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Greif Bros. 10-K 2008 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
For the
fiscal year ended October 31, 2008
or
For the
transition period from
to
Commission
file number: 001-00566
Greif,
Inc.
(Exact
name of Registrant as specified in its charter)
Registrant’s
telephone number, including area code 740-549-6000
Securities
registered pursuant to Section 12(b) of the Act:
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the Registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Exchange Act of
1934. Yes x No ¨
Indicate
by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of
1934. Yes ¨ No x
Indicate
by check mark whether the Registrant (1) has filed all reports to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes x No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the Registrant’s knowledge, in the definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer”, “accelerated filer”, “smaller reporting company” in Rule
12b-2 of the Securities Exchange Act.
Large
accelerated filer x Accelerated
filer ¨ Non-accelerated
filer ¨
Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Securities Exchange Act of
1934). Yes ¨ No x
The
aggregate market value of voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold as of the last business day of the Registrant’s most recently
completed second fiscal quarter was as follows:
Non-voting
common equity (Class A Common Stock) - $1,536,481,349
Voting
common equity (Class B Common Stock) - $531,777,796
The
number of shares outstanding of each of the Registrant’s classes of common
stock, as of December 12, 2008, was as follows:
Class A
Common Stock – 24,081,998
Class B
Common Stock – 22,562,266
Listed
hereunder are the documents, portions of which are incorporated by reference,
and the parts of this Form 10-K into which such portions are
incorporated:
1. The
Registrant’s Definitive Proxy Statement for use in connection with the Annual
Meeting of Stockholders to be held on February 23, 2009 (the “2009 Proxy
Statement”), portions of which are incorporated by reference into Part III of
this Form 10-K. The 2009 Proxy Statement will be filed within 120 days of
October 31, 2008.
IMPORTANT
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
All
statements, other than statements of historical facts, included in this Form
10-K of Greif, Inc. and subsidiaries (the “Company”) or incorporated herein,
including, without limitation, statements regarding the Company’s future
financial position, business strategy, budgets, projected costs, goals and plans
and objectives of management for future operations, are forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended (the “Exchange Act”). Forward-looking statements generally
can be identified by the use of forward-looking terminology such as “may,”
“will,” “expect,” “intend,” “estimate,” “anticipate,” “project,” “believe,”
“continue” or “target” or the negative thereof or variations thereon or similar
terminology. Forward-looking statements speak only as the date the statements
were made. Although the Company believes that the expectations reflected in
forward-looking statements have a reasonable basis, it 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. For a
discussion of the most significant risks and uncertainties that could cause the
Company’s actual results to differ materially from those projected, see “Risk
Factors” in Item 1A of this Form 10-K. The Company undertakes no obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. 2
Index
to Form 10-K Annual Report for the year ended October 31, 2008
3
PART
I
ITEM 1.
BUSINESS
(a)
General Development of Business
General
The
Company is a leading global producer of industrial packaging products with
manufacturing facilities located in over 45 countries. The Company offers a
comprehensive line of industrial packaging products, such as steel, fibre and
plastic drums, intermediate bulk containers, closure systems for industrial
packaging products, transit protection products, and polycarbonate water
bottles, and services, such as blending, filling and other packaging services,
logistics and warehousing. The Company also produces containerboard and
corrugated products for niche markets in North America. The Company sells timber
to third parties from its timberland in the southeastern United States that it
manages to maximize long-term value. The Company also owns timberland in Canada
that it does not actively manage. In addition, the Company sells, from time to
time, timberland and special use land, which consists of surplus land, higher
and better use (“HBU”) land, and development land. The Company’s customers range
from Fortune 500 companies to medium and small-sized companies in a cross
section of industries.
The
Company was founded in 1877 in Cleveland Ohio, as "Vanderwyst and Greif," a
cooperage shop co-founded by one of four Greif brothers. One year after its
founding, the other three Greif brothers were invited to join the business,
renamed Greif Bros. Company, making wooden barrels, casks and kegs to transport
post-Civil War goods nationally and internationally. The Company later purchased
nearly 300,000 acres of timberland to provide raw materials for the cooperage
plants. The Company still owns forests located in the southeastern United States
and in Canada. In the latter half of the 1900s, the Company transitioned from
its keg and barrel heading mills, stave mills and cooperage facilities to the
manufacturing of fibre, steel, and plastic drums; corrugated containers;
intermediate bulk containers; corrugated products for transit protection;
multiwall shipping bags; and containerboard. In 1926, the Company incorporated
as a Delaware corporation and made its public offering as The Greif Bros.
Cooperage Corporation. In 1951, the Company moved its headquarters from
Cleveland, Ohio to Delaware, Ohio, which is in the Columbus metro-area, where
its corporate headquarters are currently located. Following the Van Leer
acquisition in 2001, the Company changed its name from Greif Bros. Corporation
to Greif, Inc.
The
Company’s fiscal year begins on November 1 and ends on October 31 of
the following year. Any references in this Form 10-K to the years 2008, 2007 or
2006, or to any quarter of those years, relate to the fiscal year ending in that
year.
(b)
Financial Information about Segments
The
Company operates in three business segments: Industrial Packaging (formerly
known as “Industrial Packaging & Services”); Paper Packaging (former known
as “Paper, Packaging & Services”); and Timber. Information related to each
of these segments is included in Note 15 to the Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K, which Note is incorporated
herein by reference.
(c) Narrative
Description of Business>
Products
and Services
In the
Industrial Packaging segment, the Company offers a comprehensive line of
industrial packaging products, such as steel, fibre and plastic drums,
intermediate bulk containers, closure systems for industrial packaging products,
transit protection products, and polycarbonate water bottles, and services, such
as blending, filling and other packaging services, logistics and warehousing.
The Company sells its industrial packaging products to customers in over 45
countries in industries such as chemicals, paints and pigments, food and
beverage, petroleum, industrial coatings, agricultural, pharmaceutical and
mineral, among others. In addition, the Company provides a variety of blending,
filling and other packaging services, logistics and warehousing to
customers in many of these same industries in North America.
In the
Paper Packaging segment, the Company sells containerboard, corrugated
sheets and other corrugated products and multiwall bags to customers in North
America in industries such as packaging, automotive, food and building products.
The Company’s corrugated container products are used to ship such diverse
products as home appliances, small machinery, grocery products, building
products, automotive components, books and furniture, as well as numerous other
applications. The Company’s industrial and consumer multiwall bag products are
used to ship a wide range of industrial and consumer products, such as seed,
fertilizers, chemicals, concrete, flour, sugar, feed, pet foods, popcorn,
charcoal and salt, primarily for the agricultural, chemical, building products
and food industries. 4
In the
Timber segment, the Company is focused on the active harvesting and regeneration
of its United States timber properties to achieve sustainable long-term yields.
