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Anheuser-Busch InBev S.A. 10-Q 2007 UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
COMMISSION
FILE NUMBER: 1-7823
ANHEUSER-BUSCH
COMPANIES, INC.
One
Busch Place, St. Louis, Missouri 63118
(314)
577-2000
(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 the filing requirements
for
the past 90 days.
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange
Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
$1
Par
Value Common Stock – 733,837,351 shares as of September 30,
2007.
1
Anheuser-Busch
Companies, Inc. and
Subsidiaries
Consolidated
Balance Sheet (Unaudited)
See
the
accompanying footnotes on pages 5 to 12.
2
Anheuser-Busch
Companies, Inc. and
Subsidiaries
Consolidated
Statement of Income
(Unaudited)
See
the
accompanying footnotes on pages 5 to 12.
3
Anheuser-Busch
Companies, Inc. and Subsidiaries
Consolidated
Statement of Cash Flows
(Unaudited)
See
the
accompanying footnotes on pages 5 to 12.
4
Anheuser-Busch
Companies, Inc. and Subsidiaries
Notes
to Unaudited Consolidated Financial Statements
1. Unaudited
Financial Statements
The
unaudited financial statements have been prepared in accordance with U.S.
generally accepted accounting principles and applicable SEC guidelines
pertaining to quarterly financial reporting, and include all adjustments
necessary for a fair presentation. These statements should be read in
combination with the consolidated financial statements and notes included in
the
company’s annual report on Form 10-K for the year ended December 31,
2006.
2.
Business Segments Information
Following
is comparative business segments information for the third quarter and nine
months ended September 30 (in millions):
5
In
2007, the company changed management reporting responsibility for certain
administrative and technology support costs from Corporate to the U.S. beer
segment. 2006 segment results have been updated to conform to this reporting
convention.
3.
Stock Compensation
Under
the terms of the company’s stock option plans, officers, certain other employees
and non-employee directors may be granted options to purchase the company’s
common stock at a price equal to the New York Stock Exchange closing composite
tape on the date the option is granted. Options generally vest over
three years and have a maximum term of 10 years. At September 30, 2007, existing
stock plans authorized issuance of 140 million shares of common stock. The
company has the choice of issuing either new shares or from treasury stock
when
options are exercised under employee stock compensation plans. Under the plan
for the board of directors, shares are issued from treasury stock.
For
financial reporting purposes, stock compensation expense is included in cost
of
sales and marketing, distribution and administrative expenses, depending on
where the recipient’s cash 6
compensation
is reported, and is classified as a corporate item for business segments
reporting. Unrecognized stock compensation expense as of September 30, 2007
totaled $72 million, which will be recognized over a weighted average period
of
approximately 1.5 years.
The
following table provides additional information regarding options outstanding
and options that were exercisable as of September 30, 2007 (options and
in-the-money values in millions).
4.
Derivatives
Anheuser-Busch
accounts for its derivatives in accordance with FAS 133, “Accounting for
Derivatives and Other Hedging Instruments,” and therefore defers in accumulated
non-owner changes in shareholders equity the portion of cash flow hedging gains
and losses that equal the change in cost of the underlying hedged transactions.
As the underlying hedged transactions occur, the associated deferred hedging
gains and losses are reclassified into earnings to match the change in cost
of
the transaction. For fair value hedges, the changes in value for both the
derivative and the underlying hedged exposure are recognized in earnings each
quarter.
Following
are pretax gains and losses from derivatives which were recognized in earnings
during the third quarter and nine months (in millions). These gains and losses
effectively offset changes in the cost or value of the company’s hedged
exposures.
The
company immediately recognizes in earnings any portion of derivative gains
or
losses that are not 100% effective at offsetting price changes in the underlying
transactions. Anheuser-Busch recognized net pretax gains due to this
hedge ineffectiveness of $5.1 million for the third quarter of 2007 compared
to
net ineffective gains of $0.5 million for the third quarter of
2006. For the nine months, the company recognized net ineffective
gains of $3.7 million in 2007 and losses of $0.9 million in 2006.
