10-Q 1 a12-18932_110q.htm 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C.  20549

 

FORM 10-Q

 

(Mark one)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended

 

September 30, 2012

 

or

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from            to            

 

Commission file number 33-13061

 

OWENS-ILLINOIS GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

34-1559348

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

One Michael Owens Way, Perrysburg, Ohio

 

43551

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (567) 336-5000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The number of shares of common stock, par value $.01, of Owens-Illinois Group, Inc. outstanding as of September 30, 2012 was 100.

 

 

 



 

Part I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

The Condensed Consolidated Financial Statements of Owens-Illinois Group, Inc. (the “Company”) presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated.  All adjustments are of a normal recurring nature. Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

 

1



 

OWENS-ILLINOIS GROUP, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

(Dollars in millions)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

1,747

 

$

1,862

 

$

5,252

 

$

5,540

 

Manufacturing, shipping and delivery expense

 

(1,405

)

(1,475

)

(4,156

)

(4,455

)

Gross profit

 

342

 

387

 

1,096

 

1,085

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

(131

)

(138

)

(410

)

(426

)

Research, development and engineering expense

 

(13

)

(18

)

(45

)

(52

)

Interest expense

 

(61

)

(70

)

(187

)

(246

)

Interest income

 

2

 

2

 

7

 

8

 

Equity earnings

 

16

 

19

 

47

 

52

 

Royalties and net technical assistance

 

4

 

4

 

13

 

12

 

Other income

 

4

 

2

 

10

 

6

 

Other expense

 

(36

)

(40

)

(55

)

(66

)

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

127

 

148

 

476

 

373

 

Provision for income taxes

 

(28

)

(25

)

(113

)

(85

)

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

99

 

123

 

363

 

288

 

Loss from discontinued operations

 

(2

)

(3

)

(4

)

(2

)

 

 

 

 

 

 

 

 

 

 

Net earnings

 

97

 

120

 

359

 

286

 

Net earnings attributable to noncontrolling interests

 

(7

)

(4

)

(15

)

(15

)

Net earnings attributable to the Company

 

$

90

 

$

116

 

$

344

 

$

271

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to the Company:

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

92

 

$

119

 

$

348

 

$

273

 

Loss from discontinued operations

 

(2

)

(3

)

(4

)

(2

)

Net earnings

 

$

90

 

$

116

 

$

344

 

$

271

 

 

See accompanying notes.

 

2



 

OWENS-ILLINOIS GROUP, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

(Dollars in millions)

 

 

 

Three months ended
September 30,

 

Nine months ended
September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net earnings

 

$

97

 

$

120

 

$

359

 

$

286

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

86

 

(358

)

(22

)

(162

)

Pension and other postretirement benefit adjustments

 

16

 

39

 

73

 

85

 

Change in fair value of derivative instruments

 

3

 

(2

)

6

 

(1

)

Other comprehensive income (loss)

 

105

 

(321

)

57

 

(78

)

Total comprehensive income (loss)

 

202

 

(201

)

416

 

208

 

Comprehensive income attributable to noncontrolling interests

 

(9

)

2

 

(21

)

(18

)

Comprehensive income (loss) attributable to the Company

 

$

193

 

$

(199

)

$

395

 

$

190

 

 

See accompanying notes.

 

3



 

OWENS-ILLINOIS GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions, except per share amounts)

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2012

 

2011

 

2011

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

336

 

$

400

 

$

256

 

Short-term investments, at cost which approximates market

 

 

 

 

 

1

 

Receivables, less allowances for losses and discounts ($42 at September 30, 2012, $38 at December 31, 2011, and $38 at September 30, 2011)

 

1,133

 

1,158

 

1,218

 

Inventories

 

1,228

 

1,061

 

1,101

 

Prepaid expenses

 

91

 

124

 

112

 

 

 

 

 

 

 

 

 

Total current assets

 

2,788

 

2,743

 

2,688

 

 

 

 

 

 

 

 

 

Investments and other assets:

 

 

 

 

 

 

 

Equity investments

 

300

 

315

 

312

 

Repair parts inventories

 

148

 

155

 

163

 

Pension assets

 

120

 

116

 

60

 

Other assets

 

715

 

687

 

685

 

Goodwill

 

2,065

 

2,082

 

2,762

 

 

 

 

 

 

 

 

 

Total other assets

 

3,348

 

3,355

 

3,982

 

 

 

 

 

 

 

 

 

Property, plant and equipment, at cost

 

6,837

 

6,899

 

6,998

 

Less accumulated depreciation

 

4,102

 

4,022

 

4,067

 

 

 

 

 

 

 

 

 

Net property, plant and equipment

 

2,735

 

2,877

 

2,931

 

 

 

 

 

 

 

 

 

Total assets

 

$

8,871

 

$

8,975

 

$

9,601

 

 

4



 

CONDENSED CONSOLIDATED BALANCE SHEETS — Continued

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2012

 

2011

 

2011

 

Liabilities and Share Owners’ Equity

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Short-term loans and long-term debt due within one year

 

$

356

 

$

406

 

$

345

 

Accounts payable

 

853

 

1,038

 

935

 

Other liabilities

 

664

 

636

 

663

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,873

 

2,080

 

1,943

 

 

 

 

 

 

 

 

 

Long-term debt

 

3,537

 

3,627

 

3,743

 

Deferred taxes

 

209

 

212

 

204

 

Pension benefits

 

792

 

871

 

530

 

Nonpension postretirement benefits

 

