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Owens-Illinois 10-Q 2005

Documents found in this filing:

  1. 10-Q
  2. Ex-12
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

(Mark one)

 

ý

Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

 

 

 

For Quarter Ended September 30, 2005

 

 

or

 

 

o

Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

 

 

Owens-Illinois, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware

 

1-9576

 

22-2781933

(State or other

 

(Commission

 

(IRS Employer

jurisdiction of

 

File No.)

 

Identification No.)

incorporation or

 

 

 

 

organization)

 

 

 

 

 

 

 

 

 

One SeaGate, Toledo, Ohio

 

43666

(Address of principal executive offices)

 

(Zip Code)

 

419-247-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  

Yes  ý  No  o

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

 

Yes  ý

No  o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

Yes  o

No  ý

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Owens-Illinois, Inc. $.01 par value common stock – 152,851,558 shares at October 31, 2005.

 

 



 

Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

The Condensed Consolidated Financial Statements presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated.  Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2004. 

 

During the fourth quarter of 2004, the Company determined that certain commodity futures contracts did not meet all of the documentation requirements to qualify for special hedge accounting treatment and began to recognize all changes in fair value of these contracts in current earnings as required by FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  Results of Operations for the three and nine month periods ended September 30, 2004 have been restated from the amounts originally reported to include the mark to market gains on these commodity futures contracts which were previously deferred through September 30, 2004.

 

2



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

 (Dollars in millions, except per share amounts)

 

 

 

Three months ended Sept. 30,

 

 

 

2005

 

2004

 

 

 

 

 

(restated)

 

Revenues:

 

 

 

 

 

Net sales

 

$

1,807.5

 

$

1,717.8

 

Royalties and net technical assistance

 

4.5

 

4.3

 

Equity earnings

 

6.6

 

7.5

 

Interest

 

5.2

 

3.5

 

Other

 

1.7

 

4.9

 

 

 

1,825.5

 

1,738.0

 

Costs and expenses:

 

 

 

 

 

Manufacturing, shipping, and delivery

 

1,473.5

 

1,378.7

 

Research and development

 

6.6

 

5.2

 

Engineering

 

9.2

 

8.9

 

Selling and administrative

 

122.0

 

97.0

 

Interest

 

113.3

 

120.8

 

Other

 

12.0

 

11.9

 

 

 

1,736.6

 

1,622.5

 

Earnings from continuing operations before items below

 

88.9

 

115.5

 

Provision for income taxes

 

22.7

 

33.7

 

Minority share owners’ interests in earnings of subsidiaries

 

9.6

 

8.7

 

Earnings from continuing operations

 

56.6

 

73.1

 

Net earnings of discontinued operations

 

63.0

 

3.3

 

Net earnings

 

$

119.6

 

$

76.4

 

Basic net earnings per share of common stock:

 

 

 

 

 

Earnings from continuing operations

 

$

0.34

 

$

0.46

 

Net earnings of discontinued operations

 

0.41

 

0.02

 

Net earnings

 

$

0.75

 

$

0.48

 

Weighted average shares outstanding (thousands)

 

151,280

 

148,053

 

Diluted net earnings per share of common stock:

 

 

 

 

 

Earnings from continuing operations

 

$

0.34

 

$

0.45

 

Net earnings of discontinued operations

 

0.41

 

0.02

 

Net earnings

 

$

0.75

 

$

0.47

 

Weighted diluted average shares (thousands)

 

153,357

 

149,923

 

 

3



 

 

 

Nine months ended Sept. 30,

 

 

 

2005

 

2004

 

 

 

 

 

(restated)

 

Revenues:

 

 

 

 

 

Net sales

 

$

5,323.5

 

$

4,402.7

 

Royalties and net technical assistance

 

12.8

 

15.0

 

Equity earnings

 

17.9

 

22.2

 

Interest

 

12.9

 

10.2

 

Other

 

39.6

 

34.8

 

 

 

5,406.7

 

4,484.9

 

Costs and expenses:

 

 

 

 

 

Manufacturing, shipping, and delivery

 

4,236.9

 

3,522.2

 

Research and development

 

19.0

 

18.2

 

Engineering

 

28.9

 

25.9

 

Selling and administrative

 

358.2

 

260.4

 

Interest

 

348.4

 

324.4

 

Other

 

25.4

 

17.4

 

 

 

5,016.8

 

4,168.5

 

Earnings from continuing operations before items below

 

389.9

 

316.4

 

Provision for income taxes

 

104.6

 

90.0

 

Minority share owners’ interests in earnings of subsidiaries

 

25.0

 

22.2

 

Earnings from continuing operations

 

260.3

 

204.2

 

Net earnings of discontinued operations

 

63.0

 

9.6

 

Net earnings

 

$

323.3

 

$

213.8

 

Basic net earnings per share of common stock:

 

 

 

 

 

Earnings from continuing operations

 

$

1.62

 

$

1.27

 

Net earnings of discontinued operations

 

0.41

 

0.06

 

Net earnings

 

$

2.03

 

$

1.33

 

Weighted average shares outstanding (thousands)

 

150,727

 

147,561

 

Diluted net earnings per share of common stock:

 

 

 

 

 

Earnings from continuing operations

 

$

1.60

 

$

1.26

 

Net earnings of discontinued operations

 

0.41

 

0.06

 

Net earnings

 

$

2.01

 

$

1.32

 

Weighted diluted average shares (thousands)

 

152,979

 

149,098

 

 

See accompanying notes.

