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Owens-Illinois 10-Q 2014

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended

March 31, 2014

 

or

 

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

 

For the transition period from      to     

 

Commission file number 1-9576

 

GRAPHIC

 

OWENS-ILLINOIS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

22-2781933

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

One Michael Owens Way, Perrysburg, Ohio

 

43551

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:  (567) 336-5000

 

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

 

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

 

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

 

Large accelerated filer x

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

(Do not check if a

 

 

 

 

 

 

smaller reporting company)

 

 

 

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

 

The number of shares of common stock, par value $.01, of Owens-Illinois, Inc. outstanding as of March 31, 2014 was 165,074,114.

 

 

 



 

Part I – FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

The Condensed Consolidated Financial Statements of Owens-Illinois, Inc. (the “Company”) presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated.  All adjustments are of a normal recurring nature. Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.

 

2



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

(Dollars in millions, except per share amounts)

 

 

 

Three months ended March 31,

 

 

 

2014

 

2013

 

Net sales

 

$

1,639

 

$

1,641

 

Cost of goods sold

 

(1,318

)

(1,322

)

Gross profit

 

321

 

319

 

 

 

 

 

 

 

Selling and administrative expense

 

(133

)

(129

)

Research, development and engineering expense

 

(15

)

(15

)

Interest expense, net

 

(54

)

(68

)

Equity earnings

 

16

 

17

 

Other expense, net

 

(1

)

(7

)

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

134

 

117

 

Provision for income taxes

 

(27

)

(33

)

 

 

 

 

 

 

Earnings from continuing operations

 

107

 

84

 

Loss from discontinued operations

 

(1

)

(10

)

 

 

 

 

 

 

Net earnings

 

106

 

74

 

Net earnings attributable to noncontrolling interests

 

(5

)

(5

)

Net earnings attributable to the Company

 

$

101

 

$

69

 

 

 

 

 

 

 

Amounts attributable to the Company:

 

 

 

 

 

Earnings from continuing operations

 

$

102

 

$

79

 

Loss from discontinued operations

 

(1

)

(10

)

Net earnings

 

$

101

 

$

69

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.62

 

$

0.48

 

Loss from discontinued operations

 

(0.01

)

(0.06

)

Net earnings

 

$

0.61

 

$

0.42

 

 

 

 

 

 

 

Weighted average shares outstanding (thousands)

 

164,760

 

164,069

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.62

 

$

0.48

 

Loss from discontinued operations

 

(0.01

)

(0.06

)

Net earnings

 

$

0.61

 

$

0.42

 

 

 

 

 

 

 

Weighted average diluted shares outstanding (thousands)

 

166,165

 

165,501

 

 

See accompanying notes.

 

3



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

(Dollars in millions)

 

 

 

Three months ended March 31,

 

 

 

2014

 

2013

 

Net earnings

 

$

106

 

$

74

 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustments

 

32

 

(32

)

Pension and other postretirement benefit adjustments, net of tax

 

23

 

45

 

Change in fair value of derivative instruments

 

1

 

4

 

Other comprehensive income

 

56

 

17

 

Total comprehensive income

 

162

 

91

 

Comprehensive income attributable to noncontrolling interests

 

(2

)

(1

)

Comprehensive income attributable to the Company

 

$

160

 

$

90

 

 

See accompanying notes.

 

4



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

201

 

$

383

 

$

359

 

Receivables

 

1,078

 

943

 

1,047

 

Inventories

 

1,204

 

1,117

 

1,178

 

Prepaid expenses

 

94

 

107

 

99

 

 

 

 

 

 

 

 

 

Total current assets

 

2,577

 

2,550

 

2,683

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,634

 

2,632

 

2,680

 

Goodwill

 

2,059

 

2,059

 

2,048

 

Other assets

 

1,218

 

1,178

 

1,106

 

 

 

 

 

 

 

 

 

Total assets

 

$

8,488

 

$

8,419

 

$

8,517

 

 

 

 

 

 

 

 

 

Liabilities and Share Owners’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

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

 

$

331

 

$

322

 

$

347

 

Current portion of asbestos-related liabilities

 

150

 

150

 

155

 

Accounts payable

 

1,074

 

1,144

 

904

 

Other liabilities

 

527

 

638

 

523

 

 

 

 

 

 

 

 

 

Total current liabilities

 

2,082

 

2,254

 

1,929

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,371

 

3,245

 

3,550

 

Asbestos-related liabilities

 

283

 

298

 

289

 

Other long-term liabilities

 

992

 

1,019

 

1,594

 

Share owners’ equity

 

1,760

 

1,603

 

1,155

 

 

 

 

 

 

 

 

 

Total liabilities and share owners’ equity

 

$

8,488

 

$

8,419

 

$

8,517

 

 

See accompanying notes.

