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 nine months ended September 30, 2013 and 2012 regarding the Companys reportable segments is as follows (dollars in millions):
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
733
|
|
$
|
652
|
|
$
|
2,129
|
|
$
|
2,088
|
|
North America
|
|
529
|
|
513
|
|
1,525
|
|
1,511
|
|
South America
|
|
282
|
|
323
|
|
820
|
|
882
|
|
Asia Pacific
|
|
236
|
|
254
|
|
714
|
|
741
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segment totals
|
|
1,780
|
|
1,742
|
|
5,188
|
|
5,222
|
|
Other
|
|
4
|
|
5
|
|
18
|
|
30
|
|
Net Sales
|
|
$
|
1,784
|
|
$
|
1,747
|
|
$
|
5,206
|
|
$
|
5,252
|
|
34
|
|
Three months ended
September 30,
|
|
Nine months ended
September 30,
|
|
|
|
2013
|
|
2012
|
|
2013
|
|
2012
|
|
Segment operating profit:
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
97
|
|
$
|
74
|
|
$
|
267
|
|
$
|
289
|
|
North America
|
|
87
|
|
75
|
|
254
|
|
249
|
|
South America
|
|
42
|
|
69
|
|
132
|
|
154
|
|
Asia Pacific
|
|
33
|
|
27
|
|
99
|
|
79
|
|
Reportable segment totals
|
|
259
|
|
245
|
|
752
|
|
771
|
|
|
|
|
|
|
|
|
|
|
|
Items excluded from segment operating profit:
|
|
|
|
|
|
|
|
|
|
Retained corporate costs and other
|
|
(27
|
)
|
(26
|
)
|
(92
|
)
|
(82
|
)
|
Restructuring, asset impairment and related charges
|
|
|
|
(33
|
)
|
(10
|
)
|
(33
|
)
|
Interest income
|
|
2
|
|
2
|
|
6
|
|
7
|
|
Interest expense
|
|
(56
|
)
|
(61
|
)
|
(184
|
)
|
(187
|
)
|
Earnings from continuing operations before income taxes
|
|
178
|
|
127
|
|
472
|
|
476
|
|
Provision for income taxes
|
|
(40
|
)
|
(28
|
)
|
(110
|
)
|
(113
|
)
|
Earnings from continuing operations
|
|
138
|
|
99
|
|
362
|
|
363
|
|
Loss from discontinued operations
|
|
(2
|
)
|
(2
|
)
|
(15
|
)
|
(4
|
)
|
Net earnings
|
|
136
|
|
97
|
|
347
|
|
359
|
|
Net earnings attributable to noncontrolling interests
|
|
(6
|
)
|
(7
|
)
|
(16
|
)
|
(15
|
)
|
Net earnings attributable to the Company
|
|
$
|
130
|
|
$
|
90
|
|
$
|
331
|
|
$
|
344
|
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to the Company:
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
|
|
$
|
132
|
|
$
|
92
|
|
$
|
346
|
|
$
|
348
|
|
Loss from discontinued operations
|
|
(2
|
)
|
(2
|
)
|
(15
|
)
|
(4
|
)
|
Net earnings
|
|
$
|
130
|
|
$
|
90
|
|
$
|
331
|
|
$
|
344
|
|
Note: All amounts excluded from reportable segment totals are discussed in the following applicable sections.
Executive Overview Quarters ended September 30, 2013 and 2012
Third Quarter 2013 Highlights
·
Net sales higher due to improved pricing and 2% increase in glass container shipments, partially offset by unfavorable foreign currency exchange rate changes.
·
Segment operating profit higher due to benefits realized from permanent footprint adjustments, higher sales and production volumes and other global cost control initiatives, partially offset by cost inflation and unfavorable foreign currency exchange rate changes.
Net sales were $37 million higher than the prior year due to higher selling prices and a 2% increase in glass container shipments, driven by higher sales volumes in Europe, North America and Asia Pacific. The impact of higher selling prices and sales volumes was partially offset by unfavorable foreign currency exchange rate changes.
Segment operating profit for reportable segments was $14 million higher than the prior year. Benefits realized from permanent footprint adjustments made in Europe and Asia Pacific, higher sales and production volumes and other global cost control initiatives were partially offset by cost
35
inflation in excess of higher selling prices and the unfavorable effects of foreign currency exchange rate changes.
