GREIF INC, 10-K filed on 12/16/2011
Annual Report
Document and Entity Informaton (USD $)
12 Months Ended
Oct. 31, 2011
Apr. 30, 2011
Dec. 9, 2011
Class A Common Stock [Member]
Apr. 30, 2011
Class A Common Stock [Member]
Dec. 9, 2011
Class B Common Stock [Member]
Apr. 30, 2011
Class B Common Stock [Member]
Entity Registrant Name
GREIF INC 
 
 
 
 
 
Entity Central Index Key
0000043920 
 
 
 
 
 
Document Type
10-K 
 
 
 
 
 
Document Period End Date
Oct. 31, 2011 
 
 
 
 
 
Amendment Flag
FALSE 
 
 
 
 
 
Document Fiscal Year Focus
2011 
 
 
 
 
 
Document Fiscal Period Focus
FY 
 
 
 
 
 
Current Fiscal Year End Date
--10-31 
 
 
 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
 
 
 
Entity Voluntary Filers
No 
 
 
 
 
 
Entity Current Reporting Status
Yes 
 
 
 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
 
 
 
Entity Public Float
 
$ 1,826,482,062 
 
$ 1,497,194,778 
 
$ 329,287,284 
Entity Common Stock, Shares Outstanding
 
 
24,978,098 
 
22,120,966 
 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data
12 Months Ended
Oct. 31,
2011
2010
2009
Net sales
$ 4,247,954 
$ 3,461,537 
$ 2,792,217 
Cost of products sold
3,446,829 
2,757,875 
2,292,573 
Gross profit
801,125 
703,662 
499,644 
Selling, general and administrative expenses
448,399 
362,935 
267,589 
Restructuring charges
30,496 
26,746 
66,590 
(Gain) on disposal of properties, plants and equipment, net
(14,855)
(11,434)
(34,432)
Operating profit
337,085 
325,415 
199,897 
Interest expense, net
79,552 
65,787 
53,593 
Debt extinguishment charge
 
782 
Other expense, net
14,120 
7,139 
7,193 
Income before income tax expense and equity earnings (losses) of unconsolidated affiliates, net
243,413 
252,489 
138,329 
Income tax expense
71,077 
40,571 
24,061 
Equity earnings (losses) of unconsolidated affiliates, net of tax
4,838 
3,539 
(436)
Net income
177,174 
215,457 
113,832 
Net income attributable to noncontrolling interests
(1,134)
(5,472)
(3,186)
Net income attributable to Greif, Inc.
$ 176,040 
$ 209,985 
$ 110,646 
Class A Common Stock [Member]
 
 
 
Basic earnings per share:
 
 
 
EPS Basic
$ 3.02 
$ 3.60 
$ 1.91 
Diluted earnings per share:
 
 
 
EPS Diluted
$ 3.01 
$ 3.58 
$ 1.91 
Class B Common Stock [Member]
 
 
 
Basic earnings per share:
 
 
 
EPS Basic
$ 4.52 
$ 5.40 
$ 2.86 
Diluted earnings per share:
 
 
 
EPS Diluted
$ 4.52 
$ 5.40 
$ 2.86 
Consolidated Balance Sheets (USD $)
In Thousands
Oct. 31, 2011
Oct. 31, 2010
Current assets
 
 
Cash and cash equivalents
$ 127,413 
$ 106,957 1
Trade accounts receivable, less allowance of $13,754 in 2011 and $13,311 in 2010
568,624 
480,158 1
Inventories
432,518 
396,572 1
Deferred tax assets
23,654 
19,526 1
Net assets held for sale
11,381 
11,742 1
Current portion related party notes receivable
1,714 
1
Prepaid expenses and other current assets
140,033 
134,269 1
Total current assets
1,305,337 
1,149,224 1
Long-term assets
 
 
Goodwill
1,004,875 
709,725 1
Other intangible assets, net of amortization
229,790 
173,239 1
Deferred tax assets
70,630 
29,982 1
Related party notes receivable
18,310 
1
Assets held by special purpose entities
50,891 
50,891 1
Other long-term assets
92,160 
93,603 1
Total long-term assets
1,466,656 
1,057,440 1
Properties, plants and equipment
 
 
Timber properties, net of depletion
216,026 
215,537 1
Land
123,131 
121,409 1
Buildings
480,399 
411,437 1
Machinery and equipment
1,388,941 
1,319,262 1
Capital projects in progress
139,963 
112,300 1
Property, Plant and Equipment, Gross
2,348,460 
2,179,945 1
Accumulated depreciation
(913,171)
(888,164)1
Properties, plants and equipment, net
1,435,289 
1,291,781 1
Total assets
4,207,282 
3,498,445 1
Current liabilities
 
 
Accounts payable
487,783 
467,857 1
Accrued payroll and employee benefits
99,794 
90,887 1
Restructuring reserves
19,607 
20,238 1
Current portion of long-term debt
12,500 
12,523 1
Short-term borrowings
137,334 
60,908 1
Deferred tax liabilities
5,055 
5,091 1
Other current liabilities
167,695 
123,854 1
Total current liabilities
929,768 
781,358 1
Long-term liabilities
 
 
Long-term debt
1,345,138 
953,066 1
Deferred tax liabilities
196,696 
180,486 1
Pension liabilities
76,088 
65,915 1
Postretirement benefit obligations
20,909 
21,555 1
Liabilities held by special purpose entities
43,250 
43,250 1
Other long-term liabilities
203,260 
116,930 1
Total long-term liabilities
1,885,341 
1,381,202 1
Shareholders' equity
 
 
Common stock, without par value
113,799 
106,057 1
Treasury stock, at cost
(131,997)
(117,394)1
Retained earnings
1,401,700 
1,323,477 1
Accumulated other comprehensive income (loss):
 
 
foreign currency translation
(46,354)
388 1
interest rate and other derivatives
(121)
(1,505)1
minimum pension liabilities
(101,676)
(76,526)1
Total Greif, Inc. shareholders' equity
1,235,351 
1,234,497 1
Noncontrolling interests
156,822 
101,388 1
Total shareholders' equity
1,392,173 
1,335,885 1
Total liabilities and shareholders' equity
$ 4,207,282 
$ 3,498,445 1
Consolidated Statements of Cash Flows (USD $)
In Thousands
12 Months Ended
Oct. 31,
2011
2010
2009
Cash flows from operating activities:
 
 
 
Net income
$ 177,174 
$ 215,457 
$ 113,832 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation, depletion and amortization
144,191 
115,974 
102,627 
Asset impairments
8,983 
2,917 
19,516 
Deferred income taxes
12,342 
4,596 
(13,167)
Gain on disposals of properties, plants and equipment, net
(14,855)
(11,434)
(34,432)
Equity (earnings) losses of affiliates
(4,838)
(3,539)
436 
Debt extinguishment charge
 
782 
Increase (decrease) in cash from changes in certain assets and liabilities:
 
 
 
Trade accounts receivable
(22,591)
(54,046)
73,358 
Inventories
15,405 
(87,832)
109,146 
Prepaid expenses and other current assets
(25,375)
(42,557)
(151)
Accounts payable
(33,360)
4,134 
(72,902)
Accrued payroll and employee benefits
8,194 
18,868 
(20,511)
Restructuring reserves
(631)
4,923 
168 
Other current liabilities
18,576 
(38,040)
(50,117)
Pension and postretirement benefit liabilities
9,527 
(15,868)
63,744 
Other long-term assets, other long-term liabilities and other
(120,402)
64,558 
(25,805)
Net cash provided by operating activities
172,340 
178,111 
266,524 
Cash flows from investing activities:
 
 
 
Acquisitions of companies, net of cash acquired
(344,914)
(179,459)
(90,816)
Purchases of properties, plants and equipment
(162,409)
(144,137)
(124,671)
Purchases of timber properties
(3,462)
(20,996)
(1,000)
Proceeds from the sale of properties, plants, equipment and other assets
31,013 
17,325 
50,279 
Issuance of notes receivable to related party, net
(20,024)
 
 
Purchases of land rights
(650)
 
(4,992)
Net cash used in investing activities
(500,446)
(327,267)
(171,200)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
3,859,401 
3,731,683 
3,170,212 
Payments on long-term debt
(3,465,834)
(3,637,945)
(2,983,534)
Proceeds (payments of) short-term borrowings, net
74,308 
3,878 
(25,749)
Proceeds (payments of) trade accounts receivable credit facility, net
(5,000)
135,000 
(120,000)
Dividends paid
(97,817)
(93,122)
(87,957)
Acquisitions of treasury stock and other
(15,062)
(2,696)
(3,145)
Exercise of stock options
2,540 
2,002 
2,015 
Debt issuance costs paid
(4,394)
(10,902)
(13,588)
Settlement of derivatives, net
17,985 
(3,574)
Net cash provided by (used in) financing activities
348,142 
145,883 
(65,320)
Effects of exchange rates on cash
420 
(1,666)
4,265 
Net increase (decrease) in cash and cash equivalents
20,456 
(4,939)
34,269 
Cash and cash equivalents at beginning of year
106,957 1
111,896 
77,627 
Cash and cash equivalents at end of year
$ 127,413 
$ 106,957 1
$ 111,896 
Consolidated Statements of Changes in Shareholders' Equity (USD $)
In Thousands
Total
Capital Stock
Treasury Stock
Retained Earnings
Noncontrolling interest
Accumulated Other Comprehensive Income (Loss)
Beginning Balance at Oct. 31, 2008 (As Previously Reported [Member])
$ 1,088,349 
$ 86,446 
$ (112,931)
$ 1,183,925 
$ 3,729 
$ (72,820)
Beginning Balance (Correction of an error [Member])
(19,547)
 
 
 
 
(19,547)
Beginning Balance at Oct. 31, 2008
1,068,802 
86,446 
(112,931)
1,183,925 
3,729 
(92,367)
Beginning Balance, Shares at Oct. 31, 2008 (As Previously Reported [Member])
 
46,644 
30,198 
 
 
 
Beginning Balance, Shares at Oct. 31, 2008
 
46,644 
30,198 
 
 
 
Net income
113,832 
 
 
110,646 
3,186 
 
Other comprehensive income (loss):
 
 
 
 
 
 
foreign currency translation adjustment
32,868 
 
 
 
 
32,868 
foreign currency translation adjustment at Nov. 01, 2008 (As Previously Reported [Member])
51,437 
 
 
 
 
 
foreign currency translation adjustment (Correction of an error [Member])
19,547 
 
 
 
 
 
interest rate and other derivatives, net of income tax expense/benefit of $1707, $149 and $562 respectively in 2009, 2010 and 2011
4,226 
 
 
 
 
4,226 
minimum pension liability adjustment, net of tax
(51,092)
 
 
 
 
(51,092)
Comprehensive income
99,834 
 
 
 
 
 
Change in pension measurement date, net of income tax benefit of $590
(1,428)
 
 
 
 
(1,428)
Acquisitions and noncontrolling interests and other
82 
 
 
 
82 
 
Dividends paid
(87,957)
 
 
(87,957)
 
 
Treasury shared acquired
(3,145)
 
(3,145)
 
 
 
Treasury shared acquired, Shares
 
(100)
100 
 
 
 
Stock options exercised
2,015 
1,749 
266 
 
 
 
Stock options exercised, Shares
141 
133 
(133)
 
