UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
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For Quarter Ended September 30, 2009 |
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or |
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o |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Owens-Illinois, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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1-9576 |
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22-2781933 |
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(State or other |
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(Commission |
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(IRS Employer |
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jurisdiction of |
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File No.) |
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Identification No.) |
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incorporation or |
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organization) |
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One Michael Owens Way, Perrysburg, Ohio |
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43551-2999 |
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(Address of principal executive offices) |
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(Zip Code) |
567-336-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes x |
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No o |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes x |
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No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer x |
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Accelerated filer o |
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Non-accelerated filer o |
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Smaller reporting company o |
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(do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
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Yes o |
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No x |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Owens-Illinois, Inc. $.01 par value common stock — 168,510,354 shares at September 30, 2009.
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
Effective January 1, 2009, the Company adopted the provisions of a new accounting standard which changed the presentation of noncontrolling interests in subsidiaries. The format of the Company’s condensed consolidated results of operations for the three and nine months ended September 30, 2008, condensed consolidated cash flows for the nine months ended September 30, 2008, and condensed consolidated balance sheets at September 30, 2008 and December 31, 2008 have been reclassified to conform to the new presentation which is required to be applied retrospectively.
Effective January 1, 2009, the Company adopted the provisions of a new accounting standard which required the Company to allocate earnings to unvested restricted shares outstanding during the period. Earnings per share for the three and nine months ended September 30, 2008 were restated in accordance with the new provisions which are required to be applied retrospectively.
2
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
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Three months ended September 30, |
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2009 |
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2008 |
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Net sales |
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$ |
1,874.6 |
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$ |
2,008.6 |
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Manufacturing, shipping, and delivery expense |
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(1,425.9 |
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(1,601.3 |
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Gross profit |
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448.7 |
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407.3 |
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Selling and administrative expense |
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(128.2 |
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(120.8 |
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Research, development, and engineering expense |
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(14.3 |
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(17.1 |
) |
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Interest expense |
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(58.6 |
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(66.3 |
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Interest income |
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6.1 |
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10.4 |
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Equity earnings |
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11.9 |
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12.9 |
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Royalties and net technical assistance |
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3.4 |
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5.0 |
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Other income |
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2.4 |
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1.9 |
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Other expense |
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(78.6 |
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(94.5 |
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Earnings from continuing operations before income taxes |
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192.8 |
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138.8 |
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Provision for income taxes |
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(63.8 |
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(42.2 |
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Net earnings |
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129.0 |
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96.6 |
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Net earnings attributable to noncontrolling interests |
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(2.3 |
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(18.0 |
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Net earnings attributable to the Company |
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$ |
126.7 |
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$ |
78.6 |
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Basic earnings per share |
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$ |
0.75 |
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$ |
0.47 |
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Weighted average shares outstanding (thousands) |
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167,877 |
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165,462 |
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Diluted earnings per share |
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$ |
0.74 |
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$ |
0.46 |
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Weighted diluted average shares (thousands) |
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171,543 |
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170,058 |
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3
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
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Nine months ended September 30, |
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2009 |
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2008 |
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Net sales |
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$ |
5,200.6 |
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$ |
6,179.7 |
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Manufacturing, shipping, and delivery expense |
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(4,047.7 |
) |
(4,790.4 |
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Gross profit |
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1,152.9 |
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1,389.3 |
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Selling and administrative expense |
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(369.1 |
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(379.4 |
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Research, development, and engineering expense |
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(42.3 |
) |
(51.0 |
) |
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Interest expense |
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(164.6 |
) |
(199.8 |
) |
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Interest income |
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21.1 |
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29.1 |
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Equity earnings |
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39.6 |
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36.7 |
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Royalties and net technical assistance |
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9.7 |
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14.8 |
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Other income |
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4.9 |
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5.1 |
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Other expense |
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(157.4 |
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(130.3 |
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Earnings from continuing operations before income taxes |
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494.8 |
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714.5 |
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Provision for income taxes |
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(144.5 |
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(183.0 |
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Earnings from continuing operations |
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350.3 |
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531.5 |
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Gain on sale of discontinued operations |
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7.9 |
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Net earnings |
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350.3 |
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539.4 |
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Net earnings attributable to noncontrolling interests |
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(29.2 |
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(51.4 |
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Net earnings attributable to the Company |
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$ |
321.1 |
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$ |
488.0 |
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Amounts attributable to the Company: |
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Earnings from continuing operations |
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$ |
321.1 |
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$ |
480.1 |
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Gain on sale of discontinued operations |
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7.9 |
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Net earnings |
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$ |
321.1 |
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$ |
488.0 |
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Basic earnings per share: |
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Earnings from continuing operations |
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$ |
1.91 |
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$ |
2.89 |
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Gain on sale of discontinued operations |
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0.05 |
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Net earnings |
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$ |
1.91 |
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$ |
2.94 |
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Weighted average shares outstanding (thousands) |
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167,577 |
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162,390 |
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Diluted earnings per share: |
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Earnings from continuing operations |
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$ |
1.89 |
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$ |
2.81 |
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Gain on sale of discontinued operations |
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0.05 |
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Net earnings |
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$ |
1.89 |
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$ |
2.86 |
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Weighted diluted average shares (thousands) |
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170,160 |
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170,483 |
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See accompanying notes.