7
5.
Earnings Per Share
Earnings
per share are calculated by dividing net income by weighted-average common
shares outstanding for the period. The difference between basic and diluted
weighted-average common shares is the dilutive impact of unexercised
in-the-money stock options. There were no adjustments to net income for any
period shown for purposes of calculating earnings per share. Weighted-average
common shares outstanding for the third quarter and nine months ended September
30 are shown below (millions of shares):
6.
Non-Owner Changes in Shareholders Equity
The
components of accumulated non-owner changes in shareholders equity, net of
applicable taxes, as of September 30, 2007 and December 31, 2006 follow (in
millions):
Combined
net income and non-owner changes in shareholders equity, net of applicable
taxes, for the third quarter and nine months ended September 30 follows (in
millions):
8
In
its
2006 annual report on Form 10-K, the company disclosed combined net income
and
non-owner changes in shareholders equity of $1,648.2 million, which included
the
impact of recognizing certain deferred retirement benefits costs in accordance
with FAS 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans.” Excluding these costs, combined net income and
non-owner changes in shareholders equity for the year ended December 31, 2006
would have been $2,060.2 million. The company plans to report
combined net income and non-owner changes in shareholders equity for 2006
excluding the impact of FAS 158 adoption when it publishes its 2007 annual
report on Form 10-K.
7.
Inventories
The
company’s inventories were comprised of the following as of September 30, 2007
and December 31, 2006 (in millions).
8.
Goodwill
Following
is goodwill by business segment, as of September 30, 2007 and December 31,
2006
(in millions). Goodwill is included in either other assets or investment in
affiliated companies, as appropriate, in the consolidated balance sheet. The
change in goodwill during the nine months of 2007 is primarily due to
fluctuations in foreign currency exchange rates.
9
9.
Pension and Postretirement Health Care Expense
The
components of expense for pensions and postretirement health care benefits
are
shown below for the third quarter and nine months of 2007 and 2006 (in
millions). In order to enhance the funded status of its defined benefit pension
plans, the company made discretionary pension contributions of $85 million
and
$214 million in January 2007 and 2006, respectively. These contributions are
in
addition to the company’s required pension funding for those years.
In
the
first quarter, the company recognized previously deferred actuarial losses
resulting from the retirement of certain executive officers in the fourth
quarter 2006, in accordance with FAS 88, “Employers’ Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans.” The company recognized the
FAS 88 impact in the first quarter of 2007 because these individuals retired
subsequent to the company’s pension accounting measurement date of October 1,
2006.
10
10. Equity
Investment in Grupo Modelo
Summary
financial information for Anheuser-Busch’s equity investee Grupo Modelo for the
third quarter and nine months of 2007 and 2006 is presented below (in millions).
The amounts shown represent 100% of Modelo’s consolidated operating results and
financial position based on U.S. generally accepted accounting principles on
a
one-month lag basis, and include the impact of the company’s purchase accounting
adjustments.
On
October 1, 2007, Mexico enacted an additional supplemental flat tax structure
to
its existing income tax requirements. Under the new structure, taxpayers will
owe the greater of either the flat tax or the income tax. Anheuser-Busch is
currently evaluating the impact of this new law.
11.
Uncertain Tax Positions
Effective
January 1, 2007, Anheuser-Busch adopted FASB Interpretation No. 48 (FIN 48),
“Accounting for Uncertainty in Income Taxes.” On adoption, the company had $96.8
million in gross unrecognized tax benefits, resulting in $45.9 million of net
uncertain tax benefit positions that would reduce the company’s effective income
tax rate if recognized. To comply with FIN 48, Anheuser-Busch
reclassified $102.6 million of tax liabilities from current to noncurrent on
the
balance sheet and also separately recognized $53.1 million of deferred tax
assets which had previously been netted against tax liabilities. The company
made no adjustments to retained earnings related to adoption and there have
been
no material changes in the amount of unrecognized tax benefits since adoption.
