thereafter | 100.000 | % |
In addition, prior to August 1, 2007, the Company may redeem the Senior Subordinated Notes by paying a specified “make-whole” premium.
A description of the guarantors of the Senior Subordinated Notes by the Company’s United States subsidiaries is included in Note 16.17.
Trade Accounts Receivable Credit Facility
On October 31, 2003, the Company entered into a five-year, up to $120$120.0 million, credit facility with an affiliate of a bank in connection with the securitization of certain of the Company’s U.S.United States trade accounts receivable. The credit facility is secured by certain of the Company’s U.S.United States trade accounts receivable and bears interest at a variable rate based on the London InterBank Offered Rate (“LIBOR”)LIBOR plus a margin or other agreed upon rate (1.40%(2.85 percent interest rate as of April 30, 2004)2005). The Company also pays a commitment fee. The Company can terminate this facility at any time upon 60 days prior written notice. In connection with this transaction, the Company established Greif Receivables Funding LLC, which is included in the Company’s consolidated financial statements. This entity purchases and services the Company’s trade accounts receivable that are subject to this credit facility. As of April 30, 2005, there was a total of $87.0 million outstanding under the trade accounts receivable credit facility.
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NOTE 9 —10 – FINANCIAL INSTRUMENTS
The Company had interest rate swap agreements with an aggregate notional amount of $345$290 million at April 30, 2004,2005 with various maturities through 2012. Under certain of these agreements, the Company receives interest quarterly from the counterparties equal to the LIBOR rate and pays interest at a weighted average rate of 5.6%5.93 percent over the life of the contracts. The Company is also party to agreements in which the Company receives interest semi-annually from the counterparty equal to a fixed rate of 8.875%8.875 percent and pays interest based on the LIBOR rate plus a spread. At
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April 30, 2004, amargin. A net liability for the loss on interest rate swap contracts, which represented their fair values at that time, in the amount of $12.3$4.4 million ($8.52.9 million, net of tax) at April 30, 2005 was recorded.
At April 30, 2004,2005, the Company had outstanding foreign currency forward contracts in the notional amount of $30.8$33.7 million. The fair value of these contracts at April 30, 20042005 resulted in a loss of $0.1$0.5 million recorded in the consolidated statementstatements of operations.income. The purpose of these contracts is to hedge the Company’s short-term intercompany loan balances with foreignits international businesses.
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. The values represent the estimated amounts the Company would pay or receive to terminate the agreements at the reporting date.
NOTE 10 —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 ½ cent per share per year. Further distribution in any year must be made in proportion of 1 cent a share for Class A Common Stock to 1 ½ 1/2 cents a share for Class B Common Stock. The Class A Common Stock has no voting rights unless four quarterly cumulative dividends upon the Class A Common Stock are in arrears. The Class B Common Stock has full voting rights. There is no cumulative voting for the election of directors.
14
The following table summarizes the Company’s Class A and Class B common and treasury shares at the specified dates:
Authorized Shares | Issued Shares | Outstanding Shares | Treasury Shares | Authorized Shares | Issued Shares | Outstanding Shares | Treasury Shares | |||||||||
April 30, 2004: | ||||||||||||||||
April 30, 2005: | ||||||||||||||||
Class A Common Stock | 32,000,000 | 21,140,960 | 10,797,605 | 10,343,355 | 32,000,000 | 21,140,960 | 11,537,381 | 9,603,579 | ||||||||
Class B Common Stock | 17,280,000 | 17,280,000 | 11,661,189 | 5,618,811 | 17,280,000 | 17,280,000 | 11,561,189 | 5,718,811 | ||||||||
October 31, 2003: | ||||||||||||||||
October 31, 2004: | ||||||||||||||||
Class A Common Stock | 32,000,000 | 21,140,960 | 10,573,346 | 10,567,614 | 32,000,000 | 21,140,960 | 11,025,466 | 10,115,494 | ||||||||
Class B Common Stock | 17,280,000 | 17,280,000 | 11,662,003 | 5,617,997 | 17,280,000 | 17,280,000 | 11,661,189 | 5,618,811 |
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NOTE 11 —12 – DIVIDENDS PER SHARE
The following dividends per share were paid during the periods indicated:
Three months ended April 30, | Six months ended April 30, | Three months ended April 30, | Six months ended April 30, | |||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
Class A Common Stock | $ | 0.14 | $ | 0.14 | $ | 0.28 | $ | 0.28 | $ | 0.16 | $ | 0.14 | $ | 0.32 | $ | 0.28 | ||||||||
Class B Common Stock | $ | 0.21 | $ | 0.21 | $ | 0.41 | $ | 0.41 | $ | 0.24 | $ | 0.21 | $ | 0.47 | $ | 0.41 |
NOTE 12 —13 – CALCULATION OF EARNINGS (LOSS) PER SHARE
The Company has two classes of common stock and, as such, applies the “two-class method” of computing earnings (loss) per share as prescribed in SFAS No. 128, “Earnings Per Share.” In accordance with the Statement, earnings (losses) 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 (losses) for the period have been distributed in the form of dividends.
The following is a reconciliation of the average shares used to calculate basic and diluted earnings (loss) per share:
Three months ended April 30, | Six months ended April 30, | Three months ended April 30, | Six months ended April 30, | |||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||
Class A Common Stock: | ||||||||||||||||
Basic shares | 10,783,122 | 10,570,846 | 10,701,627 | 10,566,743 | 11,377,891 | 10,783,122 | 11,248,592 | 10,701,627 | ||||||||
Assumed conversion of stock options | 238,269 | — | 234,908 | — | 435,858 | 238,269 | 387,701 | 234,908 | ||||||||
Diluted shares | 11,021,391 | 10,570,846 | 10,936,535 | 10,566,743 | 11,813,749 | 11,021,391 | 11,636,293 | 10,936,535 | ||||||||
Class B Common Stock: | ||||||||||||||||
Basic and diluted shares | 11,661,789 | 11,724,403 | 11,661,892 | 11,739,532 | 11,561,189 | 11,661,789 | 11,600,974 | 11,661,892 | ||||||||
There were no stock options and 12,000 stock options that were antidilutive for the three-month and six-month periods ended April 30, 2005, respectively, and 20,000 stock options that were antidilutive for the three-month and six-month periods ended April 30, 2004 (18,000 and 8,000 for the three-month and six-month periods, respectively, ended April 30, 2003).2004.
1415
NOTE 13 —14 – COMPREHENSIVE INCOME
Comprehensive income is comprised of net income (loss) and other charges and credits to equity that are not the result of transactions with the Company’s 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, | Three months ended April 30, | Six months ended April 30, | ||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | ||||||||||||||||||||||
Net income (loss) | $ | 8,449 | $ | (4,413 | ) | $ | 5,083 | $ | 518 | ||||||||||||||||||||
Net income | $ | 16,767 | $ | 8,449 | $ | 31,903 | $ | 5,083 | |||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||
Foreign currency translation adjustment | 6,541 | 7,264 | 4,765 | 5,019 | (2,716 | ) | 6,541 | 7,972 | 4,765 | ||||||||||||||||||||
Change in market value of interest rate derivatives, net of tax | 2,283 | (964 | ) | 2,668 | (824 | ) | 1,017 | 2,283 | 2,698 | 2,668 | |||||||||||||||||||
Minimum pension liability adjustment, net of tax | — | (1,224 | ) | (497 | ) | (1,224 | ) | — | — | — | (497 | ) | |||||||||||||||||
Comprehensive income | $ | 17,273 | $ | 663 | $ | 12,019 | $ | 3,489 | $ | 15,068 | $ | 17,273 | $ | 42,573 | $ | 12,019 | |||||||||||||
NOTE 14 —15 – RETIREMENT PLANS AND POSTRETIREMENT HEALTH CAREHEALTHCARE 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, | Three months ended April 30, | Six months ended April 30, | |||||||||||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||||||||||
Service cost | $ | 3,070 | $ | 2,783 | $ | 6,140 | $ | 5,567 | $ | 3,169 | $ | 3,070 | $ | 6,334 | $ | 6,140 | ||||||||||||||||
Interest cost | 6,110 | 5,620 | 12,221 | 11,240 | 6,608 | 6,110 | 13,227 | 12,221 | ||||||||||||||||||||||||
Expected return on plan assets | (7,069 | ) | (6,580 | ) | (14,138 | ) | (13,161 | ) | (7,383 | ) | (7,069 | ) | (14,770 | ) | (14,138 | ) | ||||||||||||||||
Amortization of prior service cost, initial net asset and net actuarial gain | 749 | 228 | 1,498 | 456 | 1,161 | 749 | 2,324 | 1,498 | ||||||||||||||||||||||||
$ | 2,860 | $ | 2,051 | $ | 5,721 | $ | 4,102 | $ | 3,555 | $ | 2,860 | $ | 7,115 | $ | 5,721 | |||||||||||||||||
The Company made $2.4$8.8 million in pension contributions in the first half of 2004.2005. Based on minimum funding requirements, $16.6 million of pension contributions are estimated for the entire 20042005 fiscal year are estimated at $11.2 million.year.
The components of net periodic cost for postretirement healthcare and life insurance benefits include the following (Dollars in thousands):
Three months ended April 30, | Six months ended April 30, | |||||||||||||||
2004 | 2003 | 2004 | 2003 | |||||||||||||
Service cost | $ | 15 | $ | 34 | $ | 29 | $ | 68 | ||||||||
Interest cost | 833 | 884 | 1,666 | 1,767 | ||||||||||||
Amortization of net prior service cost and recognized actuarial loss | (31 | ) | (12 | ) | (63 | ) | (25 | ) | ||||||||
$ | 817 | $ | 906 | $ | 1,632 | $ | 1,810 | |||||||||
�� |
On December 8, 2003, the “Medicare Prescription Drug Improvement and Modernization Act of 2003” (the “Act”) was signed into law. The Act introduces a prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least “actuarially equivalent” to Medicare Part D.
Three months ended April 30, | Six months ended April 30, | |||||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 6 | $ | 15 | $ | 11 | $ | 29 | ||||||||
Interest cost | 784 | 833 | 1,571 | 1,666 | ||||||||||||
Amortization of net prior service cost and recognized actuarial loss | (57 | ) | (31 | ) | (116 | ) | (63 | ) | ||||||||
$ | 733 | $ | 817 | $ | 1,466 | $ | 1,632 | |||||||||
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A proposed FASB Staff Position 106-b (“FSP 106-b”) was issued providing guidance on accounting for the effects of the Act for employers that sponsor postretirement health care plans providing prescription drug benefits. FSP 106-b supersedes FSP FAS 106-1, “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003.”
The guidance in FSP 106-b applies only to the sponsor of a single-employer defined benefit postretirement health plan for which the employer has concluded that prescription drug benefits available under the plan are actuarially equivalent and thus qualify for the subsidy under the Act and the expected subsidy will offset or reduce the employer’s share of the costs of postretirement prescription drug coverage provided by the plan. FSP 106-b is effective for the first interim or annual period beginning after June 15, 2004.
The Company has determined that its plan is actuarially equivalent and has compared the Medicare Part D plan to its retiree prescription drug coverage using actuarial equivalencies and reflecting the retiree premiums and cost sharing provisions of the various plans. This analysis shows the Company’s plans provide more valuable benefits to retirees than the Medicare Part D plan. As permitted in FSP FAS 106-1, the Company has elected to defer recognition of the expected subsidy from the Medicare Act. The adjustment will not have a material impact on the Company’s financial position or results of operations.
NOTE 15 —16 – 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 involve the production and sale of industrial packaging and related services. 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.
Operations in the Timber segment involve the management and sale of timber in the southeastern United States (approximately 281,000 acres of timberland were owned at April 30, 2005). The Company also owns approximately 35,000 acres of timberland in Canada, which are not actively managed at this time. In May 2005, the Company completed the first phase of the sale of 56,000 acres of timberland, timber and associated assets for approximately $90 million, subject to closing adjustments. In this first phase, 35,000 acres of the Company’s timberland holdings in Florida, Georgia and Alabama were sold for approximately $51 million in the third quarter of 2005. The second phase of this transaction is expected to occur in several installments during 2006. For further information, see Note 18 – Subsequent Event.
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 “Description of Business and Summary of Significant Accounting Policies” note (see Note 1) in the 20032004 Form 10-K, except that the Company accounts for inventories on a first-in, first-out basis at the segment level compared to a last-in, first-out basis at the consolidated level for most locations in the United States.10-K.
