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Owens-Illinois 10-K 2010

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 


 

FORM 10-K

 

(Mark One)

 

 

x  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2009

 

or

 

o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 


 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

 

Name of each exchange on

Title of each class

 

which registered

Common Stock, $.01 par value

 

New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x

 

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

 

(Cover page 1 of 2 pages)

 



 

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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

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 Exchange Act).Yes o No x

 

        The aggregate market value (based on the consolidated tape closing price on June 30, 2009) of the voting and non-voting stock beneficially held by non-affiliates of Owens-Illinois, Inc. was approximately $3,569,806,000.  For the sole purpose of making this calculation, the term “non-affiliate” has been interpreted to exclude directors and executive officers of the Company.  Such interpretation is not intended to be, and should not be construed to be, an admission by Owens-Illinois, Inc. or such directors or executive officers of the Company that such directors and executive officers of the Company are “affiliates” of Owens-Illinois, Inc., as that term is defined under the Securities Act of 1934.

 

The number of shares of common stock, $.01 par value of Owens-Illinois, Inc. outstanding as of December 31, 2009 was 168,600,765.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of Owens-Illinois, Inc. Proxy Statement for The Annual Meeting of Share Owners To Be Held Thursday, May 6, 2010 (“Proxy Statement”) are incorporated by reference into Part III hereof.

 

TABLE OF GUARANTORS

 

 

 

 

 

Primary

 

 

 

 

 

 

 

Standard

 

 

 

 

 

State/Country of

 

Industrial

 

I.R.S

 

 

 

Incorporation

 

Classification

 

Employee

 

Exact Name of Registrant

 

or

 

Code

 

Identification

 

As Specified In Its Charter

 

Organization

 

Number

 

Number

 

Owens-Illinois Group, Inc

 

Delaware

 

6719

 

34-1559348

 

Owens-Brockway Packaging, Inc

 

Delaware

 

6719

 

34-1559346

 

 

The address, including zip code, and telephone number, of each additional registrant’s principal executive office is One Michael Owens Way, Perrysburg, Ohio 43551; (567) 336-5000.  These companies are listed as guarantors of the debt securities of the registrant.  The consolidating condensed financial statements of the Company depicting separately its guarantor and non-guarantor subsidiaries are presented in the notes to the consolidated financial statements.  All of the equity securities of each of the guarantors set forth in the table above are owned, either directly or indirectly, by Owens-Illinois, Inc.

 

(Cover page 2 of 2 pages)

 

 

 



Table of Contents

 

TABLE OF CONTENTS

 

PART I

 

 

1

ITEM 1.

BUSINESS

 

1

ITEM 1A.

RISK FACTORS

 

10

ITEM 1B.

UNRESOLVED STAFF COMMENTS

 

16

ITEM 2.

PROPERTIES

 

17

ITEM 3.

LEGAL PROCEEDINGS

 

19

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

20

 

 

 

 

PART II

 

 

20

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

20

ITEM 6.

SELECTED FINANCIAL DATA

 

22

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

26

ITEM 7A.

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

44

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

47

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

107

ITEM 9A.

CONTROLS AND PROCEDURES

 

107

ITEM 9B.

OTHER INFORMATION

 

110

 

 

 

 

PART III

 

 

110

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

110

ITEM 11.

EXECUTIVE COMPENSATION

 

110

ITEM 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

110

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

111

ITEM 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

111

 

 

 

 

PART IV

 

 

112

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

112

 

 

 

 

SIGNATURES

 

 

202

 

 

 

 

EXHIBITS

 

 

E-1

 



Table of Contents

 

PART I

 

ITEM 1.

 

BUSINESS

 

General Development of Business

 

Owens-Illinois, Inc. (the “Company”), through its subsidiaries, is the successor to a business established in 1903.  The Company is the largest manufacturer of glass containers in the world, with leading positions in Europe, North America, South America and Asia Pacific.

 

Strategic Priorities and Competitive Strengths

 

The Company is pursuing the following strategic priorities aimed at optimizing shareholder return:

 

·                  Marketing Glass — promote its value added benefits and communicate its earth-friendly attributes

 

·                  Strategic & Profitable Growth — expand presence in growing markets and enter growing markets where we do not have a presence

 

·                  Innovation & Technology — focus on product innovation that adds value for customers and develop technology that provides a sustainable advantage

 

·                  Operational Excellence — continuous productivity improvement, pricing strategy to improve margins, and disciplined use of cash

 

Beginning in 2007, the Company commenced a strategic review of its global profitability and manufacturing footprint.  Since undertaking this review, the Company has announced the curtailment of capacity or closing of facilities involving 26 furnaces and approximately 3,250 job eliminations.  The Company has concluded its current global review as of December 31, 2009, with the final actions being implemented in the first half of 2010.  The Company believes these actions, combined with its pricing initiatives, will contribute to optimizing shareholder return. On an ongoing basis, the Company will review its manufacturing operations, and it is possible that it will close selected facilities or production lines in the future.

 

Technology Leader

 

The Company believes it is a technological leader in the worldwide glass container segment of the rigid packaging market in which it competes.  During the five years ended December 31, 2009, on a continuing operations basis, the Company invested more than $1.7 billion in capital expenditures (excluding acquisitions) and more than $290 million in research, development and engineering to, among other things, improve labor and machine productivity, increase capacity in growing markets and commercialize technology into new products.

 

Worldwide Corporate Headquarters

 

The principal executive office of the Company is located at One Michael Owens Way, Perrysburg, Ohio 43551; the telephone number is (567) 336-5000.  The Company’s website is www.o-i.com.  The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 can be obtained from this site at no cost. The Company’s Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Compensation, Nominating/Corporate Governance and Audit Committees are also available on the Investor Relations

 

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section of the Company’s web site.  Copies of these documents are available in print to share owners upon request, addressed to the Corporate Secretary at the address above.

 

Financial Information about Reportable Segments

 

Information as to sales, earnings from continuing operations before interest income, interest expense, and provision for income taxes and excluding amounts related to certain items that management considers not representative of ongoing operations (“Segment Operating Profit”), and total assets by reportable segment is included in Note 19 to the Consolidated Financial Statements.

 

Narrative Description of Business

 

Below is a description of the business and information to the extent material to understanding the Company’s business taken as a whole.

 

The Company is the largest manufacturer of glass containers in the world with 78 glass manufacturing plants in 21 countries.  The Company is the leading glass container manufacturer in 17 of the 21 countries where it competes in the glass container segment of the rigid packaging market, including the U.S., and the sole manufacturer of glass containers in 7 of these countries.

 

Products and Services

 

The Company produces glass containers for beer, ready-to-drink low alcohol refreshers, spirits, wine, food, tea, juice and pharmaceuticals.  The Company also produces glass containers for soft drinks and other non-alcoholic beverages, principally outside the U.S.  The Company manufactures these products in a wide range of sizes, shapes and colors. The Company is active in new product development and glass container innovation.

 

Customers

 

In most of the countries where the Company competes, it has the leading position in the glass container segment of the rigid packaging market based on sales revenue.  The largest customers include many of the leading manufacturers and marketers of glass packaged products in the world.  In the U.S., the majority of customers for glass containers are brewers, wine vintners, distillers and food producers.  The Company also produces glass containers for soft drinks and other non-alcoholic beverages, principally outside the U.S.  The largest U.S. glass container customers include (in alphabetical order) Anheuser-Busch InBev, Brown Forman, Diageo, H.J. Heinz, Miller/Coors, PepsiCo, and Saxco-Demptos, Inc.  The largest glass container customers outside the U.S. include (in alphabetical order) Anheuser-Busch InBev, Carlsberg, Diageo, Foster’s, Heineken, Lion Nathan, Molson/Coors, Pernod Ricard, and SABMiller.  The Company is a major glass container supplier to all of these customers.

 

The Company sells most of its glass container products directly to customers under annual or multi-year supply agreements.  Multi-year contracts typically provide for price adjustments based on cost changes.  The Company also sells some of its products through distributors. Glass container production is typically scheduled to maintain reasonable levels of inventory.

 

Markets and Competitive Conditions

 

The principal markets for glass container products made by the Company are in Europe, North America, South America, and Asia Pacific.  The Company believes it is a low-cost producer in the glass container segment of the rigid packaging market in many of the countries in which it competes.  Much of this cost

 

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advantage is due to proprietary equipment and process technology used by the Company.  The Company’s machine development activities and systematic upgrading of production equipment, begun in the 1990’s and early 2000’s, support its low-cost leadership position in the glass container segment in many of the countries in which it competes, a key strength to competing successfully in the rigid packaging market.

 

The Company has the leading share of the glass container segment of the U.S. rigid packaging market based on sales revenue by domestic producers in the U.S.  The principal glass container competitors in the U.S. are Saint-Gobain Containers, Inc., a wholly-owned subsidiary of Compagnie de Saint-Gobain, and Anchor Glass Container Corporation.  In addition, imports from Mexico and other countries compete in U.S. glass container segments.  Additionally, a few major consumer packaged goods companies self-manufacture glass containers.

 

In supplying glass containers outside of the U.S., the Company competes directly with Compagnie de Saint-Gobain in Europe and Brazil, Ardagh plc in the U.K., Germany, and Poland, Vetropak in the Czech Republic and Amcor Limited in Australia.  In other locations in Europe, the Company competes indirectly with a variety of glass container firms including Compagnie de Saint-Gobain, Vetropak and Ardagh plc.  Except as mentioned above, the Company does not compete with any large, multi-national glass container manufacturers in South America or the Asia Pacific region.

 

In addition to competing with other large, well-established manufacturers in the glass container segment, the Company competes with manufacturers of other forms of rigid packaging, principally aluminum cans and plastic containers, on the basis of quality, price, service and the marketing attributes of the container.  The principal competitors producing metal containers are Amcor, Ball Corporation, Crown Holdings, Inc., Rexam plc, and Silgan Holdings Inc.  The principal competitors producing plastic containers are Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak Packaging, Inc. and Silgan Holdings Inc.  The Company also competes with manufacturers of non-rigid packaging alternatives, including flexible pouches and aseptic cartons.

 

The Company’s unit shipments of glass containers in countries outside of the U.S. have grown substantially from levels in earlier years.  The Company has added to its international operations by acquiring glass container companies, many of which have leading positions in growing or established markets, increasing capacity at select foreign subsidiaries, and having a global network of glass container companies that license its technology.  In many developing countries, the Company’s international glass operations have benefited in the last ten years from increased consumer spending power, a trend toward the privatization of industry, a favorable climate for foreign investment, lowering of trade barriers and global expansion programs by multi-national consumer companies.