269

 

269

 

252

 

Other liabilities

 

370

 

404

 

412

 

Commitments and contingencies

 

 

 

 

 

 

 

Share owners’ equity:

 

 

 

 

 

 

 

Share owner’s equity of the Company:

 

 

 

 

 

 

 

Common stock, par value $.01 per share, 1,000 shares authorized, 100 shares issued

 

 

 

 

Other contributed total

 

212

 

295

 

359

 

Retained earnings

 

2,688

 

2,344

 

2,950

 

Accumulated other comprehensive loss

 

(1,229

)

(1,280

)

(946

)

Total share owner’s equity of the Company

 

1,671

 

1,359

 

2,363

 

Noncontrolling interests

 

150

 

153

 

154

 

Total share owners’ equity

 

1,821

 

1,512

 

2,517

 

Total liabilities and share owners’ equity

 

$

8,871

 

$

8,975

 

$

9,601

 

 

See accompanying notes.

 

5



 

OWENS-ILLINOIS GROUP, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

359

 

$

286

 

Loss from discontinued operations

 

4

 

2

 

Non-cash charges (credits):

 

 

 

 

 

Depreciation

 

287

 

308

 

Amortization of intangibles and other deferred items

 

25

 

13

 

Amortization of finance fees and debt discount

 

24

 

24

 

Pension expense

 

69

 

69

 

Restructuring and asset impairment

 

33

 

41

 

Other

 

23

 

32

 

Pension contributions

 

(76

)

(43

)

Cash paid for restructuring activities

 

(47

)

(27

)

Change in non-current assets and liabilities

 

(59

)

(87

)

Change in components of working capital

 

(325

)

(235

)

Cash provided by continuing operating activities

 

317

 

383

 

Cash utilized in discontinued operating activities

 

(4

)

(1

)

Total cash provided by operating activities

 

313

 

382

 

Cash flows from investing activities:

 

 

 

 

 

Additions to property, plant and equipment

 

(178

)

(204

)

Acquisitions, net of cash acquired

 

(5

)

(148

)

Net cash proceeds related to sale of assets and other

 

49

 

1

 

Proceeds from collection of minority partner loan

 

9

 

 

 

Cash utilized in investing activities

 

(125

)

(351

)

Cash flows from financing activities:

 

 

 

 

 

Additions to long-term debt

 

119

 

1,560

 

Repayments of long-term debt

 

(275

)

(1,849

)

Increase (decrease) in short-term loans

 

(11

)

40

 

Net receipts (payments) for hedging activity

 

25

 

(22

)

Payment of finance fees

 

 

 

(18

)

Dividends paid to noncontrolling interests

 

(24

)

(32

)

Distributions to parent

 

(99

)

(97

)

Cash utilized in financing activities

 

(265

)

(418

)

Effect of exchange rate fluctuations on cash

 

13

 

3

 

Decrease in cash

 

(64

)

(384

)

Cash at beginning of period

 

400

 

640

 

Cash at end of period

 

$

336

 

$

256

 

 

See accompanying notes.

 

6



 

OWENS-ILLINOIS GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tabular data dollars in millions

 

1. Basis of Presentation

 

The Company is a 100%-owned subsidiary of Owens-Illinois, Inc. (“OI Inc.”).  Although OI Inc. does not conduct any operations, it has substantial obligations related to outstanding indebtedness and asbestos-related payments. OI Inc. relies primarily on distributions from its direct and indirect subsidiaries to meet these obligations.

 

2. Change in Accounting Method

 

Effective January 1, 2012, the Company elected to change the method of valuing U.S. inventories to the average cost method, while in prior years these inventories were valued using the last-in, first-out (“LIFO”) method.  The Company believes the average cost method is preferable as it conforms the inventory costing methods globally, improves comparability with industry peers and better reflects the current value of inventory on the consolidated balance sheets. All prior periods presented have been adjusted to apply the new method retrospectively.

 

There was no effect of the change on the condensed consolidated results of operations for the three months ended September 30, 2011. The effect of the change for the nine months ended September 30, 2011 is as follows:

 

 

 

As originally

 

 

 

 

 

 

 

reported under

 

Effect of

 

As

 

 

 

LIFO

 

Change

 

Adjusted

 

Manufacturing, shipping and delivery expense

 

$

(4,465

)

$

10

 

$

(4,455

)

Amounts attributable to the Company:

 

 

 

 

 

 

 

Net earnings from continuing operations

 

263

 

10

 

273

 

 

The effect of the change on the condensed consolidated balance sheets as of December 31, 2011 and September 30, 2011 is as follows:

 

 

 

As originally

 

 

 

 

 

 

 

reported under

 

Effect of

 

As

 

 

 

LIFO

 

Change

 

Adjusted

 

December 31, 2011

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Inventories

 

$

1,012

 

$

49

 

$

1,061

 

Share owners’ equity:

 

 

 

 

 

 

 

Retained earnings

 

2,295

 

49

 

2,344

 

 

 

 

 

 

 

 

 

September 30, 2011

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

Inventories

 

$

1,052

 

$

49

 

$

1,101

 

Share owners’ equity:

 

 

 

 

 

 

 

Retained earnings

 

2,901

 

49

 

2,950

 

 

7



 

The effect of the change on the consolidated share owners’ equity as of January 1, 2011 is as follows:

 

 

 

As originally

 

 

 

 

 

 

 

reported under

 

Effect of

 

As

 

 

 

LIFO

 

Change

 

Adjusted

 

 