 

5



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

 

 

Three months ended March 31,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

106

 

$

74

 

Loss from discontinued operations

 

1

 

10

 

Non-cash charges

 

 

 

 

 

Depreciation and amortization

 

111

 

107

 

Pension expense

 

15

 

26

 

Restructuring, asset impairment and related charges

 

 

 

10

 

Cash payments

 

 

 

 

 

Pension contributions

 

(5

)

(7

)

Asbestos-related payments

 

(15

)

(17

)

Cash paid for restructuring activities

 

(21

)

(34

)

Change in components of working capital

 

(352

)

(301

)

Other, net (a)

 

(42

)

(2

)

Cash utilized in continuing operating activities

 

(202

)

(134

)

Cash utilized in discontinued operating activities

 

(1

)

(2

)

Total cash utilized in operating activities

 

(203

)

(136

)

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(108

)

(94

)

Other, net

 

13

 

 

 

Cash utilized in investing activities

 

(95

)

(94

)

Cash flows from financing activities:

 

 

 

 

 

Changes in borrowings, net

 

136

 

160

 

Issuance of common stock

 

4

 

4

 

Distributions to noncontrolling interests

 

(19

)

 

 

Other, net

 

1

 

(5

)

Cash provided by financing activities

 

122

 

159

 

Effect of exchange rate fluctuations on cash

 

(6

)

(1

)

Decrease in cash

 

(182

)

(72

)

Cash at beginning of period

 

383

 

431

 

Cash at end of period

 

$

201

 

$

359

 

 


(a) Other, net includes other non cash charges plus other changes in non-current assets and liabilities.

 

See accompanying notes.

 

6



 

OWENS-ILLINOIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tabular data dollars in millions, except per share amounts

 

1.              Segment Information

 

The Company has four reportable segments based on its geographic locations:  Europe, North America, South America and 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 sales, global engineering, and non-glass equity investments.  Retained corporate costs and other also includes certain headquarters administrative and facilities costs and certain incentive compensation and other benefit plan costs that are global in nature and are not allocable to the reportable segments.

 

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

 

Financial information for the three-month periods ended March 31, 2014 and 2013 regarding the Company’s reportable segments is as follows:

 

 

 

2014

 

2013

 

Net sales:

 

 

 

 

 

Europe

 

$

706

 

$

650

 

North America

 

485

 

469

 

South America

 

239

 

269

 

Asia Pacific

 

203

 

247

 

 

 

 

 

 

 

Reportable segment totals

 

1,633

 

1,635

 

Other

 

6

 

6

 

Net sales

 

$

1,639

 

$

1,641

 

 

7



 

 

 

2014

 

2013

 

Segment operating profit:

 

 

 

 

 

Europe

 

$

87

 

$

59

 

North America

 

65

 

74

 

South America

 

41

 

53

 

Asia Pacific

 

25

 

40

 

Reportable segment totals

 

218

 

226

 

 

 

 

 

 

 

Items excluded from segment operating profit:

 

 

 

 

 

Retained corporate costs and other

 

(30

)

(31

)

Restructuring, asset impairment and related charges

 

 

 

(10

)

Interest expense, net

 

(54

)

(68

)

Earnings from continuing operations before income taxes

 

$

134

 

$

117

 

 

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

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

Total assets:

 

 

 

 

 

 

 

Europe

 

$

3,585

 

$

3,509

 

$

3,263

 

North America

 

2,055

 

1,995

 

2,030

 

South America

 

1,453

 

1,467

 

1,638

 

Asia Pacific

 

1,142

 

1,150

 

1,294

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

8,235

 

8,121

 

8,225

 

Other

 

253

 

298

 

292

 

Consolidated totals

 

$

8,488

 

$

8,419

 

$

8,517

 

 

2.  Receivables

 

Receivables consist of the following:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

Trade accounts receivable

 

$

911

 

$

757

 

$

903

 

Less: allowances for doubtful accounts and discounts

 

39

 

39

 

41

 

Net trade receivables

 

872

 

718

 

862

 

Other receivables

 

206

 

225

 

185

 

 

 

$

1,078

 

$

943

 

$

1,047

 

 

The Company uses various factoring programs to sell certain receivables to financial institutions as part of managing its cash flows. The amount of receivables sold by the Company was $129 million, $192 million, and $116 million at March 31, 2014, December 31, 2013, and March 31, 2013, respectively. The Company has no continuing involvement with the sold receivables.

