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OI > SEC Filings for OI > Form 10-K on 13-Feb-2014All Recent SEC Filings

Show all filings for OWENS ILLINOIS INC /DE/

Form 10-K for OWENS ILLINOIS INC /DE/


13-Feb-2014

Annual Report


ITEM 7. 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 selected cash flow information, to evaluate performance and to allocate resources.

Financial information regarding the Company's reportable segments is as follows (dollars in millions):

                                             2013      2012      2011
                Net sales:
                Europe                      $ 2,787   $ 2,717   $ 3,052
                North America                 2,002     1,966     1,929
                South America                 1,186     1,252     1,226
                Asia Pacific                    966     1,028     1,059


                Reportable segment totals     6,941     6,963     7,266
                Other                            26        37        92


                Net sales                   $ 6,967   $ 7,000   $ 7,358


                                                                 2013     2012     2011
Segment operating profit:
Europe                                                          $  305   $  307   $  345
North America                                                      307      288      222
South America                                                      204      227      250
Asia Pacific                                                       131      113       83


Reportable segment totals                                          947      935      900
Items excluded from segment operating profit:
Retained corporate costs and other                                (119 )   (106 )    (75 )
Restructuring, asset impairment and related charges               (119 )   (168 )   (112 )
Charge for asbestos related costs                                 (145 )   (155 )   (165 )
Gain on China land compensation                                              61
Charge for goodwill impairment                                                      (641 )
Interest income                                                     10        9       11
Interest expense                                                  (239 )   (248 )   (314 )


Earnings (loss) from continuing operations before income
taxes                                                              335      328     (396 )
Provision for income taxes                                        (120 )   (108 )    (85 )


Earnings (loss) from continuing operations                         215      220     (481 )
Gain (loss) from discontinued operations                           (18 )     (2 )      1


Net earnings (loss)                                                197      218     (480 )
Net earnings attributable to noncontrolling interests              (13 )    (34 )    (20 )


Net earnings (loss) attributable to the Company                 $  184   $  184   $ (500 )

Net earnings (loss) from continuing operations attributable to the Company $ 202 $ 186 $ (501 )


Note: all amounts excluded from reportable segment totals are discussed in the following applicable sections.

Executive Overview-Comparison of 2013 with 2012

2013 Highlights


Net sales lower due to unfavorable effects of foreign currency exchange rate changes and sales volume, partially offset by higher selling prices.


Segment operating profit higher due to improved selling prices and global cost control initiatives, partially offset by cost inflation and the unfavorable effects of foreign currency exchange rate changes.


Strong cash generation used to prepay debt and continue share repurchase program.

Net sales were $33 million lower than the prior year due primarily to the unfavorable effects of changes in foreign currency exchange rates and sales volume. The unfavorable effects of foreign currency exchange rate changes were driven by a weaker Brazilian real and Australian dollar, partially offset by a stronger Euro. Higher selling prices had a positive impact on net sales.

Segment operating profit for reportable segments was $12 million higher than the prior year. The increase was attributable to higher selling prices and lower operating expenses due to global cost control initiatives. Cost inflation and the effects of foreign currency exchange rate changes unfavorably impacted segment operating profit in 2013.


Interest expense in 2013 decreased $9 million over 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.

The Company recorded earnings from continuing operations attributable to the Company in 2013 of $202 million, or $1.22 per share (diluted), compared with $186 million, or $1.12 per share, for 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 $248 million, or $1.50 per share, in 2013 and $252 million, or $1.52 per share, in 2012.

Results of Operations-Comparison of 2013 with 2012

Net Sales

The Company's net sales in 2013 were $6,967 million compared with $7,000 million in 2012, a decrease of $33 million. Net sales were 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. Glass container shipments, in tonnes, were down slightly in 2013 compared to 2012, with all regions reporting lower or flat sales volumes. Net sales benefited in 2013 from higher selling prices.