 

 

 

 

 

 

 

Retained earnings

 

$

2,640

 

$

39

 

$

2,679

 

 

The effect of the change on the condensed consolidated cash flows for the nine months ended September 30, 2011 is as follows:

 

 

 

As originally

 

 

 

 

 

 

 

reported under

 

Effect of

 

As

 

 

 

LIFO

 

Change

 

Adjusted

 

 

 

 

 

 

 

 

 

Net earnings

 

$

276

 

$

10

 

$

286

 

Change in components of working capital

 

(225

)

(10

)

(235

)

 

Had the Company not made this change in accounting method, manufacturing, shipping and delivery expense for the three months and nine months ended September 30, 2012 would have been lower by $3 million and $2 million, respectively, and net earnings attributable to the Company would have been higher by $3 million and $2 million, respectively, than reported in the condensed consolidated results of operations.

 

8



 

3.  Debt

 

The following table summarizes the long-term debt of the Company:

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2012

 

2011

 

2011

 

Secured Credit Agreement:

 

 

 

 

 

 

 

Revolving Credit Facility:

 

 

 

 

 

 

 

Revolving Loans

 

$

 

$

 

$

30

 

Term Loans:

 

 

 

 

 

 

 

Term Loan A (119 million AUD at September 30, 2012)

 

125

 

173

 

166

 

Term Loan B

 

548

 

600

 

600

 

Term Loan C (110 million CAD at September 30, 2012)

 

113

 

114

 

112

 

Term Loan D (€134 million at September 30, 2012)

 

173

 

182

 

191

 

Senior Notes:

 

 

 

 

 

 

 

3.00%, Exchangeable, due 2015

 

637

 

624

 

620

 

7.375%, due 2016

 

590

 

588

 

587

 

6.875%, due 2017 (€300 million)

 

388

 

388

 

406

 

6.75%, due 2020 (€500 million)

 

647

 

647

 

677

 

Payable to O-I Inc.

 

250

 

250

 

250

 

Other

 

103

 

137

 

154

 

Total long-term debt

 

3,574

 

3,703

 

3,793

 

Less amounts due within one year

 

37

 

76

 

50

 

Long-term debt

 

$

3,537

 

$

3,627

 

$

3,743

 

 

On May 19, 2011, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”).  At September 30, 2012, the Agreement included a $900 million revolving credit facility, a 119 million Australian dollar term loan, a $548 million term loan, a 110 million Canadian dollar term loan, and a €134 million term loan, each of which has a final maturity date of May 19, 2016.  At September 30, 2012, the Company’s subsidiary borrowers had unused credit of $807 million available under the Agreement.

 

The weighted average interest rate on borrowings outstanding under the Agreement at September 30, 2012 was 2.52%.

 

The Company has a €240 million European accounts receivable securitization program, which extends through September 2016, subject to annual renewal of backup credit lines. Information related to the Company’s accounts receivable securitization program is as follows:

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2012

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Balance (included in short-term loans)

 

$

276

 

$

281

 

$

233

 

 

 

 

 

 

 

 

 

Weighted average interest rate

 

1.13

%

2.41

%

1.87

%

 

The carrying amounts reported for the accounts receivable securitization programs, and certain long-term debt obligations subject to frequently redetermined interest rates, approximate fair

 

9



 

value.  Fair values for the Company’s significant fixed rate debt obligations are based on published market quotations, and are classified as Level 1 in the fair value hierarchy.

 

Fair values at September 30, 2012 of the Company’s significant fixed rate debt obligations are as follows:

 

 

 

 

 

Indicated

 

 

 

 

 

Principal

 

Market

 

Fair

 

 

 

Amount

 

Price

 

Value

 

Senior Notes:

 

 

 

 

 

 

 

3.00%, Exchangeable, due 2015

 

$

690

 

98.36

 

$

679

 

7.375%, due 2016

 

600

 

114.63

 

688

 

6.875%, due 2017 (€300 million)

 

388

 

103.00

 

400

 

6.75%, due 2020 (€500 million)

 

647

 

111.38

 

721

 

 

4.  Supplemental Cash Flow Information

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

 

 

 

 

 

 

Interest paid in cash

 

$

187

 

$

233

 

 

 

 

 

 

 

Income taxes paid in cash:

 

 

 

 

 

U.S.

 

$

2

 

$

 

Non-U.S.

 

102

 

91

 

Total income taxes paid in cash

 

$

104

 

$

91

 

 

Cash interest for 2011 includes note repurchase premiums of $16 million related to the second quarter 2011 redemption of the Company’s 6.75% senior notes due 2014.

 

During the nine months ended September 30, 2012, the Company received $42 million from the Chinese government as partial compensation for land in China that the Company is required to return to the government. The Company has deferred recognition of a gain related to this compensation until all recognition criteria have been met.