 

Europe.  The Company’s European glass container business, headquartered in Switzerland, has consolidated manufacturing operations in 10 countries and is the largest in Europe.  The Company is a leading producer of wine and champagne bottles in France.  In Italy, the Company is the leading manufacturer of glass containers.  In The Netherlands, the Company is one of the leading producers of glass beer containers.  The Company is a leading manufacturer of glass containers for the spirits business in the U.K. and Germany.  In Spain, the Company serves the market for olives in the Sevilla area and the market for wine bottles in Barcelona and southern France.  In Poland, the Company is the leading glass container manufacturer and operates two plants.  The Company is the leading glass container manufacturer in the Czech Republic.  In Hungary, the Company is the sole glass container manufacturer and serves the Hungarian food industry.  In the Baltic country of Estonia, the Company is the only manufacturer of glass containers.  The Company coordinates production activities in Estonia in order to efficiently serve the Finnish, Baltic and Russian markets. In recent years, Western European brewers have been establishing beer production facilities in Central Europe and the Russian Republic.  Because these

 

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new beer plants use high-speed filling lines, they require high quality glass containers in order to operate properly. The Company believes it is well positioned to support this demand.

 

North America.  In addition to the glass container operations in the U.S., the Company’s subsidiary in Canada is the sole manufacturer of glass containers in that country.

 

South America.  The Company is the sole manufacturer of glass containers in Colombia, Ecuador and Peru.  In both Brazil and Venezuela, the Company is the leading manufacturer of glass containers.  In South America, the Company maintains a diversified portfolio serving several markets, such as beer, non-alcoholic beverages, spirits, ready-to-drink, wine, food, and pharmaceutical.  In South America there is a large infrastructure for returnable/refillable glass containers.  However, over the last several years, unit sales of non-returnable glass containers increased across countries in which the Company operates.

 

Asia Pacific. The Company has glass operations in four countries in the Asia Pacific region: Australia, New Zealand, Indonesia and China. In this region, the Company is the leading manufacturer of glass containers in most of the countries in which it competes.  In Australia, the Company’s subsidiary operates four glass container plants including a plant focused on serving the needs of the growing Australian wine industry.  In New Zealand, the Company is the sole glass container manufacturer.  In Indonesia, the Company supplies the Indonesian market and exports glass containers to a number of countries.  In China, the glass container segments of the packaging market are regional and highly fragmented with a number of local competitors.  The Company has four glass container plants and a mold shop in China, manufacturing containers to serve a wide range of customers both domestically and abroad.

 

The Company continues to focus on serving the needs of leading multi-national consumer companies as they pursue international growth opportunities.  The Company believes that it is often the glass container partner of choice for such multi-national consumer companies due to its leadership in glass technology and its status as a high quality producer in most of the markets it serves.

 

Manufacturing

 

The Company believes it is a low-cost producer in the North American rigid packaging market, as well as a low-cost producer in many of the international glass segments in which it competes.  Much of this cost advantage is due to the Company’s proprietary equipment and process technology.  The Company believes its proprietary high volume glass forming machines, developed and refined by its engineering group, are significantly more efficient and productive than those used by competitors.  The Company’s machine development activities and systematic upgrading of production equipment have given it a low-cost leadership position in the glass container segment in most of the countries in which it competes, a key strength to competing successfully in the rigid packaging market.

 

The Company operates several machine shops that assemble and repair high-productivity glass-forming machines as well as mold shops that manufacture molds and related equipment.  The Company also provides engineering support for its glass manufacturing operations through facilities located in the U.S., Australia, Poland and Peru.

 

Methods of Distribution

 

Due to the significance of transportation costs and the importance of timely delivery, glass container manufacturing facilities are generally located close to customers.  In the U.S., most of the Company’s glass container products are shipped by common carrier to customers within a 250-mile radius of a given production site.  In addition, the Company’s glass container operations outside the U.S. export some

 

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products to customers beyond their national boundaries, which may include transportation by rail and ocean delivery in combination with common carriers.

 

Suppliers and Raw Materials

 

The primary raw materials used in the Company’s glass container operations are sand, soda ash, limestone and recycled glass.  Each of these materials, as well as the other raw materials used to manufacture glass containers, has historically been available in adequate supply from multiple sources.  One of the sources is a soda ash mining operation in Wyoming in which the Company has a 25% interest.  For certain raw materials, however, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays.

 

Energy

 

The Company’s glass container operations require a continuous supply of significant amounts of energy, principally natural gas, fuel oil, and electrical power.  Adequate supplies of energy are generally available to the Company at all of its manufacturing locations.  Energy costs typically account for 15-25% of the Company’s total manufacturing costs, depending on the cost of energy, the factory location, and its particular energy requirements.  The percentage of total cost related to energy can vary significantly because of volatility in market prices, particularly for natural gas and fuel oil in volatile markets such as North America and Europe.  In order to limit the effects of fluctuations in market prices for natural gas, the Company uses commodity futures contracts related to its forecasted requirements in North America.  The objective of these futures contracts is to reduce the potential volatility in cash flows and expense due to changing market prices.  The Company continually evaluates the energy markets with respect to its forecasted energy requirements in order to optimize its use of commodity futures contracts.  If energy costs increase substantially in the future, the Company could experience a corresponding increase in operating costs, which may not be fully recoverable through increased selling prices.

 

Glass Recycling

 

The Company is an important contributor to the recycling effort in the U.S. and abroad and continues to melt substantial recycled glass tonnage in its glass furnaces. The Company is the largest user of recycled glass containers.  If sufficient high-quality recycled glass were available on a consistent basis, the Company has the technology to operate using up to 90% recycled glass.  Using recycled glass in the manufacturing process reduces energy costs and prolongs the operating life of the glass melting furnaces.

 

Technical Assistance License Agreements

 

The Company has agreements to license its proprietary glass container technology and provide technical assistance to 19 companies in 19 countries.  These agreements cover areas related to manufacturing and engineering assistance.  The worldwide licensee network provides a stream of revenue to help support the Company’s development activities and gives it the opportunity to participate in the rigid packaging market in countries where it does not already have a direct presence.  In addition, the Company’s technical agreements enable it to apply “best practices” developed by its worldwide licensee network.  In the years 2009, 2008 and 2007, the Company earned $12.9 million, $18.6 million and $19.7 million, respectively, in royalties and net technical assistance revenue on a continuing operations basis.

 

Research and Development

 

The Company believes it is a technological leader in the worldwide glass container segment of the rigid packaging market.  Research, development, and engineering constitute important parts of the Company’s

 

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technical activities.  On a continuing operations basis, research, development, and engineering expenditures were $58.8 million, $66.6 million, and $65.8 million for 2009, 2008, and 2007, respectively.  The Company’s research, development and engineering activities include new products, manufacturing process control, automatic inspection and further automation of manufacturing activities.  The Company’s research and development activities are conducted at its corporate facilities in Perrysburg, Ohio.

 

Environmental and Other Governmental Regulation

 

The Company’s worldwide operations, in common with those of the industry generally, are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean-up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety.

 

Recycling and Bottle Deposits

 

In the U.S., Canada, Europe and elsewhere, a number of government authorities have adopted or are considering legal requirements that would mandate certain rates of recycling, the use of recycled materials, or limitations on or preferences for certain types of packaging.  The Company believes that governments worldwide will continue to develop and enact legal requirements seeking to, or having the effect of, guiding customer and end-consumer packaging choices.

 

In North America, sales of beverage containers are affected by governmental regulation of packaging, including deposit return laws.  As of December 31, 2009, there were 11 U.S. states with bottle deposit laws in effect, requiring consumer deposits of between 5 and 15 cents (USD), depending on the size of the container. In Canada, there are 10 provinces and 2 territories with consumer deposits between 5 and 25 cents (Canadian), depending on the size of the container. In Europe a number of countries have some form of consumer deposit law in effect, including Austria, Belgium, Denmark, Finland, Germany, The Netherlands, Norway, Sweden and Switzerland. The structure and enforcement of such laws and regulations can impact the sales of beverage containers in a given jurisdiction. Such laws and regulations also impact the availability of post-consumer recycled glass for the Company to use in container production.

 

A number of U.S. states and Canadian provinces have recently considered or are now considering laws and regulations to encourage curbside, deposit return, and on-premise recycling.  Although there is no clear trend in the direction of these state and provincial laws and regulations, the Company believes that U.S. states and Canadian provinces, as well as municipalities within those jurisdictions, will continue to adopt recycling laws which will affect supplies of post-consumer recycled glass.  As a large user of post-consumer recycled glass for bottle-to-bottle production, the Company has an interest in laws and regulations impacting supplies of such material in its markets.

 

Air Emissions

 

The European Union Emissions Trading Scheme (“EUETS”) commenced January 1, 2005.  The EU has committed to Kyoto Protocol emissions reduction targets and the EUETS is intended to facilitate such reduction.  The Company’s manufacturing installations which operate in EU countries must restrict the volume of their CO2 emissions to the level of their individually allocated Emissions Allowances as set by country regulators.  If the actual level of emissions for any installation exceeds its allocated allowance, additional allowances can be bought on the market to cover deficits; conversely, if the actual level of emissions for such installation is less than its allocation, the excess allowances can be sold on the same market.  The EUETS has not had a material effect on the Company’s results to date, however, should the

 

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regulators significantly restrict the number of Emissions Allowances available, it could have a material effect in the future.

 

In North America, the U.S. and Canada are engaged in significant legislative and regulatory activity relating to CO2 emissions, both at the federal and the state and provincial levels of government.  There are numerous proposals pending before the U.S. Congress which would create a cap-and-trade emissions trading scheme for CO2, but no legislation has been adopted into law.  Other proposals would adopt a national carbon tax or would create restrictions on CO2 emissions without utilizing a cap-and-trade system.  The U.S. Environmental Protection Agency has recently commenced a regulatory process for CO2, but no specific scheme affecting manufacturing facilities has been detailed.

 

In Asia Pacific, Australia’s ratification of the Kyoto Protocol came into effect in March 2008. In July 2008, the Australian Federal Government issued the Carbon Pollution Reduction Scheme (“CPRS”) Green Paper aimed to help reduce the country’s carbon emissions. The CPRS recommends an emissions trading scheme (“ETS”) be established in Australia in 2010, however the framework has yet be agreed by federal parliament. In New Zealand, parliament passed ETS legislation in September 2008, which included a cap-and-trade system that was to be in effect by 2010.  However, a change of government in New Zealand in November 2008 saw the legislation put on hold for further review. Also in Australia, the National Greenhouse and Energy Reporting Act 2007 commenced on July 1, 2008. The Act establishes a mandatory reporting system for corporate greenhouse gas emissions and energy production and consumption. Key features of the Act include the following: (1) reporting of greenhouse gas emissions, energy consumption and production by large corporations, subject to independent audit; (2) public disclosure of corporate level greenhouse gas emissions and energy information; and (3) consistent and comparable data available for government, in particular, the development and administration of the CPRS.

