the lawsuits pending as of December 31, 2012, approximately 66% 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 30% of plaintiffs specifically plead damages of $15 million or less, and 4% 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 Companys 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 claims merits or disposition value. Rather, the amount potentially recoverable is determined by such factors as the severity of the plaintiffs 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 plaintiffs 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 Companys 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 June 30, 2013, has disposed of the asbestos claims of approximately 392,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $8,400. Certain of these dispositions have included deferred amounts payable over time. Deferred amounts payable totaled approximately $11 million at June 30, 2013 ($24 million at December 31, 2012) and are included in the foregoing average indemnity payment per claim. The Companys 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 Companys 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 Companys 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 Companys per-claim average indemnity payment.
The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot reasonably be estimated. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $4.3 billion through 2012, before insurance recoveries, for its asbestos-related liability. The Companys 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
17
The Companys reported results of operations for 2012 were materially affected by the $155 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 Companys 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 Companys 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 FCPAs books and records and internal controls provisions, the Companys 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). The Company intends to cooperate with any investigation by U.S. authorities.
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 any investigation by the SEC 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 Companys 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 authoritys position was upheld in court. The Company strongly disagrees with this ruling and believes it to be contradictory to other court rulings in the Companys favor. Although the Company cannot predict the ultimate outcome of this case, it believes that it is probable that the tax authoritys 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 twenty-four 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, 2013, the Company has made installment payments totaling $24 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.
19
13. Supplemental Cash Flow Information
|
|
Six months ended June 30,
|
|
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Interest paid in cash
|
|
$
|
113
|
|
$
|
123
|
|
|
|
|
|
|
|
Income taxes paid in cash:
|
|
|
|
|
|
U.S.
|
|
$
|
1
|
|
$
|
1
|
|
Non-U.S.
|
|
79
|
|
71
|
|
Total income taxes paid in cash
|
|
$
|
80
|
|
$
|
72
|
|
Cash interest for 2013 includes note repurchase premiums of $10 million related to the discharge of the Companys 6.875% senior notes due 2017 and the repurchase of a portion of the Companys 3.00% exchangeable senior notes due 2015.
14. Discontinued Operations
On October 26, 2010, the Venezuelan government, through Presidential Decree No. 7.751, expropriated the assets of Owens-Illinois de Venezuela and Fabrica de Vidrios Los Andes, C.A., two of the Companys subsidiaries in that country, which in effect constituted a taking of the going concerns of those companies. Shortly after the issuance of the decree, the Venezuelan government installed temporary administrative boards to control the expropriated assets.
Since the issuance of the decree, the Company has cooperated with the Venezuelan government, as it is compelled to do under Venezuelan law, to provide for an orderly transition while ensuring the safety and well-being of the employees and the integrity of the production facilities. The Company has been engaged in negotiations with the Venezuelan government in relation to certain aspects of the expropriation, including the compensation payable by the government as a result of its expropriation. On September 26, 2011, the Company, having been unable to reach an agreement with the Venezuelan government regarding fair compensation, commenced an arbitration against Venezuela through the World Banks International Centre for Settlement of Investment Disputes. The Company is unable at this stage to predict the amount, or timing of receipt, of compensation it will ultimately receive.
The loss from discontinued operations of $13 million for the six months ended June 30, 2013 includes $8 million of special termination benefits related to a previously disposed business and $5 million for ongoing costs related to the Venezuela expropriation.
15. New Accounting Pronouncement
In July 2013, the Financial Accounting Standards Board issued guidance related to the presentation of unrecognized tax benefits when net operating loss carryforwards or tax credit carryforwards exist. This new guidance is effective for fiscal years, and interim periods, beginning after December 15, 2013. Adoption of this guidance will impact how the Company presents certain of its unrecognized tax benefits on its balance sheet, with no impact to its results of operations or cash flows.
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
25
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The Companys measure of profit for its reportable segments is segment operating profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs. The segment data presented below is prepared in accordance with general accounting principles for segment reporting. The line titled reportable segment totals, however, is a non-GAAP measure when presented outside of the financial statement footnotes. Management has included reportable segment totals below to facilitate the discussion and analysis of financial condition and results of operations. The Companys management uses segment operating profit, in combination with net sales and selected cash flow information, to evaluate performance and to allocate resources.
