UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 2011
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9576
OWENS-ILLINOIS, INC.
(Exact name of registrant as specified in its charter)
|
Delaware |
|
22-2781933 |
|
(State or other jurisdiction of |
|
(IRS Employer |
|
incorporation or organization) |
|
Identification No.) |
|
One Michael Owens Way, Perrysburg, Ohio |
|
43551 |
|
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: (567) 336-5000
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. Yes x 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). Yes x 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.
|
Large accelerated filer x |
|
Accelerated filer o |
|
|
|
|
|
Non-accelerated filer o |
|
Smaller reporting company o |
|
(do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The number of shares of common stock, par value $.01, of Owens-Illinois, Inc. outstanding as of September 30, 2011 was 164,245,252.
Part I — FINANCIAL INFORMATION
Item 1. Financial Statements.
The Condensed Consolidated Financial Statements of Owens-Illinois, Inc. (the “Company”) presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. All adjustments are of a normal recurring nature. Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
|
|
|
Three months ended September 30, |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
Net sales |
|
$ |
1,862 |
|
$ |
1,689 |
|
|
Manufacturing, shipping, and delivery expense |
|
(1,475 |
) |
(1,329 |
) | ||
|
Gross profit |
|
387 |
|
360 |
| ||
|
|
|
|
|
|
| ||
|
Selling and administrative expense |
|
(138 |
) |
(124 |
) | ||
|
Research, development, and engineering expense |
|
(18 |
) |
(14 |
) | ||
|
Interest expense |
|
(70 |
) |
(61 |
) | ||
|
Interest income |
|
2 |
|
2 |
| ||
|
Equity earnings |
|
19 |
|
20 |
| ||
|
Royalties and net technical assistance |
|
4 |
|
4 |
| ||
|
Other income |
|
2 |
|
7 |
| ||
|
Other expense |
|
(40 |
) |
(6 |
) | ||
|
|
|
|
|
|
| ||
|
Earnings from continuing operations before income taxes |
|
148 |
|
188 |
| ||
|
Provision for income taxes |
|
(25 |
) |
(53 |
) | ||
|
|
|
|
|
|
| ||
|
Earnings from continuing operations |
|
123 |
|
135 |
| ||
|
Earnings (loss) from discontinued operations |
|
(3 |
) |
16 |
| ||
|
|
|
|
|
|
| ||
|
Net earnings |
|
120 |
|
151 |
| ||
|
Net earnings attributable to noncontrolling interests |
|
(4 |
) |
(12 |
) | ||
|
Net earnings attributable to the Company |
|
$ |
116 |
|
$ |
139 |
|
|
|
|
|
|
|
| ||
|
Amounts attributable to the Company: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
119 |
|
$ |
127 |
|
|
Earnings (loss) from discontinued operations |
|
(3 |
) |
12 |
| ||
|
Net earnings |
|
$ |
116 |
|
$ |
139 |
|
|
|
|
|
|
|
| ||
|
Amounts attributable to noncontrolling interests: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
4 |
|
$ |
8 |
|
|
Earnings from discontinued operations |
|
|
|
4 |
| ||
|
Net earnings |
|
$ |
4 |
|
$ |
12 |
|
|
|
|
|
|
|
| ||
|
Basic earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
0.73 |
|
$ |
0.78 |
|
|
Earnings (loss) from discontinued operations |
|
(0.02 |
) |
0.07 |
| ||
|
Net earnings |
|
$ |
0.71 |
|
$ |
0.85 |
|
|
|
|
|
|
|
| ||
|
Weighted average shares outstanding (thousands) |
|
163,812 |
|
163,079 |
| ||
|
|
|
|
|
|
| ||
|
Diluted earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
0.72 |
|
$ |
0.77 |
|
|
Earnings (loss) from discontinued operations |
|
(0.02 |
) |
0.07 |
| ||
|
Net earnings |
|
$ |
0.70 |
|
$ |
0.84 |
|
|
|
|
|
|
|
| ||
|
Weighted average diluted shares outstanding (thousands) |
|
165,695 |
|
165,591 |
| ||
|
|
|
|
|
|
| ||
|
Comprehensive income, net of tax: |
|
|
|
|
| ||
|
Net earnings |
|
$ |
120 |
|
$ |
151 |
|
|
Foreign currency translation adjustments |
|
(358 |
) |
276 |
| ||
|
Pension and other postretirement benefit adjustments |
|
39 |
|
11 |
| ||
|
Change in fair value of derivative instruments |
|
(2 |
) |
(4 |
) | ||
|
Total comprehensive income (loss) |
|
(201 |
) |
434 |
| ||
|
Comprehensive income attributable to noncontrolling interests |
|
2 |
|
(22 |
) | ||
|
Comprehensive income (loss) attributable to the Company |
|
$ |
(199 |
) |
$ |
412 |
|
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
|
|
|
Nine months ended September 30, |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
Net sales |
|
$ |
5,540 |
|
$ |
4,905 |
|
|
Manufacturing, shipping, and delivery expense |
|
(4,465 |
) |
(3,863 |
) | ||
|
Gross profit |
|
1,075 |
|
1,042 |
| ||
|
|
|
|
|
|
| ||
|
Selling and administrative expense |
|
(426 |
) |
(367 |
) | ||
|
Research, development, and engineering expense |
|
(52 |
) |
(43 |
) | ||
|
Interest expense |