4
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
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Sept. 30, |
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Dec. 31, |
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Sept. 30, |
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2009 |
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2008 |
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2008 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
1,017.1 |
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$ |
379.5 |
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$ |
410.5 |
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Short-term investments, at cost which approximates market |
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0.9 |
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25.0 |
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34.0 |
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Receivables, less allowances for losses and discounts ($36.7 at September 30, 2009, $39.7 at December 31, 2008, and $37.5 at September 30, 2008) |
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1,146.6 |
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988.8 |
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1,194.1 |
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Inventories |
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1,035.4 |
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999.5 |
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1,141.2 |
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Prepaid expenses |
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45.5 |
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51.9 |
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57.3 |
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Total current assets |
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3,245.5 |
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2,444.7 |
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2,837.1 |
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Investments and other assets: |
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Equity investments |
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124.0 |
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101.7 |
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94.5 |
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Repair parts inventories |
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144.2 |
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132.5 |
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136.3 |
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Prepaid pension |
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624.9 |
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Deposits, receivables, and other assets |
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513.9 |
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444.5 |
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462.4 |
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Goodwill |
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2,382.3 |
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2,207.5 |
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2,333.3 |
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Total other assets |
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3,164.4 |
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2,886.2 |
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3,651.4 |
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|||
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Property, plant, and equipment, at cost |
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6,559.2 |
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5,983.1 |
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6,345.9 |
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Less accumulated depreciation |
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3,849.3 |
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3,337.5 |
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3,597.0 |
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Net property, plant, and equipment |
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2,709.9 |
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2,645.6 |
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2,748.9 |
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Total assets |
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$ |
9,119.8 |
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$ |
7,976.5 |
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$ |
9,237.4 |
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5
CONDENSED CONSOLIDATED BALANCE SHEETS — Continued
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|
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Sept. 30, |
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Dec. 31, |
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Sept. 30, |
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|||
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2009 |
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2008 |
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2008 |
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Liabilities and Share Owners’ Equity |
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Current liabilities: |
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|
|
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|||
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Short-term loans and long-term debt due within one year |
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$ |
377.6 |
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$ |
393.8 |
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$ |
496.4 |
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Current portion of asbestos-related liabilities |
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175.0 |
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175.0 |
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210.0 |
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|||
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Accounts payable |
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816.1 |
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838.2 |
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901.5 |
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|||
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Other liabilities |
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730.8 |
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596.3 |
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773.3 |
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|||
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|
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|||
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Total current liabilities |
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2,099.5 |
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2,003.3 |
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2,381.2 |
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|||
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Long-term debt |
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3,343.9 |
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2,940.3 |
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2,961.1 |
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Deferred taxes |
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160.1 |
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77.6 |
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72.1 |
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Pension benefits |
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706.9 |
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741.8 |
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273.1 |
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Nonpension postretirement benefits |
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242.5 |
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239.7 |
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273.5 |
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|||
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Other liabilities |
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368.9 |
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360.1 |
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361.4 |
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|||
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Asbestos-related liabilities |
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197.9 |
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320.3 |
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105.2 |
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Commitments and contingencies |
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Share owners’ equity: |
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The Company’s share owners’ equity: |
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Common stock, par value $.01 per share 250,000,000 shares authorized, 179,877,088, 178,705,817, and 178,623,719 shares issued and outstanding, respectively |
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1.8 |
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1.8 |
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1.8 |
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Capital in excess of par value |
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2,935.2 |
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2,913.3 |
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2,905.0 |
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|||
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Treasury stock, at cost 11,366,734, 11,556,341, and 11,617,743 shares, respectively |
|
(218.0 |
) |
(221.5 |
) |
(222.8 |
) |
|||
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Retained earnings (deficit) |
|
288.7 |
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(32.4 |
) |
197.3 |
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|||
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Accumulated other comprehensive loss |
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(1,250.5 |
) |
(1,620.6 |
) |
(320.6 |
) |
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Total share owners’ equity of the Company |
|
1,757.2 |
|
1,040.6 |
|
2,560.7 |
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|||
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Noncontrolling interests |
|
242.9 |
|
252.8 |
|
249.1 |
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|||
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Total share owners’ equity |
|
2,000.1 |
|
1,293.4 |
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2,809.8 |
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|||
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Total liabilities and share owners’ equity |
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$ |
9,119.8 |
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$ |
7,976.5 |
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$ |
9,237.4 |
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See accompanying notes.
6
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in millions)
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Nine months ended Sept. 30, |
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|
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2009 |
|
2008 |
|
||
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Cash flows from operating activities: |
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|
|
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|
||
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Net earnings |
|
$ |
350.3 |
|
$ |
539.4 |
|
|
Net earnings attributable to noncontrolling interest |
|
(29.2 |
) |
(51.4 |
) |
||
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Gain on sale of discontinued operations |
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|
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(7.9 |
) |
||
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Non-cash charges (credits): |
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|
|
|
|
||
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Depreciation |
|
274.3 |
|
339.3 |
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||
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Amortization of intangibles and other deferred items |
|
18.0 |
|
21.5 |
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||
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Amortization of finance fees and debt discount |
|
7.3 |
|
6.0 |
|
||
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Deferred tax provision (benefit) |
|
11.8 |
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(43.1 |
) |
||
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Restructuring and asset impairment |
|
113.1 |
|
111.7 |
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||
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Other |
|
84.2 |
|
107.2 |
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Asbestos-related payments |
|
(122.4 |
) |
(140.3 |
) |
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Cash paid for restructuring activities |
|
(42.7 |
) |
(28.0 |
) |
||
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Change in non-current operating assets |
|
13.1 |
|
4.5 |
|
||
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Change in non-current liabilities |
|
(96.8 |
) |
(73.8 |
) |
||
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Change in components of working capital |
|
(1.6 |
) |
(204.2 |
) |
||
|
Cash provided by operating activities |
|
579.4 |
|
580.9 |
|
||
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Cash flows from investing activities: |
|
|
|
|
|
||
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Additions to property, plant, and equipment |
|
(193.7 |
) |
(238.5 |
) |
||
|
Advances to equity affiliate - net |
|
1.6 |
|
(8.1 |
) |
||
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Acquisitions, net of cash acquired |
|
(5.4 |
) |
|
|
||
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Net cash proceeds (payments) related to divestitures and asset sales |
|
4.4 |
|
(16.0 |
) |
||
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Cash utilized in investing activities |
|
(193.1 |
) |
(262.6 |
) |
||
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Cash flows from financing activities: |
|
|
|
|
|
||
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Additions to long-term debt |
|
1,072.6 |
|
636.8 |
|
||
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Repayments of long-term debt |
|
(750.0 |
) |
(906.4 |
) |
||
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Increase (decrease) in short-term loans |
|
(55.1 |
) |
66.0 |
|
||
|
Net receipts (payments) for hedging activity |
|
17.9 |
|
(47.1 |
) |
||
|
Payment of finance fees |
|
(13.9 |
) |
|
|
||
|
Convertible preferred stock dividends |
|
|
|
(5.4 |
) |
||
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Dividends paid to noncontrolling interests |
|
(58.3 |
) |
(46.1 |
) |
||
|
Issuance of common stock and other |
|
6.1 |
|
14.5 |
|
||
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Cash provided by (utilized in) financing activities |
|
219.3 |
|
(287.7 |
) |
||
|
Effect of exchange rate fluctuations on cash |
|
32.0 |
|
(7.8 |
) |
||
|
Increase in cash |
|
637.6 |
|
22.8 |
|
||
|
Cash at beginning of period |
|
379.5 |
|
387.7 |
|
||
|
Cash at end of period |
|
$ |
1,017.1 |
|
$ |
410.5 |
|
See accompanying notes.