 

The Company is unable to predict what environmental legal requirements may be adopted in the future.  However, the Company continually monitors its operations in relation to environmental impacts and invests in environmentally friendly and emissions-reducing projects.  As such, the Company has made significant expenditures for environmental improvements at certain of its factories over the last several years; however, these expenditures did not have a material adverse affect on the Company’s results of operations or cash flows. The Company is unable to predict the impact of future environmental legal requirements. However, based on existing regulations, the Company does not expect the associated annual compliance costs to have a material impact on its results of operations or cash flows.

 

Intellectual Property Rights

 

The Company has a large number of patents which relate to a wide variety of products and processes, has a substantial number of patent applications pending, and is licensed under several patents of others.  While in the aggregate the Company’s patents are of material importance to its businesses, the Company does not consider that any patent or group of patents relating to a particular product or process is of material importance when judged from the standpoint of any segment or its businesses as a whole.  The Company has a number of intellectual property rights, comprised of both patented and proprietary technology, that the Company believes makes its glass forming machines more efficient and productive than those used by its competitors.  In addition, the efficiency of the Company’s glass forming machines is enhanced by the Company’s overall approach to cost efficient manufacturing technology, which extends from the raw materials batch house to the finished goods warehouse.  This technology is proprietary to the Company through a combination of issued patents, pending applications, copyrights, trade secrets and proprietary know-how.

 

Upstream of the glass forming machines, there is technology to deliver molten glass to the forming machine at high rates of flow and fully conditioned to be homogeneous in consistency, viscosity and

 

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temperature for efficient forming into glass containers.  The Company has proprietary know-how in (a) the batch house, where raw materials are stored, measured and mixed, (b) the furnace control system and furnace combustion, and (c) the forehearth and feeding system to deliver such homogeneous glass to the forming machines.

 

In the Company’s glass container manufacturing processes, computer controls and electro-mechanical mechanisms are commonly used for a wide variety of applications in the forming machines and auxiliary processes. Various patents held by the Company are directed to the electro-mechanical mechanisms and related technologies used to control sections of the machines.  Additional U.S. patents held by the Company and various pending applications are directed to the technology used by the Company for the systems that control the operation of the forming machines and many of the component mechanisms that are embodied in the machine systems.

 

Downstream of the glass forming machines, there is patented and unpatented technology for ware handling, annealing, coating and inspection, which further enhances the overall efficiency of the manufacturing process.

 

While the above patents and intellectual property rights are representative of the technology used in the Company’s glass manufacturing operations, there are numerous other pending patent applications, trade secrets and other proprietary know-how and technology, as supplemented by administrative and operational best practices, which contribute to the Company’s competitive advantage.  As noted above, however, the Company does not consider that any patent or group of patents relating to a particular product or process is of material importance when judged from the standpoint of any segment or its businesses as a whole.

 

Seasonality

 

Sales of particular glass container products such as beer are seasonal.  Shipments in the U.S. and Europe are typically greater in the second and third quarters of the year, while shipments in the Asia Pacific region are typically greater in the first and fourth quarters of the year, and shipments in South America are typically greater in the third and fourth quarters of the year.

 

Employees

 

The Company’s worldwide operations employed approximately 22,000 persons as of December 31, 2009.  Approximately 78% of North American employees are hourly workers covered by collective bargaining agreements.  The principal collective bargaining agreement, which at December 31, 2009, covered approximately 81% of the Company’s union-affiliated employees in North America, will expire on March 31, 2011. Approximately 54% of employees in South America are unionized, although according to the labor legislation in each country, 100% of employees are covered by collective bargaining agreements. The average length of these agreements is approximately 2-3 years.  In addition, a large number of the Company’s employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S.  Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. The Company considers its employee relations to be good and does not anticipate any material work stoppages in the near term.

 

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Executive Officers of the Registrant

 

Name and Age

 

Position

 

 

 

Albert P. L. Stroucken (62)

 

Chairman and Chief Executive Officer since December 2006. Previously Chief Executive Officer of HB Fuller Company, a manufacturer of adhesives, sealants, coatings, paints and other specialty chemical products 1998-2006, and Chairman of HB Fuller Company from 1999-2006.

 

 

 

Edward C. White (62)

 

Chief Financial Officer since 2005; Senior Vice President and Director of Sales and Marketing for O-I Europe 2004-2005; Senior Vice President since 2003; Senior Vice President of Finance and Administration 2003-2004; Controller 1999-2004; Vice President 2002-2003.

 

 

 

James W. Baehren (59)

 

Senior Vice President Strategic Planning since 2006; Chief Administrative Officer 2004-2006; Senior Vice President and General Counsel since 2003; Corporate Secretary since 1998; Vice President and Director of Finance 2001-2003.

 

 

 

L. Richard Crawford (49)

 

President, Global Glass Operations since 2006; President, Latin America Glass 2005-2006; Vice President, Director of Operations and Technology for O-I Europe 2004-2005; Vice President of Global Glass Technology 2002-2004; Vice President, Manufacturing Manager of Domestic Glass Container 2000-2002.

 

Financial Information about Foreign and Domestic Operations

 

Information as to net sales, Segment Operating Profit, and assets of the Company’s reportable segments is included in Note 19 to the Consolidated Financial Statements.

 

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Table of Contents

 

ITEM 1A.

 

RISK FACTORS

 

Asbestos-Related Liability — The Company has made, and will continue to make, substantial payments to resolve claims of persons alleging exposure to asbestos-containing products and may need to record additional charges in the future for estimated asbestos-related costs.  These substantial payments have affected and may continue to affect the Company’s cost of borrowing and the ability to pursue acquisitions.

 

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 containing 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”).

 

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 $3.65 billion through 2009, before insurance recoveries, for its asbestos-related liability.  The Company’s ability to reasonably 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 conducted a comprehensive review of its asbestos-related liabilities and costs in connection with finalizing and reporting its results of operations for the year ended December 31, 2009 and concluded that an increase in its accrual for future asbestos-related costs in the amount of $180.0 million (pretax and after tax) was required.

 

The ultimate amount of distributions that may be required to fund the Company’s asbestos-related payments cannot reasonably be estimated.  The Company’s reported results of operations for 2009 were materially affected by the $180.0 million (pretax and after tax) fourth quarter charge and asbestos-related payments continue to be substantial.  Any future additional charge may 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.

 

Substantial Leverage — The Company’s substantial indebtedness could adversely affect the Company’s financial health.

 

The Company has a significant amount of debt.  As of December 31, 2009, the Company had approximately $3.6 billion of total debt outstanding, increased from $3.3 billion at December 31, 2008.  The Company’s ratios of earnings to fixed charges were 2.3x and 3.1x for the years ended December 31, 2009 and 2008, respectively.

 

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The Company’s substantial indebtedness could result in the following consequences:

·      Increased vulnerability to general adverse economic and industry conditions;

·      Increased vulnerability to interest rate increases for the portion of the debt under the secured credit agreement;

·      Require the Company to dedicate a substantial portion of cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions, development efforts and other general corporate purposes;

·      Limited flexibility in planning for, or reacting to, changes in the Company’s business and the rigid packaging market;

·      Place the Company at a competitive disadvantage relative to its competitors that have less debt; and

·      Limit, along with the financial and other restrictive covenants in the documents governing indebtedness, among other things, the Company’s ability to borrow additional funds.

 

Ability to Service Debt To service its indebtedness, the Company will require a significant amount of cash.  The Company’s ability to generate cash depends on many factors beyond its control.

 

The Company’s ability to make payments on and to refinance its indebtedness and to fund working capital, capital expenditures, acquisitions, development efforts and other general corporate purposes depends on its ability to generate cash in the future.  The Company has no assurance that it will generate sufficient cash flow from operations, or that future borrowings will be available under the secured credit agreement, in an amount sufficient to enable the Company to pay its indebtedness, or to fund other liquidity needs. If short term interest rates increase, the Company’s debt service cost will increase because some of its debt is subject to short term variable interest rates. At December 31, 2009, the Company’s debt subject to variable interest rates represented approximately 31% of total debt.

 

The Company may need to refinance all or a portion of its indebtedness on or before maturity. If the Company is unable to generate sufficient cash flow and is unable to refinance or extend outstanding borrowings on commercially reasonable terms or at all, it may have to take one or more of the following actions:

·      Reduce or delay capital expenditures planned for replacements, improvements and expansions;

·      Sell assets;

·      Restructure debt; and/or

·      Obtain additional debt or equity financing.

 

The Company can provide no assurance that it could effect or implement any of these alternatives on satisfactory terms, if at all.

 

Debt Restrictions The Company may not be able to finance future needs or adapt its business plans to changes because of restrictions placed on it by the secured credit agreement and the indentures and instruments governing other indebtedness.

 

The secured credit agreement, the indentures governing the senior debentures and notes, and certain of the agreements governing other indebtedness contain affirmative and negative covenants that limit the ability of the Company to take certain actions. For example, these indentures restrict, among other things, the ability of the Company and its restricted subsidiaries to borrow money, pay dividends on, or redeem or repurchase its stock, make investments, create liens, enter into certain transactions with affiliates and sell certain assets or merge with or into other companies. These restrictions could adversely affect the

 

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Company’s ability to operate its businesses and may limit its ability to take advantage of potential business opportunities as they arise.

 

Failure to comply with these or other covenants and restrictions contained in the secured credit agreement, the indentures or agreements governing other indebtedness could result in a default under those agreements, and the debt under those agreements, together with accrued interest, could then be declared immediately due and payable. If a default occurs under the secured credit agreement, the Company could no longer request borrowings under the agreement, and the lenders could cause all of the outstanding debt obligations under such secured credit agreement to become due and payable, which 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 under the secured credit 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.

 

International Operations — The Company is subject to risks associated with operating in foreign countries.

 

The Company operates manufacturing and other facilities throughout the world.  Net sales from international operations totaled approximately $5.2 billion, representing approximately 73% of the Company’s net sales for the year ended December 31, 2009.  As a result of its international operations, the Company is subject to risks associated with operating in foreign countries, including:

·      Political, social and economic instability;

·      War, civil disturbance or acts of terrorism;

·      Taking of property by nationalization or expropriation without fair compensation;

·      Changes in government policies and regulations;

·      Devaluations and fluctuations in currency exchange rates;

·      Imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries;

·      Imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;

·      Hyperinflation in certain foreign countries; and

·      Impositions or increase of investment and other restrictions or requirements by foreign governments.