|
(246 |
) |
(177 |
) | ||
|
Interest income |
|
8 |
|
10 |
| ||
|
Equity earnings |
|
52 |
|
46 |
| ||
|
Royalties and net technical assistance |
|
12 |
|
12 |
| ||
|
Other income |
|
6 |
|
10 |
| ||
|
Other expense |
|
(66 |
) |
(28 |
) | ||
|
|
|
|
|
|
| ||
|
Earnings from continuing operations before income taxes |
|
363 |
|
505 |
| ||
|
Provision for income taxes |
|
(85 |
) |
(136 |
) | ||
|
|
|
|
|
|
| ||
|
Earnings from continuing operations |
|
278 |
|
369 |
| ||
|
Earnings (loss) from discontinued operations |
|
(2 |
) |
31 |
| ||
|
|
|
|
|
|
| ||
|
Net earnings |
|
276 |
|
400 |
| ||
|
Net earnings attributable to noncontrolling interests |
|
(15 |
) |
(35 |
) | ||
|
Net earnings attributable to the Company |
|
$ |
261 |
|
$ |
365 |
|
|
|
|
|
|
|
| ||
|
Amounts attributable to the Company: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
263 |
|
$ |
341 |
|
|
Earnings (loss) from discontinued operations |
|
(2 |
) |
24 |
| ||
|
Net earnings |
|
$ |
261 |
|
$ |
365 |
|
|
|
|
|
|
|
| ||
|
Amounts attributable to noncontrolling interests: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
15 |
|
$ |
28 |
|
|
Earnings from discontinued operations |
|
|
|
7 |
| ||
|
Net earnings |
|
$ |
15 |
|
$ |
35 |
|
|
|
|
|
|
|
| ||
|
Basic earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
1.60 |
|
$ |
2.07 |
|
|
Earnings (loss) from discontinued operations |
|
(0.01 |
) |
0.14 |
| ||
|
Net earnings |
|
$ |
1.59 |
|
$ |
2.21 |
|
|
|
|
|
|
|
| ||
|
Weighted average shares outstanding (thousands) |
|
163,602 |
|
164,638 |
| ||
|
|
|
|
|
|
| ||
|
Diluted earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
1.58 |
|
$ |
2.04 |
|
|
Earnings (loss) from discontinued operations |
|
(0.01 |
) |
0.14 |
| ||
|
Net earnings |
|
$ |
1.57 |
|
$ |
2.18 |
|
|
|
|
|
|
|
| ||
|
Weighted average diluted shares outstanding (thousands) |
|
166,017 |
|
167,558 |
| ||
|
|
|
|
|
|
| ||
|
Comprehensive income, net of tax: |
|
|
|
|
| ||
|
Net earnings |
|
$ |
276 |
|
$ |
400 |
|
|
Foreign currency translation adjustments |
|
(162 |
) |
84 |
| ||
|
Pension and other postretirement benefit adjustments |
|
85 |
|
68 |
| ||
|
Change in fair value of derivative instruments |
|
(1 |
) |
(5 |
) | ||
|
Total comprehensive income |
|
198 |
|
547 |
| ||
|
Comprehensive income attributable to noncontrolling interests |
|
(18 |
) |
(43 |
) | ||
|
Comprehensive income attributable to the Company |
|
$ |
180 |
|
$ |
504 |
|
See accompanying notes.
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share amounts)
|
|
|
September 30, |
|
December 31, |
|
September 30, |
| |||
|
|
|
2011 |
|
2010 |
|
2010 |
| |||
|
Assets |
|
|
|
|
|
|
| |||
|
Current assets: |
|
|
|
|
|
|
| |||
|
Cash and cash equivalents |
|
$ |
256 |
|
$ |
640 |
|
$ |
657 |
|
|
Short-term investments, at cost which approximates market |
|
1 |
|
|
|
1 |
| |||
|
Receivables, less allowances for losses and discounts ($38 at September 30, 2011, $40 at December 31, 2010, and $43 at September 30, 2010) |
|
1,218 |
|
1,075 |
|
1,165 |
| |||
|
Inventories |
|
1,052 |
|
946 |
|
986 |
| |||
|
Prepaid expenses |
|
112 |
|
77 |
|
64 |
| |||
|
Assets of discontinued operations |
|
|
|
|
|
93 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Total current assets |
|
2,639 |
|
2,738 |
|
2,966 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Investments and other assets: |
|
|
|
|
|
|
| |||
|
Equity investments |
|
312 |
|
299 |
|
287 |
| |||
|
Repair parts inventories |
|
163 |
|
147 |
|
141 |
| |||
|
Pension assets |
|
60 |
|
54 |
|
45 |
| |||
|
Other assets |
|
685 |
|
588 |
|
623 |
| |||
|
Goodwill |
|
2,762 |
|
2,821 |
|
2,744 |
| |||
|
Assets of discontinued operations |
|
|
|
|
|
35 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Total other assets |
|
3,982 |
|
3,909 |
|
3,875 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Property, plant, and equipment, at cost |
|
6,998 |
|
7,016 |
|
6,975 |
| |||
|
Less accumulated depreciation |
|
4,067 |
|
3,909 |
|
3,933 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Net property, plant, and equipment |
|
2,931 |
|
3,107 |
|
3,042 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Total assets |
|
$ |
9,552 |
|
$ |
9,754 |
|
$ |
9,883 |
|
CONDENSED CONSOLIDATED BALANCE SHEETS — Continued
|
|
|
September 30, |
|
December 31, |
|
September 30, |
| |||
|
|
|
2011 |
|
2010 |
|
2010 |
| |||
|
Liabilities and Share Owners’ Equity |
|
|
|
|
|
|
| |||
|
Current liabilities: |
|
|
|
|
|
|
| |||
|
Short-term loans and long-term debt due within one year |
|
$ |
345 |
|
$ |
354 |
|
$ |
339 |
|
|
Current portion of asbestos-related liabilities |
|