 

4



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)

 

 

 

Sept. 30,

 

Dec. 31,

 

Sept. 30,

 

 

 

2005

 

2004

 

2004

 

 

 

 

 

 

 

(restated)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash, including time deposits

 

$

190.3

 

$

277.9

 

$

262.1

 

Short-term investments, at cost which approximates market

 

31.7

 

27.6

 

61.9

 

Receivables, less allowances for losses and discounts ($48.2 at Sept. 30, 2005, $50.3 at December 31, 2004, and $46.6 at Sept. 30, 2004)

 

993.0

 

821.3

 

887.0

 

Inventories

 

1,020.6

 

1,117.7

 

1,024.1

 

Prepaid expenses

 

121.7

 

156.3

 

167.9

 

Assets of discontinued operations

 

 

 

 

 

280.8

 

 

 

 

 

 

 

 

 

Total current assets

 

2,357.3

 

2,400.8

 

2,683.8

 

 

 

 

 

 

 

 

 

Investments and other assets:

 

 

 

 

 

 

 

Equity investments

 

109.7

 

117.1

 

159.5

 

Repair parts inventories

 

171.7

 

192.2

 

179.6

 

Prepaid pension

 

981.9

 

962.5

 

980.9

 

Deposits, receivables, and other assets

 

586.4

 

557.3

 

419.0

 

Goodwill

 

2,897.1

 

3,009.1

 

2,872.1

 

Assets of discontinued operations

 

 

 

 

 

921.2

 

 

 

 

 

 

 

 

 

Total other assets

 

4,746.8

 

4,838.2

 

5,532.3

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, at cost

 

6,163.9

 

6,256.3

 

5,817.9

 

Less accumulated depreciation

 

2,971.2

 

2,758.6

 

2,637.0

 

 

 

 

 

 

 

 

 

Net property, plant, and equipment

 

3,192.7

 

3,497.7

 

3,180.9

 

 

 

 

 

 

 

 

 

Total assets

 

$

10,296.8

 

$

10,736.7

 

$

11,397.0

 

 

5



 

 

 

Sept. 30,

 

Dec. 31,

 

Sept. 30,

 

 

 

2005

 

2004

 

2004

 

 

 

 

 

 

 

(restated)

 

Liabilities and Share Owners’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term loans and long-term debt due within one year

 

$

74.2

 

$

192.5

 

$

438.6

 

Current portion of asbestos-related liabilities

 

158.0

 

170.0

 

165.0

 

Accounts payable and other liabilities

 

1,383.1

 

1,544.0

 

1,420.6

 

Liabilities of discontinued operations

 

 

 

 

 

122.4

 

Total current liabilities

 

1,615.3

 

1,906.5

 

2,146.6

 

 

 

 

 

 

 

 

 

Liabilities of discontinued operations

 

 

 

 

 

44.8

 

 

 

 

 

 

 

 

 

Long-term debt

 

5,127.7

 

5,167.9

 

6,148.3

 

 

 

 

 

 

 

 

 

Deferred taxes

 

196.1

 

183.3

 

151.5

 

 

 

 

 

 

 

 

 

Nonpension postretirement benefits

 

277.1

 

285.6

 

282.3

 

Other liabilities

 

745.3

 

883.3

 

771.0

 

 

 

 

 

 

 

 

 

Asbestos-related liabilities

 

473.0

 

596.2

 

488.4

 

Commitments and contingencies

 

 

 

 

 

 

 

Minority share owners’ interests

 

173.5

 

169.6

 

161.9

 

Share owners’ equity:

 

 

 

 

 

 

 

Convertible preferred stock, par value $.01 per share, liquidation preference $50 per share, 9,050,000 shares authorized, issued and outstanding

 

452.5

 

452.5

 

452.5

 

Common stock, par value $.01 per share 250,000,000 shares authorized, 165,201,658 shares issued and outstanding, less 12,385,719 treasury shares at Sept. 30, 2005 (163,502,417 issued and outstanding, less 12,586,053 treasury shares at December 31, 2004 and 162,252,451 issued and outstanding, less 12,666,528 treasury shares at Sept. 30, 2004)

 

1.6

 

1.6

 

1.6

 

Capital in excess of par value

 

2,294.6

 

2,261.1

 

2,244.4

 

Treasury stock, at cost

 

(237.5

)

(241.3

)

(242.8

)

Retained earnings (deficit)

 

(668.1

)

(975.3

)

(991.7

)

Accumulated other comprehensive (loss) income

 

(154.3

)

45.7

 

(261.8

)

Total share owners’ equity

 

1,688.8

 

1,544.3

 

1,202.2

 

Total liabilities and share owners’ equity

 

$

10,296.8

 

$

10,736.7

 

$

11,397.0

 

 

See accompanying notes.

 

6



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

 

 

Nine months ended Sept. 30,

 

 

 

2005

 

2004

 

 

 

 

 

(restated)

 

Cash flows from operating activities:

 

 

 

 

 

Earnings from continuing operations

 

$

260.3

 

$

204.2

 

Non-cash charges (credits):

 

 

 

 

 

Depreciation

 

359.5

 

319.2

 

Amortization of intangibles and other deferred items

 

19.9

 

17.6

 

Amortization of finance fees

 

12.2

 

10.2

 

Deferred tax provision

 

16.2

 

6.1

 

Gain on sale of certain real property

 

(28.1

)

(20.6

)

Mark to market effect of natural gas hedge contracts

 

(13.2

)

(21.1

)

Other

 

(26.5

)

(44.1

)

Change in non-current operating assets

 

1.8

 

(17.9

)

Asbestos-related payments

 

(135.2

)

(150.3

)

Change in non-current liabilities

 

(64.7

)

(12.2

)

Change in components of working capital

 

(152.1

)

91.0

 

Cash provided by continuing operating activities

 

250.1

 

382.1

 

Cash provided by discontinued operating activities

 

 

 

95.4

 

Cash provided by total operating activities

 

250.1

 

477.5

 

Cash flows from investing activities:

 

 

 

 

 

Continuing operations - additions to property, plant, and equipment

 

(296.6

)

(268.5

)

Discontinued operations - additions to property, plant, and equipment

 

 

 

(25.1

)

Acquisitions, net of cash acquired

 

 

 

(630.3

)

Net cash proceeds from divestitures and asset sales

 

159.7

 

100.9

 

Cash utilized in investing activities

 

(136.9

)

(823.0

)

Cash flows from financing activities:

 

 

 

 

 

Additions to long-term debt

 

510.6

 

1,364.0

 

Repayments of long-term debt

 

(646.5

)

(850.3

)

Increase (decrease) in short-term loans

 

43.5

 

(11.3

)

Net payments for debt-related hedging activity

 

(100.0

)

(28.5

)

Payment of finance fees

 

(1.0

)

(20.1

)

Convertible preferred stock dividends

 

(16.1

)

(16.1

)

Issuance of common stock and other

 

20.3

 

14.2

 

Cash provided by (utilized in) financing activities

 

(189.2

)

451.9

 

Effect of exchange rate fluctuations on cash

 

(11.6

)

(7.7

)

Increase (decrease) in cash

 

(87.6

)

98.7

 

Cash at beginning of period

 

277.9

 

163.4

 

Cash at end of period

 

$

190.3

 

$

262.1

 

 

See accompanying notes.