It is anticipated that settlements in foreign tax jurisdictions will reduce
gross unrecognized tax benefits by approximately $12 million within the next
12
months. Net unrecognized tax benefits are expected to remain
unchanged due to the offset of U.S. foreign tax credits. 11
The
company’s policy is to accrue interest related to potential underpayment of
income taxes within the provision for income taxes. The liability for
accrued interest totaled $7.8 million as of January 1, 2007. Interest is
computed on the difference between the company’s uncertain tax benefit positions
under FIN 48 and the amount deducted or expected to be deducted in the company’s
tax returns.
The
principal jurisdictions for which Anheuser-Busch files income tax returns are
U.S. federal and the various city, state, and international locations where
the
company has operations. The company participates in the IRS Compliance Assurance
Process program for the examination of U.S. federal income tax returns, and
examinations are substantively complete through 2006. City and state
examinations are substantially complete through 2001. The status of
international tax examinations varies by jurisdiction. The company does not
anticipate any material adjustments to its financial statements resulting from
tax examinations currently in progress.
12
Management’s
Discussion and Analysis of Operations and Financial
Condition
This
discussion summarizes the significant factors affecting the consolidated
operating results, financial condition and liquidity and cash flows of
Anheuser-Busch Companies, Inc. for the third quarter and nine months ended
September 30, 2007, compared to the third quarter and nine months ended
September 30, 2006, and the year ended December 31, 2006. This
discussion should be read in conjunction with the consolidated financial
statements and notes included in the company's annual report to shareholders
for
the year ended December 31, 2006.
This
discussion contains forward-looking statements regarding the company’s
expectations concerning its future operations, earnings and prospects. On the
date the forward-looking statements are made, the statements represent the
company’s expectations, but the company’s expectations concerning its future
operations, earnings and prospects may change. The company’s expectations
involve risks and uncertainties (both favorable and unfavorable) and are based
on many assumptions that the company believes to be reasonable, but such
assumptions may ultimately prove to be inaccurate or incomplete, in whole or
in
part. Accordingly, there can be no assurances that the company’s expectations
and the forward-looking statements will be correct. Please refer to
the company’s most recent SEC Form 10-K for a description of risk factors that
could cause actual results to differ (favorably or unfavorably) from the
expectations stated in this discussion. Anheuser-Busch disclaims any
obligation to update any of these forward-looking statements.
Results
of Operations
Anheuser-Busch
reported that third quarter 2007 net sales increased 7.9% and diluted earnings
per share increased 15.9%. For the nine months of 2007, net sales
increased 5.7% and diluted earnings per share increased 9.2%. The company is
pleased with its earnings performance this quarter, with all operating segments
reporting higher sales and profits. Sales volume and revenue growth in the
company’s U.S. beer business benefited from its broadened beer portfolio, with
greater participation in the high end segment, and the wholesaler transition
and
supply issues encountered earlier this year regarding the InBev European brands
have been resolved. Additionally, the earnings contribution from our
international segment accelerated, led by Grupo Modelo. The company
continues to expect the full-year 2007 earnings per share increase to exceed
our
long term growth target of 7% to 10%.
The
third quarter of 2007 includes normalization items that impact the comparability
of reported operating results versus prior year. The company recorded a $26.5
million pretax gain ($.02 per share) on the sale of certain beer distribution
rights in southern California and also incurred its pro rata share of a charge
by Grupo Modelo for restructuring of its domestic distribution system and
C-store closings. Excluding the impact of these normalization items,
which the company believes allows a better comparison of underlying operating
results, diluted earnings per share increased 15.9% for the third
quarter. Additionally, results for the nine months of 2007 include
the second quarter gain on the sale of 13
the
company’s remaining interest in its Spanish theme park, and year-to-date 2006
results include the one-time deferred income tax benefit from state income
tax
reform legislation in Texas. Excluding all normalization items for better
comparison of underlying results, diluted earnings per share for the nine months
increased 9.3% (see additional discussion and reconciliation on pages 17 through
20).