170 |
|
170 |
|
175 |
| |||
|
Accounts payable |
|
935 |
|
878 |
|
838 |
| |||
|
Other liabilities |
|
663 |
|
677 |
|
779 |
| |||
|
Liabilities of discontinued operations |
|
|
|
|
|
25 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Total current liabilities |
|
2,113 |
|
2,079 |
|
2,156 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Long-term debt |
|
3,743 |
|
3,924 |
|
4,006 |
| |||
|
Deferred taxes |
|
204 |
|
203 |
|
229 |
| |||
|
Pension benefits |
|
530 |
|
576 |
|
547 |
| |||
|
Nonpension postretirement benefits |
|
252 |
|
259 |
|
265 |
| |||
|
Other liabilities |
|
412 |
|
381 |
|
313 |
| |||
|
Asbestos-related liabilities |
|
204 |
|
306 |
|
196 |
| |||
|
Liabilities of discontinued operations |
|
|
|
|
|
15 |
| |||
|
Commitments and contingencies |
|
|
|
|
|
|
| |||
|
Share owners’ equity: |
|
|
|
|
|
|
| |||
|
Share owners’ equity of the Company: |
|
|
|
|
|
|
| |||
|
Common stock, par value $.01 per share, 250,000,000 shares authorized, 181,151,747, 180,808,992, and 180,778,613 shares issued (including treasury shares), respectively |
|
2 |
|
2 |
|
2 |
| |||
|
Capital in excess of par value |
|
2,990 |
|
3,040 |
|
3,034 |
| |||
|
Treasury stock, at cost, 16,906,495, 17,093,509, and 17,142,981 shares, respectively |
|
(408 |
) |
(412 |
) |
(413 |
) | |||
|
Retained earnings |
|
343 |
|
82 |
|
494 |
| |||
|
Accumulated other comprehensive loss |
|
(987 |
) |
(897 |
) |
(1,179 |
) | |||
|
Total share owners’ equity of the Company |
|
1,940 |
|
1,815 |
|
1,938 |
| |||
|
Noncontrolling interests |
|
154 |
|
211 |
|
218 |
| |||
|
Total share owners’ equity |
|
2,094 |
|
2,026 |
|
2,156 |
| |||
|
Total liabilities and share owners’ equity |
|
$ |
9,552 |
|
$ |
9,754 |
|
$ |
9,883 |
|
See accompanying notes.
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in millions)
|
|
|
Nine months ended September 30, |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
Cash flows from operating activities: |
|
|
|
|
| ||
|
Net earnings |
|
$ |
276 |
|
$ |
400 |
|
|
(Earnings) loss from discontinued operations |
|
2 |
|
(31 |
) | ||
|
Non-cash charges (credits): |
|
|
|
|
| ||
|
Depreciation |
|
308 |
|
267 |
| ||
|
Amortization of intangibles and other deferred items |
|
13 |
|
18 |
| ||
|
Amortization of finance fees and debt discount |
|
24 |
|
16 |
| ||
|
Deferred tax benefit |
|
(22 |
) |
(7 |
) | ||
|
Restructuring and asset impairment |
|
41 |
|
8 |
| ||
|
Charge for acquisition-related fair value inventory adjustments |
|
|
|
5 |
| ||
|
Other |
|
123 |
|
78 |
| ||
|
Asbestos-related payments |
|
(102 |
) |
(114 |
) | ||
|
Cash paid for restructuring activities |
|
(27 |
) |
(49 |
) | ||
|
Change in non-current operating assets |
|
(72 |
) |
(32 |
) | ||
|
Change in non-current liabilities |
|
(58 |
) |
(44 |
) | ||
|
Change in components of working capital |
|
(225 |
) |
(145 |
) | ||
|
Cash provided by continuing operating activities |
|
281 |
|
370 |
| ||
|
Cash provided by (utilized in) discontinued operating activities |
|
(1 |
) |
35 |
| ||
|
Total cash provided by operating activities |
|
280 |
|
405 |
| ||
|
Cash flows from investing activities: |
|
|
|
|
| ||
|
Additions to property, plant, and equipment - continuing |
|
(204 |
) |
(389 |
) | ||
|
Additions to property, plant, and equipment - discontinued |
|
|
|
(3 |
) | ||
|
Acquisitions, net of cash acquired |
|
(148 |
) |
(754 |
) | ||
|
Change in short-term investements |
|
(1 |
) |
|
| ||
|
Net cash proceeds related to sale of assets and other |
|
2 |
|
1 |
| ||
|
Cash utilized in investing activities |
|
(351 |
) |
(1,145 |
) | ||
|
Cash flows from financing activities: |
|
|
|
|
| ||
|
Additions to long-term debt |
|
1,560 |
|
1,370 |
| ||
|
Repayments of long-term debt |
|
(1,849 |
) |
(495 |
) | ||
|
Increase (decrease) in short-term loans - continuing |
|
40 |
|
(28 |
) | ||
|
Decrease in short-term loans - discontinued |
|
|
|
(2 |
) | ||
|
Net receipts (payments) for hedging activity |
|
(22 |
) |
34 |
| ||
|
Payment of finance fees |
|
(18 |
) |
(33 |
) | ||
|
Dividends paid to noncontrolling interests |
|
(32 |
) |
(23 |
) | ||
|
Treasury shares purchased |
|
|
|
(199 |
) | ||
|
Issuance of common stock and other |
|
5 |
|
4 |
| ||
|
Cash provided by (utilized in) financing activities |
|
(316 |
) |
628 |
| ||
|
Effect of exchange rate fluctuations on cash |
|
3 |
|
|
| ||
|
Decrease in cash |
|
(384 |
) |
(112 |
) | ||
|
Cash at beginning of period |
|
640 |
|
812 |
| ||
|
Cash at end of period |
|
256 |
|
700 |
| ||
|
Cash - discontinued operations |
|
|
|
43 |
| ||
|
Cash - continuing operations |
|
$ |
256 |
|
$ |
657 |
|
See accompanying notes.