 
 
Tax benefit of stock options
575 
575 
 
 
 
 
Long-term incentive shares issued
8,267 
7,734 
533 
 
 
 
Long-term incentive shares issued, Shares
 
260 
(260)
 
 
 
Ending Balance at Oct. 31, 2009 (As Previously Reported [Member])
1,355,432 
 
 
 
 
 
Ending Balance (Correction of an error [Member])
19,547 
 
 
 
 
 
Ending Balance at Oct. 31, 2009
1,087,045 
96,504 
(115,277)
1,206,614 
6,997 
(107,793)
Ending Balance, Shares at Oct. 31, 2009
 
46,937 
29,905 
 
 
 
Net income
215,457 
 
 
209,985 
5,472 
 
Other comprehensive income (loss):
 
 
 
 
 
 
foreign currency translation adjustment
26,760 
 
 
 
 
26,760 
interest rate and other derivatives, net of income tax expense/benefit of $1707, $149 and $562 respectively in 2009, 2010 and 2011
370 
 
 
 
 
370 
minimum pension liability adjustment, net of tax
3,020 
 
 
 
 
3,020 
Comprehensive income
245,607 
 
 
 
 
 
Acquisitions and noncontrolling interests and other
88,919 
 
 
 
88,919 
 
Dividends paid
(93,122)
 
 
(93,122)
 
 
Treasury shared acquired
(2,696)
 
(2,696)
 
 
 
Treasury shared acquired, Shares
 
(50)
50 
 
 
 
Stock options exercised
2,002 
1,729 
273 
 
 
 
Stock options exercised, Shares
133 
133 
(133)
 
 
 
Tax benefit of stock options
17 
17 
 
 
 
 
Long-term incentive shares issued
8,113 
7,807 
306 
 
 
 
Long-term incentive shares issued, Shares
 
149 
(149)
 
 
 
Ending Balance at Oct. 31, 2010 (As Previously Reported [Member])
1,355,432 
 
 
 
 
 
Ending Balance (Correction of an error [Member])
(19,547)
 
 
 
 
 
Ending Balance at Oct. 31, 2010
1,335,885 
106,057 
(117,394)
1,323,477 
101,388 
(77,643)
Ending Balance, Shares at Oct. 31, 2010
 
47,169 
29,673 
 
 
 
Net income
177,174 
 
 
176,040 
1,134 
 
Other comprehensive income (loss):
 
 
 
 
 
 
foreign currency translation adjustment
(32,170)
 
 
 
14,572 
(46,742)
interest rate and other derivatives, net of income tax expense/benefit of $1707, $149 and $562 respectively in 2009, 2010 and 2011
1,384 
 
 
 
 
1,384 
minimum pension liability adjustment, net of tax
(25,150)
 
 
 
 
(25,150)
Comprehensive income
121,238 
 
 
 
 
 
Acquisitions and noncontrolling interests and other
39,728 
 
 
 
39,728 
 
Dividends paid
(97,817)
 
 
(97,817)
 
 
Treasury shared acquired
(15,062)
 
(15,062)
 
 
 
Treasury shared acquired, Shares
 
(300)
300 
 
 
 
Stock options exercised
2,540 
2,196 
344 
 
 
 
Stock options exercised, Shares
167 
168 
(168)
 
 
 
Restricted stock directors
719 
697 
22 
 
 
 
Restricted stock directors, Shares
 
11 
(11)
 
 
 
Restricted stock executives
318 
308 
10 
 
 
 
Restricted stock executives, Shares
 
(5)
 
 
 
Tax benefit of stock options
2,192 
2,192 
 
 
 
 
Long-term incentive shares issued
2,432 
2,349 
83 
 
 
 
Long-term incentive shares issued, Shares
 
40 
(40)
 
 
 
Ending Balance at Oct. 31, 2011 (As Previously Reported [Member])
1,355,432 
 
 
 
 
 
Ending Balance (Correction of an error [Member])
19,547 
 
 
 
 
 
Ending Balance at Oct. 31, 2011
$ 1,392,173 
$ 113,799 
$ (131,997)
$ 1,401,700 
$ 156,822 
$ (148,151)
Ending Balance, Shares at Oct. 31, 2011
 
47,093 
29,749 
 
 
 
Consolidated Statements of Changes in Shareholders' Equity (Parenthetical) (USD $)
In Thousands
12 Months Ended
Oct. 31,
2011
2010
2009
Other comprehensive income (loss):
 
 
 
Income tax expense/benefit, interest rate and other derivative
$ 562 
$ 149 
$ 1,707 
Income tax expense/benefit, minimum pension liability adjustment
9,652 
1,279 
28,580 
Income tax benefit, change in pension measurement date
 
 
590 
Accumulated Other Comprehensive Income (Loss)
 
 
 
Other comprehensive income (loss):
 
 
 
Income tax expense/benefit, interest rate and other derivative
562 
149 
1,707 
Income tax expense/benefit, minimum pension liability adjustment
9,652 
1,279 
28,580 
Income tax benefit, change in pension measurement date
 
 
$ 590 
Basis of Presentation and Summary of Significant Accounting Policies
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Business

Greif, Inc. and its subsidiaries (collectively, “Greif,” “our,” or the “Company”) principally manufacture industrial packaging products, complemented with a variety of value-added services, including blending, packaging, reconditioning, logistics and warehousing, flexible intermediate bulk containers and containerboard and corrugated products, that they sell to customers in many industries throughout the world. The Company has operations in over 55 countries. In addition, the Company owns timber properties in the southeastern United States, which are actively harvested and regenerated, and also owns timber properties in Canada.

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, food products, petroleum products, pharmaceuticals and metal products, and must make spot deliveries on a day-to-day basis as its products are required by its customers, the Company does not operate on a backlog to any significant extent and maintains only limited levels of finished goods. Many customers place their orders weekly for delivery during the same week.

The Company’s raw materials are principally steel, resin, containerboard, old corrugated containers for recycling and pulpwood.

There are approximately 15,660 employees of the Company as of October 31, 2011.

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 managed by the Company including the joint venture relating to the Flexible Products & Services segment and equity earnings (losses) of unconsolidated affiliates. All intercompany transactions and balances have been eliminated in consolidation. Investments in unconsolidated affiliates are accounted for using the equity method.

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 2011, 2010 or 2009, or to any quarter of those years, relates to the fiscal year ending in that year.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 allowance for doubtful accounts, inventory reserves, expected useful lives assigned to properties, plants and equipment, goodwill and other intangible assets, restructuring reserves, environmental liabilities, pension and postretirement benefits, income taxes, derivatives, net assets held for sale, self-insurance reserves 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 $115.0 million as of October 31, 2011. 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, we 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 $13.8 million and $13.3 million as of October 31, 2011 and 2010, 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 major banks throughout the world and invests in high quality short-term liquid instruments. Such investments are made only in instruments issued or enhanced by high quality institutions. These investments mature within three months and the Company has not incurred any related losses.

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 Reserves

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 Company also evaluates reserves for losses under firm purchase commitments for goods or inventories.

Net Assets Held for Sale

Net assets held for sale represent land, buildings and land improvements 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, 2011, there were seven locations held for sale in the Rigid Industrial Packaging & Services segment. In 2011, the Company recorded net sales of $0.2 million and net loss before taxes of $14.9 million associated with these properties, primarily related to the Rigid Industrial Packaging & Services segment. For 2010, the Company recorded net sales of $91.2 million and net loss before taxes of $1.3 million associated with these properties, primarily related to the Rigid Industrial Packaging & Services segment. The effect of suspending depreciation on the facilities held for sale is immaterial to the results of operations. The properties classified within net assets held for sale have been listed for sale and it is the Company’s intention to complete these sales within the upcoming year.

Goodwill and Other 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. Intangible assets with finite lives, primarily customer relationships, patents and trademarks, continue to be amortized over their useful lives on a straight-line basis. The Company tests for impairment during the fourth quarter of each fiscal year, or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist.

ASC 350 requires that testing for goodwill impairment be 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.

The Company’s determination of estimated fair value of the reporting units is based on a discounted cash flow analysis utilizing earnings before interest, taxes, depreciation, depletion and amortization (“EBITDA”). The discount rates used for impairment testing are based on the Company’s weighted average cost of capital. The use of alternative estimates, peer groups or changes in the industry, or adjusting the discount rate, or EBITDA forecasts 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. The Company performed its annual impairment test in fiscal 2011, 2010 and 2009, which resulted in no impairment charges. Refer to Note 6 for additional information regarding goodwill and other intangible assets.

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 as of the date of acquisition.

Beginning November 1, 2009, 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). 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.

 

Properties, Plants and Equipment

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 $122.7 million, $98.5 million and $88.6 million, in 2011, 2010 and 2009, 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.

For 2011, the Company recorded a gain of $14.9 million, primarily consisting of $3.2 million gain on the sale of specific Rigid Industrial Packaging & Services segment assets, $0.9 million gain on the sale of a Paper Packaging segment property, $11.4 million in net gains from the sale of surplus and higher and better use (“HBU”) timber properties and other miscellaneous losses of $0.6 million. The Company also recognized an impairment loss on machinery in our Rigid Industrial Packaging and Services segment of $1.3 million as well as several smaller impairment charges of $0.2 million.

The Company capitalizes interest on long-term fixed asset projects using a rate that approximates the weighted average cost of borrowing. As of October 31, 2011 and 2010, the Company had capitalized interest costs of $3.8 million and $5.3 million, respectively.

The Company owns timber properties in the southeastern United States and in Canada. With respect to the Company’s United States timber properties, which consisted of approximately 267,750 acres as of October 31, 2011, depletion expense on timber properties is computed on the basis of cost and the estimated recoverable timber. Depletion expense was $2.7 million, $2.6 million and $2.9 million in 2011, 2010 and 2009, respectively. The Company’s land costs are maintained by tract. 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, planting costs, herbaceous weed control, woody release, labor and machinery use, refrigeration rental and trucking for the seedlings. 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. These estimates are based on the current state in the growth cycle and not on quantities to be available in future years. The Company’s estimates do not include costs to be incurred in the future. The Company then projects these volumes to the end of the year. 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. These acquisition volumes and costs acquired during the year are added to the totals for each product class within the appropriate depletion block(s). The total of the beginning, one-year growth and acquisition volumes are divided by the total undepleted historical cost to arrive at a depletion rate, which is then used for the current year. As timber is sold, the Company multiplies the volumes sold by the depletion rate for the current year to arrive at the depletion cost.

The Company’s Canadian timber properties, which consisted of approximately 14,700 acres as of October 31, 2011, are not actively managed at this time, and therefore, no depletion expense is recorded.

 

Equity Earnings (Losses) of Unconsolidated Affiliates, net of tax and Noncontrolling Interests including Variable Interest Entities

The Company accounts for equity earnings (losses) of unconsolidated affiliates, net of tax and noncontrolling interests under ASC 810, “Consolidation.” ASC 810 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. ASC 810 also changes the way the consolidated financial statements are presented, establishes a single method of accounting for changes in a parent’s ownership interest in a subsidiary that do not result in deconsolidation, requires that a parent recognize a gain or loss in net income when a subsidiary is deconsolidated and expands disclosures in the consolidated financial statements that clearly identify and distinguish between the parent’s ownership interest and the interest of the noncontrolling owners of a subsidiary. Refer to Note 16 for additional information regarding the Company’s unconsolidated affiliates and noncontrolling interests.