1617
The following segment information is presented for the periods indicated (Dollars in thousands):
Three months ended April 30, | Six months ended April 30, | Three months ended April 30, | Six months ended April 30, | |||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
Net sales: | ||||||||||||||||||||||||
Industrial Packaging & Services | $ | 399,689 | $ | 343,387 | $ | 737,080 | $ | 646,535 | $ | 458,404 | $ | 399,689 | $ | 887,446 | $ | 737,080 | ||||||||
Paper, Packaging & Services | 138,043 | 120,775 | 263,337 | 245,455 | 150,034 | 138,043 | 298,239 | 263,337 | ||||||||||||||||
Timber | 4,457 | 6,645 | 10,632 | 13,495 | 4,522 | 4,457 | 9,839 | 10,632 | ||||||||||||||||
Total net sales | $ | 542,189 | $ | 470,807 | $ | 1,011,049 | $ | 905,485 | $ | 612,960 | $ | 542,189 | $ | 1,195,524 | $ | 1,011,049 | ||||||||
Operating profit: | ||||||||||||||||||||||||
Operating profit before restructuring charges and timberland gains: | ||||||||||||||||||||||||
Industrial Packaging & Services | $ | 27,760 | $ | 13,942 | $ | 36,611 | $ | 17,457 | $ | 29,411 | $ | 27,760 | $ | 47,090 | $ | 36,611 | ||||||||
Paper, Packaging & Services | 2,435 | 4,821 | 7,788 | 12,712 | 10,372 | 2,435 | 19,963 | 7,788 | ||||||||||||||||
Timber | 3,079 | 4,846 | 7,475 | 9,683 | 2,868 | 3,079 | 6,875 | 7,475 | ||||||||||||||||
Total operating profit before restructuring charges and timberland gains | 33,274 | 23,609 | 51,874 | 39,852 | ||||||||||||||||||||
Operating profit before restructuring charges and timberland gains | 42,651 | 33,274 | 73,928 | 51,874 | ||||||||||||||||||||
Restructuring charges: | ||||||||||||||||||||||||
Industrial Packaging & Services | 9,541 | 13,562 | 21,563 | 14,727 | 8,809 | 9,540 | 15,607 | 21,563 | ||||||||||||||||
Paper, Packaging & Services | 2,665 | 3,791 | 5,834 | 4,165 | 1,764 | 2,665 | 2,141 | 5,834 | ||||||||||||||||
Timber | 72 | 96 | 140 | 96 | 48 | 73 | 59 | 140 | ||||||||||||||||
Total restructuring charges | 12,278 | 17,449 | 27,537 | 18,988 | 10,621 | 12,278 | 17,807 | 27,537 | ||||||||||||||||
Timberland gains: | �� | |||||||||||||||||||||||
Timber | 1,364 | 1,568 | 5,298 | 1,964 | 3,393 | 1,364 | 11,465 | 5,298 | ||||||||||||||||
Total | $ | 22,360 | $ | 7,728 | $ | 29,635 | $ | 22,828 | $ | 35,423 | $ | 22,360 | $ | 67,586 | $ | 29,635 | ||||||||
Depreciation, depletion and amortization expense: | ||||||||||||||||||||||||
Industrial Packaging & Services | $ | 17,019 | $ | 16,088 | $ | 34,078 | $ | 30,942 | $ | 16,176 | $ | 17,019 | $ | 32,312 | $ | 34,078 | ||||||||
Paper, Packaging & Services | 8,486 | 8,707 | 17,311 | 17,554 | 8,322 | 8,486 | 16,774 | 17,311 | ||||||||||||||||
Timber | 592 | 354 | 1,418 | 754 | 694 | 592 | 1,088 | 1,418 | ||||||||||||||||
Total depreciation, depletion and amortization expense | $ | 26,097 | $ | 25,149 | $ | 52,807 | $ | 49,250 | $ | 25,192 | $ | 26,097 | $ | 50,174 | $ | 52,807 | ||||||||
April 30, 2004 | October 31, 2003 | April 30, 2005 | October 31, 2004 | |||||||||
Assets: | ||||||||||||
Industrial Packaging & Services | $ | 1,147,867 | $ | 1,153,939 | $ | 1,223,950 | $ | 1,201,689 | ||||
Paper, Packaging & Services | 295,739 | 341,305 | 291,556 | 303,245 | ||||||||
Timber | 128,636 | 123,582 | 142,741 | 130,688 | ||||||||
Total segment | 1,572,242 | 1,618,826 | 1,658,247 | 1,635,622 | ||||||||
Corporate and other | 230,157 | 212,385 | 160,114 | 177,616 | ||||||||
Total assets | $ | 1,802,399 | $ | 1,831,211 | $ | 1,818,361 | $ | 1,813,238 | ||||
17
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, | Three months ended April 30, | Six months ended April 30, | |||||||||||||||||||||
2004 | 2003 | 2004 | 2003 | 2005 | 2004 | 2005 | 2004 | |||||||||||||||||
Net sales: | ||||||||||||||||||||||||
North America | $ | 305,470 | $ | 283,980 | $ | 573,494 | $ | 559,037 | $ | 332,515 | $ | 305,470 | $ | 649,691 | $ | 573,494 | ||||||||
Europe | 159,001 | 129,407 | 291,947 | 236,728 | 191,316 | 159,001 | 367,486 | 291,947 | ||||||||||||||||
Other | 77,718 | 57,420 | 145,608 | 109,720 | 89,129 | 77,718 | 178,347 | 145,608 | ||||||||||||||||
Total net sales | $ | 542,189 | $ | 470,807 | $ | 1,011,049 | $ | 905,485 | $ | 612,960 | $ | 542,189 | $ | 1,195,524 | $ | 1,011,049 | ||||||||
18
The following table presents total assets by geographic area (Dollars in thousands):
April 30, 2004 | October 31, 2003 | April 30, 2005 | October 31, 2004 | |||||||||
Assets: | ||||||||||||
North America | $ | 1,194,695 | $ | 1,253,983 | $ | 1,151,074 | $ | 1,136,781 | ||||
Europe | 414,486 | 389,171 | 436,918 | 469,094 | ||||||||
Other | 193,218 | 188,057 | 230,369 | 207,363 | ||||||||
Total assets | $ | 1,802,399 | $ | 1,831,211 | $ | 1,818,361 | $ | 1,813,238 | ||||
NOTE 16 —17 – SUMMARIZED CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Senior Subordinated Notes, more fully described in Note 8 – Long-Term Debt, are fully guaranteed, jointly and severally, by the Company’s United States subsidiaries (“Guarantor Subsidiaries”). The Company’s 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 Company’s operating units, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the Company on a consolidated basis.
On November 1, 2004, the Company restructured certain of its United States operations and subsidiaries. As a result, the condensed consolidating financial statements at April 30, 2005 and for the three-month and six-month periods ended April 30, 2005 reflect these changes.
Presented below are condensed consolidating financial statements of the Parent, the Guarantor Subsidiaries and the non-Guarantor Subsidiaries at April 30, 2005 and October 31, 2004, and for the three-month and six-month periods ended April 30, 2005 and 2004. These summarized condensed consolidating financial statements are prepared using the equity method. Separate financial statements for the Guarantor Subsidiaries are not presented based on management’s determination that they do not provide additional information that is material to investors.
1819
Condensed Consolidating Statement of Operations Three months ended April 30, 2004
| |||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 168,899 | $ | 152,821 | $ | 284,337 | $ | (63,868 | ) | $ | 542,189 | ||||||||
Cost of products sold | 144,371 | 132,585 | 239,840 | (63,868 | ) | 452,928 | |||||||||||||
Gross profit | 24,528 | 20,236 | 44,497 | — | 89,261 | ||||||||||||||
Selling, general and administrative expenses | 23,002 | 5,643 | 27,100 | — | 55,745 | ||||||||||||||
Restructuring charges | 1,841 | 9,583 | 854 | — | 12,278 | ||||||||||||||
Gain on sale of assets | — | 882 | 240 | — | 1,122 | ||||||||||||||
Operating profit (loss) | (315 | ) | 5,892 | 16,783 | — | 22,360 | |||||||||||||
Interest expense, net | 9,346 | 425 | 945 | — | 10,716 | ||||||||||||||
Other income (expense), net(1) | (10,153 | ) | 9,735 | 1,112 | — | 694 | |||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | (19,814 | ) | 15,202 | 16,950 | — | 12,338 | |||||||||||||
Income tax expense (benefit) | (6,102 | ) | 4,682 | 5,220 | — | 3,800 | |||||||||||||
Equity in earnings of affiliates and minority interests | 22,161 | — | (89 | ) | (22,161 | ) | (89 | ) | |||||||||||
Net income (loss) | $ | 8,449 | $ | 10,520 | $ | 11,641 | $ | (22,161 | ) | $ | 8,449 | ||||||||
Condensed Consolidating StatementStatements of OperationsIncome
SixFor the three months ended April 30, 20042005
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 322,689 | $ | 283,979 | $ | 524,091 | $ | (119,710 | ) | $ | 1,011,049 | ||||||||
Cost of products sold | 280,059 | 245,141 | 446,848 | (119,710 | ) | 852,338 | |||||||||||||
Gross profit | 42,630 | 38,838 | 77,243 | — | 158,711 | ||||||||||||||
Selling, general and administrative expenses | 47,961 | 9,443 | 49,366 | — | 106,770 | ||||||||||||||
Restructuring charges | 5,049 | 18,991 | 3,497 | — | 27,537 | ||||||||||||||
Gain on sale of assets | — | 4,901 | 330 | — | 5,231 | ||||||||||||||
Operating profit (loss) | (10,380 | ) | 15,305 | 24,710 | — | 29,635 | |||||||||||||
Interest expense, net | 19,518 | 1,489 | 1,956 | — | 22,963 | ||||||||||||||
Other income (expense), net(1) | (19,042 | ) | 14,614 | 5,344 | — | 916 | |||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | (48,940 | ) | 28,430 | 28,098 | — | 7,588 | |||||||||||||
Income tax expense (benefit) | (15,073 | ) | 8,756 | 8,654 | — | 2,337 | |||||||||||||
Equity in earnings of affiliates and minority interests | 38,950 | — | (168 | ) | (38,950 | ) | (168 | ) | |||||||||||
Net income (loss) | $ | 5,083 | $ | 19,674 | $ | 19,276 | $ | (38,950 | ) | $ | 5,083 | ||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 1,326 | $ | 328,866 | $ | 311,844 | $ | (29,076 | ) | $ | 612,960 | ||||||||
Cost of products sold | 994 | 279,135 | 263,989 | (29,076 | ) | 515,042 | |||||||||||||
Gross profit | 332 | 49,731 | 47,855 | — | 97,918 | ||||||||||||||
Selling, general and administrative expenses | 304 | 30,650 | 25,114 | — | 56,068 | ||||||||||||||
Restructuring charges | — | 4,670 | 5,951 | — | 10,621 | ||||||||||||||
Gain on sale of assets | — | 3,029 | 1,165 | — | 4,194 | ||||||||||||||
Operating profit | 28 | 17,440 | 17,955 | — | 35,423 | ||||||||||||||
Interest expense, net | — | 8,707 | 1,986 | — | 10,693 | ||||||||||||||
Debt extinguishment charge | — | 2,828 | — | — | 2,828 | ||||||||||||||
Other income (expense), net (1) | 4 | (3,494 | ) | 5,463 | — | 1,973 | |||||||||||||
Income before income tax expense and equity in earnings of affiliates and minority interests | 32 | 2,411 | 21,432 | — | 23,875 | ||||||||||||||
Income tax expense | 9 | 754 | 6,238 | — | 7,001 | ||||||||||||||
Equity in earnings of affiliates and minority interests | 16,744 | — | (107 | ) | (16,744 | ) | (107 | ) | |||||||||||
Net income (loss) | $ | 16,767 | $ | 1,657 | $ | 15,087 | $ | (16,744 | ) | $ | 16,767 | ||||||||
For the six months ended April 30, 2005
|
| ||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 2,592 | $ | 646,223 | $ | 607,240 | $ | (60,531 | ) | $ | 1,195,524 | ||||||||
Cost of products sold | 1,929 | 551,509 | 515,973 | (60,531 | ) | 1,008,880 | |||||||||||||
Gross profit | 663 | 94,714 | 91,267 | — | 186,644 | ||||||||||||||
Selling, general and administrative expenses | 605 | 60,733 | 54,451 | — | 115,789 | ||||||||||||||
Restructuring charges | — | 9,155 | 8,652 | — | 17,807 | ||||||||||||||
Gain on sale of assets | — | 13,453 | 1,085 | — | 14,538 | ||||||||||||||
Operating profit | 58 | 38,279 | 29,249 | — | 67,586 | ||||||||||||||
Interest expense, net | — | 17,682 | 3,104 | — | 20,786 | ||||||||||||||
Debt extinguishment charge | — | 2,828 | — | — | 2,828 | ||||||||||||||
Other income (expense), net (1) | 6 | (6,542 | ) | 7,743 | — | 1,207 | |||||||||||||
Income before income tax expense and equity in earnings of affiliates and minority interests | 64 | 11,227 | 33,888 | — | 45,179 | ||||||||||||||
Income tax expense | 18 | 3,222 | 9,726 | — | 12,966 | ||||||||||||||
Equity in earnings of affiliates and minority interests | 31,857 | — | (310 | ) | (31,857 | ) | (310 | ) | |||||||||||
Net income (loss) | $ | 31,903 | $ | 8,005 | $ | 23,852 | $ | (31,857 | ) | $ | 31,903 | ||||||||
(1) |
19
Condensed Consolidating Statement of Operations
Three months ended April 30, 2003
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | 173,569 | $ | 129,209 | $ | 227,367 | $ | (59,338 | ) | $ | 470,807 | |||||||||
Cost of products sold | 149,645 | 107,893 | 190,364 | (59,338 | ) | 388,564 | ||||||||||||||
Gross profit | 23,924 | 21,316 | 37,003 | — | 82,243 | |||||||||||||||
Selling, general and administrative expenses | 28,138 | 5,231 | 25,631 | — | 59,000 | |||||||||||||||
Restructuring charges | 2,411 | 10,058 | 4,980 | — | 17,449 | |||||||||||||||
Gain on sale of assets | 22 | 1,243 | 669 | — | 1,934 | |||||||||||||||
Operating profit (loss) | (6,603 | ) | 7,270 | 7,061 | — | 7,728 | ||||||||||||||
Interest expense (income), net | 12,312 | (24 | ) | 1,635 | — | 13,923 | ||||||||||||||
Other income (expense), net(1) | (10,254 | ) | 11,481 | 911 | — | 2,138 | ||||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | (29,169 | ) | 18,775 | 6,337 | — | (4,057 | ) | |||||||||||||
Income tax expense (benefit) | (8,462 | ) | 5,304 | 1,860 | — | (1,298 | ) | |||||||||||||
Equity in earnings of affiliates and minority interests | 16,294 | (4,254 | ) | (191 | ) | (13,503 | ) | (1,654 | ) | |||||||||||
Net income (loss) | $ | (4,413 | ) | $ | 9,217 | $ | 4,286 | $ | (13,503 | ) | $ | (4,413 | ) | |||||||
