NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Business
Greif, Inc. and its subsidiaries (collectively, “Greif,” “our,” or the “Company”), principally manufacture rigid industrial packaging products, such as steel, fibre and plastic drums, rigid intermediate bulk containers, closure systems for industrial packaging products, transit protection products, water bottles and remanufactured and reconditioned industrial containers, and provides services, such as container life cycle management, filling, logistics, warehousing and other packaging services. The Company produces containerboard and corrugated products for niche markets in North America and is also a leading global producer of flexible intermediate bulk containers The Company has operations in over
45
countries. In addition, the Company owns timber properties in the southeastern United States, which are actively harvested and regenerated.
Due to the variety of its products, the Company has many customers buying different products and due to the scope of the Company’s sales, no one customer is considered principal in the total operations of the Company.
Because the Company supplies a cross section of industries, such as chemicals, paints and pigments, food and beverage, petroleum, industrial coatings, agricultural, pharmaceutical, mineral, packaging, automotive and building 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 same week.
The Company’s raw materials are principally steel, resin, containerboard, old corrugated containers, pulpwood and used industrial packaging for reconditioning.
There were approximately
12,370
employees of the Company as of
October 31, 2016
.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of Greif, Inc., all wholly-owned and majority-owned subsidiaries, joint ventures controlled by the Company or for which the Company is the primary beneficiary, including the joint venture relating to the Flexible Products & Services segment, and equity earnings of unconsolidated affiliates. All intercompany transactions and balances have been eliminated in consolidation. Investments in unconsolidated affiliates are accounted for using the equity method based on the Company’s ownership interest in the unconsolidated affiliate.
The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain prior year and prior quarter amounts have been reclassified to conform to the current year presentation.
The Company’s fiscal year begins on November 1 and ends on October 31 of the following year. Any references to the year
2016
,
2015
or
2014
, or to any quarter of those years, relates to the fiscal year ended in that year.
Venezuela Currency
The Company’s results of its Venezuelan businesses have been reported under highly inflationary accounting since 2010 and the functional currency was converted to US Dollars at that time. Prior to the third quarter of 2015, Greif utilized the official rate of
6.4
Bolivars/US Dollar to measure Bolivar-denominated monetary assets and liabilities and the respective historical rate to measure Bolivar-denominated nonmonetary assets for each reporting period. During the third quarter of 2015, due to the continued devaluation of the Bolivar and reconsideration of the exchange rate mechanism that best reflected the economics of the Company's business activities in Venezuela, the Company remeasured the local currency denominated balance sheet using the SIMADI exchange rate.
As a result of the change to the SIMADI rate, the Company recorded other income of
$4.9 million
related to the remeasurement of its Venezuelan monetary assets and liabilities during 2015. In addition, the Company determined that an adjustment of
$9.3 million
to increase cost of goods sold was needed to reflect the non-monetary inventory assets at net realizable value and, upon review of long-lived assets for impairment, the Company determined that the carrying amount of the long-lived asset was not recoverable in US dollar functional currency and recorded an impairment charge of
$15.0 million
.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make certain estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The most significant estimates are related to the expected useful lives assigned to properties, plants and equipment, goodwill and other intangible assets, estimates of fair value, environmental liabilities, pension and postretirement benefits including plan assets, income taxes, net assets held for sale and contingencies. Actual amounts could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying value of cash equivalents approximates fair value.
The Company had total cash and cash equivalents held outside of the United States in various foreign jurisdictions of
$96.6 million
and
$104.2 million
as of
October 31, 2016
and 2015, respectively. Under current tax laws and regulations, if cash and cash equivalents held outside the United States are repatriated to the United States in the form of dividends or otherwise, the Company may be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes.
Allowance for Doubtful Accounts
Trade receivables represent amounts owed to the Company through its operating activities and are presented net of allowance for doubtful accounts. The allowance for doubtful accounts totaled
$8.8 million
and
$11.8 million
as of
October 31, 2016
and
2015
, respectively. The Company evaluates the collectability of its accounts receivable based on a combination of factors. In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations to the Company, the Company records a specific allowance for bad debts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. In addition, the Company recognizes allowances for bad debts based on the length of time receivables are past due with allowance percentages, based on its historical experiences, applied on a graduated scale relative to the age of the receivable amounts. If circumstances such as higher than expected bad debt experience or an unexpected material adverse change in a major customer’s ability to meet its financial obligations to the Company were to occur, the recoverability of amounts due to the Company could change by a material amount. Amounts deemed uncollectible are written-off against an established allowance for doubtful accounts.
Concentration of Credit Risk and Major Customers
The Company maintains cash depository accounts with banks throughout the world and invests in high quality short-term liquid instruments. Such investments are made only in instruments issued by high quality institutions. These investments mature within three months and the Company has not incurred any related losses for the years ended
October 31, 2016
,
2015
, and
2014
.
Trade receivables can be potentially exposed to a concentration of credit risk with customers or in particular industries. Such credit risk is considered by management to be limited due to the Company’s many customers, none of which are considered principal in the total operations of the Company, and its geographic scope of operations in a variety of industries throughout the world. The Company does not have an individual customer that exceeds 10 percent of total revenue. In addition, the Company performs ongoing credit evaluations of its customers’ financial conditions and maintains reserves for credit losses. Such losses historically have been within management’s expectations.
Inventory
The Company primarily uses the FIFO method of inventory valuation or the weighted average standard costing method for valuing inventory, which approximates FIFO. Reserves for slow moving and obsolete inventories are provided based on historical experience, inventory aging and product demand. The Company continuously evaluates the adequacy of these reserves and makes adjustments to these reserves as required.
The Paper Packaging & Services segment trades certain inventories with third parties. These inventory trades are accounted for as non-monetary exchanges and the Company records an asset or liability for any imbalance resulting from these trades.
Net Assets Held for Sale
Net assets held for sale represent land, buildings and other assets and liabilities for locations that have met the criteria of “held for sale” accounting, as specified by Accounting Standards Codification (“ASC”) 360, “Property, Plant, and Equipment.” As of
October 31, 2016
, there was
one
asset group in the Rigid Industrial Packaging Products & Services segment and
one
asset group in the Flexible Products & Services segment that are recorded as assets and liabilities held for sale. The effect of suspending depreciation on the facilities held for sale is immaterial to the results of operations. The net assets held for sale are being marketed for sale and it is the Company’s intention to complete the sales of these assets within the upcoming year.
Goodwill and Indefinite-Lived Intangibles
Goodwill is the excess of the purchase price of an acquired entity over the amounts assigned to tangible and intangible assets and liabilities assumed in the business combination. The Company accounts for purchased goodwill and indefinite-lived intangible assets in accordance with ASC 350, “Intangibles – Goodwill and Other.” Under ASC 350, purchased goodwill and intangible assets with indefinite lives are not amortized, but instead are tested for impairment at least annually. The Company tests for impairment of goodwill and indefinite-lived intangible assets during the fourth quarter of each fiscal year as of August 1, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist.
In accordance with ASC 350, the Company has the option to first assess qualitative factors to determine whether it is necessary to perform the two-step test for goodwill impairment. If the Company believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, the quantitative impairment test is required. The quantitative test for goodwill impairment is conducted at the reporting unit level using a two-step approach. The first step requires a comparison of the carrying value of the reporting units to the estimated fair value of these units. If the carrying value of a reporting unit exceeds its estimated fair value, the Company performs the second step of the goodwill impairment to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the estimated implied fair value of a reporting unit’s goodwill to its carrying value. The Company allocates the estimated fair value of a reporting unit to all of the assets and liabilities in that reporting unit, including intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the estimated fair value of a reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. When there is a disposition of a portion of a reporting unit, goodwill is allocated to the gain or loss on that disposition based on the relative fair values of the portion of the reporting unit subject to disposition and the portion of the reporting unit that will be retained.
The Company’s determinations of estimated fair value of the reporting units are based on both the market approach and a discounted cash flow analysis utilizing the income approach. Under the market approach, the principal inputs are market prices and valuation multiples for public companies engaged in businesses that are considered comparable to the reporting unit. Under the income approach, the principal inputs are the reporting unit’s cash-generating capabilities and the discount rate. The discount rates used in the income approach are based on a market participant’s weighted average cost of capital. The use of alternative estimates, including different peer groups or changes in the industry, or adjusting the discount rate, earnings before interest, taxes, depreciation, depletion and amortization forecasts or cash flow assumptions used could affect the estimated fair value of the reporting units and potentially result in goodwill impairment. Any identified impairment would result in an expense to the Company’s results of operations. Refer to Note 6 for additional information regarding goodwill and other intangible assets.
Other Intangibles
The Company accounts for intangible assets in accordance with ASC 350. Indefinite lived intangible assets are not amortized. Definite lived intangible assets are amortized over their useful lives on a straight-line basis. The useful lives for definite lived intangible assets vary depending on the type of asset and the terms of contracts or the valuation performed. The Company tests for impairment of intangible assets at least annually, or more frequently if certain indicators are present to suggest that impairment may exist. Amortization expense on intangible assets is recorded on the straight-line method over their useful lives as follows:
|
|
|
|
Years
|
Trade names
|
10-15
|
Non-competes
|
1-10
|
Customer relationships
|
5-15
|
Other intangibles
|
3-15
|
Acquisitions
From time to time, the Company acquires businesses and/or assets that augment and complement its operations. In accordance with ASC 805, “Business Combinations,” these acquisitions are accounted for under the purchase method of accounting. The consolidated financial statements include the results of operations from these business combinations from the date of acquisition.
In order to assess performance, the Company classifies costs incurred in connection with acquisitions as acquisition-related costs. These costs consist primarily of transaction costs, integration costs and changes in the fair value of contingent payments (earn-outs) and are recorded within selling, general and administrative costs. Acquisition transaction costs are incurred during the initial evaluation of a potential targeted acquisition and primarily relate to costs to analyze, negotiate and consummate the transaction as well as financial and legal due diligence activities. Post-acquisition integration activities are costs incurred to combine the operations of an acquired enterprise into the Company’s operations.
Internal Use Software
Internal use software is accounted for under ASC 985, “Software.” Internal use software is software that is acquired, internally developed or modified solely to meet the Company’s needs and for which, during the software’s development or modification, a plan does not exist to market the software externally. Costs incurred to develop the software during the application development stage and for upgrades and enhancements that provide additional functionality are capitalized and then amortized over a
three
to
ten
year period. Internal use software is capitalized as a component of machinery and equipment on the Consolidated Balance Sheets.