While timber sales are subject to fluctuations, the Company seeks to maintain a
consistent cutting schedule, within the limits of market and weather conditions.
The Company also sells, from time to time, timberland and special use land,
which consists of surplus land, HBU land, and development land.
As of
October 31, 2008, the Company owned approximately 268,700 acres of timber
properties in the southeastern United States and approximately 27,450 acres of
timber properties in Canada.
Customers
Due to
the variety of its products, the Company has many customers buying different
types of its products and due to the scope of the Company’s sales, no one
customer is considered principal in the total operations of the
Company.
Backlog
The
Company supplies a cross-section of industries, such as chemicals, food
products, petroleum products, pharmaceuticals and metal products, and must make
spot deliveries on a day-to-day basis as its products are required by its
customers, the Company does not operate on a backlog to any significant extent
and maintains only limited levels of finished goods. Many customers place their
orders weekly for delivery during the week.
Competition
The
markets in which the Company sells its products are highly competitive with many
participants. Although no single company dominates, the Company faces
significant competitors in each of its businesses. The Company’s competitors
include large vertically integrated companies as well as numerous smaller
companies. The industries in which the Company competes are particularly
sensitive to price fluctuations caused by shifts in industry capacity and other
cyclical industry conditions. Other competitive factors include design, quality
and service, with varying emphasis depending on product line.
In the
industrial packaging industry, the Company competes by offering a comprehensive
line of products on a global basis. In the paper and paper packaging industry,
the Company competes by concentrating on providing value-added, higher-margin
corrugated products to niche markets. In addition, over the past several years
the Company has closed higher cost facilities and otherwise restructured its
operations, which it believes has significantly improved its cost
competitiveness.
Environmental
Matters; Governmental Regulations
The
Company’s operations are subject to extensive federal, state, local and
international laws, regulations, rules and ordinances relating to pollution, the
protection of the environment, the generation, storage, handling,
transportation, treatment, disposal and remediation of hazardous substances and
waste materials and numerous other environmental laws and regulations. In the
ordinary course of business, the Company is subject to periodic environmental
inspections and monitoring by governmental enforcement authorities. In addition,
certain of the Company’s production facilities require environmental permits
that are subject to revocation, modification and renewal.
Based on
current information, the Company believes that the probable costs of the
remediation of company-owned property will not have a material adverse effect on
its financial condition or results of operations. The Company believes that its
liability for these matters was adequately reserved as of October 31,
2008.
The
Company does not believe that compliance with federal, state, local and
international provisions, which have been enacted or adopted regulating the
discharge of materials into the environment, or otherwise relating to the
protection of the environment, has had or will have a material effect upon the
capital expenditures, earnings or competitive position of the Company. The
Company does not anticipate any material capital expenditures related to
environmental control in 2009.
See also
Item 7 of this Form 10-K and Note 14 to the Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K for additional information
concerning environmental expenses and cash expenditures for 2008, 2007 and 2006,
and the Company’s reserves for environmental liabilities at October 31,
2008. 5
Raw
Materials
Steel,
resin and containerboard are the principal raw materials for the Industrial
Packaging segment, and pulpwood, old corrugated containers for recycling and
containerboard are the principal raw materials for the Paper Packaging segment.
The Company satisfies most of its needs for these raw materials through
purchases on the open market or under short-term and long-term supply
agreements. All of these raw materials are purchased in highly competitive,
price-sensitive markets, which have historically exhibited price, demand
and supply cyclicality. From time to time, some of these raw materials have
been in short supply, but to date these shortages have not had a significant
effect on the Company’s operations.
Research
and Development
While
research and development projects are important to the Company’s continued
growth, the amount expended in any year is not material in relation to the
results of operations of the Company.
The
Company’s business is not materially dependent upon patents, trademarks,
licenses or franchises.
Employees
As of
October 31, 2008, the Company had approximately 9,600 full time employees.
A significant number of the Company’s full time employees are covered under
collective bargaining agreements. The Company believes that its employee
relations are generally good.
(d)
Financial Information about Geographic Areas
The
Company’s operations are located in the Americas, Europe, Middle East, Africa
and Asia Pacific. Information related to each of these areas is included in Note
15 to the Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K, which Note is incorporated herein by reference. Quantitative and
Qualitative Disclosures about Market Risk, included in Item 7A of this Form
10-K, is incorporated herein by reference.
(e)
Available Information
The
Company maintains an Internet Web site at www.greif.com. The Company files
reports with the Securities and Exchange Commission (the “SEC”) and makes
available, free of charge, on or through this Internet Web site, its annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy and information statements and amendments to these reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as
reasonably possible after the Company electronically files such material with,
or furnishes it to, the SEC.
Any of
the materials the Company files with the SEC may also be read and/or copied at
the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549.
Information on the operation of the SEC’s Public Reference Room may be obtained
by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet Web site
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC at
www.sec.gov.
(f)
Other Matters
The
Company’s common equity securities are listed on the New York Stock Exchange
(“NYSE”) under the symbols GEF and GEF.B. Michael J. Gasser, the Company’s
Chairman and Chief Executive Officer, has timely certified to the NYSE that, at
the date of the certification, he was unaware of any violation by the Company of
the NYSE’s corporate governance listing standards. In addition, Mr. Gasser
and Donald S. Huml, the Company’s Executive Vice President and Chief Financial
Officer, have provided certain certifications in this Form 10-K regarding the
quality of the Company’s public disclosures. See Exhibits 31.1 and 31.2 to this
Form 10-K.
ITEM
1A. RISK FACTORS
Statements
contained in this Form 10-K may be “forward-looking” within the meaning of
Section 21E of the Exchange Act. Such forward-looking statements are
subject to certain risks and uncertainties that could cause the Company’s
operating results to differ materially from those projected. The following
factors, among others, in some cases have affected, and in the future could
affect, the Company’s actual financial performance. The terms “Greif,” “our
company,” “we,” “us” and “our” as used in this discussion refer to Greif, Inc.
and subsidiaries. 6
The
current and future challenging global economy may adversely affect our
business.