 

10



 

5.  Share Owners’ Equity

 

The activity in share owners’ equity for the three months ended September 30, 2012 and 2011 is as follows:

 

 

 

Share Owner’s Equity of the Company

 

 

 

 

 

 

 

Other
Contributed
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on July 1, 2012

 

$

249

 

$

2,598

 

$

(1,332

)

$

142

 

$

1,657

 

Net distribution to parent

 

(37

)

 

 

 

 

 

 

(37

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

90

 

 

 

7

 

97

 

Foreign currency translation adjustments

 

 

 

 

 

84

 

2

 

86

 

Pension and other postretirement benefit adjustments, net of tax

 

 

 

 

 

16

 

 

 

16

 

Change in fair value of derivative instruments, net of tax

 

 

 

 

 

3

 

 

 

3

 

Dividends paid to noncontrolling interests on subsidiary common stock

 

 

 

 

 

 

 

(1

)

(1

)

Balance on September 30, 2012

 

$

212

 

$

2,688

 

$

(1,229

)

$

150

 

$

1,821

 

 

 

 

Share Owner’s Equity of the Company

 

 

 

 

 

 

 

Other
Contributed
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on July 1, 2011

 

$

387

 

$

2,834

 

$

(631

)

$

157

 

$

2,747

 

Net distribution to parent

 

(28

)

 

 

 

 

 

 

(28

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

116

 

 

 

4

 

120

 

Foreign currency translation adjustments

 

 

 

 

 

(352

)

(6

)

(358

)

Pension and other postretirement benefit adjustments, net of tax

 

 

 

 

 

39

 

 

 

39

 

Change in fair value of derivative instruments, net of tax

 

 

 

 

 

(2

)

 

 

(2

)

Dividends paid to noncontrolling interests on subsidiary common stock

 

 

 

 

 

 

 

(1

)

(1

)

Balance on September 30, 2011

 

$

359

 

$

2,950

 

$

(946

)

$

154

 

$

2,517

 

 

11



 

The activity in share owners’ equity for the nine months ended September 30, 2012 and 2011 is as follows:

 

 

 

Share Owner’s Equity of the Company

 

 

 

 

 

 

 

Other
Contributed
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2012

 

$

295

 

$

2,344

 

$

(1,280

)

$

153

 

$

1,512

 

Net distribution to parent

 

(83

)

 

 

 

 

 

 

(83

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

344

 

 

 

15

 

359

 

Foreign currency translation adjustments

 

 

 

 

 

(28

)

6

 

(22

)

Pension and other postretirement benefit adjustments, net of tax

 

 

 

 

 

73

 

 

 

73

 

Change in fair value of derivative instruments, net of tax

 

 

 

 

 

6

 

 

 

6

 

Dividends paid to noncontrolling interests on subsidiary common stock

 

 

 

 

 

 

 

(24

)

(24

)

Balance on September 30, 2012

 

$

212

 

$

2,688

 

$

(1,229

)

$

150

 

$

1,821

 

 

 

 

Share Owner’s Equity of the Company

 

 

 

 

 

 

 

Other
Contributed
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Non-
controlling
Interests

 

Total Share
Owners’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance on January 1, 2011

 

$

507

 

$

2,679

 

$

(856

)

$

211

 

$

2,541

 

Net distribution to parent

 

(94

)

 

 

 

 

 

 

(94

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

 

271

 

 

 

15

 

286

 

Foreign currency translation adjustments

 

 

 

 

 

(165

)

3

 

(162

)

Pension and other postretirement benefit adjustments, net of tax

 

 

 

 

 

85

 

 

 

85

 

Change in fair value of derivative instruments, net of tax

 

 

 

 

 

(1

)

 

 

(1

)

Acquisition of noncontrolling interest

 

(54

)

 

 

(9

)

(43

)

(106

)

Dividends paid to noncontrolling interests on subsidiary common stock

 

 

 

 

 

 

 

(32

)

(32

)

Balance on September 30, 2011

 

$

359

 

$

2,950

 

$

(946

)

$

154

 

$

2,517

 

 

12



 

6.  Inventories

 

Major classes of inventory are as follows:

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2012

 

2011

 

2011

 

 

 

 

 

 

 

 

 

Finished goods

 

$

1,054

 

$

891

 

$

930

 

Raw materials

 

128

 

123

 

117

 

Operating supplies

 

46

 

47

 

54

 

 

 

 

 

 

 

 

 

 

 

$

1,228

 

$

1,061

 

$

1,101

 

 

7.  Contingencies

 

OI Inc. is a defendant in numerous lawsuits alleging bodily injury and death as a result of exposure to asbestos dust.From 1948 to 1958, one of OI Inc.’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos.  OI Inc. exited the pipe and block insulation business in April 1958.  The typical asbestos personal injury lawsuit alleges various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).

 

As of September 30, 2012, OI Inc. has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 4,500 plaintiffs and claimants.  Based on an analysis of the lawsuits pending as of December 31, 2011, approximately 71% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court.  Approximately 27% of plaintiffs specifically plead damages of $15 million or less, and 2% of plaintiffs specifically plead damages greater than $15 million but less than $100 million.  Fewer than 1% of plaintiffs specifically plead damages $100 million or greater but less than $122 million.

 

As indicated by the foregoing summary, current pleading practice permits considerable variation in the assertion of monetary damages.  OI Inc.’s experience resolving hundreds of thousands of asbestos claims and lawsuits over an extended period demonstrates that the monetary relief that may be alleged in a complaint bears little relevance to a claim’s merits or disposition value.  Rather, the amount potentially recoverable is determined by such factors as the severity of the plaintiff’s asbestos disease, the product identification evidence against OI Inc. and other defendants, the defenses available to OI Inc. and other defendants, the specific jurisdiction in which the claim is made, and the plaintiff’s medical history and exposure to other disease-causing agents.

 

In addition to the pending claims set forth above, OI Inc. has claims-handling agreements in place with many plaintiffs’ counsel throughout the country.  These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by OI Inc.’s former business unit during its manufacturing period ending in 1958.  Some plaintiffs’ counsel have historically withheld claims under these agreements for later presentation while focusing their attention on active litigation in the tort system.  OI Inc. believes that as of September 30, 2012 there are approximately 350 claims against other defendants which are likely to be asserted some time in the future against OI Inc.