7
OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data dollars in millions,
except share and per share amounts
1. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
Three months ended Sept. 30, |
|
||||
|
|
|
2009 |
|
2008 |
|
||
|
Numerator: |
|
|
|
|
|
||
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Net earnings attributable to the Company |
|
$ |
126.7 |
|
$ |
78.6 |
|
|
Net earnings attributable to participating securities |
|
(0.4 |
) |
(0.7 |
) |
||
|
|
|
|
|
|
|
||
|
Numerator for basic earnings per share - income available to common share owners |
|
$ |
126.3 |
|
$ |
77.9 |
|
|
|
|
|
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||
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Denominator: |
|
|
|
|
|
||
|
Denominator for basic earnings per share - weighted average shares outstanding |
|
167,877,352 |
|
165,461,841 |
|
||
|
|
|
|
|
|
|
||
|
Effect of dilutive securities: |
|
|
|
|
|
||
|
Stock options and other |
|
3,665,804 |
|
4,596,597 |
|
||
|
|
|
|
|
|
|
||
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding |
|
171,543,156 |
|
170,058,438 |
|
||
|
|
|
|
|
|
|
||
|
Basic earnings per share |
|
$ |
0.75 |
|
$ |
0.47 |
|
|
|
|
|
|
|
|
||
|
Diluted earnings per share |
|
$ |
0.74 |
|
$ |
0.46 |
|
Options to purchase 400,182 and 422,331 weighted average shares of common stock that were outstanding during the three months ended September 30, 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.
8
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
Nine months ended Sept. 30, |
|
||||
|
|
|
2009 |
|
2008 |
|
||
|
Numerator: |
|
|
|
|
|
||
|
Net earnings attributable to the Company |
|
$ |
321.1 |
|
$ |
488.0 |
|
|
Convertible preferred stock dividends |
|
|
|
(5.4 |
) |
||
|
Net earnings attributable to participating securities |
|
(1.1 |
) |
(4.6 |
) |
||
|
|
|
|
|
|
|
||
|
Numerator for basic earnings per share - income available to common share owners |
|
$ |
320.0 |
|
$ |
478.0 |
|
|
|
|
|
|
|
|
||
|
Denominator: |
|
|
|
|
|
||
|
Denominator for basic earnings per share - weighted average shares outstanding |
|
167,576,712 |
|
162,390,032 |
|
||
|
|
|
|
|
|
|
||
|
Effect of dilutive securities: |
|
|
|
|
|
||
|
Convertible preferred stock |
|
|
|
2,863,118 |
|
||
|
Stock options and other |
|
2,583,478 |
|
5,230,316 |
|
||
|
|
|
|
|
|
|
||
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding |
|
170,160,190 |
|
170,483,466 |
|
||
|
|
|
|
|
|
|
||
|
Basic earnings per share: |
|
|
|
|
|
||
|
Earnings from continuing operations |
|
$ |
1.91 |
|
$ |
2.89 |
|
|
Gain on sale of discontinued operations |
|
|
|
0.05 |
|
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
1.91 |
|
$ |
2.94 |
|
|
|
|
|
|
|
|
||
|
Diluted earnings per share: |
|
|
|
|
|
||
|
Earnings from continuing operations |
|
$ |
1.89 |
|
$ |
2.81 |
|
|
Gain on sale of discontinued operations |
|
|
|
0.05 |
|
||
|
|
|
|
|
|
|
||
|
Net earnings |
|
$ |
1.89 |
|
$ |
2.86 |
|
The convertible preferred stock was included in the computation of diluted earnings per share for the nine months ended September 30, 2008 on an “if converted” basis for the period prior to its actual conversion on March 31, 2008, since the result was dilutive. For purposes of this computation, the preferred stock dividends were not subtracted from the numerator. Options to purchase 1,196,593 and 186,495 weighted average shares of common stock that were outstanding during the nine months ended September 30, 2009 and 2008, respectively, were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.
Effective January 1, 2009, the Company adopted the provisions of a new accounting standard which addresses whether instruments granted in share-based payment awards are participating securities prior to vesting and, therefore, must be included in the earnings allocation in calculating earnings per share under the two-class method. The new provisions require that unvested share-based payment awards that contain non-forfeitable rights to dividends be treated as participating securities in calculating earnings per share. The Company was required to allocate earnings to unvested restricted shares outstanding during the period. Basic earnings per share for the nine months ended September 30, 2008 were reduced by $0.03 per share in
9
accordance with the new provisions which require retrospective application. Basic earnings per share for the three months ended September 30, 2008 were not impacted. There was no impact on basic earnings per share for the three and nine months ended September 30, 2009 or diluted earnings per share in any period.
2. Debt
The following table summarizes the long-term debt of the Company:
|
|
|
Sept. 30, |
|
Dec. 31, |
|
Sept. 30, |
|
|||
|
|
|
2009 |
|
2008 |
|
2008 |
|
|||
|
Secured Credit Agreement: |
|
|
|
|
|
|
|
|||
|
Revolving Credit Facility: |
|
|
|
|
|
|
|
|||
|
Revolving Loans |
|
$ |
— |
|
$ |
18.7 |
|
$ |
— |
|
|
Term Loans: |
|
|
|
|
|
|
|
|||
|
Term Loan A (225.0 million AUD) |
|
197.9 |
|
155.7 |
|
180.2 |
|
|||
|
Term Loan B |
|
191.5 |
|
191.5 |
|
191.5 |
|
|||
|
Term Loan C (110.8 million CAD) |
|
102.5 |
|
90.9 |
|
105.5 |
|
|||
|
Term Loan D (€191.5 million) |
|
280.2 |
|
269.6 |
|
274.9 |
|
|||
|
Senior Notes: |
|
|
|
|
|
|
|
|||
|
8.25%, due 2013 |
|
461.2 |
|
470.0 |
|
450.9 |
|
|||
|
6.75%, due 2014 |
|
400.0 |
|
400.0 |
|
400.0 |
|
|||
|
6.75%, due 2014 (€225 million) |
|
329.2 |
|
316.8 |
|
323.0 |
|
|||
|
7.375%, due 2016 |
|
581.4 |
|
|
|
|
|
|||
|
6.875%, due 2017 (€300 million) |
|
438.9 |
|
422.4 |
|
430.6 |
|
|||
|
Senior Debentures: |
|
|
|
|
|
|
|
|||
|
7.50%, due 2010 |
|
28.4 |
|
259.5 |
|
253.6 |
|
|||
|
7.80%, due 2018 |
|
250.0 |
|
250.0 |
|
250.0 |
|
|||
|
Other |
|
126.0 |
|
113.4 |
|
113.1 |
|
|||
|
Total long-term debt |
|
3,387.2 |
|
2,958.5 |
|
2,973.3 |
|
|||
|
Less amounts due within one year |
|
43.3 |
|
18.2 |
|
12.2 |
|
|||
|
Long-term debt |
|
$ |
3,343.9 |
|
$ |
2,940.3 |
|
$ |
2,961.1 |
|
On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”). At September 30, 2009, the Agreement included a $900.0 million revolving credit facility, a 225.0 million Australian dollar term loan, and a 110.8 million Canadian dollar term loan, each of which has a final maturity date of June 15, 2012. It also included a $191.5 million term loan and a €191.5 million term loan, each of which has a final maturity date of June 14, 2013.