 

7



 

OWENS-ILLINOIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tabular data dollars in millions,

except share and per share amounts

 

1.              Earnings Per Share

 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Three months ended Sept. 30,

 

 

 

2005

 

2004

 

Numerator:

 

 

 

 

 

Earnings from continuing operations

 

$

56.6

 

$

73.1

 

Convertible preferred stock dividends

 

(5.4

)

(5.4

)

Numerator for basic earnings per share -
income available to common share owners

 

$

51.2

 

$

67.7

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for basic earnings per share -
weighted average shares outstanding

 

151,279,708

 

148,052,677

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and other

 

2,076,859

 

1,869,987

 

Denominator for diluted earnings per share -
adjusted weighted average shares outstanding

 

153,356,567

 

149,922,664

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.34

 

$

0.46

 

Net earnings of discontinued operations

 

0.41

 

0.02

 

Net earnings

 

$

0.75

 

$

0.48

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.34

 

$

0.45

 

Net earnings of discontinued operations

 

0.41

 

0.02

 

Net earnings

 

$

0.75

 

$

0.47

 

 

The convertible preferred stock was not included in the computation of diluted earnings per share for the three months ended September 30, 2005 and 2004 since the result would have been antidilutive.  Options to purchase 3,911,037 and 4,601,275 weighted average shares of common stock that were outstanding during the three months ended September 30, 2005 and 2004, respectively, were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares. 

 

8



 

The following table sets forth the computation of basic and diluted earnings per share:

 

 

 

Nine months ended Sept. 30,

 

 

 

2005

 

2004

 

Numerator:

 

 

 

 

 

Earnings from continuing operations

 

$

260.3

 

$

204.2

 

Convertible preferred stock dividends

 

(16.1

)

(16.1

)

Numerator for basic earnings per share -
income available to common share owners

 

$

244.2

 

$

188.1

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

Denominator for basic earnings per share -
weighted average shares outstanding

 

150,727,317

 

147,560,506

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and other

 

2,251,801

 

1,537,018

 

Denominator for diluted earnings per share -
adjusted weighted average shares outstanding

 

152,979,118

 

149,097,524

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

1.62

 

$

1.27

 

Net earnings of discontinued operations

 

0.41

 

0.06

 

Net earnings

 

$

2.03

 

$

1.33

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

1.60

 

$

1.26

 

Net earnings of discontinued operations

 

0.41

 

0.06

 

Net earnings

 

$

2.01

 

$

1.32

 

 

The convertible preferred stock was not included in the computation of diluted earnings per share for the nine months ended September 30, 2005 and 2004 since the result would have been antidilutive.  Options to purchase 3,244,755 and 5,452,934 weighted average shares of common stock that were outstanding during the nine months ended September 30, 2005 and 2004, 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. 

 

2.  Stock Options  

 

The Company has three nonqualified stock option plans.  The Company has adopted the disclosure-only provisions (intrinsic value method) of FAS No. 123, “Accounting for Stock-Based Compensation.”  All options have been granted at prices equal to the market price of the Company’s common stock on the date granted.  Accordingly, the Company recognizes no compensation expense related to the stock option plans.

 

If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as allowed by FAS No. 123, pro forma net earnings and earnings per share would have been as follows:

 

9



 

 

 

Three months ended Sept. 30,

 

 

 

2005

 

2004

 

Net earnings:

 

 

 

 

 

As reported

 

$

119.6

 

$

76.4

 

Total stock-based employee compensation expense determined under fair value based method, net of related tax effects

 

(1.8

)

(1.2

)

Pro forma

 

$

117.8

 

$

75.2

 

Basic earnings per share:

 

 

 

 

 

As reported

 

$

0.75

 

$

0.48

 

Pro forma

 

0.74

 

0.48

 

Diluted earnings per share:

 

 

 

 

 

As reported

 

0.75

 

0.47

 

Pro forma

 

0.73

 

0.47

 

 

 

 

 

 

 

 

 

Nine months ended Sept. 30,

 

 

 

2005

 

2004

 

Net earnings:

 

 

 

 

 

As reported

 

$

323.3

 

$

213.8

 

Total stock-based employee compensation expense determined under fair value based method, net of related tax effects

 

(4.8

)

(4.1

)

Pro forma

 

$

318.5

 

$

209.7

 

Basic earnings per share:

 

 

 

 

 

As reported

 

$

2.03

 

$

1.33

 

Pro forma

 

2.01

 

1.31

 

Diluted earnings per share:

 

 

 

 

 

As reported

 

2.01

 

1.32

 

Pro forma

 

1.98

 

1.30

 

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

 

 

2005

 

2004

 

Expected life of options

 

5 years

 

5 years

 

Expected stock price volatility

 

72.0

%

74.0

%

Risk-free interest rate

 

4.2

%

2.7

%

Expected dividend yield

 

0.0

%

0.0

%

 

10



 

3.  Long-Term Debt

 

The following table summarizes the long-term debt of the Company:

 

 

 

Sept. 30,

 

Dec. 31,

 

Sept. 30,

 

 

 

2005

 

2004

 

2004

 

Secured Credit Agreement:

 

 

 

 

 

 

 

Revolving Credit Facility:

 

 

 

 

 

 

 

Revolving Loans

 

$

75.9

 

$

30.1

 

$

3.9

 

Term Loans:

 

 

 

 

 

 

 

A1 Term Loan

 

223.9

 

315.0

 

380.0

 

B1 Term Loan

 

220.8

 

226.8

 

840.0

 

C Term Loan

 

 

 

 

 

395.0

 

C1 Term Loan

 

185.6

 

190.6

 

230.0

 

C2 Term Loan (€46.3 million at Sept. 30, 2005)

 

55.6

 

64.7

 