The current economic slowdown and any
further economic decline in future reporting periods could negatively affect our
business and results of operations. The volatility of the current
economic climate makes it difficult for us to predict the complete impact of
this slowdown on our business and results of operations. Due to these
current economic conditions, our customers may face financial
difficulties, the unavailability of or reduction in commercial credit, or
both, that may result in decreased sales and revenues of the
Company. Certain of our customers may cease operations or seek
bankruptcy protection, which would reduce our cash flows and adversely impact
our results of operations. Our customers that are financially
viable and not experiencing economic distress may elect to reduce the volume of
orders for our products in an effort to remain financially stable or as a result
of the unavailability of commercial credit which would negatively affect
our results of operations. We may also have difficulty accessing the
global credit markets due to the tightening of commercial credit availability
and the financial difficulties of our customers, which would result in decreased
ability to fund capital-intensive strategic projects and our ongoing acquisition
strategy. Further, we may experience challenges in forecasting
revenues and operating results due to these global economic
conditions. The difficulty in forecasting revenues and operating
results may result in volatility in the market price of our common stock.
In
addition, the lenders under our Credit Agreement and other borrowing facilities
described in Item 7 of this Form 10-K under “Liquidity and Capital Resources -
Borrowing Arrangements”
and the counterparties with whom we maintain interest rate swap agreements,
cross-currency interest rate swaps, currency forward contracts and derivatives
and other hedge agreements may be unable to perform their lending or payment
obligations in whole or in part, or may cease operations or seek bankruptcy
protection, which would negatively affect our cash flows and our results of
operations.
Historically,
our business has been sensitive to changes in general economic or business
conditions.
Our
customers generally consist of other manufacturers and suppliers who purchase
industrial packaging products and containerboard and related corrugated products
for their own containment and shipping purposes. Because we supply a cross
section of industries, such as chemicals, food products, petroleum products,
pharmaceuticals, metal products, agricultural and agrichemical products, and
have operations in many countries, demand for our industrial packaging products
and containerboard and related corrugated products has historically corresponded
to changes in general economic and business conditions of the industries and
countries in which we operate. Accordingly, our financial performance is
substantially dependent upon the general economic conditions existing in these
industries and countries, and any prolonged or substantial economic downturn in
the markets we operate, including the current economic downturn, could have
a material adverse affect on our business, results of operations or financial
condition.
Our
operations are subject to currency exchange and political risks that could
adversely affect our results of operations.
We have
operations in over 45 countries. As a result of our international operations, we
are subject to certain risks that could disrupt our operations or force us to
incur unanticipated costs.
Our
operating performance is affected by fluctuations in currency exchange rates
by:
We are
subject to various other risks associated with operating in international
countries, such as the following:
We
operate in highly competitive industries.
Each of
our business segments operates in highly competitive industries. The most
important competitive factors we face are price, quality and service. To the
extent that one or more of our competitors become more successful with respect
to any of these key competitive factors, we could lose customers and our sales
could decline. In addition, due to the tendency of certain customers to
diversify their suppliers, we could be unable to increase or maintain sales
volumes with particular customers. Certain of our competitors are substantially
larger and have significantly greater financial resources.
7
Our
business is sensitive to changes in industry demands.
Industry
demand for containerboard in the United States and certain of our industrial
packaging products in our United States and international markets has varied in
recent years causing competitive pricing pressures for those products. We
compete in industries that are capital intensive, which generally leads to
continued production as long as prices are sufficient to cover marginal costs.
As a result, changes in industry demands like the current economic slowdown,
including any resulting industry over-capacity, may cause substantial price
competition and, in turn, negatively impact our financial
performance.
The
continuing consolidation of our customer base for industrial packaging,
containerboard and corrugated products may intensify pricing pressures and may
negatively impact our financial performance.
Over the
last few years, many of our large industrial packaging, containerboard and
corrugated products customers have acquired, or been acquired by, companies with
similar or complementary product lines. This consolidation has increased the
concentration of our largest customers, and resulted in increased pricing
pressures from our customers. Any future consolidation of our customer
base could negatively impact our financial performance.
Raw
material and energy price fluctuations and shortages could adversely affect our
ability to obtain the materials needed to manufacture our products and could
adversely affect our manufacturing costs.
The
principal raw materials used in the manufacture of our products are steel,
resin, pulpwood, old corrugated containers for recycling, and containerboard,
which we purchase in highly competitive, price sensitive markets. These raw
materials have historically exhibited price and demand cyclicality. Some of
these materials have been, and in the future may be, in short supply. However,
we have not recently experienced any significant difficulty in obtaining our
principal raw materials. We have long-term supply contracts in place for
obtaining a portion of our principal raw materials. The cost
of producing our products is also sensitive to the price of energy. We have,
from time to time, entered into short-term contracts to hedge certain of our
energy costs. Energy prices, in particular oil and natural gas, have fluctuated
in recent years, with a corresponding effect on our production
costs.
Environmental
and health and safety matters and product liability claims could negatively
impact our operations and financial performance.
We must
comply with extensive rules and regulations regarding federal, state, local and
international environmental matters, such as air and water quality and waste
disposal. We must also comply with extensive rules and regulations regarding
safety and health matters. The failure to materially comply with such rules and
regulations could adversely affect our operations and financial performance.
Furthermore, litigation or claims against us with respect to such matters could
adversely affect our financial performance. We may also become subject to
product liability claims, which could adversely affect our operations and
financial performance.
Our
business may be adversely impacted by work stoppages and other labor relations
matters.
We are
subject to risk of work stoppages and other labor relations matters because a
significant number of our employees are represented by unions. We have
experienced work stoppages and strikes in the past, and there may be work
stoppages and strikes in the future. Any prolonged work stoppage or strike at
any one of our principal manufacturing facilities could have a negative impact
on our business, results of operations or financial condition.
We
may encounter difficulties arising from acquisitions.
During
recent years, we have invested a substantial amount of capital in acquisitions.
Acquisitions involve numerous risks, including the failure to retain key
customers, employees and contracts, the inability to integrate businesses
without material disruption, unanticipated costs incurred in connection with
integrating businesses and the incurrence of liabilities greater than
anticipated or operating results that are less than anticipated. In addition,
acquisitions and integration activities require time and attention of management
and other key personnel, and other companies in our industries have similar
acquisition strategies. There can be no assurance that any future acquisitions
will be successfully integrated into our operations, that competition for
acquisitions will not intensify or that we will be able to complete such
acquisitions on acceptable terms and conditions. The costs of unsuccessful
acquisition efforts may adversely affect our financial performance.
8
We
may be subject to losses that might not be covered in whole or in part by
existing insurance reserves or insurance coverage. These uninsured losses could
adversely affect our financial performance.