 

The risks associated with operating in foreign countries may have a material adverse effect on operations.

 

Competition — The Company faces intense competition from other glass container producers, as well as from makers of alternative forms of packaging.  Competitive pressures could adversely affect the Company’s financial health.

 

The Company is subject to significant competition from other glass container producers, as well as from makers of alternative forms of packaging, such as aluminum cans and plastic containers.  The Company competes with each rigid packaging competitor on the basis of price, quality, service and the marketing attributes of the container.  Advantages or disadvantages in any of these competitive factors may be sufficient to cause the customer to consider changing suppliers and/or using an alternative form of packaging. The adverse effects of consumer purchasing decisions may be more significant in periods of economic downturn and may lead to longer term reductions in consumer spending on glass packaged products. The Company also competes with manufacturers of non-rigid packaging alternatives, including flexible pouches and aseptic cartons, in serving the packaging needs of certain end-use markets, including juice customers.

 

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Pressures from competitors and producers of alternative forms of packaging have resulted in excess capacity in certain countries in the past and have led to capacity adjustments and significant pricing pressures in the rigid packaging market.

 

High Energy Costs — Higher energy costs worldwide and interrupted power supplies may have a material adverse effect on operations.

 

Electrical power, natural gas, and fuel oil are vital to the Company’s operations as it relies on a continuous power supply to conduct its business.  Depending on the location and mix of energy sources, energy accounts for 15% to 25% of total production costs.  Substantial increases and volatility in energy costs could cause the Company to experience a significant increase in operating costs, which may have a material adverse effect on operations.

 

Economic Environment - The Company may be adversely affected by the current economic environment.

 

As a result of severely weak credit market conditions (including uncertainties with respect to financial institutions, and severely diminished liquidity and credit availability), volatility in energy costs and other macro-economic challenges currently affecting many of the economies in which the Company operates, customers or vendors may experience serious cash flow problems and as a result, may modify, delay, or curtail plans to purchase the Company’s products and vendors may significantly and quickly increase their prices or reduce their output.  Additionally, if customers are not successful in generating sufficient revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to the Company.  Any inability of current and/or potential customers to pay the Company for its products may adversely affect the Company’s earnings and cash flow.  If the economic conditions in the Company’s key markets deteriorate further, the Company may experience material adverse impacts to its business and operating results.

 

Business Integration Risks — The Company may not be able to effectively integrate additional businesses it acquires in the future.

 

The Company may consider strategic transactions, including acquisitions that will complement, strengthen and enhance growth in its worldwide glass operations.  The Company evaluates opportunities on a preliminary basis from time to time, but these transactions may not advance beyond the preliminary stages or be completed.  Such acquisitions are subject to various risks and uncertainties, including:

·      The inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which are located in diverse geographic regions) and achieve expected synergies;

·      The potential disruption of existing business and diversion of management’s attention from day-to-day operations;

·      The inability to maintain uniform standards, controls, procedures and policies;

·      The need or obligation to divest portions of the acquired companies; and

·      The potential impairment of relationships with customers.

 

In addition, the Company cannot make assurances that the integration and consolidation of newly acquired businesses will achieve any anticipated cost savings and operating synergies.

 

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Customer Consolidation — The continuing consolidation of the Company’s customer base may intensify pricing pressures and have a material adverse effect on operations.

 

Beginning in the early 1990s, many of the Company’s largest customers have acquired companies with similar or complementary product lines.  This consolidation has increased the concentration of the Company’s business with its largest customers.  In many cases, such consolidation has been accompanied by pressure from customers for lower prices, reflecting the increase in the total volume of products purchased or the elimination of a price differential between the acquiring customer and the company acquired.  Increased pricing pressures from the Company’s customers may have a material adverse effect on operations.

 

Seasonality and Raw Materials — Profitability could be affected by varied seasonal demands and the availability of raw materials.

 

Due principally to the seasonal nature of the consumption of beer and other beverages, for which demand is stronger during the summer months, sales of the Company’s products have varied and are expected to vary by quarter.  Shipments in the U.S. and Europe are typically greater in the second and third quarters of the year, while shipments in the Asia Pacific region are typically greater in the first and fourth quarters of the year, and shipments in South America are typically greater in the third and fourth quarters of the year.  Unseasonably cool weather during peak demand periods can reduce demand for certain beverages packaged in the Company’s containers.

 

The raw materials that the Company uses have historically been available in adequate supply from multiple sources.  For certain raw materials, however, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays.  These shortages, as well as material volatility in the cost of any of the principal raw materials that the Company uses, may have a material adverse effect on operations.

 

Environmental Risks — The Company is subject to various environmental legal requirements and may be subject to new legal requirements in the future.  These requirements may have a material adverse effect on operations.

 

The Company’s operations and properties, both in the U.S. and abroad, are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean-up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety.  Such legal requirements frequently change and vary among jurisdictions.  The Company’s operations and properties, both in the U.S. and abroad, must comply with these legal requirements.  These requirements may have a material adverse effect on operations.

 

The Company has incurred, and expects to incur, costs for its operations to comply with environmental legal requirements, and these costs could increase in the future.  Many environmental legal requirements provide for substantial fines, orders (including orders to cease operations), and criminal sanctions for violations.  These legal requirements may apply to conditions at properties that the Company presently or formerly owned or operated, as well as at other properties for which the Company may be responsible, including those at which wastes attributable to the Company were disposed.  A significant order or judgment against the Company, the loss of a significant permit or license or the imposition of a significant fine may have a material adverse effect on operations.

 

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A number of governmental authorities both in the U.S. and abroad have enacted, or are considering, legal requirements that would mandate certain rates of recycling, the use of recycled materials and/or limitations on certain kinds of packaging materials.  In addition, some companies with packaging needs have responded to such developments and/or perceived environmental concerns of consumers by using containers made in whole or in part of recycled materials.  Such developments may reduce the demand for some of the Company’s products and/or increase the Company’s costs, which may have a material adverse effect on operations.

 

Labor Relations — Some of the Company’s employees are unionized or represented by workers’ councils.

 

The Company is party to a number of collective bargaining agreements with labor unions which at December 31, 2009, covered approximately 78% of the Company’s employees in North America. Approximately 54% of employees in South America are unionized, although according to the labor legislation of each country, 100% of employees are covered by collective bargaining agreements.  The agreement covering substantially all of the Company’s union-affiliated employees in its U.S. glass container operations expires on March 31, 2011.  Agreements in South America typically have an average term of approximately 2-3 years.  Upon the expiration of any collective bargaining agreement, if the Company is unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. In addition, a large number of the Company’s employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S.  Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements.  For example, most of the Company’s employees in Europe are represented by workers’ councils that must approve any changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure the Company’s workforce.  Although the Company believes that it has a good working relationship with its employees, if the Company’s employees were to engage in a strike or other work stoppage, the Company could experience a significant disruption of operations and/or higher ongoing labor costs, which may have a material adverse effect on operations.

 

Accounting — The Company’s financial results are based upon estimates and assumptions that may differ from actual results.

 

In preparing the Company’s consolidated financial statements in accordance with U.S. generally accepted accounting principles, several estimates and assumptions are made that affect the accounting for and recognition of assets, liabilities, revenues and expenses.  These estimates and assumptions must be made because certain information that is used in the preparation of the Company’s financial statements is dependent on future events, cannot be calculated with a high degree of precision from data available or is not capable of being readily calculated based on generally accepted methodologies.  In some cases, these estimates are particularly difficult to determine and the Company must exercise significant judgment.  The Company believes that accounting for long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.  Actual results for all estimates could differ materially from the estimates and assumptions that the Company uses, which could have a material adverse effect on the Company’s financial condition and results of operations.

 

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Accounting Standards — The adoption of new accounting standards or interpretations could adversely impact the Company’s financial results.

 

The Company’s implementation of and compliance with changes in accounting rules and interpretations could adversely affect its operating results or cause unanticipated fluctuations in its results in future periods.  The accounting rules and regulations that the Company must comply with are complex and continually changing.  Recent actions and public comments from the SEC have focused on the integrity of financial reporting generally.  The Financial Accounting Standards Board has recently introduced several new or proposed accounting standards, or is developing new proposed standards, which would represent a significant change from current industry practices.  In addition, many companies’ accounting policies are being subjected to heightened scrutiny by regulators and the public.  While the Company believes that its financial statements have been prepared in accordance with U.S. generally accepted accounting principles, the Company cannot predict the impact of future changes to accounting principles or its accounting policies on its financial statements going forward.

 

Goodwill — A significant write down of goodwill would have a material adverse effect on the Company’s reported results of operations and net worth.

 

Goodwill at December 31, 2009 totaled $2,381.0 million.  The Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment using the required business valuation methods.  These methods include the use of a weighted average cost of capital to calculate the present value of the expected future cash flows of the Company’s reporting units.  Future changes in the cost of capital, expected cash flows, or other factors may cause the Company’s goodwill to be impaired, resulting in a non-cash charge against results of operations to write down goodwill for the amount of the impairment.  If a significant write down is required, the charge would have a material adverse effect on the Company’s reported results of operations and net worth.

 

Pension Funding — Declines in the fair value of the assets of the pension plans sponsored by the Company could require increased funding.

 

The Company’s defined benefit pension plans in the U.S. and several other countries are funded through qualified trusts that hold investments in a broad range of equity and debt securities.  Deterioration in the value of such investments, or reductions driven by a decline in securities markets or otherwise, could increase the underfunded status of the Company’s funded pension plans, thereby increasing its obligation to make contributions to the plans as required by the laws and regulations governing each plan.  An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on the Company’s operations, financial condition and liquidity.

 

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

 

None.

 

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Table of Contents

 

ITEM 2.

 

PROPERTIES

 

The principal manufacturing facilities and other material important physical properties of the Company at December 31, 2009 are listed below.  All properties shown are owned in fee except where otherwise noted.