Financial information for the three and six months ended June 30, 2013 and 2012 regarding the Companys reportable segments is as follows (dollars in millions):
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
746
|
|
$
|
731
|
|
$
|
1,396
|
|
$
|
1,436
|
|
North America
|
|
527
|
|
516
|
|
996
|
|
998
|
|
South America
|
|
269
|
|
282
|
|
538
|
|
559
|
|
Asia Pacific
|
|
231
|
|
230
|
|
478
|
|
487
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segment totals
|
|
1,773
|
|
1,759
|
|
3,408
|
|
3,480
|
|
Other
|
|
8
|
|
7
|
|
14
|
|
25
|
|
Net Sales
|
|
$
|
1,781
|
|
$
|
1,766
|
|
$
|
3,422
|
|
$
|
3,505
|
|
34
|
|
Three months ended
June 30,
|
|
Six months ended
June 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Segment operating profit:
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
111
|
|
$
|
107
|
|
$
|
170
|
|
$
|
215
|
|
North America
|
|
93
|
|
96
|
|
167
|
|
174
|
|
South America
|
|
37
|
|
47
|
|
90
|
|
85
|
|
Asia Pacific
|
|
26
|
|
16
|
|
66
|
|
52
|
|
Reportable segment totals
|
|
267
|
|
266
|
|
493
|
|
526
|
|
|
|
|
|
|
|
|
|
|
|
Items excluded from segment operating profit:
|
|
|
|
|
|
|
|
|
|
Retained corporate costs and other
|
|
(34
|
)
|
(27
|
)
|
(65
|
)
|
(56
|
)
|
Restructuring, asset impairment and related charges
|
|
|
|
|
|
(10
|
)
|
|
|
Interest income
|
|
1
|
|
2
|
|
4
|
|
5
|
|
Interest expense
|
|
(57
|
)
|
(62
|
)
|
(128
|
)
|
(126
|
)
|
Earnings from continuing operations before income taxes
|
|
177
|
|
179
|
|
294
|
|
349
|
|
Provision for income taxes
|
|
(37
|
)
|
(41
|
)
|
(70
|
)
|
(85
|
)
|
Earnings from continuing operations
|
|
140
|
|
138
|
|
224
|
|
264
|
|
Loss from discontinued operations
|
|
(3
|
)
|
(1
|
)
|
(13
|
)
|
(2
|
)
|
Net earnings
|
|
137
|
|
137
|
|
211
|
|
262
|
|
Net earnings attributable to noncontrolling interests
|
|
(5
|
)
|
(4
|
)
|
(10
|
)
|
(8
|
)
|
Net earnings attributable to the Company
|
|
$
|
132
|
|
$
|
133
|
|
$
|
201
|
|
$
|
254
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to the Company:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
135
|
|
$
|
134
|
|
$
|
214
|
|
$
|
256
|
|
Loss from discontinued operations
|
|
(3
|
)
|
(1
|
)
|
(13
|
)
|
(2
|
)
|
Net earnings
|
|
$
|
132
|
|
$
|
133
|
|
$
|
201
|
|
$
|
254
|
|
Note: All amounts excluded from reportable segment totals are discussed in the following applicable sections.
Executive Overview Quarters ended June 30, 2013 and 2012
Second Quarter 2013 Highlights
·
Net sales higher due to improved pricing, partially offset by 1% decline in glass container shipments.
·
Segment operating profit consistent with prior year as benefits realized from permanent footprint adjustments and other global cost control initiatives were offset by lower production volumes.
Net sales were $15 million higher than the prior year due to higher selling prices, partially offset by a 1% decline in glass container shipments, driven by lower sales volumes in Europe, North America and South America.
Segment operating profit for reportable segments was $1 million higher than the prior year. Benefits realized from permanent footprint adjustments made in Europe and Asia Pacific and other global cost control initiatives were largely offset by lower production volumes in North America and South America due to a higher number of furnace rebuilds.
35
Interest expense for the second quarter of 2013 decreased $5 million compared to the second quarter of 2012. The decrease was due to debt reduction initiatives and lower interest rates.
Net earnings from continuing operations attributable to the Company for the second quarter of 2013 was $135 million, or $0.81 per share (diluted), compared with $134 million, or $0.81 per share (diluted), for the second quarter of 2012. There were no items that management considered not representative of ongoing operations in the second quarter of 2013 or 2012.