As a result of the bankruptcy of Lehman Brothers Holdings Inc. and several of its subsidiaries, the Company believes that the maximum amount available under the revolving credit facility was reduced by $32.3 million. After further deducting amounts attributable to letters of credit and overdraft facilities that are supported by the revolving credit facility, at September 30, 2009 the Company’s subsidiary borrowers had unused credit of $761.2 million available under the Agreement.
The weighted average interest rate on borrowings outstanding under the Agreement at September 30, 2009 was 2.40%.
During May 2009, a subsidiary of the Company issued senior notes with a face value of $600.0 million issued at 96.72% of face value for an effective interest rate of 8.00%. The notes bear
10
interest at 7.375% and are due May 15, 2016. The notes are guaranteed by substantially all of the Company’s domestic subsidiaries. The net proceeds, after deducting commissions and expenses from the notes, approximated $568 million and were used to purchase in a tender offer $221.9 million of the $250 million principal amount of 7.50% Senior Debentures due May 2010 and to reduce borrowings under the revolving credit facility. The balance of the proceeds increased cash. As a part of the issuance of these notes and the related tender offer, the Company recorded in the second quarter of 2009 additional interest charges of $5.2 million for note repurchase premiums and the related write-off of unamortized finance fees, net of a gain from the termination of the interest rate swap agreement on the notes.
During October 2006, the Company entered into a €300 million European accounts receivable securitization program. The program extends through October 2011, subject to annual renewal of backup credit lines. In addition, the Company participates in a receivables financing program in the Asia Pacific region with a revolving funding commitment of 85 million Australian dollars and 25 million New Zealand dollars that expire January 2010 and November 2009, respectively.
Information related to the Company’s accounts receivable securitization programs is as follows:
|
|
|
Sept. 30, |
|
Dec. 31, |
|
Sept. 30, |
|
|||
|
|
|
2009 |
|
2008 |
|
2008 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Balance (included in short-term loans) |
|
$ |
289.4 |
|
$ |
293.7 |
|
$ |
390.5 |
|
|
|
|
|
|
|
|
|
|
|||
|
Weighted average interest rate |
|
1.70 |
% |
5.31 |
% |
6.00 |
% |
|||
The carrying amounts reported for the accounts receivable securitization programs, and certain long-term debt obligations subject to frequently redetermined interest rates, approximate fair value. Fair values for the Company’s significant fixed rate debt obligations are generally based on published market quotations.
Fair values at September 30, 2009 of the Company’s significant fixed rate debt obligations are as follows:
|
|
|
Principal Amount |
|
Indicated |
|
Fair Value |
|
||
|
|
|
(millions of |
|
Market |
|
(millions of |
|
||
|
|
|
dollars) |
|
Price |
|
dollars) |
|
||
|
|
|
|
|
|
|
|
|
||
|
Senior Notes: |
|
|
|
|
|
|
|
||
|
8.25%, due 2013 |
|
$ |
450.0 |
|
102.65 |
|
$ |
461.9 |
|
|
6.75%, due 2014 |
|
400.0 |
|
99.13 |
|
396.5 |
|
||
|
6.75%, due 2014 (€225 million) |
|
329.2 |
|
99.50 |
|
327.6 |
|
||
|
7.375%, due 2016 |
|
600.0 |
|
102.25 |
|
613.5 |
|
||
|
6.875%, due 2017 (€300 million) |
|
438.9 |
|
98.33 |
|
431.6 |
|
||
|
Senior Debentures: |
|
|
|
|
|
|
|
||
|
7.50%, due 2010 |
|
28.1 |
|
103.00 |
|
28.9 |
|
||
|
7.80%, due 2018 |
|
250.0 |
|
100.25 |
|
250.6 |
|
||
11
3. Supplemental Cash Flow Information
|
|
|
Nine months ended September 30, |
|
||||
|
|
|
2009 |
|
2008 |
|
||
|
|
|
|
|
|
|
||
|
Interest paid in cash |
|
$ |
131.7 |
|
$ |
174.6 |
|
|
|
|
|
|
|
|
||
|
Income taxes paid in cash |
|
123.5 |
|
106.6 |
|
||
Cash interest for 2009 includes note repurchase premiums and the proceeds from the settlement of interest rate swaps related to the May tender of the Company’s 7.50% Senior Debentures due May 2010.
4. Share Owners’ Equity
The activity in share owners’ equity for the three months ended September 30, 2009 and 2008 is as follows:
12
|
|
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|||||||||
|
|
|
Total
Share |
|
Common
Stock, |
|
Retained |
|
Accumulated |
|
Non- |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance on July 1, 2009 |
|
$ |
1,680.5 |
|
$ |
2,710.6 |
|
$ |
162.0 |
|
$ |
(1,424.4 |
) |
$ |
232.3 |
|
|
Issuance of common stock |
|
7.0 |
|
7.0 |
|
|
|
|
|
|
|
|||||
|
Reissuance of common stock |
|
1.4 |
|
1.4 |
|
|
|
|
|
|
|
|||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings |
|
129.0 |
|
|
|
126.7 |
|
|
|
2.3 |
|
|||||
|
Foreign currency translation adjustments |
|
158.4 |
|
|
|
|
|
147.2 |
|
11.2 |
|
|||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
10.8 |
|
|
|
|
|
10.8 |
|
|
|
|||||
|
Change in fair value of derivative instruments, net of tax |
|
15.9 |
|
|
|
|
|
15.9 |
|
|
|
|||||
|
Total comprehensive income |
|
314.1 |
|
|
|
|
|
|
|
|
|
|||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
(2.9 |
) |
|
|
|
|
|
|
(2.9 |
) |
|||||
|
Balance on September 30, 2009 |
|
$ |
2,000.1 |
|
$ |
2,719.0 |
|
$ |
288.7 |
|
$ |
(1,250.5 |
) |
$ |
242.9 |
|
|
|
|
|
|
|
|
|
|
|||||||||
|
|
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|||||||||
|
|
|
Total
Share |
|
Common
Stock, |
|
Retained |
|
Accumulated |
|
Non- |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance on July 1, 2008 |
|
$ |
3,095.7 |
|
$ |
2,676.6 |
|
$ |
118.7 |
|
$ |
43.0 |
|
$ |
257.4 |
|
|
Issuance of common stock |
|
6.0 |
|
6.0 |
|
|
|
|
|
|
|
|||||
|
Reissuance of common stock |
|
1.4 |
|
1.4 |
|
|
|
|
|
|
|
|||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings |
|
96.6 |
|
|
|
78.6 |
|
|
|
18.0 |
|
|||||
|
Foreign currency translation adjustments |
|
(335.2 |
) |
|
|
|
|
(313.4 |
) |
(21.8 |
) |
|||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
6.8 |
|
|
|
|
|
6.8 |
|
|
|
|||||
|
Change in fair value of derivative instruments, net of tax |
|
(57.0 |
) |
|
|
|
|
(57.0 |
) |
|
|
|||||
|
Total comprehensive loss |
|
(288.8 |
) |
|
|
|
|
|
|
|
|