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 September 30, |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
Numerator: |
|
|
|
|
| ||
|
Net earnings attributable to the Company |
|
$ |
116 |
|
$ |
139 |
|
|
|
|
|
|
|
| ||
|
Denominator (in thousands): |
|
|
|
|
| ||
|
Denominator for basic earnings per share - weighted average shares outstanding |
|
163,812 |
|
163,079 |
| ||
|
|
|
|
|
|
| ||
|
Effect of dilutive securities: |
|
|
|
|
| ||
|
Stock options and other |
|
1,883 |
|
2,512 |
| ||
|
|
|
|
|
|
| ||
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding |
|
165,695 |
|
165,591 |
| ||
|
Basic earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
0.73 |
|
$ |
0.78 |
|
|
Earnings (loss) from discontinued operations |
|
(0.02 |
) |
0.07 |
| ||
|
Net earnings |
|
$ |
0.71 |
|
$ |
0.85 |
|
|
|
|
|
|
|
| ||
|
Diluted earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
0.72 |
|
$ |
0.77 |
|
|
Earnings (loss) from discontinued operations |
|
(0.02 |
) |
0.07 |
| ||
|
Net earnings |
|
$ |
0.70 |
|
$ |
0.84 |
|
Options to purchase 1,621,239 and 838,535 weighted average shares of common stock which were outstanding during the three months ended September 30, 2011 and 2010, 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.
|
|
|
Nine months ended September 30, |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
Numerator: |
|
|
|
|
| ||
|
Net earnings attributable to the Company |
|
$ |
261 |
|
$ |
365 |
|
|
Net earnings attributable to participating securities |
|
|
|
(1 |
) | ||
|
|
|
|
|
|
| ||
|
Numerator for basic earnings per share - income available to common share owners |
|
$ |
261 |
|
$ |
364 |
|
|
|
|
|
|
|
| ||
|
Denominator (in thousands): |
|
|
|
|
| ||
|
Denominator for basic earnings per share - weighted average shares outstanding |
|
163,602 |
|
164,638 |
| ||
|
|
|
|
|
|
| ||
|
Effect of dilutive securities: |
|
|
|
|
| ||
|
Stock options and other |
|
2,415 |
|
2,920 |
| ||
|
|
|
|
|
|
| ||
|
Denominator for diluted earnings per share - adjusted weighted average shares outstanding |
|
166,017 |
|
167,558 |
| ||
|
|
|
|
|
|
| ||
|
Basic earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
1.60 |
|
$ |
2.07 |
|
|
Earnings (loss) from discontinued operations |
|
(0.01 |
) |
0.14 |
| ||
|
Net earnings |
|
$ |
1.59 |
|
$ |
2.21 |
|
|
|
|
|
|
|
| ||
|
Diluted earnings per share: |
|
|
|
|
| ||
|
Earnings from continuing operations |
|
$ |
1.58 |
|
$ |
2.04 |
|
|
Earnings (loss) from discontinued operations |
|
(0.01 |
) |
0.14 |
| ||
|
Net earnings |
|
$ |
1.57 |
|
$ |
2.18 |
|
Options to purchase 895,539 and 640,294 weighted average shares of common stock which were outstanding during the nine months ended September 30, 2011 and 2010, 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.
The 2015 Exchangeable Notes have a dilutive effect only in those periods in which the Company’s average stock price exceeds the exchange price of $47.47 per share. For the three and nine months ended September 30, 2011, the Company’s average stock price did not exceed the exchange price. Therefore, the potentially issuable shares resulting from the settlement of the 2015 Exchangeable Notes were not included in the calculation of diluted earnings per share.
2. Debt
The following table summarizes the long-term debt of the Company:
|
|
|
September 30, |
|
December 31, |
|
September 30, |
| |||
|
|
|
2011 |
|
2010 |
|
2010 |
| |||
|
Secured Credit Agreement: |
|
|
|
|
|
|
| |||
|
Revolving Credit Facility: |
|
|
|
|
|
|
| |||
|
Revolving Loans |
|
$ |
30 |
|
$ |
— |
|
$ |
— |
|
|
Term Loans: |
|
|
|
|
|
|
| |||
|
Term Loan A (170 million AUD at September 30, 2011) |
|
166 |
|
|
|
|
| |||
|
Term Loan B |
|
600 |
|
|
|
|
| |||
|
Term Loan C (116 million CAD at September 30, 2011) |
|
112 |
|
|
|
|
| |||
|
Term Loan D (€141 million at September 30, 2011) |
|
191 |
|
|
|
|
| |||
|
Fourth Amended and Restated Secured Credit Agreement: |
|
|
|
|
|
|
| |||
|
Term Loans: |
|
|
|
|
|
|
| |||
|
Term Loan A |
|
|
|
92 |
|
155 |
| |||
|
Term Loan B |
|
|
|
190 |
|
190 |
| |||
|
Term Loan C |
|
|
|
111 |
|
107 |
| |||
|
Term Loan D |
|
|
|
253 |
|
258 |
| |||
|
Senior Notes: |
|
|
|
|
|
|
| |||
|
6.75%, due 2014 |
|
|
|
400 |
|
400 |
| |||
|
6.75%, due 2014 (€225 million) |
|
|
|
300 |
|
306 |
| |||
|
3.00%, Exchangeable, due 2015 |
|
620 |
|
607 |
|
603 |
| |||
|
7.375%, due 2016 |
|
587 |
|
585 |
|
584 |
| |||
|
6.875%, due 2017 (€300 million) |
|
406 |
|
401 |
|
408 |
| |||
|
6.75%, due 2020 (€500 million) |
|
677 |
|
668 |
|
680 |
| |||
|
Senior Debentures: |
|
|
|
|
|
|
| |||
|
7.80%, due 2018 |
|
250 |
|
250 |
|
250 |
| |||
|
Other |
|
154 |
|
164 |
|
131 |
| |||
|
Total long-term debt |
|
3,793 |
|
4,021 |
|
4,072 |
| |||
|
Less amounts due within one year |
|
50 |
|
97 |
|
66 |
| |||
|
Long-term debt |
|
$ |
3,743 |
|
$ |
3,924 |
|
$ |
4,006 |
|
On May 19, 2011, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”). The proceeds from the Agreement were used to repay all outstanding amounts under the previous credit agreement and the U.S. dollar-denominated 6.75% senior notes due 2014. On June 7, 2011, the Company also redeemed the euro-denominated 6.75% senior notes due 2014. The Company recorded $25 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees.