 

8



 

3.  Inventories

 

Major classes of inventory are as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Finished goods

 

$

1,037

 

$

958

 

$

1,014

 

Raw materials

 

121

 

113

 

124

 

Operating supplies

 

46

 

46

 

40

 

 

 

 

 

 

 

 

 

 

 

$

1,204

 

$

1,117

 

$

1,178

 

 

4. Derivative Instruments

 

The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts.  The Company uses an income approach to valuing these contracts.  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.

 

Commodity Futures Contracts Designated as Cash Flow Hedges

 

The significant majority of the Company’s 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. When the customer exercises that option the Company enters into commodity futures contracts for the related natural gas requirements, in order to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows.  At March 31, 2014 and 2013, the Company had entered into commodity futures contracts covering approximately 4,400,000 MM BTUs and 6,200,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas.

 

The Company accounts for these futures contracts as cash flow hedges 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. An unrecognized gain of $2 million at both March 31, 2014 and 2013 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, 2014 and 2013 was not material.

 

9



 

The effect of the commodity futures contracts on the results of operations for the three months ended March 31, 2014 and 2013 is as follows:

 

 

 

Amount of Gain (Loss)

 

Amount of Gain

 

Reclassified from

 

Recognized in OCI on

 

Accumulated OCI into Income

 

Commodity Futures Contracts

 

(reported in Cost of goods sold)

 

(Effective Portion)

 

(Effective Portion)

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

$

2

 

$

3

 

$

1

 

$

(1

)

 

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 are used 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. Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany 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.

 

At March 31, 2014 and 2013, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $670 million and $900 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, 2014 and 2013 is as follows:

 

 

 

Amount of Loss

 

Location of Gain (Loss)

 

Recognized in Income on

 

Recognized in Income on

 

Forward Exchange Contracts

 

Forward Exchange Contracts

 

2014

 

2013

 

 

 

 

 

 

 

Other expense, net

 

$

(1

)

$

(3

)

 

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) other assets if the instrument has a positive fair value and maturity after one year, (c) other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other long-term 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:

 

10



 

 

 

Balance

 

Fair Value

 

 

 

Sheet
Location

 

March 31,
2014

 

December 31,
2013

 

March 31,
2013

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

a

 

$

2

 

$

1

 

$

2

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

a

 

4

 

3

 

3

 

Foreign exchange contracts

 

c

 

3

 

 

 

1

 

Total derivatives not designated as hedging instruments

 

 

 

7

 

3

 

4

 

Total asset derivatives

 

 

 

$

9

 

$

4

 

$

6

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

c

 

$

10

 

$

7

 

$

8

 

Total liability derivatives

 

 

 

$

10

 

$

7

 

$

8

 

 

5.  Restructuring Accruals

 

Selected information related to the restructuring accruals for the first three months of 2014 and 2013 is as follows:

 

 

 

European
Asset
Optimization

 

Asia Pacific
Restructuring

 

Other
Restructuring
Actions

 

Total
Restructuring

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2014

 

$

30

 

$

20

 

$

64

 

$

114

 

Net cash paid, principally severance and related benefits

 

(2

)

(4

)

(15

)

(21

)

Other, including foreign exchange translation

 

(1

)

(4

)

(3

)

(8

)

Balance at March 31, 2014

 

$

27

 

$

12

 

$

46

 

$

85

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

$

53

 

$

6

 

$

64

 

$

123

 

First quarter 2013 charges

 

7

 

2

 

1

 

10

 

Write-down of assets to net realizable value

 

(2

)

 

 

 

 

(2

)

Net cash paid, principally severance and related benefits

 

(20

)

(4

)

(10

)

(34

)

Other, including foreign exchange translation

 

(1

)

 

 

(1

)

(2

)

Balance at March 31, 2013

 

$

37

 

$

4

 

$

54

 

$

95

 

 

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.