We are
self-insured for certain of the claims made under our employee medical and
dental insurance programs and for certain of our workers’ compensation claims.
We establish reserves for estimated costs related to pending claims,
administrative fees and claims incurred but not reported. Because establishing
reserves is an inherently uncertain process involving estimates, currently
established reserves may not be adequate to cover the actual liability for
claims made under our employee medical and dental insurance programs and for
certain of our workers’ compensation claims. If we conclude that our estimates
are incorrect and our reserves are inadequate for these claims, we will need to
increase our reserves, which could adversely affect our financial
performance.
We carry
comprehensive liability, fire and extended coverage insurance on most of our
facilities, with policy specifications and insured limits customarily carried
for similar properties. However, there are certain types of losses, such as
losses resulting from wars, acts of terrorism, or hurricanes, tornados, or other
natural disasters, that generally are not insured because they are either
uninsurable or not economically insurable. Should an uninsured loss or a loss in
excess of insured limits occur, we could lose capital invested in that property,
as well as the anticipated future revenues derived from the manufacturing
activities conducted at that property, while remaining obligated for any
mortgage indebtedness or other financial obligations related to the property.
Any such loss would adversely impact our business, financial condition and
results of operations.
We
purchase insurance policies covering general liability and product liability
with substantial policy limits. However, there can be no assurance that any
liability claim would be adequately covered by our applicable insurance policies
or it would not be excluded from coverage based on the terms and conditions of
the policy. This could also apply to any applicable contractual
indemnity.
The
frequency and volume of our timber and timberland sales will impact our
financial performance.
We have a
significant inventory of standing timber and timberland and approximately 61,600
acres of special use properties in the United States and Canada. The frequency,
demand for and volume of sales of timber, timberland and special use
properties will have an effect on our financial performance. In addition,
volatility in the real estate market for special use properties could negatively
affect our results of operations.
ITEM 1B. UNRESOLVED
STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The
following are the Company’s principal operating locations and the products
manufactured at such facilities or the use of such facilities. The Company
considers its operating properties to be in satisfactory condition and adequate
to meet its present needs. However, the Company expects to make further
additions, improvements and consolidations of its properties to support its
business expansion.
9
10
The
Company also owns a substantial number of timber properties comprising
approximately 268,700 acres in the states of Alabama, Louisiana and Mississippi
and approximately 27,450 acres in the provinces of Ontario and Quebec in Canada
as of October 31, 2008.
ITEM
3. LEGAL PROCEEDINGS
The
Company has no pending material legal proceedings.
From time
to time, various legal proceedings arise at the country, state or local levels
involving environmental sites to which the Company has shipped, directly or
indirectly, small amounts of toxic waste, such as paint solvents, etc. The
Company, to date, has been classified as a “de minimis” participant and such
proceedings do not involve potential monetary sanctions in excess of
$100,000.
ITEM 4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
There
were no matters submitted to a vote of security holders during the fourth
quarter of the year covered by this Form 10-K. 11
PART
II
ITEM 5.
MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Shares of
the Company’s Class A and Class B Common Stock are listed on the New York
Stock Exchange under the symbols GEF and GEF.B, respectively.
Financial
information regarding the Company’s two classes of common stock, as well as the
number of holders of each class and the high, low and closing sales prices for
each class for each quarterly period for the two most recent years, is included
in Note 16 to the Notes to Consolidated Financial Statements in Item 8 of
this Form 10-K, which Note is incorporated herein by reference.
The
Company pays quarterly dividends of varying amounts computed on the basis
described in Note 9 to the Notes to Consolidated Financial Statements included
in Item 8 of this Form 10-K, which Note is incorporated herein by
reference. The annual dividends paid for the last two years are as follows(1):
2008
year dividends per share – Class A $1.32; Class B $1.97
2007
year dividends per share(1) –
Class A $0.92; Class B $1.38
The terms
of the Company’s Credit Agreement limit its ability to make “restricted
payments,” which include dividends and purchases, redemptions and acquisitions
of equity interests of the Company. The payment of dividends and other
restricted payments are subject to the condition that certain defaults not exist
under the terms of the Credit Agreement and are limited in amount by a formula
based, in part, on the consolidated net income of the Company. See “Borrowing
Arrangements” in Item 7 of this Form 10-K.
The
following tables set forth the Company’s purchases of its shares of Class B
Common Stock during 2008. No shares of Class A Common Stock were
purchased during 2008. 12
Issuer Purchases of
Class B Common Stock>
13
Performance
Graph
The
following graph compares the performance of shares of the Company’s Class A
and B Common Stock to that of the Standard and Poor’s 500 Index and the
Company’s industry group (Peer Index) assuming $100 invested on October 31,
2003. The graph does not purport to represent the value of the
Company.
 The Peer
Index comprises the containers and packaging index as shown by Dow
Jones. 14
ITEM 6.
SELECTED FINANCIAL DATA
The
five-year selected financial data is as follows (Dollars in thousands, except
per share amounts)
(1):
The
results of operations include the effects of pretax restructuring charges of
$43.2 million, $21.2 million, $33.2 million, $35.7 million and $54.1 million for
2008, 2007, 2006, 2005 and 2004, respectively; pretax debt extinguishment
charges of $23.5 million and $2.8 million for 2007 and 2005, respectively; and
large timberland gains of $41.3 million and $56.3 million for 2006 and 2005,
respectively.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 and notes, which appear elsewhere in this Form 10-K. The terms
“Greif,” “our company,” “we,” “us,” and “our” as used in this discussion refer
to Greif, Inc. and subsidiaries.
Business
Segments
We
operate in three business segments: Industrial Packaging; Paper
Packaging; 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
packaging products, transit protection products and polycarbonate water bottles,
and services, such as blending, filling and other packaging services, logistics
and warehousing. 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, paint
and pigments, food and beverage, petroleum, industrial coatings, agricultural,
pharmaceutical and mineral, among others. In addition, the Company provides a
variety of blending, filling and other packaging services, logistics and
warehousing to customers in many of these same industries in North
America.
We sell
our containerboard, corrugated sheets, corrugated containers and multiwall bags
to customers in North America in industries such as packaging, automotive, food
and building products. Our corrugated container products are used to ship such
diverse products as home appliances, small machinery, grocery products, building
products, automotive components, books and furniture, as well as numerous other
applications. Our full line of multiwall bag products is used to ship a wide
range of industrial and consumer products, such as seed, fertilizers, chemicals,
concrete, flour, sugar, feed, pet foods, popcorn, charcoal and salt, primarily
for the agricultural, chemical, building products and food
industries. 15
As of
October 31, 2008, we owned approximately 268,700 acres of timber properties
in the southeastern United States, which are actively managed, and approximately
27,450 acres of timber properties in Canada. Our timber management 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 available merchantable acreage of timber, market and weather
conditions. We also sell, from time to time, timberland and special use land,
which consists of surplus land, HBU land, and development land.