|||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
(4.5 |
) |
|
|
|
|
|
|
(4.5 |
) |
|||||
|
Balance on September 30, 2008 |
|
$ |
2,809.8 |
|
$ |
2,684.0 |
|
$ |
197.3 |
|
$ |
(320.6 |
) |
$ |
249.1 |
|
13
The activity in share owners’ equity for the nine months ended September 30, 2009 and 2008 is as follows:
|
|
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|||||||||
|
|
|
Total
Share |
|
Common
Stock, |
|
Retained |
|
Accumulated |
|
Non- |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance on January 1, 2009 |
|
$ |
1,293.4 |
|
$ |
2,693.6 |
|
$ |
(32.4 |
) |
$ |
(1,620.6 |
) |
$ |
252.8 |
|
|
Issuance of common stock |
|
21.1 |
|
21.1 |
|
|
|
|
|
|
|
|||||
|
Reissuance of common stock |
|
4.3 |
|
4.3 |
|
|
|
|
|
|
|
|||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings |
|
350.3 |
|
|
|
321.1 |
|
|
|
29.2 |
|
|||||
|
Foreign currency translation adjustments |
|
338.1 |
|
|
|
|
|
318.9 |
|
19.2 |
|
|||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
26.5 |
|
|
|
|
|
26.5 |
|
|
|
|||||
|
Change in fair value of derivative instruments, net of tax |
|
24.7 |
|
|
|
|
|
24.7 |
|
|
|
|||||
|
Total comprehensive income |
|
739.6 |
|
|
|
|
|
|
|
|
|
|||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
(58.3 |
) |
|
|
|
|
|
|
(58.3 |
) |
|||||
|
Balance on September 30, 2009 |
|
$ |
2,000.1 |
|
$ |
2,719.0 |
|
$ |
288.7 |
|
$ |
(1,250.5 |
) |
$ |
242.9 |
|
|
|
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|||||||||
|
|
|
Total
Share |
|
Common
Stock, |
|
Retained |
|
Accumulated Loss |
|
Non- |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance on January 1, 2008 |
|
$ |
1,986.6 |
|
$ |
2,197.1 |
|
$ |
(285.3 |
) |
$ |
(176.9 |
) |
$ |
251.7 |
|
|
Issuance of common stock |
|
482.5 |
|
482.5 |
|
|
|
|
|
|
|
|||||
|
Reissuance of common stock |
|
4.4 |
|
4.4 |
|
|
|
|
|
|
|
|||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Net earnings |
|
539.4 |
|
|
|
488.0 |
|
|
|
51.4 |
|
|||||
|
Foreign currency translation adjustments |
|
(160.3 |
) |
|
|
|
|
(152.4 |
) |
(7.9 |
) |
|||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
24.8 |
|
|
|
|
|
24.8 |
|
|
|
|||||
|
Change in fair value of derivative instruments, net of tax |
|
(16.1 |
) |
|
|
|
|
(16.1 |
) |
|
|
|||||
|
Total comprehensive income |
|
387.8 |
|
|
|
|
|
|
|
|
|
|||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
(46.1 |
) |
|
|
|
|
|
|
(46.1 |
) |
|||||
|
Dividends paid on convertible preferred stock |
|
(5.4 |
) |
|
|
(5.4 |
) |
|
|
|
|
|||||
|
Balance on September 30, 2008 |
|
$ |
2,809.8 |
|
$ |
2,684.0 |
|
$ |
197.3 |
|
$ |
(320.6 |
) |
$ |
249.1 |
|
14
5. Inventories
Major classes of inventory are as follows:
|
|
|
Sept. 30, |
|
Dec. 31, |
|
Sept. 30, |
|
|||
|
|
|
2009 |
|
2008 |
|
2008 |
|
|||
|
Finished goods |
|
$ |
862.5 |
|
$ |
831.7 |
|
$ |
974.0 |
|
|
Work in process |
|
1.1 |
|
0.8 |
|
1.2 |
|
|||
|
Raw materials |
|
116.9 |
|
109.8 |
|
101.8 |
|
|||
|
Operating supplies |
|
54.9 |
|
57.2 |
|
64.2 |
|
|||
|
|
|
$ |
1,035.4 |
|
$ |
999.5 |
|
$ |
1,141.2 |
|
6. Contingencies
The Company is one of a number of defendants in a substantial number of lawsuits filed in numerous state and federal courts by persons alleging bodily injury (including death) as a result of exposure to dust from asbestos fibers. From 1948 to 1958, one of the Company’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos. The Company exited the pipe and block insulation business in April 1958. The traditional asbestos personal injury lawsuits and claims relating to such production and sale of asbestos material typically allege various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).
As of September 30, 2009, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 7,000 plaintiffs and claimants. Based on an analysis of the lawsuits pending as of December 31, 2008, approximately 84% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court. Approximately 15% of plaintiffs specifically plead damages of $15 million or less, and fewer than 1% of plaintiffs specifically plead damages greater than $15 million but less than $100 million. Fewer than 1% of plaintiffs specifically plead damages $100 million or greater but less than $122 million.
As indicated by the foregoing summary, current pleading practice permits considerable variation in the assertion of monetary damages. The Company’s experience resolving hundreds of thousands of asbestos claims and lawsuits over an extended period, demonstrates that the monetary relief which may be alleged in a complaint bears little relevance to a claim’s merits or disposition value. Rather, the amount potentially recoverable is determined by such factors as the plaintiff’s severity of disease, the product identification evidence against specific defendants, the defenses available to those defendants, the specific jurisdiction in which the claim is made, and the plaintiff’s history of smoking or exposure to other possible disease-causative factors.
In addition to the pending claims set forth above, the Company has claims-handling agreements in place with many plaintiffs’ counsel throughout the country. These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by the Company’s former business unit during its manufacturing period ending in 1958. Some plaintiffs’ counsel have historically withheld claims under these agreements for later presentation while focusing their attention on active litigation in the tort system. The Company
15
believes that as of September 30, 2009 there are approximately 760 claims against other defendants which are likely to be asserted some time in the future against the Company. These claims are not included in the pending “lawsuits and claims” totals set forth above.
The Company is also a defendant in other asbestos-related lawsuits or claims involving maritime workers, medical monitoring claimants, co-defendants and property damage claimants. Based upon its past experience, the Company believes that these categories of lawsuits and claims will not involve any material liability and they are not included in the above description of pending matters or in the following description of disposed matters.