Beer
Sales Results
Following
is a summary and discussion of the company’s beer volume and sales results for
the third quarter and nine months of 2007 versus comparable 2006
periods.
U.S.
beer volume represents beer shipments to wholesalers in the United
States. U.S. beer shipments-to-wholesalers increased 2% for the third
quarter, while sales-to-retailers increased 2.2%. Import brands
contributed 160 basis points of growth to shipments and 170 points to
sales-to-retailers. For the nine months of 2007, shipments-to-wholesalers
increased 1.7%, and sales-to-retailers increased 0.9% with acquired and import
brands contributing 170 basis points of growth to both shipments and
sales-to-retailers. Wholesaler inventories for Anheuser-Busch
produced brands at the end of the third quarter were approximately half a
day higher than at the end of the third quarter 2006. The company’s
estimated U.S. beer market share for the nine months of 2007 was 48.8% compared
to prior year market share of 48.7%. Market share is based on
estimated U.S. beer industry shipment volume using information provided by
the
Beer Institute and the U.S. Department of Commerce.
International
volume consisting of Anheuser-Busch brands produced overseas by company-owned
breweries and under license and contract brewing agreements, plus exports from
the company’s U.S. breweries, increased 8.2% for the third quarter and 6.1% for
the nine months of 2007, driven primarily by volume increases in China, Mexico
and Canada in both periods, partially offset by lower volume in the United
Kingdom for the nine months. Worldwide Anheuser-Busch brands volume is comprised
of U.S. and international volume, and increased 3.2% for the third quarter
and
2.4% year-to-date, to 35.1 million and 99.5 million barrels,
respectively. 14
Equity
partner
brands volume, which represents the company’s share of its foreign equity
partners’ volume reported on a one-month lag, increased 7.6% for the third
quarter of 2007, to 9.9 million barrels, and increased 6.4% for the nine months
to 25.6 million barrels, due to Modelo and Tsingtao volume growth in both
periods. Total brands volume, which combines worldwide Anheuser-Busch brand
volume with equity partner brands volume was 45.0 million barrels in the third
quarter and 125.1 million barrels for the nine months, up 4.1% and 3.2%,
respectively.
2007
Financial Results
Following
is a summary and discussion of key operating results for the third quarter
and
nine months of 2007 versus comparable 2006 periods.
Anheuser-Busch
reported gross sales of $5.2 billion during the third quarter 2007, an increase
of $360 million, or 7.4%. Gross sales increased 5.3%, or $742
million, to $14.8 billion for the nine months. Net sales were $4.6
billion and $13 billion, increases of $337 million and $700 million,
respectively, or 7.9% for the quarter and 5.7% year-to-date. The differences
between gross and net sales in 2007 are due to beer excise taxes of $619 million
and $1.8 billion, respectively. The sales increases were driven by
higher sales for all operating segments. For the third quarter and nine months,
respectively, U.S. beer segment net sales increased 7%, or $203 million, and
6%,
or $512 million on higher volume and 15
increased
revenue per barrel; international beer net sales increased 16% and 10%,
respectively, primarily due to volume gains in China, Mexico and Canada in
both
periods, partially offset by lower volume in the United Kingdom year-to-date;
packaging operations net sales increased 10% and 3% for the third quarter and
nine months, respectively, on higher aluminum can and recycling revenues; and
entertainment segment sales increased 8% in both periods due to increased
attendance, higher ticket pricing and higher in-park spending.
U.S.
beer revenue per barrel was up 3.1% in the third quarter 2007 and grew 2.8%
compared to the nine months of 2006, due to the successful implementation of
price increases and discount reductions on over half the company’s U.S. volume
earlier in the year, higher promotional prices over the key summer holiday
periods, and favorable brand mix. Revenue per barrel is calculated as
net sales generated by the company’s U.S. beer operations on barrels of beer
sold, determined on a U.S. GAAP basis, divided by the total volume of beer
shipped to U.S. wholesalers. Net pricing actions and favorable mix accounted
for
$100 million and $267 million, respectively, of the increases in U.S. beer
net
sales in the third quarter and nine months, while higher beer volume contributed
$69 million and $162 million, respectively, and non-beer revenues added $34
million and $83 million, respectively, to the increases for the same periods.