Interest expense for the third quarter of 2013 decreased $5 million compared to the third 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 third quarter of 2013 was $132 million, or $0.79 per share (diluted), compared with $92 million, or $0.55 per share (diluted), for the third quarter of 2012. Earnings in the third quarter of 2012 included items that management considered not representative of ongoing operations. These items decreased net earnings attributable to the Company in the third quarter of 2012 by $23 million, or $0.14 per share. There were no items that management considered not representative of ongoing operations in the third quarter of 2013.
Results of Operations Third Quarter of 2013 compared with Third Quarter of 2012
Net Sales
The Companys net sales in the third quarter of 2013 were $1,784 million compared with $1,747 million for the third quarter of 2012, an increase of $37 million, or 2%. The increase in net sales was partly due to higher selling prices. In addition, glass container shipments, in tonnes, were up 2% in the third quarter of 2013 compared to the third quarter of 2012, as higher sales volumes in Europe, North America and Asia Pacific offset declines in South America. The unfavorable effect of foreign currency exchange rate changes decreased net sales, primarily due to a weaker Brazilian real and Australian dollar, partially offset by a stronger euro.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2012
|
|
|
|
$
|
1,742
|
|
Price
|
|
$
|
28
|
|
|
|
Sales volume
|
|
27
|
|
|
|
Effects of changing foreign currency rates
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
Total effect on net sales
|
|
|
|
38
|
|
Net sales - 2013
|
|
|
|
$
|
1,780
|
|
|
|
|
|
|
|
|
|
Europe:
Net sales in Europe in the third quarter of 2013 were $733 million compared with $652 million for the third quarter of 2012, an increase of $81 million, or 12%. Higher glass container shipments in the third quarter of 2013, which were up 7% compared to the third quarter of 2012, increased net sales by $46 million. The higher sales volume in the quarter was primarily due to increases in the wine, food and beer categories. The favorable effect of foreign currency exchange rate changes increased net sales by $36 million in the current year as the Euro strengthened in relation to the U.S. dollar. Slightly higher selling prices were offset by unfavorable product mix during the quarter.
North America:
Net sales in North America in the third quarter of 2013 were $529 million compared with $513 million for the third quarter of 2012, an increase of $16 million, or 3%. The increase in net sales was primarily due to higher selling prices of $13 million in the third quarter of 2013 as the Company increased prices to recover cost inflation. Glass container shipments were up 1% in the quarter compared to the prior year, driven by increases in the non-alcoholic beverage, spirits and wine categories, partially offset by lower shipments of food containers.
36
South America:
Net sales in South America in the third quarter of 2013 were $282 million compared with $323 million for the third quarter of 2012, a decrease of $41 million, or 13%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $28 million in the third quarter of 2013 compared to 2012, principally due to an 11% decline in the Brazilian real in relation to the U.S. dollar. Lower glass container shipments in the third quarter of 2013, which were down 9% compared to the third quarter of 2012, decreased net sales by $27 million. The lower sales volume was primarily due to lower beer demand across the region and the impact of general strikes in Colombia in the mining, agriculture and transportation industries. Improved pricing in the current quarter benefited net sales by $14 million.