Condensed Consolidating Statement of Operations
Six months ended April 30, 2003
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
Net sales | $ | 342,195 | $ | 253,362 | $ | 422,181 | $ | (112,253 | ) | $ | 905,485 | |||||||||
Cost of products sold | 293,280 | 212,188 | 354,298 | (112,253 | ) | 747,513 | ||||||||||||||
Gross profit | 48,915 | 41,174 | 67,883 | — | 157,972 | |||||||||||||||
Selling, general and administrative expenses | 51,227 | 17,665 | 49,609 | — | 118,501 | |||||||||||||||
Restructuring charges | 3,534 | 10,058 | 5,396 | — | 18,988 | |||||||||||||||
Gain on sale of assets | 34 | 1,693 | 618 | — | 2,345 | |||||||||||||||
Operating profit (loss) | (5,812 | ) | 15,144 | 13,496 | — | 22,828 | ||||||||||||||
Interest expense (income), net | 24,789 | (372 | ) | 3,060 | — | 27,477 | ||||||||||||||
Other income (expense), net(1) | (20,345 | ) | 22,627 | 80 | — | 2,362 | ||||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | (50,946 | ) | 38,143 | 10,516 | — | (2,287 | ) | |||||||||||||
Income tax expense (benefit) | (16,303 | ) | 12,206 | 3,365 | — | (732 | ) | |||||||||||||
Equity in earnings of affiliates and minority interests | 30,339 | (7,973 | ) | (201 | ) | (24,914 | ) | (2,749 | ) | |||||||||||
Income (loss) before cumulative effect of change in accounting principle | (4,304 | ) | 17,964 | 6,950 | (24,914 | ) | (4,304 | ) | ||||||||||||
Cumulative effect of change in accounting principle | 4,822 | — | — | — | 4,822 | |||||||||||||||
Net income (loss) | $ | 518 | $ | 17,964 | $ | 6,950 | $ | (24,914 | ) | $ | 518 | |||||||||
20
Condensed Consolidating Balance SheetStatement of Income
For the Three months ended April 30, 2004
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 4,515 | $ | 25,077 | $ | — | $ | 29,592 | ||||||
Trade accounts receivable | 73,458 | 55,755 | 177,249 | — | 306,462 | |||||||||||
Inventories | 13,501 | 43,843 | 103,063 | — | 160,407 | |||||||||||
Other current assets | 38,059 | 8,599 | 36,963 | — | 83,621 | |||||||||||
125,018 | 112,712 | 342,352 | — | 580,082 | ||||||||||||
Long-term assets | ||||||||||||||||
Goodwill and other intangible assets | 113,438 | 39,626 | 118,344 | — | 271,408 | |||||||||||
Other long-term assets | 933,003 | 523,125 | 30,725 | (1,417,196 | ) | 69,657 | ||||||||||
1,046,441 | 562,751 | 149,069 | (1,417,196 | ) | 341,065 | |||||||||||
Properties, plants and equipment, net | 231,723 | 373,459 | 276,070 | — | 881,252 | |||||||||||
$ | 1,403,182 | $ | 1,048,922 | $ | 767,491 | $ | (1,417,196 | ) | $ | 1,802,399 | ||||||
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 18,792 | $ | 29,660 | $ | 110,454 | $ | — | $ | 158,906 | ||||||
Short-term borrowings | — | — | 20,200 | — | 20,200 | |||||||||||
Other current liabilities | 17,939 | 33,982 | 68,301 | — | 120,222 | |||||||||||
36,731 | 63,642 | 198,955 | — | 299,328 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Long-term debt | 616,991 | — | 7,123 | — | 624,114 | |||||||||||
Other long-term liabilities | 166,426 | 56,738 | 71,227 | — | 294,391 | |||||||||||
783,417 | 56,738 | 78,350 | — | 918,505 | ||||||||||||
Minority interest | — | — | 1,532 | — | 1,532 | |||||||||||
Shareholders’ equity | 583,034 | 928,542 | 488,654 | (1,417,196 | ) | 583,034 | ||||||||||
$ | 1,403,182 | $ | 1,048,922 | $ | 767,491 | $ | (1,417,196 | ) | $ | 1,802,399 | ||||||
Condensed Consolidating Balance Sheet
October 31, 2003
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 26,421 | $ | 23,346 | $ | — | $ | 49,767 | ||||||
Trade accounts receivable | 84,282 | 49,517 | 161,158 | — | 294,957 | |||||||||||
Inventories | 16,896 | 46,696 | 103,565 | — | 167,157 | |||||||||||
Other current assets | 30,938 | 8,348 | 32,290 | — | 71,576 | |||||||||||
132,116 | 130,982 | 320,359 | — | 583,457 | ||||||||||||
Long-term assets | ||||||||||||||||
Goodwill and other intangible assets | 113,117 | 38,847 | 130,999 | — | 282,963 | |||||||||||
Other long-term assets | 952,972 | 524,372 | 10,651 | (1,435,579 | ) | 52,416 | ||||||||||
1,066,089 | 563,219 | 141,650 | (1,435,579 | ) | 335,379 | |||||||||||
Properties, plants and equipment, net | 243,007 | 383,205 | 286,163 | — | 912,375 | |||||||||||
$ | 1,441,212 | $ | 1,077,406 | $ | 748,172 | $ | (1,435,579 | ) | $ | 1,831,211 | ||||||
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 26,776 | $ | 39,392 | $ | 92,165 | $ | — | $ | 158,333 | ||||||
Short-term borrowings | — | — | 15,605 | — | 15,605 | |||||||||||
Current portion of long-term debt | 3,000 | — | — | — | 3,000 | |||||||||||
Other current liabilities | 20,353 | 22,146 | 92,881 | — | 135,380 | |||||||||||
50,129 | 61,538 | 200,651 | — | 312,318 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Long-term debt | 637,034 | — | 6,033 | — | 643,067 | |||||||||||
Other long-term liabilities | 181,485 | 56,645 | 63,246 | — | 301,376 | |||||||||||
818,519 | 56,645 | 69,279 | — | 944,443 | ||||||||||||
Minority interest | — | — | 1,886 | — | 1,886 | |||||||||||
Shareholders’ equity | 572,564 | 959,223 | 476,356 | (1,435,579 | ) | 572,564 | ||||||||||
$ | 1,441,212 | $ | 1,077,406 | $ | 748,172 | $ | (1,435,579 | ) | $ | 1,831,211 | ||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 168,899 | $ | 152,821 | $ | 284,337 | $ | (63,868 | ) | $ | 542,189 | ||||||||
Cost of products sold | 144,371 | 132,585 | 239,840 | (63,868 | ) | 452,928 | |||||||||||||
Gross profit | 24,528 | 20,236 | 44,497 | — | 89,261 | ||||||||||||||
Selling, general and administrative expenses | 23,002 | 5,643 | 27,100 | — | 55,745 | ||||||||||||||
Restructuring charges | 1,841 | 9,583 | 854 | — | 12,278 | ||||||||||||||
Gain on sale of assets | — | 882 | 240 | — | 1,122 | ||||||||||||||
Operating profit (loss) | (315 | ) | 5,892 | 16,783 | — | 22,360 | |||||||||||||
Interest expense, net | 9,346 | 425 | 945 | — | 10,716 | ||||||||||||||
Other income (expense), net (1) | (10,153 | ) | 9,735 | 1,112 | — | 694 | |||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | (19,814 | ) | 15,202 | 16,950 | — | 12,338 | |||||||||||||
Income tax expense (benefit) | (6,102 | ) | 4,682 | 5,220 | — | 3,800 | |||||||||||||
Equity in earnings of affiliates and minority interests | 22,161 | — | (89 | ) | (22,161 | ) | (89 | ) | |||||||||||
Net income (loss) | $ | 8,449 | $ | 10,520 | $ | 11,641 | $ | (22,161 | ) | $ | 8,449 | ||||||||
For the Six months ended April 30, 2004 | |||||||||||||||||||
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Net sales | $ | 322,689 | $ | 283,979 | $ | 524,091 | $ | (119,710 | ) | $ | 1,011,049 | ||||||||
Cost of products sold | 280,059 | 245,141 | 446,848 | (119,710 | ) | 852,338 | |||||||||||||
Gross profit | 42,630 | 38,838 | 77,243 | — | 158,711 | ||||||||||||||
Selling, general and administrative expenses | 47,961 | 9,443 | 49,366 | — | 106,770 | ||||||||||||||
Restructuring charges | 5,049 | 18,991 | 3,497 | — | 27,537 | ||||||||||||||
Gain on sale of assets | — | 4,901 | 330 | — | 5,231 | ||||||||||||||
Operating profit (loss) | (10,380 | ) | 15,305 | 24,710 | — | 29,635 | |||||||||||||
Interest expense, net | 19,518 | 1,489 | 1,956 | — | 22,963 | ||||||||||||||
Other income (expense), net (1) | (19,042 | ) | 14,614 | 5,344 | — | 916 | |||||||||||||
Income (loss) before income tax expense (benefit) and equity in earnings of affiliates and minority interests | (48,940 | ) | 28,430 | 28,098 | — | 7,588 | |||||||||||||
Income tax expense (benefit) | (15,073 | ) | 8,756 | 8,654 | — | 2,337 | |||||||||||||
Equity in earnings of affiliates and minority interests | 38,950 | — | (168 | ) | (38,950 | ) | (168 | ) | |||||||||||
Net income (loss) | $ | 5,083 | $ | 19,674 | $ | 19,276 | $ | (38,950 | ) | $ | 5,083 | ||||||||
(1) | Includes amounts that relate to intercompany royalty arrangements. |
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Condensed Consolidating StatementBalance Sheets
April 30, 2005
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 25,440 | $ | 26,589 | $ | — | $ | 52,029 | ||||||
Trade accounts receivable | 805 | 138,190 | 143,569 | — | 282,564 | |||||||||||
Inventories | 282 | 65,655 | 156,212 | — | 222,149 | |||||||||||
Other current assets | 1,826 | 16,878 | 68,231 | — | 86,935 | |||||||||||
2,913 | 246,163 | 394,601 | — | 643,677 | ||||||||||||
Long-term assets | ||||||||||||||||
Goodwill and other intangible assets | — | 141,526 | 119,781 | — | 261,307 | |||||||||||
Other long-term assets | 1,101,769 | 614,353 | 13,768 | (1,673,527 | ) | 56,363 | ||||||||||
1,101,769 | 755,879 | 133,549 | (1,673,527 | ) | 317,670 | |||||||||||
Properties, plants and equipment, net | 2,009 | 575,760 | 279,245 | — | 857,014 | |||||||||||
$ | 1,106,691 | $ | 1,577,802 | $ | 807,395 | $ | (1,673,527 | ) | $ | 1,818,361 | ||||||
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 92 | $ | 101,335 | $ | 140,503 | $ | — | $ | 241,930 | ||||||
Short-term borrowings | — | — | 23,506 | — | 23,506 | |||||||||||
Other current liabilities | 4,663 | 21,106 | 107,765 | — | 133,534 | |||||||||||
4,755 | 122,441 | 271,774 | — | 398,970 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Long-term debt | 429,527 | — | 36,688 | — | 466,215 | |||||||||||
Other long-term liabilities | 104 | 199,955 | 79,522 | — | 279,581 | |||||||||||
429,631 | 199,955 | 116,210 | — | 745,796 | ||||||||||||
Minority interest | — | 35 | 1,255 | — | 1,290 | |||||||||||
Shareholders’ equity | 672,305 | 1,255,371 | 418,156 | (1,673,527 | ) | 672,305 | ||||||||||
$ | 1,106,691 | $ | 1,577,802 | $ | 807,395 | $ | (1,673,527 | ) | $ | 1,818,361 | ||||||
October 31, 2004
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | ||||||||||||
ASSETS | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | $ | — | $ | 13,784 | $ | 24,325 | $ | — | $ | 38,109 | ||||||
Trade accounts receivable | 87,737 | 62,196 | 157,817 | — | 307,750 | |||||||||||
Inventories | 11,626 | 49,328 | 130,503 | — | 191,457 | |||||||||||
Other current assets | 16,320 | 8,913 | 50,133 | — | 75,366 | |||||||||||
115,683 | 134,221 | 362,778 | — | 612,682 | ||||||||||||
Long-term assets | ||||||||||||||||
Goodwill and other intangible assets | 113,291 | 28,556 | 123,480 | — | 265,327 | |||||||||||
Other long-term assets | 808,519 | 399,106 | 26,687 | (1,179,765 | ) | 54,547 | ||||||||||
921,810 | 427,662 | 150,167 | (1,179,765 | ) | 319,874 | |||||||||||
Properties, plants and equipment, net | 231,337 | 360,376 | 288,969 | — | 880,682 | |||||||||||
$ | 1,268,830 | $ | 922,259 | $ | 801,914 | $ | (1,179,765 | ) | $ | 1,813,238 | ||||||
LIABILITIES & SHAREHOLDERS’ EQUITY | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable | $ | 26,990 | $ | 86,895 | $ | 167,380 | $ | — | $ | 281,265 | ||||||
Short-term borrowings | — | — | 11,621 | — | 11,621 | |||||||||||
Other current liabilities | 4,477 | 51,339 | 88,516 | — | 144,332 | |||||||||||
31,467 | 138,234 | 267,517 | — | 437,218 | ||||||||||||
Long-term liabilities | ||||||||||||||||
Long-term debt | 437,863 | — | 19,552 | — | 457,415 | |||||||||||
Other long-term liabilities | 170,406 | 38,378 | 79,002 | — | 287,786 | |||||||||||
608,269 | 38,378 | 98,554 | — | 745,201 | ||||||||||||
Minority interest | — | — | 1,725 | — | 1,725 | |||||||||||
Shareholders’ equity | 629,094 | 745,647 | 434,118 | (1,179,765 | ) | 629,094 | ||||||||||
$ | 1,268,830 | $ | 922,259 | $ | 801,914 | $ | (1,179,765 | ) | $ | 1,813,238 | ||||||
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Condensed Consolidating Statements of Cash Flows
For the six months ended April 30, 2005
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net cash provided by (used in) operating activities | $ | (11,644 | ) | $ | 3,893 | $ | 4,475 | $ | — | $ | (3,276 | ) | |||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchases of properties, plants and equipment | — | (8,857 | ) | (17,343 | ) | — | (26,200 | ) | |||||||||||
Proceeds on disposals of properties, plants and equipment | — | 16,620 | 1,067 | — | 17,687 | ||||||||||||||
Net cash provided by (used in) investing activities | — | 7,763 | (16,276 | ) | — | (8,513 | ) | ||||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Proceeds from issuance of long-term debt | 11,217 | — | — | — | 11,217 | ||||||||||||||
Proceeds on short-term borrowings | — | — | 12,880 | — | 12,880 | ||||||||||||||
Other, net | 427 | — | — | — | 427 | ||||||||||||||
Net cash provided by financing activities | 11,644 | — | 12,880 | — | 24,524 | ||||||||||||||
