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Owens-Illinois 10-Q 2011

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)

 

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

 

For Quarter Ended March 31, 2011

 

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 Michael Owens Way, Perrysburg, Ohio

 

43551-2999

(Address of principal executive offices)

 

(Zip Code)

 

567-336-5000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

 

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 — 164,005,952 shares at March 31, 2011.

 

 

 



 

Part I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

The Condensed Consolidated Financial Statements of Owens-Illinois, Inc. (“the Company”) presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated.  All adjustments are of a normal recurring nature. Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2010.

 

2



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

 (Dollars in millions, except per share amounts)

 

 

 

Three months ended March 31,

 

 

 

2011

 

2010

 

Net sales

 

$

1,719

 

$

1,546

 

Manufacturing, shipping, and delivery expense

 

(1,386

)

(1,247

)

Gross profit

 

333

 

299

 

 

 

 

 

 

 

Selling and administrative expense

 

(142

)

(120

)

Research, development, and engineering expense

 

(16

)

(14

)

Interest expense

 

(76

)

(56

)

Interest income

 

3

 

4

 

Equity earnings

 

14

 

13

 

Royalties and net technical assistance

 

5

 

4

 

Other income

 

2

 

1

 

Other expense

 

(18

)

(8

)

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

105

 

123

 

Provision for income taxes

 

(28

)

(32

)

 

 

 

 

 

 

Earnings from continuing operations

 

77

 

91

 

Earnings (loss) from discontinued operations

 

(1

)

3

 

 

 

 

 

 

 

Net earnings

 

76

 

94

 

Net earnings attributable to noncontrolling interests

 

(4

)

(9

)

Net earnings attributable to the Company

 

$

72

 

$

85

 

 

 

 

 

 

 

Amounts attributable to the Company:

 

 

 

 

 

Earnings from continuing operations

 

$

73

 

$

82

 

Earnings (loss) from discontinued operations

 

(1

)

3

 

Net earnings

 

$

72

 

$

85

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.44

 

$

0.49

 

Earnings from discontinued operations

 

 

 

0.02

 

Net earnings

 

$

0.44

 

$

0.51

 

 

 

 

 

 

 

Weighted average shares outstanding (thousands)

 

163,355

 

167,381

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.44

 

$

0.48

 

Earnings from discontinued operations

 

 

 

0.02

 

Net earnings

 

$

0.44

 

$

0.50

 

 

 

 

 

 

 

Weighted diluted average shares (thousands)

 

166,114

 

170,671

 

 

 

 

 

 

 

Comprehensive income, net of tax:

 

 

 

 

 

Net earnings

 

$

76

 

$

94

 

Foreign currency translation adjustments

 

74

 

(36

)

Pension and other postretirement benefit adjustments

 

20

 

32

 

Change in fair value of derivative instruments

 

1

 

(6

)

Total comprehensive income

 

171

 

84

 

Comprehensive income attributable to noncontrolling interests

 

(8

)

(9

)

Comprehensive income attributable to the Company

 

$

163

 

$

75

 

 

See accompanying notes.

 

3



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

430

 

$

640

 

$

496

 

Short-term investments, at cost which approximates market

 

 

 

 

 

1

 

Receivables, less allowances for losses and discounts ($43 at March 31, 2011, $40 at December 31, 2010, and $35 at March 31, 2010)

 

1,223

 

1,075

 

1,029

 

Inventories

 

1,054

 

946

 

888

 

Prepaid expenses

 

78

 

77

 

63

 

Assets of discontinued operations

 

 

 

 

 

60

 

 

 

 

 

 

 

 

 

Total current assets

 

2,785

 

2,738

 

2,537

 

 

 

 

 

 

 

 

 

Investments and other assets:

 

 

 

 

 

 

 

Equity investments

 

301

 

299

 

116

 

Repair parts inventories

 

154

 

147

 

128

 

Prepaid pension

 

59

 

54

 

42

 

Other assets

 

634

 

588

 

502

 

Goodwill

 

2,900

 

2,821

 

2,347

 

Assets of discontinued operations

 

 

 

 

 

34

 

 

 

 

 

 

 

 

 

Total other assets

 

4,048

 

3,909

 

3,169

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, at cost

 

7,213

 

7,016

 

6,445

 

Less accumulated depreciation

 

4,070

 

3,909

 

3,779

 

 

 

 

 

 

 

 

 