64.1

 

D Term Loan

 

 

 

 

 

240.0

 

Senior Secured Notes:

 

 

 

 

 

 

 

8.875%, due 2009

 

1,000.0

 

1,000.0

 

1,000.0

 

7.75%, due 2011

 

450.0

 

450.0

 

450.0

 

8.75%, due 2012

 

625.0

 

625.0

 

625.0

 

Senior Notes:

 

 

 

 

 

 

 

7.15%, due 2005

 

 

 

112.4

 

350.0

 

8.10%, due 2007

 

294.8

 

298.2

 

299.9

 

7.35%, due 2008

 

244.5

 

248.4

 

249.6

 

8.25%, due 2013

 

436.7

 

440.0

 

440.5

 

6.75%, due 2014

 

400.0

 

400.0

 

 

 

6.75%, due 2014 (€225 million at Sept. 30, 2005)

 

270.7

 

306.4

 

 

 

Senior Debentures:

 

 

 

 

 

 

 

7.50%, due 2010

 

245.5

 

249.6

 

250.9

 

7.80%, due 2018

 

250.0

 

250.0

 

250.0

 

Senior Subordinated Notes:

 

 

 

 

 

 

 

10.25%, due 2009

 

 

 

17.4

 

181.6

 

9.25%, due 2009 (€0.4 million at Sept. 30, 2005)

 

0.5

 

0.6

 

206.6

 

Other

 

163.2

 

117.0

 

105.1

 

Total long-term debt

 

5,142.7

 

5,342.2

 

6,562.2

 

Less amounts due within one year

 

15.0

 

174.3

 

413.9

 

Long-term debt

 

$

5,127.7

 

$

5,167.9

 

$

6,148.3

 

 

On October 7, 2004, in connection with the sale of the Company’s blow-molded plastic container operations, the Company’s subsidiary borrowers entered into the Third Amended and Restated Secured Credit Agreement (the “Agreement”).  The proceeds from the sale were used to repay C and D term loans and a portion of the B1 term loan outstanding under the previous agreement.  On January 19, 2005, the Company completed the required divestiture of two European glass container factories and received proceeds of approximately $180 million.  The proceeds were largely used to repay debt during the quarter.  At September 30, 2005, the Third Amended and Restated Secured Credit Agreement includes a $600.0 million revolving credit facility and a $223.9 million A1 term loan, each of which has a final maturity date of April 1,

 

11



 

2007.  It also includes a $220.8 million B1 term loan, a $185.6 million C1 term loan, and a €46.3 million C2 term loan, each of which has a final maturity date of April 1, 2008. 

 

At September 30, 2005, the Company’s subsidiary borrowers had unused credit of $414.7 million available under the Agreement.

 

The weighted average interest rate on borrowings outstanding under the Agreement at September 30, 2005 was 5.41%. Including the effects of cross-currency swap agreements related to borrowings under the Agreement by the Company’s Australian and European subsidiaries, as discussed in Note 11, the weighted average interest rate was 6.17%.

 

4.  Supplemental Cash Flow Information

 

 

 

Nine months ended Sept. 30,

 

 

 

2005

 

2004

 

Interest paid in cash

 

$

299.2

 

$

347.0

 

 

 

 

 

 

 

Income taxes paid in cash

 

92.3

 

67.2

 

 

5.  Comprehensive Income

 

The components of comprehensive income are: (a) net earnings; (b) change in fair value of certain derivative instruments; (c) adjustment of minimum pension liabilities; and (d) foreign currency translation adjustments.  Total comprehensive income is as follows:

 

 

 

Three months ended

 

 

 

September 30,

 

 

 

2005

 

2004

 

Net earnings

 

$

119.6

 

$

76.4

 

Foreign currency translation adjustments

 

16.9

 

93.6

 

Change in minimum pension liability, net of tax

 

 

 

Change in fair value of derivative instruments, net of tax

 

31.4

 

(6.9

)

Total comprehensive income

 

$

167.9

 

$

163.1

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

 

2005

 

2004

 

Net earnings

 

$

323.3

 

$

213.8

 

Foreign currency translation adjustments

 

(237.2

)

(17.8

)

Change in minimum pension liability, net of tax

 

 

 

Change in fair value of derivative instruments, net of tax

 

37.2

 

(0.9

)

Total comprehensive income

 

$

123.3

 

$

195.1

 

 

12



 

6.  Inventories

 

Major classes of inventory are as follows:

 

 

 

Sept. 30,

 

Dec. 31,

 

Sept. 30,

 

 

 

2005

 

2004

 

2004

 

Finished goods

 

$

849.9

 

$

929.9

 

$

866.6

 

Work in process

 

5.4

 

6.4

 

6.3

 

Raw materials

 

95.8

 

100.1

 

71.9

 

Operating supplies

 

69.5

 

81.3

 

79.3

 

 

 

$

1,020.6

 

$

1,117.7

 

$

1,024.1

 

 

7.  New Accounting Standards 

 

In December 2004, the Financial Accounting Standards Board issued FAS No. 123R, “Share-Based Payment,” which requires that the cost resulting from all share-based payment transactions be recognized in the financial statements.  The statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions).  That cost will be recognized over the required service period (usually the vesting period).  No compensation cost is recognized for equity instruments for which employees do not render the requisite service.  The provisions of FAS No. 123R are effective as of the beginning of the annual reporting period that begins after June 15, 2005, therefore, the Company will adopt FAS No. 123R effective as of January 1, 2006.  The Company has not yet determined the impact of adopting FAS No. 123R, however, based on initial calculations, the Company expects amounts will not differ materially from those disclosed in Note 2 above.

 

In May 2005, the Financial Accounting Standards Board issued FAS No. 154, “Accounting Changes and Error Corrections,” which changes the requirements for accounting for and reporting a change in accounting principle.  The statement requires changes in accounting principle to be applied retrospectively to prior periods’ financial statements.  The statement also redefines “restatement” as being the correction of an error. FAS No. 154 is effective for fiscal years beginning after December 15, 2005.  The Company will apply FAS No. 154 as required.