 

11



 

6.  Pension Benefit Plans

 

The components of the net periodic pension cost for the three months ended March 31, 2014 and 2013 are as follows:

 

 

 

U.S.

 

Non-U.S.

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

6

 

$

7

 

$

7

 

$

8

 

Interest cost

 

27

 

27

 

18

 

17

 

Expected asset return

 

(43

)

(46

)

(22

)

(23

)

 

 

 

 

 

 

 

 

 

 

Amortization:

 

 

 

 

 

 

 

 

 

Actuarial loss

 

18

 

28

 

4

 

8

 

 

 

 

 

 

 

 

 

 

 

Net periodic pension cost

 

$

8

 

$

16

 

$

7

 

$

10

 

 

The U.S. pension expense excludes $8 million of special termination benefits that were recorded in discontinued operations in 2013.

 

7.  Income Taxes

 

The Company performs a quarterly review of the annual effective tax rate and makes changes if necessary based on new information or events. The estimated annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates. The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes in the forecasted mix of earnings by country; changes to the valuation allowance for deferred tax assets (such changes would be recorded discretely in the quarter in which they occur); changes to actual or forecasted permanent book to tax differences (non-deductible expenses); impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occur); or impacts from tax law changes. To the extent such changes impact deferred tax assets/liabilities, these changes would generally be recorded discretely in the quarter in which they occur.  Additionally, the annual effective tax rate differs from the statutory U.S. Federal tax rate of 35% primarily because of valuation allowances in some jurisdictions and varying non-U.S. tax rates.

 

In the U.S., the Company has experienced cumulative losses in previous years and has recorded a valuation allowance against its deferred tax assets. The Company’s U.S. operations are in a three-year cumulative income position, but this is not solely determinative of the need for a valuation allowance. The Company considered this factor and all other available positive and negative evidence and concluded that it is still more likely than not that the net deferred tax assets in the U.S. will not be realized, and accordingly continued to record a valuation allowance. The evidence considered included the magnitude of the current three-year cumulative income compared to historical losses, expected impact of tax planning strategies, interest rates, and the overall business environment. The Company continues to evaluate its cumulative income position and income trend as well as its future projections of sustained profitability and whether this profitability trend constitutes sufficient positive evidence to support a reversal of the valuation allowance (in full or in part). The amount of the valuation allowance recorded in the U.S. as of December 31, 2013 was $837 million.

 

12



 

8.  Debt

 

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

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

Secured Credit Agreement:

 

 

 

 

 

 

 

Revolving Credit Facility:

 

 

 

 

 

 

 

Revolving Loans

 

$

150

 

$

 

$

126

 

Term Loans:

 

 

 

 

 

 

 

Term Loan A

 

 

 

 

 

53

 

Term Loan B

 

405

 

405

 

525

 

Term Loan C (81 million CAD at March 31, 2014)

 

74

 

76

 

100

 

Term Loan D (€85 million at March 31, 2014)

 

116

 

117

 

158

 

Senior Notes:

 

 

 

 

 

 

 

3.00%, Exchangeable, due 2015

 

621

 

617

 

647

 

7.375%, due 2016

 

594

 

593

 

591

 

6.75%, due 2020 (€500 million)

 

688

 

690

 

641

 

4.875%, due 2021 (€330 million)

 

454

 

455

 

423

 

Senior Debentures:

 

 

 

 

 

 

 

7.80%, due 2018

 

250

 

250

 

250

 

Other

 

60

 

58

 

92

 

Total long-term debt

 

3,412

 

3,261

 

3,606

 

Less amounts due within one year

 

41

 

16

 

56

 

Long-term debt

 

$

3,371

 

$

3,245

 

$

3,550

 

 

On May 19, 2011, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”).  At March 31, 2014, the Agreement included a $900 million revolving credit facility, a $405 million term loan, a 81 million Canadian dollar term loan, and a €85 million term loan, each of which has a final maturity date of May 19, 2016.  At March 31, 2014, the Company’s subsidiary borrowers had unused credit of $660 million available under the Agreement.

 

The weighted average interest rate on borrowings outstanding under the Agreement at March 31, 2014 was 2.02%.

