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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

June 30, 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

 

 

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 June 30, 2014 was 164,843,793.

 

 

 



 

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.

 

1



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

 (Dollars in millions, except per share amounts)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales

 

$

1,797

 

$

1,781

 

$

3,436

 

$

3,422

 

Cost of goods sold

 

(1,439

)

(1,412

)

(2,757

)

(2,734

)

Gross profit

 

358

 

369

 

679

 

688

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

(131

)

(129

)

(264

)

(258

)

Research, development and engineering expense

 

(17

)

(15

)

(32

)

(30

)

Interest expense, net

 

(54

)

(56

)

(108

)

(124

)

Equity earnings

 

19

 

16

 

35

 

33

 

Other income (expense), net

 

4

 

(8

)

3

 

(15

)

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

179

 

177

 

313

 

294

 

Provision for income taxes

 

(39

)

(37

)

(66

)

(70

)

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

140

 

140

 

247

 

224

 

Loss from discontinued operations

 

(20

)

(3

)

(21

)

(13

)

 

 

 

 

 

 

 

 

 

 

Net earnings

 

120

 

137

 

226

 

211

 

Net earnings attributable to noncontrolling interests

 

(6

)

(5

)

(11

)

(10

)

Net earnings attributable to the Company

 

$

114

 

$

132

 

$

215

 

$

201

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to the Company:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

134

 

$

135

 

$

236

 

$

214

 

Loss from discontinued operations

 

(20

)

(3

)

(21

)

(13

)

Net earnings

 

$

114

 

$

132

 

$

215

 

$

201

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.81

 

$

0.82

 

$

1.43

 

$

1.30

 

Loss from discontinued operations

 

(0.12

)

(0.02

)

(0.13

)

(0.08

)

Net earnings

 

$

0.69

 

$

0.80

 

$

1.30

 

$

1.22

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (thousands)

 

164,906

 

164,369

 

164,833

 

164,220

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.80

 

$

0.81

 

$

1.42

 

$

1.29

 

Loss from discontinued operations

 

(0.12

)

(0.02

)

(0.13

)

(0.08

)

Net earnings

 

$

0.68

 

$

0.79

 

$

1.29

 

$

1.21

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding (thousands)

 

166,258

 

165,731

 

166,212

 

165,617

 

 

See accompanying notes.

 

2



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

(Dollars in millions)

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net earnings

 

$

120

 

$

137

 

$

226

 

$

211

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

49

 

(162

)

81

 

(194

)

Pension and other postretirement benefit adjustments, net of tax

 

14

 

90

 

37

 

135

 

Change in fair value of derivative instruments

 

(1

)

(4

)

 

 

 

 

Other comprehensive income (loss):

 

62

 

(76

)

118

 

(59

)

Total comprehensive income

 

182

 

61

 

344

 

152

 

Comprehensive income attributable to noncontrolling interests

 

(8

)

(3

)

(10

)

(4

)

Comprehensive income attributable to the Company

 

$

174

 

$

58

 

$

334

 

$

148

 

 

See accompanying notes.

 

3



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2014

 

2013

 

2013

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

194

 

$

383

 

$

249

 

Receivables

 

1,147

 

943

 

1,159

 

Inventories

 

1,204

 

1,117

 

1,175

 

Prepaid expenses

 

103

 

107

 

110

 

 

 

 

 

 

 

 

 

Total current assets

 

2,648

 

2,550

 

2,693

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,661

 

2,632

 

2,600

 

Goodwill

 

2,065

 

2,059

 

2,031

 

Other assets

 

1,217

 

1,178

 

1,086

 

 

 

 

 

 

 

 

 

Total assets

 

$

8,591

 

$

8,419

 

$

8,410

 

 

 

 

 

 

 

 

 

Liabilities and Share Owners’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

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

 

$

1,027

 

$

322

 

$

437

 

Current portion of asbestos-related liabilities

 

150

 

150

 

155

 

Accounts payable

 

1,123

 

1,144

 

982

 

Other liabilities

 

538

 

638

 

545

 

 

 

 

 

 

 

 

 

Total current liabilities

 

2,838

 

2,254

 

2,119

 

 

 

 

 

 

 

 

 

Long-term debt

 

2,620

 

3,245

 

3,336

 

Asbestos-related liabilities

 

256

 

298

 

257

 

Other long-term liabilities

 

955

 

1,019

 

1,504

 

Share owners’ equity

 

1,922

 

1,603

 

1,194

 

 

 

 

 

 

 

 

 

Total liabilities and share owners’ equity

 

$

8,591

 

$

8,419

 

$

8,410

 

 

See accompanying notes.