Asia Pacific:
Net sales in Asia Pacific in the third quarter of 2013 were $236 million compared with $254 million for the third quarter of 2012, a decrease of $18 million, or 7%. The unfavorable effects of foreign currency exchange rate changes during the third quarter of 2013 decreased net sales by $22 million, primarily due to a 13% decline in the Australian dollar in relation to the U.S. dollar. The unfavorable currency exchange rate changes were partially offset by a 1% increase in glass container shipments and 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 third quarter of 2013 was $259 million compared to $245 million for the third quarter of 2012, an increase of $14 million, or 6%. The increase in segment operating profit was mainly due to the higher sales volume discussed above and lower manufacturing and delivery costs, partly 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. The improvement in manufacturing and delivery costs was also the result of higher production levels in Europe, driven by the Companys decision to better phase production over the course of the year. Cost inflation in the third quarter of 2013 exceeded higher selling prices.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
Segment operating profit - 2012
|
|
|
|
$
|
245
|
|
Price
|
|
$
|
28
|
|
|
|
Cost inflation
|
|
(33
|
)
|
|
|
Price / inflation spread
|
|
(5
|
)
|
|
|
Sales volume
|
|
9
|
|
|
|
Manufacturing and delivery
|
|
10
|
|
|
|
Operating expenses and other
|
|
5
|
|
|
|
Effects of changing foreign currency rates
|
|
(5
|
)
|
|
|
|
|
|
|
|
|
Total net effect on segment operating profit
|
|
|
|
14
|
|
Segment operating profit - 2013
|
|
|
|
$
|
259
|
|
|
|
|
|
|
|
|
|
37
Europe:
Segment operating profit in Europe in the third quarter of 2013 was $97 million compared with $74 million in the third quarter of 2012, an increase of $23 million, or 31%. The improvement in segment operating profit was primarily due to $13 million from higher sales volumes and a $20 million decrease in manufacturing and delivery costs. The decrease in manufacturing and delivery costs was partly due to the benefits realized from the permanent footprint adjustments made over the last year and other cost control initiatives, as well as the result of the Companys decision to better phase production over the course of the year. This action resulted in higher production levels in Europe during the third quarter of 2013 compared to the third quarter of 2012, when production curtailments increased manufacturing and delivery costs due to lower fixed cost absorption. Cost inflation for the quarter exceeded higher selling prices.
North America:
Segment operating profit in North America in the third quarter of 2013 was $87 million compared with $75 million in the third quarter of 2012, an increase of $12 million, or 16%. Higher sales volume in the third quarter of 2013 increased segment operating profit by $2 million, while lower manufacturing and delivery costs, driven by cost control initiatives, added $5 million in the current quarter. The remainder of the increase in segment operating profit was due to higher selling prices in excess of cost inflation and operating expense cost reductions.
South America:
Segment operating profit in South America in the third quarter of 2013 was $42 million compared with $69 million in the third quarter of 2012, a decrease of $27 million, or 39%. The decrease in segment operating profit was primarily due to $7 million from lower sales volumes and $20 million from higher manufacturing and delivery costs. Lower production volumes in the current quarter, due to lower sales volumes and the impact of the general strikes in Colombia, resulted in higher manufacturing and delivery costs due to lower fixed cost absorption. The region also recognized additional costs in the quarter for furnace repairs. The unfavorable effects of foreign currency exchange rate changes decreased segment operating profit, but were offset by higher selling prices in excess of cost inflation. The region was also negatively impacted by macroeconomic conditions in Argentina, where high cost inflation, among other issues, has created a challenging business environment.
Asia Pacific:
Segment operating profit in Asia Pacific in the third quarter of 2013 was $33 million compared with $27 million in the third quarter of 2012, an increase of $6 million, or 22%. The increase in segment operating profit was primarily due to a $5 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 third quarter of 2013. The benefit of higher selling prices in the quarter was more than offset by cost inflation. The unfavorable effects of foreign currency exchange rate changes decreased segment operating profit in the current quarter.
Interest Expense
Interest expense for the third quarter of 2013 was $56 million compared with $61 million for the third quarter of 2012. The decrease in interest expense was principally due to debt reduction initiatives and lower interest rates.
38
Earnings from Continuing Operations Attributable to the Company
For the third quarter of 2013, the Company recorded earnings from continuing operations attributable to the Company of $132 million, or $0.79 per share (diluted), compared to $92 million, or $0.55 per share (diluted), in the third quarter of 2012. Earnings in the third quarter of 2012 included items that management considered not representative of ongoing operations. These items decreased net earnings attributable to the Company in the third quarter of 2012 by $23 million, or $0.14 per share. There were no items that management considered not representative of ongoing operations in the third quarter of 2013.
Executive Overview Nine Months ended September 30, 2013 and 2012
2013 Highlights
·
Net sales lower due to 1% decline in glass container shipments and unfavorable effects of foreign currency exchange rate changes, partially offset by higher selling prices.