ASC 810 also provides a framework for identifying variable interest entities (“VIE’s”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of operations of a VIE in its consolidated financial statements. In general, a VIE is a corporation, partnership, limited liability company, trust or any other legal structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support, (2) has a group of equity owners that are unable to make significant decisions about its activities or (3) has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations. ASC 810 requires a VIE to be consolidated if a party with an ownership, contractual or other financial interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a majority of the VIE’s losses), or both. One of the companies acquired in 2011 is considered a VIE. However, because the Company is not the primary beneficiary, the Company will report its ownership interest in this acquired company using the equity method of accounting.

On September 29, 2010, Greif, Inc. and its indirect subsidiary Greif International Holding Supra C.V. (“Greif Supra”), a Netherlands limited partnership, completed a Joint Venture Agreement with Dabbagh Group Holding Company Limited (“Dabbagh”), a Saudi Arabia corporation and National Scientific Company Limited (“NSC”), a Saudi Arabia limited liability company and a subsidiary of Dabbagh, referred to herein as the Flexible Packaging JV. The joint venture owns the operations in the Flexible Products & Services segment, with the exception of the North American multi-wall bag business. Greif Supra and NSC have equal economic interests in the joint venture, notwithstanding the actual ownership interests in the various legal entities. All investments, loans and capital injections are shared 50 percent by Greif and the Dabbagh entities. Greif has deemed this joint venture to be a VIE based on the criteria outlined in ASC 810. Greif exercises management control over this joint venture and is the primary beneficiary due to supply agreements and broader packaging industry customer risks and rewards. Therefore, Greif has fully consolidated the operations of this joint venture as of the formation date of September 29, 2010 and has reported Dabbagh’s share in the profits and losses in this joint venture as from this date on the Company’s income statement under net income attributable to noncontrolling interests.

The Company has consolidated the assets and liabilities of STA Timber LLC (“STA Timber”) in accordance with ASC 810 which was involved in the transactions described in Note 8. Because STA Timber is a separate and distinct legal entity from Greif, Inc. and its other subsidiaries, the assets of STA Timber are not available to satisfy the liabilities and obligations of these entities and the liabilities of STA Timber are not liabilities or obligations of these entities. The Company has also consolidated the assets and liabilities of the buyer-sponsored purpose entity described in Note 8 (the “Buyer SPE”) involved in that transaction as a result of ASC 810. However, because the Buyer SPE is a separate and distinct legal entity from Greif, Inc. and its other subsidiaries, the assets of the Buyer SPE are not available to satisfy the liabilities and obligations of the Company, and the liabilities of the Buyer SPE are not liabilities or obligations of the Company.

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 adverse effect on the Company’s financial position or results of operations.

Environmental Cleanup Costs

The Company accounts for environmental clean up costs in accordance with ASC 450. The Company expenses environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernable. Expenditures that extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The 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 $2.9 million and $2.6 million for estimated costs related to outstanding claims as of October 31, 2011 and 2010, 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. This lag period assumption has been consistently applied for the periods presented. If the lag period was hypothetically adjusted by a period equal to a half month, the impact on earnings would be approximately $0.7 million. However, 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. Deductible liabilities are insured through the Company’s captive insurance subsidiary, which had recorded liabilities totaling $15.3 million and $15.6 million for anticipated costs related to general liability, product, auto and workers’ compensation as of October 31, 2011 and 2010, 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 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 where expected future taxable income does not support the realization of the deferred tax assets.

The Company’s effective tax rate is based on income, 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 position 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 that it considers appropriate 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.

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 and duplicate payroll costs during transition periods. 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 accelerated depreciation, equipment relocation costs, project consulting fees and costs associated with restructuring the Company’s delivery of information technology infrastructure services. 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 Service 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. 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 accounts receivable. 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 options were granted in 2011, 2010, or 2009. For any options granted in the future, compensation expense will be based on the grant date fair value estimated in accordance with the standard. During 2011 an officer of the Company received a restricted stock award as part of the terms of his initial employment arrangement. There was no share-based compensation expense recognized under the standard for 2010 or 2009.

The Company uses the straight-line single option method of expensing stock options to recognize compensation expense in its consolidated statements of income for all share-based awards. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.

Revenue Recognition

The Company recognizes revenue when title passes 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 and special use property 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 surplus and HBU property in our consolidated statements of income under “gain on disposals of properties, plants and equipment, net” and reports the sale of development property under “net sales” and “cost of products sold.” 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 translation and remeasurement 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 year-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). The transaction gains and losses are credited or charged to income. The amounts included in other expense, net related to transaction gains and (losses), net of tax were ($4.7) million, $0.1 million and ($0.1) million in 2011, 2010 and 2009, 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 uses interest rate swap agreements for cash flow hedging purposes. For derivative instruments that hedge the exposure of variability in interest rates, 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.

Interest rate swap agreements that hedge against variability in interest rates effectively convert a portion of floating rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. The Company uses the “variable cash flow 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 comprehensive income (loss).

The Company uses derivative instruments to hedge a portion of its natural gas. These derivatives are designated as cash flow hedges. The effective portion of the net gain or loss is 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, is adjusted to market value and 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 future adjustments to the contract’s fair value would be recognized in earnings immediately. 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. For derivative instruments, the Company uses interest rates, LIBOR curves, commodity rates, and foreign currency futures when assessing fair value.

 

   

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.

 

Newly Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) amended ASC 860, “Transfers and Servicing.” The amendment to ASC 860 requires an enterprise to evaluate whether the transaction is legally isolated from the Company and whether the results of the transaction are consolidated within the consolidated financial statements. The Company adopted the new guidance beginning November 1, 2010, and the adoption of the new guidance did not impact the Company’s financial position, results of operations or cash flows, other than the related disclosures.

In June 2009, the FASB amended ASC 810, “Consolidation.” The amendment to ASC 810 changed the methodology for determining the primary beneficiary of a variable interest entity (“VIE”) from a quantitative risk and rewards based model to a qualitative determination. It also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a VIE. Accordingly, the Company reevaluated its previous ASC 810 conclusions, including (1) whether an entity is a VIE, (2) whether the enterprise is the VIE’s primary beneficiary, and (3) what type of financial statement disclosures are required. The Company adopted the new guidance beginning November 1, 2010, and the adoption of the new guidance did not impact the Company’s financial position, results of operations or cash flows, other than the related disclosures.

Recently Issued Accounting Standards

Effective July 1, 2009, changes to the ASC are communicated through an Accounting Standards Update (“ASU”). As of October 31, 2011, the FASB has issued ASU’s 2009-01 through 2011-09. The Company reviewed each ASU and determined that they will not have a material impact on the Company’s financial position, results of operations or cash flows, other than related disclosures.

In December 2010, the FASB issued ASU 2010-29 “Business Combinations: Disclosure of supplementary pro forma information for business combinations.” The amendment to ASC 805 “Business Combinations” requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as through the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. The Company will adopt the new guidance beginning November 1, 2011, and the adoption of the new guidance will not impact the Company’s financial position, results of operations or cash flows, other than the related disclosures.

In June 2011, the FASB issued ASU 2011-05 “Comprehensive Income: Presentation of comprehensive income.” The amendment to ASC 220 “Comprehensive Income” requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present total other comprehensive income, the components of other comprehensive income, and the total of comprehensive income. The Company will adopt the new guidance beginning November 1, 2011, and the adoption of the new guidance will not impact the Company’s financial position, results of operations or cash flows, other than the related disclosures.

Acquisitions and Other Significant Transactions
ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

NOTE 2—ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

The following table summarizes the Company’s acquisition activity in 2011 and 2010 (Dollars in thousands).

                                                         
Segment   # of
Acquisitions
    Purchase Price,
net of Cash
    Revenue     Operating
Profit
    Tangible
Assets, net
    Intangible
Assets
    Goodwill  

Total 2011 Acquisitions

    8     $ 344,914     $ 122,470     $ 6,083     $ 119,745     $ 76,083     $ 287,885  
               

Total 2010 Acquisitions

    12     $ 176,156     $ 268,443     $ 19,042     $ 109,038     $ 49,601     $ 129,500  

 

Note: Purchase price, net of cash acquired, does not factor payments for earn-out provisions on prior acquisitions. Revenue and operating profit represent activity only in the year of acquisition. Goodwill in 2010 excludes an immaterial acquisition in our Land Management segment.

 

During 2011, the Company completed eight acquisitions, all in the Rigid Industrial Packaging and Services segment: four European companies acquired in February, May, July and August; two joint ventures entered into in February and August in North America and Asia Pacific, respectively; the acquisition of the remaining outstanding minority shares from a 2008 acquisition in South America; and the acquisition of additional shares of a company in North America that was a consolidated subsidiary as of October 31, 2011.

The rigid industrial packaging acquisitions are expected to complement the Company’s existing product lines that together will provide growth opportunities and economies of scale. The estimated fair value of the net tangible assets acquired was $119.7 million. This does not include any liabilities for deferred purchase payments. Identifiable intangible assets, with a combined fair value of $76.1 million, including trade names, customer relationships and certain non-compete agreements, have been recorded for these acquisitions. The excess of the purchase prices over the estimated fair values of the net tangible and intangible assets acquired of $287.9 million was recorded as goodwill.

During 2011 there were no divestitures.

During 2010, the Company completed twelve acquisitions consisting of seven rigid industrial packaging companies and five flexible products companies and made a contingent purchase price related to a 2007 acquisition. The seven rigid industrial packaging companies consisted of a European company purchased in November 2009, an Asian company purchased in June 2010, a North American drum reconditioning company purchased in July, a North American drum reconditioning company purchased in August 2010, one European company purchased in August 2010, a 51 percent interest in a Middle Eastern company purchased in September 2010 and a South American company purchased in September 2010. The five flexible products companies acquired conduct business throughout Europe, Asia and North America and were acquired in February, June, August and September 2010. The aggregate purchase price in the table above includes approximately $98.2 million received from the Flexible Packaging JV partner relating to their investment in the Flexible Packaging JV and reimbursement of certain costs. The five flexible products companies were contributed to a joint venture on September 29, 2010 which was accounted for in accordance with ASC 810. Greif owns 50 percent of this joint venture but maintains management control. The rigid industrial packaging acquisitions are expected to complement the Company’s existing product lines that together will provide growth opportunities and economies of scale. The drum reconditioning, within our rigid industrial packaging acquisitions, and flexible products acquisitions expand the Company’s product and service offerings. The estimated fair value of the net tangible assets acquired was $109.0 million. Identifiable intangible assets, with a combined fair value of $49.6 million, including trade-names, customer relationships, and certain non-compete agreements, have been recorded for these acquisitions. The excess of the purchase prices over the estimated fair values of the net tangible and intangible assets acquired of $129.5 million was recorded as goodwill. Certain business combinations that occurred at or near year end have been recorded with provisional estimates for fair value based on management’s best estimate.

During 2010, we sold specific Paper Packaging segment assets and facilities in North America. The net gain from these sales was immaterial.

The Company’s 2011 and 2010 acquisitions were made to obtain technologies, patents, equipment, customer lists and access to markets. All of the 2011 and 2010 acquisitions were of companies not listed on a stock exchange or not otherwise publicly traded or not required to provide public financial information. Pro-forma results of operations for the years ended October 31, 2011 and October 31, 2010 were not materially different from reported results and, consequently, are not presented.