 

4



 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

 

 

Six months ended June 30,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

226

 

$

211

 

Loss from discontinued operations

 

21

 

13

 

Non-cash charges

 

 

 

 

 

Depreciation and amortization

 

229

 

215

 

Pension expense

 

29

 

52

 

Restructuring, asset impairment and related charges

 

 

 

10

 

Cash payments

 

 

 

 

 

Pension contributions

 

(20

)

(17

)

Asbestos-related payments

 

(42

)

(49

)

Cash paid for restructuring activities

 

(38

)

(47

)

Change in components of working capital

 

(354

)

(351

)

Other, net (a)

 

(82

)

(15

)

Cash provided by (utilized in) continuing operating activities

 

(31

)

22

 

Cash utilized in discontinued operating activities

 

(2

)

(5

)

Total cash provided by (utilized in) operating activities

 

(33

)

17

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(196

)

(164

)

Other, net

 

18

 

2

 

Cash utilized in investing activities

 

(178

)

(162

)

Cash flows from financing activities:

 

 

 

 

 

Changes in borrowings, net

 

71

 

9

 

Issuance of common stock

 

5

 

6

 

Treasury shares purchased

 

(12

)

(10

)

Distributions to noncontrolling interests

 

(35

)

(21

)

Other, net

 

(3

)

(13

)

Cash provided by (utilized in) financing activities

 

26

 

(29

)

Effect of exchange rate fluctuations on cash

 

(4

)

(8

)

Decrease in cash

 

(189

)

(182

)

Cash at beginning of period

 

383

 

431

 

Cash at end of period

 

$

194

 

$

249

 

 


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

 

See accompanying notes.

 

5



 

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 and six months ended June 30, 2014 and 2013 regarding the Company’s reportable segments is as follows:

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales:

 

 

 

 

 

 

 

 

 

Europe

 

$

790

 

$

746

 

$

1,496

 

$

1,396

 

North America

 

541

 

527

 

1,026

 

996

 

South America

 

274

 

269

 

513

 

538

 

Asia Pacific

 

184

 

231

 

387

 

478

 

 

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

1,789

 

1,773

 

3,422

 

3,408

 

Other

 

8

 

8

 

14

 

14

 

Net sales

 

$

1,797

 

$

1,781

 

$

3,436

 

$

3,422

 

 

6



 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

Europe

 

$

109

 

$

111

 

$

196

 

$

170

 

North America

 

83

 

93

 

148

 

167

 

South America

 

53

 

37

 

94

 

90

 

Asia Pacific

 

17

 

26

 

42

 

66

 

Reportable segment totals

 

262

 

267

 

480

 

493

 

 

 

 

 

 

 

 

 

 

 

Items excluded from segment operating profit:

 

 

 

 

 

 

 

 

 

Retained corporate costs and other

 

(29

)

(34

)

(59

)

(65

)

Restructuring, asset impairment and related charges

 

 

 

 

 

 

 

(10

)

Interest expense, net

 

(54

)

(56

)

(108

)

(124

)

Earnings from continuing operations before income taxes

 

$

179

 

$

177

 

$

313

 

$

294

 

 

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

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2014

 

2013

 

2013

 

Total assets:

 

 

 

 

 

 

 

Europe

 

$

3,667

 

$

3,509

 

$

3,452

 

North America

 

2,087

 

1,995

 

2,029

 

South America

 

1,436

 

1,467

 

1,495

 

Asia Pacific

 

1,127

 

1,150

 

1,178

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

8,317

 

8,121

 

8,154

 

Other

 

274

 

298

 

256

 

Consolidated totals

 

$

8,591

 

$

8,419

 

$

8,410

 

 

2.  Receivables

 

Receivables consist of the following:

 

 

 

June 30,
2014

 

December 31,
2013

 

June 30,
2013

 

Trade accounts receivable

 

$

976

 

$

757

 

$

1,008

 

Less: allowances for doubtful accounts and discounts

 

40

 

39

 

42

 

Net trade receivables

 

936

 

718

 

966

 

Other receivables

 

211

 

225

 

193

 

 

 

$

1,147

 

$

943

 

$

1,159

 

 

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 $190 million, $192 million, and $90 million at June 30, 2014, December 31, 2013, and June 30, 2013, respectively. The Company has no continuing involvement with the sold receivables.