Effects of exchange rates on cash | — | — | 1,185 | — | 1,185 | ||||||||||||||
Net increase in cash and cash equivalents | — | 11,656 | 2,264 | — | 13,920 | ||||||||||||||
Cash and cash equivalents at beginning of period | — | 13,784 | 24,325 | — | 38,109 | ||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 25,440 | $ | 26,589 | $ | — | $ | 52,029 | |||||||||
For the six months ended April 30, 2004
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||
Cash flows from operating activities: | |||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 30,450 | $ | (14,719 | ) | $ | 5,786 | $ | — | $ | 21,517 | ||||||||
Cash flows from investing activities: | |||||||||||||||||||
Purchases of properties, plants and equipment | (6,861 | ) | (12,853 | ) | (8,382 | ) | — | (28,096 | ) | ||||||||||
Proceeds on disposals of properties, plants and equipment | — | 5,666 | — | — | 5,666 | ||||||||||||||
Net cash used in investing activities | (6,861 | ) | (7,187 | ) | (8,382 | ) | — | (22,430 | ) | ||||||||||
Cash flows from financing activities: | |||||||||||||||||||
Payments on long-term debt | (21,952 | ) | — | — | — | (21,952 | ) | ||||||||||||
Proceeds from short-term borrowings | — | — | 4,252 | — | 4,252 | ||||||||||||||
Other, net | (1,637 | ) | — | — | — | (1,637 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (23,589 | ) | — | 4,252 | — | (19,337 | ) | ||||||||||||
Effects of exchange rates on cash | — | — | 75 | — | 75 | ||||||||||||||
Net increase (decrease) in cash and cash equivalents | — | (21,906 | ) | 1,731 | — | (20,175 | ) | ||||||||||||
Cash and cash equivalents at beginning of period | — | 26,421 | 23,346 | — | 49,767 | ||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 4,515 | $ | 25,077 | $ | — | $ | 29,592 | |||||||||
Condensed Consolidating Statement of Cash Flows
For the six months ended April 30, 2003
Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | Parent | Guarantor Subsidiaries | Non-Guarantor Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||||||||||||
Cash flows from operating activities: | ||||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) operating activities | $ | 24,526 | $ | 5,694 | $ | (1,414 | ) | $ | — | $ | 28,806 | $ | 30,450 | $ | (14,719 | ) | $ | 5,786 | $ | — | $ | 21,517 | ||||||||||||||||
Cash flows from investing activities: | ||||||||||||||||||||||||||||||||||||||
Purchase of properties, plants and equipment | (4,146 | ) | (8,383 | ) | (10,459 | ) | — | (22,988 | ) | |||||||||||||||||||||||||||||
Purchases of properties, plants and equipment | (6,861 | ) | (12,853 | ) | (8,382 | ) | — | (28,096 | ) | |||||||||||||||||||||||||||||
Proceeds on disposals of properties, plants and equipment | 2,109 | 2,717 | — | — | 4,826 | — | 5,666 | — | — | 5,666 | ||||||||||||||||||||||||||||
Net cash used in investing activities | (2,037 | ) | (5,666 | ) | (10,459 | ) | — | (18,162 | ) | (6,861 | ) | (7,187 | ) | (8,382 | ) | — | (22,430 | ) | ||||||||||||||||||||
Cash flows from financing activities: | ||||||||||||||||||||||||||||||||||||||
Payments on (proceeds from) long-term debt | (15,014 | ) | — | 6,794 | — | (8,220 | ) | |||||||||||||||||||||||||||||||
Payments on long-term debt | (21,952 | ) | — | — | — | (21,952 | ) | |||||||||||||||||||||||||||||||
Proceeds from short-term borrowings | — | — | 7,877 | — | 7,877 | — | — | 4,252 | — | 4,252 | ||||||||||||||||||||||||||||
Dividends paid | (7,770 | ) | — | — | — | (7,770 | ) | |||||||||||||||||||||||||||||||
Other, net | (1,031 | ) | — | — | — | (1,031 | ) | (1,637 | ) | — | — | — | (1,637 | ) | ||||||||||||||||||||||||
Net cash (used in) provided by financing activities | (23,815 | ) | — | 14,671 | — | (9,144 | ) | |||||||||||||||||||||||||||||||
Net cash provided by (used in) financing activities | (23,589 | ) | — | 4,252 | — | (19,337 | ) | |||||||||||||||||||||||||||||||
Effects of exchange rates on cash | — | — | (6,704 | ) | — | (6,704 | ) | — | — | 75 | — | 75 | ||||||||||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | (1,326 | ) | 28 | (3,906 | ) | — | (5,204 | ) | — | (21,906 | ) | 1,731 | — | (20,175 | ) | |||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 1,326 | 2,218 | 21,852 | — | 25,396 | — | 26,421 | 23,346 | — | 49,767 | ||||||||||||||||||||||||||||
Cash and cash equivalents at end of period | $ | — | $ | 2,246 | $ | 17,946 | $ | — | $ | 20,192 | $ | — | $ | 4,515 | $ | 25,077 | $ | — | $ | 29,592 | ||||||||||||||||||
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NOTE 18 – SUBSEQUENT EVENT
On March 28, 2005, Soterra LLC (a wholly owned subsidiary of the Company) 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 purchase price of approximately $90 million, subject to closing adjustments. In connection with the closing of one of these agreements, on May 23, 2005, Soterra LLC sold approximately 35,000 acres of timberland and associated assets in Florida, Georgia and Alabama and the purchase price of approximately $51 million was paid in the form of cash and a purchase note (the “Purchase Note”). The remaining acres will be sold in several installments during 2006. The Company will recognize significant timberland gains in its consolidated statements of income in the periods that these transactions occur.
On May 31, 2005, STA Timber LLC (“STA Timber”), one of the Company’s indirect wholly-owned subsidiaries, issued $43 million 5.20 percent Senior Secured Notes due August 5, 2020 (the “Monetization Notes”). In connection with the sale thereof, 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 in the principal amount of $50.9 million dated May 31, 2005, issued by Timberlands SPE, L.L.C. (the “Payor”) payable to the order of Soterra LLC and contributed and assigned to STA Timber. The Payor is an indirect subsidiary of Plum Creek. The proceeds from the sale of the Monetization Notes will be used for general corporate purposes, including the repayment of indebtedness.
The Monetization Notes (as well as the Purchase Note) are also secured by the Deed of Guarantee issued by Bank of America, N.A., London Branch, in an amount not to exceed $52.3 million as a guarantee of the due and punctual payment of principal and interest on the Purchase Note.
Neither Greif, Inc. nor any of its other consolidated subsidiaries have extended any form of guaranty of the principal or interest on the Monetization Notes. Accordingly, neither Greif, Inc. nor any of its other consolidated subsidiaries will become directly or contingently liable for the payment of the Monetization Notes at any time.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements, which appear elsewhere in this Form 10-Q. The terms “Greif,” “our company,” “we,” “us” and “our” as used in this discussion refer to Greif, Inc. and its subsidiaries. Our fiscal year begins on November 1 and ends on October 31 of the following year. Any references in this Form 10-Q to the years 20042005 or 2003,2004, or to any quarter of those years, relates to the fiscal year or quarter, as the case may be, ending in that year.
OVERVIEWBUSINESS SEGMENTS
We operate in three business segments: Industrial Packaging & Services; Paper, Packaging & Services; and Timber.
We are a leading global provider of industrial packaging products such as steel, fibre and plastic drums, intermediate bulk containers, closure systems for industrial shipping containerspackaging products and polycarbonate water bottles. We seek to provide complete packaging solutions to our customers by offering a comprehensive range of products and services on a global basis. We sell our products to customers in industries such as chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agricultural, pharmaceutical and mineral, among others.
We sell our containerboard, corrugated sheets and other corrugated products and multiwall bags to customers in North America.America in industries such as packaging, automotive, food and building products. Our corrugated container products are used to ship such diverse products as home appliances, small machinery, grocery products, building products, automotive components, books and furniture, as well as numerous other applications. Our full line of industrial and consumer multiwall bag products is used to ship a wide range of industrial and consumer products, such as fertilizers, chemicals, concrete, flour, sugar, feed, seed, pet foods, popcorn, charcoal and salt. Our products aresalt, primarily sold tofor the agricultural, automotive, chemical, building products food and packagingfood industries.
As of April 30, 2004,2005, we owned approximately 278,000281,000 acres of timberland in the southeastern United States, which is actively managed, and approximately 40,00035,000 acres of timberland in Canada. Our timber management in the United States is focused on the active harvesting and regeneration of our timber properties to achieve sustainable long-term yields on our timberland. While timber sales are subject to fluctuations, we seek to maintain a consistent cutting schedule, within the limits of market and weather conditions. Our CanadianDuring May 2005, after the end of the second quarter, 35,000 acres of our timberland is not actively managed at this time.holdings in Florida, Georgia and Alabama were sold for approximately $51 million as part of a $90 million transaction. For further information, see Liquidity and Capital Resources — Real Estate Transactions; Monetization Notes.
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CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of these consolidated financial statements, in accordance with GAAP requiresthese principles, require us to make estimates and assumptions that affect the reported
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amount of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our consolidated financial statements.
A summary of our significant accounting policies is included in Note 1 to the Notes to Consolidated Financial Statements included in our 20032004 Form 10-K. We believe that the consistent application of these policies enables us to provide readers of the consolidated financial statements with useful and reliable information about our operating results of operations and financial condition. The following are the accounting policies that we believe are most important to the portrayal of our financial condition and results of operations and financial condition and require our most difficult, subjective or complex judgments.
Allowance for Accounts Receivable —Receivable. We evaluate the collectibility of our accounts receivable based on a combination of factors. In circumstances where we are aware of a specific customer’s inability to meet its financial obligations to us, we record a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believe will be collected. In addition, we recognize allowances for bad debts based on the length of time receivables are past due with allowance percentages, based on our historical experiences, applied on a graduated scale relative to the age of the receivable amounts. If circumstances change (i.e.(e.g., higher than expected bad debt experience or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to us), our estimates of the recoverability of amounts due to us could be reducedchange by a material amount.
Inventory Reserves —Reserves. Reserves for slow moving and obsolete inventories are provided based on historical experience and product demand. We continuously evaluate the adequacy of these reserves and make adjustments to these reserves as required.
Net Assets Held for Sale —Sale. Net assets held for sale represent land, buildings and land improvements less accumulated depreciation for locations that have been closed. We record net assets held for sale in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” at the lower of carrying value or fair value less cost to sell. Fair value is based on the estimated proceeds from the sale of the facility utilizing recent buy offers, market comparables and/or data obtained from our commercial real estate broker. Our estimate as to fair value is regularly reviewed and subject to changes in the commercial real estate markets and our continuing evaluation as to the facility’s acceptable sale price.
Properties, Plants and Equipment —Equipment. Depreciation on properties, plants and equipment is provided on the straight-line method over the estimated useful lives of our assets.