Long-Lived Assets
Properties, plants and equipment are stated at cost. Depreciation on properties, plants and equipment is provided on the straight-line method over the estimated useful lives of the assets as follows:
|
|
|
|
Years
|
Buildings
|
30-45
|
Machinery and equipment
|
3-19
|
Depreciation expense was
$107.4 million
,
$113.4 million
and
$129.8 million
in
2016
,
2015
and
2014
, respectively. Expenditures for repairs and maintenance are charged to expense as incurred. When properties are retired or otherwise disposed of, the cost and accumulated depreciation are eliminated from the asset and related allowance accounts. Gains or losses are credited or charged to income as incurred.
The Company capitalizes interest on long-term fixed asset projects using a rate that approximates the weighted average cost of borrowing. For the years ended
October 31, 2016
,
2015
, and
2014
, the Company capitalized interest costs of
$2.6 million
,
$1.5 million
, and
$1.4 million
, respectively.
The Company tests for impairment of properties, plants and equipment if certain indicators are present to suggest that impairment may exist. Long-lived assets are grouped together at the lowest level, generally at the plant level, for which identifiable cash flows are largely independent of cash flows of other groups of long-lived assets. As events warrant, we evaluate the recoverability of long-lived assets, other than goodwill and indefinite-lived intangible assets, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying business. Impairment indicators include, but are not limited to, a significant decrease in the market price of a long-lived asset; a significant adverse change in the manner in which the asset is being used or in its physical condition; a significant adverse change in legal factors or the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; current period operating or cash flow losses combined with a history of operating or cash flow losses associated with the use of the asset; or a current expectation that it is more likely than not that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Future decisions to change our manufacturing processes, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could also result in material impairment charges. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value.
As of October 31, 2016, the Company's timber properties consisted of approximately
244,548
acres, all of which were located in the southeastern United States. The Company’s land costs are maintained by tract. Upon acquisition of a new timberland tract, the Company records separate amounts for land, merchantable timber and pre-merchantable timber allocated as a percentage of the values being purchased. The Company begins recording pre-merchantable timber costs at the time the site is prepared for planting. Costs capitalized during the establishment period include site preparation by aerial spray, costs of seedlings, including refrigeration rental and trucking, planting costs, herbaceous weed control, woody release, and labor and machinery use. The Company does not capitalize interest costs in the process. Property taxes are expensed as incurred. New road construction costs are capitalized as land improvements and depreciated over
20 years
. Road repairs and maintenance costs are expensed as incurred. Costs after establishment of the seedlings, including management costs, pre-commercial thinning costs and fertilization costs, are expensed as incurred. Once the timber becomes merchantable, the cost is transferred from the pre-merchantable timber category to the merchantable timber category in the depletion block.
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, the Company has
eight
depletion blocks. These same depletion blocks are used for pre-merchantable timber costs. Each year, the Company estimates the volume of the Company’s merchantable timber for the
five
product classes by each depletion block and depletion costs recognized upon sales are calculated as volumes sold times the unit costs in the respective depletion block. Depletion expense was
$3.2 million
,
$2.8 million
and
$3.8 million
in
2016
,
2015
and
2014
, respectively.
Contingencies
Various lawsuits, claims and proceedings have been or may be instituted or asserted against the Company, including those pertaining to environmental, product liability and safety and health matters. While the amounts claimed may be substantial, the ultimate liability cannot 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 ASC 450, “Contingencies.” In accordance with the provisions of ASC 450, 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 effect on the Company’s financial position or results of operations.
Environmental Cleanup Costs
The Company accounts for environmental cleanup costs in accordance with ASC 410, “Asset Retirement and Environmental Obligations.” The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site-by-site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company’s estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs.
Self-Insurance
The Company is self-insured for certain of the claims made under its employee medical and dental insurance programs. The Company had recorded liabilities totaling
$4.4 million
and
$3.6 million
for estimated costs related to outstanding claims as of
October 31, 2016
and
2015
, 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 management’s assessment of outstanding claims, historical analyses and current payment trends. The Company recorded an estimate for the claims incurred, but not reported using an estimated lag period based upon historical information. The Company believes the reserves recorded are adequate based upon current facts and circumstances.
The Company has certain deductibles applied to various insurance policies including general liability, product, auto and workers’ compensation. The Company maintains liabilities totaling
$11.8 million
and
$12.2 million
for anticipated costs related to general liability, product, vehicle and workers’ compensation claims as of
October 31, 2016
and
2015
, 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 the Company’s assessment of its deductibles, outstanding claims, historical analysis, actuarial information and current payment trends.
Income Taxes
Income taxes are accounted for under ASC 740, “Income Taxes.” In accordance with ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as measured by enacted tax rates that are expected to be in effect in the periods when the deferred tax assets and liabilities are expected to be settled or realized. Valuation allowances are established when management believes it is more likely than not that some portion of the deferred tax assets will not be realized.
The Company’s effective tax rate is impacted by the amount of income generated in each taxing jurisdiction, statutory tax rates and tax planning opportunities available to the Company in the various jurisdictions in which the Company operates. Significant judgment is required in determining the Company’s effective tax rate and in evaluating its tax positions.
Tax benefits from uncertain tax positions are 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. The Company’s effective tax rate includes the impact of reserve provisions and changes to reserves on uncertain tax positions that are not more likely than not to be sustained upon examination as well as related interest and penalties.
A number of years may elapse before a particular matter, for which the Company has 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, the Company believes that its reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require use of the Company’s cash. Favorable resolution would be recognized as a reduction to the Company’s effective tax rate in the period of resolution.
Other Comprehensive Income
Our other comprehensive income is significantly impacted by foreign currency translation and defined benefit pension and postretirement benefit adjustments. The impact of foreign currency translation is affected by the translation of assets, liabilities and operations of our foreign subsidiaries which are denominated in functional currencies other than the U.S. dollar and the recognition of accumulated foreign currency translation upon the disposal of foreign entities. The primary assets and liabilities affecting the adjustments are: cash and cash equivalents; accounts receivable; inventory; properties, plants and equipment; accounts payable; pension and other postretirement benefit obligations; and certain intercompany loans payable and receivable. The primary currencies in which these assets and liabilities are denominated are the Euro, Brazilian Real, and Chinese Yuan. The impact of defined benefit pension and postretirement benefit adjustments is primarily affected by unrecognized actuarial gains and losses related to our defined benefit and other postretirement benefit plans, as well as the subsequent amortization of gains and losses from accumulated other comprehensive income in periods following the initial recording of such items. These actuarial gains and losses are determined using various assumptions, the most significant of which are (i) the weighted average rate used for discounting the liability, (ii) the weighted average expected long-term rate of return on pension plan assets, (iii) the method used to determine market-related value of pension plan assets, (iv) the weighted average rate of future salary increases and (v) the anticipated mortality rate tables.
Restructuring Charges
The Company accounts for all exit or disposal activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.” Under ASC 420, a liability is measured at its fair value and recognized as incurred.
Employee-related costs primarily consist of one-time termination benefits provided to employees who have been involuntarily terminated. A one-time benefit arrangement is an arrangement established by a plan of termination that applies for a specified termination event or for a specified future period. A one-time benefit arrangement exists at the date the plan of termination meets all of the following criteria and has been communicated to employees:
|
|
(1)
|
Management, having the authority to approve the action, commits to a plan of termination.
|
|
|
(2)
|
The plan identifies the number of employees to be terminated, their job classifications or functions and their locations, and the expected completion date.
|
|
|
(3)
|
The plan establishes the terms of the benefit arrangement, including the benefits that employees will receive upon termination (including but not limited to cash payments), in sufficient detail to enable employees to determine the type and amount of benefits they will receive if they are involuntarily terminated.
|
|
|
(4)
|
Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
|
Facility exit and other costs consist of equipment relocation costs and project consulting fees. A liability for other costs associated with an exit or disposal activity shall be recognized and measured at its fair value in the period in which the liability is incurred (generally, when goods or services associated with the activity are received). The liability shall not be recognized before it is incurred, even if the costs are incremental to other operating costs and will be incurred as a direct result of a plan.
Pension and Postretirement Benefits
Under ASC 715, “Compensation – Retirement Benefits,” employers recognize the funded status of their defined benefit pension and other postretirement plans on the consolidated balance sheet and record as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that have not been recognized as components of the net periodic benefit cost.
Transfer and Servicing of Assets
An indirect wholly-owned subsidiary of Greif, Inc. agrees to sell trade receivables meeting certain eligibility requirements that it had purchased from other indirect wholly-owned subsidiaries of Greif, Inc., under a non-U.S. factoring agreement. The structure of the transactions provide for a legal true sale, on a revolving basis, of the receivables transferred from the various Greif, Inc. indirect subsidiaries to the respective banks or their affiliates. The banks and their affiliates fund an initial purchase price of a certain percentage of eligible receivables based on a formula with the initial purchase price approximating
75 percent
to
90 percent
of eligible receivables. The remaining deferred purchase price is settled upon collection of the receivables. At the balance sheet reporting dates, the Company removes from accounts receivable the amount of proceeds received from the initial purchase price since they meet the applicable criteria of ASC 860, “Transfers and Servicing,” and continues to recognize the deferred purchase price in its other current assets. The receivables are sold on a non-recourse basis with the total funds in the servicing collection accounts pledged to the banks between settlement dates.
Stock-Based Compensation Expense
The Company recognizes stock-based compensation expense in accordance with ASC 718, “Compensation – Stock Compensation.” ASC 718 requires the measurement and recognition of compensation expense, based on estimated fair values, for all share-based awards made to employees and directors, including stock options, restricted stock, restricted stock units and participation in the Company’s employee stock purchase plan.
ASC 718 requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s consolidated statements of income over the requisite service periods.
No
stock options were granted in
2016
,
2015
or
2014
. For any options granted in the future, compensation expense will be based on the grant date fair value estimated in accordance with the standard.
Revenue Recognition
The Company recognizes revenue when title passes and risks and rewards of ownership have transferred to customers or services have been rendered, with appropriate provision for returns and allowances. Revenue is recognized in accordance with ASC 605, “Revenue Recognition.”
Timberland disposals, timber sales, higher and better use (“HBU”) land, surplus and development property sales revenues are recognized when closings have occurred, required down payments have been received, title and possession have been transferred to the buyer and all other criteria for sale and profit recognition have been satisfied.
The Company reports the sale of timberland property in "timberland gains," the sale of HBU and surplus property in “gain on disposal of properties, plants and equipment, net” and the sale of timber and development property under “net sales” and “cost of products sold" in its consolidated statements of income. All HBU and development property, together with surplus property, is used by the Company to productively grow and sell timber until the property is sold.
Shipping and Handling Fees and Costs
The Company includes shipping and handling fees and costs in cost of products sold.
Other Expense, Net
Other expense, net primarily represents non-United States trade receivables program fees, currency transaction gains and losses and other infrequent non-operating items.
Currency Translation
In accordance with ASC 830, “Foreign Currency Matters,” the assets and liabilities denominated in a foreign currency are translated into United States dollars at the rate of exchange existing at period-end, and revenues and expenses are translated at average exchange rates.