 

13



 

OI Inc. is also a defendant in other asbestos-related lawsuits or claims involving maritime workers, medical monitoring claimants, co-defendants and property damage claimants.  Based upon its past experience, the OI Inc. believes that these categories of lawsuits and claims will not involve any material liability and they are not included in the above description of pending matters or in the following description of disposed matters.

 

Since receiving its first asbestos claim, OI Inc., as of September 30, 2012, has disposed of the asbestos claims of approximately 389,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $8,200.  Certain of these dispositions have included deferred amounts payable over a number of years.  Deferred amounts payable totaled approximately $27 million at September 30, 2012 ($18 million at December 31, 2011) and are included in the foregoing average indemnity payment per claim.  OI Inc.’s asbestos indemnity payments have varied on a per claim basis, and are expected to continue to vary considerably over time.  As discussed above, a part of OI Inc.’s objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements.  Failure of claimants to meet certain medical and product exposure criteria in OI Inc.’s administrative claims handling agreements has generally reduced the number of marginal or suspect claims that would otherwise have been received.  In addition, certain courts and legislatures have reduced or eliminated the number of marginal or suspect claims that OI Inc. otherwise would have received.  These developments generally have had the effect of increasing the OI Inc.’s per-claim average indemnity payment.

 

OI Inc. believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot reasonably be estimated. Beginning with the initial liability of $975 million established in 1993, OI Inc. has accrued a total of approximately $4.0 billion through 2011, before insurance recoveries, for its asbestos-related liability.  OI Inc.’s ability to reasonably estimate its liability has been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty of future disease incidence and claiming patterns, the expanding list of non-traditional defendants that have been sued in this litigation, and the use of mass litigation screenings to generate large numbers of claims by parties who allege exposure to asbestos dust but have no present physical asbestos impairment.

 

OI Inc. has continued to monitor trends that may affect its ultimate liability and has continued to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against OI Inc. The material components of OI Inc.’s accrued liability are based on amounts determined by OI Inc. in connection with its annual comprehensive review and consist of the following estimates, to the extent it is probable that such liabilities have been incurred and can be reasonably estimated: (i) the liability for asbestos claims already asserted against OI Inc.; (ii) the liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs’ counsel; (iii) the liability for asbestos claims not yet asserted against OI Inc., but which OI Inc. believes will be asserted in the next several years; and (iv) the legal defense costs likely to be incurred in connection with the foregoing types of claims.

 

14



 

The significant assumptions underlying the material components of OI Inc.’s accrual are:

 

a)

the extent to which settlements are limited to claimants who were exposed to OI Inc.’s asbestos-containing insulation prior to its exit from that business in 1958;

 

 

b)

the extent to which claims are resolved under OI Inc.’s administrative claims agreements or on terms comparable to those set forth in those agreements;

 

 

c)

the extent of decrease or increase in the incidence of serious disease cases and claiming patterns for such cases;

 

 

d)

the extent to which OI Inc. is able to defend itself successfully at trial;

 

 

e)

the extent to which courts and legislatures eliminate, reduce or permit the diversion of financial resources for unimpaired claimants;

 

 

f)

the number and timing of additional co-defendant bankruptcies;

 

 

g)

the extent to which bankruptcy trusts direct resources to resolve claims that are also presented to OI Inc. and the timing of the payments made by the bankruptcy trusts; and

 

 

h)

the extent to which co-defendants with substantial resources and assets continue to participate significantly in the resolution of future asbestos lawsuits and claims.

 

As noted above, OI Inc. conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review.  If the results of an annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated future asbestos-related costs, then OI Inc. will record an appropriate charge to increase the accrued liability.  OI Inc. believes that a reasonable estimation of the probable amount of the liability for claims not yet asserted against OI Inc. is not possible beyond a period of several years.  Therefore, while the results of future annual comprehensive reviews cannot be determined, OI Inc. expects the addition of one year to the estimation period will result in an annual charge.

 

On March 11, 2011, OI Inc. received a verdict in an asbestos case in which conspiracy claims had been asserted against OI Inc. Of the total nearly $90 million awarded by the jury against the four defendants in the case, almost $10 million in compensatory damages were assessed against all four defendants, and $40 million in punitive damages were assessed against OI Inc. On August 31, 2012, the trial judge who presided over the original trial vacated all of the damages awarded against OI Inc. in the trial and entered judgment in OI Inc.’s favor.  The plaintiff has appealed the trial judge’s ruling to an intermediate appellate court, and while OI Inc. cannot predict the ultimate outcome of this appeal, OI Inc. believes that the trial judge ruled appropriately based upon applicable appellate precedent.

 

OI Inc.’s reported results of operations for 2011 were materially affected by the $165 million fourth quarter charge for asbestos-related costs and asbestos-related payments continue to be substantial.  Any future additional charge would likewise materially affect OI Inc.’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and may continue to affect the Company’s and OI Inc.’s cost of borrowing and its ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity will be sufficient to pay its obligations for asbestos-related costs and to fund its working capital and capital expenditure requirements on a short-term and long-term basis.

 

15



 

The Company is conducting an internal investigation into conduct in certain of its overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (FCPA), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). The Company intends to cooperate with any investigation by the DOJ and the SEC.