Net property, plant, and equipment

 

3,143

 

3,107

 

2,666

 

 

 

 

 

 

 

 

 

Total assets

 

$

9,976

 

$

9,754

 

$

8,372

 

 

4



 

 

CONDENSED CONSOLIDATED BALANCE SHEETS — Continued

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

Liabilities and Share Owners’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

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

 

$

372

 

$

354

 

$

281

 

Current portion of asbestos-related liabilities

 

170

 

170

 

175

 

Accounts payable

 

889

 

878

 

810

 

Other liabilities

 

646

 

677

 

615

 

Liabilities of discontinued operations

 

 

 

 

 

18

 

 

 

 

 

 

 

 

 

Total current liabilities

 

2,077

 

2,079

 

1,899

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,991

 

3,924

 

3,185

 

Deferred taxes

 

215

 

203

 

175

 

Pension benefits

 

576

 

576

 

553

 

Nonpension postretirement benefits

 

260

 

259

 

268

 

Other liabilities

 

403

 

381

 

318

 

Asbestos-related liabilities

 

273

 

306

 

276

 

Liabilities of discontinued operations

 

 

 

 

 

11

 

Commitments and contingencies

 

 

 

 

 

 

 

Share owners’ equity:

 

 

 

 

 

 

 

Share owners’ equity of the Company:

 

 

 

 

 

 

 

Common stock, par value $.01 per share, 250,000,000 shares authorized, 181,051,389, 180,808,992, and 180,584,042 shares issued (including treasury shares), respectively

 

2

 

2

 

2

 

Capital in excess of par value

 

3,041

 

3,040

 

2,949

 

Treasury stock, at cost, 17,045,437, 17,093,509, and 15,621,337 shares, respectively

 

(411

)

(412

)

(360

)

Retained earnings

 

154

 

82

 

214

 

Accumulated other comprehensive loss

 

(806

)

(897

)

(1,328

)

Total share owners’ equity of the Company

 

1,980

 

1,815

 

1,477

 

Noncontrolling interests

 

201

 

211

 

210

 

Total share owners’ equity

 

2,181

 

2,026

 

1,687

 

Total liabilities and share owners’ equity

 

$

9,976

 

$

9,754

 

$

8,372

 

 

See accompanying notes.

 

5



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

 

 

Three months ended March 31,

 

 

 

2011

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

76

 

$

94

 

(Earnings) loss from discontinued operations

 

1

 

(3

)

Non-cash charges (credits):

 

 

 

 

 

Depreciation

 

101

 

89

 

Amortization of intangibles and other deferred items

 

5

 

6

 

Amortization of finance fees and debt discount

 

8

 

3

 

Deferred tax benefit

 

(4

)

(1

)

Restructuring

 

8

 

 

 

Other

 

38

 

49

 

Asbestos-related payments

 

(33

)

(34

)

Cash paid for restructuring activities

 

(4

)

(19

)

Change in non-current operating assets

 

(25

)

(11

)

Change in non-current liabilities

 

(17

)

(13

)

Change in components of working capital

 

(239

)

(144

)

Cash provided by (utilized in) continuing operating activities

 

(85

)

16

 

Cash provided by discontinued operating activities

 

 

 

8

 

Total cash provided by (utilized in) operating activities

 

(85

)

24

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant, and equipment

 

(73

)

(96

)

Acquisitions, net of cash acquired

 

6

 

(26

)

Cash utilized in investing activities

 

(67

)

(122

)

Cash flows from financing activities:

 

 

 

 

 

Additions to long-term debt

 

5

 

 

 

Repayments of long-term debt

 

(10

)

(4

)

Decrease in short-term loans

 

(32

)

(50

)

Net receipts (payments) for hedging activity

 

(12

)

12

 

Dividends paid to noncontrolling interests

 

(18

)

(5

)

Treasury shares purchased

 

 

 

(144

)

Issuance of common stock and other

 

2

 

1

 

Cash utilized in financing activities

 

(65

)

(190

)

Effect of exchange rate fluctuations on cash

 

7

 

(3

)

Decrease in cash

 

(210

)

(291

)

Cash at beginning of period

 

640

 

812

 

Cash at end of period

 

430

 

521

 

Cash - discontinued operations

 

 

 

25

 

Cash - continuing operations

 

$

430

 

$

496

 

 

See accompanying notes.