Sale of Non-United States Accounts Receivable
SALE OF NON-UNITED STATES ACCOUNTS RECEIVABLE

NOTE 3—SALE OF NON-UNITED STATES ACCOUNTS RECEIVABLE

Pursuant to the terms of a Receivable Purchase Agreement (the “RPA”) between Greif Coordination Center BVBA, an indirect wholly-owned subsidiary of Greif, Inc., and a major international bank, the seller agreed to sell trade receivables meeting certain eligibility requirements that seller had purchased from other indirect wholly-owned subsidiaries of Greif, Inc., including Greif Belgium BVBA, Greif Germany GmbH, Greif Nederland BV, Greif Packaging Belgium NV, Greif Spain SA, Greif Sweden AB, Greif Packaging Norway AS, Greif Packaging France, SAS, Greif Packaging Spain SA, Greif Portugal Lda and Greif UK Ltd, under discounted receivables purchase agreements and from Greif France SAS under a factoring agreement. This agreement is amended from time to time to add additional Greif entities. In addition, Greif Italia S.P.A., also an indirect wholly-owned subsidiary of Greif, Inc., entered into the Italian Receivables Purchase Agreement with the Italian branch of the major international bank (the “Italian RPA”) agreeing to sell trade receivables that meet certain eligibility criteria to the Italian branch of the major international bank. The Italian RPA is similar in structure and terms as the RPA. The maximum amount of receivables that may be financed under the RPA and the Italian RPA is €115 million ($162.7 million) as of October 31, 2011.

In October 2007, Greif Singapore Pte. Ltd., an indirect wholly-owned subsidiary of Greif, Inc., entered into the Singapore Receivable Purchase Agreement (the “Singapore RPA”) with a major international bank. The maximum amount of aggregate receivables that may be sold under the Singapore RPA is 15.0 million Singapore Dollars ($12.0 million) as of October 31, 2011.

In October 2008, Greif Embalagens Industrialis Do Brasil Ltda., an indirect wholly-owned subsidiary of Greif, Inc., entered into agreements (the “Brazil Agreements”) with Brazilian banks. As of October 31, 2011, there were no more sales of trade receivables under this agreement.

In May 2009, Greif Malaysia Sdn Bhd., an indirect wholly-owned Malaysian subsidiary of Greif, Inc., entered into the Malaysian Receivables Purchase Agreement (the “Malaysian Agreement”) with Malaysian banks. The maximum amount of the aggregate receivables that may be sold under the Malaysian Agreement is 15.0 million Malaysian Ringgits ($4.8 million) as of October 31, 2011.

The structure of the transactions provide for a legal true sale, on a revolving basis, of the receivables transferred from the various Greif, Inc. subsidiaries to the respective banks. The bank funds an initial purchase price of a certain percentage of eligible receivables based on a formula with the initial purchase price approximating 75 percent to 90 percent of eligible receivables. The remaining deferred purchase price is settled upon collection of the receivables. At the balance sheet reporting dates, the Company removes from accounts receivable the amount of proceeds received from the initial purchase price since they meet the applicable criteria of ASC 860, “Transfers and Servicing”, and continues to recognize the deferred purchase price in its accounts receivable. 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.

As of October 31, 2011 and October 31, 2010, €105.4 million ($149.2 million) and €117.6 million ($162.9 million), respectively, of accounts receivable were sold under the RPA and Italian RPA.

As of October 31, 2011 and October 31, 2010, 12.2 million Singapore Dollars ($9.8 million) and 6.7 million Singapore Dollars ($5.4 million), respectively, of accounts receivable were sold under the Singapore RPA.

As of October 31, 2011 there were no accounts receivable sold and, 11.7 million Brazilian Reais ($6.9 million) of accounts receivable were sold under the Brazil Agreements as of October 31, 2010.

As of October 31, 2011 and October 31, 2010, 12.6 million Malaysian Ringgits ($4.1million) and 6.3 million Malaysian Ringgits ($2.0 million), respectively, of accounts receivable were sold under the Malaysian Agreement.

Expenses associated with the RPA and Italian RPA totaled €3.1 million ($4.3 million), €2.9 million ($3.9 million) and €3.7 million ($5.5 million) for the year ended October 31, 2011, 2010 and 2009, respectively.

Expenses associated with the Singapore RPA totaled 0.4 million Singapore Dollars ($0.3 million), 0.4 million Singapore Dollars ($0.3 million) and 0.3 million Singapore Dollars ($0.2 million) for the year ended October 31, 2011, 2010 and 2009, respectively.

Expenses associated with the Brazil Agreements totaled 2.8 million Brazilian Reais ($1.7 million), 4.4 million Brazilian Reais ($2.5 million) and 1.3 million Brazilian Reais ($0.8 million) for the year ended October 31, 2011, 2010 and 2009, respectively.

Expenses associated with the Malaysian Agreement totaled 0.7 million Malaysian Ringgits ($0.2 million), 0.4 million Malaysian Ringgits ($0.1 million) and 0.2 million Malaysian Ringgits ($0.1 million) for the year ended October 31, 2011, 2010 and 2009, respectively.

 

Additionally, the Company performs collections and administrative functions on the receivables sold similar to the procedures it uses for collecting all of its receivables, including receivables that are not sold under the RPA, the Italian RPA, the Singapore RPA, the Brazil Agreements, and the Malaysian Agreement. The servicing liability for these receivables is not material to the consolidated financial statements.

Inventories
INVENTORIES

NOTE 4—INVENTORIES

The inventories are comprised as follows as of October 31 for each year (Dollars in thousands):

                 
     2011     2010  

Finished goods

  $ 105,461     $ 92,469  
     

Raw materials and work-in process

    327,057       304,103  
   

 

 

 
     
    $ 432,518     $ 396,572  
   

 

 

 
Net Assets Held for Sale
NET ASSETS HELD FOR SALE

NOTE 5—NET ASSETS HELD FOR SALE

As of October 31, 2011 there were seven locations in the Rigid Industrial Packaging & Services segment with assets held for sale. During 2011, the Company sold seven locations, added four locations and placed six locations back in service for purposes of GAAP and resumed depreciation. As a result of placing six locations back in service in 2011, the 2010 consolidated balance sheet has been reclassified for such locations to conform to the current year presentation. The net assets held for sale are being marketed for sale and it is the Company’s intention to complete the facility sales within the upcoming year. In 2011, there were sales in the Rigid Industrial Packaging & Services segment which resulted in a $3.2 million gain, sales in the Paper Packaging segment which resulted in a $0.9 million gain, sales in the Land Management segment of HBU and surplus properties which resulted in a $11.4 million gain and sales of other miscellaneous equipment which resulted in a $0.6 million loss.

Goodwill and Other Intangible Assets
GOODWILL AND OTHER INTANGIBLE ASSETS

NOTE 6—GOODWILL AND OTHER INTANGIBLE ASSETS

The Company reviews goodwill and indefinite-lived intangible assets for impairment as required by ASC 350, “Intangibles—Goodwill and Other”, either annually or when events and circumstances indicate an impairment may have occurred. The Company’s business segments have been identified as reporting units, which contain goodwill and indefinite-lived intangibles that are assessed for impairment. 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. However, components are aggregated as a single reporting unit if they have similar economic characteristics. The Company has concluded that no impairment exists at this time. The following table summarizes the changes in the carrying amount of goodwill by segment for the year ended October 31, 2011 and 2010 (Dollars in thousands):

                                         
    

Rigid Industrial

Packaging

& Services

    Flexible Products
& Services
   

Paper

Packaging

   

Land

Management

    Total  

Balance at October 31, 2009

  $ 530,717     $     $ 61,400     $     $ 592,117  
           

Goodwill acquired

    51,655       75,656             150       127,461  
           

Goodwill adjustments

    (6,316           (747           (7,063
           

Currency translation

    (5,395     2,605                   (2,790
   

 

 

 
           

Balance at October 31, 2010

  $ 570,661     $ 78,261     $ 60,653     $ 150     $ 709,725  
           

Goodwill acquired

    287,885                         287,885  
           

Goodwill adjustments

    9,807       (1,779     (997           7,031  
           

Currency translation

    (1,432     1,666                   234  
   

 

 

 
           

Balance at October 31, 2011

  $ 866,921     $ 78,148     $ 59,656     $ 150     $ 1,004,875  
   

 

 

 

 

The goodwill acquired during 2011 of $287.9 million consisted of preliminary goodwill related to acquisitions in the Rigid Industrial Packaging & Services segment. Goodwill from prior year acquisitions has been adjusted to properly reflect tax valuation allowances in our Rigid Industrial Packaging & Services.

The goodwill adjustments during 2011 increased goodwill by a net amount of $7.0 million related to the finalization of purchase price allocation of prior year acquisitions. Certain business combinations that occurred at or near year end were recorded with provisional estimates for fair value based on management’s best estimate.

The goodwill acquired during 2010 of $127.5 million consisted of preliminary goodwill related to acquisitions in the Rigid Industrial Packaging & Services and Flexible Products & Services segments. Goodwill from prior year acquisitions has been adjusted to properly reflect tax valuation allowances in our Rigid Industrial Packaging & Services.

The details of other intangible assets by class as of October 31, 2011 and October 31, 2010 are as follows (Dollars in thousands):

                         
     Gross     Accum     Net  

2011

                       
       

Trademarks and patents

    47,419       17,422       29,997  
       

Non-compete agreements

    22,743       8,953       13,790  
       

Customer Relationships

    183,015       22,449       160,566  
       

Other

    33,132       7,695       25,437  
   

 

 

 
       
      286,309       56,519       229,790  
   

 

 

 
       
     Gross     Accum     Net  

2010

                       
       

Trademarks and patents

    41,040       15,346       25,694  
       

Non-compete agreements

    20,456       7,774       12,682  
       

Customer Relationships

    146,568       20,528       126,040  
       

Other

    14,582       5,759       8,823  
   

 

 

 
       
      222,647       49,408       173,239  
   

 

 

 

Gross intangible assets increased by $63.7 million for the year ended October 31, 2011. The increase in gross intangible assets consisted of $0.3 million in final purchase price allocations related to the 2010 acquisitions in the Flexible Products & Services segment and $63.4 million in purchase price allocations substantially related to 2011 acquisitions in the Rigid Industrial Packaging & Services and other miscellaneous items. As a result of impairment in certain intangible assets in the Flexible Products & Services segment in 2011, the 2010 consolidated balance sheet has been reclassified for such locations to conform to the current year presentation. Amortization expense was $18.6 million, $14.4 million and $11.0 million for 2011, 2010 and 2009, respectively. Amortization expense for the next five years is expected to be $26.3 million in 2012, $24.1 million in 2013, $23.2 million in 2014, $22.1 million in 2015 and $21.4 million in 2016.

All intangible assets for the periods presented are subject to amortization and are being amortized using the straight-line method over periods that range from three to 15 years for trade names, two to ten years for non-competes, one to 23 for customer relationships and four to 20 for other intangibles, except for $17.5 million related to the Tri-Sure trademark and the trade names related to Blagden Express, Closed-loop, Box Board, and Fustiplast, all of which have indefinite lives.