Since receiving its first asbestos claim, the Company as of September 30, 2009, has disposed of the asbestos claims of approximately 374,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $7,400. Certain of these dispositions have included deferred amounts payable over a number of years. Deferred amounts payable totaled approximately $33.2 million at September 30, 2009 ($34.0 million at December 31, 2008) and are included in the foregoing average indemnity payment per claim. The Company’s indemnity payments for these claims have varied on a per claim basis, and are expected to continue to vary considerably over time. As discussed above, a part of the Company’s objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements. Failure of claimants to meet certain medical and product exposure criteria in the Company’s administrative claims handling agreements has generally reduced the number of marginal or suspect claims that would otherwise have been received. This may have the effect of increasing the Company’s per-claim average indemnity payment over time.
The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot be estimated with certainty. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $3.47 billion through 2008, before insurance recoveries, for its asbestos-related liability. The Company’s ability reasonably to estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the inherent uncertainty of future disease incidence and claiming patterns, the expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the use of mass litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the significant number of co-defendants that have filed for bankruptcy.
The Company has continued to monitor trends which may affect its ultimate liability and has continued to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company. The material components of the Company’s accrued liability are based on amounts estimated by the Company in connection with its annual comprehensive review and consist of the following: (i) the reasonably probable contingent liability for asbestos claims already asserted against the Company; (ii) the contingent liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel; (iii) the contingent liability for asbestos claims not yet asserted against the Company, but which the Company believes it is reasonably probable will be asserted in the next several years, to the degree that an estimation as to future claims is possible; and (iv) the legal defense costs likely to be incurred in connection with the foregoing types of claims.
The significant assumptions underlying the material components of the Company’s accrual are:
16
a) the extent to which settlements are limited to claimants who were exposed to the Company’s asbestos-containing insulation prior to its exit from that business in 1958;
b) the extent to which claims are resolved under the Company’s administrative claims agreements or on terms comparable to those set forth in those agreements;
c) the extent to which the Company’s accelerated settlements in 2007 and 2008 impact the number and type of future claims and lawsuits;
d) the extent of decrease or increase in the incidence of serious disease cases and claiming patterns for such cases;
e) the extent to which the Company is able to defend itself successfully at trial;
f) the extent to which courts and legislatures eliminate, reduce or permit the diversion of financial resources for unimpaired claimants and so-called forum shopping;
g) the extent to which additional defendants with substantial resources and assets are required to participate significantly in the resolution of future asbestos lawsuits and claims;
h) the number and timing of additional co-defendant bankruptcies; and
i) the extent to which co-defendant bankruptcy trusts direct resources to resolve claims that are also presented to the Company and the timing of the payments made by the bankruptcy trusts.
As noted above, the Company conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review. If the results of an annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated future asbestos-related costs, then the Company will record an appropriate charge to increase the accrued liability. The Company believes that an estimation of the reasonably probable amount of the contingent liability for claims not yet asserted against the Company is not possible beyond a period of several years. Therefore, while the results of future annual comprehensive reviews cannot be determined, the Company expects the addition of one year to the estimation period will result in an annual charge.
Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are non-routine and involve compensatory, punitive or treble damage claims as well as other types of relief. The Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated. Recorded amounts are reviewed and adjusted to reflect changes in the factors upon which the estimates are based including additional information, negotiations, settlements, and other events.
The ultimate legal and financial liability of the Company with respect to the lawsuits and proceedings referred to above, in addition to other pending litigation, cannot be estimated with certainty. The Company’s reported results of operations for 2008 were materially affected by
17
the $250.0 million ($248.8 million after tax) fourth quarter charge for asbestos-related costs and asbestos-related payments continue to be substantial. Any future additional charge would likewise materially affect the Company’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and will continue to affect the Company’s cost of borrowing and its ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity will be sufficient to pay its obligations for asbestos-related costs and to fund its working capital and capital expenditure requirements on a short-term and long-term basis.
7. Segment Information
The Company has four reportable segments based on its four geographic locations: (1) Europe; (2) North America; (3) South America; (4) Asia Pacific. These four segments are aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its global glass operations. Certain assets and activities not directly related to one of the regions or to glass manufacturing are reported with Retained Corporate Costs and Other. These include licensing, equipment manufacturing, global engineering, and non-glass equity investments. Retained Corporate Costs and Other also includes certain headquarters administrative and facilities costs and certain incentive compensation and other benefit plan costs that are global in nature and are not allocable to the reportable segments.
The Company’s measure of profit for its reportable segments is Segment Operating Profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs. The Company’s management uses Segment Operating Profit, in combination with selected cash flow information, to evaluate performance and to allocate resources.
Segment Operating Profit for reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided.
Financial information for the three-month periods ended September 30, 2009 and 2008 regarding the Company’s reportable segments is as follows:
|
|
|