 

6



 

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 March 31,

 

 

 

2011

 

2010

 

Numerator:

 

 

 

 

 

Net earnings attributable to the Company

 

$

72

 

$

85

 

 

 

 

 

 

 

Denominator (in thousands):

 

 

 

 

 

Denominator for basic earnings per share - weighted average shares outstanding

 

163,355

 

167,381

 

 

 

 

 

 

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and other

 

2,759

 

3,290

 

 

 

 

 

 

 

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

 

166,114

 

170,671

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.44

 

$

0.49

 

Earnings from discontinued operations

 

 

 

0.02

 

Net earnings

 

$

0.44

 

$

0.51

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.44

 

$

0.48

 

Earnings from discontinued operations

 

 

 

0.02

 

Net earnings

 

$

0.44

 

$

0.50

 

 

Options to purchase 462,037 and 395,092 weighted average shares of common stock which were outstanding during the three months ended March 31, 2011 and 2010, respectively, were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares.

 

The 2015 Exchangeable Notes have a dilutive effect only in those periods in which the Company’s average stock price exceeds the exchange price of $47.47 per share.  For the three months ended March 31, 2011, the Company’s average stock price did not exceed the exchange price.  Therefore, the potentially issuable shares resulting from the settlement of the 2015 Exchangeable Notes were not included in the calculation of diluted earnings per share.

 

7



 

2.  Debt

 

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

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

Secured Credit Agreement:

 

 

 

 

 

 

 

Revolving Credit Facility:

 

 

 

 

 

 

 

Revolving Loans

 

$

 

$

 

$

 

Term Loans:

 

 

 

 

 

 

 

Term Loan A (90 million AUD at March 31, 2011)

 

93

 

92

 

146

 

Term Loan B

 

190

 

190

 

190

 

Term Loan C (111 million CAD at March 31, 2011)

 

114

 

111

 

109

 

Term Loan D (€190 million at March 31, 2011)

 

268

 

253

 

254

 

Senior Notes:

 

 

 

 

 

 

 

8.25%, due 2013

 

 

 

 

 

460

 

6.75%, due 2014

 

400

 

400

 

400

 

6.75%, due 2014 (€225 million)

 

318

 

300

 

301

 

3.00%, Exchangeable, due 2015

 

611

 

607

 

 

 

7.375%, due 2016

 

586

 

585

 

583

 

6.875%, due 2017 (€300 million)

 

425

 

401

 

402

 

6.75%, due 2020 (€500 million)

 

708

 

668

 

 

 

Senior Debentures:

 

 

 

 

 

 

 

7.50%, due 2010

 

 

 

 

 

28

 

7.80%, due 2018

 

250

 

250

 

250

 

Other

 

163

 

164

 

110

 

Total long-term debt

 

4,126

 

4,021

 

3,233

 

Less amounts due within one year

 

135

 

97

 

48

 

Long-term debt

 

$

3,991

 

$

3,924

 

$

3,185

 

 

On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”).  At March 31, 2011, the Agreement included a $900 million revolving credit facility, a 90 million Australian dollar term loan, and a 111 million Canadian dollar term loan, each of which has a final maturity date of June 15, 2012.  It also included a $190 million term loan and a €190 million term loan, each of which has a final maturity date of June 14, 2013.  At March 31, 2011, the Company’s subsidiary borrowers had unused credit of $728 million available under the Agreement.

 

The weighted average interest rate on borrowings outstanding under the Agreement at March 31, 2011 was 2.68%.

During October 2006, the Company entered into a €250 million European accounts receivable securitization program.  The program extends through October 2011, subject to annual renewal of backup credit lines.

 

8



 

Information related to the Company’s accounts receivable securitization programs is as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Balance (included in short-term loans)

 

$

222

 

$

247

 

$

229

 

 

 

 

 

 

 

 

 

Weighted average interest rate

 

2.85

%

2.40

%

2.57

%

 

The carrying amounts reported for the accounts receivable securitization programs, and certain long-term debt obligations subject to frequently redetermined interest rates, approximate fair value.  Fair values for the Company’s significant fixed rate debt obligations are generally based on published market quotations.