The change in net sales of reportable segments can be summarized as follows (dollars in millions):

            Net sales-2012                                       $ 6,963
            Price                                        $ 118
            Sales volume                                   (48 )
            Effects of changing foreign currency rates     (92 )


            Total effect on net sales                                (22 )


            Net sales-2013                                       $ 6,941

Europe: Net sales in Europe in 2013 were $2,787 million compared with $2,717 million in 2012, an increase of $70 million, or 3%. Net sales increased $68 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. Glass container shipments in 2013 were down less than 1% compared to the prior year, particularly in the beer and non-alcoholic beverage categories. The lower sales volume, which reduced net sales by $16 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 2013 were $2,002 million compared with $1,966 million in 2012, an increase of $36 million, or 2%. The increase in net sales was due to higher selling prices of $44 million. The benefit of higher selling prices was partially offset by the unfavorable effects of foreign currency exchange rate changes, which decreased net sales by $8 million due to a weakening of the Canadian dollar in relation to the U.S. dollar. Glass container shipments were flat in the current year compared to the prior year, as lower megabeer bottle sales were offset by higher shipments of craft beer and non-alcoholic beverage containers.

South America: Net sales in South America in 2013 were $1,186 million compared with $1,252 million in 2012, a decrease of $66 million, or 5%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $99 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 $18 million due to a decline in glass container shipments of less than 1%, driven by lower beer demand across the region, general economic uncertainty and the impact of general


strikes in Colombia in the mining, agriculture and transportation industries. Higher selling prices benefited net sales $51 million in the current year.

Asia Pacific: Net sales in Asia Pacific in 2013 were $966 million compared with $1,028 million in 2012, a decrease of $62 million, or 6%. The unfavorable effects of foreign currency exchange rate changes decreased net sales $53 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 almost 1% compared to the prior year, resulting in a $14 million decline in net sales, driven by lower shipments of beer bottles partially offset by gains in non-alcoholic beverage and food containers. Improved pricing increased net sales $5 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 2 to the Consolidated Financial Statements.

Segment operating profit of reportable segments in 2013 was $947 million compared to $935 million in 2012, an increase of $12 million, or 1%. The increase in segment operating profit was the result of higher selling prices and lower operating expenses due to global cost control initiatives. Cost inflation negatively impacted segment operating profit in the current year. The effects of changes in foreign currency exchange rates unfavorably impacted segment operating profit in 2013, primarily due to a weaker Brazilian real and Australian dollar in relation to the U.S. dollar, partially offset by a stronger Euro. Manufacturing and delivery costs were flat with the prior year as lower global production volumes were offset by benefits realized from permanent footprint initiatives.

The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):

            Segment operating profit-2012                           $ 935
            Price and product mix                          $  118
            Sales volume                                       (3 )
            Cost inflation                                   (134 )
            Manufacturing and delivery
            Operating expenses and other                       44
            Effects of changing foreign currency rates        (13 )


            Total net effect on segment operating profit               12


            Segment operating profit-2013                           $ 947

Europe: Segment operating profit in Europe in 2013 was $305 million compared with $307 million in 2012, a decrease of $2 million, or 1%. The higher selling prices discussed above increased segment operating profit by $18 million, while the decline in sales volume decreased segment operating profit by $3 million. Cost inflation in the current year reduced segment operating profit by $39 million. Cost control initiatives and the asset optimization program, partially offset by higher spending on equipment repairs and logistical costs, had a net $16 million positive impact on segment operating profit during 2013, while the favorable effects of foreign currency exchange rate changes increased segment operating profit by $6 million.

The Company continued implementing the European asset optimization program to increase the efficiency and capability of its European operations. Through this program over the next several years,


the Company expects to improve the long term profitability of this region through investments and by addressing higher cost facilities to better align its European manufacturing footprint with market and customer needs.

North America: Segment operating profit in North America in 2013 was $307 million compared with $288 million in 2012, an increase of $19 million, or 7%. Higher selling prices in the current year increased segment operating profit by $44 million and lower operating expenses, driven by cost control initiatives, had a $17 million positive impact on segment operating profit. Cost inflation had a $40 million unfavorable impact on segment operating profit. Higher manufacturing and delivery costs decreased segment operating profit by $2 million in the current year.

South America: Segment operating profit in South America in 2013 was $204 million compared with $227 million in 2012, a decrease of $23 million, or 10%. The lower sales volume in the current year decreased segment operating profit by $2 million, while higher selling prices improved segment operating profit by $51 million, despite the price controls imposed by the Argentina government in the first half of the year. Cost inflation in the current year decreased segment operating profit by $37 million and higher manufacturing and delivery costs resulted in a $15 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 $14 million in the current year while other costs increased by $6 million.