The cumulative translation adjustments, which represent the effects of translating assets and liabilities of the Company’s international operations, are presented in the consolidated statements of changes in shareholders’ equity in accumulated other comprehensive income (loss). Transaction gains and losses on foreign currency transactions denominated in a currency other than an entity’s functional currency are credited or charged to income. The amounts included in other expense, net related to transaction losses were
$6.7 million
,
$3.8 million
and
$1.2 million
in
2016
,
2015
and
2014
, respectively.
Derivative Financial Instruments
In accordance with ASC 815, “Derivatives and Hedging,” the Company records all derivatives in the consolidated balance sheet as either assets or liabilities measured at fair value. Dependent on the designation of the derivative instrument, changes in fair value are recorded to earnings or shareholders’ equity through other comprehensive income (loss).
The Company may from time to time use interest rate swap agreements to hedge against changing interest rates. For interest rate swap agreements designated as cash flow hedges, the effective portion of the net gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.
The Company's interest rate swap agreements effectively convert a portion of floating rate debt to a fixed rate basis, thus reducing the impact of interest rate increases on future interest expense. The Company uses the regression method for assessing the effectiveness of these swaps. The effectiveness of these swaps is reviewed at least every quarter. Hedge ineffectiveness has not been material during any of the years presented herein.
The Company enters into currency forward contracts to hedge certain currency transactions and short-term intercompany loan balances with its international businesses. Such contracts limit the Company’s exposure to both favorable and unfavorable currency fluctuations. These contracts are adjusted to reflect market value as of each balance sheet date, with the resulting changes in fair value being recognized in other expense, net.
The Company has used derivative instruments to hedge a portion of its natural gas purchases. These derivatives were designated as cash flow hedges. The effective portion of the net gain or loss was reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period during which the hedged transaction affects earnings.
Any derivative contract that is either not designated as a hedge, or is so designated but is ineffective, has its changes to market value recognized in earnings immediately. If a cash flow or fair value hedge ceases to qualify for hedge accounting, the contract would continue to be carried on the balance sheet at fair value until settled and have the adjustments to the contract’s fair value recognized in earnings. If a forecasted transaction were no longer probable to occur, amounts previously deferred in accumulated other comprehensive income (loss) would be recognized immediately in earnings.
Fair Value
The Company uses ASC 820, “Fair Value Measurements and Disclosures” to account for fair value. ASC 820 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. Additionally, this standard established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair values are as follows:
|
|
•
|
Level 1 – Observable inputs such as unadjusted quoted prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 2 – Observable inputs other than quoted prices in active markets for identical assets and liabilities.
|
|
|
•
|
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.
|
The Company presents various fair value disclosures in Notes 10 and 13 to these consolidated financial statements.
Newly Adopted Accounting Standards
In April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-3, “Interest—Imputation of Interest (Subtopic 835-30)”. The objective of this update is to simplify the presentation of debt issuance costs in the financial statements. Under this ASU, the Company is required to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset, with amortization of the costs reported as interest expense. The ASU requires the Company to disclose in the first fiscal year after the entity’s adoption date, and in the interim periods within the first fiscal year, the following: (1) The nature and reason for the change in accounting principle; (2) The transition method; (3) A description of the prior-period information that has been retrospectively adjusted; and (4) The effect of the change on the financial statement line item (that is, the debt issuance costs asset and the debt liability). The Company adopted the new guidance beginning on November 1, 2016, and the adoption will not have a material impact on the Company's financial position, results of operations, comprehensive income (loss), cash flows or disclosures.
In February 2015, the FASB issued ASU 2015-2, “Consolidation (Topic 810): Amendments to the Consolidation Analysis,” which makes changes to both the variable interest model and the voting interest model and eliminates the indefinite deferral of FASB Statement No. 167, included in ASU 2010-10, for certain investment funds. All reporting entities that hold a variable interest in other legal entities were required to re-evaluate their consolidation conclusions as well as disclosure requirements. The Company adopted the new guidance beginning on November 1, 2016, and the adoption will not have a material impact on the Company's financial position, results of operations, comprehensive income (loss), cash flows or disclosures.
In November 2015, the FASB issued ASU 2015-17, "Balance Sheet Classification of Deferred Tax Items." This ASU amends ASC 740-10-45-4, which now states that in a classified statement of financial position an entity must classify deferred tax liabilities and assets as noncurrent amounts. This ASU also supersedes ASC 740-12-45-5, which required the valuation allowance for a particular tax jurisdiction to be allocated between current and noncurrent deferred tax assets for that tax jurisdiction on a pro rata basis. For public companies, this ASU is effective for periods beginning after December 15, 2016. The Company elected to adopt the new guidance beginning February 1, 2016 prospectively, resulting in deferred tax liabilities and assets being classified as noncurrent on the Company's balance sheet. Prior periods were not retrospectively adjusted. The adoption did not have a material impact on the Company's financial position, results of operations, comprehensive income (loss) or cash flows.
Recently Issued Accounting Standards
The FASB has issued ASUs through 2016-19. The Company has reviewed each recently issued ASU and the adoption of each ASU that is applicable to the Company, other than as explained below, will not have a material impact on the Company's financial position, results of operations, comprehensive income (loss) or cash flows, other than the related disclosures.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. The update is effective in fiscal year 2019 using one of two retrospective application methods. The Company is in the process of analyzing the impact of adopting this guidance but does not anticipate that it will have a material impact on its financial position, results of operations, comprehensive income (loss), cash flow and disclosures.
In February 2016, the FASB issued ASU 2016-2, "Leases (Topic 842)," which amends the lease accounting and disclosure requirements in ASC 842, "Leases". The objective of this update is to increase transparency and comparability among organizations recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about lease arrangements. This ASU will require the recognition of lease assets and lease liabilities for those leases classified as operating
leases under previous GAAP. The update is effective in fiscal year 2020 using a modified retrospective approach. The Company is in the process of determining the potential impact of adopting this guidance on its financial position, results of operations, comprehensive income (loss), cash flows and disclosures.
In March 2016, the FASB issued ASU 2016-9, "Improvements to Employee Share-Based Payment Accounting," which simplifies several aspects of the accounting for employee share-based payment transactions. This ASU is effective for annual periods beginning after December 15, 2016 and early adoption is permitted, including any interim period. The Company is in the process of determining the potential impact of adopting this guidance on its financial position, results of operations, comprehensive income (loss), cash flows and disclosures.
In October 2016, the FASB issued ASU 2016-16, "Intra-Equity Transfers of Assets Other Than Inventory," which improves the accounting for income tax consequences of intra-entity transfers of assets other than inventory. This ASU is effective for annual periods beginning after December 15, 2017 and early adoption is permitted, including any interim period. The Company is in the process of determining the potential impact of adopting this guidance on its financial position, results of operations, comprehensive income (loss), cash flows and disclosures.
In October 2016, the FASB issued ASU 2016-17, "Interests Held through Related Parties That Are under Common Control," which amends the consolidation guidance for single decision makers of variable interest entities. This ASU is effective for annual periods beginning after December 15, 2016 and early adoption is permitted, including any interim period. The Company is in the process of determining the potential impact of adopting this guidance on its financial position, results of operations, comprehensive income (loss), cash flows and disclosures.
NOTE 2 – ACQUISITIONS AND DIVESTITURES
The following table summarizes the Company’s significant acquisition activity in
2016
,
2015
and
2014
(Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
# of
Acquisitions
|
|
|
Purchase Price,
net of Cash
|
|
|
Tangible
Assets, net
|
|
|
Intangible
Assets
|
|
|
Goodwill
|
Total 2016 Acquisitions
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total 2015 Acquisitions
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total 2014 Acquisitions
|
|
2
|
|
|
$
|
53.5
|
|
|
2.5
|
|
|
22.1
|
|
|
25.9
|
|
Note: Purchase price, net of cash acquired, represents cash paid in the period of each acquisition and does not include assumed debt, subsequent payments for deferred purchase adjustments or earn-out provisions.
During 2016, the Company completed
four
divestitures,
one
partial sale of ownership interest resulting in deconsolidation of a then wholly-owned indirect subsidiary and
no
material acquisitions. The divestitures were of nonstrategic businesses:
three
in the Rigid Industrial Packaging & Services segment and
one
in Flexible Products & Services segment. The loss on disposal of businesses was
$14.5 million
for the year ended
October 31, 2016
, consisting of an
$18.1 million
loss on the partial sale of ownership interest and a net gain of
$3.6 million
for the four divestitures. Proceeds from the divestitures and the partial sale of ownership interest were
$24.1 million
. Additionally, the Company has recorded notes receivable of
$2.4 million
for the sale of
two
businesses in the second quarter, which are expected to be collected in the fourth quarter of 2017.
The partial sale of ownership interest resulting in deconsolidation of a then wholly-owned indirect subsidiary was the result of the sale of
51 percent
ownership interest in Earthminded Benelux, NV, a subsidiary in the Rigid Industrial Packaging & Services segment, which, together with the relinquishment of the Company's power to direct the activities that most significantly impact the subsidiary's performance, resulted in deconsolidation . As of September 1, 2016, the Company accounts for its investment in this subsidiary under the equity method of accounting due to the Company's noncontrolling ownership interest.
The
$18.1 million
loss on the partial sale of ownership interest resulting in deconsolidation was measured as the difference between (a) the fair value of the retained noncontrolling interest of
$0.3 million
and the consideration transferred of
$0.3 million
from the unrelated third party purchaser and (b) the carrying value of the former subsidiary's net assets of
$18.7 million
.
During
2015
, the Company completed
eight
divestitures and
no
material acquisitions. The divestitures were of nonstrategic businesses:
six
in the Rigid Industrial Packaging & Services segment and
two
in the Flexible Products & Services segment. The loss on disposal of businesses was
$9.2 million
for the year ended
October 31, 2015
. Proceeds from divestitures were
$19.6
million
. Additionally, the Company has recorded notes receivable of
$2.9 million
for the sale of these businesses, with terms ranging from
three months to five years
.
During
2014
, the Company completed
two
acquisitions and
nine
divestitures.
One
acquisition was in the Rigid Industrial Packaging & Services segment in November and the other acquisition was in the Paper Packaging & Services segment in November. The rigid industrial packaging acquisition complemented the Company’s existing product lines and provided growth opportunities and economies of scale. The paper packaging acquisition was made in part to obtain technologies, equipment, and customer lists. The gain on sale of businesses, net was
$11.5 million
for the year ended
October 31, 2014
.
Three
of the divestitures were of nonstrategic businesses in the Rigid Industrial Packaging & Services segment.