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We own timber properties in the southeastern United States and in Canada. With respect to our United States timber properties, which are being actively managed,consisted of 281,000 acres at April 30, 2005, depletion expense is computed on the basis of cost and the estimated recoverable timber acquired. Our land costs are maintained by tract. Merchantable timber costs are maintained by five product classes, pine sawtimber, pine chip-n-saw, pine pulpwood, hardwood sawtimber and hardwood
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pulpwood, within a “depletion block,” with each depletion block based upon a geographic district or subdistrict. Currently, we have twelve12 depletion blocks. These same depletion blocks are used for pre-merchantable timber costs. Each year, we estimate the volume of our merchantable timber for the five product classes by each depletion block. These estimates are based on the current state in the growth cycle and not on quantities to be available in future years. Our estimates do not include costs to be incurred in the future. We then project these volumes to the end of the year. Upon acquisition of a new timberland tract, we record separate amounts for land, merchantable timber and pre-merchantable timber allocated as a percentage of the values being purchased. These acquisition volumes and costs acquired during the year are added to the totals for each product class within the appropriate depletion block(s). The total of the beginning, one-year growth and acquisition volumes are divided by the total undepleted historical cost to arrive at a depletion rate, which is then used for the current year. As timber is sold, we multiply the volumes sold by the depletion rate for the current year to arrive at the depletion cost. Our Canadian timberlands, which consisted of approximately 35,000 acres at April 30, 2005, did not have any depletion expense since they are not actively managed at this time.
We believe that the lives and methods of determining depreciation and depletion are reasonable; however, using other lives and methods could provide materially different results.
Restructuring Charges —Reserves. Restructuring chargesreserves are determined in accordance with appropriate accounting guidance, including SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities,” and Staff Accounting Bulletin No. 100, “Restructuring and Impairment Charges,” depending upon the facts and circumstances surrounding the situation. Restructuring charges recorded in connection with existing and acquired companiesreserves are further discussed in Note 76 to the Notes to Consolidated Financial Statements included in thisour 2004 Form 10-Q.
Pension and Postretirement Benefits —Benefits. Pension and postretirement benefit expenses are determined by our actuaries using assumptions about the discount rate, expected return on plan assets, rate of compensation increase and health care cost trend rates. Further discussion of our pension and postretirement benefit plans and related assumptions is includedcontained in Note 14 to the Notes to Consolidated Financial Statements in this Form 10-Q and Notes 12 and 13 to the Notes to Consolidated Financial Statements included in our 20032004 Form 10-K. The actual results would be different using other assumptions.
Income Taxes —Taxes. Our effective tax rate, taxes payable and the tax bases of our assets and liabilities reflect current tax rates in our domestic and foreign tax jurisdictions and our best estimate of the ultimate outcome of ongoing and potential future tax audits. Valuation allowances are established where expected future taxable income does not support the realization of the deferred tax assets.
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Environmental Cleanup Costs —Costs. We expense environmental expenditures related to existing conditions caused by past or current operations and from which no current or future benefit is discernable. Expenditures that extend the life of the related property, or mitigate or prevent future environmental contamination, are capitalized.
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Our reserves for environmental liabilities at April 30, 20042005 amounted to $9.0 million, which included a reserve of $4.9 million related to our facility in Lier, Belgium and $4.1 million for asserted and unasserted environmental litigation, claims and/or assessments at several manufacturing sites orand other locations where we believe the outcome of such matters will be unfavorable to us. The environmental exposures for those sites included in the $4.1 million reserve were not individually significant. The reserve for the Lier, Belgium site is based on environmental studies that have been conducted at this location. The Lier, Belgium site is being monitored by the Public Flemish Waste Company (“PFWC”), which is the Belgian body for waste control. The PFWC must approve all remediation efforts that are undertaken by us at this site.
We anticipate 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 April 30, 2004.2005. Our exposure to adverse developments with respect to any individual site is not expected to be material. Although environmental remediation could have a material effect on results of operations if a series of adverse developments occur in a particular quarter or fiscal year, we believe that the chance of sucha series of adverse developments occurring in the same quarter or fiscal year is remote. Future information and developments will require us to continually reassess the expected impact of these environmental matters.
Contingencies. Various lawsuits, claims and proceedings have been or may be instituted or asserted against us, including those pertaining to environmental, product liability, and safety and health matters. We are continually consulting legal counsel and evaluating requirements to reserve for contingencies in accordance with SFAS No. 5, “Accounting for Contingencies.” While the amounts claimed may be substantial, the ultimate liability cannot currently be determined because of the considerable uncertainties that exist. Based on the facts currently available, we believe the disposition of matters that are pending will not have a material effect on the consolidated financial statements.
Goodwill, Other Intangible Assets and Other Long-Lived Assets —GoodwillAssets. Goodwill and indefinite-lived intangible assets are no longer amortized, but instead are periodically reviewed for impairment as required by SFAS No. 142, “Goodwill and Other Intangible Assets.” The costs of acquired intangible assets determined to have definite lives are amortized on a straight-line basis over their estimated economic lives of two to 20 years. Our policy is to periodically review other intangible assets subject to amortization and other long-lived assets based upon the evaluation of such factors as the occurrence of a significant adverse event or change in the environment in which the business operates, or if the expected future net cash flows (undiscounted and without interest) would become less than the carrying amount of the asset. An impairment loss would be recorded in the period such determination is made based on the fair value of the related assets.
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Other Items.Other items that could have a significant impact on the consolidated financial statements include the risks and uncertainties listed in this Form 10-Q under the “Forward-Looking Statements; Certain Factors Affecting Future Results” below. Actual
26
results could differ materially using different estimates and assumptions, or if conditions are significantly different in the future.
RESULTS OF OPERATIONS
The following comparative information is presented for the three-month and six-month periods ended April 30, 20042005 and 2003.2004. Historically, revenues or earnings may or may not be representative of future operating results due to various economic and other factors.
The non-GAAP financial measure of operating profit, before restructuring charges and timberland gains, is used throughout the following discussion of our results of operations (except with respect to the segment discussions for Industrial Packaging & Services and Paper, Packaging & Services, where timberland gains are not applicable). Operating profit, before restructuring charges and timberland gains, is equal to the GAAP operating profit plus restructuring charges less timberland gains. We use operating profit, before restructuring charges and timberland gains, because we believe that this measure provides a better indication of our operational performance than the corresponding GAAP measure because it excludes restructuring charges, which are not representative of ongoing operations, and timberland gains, which are volatile from period to period, and it provides a more stable platform on which to compare our historical performance.
Second Quarter Results
Overview
Net sales rose 15%13 percent (10 percent excluding the impact of foreign currency translation) to $542.2$613.0 million for the second quarter of 20042005 from $470.8$542.2 million duringfor the same quarter last year. On a consolidated basis,of 2004. The net sales increased approximately 9% after excluding the impact of foreign currency translation. Higher selling prices and volumes inimprovement was attributable to the Industrial Packaging & Services segment ($58.7 million increase) and higher volumes in the Paper, Packaging & Services segments contributedsegment ($12.0 million increase). Higher selling prices, primarily in response to increased costs of steel and resin, drove this increase.
GAAP operating profit was $22.4 million for the second quarter of 2004 compared with GAAP operating profit of $7.7 million for the same period last year.improvement.
Operating profit before restructuring charges and timberland gains increased 41%28 percent to $42.7 million for the second quarter of 2005 compared with $33.3 million for the second quarter of 2004 compared with $23.62004. This was primarily attributable to the Paper, Packaging & Services segment ($7.9 million forincrease) and the same period last year.Industrial Packaging & Services segment ($1.7 million increase), partially offset by the Timber segment ($0.2 million decrease). There were $12.3$10.6 million and $17.4$12.3 million of restructuring charges and $1.4$3.4 million and $1.6$1.4 million of timberland gains during the second quarter of 2005 and 2004, and 2003, respectively. GAAP operating profit was $35.4 million for the second quarter of 2005 compared with $22.4 million for the same period last year.
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The following table sets forth the net sales and operating profit for each of our business segments (Dollars in thousands):
For the three months ended April 30, | 2004 | 2003 | 2005 | 2004 | ||||||||
Net sales: | ||||||||||||
Net Sales | ||||||||||||
Industrial Packaging & Services | $ | 399,689 | $ | 343,387 | $ | 458,404 | $ | 399,689 | ||||
Paper, Packaging & Services | 138,043 | 120,775 | 150,034 | 138,043 | ||||||||
Timber | 4,457 | 6,645 | 4,522 | 4,457 | ||||||||
Total net sales | $ | 542,189 | $ | 470,807 | $ | 612,960 | $ | 542,189 | ||||
Operating profit: | ||||||||||||
Operating Profit | ||||||||||||
Operating profit, before restructuring charges and timberland gains: | ||||||||||||
Industrial Packaging & Services | $ | 27,760 | $ | 13,942 | $ | 29,411 | $ | 27,760 | ||||
Paper, Packaging & Services | 2,435 | 4,821 | 10,372 | 2,435 | ||||||||
Timber | 3,079 | 4,846 | 2,868 | 3,079 | ||||||||
Total operating profit before restructuring charges and timberland gains | 33,274 | 23,609 | 42,651 | 33,274 | ||||||||
Restructuring charges: | ||||||||||||
Industrial Packaging & Services | 9,541 | 13,562 | 8,809 | 9,541 | ||||||||
Paper, Packaging & Services | 2,665 | 3,791 | 1,764 | 2,665 | ||||||||
Timber | 72 | 96 | 48 | 72 | ||||||||
Total restructuring charges | 12,278 | 17,449 | 10,621 | 12,278 | ||||||||
Timberland gains: | ||||||||||||
Timber | 1,364 | 1,568 | 3,393 | 1,364 | ||||||||
Total operating profit | $ | 22,360 | $ | 7,728 | $ | 35,423 | $ | 22,360 | ||||
Segment Review
Industrial Packaging & Services
NetIn the Industrial Packaging & Services segment, we offer a comprehensive line of industrial packaging products, such as steel, fibre and plastic drums, intermediate bulk containers, closure systems for industrial packaging products and polycarbonate water bottles throughout the world. The key factors influencing profitability in the second quarter of 2005 compared to the second quarter of 2004 in the Industrial Packaging & Services segment were:
In this segment, net sales rose 16%15 percent (11 percent excluding the impact of foreign currency translation) to $399.7$458.4 million for the second quarter of 20042005 from $343.4$399.7 million for the same period last year. Net sales increased 8% after excluding the impact of foreign currency translation. Selling prices rose primarily in response to higher average raw material costs, especially steel and contributedresin, compared to the increase in net sales for the secondsame quarter of 2004. Additionally,last year. However, sales volumes were highergenerally lower for steel and plasticfibre drums.
GAAP operating profit was $18.2 million for the second quarter of 2004 compared with $0.4 million for the second quarter of 2003.
Operating profit before restructuring charges rose to $27.8$29.4 million for the second quarter of 20042005 from $13.9$27.8 million for the same period a year ago. Restructuring
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charges were $9.5$8.8 million for the second quarter of 20042005 compared with $13.6$9.5 million a year ago. The Industrial Packaging & Services segment’s gross profit margin benefited fromwas 15.6 percent versus 17.8 percent in the second quarter of 2005 and 2004, respectively, due to generally lower sales volumes and higher raw material costs, partially offset by improved selling prices and labor and other manufacturing efficiencies partially offset by higher raw material costs, as a percentage of net sales. Selling, general and administrative (“SG&A”) expenses for this segment reflect a portion of the savings resulting fromrelated to the transformation initiatives. GAAP operating profit was $20.6 million for the second quarter of 2005 compared with $18.2 million for the second quarter of 2004.
Paper, Packaging & Services
NetIn the Paper, Packaging & Services segment, we sell containerboard, corrugated sheets and other corrugated products and multiwall bags in North America. The key factors influencing profitability in the second quarter of 2005 compared to the second quarter of 2004 in the Paper, Packaging & Services segment were:
In this segment, net sales rose 14%9 percent to $138.0$150.0 million for the second quarter of 20042005 from $120.8$138.0 million for the same period last year. Improvedyear due to improved selling prices for this segment’s products. Sales volumes for most of this segment’s
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productscontainerboard, corrugated sheets and corrugated containers were partially offset by lower average selling prices in the containerboard operations.
GAAP operating loss was $0.2 million for the second quarter of 2004 compared with GAAP operating profit of $1.0 million for the second quarter of 2003.down on a quarter-over-quarter comparison.
Operating profit before restructuring charges was $2.4$10.4 million for the second quarter of 20042005 compared with $4.8$2.4 million the prior year. Restructuring charges were $2.7$1.8 million for the second quarter of 20042005 versus $3.8$2.7 million a year ago. The decreaseincrease in operating profit before restructuring charges was primarily due to a decline in gross profit margin resulting from reduced pricing levelsimproved selling prices, partially offset by generally lower sales volumes and higher raw materialtransportation and energy costs particularly for old corrugated containers, in the containerboard operations. In absolute dollarsGAAP operating profit was $8.6 million for the second quarter of 2005 compared with a loss of $0.2 million for the second quarter of 2004.
Timber
As of April 30, 2005, we owned approximately 281,000 acres of timber properties in southeastern United States, which were actively harvested and as a percentage of net sales, laborregenerated, and energy costs were higher on a quarter-over-quarter comparison. Lower SG&A expensesapproximately 35,000 acres in Canada. The key factors influencing profitability in the second quarter of 2005 compared to the second quarter of 2004 compared within the same quarter last year partially offset this reduction.Timber segment were:
Timber
Timber net sales were $4.5 million for the second quarter of 2004 compared with $6.6 million for the same period last year. These net sales were consistent with planned levels for both periods.
GAAP operating profit was $4.4 million for the second quarter of 2004 compared with $6.3 million for the second quarter of 2003.