Asia Pacific: Segment operating profit in Asia Pacific in 2013 was $131 million compared with $113 million in 2012, an increase of $18 million, or 16%. The increase in segment operating profit was primarily due to a $18 million decline in manufacturing and delivery costs driven by the benefits realized from the permanent footprint adjustments made over the past year. Higher selling prices and sales volume increased segment operating profit by $5 million and $1 million, respectively, and lower operating expenses, driven by cost control initiatives, had a $16 million positive impact in the current year. Cost inflation reduced segment operating profit by $18 million, while the unfavorable effects of foreign currency exchange rate changes decreased segment operating profit by $4 million in 2013.

Interest Expense

Interest expense in 2013 was $239 million compared with $248 million in 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 $23 million in the current year. The decrease was principally due to debt reduction initiatives and lower interest rates.

Provision for Income Taxes

The Company's effective tax rate from continuing operations for 2013 was 35.8%, compared with 32.9% for 2012. Excluding the amounts related to items that management considers not representative of ongoing operations, the Company's effective tax rate for 2013 was 21.9%, compared with 22.1% for 2012.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests for 2013 was $13 million compared to $34 million for 2012. The decrease was primarily due to $14 million included in 2012 related to a gain recorded by the Company for cash received from the Chinese government as compensation for land in China that the Company was required to return to the government.


Earnings from Continuing Operations Attributable to the Company

    For 2013, the Company recorded earnings from continuing operations
attributable to the Company of $202 million compared with $186 million for 2012.
The after tax effects of the items excluded from segment operating profit, the
unusual tax items and the additional interest charges increased or decreased
earnings in 2013 and 2012 as set forth in the following table (dollars in
millions).

                                                                    Net Earnings
                                                                      Increase
                                                                     (Decrease)
   Description                                                     2013      2012
   Restructuring, asset impairment and related charges             $  (92 ) $ (144 )
   Gain on China land compensation                                              33
   Note repurchase premiums and write-off of finance fees             (11 )
   Net benefit related to changes in unrecognized tax positions                 14
   Charge for asbestos related costs                                 (145 )   (155 )


   Total                                                           $ (248 ) $ (252 )

Executive Overview-Comparison of 2012 with 2011

2012 Highlights


Net sales lower due to foreign currency exchange rate changes and 5% decline in glass container shipments, partially offset by higher selling prices


Increased segment operating profit due to higher selling prices to offset cost inflation, as well as improved manufacturing performance in North America and cost savings from permanent footprint adjustments made in Australia


Strong cash generation used to prepay debt, make discretionary pension contributions and initiate a share repurchase program

Net sales were $358 million lower than the prior year, primarily due to the unfavorable effects of changes in foreign currency exchange rates and lower sales volumes, partially offset by improved pricing.

Segment operating profit for reportable segments was $35 million higher than the prior year. The increase was mainly attributable to higher selling prices to offset inflation, improvements made in North America to correct the production and supply chain issues from 2011, cost savings achieved from the permanent footprint adjustments made in Australia and global cost-cutting initiatives. These increases to segment operating profit were partially offset by the unfavorable effects of changes in foreign currency exchange rates, the unfavorable impacts of the production curtailments in Europe and lower sales volume.

Interest expense in 2012 decreased $66 million over 2011. The decrease was principally due to the refinancing of higher cost debt in connection with the Company's new bank credit agreement completed in mid-2011, as well as the non-recurrence of note repurchase premiums and the write-off of finance fees related to debt redeemed in 2011. Interest expense also decreased due to the prepayment in 2012 of term loans under the Company's bank credit agreement.

The Company recorded earnings from continuing operations attributable to the Company in 2012 of $186 million, or $1.12 per share (diluted), compared to a loss from continuing operations attributable to the Company of $501 million, or $3.06 per share, for 2011. 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 $252 million, or $1.52 per share, in 2012 and $905 million, or $5.49 per share, in 2011.