2009 |
|
2008 |
|
||
|
Net sales: |
|
|
|
|
|
||
|
Europe |
|
$ |
785.9 |
|
$ |
869.7 |
|
|
North America |
|
538.5 |
|
580.6 |
|
||
|
South America |
|
290.5 |
|
299.1 |
|
||
|
Asia Pacific |
|
252.1 |
|
248.7 |
|
||
|
Reportable segment totals |
|
1,867.0 |
|
1,998.1 |
|
||
|
Other |
|
7.6 |
|
10.5 |
|
||
|
Net sales |
|
$ |
1,874.6 |
|
$ |
2,008.6 |
|
18
|
|
|
2009 |
|
2008 |
|
||
|
Segment Operating Profit: |
|
|
|
|
|
||
|
Europe |
|
$ |
128.4 |
|
$ |
114.8 |
|
|
North America |
|
82.9 |
|
41.7 |
|
||
|
South America |
|
63.6 |
|
92.4 |
|
||
|
Asia Pacific |
|
41.7 |
|
38.7 |
|
||
|
Reportable segment totals |
|
316.6 |
|
287.6 |
|
||
|
|
|
|
|
|
|
||
|
Items excluded from Segment Operating Profit: |
|
|
|
|
|
||
|
Retained corporate costs and other |
|
(13.8 |
) |
(2.3 |
) |
||
|
Restructuring and asset impairments |
|
(57.5 |
) |
(90.6 |
) |
||
|
Interest income |
|
6.1 |
|
10.4 |
|
||
|
Interest expense |
|
(58.6 |
) |
(66.3 |
) |
||
|
Earnings from continuing operations before income taxes |
|
$ |
192.8 |
|
$ |
138.8 |
|
Financial information for the nine-month periods ended September 30, 2009 and 2008 regarding the Company’s reportable segments is as follows:
|
|
|
2009 |
|
2008 |
|
||
|
Net sales: |
|
|
|
|
|
||
|
Europe |
|
$ |
2,192.7 |
|
$ |
2,804.3 |
|
|
North America |
|
1,593.2 |
|
1,717.8 |
|
||
|
South America |
|
754.4 |
|
847.4 |
|
||
|
Asia Pacific |
|
626.9 |
|
741.0 |
|
||
|
|
|
|
|
|
|
||
|
Reportable segment totals |
|
5,167.2 |
|
6,110.5 |
|
||
|
Other |
|
33.4 |
|
69.2 |
|
||
|
Net sales |
|
$ |
5,200.6 |
|
$ |
6,179.7 |
|
|
|
|
2009 |
|
2008 |
|
||
|
Segment Operating Profit: |
|
|
|
|
|
||
|
Europe |
|
$ |
293.0 |
|
$ |
458.2 |
|
|
North America |
|
248.7 |
|
165.2 |
|
||
|
South America |
|
180.6 |
|
251.5 |
|
||
|
Asia Pacific |
|
78.1 |
|
124.9 |
|
||
|
Reportable segment totals |
|
800.4 |
|
999.8 |
|
||
|
|
|
|
|
|
|
||
|
Items excluded from Segment Operating Profit: |
|
|
|
|
|
||
|
Retained corporate costs and other |
|
(49.0 |
) |
(2.9 |
) |
||
|
Restructuring and asset impairments |
|
(113.1 |
) |
(111.7 |
) |
||
|
Interest income |
|
21.1 |
|
29.1 |
|
||
|
Interest expense |
|
(164.6 |
) |
(199.8 |
) |
||
|
Earnings from continuing operations before income taxes |
|
$ |
494.8 |
|
$ |
714.5 |
|
Financial information regarding the Company’s total assets is as follows:
19
|
|
|
Sept. 30, |
|
Dec. 31, |
|
Sept. 30, |
|
|||
|
|
|
2009 |
|
2008 |
|
2008 |
|
|||
|
Total assets: |
|
|
|
|
|
|
|
|||
|
Europe |
|
$ |
4,046.5 |
|
$ |
3,758.4 |
|
$ |
4,045.4 |
|
|
North America |
|
1,919.3 |
|
1,802.9 |
|
1,942.3 |
|
|||
|
South America |
|
1,086.1 |
|
976.2 |
|
990.8 |
|
|||
|
Asia Pacific |
|
1,658.9 |
|
1,239.6 |
|
1,469.2 |
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Reportable segment totals |
|
8,710.8 |
|
7,777.1 |
|
8,447.7 |
|
|||
|
Other |
|
409.0 |
|
199.4 |
|
789.7 |
|
|||
|
Consolidated totals |
|
$ |
9,119.8 |
|
$ |
7,976.5 |
|
$ |
9,237.4 |
|
8. Other Expense
During the third quarter of 2009, the Company recorded charges totaling $57.5 million ($36.0 million after tax amount attributable to the Company) for restructuring and asset impairment. The total of all such charges for the nine months ended September 30, 2009 was $113.1 million ($88.9 million after tax amount attributable to the Company). The charges reflect the additional decisions reached in the Company’s ongoing strategic review of its global manufacturing footprint. See Note 9 for additional information.
Charges for similar actions during the third quarter of 2008 totaled $90.6 million ($79.7 million after tax amount attributable to the Company). The total of all such charges for the nine months ended September 30, 2008 was $110.8 million ($92.7 million after tax amount attributable to the Company). See Note 9 for additional information.
During the first nine months of 2008, the Company also recorded an additional $0.9 million (pretax and after tax amount attributable to the Company), related to the impairment of the Company’s equity investment in the South American Segment’s 50%-owned Caribbean affiliate.
During the three months ended September 30, 2009, the Company entered into a series of parallel market transactions to exchange Venezuelan bolivars into U.S. dollars. In the parallel market, bolivars are valued significantly lower than the official government rate, giving rise to exchange losses from such transactions. As a result, the Company recognized foreign currency exchange losses of $14.7 million in the quarter.
Beginning in 2007, the Company commenced a strategic review of its global profitability and manufacturing footprint. The combined 2007, 2008 and 2009 charges, amounting to $300.8 million ($239.2 million after tax amount attributable to the Company) reflect the decisions reached through September 30, 2009 in the Company’s ongoing strategic review of its global manufacturing footprint. The related curtailment of plant capacity and realignment of selected operations will result in an overall reduction in the Company’s workforce of approximately 2,500 jobs. Amounts recorded by the Company do not include any gains that may be realized upon the ultimate sale or disposition of closed facilities.
The Company’s decisions to curtail selected production capacity have resulted in write downs of certain long-lived assets to the extent their carrying amounts exceeded fair value less cost to sell. The Company classified the significant assumptions used to determine the fair value of the impaired assets, which was not material, as “Level 3” in the fair value hierarchy as set forth in the general accounting principles for fair value measurements.
20
The Company also recorded liabilities for certain employee separation costs to be paid under contractual arrangements and other exit costs.
2007
During the third and fourth quarters of 2007, the Company recorded charges totaling $55.3 million ($40.2 million after tax), for restructuring and asset impairment in Europe and North America. The curtailment of plant capacity resulted in elimination of approximately 560 jobs and a corresponding reduction in the Company’s workforce.
2008
During 2008, the Company recorded charges totaling $132.4 million ($110.1 million after tax amount attributable to the Company), for restructuring and asset impairment across all segments as well as in Retained Corporate Costs and Other. The curtailment of plant capacity and realignment of selected operations resulted in elimination of approximately 1,240 jobs and a corresponding reduction in the Company’s workforce.
2009
During the first three quarters of 2009, the Company recorded charges totaling $113.1 million ($88.9 million after tax amount attributable to the Company), for restructuring and asset impairment in Europe, North America and South America. The charges in 2009 also include $8.7 million for the settlement of pension liabilities related to previously closed facilities. The curtailment of plant capacity will result in elimination of approximately 700 jobs and a corresponding reduction in the Company’s workforce.
The Company expects that the majority of the remaining estimated cash expenditures related to the above charges will be paid out by the end of 2009.