 

The Company is presently unable to predict the duration, scope or result of its internal investigation, of any investigations by the DOJ or the SEC or whether either agency will commence any legal action. The DOJ and the SEC have a broad range of civil and criminal sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, fines, penalties, and modifications to business practices. The Company also could be subject to investigation and sanctions outside the United States. While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.

 

Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are non-routine and involve compensatory, punitive or treble damage claims as well as other types of relief.  The Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated.  Recorded amounts are reviewed and adjusted to reflect changes in the factors upon which the estimates are based including additional information, negotiations, settlements, and other events.

 

8. Segment Information

 

The Company has four reportable segments based on its four geographic locations:  (1) Europe; (2) North America; (3) South America; (4) Asia Pacific.  These four segments are aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its global glass operations.  Certain assets and activities not directly related to one of the regions or to glass manufacturing are reported with Retained corporate costs and other.  These include licensing, equipment manufacturing, global engineering, and non-glass equity investments.  Retained corporate costs and other also includes certain headquarters administrative and facilities costs and certain incentive compensation and other benefit plan costs that are global in nature and are not allocable to the reportable segments.

 

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 Company’s management uses segment operating profit, in combination with net sales and selected cash flow information, to evaluate performance and to allocate resources.  Segment operating profit for 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.

 

In prior periods, pension expense was recorded in each segment related to the pension plans in place in that segment, with the exception of the U.S. pension plans which were recorded in Retained corporate costs and other.  Effective January 1, 2012, the Company changed the

 

16



 

allocation of pension expense to its reportable segments such that pension expense recorded in each segment relates only to the service cost component of the plans in that segment.  The other components of pension expense, including interest cost, expected asset returns and amortization of actuarial losses, are recorded in Retained corporate costs and other.  This change in allocation has been applied retrospectively to all periods.  Also effective January 1, 2012, the Company elected to change the method of valuing U.S. inventories (see Note 2 for additional information).

 

There is no impact of the change in accounting method for inventory on segment operating profit for the three months ended September 30, 2011. The impact of the change in pension expense allocation for the three months ended September 30, 2011is as follows:

 

 

 

As
Originally
Reported

 

Change in
Pension
Allocation

 

As
Adjusted

 

Segment Operating Profit:

 

 

 

 

 

 

 

Europe

 

$

106

 

$

5

 

$

111

 

North America

 

73

 

(6

)

67

 

South America

 

67

 

 

 

67

 

Asia Pacific

 

23

 

 

 

23

 

Reportable segment totals

 

269

 

(1

)

268

 

 

 

 

 

 

 

 

 

Retained corporate costs and other

 

(24

)

1

 

(23

)

 

The impact of the changes in pension expense allocation and accounting method for inventory on segment operating profit for the nine months ended September 30, 2011 is as follows:

 

 

 

As
Originally
Reported

 

Change in
Pension
Allocation

 

Change in
Accounting
Method for
Inventory

 

As
Adjusted

 

Segment Operating Profit:

 

 

 

 

 

 

 

 

 

Europe

 

$

284

 

$

15

 

$

 

$

299

 

North America

 

188

 

(18

)

10

 

180

 

South America

 

165

 

 

 

 

 

165

 

Asia Pacific

 

56

 

 

 

 

 

56

 

Reportable segment totals

 

693

 

(3

)

10

 

700

 

 

 

 

 

 

 

 

 

 

 

Retained corporate costs and other

 

(51

)

3

 

 

 

(48

)

 

17



 

Financial information for the three months ended September 30, 2012 and 2011 regarding the Company’s reportable segments is as follows:

 

 

 

2012

 

2011

 

Net sales:

 

 

 

 

 

Europe

 

$

652

 

$

770

 

North America

 

513

 

497

 

South America

 

323

 

310

 

Asia Pacific

 

254

 

270

 

 

 

 

 

 

 

Reportable segment totals

 

1,742

 

1,847

 

Other

 

5

 

15

 

Net sales

 

$

1,747

 

$

1,862

 

 

 

 

2012

 

2011

 

Segment operating profit:

 

 

 

 

 

Europe

 

$

74

 

$

111

 

North America

 

75

 

67

 

South America

 

69

 

67

 

Asia Pacific

 

27

 

23

 

Reportable segment totals

 

245

 

268

 

 

 

 

 

 

 

Items excluded from segment operating profit:

 

 

 

 

 

Retained corporate costs and other

 

(26

)

(23

)

Restructuring and asset impairment

 

(33

)

(29

)

Interest income

 

2

 

2

 

Interest expense

 

(61

)

(70

)

Earnings from continuing operations before income taxes

 

$

127

 

$

148

 

 

Financial information for the nine months ended September 30, 2012 and 2011 regarding the Company’s reportable segments is as follows:

 

 

 

2012

 

2011

 

Net sales:

 

 

 

 

 

Europe

 

$

2,088

 

$

2,355

 

North America

 

1,511

 

1,466

 

South America

 

882

 

881

 

Asia Pacific

 

741

 

778

 

 

 

 

 

 

 

Reportable segment totals

 

5,222

 

5,480

 

Other

 

30

 

60

 

Net sales

 

$

5,252

 

$

5,540

 

 

18



 

 

 

2012

 

2011

 

Segment operating profit:

 

 

 

 

 

Europe

 

$

289

 

$

299

 

North America

 

249

 

180

 

South America

 

154

 

165

 

Asia Pacific

 

79

 

56

 

Reportable segment totals

 

771

 

700

 

 

 

 

 

 

 

Items excluded from segment operating profit:

 