As a result of the lower sales volume, operating2005 and 2004. Operating profit before restructuring charges and timberland gains was $3.1$2.9 million for the second quarter of 20042005 compared to $4.8$3.1 million a year ago. Restructuring charges were $0.1insignificant for the second quarter in both years. Timberland gains were $3.4 million for the second quarter of 20042005 and 2003. Timberland gains were $1.4 million for the same quarter last year. GAAP operating profit was $6.2 million for the second quarter of 2004 and $1.62005 compared with $4.4 million for the same period lastsecond quarter of 2004.
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As previously discussed in May 2005, we completed the first phase of the sale of 56,000 acres of timberland, timber and associated assets for $90 million. In this first phase, 35,000 acres of our timberland holdings in Florida, Georgia and Alabama were sold for approximately $51 million in the third quarter of 2005. The second phase of this transaction is expected to occur in several installments during our 2006 fiscal year. We will recognize significant timberland gains in our consolidated statements of income in the periods that these transactions occur. For further information, see Liquidity and Capital Resources — Real Estate Transactions; Monetization Notes.
Other Income Statement Changes
Cost of Products Sold
The cost of products sold, as a percentage of net sales, increased to 83.5%84.0 percent for the second quarter of 20042005 from 82.5%83.5 percent for the second quarter of 2003.2004. The principal factors impacting the 1.0 pointthis increase were generally lower sales volumes and higher raw material costs, particularly steelpartially offset by improved selling prices and old corrugated containers, lower planned timber sales and higher energy costs. Reductions in labor and other manufacturing costs partially offset these impacts.efficiencies from the ongoing transformation initiatives.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A&A”) expenses declined to $55.7were $56.1 million, or 10.3%9.1 percent of net sales, for the second quarter of 2004 from $59.02005 compared to $55.7 million, or 12.5%10.3 percent of net sales, for the same period a year ago. The decline inWhile certain SG&A expenses, wassuch as employee benefits and professional fees, primarily attributablerelated to realizationcompliance matters regarding Section 404 of additional savings from our transformation initiatives. The dollar reduction inthe Sarbanes-Oxley Act of 2002, were higher on a quarter-over-quarter comparison, certain other SG&A expenses was partially offset bywere reduced compared to the impactsecond quarter of foreign currency translation (approximately $3 million).2004.
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Restructuring Charges
Our transformation initiatives, which began in 2003, continue to enhance long-term organic sales growth, generate productivity improvements and achieve permanent cost reductions. We incurred restructuring charges of $60.7 million in 2003, $54.1 million in 2004, and $14.0 million during the first half of 2005. We are pleased with the progress of the transformation initiatives to-date and are continuing to evaluate future rationalization options based on that progress.
As part of the transformation initiatives, initially referred to as the performance improvement plan, we closed one company-owned plant in the Industrial Packaging & Services segment during the second quarter of 2005 and one company-owned plant in the Industrial Packaging & Services segment during the second quarter of 2004. The plant isBoth of the plants were located in North America. In addition, corporate and administrative staff reductions have been made throughout the world. As a result of the transformation initiatives, during the second quarter of 2005, we recorded restructuring charges of $6.8 million, consisting of $3.8 million in employee
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separation costs, $1.2 million in professional fees directly related to the transformation initiatives and $1.8 million in other restructuring costs. In the second quarter of 2005, we also recorded $3.8 million of restructuring charges related to the impairment of two facilities, currently held for sale, that were closed during previous restructuring programs. During the second quarter of 2004, we recognizedrecorded restructuring charges of $12.3 million, consisting of $2.1 million in employee separation costs, $0.1 million in asset impairments, $7.5 million in professional fees directly related to the transformation initiatives and $10.1$2.6 million in other costs, which were primarily for consulting servicesrestructuring costs. The asset impairment charges related to the write-down to fair value of buildings and equipment based on recent buy offers, market comparables and/or data obtained from our commercial real estate broker.
A total of approximately 1,500 employees have been or will be terminated in connection with the transformation initiatives. Seeinitiatives, 1,445 of which have been terminated as of April 30, 2005.
Upon completion of the transformation initiatives, we believe that annual contributions to earnings from these actions will be approximately $115 million.
For further information, see Note 7 to8 – Restructuring Charges in the Notes to Consolidated Financial Statements included in this Form 10-Q for additional disclosures regarding our restructuring activities.
For further information, see the “Transformation Initiatives” section below.10-Q.
Gain on Sale of Assets
Gain on sale of assets decreasedincreased to $4.2 million in the second quarter of 2005 as compared to $1.1 million in the second quarter of 2004 as comparedprimarily due to $1.9$2.0 million in the second quarter of 2003, including $0.2 million less from thehigher gains on sale of timber properties.
Interest Expense, Net
Interest expense, net declined towas $10.7 million for the second quarter of 2005 and 2004. Lower average debt outstanding was offset by higher interest rates during the second quarter of 2005 compared to the second quarter of 2004.
Debt Extinguishment Charge
During the second quarter of 2005, we entered into a new revolving credit facility to improve pricing and financial flexibility. As a result, we recorded a $2.8 million debt extinguishment charge.
Other Income, Net
Other income, net increased $1.3 million in the second quarter of 2005 as compared to the second quarter of 2004 primarily due to higher rental income and foreign exchange costs.
Income Tax Expense
The effective tax rate was 29.3% and 30.8% in the second quarter of 2005 and 2004, respectively. The lower effective tax rate resulted from $13.9a change in the mix of income outside the United States.
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Equity in Earnings of Affiliates and Minority Interests
Equity in earnings of affiliates and minority interests was a negative $0.1 million for the second quarter of 2005 and 2004.
Net Income
Based on the foregoing, we recorded net income of $16.8 million for the second quarter of 2005 compared to a net income of $8.4 million in the same period last year.
Year-to-Date Results
Overview
Net sales rose 18 percent (15 percent excluding the impact of foreign currency translation) to $1.2 billion for the first half of 2005 from $1.0 billion for the same period of 2004. The net sales improvement was attributable to the Industrial Packaging & Services segment ($150.4 million increase) and the Paper, Packaging & Services segment ($34.9 million increase), partially offset by the Timber segment ($0.8 million decrease). Higher selling prices, primarily in response to increased costs of steel and resin, drove this improvement.
Operating profit before restructuring charges and timberland gains increased 43 percent to $73.9 million for the first half of 2005 compared with $51.9 million for the first half of 2004. This was primarily attributable to the Paper, Packaging & Services segment ($12.2 million increase) and the Industrial Packaging & Services segment ($10.5 million increase), partially offset by the Timber segment ($0.6 million decrease). There were $17.8 million and $27.5 million of restructuring charges and $11.5 million and $5.3 million of timberland gains during the first half of 2005 and 2004, respectively. GAAP operating profit was $67.6 million for the first half of 2005 compared with $29.6 million for the same period last year. This reduction
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The following table sets forth the net sales and operating profit for each of our business segments (Dollars in thousands):
For the six months ended April 30,
| 2005 | 2004 | ||||
Net Sales | ||||||
Industrial Packaging & Services | $ | 887,446 | $ | 737,080 | ||
Paper, Packaging & Services | 298,239 | 263,337 | ||||
Timber | 9,839 | 10,632 | ||||
Total net sales | $ | 1,195,524 | $ | 1,011,049 | ||
Operating Profit | ||||||
Operating profit, before restructuring charges and timberland gains: | ||||||
Industrial Packaging & Services | $ | 47,090 | $ | 36,611 | ||
Paper, Packaging & Services | 19,963 | 7,788 | ||||
Timber | 6,875 | 7,475 | ||||
Total operating profit before restructuring charges and timberland gains | 73,928 | 51,874 | ||||
Restructuring charges: | ||||||
Industrial Packaging & Services | 15,607 | 21,563 | ||||
Paper, Packaging & Services | 2,141 | 5,834 | ||||
Timber | 59 | 140 | ||||
Total restructuring charges | 17,807 | 27,537 | ||||
Timberland gains: | ||||||
Timber | 11,465 | 5,298 | ||||
Total operating profit | $ | 67,586 | $ | 29,635 | ||
Segment Review
Industrial Packaging & Services
In the Industrial Packaging & Services segment, we offer a comprehensive line of industrial packaging products, such as steel, fibre and plastic drums, intermediate bulk containers, closure systems for industrial packaging products and polycarbonate water bottles throughout the world. The key factors influencing profitability in the first half of 2005 compared to the first half of 2004 in the Industrial Packaging & Services segment were:
In this segment, net sales rose 20 percent (16 percent excluding the impact of foreign currency translation) to $887.4 million for the first half of 2005 from $737.1 million for the same period last year. Selling prices rose primarily in response to higher average raw material costs, especially steel and resin, compared to the same quarter last year. However, sales volumes were generally lower for steel and fibre drums.
Operating profit before restructuring charges rose to $47.1 million for the first half of 2005 from $36.6 million for the same period a year ago. Restructuring charges were $15.6 million for the first half of 2005 compared with $21.6 million a year ago. The Industrial Packaging & Services segment’s gross profit was 15.0 percent versus 16.3
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percent in the first half of 2005 and 2004, respectively, due to generally lower sales volumes and higher raw material costs, partially offset by improved average selling prices and labor and other manufacturing efficiencies related to the transformation initiatives. GAAP operating profit was $31.5 million for the first half of 2005 compared with $15.0 million for the first half of 2004.
Paper, Packaging & Services
In the Paper, Packaging & Services segment, we sell containerboard, corrugated sheets and other corrugated products and multiwall bags in North America. The key factors influencing profitability in the first half of 2005 compared to the first half of 2004 in the Paper, Packaging & Services segment were:
In this segment, net sales rose 13 percent to $298.2 million for the first half of 2005 from $263.3 million for the same period last year due to improved selling prices for this segment’s products. Sales volumes for containerboard, corrugated sheets and corrugated containers were down versus the same period last year.
Operating profit before restructuring charges was $20.0 million for the first half of 2005 compared with $7.8 million the prior year. Restructuring charges were $2.1 million for the first half of 2005 versus $5.8 million a year ago. The increase in operating profit before restructuring charges was primarily due to improved selling prices, partially offset by generally lower average interest ratessales volumes and higher transportation and energy costs in the containerboard operations. GAAP operating profit was $17.8 million for the first half of 2005 compared with $2.0 million for the first half of 2004.
Timber
As of April 30, 2005, we owned approximately 281,000 acres of timber properties in southeastern United States, which were actively harvested and regenerated, and approximately 35,000 acres in Canada. The key factors influencing profitability in the first half of 2005 compared to the first half of 2004 in the Timber segment were:
Timber net sales were $9.8 million reductionfor the first half of 2005 compared to $10.6 million for the first half of 2004. Operating profit before restructuring charges and timberland gains was $6.9 million for the first half of 2005 compared to $7.5 million a year ago. Restructuring charges were insignificant for the first half in average debt outstandingboth years. Timberland gains were $11.5 million for the first half of 2005 and $5.3 million for the same period last year. GAAP operating profit was $18.3 million for the first half of 2005 compared with $12.6 million for the first half of 2004.
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Other Income Statement Changes
Cost of Products Sold
The cost of products sold, as a percentage of net sales, increased to 84.4 percent for the first half of 2005 from 84.3 percent for the first half of 2004. The principal factors impacting this increase were generally lower sales volumes and higher raw material costs, partially offset by improved selling prices and labor and other manufacturing efficiencies the ongoing transformation initiatives.
Selling, General and Administrative Expenses
SG&A expenses were $115.8 million, or 9.7 percent of net sales, for the first half of 2005 compared to $106.8 million, or 10.6 percent of net sales, for the same period a year ago. While certain SG&A expenses, such as employee benefits and professional fees, primarily related to compliance matters regarding Section 404 of the Sarbanes-Oxley Act of 2002, were higher versus the same period last year, certain other SG&A expenses were reduced compared to the first six months of 2004.
Restructuring Charges
As part of the transformation initiatives, we closed two company-owned plants in the Industrial Packaging & Services segment during the first half of 2005, and four company-owned plants (three in the Industrial Packaging & Services segment and one in the Paper, Packaging & Services segment) during the first half of 2004. All of the plants are located in North America. In addition, corporate and administrative staff reductions have been made throughout the world. As a result of the transformation initiatives, during the first half of 2005, we recorded restructuring charges of $14.0 million, consisting of $7.0 million in employee separation costs, $0.1 million in asset impairments, $2.3 million in professional fees directly related to the transformation initiatives and $4.6 million in other restructuring costs. In the second quarter of 2005, we also recorded $3.8 million of restructuring charges related to the impairment of two facilities, currently held for sale, that were closed during previous restructuring programs. During the first half of 2004, we recorded restructuring charges of $27.5 million, consisting of $9.0 million of in employee separation costs, $2.3 million in asset impairments, $12.1 million in professional fees directly related to the transformation initiatives and $4.1 million in other restructuring costs. The asset impairment charges related to the write-down to fair value of buildings and equipment based on recent buy offers, market comparables and/or data obtained from our commercial real estate broker. For further information, see Second Quarter Results – Other Income Statement Changes – Restructuring Charges above and Note 8 – Restructuring Charges in the Notes to Consolidated Financial Statements in this Form 10-Q.
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Gain on Sale of Assets
Gain on sale of assets increased to $14.5 million in the first half of 2005 as compared to $5.2 million in the first half of 2004, primarily due to $6.2 million higher gains from the sale of timber properties and the gain on a facility sale that was included in net assets held for sale at October 31, 2004.
Interest Expense, Net
Interest expense, net declined to $20.8 million for the first half of 2005 from $23.0 million for the same period last year. Lower average debt outstanding was partially offset by higher interest rates during the first half of 2005 compared to the same period last year.