Consistent with its pattern for pricing actions in recent years, the company
plans to implement increases on the majority of its volume early next year,
with
a few selective increases in the fourth quarter 2007. As in the past,
pricing initiatives will be tailored to selected markets, brands and
packages.
The
cost of sales for the third quarter 2007 was $2.9 billion, an increase of $224
million, or 8.5%, and was up $478 million, or 6%, to $8.2 billion for the nine
months. The increases in cost of sales are primarily attributable to
increased costs associated with higher U.S. and international beer volume,
higher costs for brewing and packaging materials and higher labor and operating
costs for entertainment operations, partially offset by lower energy costs
and
lower can manufacturing operating costs. Costs associated with higher
U.S. and international beer volumes were $84 million and $23 million,
respectively, for the third quarter and $215 million and $42 million,
respectively, for the nine months. Gross profit as a percentage of
net sales was 37.9% for the third quarter and 36.9% year-to-date, down 30 basis
points for both periods.
Marketing,
distribution and administrative expenses were $777 million for the third quarter
and $2.2 billion year-to-date, representing a $39 million increase for the
quarter and a $131 million increase year-to-date. The changes versus prior
year
periods are due to higher U.S. beer marketing costs, including incremental
marketing and selling expense for the company’s new import beer portfolio,
increased marketing costs for international beer and entertainment operations
and higher delivery costs for company-owned beer wholesalerships, partially
offset by lower administrative expenses in both
periods. Administrative expenses 16
in
2007
include asset disposition gains in both the third quarter and nine months and
a
FAS 88 settlement charge year-to-date.
Operating
income was $998 million, an increase of $100 million, or 11% for the third
quarter 2007. For the nine months of 2007, operating income was $2.6
billion, an increase of $117 million, or 5%. Operating margins improved 60
basis
points for the third quarter and declined 20 basis points for the nine months,
to 21.6% and 20.1%, respectively. The increases in operating income are due
to
improved results for all business segments plus the one-time gain on the sale
of
distribution rights in California and lower administrative expenses. Excluding
the $26.5 million gain on the sale of distribution rights to better convey
the
company’s results, operating margin was level in the third quarter and declined
40 basis points year-to-date, to 21.0% and 19.9%, respectively, as shown
below.
Interest
expense less interest income was $119 million for the third quarter and $356
million for the nine months of 2007, increases versus respective 2006 periods
of
$8 million and $16 million. The increases are due to higher average outstanding
debt partially offset by lower interest rates during the quarter and a
combination of higher interest rates and higher average debt balances
year-to-date. Interest income was greater in both 2007 periods versus
2006. Interest capitalized of $4.5 million in the third quarter and
$12 million for the nine months was level for the quarter and down slightly
year-to-date due to the timing of capital spending and project in-service
dates.
Other
income/(expense), net reflects the impact of numerous items not directly related
to the company’s operations. For the third quarter of 2007, the company had net
other expense of $13 million versus other income of $1 million in 2006. The
third quarter expense includes a charge associated with the early redemption
of
the company’s 7.125% debentures due 2017. Year-to-date the company recognized
net expense of $9 million in 2007 compared to expense of $2 million in
2006. Other expense for the nine months of 2007 includes the $16
million gain from the second quarter sale of the company’s remaining interest in
its Spanish theme park investment. For business segment reporting purposes,
the
theme park disposition gain and the loss on debt redemption are reported as
corporate items.
Income
before income taxes for the third quarter 2007 was $872 million, an increase
of
$79 million, or 10%, due to improved results for all segments. Year-to-date,
pretax income was $2.3 billion, an increase of $93 million or 4%, due to higher
earnings from all business segments, the one-time gain on 17
the
sale of distribution rights in southern California and lower administrative
costs, partially offset by higher interest expense.