 

During March 2013, the Company issued senior notes with a face value of €330 million due March 31, 2021. The notes bear interest at 4.875% and are guaranteed by substantially all of the Company’s domestic subsidiaries. The net proceeds, after deducting debt issuance costs, totaled approximately $418 million.

 

During March 2013, the Company discharged, in accordance with the indenture, all €300 million of the 6.875% senior notes due 2017. The Company recorded $11 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees.

 

13



 

The Company has a €215 million European accounts receivable securitization program, which extends through September 2016, subject to periodic renewal of backup credit lines.  Information related to the Company’s accounts receivable securitization program is as follows:

 

 

 

March 31,

 

December 31,

 

March 31,

 

 

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Balance (included in short-term loans)

 

$

253

 

$

276

 

$

241

 

 

 

 

 

 

 

 

 

Weighted average interest rate

 

1.53

%

1.41

%

1.38

%

 

The carrying amounts reported for the accounts receivable securitization program, 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 based on published market quotations, and are classified as Level 1 in the fair value hierarchy.

 

Fair values at March 31, 2014 of the Company’s significant fixed rate debt obligations are as follows:

 

 

 

 

 

Indicated

 

 

 

 

 

Principal

 

Market

 

Fair

 

 

 

Amount

 

Price

 

Value

 

Senior Notes:

 

 

 

 

 

 

 

3.00%, Exchangeable, due 2015

 

$

644

 

103.51

 

$

667

 

7.375%, due 2016

 

600

 

111.00

 

666

 

6.75%, due 2020 (€500 million)

 

688

 

118.33

 

814

 

4.875%, due 2021 (€330 million)

 

454

 

107.39

 

488

 

Senior Debentures:

 

 

 

 

 

 

 

7.80%, due 2018

 

250

 

117.00

 

293

 

 

9.  Contingencies

 

Asbestos

 

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 seeks compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).

 

As of March 31, 2014, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 2,500 plaintiffs and claimants.  Based on an analysis of the lawsuits pending as of December 31, 2013, approximately 80% 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 16% of plaintiffs specifically plead damages above the jurisdictional minimum up to, and including, $15 million or less, and 3% of plaintiffs specifically plead damages greater than $15 million but less than $100 million.  Fewer than 1% of plaintiffs specifically plead damages equal to or greater than $100 million.

 

14



 

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.

 

The Company has also been 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, 2014, has disposed of the asbestos claims of approximately 393,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $8,700.  Certain of these dispositions have included deferred amounts payable over a number of years.  Deferred amounts payable totaled approximately $24 million at March 31, 2014 ($12 million at December 31, 2013) 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 over time.

 

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 $4.3 billion through 2013, 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 against the Company, and the success of efforts by co-defendants to restrict or eliminate their liability in the litigation.

 

15



 

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 asbestos claims not yet asserted against the Company, but which the Company believes will be asserted in the next several years; and (iii) the legal defense costs likely to be incurred in connection with the foregoing types of claims.

 

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

 

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

 

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

 

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

 

d)             the extent to which the Company is able to defend itself successfully at trial or on appeal;

 

e)              the number and timing of additional co-defendant bankruptcies; and

 

f)               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.

 

The Company’s reported results of operations for 2013 were materially affected by the $145 million 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.

 

16



 

Other Matters

 

The Company conducted an internal investigation into conduct in certain of its overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (the “FCPA”), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws.  In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”).

 

On July 18, 2013, the Company received a letter from the DOJ indicating that it presently did not intend to take any enforcement action and is closing its inquiry into the matter.

 

The Company is presently unable to predict the duration, scope or result of an investigation by the SEC, if any, or whether the SEC will commence any legal action.  The SEC has a broad range of civil sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, penalties, and modifications to business practices.  The Company could also be subject to investigation and sanctions outside the United States.  While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.

 

The Company received a non-income tax assessment from a foreign tax authority for approximately $90 million (including penalties and interest). The Company challenged this assessment, but the tax authority’s position was upheld in court. The Company strongly disagrees with this ruling and believes it to be contradictory to other court rulings in the Company’s favor. Although the Company cannot predict the ultimate outcome of this case, it believes that it is probable that the tax authority’s assessment will be overturned by a higher court, and therefore, the Company has not established an accrual. In order to contest the lower court rulings, legal rules require the Company to deposit the amount of the tax assessment, which will be remitted in monthly installments over the next fifteen months. A favorable ruling by the higher court will result in a return to the Company of amounts paid. An unfavorable ruling will result in the forfeiture of the deposit, a charge of approximately $60 million and a non-income tax refund of $30 million.  As of March 31, 2014, the Company has made installment payments totaling $60 million, which is included in Other assets on the balance sheet.