Debt Extinguishment Charge
During the second quarter of 2003 also contributed2005, we entered into a new revolving credit facility to this decrease.improve pricing and financial flexibility. As a result, we recorded a $2.8 million debt extinguishment charge.
Other Income, Net
Other income, net was $0.7$1.2 million in the second quarterfirst half of 20042005 versus $2.1$0.9 million in the second quarterfirst half of 2003.2004.
Income Tax Expense (Benefit)
The effective tax rate was 30.8%28.7% and 32.0%30.8% in the second quarterfirst half of 20042005 and 2003,2004, respectively, resulting in an income tax expense of $3.8$13.0 million for the second quarterfirst half of 20042005 and an income tax benefitexpense of $1.3$2.3 million for the second quarterfirst half of 2003.2004. The lower effective tax rate resulted from a change in the mix of income outside the United States.
Equity in Earnings of Affiliates and Minority Interests
Equity in earnings of affiliates and minority interests was a charge of $0.1negative $0.3 million for the second quarterfirst half of 20042005 as compared to a charge of $1.7negative $0.2 million in the same period of 2003. During the second quarter of 2003, we deducted 37% of CorrChoice’s net income related to its minority shareholders. Effective September 30, 2003, our ownership increased to 100% resulting from CorrChoice’s redemption of its minority
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shareholders’ outstanding shares. Therefore, no such deduction was made in the second quarter of 2004.
Net Income (Loss)
Based on the foregoing, we recorded net income of $8.4 million for the second quarter of 2004 compared to net loss of $4.4 million in the same period last year.
Year-to-Date Results
Overview
Net sales rose 12% to $1,011.0 million for the first half of 2004 from $905.5 million during the same period last year. On a consolidated basis, net sales increased approximately 5% after excluding the impact of foreign currency translation. Higher sales in both the Industrial Packaging & Services and Paper, Packaging & Services segments contributed to this increase.
The GAAP operating profit was $29.6 million for the first half of 2004 compared with $22.8 million a year ago. Our operating profit for the first half of 2004 was negatively impacted by a higher level of restructuring charges and positively impacted by a higher level of timberland gains versus the first half of 2003.
Operating profit, before restructuring charges of $27.5 million and timberland gains of $5.3 million, increased 30% to $51.9 million for the first half of 2004 compared with operating profit, before restructuring charges of $19.0 million and timberland gains of $2.0 million, of $39.9 million for the same period last year.
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The following table sets forth the net sales and operating profit for each of our business segments (Dollars in thousands):
For the six months ended April 30, | 2004 | 2003 | ||||
Net sales: | ||||||
Industrial Packaging & Services | $ | 737,080 | $ | 646,535 | ||
Paper, Packaging & Services | 263,337 | 245,455 | ||||
Timber | 10,632 | 13,495 | ||||
Total net sales | $ | 1,011,049 | $ | 905,485 | ||
Operating profit: | ||||||
Operating profit, before restructuring charges and timberland gains: | ||||||
Industrial Packaging & Services | $ | 36,611 | $ | 17,457 | ||
Paper, Packaging & Services | 7,788 | 12,712 | ||||
Timber | 7,475 | 9,683 | ||||
Total operating profit before restructuring charges and timberland gains | 51,874 | 39,852 | ||||
Restructuring charges: | ||||||
Industrial Packaging & Services | 21,563 | 14,727 | ||||
Paper, Packaging & Services | 5,834 | 4,165 | ||||
Timber | 140 | 96 | ||||
Total restructuring charges | 27,537 | 18,988 | ||||
Timberland gains: | ||||||
Timber | 5,298 | 1,964 | ||||
Total operating profit | $ | 29,635 | $ | 22,828 | ||
Segment Review
Industrial Packaging & Services
Net sales rose 14% to $737.1 million for the first half of 2004 from $646.5 million for the same period last year. After excluding the impact of foreign currency translation, net sales for this segment increased 5%. Increased selling prices for this segment’s products in response to higher raw material costs, especially steel, contributed to the increase in net sales. Additionally, sales volumes were higher for steel and fibre drums.
The GAAP operating profit was $15.0 million for the first half of 2004 compared with $2.7 million for the first half of 2003. This segment’s first half of 2004 results were negatively impacted by a higher level of restructuring charges versus the same period last year.
Operating profit, before restructuring charges of $21.6 million, rose to $36.6 million for the first half of 2004 from operating profit, before restructuring charges of $14.7 million, of $17.5 million a year ago. The Industrial Packaging & Services segment’s gross profit margin benefited from labor and other manufacturing efficiencies, partially offset by higher raw material costs, as a percentage of net sales. SG&A expenses for this segment reflect a portion of the savings resulting from the transformation initiatives.
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Paper, Packaging & Services
Net sales rose 7% to $263.3 million for the first half of 2004 from $245.5 million for the same period last year. Improved volumes for most of this segment’s products were partially offset by lower average sales prices in the containerboard operations.
The GAAP operating profit was $2.0 million for the first half of 2004 compared with $8.5 million for the first half of 2003.
Operating profit, before restructuring charges of $5.8 million, was $7.8 million for the first half of 2004 compared with operating profit, before restructuring charges of $4.2 million, of $12.7 million a year ago. This decrease was primarily due to a decline in gross profit margin resulting from reduced pricing levels and higher raw material costs, particularly for old corrugated containers, and energy costs in the containerboard operations. Lower SG&A expenses in the first half of 2004 compared with the same period last year partially offset this reduction.
Timber
Timber sales were $10.6 million for the first half of 2004 compared with $13.5 million for the same period last year. These sales were consistent with budgeted levels for both periods.
The GAAP operating profit was $12.6 million for the first half of 2004 compared with $11.6 million for the first half of 2003. This segment’s first half of 2004 results were positively impacted by a higher level of timberland gains versus the same period last year.
As a result of the lower sales volume, operating profit, before restructuring charges of $0.1 million and timberland gains of $5.3 million, was $7.5 million for the first half of 2004, compared to operating profit, before restructuring charges of $0.1 million and timberland gains of $2.0 million, of $9.7 million a year ago.
Other Income Statement Changes
Cost of Products Sold
The cost of products sold, as a percentage of net sales, increased to 84.3% for the first half of 2004 from 82.6% for the first half of 2003. The principal factors impacting the 1.7 point increase were higher raw material costs, particularly steel and old corrugated containers, lower planned timber sales and higher energy costs. Improved efficiencies in labor and other manufacturing costs partially offset these impacts.
Selling, General and Administrative Expenses
SG&A expenses declined to $106.8 million, or 10.6% of net sales, for the first half of 2004 from $118.5 million, or 13.1% of net sales, for the same period a year ago. The decline in SG&A expenses was primarily attributable to realization of additional savings from our transformation initiatives. The dollar reduction in SG&A expenses was partially offset by the impact of foreign currency translation (approximately $6 million).
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Restructuring Charges
As part of the transformation initiatives, initially referred to as the performance improvement plan, we closed four company-owned plants (three in the Industrial Packaging & Services segment and one in the Paper, Packaging & Services segment) during the first half of 2004. These plants are located in North America. In addition, administrative staff reductions continue to be made throughout the world. As a result of the transformation initiatives, during the first half of 2004, we recognized restructuring charges of $27.5 million, consisting of $9.0 million in employee separation costs, $2.3 million in asset impairments and $16.2 million in other costs, which were primarily for consulting services in connection with the transformation initiatives. See Note 7 to the Notes to Consolidated Financial Statements in this Form 10-Q for additional disclosures regarding our restructuring activities.
For further information, see the “Transformation Initiatives” section below.
Gain on Sale of Assets
Gain on sale of assets increased to $5.2 million in the first half of 2004 as compared to $2.3 million in the first half of 2003, including $3.3 million more from the sale of timber properties.
Interest Expense, Net
Interest expense, net declined to $23.0 million for the first half of 2004 from $27.5 million for the same period last year. This reduction was primarily due to lower average interest rates on our debt. An $8 million reduction in average debt outstanding during the first half of 2004 compared to the first half of 2003 also contributed to this decrease.
Other Income, Net
Other income, net was $0.9 million in the first half of 2004 versus $2.4 million in the first half of 2003.
Income Tax Expense (Benefit)
The effective tax rate was 30.8% and 32.0% in the first half of 2004 and 2003, respectively, resulting in an income tax expense of $2.3 million for the first half of 2004 and an income tax benefit of $0.7 million for the first half of 2003. The lower effective tax rate resulted from a change in the mix of income outside the United States.
Equity in Earnings of Affiliates and Minority Interests
Equity in earnings of affiliates and minority interests was a charge of $0.2 million for the first half of 2004 as compared to a charge of $2.7 million in the same period of 2003. During the first half of 2003, we deducted 37% of CorrChoice’s net income
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related to its minority shareholders. Effective September 30, 2003, our ownership increased to 100% resulting from CorrChoice’s redemption of its minority shareholders’ outstanding shares. Therefore, no such deduction was made in the first half of 2004.
Cumulative Effect of Change in Accounting Principle
During the first quarter of 2003, we recorded a $4.8 million gain as a cumulative effect of change in accounting principle resulting from the adjustment of our unamortized negative goodwill in accordance with the transition provisions of SFAS No. 141, “Business Combinations,” upon the adoption of SFAS No. 142.
Net Income
Based on the foregoing, we recorded net income of $5.1$31.9 million for the first half of 20042005 compared to net income of $0.5$5.1 million in the same period last year.
Transformation Initiatives (Performance Improvement Plan)38
As previously announced, our transformation initiatives are expected to enhance long-term organic sales growth and productivity and achieve permanent cost reductions. Our focus during fiscal 2003 had been primarily SG&A optimization, which is expected to result in annual cost savings of $60 million realized in fiscal 2004. The focus during fiscal 2004 is to become an even leaner, more market-focused/performance-driven company. This next and final phase of the transformation is expected to deliver additional annualized benefits of approximately $50 million, with about $15 million of those savings to be realized in fiscal 2004 and the remainder in fiscal 2005. The opportunities identified include, but are not limited to, improved labor productivity, material yield and other manufacturing efficiencies, coupled with further network consolidation. The related one-time costs for this phase will be approximately $45 million to $50 million, which will be incurred in fiscal 2004. In addition, we launched a strategic sourcing initiative to more effectively leverage our global spending and lay the foundation for a world-class sourcing and supply chain capability.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are operating cash flows, the proceeds from our Senior Subordinated Notes, and trade accounts receivable credit facility, sale of our European accounts receivable and borrowings under our Amended and Restated Senior Secured Credit Agreement, further discussed below. We have used these sources to fund our working capital needs, capital expenditures, cash dividends, common stock repurchases and acquisitions. We anticipate continuing to fund these items in a like manner. We currently expect that operating cash flows, the proceeds from our Senior Subordinated Notes, and trade accounts receivable credit facility and borrowings under our Amended and Restated Senior Secured Credit Agreement will be sufficient to fund our working capital, capital expenditures, debt repayment and other liquidity needs for the foreseeable future.
Capital Expenditures
During the first half of 2004,2005, we invested $28.1$24.9 million in capital expenditures, which includedexcluding timberland purchases of $1.3 compared with capital expenditures of $23.5 million, excluding timberland purchases of $4.6 million, forduring the purchase of timber properties.same period last year.
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We expect capital expenditures to be approximately $75 million to $80 million in 2004,2005, which would be $20 million toapproximately $25 million below our anticipated depreciation expense.expense of approximately $100 million.
Balance Sheet Changes
The increase$25.1 million reduction in trade accounts receivable was primarily due to higherlower net sales in the second quarter of 2004 as2005 compared withto the fourth quarter of 2003.2004, the sale of certain European accounts receivable and improved collection efforts, partially offset by the impact of foreign currency translation.
Net assets held for sale has increasedThe $30.7 million increase in inventories was primarily due to our transformation initiatives. We now have 16 properties classified as held for sale versus eight properties at October 31, 2003.higher raw material costs coupled with the impact of foreign currency translation.
Goodwill hasProperties, plants and equipment, net decreased as a result$9.5 million primarily due to depreciation expense ($47.2 million) and depletion expense ($0.9 million) partially offset by the impact of an adjustmentforeign currency translation and the second half of 2005 capital expenditures.
The $39.3 million decrease in accounts payable was mostly due to recognize the cash surrender valuelower cost of reinsurance contracts that are used to fund pension payments in Europe. The adjustment, which relates to the Van Leer Industrial Packaging acquisition, was recordedproducts sold in the second quarter of 2004.
Other long-term assets increased mostly as a result2005 compared to the fourth quarter of 2004 and the cash surrender valuetiming of reinsurance contracts as discussed above.payments made to our suppliers, partially offset by higher raw material costs.
Accrued payroll and employee benefits were lower by $7.7 million primarily due to the timing of the annual bonus payments,and long-term incentive accruals, which were fully accrued at October 31, 2003.
Long-term debt has decreased due to payments made2004 and paid during the first halfquarter of 2004. We expect to continue repaying debt throughout the second half2005, and timing of 2004 from cash generated by our operating activities.other employee-related accruals.
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Long-term debt increased $6.9 million due to weak operating cash flows for the six months ended April 30, 2005.