 

8.  Contingencies

 

The Company is one of a number of defendants in a substantial number of lawsuits filed in numerous state and federal courts by persons alleging bodily injury (including death) as a result of exposure to dust from asbestos fibers.  From 1948 to 1958, one of the Company’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos.  The Company exited the pipe and block insulation business in April 1958.  The traditional asbestos personal injury lawsuits and claims relating to such production and sale of asbestos material typically allege various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).

 

13



 

As of September 30, 2005, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 33,000 plaintiffs and claimants.  Based on an analysis of the claims and lawsuits pending as of December 31, 2004, approximately 94% of plaintiffs and claimants either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court.  Approximately 5% of plaintiffs specifically plead damages of $15 million or less, and 1% of plaintiffs specifically plead damages greater than $15 million but less than $100 million.  Fewer than 1% of plaintiffs specifically plead damages $100 million or greater but less than $123 million.

 

As indicated by the foregoing summary, current pleading practice permits considerable variation in the assertion of monetary damages.  This variability, together with the actual experience discussed further below of litigating or resolving through settlement hundreds of thousands of asbestos claims and lawsuits over an extended period, demonstrates that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value.  Rather, the amount potentially recoverable for a specific claimant is determined by other factors such as the claimant’s severity of disease, product identification evidence against specific defendants, the defenses available to those defendants, the specific jurisdiction in which the claim is made, the claimant’s history of smoking or exposure to other possible disease-causative factors, and the various other matters discussed further below.

 

In addition to the pending claims set forth above, the Company has claims-handling agreements in place with many plaintiffs’ counsel throughout the country.  These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by the Company’s former business unit during its manufacturing period ending in 1958.  Some plaintiffs’ counsel have historically withheld claims under these agreements for later presentation while focusing their attention on active litigation in the tort system.  The Company believes that as of September 30, 2005 there are approximately 20,000 claims against other defendants and which are likely to be asserted some time in the future against the Company. These claims are not included in the totals set forth above.  The Company further believes that the bankruptcies of additional co-defendants, as discussed below, resulted in an acceleration of the presentation and disposition of a number of these previously withheld preexisting claims under such agreements, which claims would otherwise have been presented and disposed of over the next several years.  This acceleration resulted in a significant increase in the dispositions and cash payments during the period 2001-2002; however, the resolution of the accumulated yet previously unpresented cases continues to affect the annual dispositions and cash payments.

 

The Company is also a defendant in other asbestos-related lawsuits or claims involving maritime workers, medical monitoring claimants, co-defendants and property damage claimants.  Based upon its past experience, the Company believes that these categories of lawsuits and claims will not involve any material liability and they are not included in the above description of pending matters or in the following description of disposed matters.

 

Since receiving its first asbestos claim, the Company as of September 30, 2005, has disposed of the asbestos claims of approximately 325,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $6,400.  Certain of these dispositions have included deferred amounts payable over a number of years.  Deferred amounts payable totaled approximately $90 million at September 30, 2005 ($91 million at December 31, 2004) and are

 

14



 

included in the foregoing average indemnity payment per claim.  The Company’s indemnity payments for these claims have varied on a per claim basis, and are expected to continue to vary considerably over time.  As discussed above, a part of the Company’s objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements.  Under such agreements, qualification by meeting certain illness and exposure criteria has tended to reduce the number of claims presented to the Company that would ultimately be dismissed or rejected due to the absence of impairment or product exposure evidence.  The Company expects that as a result, although aggregate spending may be lower, there may be an increase in the per claim average indemnity payment involved in such resolution. 

 

The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot be estimated with certainty. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $2.85 billion through 2004, 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 expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the continued use of 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 growing number of co-defendants that have filed for bankruptcy.

 

The Company has continued to monitor trends which may affect its ultimate liability and has continued to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company.  The Company expects that the total asbestos-related cash payments will be moderately lower in 2005 compared to 2004 and will continue to decline thereafter as the preexisting but presently unasserted claims withheld under the claims handling agreements are presented to the Company and as the number of potential future claimants continues to decrease.  The material components of the Company’s accrued liability are based on amounts estimated by the Company in connection with its annual comprehensive review and consist of the following: (i) the reasonably probable contingent liability for asbestos claims already asserted against the Company, (ii) the contingent liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel, (iii) the contingent liability for asbestos claims not yet asserted against the Company, but which the Company believes it is reasonably probable will be asserted in the next several years, to the degree that an estimation as to future claims is possible, and (iv) the legal defense costs likely to be incurred in connection with the foregoing types of claims.

 

The significant assumptions underlying the material components of the Company’s accrual are:

 

a)

the extent to which settlements are limited to claimants who were exposed to the Company’s asbestos-containing insulation prior to its exit from that business in 1958;

 

 

b)

the extent to which claims are resolved under the Company’s administrative claims agreements or on terms comparable to those set forth in those agreements;

 

 

c)

the extent of decrease or increase in the inventory of pending serious disease cases;

 

 

d)

the extent to which the Company is able to successfully defend itself at trial;

 

15



 

e)

the extent of actions by courts to eliminate, reduce or permit the diversion of financial resources for unimpaired claimants and so-called forum shopping;

 

 

f)

the extent to which additional defendants with substantial resources and assets are required to participate significantly in the resolution of future asbestos lawsuits and claims;

 

 

g)

the number and timing of co-defendant bankruptcies; and

 

 

h)

the extent to which the resolution of co-defendant bankruptcies divert resources to unimpaired claimants.

 

The Company conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review.  If the results of an annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated future asbestos-related costs, then the Company will record an appropriate charge to increase the accrued liability.  The Company believes that an estimation of the reasonably probable amount of the contingent liability for claims not yet asserted against the Company is not possible beyond a period of several years.  Therefore, while the results of future annual comprehensive reviews cannot be determined, the Company expects the addition of one year to the estimation period will result in an annual charge.

 

On November 15, 2004, a lawsuit was filed against the Company in the Delaware Court of Chancery by a shareholder, Joseph Sitorsky, pursuant to Section 220 of the Delaware General Corporation Law, captioned Sitorsky v. Owens-Illinois, Inc.  Mr. Sitorsky seeks an order compelling the Company to produce several categories of documents concerning advisory fees paid to KKR Associates, L.P., the acquisition of BSN Glasspack, N.A., the sale of the Company’s blow-molded plastic container operations, due diligence in connection with the Company’s contract with software vendor, Model N, an alleged affiliate of KKR Associates, L.P., and executive compensation.  The Company reached a settlement with Mr. Sitorsky involving production of a limited selection of documents subject to a confidentiality agreement and court orders and the matter has been dismissed.