Results of Operations Second Quarter of 2013 compared with Second Quarter of 2012
Net Sales
The Companys net sales in the second quarter of 2013 were $1,781 million compared with $1,766 million for the second quarter of 2012, an increase of $15 million, or 1%. The increase in net sales was due to higher selling prices to recover cost inflation. Glass container shipments, in tonnes, were down 1% in the second quarter of 2013 compared to the second quarter of 2012, driven by lower sales volumes in Europe, North America and South America.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2012
|
|
|
|
$
|
1,759
|
|
Price
|
|
$
|
36
|
|
|
|
Sales volume
|
|
(20
|
)
|
|
|
Effects of changing foreign currency rates
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
Total effect on net sales
|
|
|
|
14
|
|
Net sales - 2013
|
|
|
|
$
|
1,773
|
|
|
|
|
|
|
|
|
|
Europe:
Net sales in Europe in the second quarter of 2013 were $746 million compared with $731 million for the second quarter of 2012, an increase of $15 million, or 2%. The favorable effect of foreign currency exchange rate changes increased net sales by $16 million in the current year as the Euro strengthened in relation to the U.S. dollar. Higher selling prices benefited net sales in the second quarter of 2013 by $7 million as the Company raised prices to recover cost inflation. The benefit of higher selling prices on the current quarter was offset by lower sales volume. Glass container shipments in the second quarter of 2013 were down 1% compared to the second quarter of 2012, particularly in the beer category. The lower sales volume, which reduced net sales by $8 million, was mainly due to the macroeconomic environment in Europe and unfavorable weather conditions, partially offset by an increase in wine bottle sales due to the Companys efforts to recover wine share lost in 2012.
North America:
Net sales in North America in the second quarter of 2013 were $527 million compared with $516 million for the second quarter of 2012, an increase of $11 million, or 2%. The increase in net sales was due to higher selling prices of $17 million in the second quarter of 2013 as the Company increased prices to recover cost inflation. The benefit of higher selling prices was partially offset by lower sales volume. Glass container shipments were down 1% in the quarter compared to the prior year, driven by lower beer bottle sales from the unfavorable weather conditions in the region compared to the second quarter of 2012.
South America:
Net sales in South America in the second quarter of 2013 were $269 million compared with $282 million for the second quarter of 2012, a decrease of $13 million, or 5%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $14 million in
36
the second quarter of 2013 compared to 2012, principally due to a 6% decline in the Brazilian real in relation to the U.S. dollar. Glass container shipments were down 3% in the second quarter of 2013, primarily due to lower beer bottle shipments driven by low consumer confidence and unfavorable weather conditions. Improved pricing in the current quarter offset the lower sales volume and benefited net sales by $10 million as the Company increased selling prices to recover cost inflation.
Asia Pacific:
Net sales in Asia Pacific in the second quarter of 2013 were $231 million compared with $230 million for the second quarter of 2012, an increase of $1 million. Glass container shipments were flat compared to the prior year. The unfavorable effects of foreign currency exchange rate changes during the second quarter of 2013, primarily due to the weakening of the Australian dollar in relation to the U.S. dollar, were offset by improved pricing.
Segment Operating Profit
Operating profit of the reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments operations are included in Retained corporate costs and other. For further information, see Segment Information included in Note 1 to the Condensed Consolidated Financial Statements.
Segment operating profit of reportable segments in the second quarter of 2013 was $267 million compared to $266 million for the second quarter of 2012, an increase of $1 million. The increase in segment operating profit was primarily due to the benefits realized from the permanent footprint adjustments made in Europe and Asia Pacific over the past year, as well as other global cost control initiatives. These benefits were offset by an increase in the number of furnace rebuilds in North America and South America, which resulted in lower fixed cost absorption in the second quarter of 2013. Cost inflation in the second quarter of 2013 was more than offset by higher selling prices.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
Segment operating profit - 2012
|
|
|
|
$
|
266
|
|
Price
|
|
$
|
36
|
|
|
|
Cost inflation
|
|
(34
|
)
|
|
|
Price / inflation spread
|
|
2
|
|
|
|
|
|
|
|
|
|
Sales volume
|
|
(1
|
)
|
|
|
Manufacturing and delivery
|
|
(4
|
)
|
|
|
Operating expenses and other
|
|
4
|
|
|
|
|
|
|
|
|
|
Total net effect on segment operating profit
|
|
|
|
1
|
|
Segment operating profit - 2013
|
|
|
|
$
|
267
|
|
|
|
|
|
|
|
|
|
Europe:
Segment operating profit in Europe in the second quarter of 2013 was $111 million compared with $107 million in the second quarter of 2012, an increase of $4 million, or 4%. The improvement in segment operating profit was due in part to a $4 million decline in manufacturing and delivery costs as the region began to realize the benefits of permanent footprint adjustments made over the last year. Cost inflation for the quarter was completely offset by higher selling prices. Lower operating expenses, driven by cost control initiatives, had a $6 million positive
37
impact on segment operating profit during the second quarter of 2013, but was offset by lower sales volume and an increase in other costs.
