OWENS ILLINOIS INC /DE/ - 10-K/A - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read together with the Consolidated Financial
Statements and related Notes thereto and other financial information appearing
elsewhere in this Form 10-K/A. All of the financial information presented in
this Item 7 has been revised to reflect the restatement more fully described in
Note 1 to the Consolidated Financial Statements.
In connection with the Vitro Acquisition on September 1, 2015 (see Note 19 to
the Consolidated Financial Statements), the Company has renamed the former South
America segment to the Latin America segment. This change in segment name was
made to reflect the addition of the Mexican and Bolivian operations from the
Vitro Acquisition into the former South America segment. The acquired Vitro food
and beverage glass container distribution business located in the United States
is included in the North American operating segment.
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 nonGAAP 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):
2015 2014 2013
Net Sales:
Europe $ 2,324 $ 2,794 $ 2,787
North America 2,039 2,003 2,002
Latin America 1,064 1,159 1,186
Asia Pacific 671 793 966
Reportable segment totals 6,098 6,749 6,941
Other 58 35 26
Net Sales $ 6,156 $ 6,784 $ 6,967
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2015 2014 2013
(restated(1)) (restated(1)) (restated(1))
Segment operating profit:
Europe $ 209 $ 353 $ 305
North America 265 240 307
Latin America 183 227 204
Asia Pacific 83 88 131
Reportable segment totals 740 908 947
Items excluded from segment operating profit:
Retained corporate costs and other (70) (100) (119)
Charge for asbestos-related costs (16) (46) (12)
Restructuring, asset impairment and other related
charges (80) (91) (119)
Strategic transaction costs (23)
Acquisition-related fair value inventory adjustments (22)
Acquisition-related fair value intangible
adjustments (10)
Non-income tax charge (69)
Pension settlement charges (65)
Interest expense, net (251) (230) (229)
Earnings from continuing operations before income
taxes 268 307 468
Provision for income taxes (106) (92) (120)
Earnings from continuing operations 162 215 348
Loss from discontinued operations (4) (23) (18)
Net earnings 158 192 330
Net earnings attributable to noncontrolling
interests (23) (28) (13)
Net earnings attributable to the Company $ 135 $ 164 $ 317
Net earnings from continuing operations attributable
to the Company $ 139 $ 187 $ 335
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(1) Certain amounts have been restated to reflect adjustments related to the
correction of an error (see Note 1 to the Consolidated Financial Statements
for additional information).
Note: all amounts excluded from reportable segment totals are discussed in the following applicable sections.
Executive Overview-Comparison of 2015 with 2014
2015 Highlights
· The unfavorable effect of foreign currency exchange rates reduced net sales by
13% and segment operating profit by 16% in 2015 compared to the prior year
· Acquired the food and beverage glass container business of Vitro, S.A.B. de
C.V. for $2.297 billion
· Entered into a new senior secured credit facility that matures in April 2020.
To finance the Vitro Acquisition, this facility was then amended to borrow an
incremental $1.25 billion. The Company also issued $1 billion of senior notes
due 2023 and 2025.
· Repaid the senior notes due 2016
· Repurchased $100 million of shares of common stock
Net sales decreased by $628 million compared to the prior year primarily due to
the unfavorable effect of changes in foreign currency exchange rates. Net sales
for 2015 included approximately $258 million from the acquired Vitro Business.
Segment operating profit for reportable segments decreased by $168 million compared to the prior year. The decrease was largely attributable to the unfavorable effect of changes in foreign currency exchange rates and
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higher operating costs due to cost inflation and lower operational performance
in Europe. Segment operating profit for 2015 included approximately $46 million
from the acquired Vitro Business.
Net interest expense in 2015 increased $21 million compared to 2014. The
increase was due to higher note repurchase premiums and the writeoff of finance
fees related to debt that was repaid during 2015 prior to its maturity.