 

 

 

 

Retained corporate costs and other

 

(82

)

(48

)

Restructuring and asset impairment

 

(33

)

(41

)

Interest income

 

7

 

8

 

Interest expense

 

(187

)

(246

)

Earnings from continuing operations before income taxes

 

$

476

 

$

373

 

 

Financial information regarding the Company’s total assets is as follows:

 

 

 

September 30,

 

December 31,

 

September 30,

 

 

 

2012

 

2011

 

2011

 

Total assets:

 

 

 

 

 

 

 

Europe

 

$

3,510

 

$

3,588

 

$

3,693

 

North America

 

2,058

 

2,020

 

2,002

 

South America

 

1,658

 

1,682

 

1,649

 

Asia Pacific

 

1,371

 

1,379

 

1,974

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

8,597

 

8,669

 

9,318

 

Other

 

274

 

306

 

283

 

Consolidated totals

 

$

8,871

 

$

8,975

 

$

9,601

 

 

9. Other Expense

 

Other expense for the three months and nine months ended September 30, 2012 includes charges for restructuring and asset impairment totaling $9 million in the Company’s Europe segment and $27 million in the Asia Pacific segment, primarily related to the closure of a furnace in each segment. Other expense for the three months and nine months ended September 30, 2012 also includes a $3 million gain related to the sale of a previously closed facility in North America. See Note 10 for additional information.

 

Other expense for the three months and nine months ended September 30, 2011 includes charges totaling $23 million and $35 million, respectively, for restructuring and asset impairment in the Company’s Asia Pacific segment related to the completed and planned closures of furnaces and machine lines. Other expense for the three months and nine months ended September 30, 2011 also includes $6 million for restructuring charges related to headcount reductions, primarily in the Company’s South America segment. See Note 10 for additional information.

 

19



 

10. Restructuring Accruals

 

Selected information related to the restructuring accruals for the three months and nine months ended September 30, 2012 and 2011 is as follows:

 

 

 

Strategic
Footprint
Review

 

Asia Pacific
Restructuring

 

Other
Restructuring
Actions

 

Total
Restructuring

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2012

 

$

37

 

$

17

 

$

49

 

$

103

 

Net cash paid, principally severance and related benefits

 

(2

)

(11

)

(17

)

(30

)

Other, including foreign exchange translation

 

 

 

 

 

3

 

3

 

Balance at March 31, 2012

 

35

 

6

 

35

 

76

 

Second quarter 2012 charges

 

(1

)

(1

)

2

 

 

Write-down of assets to net realizable value

 

 

 

 

 

(2

)

(2

)

Net cash paid, principally severance and related benefits

 

(1

)

(2

)

(7

)

(10

)

Other, including foreign exchange translation

 

(4

)

 

 

(4

)

(8

)

Balance at June 30, 2012

 

29

 

3

 

24

 

56

 

Third quarter 2012 Charges

 

(3

)

27

 

9

 

33

 

Write-down of assets to net realizable value

 

 

 

(14

)

(2

)

(16

)

Net cash paid, principally severance and related benefits

 

(1

)

 

 

(6

)

(7

)

Other, including foreign exchange translation

 

2

 

 

 

2

 

4

 

Balance at September 30, 2012

 

$

27

 

$

16

 

$

27

 

$

70

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2011

 

$

52

 

$

 

$

27

 

$

79

 

First quarter 2011 charges

 

 

 

8

 

 

 

8

 

Net cash paid, principally severance and related benefits

 

(4

)

 

 

 

 

(4

)

Other, including foreign exchange translation

 

2

 

 

 

 

 

2

 

Balance at March 31, 2011

 

50

 

8

 

27

 

85

 

Second quarter 2011 charges

 

 

 

4

 

 

 

4

 

Net cash paid, principally severance and related benefits

 

(2

)

(7

)

 

 

(9

)

Other, including foreign exchange translation

 

 

 

 

 

(2

)

(2

)

Balance at June 30, 2011

 

48

 

5

 

25

 

78

 

Third quarter 2011 charges

 

 

 

23

 

6

 

29

 

Write-down of assets to net realizable value

 

 

 

(10

)

 

 

(10

)

Net cash paid, principally severance and related benefits

 

(2

)

(10

)

(2

)

(14

)

Acquisition

 

 

 

 

 

11

 

11

 

Other, including foreign exchange translation

 

(1

)

 

 

(2

)

(3

)

Balance at September 30, 2011

 

$

45

 

$

8

 

$

38

 

$

91

 

 

The Company’s decisions to curtail selected production capacity have resulted in write downs of certain long-lived assets to the extent their carrying amounts exceeded fair value or fair value less cost to sell. The Company classified the significant assumptions used to determine the fair value of the impaired assets, which was not material, as Level 3 in the fair value hierarchy as set forth in the general accounting principles for fair value measurements.

 

The Company also recorded liabilities for certain employee separation costs to be paid under contractual arrangements and other exit costs.

 

20



 

11. Derivative Instruments

 

The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts. The Company uses an income approach to valuing these contracts. Natural gas forward rates and foreign exchange rates are the significant inputs into the valuation models. These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy. The Company also evaluates counterparty risk in determining fair values.

 

Commodity Futures Contracts Designated as Cash Flow Hedges

 

In North America, the Company enters into commodity futures contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas market and related price risk and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements. The majority of the sales volume in North America is tied to customer contracts that contain provisions that pass the price of natural gas to the customer. In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time. At September 30, 2012 and 2011, the Company had entered into commodity futures contracts covering approximately 6,300,000 MM BTUs and 5,100,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas.