Two
of the divestitures in this segment resulted in losses on disposal of
$9.1 million
and
$1.8 million
, respectively, which included the write off of allocated goodwill. The third divestiture in this segment resulted in a loss of
$11.4 million
, which consisted of
$5.5 million
recorded as a loss on disposal and of
$5.9 million
of non-cash asset impairment charges due to the recording of an expected loss prior to the period in which the transaction was completed. There were also divestitures of businesses in the Flexible Products & Services and Paper Packaging & Services segments that resulted in gains of
$18.3 million
and
$4.2 million
, respectively, which included the write-off of allocated goodwill. Additionally, there were divestitures of
four
smaller investments in the Rigid Industrial Packaging & Services segment that resulted in an aggregate net gain of
$5.4 million
. Proceeds from divestitures were
$115.3 million
.
None of the above-referenced divestitures in
2016
,
2015
or 2014 qualified as discontinued operations as they do not, individually or in the aggregate, represent a strategic shift that has had a major impact on the Company’s operations or financial results.
The Company has allocated purchase price as of the dates of acquisition based upon its understanding, obtained during due diligence and through other sources, of the fair value of the acquired assets and assumed liabilities.
NOTE 3 – SALE OF NON-UNITED STATES ACCOUNTS RECEIVABLE
On April 27, 2012, Cooperage Receivables Finance B.V. (the “Main SPV”) and Greif Coordination Center BVBA, an indirect wholly owned subsidiary of Greif, Inc. (“Seller”), entered into the Nieuw Amsterdam Receivables Purchase Agreement (the “European RPA”) with affiliates of a major international bank (the “Purchasing Bank Affiliates”). On April 20, 2015, the Main SPV and Seller amended and extended
the term of the existing European RPA. Under the European RPA, as amended, the number of entities participating in the agreement have decreased. Additionally, the terms have been amended to decrease the maximum amount of receivables that may be sold and outstanding under the European RPA at any time to
€100 million
(
$109.0 million
as of
October 31, 2016
). Under the ter
ms of the European RPA, the Company has the ability to loan excess cash back to the Purchasing Bank Affiliates in the form of a subordinated loan receivable. As of October 31, 2015, the Company had loaned
$44.2 million
of excess cash back to the Purchasing Bank Affiliates, which was included in prepaid expenses and other current assets. As of October 31, 2016, the Company collected the full balance of the subordinated note receivable.
Under the terms of the European RPA, the Company has agreed to sell trade receivables meeting certain eligibility requirements that the Seller had purchased from other of our indirect wholly-owned subsidiaries under a factoring agreement. The structure of the transactions provide for a legal true sale, on a revolving basis, of the receivables transferred from our various subsidiaries to the respective banks and their affiliates. The purchaser funds an initial purchase price of a certain percentage of eligible receivables based on a formula, with the initial purchase price approximating
75 percent
to
90 percent
of eligible receivables. The remaining
deferred purchase price is settled upon collection of the receivables. At the balance sheet reporting dates, the Company removes from accounts receivable the amount of proceeds received from the initial purchase price since they meet the applicable criteria of ASC 860, “Transfers and Servicing,” and the Company continues to recognize the deferred purchase price in prepaid expenses and other current assets or other current liabilities. Th
e receivables are sold on a non-recourse basis with the total funds in the servicing collection accounts pledged to the banks between settlement dates.
In October 2007, Greif Singapore Pte. Ltd., an indirect wholly-owned subsidia
ry of Greif, Inc., entered into the Singapore Receivable Purchase Agreement (the “Singapore RPA”) with a major international bank. The maximum amount of aggregate receivables that may be financed under the Singapore RPA is
15.0 million
Singapore Dollars (
$10.8 million
a
s of
October 31, 2016
). Under the terms of the Singapore RPA, the Company has agreed to sell trade receivables in exchange for an initial purchase price of approximately
90 percent
of the eligible receivables. The remaining deferred purchase price is settled upon collection of the receivables
.
The table below contains information related to the Company’s accounts receivables programs (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended October 31,
|
2016
|
|
2015
|
|
2014
|
European RPA
|
|
|
|
|
|
Gross accounts receivable sold to third party financial institution
|
$
|
620.3
|
|
|
$
|
715.2
|
|
|
$
|
1,006.4
|
|
Cash received for accounts receivable sold under the programs
|
548.1
|
|
|
633.6
|
|
|
888.1
|
|
Deferred purchase price related to accounts receivable sold
|
71.7
|
|
|
76.2
|
|
|
118.3
|
|
Loss associated with the programs
|
0.8
|
|
|
1.5
|
|
|
2.5
|
|
Expenses associated with the programs
|
—
|
|
|
—
|
|
|
—
|
|
Singapore RPA
|
|
|
|
|
|
Gross accounts receivable sold to third party financial institution
|
$
|
44.1
|
|
|
$
|
48.1
|
|
|
$
|
56.7
|
|
Cash received for accounts receivable sold under the programs
|
36.4
|
|
|
48.1
|
|
|
56.7
|
|
Deferred purchase price related to accounts receivable sold
|
7.1
|
|
|
—
|
|
|
—
|
|
Loss associated with the programs
|
—
|
|
|
0.1
|
|
|
—
|
|
Expenses associated with the programs
|
—
|
|
|
0.1
|
|
|
0.1
|
|
Total RPAs and Agreements
|
|
|
|
|
|
Gross accounts receivable sold to third party financial institution
|
$
|
664.4
|
|
|
$
|
763.3
|
|
|
$
|
1,063.1
|
|
Cash received for accounts receivable sold under the program
|
584.5
|
|
|
681.7
|
|
|
944.8
|
|
Deferred purchase price related to accounts receivable sold
|
78.8
|
|
|
76.2
|
|
|
118.3
|
|
Loss associated with the program
|
0.8
|
|
|
1.6
|
|
|
2.5
|
|
Expenses associated with the program
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
European RPA
|
|
|
|
Accounts receivable sold to and held by third party financial institution
|
$
|
106.7
|
|
|
$
|
114.8
|
|
Deferred purchase price asset (liability) related to accounts receivable sold
|
(0.4
|
)
|
|
(1.5
|
)
|
Singapore RPA
|
|
|
|
Accounts receivable sold to and held by third party financial institution
|
$
|
4.0
|
|
|
$
|
4.0
|
|
Uncollected deferred purchase price related to accounts receivable sold
|
0.5
|
|
|
—
|
|
Total RPAs and Agreements
|
|
|
|
Accounts receivable sold to and held by third party financial institution
|
$
|
110.7
|
|
|
$
|
118.8
|
|
Deferred purchase price asset (liability) related to accounts receivable sold
|
0.1
|
|
|
(1.5
|
)
|
The deferred purchase price related to the accounts receivable sold is reflected as prepaid expenses and other current assets or other current liabilities on the Company’s consolidated balance sheet and was initially recorded at an amount which approximates its fair value due to the short-term nature of these items. The cash received initially and the deferred purchase price relate to the sale or ultimate collection of the underlying receivables and are not subject to significant other risks given their short nature; therefore, the Company reflects all cash flows under the accounts receivable sales programs as operating cash flows on the Company’s consolidated statements of cash flows.
Additionally, the Company performs collections and administrative functions on the receivables sold similar to the procedures it uses for collecting all of its receivables, including receivables that are not sold under the European RPA and the Singapore RPA. The servicing liability for these receivables is not material to the consolidated financial statements.
NOTE 4 – INVENTORIES
The inventories are stated at the lower of cost or market and summarized as follows as of October 31 for each year (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Finished goods
|
$
|
79.8
|
|
|
$
|
88.0
|
|
Raw materials
|
185.4
|
|
|
190.7
|
|
Work-in process
|
12.2
|
|
|
18.3
|
|
|
$
|
277.4
|
|
|
$
|
297.0
|
|
NOTE 5 – ASSETS AND LIABILITIES HELD FOR SALE AND DISPOSALS OF PROPERTY, PLANT AND EQUIPMENT, NET
The following table presents assets and liabilities classified as held for sale as of October 31, 2016 and 2015.
|
|
|
|
|
|
|
|
|
October 31, 2016
|
October 31, 2015
|
Trade accounts receivable, less allowance
|
$
|
—
|
|
$
|
2.3
|
|
Inventories
|
—
|
|
1.6
|
|
Properties, plants and equipment, net
|
11.8
|
|
8.1
|
|
Other assets
|
—
|
|
4.9
|
|
Assets held for sale
|
11.8
|
|
16.9
|
|
Accounts payable
|
—
|
|
1.8
|
|
Liabilities held for sale
|
$
|
—
|
|
$
|
1.8
|
|
As of
October 31, 2016
, there was
one
asset group in the Rigid Industrial Packaging Products & Services segment and
one
asset group in the Flexible Products & Services segment classified as assets held for sale. These assets held for sale are being marketed for sale and it is the Company's intention to complete the sales of these assets within the twelve months following their initial classification into assets held for sale.
During 2016, the Company recorded a gain on disposal of properties, plants and equipment, net of
$10.3 million
. This included insurance recoveries that resulted in gains of
$6.4 million
in the Rigid Industrial Packaging & Services segment, disposals of assets in the Flexible Products & Services segment classified as held for sale that resulted in gains of
$1.3 million
, sales of surplus properties in the Land Management segment that resulted in gains of
$1.6 million
, insurance recoveries that resulted in gains of
$0.2 million
in the Paper Packaging & Services segment, and other net gains totaling an additional
$0.8 million
. For additional information regarding the sale of businesses refer to Note 2 to these consolidated financial statements.
For the year ended
October 31, 2015
, the Company recorded a gain on disposal of properties, plants and equipment, net of
$7.0 million
. There were sales of HBU and surplus properties which resulted in gains of
$2.7 million
in the Land Management segment, a disposal of an asset group previously classified as held for sale in the Rigid Industrial Packaging & Services segment that resulted in a gain of
$4.4 million
, insurance recoveries which resulted in gains of
$3.0 million
in the Rigid Industrial Packaging & Services segment, a
$3.0 million
loss in the Flexible Products & Services segment resulting from the fair market value adjustment of an asset previously classified as held for sale and other miscellaneous losses of
$0.1 million
.
For the year ended October 31, 2014, the Company recorded a gain on disposal of properties, plants and equipment, net of
$8.3 million
. There were sales of HBU and surplus properties which resulted in gains of
$5.4 million
in the Land Management segment, a sale of equipment in the Flexible Products & Services segment that resulted in a gain of
$1.1 million
, a disposal of an asset in the Paper Packaging & Services segment that resulted in a gain of
$0.7 million
and sales of other miscellaneous equipment which resulted in aggregate gains of
$1.1 million
.
For the year ended
October 31, 2016
, the Company recorded
no
gains relating to the sale of timberland. For the years ended October 31
2015
and
2014
, the Company recorded a gain of
$24.3 million
and
$17.1 million
, respectively, relating to the sale of timberland.