In
2003, we began a transformation to become a leaner, more
market-focused, performance-driven company – what we call the “Greif Business
System.” We believe the Greif Business System has and will continue
to generate productivity improvements and achieve permanent cost
reductions. The Greif Business System continues to focus on
opportunities such as improved labor productivity, material yield and other
manufacturing efficiencies, along with further plant
consolidations. In addition, as part of the Greif Business System, we
have launched a strategic sourcing initiative to more effectively leverage our
global spending and lay the foundation for a world-class sourcing and supply
chain capability. In response to the current economic slowdown, we
have accelerated the implementation of certain Greif Business System
initiatives. These initiatives include continuation of active
portfolio management, further administrative excellence activities, and
curtailed discretionary spending.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations are
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States
(“GAAP”). The preparation of these consolidated financial statements, in
accordance with these principles, require us to make estimates and assumptions
that affect the reported amount of assets and liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities at the
date of our consolidated financial statements.
A summary
of our significant accounting policies is included in Note 1 to the Notes to
Consolidated Financial Statements
included
in Item 8 of this Form 10-K. We believe that the consistent application of
these policies enables us to provide readers of the consolidated financial
statements with useful and reliable information about our results of operations
and financial condition. The following are the accounting policies that we
believe are most important to the portrayal of our results of operations and
financial condition and require our most difficult, subjective or complex
judgments.
Allowance for
Accounts Receivable.> We evaluate the collectability 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 (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 change by a material
amount.
Inventory
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. We also evaluate reserves for losses under firm purchase
commitments for goods or inventories.
Net Assets Held
for Sale.> Net assets held for sale represent land, buildings and land
improvements less accumulated depreciation. 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
purchase 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.> Depreciation on properties, plants and equipment is
provided on the straight-line method over the estimated useful lives of our
assets.
16
We own
timber properties in the southeastern United States and in Canada. With respect
to our United States timber properties, which consisted of approximately 268,700
acres at October 31, 2008, 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 pulpwood, within a “depletion block,” with each depletion block based
upon a geographic district or subdistrict. Currently, we have 11 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 timber properties, which consisted of approximately 27,450 acres at
October 31, 2008, 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
Reserves.> Restructuring reserves 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 reserves
are further discussed in Note 5 to the Notes to Consolidated Financial
Statements included in Item 8 of this Form 10-K.
Pension and
Postretirement Benefits.> Pension and postretirement benefit expenses and
liabilities 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 contained in Notes 12 and 13 to the
Notes to Consolidated Financial Statements included in Item 8 of this Form
10-K. The results would be different using other assumptions.
Income
Taxes.> Our effective tax rate is based on income, statutory tax rates and
tax planning opportunities available to us in the various jurisdictions in which
we operate. Significant judgment is required in determining our effective tax
rate and in evaluating our tax positions.
In the
first quarter of fiscal 2008, the Company adopted the provisions of Financial
Accounting Standards Boards ("FASB") Interpretation (“FIN”) No. 48, “Accounting
for Uncertainty in Income Taxes.” FIN No. 48 clarifies the accounting for
uncertainty in income taxes recognized in the financial statements in accordance
with SFAS No. 109, “Accounting for Income Taxes.” This standard provides that a
tax benefit from uncertain tax position may be recognized when it is more likely
than not that the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes, based on the
technical merits. The amount recognized is measured as the largest amount of tax
benefit that is greater than 50 percent likely of being realized upon
settlement. Our effective tax rate includes the impact of reserve
provisions and changes to reserves that we consider appropriate as well as
related interest and penalties.
A number
of years may elapse before a particular matter, for which we have established a
reserve, is audited and finally resolved. The number of years with open tax
audits varies depending on the tax jurisdiction. While it is often difficult to
predict the final outcome or the timing of resolution of any particular tax
matter, we believe that our reserves reflect the probable outcome of known tax
contingencies. Unfavorable settlement of any particular issue would require use
of our cash. Favorable resolution would be recognized as a reduction to our
effective tax rate in the period of resolution.
Valuation
allowances are established where expected future taxable income does not support
the realization of the deferred tax assets.
Environmental
Cleanup 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. The capitalized cost at October 31, 2008, 2007, and 2006 was
immaterial.
Environmental
expenses were $0.4 million, $0.2 million, and $1.6 million in 2008, 2007, and
2006, respectively. Environmental cash expenditures were $3.2
million, $1.6 million, and $1.8 million in 2008, 2007 and 2006,
respectively. Our reserves for environmental liabilities at October
31, 2008 amounted to $37.2 million, which included a reserve of $21.5 million
related to our blending facility in Chicago, Illinois, $9.3 million related to
our Blagden facilities, $3.3 million related to our facility in Lier,
Belgium and $3.1 million related to smaller facilities not individually
material. Our reserves for asserted and unasserted environmental
litigation, claims and/or assessments at manufacturing sites and other locations
where we believe it is probable the outcome of such matters will be unfavorable
to us, were $5.8 million, which included $5.3 million related to our facility in
Chicago, Illinois. Reserves for large environmental exposures are
principally based on environmental studies and cost estimates provided by third
parties, but also take into account management estimates. Reserves
for less significant environmental exposures are principally based on management
estimates. 17
We
anticipate that expenditures for remediation costs at most of the 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 October 31, 2008. 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 a 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.
Self-Insurance.>
We are self-insured for certain of the claims made under our employee medical
and dental insurance programs. We had recorded liabilities totaling $4.1 million
and $3.1 million for estimated costs related to outstanding claims at
October 31, 2008 and 2007, respectively. These costs include an estimate
for expected settlements on pending claims, administrative fees and an estimate
for claims incurred but not reported. These estimates are based on our
assessment of outstanding claims, historical analyses and current payment
trends. We record an estimate for the claims incurred but not reported using an
estimated lag period based upon historical information. This lag period
assumption has been consistently applied for the periods presented. If the lag
period was hypothetically adjusted by a period equal to a half month, the impact
on earnings would be approximately $1.0 million. However, we believe the
reserves recorded are adequate based upon current facts and
circumstances.