 

Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are nonroutine and involve compensatory, punitive or treble damage claims as well as other types of relief.  In accordance with FAS No. 5, “Accounting for Contingencies,” the Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated.  Recorded amounts are reviewed and adjusted to reflect changes in the factors upon which the estimates are based including additional information, negotiations, settlements, and other events.

 

The ultimate legal and financial liability of the Company with respect to the lawsuits and proceedings referred to above, in addition to other pending litigation, cannot be estimated with certainty.  The Company’s reported results of operations for 2004 were materially affected by the $152.6 million fourth quarter charge and asbestos-related payments continue to be substantial.  Any future additional charge would likewise materially affect the Company’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and will continue to affect the Company’s cost of borrowing and its ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity will be sufficient to pay its obligations for asbestos-related costs and to fund its working capital and capital expenditure requirements on a short-term and long-term basis.

 

16



 

9.  Segment Information

 

The Company operates in the rigid packaging industry.  The Company has two reportable product segments within the rigid packaging industry:  (1) Glass Containers and (2) Plastics Packaging.  The Glass Containers segment includes operations in Europe, the Americas, and the Asia Pacific region.  Following the sale of a substantial portion of the Company’s blow-molded plastic container operations which was completed on October 7, 2004, the Plastics Packaging segment consists of healthcare packaging, closures and specialty products. 

 

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, provision for income taxes and minority share owners’ interests in earnings of subsidiaries and excludes amounts related to certain items that management considers not representative of ongoing operations.  The Company’s management uses Segment Operating Profit, in combination with selected cash flow information, to evaluate performance and to allocate resources. 

 

Segment Operating Profit for product 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.  For the Company’s U.S. pension plans, net periodic pension cost (credit) has been allocated to product segments.   The information below is presented on a continuing operations basis. See Note 17 for more information.

 

Financial information for continuing operations for the three month periods ended September 30, 2005 and 2004 regarding the Company’s product segments is as follows:

 

17



 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

Total

 

Other

 

 

 

 

 

Glass

 

Plastics

 

Product

 

Retained

 

Consolidated

 

 

 

Containers

 

Packaging

 

Segments

 

Items

 

Totals

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

2005

 

$

1,604.3

 

$

203.2

 

$

1,807.5

 

 

 

$

1,807.5

 

2004

 

1,544.0

 

173.8

 

1,717.8

 

 

 

1,717.8

 

Segment Operating Profit:

 

 

 

 

 

 

 

 

 

 

 

2005

 

$

198.3

 

$

33.1

 

$

231.4

 

$

(26.2

)

$

205.2

 

2004

 

210.8

 

29.5

 

240.3

 

(18.8

)

221.5

 

Items excluded from Segment Operating Profit:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2005:

 

 

 

 

 

 

 

 

 

 

 

Mark to market loss on natural gas hedge contracts

 

$

(8.2

)

 

 

$

(8.2

)

 

 

$

(8.2

)

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

Mark to market gain on natural gas hedge contracts

 

11.3

 

 

 

11.3

 

 

 

11.3

 

 

The reconciliation of Segment Operating Profit to earnings from continuing operations before income taxes and minority share owners’ interests in earnings of subsidiaries for the three month periods ended September 30, 2005 and 2004 is as follows:

 

 

 

2005

 

2004

 

Segment Operating Profit for reportable segments

 

$

231.4

 

$

240.3

 

Items excluded from Segment Operating Profit

 

(8.2

)

11.3

 

Eliminations and other retained items

 

(26.2

)

(18.8

)

Interest expense

 

(113.3

)

(120.8

)

Interest income

 

5.2

 

3.5

 

Total

 

$

88.9

 

$

115.5

 

 

Financial information for continuing operations for the nine month periods ended September 30, 2005 and 2004 regarding the Company’s product segments is as follows:

 

18



 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

 

 

and

 

 

 

 

 

 

 

 

 

Total

 

Other

 

 

 

 

 

Glass

 

Plastics

 

Product

 

Retained

 

Consolidated

 

 

 

Containers

 

Packaging

 

Segments

 

Items

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

2005

 

$

4,708.6

 

$

614.9

 

$

5,323.5

 

 

 

$

5,323.5

 

2004

 

3,826.1

 

576.6

 

4,402.7

 

 

 

4,402.7

 

Segment Operating Profit:

 

 

 

 

 

 

 

 

 

 

 

2005

 

$

646.2

 

$

97.8

 

$

744.0

 

$

(59.9

)

$

684.1

 

2004

 

564.8

 

95.3

 

660.1

 

(71.2

)

588.9

 

Items excluded from Segment Operating Profit:

 

 

 

 

 

 

 

 

 

 

 

September 30, 2005:

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of the Corsico, Italy glass container facility

 

$

28.1

 

 

 

$

28.1

 

 

 

$

28.1

 

Mark to market gain on natural gas hedge contracts

 

13.2

 

 

 

13.2

 

 

 

13.2

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2004:

 

 

 

 

 

 

 

 

 

 

 

Gain on the sale of certain real property

 

20.6

 

 

 

20.6

 

 

 

20.6

 

Mark to market gain on natural gas hedge contracts

 

21.1

 

 

 

21.1

 

 

 

21.1

 

 

The reconciliation of Segment Operating Profit to earnings from continuing operations before income taxes and minority share owners’ interests in earnings of subsidiaries for the nine month periods ended September 30, 2005 and 2004 is as follows:

 

 

 

2005

 

2004

 

Segment Operating Profit for reportable segments

 

$

744.0

 

$

660.1

 

Items excluded from Segment Operating Profit

 

41.3

 

41.7

 

Eliminations and other retained items

 

(59.9

)

(71.2

)

Interest expense

 

(348.4

)

(324.4

)

Interest income

 

12.9

 

10.2

 

Total

 

$

389.9

 

$

316.4

 

