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OI > SEC Filings for OI > Form 10-Q on 31-Oct-2013All Recent SEC Filings

Show all filings for OWENS ILLINOIS INC /DE/ | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for OWENS ILLINOIS INC /DE/


31-Oct-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The Company's measure of profit for its reportable segments is segment operating profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs. The 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 Company's 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 Company's reportable segments is as follows (dollars in millions):

                              Three months ended       Nine months ended
                                September 30,            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


                                         Three months ended              Nine months ended
                                            September 30,                  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


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 Company's 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.


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 Company's 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


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 Company's 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.


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 Company's 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,


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 Company's 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.


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


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 . . .

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