We have
certain deductibles applied to various insurance policies including general
liability, product, auto and workers’ compensation. Deductible liabilities are
insured through our captive insurance subsidiary, which had recorded liabilities
totaling $20.6 million and $21.9 million for anticipated costs related to
general liability, product, auto and workers’ compensation at October 31,
2008 and 2007, respectively. These costs include an estimate for expected
settlements on pending claims, defense costs and an estimate for claims incurred
but not reported. These estimates are based on our assessment of outstanding
claims, historical analysis, actuarial information and current payment
trends.
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. While the amounts claimed may be substantial,
the ultimate liability cannot currently be determined because of the
considerable uncertainties that exist.
All
lawsuits, claims and proceedings are considered by the Company in establishing
reserves for contingencies in accordance with SFAS No. 5, “Accounting for
Contingencies.” In accordance with the provisions of SFAS No. 5, the
Company accrues for a litigation-related liability when it is probable that a
liability has been incurred and the amount of the loss can be reasonably
estimated. Based on currently available information known to the Company, the
Company believes that its reserves for these litigation-related liabilities are
reasonable and that the ultimate outcome of any pending matters is not likely to
have a material adverse effect on the Company’s financial position or results
from operations.
Goodwill, Other
Intangible Assets and Other Long-Lived Assets.> 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 five 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 undiscounted net cash flows 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.
Other
Items.> Other items that could have a significant impact on the
financial statements include the risks and uncertainties listed in Item 1A
under “Risk Factors.” Actual results could differ materially using different
estimates and assumptions, or if conditions are significantly different in the
future. 18
RESULTS
OF OPERATIONS
Historically,
revenues and earnings may or may not be representative of future operating
results due to various economic and other factors.
In 2003,
we began a transformation to become a leaner, more
market-focused/performance-driven company, to what we call the “Greif Business
System.” We believe the Greif Business System has and will continue
to generate productivity improvements and achieve permanent cost
reductions. The Greif Business System continues to focus on
opportunities such as improved labor productivity, material yield and other
manufacturing efficiencies, along with further plant
consolidations. In addition, as part of the Greif Business System, we
have launched a strategic sourcing initiative to more effectively leverage our
global spending, including a transportation management system, and lay the
foundation for a world-class sourcing and supply chain capability. In
response to the current economic slowdown, we have accelerated the
implementation of certain Greif Business System initiatives. These
initiatives include continuation of active portfolio management, further
administrative excellence activities, and curtailed discretionary
spending.
The
non-GAAP financial measure of operating profit before the impact of
restructuring charges and timberland disposals, net is used throughout the
following discussion of our results of operations (except with respect to the
segment discussions for Industrial Packaging and Paper Packaging, where
timberland disposals, net are not applicable). Operating profit before the
impact of restructuring charges and timberland disposals, net is equal to
operating profit plus restructuring charges less timberland gains plus
timberland losses. We use operating profit before the impact of restructuring
charges and timberland disposals, net because we believe that this measure
provides a better indication of our operational performance because it excludes
restructuring charges, which are not representative of ongoing operations, and
timberland disposals, net which are volatile from period to period, and it
provides a more stable platform on which to compare our historical
performance.
The
following table sets forth the net sales and operating profit for each of our
business segments for 2008, 2007 and 2006 (Dollars in millions):
19
Year
2008 Compared to Year 2007
Overview
Net sales
increased 14 percent (10 percent excluding the impact of foreign currency
translation) to $3,776.8 million in 2008 compared to $3,322.3 million in 2007.
The $454.5 million increase was due to Industrial Packaging ($407.4 million),
Paper Packaging ($43.2 million) and Timber ($3.9 million). Strong organic sales
growth for industrial packaging products and higher selling prices, principally
in response to higher raw material costs, drove the 10 percent constant-currency
increase.
Operating
profit was $370.3 million and $289.6 million in 2008 and 2007, respectively.
Operating profit before the impact of restructuring charges and timberland
disposals, net was $413.1 million for 2008 compared to $311.5 million for 2007.
The $101.6 million increase was principally due to higher operating profit in
Industrial Packaging ($85.7 million), Paper Packaging ($9.7 million) and Timber
($6.2 million). Operating profit, expressed as a percentage of net sales,
increased to 9.8 percent for 2008 from 8.7 percent in 2007. Operating
profit before restructuring charges and the impact of timberland disposals, net,
expressed as a percentage of net sales, increased to 10.9 percent for 2008 from
9.4 percent in 2007.
Segment
Review
Industrial
Packaging
Our
Industrial Packaging segment offers a comprehensive line of industrial
packaging products and services, such as steel, fibre and plastic drums,
intermediate bulk containers, closure systems for industrial packaging products,
transit protection products, and polycarbonate water bottles, and services, such
as blending, filling and other packaging services, logistics and warehousing.
The key factors influencing profitability in the Industrial
Packaging segment are:
In this
segment, net sales increased 15 percent to $3,061.1 million in 2008 compared to
$2,653.6 million in 2007 — an increase of 10 percent excluding the impact of
foreign currency translation. Higher sales volumes across all regions, with
particular strength in emerging markets, in addition to higher selling prices in
response to higher raw material costs, continued to drive the segment’s organic
growth.
Gross
profit margin for the Industrial Packaging segment was 18.5 percent in
2008 compared to 18.3 percent in 2007, primarily due to the
continued implementation of the Greif Business System (lower labor,
transportation and other manufacturing costs).
Operating
profit was $281.2 million in 2008 compared to $213.4 million in 2007. Operating
profit before the impact of restructuring charges increased to $315.2 million in
2008 compared to $229.4 million in 2007. The increase in operating profit was
primarily due to improvement in sales volumes, higher selling prices and
contributions from the Greif Business System, which were partially offset by
higher input costs.
Paper
Packaging
Our Paper
Packaging segment sells containerboard, corrugated sheets, corrugated
containers and multiwall bags in North America. The key factors influencing
profitability in the Paper Packaging segment are:
In this
segment, net sales were $696.9 million in 2008 compared to $653.7 million in
2007. The increase in net sales was principally due to higher selling prices,
including a containerboard price increase implemented in the fourth quarter of
2007 and the realization of a containerboard price increase implemented in the
fourth quarter of 2008. 20
Gross
profit margin for the Paper Packaging segment was 17.1 percent in
2008 compared to 17.4 percent in 2007. This decrease was
primarily due to higher
input costs, including energy and transportion, partially offset by higher
selling prices from the containerboard increase implemented in the fourth
quarter of 2007 and the partial realization of an increase implemented in
the fourth quarter of 2008.