NOTE 6 – GOODWILL AND OTHER INTANGIBLE ASSETS
The following table summarizes the changes in the carrying amount of goodwill by segment for the year ended
October 31, 2016
and
2015
(Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rigid Industrial
Packaging & Services
|
|
Paper
Packaging & Services
|
|
Flexible Products
& Services (1)
|
|
Land
Management
|
|
Total
|
Balance at October 31, 2014
|
$
|
820.7
|
|
|
$
|
59.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
880.2
|
|
Goodwill acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill allocated to divestitures and businesses held for sale
|
(11.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11.6
|
)
|
Goodwill adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency translation
|
(61.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(61.5
|
)
|
Balance at October 31, 2015
|
$
|
747.6
|
|
|
$
|
59.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
807.1
|
|
Goodwill acquired
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill allocated to divestitures and businesses held for sale
|
(17.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(17.6
|
)
|
Goodwill adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Goodwill impairment charge
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Currency translation
|
(3.1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3.1
|
)
|
Balance at October 31, 2016
|
$
|
726.9
|
|
|
$
|
59.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
786.4
|
|
|
|
(1)
|
Accumulated goodwill impairment loss was
$50.3 million
as of
October 31, 2016
,
2015
and
2014
.
|
The Company reviews goodwill by reporting unit and indefinite-lived intangible assets for impairment as required by ASC 350, “Intangibles – Goodwill and Other,” either annually in the fourth quarter as of August 1, or whenever events and circumstances indicate impairment may have occurred. A reporting unit is the operating segment, or a business one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. The components are aggregated into reporting units for purposes of goodwill impairment testing to the extent they share similar qualitative and quantitative characteristics. The Company has
five
operating segments: Rigid Industrial Packaging & Services – Americas; Rigid Industrial Packaging & Services Europe, Middle East, Africa and Asia Pacific; Paper Packaging & Services; Flexible Products & Services; and Land Management. These five operating segments are aggregated into
four
reportable business segments by combining the Rigid Industrial Packaging & Services – Americas and Rigid Industrial Packaging & Services Europe, Middle East, Africa and Asia Pacific operating segments. The Company’s reporting units are the same as the operating segments.
Refer to Note 10 herein for further discussion regarding goodwill allocated to divestitures and businesses held for sale.
During the fourth quarter of 2014, triggering events occurred in the Flexible Products & Services reporting unit that significantly lowered the forecasted cash flow projections used by the Company during its annual impairment test. The triggering events identified were as follows:
|
|
•
|
During the fourth quarter of 2014, the Flexible Products & Services business changed the labor mix of employees at one of its facilities in Turkey, resulting in higher expected long-term overall labor costs.
|
|
|
•
|
There were also certain Flexible Products & Services businesses and facilities identified during the fourth quarter of 2014 as planned divestitures and shutdowns. These planned divestitures and shutdowns were primarily distribution locations and so reduced overall sales and topline revenue for Flexible Products & Services without reducing fixed production costs, resulting in projected decreases in gross margins and operating profit margins for the business as a whole.
|
|
|
•
|
Finally, there was a significant devaluation of the Euro that negatively impacted expected results for the Flexible Products & Services business, as a significant portion of its forecasted sales are to customers in the Euro zone. The devaluation is projected to have a long-term effect on the results of the Flexible Products & Services reporting unit.
|
Due to these events, the Company performed a goodwill impairment test as of October 31, 2014 for the Flexible Products & Services reporting unit. Based on the analysis performed as of October 31, 2014, the carrying amount of the Flexible Products & Services reporting unit exceeded the fair value of the Flexible Products & Services reporting unit and the goodwill of the Flexible Products & Services reporting unit as of October 31, 2014 was fully impaired and written off as of October 31, 2014.
The fair value was determined primarily using the income approach by discounting estimated future cash flows. Those cash flow projections were prepared based upon the evaluation of the historical performance and future growth expectations for the Flexible Products & Services segment. Revenue was based on 2015 projections with a long-term growth rate applied to future periods. The most critical assumptions within the cash flow projections are revenue growth rates and forecasted gross margin percentages. The second step of the goodwill impairment test compared the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill was calculated as the difference between the fair value of the reporting unit as a whole and the fair values of the other non-goodwill assets and liabilities making up the reporting unit. Significant assumptions used in the calculation of the implied fair value include those used in the valuation of fixed assets and intangibles. Fixed assets were valued using the indirect cost approach. The customer retention model used to value the customer list intangible asset was the multi-period excess earnings method.
The following table summarizes the carrying amount of net intangible assets by class as of
October 31, 2016
and
October 31, 2015
(Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Intangible
Assets
|
|
Accumulated
Amortization
|
|
Net Intangible
Assets
|
October 31, 2016:
|
|
|
|
|
|
Indefinite lived:
|
|
|
|
|
|
Trademarks and patents
|
$
|
13.0
|
|
|
$
|
—
|
|
|
$
|
13.0
|
|
Definite lived:
|
|
|
|
|
|
Customer relationships
|
$
|
167.6
|
|
|
$
|
86.9
|
|
|
$
|
80.7
|
|
Trademarks and patents
|
12.1
|
|
|
4.8
|
|
|
7.3
|
|
Non-compete agreements
|
1.0
|
|
|
0.9
|
|
|
0.1
|
|
Other
|
23.5
|
|
|
14.0
|
|
|
9.5
|
|
Total
|
$
|
217.2
|
|
|
$
|
106.6
|
|
|
$
|
110.6
|
|
October 31, 2015:
|
|
|
|
|
|
Indefinite lived:
|
|
|
|
|
|
Trademarks and patents
|
$
|
13.1
|
|
|
$
|
—
|
|
|
$
|
13.1
|
|
Definite lived:
|
|
|
|
|
|
Customer relationships
|
$
|
180.7
|
|
|
$
|
81.7
|
|
|
$
|
99.0
|
|
Trademarks and patents
|
12.4
|
|
|
4.2
|
|
|
8.2
|
|
Non-compete agreements
|
4.9
|
|
|
4.5
|
|
|
0.4
|
|
Other
|
24.2
|
|
|
12.2
|
|
|
12.0
|
|
Total
|
$
|
235.3
|
|
|
$
|
102.6
|
|
|
$
|
132.7
|
|
Gross intangible assets decreased by
$18.1 million
for the year ended
October 31, 2016
. The decrease was attributable to
$7.6 million
of gross intangibles divested,
$4.2 million
of impairments resulting from a business being classified into held for sale,
$1.6 million
of currency fluctuations and the write-off of
$4.7 million
of fully-amortized assets. Amortization expense was
$16.8 million
,
$18.4 million
and
$22.0 million
for the years ended
2016
,
2015
and
2014
, respectively. Amortization expense for the next five years is expected to be
$15.3 million
in
2017
,
$14.9 million
in
2018
,
$14.8 million
in
2019
,
$14.3 million
in
2020
and
$12.6 million
million in
2021
.
Definite lived intangible assets for the periods presented are subject to amortization and are being amortized using the straight-line method over periods that are contractually or legally determined or through purchase price accounting. Indefinite lived intangibles of approximately
$13.0 million
as of October 31, 2016, which related primarily to the Tri-Sure trademark and trade names related to Blagden Express, Closed-loop and Box Board, are not amortized.
NOTE 7 – RESTRUCTURING CHARGES
The following is a reconciliation of the beginning and ended restructuring reserve balances for the years ended
October 31, 2016
and
2015
(Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
Separation
Costs
|
|
Other costs
|
|
Total
|
Balance at October 31, 2014
|
$
|
2.9
|
|
|
$
|
1.2
|
|
|
$
|
4.1
|
|
Costs incurred and charged to expense
|
27.8
|
|
|
12.2
|
|
|
40.0
|
|
Costs paid or otherwise settled
|
(16.0
|
)
|
|
(6.8
|
)
|
|
(22.8
|
)
|
Balance at October 31, 2015
|
$
|
14.7
|
|
|
$
|
6.6
|
|
|
$
|
21.3
|
|
Costs incurred and charged to expense
|
16.7
|
|
|
10.2
|
|
|
26.9
|
|
Costs paid or otherwise settled
|
(22.2
|
)
|
|
(15.6
|
)
|
|
(37.8
|
)
|
Balance at October 31, 2016
|
$
|
9.2
|
|
|
$
|
1.2
|
|
|
$
|
10.4
|
|
The focus for restructuring activities in
2016
was to continue to rationalize operations and close underperforming assets in the Rigid Industrial Packaging & Services and Flexible Products & Services segments. During the year ended
October 31, 2016
, the Company recorded restructuring charges of
$26.9 million
, as compared to
$40.0 million
of restructuring charges recorded during the year ended
October 31, 2015
. The restructuring activity for the year ended
October 31, 2016
consisted of
$16.7 million
in employee separation costs and
$10.2 million
in other restructuring costs, primarily consisting of professional fees incurred for services specifically associated with employee separation and relocation. There were
four
plants closed in
2016
, and a total of
254
employees severed throughout
2016
as part of the Company’s restructuring efforts.
The following is a reconciliation of the total amounts expected to be incurred from open restructuring plans or plans that are being formulated and have not been announced as of the filing date of this Form 10-K. Remaining amounts expected to be incurred were
$16.1 million
as of
October 31, 2016
. (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Amounts
Expected to be
Incurred
|
|
Amounts
Incurred During
the year ended October 31, 2016
|
|
Amounts
Remaining to be
Incurred
|
Rigid Industrial Packaging & Services:
|
|
|
|
|
|
Employee separation costs
|
$
|
23.5
|
|
|
$
|
12.4
|
|
|
11.1
|
|
Other restructuring costs
|
8.3
|
|
|
6.6
|
|
|
1.7
|
|
|
31.8
|
|
|
19.0
|
|
|
12.8
|
|
Flexible Products & Services:
|
|
|
|
|
|
Employee separation costs
|
6.0
|
|
|
4.0
|
|
|
2.0
|
|
Other restructuring costs
|
3.6
|
|
|
2.3
|
|
|
1.3
|
|
|
9.6
|
|
|
6.3
|
|
|
3.3
|
|
Paper Packaging & Services:
|
|
|
|
|
|
Employee separation costs
|
0.3
|
|
|
0.3
|
|
|
—
|
|
Other restructuring costs
|
1.2
|
|
|
1.2
|
|
|
—
|
|
|
1.5
|
|
|
1.5
|
|
|
—
|
|
Land Management:
|
|
|
|
|
|
Employee separation costs
|
—
|
|
|
—
|
|
|
—
|
|
Other restructuring costs
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
|
0.1
|
|
|
—
|
|
|
$
|
43.0
|
|
|
$
|
26.9
|
|
|
$
|
16.1
|
|
The focus for restructuring activities in
2015
was to rationalize operations and close underperforming assets throughout all segments. During
2015
, the Company recorded restructuring charges of
$40.0 million
, consisting of
$27.8 million
in employee separation costs and
$12.2 million
in other restructuring costs, primarily consisting of professional fees incurred for services specifically associated with employee separation and relocation. There were
eight
plants closed and a total of
1,020
employees severed throughout
2015
as part of the Company’s restructuring efforts.