 

 

North American Operations

 

 

 

 

United States

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Atlanta, GA

 

Oakland, CA

 

 

 

 

Auburn, NY

 

Portland, OR

 

 

 

 

Brockway, PA

 

Streator, IL

 

 

 

 

Charlotte, MI (1)

 

Toano, VA

 

 

 

 

Clarion, PA (1)

 

Tracy, CA

 

 

 

 

Crenshaw, PA

 

Waco, TX

 

 

 

 

Danville, VA

 

Windsor, CO

 

 

 

 

Lapel, IN

 

Winston-Salem, NC

 

 

 

 

Los Angeles, CA

 

Zanesville, OH

 

 

 

 

Muskogee, OK

 

 

 

 

 

 

 

 

 

 

 

Canada

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Brampton, Ontario

 

Montreal, Quebec

 

 

 

 

 

 

 

 

Asia Pacific Operations

 

 

 

 

Australia

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Adelaide

 

Melbourne

 

 

 

 

Brisbane

 

Sydney

 

 

China

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Guangzhou

 

Tianjin

 

 

 

 

Shanghai

 

Wuhan

 

 

 

 

 

 

 

 

 

 

Mold Shop

 

 

 

 

 

 

Tianjin

 

 

 

 

 

 

 

 

 

 

 

Indonesia

 

 

 

 

 

Glass Container Plant

 

 

 

 

 

 

Jakarta

 

 

 

 

 

 

 

 

 

 

 

New Zealand

 

 

 

 

 

Glass Container Plant

 

 

 

 

 

 

Auckland

 

 

 

 

 

 

 

 

 

 

European Operations

 

 

 

 

Czech Republic

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Sokolov

 

Teplice

 

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Table of Contents

 

 

 

Estonia

 

 

 

 

 

Glass Container Plant

 

 

 

 

 

 

Jarvakandi

 

 

 

 

 

 

 

 

 

 

 

France

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Beziers

 

Reims

 

 

 

 

Gironcourt

 

Vayres

 

 

 

 

Labegude

 

Veauche

 

 

 

 

Puy-Guillaume

 

Wingles

 

 

 

 

 

 

 

 

 

Germany

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Achern

 

Holzminden

 

 

 

 

Bernsdorf

 

Rinteln

 

 

 

 

 

 

 

 

 

Hungary

 

 

 

 

 

Glass Container Plant

 

 

 

 

 

 

Oroshaza

 

 

 

 

 

 

 

 

 

 

 

Italy

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Asti

 

Pordenone

 

 

 

 

Bari (2 plants)

 

Terni

 

 

 

 

Latina

 

Trento

 

 

 

 

Trapani

 

Treviso

 

 

 

 

Napoli

 

Varese

 

 

 

 

 

 

 

 

 

The Netherlands

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Leerdam

 

Schiedam

 

 

 

 

Maastricht

 

 

 

 

 

 

 

 

 

 

 

Poland

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Antoninek

 

Jaroslaw

 

 

 

 

 

 

 

 

 

Spain

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Alcala

 

Barcelona

 

 

 

 

 

 

 

 

 

United Kingdom

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Alloa

 

Harlow

 

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South American Operations

 

 

 

 

Brazil

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Rio de Janeiro

 

Sao Paulo

 

 

 

 

(glass container and tableware)

 

 

 

 

 

 

 

 

 

 

 

 

Mold Shop

 

 

 

 

 

 

Manaus

 

 

 

 

 

 

 

 

 

 

 

Colombia

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Envigado

 

Zipaquira (glass container and flat glass)

 

 

 

 

Soacha

 

 

 

 

 

 

 

 

 

 

 

 

Tableware Plant

 

 

 

 

 

 

Buga

 

 

 

 

 

 

 

 

 

 

 

Ecuador

 

 

 

 

 

Glass Container Plant

 

 

 

 

 

 

Guayaquil

 

 

 

 

 

 

 

 

 

 

 

Peru

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Callao

 

Lurin (2)

 

 

 

 

 

 

 

 

 

Venezuela

 

 

 

 

 

Glass Container Plants

 

 

 

 

 

 

Valencia

 

Valera

 

 

 

 

 

 

 

 

Other Operations

 

 

 

 

 

Machine Shops and Engineering Support Center

 

 

 

 

 

 

Brockway, Pennsylvania

 

Cali, Colombia

 

 

 

 

Clayton, Australia

 

Jaroslaw, Poland

 

 

 

 

Lurin, Peru

 

Perrysburg, Ohio

 

 

 

 

 

 

 

 

Corporate Facilities

 

 

 

 

Perrysburg, Ohio (2)

 

 

 


(1)

This facility is scheduled to be closed in 2010.

(2)

This facility is leased in whole or in part.

 

The Company believes that its facilities are well maintained and currently adequate for its planned production requirements over the next three to five years.

 

ITEM 3.

 

LEGAL PROCEEDINGS

 

For further information on legal proceedings, see Note 18 to the Consolidated Financial Statements and the section entitled “Environmental and Other Governmental Regulation” in Item 1.

 

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ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

No matter was submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 2009.

 

PART II

 

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

The price range for the Company’s common stock on the New York Stock Exchange, as reported by the Financial Industry Regulatory Authority, Inc., was as follows:

 

 

 

2009

 

2008

 

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

27.69

 

$

9.60

 

$

58.68

 

$

38.60

 

Second Quarter

 

31.00

 

14.16

 

60.60

 

41.49

 

Third Quarter

 

39.00

 

25.66

 

48.60

 

23.66

 

Fourth Quarter

 

39.55

 

29.84

 

29.53

 

15.20

 

 

The number of share owners of record on December 31, 2009 was 1,464.  Approximately 94% of the outstanding shares were registered in the name of Depository Trust Company, or CEDE, which held such shares on behalf of a number of brokerage firms, banks, and other financial institutions.  The shares attributed to these financial institutions, in turn, represented the interests of more than 70,000 unidentified beneficial owners.  No dividends have been declared or paid since the Company’s initial public offering in December 1991 and the Company does not anticipate paying any dividends in the near future.  For restrictions on payment of dividends on common stock, see Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity — Current and Long-Term Debt and Note 6 to the Consolidated Financial Statements.

 

Information with respect to securities authorized for issuance under equity compensation plans is included herein under Item 12.

 

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PERFORMANCE GRAPH

COMPARISON OF CUMULATIVE TOTAL RETURN

AMONG OWENS-ILLINOIS, S&P 500, AND PACKAGING GROUP

 

 

 

 

Years Ending December 31,

 

 

 

2004

 

2005

 

2006

 

2007

 

2008

 

2009

 

Owens-Illinois

 

$

100.00

 

$

92.88

 

$

81.45

 

$

218.53

 

$

120.63

 

$

145.09

 

S&P 500

 

$

100.00

 

$

104.89

 

$

121.46

 

$

128.13

 

$

80.73

 

$

102.08

 

Packaging Group

 

$

100.00

 

$

103.46

 

$

118.38

 

$

137.60

 

$

101.45

 

$

128.28

 

 

The above graph compares the performance of the Company’s Common Stock with that of a broad market index (the S&P 500 Composite Index) and a packaging group consisting of companies with lines of business or product end uses comparable to those of the Company for which market quotations are available.

 

The packaging group consists of: AptarGroup, Inc., Ball Corp., Bemis Company, Inc., Crown Holdings, Inc., Owens-Illinois, Inc., Sealed Air Corp., Silgan Holdings Inc., Sonoco Products Co., and Vitro Sociedad Anonima (ADSs).

 

The comparison of total return on investment for each period is based on the investment of $100 on December 31, 2004 and the change in market value of the stock, including additional shares assumed purchased through reinvestment of dividends, if any.

 

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Table of Contents

 

ITEM 6.

 

SELECTED FINANCIAL DATA

 

The selected consolidated financial data presented below relates to each of the five years in the period ended December 31, 2009.  The financial data for each of the five years in the period ended December 31, 2009 was derived from the audited consolidated financial statements of the Company.  For more information, see the “Consolidated Financial Statements” included elsewhere in this document.

 

 

 

Years ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(Dollar amounts in millions)

 

Consolidated operating results (a):

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,066.5

 

$

7,884.7

 

$

7,566.7

 

$

6,650.4

 

$

6,266.9

 

Manufacturing, shipping and delivery (b)

 

(5,582.6

)

(6,208.1

)

(5,971.4

)

(5,481.1

)

(5,084.9

)

Gross profit

 

1,483.9

 

1,676.6

 

1,595.3

 

1,169.3

 

1,182.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative, research development and engineering

 

(565.2

)

(578.5

)

(586.4

)

(579.1

)

(506.1

)

Other expense (c)

 

(477.0

)

(404.2

)

(266.2

)

(174.7

)

(660.8

)

Other revenue (d)

 

105.3

 

117.5

 

112.5

 

98.6

 

103.2

 

Earnings before interest expense and items below

 

547.0

 

811.4

 

855.2

 

514.1

 

118.3

 

Interest expense (e)

 

(221.7

)

(253.0

)

(348.6

)

(349.0

)

(325.4

)

Earnings (loss) from continuing operations before income taxes

 

325.3

 

558.4

 

506.6

 

165.1

 

(207.1

)

Provision for income taxes (f)

 

(127.5

)

(236.7

)

(147.8

)

(125.3

)

(379.9

)

Earnings from continuing operations

 

197.8

 

321.7

 

358.8

 

39.8

 

(587.0

)

Net earnings (loss) of discontinued operations (g)

 

 

 

 

 

3.0

 

(23.7

)

63.1

 

Gain on sale of discontinued operations

 

 

 

6.8

 

1,038.5

 

 

 

1.2

 

Net earnings (loss)

 

197.8

 

328.5

 

1,400.3

 

16.1

 

(522.7

)

Net earnings attributable to noncontrolling interests

 

(36.0

)

(70.2

)

(59.7

)

(43.6

)

(35.9

)

Net earnings (loss) attributable to the Company

 

$

161.8

 

$

258.3

 

$

1,340.6

 

$

(27.5

)

$

(558.6

)

 

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Table of Contents

 

 

 

Years ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

Basic earnings (loss) per share of common stock: (h)

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.96

 

$

1.49

 

$

1.78

 

$

(0.17

)

$

(4.27

)

Net earnings (loss) of discontinued operations

 

 

 

 

 

0.02

 

(0.15

)

0.41

 

Gain on sale of discontinued operations

 

 

 

0.04

 

6.66

 

 

 

0.01

 

Net earnings (loss)

 

$

0.96

 

$

1.53

 

$

8.46

 

$

(0.32

)

$

(3.85

)

Weighted average shares outstanding (in thousands)

 

167,687

 

163,178

 

154,215

 

152,071

 

150,910

 

Diluted earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations

 

$

0.95

 

$

1.48

 

$

1.78

 

$

(0.17

)

$

(4.27

)

Net earnings (loss) of discontinued operations

 

 

 

 

 

0.02

 

(0.15

)

0.41

 

Gain on sale of discontinued operations

 

 

 

0.04

 

6.19

 

 

 

0.01

 

Net earnings (loss)

 

$

0.95

 

$

1.52

 

$

7.99

 

$

(0.32

)

$

(3.85

)

Diluted average shares (in thousands)

 

170,540

 

169,677

 

167,767

 

152,071

 

150,910

 

 

The Company’s convertible preferred stock was included in the computation of diluted earnings per share for 2008, to the extent outstanding during 2008, and 2007 on an “if converted” basis since the result was dilutive.  The Company’s convertible preferred stock was not included in the computation of 2005 and 2006 diluted earnings per share since the result would have been antidilutive.  Options to purchase 994,834, 241,711 and 862,906 weighted average shares of common stock which were outstanding during 2009, 2008 and 2007, 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. For the years ended December 31, 2006 and 2005, diluted earnings per share of common stock are equal to basic earnings per share of common stock due to the net losses.