 

The Company accounts for the above futures contracts as cash flow hedges at September 30, 2012 and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. At September 30, 2012, an immaterial unrecognized gain related to the commodity futures contracts was included in Accumulated OCI, while an unrecognized loss of $4 million was included in Accumulated OCI at September 30, 2011. The amounts recorded in Accumulated OCI will be reclassified into earnings over the next twelve to twenty-four months. Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings. The ineffectiveness related to these natural gas hedges for the three and nine months ended September 30, 2012 and 2011 was not material.

 

The effect of the commodity futures contracts on the results of operations for the three months ended September 30, 2012 and 2011 is as follows:

 

Amount of Gain (Loss)
Recognized in OCI on
Commodity Futures Contracts
(Effective Portion)

 

Amount of Loss
Reclassified from
Accumulated OCI into
Income (reported in
manufacturing, shipping and
delivery) (Effective Portion)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

$

1

 

$

(3

)

$

(2

)

$

(1

)

 

21



 

The effect of the commodity futures contracts on the results of operations for the nine months ended September 30, 2012 and 2011 is as follows:

 

Amount of Loss
Recognized in OCI on
Commodity Futures Contracts
(Effective Portion)

 

Amount of Loss
Reclassified from
Accumulated OCI into
Income (reported in
manufacturing, shipping and
delivery) (Effective Portion)

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

$

(1

)

$

(5

)

$

(7

)

$

(4

)

 

Senior Notes Designated as Net Investment Hedge

 

During December 2004, a U.S. subsidiary of the Company issued senior notes totaling €225 million. These notes were designated by the Company’s subsidiary as a hedge of a portion of its net investment in a non-U.S. subsidiary with a Euro functional currency. Because the amount of the senior notes matched the hedged portion of the net investment, there was no hedge ineffectiveness. Accordingly, the Company recorded the impact of changes in the foreign currency exchange rate on the Euro-denominated notes in OCI. The amount of loss recognized in OCI related to this net investment hedge for the nine months ended September 30, 2011 was $25 million. During the second quarter of 2011, the senior notes designated as the net investment hedge were redeemed by a subsidiary of the Company. The amount recorded in OCI related to this net investment hedge will be reclassified into earnings when the Company sells or liquidates its net investment in the non-U.S. subsidiary.

 

Forward Exchange Contracts not Designated as Hedging Instruments

 

The Company’s subsidiaries may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables and payables, not denominated in, or indexed to, their functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

 

At September 30, 2012 and 2011, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $640 million and $740 million, respectively, related primarily to intercompany transactions and loans.

 

22



 

The effect of the forward exchange contracts on the results of operations for the three months ended September 30, 2012 and 2011 is as follows:

 

Location of Gain (Loss)
Recognized in Income on

 

Amount of Gain (Loss)
Recognized in Income on
Forward Exchange Contracts

 

Forward Exchange Contracts

 

2012

 

2011

 

 

 

 

 

 

 

Other expense

 

$

(1

)

$

10

 

 

The effect of the forward exchange contracts on the results of operations for the nine months ended September 30, 2012 and 2011 is as follows:

 

Location of Gain (Loss)
Recognized in Income on 

 

Amount of Gain (Loss)
Recognized in Income on
Forward Exchange Contracts

 

Forward Exchange Contracts

 

2012

 

2011

 

 

 

 

 

 

 

Other expense

 

$

9

 

$

(14

)

 

23



 

Balance Sheet Classification

 

The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) deposits, receivables, and other assets if the instrument has a positive fair value and maturity after one year, (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other liabilities if the instrument has a negative fair value and maturity after one year.  The following table shows the amount and classification (as noted above) of the Company’s derivatives:

 

 

 

Balance

 

Fair Value

 

 

 

Sheet
Location

 

September 30,
2012

 

December 31,
2011

 

September 30,
2011

 

 

 

 

 

 

 

 

 

 

 

Asset Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

c

 

$

1

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

a

 

2

 

13

 

19

 

Foreign exchange contracts

 

b

 

1

 

 

 

 

 

Foreign exchange contracts

 

c

 

 

 

 

 

3

 

Total derivatives not designated as hedging instruments

 

 

 

3

 

13

 

22

 

Total asset derivatives

 

 

 

$

4

 

$

13

 

$

22

 

 

 

 

 

 

 

 

 

 

 

Liability Derivatives:

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

c

 

$

1

 

$

6

 

$

4

 

 

 

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange contracts

 

c

 

4

 

4

 

8

 

Foreign exchange contracts

 

d

 

 

 

 

 

 

 

Total derivatives not designated as hedging instruments

 

 

 

4

 

4

 

8

 

Total liability derivatives

 

 

 

$

5

 

$

10

 

$

12

 

 

24



 

12.  Pensions Benefit Plans and Other Postretirement Benefits

 

The components of the net periodic pension cost for the three months ended September 30, 2012 and 2011 are as follows:

 

 

 

U.S.

 

Non-U.S.

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

6

 

$

6

 

$

10

 

$

6

 

Interest cost

 

29

 

31

 

18

 

24

 

Expected asset return

 

(46

)

(46

)

(22

)

(23

)

 

 

 

 

 

 

 

 

 

 

Amortization:

 

 

 

 

 

 

 

 

 

Prior service credit

 

 

 

 

 

 

 

(1

)

Actuarial loss

 

24

 

21

 

6

 

6