 

Restructuring Charges
RESTRUCTURING CHARGES

NOTE 7—RESTRUCTURING CHARGES

The following is a reconciliation of the beginning and ending restructuring reserve balances for the years ended October 31, 2011, 2010 and 2009 (Dollars in thousands):

                                         
    Cash Charges     Non-cash Charges        
     Employee
Separation
Costs
    Other costs     Asset
Impairments
    Inventory
Write-down
    Total  

Balance at October 31, 2009

  $ 9,239     $ 6,076     $     $     $ 15,315  
           

Costs incurred and charged to expense

    13,744       10,086       2,916       131       26,877  
           

Costs paid or otherwise settled

    (10,315     (8,592     (2,916     (131     (21,954
   

 

 

   

 

 

   

 

 

 
           

Balance at October 31, 2010

  $ 12,668     $ 7,570     $     $     $ 20,238  
   

 

 

   

 

 

   

 

 

 
           

Costs incurred and charged to expense

    13,360       12,662       4,474             30,496  
           

Costs paid or otherwise settled

    (14,213     (12,617     (4,297           (31,127
   

 

 

   

 

 

   

 

 

 
           

Balance at October 31, 2011

  $ 11,815     $ 7,615     $ 177     $     $ 19,607  
   

 

 

   

 

 

   

 

 

 

The focus for restructuring activities in 2011 was on integration of recent acquisitions in the Rigid Industrial Packaging & Services and Flexible Products & Services segments as well as the implementation of certain cost-cutting measures. During 2011, the Company recorded restructuring charges of $30.5 million, consisting of $13.3 million in employee separation costs, $4.5 million in asset impairments and $12.7 million in other restructuring costs, primarily consisting of lease termination costs ($3.5 million), professional fees ($1.9 million), relocation costs ($2.2 million) and other costs ($5.1 million). Two plants in the Rigid Industrial Packaging & Services segment were closed. There were a total of 257 employees severed throughout 2011 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 which are anticipated to be realized in 2012 or plans that are being formulated and have not been announced as of the date of this From 10-K (Dollars in thousands):

                         
     Amounts
expected to be
incurred
    Amounts
Incurred in
2011
    Amounts
remaining
to be
incurred
 

Rigid Industrial Packaging & Services:

                       
       

Employee separation costs

  $ 11,874     $ 9,538     $ 2,336  
       

Asset impairments

    4,395       4,395        
       

Other restructuring costs

    17,868       10,121       7,747  
   

 

 

 
       
      34,137       24,054       10,083  
       

Flexible Products & Services:

                       
       

Employee separation costs

    4,872       4,513       359  
       

Asset impairments

    44       44        
       

Other restructuring costs

    2,342       2,342        
   

 

 

 
       
      7,258       6,899       359  
       

Paper Packaging:

                       
       

Employee separation costs

          (685      
       

Asset impairments

    35       35        
       

Other restructuring costs

    199       199        
   

 

 

 
       
      234       (451      
       

Land Management:

                       
       

Employee separation costs

          (6      
   

 

 

 
       
    $ 41,629     $ 30,496     $ 10,442  
   

 

 

 

 

The gain recognized within the Paper Packaging segment reflects actual expenditures being less than originally estimated for completed restructuring activities.

The focus for restructuring activities in 2010 was on integration of recent acquisitions in the Rigid Industrial Packaging & Services and Flexible Products & Services segments. During 2010, the Company recorded restructuring charges of $26.7 million, consisting of $13.7 million in employee separation costs, $2.9 million in asset impairments, $2.4 million in professional fees and $7.7 million in other restructuring costs, primarily consisting of facility consolidation and lease termination costs. In addition, the Company recorded $0.1 million in restructuring-related inventory charges in cost of products sold. Seven plants in the Rigid Industrial Packaging & Services segment, one plant in the Flexible Products & Services segment and two plants in the Paper Packaging segment were closed. There were a total of 232 employees severed throughout 2010 as part of the Company’s restructuring efforts.

The focus for restructuring activities in 2009 was on business realignment to address the adverse impact resulting from the global economic downturn and further implementation of the Greif Business System and specific contingency actions. During 2009, the Company recorded restructuring charges of $66.6 million, consisting of $28.4 million in employee separation costs, $19.6 million in asset impairments, $0.3 million in professional fees, and $18.3 million in other restructuring costs, primarily consisting of facility consolidation and lease termination costs. In addition, the Company recorded $10.8 million in restructuring-related inventory charges in costs of products sold. Nineteen plants in the Rigid Industrial Packaging & Services segment were closed. There were a total of 1,294 employees severed throughout 2009 as part of the Company’s restructuring efforts. Within the Paper Packaging segment, the Company recorded a reversal of severance expense in the amount of $2.1 million related to the actual costs being less as a result of fewer employees being served in connection with the sale of assets and closure of operations.

Significant Nonstrategic Timberland Transactions and Consolidation of Variable Interest Entities
SIGNIFICANT NONSTRATEGIC TIMBERLAND TRANSACTIONS AND CONSOLIDATION OF VARIABLE INTEREST ENTITIES

NOTE 8—SIGNIFICANT NONSTRATEGIC TIMBERLAND TRANSACTIONS AND CONSOLIDATION OF VARIABLE INTEREST ENTITIES

The Company evaluates whether an entity is a 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. 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. One of the companies acquired in 2011 is considered a VIE. However, because the Company is not the primary beneficiary, the Company will report its ownership interest in this acquired company using the equity method of accounting.

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 phase of these transactions in the first quarter of 2006. In this phase, the Company sold 15,300 acres of timberland holdings in Florida for $29.3 million in cash, resulting in a pre-tax gain of $27.4 million. The final phase of this transaction, approximately 5,700 acres sold for $9.7 million in 2006 which resulted in a pre-tax gain of $9.0 million.

 

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, 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, 2011 and 2010, assets of the Buyer SPE consisted of $50.9 million of restricted bank financial instruments. For the years ended October 31, 2011 and 2010, the Buyer SPE recorded interest income of $2.4 million, respectively.

As of October 31, 2011 and 2010, STA Timber had long-term debt of $43.3 million. For the years ended October 31, 2011 and 2010, STA Timber recorded interest expense of $2.2 million, respectively. STA Timber is exposed to credit-related losses in the event of nonperformance by the issuer of the Deed of Guarantee.

Flexible Products 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 Products JV”) with Dabbagh Group Holding Company Limited and its subsidiary National Scientific Company Limited (“NSC”). The Flexible Products JV owns the operations in the Flexible Products & Services segment, with the exception of the North American multi-wall bag business. The Flexible Products JV has been consolidated into the operations of the Company as of its formation date of September 29, 2010.

The Flexible Products JV is deemed to be a VIE since the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support. The Company is the primary beneficiary because it has (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and (2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.

The economic and business purpose underlying the Flexible Products 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 Products 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 Company has 51 percent ownership in Trading Co. and 49 percent ownership in Asset Co. However, Greif Supra and NSC have equal economic interests in the Flexible Products JV, notwithstanding the actual ownership interests in the various legal entities.

All investments, loans and capital contributions are to be shared equally by Greif Supra and NSC and each partner has committed to contribute capital of up to $150 million and obtain third party financing for up to $150 million as required.

 

The following table presents the Flexible Products JV total net assets (Dollars in thousands):

                         
October 31, 2011   Asset Co.     Trading Co.     Flexible Products JV  

Total assets

  $ 192,977     $ 171,261     $ 364,238  
       

Total liabilities

    78,917       57,195       136,112  
   

 

 

 
       

Net assets

  $ 114,060     $ 114,066     $ 228,126  
   

 

 

 
       
October 31, 2010   Asset Co.     Trading Co.     Flexible Products JV  

Total assets

  $ 187,727     $ 166,956     $ 354,683  
       

Total liabilities

    79,243       65,033       144,276  
   

 

 

 
       

Net assets

  $ 108,484     $ 101,923     $ 210,407  
   

 

 

 

Net income (loss) attributable to the non controlling interest in the Flexible Products JV for the years ended October 31, 2011 and 2010 was ($5.3) million and ($1.1) million, respectively and was added to net income to arrive at net income attributable to the Company.

Long-Term Debt
LONG-TERM DEBT

NOTE 9—LONG-TERM DEBT

Long-term debt is summarized as follows (Dollars in thousands):

                 
    

October 31,

2011

   

October 31,

2010

 

Credit Agreement

  $ 355,447     $ 273,700  
     

Senior Notes due 2017

    302,853       303,396  
     

Senior Notes due 2019

    242,932       242,306  
     

Senior Notes due 2021

    280,206        
     

Trade accounts receivable credit facility

    130,000       135,000  
     

Other long-term debt

    46,200       11,187  
   

 

 

 
     
      1,357,638       965,589  
     

Less current portion

    (12,500     (12,523
   

 

 

 
     

Long-term debt

  $ 1,345,138     $ 953,066  
   

 

 

 

Credit Agreement

On October 29, 2010, the Company obtained a $1.0 billion senior secured credit facility pursuant to an Amended and Restated Credit Agreement with a syndicate of financial institutions (the “Credit Agreement”). The Credit Agreement provides for a $750 million revolving multicurrency credit facility and a $250 million term loan, both expiring October 29, 2015, with an option to add $250 million to the facilities with the agreement of the lenders. The $250 million term loan is scheduled to amortize by $3.1 million each quarter-end for the first eight quarters, $6.3 million each quarter-end for the next eleven quarters and the remaining balance due on the maturity date.

The Credit Agreement is available to fund ongoing working capital and capital expenditure needs, for general corporate purposes and to finance acquisitions. Interest is based on a Eurodollar rate or a base rate that resets periodically plus a calculated margin amount. As of October 31, 2011, $355.4 million was outstanding under the Credit Agreement. The current portion of the Credit Agreement was $12.5 million and the long-term portion was $342.9 million. The weighted average interest rate on the Credit Agreement was 2.15% for the year ended October 31, 2011. The actual interest rate on the Credit Agreement was 2.14% as of October 31, 2011.

The Credit Agreement contains financial covenants that require the Company to maintain a certain leverage ratio and a fixed charge coverage ratio. As of October 31, 2011, the Company was in compliance with these covenants.

 

Senior Notes due 2017

On February 9, 2007, the Company issued $300.0 million of 6.75% Senior Notes due February 1, 2017. Interest on these Senior Notes is payable semi-annually. Proceeds from the issuance of these Senior Notes were principally used to fund the purchase of previously outstanding 8.875% Senior Subordinated Notes in a tender offer and for general corporate purposes.

The fair value of these Senior Notes due 2017 was $317.9 million as of October 31, 2011 based upon quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains certain covenants. As of October 31, 2011, the Company was in compliance with these covenants.

Senior Notes due 2019

On July 28, 2009, the Company issued $250.0 million of 7.75% Senior Notes due August 1, 2019. Interest on these Senior Notes is payable semi-annually. Proceeds from the issuance of Senior Notes were principally used for general corporate purposes, including the repayment of amounts outstanding under the Company’s then existing revolving multicurrency credit facility, without any permanent reduction of the commitments thereunder.

The fair value of these Senior Notes due 2019 was $268.8 million at October 31, 2011 based upon quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains certain covenants. As of October 31, 2011, the Company was in compliance with these covenants.