Exclusive of these items, net interest expense decreased $1 million in the
current year primarily due to debt management activities and the weaker Euro
exchange rate in relation to the U.S. dollar, partially offset by an increase in
net interest expense as a result of higher debt due to the Vitro Acquisition.
For 2015, the Company recorded earnings from continuing operations attributable
to the Company of $139 million, or $0.85 per share (diluted), compared with
earnings of $187 million, or $1.13 per share (diluted), for 2014. 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 $186 million, or $1.15 per share, in 2015 and
$249 million, or $1.50 per share, in 2014.
Results of Operations-Comparison of 2015 with 2014
Net Sales
The Company's net sales in 2015 were $6,156 million compared with $6,784 million
in 2014, a decrease of $628 million. Unfavorable foreign currency exchange
rates, primarily due to a weaker Brazilian real, Colombian peso, Euro, Canadian
dollar and Australian dollar in relation to the U.S. dollar, impacted sales by
$881 million in 2015 compared to 2014. Driven by incremental shipments related
to the Vitro Acquisition, total glass container shipments, in tonnes, were up
approximately 3% in 2015 compared to 2014. The Vitro Acquisition resulted in
approximately $258 million of additional sales. Excluding the impact of the
Vitro Acquisition, shipments in 2015 were comparable to 2014. On a global basis,
sales volumes of wine, spirits, food and non-alcoholic beverages all grew
year-on-year. While sales volumes in the beer category declined by approximately
1%, driven by a decline in mainstream beer, shipments into craft and premium
beer customers continued to expand. However, an unfavorable sales mix resulted
in $47 million of lower net sales in 2015. Net sales also benefited from
slightly higher selling prices in 2015.
The change in net sales of reportable segments can be summarized as follows
(dollars in millions):
Net sales- 2014 $ 6,749
Price $ 19
Sales volume (excluding acquisitions) (47)
Effects of changing foreign currency rates (881)
Vitro Acquisition 258
Total effect on net sales (651)
Net sales- 2015 $ 6,098
Europe: Net sales in Europe in 2015 were $2,324 million compared with $2,794 in
2014, an decrease of $470 million, or 17%. The primary reason for the decline in
net sales in the region in 2015 was a $445 million impact due to foreign
currency exchange rates, as the Euro weakened in relation to the U.S. dollar.
Glass container shipments in 2015 increased slightly compared to the prior year
and this increased net sales by $9 million. Selling prices decreased in Europe
due to competitive pressures and resulted in a $34 million decrease in net sales
in 2015. This trend in lower prices is expected to continue into the first
quarter of 2016.
North America: Net sales in North America in 2015 were $2,039 million compared
with $2,003 million in 2014, an increase of $36 million, or 2%. Net sales from
the acquired Vitro food and beverage business in the United States increased the
region's net sales by $80 million in 2015. Total glass container shipments in
the region were up 3% in 2015 compared to 2014. Excluding the impact of the
Vitro Acquisition in the region, glass container shipments were up slightly in
2015, however, an unfavorable sales mix resulted in $4 million of lower sales.
Lower selling prices decreased net sales by $14 million in 2015 due, in part, to
the Company's contractual pass through provisions of lower natural gas costs.
Unfavorable foreign currency exchange rate changes decreased net sales by $26
million, as the Canadian dollar weakened in relation to the U.S. dollar.
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Latin America: Net sales in Latin America in 2015 were $1,064 million compared
with $1,159 million in 2014, a decrease of $95 million, or 8%. The unfavorable
effects of foreign currency exchange rate changes decreased net sales
$293 million in 2015 compared to 2014, principally due to a decline in the
Brazilian real and the Colombian peso in relation to the U.S. dollar. Net sales
from the acquired Vitro food and beverage business in Mexico and Bolivia
increased the region's net sales by approximately $178 million in 2015. Total
glass container shipments were up approximately 18% in 2015. Excluding the
impact of the Vitro Acquisition in the region, glass container shipments were
down nearly 4% in 2015. This decline impacted net sales by approximately $45
million and was primarily due to a general economic slowdown in Brazil, which is
expected to continue into 2016. Improved pricing in the current year benefited
net sales by $65 million.