 

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Table of Contents

 

 

 

Years ended December 31,

 

 

 

2009

 

2008

 

2007

 

2006

 

2005

 

 

 

(Dollar amounts in millions)

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

The following are included in net earnings:

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

$

374.8

 

$

431.0

 

$

423.4

 

$

427.7

 

$

436.1

 

Amortization of intangibles

 

21.1

 

28.9

 

28.9

 

22.3

 

22.5

 

Amortization of deferred finance fees (included in interest expense)

 

10.4

 

7.9

 

8.6

 

5.7

 

6.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

Working capital (current assets less current liabilities)

 

$

763

 

$

441

 

$

165

 

$

67

 

$

460

 

Total assets

 

8,727

 

7,977

 

9,325

 

9,321

 

9,522

 

Total debt

 

3,610

 

3,334

 

3,714

 

5,457

 

5,297

 

Share owners’ equity (a)

 

1,736

 

1,293

 

2,439

 

563

 

905

 

 


(a)         Amounts related to the Company’s plastic packaging business have been reclassified to discontinued operations for 2005-2007 as a result of the sale of that business in 2007.

 

The Company adopted the provisions of a new accounting standard on January 1, 2009, which changed the presentation of noncontrolling interests in subsidiaries.  The presentation requirements of the new standard were also required to be applied retrospectively.

 

(b)         Amount for 2006 includes a loss of $8.7 million ($8.4 million after tax amount attributable to the Company) from the mark to market effect of natural gas hedge contracts.

 

Amount for 2005 includes a gain of $3.8 million ($2.3 million after tax amount attributable to the Company) from the mark to market effect of natural gas hedge contracts.

 

(c)          Amount for 2009 includes charges of $180.0 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs, $213.6 million ($182.8 million after tax amount attributable to the Company) for restructuring and asset impairments, and $17.3 million ($17.6 million after tax amount attributable to the Company) for the remeasurement of certain bolivar-denominated assets and liabilities held outside of Venezuela.

 

Amount for 2008 includes charges of $250.0 million ($248.8 million after tax) to increase the accrual for estimated future asbestos-related costs and $133.3 million ($110.1 million after tax amount attributable to the Company) for restructuring and asset impairments.

 

Amount for 2007 includes charges of $115.0 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs and $100.3 million ($84.1 million after tax amount attributable to the Company) for restructuring and asset impairments.

 

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Amount for 2006 includes charges of $120.0 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs, a charge of $20.8 million ($20.7 million after tax amount attributable to the Company) for CEO transition costs, and a charge of $29.7 million ($27.7 million after tax amount attributable to the Company) for the closing of the Godfrey, Illinois machine parts manufacturing operation.

 

Amount for 2005 includes a charge of $135.0 million ($86.0 million after tax) to increase the accrual for estimated future asbestos-related costs and a charge of $494.0 million (pretax and after tax amount attributable to the Company) to write down goodwill in the Asia Pacific Glass unit.

 

(d)         Other revenue in 2006 includes a gain of $15.9 million ($11.2 million after tax amount attributable to the Company) for the curtailment of postretirement benefits in The Netherlands.

 

Other revenue in 2005 includes $28.1 million (pretax and after tax amount attributable to the Company) from the sale of the Company’s glass container facility in Corsico, Italy.

 

(e)          Amount for 2009 includes charges of $4.9 million (pretax and after tax amount attributable to the Company) for note repurchase premiums, net of a gain from the termination of interest rate swap agreements on the notes.

 

Amount for 2007 includes charges of $7.9 million ($7.3 million after tax amount attributable to the Company) for note repurchase premiums.

 

Amount for 2006 includes charges of $6.2 million (pretax and after tax amount attributable to the Company) for note repurchase premiums.

 

Includes additional interest charges for the write-off of unamortized deferred financing fees related to the early extinguishment of debt as follows:  $0.3 million (pretax and after tax amount attributable to the Company) for 2009; $1.6 million ($1.5 million after tax amount attributable to the Company) for 2007; and $11.3 million ($10.9 million after tax amount attributable to the Company) for 2006.

 

(f)           Amount for 2009 includes a non-cash tax benefit transferred from other comprehensive income (equity) of $47.9 million.

 

Amount for 2008 includes a net tax expense of $33.3 million ($34.8 million attributable to the Company) related to tax legislation, restructuring, and other.

 

Amount for 2007 includes a benefit of $13.5 million for the recognition of tax credits related to restructuring of investments in certain European operations.

 

Amount for 2006 includes a benefit of $5.7 million from the reversal of a non-U.S. deferred tax asset valuation allowance partially offset by charges related to international tax restructuring.

 

Amount for 2005 includes a charge of $300.0 million to record a valuation allowance related to accumulated deferred tax assets in the U.S. and a benefit of $5.3 million for the reversal of an accrual for potential tax liabilities related to a previous divestiture.  The accrual is no longer required based on the Company’s reassessment of potential liabilities.

 

(g)          Amount for 2005 consists principally of a third quarter benefit from the reversal of an accrual for potential tax liabilities related to a previous divestiture.  The accrual is no longer required based on the Company’s reassessment of the potential liabilities.

 

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Table of Contents

 

(h)         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 2005-2008 were restated in accordance with the new provisions which are required to be applied retrospectively.  There was no impact on diluted earnings per share in any period presented.

 

ITEM 7.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Following are the Company’s net sales by segment and segment operating profit for the years ended December 31, 2009, 2008, and 2007 (dollars in millions).  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 segment data presented below is prepared in accordance with general accounting principles for segment reporting.  The line titled ‘reportable segment totals’, however, is a non-GAAP measure when presented outside of the financial statement footnotes.  Management has included ‘reportable segment totals’ below to facilitate the discussion and analysis of financial condition and results of operations.  The Company’s management uses Segment Operating Profit, in combination with selected cash flow information, to evaluate performance and to allocate resources.

 

Net Sales:

 

2009

 

2008

 

2007

 

Europe

 

$

2,917.6

 

$

3,497.8

 

$

3,298.7

 

North America

 

2,074.3

 

2,209.7

 

2,271.3

 

South America

 

1,104.1

 

1,135.9

 

970.7

 

Asia Pacific

 

925.0

 

964.1

 

934.3

 

Reportable segment totals

 

7,021.0

 

7,807.5

 

7,475.0

 

Other

 

45.5

 

77.2

 

91.7

 

Net Sales

 

$

7,066.5

 

$

7,884.7

 

$

7,566.7

 

 

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Table of Contents

 

Segment Operating Profit:

 

2009

 

2008

 

2007

 

Europe

 

$

332.6

 

$

477.8

 

$

433.0

 

North America

 

281.5

 

185.2

 

265.1

 

South America

 

250.6

 

331.0

 

254.9

 

Asia Pacific

 

131.3

 

162.8

 

154.0

 

Reportable segment totals

 

996.0

 

1,156.8

 

1,107.0

 

 

 

 

 

 

 

 

 

Items excluded from Segment Operating Profit:

 

 

 

 

 

 

 

Retained corporate costs and other

 

(66.7

)

(0.7

)

(78.8

)

Restructuring and asset impairment

 

(213.6

)

(133.3

)

(100.3

)

Charge for Venezuela currency remeasurement

 

(17.3

)

 

 

 

 

Charge for asbestos related costs

 

(180.0

)

(250.0

)

(115.0

)

Interest income

 

28.6

 

38.6

 

42.3

 

Interest expense

 

(221.7

)

(253.0

)

(348.6

)

Earnings from continuing operations before income taxes

 

325.3

 

558.4

 

506.6

 

Provision for income taxes

 

(127.5

)

(236.7

)

(147.8

)

Earnings from continuing operations

 

197.8

 

321.7

 

358.8

 

Net earnings of discontinued operations

 

 

 

 

 

3.0

 

Gain on sale of discontinued operations

 

 

 

6.8

 

1,038.5

 

Net earnings

 

197.8

 

328.5

 

1,400.3

 

Net earnings attributable to noncontrolling interests

 

(36.0

)

(70.2

)

(59.7

)

Net earnings attributable to the Company

 

$

161.8

 

$

258.3

 

$

1,340.6

 

 

 

 

 

 

 

 

 

Net earnings from continuing operations attributable to the Company

 

$

161.8

 

$

251.5

 

$

299.3

 

 

Note:  all amounts excluded from reportable segment totals are discussed in the following applicable sections.

 

Executive Overview — Years ended December 31, 2009 and 2008

 

Net sales were $818.2 million lower than the prior year principally resulting from decreased shipments and the unfavorable effect of foreign currency exchange rates, partially offset by higher selling prices and improved mix.

 

Segment Operating Profit for reportable segments was $160.8 million lower than the prior year.  The decrease was mainly attributable to lower sales volume and increased manufacturing and delivery costs resulting from higher unabsorbed fixed costs of approximately $302.0 million, primarily from production curtailments, as well as inflationary cost increases.  The Company also recognized $28.0 million of foreign currency exchange losses in 2009 related to cash remittances out of Venezuela as part of the Company’s cash management strategy.  Partially offsetting these costs were higher selling prices and savings from permanent curtailment of plant capacity and realignment of selected operations.

 

Interest expense in 2009 was $221.7 million compared with interest expense of $253.0 million in 2008.  The 2009 amount includes $5.2 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees, net of a gain from the termination of interest rate swap agreements following the May tender for the 7.50% Senior Debentures due May 2010.  Exclusive of these

 

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Table of Contents

 

items, interest expense decreased approximately $36.5 million.  The decrease is principally due to lower variable interest rates under the Company’s bank credit agreement as well as favorable foreign currency exchange rates.

 

Interest income for 2009 was $28.6 million compared to $38.6 million for 2008.

 

Net earnings from continuing operations attributable to the Company for 2009 were $161.8 million, or $0.95 per share (diluted), compared to $251.5 million, or $1.48 per share (diluted) for 2008.  Earnings in both periods included items that management considered not representative of ongoing operations.  These items decreased net earnings in 2009 by $337.7 million, or $1.98 per share, and decreased net earnings in 2008 by $393.7 million, or $2.32 per share.