Senior Notes due 2021

On July 15, 2011, Greif, Inc.’s wholly-owned indirect Luxembourg subsidiary, 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. A portion of the proceeds from the issuance of these Senior Notes was used to repay non-U.S. borrowings under the credit agreement, without any permanent reduction of the commitments thereunder, and the remaining proceeds are available for general corporate purposes, including the financing of acquisitions.

The fair value of these Senior Notes due 2021 was $280.2 million as of October 31, 2011, based upon quoted market prices. The Indenture pursuant to which these Senior Notes were issued contains certain covenants. As of October 31, 2011, the Company was in compliance with these covenants.

United States Trade Accounts Receivable Credit Facility

On December 8, 2008, the Company entered into a trade accounts receivable credit facility with a financial institution. This facility was amended on September 19, 2011, which decreased the amount available to the borrowers from $135.0 million to $130.0 million and extended the termination date of the commitment to September 19, 2014. The credit facility is secured by certain of the Company’s trade accounts receivable in the United States and bears interest at a variable rate based on the applicable base rate or other agreed-upon rate plus a margin amount (1.01% as of October 31, 2011). In addition, the Company can terminate the credit facility at any time upon five days prior written notice. A significant portion of the initial proceeds from this credit facility was used to pay the obligations under the previous trade accounts receivable credit facility, which was terminated. The remaining proceeds were and will be used to pay certain fees, costs and expenses incurred in connection with the credit facility and for working capital and general corporate purposes. As of October 31, 2011, there was $130.0 million outstanding under the credit facility. The agreement for this receivables financing facility contains financial covenants that require the Company to maintain the same leverage ratio and fixed charge coverage ratio as set forth in the Credit Agreement. As of October 31, 2011, the Company was in compliance with these covenants.

Greif Receivables Funding LLC (“GRF”), an indirect subsidiary of the Company, has participated in the purchase and transfer of receivables in connection with these credit facilities and is included in the Company’s consolidated financial statements. However, because GRF is a separate and distinct legal entity from the Company and its other subsidiaries, the assets of GRF are not available to satisfy the liabilities and obligations of the Company and its other subsidiaries, and the liabilities of GRF are not the liabilities or obligations of the Company and its other subsidiaries. This entity purchases and services the Company’s trade accounts receivable that are subject to this credit facility.

Other

In addition to the amounts borrowed under the Credit Agreement and proceeds from these Senior Notes and the United States Trade Accounts Receivable Credit Facility, as of October 31, 2011, the Company had outstanding other debt of $183.5 million, comprised of $46.2 million in long-term debt and $137.3 million in short-term borrowings, compared to other debt outstanding of $72.1 million, comprised of $11.2 million in long-term debt and $60.9 million in short-term borrowings, as of October 31, 2010.

As of October 31, 2011, the current portion of the Company’s long-term debt was $12.5 million. Annual maturities, including the current portion, of long-term debt under the Company’s various financing arrangements were $12.5 million in 2012, $71.2 million in 2013, $155.0 million in 2014, $292.9 million in 2015, $0.0 million in 2016 and $826.0 million thereafter. Cash paid for interest expense was $67.7 million, $65.3 million and $48.0 million in 2011, 2010 and 2009, respectively.

As of October 31, 2011 and 2010, the Company had deferred financing fees and debt issuance costs of $18.9 million and $21.4 million, respectively, which are included in other long-term assets.

Financial Instruments and Fair Value Measurements
FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

NOTE 10—FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Financial Instruments

The Company uses derivatives from time to time to partially mitigate the effect of exposure to interest rate movements, exposure to currency fluctuations, and energy cost fluctuations. Under ASC 815, “Derivatives and Hedging,” all derivatives are to be recognized as assets or liabilities on the balance sheet and measured at fair value. Changes in the fair value of derivatives are recognized in either net income or in other comprehensive income, depending on the designated purpose of the derivative.

While the Company may be exposed to credit losses in the event of nonperformance by the counterparties to its derivative financial instrument contracts, its counterparties are established banks and financial institutions with high credit ratings. The Company has no reason to believe that such counterparties will not be able to fully satisfy their obligations under these contracts.

During the next twelve months, the Company expects to reclassify into earnings a net gain from accumulated other comprehensive gain of approximately $0.1 million after tax at the time the underlying hedge transactions are realized.

ASC 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements for financial and non-financial assets and liabilities. Additionally, this guidance established a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs.

The three levels of inputs used to measure fair values are as follows:

 

   

Level 1—Observable inputs such as unadjusted quoted prices in active markets for identical assets and liabilities.

 

   

Level 2—Observable inputs other than quoted prices in active markets for identical assets and liabilities.

 

   

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

 

Recurring Fair Value Measurements

The following table presents the fair values adjustments for those assets and (liabilities) measured on a recurring basis as of October 31, 2011 and 2010 (Dollars in thousands):

                                                                     
    October 31, 2011     October 31, 2010    

Balance sheet

Location

 

     Level 1     Level 2     Level 3     Total     Level 1     Level 2     Level 3     Total    

Interest rate derivatives

  $     $ (339   $     $ (339   $     $ (2,028   $     $ (2,028   Other long-term liabilities
                   

Foreign exchange hedges

          1,001             1,001             946             946     Other current assets
                   

Foreign exchange hedges

          (1,930           (1,930           (2,443           (2,443   Other current liabilities
                   

Energy hedges

          (126           (126           (288           (288   Other current liabilities
   

 

 

     
                   

Total*

  $     $ (1,394   $     $ (1,394   $     $ (3,813   $     $ (3,813    
   

 

 

     

 

 

* The carrying amounts of cash and cash equivalents, trade accounts receivable, accounts payable, current liabilities and short-term borrowings as of October 31, 2011 and 2010 approximate their fair values because of the short-term nature of these items and are not included in this table.

Cross-Currency Interest Rate Swaps

The Company entered into a cross-currency interest rate swap agreement which was designated as a hedge of a net investment in a foreign operation. Under this swap agreement, the Company received interest semi-annually from the counterparties in an amount equal to a fixed rate of 6.75% on $200.0 million and paid interest in an amount equal to a fixed rate of 6.25% on €146.6 million. During 2010, the Company terminated this swap agreement, including any future cash flows. The termination of this swap agreement resulted in a cash benefit of $25.7 million ($15.8 million, net of tax) which is included within foreign currency translation adjustments.

Interest Rate Derivatives

The Company has interest rate swap agreements with various maturities through 2013. These interest rate swap agreements are used to manage the Company’s fixed and floating rate debt mix. Under these agreements, the Company receives interest monthly from the counterparties based upon a designated London Interbank Offered Rate (“LIBOR”) and pays interest based upon a designated fixed rate over the life of the swap agreements.

The Company has three interest rate derivatives (floating to fixed swap agreements recorded as cash flow hedges) with a total notional amount of $76.6 million. Under these swap agreements, the Company receives interest based upon a variable interest rate from the counterparties (weighted average of 0.27% as of October 31, 2011 and 0.26% as of October 31, 2010) and pays interest based upon a fixed interest rate (weighted average of 1.92% as of October 31, 2011 and 1.78% as of October 31, 2010). The other comprehensive loss on these interest rate derivatives was $0.3 million and $2.0 million as of October 31, 2011 and 2010, respectively.

In the first quarter of 2010, the Company entered into a $100.0 million fixed to floating swap agreement which was recorded as a fair value hedge. Under this swap agreement, the Company received interest from the counterparty based upon a fixed rate of 6.75% and paid interest based upon a variable rate on a semi-annual basis. In the third quarter of 2010, the Company terminated this swap agreement, including any future cash flows. The termination of this swap agreement resulted in a cash benefit of $3.6 million ($2.2 million, net of tax) which is included within long-term debt on the balance sheet.

Foreign Exchange Hedges

As of October 31, 2011, the Company had outstanding foreign currency forward contracts in the notional amount of $160.6 million (252.9 million as of October 31, 2010). The purpose of these contracts is to hedge the Company’s exposure to foreign currency transactions and short-term intercompany loan balances in its international businesses. The fair value of these contracts as of October 31, 2011 resulted in a loss of $1.6 million recorded in the consolidated statements of operations and a gain of $0.7 million recorded in other comprehensive income. The fair value of similar contracts as of October 31, 2010 resulted in a gain of $0.8 million recorded in the consolidated statements of operations and a loss of $2.3 million recorded in other comprehensive income.

Energy Hedges

The Company has entered into certain cash flow agreements to mitigate its exposure to cost fluctuations in natural gas prices through October 31, 2011. Under these hedge agreements, the Company agrees to purchase natural gas at a fixed price. As of October 31, 2011, the notional amount of these hedges was $2.7 million ($2.4 million as of October 31, 2010). The other comprehensive loss on these agreements was $0.1 million as of October 31, 2011 and $0.3 million as of October 31, 2010. As a result of the high correlation between the hedged instruments and the underlying transactions, ineffectiveness has not had a material impact on the Company’s consolidated statements of operations for the year ended October 31, 2011.

Other Financial Instruments

The estimated fair values of the Company’s long-term senior notes were $866.8 million and $601.6 million compared to the carrying amounts of $825.9 million and $545.7 million as of October 31, 2011 and October 31, 2010, respectively. All of the Company’s long-term debt is considered level 2. The current portion of the long-term debt was $12.5 million as of October 31, 2011 and 2010. The fair value of the Company’s Credit Agreement and the United States Trade Accounts Receivable Credit Facility does 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 debt of the same remaining maturities.

Non-Recurring Fair Value Measurements

Long-Lived Assets

As part of the Company’s restructuring plans following current and future acquisitions, the Company may shut down manufacturing facilities during the next few years. The long-lived assets are considered level three assets which were valued based on bids received from third parties and using discounted cash flow analysis based on assumptions that the Company believes market participants would use. Key inputs included anticipated revenues, associated manufacturing costs, capital expenditures and discount, growth and tax rates. The Company recorded restructuring related expenses for the year ended October 31, 2011 of $4.5 million on long lived assets with net book values of $5.4 million.

Net Assets Held for Sale

Net assets held for sale are considered level two assets which include recent purchase offers, market comparables and/or data obtained from commercial real estate brokers. As of October 31, 2011, the Company recognized an impairment of $1.3 million related to net assets held for sale in our Rigid Industrial Packaging & Service Segment.

Goodwill and Long Lived Intangible Assets

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.” In the third quarter of 2011, the Company recognized an impairment charge of $3.0 million related to the discontinued usage of certain trade names in our Flexible Products & Services segment. The Company concluded that no further impairment existed as of October 31, 2011.

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 either equity securities, debt securities, or other assets, which are all considered level 1 and level 2 fair value measurements. The typical asset holdings include:

 

   

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.

 

   

The common collective trusts invest in an array of fixed income, debt and equity securities with various growth and preservation strategies. The trusts invest in long term bonds and large small capital stock.

 

   

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.

Stock-Based Compensation
STOCK-BASED COMPENSATION

NOTE 11—STOCK-BASED COMPENSATION

Stock-based compensation is accounted for in accordance with ASC 718, “Compensation – Stock Compensation,” which requires companies to estimate the fair value of share-based awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense in the Company’s consolidated statements of operations over the requisite service periods. The Company uses the straight-line single option method of expensing stock options to recognize compensation expense in its consolidated statements of operations for all share-based awards. Because share-based compensation expense is based on awards that are ultimately expected to vest, share-based compensation expense will be reduced to account for estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. No stock options were granted in 2011, 2010 or 2009. For any options granted in the future, compensation expense will be based on the grant date fair value estimated in accordance with the provisions of ASC 718.