The focus for restructuring activities in
2014
was to rationalize and close underperforming assets in both the Flexible Products & Services and the Rigid Industrial Packaging & Services segments. During
2014
, the Company recorded restructuring charges
of
$16.1 million
, consisting of
$12.0 million
in employee separation costs and
$4.1 million
in other restructuring costs, primarily consisting of lease termination costs, professional fees and other miscellaneous exit costs. There were
eight
plants closed and a total of
850
employees severed throughout
2014
as part of the Company’s restructuring efforts.
NOTE 8 – CONSOLIDATION OF VARIABLE INTEREST ENTITIES
The Company evaluates whether an entity is a variable interest entity (“VIE”) whenever reconsideration events occur and performs reassessments of all VIE’s quarterly to determine if the primary beneficiary status is appropriate. The Company consolidates VIE’s for which it is the primary beneficiary. If the Company is not the primary beneficiary and an ownership interest is held, the VIE is accounted for under the equity or cost methods of accounting, as appropriate. When assessing the determination of the primary beneficiary, the Company considers all relevant facts and circumstances, including: the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance; and the obligation to absorb the expected losses and/or the right to receive the expected returns of the VIE.
Significant Nonstrategic Timberland Transactions
On March 28, 2005, Soterra LLC (a wholly owned subsidiary) entered into
two
real estate purchase and sale agreements with Plum Creek Timberlands, L.P. (“Plum Creek”) to sell approximately
56,000
acres of timberland and related assets located primarily in Florida for an aggregate sales price of approximately
$90 million
, subject to closing adjustments. In connection with the closing of one of these agreements, Soterra LLC sold approximately
35,000
acres of timberland and associated assets in Florida, Georgia and Alabama for
$51.0 million
, resulting in a pretax gain of
$42.1 million
, on May 23, 2005. The purchase price was paid in the form of cash and a
$50.9 million
purchase note payable (the “Purchase Note”) by an indirect subsidiary of Plum Creek (the “Buyer SPE”). Soterra LLC contributed the Purchase Note to STA Timber LLC (“STA Timber”), one of the Company’s indirect wholly owned subsidiaries. The Purchase Note is secured by a Deed of Guarantee issued by Bank of America, N.A., London Branch, in an amount not to exceed
$52.3 million
(the “Deed of Guarantee”), as a guarantee of the due and punctual payment of principal and interest on the Purchase Note.
The Company completed the second and final phase of these transactions in the first and second quarters of 2006, respectively, with the sale of
15,300
acres and another approximately
5,700
acres.
On May 31, 2005, STA Timber issued in a private placement its
5.20%
Senior Secured Notes due
August 5, 2020
(the “Monetization Notes”) in the principal amount of
$43.3 million
. In connection with the sale of the Monetization Notes, STA Timber entered into note purchase agreements with the purchasers of the Monetization Notes (the “Note Purchase Agreements”) and related documentation. The Monetization Notes are secured by a pledge of the Purchase Note and the Deed of Guarantee. The Monetization Notes may be accelerated in the event of a default in payment or a breach of the other obligations set forth therein or in the Note Purchase Agreements or related documents, subject in certain cases to any applicable cure periods, or upon the occurrence of certain insolvency or bankruptcy related events. The Monetization Notes are subject to a mechanism that may cause them, subject to certain conditions, to be extended to
November 5, 2020
. The proceeds from the sale of the Monetization Notes were primarily used for the repayment of indebtedness. Greif, Inc. and its other subsidiaries have not extended any form of guaranty of the principal or interest on the Monetization Notes. Accordingly, Greif, Inc. and its other subsidiaries will not become directly or contingently liable for the payment of the Monetization Notes at any time.
The Buyer SPE is deemed to be a VIE since the assets of the Buyer SPE are not available to satisfy the liabilities of the Buyer SPE. The Buyer SPE is a separate and distinct legal entity from the Company and no ownership interest in the Buyer SPE is held by the Company, but the Company is the primary beneficiary because it has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. As a result, Buyer SPE has been consolidated into the operations of the Company.
As of
October 31, 2016
and
2015
, assets of the Buyer SPE consisted of
$50.9 million
of restricted bank financial instruments which are expected to be held to maturity. For each of the years ended
October 31, 2016
,
2015
and
2014
, the Buyer SPE recorded interest income of
$2.4 million
.
As of
October 31, 2016
and
2015
, STA Timber had long-term debt of
$43.3 million
. For each of the years ended
October 31, 2016
,
2015
and
2014
, STA Timber recorded interest expense of
$2.2 million
. STA Timber is exposed to credit-related losses in the event of nonperformance by the issuer of the Deed of Guarantee.
Flexible Packaging Joint Venture
On September 29, 2010, Greif, Inc. and its indirect subsidiary Greif International Holding Supra C.V. (“Greif Supra,”) formed a joint venture (referred to herein as the “Flexible Packaging JV” or "FPS VIE") with Dabbagh Group Holding Company Limited and one of its subsidiaries, originally National Scientific Company Limited and now Gulf Refined Packaging for Industrial Packaging Company LTD ("GRP"). The Flexible Packaging JV owns the operations in the Flexible Products & Services segment. The Flexible Packaging JV has been consolidated into the operations of the Company as of its formation date of September 29, 2010.
The Flexible Packaging JV is deemed to be a VIE since the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support. The major factors that led to the conclusion that the Company was the primary beneficiary of this VIE was that (1) the Company has the power to direct the most significant activities due to its ability to direct the operating decisions of the FPS VIE, which power is derived from the significant CEO discretion over the operations of the FPS VIE combined with the Company's sole and exclusive right to appoint the CEO of the FPS VIE, and (2) the significant variable interest through the Company's equity interest in the FPS VIE.
The economic and business purpose underlying the Flexible Packaging JV is to establish a global industrial flexible products enterprise through a series of targeted acquisitions and major investments in plant, machinery and equipment. All entities contributed to the Flexible Packaging JV were existing businesses acquired by Greif Supra and that were reorganized under Greif Flexibles Asset Holding B.V. and Greif Flexibles Trading Holding B.V. (“Asset Co.” and “Trading Co.”), respectively. The Flexibles Packaging J.V. also includes Global Textile Company LLC (“Global Textile”), which owned and operated a fabric hub in the Kingdom of Saudi Arabia that commenced operations in the fourth quarter of 2012 and ceased operations in the fourth quarter of 2014. The Company has
51 percent
ownership in Trading Co. and
49 percent
ownership in Asset Co. and Global Textile. However, Greif Supra and GRP have equal economic interests in the Flexible Packaging JV, notwithstanding the actual ownership interests in the various legal entities.
All investments, loans and capital contributions are to be shared equally by Greif Supra and GRP and each partner has committed to contribute capital of up to
$150.0 million
and obtain third party financing for up to
$150.0 million
as required.
The following table presents the Flexible Packaging JV total net assets (Dollars in millions):
|
|
|
|
|
|
|
|
|
As of October 31,
|
2016
|
|
2015
|
Cash and cash equivalents
|
$
|
15.2
|
|
|
$
|
14.5
|
|
Trade accounts receivable, less allowance of $2.8 in 2016 and $3.2 in 2015
|
43.3
|
|
|
47.5
|
|
Inventories
|
50.9
|
|
|
44.7
|
|
Properties, plants and equipment, net
|
25.0
|
|
|
43.1
|
|
Other assets
|
37.3
|
|
|
36.8
|
|
Total Assets
|
$
|
171.7
|
|
|
$
|
186.6
|
|
Accounts payable
|
30.7
|
|
|
27.9
|
|
Other liabilities
|
43.7
|
|
|
50.6
|
|
Total Liabilities
|
$
|
74.4
|
|
|
$
|
78.5
|
|
Net loss attributable to the noncontrolling interest in the Flexible Packaging JV for the years ended
October 31, 2016
,
2015
and
2014
were
$8.2 million
,
$14.2 million
and
$57.0 million
, respectively.
Non-United States Accounts Receivable VIE
As further described in Note 3, Cooperage Receivables Finance B.V. is a party to the European RPA. Cooperage Receivables Finance B.V. is deemed to be a VIE since this entity is not able to satisfy its liabilities without the financial support from the Company. While this entity is a separate and distinct legal entity from the Company and
no
ownership interest in this entity is held by the Company, the Company is the primary beneficiary because it has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE. As a result, Cooperage Receivables Finance B.V. has been consolidated into the operations of the Company.
EarthMinded Benelux NV VIE
On August 31, 2016, a wholly owned indirect subsidiary of Greif, Inc.sold
51
percent of its shares in its then wholly owned subsiduary, EarthMinded Benelux NV for
$0.3 million
.
EarthMinded Benelux NV is a VIE due to insufficient equity investment at risk. The Company is not the primary beneficiary of this VIE since (1) the Company does not have the power to direct the most significant activities due to its lack of ability to direct the financing, capital and operating decisions of the VIE, and (2) the Company does not have the obligation to absorb losses of the VIE that could potentially be significant to the VIE. As a result, EarthMinded Benelux NV was deconsolidated from the operations of the Company as of August 31, 2016. The retained noncontrolling interest of
$0.3 million
is included in prepaid expenses and other current assets in the consolidated balance sheets and the Company's share of the operations is classified in equity earnings of unconsolidated affiliates, net of tax, on the condensed consolidated statements of income prospectively.
NOTE 9 – LONG-TERM DEBT
Long-term debt is summarized as follows (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
Prior Credit Agreement
|
$
|
201.2
|
|
|
$
|
217.4
|
|
Senior Notes due 2017
|
300.1
|
|
|
300.7
|
|
Senior Notes due 2019
|
247.0
|
|
|
246.0
|
|
Senior Notes due 2021
|
216.6
|
|
|
219.4
|
|
Amended Receivables Facility
|
—
|
|
|
147.6
|
|
Other long-term debt
|
9.7
|
|
|
15.8
|
|
|
974.6
|
|
|
1,146.9
|
|
Less current portion
|
—
|
|
|
(30.7
|
)
|
Long-term debt
|
$
|
974.6
|
|
|
$
|
1,116.2
|
|
Credit Agreement
On November 3, 2016, the Company and four of its international subsidiaries entered into a new senior secured credit agreement (the “2017 Credit Agreement”) with a syndicate of financial institutions. The 2017 Credit Agreement replaces in its entirety the
$1.0 billion
senior secured credit agreement entered into on December 19, 2012, by the Company and two of its international subsidiaries ("Prior Credit Agreement") with a syndicate of financial institutions. The total available borrowing under the Prior Credit Agreement was
$584.4 million
as of
October 31, 2016
, which has been reduced by
$14.4 million
for outstanding letters of credit, all of which was then available without violating covenants.