North America:
Segment operating profit in North America in the second quarter of 2013 was $93 million compared with $96 million in the second quarter of 2012, a decrease of $3 million, or 3%. The decrease in segment operating profit was primarily due to higher manufacturing and delivery costs of $9 million in the current quarter as a higher number of furnace rebuilds resulted in lower fixed cost absorption. Higher selling prices exceeded cost inflation in the quarter, increasing segment operating profit $5 million compared to the prior year. The decline in sales volume discussed above was offset by the benefits of cost control initiatives.
South America:
Segment operating profit in South America in the second quarter of 2013 was $37 million compared with $47 million in the second quarter of 2012, a decrease of $10 million, or 21%. The decrease in segment operating profit was primarily due to higher manufacturing and delivery costs of $5 million in the current quarter as a higher number of furnace rebuilds resulted in lower fixed cost absorption, partially offset by the benefits of the new furnace in Brazil that started production at the end of 2012. The unfavorable effects of foreign currency exchange rate changes decreased segment operating profit by $2 million in the current quarter. Cost inflation for the quarter was offset by higher selling prices. The region was negatively impacted by macroeconomic conditions in Argentina, where government price controls limited the Companys ability to effectively offset the high cost inflation experienced in this country.
Asia Pacific:
Segment operating profit in Asia Pacific in the second quarter of 2013 was $26 million compared with $16 million in the second quarter of 2012, an increase of $10 million, or 63%. The increase in segment operating profit was primarily due to a $6 million decline in manufacturing and delivery costs driven by the benefits realized from the permanent footprint adjustments made over the past year. Segment operating profit also increased due to higher sales volume and other cost control initiatives in the second quarter of 2013. The benefit of higher selling prices in the quarter was more than offset by cost inflation.
Interest Expense
Interest expense for the second quarter of 2013 was $57 million compared with $62 million for the second quarter of 2012. Interest expense for 2013 included $3 million for the loss on debt extinguishment and the write-off of finance fees related to the repurchase of a portion of the 2015 Exchangeable Notes. Exclusive of these items, interest expense decreased $8 million in the current year. The decrease was principally due to debt reduction initiatives and lower interest rates.
Earnings from Continuing Operations Attributable to the Company
For the second quarter of 2013, the Company recorded earnings from continuing operations attributable to the Company of $135 million, or $0.81 per share (diluted), compared to $134 million, or $0.81 per share (diluted), in the second quarter of 2012. There were no items that management considered not representative of ongoing operations in the second quarter of 2013 or 2012.
38
Executive Overview Six Months ended June 30, 2013 and 2012
2013 Highlights
·
Net sales lower due to 3% decline in glass container shipments.
·
Segment operating profit lower due to decline in glass container production and shipments, partially offset by global cost control initiatives.
·
Issued 330 million 4.875% senior notes due 2021 and discharged 300 million 6.875% senior notes due 2017.
Net sales were $83 million lower than the prior year due to a 3% decline in glass container shipments. Higher selling prices had a positive impact on net sales, while the effect of changes in foreign currency exchange rates had an unfavorable impact on net sales.
Segment operating profit for reportable segments was $33 million lower than the prior year. The decrease was mainly attributable to lower production volume, which resulted in higher manufacturing costs, and lower sales volume, partially offset by global cost control initiatives.
Interest expense for the first six months of 2013 increased $2 million over the first six months of 2012. The increase was due to note repurchase premiums and the write-off of finance fees related to debt that was repaid during 2013 prior to its maturity.
Net earnings from continuing operations attributable to the Company for the first six months of 2013 was $214 million, or $1.29 per share (diluted), compared with $256 million, or $1.54 per share (diluted), for the first six months of 2012. Earnings in 2013 included items that management considered not representative of ongoing operations. These items decreased net earnings attributable to the Company in 2013 by $20 million, or $0.12 per share. There were no items that management considered not representative of ongoing operations in the first six months of 2012.