 

3.  Inventories

 

Major classes of inventory are as follows:

 

7



 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Finished goods

 

$

1,032

 

$

958

 

$

1,006

 

Raw materials

 

127

 

113

 

125

 

Operating supplies

 

45

 

46

 

44

 

 

 

 

 

 

 

 

 

 

 

$

1,204

 

$

1,117

 

$

1,175

 

 

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 June 30, 2014 and 2013, the Company had entered into commodity futures contracts covering approximately 2,900,000 MM BTUs and 7,400,000 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 $1 million at June 30, 2014 and an unrecognized loss of $1 million at June 30, 2013 related to the commodity futures contracts was included in Accumulated OCI, and will be reclassified into earnings over the next twelve 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 and six months ended June 30, 2014 and 2013 was not material.

 

The effect of the commodity futures contracts on the results of operations for the three months ended June 30, 2014 and 2013 is as follows:

 

8



 

 

 

Amount of Gain

 

Amount of Gain (Loss)

 

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

 

 

 

 

 

 

 

 

 

$

 

$

(3

)

$

1

 

$

1

 

 

The effect of the commodity futures contracts on the results of operations for the six months ended June 30, 2014 and 2013 is as follows:

 

 

 

Amount of Gain

 

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

 

$

 

$

2

 

$

 

 

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 June 30, 2014 and 2013, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $510 million and $740 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 June 30, 2014 and 2013 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

 

2014

 

2013

 

 

 

 

 

 

 

Other expense, net

 

$

 

$

(9

)

 

The effect of the forward exchange contracts on the results of operations for the six months ended June 30, 2014 and 2013 is as follows:

 

9



 

 

 

Amount of Gain (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

)

$

(12

)

 

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:

 

 

 

Balance

 

Fair Value

 

 

 

Sheet
Location

 

June 30,
2014

 

December 31,
2013

 

June 30,
2013

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

a

 

$

1

 

$

1

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Forward exchange contracts

 

a

 

3

 

3

 

2

 

Total asset derivatives

 

 

 

$

4

 

$

4

 

$

2

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

c

 

$

 

$

 

$

1

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Forward exchange contracts

 

c

 

2

 

7

 

9

 

Total liability derivatives

 

 

 

$

2

 

$

7

 

$

10

 

 

10



 

5.  Restructuring Accruals

 

Selected information related to the restructuring accruals for the three months ended June 30, 2014 and 2013 is as follows:

 

 

 

European
Asset
Optimization

 

Asia Pacific
Restructuring

 

Other
Restructuring
Actions

 

Total
Restructuring

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2014

 

$

27

 

$

12

 

$

46

 

$

85

 

Net cash paid, principally severance and related benefits

 

(3

)

(9

)

(5

)

(17

)

Other, including foreign exchange translation

 

(4

)

 

 

1

 

(3

)

Balance at June 30, 2014

 

$

20

 

$

3

 

$

42

 

$

65

 

 

 

 

European
Asset
Optimization

 

Asia Pacific
Restructuring

 

Other
Restructuring
Actions

 

Total
Restructuring

 

 

 

 

 

 

 

 

 

 

 

Balance at April 1, 2013

 

$

37

 

$

4

 

$

54

 

$

95

 

Net cash paid, principally severance and related benefits

 

(7

)

(1

)

(5

)

(13

)

Other, including foreign exchange translation

 

1

 

 

 

 

 

1

 

Balance at June 30, 2013

 

$

31

 

$

3

 

$

49

 

$

83

 

 

Selected information related to the restructuring accruals for the six months ended June 30, 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

 

(5

)

(13

)

(20

)

(38

)

Other, including foreign exchange translation

 

(5

)

(4

)

(2

)

(11

)

Balance at June 30, 2014

 

$

20

 