The Prior Credit Agreement contained financial covenants that required the Company to maintain a certain leverage ratio and an interest coverage ratio. The leverage ratio generally required that at the end of any fiscal quarter the Company will not permit the ratio of (a) the Company’s total consolidated indebtedness, to (b) the Company’s consolidated net income plus depreciation, depletion and amortization, interest expense (including capitalized interest), income taxes, and minus certain extraordinary gains and non-recurring gains (or plus certain extraordinary losses and non-recurring losses) and plus or minus certain other items for the preceding twelve months (“adjusted EBITDA”) to be greater than
4.00
to
1
. The interest coverage ratio generally required that at the end of any fiscal quarter the Company would not permit the ratio of (a) the Company’s adjusted EBITDA to (b) the Company’s consolidated interest expense to the extent paid or payable, to be less than
3.00
to
1
, during the preceding twelve month period (the “Interest Coverage Ratio Covenant”).
The terms of the Prior Credit Agreement limit the Company’s ability to make “restricted payments,” which include dividends and purchases, redemptions and acquisitions of the Company’s equity interests. The payment of dividends and other restricted payments are subject to the condition that certain defaults not exist under the terms of the Prior Credit Agreement and, in the event that certain defaults exist, are limited in amount by a formula based, in part, on the Company’s consolidated net income. The repayment of amounts borrowed under the Prior Credit Agreement are secured by a security interest in the personal property of Greif, Inc. and certain of the Company’s United States subsidiaries, including equipment and inventory and certain intangible assets, as well as a pledge of the capital stock of substantially all of the Company’s United States subsidiaries. The repayment of amounts borrowed under the Prior Credit Agreement is also secured, in part, by capital stock of the non-U.S.
subsidiaries that are parties to the Prior Credit Agreement. The payment of outstanding principal under the Prior Credit Agreement and accrued interest thereon may be accelerated and become immediately due and payable upon the Company’s default in its payment or other performance obligations or its failure to comply with the financial and other covenants in the Prior Credit Agreement, subject to applicable notice requirements and cure periods as provided in the Prior Credit Agreement.
As of
October 31, 2016
,
$201.2 million
was outstanding under the Prior Credit Agreement. There was no current portion of the Prior Credit Agreement. The weighted average interest rate on the Prior Credit Agreement was
1.78%
for the year ended
October 31, 2016
. The actual interest rate on the Prior Credit Agreement was
1.28%
as of
October 31, 2016
.
The 2017 Credit Agreement provides for an
$800.0 million
revolving multicurrency credit facility expiring November 3, 2021, and a
$300.0 million
term loan, with quarterly principal installments commencing April 30, 2017, through maturity on November 3, 2021, both with an option to add an aggregate of
$550.0 million
to the facilities with the agreement of the lenders. The term loan facility can be drawn upon as a single loan any time on or prior to February 15, 2017. The Company expects to use the term loan on February 1, 2017, to repay the principal of the Company’s
$300.0 million
6.75%
Senior Notes that mature on that date. The revolving credit facility is available to fund ongoing working capital and capital expenditure needs, for general corporate purposes, to finance acquisitions and to refinance amounts outstanding under the Prior Credit Agreement. Interest is based on either a Eurodollar rate or a base rate that resets periodically plus a calculated margin amount. On November 3, 2016, a total of approximately
$208.0 million
was used to pay the obligations outstanding under the Prior Credit Agreement in full and certain costs and expenses incurred in connection with the 2017 Credit Agreement.
The 2017 Credit Agreement contains certain covenants, which include financial covenants that require the Company to maintain a certain leverage ratio and an interest coverage ratio. The leverage ratio generally requires that at the end of any fiscal quarter the Company will not permit the ratio of (a) its total consolidated indebtedness, to (b) adjusted EBITDA to be greater than
4.00
to 1 (or
3.75
to 1, during any collateral release period). The interest coverage ratio generally requires that at the end of any fiscal quarter the Company will not permit the ratio of (a) adjusted EBITDA, to (b) the consolidated interest expense to the extent paid or payable, to be less than
3.00
to 1, during the applicable preceding twelve month period.
The terms of the 2017 Credit Agreement limit the Company’s ability to make “restricted payments,” which include dividends and purchases, redemptions and acquisitions of equity interests of the Company. The repayment of this facility is secured by a security interest in the personal property of the Company and certain of its United States subsidiaries, including equipment and inventory and certain intangible assets, as well as a pledge of the capital stock of substantially all of the Company’s United States subsidiaries and will be secured, in part, by the capital stock of the non-U.S. borrowers. However, in the event that the Company receives and maintains an investment grade rating from either Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, the Company may request the release of such collateral. The payment of outstanding principal under the 2017 Credit Agreement and accrued interest thereon may be accelerated and become immediately due and payable upon the Company’s default in its payment or other performance obligations or its failure to comply with the financial and other covenants in the 2017 Credit Agreement, subject to applicable notice requirements and cure periods as provided in the 2017 Credit Agreement.
Senior Notes due 2017
On February 9, 2007, the Company issued
$300.0 million
of
6.75%
Senior Notes due
February 1, 2017
. Interest on these Senior Notes is payable semi-annually. The Senior Notes are classified as long-term debt on the consolidated balance sheet as of October 31, 2016 because the Company has the intent and ability to repay them and anticipates doing so using proceeds from the term loan under the 2017 Credit Agreement.
Senior Notes due 2019
On July 28, 2009, the Company issued
$250.0 million
of
7.75%
Senior Notes due
August 1, 2019
. Interest on these Senior Notes is payable semi-annually.
Senior Notes due 2021
On July 15, 2011, Greif, Inc.’s wholly-owned subsidiary, Greif Nevada Holdings, Inc., S.C.S. (formerly Greif Luxembourg Finance S.C.A.), issued
€200.0 million
of
7.375%
Senior Notes due
July 15, 2021
. These Senior Notes are fully and unconditionally guaranteed on a senior basis by Greif, Inc. Interest on these Senior Notes is payable semi-annually.
United States Trade Accounts Receivable Credit Facility
On September 28, 2016, certain domestic subsidiaries of Greif, Inc. (the “Company”) amended and restated their receivables financing facility (the “Receivables Facility”) with Cooperatieve Rabobank U.A., New York Branch (“Rabobank”), as the agent, managing agent, administrator and committed investor.
Greif Receivables Funding LLC (“Greif Funding”), Greif Packaging LLC (“Greif Packaging”) and certain other domestic subsidiaries of the Company entered into a Second Amended and Restated Transfer and Administration Agreement, dated as of September 28, 2016 (the “Second Amended TAA”), with Rabobank, as a committed investor, a managing agent, an administrator and the agent and various investor groups, managing agents, and administrators, from time to time parties thereto. The Second Amended TAA, as of September 28, 2016, replaced in its entirety the Amended and Restated Transfer and Administration Agreement, dated as of September 30, 2013 with PNC Bank, National Association, as a committed investor, managing agent, administrator and agent (the "Prior TAA"), which provided for a
$150.0 million
Receivables Facility. The Second Amended TAA also provides for a
$150.0 million
Receivables Facility.
Greif Funding is a direct subsidiary of Greif Packaging and is included in the Company’s consolidated financial statements. However, because Greif Funding is a separate and distinct legal entity from the Company, the assets of Greif Funding are not available to satisfy the liabilities and obligations of the Company, Greif Packaging or other subsidiaries of the Company, and the liabilities of Greif Funding are not the liabilities or obligations of the Company or its other subsidiaries.
The Second Amended TAA provides for the ongoing purchase by Rabobank of receivables from Greif Funding, which Greif Funding will have purchased from Greif Packaging and certain other domestic subsidiaries of the Company as the originators under the Second Amended and Restated Sale Agreement, dated as of September 28, 2016 (the “Second Amended Sale Agreement”). Greif Packaging will service and collect on behalf of Greif Funding those receivables sold to Greif Funding under the Second Amended Sale Agreement. The maturity date of the Receivables Facility is September 27, 2017, subject to earlier termination as provided in the Second Amended TAA (including acceleration upon an event of default as provided therein), or such later date to which the purchase commitment may be extended by agreement of the parties. In addition, Greif Funding can terminate the Receivables Facility at any time upon
five days
prior written notice. The Company has guaranteed the performance by Greif Funding, Greif Packaging and its other participating subsidiaries of their respective obligations under the Second Amended TAA, the Second Amended Sale Agreement and related agreements, but has not guaranteed the collectability of the receivables. A significant portion of the proceeds from the Receivables Facility were used to pay the obligations under the Prior TAA. The remaining proceeds are to be used to pay certain fees, costs and expenses incurred in connection with the Receivables Facility and for working capital and general corporate purposes.
The Receivables Facility is secured by certain trade accounts receivables relating to the Rigid Industrial Packaging and Paper Packaging & Services businesses of Greif Packaging and other domestic subsidiaries of the Company in the United States and bears interest at a variable rate based on the London InterBank Offered Rate or an applicable base rate, plus a margin, or a commercial paper rate, all as provided in the Second Amended TAA. Interest is payable on a monthly basis and the principal balance is payable upon termination of the Receivables Facility.
Other
In addition to the amounts borrowed under the Amended Credit Agreement and proceeds from the Senior Notes and the Receivables Facility, as of
October 31, 2016
, the Company had outstanding other debt of
$9.7 million
in long-term debt and
$51.6 million
in short-term borrowings, compared to other debt of
$15.8 million
in long-term debt and
$40.7 million
in short-term borrowings, as of
October 31, 2015
. There are no financial covenants associated with this other debt.
Annual maturities are
$300.1 million
in
2017
,
$201.2 million
in
2018
,
$247.0 million
in
2019
,
zero
in
2020
,
$216.6 million
in
2021
and
$9.7 million
thereafter. Cash paid for interest expense was
$74.8 million
,
$77.5 million
and
$86.4 million
in
2016
,
2015
and
2014
, respectively.
As of
October 31, 2016
and
2015
, the Company had deferred financing fees and debt issuance costs of
$4.2 million
and
$7.2 million
, respectively, which are included in other long-term assets.