Operating
Profit was $68.3 million and $62.5 million in 2008 and 2007, respectively.
Operating profit before the impact of restructuring charges increased to $77.4
million in 2008 compared to $67.7 million in 2007. The increase was primarily
due to higher selling prices from containerboard increases, partially offset by
higher input costs, including increased energy costs and increased
transportation costs.
Timber
As of
October 31, 2008, our Timber segment consists of approximately 268,700 acres of
timber properties in the southeastern United States, which are actively
harvested and regenerated, and approximately 27,450 acres in Canada. The key
factors influencing profitability in the Timber segment are:
Net sales
were $18.8 million in 2008 compared to and $14.9 million in
2007. While timber sales are subject to fluctuations, we seek
to maintain a consistent cutting schedule, within the limits of market and
weather conditions.
Operating
profit was $20.8 million and $13.7 million in 2008 and 2007, respectively.
Operating profit before the impact of restructuring charges and timberland
disposals, net was $20.6 million in 2008 compared to $14.4 million in 2007.
Included in these amounts were profits from the sale of special use properties
of $16.8 million in 2008 and $9.5 million in 2007.
In order
to maximize the value of our timber property, we continue to review our current
portfolio and explore the development of certain of these properties in
Canada and the United States. This process has led us to characterize our
property as follows:
We report
the sale of surplus and HBU property in our consolidated statements of income
under “gain on disposals of properties, plants and equipment, net” and report
the sale of development property under “net sales” and “cost of products sold.”
All HBU and development property, together with surplus property will continue
to be used by us to productively grow and sell timber until sold.
Whether
timberland has a higher value for uses other than growing and selling timber is
a determination based upon several variables, such as proximity to population
centers, anticipated population growth in the area, the topography of the land,
aesthetic considerations, including access to lakes or rivers, the condition of
the surrounding land, availability of utilities, markets for timber and economic
considerations both nationally and locally. Given these considerations, the
characterization of land is not a static process, but requires an ongoing review
and re-characterization as circumstances change.
At
October 31, 2008, we estimated that there were
approximately 61,600 acres in Canada and the United States of special
use property, which will be available for sale in the next five to seven
years.
Other
Income Statement Changes
Cost
of Products Sold
Cost of
products sold, as a percentage of net sales, decreased to 81.7 percent in 2008
from 81.8 percent in 2007. Cost of products sold, as a percentage of net sales,
primarily decreased as a result of the improvement in net sales and positive
contributions from the Greif Business System. These positive factors were
partially offset by higher raw material, transportation and energy costs
compared to 2007. 21
Selling,
General and Administrative (“SG&A”) Expenses
SG&A
expenses were $339.2 million, or 9.0 percent of net sales, in 2008 compared to
$313.4 million, or 9.4 percent of net sales, in 2007. The
dollar increase in our SG&A expense was primarily due to acquisition
synergies and the impact of foreign currency translation, partially
offset by tighter controls over SG&A expenses.
Restructuring
Charges
Restructuring
charges were $43.2 million and $21.2 million in 2008 and 2007,
respectively.
Restructuring
charges for 2008 consisted of $20.5 million in employee separation costs, $12.3
million in asset impairments, $0.4 million in professional fees and $10.0
million in other restructuring costs, primarily consisting of facility
consolidation and lease termination costs. Six company-owned plants in the
Industrial Packaging segment and four company-owned plants in the Paper
Packaging segment were closed. Additionally, severance costs were
incurred due to the elimination of certain operating and administrative
positions throughout the world. A total of 630 employees were severed
during 2008.
Restructuring
charges for 2007 consisted of $9.2 million in employee separation costs, $0.9
million in asset impairments, $1.0 million in professional fees, and $10.1
million in other restructuring costs, primarily consisting of facility
consolidation and lease termination costs. Two company-owned plants in the
Industrial Packaging segment were closed. Additionally, severance
costs were incurred due to the elimination of certain operating and
administrative positions throughout the world. A total of 303
employees were severed in 2007.
See Note
5 to the Notes to Consolidated Financial Statements included in Item 8 of
this Form 10-K for additional disclosures regarding our restructuring
activities.
Gains
on Disposal of Properties, Plants and Equipment, Net
For 2008,
we recorded a gain on disposal of properties, plants and equipment, net of $59.5
million, primarily consisting of $29.9 million pre-tax net gain on divestiture
of business units in Australia and our controlling interest in a Zimbabwean
operation, and $15.2 million in net gains from the sale of surplus and HBU
timber properties. During 2007, gain on disposals of properties,
plants and equipment, net was $19.4 million, primarily consisting of
$8.9 million in gains from the sale of surplus and HBU timber
properties.
Interest
Expense, Net
Interest
expense, net, was $49.6 million and $45.5 million in 2008 and 2007,
respectively. The increase was primarily due to higher outstanding debt, a larger
mix of debt outside of the United States and Europe with higher interest
rates, and interest received on lower cash
balances.
Other
Income (Expense), Net
Other
expense, net was $8.8 million in 2008 compared to $9.0 million in 2007. The
decrease was primarily due to the recording of $1.7 million in net expense
related to losses on foreign currency transactions in 2008 compared to $2.2
million in 2007 and other infrequent non-operating items recorded in
2007.
Income
Tax Expense
During
2008, the effective tax rate was 23.6 percent compared to 25.3 percent in
2007. The effective tax rate decreased due to a change in the mix of income
in the United States compared to regions outside of the United
States, where tax rates were lower. In future years, the effective tax
rate may fluctuate based on the mix of income inside and outside the United
States and other factors.
Equity
in Earnings of Affiliates and Minority Interests
Equity in
earnings of affiliates and minority interests was $3.9 million in 2008 compared
to $1.7 million for 2007. We have majority holdings in various companies, and
the minority interests of other persons in the respective net income of these
companies have been recorded as an expense. These expenses were partially offset
by equity in the earnings of three of our subsidiaries under the equity
method, one in India and two in North America.
Net
Income
Based on
the foregoing, net income increased $78.0 million to $234.4 million in 2008 from
$156.4 million in 2007.