 

19



 

 

 

 

 

 

 

 

 

 

 

Eliminations

 

 

 

 

 

 

 

 

 

Total

 

 

 

and

 

 

 

 

 

Glass

 

Plastics

 

Product

 

Discontinued

 

Other

 

Consolidated

 

 

 

Containers

 

Packaging

 

Segments

 

Operations

 

Retained

 

Totals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sept. 30, 2005

 

$

8,144.8

 

$

756.4

 

$

8,901.2

 

 

 

$

1,395.6

 

$

10,296.8

 

December 31, 2004

 

8,579.4

 

789.3

 

9,368.7

 

 

 

1,368.0

 

10,736.7

 

Sept. 30, 2004

 

8,241.1

 

778.8

 

9,019.9

 

$

1,202.0

 

1,175.1

 

11,397.0

 

 

10.  Other Revenue and Costs and Expenses

 

During the first quarter of 2005, the Company completed the sale of its Corsico, Italy glass container facility.  The resulting gain of $28.1 million (pre-tax and after tax) was included in other revenue in the results of operations for the first quarter of 2005.  See Note 15 for more information.

 

Manufacturing costs for the first quarter of 2005 included a favorable adjustment of approximately $10.0 million to the Company’s accruals for self insured risks.

 

Manufacturing costs for the second quarter of 2005 included a favorable adjustment for depreciation and amortization in connection with finalizing the fair values of the BSN Glasspack assets acquired in June 2004. The difference between the estimated amounts recorded in 2004 and the final amounts related to 2004 accounted for a benefit of approximately $6.5 million.

 

Other revenue for the second quarter of 2004 includes a gain of $20.6 million ($14.5 million after tax) for the sale of certain real property.

 

11. Derivative Instruments

 

At September 30, 2005, the Company has the following derivative instruments related to its various hedging programs:

 

Fair Value Hedges of Debt

 

The terms of the Third Amended and Restated Secured Credit Agreement require that borrowings under the Agreement be denominated in U.S. dollars except for the C2 term loan which allows for €46.3 million borrowings.  In order to manage the exposure to fluctuating foreign exchange rates created by U.S. dollar borrowings by the Company’s international subsidiaries, certain subsidiaries have entered into currency swaps for the principal amount of their borrowings under the Agreement and for their interest payments due under the Agreement. 

 

At the end of the third quarter of 2005, the Company’s subsidiary in Australia had an agreement that swaps a total of U.S. $175.0 million of borrowings into 251.8 million Australian dollars.   This derivative instrument swaps the principal from U.S. dollars to Australian dollars and also swaps the interest rate from a U.S.-based rate to an Australian-based rate.  This agreement has a maturity date of March 2006.

 

20



 

The Company’s subsidiaries in Australia, Canada, the United Kingdom and several European countries have also entered into short term forward exchange contracts which effectively swap additional intercompany and external borrowings by each subsidiary into its local currency.  These contracts swap the principal amount of borrowings and in some cases they swap the related interest.

 

The Company recognizes the above derivatives on the balance sheet at fair value, and the Company accounts for them as fair value hedges.  Accordingly, the changes in the value of the swaps are recognized in current earnings and are expected to substantially offset any exchange rate gains or losses on the related U.S. dollar borrowings.  For the three and nine months ended September 30, 2005, the amount not offset was immaterial.  The fair values are included with other long term liabilities on the balance sheet.

 

Foreign Currency Exchange Contracts Designated as Cash Flow Hedges

 

In connection with debt refinancing in late December 2004, the Company’s subsidiary in France borrowed approximately €91 million from Owens-Brockway Glass Container (“OBGC”), a U.S. subsidiary of the Company, at a fixed interest rate through 2009.  In order to hedge the changes in the cash flows of the foreign currency interest and principal repayments, OBGC entered into a swap that converts the Euro coupon interest payments into a predetermined U.S. dollar coupon interest payment and also converts the final principal payment in December 2009 from €91.0 million to approximately $120.7 million U.S. dollars. 

 

The Company accounts for the above foreign currency exchange contract on the balance sheet at fair value.  The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings.  Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings.  The fair value is included with other long term liabilities on the balance sheet.

 

The above foreign currency exchange contract is accounted for as a cash flow hedge at September 30, 2005.  Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting anticipated cash flows of the hedged transactions.  For hedged forecasted transactions, hedge accounting will be discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses will be recorded to earnings immediately.

 

At September 30, 2005, the amount included in OCI related to this foreign currency exchange contract was $3.5 million.  The ineffectiveness related to this hedge for the three and nine months ended September 30, 2005 was not material. 

 

The Company has also entered into a foreign currency exchange contract in Europe to swap €37.5 million into $47.3 million U.S. dollars related to anticipated fuel oil purchases for 2006. A portion of European fuel oil purchases fluctuates based on U.S. dollars. The swap will help mitigate the changes in the cash flows for fuel oil purchases that may result from fluctuations in exchange rates. The Company accounts for this transaction in the same manner as the intercompany loan hedge described above.  At September 30, 2005, the amount included in OCI related to this foreign currency exchange was $1.4 million.  There was no ineffectiveness related to this hedge for the three and nine months ended September 30, 2005. 

 

21



 

Interest Rate Swaps Designated as Fair Value Hedges

 

In the fourth quarter of 2003 and the first quarter of 2004, the Company entered into a series of interest rate swap agreements with a total notional amount of $1.25 billion that mature from 2007 through 2013.  The swaps were executed in order to: (i) convert a portion of the senior notes and senior debentures fixed-rate debt into floating-rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed and floating-rate debt; and (iii) reduce net interest payments and expense in the near-term.

 

The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges.  Because the relevant terms of the swap agreements match the corresponding terms of the notes, there is no hedge ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a long-term liability along with a corresponding net decrease in the carrying value of the hedged debt.  The fair values are included with other long term liabilities on the balance sheet.

 

Under the swaps, the Company receives fixed rate interest amounts (equal to interest on the corresponding hedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears) plus a margin spread (see table below).  The interest rate differential on each swap is recognized as an adjustment of interest expense during each six-month period over the term of the agreement.