At September 30, 2011, the Agreement included a $900 million revolving credit facility, a 170 million Australian dollar term loan, a $600 million term loan, a 116 million Canadian dollar term loan, and a €141 million term loan, each of which has a final maturity date of May 19, 2016. At September 30, 2011, the Company’s subsidiary borrowers had unused credit of $767 million available under the Agreement.
The Agreement contains various covenants that restrict, among other things and subject to certain exceptions, the ability of the Company to incur certain liens, make certain investments, become liable under contingent obligations in certain defined instances only, make restricted junior payments, make certain asset sales within guidelines and limits, make capital expenditures beyond a certain threshold, engage in material transactions with shareholders and affiliates, participate in sale and leaseback financing arrangements, alter its fundamental business, and amend certain outstanding debt obligations.
The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the Company to not exceed a ratio calculated by dividing consolidated total debt, less cash and cash equivalents, by Consolidated Adjusted EBITDA, as defined in the Agreement. The Leverage Ratio could restrict the ability of the Company to undertake additional financing or acquisitions to the extent that such financing or acquisitions would cause the Leverage Ratio to exceed the specified maximum.
Failure to comply with these covenants and restrictions could result in an event of default under the Agreement. In such an event, the Company could not request borrowings under the revolving facility, and all amounts outstanding under the Agreement, together with accrued interest, could then be declared immediately due and payable. If an event of default occurs under the Agreement and the lenders cause all of the outstanding debt obligations under the Agreement to become due and payable, this would result in a default under a number of other outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. A default or event of default under the Agreement, indentures or agreements governing other indebtedness could also lead to an acceleration of debt under other debt instruments that contain cross acceleration or cross-default provisions.
The Leverage Ratio also determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the Agreement. These rates include a margin linked to the Leverage Ratio. The margins range from 1.25% to 2.00% for Eurocurrency Rate loans and from 0.25% to 1.00% for Base Rate loans. In addition, a facility fee is payable on the revolving credit facility commitments ranging from 0.25% to 0.50% per annum linked to the Leverage Ratio. The weighted average interest rate on borrowings outstanding under the Agreement at September 30, 2011 was 2.93%. As of September 30, 2011, the Company was in compliance with all covenants and restrictions in the Agreement. In addition, the Company believes that it will remain in compliance and that its ability to borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.
Borrowings under the Agreement are secured by substantially all of the assets, excluding real estate, of the Company’s domestic subsidiaries and certain foreign subsidiaries. Borrowings are also secured by a pledge of intercompany debt and equity in most of the Company’s domestic subsidiaries and stock of certain foreign subsidiaries. All borrowings under the agreement are guaranteed by substantially all domestic subsidiaries of the Company for the term of the Agreement.
The Company has a €280 million European accounts receivable securitization program, which extends through September 2016, subject to annual renewal of backup credit lines. Information related to the Company’s accounts receivable securitization program is as follows:
|
|
|
September 30, |
|
December 31, |
|
September 30, |
| |||
|
|
|
2011 |
|
2010 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Balance (included in short-term loans) |
|
$ |
233 |
|
$ |
247 |
|
$ |
243 |
|
|
|
|
|
|
|
|
|
| |||
|
Weighted average interest rate |
|
1.87 |
% |
2.40 |
% |
2.49 |
% | |||
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, 2011 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: |
|
|
|
|
|
|
| ||
|
3.00%, Exchangeable, due 2015 |
|
$ |
690 |
|
89.95 |
|
$ |
621 |
|
|
7.375%, due 2016 |
|
600 |
|
105.25 |
|
632 |
| ||
|
6.875%, due 2017 (€300 million) |
|
406 |
|
95.46 |
|
388 |
| ||
|
6.75%, due 2020 (€500 million) |
|
677 |
|
92.81 |
|
628 |
| ||
|
Senior Debentures: |
|
|
|
|
|
|
| ||
|
7.80%, due 2018 |
|
250 |
|
106.00 |
|
265 |
| ||
3. Supplemental Cash Flow Information
|
|
|
Nine months ended September 30, |
| ||||
|
|
|
2011 |
|
2010 |
| ||
|
|
|
|
|
|
| ||
|
Interest paid in cash |
|
$ |
217 |
|
$ |
163 |
|
|
|
|
|
|
|
| ||
|
Income taxes paid in cash: |
|
|
|
|
| ||
|
U.S. - continuing |
|
$ |
— |
|
$ |
2 |
|
|
Non-U.S. - continuing |
|
91 |
|
61 |
| ||
|
Non-U.S. - discontinued operations |
|
|
|
7 |
| ||
|
Total income taxes paid in cash |
|
$ |
91 |
|
$ |
70 |
|
Cash interest for 2011 includes note repurchase premiums of $16 million related to the second quarter 2011 redemption of the Company’s 6.75% senior notes due 2014. Cash interest for
2010 included note repurchase premiums of $6 million related to the second quarter 2010 redemption of the Company’s 8.25% senior notes due 2013.