Results of Operations First six months of 2013 compared with first six months of 2012
Net Sales
The Companys net sales in the first six months of 2013 were $3,422 million compared with $3,505 million for the first six months of 2012, a decrease of $83 million, or 2%. Glass container shipments, in tonnes, were down 3% in 2013 compared to 2012, driven by lower sales in Europe, North America and Asia Pacific. The benefit of higher selling prices to recover cost inflation was partially offset by unfavorable foreign currency exchange rate changes, primarily due to a weaker Brazilian real in relation to the U.S. dollar.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2012
|
|
|
|
$
|
3,480
|
|
Price
|
|
$
|
73
|
|
|
|
Sales volume
|
|
(106
|
)
|
|
|
Effects of changing foreign currency rates
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
Total effect on net sales
|
|
|
|
(72
|
)
|
Net sales - 2013
|
|
|
|
$
|
3,408
|
|
|
|
|
|
|
|
|
|
39
Europe:
Net sales in Europe in the first six months of 2013 were $1,396 million compared with $1,436 million for the first six months of 2012, a decrease of $40 million, or 3%. Glass container shipments in 2013 were down 4% compared to the prior year, particularly in the beer category. The lower sales volume, which reduced net sales by $65 million, was mainly due to the macroeconomic environment in Europe and unfavorable weather conditions, partially offset by an increase in wine bottle sales due to the Companys efforts to recover wine share lost in 2012. Higher selling prices benefited net sales in the current year by $19 million as the Company raised prices to recover cost inflation. Additionally, net sales were increased by $6 million due to the favorable effects of foreign currency exchange rate changes, as the Euro strengthened in relation to the U.S. dollar.
North America:
Net sales in North America in the first six months of 2013 were $996 million compared with $998 million for the first six months of 2012, a decrease of $2 million. Glass container shipments were down 3% in the current year compared to the prior year, driven by lower beer bottle sales from the unfavorable weather conditions in the region compared to 2012. Mostly offsetting the decline in sales volume were higher selling prices of $24 million as the Company increased prices to recover cost inflation.
South America:
Net sales in South America in the first six months of 2013 were $538 million compared with $559 million for the first six months of 2012, a decrease of $21 million, or 4%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $35 million in 2013 compared to 2012, principally due to a 9% decline in the Brazilian real in relation to the U.S. dollar. Improved pricing and higher sales volume in the current year benefited net sales by $14 million as the Company increased selling prices to recover cost inflation and glass container shipments were up nearly 1%.
Asia Pacific:
Net sales in Asia Pacific in the first six months of 2013 were $478 million compared with $487 million for the first six months of 2012, a decrease of $9 million, or 2%. Glass container shipments were down 3% compared to the prior year, largely due to the closure of a plant in the region at the end of 2012, resulting in a $9 million decline in net sales. The unfavorable effects of foreign currency exchange rate changes decreased net sales $8 million in 2013 compared to 2012, primarily due to the weakening of the Australian dollar in relation to the U.S. dollar. Improved pricing increased net sales $8 million in the current year.
Segment Operating Profit
Operating profit of the reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments operations are included in Retained corporate costs and other. For further information, see Segment Information included in Note 1 to the Condensed Consolidated Financial Statements.
Segment operating profit of reportable segments in the first six months of 2013 was $493 million compared to $526 million for the first six months of 2012, a decrease of $33 million, or 6%. The decrease in segment operating profit was primarily due to higher manufacturing and delivery costs and lower sales volume, partially offset by lower operating expenses. Manufacturing and delivery costs were higher in the current year as the Company lowered production volumes in Europe in order to reduce earnings volatility by better phasing production over the course of the year. This action, along with an increase in the number of furnace rebuilds in North America and South America, resulted in lower fixed cost absorption in 2013. Operating expenses were lower in the current year due to global cost control initiatives. Cost inflation in the first six months of 2013 was more than offset by higher selling prices.
40
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
Segment operating profit - 2012
|
|
|
|
$
|
526
|
|
Price
|
|
$
|
73
|
|
|
|
Cost inflation
|
|
(68
|
)
|
|
|
Price / inflation spread
|
|
5
|
|
|
|
|
|
|
|
|
|
Sales volume
|
|
(20
|
)
|
|
|
Manufacturing and delivery
|
|
(33
|
)
|
|
|
Operating expenses and other
|
|
16
|
|
|
|
Effects of changing foreign currency rates
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Total net effect on segment operating profit
|
|
|
|
(33
|
)
|
Segment operating profit - 2013
|
|
|
|
$
|
493
|
|
|
|
|
|
|
|
|
|
Europe:
Segment operating profit in Europe in the first six months of 2013 was $170 million compared with $215 million in the first six months of 2012, a decrease of $45 million, or 21%. The decline in sales volume discussed above decreased segment operating profit by $18 million and higher manufacturing and delivery costs decreased earnings by $39 million. The Company deliberately lowered production in this region during the first six months of 2013 to reduce earnings volatility by better phasing production over the course of the year. The lower production resulted in lower fixed cost absorption compared to the prior year. Cost inflation in the current year was completely offset by higher selling prices. Lower operating expenses, driven by cost control initiatives, had a $12 million positive impact on segment operating profit during the first six months of 2013.
