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| OI > SEC Filings for OI > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
Executive Overview
Quarters ended September 30, 2008 and 2007
Net sales from continuing operations were $80.2 million higher than the prior year principally resulting from improved pricing, favorable product mix, and favorable foreign currency exchange rates partially offset by lower unit shipments.
Segment Operating Profit of reportable segments was $11.7 million lower than the prior year. The benefits of higher selling prices, improved product mix, and favorable exchange rates were more than offset by inflationary cost increases and lower unit shipments and lower production volume.
Interest expense in 2008 was $66.3 million compared with interest expense of $97.0 million for continuing operations in 2007. The decrease was principally due to lower variable interest rates under the Company's bank credit agreement as well as lower overall debt levels.
Net earnings from continuing operations in 2008 were $78.6 million, or $0.46 per share (diluted), compared with $75.6 million, or $0.45 per share (diluted) in 2007. Earnings in both periods included items that management considered not representative of ongoing operations. These items decreased net earnings in 2008 by $75.1 million, or $0.44 per share, and decreased net earnings in 2007 by $55.0 million, or $0.33 per share.
Cash payments for asbestos-related costs were $36.7 million in 2008 compared with payments of $132.5 million in 2007. The decrease is due to reduced funding for settlements of certain claims on an accelerated basis.
Capital spending for property, plant, and equipment was $109.5 million in 2008 compared with spending of $62.6 million for continuing operations in 2007. The increased amount in 2008 returns the Company to its normal spending level.
Nine months ended September 30, 2008 and 2007
Net sales from continuing operations were $570.3 million higher than the prior year principally resulting from improved pricing, favorable product mix, and favorable foreign currency exchange rates partially offset by lower unit shipments.
Segment Operating Profit of reportable segments was $192.4 million higher than the prior year. The benefits of higher selling prices, improved product mix, and favorable exchange rates were partially offset by lower unit shipments and inflationary cost increases.
Interest expense in 2008 was $199.8 million compared with interest expense of $260.2 million from continuing operations in 2007. The decrease was principally due to lower variable interest rates under the Company's bank credit agreement as well as lower overall debt levels partially offset by an increase from foreign currency exchange rates.
Net earnings from continuing operations in 2008 were $480.1 million, or $2.81 per share (diluted), compared with $284.7 million, or $1.70 per share (diluted) in 2007. Earnings in both
periods included items that management considered not representative of ongoing operations. These items decreased net earnings in 2008 by $89.0 million, or $0.53 per share, and decreased net earnings in 2007 by $41.5 million, or $0.25 per share.
Cash payments for asbestos-related costs were $140.3 million in 2008 compared with payments of $226.2 million in 2007. The decrease is due to reduced funding for settlements of certain claims on an accelerated basis.
Capital spending for property, plant, and equipment was $238.5 million in 2008 compared with spending of $164.7 million for continuing operations in 2007. The increased amount in 2008 returns the Company to its normal spending level.
Results of Operations - Third Quarter of 2008 compared with Third Quarter of 2007
Net Sales
The Company's net sales by segment in the third quarter of 2008 and 2007 are presented in the following table. For further information, see Segment Information included in Note 7 to the Condensed Consolidated Financial Statements.
2008 2007
(dollars in millions)
Europe $ 869.7 $ 825.2
North America 580.6 596.2
South America 299.1 253.0
Asia Pacific 248.7 239.4
Reportable segment totals 1,998.1 1,913.8
Other 10.5 14.6
Consolidated totals 2,008.6 1,928.4
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The Company's net sales in the third quarter of 2008 increased $80.2 million, or 4.2%, over the third quarter of 2007.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2007 $ 1,913.8 Net effect of price and mix $ 149.0 Effects of changing foreign currency rates 80.3 Decreased sales volume (145.0 ) Total effect on net sales 84.3 Net sales - 2008 $ 1,998.1 |
Segment Operating Profit
Operating Profit of the reportable segments in the table below 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 7 to the Condensed Consolidated Financial Statements.
2008 2007
(dollars in millions)
Europe $ 114.8 $ 106.5
North America 41.7 84.1
South America 92.4 66.1
Asia Pacific 38.7 42.6
Reportable segment totals 287.6 299.3
Retained corporate costs and other (2.3 ) (21.4 )
Consolidated totals 285.3 277.9
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Segment Operating Profit of reportable segments in the third quarter of 2008 decreased $11.7 million, or 3.9%, to $287.6 million, compared with Segment Operating Profit of $299.3 million for the third quarter of 2007.