·
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 $46 million lower than the prior year due to a 1% 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 $19 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 nine months of 2013 decreased $3 million over the first nine months of 2012. The decrease was due to debt reduction initiatives and lower interest rates, partially offset by 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 nine months of 2013 was $346 million, or $2.08 per share (diluted), compared with $348 million, or $2.10 per share (diluted), for the first nine months of 2012. Earnings in both periods included items that management considered not representative of ongoing operations. These items decreased earnings from continuing operations attributable to the Company by $20 million, or $0.12 per share, in 2013 and $23 million, or $0.14 per share, in 2012.
Results of Operations First nine months of 2013 compared with first nine months of 2012
Net Sales
The Companys net sales in the first nine months of 2013 were $5,206 million compared with $5,252 million for the first nine months of 2012, a decrease of $46 million, or 1%. Glass container shipments, in tonnes, were down 1% in 2013 compared to 2012, with lower sales reported in all regions. Net sales were also lower due to the unfavorable effects of foreign currency exchange rate changes, primarily due to a weaker Brazilian real and Australian dollar in relation to the U.S. dollar,
39
partially offset by a stronger euro. Net sales benefited in 2013 from higher selling prices to recover cost inflation.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2012
|
|
|
|
$
|
5,222
|
|
Price
|
|
$
|
101
|
|
|
|
Sales volume
|
|
(79
|
)
|
|
|
Effects of changing foreign currency rates
|
|
(56
|
)
|
|
|
|
|
|
|
|
|
Total effect on net sales
|
|
|
|
(34
|
)
|
Net sales - 2013
|
|
|
|
$
|
5,188
|
|
|
|
|
|
|
|
|
|
Europe:
Net sales in Europe in the first nine months of 2013 were $2,129 million compared with $2,088 million for the first nine months of 2012, an increase of $41 million, or 2%. Net sales increased $42 million due to the favorable effects of foreign currency exchange rate changes, as the Euro strengthened in relation to the U.S. dollar. Higher selling prices benefited net sales in the current year by $18 million as the Company raised prices to recover cost inflation. Glass container shipments in 2013 were down 1% compared to the prior year, particularly in the beer category. The lower sales volume, which reduced net sales by $19 million, was mainly due to the macroeconomic environment in Europe, 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 first nine months of 2013 were $1,525 million compared with $1,511 million for the first nine months of 2012, an increase of $14 million, or 1%. The increase in net sales was due to higher selling prices of $37 million as the Company increased prices to recover cost inflation. The benefit of higher selling prices was partially offset by lower sales volume of $18 million. Glass container shipments were down 1% in the current year compared to the prior year, driven by lower beer bottle sales from unfavorable weather conditions in the region compared to 2012. The unfavorable effects of foreign currency exchange rate changes decreased net sales by $5 million due to a weakening of the Canadian dollar in relation to the U.S. dollar.
South America:
Net sales in South America in the first nine months of 2013 were $820 million compared with $882 million for the first nine months of 2012, a decrease of $62 million, or 7%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $63 million in 2013 compared to 2012, principally due to a 10% decline in the Brazilian real in relation to the U.S. dollar. Lower sales volume in the current year reduced net sales by $35 million due to a 3% decline in glass container shipments, driven by lower beer demand across the region and the impact of general strikes in Colombia in the mining, agriculture and transportation industries. Higher selling prices benefited net sales $36 million in the current year as the Company increased selling prices to recover cost inflation.
Asia Pacific:
Net sales in Asia Pacific in the first nine months of 2013 were $714 million compared with $741 million for the first nine months of 2012, a decrease of $27 million, or 4%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $30 million in 2013 compared to 2012, primarily due to the weakening of the Australian dollar in relation to the U.S. dollar. Glass container shipments were down 1% compared to the prior year, largely due to the closure of a plant in the region at the end of 2012, resulting in a $7 million decline in net sales. Improved pricing increased net sales $10 million in the current year.