 

Fair values at March 31, 2011 of the Company’s significant fixed rate debt obligations are as follows:

 

 

 

Principal Amount

 

Indicated

 

Fair Value

 

 

 

(millions of

 

Market

 

(millions of

 

 

 

dollars)

 

Price

 

dollars)

 

Senior Notes:

 

 

 

 

 

 

 

6.75%, due 2014

 

$

400

 

102.30

 

$

409

 

6.75%, due 2014 (€225 million)

 

318

 

102.25

 

325

 

3.00%, Exchangeable, due 2015

 

690

 

101.42

 

700

 

7.375%, due 2016

 

600

 

110.00

 

660

 

6.875%, due 2017 (€300 million)

 

425

 

102.63

 

436

 

6.75%, due 2020 (€500 million)

 

708

 

101.51

 

719

 

Senior Debentures:

 

 

 

 

 

 

 

7.80%, due 2018

 

250

 

110.00

 

275

 

 

3.  Supplemental Cash Flow Information

 

 

 

Three months ended March 31,

 

 

 

2011

 

2010

 

Interest paid in cash

 

$

67

 

$

45

 

 

 

 

 

 

 

Income taxes paid in cash:

 

 

 

 

 

 

 

 

 

 

 

Non-U.S.

 

21

 

10

 

 

9



 

4.  Share Owners’ Equity

 

The activity in share owners’ equity for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

Share Owners’ Equity of the Company

 

 

 

 

 

 

 

Common
Stock

 

Capital in
Excess of
Par Value

 

Treasury
Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2011

 

$

2

 

$

3,040

 

$

(412

)

$

82

 

$

(897

)

$

211

 

$

2,026

 

Issuance of common stock (0.2 million shares)

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Reissuance of common stock (0.05 million shares)

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Stock compensation

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

72

 

 

 

4

 

76

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

70

 

4

 

74

 

Pension and other postretirement benefit adjustments, net of tax

 

 

 

 

 

 

 

 

 

20

 

 

 

20

 

Change in fair value of derivative instruments, net of tax

 

 

 

 

 

 

 

 

 

1

 

 

 

1

 

Dividends paid to noncontrolling interests on subsidiary common stock

 

 

 

 

 

 

 

 

 

 

 

(18

)

(18

)

Balance on March 31, 2011

 

$

2

 

$

3,041

 

$

(411

)

$

154

 

$

(806

)

$

201

 

$

2,181

 

 

 

 

Share Owners’ Equity of the Company

 

 

 

 

 

 

 

Common
Stock

 

Capital in
Excess of
Par Value

 

Treasury

Stock

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2010

 

$

2

 

$

2,942

 

$

(217

)

$

129

 

$

(1,318

)

$

198

 

$

1,736

 

Issuance of common stock (0.7 million shares)

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Reissuance of common stock (0.04 million shares)

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Treasury shares purchased (4.3 million shares)

 

 

 

 

 

(144

)

 

 

 

 

 

 

(144

)

Stock compensation

 

 

 

5

 

 

 

 

 

 

 

 

 

5

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

 

 

 

 

85

 

 

 

9

 

94

 

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

(36

)

 

 

(36

)

Pension and other postretirement benefit adjustments, net of tax

 

 

 

 

 

 

 

 

 

32

 

 

 

32

 

Change in fair value of derivative instruments, net of tax

 

 

 

 

 

 

 

 

 

(6

)

 

 

(6

)

Noncontrolling interests’ share of acquisition

 

 

 

 

 

 

 

 

 

 

 

8

 

8

 

Dividends paid to noncontrolling interests on subsidiary common stock

 

 

 

 

 

 

 

 

 

 

 

(5

)

(5

)

Balance on March 31, 2010

 

$

2

 

$

2,949

 

$

(360

)

$

214

 

$

(1,328

)

$

210

 

$

1,687

 

 

10



 

5.  Inventories

 

Major classes of inventory are as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

 

 

 

 

 

 

 

 

Finished goods

 

$

887

 

$

786

 

$

734

 

Raw materials

 

110

 

106

 

105

 

Operating supplies

 

57

 

54

 

49

 

 

 

 

 

 

 

 

 

 

 

$

1,054

 

$

946

 

$

888

 

 

6.  Contingencies

 

The Company is a defendant in numerous lawsuits alleging bodily injury and death as a result of exposure to asbestos dust.  From 1948 to 1958, one of the Company’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos.  The Company exited the pipe and block insulation business in April 1958.  The typical asbestos personal injury lawsuit alleges various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).