The change in Segment Operating Profit of reportable segments can be summarized as follows (dollars in millions):
Segment Operating Profit - 2007 $ 299.3 Net effect of price and mix $ 149.0 Effects of changing foreign currency rates 13.0 Manufacturing and delivery (144.0 ) Decreased sales volume (33.0 ) Operating expenses (1.0 ) Other 4.3 Total net effect on Segment Operating Profit (11.7 ) Segment Operating Profit - 2008 $ 287.6 |
Retained corporate costs and other in 2008 were $2.3 million compared with $21.4 million for 2007. Beginning in 2008, the Company revised its method of allocating corporate expenses. The Company decreased slightly the percentage allocation based on sales and significantly expanded the number of functions included in the allocation based on cost of services. It is not practicable to quantify the net effect of these changes on periods prior to 2008. However, the effect for the three months ended September 30, 2008 was to reduce the amount of retained corporate costs by approximately $9.0 million. Also contributing to the decrease was increased pension income for 2008.
Interest Expense
Interest expense in 2008 was $66.3 million compared with interest expense of $97.0 million for continuing operations in 2007. The decrease was principally due to lower variable interest rates under the Company's bank credit agreement as well as lower overall debt levels.
Minority Share Owners' Interest in Earnings of Subsidiaries
Minority share owners' interest in earnings of subsidiaries in the third quarter of 2008 was $18.0 million compared with $18.1 million in the third quarter of 2007.
Results of Operations - First nine months of 2008 compared with first nine months of 2007
Net Sales
The Company's net sales by segment in the first nine months of 2008 and 2007 are presented in the following table. For further information, see Segment Information included in Note 7 to the Condensed Consolidated Financial Statements.
2008 2007
(dollars in millions)
Europe $ 2,804.3 $ 2,455.2
North America 1,717.8 1,733.5
South America 847.4 687.3
Asia Pacific 741.0 662.4
Reportable segment totals 6,110.5 5,538.4
Other 69.2 71.0
Consolidated totals 6,179.7 5,609.4
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The Company's net sales in the first nine months of 2008 increased $570.3 million, or 10.2%, over the first nine months of 2007.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2007 $ 5,538.4 Net effect of price and mix $ 422.0 Effects of changing foreign currency rates 469.1 Decreased sales volume (319.0 ) Total effect on net sales 572.1 Net sales - 2008 $ 6,110.5 |
Segment Operating Profit
Operating Profit of the reportable segments in the table below 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 7 to the Condensed Consolidated Financial Statements.
2008 2007
(dollars in millions)
Europe $ 458.2 $ 303.8
North America 165.2 231.6
South America 251.5 172.5
Asia Pacific 124.9 99.5
Reportable segment totals 999.8 807.4
Retained corporate costs and other (2.9 ) (62.9 )
Consolidated totals 996.9 744.5
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Segment Operating Profit of reportable segments in the first nine months of 2008 increased $192.4 million, or 23.8%, to $999.8 million, compared with Segment Operating Profit of $807.4 million in the first nine months of 2007.
The change in Segment Operating Profit of reportable segments can be summarized as follows (dollars in millions):
Segment Operating Profit - 2007 $ 807.4 Net effect of price and mix $ 422.0 Effects of changing foreign currency rates 80.0 Manufacturing and delivery (296.0 ) Decreased sales volume (75.0 ) Operating expenses (6.0 ) Other 67.4 Total net effect on Segment Operating Profit 192.4 Segment Operating Profit - 2008 $ 999.8 |
Retained corporate costs and other in 2008 were $2.9 million compared with $62.9 million in 2007. Beginning in 2008, the Company revised its method of allocating corporate expenses. The Company decreased slightly the percentage allocation based on sales and significantly expanded the number of functions included in the allocation based on cost of services. It is not practicable to quantify the net effect of these changes on periods prior to 2008. However, the effect for the nine months ended September 30, 2008 was to reduce the amount of retained corporate costs by approximately $29.0 million. Also contributing to the decrease were lower accruals for self insured risks and increased pension income in 2008.