North America:
Segment operating profit in North America in the first six months of 2013 was $167 million compared with $174 million in the first six months of 2012, a decrease of $7 million, or 4%. The decrease in segment operating profit was primarily due to higher manufacturing and delivery costs of $11 million in the current year as a higher number of furnace rebuilds resulted in lower fixed cost absorption. Higher selling prices exceeded cost inflation in the current year, increasing segment operating profit $5 million compared to the prior year. The decline in sales volume discussed above was offset by the benefits of cost control initiatives.
South America:
Segment operating profit in South America in the first six months of 2013 was $90 million compared with $85 million in the first six months of 2012, an increase of $5 million, or 6%. Manufacturing and delivery costs were $9 million lower in 2013 compared to the prior year, primarily due to the benefits of the new furnace in Brazil that started production at the end of 2012, partially offset by a higher number of furnace rebuilds in the current year. The unfavorable effects of foreign currency exchange rate changes decreased segment operating profit by $4 million in the current year. Higher sales volume increased segment operating profit in 2013, and the benefit of higher selling prices in 2013 exceeded cost inflation. The region was negatively impacted by macroeconomic conditions in Argentina, where government price controls limited the Companys ability to effectively offset the high cost inflation experienced in this country.
Asia Pacific:
Segment operating profit in Asia Pacific in the first six months of 2013 was $66 million compared with $52 million in the first six months of 2012, an increase of $14 million, or 27%. The increase in segment operating profit was primarily due to an $8 million decline in manufacturing and delivery costs driven by the benefits realized from the permanent footprint adjustments made
41
over the past year. Segment operating profit also increased due to other cost control initiatives in 2013. The benefit of higher selling prices in the current year was offset by cost inflation.
Interest Expense
Interest expense for the first six months of 2013 was $128 million compared with $126 million for the first six months of 2012. Interest expense for 2013 included $11 million for note repurchase premiums and the write-off of finance fees related to the discharge of the 300 million senior notes due 2017 and $3 million for loss on debt extinguishment and the write-off of finance fees related to the repurchase of a portion of the 2015 Exchangeable Notes. Exclusive of these items, interest expense decreased $12 million in the current year. The decrease was principally due to debt reduction initiatives and lower interest rates.
Provision for Income Taxes
The Companys effective tax rate from continuing operations for the six months ended June 30, 2013 was 23.8% compared with 24.4% for the six months ended June 30, 2012. Excluding the amounts related to items that management considers not representative of ongoing operations, the Company expects that the full year effective tax rate for 2013 will be between 23% to 24% compared with 22.1% for 2012. The increase in the expected effective tax rate for the full year 2013 is due to the Companys current expected change in mix of earnings by jurisdiction.
Earnings from Continuing Operations Attributable to the Company
For the first six months of 2013, the Company recorded earnings from continuing operations attributable to the Company of $214 million, or $1.29 per share (diluted), compared to $256 million, or $1.54 per share (diluted), in the first six months of 2012. Earnings in 2013 included items that management considered not representative of ongoing operations. These items decreased earnings from continuing operations attributable to the Company in 2013 by $20 million, or $0.12 per share. There were no items that management considered not representative of ongoing operations in the first six months of 2012.
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
Retained corporate costs and other for the second quarter of 2013 was $34 million compared with $27 million for the second quarter of 2012, and $65 million for the first six months of 2013 compared with $56 million for the first six months of 2012. Retained corporate costs and other for the three and six months ended June 30, 2013 reflect lower earnings from the Companys equity investment in a soda ash mining operation, higher pension expense and lower earnings from global machine and equipment sales, partially offset by cost control initiatives.
Restructuring
During the six months ended June 30, 2013, the Company recorded restructuring, asset impairment and related charges of $10 million, primarily related to the European Asset Optimization program. See Note 4 to the Condensed Consolidated Financial Statements for additional information.
42
Discontinued Operations
On October 26, 2010, the Venezuelan government, through Presidential Decree No. 7.751, expropriated the assets of Owens-Illinois de Venezuela and Fabrica de Vidrios Los Andes, C.A., two of the Companys subsidiaries in that country, which in effect constituted a taking of the going concerns of those companies. Shortly after the issuance of the decree, the Venezuelan government installed temporary administrative boards to control the expropriated assets.