 

As of March 31, 2011, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 5,900 plaintiffs and claimants.  Based on an analysis of the lawsuits pending as of December 31, 2010, approximately 76% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court.  Approximately 22% of plaintiffs specifically plead damages of $15 million or less, and 2% of plaintiffs specifically plead damages greater than $15 million but less than $100 million.  Fewer than 1% of plaintiffs specifically plead damages $100 million or greater but less than $122 million.

 

As indicated by the foregoing summary, current pleading practice permits considerable variation in the assertion of monetary damages.  The Company’s experience resolving hundreds of thousands of asbestos claims and lawsuits over an extended period demonstrates that the monetary relief that may be alleged in a complaint bears little relevance to a claim’s merits or disposition value.  Rather, the amount potentially recoverable is determined by such factors as the severity of the plaintiff’s asbestos disease, the product identification evidence against the Company and other defendants, the defenses available to the Company and other defendants, the specific jurisdiction in which the claim is made, and the plaintiff’s medical history and exposure to other disease-causing agents.

 

In addition to the pending claims set forth above, the Company has claims-handling agreements in place with many plaintiffs’ counsel throughout the country.  These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by the Company’s former business unit during its manufacturing period ending in 1958.  Some plaintiffs’ counsel have historically withheld claims under these agreements for later presentation while focusing their attention on active litigation in the tort system.  The Company believes that as of March 31, 2011 there are approximately 550 claims against other defendants

 

11



 

which are likely to be asserted some time in the future against the Company. These claims are not included in the pending “lawsuits and claims” totals set forth above.

 

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

 

Since receiving its first asbestos claim, the Company as of March 31, 2011, has disposed of the asbestos claims of approximately 383,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $7,900.  Certain of these dispositions have included deferred amounts payable over a number of years.  Deferred amounts payable totaled approximately $26 million at March 31, 2011 ($26 million at December 31, 2010) and are included in the foregoing average indemnity payment per claim.  The Company’s asbestos indemnity payments have varied on a per claim basis, and are expected to continue to vary considerably over time.  As discussed above, a part of the Company’s objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements.  Failure of claimants to meet certain medical and product exposure criteria in the Company’s administrative claims handling agreements has generally reduced the number of marginal or suspect claims that would otherwise have been received.  In addition, certain courts and legislatures have reduced or eliminated the number of marginal or suspect claims that the Company otherwise would have received.  These developments generally have had the effect of increasing the Company’s per-claim average indemnity payment.

 

The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot reasonably be estimated. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $3.82 billion through 2010, before insurance recoveries, for its asbestos-related liability.  The Company’s ability to reasonably estimate its liability has been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty of future disease incidence and claiming patterns, the expanding list of non-traditional defendants that have been sued in this litigation, and the use of mass litigation screenings to generate large numbers of claims by parties who allege exposure to asbestos dust but have no present physical asbestos impairment.

 

The Company has continued to monitor trends that may affect its ultimate liability and has continued to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company. The material components of the Company’s accrued liability are based on amounts determined by the Company in connection with its annual comprehensive review and consist of the following estimates, to the extent it is probable that such liabilities have been incurred and can be reasonably estimated: (i) the liability for asbestos claims already asserted against the Company; (ii) the liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel; (iii) the liability for asbestos claims not yet asserted against the Company, but which the Company believes will be asserted in the next several years; and (iv) the legal defense costs likely to be incurred in connection with the foregoing types of claims.

 

12



 

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

 

a)

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

 

 

b)

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

 

 

c)

the extent of decrease or increase in the incidence of serious disease cases and claiming patterns for such cases;

 

 

d)

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

 

 

e)

the extent to which courts and legislatures eliminate, reduce or permit the diversion of financial resources for unimpaired claimants;

 

 

f)

the number and timing of additional co-defendant bankruptcies;

 

 

g)

the extent to which bankruptcy trusts direct resources to resolve claims that are also presented to the Company and the timing of the payments made by the bankruptcy trusts; and

 

 

h)

the extent to which co-defendants with substantial resources and assets continue to participate significantly in the resolution of future asbestos lawsuits and claims.

 

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

 

On March 11, 2011, the Company received a verdict in an asbestos case in which conspiracy claims had been asserted against the Company. Of the total nearly $90 million awarded by the jury against the four defendants in the case, almost $10 million in compensatory damages were assessed against all four defendants, and $40 million in punitive damages were assessed against the Company.