Interest Expense
Interest expense in the first nine months of 2008 was $199.8 million compared with $260.2 million from continuing operations in the first nine months of 2007. The decrease was principally due to lower variable interest rates under the Company's bank credit agreement as well as lower overall debt levels partially offset by an increase from foreign currency exchange rates.
Provision for Income Taxes
The Company's effective tax rate from continuing operations in the nine months ended September 30, 2008 was 25.6%, compared with 27.3% in the first nine months of 2007. The
provision for 2008 includes a net benefit of $6.2 million related to the favorable effect of the Company's election under recent tax legislation in Italy, partially offset by the tax effects of restructuring in Europe. The provision for 2007 includes a benefit of $13.5 million for the recognition of tax credits related to restructuring of investments in certain European operations. Excluding those benefits and the effects in both periods of pretax items for which taxes are separately calculated and recorded in the period, the Company's effective tax rate from continuing operations for the nine months ended 2008 was 24.9% compared with 28.0% for the nine months ended 2007. Based upon the current projection for the mix of earnings for 2008, the Company expects that the full year effective tax rate will be comparable to the 24.4% effective tax rate for 2007 excluding the separately taxed items in both years.
Minority Share Owners' Interest in Earnings of Subsidiaries
Minority share owners' interest in earnings of subsidiaries in the first nine months of 2008 was $51.4 million compared with $44.2 million in the first nine months of 2007. The increase is primarily attributed to higher earnings from the Company's operations in South America.
Restructuring and Impairment Charges
During the first nine months of 2008, the Company recorded charges totaling $111.7 million ($93.6 million after tax and minority share owners' interests), for additional restructuring and asset impairment principally in North America with additional charges across all segments as well as in Retained Corporate Costs and Other. The charges reflect the additional decisions reached in the Company's ongoing strategic review of its global manufacturing footprint. See Note 10 for additional information.
During the first nine months of 2007, the Company recorded a charge of $61.9 million ($55.0 million after tax), for restructuring and asset impairment in South America and Europe. The charge reflects the initial conclusions of the Company's ongoing strategic review of its global manufacturing footprint. See Note 10 for additional information.
Discontinued Operations
On July 31, 2007, the Company completed the sale of its plastics packaging business to Rexam PLC for approximately $1.825 billion in cash. The plastics packaging business comprised the Company's former Plastics Packaging segment. As required by FAS No. 144, the Company has presented the results of operations for the plastics packaging business in the Condensed Consolidated Results of Operations for the three and nine months ended September 30, 2007 as discontinued operations. Interest expense was allocated to the discontinued operations based on debt that was required by an amendment to the Secured Credit Agreement to be repaid from the net proceeds.
The following summarizes the revenues and expenses of the discontinued operations as reported in the consolidated results of operations for the periods indicated:
Three months Nine months
ended ended
Sept. 30, Sept. 30,
2007 2007
Net sales $ 65.8 $ 455.0
Manufacturing, shipping, and delivery expense (46.0 ) (343.5 )
Gross profit 19.8 111.5
Selling and administrative expense (3.8 ) (20.7 )
Research, development, and engineering (1.1 ) (8.3 )
Interest expense (12.3 ) (80.6 )
Other revenue (expense), net 1.1 (1.3 )
Earnings before item below 3.7 0.6
Credit for income taxes 5.4 2.4
Minority share owners' interests in earnings of
subsidiaries (0.1 ) (0.2 )
Gain on sale of discontinued operations 1,071.9 1,071.9
Net earnings from discontinued operations $ 1,080.9 $ 1,074.7
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The gain on sale of discontinued operations of $7.9 million reported in 2008 relates to an adjustment of the 2007 gain on the sale of the plastics packaging business mainly related to finalizing certain tax allocations and an adjustment to the selling price in accordance with procedures set forth in the final contract.
Capital Resources and Liquidity
The Company's total debt at September 30, 2008 was $3.46 billion, compared to $3.71 billion at December 31, 2007 and $4.84 billion at September 30, 2007.
On June 14, 2006, the Company's subsidiary borrowers entered into the Secured Credit Agreement (the "Agreement"). At September 30, 2008, the Agreement included a $900.0 million revolving credit facility, a 225.0 million Australian dollar term loan, and a 110.8 million Canadian dollar term loan, each of which has a final maturity date of June 15, 2012. It also included a $191.5 million term loan and a €191.5 million term loan, each of which has a final maturity date of June 14, 2013.