40
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 nine months of 2013 was $752 million compared to $771 million for the first nine months of 2012, a decrease of $19 million, or 2%. 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 better phase 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 nine months of 2013 was 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
|
|
|
|
$
|
771
|
|
Price
|
|
$
|
101
|
|
|
|
Cost inflation
|
|
(101
|
)
|
|
|
Price / inflation spread
|
|
|
|
|
|
Sales volume
|
|
(11
|
)
|
|
|
Manufacturing and delivery
|
|
(23
|
)
|
|
|
Operating expenses and other
|
|
21
|
|
|
|
Effects of changing foreign currency rates
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
Total net effect on segment operating profit
|
|
|
|
(19
|
)
|
Segment operating profit - 2013
|
|
|
|
$
|
752
|
|
|
|
|
|
|
|
|
|
Europe:
Segment operating profit in Europe in the first nine months of 2013 was $267 million compared with $289 million in the first nine months of 2012, a decrease of $22 million, or 8%. The decline in sales volume discussed above decreased segment operating profit by $5 million and higher manufacturing and delivery costs decreased earnings by $20 million. The Company deliberately lowered production in this region during the first half of 2013 to better phase 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 exceeded higher selling prices by $11 million. Lower operating expenses, driven by cost control initiatives, had a $13 million positive impact on segment operating profit during the first nine months of 2013, while the favorable effects of foreign currency exchange rate changes increased segment operating profit by $5 million.
North America:
Segment operating profit in North America in the first nine months of 2013 was $254 million compared with $249 million in the first nine months of 2012, an increase of $5 million, or 2%. Higher selling prices exceeded cost inflation in the current year, increasing segment operating profit $6 million compared to the prior year, and lower operating expenses, driven by cost control initiatives, had a $10 million positive impact on segment operating profit. Higher manufacturing and delivery costs decreased segment operating profit by $7 million in the current
41
year as a higher number of furnace rebuilds resulted in lower fixed cost absorption. The decline in sales volume discussed above decreased segment operating profit by $4 million.
South America:
Segment operating profit in South America in the first nine months of 2013 was $132 million compared with $154 million in the first nine months of 2012, a decrease of $22 million, or 14%. The lower sales volume in the current year decreased segment operating profit by $6 million, while higher manufacturing and delivery costs resulted in a $10 million decline in 2013 compared to the prior year. The higher manufacturing and delivery costs were primarily due to a higher number of furnace rebuilds and repairs in the current year and the effects of the general strikes in Colombia, 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 $8 million in the current year. Higher selling prices in 2013 exceeded cost inflation. The region was also negatively impacted by macroeconomic conditions in Argentina, where government price controls in the first half of the year 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 nine months of 2013 was $99 million compared with $79 million in the first nine months of 2012, an increase of $20 million, or 25%. The increase in segment operating profit was primarily due to a $16 million decline in manufacturing and delivery costs driven by the benefits realized from the permanent footprint adjustments made over the past year. Higher sales volume increased segment operating profit by $4 million and lower operating expenses, driven by cost control initiatives, had a $4 million positive impact in the current year. The benefit of higher selling prices in the current year was more than offset by cost inflation and the unfavorable effects of foreign currency exchange rate changes decreased segment operating profit by $3 million in 2013.
Interest Expense
Interest expense for the first nine months of 2013 was $184 million compared with $187 million for the first nine 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 $17 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 nine months ended September 30, 2013 was 23.3% compared with 23.7% for the nine months ended September 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 approximately 23% 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.
42
Earnings from Continuing Operations Attributable to the Company
For the first nine months of 2013, the Company recorded earnings from continuing operations attributable to the Company of $346 million, or $2.08 per share (diluted), compared to $348 million, or $2.10 per share (diluted), in the first nine months of 2012. Earnings in both periods included items that management considered not representative of ongoing operations. These items decreased earnings from continuing operations attributable to the Company by $20 million, or $0.12 per share, in 2013 and $23 million, or $0.14 per share, in 2012.
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
Retained corporate costs and other for the third quarter of 2013 was $27 million compared with $26 million for the third quarter of 2012, and $92 million for the first nine months of 2013 compared with $82 million for the first nine months of 2012. Retained corporate costs and other for the nine months ended September 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 nine months ended September 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.
During the three and nine months ended September 30, 2012, the Company recorded restructuring, asset impairment and related charges totaling $9 million in the Companys Europe segment and $27 million in its Asia Pacific segment primarily related to the closure of a furnace in each segment. During the three and nine months ended September 30, 2012, the Company also recorded a reduction in restructuring charges for $3 million related to a gain on the sale of a previously closed facility in North America.