 

The Company continues to deny the conspiracy allegations in this case and will vigorously challenge this verdict, if necessary, in the appellate courts, and, therefore, has made no change to its asbestos-related liability as of March 31, 2011.  While the Company cannot predict the ultimate outcome of this lawsuit, the Company and other conspiracy defendants have successfully challenged jury verdicts in similar cases.

 

Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are

 

13



 

non-routine and involve compensatory, punitive or treble damage claims as well as other types of relief.  The Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated.  Recorded amounts are reviewed and adjusted to reflect changes in the factors upon which the estimates are based including additional information, negotiations, settlements, and other events.

 

The ultimate legal and financial liability of the Company with respect to the lawsuits and proceedings referred to above, in addition to other pending litigation, cannot reasonably be estimated.  The Company’s reported results of operations for 2010 were materially affected by the $170 million (pretax and after tax) fourth quarter charge for asbestos-related costs and asbestos-related payments continue to be substantial.  Any future additional charge would likewise materially affect the Company’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and may continue to affect the Company’s cost of borrowing and its ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity will be sufficient to pay its obligations for asbestos-related costs and to fund its working capital and capital expenditure requirements on a short-term and long-term basis.

 

7. Segment Information

 

The Company has four reportable segments based on its four geographic locations:  (1) Europe; (2) North America; (3) South America; (4) Asia Pacific.  These four segments are aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its global glass operations.  Certain assets and activities not directly related to one of the regions or to glass manufacturing are reported with Retained corporate costs and other.  These include licensing, equipment manufacturing, global engineering, and non-glass equity investments.  Retained corporate costs and other also includes certain headquarters administrative and facilities costs and certain incentive compensation and other benefit plan costs that are global in nature and are not allocable to the reportable segments.

 

The Company’s measure of profit for its reportable segments is Segment Operating Profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs.  The Company’s management uses Segment Operating Profit, in combination with net sales and selected cash flow information, to evaluate performance and to allocate resources.  Segment Operating Profit for reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided.

 

14



 

Financial information for the three-month periods ended March 31, 2011 and 2010 regarding the Company’s reportable segments is as follows:

 

 

 

2011

 

2010

 

Net sales:

 

 

 

 

 

Europe

 

$

698

 

$

668

 

North America

 

463

 

444

 

South America

 

269

 

175

 

Asia Pacific

 

262

 

250

 

Reportable segment totals

 

1,692

 

1,537

 

Other

 

27

 

9

 

Net sales

 

$

1,719

 

$

1,546

 

 

 

 

2011

 

2010

 

Segment Operating Profit:

 

 

 

 

 

Europe

 

$

71

 

$

56

 

North America

 

59

 

63

 

South America

 

45

 

37

 

Asia Pacific

 

24

 

37

 

Reportable segment totals

 

199

 

193

 

 

 

 

 

 

 

Items excluded from Segment Operating Profit:

 

 

 

 

 

Retained corporate costs and other

 

(13

)

(18

)

Restructuring

 

(8

)

 

 

Interest income

 

3

 

4

 

Interest expense

 

(76

)

(56

)

Earnings from continuing operations before income taxes

 

$

105

 

$

123

 

 

Financial information regarding the Company’s total assets is as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2011

 

2010

 

2010

 

Total assets:

 

 

 

 

 

 

 

Europe

 

$

3,842

 

$

3,618

 

$

3,618

 

North America

 

1,991

 

1,961

 

1,959

 

South America

 

1,678

 

1,680

 

780

 

Asia Pacific

 

2,037

 

2,047

 

1,684

 

Reportable segment totals

 

9,548

 

9,306

 

8,041

 

Other

 

428

 

448

 

331

 

Consolidated totals

 

$

9,976

 

$

9,754

 

$

8,372

 

 

8. Other Expense

 

Other expense for the three months ended March 31, 2011, includes charges totaling $8 million for restructuring charges in the Company’s Asia Pacific segment.  See Note 9 for additional information.

 

15



 

9.  Restructuring Accruals

 

Beginning in 2007, the Company commenced a strategic review of its global profitability and manufacturing footprint.  The Company concluded its global review as of December 31, 2009, with the final actions implemented in the first half of 2010.  The combined 2007, 2008, 2009 and 2010 charges, amounting to $407 million ($340 million after tax amount attributable to the Company), reflect the decisions reached by the Company in its strategic review of its global manufacturing footprint. The related curtailment of plant capacity and realignment of selected operations have resulted in an overall reduction in the Company’s workforce of approximately 3,250 jobs.  Amounts recorded by the Company do not include any gains that may be realized upon the ultimate sale or disposition of closed facilities.