 

Cash payments for asbestos-related costs were $190.3 million for 2009 compared to $210.2 million for 2008.

 

Capital spending for property, plant and equipment was $427.6 million for 2009 compared to $361.7 million for 2008.

 

Results of Operations - Comparison of 2009 with 2008

 

Net Sales

 

The Company’s net sales in 2009 were $7,066.5 million compared with $7,884.7 million in 2008, a decrease of $818.2 million, or 10.4%. For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

 

The change in net sales of reportable segments can be summarized as follows (dollars in millions):

 

Net sales - 2008

 

 

 

$

7,807.5

 

Net effect of price and mix

 

$

377.0

 

 

 

Decreased sales volume

 

(819.8

)

 

 

Effects of changing foreign currency rates

 

(343.7

)

 

 

Total effect on net sales

 

 

 

(786.5

)

Net sales - 2009

 

 

 

$

7,021.0

 

 

Segment Operating Profit

 

Operating Profit of the 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.  Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained Corporate Costs and Other.  For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

 

Segment Operating Profit of reportable segments in 2009 was $996.0 million compared to $1,156.8 million in 2008, a decrease of $160.8 million, or 13.9%.

 

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Table of Contents

 

The change in Segment Operating Profit of reportable segments can be summarized as follows (dollars in millions):

 

Segment Operating Profit - 2008

 

 

 

$

1,156.8

 

Net effect of price and mix

 

$

377.0

 

 

 

Decreased sales volume

 

(280.2

)

 

 

Effects of changing foreign currency rates

 

(35.1

)

 

 

Manufacturing and delivery

 

(205.5

)

 

 

Operating expenses

 

4.4

 

 

 

Other

 

(21.4

)

 

 

Total net effect on Segment Operating Profit

 

 

 

(160.8

)

Segment Operating Profit - 2009

 

 

 

$

996.0

 

 

Interest Expense

 

Interest expense in 2009 was $221.7 million compared with interest expense of $253.0 million in 2008.  The 2009 amount includes $5.2 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees, net of a gain from the termination of interest rate swap agreements following the May tender for the 7.50% Senior Debentures due May 2010.  Exclusive of these items, interest expense decreased approximately $36.5 million.  The decrease is principally due to lower variable interest rates under the Company’s bank credit agreement as well as favorable foreign currency exchange rates.

 

Interest Income

 

Interest income for 2009 was $28.6 million compared to $38.6 million for 2008.  The decrease is principally due to lower interest rates on investments, which more than offset the additional interest earned on the Company’s higher cash balance.

 

Provision for Income Taxes

 

The Company’s effective tax rate from continuing operations for 2009 was 39.2%, compared with 42.4% for 2008.  The provision for 2009 includes a non-cash tax benefit transferred from other comprehensive income of $47.9 million (see Note 11 to the Consolidated Financial Statements for more information).  The provision for 2008 includes a net expense of $33.3 million related to tax legislation, restructuring, and other.  Excluding these items and the effects in both periods of pretax items for which taxes are separately calculated and recorded in the period, the Company’s effective tax rate for 2009 was 26.5% compared to 24.0% for 2008.  The increase in the effective tax rate in 2009 was due to lower earnings generated in jurisdictions where the Company has lower effective tax rates.  The Company expects that the effective tax rate will not change significantly in 2010 compared to 2009.

 

Net Earnings Attributable to Noncontrolling Interests

 

Net earnings attributable to noncontrolling interests for 2009 were $36.0 million compared to $70.2 million for 2008.  Net earnings attributable to noncontrolling interests were reduced by $9.2 million in 2009 related to restructuring and asset impairment charges recorded during the year.  Excluding this amount, net earnings attributable to noncontrolling interests in 2009 decreased $25.0 million compared with 2008.  The decrease is primarily a result of lower segment operating profit in the Company’s South American segment in 2009.

 

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Table of Contents

 

Earnings from Continuing Operations Attributable to the Company

 

For 2009, the Company recorded earnings from continuing operations attributable to the Company of $161.8 million compared to $251.5 million for 2008.  The after tax effects of the items excluded from Segment Operating Profit, the 2009 additional interest charges, and the 2009 and 2008 unusual tax items increased or decreased earnings in 2009 and 2008 as set forth in the following table (dollars in millions).

 

 

 

Net Earnings
Increase (Decrease)

 

Description

 

2009

 

2008

 

Net expense related to tax legislation, restructuring, and other

 

$

 

$

(34.8

)

Non-cash tax benefit transferred from other comprehensive income

 

47.9

 

 

 

Restructuring and asset impairment

 

(182.8

)

(110.1

)

Charge for Venezuela currency remeasurement

 

(17.6

)

 

 

Note repurchase premiums and write-off of finance fees, net of interestrate swap gain

 

(5.2

)

 

 

Increase in the accrual for future asbestos related costs

 

(180.0

)

(248.8

)

 

 

 

 

 

 

Total

 

$

(337.7

)

$

(393.7

)

 

Executive Overview — Years ended December 31, 2008 and 2007

 

Net sales from continuing operations were $318.0 million higher than the prior year principally resulting from improved pricing and favorable product mix across all regions, as well as favorable foreign currency exchange rates, principally the Euro.  Lower unit shipments partially offset these favorable increases.

 

Segment Operating Profit for reportable segments was $49.8 million higher than the prior year.  The benefits of higher selling prices, improved product mix, improvements in glass plant operating efficiencies, and favorable foreign currency exchange rates were partially offset by inflationary cost increases in manufacturing and delivery costs and lower sales volume.

 

Interest expense in 2008 was $253.0 million compared with interest expense from continuing operations of $348.6 million in 2007.  Included in the 2007 interest expense was $9.5 million for both note repurchase premiums and the write-off of unamortized finance fees related to the November 2007 repurchase of the $625.0 million 8.75% Senior Secured Notes.  Exclusive of these items, interest expense decreased approximately $86.1 million.  The decrease is principally due to lower variable interest rates under the Company’s bank credit agreement and on long term debt variable and swapped rates as well as lower overall debt levels, partially offset by an increase in foreign currency exchange rates.  The decrease is also due to the non-recurrence of interest on debt that was repaid during the fourth quarter of 2007 with the proceeds from the plastics sale.  This interest was previously allocated to discontinued operations until the date of the sale.

 

Interest income for continuing operations for 2008 was $38.6 million compared to $42.3 million for 2007.

 

Net earnings from continuing operations attributable to the Company for 2008 were $251.5 million, or $1.48 per share (diluted), compared to earnings from continuing operations attributable to the Company of $299.3 million, or $1.78 per share (diluted) for 2007.  Earnings in both periods included items that management considered not representative of ongoing operations.  These items decreased net earnings in

 

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2008 by $393.7 million, or $2.32 per share, and decreased net earnings in 2007 by $194.4 million, or $1.16 per share.

 

Cash payments for asbestos-related costs were $210.2 million for 2008 compared to $347.1 million for 2007.  The decrease is due to reduced funding for settlements of certain claims on an accelerated basis.

 

Capital spending for property, plant and equipment for continuing operations was $361.7 million for 2008 compared to $292.5 million for 2007.  The 2008 amount is in a range consistent with long term historical levels.  The increase is also due to changes in foreign currency exchange rates.

 

Results of Operations - Comparison of 2008 with 2007

 

Net Sales

 

The Company’s net sales in 2008 were $7,884.7 million compared with $7,566.7 million in 2007, an increase of $318.0 million, or 4.2%. For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

 

The change in net sales can be summarized as follows (dollars in millions):

 

Net sales - 2007

 

 

 

$

7,475.0

 

Net effect of price and mix

 

$

572.0

 

 

 

Effects of changing foreign currency rates

 

274.5

 

 

 

Decreased sales volume

 

(514.0

)

 

 

Total effect on net sales

 

 

 

332.5

 

Net sales - 2008

 

 

 

$

7,807.5

 

 

Segment Operating Profit

 

Operating Profit of the 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.  Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained Corporate Costs and Other.  For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

 

Segment Operating Profit of reportable segments in 2008 was $1,156.8 million compared to $1,107.0 million in 2007, an increase of $49.8 million, or 4.5%.

 

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The change in Segment Operating Profit of reportable segments can be summarized as follows (dollars in millions):

 

Segment Operating Profit - 2007

 

 

 

$

1,107.0

 

Net effect of price and mix

 

$

572.0

 

 

 

Effects of changing foreign currency rates

 

56.0

 

 

 

Manufacturing and delivery costs

 

(468.0

)

 

 

Decreased sales volume

 

(116.0

)

 

 

Operating expense

 

(28.0

)

 

 

Other

 

33.8

 

 

 

Total net effect on Segment Operating Profit

 

 

 

49.8

 

Segment Operating Profit - 2008

 

 

 

$

1,156.8

 

 

Interest Expense

 

Interest expense in 2008 was $253.0 million compared with interest expense from continuing operations of $348.6 million in 2007.  Included in the 2007 interest expense was $9.5 million for both note repurchase premiums and the write-off of unamortized finance fees related to the November 2007 repurchase of the $625.0 million 8.75% Senior Secured Notes.  Exclusive of these items, interest expense decreased approximately $86.1 million.  The decrease is principally due to lower variable interest rates under the Company’s bank credit agreement and on long term debt variable and swapped rates as well as lower overall debt levels, partially offset by an increase in foreign currency exchange rates.  The decrease is also due to the non-recurrence of interest on debt that was repaid during the fourth quarter of 2007 with the proceeds from the plastics sale.  This interest was previously allocated to discontinued operations until the date of the sale.

 

Interest Income

 

Interest income for continuing operations for 2008 was $38.6 million compared to $42.3 million for 2007.

 

Provision for Income Taxes

 

The Company’s effective tax rate from continuing operations for 2008 was 42.4%, compared with 29.2% for 2007.  The provision for 2008 includes a net expense of $33.3 million related to tax legislation, restructuring, and other.  The provision for 2007 includes a benefit of $13.5 million for the recognition of tax credits related to restructuring of investments in certain European operations.  Excluding those items and the effects in both periods of pretax items for which taxes are separately calculated and recorded in the period, the Company’s effective tax rate from continuing operations for 2008 was 24.0% compared to 24.4% for 2007.

 

Net Earnings Attributable to Noncontrolling Interests

 

Net earnings attributable to noncontrolling interests for 2008 were $70.2 million compared to $59.7 million for 2007.  The increase was primarily attributed to higher earnings from the Company’s operations in South America.