Borrowing Arrangements
$550 million Amended and Restated Senior Secured Credit Agreement
On August 23, 2002,As of March 2, 2005, we and certain of our non-United Statesinternational subsidiaries, as borrowers, entered into a $550$350 million Amended and Restated Senior Secured Credit Agreement (the “Credit Agreement”) with a syndicate of lenders.financial institutions, as lenders, Deutsche Bank AG, New York Branch, as administrative agent, Deutsche Bank Securities Inc., as joint lead arranger and sole book-runner, KeyBank National Association, as joint lead arranger and syndication agent and National City Bank, Fleet National Bank and ING Capital LLC, as co-documentation agents. The Amended and Restated Senior Secured Credit Agreement originally providedprovides for a $300 million term loan and a $250$350 million revolving multicurrency credit facility. The revolving multicurrency credit facility is available for ongoing working capital and general corporate purposes and has been permanently reduced to $240 million. On February 11, 2004, we amended our term loanrefinance amounts outstanding under the Amended and Restated Senior Secured Credit Agreement. As a result of the amendment, the term loan was increased from its balance then outstanding of $226 million to $250 million, and the applicable margin was lowered by 50 basis points while maintaining the existing maturity schedule. The incremental borrowings under the term loan were used to reduce borrowings under the revolving multicurrency credit facility. Interest is based on either a London InterBank Offered Rate (“LIBOR”)Eurocurrency rate or an alternative base rate that resets periodically plus a calculated margin amount. On March 3, 2005, $189.4 million was borrowed under the revolving multicurrency credit facility in order to prepay the obligations outstanding under the Senior Secured Credit Agreement and certain costs and expenses incurred in connection with the Credit Agreement. As of April 30, 2004, there2005, $129.4 million was a total of $300 million outstanding under the Amended and Restated Senior Secured Credit Agreement.revolving multicurrency credit facility.
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The Amended and Restated Senior Secured Credit Agreement contains certain covenants, which include financial covenants that require us to maintain a certain leverage ratio and a minimum coverage of interest expense. The leverage ratio generally requires that at the end of any fiscal quarter we will not permit the ratio of (a) our total consolidated indebtedness less cash and cash equivalents plus aggregate cash proceeds received from an unrelated third party from a permitted receivables transaction to (b) our consolidated net income plus depreciation, depletion and amortization, interest expense (including capitalized interest), income taxes, and fixed charges,minus certain extraordinary gains and a minimum net worth. Atnon-recurring gains (or plus certain extraordinary losses and non-recurring losses) for the preceding twelve months (“EBITDA”) to be greater than 3.5 to 1. The interest coverage ratio generally requires that at the end of any fiscal quarter we will not permit the ratio of (a) our EBITDA to (b) our interest expense (including capitalized interest) for the preceding twelve months to be less than 3 to 1. On April 30, 2004,2005, we were in compliance with these covenants. The terms of the Amended and Restated Senior Secured Credit Agreement also limit our ability to make “restricted payments,” which include dividends and purchases, redemptions and acquisitions of our equity interests. The repayment of this facility is secured by a first lien onpledge of the capital stock of substantially all of the personal property and certain of the real property of Greif and itsour United States subsidiaries and, in part, by the capital stock of the non-United States borrowers and any intercompany notes payable to them.international borrowers. However, in the event that we receive an investment grade rating from either Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, we may request that such collateral be released.
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8 7/8% percent Senior Subordinated Notes
On July 31, 2002, we issued Senior Subordinated Notes in the aggregate principal amount of $250 million, receiving net proceeds of approximately $248 million before expenses. Interest on the Senior Subordinated Notes is payable semi-annually at the annual rate of 8.875%.8.875 percent. The Senior Subordinated Notes do not have required principal payments prior to maturity on August 1, 2012. As of April 30, 2004,2005, there was a total of $251.3$249.9 million outstanding under the Senior Subordinated Notes. The increase in the balance as compared to the proceeds originally received was primarily due to the recording of gains on fair value hedges we have in place to hedge interest rate risk.
The Indenture pursuant to which the Senior Subordinated Notes were issued contains certain covenants. At April 30, 2004,2005, we were in compliance with these covenants. The terms of the Senior Subordinated Notes also limit our ability to make “restricted payments,” which include dividends and purchases, redemptions and acquisitions of equity interests.
Trade Accounts Receivable Credit Facility
On October 31, 2003, we entered into a five-year, up to $120$120.0 million, credit facility with an affiliate of a bank in connection with the securitization of certain of our U.S.United States trade accounts receivable. The facility is secured by certain of our U.S.United States trade accounts receivable and bears interest at a variable rate based on LIBOR plus a margin or other agreed upon rate. We also pay a commitment fee. We can terminate thethis facility at any time upon 60 days prior written notice. In connection with this transaction, we established Greif Receivables Funding LLC, which is included in our consolidated financial statements. This entity purchases and services our trade accounts receivable that are subject to this credit facility. As of April 30, 2004,2005, there was a total of $73.0$87.0 million outstanding under the trade accounts receivable credit facility.
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The trade accounts receivable credit facility provides that in the event we breach any of our financial covenants under the Amended and Restated Senior Secured 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 we must within 90 days of providing notice of the breach, pay all amounts outstanding under the trade accounts receivable credit facility.
37Sale of European Accounts Receivable
Real Estate Transactions; Monetization Notes
On March 28, 2005, we 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 purchase price of approximately $90 million, subject to closing adjustments. In connection with the closing of one of these agreements, on May 23, 2005, we sold approximately 35,000 acres of timberland and associated assets in Florida, Georgia and Alabama for a purchase price of approximately $51 million. 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”). 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 an interest on the Purchase Note. The remaining acres will be sold in several installments during 2006. We will recognize significant timberland gains in its consolidated statements of income in the periods that these transactions occur.
On May 31, 2005, STA Timber LLC (“STA Timber”), one of our indirect wholly-owned subsidiaries, issued in a private placement $43 million 5.20 percent Senior Secured Notes due August 5, 2020 (the “Monetization Notes”). 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 grace 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 will be used for general corporate purposes, including the repayment of indebtedness. Neither Greif, Inc. nor any of its other consolidated subsidiaries have extended any form of guaranty of the principal or interest on the Monetization Notes. Accordingly, neither Greif, Inc. nor any of its other consolidated subsidiaries will become directly or contingently liable for the payment of the Monetization Notes at any time.
Contractual Obligations
As of April 30, 2004,2005, we had the following contractual obligations (Dollars in millions):
Payments Due by Period | Payments Due By Period | |||||||||||||||||||||||||||||
Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | Total | Less than 1 year | 1-3 years | 3-5 years | After 5 years | |||||||||||||||||||||
Long-term debt | $ | 624 | $ | — | $ | 37 | $ | 73 | $ | 514 | $ | 466 | $ | — | $ | — | $ | 216 | $ | 250 | ||||||||||
Short-term borrowings | 20 | 20 | — | — | — | 24 | 24 | — | — | — | ||||||||||||||||||||
Non-cancelable operating leases | 57 | 8 | 23 | 13 | 13 | 61 | 9 | 24 | 13 | 15 | ||||||||||||||||||||
Total contractual cash obligations | $ | 701 | $ | 28 | $ | 60 | $ | 86 | $ | 527 | $ | 551 | $ | 33 | $ | 24 | $ | 229 | $ | 265 | ||||||||||
Stock Repurchase Program
In February 1999, ourOur Board of Directors has authorized a one million-share stock repurchase program.us to purchase up to two million shares of Class A Common Stock or Class B Common Stock or any combination of the foregoing (the “Common Stock”). During the first halfsix months of 2004,2005, we repurchased 814100,000 shares of Class B Common Stock. As of April 30, 2004,2005, we had repurchased 713,680864,680 shares, including 435,476486,476 shares of Class A Common Stock and 278,204378,204 shares of Class B Common Stock.Stock, under this program. The total cost of the shares repurchased duringfrom 1999 through April 30, 20042005 was $20.5$28 million.
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Recent Accounting Standards
In December 2003,2004, the Financial Accounting Standards Board (“FASB”) issued a revision to SFAS No. 132, “Employers Disclosures about Pensions and Other Postretirement Benefits.” The123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”). This revision relateswill require us to employers’ disclosures about pension plans and other postretirement benefit plans. It does not altermeasure the measurement or recognition provisionscost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the originalaward. The cost will be recognized over the period during which an employee is required to provide service in exchange for the award. SFAS No. 132. It requires additional disclosures regarding assets, obligations, cash flows123R was effective as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. However, based on a new rule by the Securities and net periodic benefit costsExchange Commission, companies are allowed to implement SFAS No. 123R at the beginning of pension planstheir next fiscal year instead of the next reporting period that begins after June 15, 2005 (November 1, 2005 for us). SFAS No. 123R will apply to all awards granted after the required effective date and other defined benefit postretirement plans. Excluding certain disclosure requirements,to awards modified, repurchased or canceled after that date. As of the revised Statementrequired effective date, we will apply SFAS No. 123R using a modified version of prospective application. Under this transition method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123R for either recognition or pro forma disclosures. For periods before the required effective date, we have elected not to apply a modified version of retrospective application under which financial statements with fiscal years ended after December 15, 2003. Interim period disclosuresfor prior periods are effective for interim periods beginning after December 15, 2003 and have been included in Note 14 to the Notes to Consolidated Financial Statements in this Form 10-Q.
In December 2003, the FASB issued a revision to Interpretationadjusted by SFAS No. 46, “Consolidation of Variable Interest Entities.” This Interpretation defines when a business enterprise must consolidate a variable interest entity. The Interpretation provisions are effective for variable interest entities commonly referred to as special-purpose entities for periods ending after March 15, 2004. We do not have any material unconsolidated variable interest entities as of April 30, 2004 that would require consolidation.123R. Adoption of SFAS No. 123R is expected to result in compensation cost of approximately $1.0 million in the subsequent provisionsconsolidated statements of the Interpretation did not have a material impact on our financial positionincome in 2006, assuming no additional stock options are granted during 2005 or results of operations.2006.
Forward-Looking Statements; Certain Factors Affecting Future Results
All statements other than statements of historical facts included in this Form 10-Q, including, without limitation, statements regarding our future financial position,
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business strategy, budgets, projected costs, goals and plans and objectives of management for future operations, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “believe”“believe,” “continue” or “continue”“target” or the negative thereof or variations thereon or similar terminology. All forward-looking statements made in this Form 10-Q are based on information presently available to our management. Although we believe that the expectations reflected in forward-looking statements have a reasonable basis, we can give no assurance that these expectations will prove to be correct. Forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed in or implied by the statements. Such risks and uncertainties that could cause a difference include, but are not limited to: general economic and business conditions, including a prolonged or substantial economic downturn; changing trends and demands in the industries in which we compete, including industry over-capacity; industry competition; the continuing consolidation of our customer base for industrial packaging, containerboard and corrugated products; political instability in
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those foreign countries where we manufacture and sell our products; foreign currency fluctuations and devaluations; availability and costs of raw materials for the manufacture of our products, particularly steel, resins, pulpwood, old corrugated containers for recycling and resin,containerboard, and price fluctuations in energy costs; costs associated with litigation or claims against us pertaining to environmental, safety and health, product liability and other matters; work stoppages and other labor relations matters; property loss resulting from wars, acts of terrorism, or natural disasters; the frequency and volume of sales of our timber and timberland; and the deviation of actual results from the estimates and/or assumptions used by us in the application of our significant accounting policies. These and other risks and uncertainties that could materially affect our consolidated financial results are further discussed in our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended October 31, 2003.2004. We assume no obligation to update any forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
There has not been a significant change in the quantitative and qualitative disclosures about the Company’s market risk from the disclosures contained in the 2003Company’s Form 10-K.10-K for the year ended October 31, 2004.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision of the Chief Executive Officer and Chief Financial Officer, the Company’s management conducted an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures, as such term is defined under Rule 15d–15(e) promulgated under the Securities Exchange Act of 1934. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in timely making known to them material information required to be included in the Company’s periodic filings with the Securities and Exchange Commission.
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There has been no change in the Company’s internal controls over financial reporting that occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II. OTHER INFORMATION
Issuer Purchases of Class B Common Stock
Period | Total Number of Shares | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1) | Maximum Number of Shares that May Yet Be Purchased under the Plans or Programs(1) | |||||
02/01/04 thru 02/29/04 | — | — | — | 287,020 | |||||
03/01/04 thru 03/31/04 | — | — | — | 287,020 | |||||
04/01/04 thru 04/30/04 | 750 | $ | 36.00 | 750 | 286,320 | ||||
Total | 750 | $ | 36.00 | 750 | 286,320 | ||||
40ITEM 6. EXHIBITS
(a.) | Exhibits |
Exhibit No. | Description of Exhibit | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a - 14(a) of the Securities Exchange Act of | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a - 14(a) of the Securities Exchange Act of | |
32.1 | Certification of Chief Executive Officer required by Rule 13a - 14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States | |
32.2 | Certification of Chief Financial Officer required by Rule 13a - 14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States |
No events occurred requiring a Form 8-K to be filed during the second quarter of 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized.
Greif, Inc. | ||||||||
| ||||||||
(Registrant) | ||||||||
Date: June | 8, 2005 | /s/ Donald S. Huml | ||||||
Donald S. Huml, Chief Financial
|
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GREIF, INC.
Form 10-Q
For Quarterly Period Ended April 30, 20042005
EXHIBIT INDEX
Exhibit No. | Description of Exhibit | |
31.1 | Certification of Chief Executive Officer Pursuant to Rule 13a - 14(a) of the Securities Exchange Act of | |
31.2 | Certification of Chief Financial Officer Pursuant to Rule 13a - 14(a) of the Securities Exchange Act of | |
32.1 | Certification of Chief Executive Officer required by Rule 13a - 14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States | |
32.2 | Certification of Chief Financial Officer required by Rule 13a - 14(b) of the Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18 of the United States |
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