 

Selected information related to the restructuring accrual for the strategic footprint review for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

Employee
Costs

 

Other

 

Total

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

$

27

 

$

25

 

$

52

 

Net cash paid, principally severance and related benefits

 

(2

)

(2

)

(4

)

Other, principally foreign exchange translation

 

2

 

 

 

2

 

Balance at March 31, 2011

 

$

27

 

$

23

 

$

50

 

 

 

 

 

 

 

 

 

Balance at January 1, 2010

 

$

93

 

$

26

 

$

119

 

Net cash paid, principally severance and related benefits

 

(18

)

(1

)

(19

)

Other, principally foreign exchange translation

 

(1

)

 

 

(1

)

Balance at March 31, 2010

 

$

74

 

$

25

 

$

99

 

 

The Company continually reviews its manufacturing footprint and may close various operations due to plant efficiencies, integration of acquisitions, and other market factors.  The restructuring accruals related to these types of actions taken by the Company not related to the strategic review of manufacturing operations discussed above are $35 million as of March 31, 2011, $27 million at December 31, 2010, and $27 million at March 31, 2010.  The Company recorded restructuring charges of $8 million in the first quarter of 2011 for employee costs related to a plant closing and the related relocation of business to other facilities in its Asia Pacific segment.  There were no other material charges or cash payments in 2011 or 2010 related to these actions.

 

The Company’s decisions to curtail selected production capacity have resulted in write downs of certain long-lived assets to the extent their carrying amounts exceeded fair value or fair value less cost to sell.  The Company classified the significant assumptions used to determine the fair value of the impaired assets, which was not material, as Level 3 in the fair value hierarchy as set forth in the general accounting principles for fair value measurements.

 

The Company also recorded liabilities for certain employee separation costs to be paid under contractual arrangements and other exit costs.

 

16



 

10. Derivative Instruments

 

The Company has certain derivative assets and liabilities which consist of interest rate swaps, natural gas forwards, and foreign exchange option and forward contracts.  The Company uses an income approach to valuing these contracts.  Interest rate yield curves, natural gas forward rates, and foreign exchange rates are the significant inputs into the valuation models.  These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty risk in determining fair values.

 

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 $700 million that were to mature in 2010 and 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-floating interest rate swaps were accounted for as fair value hedges. Because the relevant terms of the swap agreements matched the corresponding terms of the notes, there was no hedge ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a long-term asset (liability) along with a corresponding net increase (decrease) in the carrying value of the hedged debt.

 

For derivative instruments that are designated and qualify as fair value hedges, the change in the fair value of the derivative instrument related to the future cash flows (gain or loss on the derivative) as well as the offsetting change in the fair value of the hedged item attributable to the hedged risk are recognized in current earnings.  The Company includes the gain or loss on the hedged items (i.e. long-term debt) in the same line item (interest expense) as the offsetting loss or gain on the related interest rate swaps.

 

During the second quarter of 2009, the Company completed a tender offer for its $250 million senior debentures due 2010.  As a result of the tender offer, the Company extinguished $222 million of the senior debentures and terminated the related interest rate swap agreements for proceeds of $5 million.  The Company recognized $4 million of the proceeds as a reduction to interest expense upon the termination of the interest rate swap agreements, while the remaining proceeds were recognized as a reduction to interest expense over the remaining life of the outstanding senior debentures, which matured in May 2010.

 

During the second quarter of 2009, the Company’s interest rate swaps related to the $450 million senior notes due 2013 were terminated.  The Company received proceeds of $12 million which were recorded as an adjustment to debt and were to be recognized as a reduction to interest expense over the remaining life of the senior notes due 2013.  During the second quarter of 2010, a subsidiary of the Company redeemed the senior notes due 2013.  Accordingly, the remaining unamortized proceeds from the terminated interest rate swaps were recognized in the second quarter as a reduction to interest expense.

 

The amortization of the proceeds from the terminated interest rate swaps reduced interest expense $1 million for the three months ended March 31, 2010.

 

17



 

Commodity Futures Contracts Designated as Cash Flow Hedges

 

In North America, the Company enters into commodity futures contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas market and related price risk and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements. The majority of the sales volume in North America is tied to customer contracts that contain provisions that pass the price of natural gas to the customer. In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time. At March 31, 2011 and 2010, the Company had entered into commodity futures contracts covering approximately 8,000,000 MM BTUs and 5,200,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas.