$

3

 

$

42

 

$

65

 

 

 

 

European
Asset
Optimization

 

Asia Pacific
Restructuring

 

Other
Restructuring
Actions

 

Total
Restructuring

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2013

 

$

53

 

$

6

 

$

64

 

$

123

 

Charges

 

7

 

2

 

1

 

10

 

Write-down of assets to net realizable value

 

(2

)

 

 

 

 

(2

)

Net cash paid, principally severance and related benefits

 

(27

)

(5

)

(15

)

(47

)

Other, including foreign exchange translation

 

 

 

 

 

(1

)

(1

)

Balance at June 30, 2013

 

$

31

 

$

3

 

$

49

 

$

83

 

 

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



 

European Asset Optimization

 

During the six months ended June 30, 2013, the Company recorded charges of $7 million related to the European Asset Optimization program. These charges represented additional employee costs that the Company was required to record for the furnace closures announced during the fourth quarter of 2012.

 

6.  Pensions Benefit Plans and Other Postretirement Benefits

 

The components of the net periodic pension cost for the three months ended June 30, 2014 and 2013 are as follows:

 

 

 

U.S.

 

Non-U.S.

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

5

 

$

7

 

$

7

 

$

8

 

Interest cost

 

26

 

27

 

19

 

17

 

Expected asset return

 

(44

)

(46

)

(24

)

(22

)

 

 

 

 

 

 

 

 

 

 

Amortization:

 

 

 

 

 

 

 

 

 

Prior Service cost

 

 

 

 

 

(1

)

 

 

Actuarial loss

 

19

 

27

 

7

 

8

 

 

 

 

 

 

 

 

 

 

 

Net periodic pension cost

 

$

6

 

$

15

 

$

8

 

$

11

 

 

The components of the net periodic pension cost for the six months ended June 30, 2014 and 2013 are as follows:

 

 

 

U.S.

 

Non-U.S.

 

 

 

2014

 

2013

 

2014

 

2013

 

Service cost

 

$

12

 

$

14

 

$

14

 

$

16

 

Interest cost

 

53

 

54

 

37

 

34

 

Expected asset return

 

(87

)

(92

)

(46

)

(45

)

 

 

 

 

 

 

 

 

 

 

Amortization:

 

 

 

 

 

 

 

 

 

Prior Service cost

 

 

 

 

 

(1

)

 

 

Actuarial loss

 

36

 

55

 

11

 

16

 

 

 

 

 

 

 

 

 

 

 

Net periodic pension cost

 

$

14

 

$

31

 

$

15

 

$

21

 

 

The U.S. pension expense for the six months ended June 30, 2013 excludes $8 million of special termination benefits that were recorded in discontinued operations in 2013.

 

During the second quarter of 2013, the Company recorded a curtailment gain of $5 million related to modifications made to one of its U.S. postretirement benefit plans that reduced or eliminated certain health care and life insurance benefits. These modifications also resulted in a $55 million reduction in the postretirement benefit obligation that was recognized in accumulated other comprehensive income.

 

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

 

12



 

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.

 

8.  Debt

 

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

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2014

 

2013

 

2013

 

Secured Credit Agreement:

 

 

 

 

 

 

 

Revolving Credit Facility:

 

 

 

 

 

 

 

Revolving Loans

 

$

65

 

$

 

$

 

Term Loans:

 

 

 

 

 

 

 

Term Loan A

 

 

 

 

 

23

 

Term Loan B

 

405

 

405

 

525

 

Term Loan C (81 million CAD at June 30, 2014)

 

76

 

76

 

97

 

Term Loan D (€85 million at June 30, 2014)

 

116

 

117

 

161

 

Senior Notes:

 

 

 

 

 

 

 

3.00%, Exchangeable, due 2015

 

611

 

617

 

607

 

7.375%, due 2016

 

595

 

593

 

592

 

6.75%, due 2020 (€500 million)

 

682

 

690

 

653

 

4.875%, due 2021 (€330 million)

 

450

 

455

 

431

 

Senior Debentures:

 

 

 

 

 

 

 

7.80%, due 2018

 

250

 

250

 

250

 

Other

 

66

 

58

 

84

 

Total long-term debt

 

3,316

 

3,261

 

3,423

 

Less amounts due within one year

 

696

 

16

 

87

 

Long-term debt

 

$

2,620

 

$

3,245

 

$

3,336

 

 

On May 19, 2011, the Company’s subsidiary borrowers entered into the Secured Credit Agreement

 

13



 

(the “Agreement”).  At June 30, 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 June 30, 2014, the Company’s subsidiary borrowers had unused credit of $727 million available under the Agreement.