4. Share Owners’ Equity
The activity in share owners’ equity for the three months ended September 30, 2011 and 2010 is as follows:
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|
| |||||||||||||||
|
|
|
Common |
|
Capital in |
|
Treasury |
|
Retained |
|
Accumulated |
|
Non- |
|
Total Share |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Balance on July 1, 2011 |
|
$ |
2 |
|
$ |
2,986 |
|
$ |
(410 |
) |
$ |
227 |
|
$ |
(672 |
) |
$ |
157 |
|
$ |
2,290 |
|
|
Issuance of common stock (0.1 million shares) |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
2 |
| |||||||
|
Reissuance of common stock (0.1 million shares) |
|
|
|
(1 |
) |
2 |
|
|
|
|
|
|
|
1 |
| |||||||
|
Stock compensation |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
3 |
| |||||||
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Net earnings |
|
|
|
|
|
|
|
116 |
|
|
|
4 |
|
120 |
| |||||||
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
(352 |
) |
(6 |
) |
(358 |
) | |||||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
|
|
|
|
|
|
|
|
39 |
|
|
|
39 |
| |||||||
|
Change in fair value of derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) | |||||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
(1 |
) | |||||||
|
Balance on September 30, 2011 |
|
$ |
2 |
|
$ |
2,990 |
|
$ |
(408 |
) |
$ |
343 |
|
$ |
(987 |
) |
$ |
154 |
|
$ |
2,094 |
|
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|
| |||||||||||||||
|
|
|
Common |
|
Capital in |
|
Treasury |
|
Retained |
|
Accumulated |
|
Non- |
|
Total Share |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Balance on July 1, 2010 |
|
$ |
2 |
|
$ |
3,047 |
|
$ |
(414 |
) |
$ |
355 |
|
$ |
(1,452 |
) |
$ |
205 |
|
$ |
1,743 |
|
|
Reissuance of common stock (0.1 million shares) |
|
|
|
|
|
1 |
|
|
|
|
|
|
|
1 |
| |||||||
|
Stock compensation |
|
|
|
(3 |
) |
|
|
|
|
|
|
|
|
(3 |
) | |||||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Net earnings |
|
|
|
|
|
|
|
139 |
|
|
|
12 |
|
151 |
| |||||||
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
266 |
|
10 |
|
276 |
| |||||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
|
|
|
|
|
|
|
|
11 |
|
|
|
11 |
| |||||||
|
Change in fair value of derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) | |||||||
|
Acquisition of noncontrolling interest |
|
|
|
(10 |
) |
|
|
|
|
|
|
(8 |
) |
(18 |
) | |||||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
(1 |
) | |||||||
|
Balance on September 30, 2010 |
|
$ |
2 |
|
$ |
3,034 |
|
$ |
(413 |
) |
$ |
494 |
|
$ |
(1,179 |
) |
$ |
218 |
|
$ |
2,156 |
|
The activity in share owners’ equity for the nine months ended September 30, 2011 and 2010 is as follows:
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|
| |||||||||||||||
|
|
|
Common |
|
Capital in |
|
Treasury |
|
Retained |
|
Accumulated |
|
Non- |
|
Total Share |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Balance on January 1, 2011 |
|
$ |
2 |
|
$ |
3,040 |
|
$ |
(412 |
) |
$ |
82 |
|
$ |
(897 |
) |
$ |
211 |
|
$ |
2,026 |
|
|
Issuance of common stock (0.3 million shares) |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
5 |
| |||||||
|
Reissuance of common stock (0.2 million shares) |
|
|
|
|
|
4 |
|
|
|
|
|
|
|
4 |
| |||||||
|
Stock compensation |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
(1 |
) | |||||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Net earnings |
|
|
|
|
|
|
|
261 |
|
|
|
15 |
|
276 |
| |||||||
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
(165 |
) |
3 |
|
(162 |
) | |||||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
|
|
|
|
|
|
|
|
85 |
|
|
|
85 |
| |||||||
|
Change in fair value of derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
(1 |
) | |||||||
|
Acquisition of noncontrolling interest |
|
|
|
(54 |
) |
|
|
|
|
(9 |
) |
(43 |
) |
(106 |
) | |||||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
|
|
|
|
|
|
|
|
|
|
(32 |
) |
(32 |
) | |||||||
|
Balance on September 30, 2011 |
|
$ |
2 |
|
$ |
2,990 |
|
$ |
(408 |
) |
$ |
343 |
|
$ |
(987 |
) |
$ |
154 |
|
$ |
2,094 |
|
|
|
|
Share Owners’ Equity of the Company |
|
|
|
|
| |||||||||||||||
|
|
|
Common |
|
Capital in |
|
Treasury |
|
Retained |
|
Accumulated |
|
Non- |
|
Total Share |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Balance on January 1, 2010 |
|
$ |
2 |
|
$ |
2,942 |
|
$ |
(217 |
) |
$ |
129 |
|
$ |
(1,318 |
) |
$ |
198 |
|
$ |
1,736 |
|
|
Issuance of common stock (0.9 million shares) |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
4 |
| |||||||
|
Reissuance of common stock (0.2 million shares) |
|
|
|
1 |
|
3 |
|
|
|
|
|
|
|
4 |
| |||||||
|
Treasury shares purchased (6.0 million shares) |
|
|
|
|
|
(199 |
) |
|
|
|
|
|
|
(199 |
) | |||||||
|
Stock compensation |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
6 |
| |||||||
|
Issuance of exchangeable notes |
|
|
|
91 |
|
|
|
|
|
|
|
|
|
91 |
| |||||||
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
Net earnings |
|
|
|
|
|
|
|
365 |
|
|
|
35 |
|
400 |
| |||||||
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
76 |
|
8 |
|
84 |
| |||||||
|
Pension and other postretirement benefit adjustments, net of tax |
|
|
|
|
|
|
|
|
|
68 |
|
|
|
68 |
| |||||||
|
Change in fair value of derivative instruments, net of tax |
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) | |||||||
|
Acquisition of noncontrolling interest |
|
|
|
(10 |
) |
|
|
|
|
|
|
(8 |
) |
(18 |
) | |||||||
|
Noncontrolling interests’ share of acquisition |
|
|
|
|
|
|
|
|
|
|
|
8 |
|
8 |
| |||||||
|
Dividends paid to noncontrolling interests on subsidiary common stock |
|
|
|
|
|
|
|
|
|
|
|
(23 |
) |
(23 |
) | |||||||
|
Balance on September 30, 2010 |
|
$ |
2 |
|
$ |
3,034 |
|
$ |
(413 |
) |
$ |
494 |
|
$ |
(1,179 |
) |
$ |
218 |
|
$ |
2,156 |
|
The acquisition of noncontrolling interests for the nine months ended September 30, 2011 was related to the Company purchasing the noncontrolling interest in its southern Brazil operations.