In 2001, the Company adopted the 2001 Management Equity Incentive and Compensation Plan (the “2001 Plan”). The provisions of the 2001 Plan allow the awarding of incentive and nonqualified stock options and restricted and performance shares of Class A Common Stock to key employees. The maximum number of shares that may be issued each year is determined by a formula that takes into consideration the total number of shares outstanding and is also subject to certain limits. In addition, the maximum number of incentive stock options that will be issued under the 2001 Plan during its term is 5,000,000 shares.

Prior to 2001, the Company had adopted a Non-statutory Stock Option Plan (the “2000 Plan”) that provides the discretionary granting of non-statutory options to key employees, and an Incentive Stock Option Plan (the “Option Plan”) that provides the discretionary granting of incentive stock options to key employees and non-statutory options for non-employees. The aggregate number of the Company’s Class A Common Stock options that may be granted under the 2000 Plan and Option Plan may not exceed 400,000 shares and 2,000,000 shares, respectively.

Under the terms of the 2001 Plan, the 2000 Plan and the Option Plan, stock options may be granted at exercise prices equal to the market value of the common stock on the date options are granted and become fully vested two years after date of grant. Options expire 10 years after date of grant.

In 2005, the Company adopted the 2005 Outside Directors Equity Award Plan (the “2005 Directors Plan”), which provides for the granting of stock options, restricted stock or stock appreciation rights to directors who are not employees of the Company. Prior to 2005, the Directors Stock Option Plan (the “Directors Plan”) provided for the granting of stock options to directors who are not employees of the Company. The aggregate number of the Company’s Class A Common Stock options, and in the case of the 2005 Directors Plan, restricted stock, that may be granted may not exceed 200,000 shares under each of these plans. Under the terms of both plans, options are granted at exercise prices equal to the market value of the common stock on the date options are granted and become exercisable immediately. Options expire 10 years after date of grant.

 

Stock option activity for the years ended October 31 was as follows (Shares in thousands):

                                                 
    2011     2010     2009  
     Shares     Weighted
Average
Exercise
price
    Shares     Weighted
Average
Exercise
price
    Shares     Weighted
Average
Exercise
price
 

Beginning balance

    510     $ 16.14       643     $ 15.91       785     $ 16.01  
             

Granted

                                   
             

Forfeited

    1       12.72                   1       13.10  
             

Exercised

    167       15.17       133       15.06       141       16.50  
   

 

 

 
             

Ending balance

    342     $ 16.61       510     $ 16.14       643     $ 15.91  

As of October 31, 2011, outstanding stock options had exercise prices and contractual lives as follows (Shares in thousands):

                 
Range of Exercise Prices   Number
Outstanding
    Weighted-
Average
Remaining
Contractual
Life
 

$5—$15

    228       1.3  
     

$15—$25

    102       2.9  
     

$25—$35

    12       3.3  

All outstanding options were exercisable as of October 31, 2011, 2010 and 2009, respectively.

During 2011, the Company awarded an officer, as part of the terms of his initial employment arrangement, 30,000 shares of Class A Common Stock under the 2001 Plan. These shares were issued subject to restrictions on transfer and risk of forfeiture. The sale or transfer of these shares is restricted until January 1, 2016. In June 2011, 7,500 of such shares vested with an expense of $0.5 million. The remaining shares vest in equal installments of 7,500 shares each on January 1, 2012, 2013 and 2014, respectively. When shares vest, they are no longer subject to any risk of forfeiture. The Company’s results of operations did not include share based compensation expense for stock options for 2011, 2010, or 2009 respectively.

Under the Company’s Long-Term Incentive Plan and the 2005 Directors Plan, the Company granted 40,215 and 11,144 shares of restricted stock with a weighted average grant date fair value of $60.46 and $64.59, respectively, in 2011. The Company granted 134,721 and 14,480 shares of restricted stock with a weighted average grant date fair value of $54.88 and $49.70, under the Company’s Long-Term Incentive Plan and the 2005 Directors Plan, respectively, in 2010. All restricted stock awards under the Long Term Investment Plan are fully vested at the date of award.

Income Taxes
INCOME TAXES

NOTE 12—INCOME TAXES

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state and local jurisdictions, and various non-U.S. jurisdictions.

 

The provision for income taxes consists of the following (Dollars in thousands):

                         
For the years ended October 31,   2011     2010     2009  

Current

                       
       

Federal

  $ 25,894     $ 15,222     $ 24,005  
       

State and local

    4,435       5,892       1,268  
       

non-U.S.

    28,406       14,861       11,955  
   

 

 

 
       
      58,735       35,975       37,228  
       

Deferred

                       
       

Federal

    10,587       (372     (8,762
       

State and local

    4,908       653       2,062  
       

non-U.S.

    (3,153     4,315       (6,467
   

 

 

 
       
      12,342       4,596       (13,167
   

 

 

 
       
    $ 71,077     $ 40,571     $ 24,061  
   

 

 

 

Non-U.S. income before income tax expense was $134.1 million, $159.7 million and $63.3 million in 2011, 2010, and 2009, respectively.

The following is a reconciliation of the provision for income taxes based on the federal statutory rate to the Company’s effective income tax rate:

                         
For the years ended October 31,   2011     2010     2009  

United States federal tax rate

    35.00     35.00     35.00
       

Non-U.S. tax rates

    (8.80 )%      (15.30 )%      (9.00 )% 
       

State and local taxes, net of federal tax benefit

    1.80     1.30     1.90
       

United States tax credits

    (0.70 )%      (3.90 )%      (4.40 )% 
       

Unrecognized tax benefits

    13.60     (1.50 )%      (2.30 )% 
       

Valuation allowance

    (14.60 )%      0.70     (4.80 )% 
       

Withholding tax

    1.10     1.30     1.50
       

Other non-recurring items

    1.80     (1.50 )%      (0.50 )% 
   

 

 

 
       
      29.20     16.10     17.40
   

 

 

 

 

Significant components of the Company’s deferred tax assets and liabilities as of October 31 for the years indicated were as follows (Dollars in thousands):

                 
     2011     2010  

Deferred Tax Assets

               
     

Net operating loss carryforwards

  $ 128,460     $ 117,850  
     

Minimum pension liabilities

    50,966       46,064  
     

Insurance operations

    9,741       13,659  
     

Incentives

    6,550       8,605  
     

Environmental reserves

    7,078       7,619  
     

State income tax

    9,036       8,026  
     

Postretirement

    9,481       6,963  
     

Other

    538       8,829  
     

Derivatives instruments

            832  
     

Interest

    6,970       4,606  
     

Allowance for doubtful accounts

    3,258       2,496  
     

Restructuring reserves

    2,563       3,558  
     

Deferred compensation

    2,860       3,098  
     

Foreign tax credits

    1,831       1,602  
     

Vacation accruals

    1,291       1,186  
     

Stock options

    2,112       1,820  
     

Severance

    47       372  
     

Workers compensation accruals

    990       295  
   

 

 

 
     

Total Deferred Tax Assets

    243,772       237,480  
     

Valuation allowance

    (41,259     (64,568
   

 

 

 
     

Net Deferred Tax Assets

    202,513       172,912  
   

 

 

 
     

Deferred Tax Liabilities

               
     

Properties, plants and equipment

    110,360       106,544  
     

Goodwill and other intangible assets

    79,972       83,690  
     

Inventories

    1,033       5,117  
     

Derivative instruments

    266          
     

Timberland transactions

    95,799       95,355  
     

Pension

    22,550       18,275  
   

 

 

 
     

Total Deferred Tax Liabilities

    309,980       308,981  
   

 

 

 
     

Net Deferred Tax Liability

  $ (107,467   $ (136,069
   

 

 

 

As of October 31, 2011, the Company had tax benefits from non-U.S. net operating loss carryforwards of approximately $126.6 million and approximately $1.1 million of state net operating loss carryfowards. A majority of the non-U.S. net operating losses will begin expiring in 2012. As of October 31, 2010, the company had recorded valuation allowances of approximately $64.5 million and as of October 31, 2011, had recorded valuation allowance of $42.2 million against the tax benefits from non-U.S. net operating loss carryforwards. During 2011, the valuation allowance decreased in the amount of $23.3 million, primarily due to the realization of deferred tax assets related to net operating loss carryforwards. It was determined that the realization of the deferred tax asset was appropriate due to the ability to generate future taxable income of the appropriate nature.

As of October 31, 2011, the Company had undistributed earnings from certain non-U.S. subsidiaries that are intended to be permanently reinvested in non-U.S. operations. Because these earnings are considered permanently reinvested, no U.S. tax provision has been accrued related to the repatriation of these earnings. It is not practicable to determine the additional tax, if any, which would result from the remittance of these amounts.

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

                         
     2011     2010     2009  

Balance at November 1

  $ 35,362     $ 45,459     $ 51,715  
       

Increases in tax provisions for prior years

    48,493       66       3,335  
       

Decreases in tax provisions for prior years

    (1,616     (2,728     (2,992
       

Increases in tax positions for current years

          1,517       2,951  
       

Settlements with taxing authorities

    (2,179     (6,667      
       

Lapse in statute of limitations

                (6,016
       

Currency translation

    623       (2,285     (3,534
   

 

 

 
       

Balance at October 31

  $ 80,683     $ 35,362     $ 45,459  
   

 

 

 

The 2011 increases in tax provisions for prior years primarily related to a prior year issue in a non-U.S. jurisdiction. In January 2011, a Dutch Appeals Court ruled in favor of the local Dutch taxing authority relative to the 10a interest exemption. Since the Dutch Appeals Court cited “public interest” as justification for its decision, the Company determined that this same ruling and interpretation could be applied to the deductibility of the 13a participation exemption and concluded that it is no longer able to assert a more-likely-than-not tax position. Therefore, the Company recorded a tax reserve for the Dutch participation exemption for 2008 through 2011 in the current year. The increase in reserve was substantially offset by the realization of net operating losses and a decrease in valuation allowances. The 2011 settlements with taxing authorities primarily relate to a prior-year issue that was resolved during 2011 with a separate non-U.S. jurisdiction.

The Company files income tax returns in the U.S. federal jurisdiction, various U.S. state jurisdictions and various foreign jurisdictions. With a few exceptions, the Company is subject to audit by various taxing authorities for 2008 up through the current fiscal year. The company has completed its U.S. federal tax audit for the year up through 2008 and has an ongoing audit for fiscal year 2009. The Company is subject to audit in the Netherlands for the fiscal period 2001 through the current fiscal period.

The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense net of tax. As of October 31, 2011 and October 31, 2010, the Company had $8.6 million and $11.1 million, respectively, accrued for the payment of interest and penalties.

The Company has estimated the reasonably possible expected net change in unrecognized tax benefits through October 31, 2011 based on lapses of the applicable statutes of limitations of unrecognized tax benefits. The estimated net decrease in unrecognized tax benefits for the next 12 months ranges from $0 to $48.5 million. Actual results may differ materially from this estimate.

The Company paid income taxes of $64.9 million, $29.3 million and $58.9 million in 2011, 2010, and 2009, respectively.