 

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Earnings from Continuing Operations

 

For 2008, the Company recorded earnings from continuing operations attributable to the Company of $251.5 million compared to $299.3 million for 2007.  The after tax effects of the items excluded from Segment Operating Profit, the 2008 and 2007 international net tax benefits, and the 2007 additional interest charges, increased or decreased earnings in 2008 and 2007 as set forth in the following table (dollars in millions).

 

 

 

Net Earnings
Increase (Decrease)

 

Description

 

2008

 

2007

 

Net expense related to tax legislation, restructuring, and other

 

$

(34.8

)

$

 

Gain recognition from foreign tax credits

 

 

 

13.5

 

Restructuring and asset impairments

 

(110.1

)

(84.1

)

Increase in accrual for future asbestos related costs

 

(248.8

)

(115.0

)

Note repurchase premiums and write-off of finance fees

 

 

 

(8.8

)

Total

 

$

(393.7

)

$

(194.4

)

 

Items Excluded from Reportable Segment Totals

 

Retained Corporate Costs and Other

 

Retained corporate costs and other for 2009 were $66.7 million compared with $0.7 million for 2008.  The increased expense in 2009 is mainly attributable to increased employee benefit costs, primarily pension expense, and lower royalty income.

 

Retained corporate costs and other for 2008 were $0.7 million compared with $78.8 million for 2007. Beginning in 2008, the Company revised its method of allocating corporate expenses.  The Company decreased slightly the percentage allocation based on sales and significantly expanded the number of functions included in the allocation based on cost of services.  It is not practicable to quantify the net effect of these changes on periods prior to 2008.  However, the effect for 2008 was to reduce the amount of retained corporate costs by approximately $38.0 million.  Also contributing to the decrease were lower accruals for self insured risks and increased pension income in 2008.

 

Restructuring and Asset Impairments

 

During 2009, the Company recorded charges totaling $213.6 million ($182.8 million after tax amount attributable to the Company), for restructuring, asset impairment and settlement of pension liabilities in Europe, North America and South America.  The charges reflect the additional decisions reached in the Company’s strategic review of its global manufacturing footprint.  See Note 16 to the Consolidated Financial Statements for additional information.

 

Charges for similar actions during 2008 totaled $132.4 million ($109.2 million after tax amount attributable to the Company).  See Note 16 to the Consolidated Financial Statements for additional information.

 

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During 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 2007, the Company recorded charges totaling $100.3 million ($84.1 million after tax amount attributable to the Company), for restructuring and asset impairment in South America, Europe, and North America.  The charges reflect the initial decisions of the Company’s strategic global manufacturing footprint review. See Note 16 to the Consolidated Financial Statements for additional information.

 

Charge for Venezuela Currency Remeasurement

 

Due to Venezuelan government restrictions on transfers of cash out of the country, the Company used the parallel market rate to translate the balance sheets of its Venezuelan subsidiaries as of December 31, 2009.  The impact of this change in exchange rates was an approximate 60% reduction in the U.S. dollar reported amounts for all assets and liabilities of the Company’s Venezuelan subsidiaries, and a resulting $132.5 million charge recorded in the cumulative translation adjustment component of other comprehensive income and $45.9 million charge recorded against noncontrolling interests.  In addition, the Company remeasured certain bolivar-denominated assets and liabilities held outside of Venezuela to the parallel market rate and recorded a charge of $17.3 million ($17.6 million after tax amount attributable to the Company) in 2009.  See Note 22 to the Consolidated Financial Statements for additional information.

 

Charge for Asbestos Related Costs

 

The fourth quarter of 2009 charge for asbestos-related costs was $180.0 million (pretax and after tax), compared to the fourth quarter of 2008 charge of $250.0 million ($248.8 million after tax).  These charges resulted from the Company’s comprehensive annual review of asbestos-related liabilities and costs.  In each year, the Company concluded that an increase in the accrued liability was required to provide for estimated indemnity payments and legal fees arising from asbestos personal injury lawsuits and claims pending and expected to be filed during the several years following the completion of the comprehensive review.  See “Critical Accounting Estimates” for further information.  The lower 2009 asbestos charge reflected, in part, the lower level of pending asbestos-related lawsuits at December 31, 2009 compared to the prior year.

 

Asbestos-related cash payments for 2009 were $190.3 million, a decrease of $19.9 million from 2008.  Deferred amounts payable were approximately $36.3 million and $34.0 million at December 31, 2009 and 2008, respectively.

 

During 2009, the Company received approximately 6,000 new filings and disposed of approximately 10,000 claims.  As of December 31, 2009, the number of asbestos-related claims pending against the Company was approximately 7,000.  The Company anticipates that cash flows from operations and other sources will be sufficient to meet all asbestos-related obligations on a short-term and long-term basis.  See Note 18 to the Consolidated Financial Statements for further information.

 

Discontinued Operations

 

On July 31, 2007, the Company completed the sale of its plastics packaging business to Rexam PLC for approximately $1.825 billion in cash.  The Company has presented the results of operations for the plastics packaging business in the Consolidated Results of Operations for the year ended December 31, 2007 as discontinued operations.  Interest expense was allocated to the discontinued operations based on

 

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debt that was required by an amendment to the Secured Credit Agreement to be repaid from the net proceeds.  Amounts for the prior periods have been reclassified to conform to this presentation.

 

The following summarizes the revenues and expenses of the discontinued operations as reported in the consolidated results of operations for the periods indicated:

 

 

 

Year ended December 31,

 

 

 

2007

 

Net sales

 

$

455.0

 

Manufacturing, shipping and delivery

 

(343.5

)

Gross profit

 

111.5

 

 

 

 

 

Selling and administrative

 

(20.7

)

Research, development and engineering

 

(8.3

)

Interest expense

 

(80.6

)

Other income

 

(0.1

)

Other expense

 

(1.2

)

Earnings before income taxes

 

0.6

 

Credit for income taxes

 

2.4

 

Earnings from discontinued operations

 

3.0

 

Gain on sale of discontinued operations

 

1,038.5

 

Net earnings from discontinued operations

 

1,041.5

 

Net earnings from discontinued operations attributable to noncontrolling interests

 

(0.2

)

Net earnings from discontinued operations attributable to the Company

 

$

1,041.3

 

 

The 2007 gain on the sale of discontinued operations of $1,038.5 million includes charges totaling $62.1 million for debt retirement costs, consisting principally of redemption premiums and write-off of unamortized fees, and a gain of $8.7 million for curtailment and settlement of pension and other postretirement benefits.  The gain also includes a net provision for income taxes of $38.2 million, consisting of taxes on the gain of $445.0 million that are substantially offset by a credit of $406.8 million for the reversal of valuation allowances against existing tax loss carryforwards.  The sale agreement provides for an adjustment of the selling price based on working capital levels and certain other factors.

 

The gain on sale of discontinued operations of $6.8 million reported in 2008 relates to an adjustment of the 2007 gain on the sale of the plastics packaging business mainly related to finalizing certain tax allocations and an adjustment to the selling price in accordance with procedures set forth in the final contract.

 

Capital Resources and Liquidity

 

Current and Long-Term Debt

 

The Company’s total debt at December 31, 2009 was $3.61 billion, compared to $3.33 billion at December 31, 2008.

 

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On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”).  At December 31, 2009, the Agreement included a $900.0 million revolving credit facility, a 160.0 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 $189.5 million term loan and a €189.5 million term loan, each of which has a final maturity date of June 14, 2013.  During December 2009, the Company’s subsidiary borrowers repaid 65.0 million Australian dollars, $2.0 million and €2.0 million of term loans under the Agreement.

 

As a result of the 2008 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 December 31, 2009 the Company’s subsidiary borrowers had unused credit of $760.0 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 and acquisitions, 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, amend certain outstanding debt obligations, and prepay certain outstanding debt obligations.

 

The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the Company not to 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 to the extent that such financing 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 and the borrowers’ senior secured debt rating.  The margins range from 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to 0.75% for Base Rate loans.  In addition, a facility fee is payable on the revolving credit facility commitments ranging from 0.20% to 0.50% per annum linked to the Leverage Ratio.  The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2009 was 2.40%. As of December 31, 2009, 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.

 

During the second quarter of 2008, the Company used cash from operations and borrowings under the Agreement to retire $250 million principal amount of 7.35% Senior Notes which matured in May 2008.

 

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During May 2009, a subsidiary of the Company issued senior notes with a face value of $600.0 million at 96.72% of face value for an effective interest rate of 8.00%.  The notes bear 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 additional interest charges in 2009 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 interest rate swap agreements related to the notes.

 

During October 2006, the Company entered into a European accounts receivable securitization program, which had a limit of €250 million at December 31, 2009.  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 89 million Australian dollars and 10 million New Zealand dollars that expire February 2010 and November 2010, respectively.

 

Information related to the Company’s accounts receivable securitization program as of December 31, 2009 and 2008 is as follows:

 

 

 

2009

 

2008

 

 

 

 

 

 

 

Balance (included in short-term loans)

 

$

289.0

 

$

293.7

 

 

 

 

 

 

 

Weighted average interest rate

 

2.52

%

5.31

%

 

Cash Flows

 

For 2009, cash provided by continuing operating activities was $800.0 million compared with $757.2 million for 2008.  The increase is mainly attributable to lower working capital balances, lower interest payments, and lower payments for asbestos-related costs, partially offset by lower net earnings, increased payments for restructuring activities, and increased pension contributions.  Cash flows from operating activities will continue to be affected by payments for restructuring activities in 2010.

 

Asbestos-related payments for 2009 decreased $19.9 million to $190.3 million, compared with $210.2 million for 2008.

 

During 2009, the Company contributed $123.1 million, including $49.5 million of accelerated 2010 contributions, to its non-U.S. defined benefit pension plans, compared with $61.2 million in 2008.  The Company was not required to make cash contributions to the U.S. defined benefit pension plans during 2009.  Contributions in 2010 are dependent on future asset returns and discount rates which the Company is unable to predict.  However, the Company believes that contributions to its non-U.S. plans will be lower in 2010, due to the accelerated contributions made in 2009, and that it will not be required to make contributions to its U.S. plans in 2010.  Depending on a number of factors, the Company may elect to contribute amounts in excess of minimum required amounts in order to improve the funded status of certain plans.

 

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Capital spending for property, plant and equipment was $427.6 million compared with $361.7 million in the prior year.  The Company capitalized $16.8 million and $25.6 million in 2009 and 2008, respectively, under capital lease obligations with the related financing recorded as long-term debt.

 

As of December 31, 2009, the Company had $811.7 million in cash and cash equivalents. The increase over the December 31, 2008 balance of $379.5 million largely represents cash provided by operating activities of $800.0 million for 2009 and additional funds provided by the May 2009 financing activities described above, partially offset by capital spending of $427.6 million and term loan rep