 

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

 

17



 

10.  Share Owners’ Equity

 

The activity in share owners’ equity for the three months ended March 31, 2014 and 2013 is as follows:

 

 

 

Share Owners’ Equity of the Company

 

 

 

 

 

 

 

Common
Stock

 

Capital in
Excess of
Par Value

 

Treasury
Stock

 

Retained
Earnings
(Loss)

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2014

 

$

2

 

$

3,040

 

$

(454

)

$

(11

)

$

(1,121

)

$

147

 

$

1,603

 

Issuance of common stock (155,727 shares)

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Reissuance of common stock (48,041 shares)

 

 

 

 

 

2

 

 

 

 

 

 

 

2

 

Stock compensation

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

Net earnings

 

 

 

 

 

 

 

101

 

 

 

5

 

106

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

59

 

(3

)

56

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

(19

)

(19

)

Balance on March 31, 2014

 

$

2

 

$

3,052

 

$

(452

)

$

90

 

$

(1,062

)

$

130

 

$

1,760

 

 

 

 

Share Owners’ Equity of the Company

 

 

 

 

 

 

 

Common
Stock

 

Capital in
Excess of
Par Value

 

Treasury
Stock

 

Retained
Loss

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2013

 

$

2

 

$

3,005

 

$

(425

)

$

(195

)

$

(1,506

)

$

174

 

$

1,055

 

Issuance of common stock (315,704 shares)

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Reissuance of common stock (40,771 shares)

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Stock compensation

 

 

 

4

 

 

 

 

 

 

 

 

 

4

 

Net earnings

 

 

 

 

 

 

 

69

 

 

 

5

 

74

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

21

 

(4

)

17

 

Balance on March 31, 2013

 

$

2

 

$

3,013

 

$

(424

)

$

(126

)

$

(1,485

)

$

175

 

$

1,155

 

 

The Company has 250,000,000 shares of common stock authorized with a par value of $.01 per share. Shares outstanding are as follows:

 

 

 

Shares Outstanding

 

 

 

March 31,

 

December 31,

 

March 31,

 

(share amounts in thousands)

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Shares of common stock issued (including treasury shares)

 

183,811

 

183,500

 

182,356

 

 

 

 

 

 

 

 

 

Treasury shares, at cost

 

18,738

 

18,786

 

17,861

 

 

18



 

11. Accumulated Other Comprehensive Loss

 

The activity in accumulated other comprehensive loss for the three months ended March 31, 2014 and 2013 is as follows:

 

 

 

Net Effect of
Exchange Rate
Fluctuations

 

Change in
Certain Derivative
Instruments

 

Employee Benefit
Plans

 

Total
Accumulated
Other
Comprehensive
Loss

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2014

 

$

229

 

$

(12

)

$

(1,338

)

$

(1,121

)

 

 

 

 

 

 

 

 

 

 

Change before reclassifications

 

35

 

2

 

 

 

37

 

Amounts reclassified from accumulated other comprehensive income

 

 

 

(1

)(a)

23

(b)

22

 

Translation effect

 

 

 

 

 

1

 

1

 

Tax effect

 

 

 

 

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income attributable to the Company

 

35

 

1

 

23

 

59

 

 

 

 

 

 

 

 

 

 

 

Balance on March 31, 2014

 

$

264

 

$

(11

)

$

(1,315

)

$

(1,062

)

 

 

 

Net Effect of
Exchange Rate
Fluctuations

 

Change in
Certain Derivative
Instruments

 

Employee Benefit
Plans

 

Total
Accumulated
Other
Comprehensive
Loss

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2013

 

$

455

 

$

(14

)

$

(1,947

)

$

(1,506

)

 

 

 

 

 

 

 

 

 

 

Change before reclassifications

 

(28

)

3

 

 

 

(25

)

Amounts reclassified from accumulated other comprehensive income

 

 

 

1

(a)

37

(b)

38

 

Translation effect

 

 

 

 

 

10

 

10

 

Tax effect

 

 

 

 

 

(2

)

(2

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive income attributable to the Company

 

(28

)

4

 

45

 

21

 

 

 

 

 

 

 

 

 

 

 

Balance on March 31, 2013

 

$

427

 

$

(10

)

$

(1,902

)

$

(1,485

)

 


(a)         Amount is included in Cost of goods sold on the Condensed Consolidated Results of Operations (see Note 4 for additional information).