 

Retirement Plans and Postretirement Health Care and Life Insurance Benefits
RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

NOTE 13—RETIREMENT PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS

Retirement Plans

The Company has certain non-contributory defined benefit pension plans in the United States, Canada, Germany, the Netherlands, South Africa and the United Kingdom. The Company uses a measurement date of October 31 for fair value purposes for its pension plans. The salaried plans’ benefits are based primarily on years of service and earnings. The hourly plans’ benefits are based primarily upon years of service. The Company contributes an amount that is not less than the minimum funding or more than the maximum tax-deductible amount to these plans. The plans’ assets consist of large cap, small cap and international equity securities, fixed income investments and not more than the allowable number of shares of the Company’s common stock, which was 247,504 Class A shares and 160,710 Class B shares at October 31, 2011 and 2010. The category “Other International” represents the noncontributory defined benefit pension plans in Canada, the Netherlands, and South Africa.

The components of net periodic pension cost include the following (Dollars in thousands):

                                         
For the year ended October 31, 2011   Consolidated     United States     Germany     United Kingdom     Other
International
 

Service cost

  $ 12,625     $ 8,957     $ 450     $ 2,121     $ 1,097  
           

Interest cost

    29,636       16,651       1,406       7,008       4,571  
           

Expected return on plan assets

    (36,763     (19,712           (12,662     (4,389
           

Amortization of transition net asset

    26       (48                 74  
           

Amortization of prior service cost

    1,868       1,868                    
           

Recognized net actuarial (gain) loss

    8,404       7,118       145       429       712  
   

 

 

 
           

Net periodic pension cost

  $ 15,796     $ 14,834     $ 2,001     $ (3,104   $ 2,065  
   

 

 

 
           
For the year ended October 31, 2010   Consolidated     United States     Germany     United Kingdom     Other
International
 

Service cost

  $ 12,670     $ 9,171     $ 366     $ 2,326     $ 807  
           

Interest cost

    29,213       15,990       1,387       6,958       4,878  
           

Expected return on plan assets

    (34,784     (18,097           (11,604     (5,083
           

Amortization of transition net asset

    24       (48                 72  
           

Amortization of prior service cost

    951       951                    
           

Recognized net actuarial (gain) loss

    6,718       5,899             524       295  
   

 

 

 
           

Net periodic pension cost

  $ 14,792     $ 13,866     $ 1,753     $ (1,796   $ 969  
   

 

 

 
           
For the year ended October 31, 2009   Consolidated     United States     Germany     United Kingdom     Other
International
 

Service cost

  $ 10,224     $ 7,366     $ 345     $ 1,838     $ 675  
           

Interest cost

    31,440       16,572       1,505       6,792       6,571  
           

Expected return on plan assets

    (35,875     (17,593           (10,927     (7,355
           

Amortization of transition net asset

    29       (48                 77  
           

Amortization of prior service cost

    1,005       1,017       9             (21
           

Recognized net actuarial (gain) loss

    (1,209     38             (1,268     21  
           

Curtailment, settlement and other

    497       147             350        
   

 

 

 
           

Net periodic pension cost

  $ 6,111     $ 7,499     $ 1,859     $ (3,215   $ (32
   

 

 

 

 

The significant weighted average assumptions used in determining benefit obligations and net periodic pension costs were as follows:

                                         
For the year ended October 31, 2011   Consolidated     United States     Germany     United Kingdom     Other
International
 

Discount rate

    4.94     4.90     5.25     5.00     5.07
           

Expected return on plan assets(1)

    7.20     8.25     0.00     7.50     4.55
           

Rate of compensation increase

    3.13     3.00     2.75     4.00     2.31
           
For the year ended October 31, 2010                              

Discount rate

    5.20     5.50     5.00     5.25     4.36
           

Expected return on plan assets(1)

    7.50     8.25     0.00     7.50     6.06
           

Rate of compensation increase

    3.11     3.00     2.75     4.00     2.32
           
For the year ended October 31, 2009                              

Discount rate

    5.72     5.75     6.00     5.50     5.99
           

Expected return on plan assets(1)

    7.69     8.25     0.00     7.50     6.73
           

Rate of compensation increase

    3.25     3.00     2.75     4.00     3.01

 

 

(1) To develop the expected long-term rate of return on assets assumption, the Company uses a generally consistent approach wordwide. The approach considers various sources, primarily inputs from a range of advisors, inflation, bond yields, historical returns, and future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This rate is gross of any investment or administrative expenses.

The following table sets forth the plans’ change in benefit obligation, change in plan assets and amounts recognized in the consolidated financial statements (Dollars in thousands):

                                         
For the year ended October 31, 2011   Consolidated     USA     Germany     United Kingdom     Other
International
 

Change in benefit obligation:

                                       
           

Benefit obligation at beginning of year

  $ 580,703     $ 309,455     $ 28,548     $ 134,459     $ 108,241  
           

Service cost

    12,625       8,957       450       2,121       1,097  
           

Interest cost

    29,636       16,651       1,406       7,008       4,571  
           

Plan participant contributions

    525                   319       206  
           

Amendments

    (1,646     (622           (963     (61
           

Actuarial (gains) loss

    24,973       24,780       (778     6,172       (5,201
           

Foreign currency effect

    (2,947           (390     (1,314     (1,243
           

Benefits paid

    (27,654     (13,696     (1,299     (5,740     (6,919
   

 

 

 
           

Benefit obligation at end of year

  $ 616,215     $ 345,525     $ 27,937     $ 142,062     $ 100,691  
   

 

 

 
           

Change in plan assets:

                                       
           

Fair value of plan assets at beginning of year

  $ 514,728     $ 228,302     $     $ 178,486     $ 107,940  
           

Actual return on plan assets

    21,444       20,969             2,802       (2,327
           

Expenses paid

    (987     (926                 (61
           

Plan participant contributions

    525                   319       206  
           

Other

    1,060                   (722     1,782  
           

Foreign currency effects

    (3,183                 (1,492     (1,691
           

Employer contributions

    32,595       27,900             3,043       1,652  
           

Benefits paid

    (25,894     (13,235           (5,740     (6,919
   

 

 

 
           

Fair value of plan assets at end of year

  $ 540,288     $ 263,010     $     $ 176,696     $ 100,582  
   

 

 

 

 

                                         
For the year ended October 31, 2010   Consolidated     USA     Germany     United Kingdom     Other
International
 

Change in benefit obligation:

                                       
           

Benefit obligation at beginning of year

  $ 541,791     $ 284,680     $ 25,287     $ 133,669     $ 98,155  
           

Service cost

    12,670       9,171       366       2,326       807  
           

Interest cost

    29,213       15,990       1,387       6,958       4,878  
           

Plan participant contributions

    500                   312       188  
           

Amendments

    1,351       1,397                   (46
           

Actuarial loss

    34,275       10,734       4,393       1,694       17,454  
           

Foreign currency effect

    (12,452           (1,608     (4,259     (6,585
           

Benefits paid

    (26,645     (12,517     (1,277     (6,241     (6,610
   

 

 

 
           

Benefit obligation at end of year

  $ 580,703     $ 309,455     $ 28,548     $ 134,459     $ 108,241  
   

 

 

 
           

Change in plan assets:

                                       
           

Fair value of plan assets at beginning of year

  $ 463,158     $ 194,470     $     $ 166,250     $ 102,438  
           

Actual return on plan assets

    65,495       27,358             20,449       17,688  
           

Expenses paid

    (46                       (46
           

Plan participant contributions

    500                   312       188  
           

Other

    (625     (625                  
           

Foreign currency effects

    (11,816                 (5,291     (6,525
           

Employer contributions

    22,983       19,169             3,007       807  
           

Benefits paid

    (24,921     (12,070           (6,241     (6,610
   

 

 

 
           

Fair value of plan assets at end of year

  $ 514,728     $ 228,302     $     $ 178,486     $ 107,940  
   

 

 

 
                                         
For the year ended October 31, 2011   Consolidated     USA     Germany     United Kingdom     Other
International
 

Unrecognized net actuarial loss

    153,441       119,475       3,899       11,462       18,605  
           

Unrecognized prior service cost

    4,675       4,675                    
           

Unrecognized initial net obligation

    471       (28                 499  
   

 

 

 
           

Accumulated other comprehensive loss

  $ 158,587     $ 124,122     $ 3,899     $ 11,462       19,104  
   

 

 

 
           

Amounts recognized in the Consolidated Balance Sheets consist of:

                                       
           

Prepaid benefit cost

  $ 40,741     $     $     $ 34,634     $ 6,107  
           

Accrued benefit liability

    (115,044     (80,888     (27,937           (6,219
           

Accumulated other comprehensive loss

    158,587       124,122       3,899       11,462       19,104  
   

 

 

 
           

Net amount recognized

  $ 84,284     $ 43,234     $ (24,038   $ 46,096     $ 18,992  
   

 

 

 

 

                                         
For the year ended October 31, 2010   Consolidated     USA     Germany     United Kingdom     Other
International
 

Unrecognized net actuarial (gain) loss

    125,520       104,697       4,872       (3,609     19,560  
           

Unrecognized prior service cost

    6,239       6,239                    
           

Unrecognized initial net obligation

    494       (76                 570  
   

 

 

 
           

Accumulated other comprehensive (income) loss

  $ 132,253     $ 110,860     $ 4,872     $ (3,609     20,130  
   

 

 

 
           

Amounts recognized in the Consolidated Balance Sheets consist of:

                                       
           

Prepaid benefit cost

  $ 48,815     $     $     $ 44,027     $ 4,788  
           

Accrued benefit liability

    (114,790     (81,153     (28,548           (5,089
           

Accumulated other comprehensive (income) loss

    132,253       110,860       4,872       (3,609     20,130  
   

 

 

 
           

Net amount recognized

  $ 66,278     $ 29,707     $ (23,676   $ 40,418     $ 19,829  
   

 

 

 

Aggregated accumulated benefit obligations for all plans were $589.2 million and $556.6 million at October 31, 2011 and 2010, respectively. The $616.2 million projected benefit obligation consists of $345.5 million related to the United States pension and $270.7 million related to the non-United States pensions. The $540.3 million fair value of pension assets consists of $263.0 million related to the United States pension and $277.3 related to the non-United States pensions. The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $388.8 million, $366.4 million and $273.7 million, respectively, as of October 31, 2011.

Pension plan contributions totaled $32.6 million, $23.0 million, and $15.9 million during 2011, 2010 and 2009, respectively. Contributions during 2012 are expected to be approximately $25.4 million. The Company expects to record an amortization loss of $11.3 million which is recorded in other comprehensive losses on the balance sheet.

The following table presents the fair value measurements for the pension assets:

As of October 31, 2011 (Dollars in thousands)

                                 
    Fair Value Measurement        
Asset Category   Level 1     Level 2     Level 3     Total  

Equity securities

  $ 83,854     $ 144,255     $     $ 228,109  
         

Debt securities

    74,438       106,288             180,726  
         

Other

          131,453             131,453  
   

 

 

 
         

Total

  $ 158,292     $ 381,996     $     $ 540,288  
   

 

 

 

As of October 31, 2010 (Dollars in thousands)

 

                                 
    Fair Value Measurement        
Asset Category   Level 1     Level 2     Level 3     Total  

Equity securities

  $ 154,190     $ 134,057     $     $ 288,247  
         

Debt securities

          87,504