Selected information related to the restructuring accrual is as follows:
21
|
|
|
Employee |
|
Asset |
|
Other |
|
Total |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
2007 Charges |
|
$ |
26.1 |
|
$ |
22.3 |
|
$ |
6.9 |
|
$ |
55.3 |
|
|
Write-down of assets to net realizable value |
|
— |
|
(22.3 |
) |
(2.4 |
) |
(24.7 |
) |
||||
|
Balance at December 31, 2007 |
|
26.1 |
|
— |
|
4.5 |
|
30.6 |
|
||||
|
2008 charges |
|
70.1 |
|
32.5 |
|
29.8 |
|
132.4 |
|
||||
|
Write-down of assets to net realizable value |
|
|
|
(32.5 |
) |
(4.7 |
) |
(37.2 |
) |
||||
|
Net cash paid, principally severance and related benefits |
|
(35.6 |
) |
|
|
(7.2 |
) |
(42.8 |
) |
||||
|
Other, principally foreign exchange translation |
|
(13.0 |
) |
|
|
(6.1 |
) |
(19.1 |
) |
||||
|
Balance at December 31, 2008 |
|
47.6 |
|
— |
|
16.3 |
|
63.9 |
|
||||
|
First quarter 2009 charges |
|
19.1 |
|
29.3 |
|
2.0 |
|
50.4 |
|
||||
|
Write-down of assets to net realizable value |
|
|
|
(29.3 |
) |
|
|
(29.3 |
) |
||||
|
Net cash paid, principally severance and related benefits |
|
(18.9 |
) |
|
|
(1.3 |
) |
(20.2 |
) |
||||
|
Other, principally foreign exchange translation |
|
(1.7 |
) |
|
|
(0.5 |
) |
(2.2 |
) |
||||
|
Balance at March 31, 2009 |
|
46.1 |
|
— |
|
16.5 |
|
62.6 |
|
||||
|
Second quarter 2009 charges |
|
4.6 |
|
0.6 |
|
|
|
5.2 |
|
||||
|
Write-down of assets to net realizable value |
|
|
|
(0.6 |
) |
|
|
(0.6 |
) |
||||
|
Net cash paid, principally severance and related benefits |
|
(12.5 |
) |
|
|
(0.5 |
) |
(13.0 |
) |
||||
|
Other, principally foreign exchange translation |
|
3.4 |
|
|
|
1.3 |
|
4.7 |
|
||||
|
Balance at June 30, 2009 |
|
41.6 |
|
— |
|
17.3 |
|
58.9 |
|
||||
|
Third quarter 2009 charges |
|
40.1 |
|
15.4 |
|
2.0 |
|
57.5 |
|
||||
|
Write-down of assets to net realizable value |
|
|
|
(15.4 |
) |
|
|
(15.4 |
) |
||||
|
Net cash paid, principally severance and related benefits |
|
(8.4 |
) |
|
|
(1.1 |
) |
(9.5 |
) |
||||
|
Non-cash settlement of pension liability |
|
(8.7 |
) |
|
|
|
|
(8.7 |
) |
||||
|
Other, principally foreign exchange translation |
|
1.9 |
|
|
|
0.9 |
|
2.8 |
|
||||
|
Balance at September 30, 2009 |
|
$ |
66.5 |
|
$ |
— |
|
$ |
19.1 |
|
$ |
85.6 |
|
10. Derivative Instruments
The Company has certain derivative assets and liabilities which consist of interest rate swaps, natural gas forwards, and foreign exchange option and forward contracts. The Company records derivative assets and liabilities at fair value and classifies them as “Level 2” in the fair value hierarchy.
The Company’s fixed-to-floating interest rate swaps were accounted for as fair value hedges. Because the relevant terms of the swap agreements matched the corresponding terms of the notes, there was no hedge ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a long-term asset (liability) along with a corresponding net increase (decrease) in the carrying value of the hedged debt.
For derivative instruments that are designated and qualify as fair value hedges, the change in the fair value of the derivative instrument related to the future cash flows (gain or loss on the derivative) as well as the offsetting change in the fair value of the hedged item attributable to the
22
hedged risk are recognized in current earnings. The Company includes the gain or loss on the hedged items (i.e. long-term debt) in the same line item (interest expense) as the offsetting loss or gain on the related interest rate swaps.
During the second quarter of 2009, the Company completed a tender offer for its $250 million senior debentures due 2010. As a result of the tender offer, the Company extinguished $221.9 million of the senior debentures and terminated the related interest rate swap agreements for proceeds of $5.0 million. The Company recognized $4.4 million of the proceeds as a reduction to interest expense upon the termination of the interest rate swap agreements, while the remaining $0.6 million was recorded as an adjustment to debt and is being recognized as a reduction to interest expense over the remaining life of the outstanding senior debentures due 2010. See Note 2 for additional information.
During the second quarter of 2009, the Company’s interest rate swaps related to the $450 million senior notes due 2013 were terminated. The Company received proceeds of $12.4 million which were recorded as an adjustment to debt and will be recognized as a reduction to interest expense over the remaining life of the senior notes due 2013.
As of September 30, 2009, the balance of unamortized proceeds from terminated interest rate swaps included in long-term debt is $11.6 million.
The effect of the interest rate swaps on the results of operations for the three and nine months ended September 30, 2009 and 2008 is as follows:
|
|
|
Amount of Gain (Loss) Recognized in Interest Expense |
|
||||||||||
|
|
|
Three Months Ended Sept. 30 |
|
Nine Months Ended Sept. 30 |
|
||||||||
|
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
||||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Interest Rate Swaps |
|
|
|
$ |
6.5 |
|
$ |
(11.0 |
) |
$ |
1.2 |
|
|
|
Related long-term debt |
|
|
|
(6.5 |
) |
11.0 |
|
(1.2 |
) |
||||
|
Proceeds recognized and amortized for terminated interest rate swaps |
|
$ |
0.9 |
|
|
|
5.7 |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
||||
|
Net impact on interest expense |
|
$ |
0.9 |
|
$ |
— |
|
$ |
5.7 |
|
$ |
— |
|
Commodity Futures Contracts Designated as Cash Flow Hedges
The Company enters into commodity futures contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas market with respect to its forecasted usage requirements over the next twelve to twenty-four months and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements over that period. At September 30, 2009, the Company had entered into commodity futures contracts covering approximately 6,600,000 MM BTUs over that period.
The Company accounts for the above futures contracts as cash flow hedges at September 30, 2009 and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which
23
the underlying hedged item affects earnings. At September 30, 2009, an unrecognized loss of $12.8 million (pretax and after tax) related to the commodity futures contracts was included in Accumulated OCI, and will be reclassified into earnings over the next twelve to twenty-four months. Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings. The ineffectiveness related to these natural gas hedges for the three and nine months ended September 30, 2009 and 2008 was not material.
The effect of the commodity futures contracts on the results of operations for the three months ended September 30, 2009 and 2008 is as follows:
|
|
|
Amount of Gain (Loss) |
|
||||||||
|
|
|
Reclassified from |
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Amount of Loss |
|
Accumulated OCI into |
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Recognized in OCI on |
|
Income (reported in |
|
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|
Commodity Futures Contracts |
|
manufacturing, shipping, and |
|
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|
(Effective Portion) |
|
delivery) (Effective Portion) |
|
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|
2009 |
|
2008 |
|
2009 |
|
2008 |
|
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|
|
|
|
|
|
|
|
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|
$ |
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