As a result of the pending bankruptcy of Lehman Brothers Holdings Inc. and several of its subsidiaries, the Company believes that the maximum amount available under the revolving credit facility was reduced by $32.3 million. After further deducting amounts attributable to letters of credit and overdraft facilities that are supported by the revolving credit facility, at September 30, 2008 the Company's subsidiary borrowers had unused credit of $745.3 million available under the Agreement.
The weighted average interest rate on borrowings outstanding under the Agreement at September 30, 2008 was 6.10%.
During the second quarter of 2008, the Company used cash from operations and borrowings under the Agreement to retire $250 million principal amount of 7.35% Senior Notes which matured in May 2008.
During October 2006, the Company entered into a €300 million European accounts receivable securitization program. The program extends through October 2011, subject to annual renewal of backup credit lines. In addition, the Company participates in a receivables financing program in the Asia Pacific region with a revolving funding committment of 100 million Australian dollars and 25 million New Zealand dollars that extends through January 2009 and November 2008, respectively.
Information related to the Company's accounts receivable securitization program is as follows:
Sept. 30, Dec. 31, Sept. 30,
2008 2007 2007
Balance (included in short-term loans) $ 390.5 $ 361.8 $ 378.7
Weighted average interest rate 6.00 % 5.48 % 5.75 %
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Cash provided by continuing operating activities in the first nine months of 2008 was $534.8 million compared with $470.5 million in the prior year. The increase is mainly attributable to improved earnings and lower payments for asbestos-related costs, partially offset by a larger seasonal increase in working capital.
Capital spending for property, plant, and equipment was $238.5 million in the first nine months of 2008 compared with $164.7 million (continuing operations) in the prior year. In addition, during 2008 and 2007, the Company capitalized $14.5 million and $24.0 million, respectively, under capital lease obligations with the related financing recorded as long term debt. The increased amount in 2008 returns the Company to its normal spending level.
During the current downturn in global financial markets, some companies may experience difficulties accessing their cash equivalents, drawing on revolvers, issuing debt, and raising capital generally, which could have a material adverse impact on their liquidity. Notwithstanding these adverse market conditions, the Company anticipates that cash flow 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 Company's expectations regarding future payments for lawsuits and claims and also based on the Company's 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 Company's liquidity on a short-term or long-term basis.
Critical Accounting Estimates
The Company's 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 Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company's reported and expected financial results.
The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.
Property, Plant, and Equipment
The net carrying amount of property, plant, and equipment ("PP&E") at September 30, 2008 totaled $2,748.9 million, representing 30% of total assets. Depreciation expense for the nine months ended September 30, 2008 totaled $339.3 million, representing over 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company's consolidated financial statements, the determinations of an asset's cost basis and its economic useful life are considered to be critical accounting estimates.
Cost Basis - PP&E is recorded at cost, which is generally objectively quantifiable when assets are purchased singly. However, when assets are purchased in groups, or as part of a business, costs assigned to PP&E are based on an estimate of fair value of each asset at the date of acquisition. These estimates are based on assumptions about asset condition, remaining useful life and market conditions, among others. The Company frequently employs expert appraisers to aid in allocating cost among assets purchased as a group.
Included in the cost basis of PP&E are those costs which substantially increase the useful lives or capacity of existing PP&E. Significant judgment is needed to determine which costs should be capitalized under these criteria and which costs should be expensed as a repair or maintenance expenditure. For example, the Company frequently incurs various costs related to its existing glass melting furnaces and forming machines and must make a determination of which costs, if any, to capitalize. The Company relies on the experience and expertise of its operations and engineering staff to make reasonable and consistent judgments regarding increases in useful lives or capacity of PP&E.
Estimated Useful Life - PP&E is generally depreciated using the straight-line method, which deducts equal amounts of the cost of each asset from earnings each period over its estimated economic useful life. Economic useful life is the duration of time an asset is expected to be productively employed by the Company, which may be less than its physical life. Management's assumptions regarding the following factors, among others, affect the determination of
estimated economic useful life: wear and tear, product and process obsolescence, technical standards, and changes in market demand.
The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, technological advances, excessive wear and tear, or changes in customers' requirements may result in a shorter estimated useful life than originally anticipated. In these cases, the Company depreciates the remaining net book value over the new estimated remaining life, thereby increasing . . .
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