(b)         Amount is included in the computation of net periodic pension cost (see Note 6 for additional information) and net postretirement benefit cost.

 

12. Other Expense

 

During the three months ended March 31, 2013, the Company recorded charges of $10 million for restructuring, asset impairment and related charges primarily related to the Company’s European Asset Optimization program.  See Note 5 for additional information.

 

19



 

13. Earnings Per Share

 

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

 

 

 

Three months ended March 31,

 

 

 

2014

 

2013

 

Numerator:

 

 

 

 

 

Net earnings attributable to the Company

 

$

101

 

$

69

 

 

 

 

 

 

 

Denominator (in thousands):

 

 

 

 

 

Denominator for basic earnings per share - weighted average shares outstanding

 

164,760

 

164,069

 

Effect of dilutive securities:

 

 

 

 

 

Stock options and other

 

1,405

 

1,432

 

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

 

166,165

 

165,501

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.62

 

$

0.48

 

Loss from discontinued operations

 

(0.01

)

(0.06

)

Net earnings

 

$

0.61

 

$

0.42

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

Earnings from continuing operations

 

$

0.62

 

$

0.48

 

Loss from discontinued operations

 

(0.01

)

(0.06

)

Net earnings

 

$

0.61

 

$

0.42

 

 

Options to purchase 370,012 and 1,640,504 weighted average shares of common stock which were outstanding during the three months ended March 31, 2014 and 2013, 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, 2014 and 2013, 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.

 

20



 

14.  Supplemental Cash Flow Information

 

 

 

Three months ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Interest paid in cash

 

$

70

 

$

81

 

 

 

 

 

 

 

Income taxes paid in cash (non-U.S.)

 

$

31

 

$

33

 

 

Cash interest for 2013 includes note repurchase premiums of $9 million related to the discharge of the Company’s 6.875% senior notes due 2017.

 

15.  Discontinued Operations

 

The loss from discontinued operations of $1 million for the three months ended March 31, 2014 is related to ongoing costs for the 2010 Venezuela expropriation. The loss from discontinued operations of $10 million for the three months ended March 31, 2013 included $8 million of special termination benefits related to a previously disposed business and $2 million for ongoing costs related to the Venezuela expropriation.

 

16.  Financial Information for Subsidiary Guarantors and Non-Guarantors

 

The following presents condensed consolidating financial information for the Company, segregating:  (1) Owens-Illinois, Inc., the issuer of senior debentures (the “Parent”); (2) the two subsidiaries which have guaranteed the senior debentures on a subordinated basis (the “Guarantor Subsidiaries”); and (3) all other subsidiaries (the “Non-Guarantor Subsidiaries”).  The Guarantor Subsidiaries are 100% owned direct and indirect subsidiaries of the Company and their guarantees are full, unconditional and joint and several.  They have no operations and function only as intermediate holding companies.

 

Certain reclassifications have been made to conform all of the financial information to the financial presentation on a consolidated basis.  The principal eliminations relate to investments in subsidiaries and intercompany balances and transactions.

 

21



 

 

 

March 31, 2014

 

 

 

 

 

 

 

Non-

 

 

 

 

 

 

 

 

 

Guarantor

 

Guarantor

 

 

 

 

 

 

 

Parent

 

Subsidiaries

 

Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

 

$

201

 

$

 

$

201

 

Receivables

 

 

 

 

 

1,078

 

 

 

1,078

 

Inventories

 

 

 

 

 

1,204

 

 

 

1,204

 

Prepaid expenses

 

 

 

 

 

94

 

 

 

94

 

 

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

 

 

2,577

 

 

2,577

 

Investments in and advances to subsidiaries

 

2,313

 

2,063

 

 

 

(4,376

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

 

 

 

2,634

 

 

 

2,634

 

Goodwill

 

 

 

 

 

2,059

 

 

 

2,059

 

Other assets

 

 

 

 

 

1,218

 

 

 

1,218