NOTE 10 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS
Recurring Fair Value Measurements
The following table presents the fair value of those assets and (liabilities) measured on a recurring basis as of
October 31, 2016
and
2015
(Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
Balance sheet
Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Foreign exchange hedges
|
$
|
—
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
0.3
|
|
|
Prepaid expenses and other current assets
|
Foreign exchange hedges
|
—
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.3
|
)
|
|
Other current liabilities
|
Insurance Annuity
|
—
|
|
|
—
|
|
|
20.1
|
|
|
20.1
|
|
|
Other long-term assets
|
Total*
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20.1
|
|
|
$
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2015
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Balance sheet
Location
|
Foreign exchange hedges
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
Prepaid expenses and other current assets
|
Foreign exchange hedges
|
—
|
|
|
(0.2
|
)
|
|
|
|
|
(0.2
|
)
|
|
Other current liabilities
|
Insurance Annuity
|
—
|
|
|
—
|
|
|
20.1
|
|
|
20.1
|
|
|
Other long-term assets
|
Total*
|
$
|
—
|
|
|
$
|
0.1
|
|
|
$
|
20.1
|
|
|
$
|
20.2
|
|
|
|
* The carrying amounts of cash and cash equivalents, trade accounts receivable, notes receivable, accounts payable, current liabilities and short-term borrowings as of
October 31, 2016
and
2015
approximate their fair values because of the short-term nature of these items and are not included in this table.
Interest Rate Derivatives
As of
October 31, 2016
and October 31, 2015 the Company had
no
interest rate derivatives.
Through December
2014
, the Company had
two
interest rate derivatives (floating to fixed swap agreements designated as cash flow hedges) with a total notional amount of
$150.0 million
. Under these swap agreements, the Company received interest based upon a variable interest rate from the counterparties and paid interest based upon a fixed interest rate. The assumptions that were used in measuring fair value of the interest rate derivatives were considered level 2 inputs, which were based on interest from the counterparties based upon LIBOR and interest paid based upon a designated fixed rate over the life of the swap agreements. These derivative instruments were designated and qualified as cash flow hedges. Accordingly, the effective portion of the gain or loss on these derivative instruments was reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affected earnings. The ineffective portion of the gain or loss on the derivative instrument was recognized in earnings immediately.
Losses reclassified to earnings under these contracts were
$0.2 million
and
$0.9 million
for the
twelve months ended
October 31,
2015
, and
2014
, respectively. These losses were recorded within the consolidated statements of income as interest expense, net.
Subsequent to October 31, 2016, the Company entered into a forward interest rate swap with a notional amount of
$300 million
. Beginning as of February 1, 2017, the Company has agreed to receive variable rate interest based upon one month U.S. dollar LIBOR and pay a fixed spread, depending on the leverage ratio, over the borrowing cost as defined in the 2017 Credit Agreement. On February 1, 2017, this will effectively convert the borrowing rate on
$300 million
of debt under the 2017 Credit Agreement from a variable rate to a rate of
2.944%
. This derivative will be designated as a cash flow hedge for accounting purposes. Accordingly, any effective portion of the gain or loss on this derivative instrument will be reported as a component of other comprehensive income and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. Any ineffective portion of the gain or loss on the derivative instrument will be recognized into earnings. The assumptions that will be used in measuring fair value of the interest rate derivative are considered level 2 inputs, which are based upon LIBOR and interest paid based upon a designated fixed rate over the life of the swap agreements.
Foreign Exchange Hedges
The Company conducts business in various international currencies and is subject to risks associated with changing foreign exchange rates. The Company’s objective is to reduce volatility associated with foreign exchange rate changes. Accordingly, the
Company enters into various contracts that change in value as foreign exchange rates change to protect the value of certain existing foreign currency assets and liabilities, commitments and anticipated foreign currency cash flows.
As of
October 31, 2016
, the Company had outstanding foreign currency forward contracts in the notional amount of
$78.9 million
(
$129.9 million
as of
October 31, 2015
). Adjustments to fair value are recognized in earnings, offsetting the impact of the hedged item. The assumptions used in measuring fair value of foreign exchange hedges are considered level 2 inputs, which were based on observable market pricing for similar instruments, principally foreign exchange futures contracts. Losses recorded under fair value contracts were
$2.7 million
,
$6.0 million
and
$6.2 million
for the years ended
October 31, 2016
, 2015 and 2014, respectively.
Other Financial Instruments
The fair values of the Company’s Prior Credit Agreement and the Amended Receivables Facility do not materially differ from carrying value as the Company’s cost of borrowing is variable and approximates current borrowing rates. The fair values of the Company’s long-term obligations are estimated based on either the quoted market prices for the same or similar issues or the current interest rates offered for the debt of the same remaining maturities, which are considered level 2 inputs in accordance with ASC Topic 820, “Fair Value Measurements and Disclosures.”
The following table presents the estimated fair values for the Company’s Senior Notes and Assets held by special purpose entities (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
October 31, 2016
|
|
October 31, 2015
|
Senior Notes due 2017 Estimated fair value
|
$
|
302.4
|
|
|
$
|
314.8
|
|
Senior Notes due 2019 Estimated fair value
|
280.1
|
|
|
280.6
|
|
Senior Notes due 2021 Estimated fair value
|
264.9
|
|
|
258.7
|
|
Assets held by special purpose entities Estimated fair value
|
54.3
|
|
|
54.4
|
|
Pension Plan Assets
On an annual basis we compare the asset holdings of our pension plan to targets established by the Company. The pension plan assets are categorized as equity securities, debt securities, fixed income securities, insurance annuities or other assets, which are considered level 1, level 2 and level 3 fair value measurements. The typical asset holdings include:
|
|
•
|
Common Stock: Valued based on quoted prices and are primarily exchange-traded.
|
|
|
•
|
Mutual funds: Valued at the Net Asset Value “NAV” available daily in an observable market.
|
|
|
•
|
Common collective trusts: Unit value calculated based on the observable NAV of the underlying investment.
|
|
|
•
|
Pooled separate accounts: Unit value calculated based on the observable NAV of the underlying investment.
|
|
|
•
|
Government and corporate debt securities: Valued based on readily available inputs such as yield or price of bonds of comparable quality, coupon, maturity and type.
|
|
|
•
|
Insurance annuity: Value is derived based on the value of the corresponding liability.
|
Non-Recurring Fair Value Measurements
The following table presents quantitative information about the significant unobservable inputs used to determine the fair value of the impairment of long-lived assets held and used and net assets held for sale for the twelve months ended October 31, 2016 and October 31, 2015 (Dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
Quantitative Information about Level 3 Fair Value Measurements
|
|
Fair Value of
Impairment
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Range
of Input Values
|
October 31, 2016
|
|
|
|
|
|
|
|
Impairment of Net Assets Held for Sale
|
$
|
37.6
|
|
|
Broker Quote /
Indicative Bids
|
|
Indicative Bids
|
|
N/A
|
Impairment of Long Lived Assets
|
13.8
|
|
|
Sales Value
|
|
Sales Value
|
|
N/A
|
Total
|
$
|
51.4
|
|
|
|
|
|
|
|
October 31, 2015
|
|
|
|
|
|
|
|
Impairment of Long-lived assets- Land & Building
|
$
|
28.1
|
|
|
Broker Quote /
Indicative Bids
|
|
Indicative Bids
|
|
N/A
|
Impairment of Long-lived assets- Machinery & Equipment
|
17.8
|
|
|
Sales Value
|
|
Sales Value
|
|
N/A
|
Total
|
$
|
45.9
|
|
|
|
|
|
|
|
Long-Lived Assets
During the year ended October 31, 2016, the Company wrote down long-lived assets with a carrying value of
$19.2 million
to a fair value of
$5.4 million
, resulting in recognized asset impairment charges of
$13.8 million
. These charges include
$8.6 million
related to properties, plants and equipment, net, in the Rigid Industrial Packaging & Services segment,
$3.7 million
of properties, plants and equipment, net, in the Flexible Products & Services segment, and
$1.5 million
related to a cost method investment in the Paper Packaging & Services segment.
During the year ended October 31, 2015, the Company wrote down long-lived assets with a carrying value of
$60.7 million
to a fair value of
$14.8 million
, resulting in recognized asset impairment charges of
$45.9 million
. These charges include
$15.0 million
of impairment charges related to Venezuelan properties, plants, and equipment, net,
$11.4 million
of impairment charges related to assets recognized at fair value in the Company's reconditioning business,
$1.5 million
of IT software assets that were identified as obsolete,
$0.5 million
other-than-temporary impairment of equity method investment within the Flexible Products & Services segment,
$10.9 million
of impairment charges related to plant closures within the Rigid Industrial Packaging & Services and Flexible Products & Services segments, and
$6.6 million
of various machinery and equipment determined to be obsolete.
During the year ended October 31, 2014, the Company wrote down long-lived assets with a carrying value of
$58.0 million
to a fair value of
$22.5 million
, resulting in recognized asset impairment charges of properties, plants and equipment of
$35.5 million
, consisting of:
$11.5 million
for assets in the Rigid Industrial Packaging & Services segment related to the third quarter 2014 impairment of assets to be sold for a loss in the fourth quarter of 2014, underutilized and damaged equipment and unutilized facilities in Europe; and
$24.0 million
for assets in Flexible Products & Services segment related to underutilized equipment and the shutdown of the fabric hub in the Kingdom of Saudi Arabia. The impairment charges in the Flexible Products & Services segment included
$15.7 million
related to assets valued on the basis of their highest and best use.
The assumptions used in measuring fair value of long-lived assets are considered level 3 inputs, which include bids received from third parties, recent purchase offers, market comparable information and discounted cash flows based on assumptions that market participants would use.
Assets and Liabilities Held for Sale
During the year ended October 31, 2016, the Company wrote down assets and liabilities held for sale with a carrying value of
$70.6 million
to a fair value of
$33.0 million
, resulting in recognized asset impairment charges of
$37.6 million
. During the year ended October 31, 2016,
three
asset groups were reclassified to assets and liabilities held for sale, resulting in a
$23.6 million
impairment to net realizable value. Included in that asset impairment, was
$9.1 million
of goodwill allocated to the business classified as held for sale.
One
asset group classified as held for sale as of October 31, 2015, was remeasured to net realizable value, resulting in an impairment of
$14.0 million
. Included in that asset impairment was
$11.9 million
of goodwill allocated to the business classified as held for sale. During the year ended October 31, 2015,
two
asset groups classified as held for sale at October 31, 2014 were reclassified to held and used, resulting in a
$3.0 million
impairment to net realizable value. During the year ended October 31, 2014, the Company recorded no additional impairment charges related to assets which were previously
classified as held for sale. The assumptions used in measuring fair value of assets and liabilities held for sale are considered level 3 inputs, which include recent purchase offers, market comparables and/or data obtained from commercial real estate brokers.
Goodwill and Indefinite-Lived Intangibles
On an annual basis or when events or circumstances indicate impairment may have occurred, the Company performs impairment tests for goodwill and intangibles as defined under ASC 350, “Intangibles-Goodwill and Other.” As of October 31, 2014, the Company concluded that the carrying amount of the Flexible Products & Services reporting unit exceeded the fair value of the Flexible Products & Services reporting unit and the goodwill of
$50.3 million
on the Flexible Products & Services reporting unit as of October 31, 2014 was fully impaired. See Note 6 for additional information. The Company concluded that
no
impairment existed as of October 31, 2016 and 2015.