Year
2007 Compared to Year 2006
Overview
Net sales
increased 26 percent to $3,322.2 million in 2007 compared to $2,628.4 million in
2006. Of this increase, 14 percent was due to the acquisitions of
Blagden Packaging Group’s steel drum manufacturing and closures businesses
(“Blagden”) in the first quarter of 2007 and Delta Petroleum Company, Inc.’s
blending and filling businesses (“Delta”) in the fourth quarter of 2006, and 4
percent was from currency translation. The $693.8 million increase in
net sales was primarily due to higher sales of products in our Industrial
Packaging ($665.5 million), which benefited principally from stronger sales
volumes compared to 2006, and higher selling prices in Paper Packaging ($28.6
million). 22
Operating
profit was $289.6 million in 2007 compared to $246.2 million in 2006. Operating
profit before the impact of restructuring charges and timberland disposals, net
was $311.5 million for 2007 compared to $238.1 million for 2006. The
$73.4 million increase compared to the prior year was principally due to higher
operating profit in all three of the Company’s business segments, which include
Industrial Packaging ($62.0 million), Paper Packaging ($7.7 million) and Timber
($3.7 million). Operating profit before restructuring charges and the impact of
timberland disposals, net, expressed as a percentage of net sales, increased to
9.4 percent for 2007 from 9.1 percent in 2006.
Segment
Review
Industrial
Packaging
The
Industrial Packaging segment offers a comprehensive line of industrial packaging
products, such as steel, fibre and plastic drums, intermediate bulk containers,
closure systems for industrial packaging products, transit protection products
and polycarbonate water bottles, and services, such as blending, filling and
packaging services, logistics and warehousing. The key factors influencing
profitability in the Industrial Packaging segment are:
In this
segment, net sales increased 34 percent to $2,653.6 million in 2007 from
$1,993.0 million in 2006 – an increase of 10 percent excluding the impact of the
Blagden and Delta acquisitions (19 percent) and currency translation (5
percent). This segment’s organic growth was driven by higher sales
volumes in most regions, with particular strength in Europe and the emerging
markets.
Gross
profit margin for the Industrial Packaging segment was 18.3 percent in 2007
compared to 18.5 percent in 2006. This decrease was primarily due to
portfolio mix and increases in raw material costs that were partially offset by
improvements in labor, transportation and other manufacturing costs which
benefited from the continued execution of the Greif Business
System.
Operating
profit was $213.4 million in 2007 compared to $143.5 million in 2006. Operating
profit before the impact of restructuring charges increased 38 percent to $229.4
million in 2007 from $167.5 million in 2006 primarily due to the improvement in
net sales and the execution of the Greif Business System. Restructuring charges
were $16.0 million in 2007 compared to $24.0 million in 2006.
Paper
Packaging
The Paper
Packaging segment sells containerboard, corrugated sheets and other corrugated
products and multiwall bags in North America. The key factors influencing
profitability in the Paper Packaging segment are:
In this
segment, net sales were $653.7 million in 2007 compared to $620.3 million in
2006. The increase in net sales was principally due to higher
containerboard selling prices implemented in 2006 and slightly improved
volumes.
Gross
profit margin for the Paper Packaging segment was 17.8 percent in 2007 compared
to 17.5 percent in 2006. Higher raw material costs, especially old
corrugated containers, were partially offset by contributions from further
execution of the Greif Business System. The previously announced $40
per ton containerboard price increase has been fully
implemented. 23
Operating
profit was $62.5 million in 2007 compared to $50.8 million in 2006. Operating
profit before the impact of restructuring charges increased 12 percent to $67.7
million in 2007 compared to $60.0 million in 2006 primarily due to higher net
sales. Restructuring charges were $5.2 million in 2007 compared to
$9.2 million in 2006.
Timber
As of
October 31, 2007, the Timber segment consisted of approximately 269,950 acres of
timber properties in the southeastern United States, which are actively
harvested and regenerated, and approximately 36,650 acres in Canada. The key
factors influencing profitability in the Timber segment are:
Net sales
were $14.9 million in 2007, consistent with plan, compared to $15.1 million in
2006. While timber sales are subject to fluctuations, we seek to maintain a
consistent cutting schedule, within the limits of market and weather conditions.
The 2007 timber sales were in line with our expectations.
Operating
profit was $13.7 million in 2007 compared to $51.9 million, including $41.3
million from timberland disposals, net, in 2006. Operating profit before the
impact of restructuring charges and timberland disposals, net was $14.4 million
in 2007 compared to $10.6 million in 2006. Profit from the sale of
special use property more than doubled to $9.5 million in 2007 from $4.6 million
the prior year. Timberland disposals, net decreased by $42.0
million in 2007 compared to 2006 as the final phases of the $90 million sale of
56,000 acres of timberland, timber and associated assets were completed in 2006.
These gains were the result of sales of timberland and are volatile from period
to period. Restructuring charges were insignificant in both years.
At
October 31, 2007, we estimated that there were approximately 76,000 acres in
Canada and the United States of special use property, which will be available
for sale in the next five to seven years.
Other
Income Statement Changes
Cost
of Products Sold
Cost of
products sold, as a percentage of net sales, is the same at 81.8 percent for
2007 and 2006. The flat cost of products sold is due to lower labor,
transportation and other manufacturing cost resulting from the Greif Business
System, which was offset by the change in portfolio mix and increase in raw
material costs.
Selling,
General and Administrative (“SG&A”) Expenses
SG&A
expenses were $313.4 million, or 9.4 percent of net sales, in 2007 compared to
$259.1 million, or 9.9 percent of net sales, in 2006. The year over
year dollar increase in SG&A was primarily due to the Blagden and Delta
acquisitions and performance-based incentive accruals, which were partially
offset by tight control over SG&A expenses and the positive impact from
prior acquisition integration activities.
Restructuring
Charges
Restructuring
charges were $21.2 million and $33.2 million in 2007 and 2006,
respectively.
Restructuring
charges for 2007 consisted of $9.2 million in employee separation costs, $0.9
million in asset impairments, $1.0 million in professional fees, and $10.1
million in other restructuring costs, primarily consisting of facility
consolidation and lease termination costs. Two company-owned plants in the
Industrial Packaging segment were closed. Additionally, severance
costs were incurred due to the elimination of certain operating and
administrative positions throughout the world. A total of 303 employees
were severed in 2007.
Restructuring
charges for 2006 consisted of $16.8 million in employee separation costs, $8.3
million in asset impairments, $2.0 million in professional fees and $6.1 million
in other restructuring costs, primarily consisting of facility consolidation and
lease terminations costs. Four company-owned plants were closed.
Three plants in the Paper Packaging segment and one in the Industrial Packaging
segment were closed. The Industrial Packaging segment reduced the number of
plants in the United Kingdom from five to three; merged operations of businesses
purchased in October 2005 into existing North American plants; and consolidated
one plant in France. In addition, severance costs were incurred due
to the elimination of certain operating and administrative positions throughout
the world. A total of 281 employees were severed in 2006. 24
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