5. Inventories
Major classes of inventory are as follows:
|
|
|
September 30, |
|
December 31, |
|
September 30, |
| |||
|
|
|
2011 |
|
2010 |
|
2010 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Finished goods |
|
$ |
885 |
|
$ |
786 |
|
$ |
818 |
|
|
Raw materials |
|
113 |
|
106 |
|
111 |
| |||
|
Operating supplies |
|
54 |
|
54 |
|
57 |
| |||
|
|
|
|
|
|
|
|
| |||
|
|
|
$ |
1,052 |
|
$ |
946 |
|
$ |
986 |
|
6. Contingencies
The Company is a defendant in numerous lawsuits alleging bodily injury and death as a result of exposure to asbestos dust. 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 typical asbestos personal injury lawsuit alleges 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, 2011, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 5,300 plaintiffs and claimants. Based on an analysis of the lawsuits pending as of December 31, 2010, approximately 76% 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 22% of plaintiffs specifically plead damages of $15 million or less, and 2% 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 that 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 severity of the plaintiff’s asbestos disease, the product identification evidence against the Company and other defendants, the defenses available to the Company and other defendants, the specific jurisdiction in which the claim is made, and the plaintiff’s medical history and exposure to other disease-causing agents.
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 believes that as of September 30, 2011 there are approximately 500 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, 2011, has disposed of the asbestos claims of approximately 385,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $7,900. Certain of these dispositions have included deferred amounts payable over a number of years. Deferred amounts payable totaled approximately $14 million at September 30, 2011 ($26 million at December 31, 2010) and are included in the foregoing average indemnity payment per claim. The Company’s asbestos indemnity payments 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. In addition, certain courts and legislatures have reduced or eliminated the number of marginal or suspect claims that the Company otherwise would have received. These developments generally have had the effect of increasing the Company’s per-claim average indemnity payment.
The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot reasonably be estimated. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $3.82 billion through 2010, before insurance recoveries, for its asbestos-related liability. The Company’s ability to reasonably estimate its liability has been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, 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 the use of mass litigation screenings to generate large numbers of claims by parties who allege exposure to asbestos dust but have no present physical asbestos impairment.
The Company has continued to monitor trends that 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 determined by the Company in connection with its annual comprehensive review and consist of the following estimates, to the extent it is probable that such liabilities have been incurred and can be reasonably estimated: (i) the liability for asbestos claims already asserted against the Company; (ii) the liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel; (iii) the liability for asbestos claims not yet asserted against the Company, but which the Company believes will be asserted in the next several years; 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:
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 of decrease or increase in the incidence of serious disease cases and claiming patterns for such cases;
d) the extent to which the Company is able to defend itself successfully at trial;
e) the extent to which courts and legislatures eliminate, reduce or permit the diversion of financial resources for unimpaired claimants;
f) the number and timing of additional co-defendant bankruptcies;
g) the extent to which 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; and
h) the extent to which co-defendants with substantial resources and assets continue to participate significantly in the resolution of future asbestos lawsuits and claims.
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 a reasonable estimation of the probable amount of the 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.
On March 11, 2011, the Company received a verdict in an asbestos case in which conspiracy claims had been asserted against the Company. Of the total nearly $90 million awarded by the jury against the four defendants in the case, almost $10 million in compensatory damages were assessed against all four defendants, and $40 million in punitive damages were assessed against the Company.
The Company continues to deny the conspiracy allegations in this case and will vigorously challenge this verdict, if necessary, in the appellate courts, and, therefore, has made no change to its asbestos-related liability as of September 30, 2011. While the Company cannot predict the ultimate outcome of this lawsuit, the Company and other conspiracy defendants have successfully challenged jury verdicts in similar cases.
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 reasonably be estimated. The Company’s reported results of operations for 2010 were materially affected by the $170 million (pretax and 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 may 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 net sales and 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, 2011 and 2010 regarding the Company’s reportable segments is as follows:
|
|
|
2011 |
|
2010 |
| ||
|
Net sales: |
|
|
|
|
| ||
|
Europe |
|
$ |
770 |
|
$ |
702 |
|
|
North America |
|
497 |
|
483 |
| ||
|
South America |
|
310 |
|
243 |
| ||
|
Asia Pacific |
|
270 |
|
251 |
| ||
|
|
|
|
|
|
| ||
|
Reportable segment totals |
|
1,847 |
|
1,679 |
| ||
|
Other |
|
15 |
|
10 |
| ||
|
Net sales |
|
$ |
1,862 |
|
$ |
1,689 |
|
|
|
|
2011 |
|
2010 |
| ||
|
Segment Operating Profit: |
|
|
|
|
| ||
|
Europe |
|
$ |
106 |
|
$ |
114 |
|
|
North America |
|
73 |
|
72 |
| ||
|
South America |
|
67 |
|
56 |
| ||
|
Asia Pacific |
|
23 |
|