U.S.
beer pretax profits improved $38 million in both periods, or 4.9% in the third
quarter and 1.6% for the nine months, on higher beer sales volume, increased
pricing and the gain on the sale of distribution rights, partially offset by
higher marketing and beer production costs. Excluding the gain on the sale
of
distribution rights to better illustrate underlying U.S. beer results, pretax
profits would have increased 1.5% and 0.5% for the third quarter and nine months
of 2007, respectively, as shown below.
International
beer pretax income increased $6 million in the third quarter and $5 million
year-to-date. For the quarter, profit growth in Canada, Ireland and Mexico
from
volume increases was partially offset by lower results in China due to higher
selling costs associated with the rollout of Budweiser and Harbin brands into
new markets. Year-to-date, international beer pretax income is up on increased
profits in China, Canada, Mexico and Ireland, partially offset by lower results
in the United Kingdom driven by unfavorable industry fundamentals.
Packaging
segment pretax profits were up $12 million and $27 million, respectively,
primarily due to increased profits from can manufacturing and aluminum recycling
on a combination of improved pricing and higher volume in the third quarter,
with improved pricing partially offset by lower volume for the nine months.
Label manufacturing earnings also improved year-to-date.
Entertainment
segment pretax profits grew $18 million and $22 million, respectively, due
to
increased attendance, increased ticket pricing and higher in-park spending
in
both periods, partially offset by higher marketing and park operating
costs.
Equity
income of $185 million for the third quarter and $539 million year-to-date
increased $28 million and $90 million, respectively, reflecting the benefit
of
improved Grupo Modelo earnings from higher volume and benefits associated with
the new Crown import joint venture. Equity income for the nine months
includes a $29 million benefit from the return of advertising funds that were
part of prior import contracts. This benefit was partially offset by a timing
change in the recognition of Modelo’s export sales to the
U.S. Additionally, equity income for both the third quarter and nine
months of 2007 includes a $16 million 18
charge
representing Anheuser-Busch’s pro rata share of a charge recorded by Grupo
Modelo for restructuring related to its domestic distribution system and C-store
closings. Excluding the $16 million from both periods, equity income was up
29%,
or $45 million for the quarter and 24%, or $106 million
year-to-date.
Anheuser-Busch’s
effective income tax rate was 40.2% for the third quarter 2007 and 39.9% for
the
nine months, representing increases of 90 basis points for both periods,
primarily due to higher taxes on foreign earnings and the favorable impact
of
the Texas state income tax legislation in 2006, partially offset by a percentage
step-up in the federal domestic manufacturing deduction rate in
2007.
Net
income of $707 million in the third quarter of 2007 represented an increase
of
$69 million, or 11%. Net income grew 7%, to $1.9 billion for the nine
months of 2007. Diluted earnings per share were $.95 and $2.49, respectively,
for the third quarter and nine months of 2007, representing increases of 15.9%
and 9.2%, respectively. Diluted earnings per share for the nine
months benefited from the repurchase of over 38 million shares under the
company’s share repurchase program.
The
company believes excluding the normalization items previously discussed – the
gain from the sale of the Spanish theme park investment, the beer distribution
rights sale gain and the Grupo Modelo restructuring in 2007, plus the favorable
income tax legislation benefit in 2006 – provides more meaningful comparisons
between periods. As shown in the following table, pretax income, equity income,
net income and diluted earnings per share excluding these normalization items
increased 6.6%, 28.6%, 10.8% and 15.9%, respectively for the third quarter,
while the effective income tax rate increased 90 basis points. For
the nine months, income before income taxes increased 2.3%, while equity income,
net income, diluted earnings per share and the effective income tax rate
increased 23.6%, 7%, 9.3% and 60 basis points, respectively.