Results of Operations-Comparison of 2012 with 2011

Net Sales

The Company's net sales in 2012 were $7,000 million compared with $7,358 million in 2011, a decrease of $358 million, or 5%. The decrease in net sales was caused by the unfavorable effects of changes in foreign currency exchange rates and lower sales volumes, partially offset by improved pricing. The unfavorable effects of changes in foreign currency exchange rates were primarily due to a weaker Euro and Brazilian real in relation to the U.S. dollar. Glass container shipments, in tonnes, were down approximately 5% in 2012 compared to 2011, driven by lower sales in Europe and Asia Pacific, partially offset by higher sales in South America. Average selling prices improved in 2012 over the prior year as the Company increased prices to recover high cost inflation.

The change in net sales of reportable segments can be summarized as follows (dollars in millions):

            Net sales-2011                                        $ 7,266
            Price
            Price and product mix                        $  322
            Cost pass-through provisions                    (18 )
            Sales volume                                   (287 )
            Effects of changing foreign currency rates     (320 )


            Total effect on net sales                                (303 )


            Net sales-2012                                        $ 6,963

Europe: Net sales in Europe in 2012 were $2,717 million compared with $3,052 million in 2011, a decrease of $335 million, or 11%. The decrease in net sales was partly attributable to the unfavorable effects of foreign currency exchange rate changes as the Euro declined in value in relation to the U.S. dollar by approximately 8% in 2012 compared to the prior year. The decrease in net sales was also due to lower glass container shipment levels which were down approximately 9% in 2012 compared to 2011. Lower wine and food bottle shipments accounted for the majority of the volume decrease, primarily a result of macroeconomic conditions in the region and the Company's pricing strategy. Partially offsetting these decreases to net sales were higher selling prices resulting from the successful negotiation of annual customer contracts to recover high cost inflation.

North America: Net sales in North America in 2012 were $1,966 million compared with $1,929 million in 2011, an increase of $37 million, or 2%. The increase in net sales was due to improved pricing, as the Company increased selling prices in the current year to recover high cost inflation. Glass container shipments in 2012 were similar to 2011 shipments.

South America: Net sales in South America in 2012 were $1,252 million compared with $1,226 million in 2011, an increase of $26 million, or 2%. The increase in net sales was due to improved pricing and higher glass container shipments. The Company increased selling prices in 2012 to recover high cost inflation. Glass container shipments were up about 6% in the current year, particularly in the beer category. Partially offsetting these increases to net sales was the unfavorable effects of foreign currency exchange rate changes as the Brazilian real declined in value in relation to the U.S. dollar by approximately 17% in 2012 compared to 2011.

Asia Pacific: Net sales in Asia Pacific in 2012 were $1,028 million compared with $1,059 million in 2011, a decrease of $31 million, or 3%. The decrease in net sales was caused by lower glass container shipments, partially offset by higher selling prices to recover high cost inflation. Glass container


shipments, in tonnes, were down approximately 9% in 2012 compared to the prior year. In 2012, the Company continued to experience declines in shipments of wine and beer bottles primarily due to the off-shoring of Australian wine bottling and lower beer consumption due to macroeconomic conditions.

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 2 to the Consolidated Financial Statements.

Segment operating profit of reportable segments in 2012 was $935 million compared to $900 million in 2011, an increase of $35 million, or 4%. The increase in segment operating profit was primarily due to higher selling prices to recover high cost inflation, improved manufacturing performance in North America, footprint adjustments in Australia and global cost-cutting initiatives. These increases in segment operating profit were partially offset by the unfavorable effects of changes in foreign currency exchange rates, production curtailments in Europe and lower sales volume. Costs of goods sold were comparable to the prior year as lower costs in 2012 due to the improvements made in North America to correct the production and supply chain issues from 2011 and cost savings achieved from the permanent footprint adjustments made in Australia were offset by the unfavorable impacts of the production curtailments in Europe in the second half of 2012. Operating expenses were lower in 2012 compared to 2011 due to global cost reductions and the non-recurrence of expenses in 2011 related to the implementation of an ERP system.

The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):

            Segment operating profit-2011                           $ 900
            Price and product mix                          $  322
            Cost inflation                                   (194 )


            Price / inflation spread                          128
            Sales volume                                      (77 )
            Manufacturing and delivery                          -
            Operating expenses and other                       21
            Effects of changing foreign currency rates        (37 )


            Total net effect on segment operating profit               35


            Segment operating profit-2012                           $ 935

Europe: Segment operating profit in Europe in 2012 was $307 million compared with $345 million in 2011, a decrease of $38 million, or 11%. The . . .

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