37 |
| ||
|
Reportable segment totals |
|
269 |
|
279 |
| ||
|
|
|
|
|
|
| ||
|
Items excluded from Segment Operating Profit: |
|
|
|
|
| ||
|
Retained corporate costs and other |
|
(24 |
) |
(21 |
) | ||
|
Restructuring and asset impairment |
|
(29 |
) |
|
| ||
|
Acquisition-related fair value inventory adjustments and restructuring, transaction and financing costs |
|
|
|
(11 |
) | ||
|
Interest income |
|
2 |
|
2 |
| ||
|
Interest expense |
|
(70 |
) |
(61 |
) | ||
|
Earnings from continuing operations before income taxes |
|
$ |
148 |
|
$ |
188 |
|
Financial information for the nine-month periods ended September 30, 2011 and 2010 regarding the Company’s reportable segments is as follows:
|
|
|
2011 |
|
2010 |
| ||
|
Net sales: |
|
|
|
|
| ||
|
Europe |
|
$ |
2,355 |
|
$ |
2,086 |
|
|
North America |
|
1,466 |
|
1,443 |
| ||
|
South America |
|
881 |
|
625 |
| ||
|
Asia Pacific |
|
778 |
|
724 |
| ||
|
|
|
|
|
|
| ||
|
Reportable segment totals |
|
5,480 |
|
4,878 |
| ||
|
Other |
|
60 |
|
27 |
| ||
|
Net sales |
|
$ |
5,540 |
|
$ |
4,905 |
|
|
|
|
2011 |
|
2010 |
| ||
|
Segment Operating Profit: |
|
|
|
|
| ||
|
Europe |
|
$ |
284 |
|
$ |
274 |
|
|
North America |
|
188 |
|
222 |
| ||
|
South America |
|
165 |
|
142 |
| ||
|
Asia Pacific |
|
56 |
|
105 |
| ||
|
Reportable segment totals |
|
693 |
|
743 |
| ||
|
|
|
|
|
|
| ||
|
Items excluded from Segment Operating Profit: |
|
|
|
|
| ||
|
Retained corporate costs and other |
|
(51 |
) |
(52 |
) | ||
|
Restructuring and asset impairment |
|
(41 |
) |
(8 |
) | ||
|
Acquisition-related fair value inventory adjustments and restructuring, transaction and financing costs |
|
|
|
(11 |
) | ||
|
Interest income |
|
8 |
|
10 |
| ||
|
Interest expense |
|
(246 |
) |
(177 |
) | ||
|
Earnings from continuing operations before income taxes |
|
$ |
363 |
|
$ |
505 |
|
Financial information regarding the Company’s total assets is as follows:
|
|
|
September 30, |
|
December 31, |
|
September 30, |
| |||
|
|
|
2011 |
|
2010 |
|
2010 |
| |||
|
Total assets: |
|
|
|
|
|
|
| |||
|
Europe |
|
$ |
3,693 |
|
$ |
3,618 |
|
$ |
3,659 |
|
|
North America |
|
1,953 |
|
1,961 |
|
2,002 |
| |||
|
South America |
|
1,649 |
|
1,680 |
|
1,639 |
| |||
|
Asia Pacific |
|
1,974 |
|
2,047 |
|
1,898 |
| |||
|
|
|
|
|
|
|
|
| |||
|
Reportable segment totals |
|
9,269 |
|
9,306 |
|
9,198 |
| |||
|
Other |
|
283 |
|
448 |
|
685 |
| |||
|
Consolidated totals |
|
$ |
9,552 |
|
$ |
9,754 |
|
$ |
9,883 |
|
8. Other Expense
Other expense for the three months and nine months ended September 30, 2011, includes charges totaling $23 million and $35 million, respectively, for restructuring and asset impairment in the Company’s Asia Pacific segment. Other expense for the three months and nine months ended September 30, 2011, also includes $6 million for restructuring charges related to headcount reductions, primarily in the Company’s South America segment. See Note 9 for additional information.
During the three months ended September 30, 2010, the Company recorded charges of $6 million for acquisition transaction costs. These charges represent legal, accounting and other outside consultants expenses directly related to acquisitions.
During the nine months ended September 30, 2010, the Company recorded charges totaling $8 million for restructuring and asset impairment related to the Company’s strategic review of its global manufacturing footprint. See Note 9 for additional information.
9. Restructuring Accruals
Beginning in 2007, the Company commenced a strategic review of its global profitability and manufacturing footprint. The Company concluded its global review as of December 31, 2009, with the final actions implemented in the first half of 2010. Amounts recorded by the Company do not include any future gains that may be realized upon the ultimate sale or disposition of closed facilities.
The Company is currently formulating and implementing a restructuring plan in its Asia Pacific segment to align its supply base with lower demand in Australia. As part of this plan, the Company closed one machine line in the second quarter of 2011, and recorded $4 million of restructuring charges for related employee costs. During the third quarter of 2011, the Company recorded charges of $22 million for employee costs and asset impairments as it closed one furnace in Australia during the quarter and plans to close one additional furnace in early 2012. Further restructuring activities in Australia will depend on 2012 supply and demand trends and the outcome of contract negotiations.
The Company continually reviews its manufacturing footprint and may close various operations due to plant efficiencies, integration of acquisitions, and other market factors. These restructuring actions taken by the Company are not related to the strategic review of manufacturing operations or the Australian restructuring plan discussed above. As part of this continuing review of its manufacturing footprint, the Company recorded restructuring charges of $8 million in the first quarter of 2011 for employee costs related to a plant closing and the related relocation of business to other facilities in its Asia Pacific segment. In addition, the Company recorded restructuring charges of $6 million in the third quarter of 2011 related to headcount reductions, primarily in the South America segment.
The Company acquired VDL in the third quarter of 2011 (see Note 13). As part of this acquisition, the Company assumed the severance liability of VDL related to a headcount reduction program initiated prior to the acquisition.
Selected information related to the restructuring accruals for the first nine months of 2011 and 2010 is as follows:
|
|
|
Strategic Footprint Review |
|
|
|
Other |
|
|
| ||||||||||
|
|
|
Employee |
|
Other |
|
Total |
|
Australia |
|
Restructuring |
|
Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
Balance at January 1, 2011 |
|
$ |
27 |
|
$ |
25 |
|
$ |
52 |
|
$ |
— |
|
$ |
27 |
|
$ |
79 |
|
|
First quarter 2011 charges |
|
|
|
|
|
|
|
|
|
8 |
|
8 |
| ||||||
|
Net cash paid, principally severance and related benefits |
|
(2 |
) |
(2 |
) |
(4 |
) |
|
|
|
|
(4 |
) | ||||||
|
Other, including foreign exchange translation |
|
2 |
|
|
|
2 |
|
|
|
|
|
2 |
| ||||||
|
Balance at March 31, 2011 |
|
27 |
|
23 |
|
50 |
|
— |
|
35 |
|
||||||||