19
Liquidity
and Financial Condition
The
primary source of the company’s cash flow is generated by operations. Principal
uses of cash are capital expenditures, share repurchase, dividends and business
investments. Cash generated by the company’s business segments is
projected to exceed funding requirements for each segment’s anticipated capital
spending. The net issuance of debt provides an additional source of cash as
necessary for share repurchasing, dividends and business investments. The
nature, extent and timing of debt financing vary depending on the company’s
evaluation of existing market conditions and other factors.
Cash
at
September 30, 2007 was $302 million, an increase of $82 million from the
December 31, 2006 balance. The company generated operating cash flow
before the change in working capital of $2.5 billion for the nine months of
2007, an increase of $341 million compared to 2006 due primarily to increased
earnings, higher Grupo Modelo dividends and a lower discretionary defined
benefit pension contribution in 2007, $85 million versus $214 million in 2006.
See the consolidated statement of cash flows for additional information on
the
company’s sources and uses of cash.
20
The
company’s debt
balance increased $691 million for the nine months of 2007 compared to a
decrease of $580 million in 2006. The changes in debt for the nine
months of 2007 and 2006 are summarized below (in millions).
The
company commercial paper obligation was $733 million at September 30, 2007.
This
debt is classified as long-term since commercial paper is maintained on a
long-term basis with on-going support provided by the company's $2 billion
revolving credit agreement. The interest rates for commercial paper at September
30, 2007 and 2006 were 5.04% and 5.45%, respectively.
There
have been only normal and recurring changes in the company’s cash commitments
since December 31, 2006.
21
Capital
expenditures during the third quarter 2007 were $219 million, compared to $168
million for the third quarter 2006. Capital expenditures totaled $565
million and $487 million, respectively, for the nine months of 2007 and
2006. Full year 2007 capital expenditures are expected to be
approximately $900 million.
At
its
October 2007 meeting, the Board of Directors declared a regular quarterly
dividend of $.33 per share on outstanding shares of the company’s
common stock, payable December 10, 2007, to shareholders of record November
9,
2007.
Item
3. Disclosures About Market Risks
The
company’s derivatives holdings fluctuate during the year based on normal and
recurring changes in purchasing and production activity. Since December 31,
2006, there have been no significant changes in the company’s interest rate,
foreign currency or commodity exposures. There have been no changes
in the types of derivative instruments used to hedge the company’s
exposures.
Item
4. Controls and Procedures
It
is
the responsibility of the chief executive officer and chief financial officer
to
ensure the company maintains disclosure controls and procedures designed to
provide reasonable assurance that material information, both financial and
non-financial, and other information required under the securities laws to
be
disclosed is identified and communicated to senior management on a timely
basis. The company’s disclosure controls and procedures include
mandatory communication of material subsidiary events, automated accounting
processing and reporting, management review of monthly and quarterly results,
periodic subsidiary business reviews, an established system of internal controls
and rotating internal control reviews by the company’s internal
auditors.
The
chief executive officer and chief financial officer evaluated the company’s
disclosure controls and procedures as of the end of the quarter ended September
30, 2007 and have concluded that they are effective as of September 30, 2007
in
providing reasonable assurance that such information is identified and
communicated on a timely basis. Additionally, there were no changes
in the company’s internal control over financial reporting during the quarter
that have materially affected, or are reasonably likely to materially affect,
the company’s internal control over financial reporting. 22
PART
II – OTHER INFORMATION
Item
1. Legal Proceedings
For
a
description of certain litigation to which the company is a party, reference
the
company’s Form 10-K for the year ended December 31, 2006 and the company’s Form
10-Q for the quarter ended June 30, 2007.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
Following
are the company’s monthly common stock purchases during the third quarter 2007
(in millions, except per share). All shares are repurchased under Board of
Directors authorization. The Board’s most recent authorization to repurchase 100
million shares occurred in December 2006. There is no prescribed termination
date for this program. The numbers of shares shown include shares delivered
to
the company to exercise stock options.
Item
6. Exhibits
23
Signatures
Pursuant
to the
requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto
duly
authorized.
24
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