 

The weighted average interest rate on borrowings outstanding under the Agreement at June 30, 2014 was 2.03%.

 

The Company repurchased $15 million and $46 million of the 2015 Exchangeable Notes during the six months ended June 30, 2014 and June 30, 2013, respectively. The amount by which the cash paid exceeded the fair value of the notes repurchased was recorded as a reduction to share owners’ equity. The Company recorded $3 million of additional interest charges for the loss on debt extinguishment and the related write-off of unamortized finance fees for the six months ended June 30, 2013.  As of June 30, 2014, the remaining $611 million balance of the Exchangeable Notes are classified as current liabilities on the balance sheet since they mature on June 1, 2015.  The Company intends to refinance these notes prior to their due date.

 

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.

 

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:

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

2014

 

2013

 

2013

 

 

 

 

 

 

 

 

 

Balance (included in short-term loans)

 

$

294

 

$

276

 

$

290

 

 

 

 

 

 

 

 

 

Weighted average interest rate

 

1.44

%

1.41

%

1.20

%

 

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 June 30, 2014 of the Company’s significant fixed rate debt obligations are as follows:

 

14



 

 

 

 

 

Indicated

 

 

 

 

 

Principal

 

Market

 

Fair

 

 

 

Amount

 

Price

 

Value

 

Senior Notes:

 

 

 

 

 

 

 

3.00%, Exchangeable, due 2015

 

$

611

 

102.52

 

$

626

 

7.375%, due 2016

 

595

 

110.63

 

658

 

6.75%, due 2020 (€500 million)

 

682

 

117.99

 

805

 

4.875%, due 2021 (€330 million)

 

450

 

107.68

 

485

 

Senior Debentures:

 

 

 

 

 

 

 

7.80%, due 2018

 

250

 

116.81

 

292

 

 

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 June 30, 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.

 

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.

 

15



 

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 June 30, 2014, has disposed of the asbestos claims of approximately 394,000 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 June 30, 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.

 

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;

 

16



 

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.

 

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.

 

17



 

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 twelve 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 June 30, 2014, the Company has made installment payments totaling $70 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.

 

10.  Share Owners’ Equity

 

The activity in share owners’ equity for the three months ended June 30, 2014 and 2013 is as follows:

 

18



 

 

 

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 April 1, 2014

 

$

2

 

$

3,052

 

$

(452

)

$

90

 

$

(1,062

)

$

130

 

$

1,760

 

Issuance of common stock (57,815 shares)

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Reissuance of common stock (49,026 shares)

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Treasury shares purchased (364,436 shares)

 

 

 

 

 

(12

)

 

 

 

 

 

 

(12

)

Stock compensation

 

 

 

6

 

 

 

 

 

 

 

 

 

6

 

Net earnings

 

 

 

 

 

 

 

114

 

 

 

6

 

120

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

60

 

2

 

62

 

Distributions to noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

(16

)

(16

)

Balance on June 30, 2014

 

$

2

 

$

3,059

 

$

(463

)

$

204

 

$

(1,002

)

$

122

 

$

1,922

 

 

 

 

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 April 1, 2013

 

$

2

 

$

3,013

 

$

(424

)

$

(126

)

$

(1,485

)

$

175

 

$

1,155

 

Issuance of common stock (114,861 shares)

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Reissuance of common stock (57,153 shares)

 

 

 

 

 

1

 

 

 

 

 

 

 

1

 

Treasury shares purchased (348,289 shares)

 

 

 

 

 

(10

)

 

 

 

 

 

 

(10

)

Repurchase of exchangeable notes

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Stock compensation

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Net earnings

 

 

 

 

 

 

 

132

 

 

 

5

 

137

 

Other comprehensive income (loss)

 

 

 

 

 

 

 

 

 

(74

)

(2

)

(76

)

Distributions to noncontrolling interests