Since the issuance of the decree, the Company has cooperated with the Venezuelan government, as it is compelled to do under Venezuelan law, to provide for an orderly transition while ensuring the safety and well-being of the employees and the integrity of the production facilities. The Company has been engaged in negotiations with the Venezuelan government in relation to certain aspects of the expropriation, including the compensation payable by the government as a result of its expropriation. On September 26, 2011, the Company, having been unable to reach an agreement with the Venezuelan government regarding fair compensation, commenced an arbitration against Venezuela through the World Banks International Centre for Settlement of Investment Disputes. The Company is unable at this stage to predict the amount, or timing of receipt, of compensation it will ultimately receive.
The loss from discontinued operations of $13 million for the six months ended June 30, 2013 included $8 million of special termination benefits related to a previously disposed business and $5 million for ongoing costs related to the Venezuela expropriation.
Capital Resources and Liquidity
As of June 30, 2013, the Company had cash and total debt of $249 million and $3.8 billion, respectively, compared to $336 million and $4.0 billion, respectively, as of June 30, 2012. A significant portion of the cash was held in mature, liquid markets where the Company has operations, such as the U.S., Europe and Australia, and is readily available to fund global liquidity requirements. The amount of cash held in non-U.S. locations as of June 30, 2013 was $221 million.
Current and Long-Term Debt
On May 19, 2011, the Companys subsidiary borrowers entered into the Secured Credit Agreement (the Agreement). At June 30, 2013, the Agreement included a $900 million revolving credit facility, a 25 million Australian dollar term loan, a $525 million term loan, a 102 million Canadian dollar term loan, and a 123 million term loan, each of which has a final maturity date of May 19, 2016. At June 30, 2013, the Companys subsidiary borrowers had unused credit of $816 million available under the Agreement.
The weighted average interest rate on borrowings outstanding under the Agreement at June 30, 2013 was 2.13%.
During the six months ended June 30, 2013, a subsidiary of the Company repurchased $46 million of the 2015 Exchangeable Notes.
During March 2013, a subsidiary of 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 Companys domestic subsidiaries. The net proceeds, after deducting debt issuance costs, totaled approximately $418 million.
43
During March 2013, a subsidiary of the Company discharged, in accordance with the indenture, all 300 million of the 6.875% senior notes due 2017.
The Company assesses its capital raising and refinancing needs on an ongoing basis and may enter into additional credit facilities and seek to issue equity and/or debt securities in the domestic and international capital markets if market conditions are favorable. Also, depending on market conditions, the Company may elect to repurchase portions of its debt securities in the open market.
The Company has a 240 million European accounts receivable securitization program, which extends through September 2016, subject to annual renewal of backup credit lines. Information related to the Companys accounts receivable securitization program is as follows:
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
|
|
|
|
|
|
|
|
Balance (included in short-term loans)
|
|
$
|
290
|
|
$
|
264
|
|
$
|
302
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
|
|
1.20
|
%
|
1.33
|
%
|
1.42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
Free cash flow was $(142) million for the first six months of 2013 compared to $(118) million for the first six months of 2012. The Company defines free cash flow as cash provided by continuing operating activities less additions to property, plant and equipment from continuing operations. Free cash flow does not conform to U.S. GAAP and should not be construed as an alternative to the cash flow measures reported in accordance with U.S. GAAP. The Company uses free cash flow for internal reporting, forecasting and budgeting and believes this information allows the board of directors, management, investors and analysts to better understand the Companys financial performance. Free cash flow for the six months ended June 30, 2013 and 2012 is calculated as follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Cash provided by continuing operating activities
|
|
$
|
22
|
|
$
|
6
|
|
Additions to property, plant and equipment
|
|
(164
|
)
|
(124
|
)
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
(142
|
)
|
$
|
(118
|
)
|
Operating activities:
Cash provided by continuing operating activities was $22 million for the six months ended June 30, 2013, compared with $6 million for the six months ended June 30, 2012. The increase in cash provided by continuing operating activities was primarily due to an increase in working capital of $351 million in 2013 compared to $380 million in 2012. The smaller increase in working capital during 2013 was mainly due to a smaller increase in inventories compared to the prior year. The smaller increase in inventories was driven by the Companys decision to build inventory levels in North America in the first six months of 2012 to avoid the supply chain issues that impacted the region in the second quarter of 2011. In addition, the Company increased inventory levels in Europe in the first six months of 2012 in advance of implementing production curtailment measures at the end of the second quarter of 2012. The increase in cash provided by continuing operating activities was also due to a decrease in pension plan contributions of $22
44
million and a decrease in asbestos-related payments of $9 million, partially offset by lower earnings and an increase in cash paid for restructuring activities of $7 million.