 

The Company accounts for the above futures contracts as cash flow hedges at March 31, 2011 and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. At March 31, 2011 and 2010, an unrecognized loss of $2 million and $7 million, respectively, related to the commodity futures contracts was included in Accumulated OCI, and will be reclassified into earnings over the next twelve to twenty-four months.  Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these natural gas hedges for the three months ended March 31, 2011 and 2010 was not material.

 

The effect of the commodity futures contracts on the results of operations for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

Amount of Loss

 

 

 

Reclassified from

 

Amount of Loss

 

Accumulated OCI into

 

Recognized in OCI on

 

Income (reported in

 

Commodity Futures Contracts

 

manufacturing, shipping, and

 

(Effective Portion)

 

delivery) (Effective Portion)

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

$

 (1

)

$

(7

)

$

(2

)

$

(1

)

 

Senior Notes Designated as Net Investment Hedge

 

During December 2004, a U.S. subsidiary of the Company issued senior notes totaling €225 million.  These notes were designated by the Company’s subsidiary as a hedge of a portion of its net investment in a non-U.S. subsidiary with a Euro functional currency.  Because the amount of the senior notes matches the hedged portion of the net investment, there is no hedge ineffectiveness. Accordingly, the Company recorded the impact of changes in the foreign currency exchange rate on the Euro-denominated notes in OCI.  The amount recorded in OCI will be reclassified into earnings when the Company sells or liquidates its net investment in the non-U.S. subsidiary.

 

18



 

The effect of the net investment hedge on the results of operations for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

 

 

Amount of Gain (Loss)

 

Amount of Gain (Loss)

 

Location of Gain (Loss)

 

Reclassified from Accumulated

 

Recognized in OCI

 

Reclassified from Accumulated

 

OCI into Income

 

2011

 

2010

 

OCI into Income

 

2011

 

2010

 

 

 

 

 

 

 

 

 

 

 

$

(18

)

$

24

 

N/A

 

$

 

$

 

 

Forward Exchange Contracts not Designated as Hedging Instruments

 

The Company’s subsidiaries may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements may be used to offset the foreign currency risk for receivables and payables, including intercompany receivables and payables, not denominated in, or indexed to, their functional currencies. Subsidiaries may also use forward exchange agreements to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. 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.

 

At March 31, 2011 and 2010, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $881 million and $590 million, respectively, related primarily to intercompany transactions and loans.

 

The effect of the forward exchange contracts on the results of operations for the three months ended March 31, 2011 and 2010 is as follows:

 

 

 

Amount of Gain (Loss)

 

Location of Gain (Loss)

 

Recognized in Income on

 

Recognized in Income on

 

Forward Exchange Contracts

 

Forward Exchange Contracts

 

2011

 

2010

 

 

 

 

 

 

 

Other expense

 

$

(7

)

$

23

 

 

19



 

Balance Sheet Classification

 

The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) deposits, receivables, and other assets if the instrument has a positive fair value and maturity after one year, (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other liabilities if the instrument has a negative fair value and maturity after one year.  The following table shows the amount and classification (as noted above) of the Company’s derivatives:

 

 

 

Balance

 

Fair Value

 

 

 

Sheet
Location

 

March 31,
2011

 

December 31,
2010

 

March 31,
2010

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

a

 

$

6

 

$

5

 

$

16

 

Foreign exchange contracts

 

b

 

4

 

2

 

 

 

Foreign exchange contracts

 

c

 

1

 

1

 

 

 

Total derivatives not designated as hedging instruments:

 

 

 

11

 

8

 

16

 

Total asset derivatives

 

 

 

$

11

 

$

8

 

$

16

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

c

 

$

2

 

$

3

 

$

7

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

c

 

15

 

21

 

2

 

Total liability derivatives

 

 

 

$

17

 

$

24

 

$

9

 

 

20



 

 

11.  Pensions Benefit Plans and Other Postretirement Benefits

 

The components of the net periodic pension cost for the three months ended March 31, 2011 and 2010 are as follows:

 

 

 

U.S.

 

Non-U.S.

 

 

 

2011

 

2010

 

2011

 

2010

 

Service cost

 

$

7

 

$

6

 

$

5

 

$

5

 

Interest cost

 

31