 

The following selected information relates to fair value swaps at September 30, 2005 (based on a projected U.S. LIBOR rate of 4.552%):

 

 

 

 

 

 

 

 

 

Asset

 

 

 

Amount

 

Receive

 

Average

 

(Liability)

 

 

 

Hedged

 

Rate

 

Spread

 

Recorded

 

Senior Notes due 2007

 

$

300.0

 

8.10

%

4.5

%

$

(5.2

)

Senior Notes due 2008

 

250.0

 

7.35

%

3.5

%

(5.5

)

Senior Debentures due 2010

 

250.0

 

7.50

%

3.2

%

(4.5

)

Senior Notes due 2013

 

450.0

 

8.25

%

3.7

%

(13.2

)

Total

 

$

1,250.0

 

 

 

 

 

$

(28.4

)

 

Natural Gas Hedges

 

The Company uses commodity futures contracts related to forecasted natural gas requirements.  The objective of these futures contracts is to limit the fluctuations in prices paid for natural gas and the potential volatility in cash flows from future market price movements.  The Company continually evaluates the natural gas market with respect to its future usage requirements.  The Company generally evaluates the natural gas market for the next twelve to eighteen months and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements through the next twelve to eighteen months.  At September 30, 2005, the Company had entered into commodity futures contracts for approximately 79% (approximately 4,550,000 MM BTUs) of its expected North American natural gas usage for the fourth quarter of 2005, approximately 37% (approximately 8,640,000 MM BTUs) for the full year of 2006, and approximately 3% (approximately 720,000 MM BTUs) for the full year of 2007.

 

22



 

The Company accounts for the above futures contracts on the balance sheet at fair value.  The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in OCI and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings.  Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings.

 

The above futures contracts are accounted for as cash flow hedges at September 30, 2005.  Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting anticipated cash flows of the hedged transactions.  For hedged forecasted transactions, hedge accounting will be discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses will be recorded to earnings immediately.

 

At September 30, 2005, an unrecognized gain of $61.1 million ($39.7 million after tax), related to these commodity futures contracts, was included in OCI.  The ineffectiveness related to these natural gas hedges for the three months ended September 30, 2005 was not material.

 

During the fourth quarter of 2004, the Company determined that the natural gas hedge contracts described above did not meet all of the documentation requirements to qualify for special hedge accounting treatment and began to recognize all changes in fair value of these contracts in current earnings.  The total unrealized pretax gain (loss) recorded for the three and nine months ended September 30, 2005 was $(8.2) million ($4.9 million after tax) and $13.2 million ($8.1 million after tax), respectively. The total unrealized pretax gain recorded for the three and nine months ended September 30, 2004 was $11.3 million ($7.4 million after tax) and $21.1 million ($13.8 million after tax), respectively.  This change had no effect upon the Company’s cash flows.  During the first quarter of 2005, the Company completed the documentation and re-designation of its natural gas hedge contracts.  As of April 1, 2005, all futures contracts meet the qualifications for special hedge accounting and will be accounted for as described in the preceding paragraphs.

 

Other Hedges

 

The Company’s subsidiaries may enter into short-term forward exchange agreements to purchase foreign currencies at set rates in the future.  These foreign currency forward exchange agreements are used to limit exposure to fluctuations in foreign currency exchange rates for all significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency.   Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables not denominated in, or indexed to, their functional currencies.  The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

 

12.  Restructuring Accruals

 

During December of 2004 and June of 2005, restructuring accruals of €96 million were recorded in connection with the acquisition of BSN as part of the previously announced European integration strategy to optimally align the manufacturing capacities with the market and improve operational efficiencies.  See Note 15 for a description of this accrual and the related activity.

 

23



 

In August 2003, the Company announced the permanent closing of its Hayward, California glass container factory.  Production at the factory was suspended in June of 2003 following a major leak in its only glass furnace.  As a result, the Company recorded a capacity curtailment charge of $28.5 million ($17.8 million after tax) in the third quarter of 2003.

 

The closing of this factory resulted in the elimination of approximately 170 jobs and a corresponding reduction in the Company’s workforce.  The Company reduced fixed manufacturing costs by approximately $12 million per year by closing this factory and moving the production to other locations.  The Company anticipates that it will pay out approximately $15 million in cash related to severance, benefits, lease commitments, plant clean-up, and other plant closing costs.  The Company expects that a substantial portion of these costs will be paid out by the end of 2005.

 

In November 2003, the Company announced the permanent closing of its Milton, Ontario glass container factory.  This closing was part of an effort to bring capacity and inventory levels in line with anticipated demand.  As a result, the Company recorded a capacity curtailment charge of $20.1 million ($19.5 million after tax) in the fourth quarter of 2003.

 

The closing of this factory in November 2003 resulted in the elimination of approximately 150 jobs and a corresponding reduction in the Company’s workforce.  The Company reduced manufacturing costs by approximately $8.5 million per year by closing this factory and moving the production to other locations.  The Company anticipates that it will pay out approximately $8.0 million in cash related to severance, benefits, plant clean-up, and other plant closing costs.  The Company expects that the majority of these costs will be paid out by the end of 2005.

 

Selected information related to the above glass container factory closings is as follows:

 

 

 

Hayward

 

Milton

 

Total

 

Restructuring accrual balance as of December 31, 2004

 

$

12.0

 

$

4.8

 

$

16.8

 

Net cash paid

 

(0.6

)

(0.7

)

(1.3

)

Other, principally translation

 

(0.2

)

(0.1

)

(0.3

)

Remaining restructuring accruals related to plant closing charges as of March 31, 2005

 

11.2

 

4.0

 

15.2

 

Net cash paid

 

(0.5

)

(0.1

)

(0.6

)

Remaining restructuring accruals related to plant closing charges as of June 30, 2005

 

10.7

 

3.9

 

14.6

 

Net cash paid

 

4.7

 

 

 

4.7

 

Other

 

(3.9

)

0.1

 

(3.8

)

Remaining restructuring accruals related to plant closing charges as of September 30, 2005

 

$

11.5

 

$

4.0

 

$

15.5

 

 

24



 

13.  Pensions 

 

The components of the net pension expense for the three months ended September 30, 2005 and 2004 were as follows:

 

 

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