Investing activities:
Cash utilized in investing activities was $162 million for the six months ended June 30, 2013 compared to $100 million for the six months ended June 30, 2012. Capital spending for property, plant and equipment was $164 million during the current year and $124 million during the prior year. The increase in capital spending in 2013 was primarily due to the large amount of capital projects completed during the fourth quarter of 2012 that were paid for in 2013, in addition to an increase in the number of furnace rebuilds in the current year. Cash utilized in investing activities in 2012 included $5 million for the final payment related to an acquisition in China in 2010. During the first six months of 2012, the Company received $14 million from the Chinese government as partial compensation for the land in China that the Company was required to return to the government. The Company also paid $4 million as a loan to one of its noncontrolling partners in South America in 2013, while in 2012 the Company received $9 million from one of its noncontrolling partners as a repayment of a loan.
Financing activities:
Cash utilized in financing activities was $29 million for the six months ended June 30, 2013 compared to cash provided by financing activities of $27 million for the six months ended June 30, 2012. Financing activities in 2013 included repayments of long-term debt of $724 million, primarily related to the discharge of the 300 million senior notes due 2017 and the repurchase of $46 million of the 2015 Exchangeable Notes, partially offset by additions to long-term debt of $674 million, primarily related to the issuance of the 330 million senior notes due 2021, and additions to short-term loans of $59 million. Financing activities in 2012 included additions to long-term debt of $119 million and short-term loans of $31 million, partially offset by repayments of long-term debt of $128 million. In 2013, the Company also repurchased shares of its common stock for $10 million.
The Company anticipates that cash flows from its operations and from utilization of credit available under the Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short-term (twelve-months) and long-term basis. Based on the Companys expectations regarding future payments for lawsuits and claims and also based on the Companys expected operating cash flow, the Company believes that the payment of any deferred amounts of previously settled or otherwise determined lawsuits and claims, and the resolution of presently pending and anticipated future lawsuits and claims associated with asbestos, will not have a material adverse effect upon the Companys liquidity on a short-term or long-term basis.
Critical Accounting Estimates
The Companys analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates.
45
The impact of, and any associated risks related to, estimates and assumptions are discussed within Managements Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Companys reported and expected financial results.
There have been no other material changes in critical accounting estimates at June 30, 2013 from those described in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
Forward Looking Statements
This document contains forward looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Forward looking statements reflect the Companys current expectations and projections about future events at the time, and thus involve uncertainty and risk. The words believe, expect, anticipate, will, could, would, should, may, plan, estimate, intend, predict, potential, continue, and the negatives of these words and other similar expressions generally identify forward looking statements. It is possible the Companys future financial performance may differ from expectations due to a variety of factors including, but not limited to the following: (1) foreign currency fluctuations relative to the U.S. dollar, specifically the Euro, Brazilian real and Australian dollar, (2) changes in capital availability or cost, including interest rate fluctuations and the ability of the Company to refinance debt at favorable terms, (3) the general political, economic and competitive conditions in markets and countries where the Company has operations, including uncertainties related to the economic conditions in Australia, Europe and South America, disruptions in capital markets, disruptions in the supply chain, competitive pricing pressures, inflation or deflation, and changes in tax rates and laws, (4) consumer preferences for alternative forms of packaging, (5) cost and availability of raw materials, labor, energy and transportation, (6) the Companys ability to manage its cost structure, including its success in implementing restructuring plans and achieving cost savings, (7) consolidation among competitors and customers, (8) the ability of the Company to acquire businesses and expand plants, integrate operations of acquired businesses and achieve expected synergies, (9) unanticipated expenditures with respect to environmental, safety and health laws, (10) the Companys ability to further develop its sales, marketing and product development capabilities, and (11) the timing and occurrence of events which are beyond the control of the Company, including any expropriation of the Companys operations, floods and other natural disasters, events related to asbestos-related claims, and the other risk factors discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 2012 and any subsequently filed Quarterly Report on Form 10-Q. It is not possible to foresee or identify all such factors. Any forward looking statements in this document are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Forward looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. While the Company continually reviews trends and uncertainties affecting the Companys results of operations and financial condition, the Company does not assume any obligation to update or supplement any particular forward looking statements contained in this document.
46