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
43
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 $15 million for the nine months ended September 30, 2013 included $8 million of special termination benefits related to a previously disposed business and $7 million for ongoing costs related to the Venezuela expropriation.
Capital Resources and Liquidity
As of September 30, 2013, the Company had cash and total debt of $219 million and $3.7 billion, respectively, compared to $336 million and $3.9 billion, respectively, as of September 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 September 30, 2013 was $217 million.
Current and Long-Term Debt
On May 19, 2011, the Companys subsidiary borrowers entered into the Secured Credit Agreement (the Agreement). At September 30, 2013, the Agreement included a $900 million revolving credit facility, a $450 million term loan, an 81 million Canadian dollar term loan, and a 99 million term loan, each of which has a final maturity date of May 19, 2016. During 2013, the Companys subsidiary borrowers repaid 51 million Australian dollars on Term Loan A, $75 million on Term Loan B, 21 million Canadian dollars on Term Loan C and 24 million on Term Loan D under the Agreement. At September 30, 2013, the Companys subsidiary borrowers had unused credit of $817 million available under the Agreement.
The weighted average interest rate on borrowings outstanding under the Agreement at September 30, 2013 was 2.02%.
During the nine months ended September 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.
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.
44
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 Companys accounts receivable securitization program is as follows:
|
|
September 30,
|
|
December 31,
|
|
September 30,
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
|
|
|
|
|
|
|
|
Balance (included in short-term loans)
|
|
$
|
287
|
|
$
|
264
|
|
$
|
276
|
|
|
|
|
|
|
|
|
|
Weighted average interest rate
|
|
1.23
|
%
|
1.33
|
%
|
1.13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows
Free cash flow was $10 million for the first nine months of 2013 compared to $53 million for the first nine 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 nine months ended September 30, 2013 and 2012 is calculated as follows:
|
|
2013
|
|
2012
|
|
|
|
|
|
|
|
Cash provided by continuing operating activities
|
|
$
|
249
|
|
$
|
231
|
|
Additions to property, plant and equipment
|
|
(239
|
)
|
(178
|
)
|
|
|
|
|
|
|
Free cash flow
|
|
$
|
10
|
|
$
|
53
|
|
Operating activities:
Cash provided by continuing operating activities was $249 million for the nine months ended September 30, 2013, compared with $231 million for the nine months ended September 30, 2012. The increase in cash provided by continuing operating activities was primarily due to a decrease in pension plan contributions of $53 million, an increase in equity dividends of $11 million and a decrease in income taxes paid of $7 million, partially offset by an increase in asbestos-related payments of $22 million, an increase in cash paid for restructuring activities of $7 million and installment payments made of $31 million related to a foreign non-income tax assessment (see Note 8 to the Condensed Consolidated Financial Statements for further information).
Investing activities:
Cash utilized in investing activities was $249 million for the nine months ended September 30, 2013 compared to $125 million for the nine months ended September 30, 2012. Capital spending for property, plant and equipment was $239 million during the current year and $178 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 nine months of 2012, the Company received $42 million from the Chinese government as partial compensation for the land in China that the Company was required
45
to return to the government. The Company also paid $16 million as loans to certain of its noncontrolling partners 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 $198 million for the nine months ended September 30, 2013 compared to $179 million for the nine months ended September 30, 2012. Financing activities in 2013 included repayments of long-term debt of $909 million, primarily related to the discharge of the 300 million senior notes due 2017, payments of $151 million on term loans under the Secured Credit Agreement and the repurchase of $46 million of the 2015 Exchangeable Notes, partially offset by additions to long-term debt of $704 million, primarily related to the issuance of the 330 million senior notes due 2021, and additions to short-term loans of $46 million. Financing activities in 2012 included repayments of long-term debt of $275 million, partially offset by additions to long-term debt of $119 million. The Company also repurchased shares of its common stock for $20 million in 2013 and $14 million in 2012. The Company received $22 million in 2013 from the exercise of stock options compared to $3 million in 2012.
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.
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 September 30, 2013 from those described in the Companys Annual Report on Form 10-K for the year ended December 31, 2012.
46
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.
47