Asia Pacific: Net sales in Asia Pacific in 2015 were $671 million compared with
$793 million for 2014, a decrease of $122 million, or 15%. The unfavorable
effects of foreign currency exchange rate changes decreased net sales
$117 million in 2015 compared to 2014, primarily due to the weakening of the
Australian dollar in relation to the U.S. dollar. Glass container shipments were
down 3% compared to the prior year, largely due to the planned plant closures in
China in 2014. This resulted in $7 million of lower sales in 2015. Higher prices
increased net sales by $2 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 2015 was $740 million
compared to $908 million in 2014, a decrease of $168 million, or 19%. The
decrease in segment operating profit was primarily due to unfavorable foreign
currency exchange rates. In addition, cost inflation and lower operational
performance in Europe increased operating costs in the current year. Segment
operating profit for 2015 included approximately $46 million from the acquired
Vitro Businesses.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
Segment operating profit - 2014 $ 908
Price $ 19
Sales volume (excluding acquisitions) (8)
Operating costs (84)
Effects of changing foreign currency rates (141)
Vitro Acquisition 46
Total net effect on segment operating profit (168)
Segment operating profit - 2015 $ 740
Europe: Segment operating profit in Europe in 2015 was $209 million compared
with $353 million in 2014, a decrease of $144 million, or 41%. The unfavorable
effects of foreign currency exchange rates in 2015 decreased segment operating
profit by $63 million compared to the prior year. The region also had higher
operating costs and lower production volumes in 2015 due to a higher level of
furnace rebuild activity and lower productivity. In addition, the region did not
receive an energy credit from a local government entity in 2015 as it had in the
prior year. Together, this activity contributed to a $49 million increase to
operating expenses in Europe in 2015 compared to 2014. Lower selling prices
impacted segment operating profit by $34 million due to competitive activity,
primarily in Southern Europe, while slightly higher sales volumes benefited
segment operating profit by $2 million in 2015.
North America: Segment operating profit in North America in 2015 was
$265 million compared with $240 million in 2014, an increase of $25 million, or
10%. Segment operating profit from the acquired Vitro food and beverage glass
container distribution business in the region contributed $4 million in 2015.
Segment
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operating profit also benefited from lower operating costs of $38 million in the
current year, which were driven by lower energy, supply chain and logistics
costs. As a result of the lower energy costs and the Company's contractual pass
through provisions, selling prices were $14 million lower in 2015 compared to
2014. Also, the unfavorable effects of the weakening of the Canadian dollar in
relation to the U.S. dollar decreased segment operating profit by $3 million.
Latin America: Segment operating profit in Latin America in 2015 was
$183 million compared with $227 million in 2014, a decrease of $44 million, or
19%. The unfavorable effects of foreign currency rate changes decreased segment
operating profit by $58 million in the current year. Segment operating profit
from the acquired Vitro food and beverage business increased the region's
operating profit by $42 million in 2015. Excluding the impact of the Vitro
Acquisition, the decline in sales volume discussed above reduced segment
operating profit by $12 million. Segment operating profit was also impacted by
$75 million of higher operating costs, primarily due to energy and soda ash
inflation in Brazil. In addition, approximately $6 million of non-strategic
asset sales, which benefited 2014, did not reoccur in 2015. Higher selling
prices increased segment operating profit by $65 million in 2015.
Asia Pacific: Segment operating profit in Asia Pacific in 2015 was $83 million
compared with $88 million in 2014, a decrease of $5 million, or 6%. The
unfavorable effects of foreign currency exchange rates decreased segment
operating profit by $17 million. Despite the decline in sales volume discussed
above, a favorable sales mix resulted in a $2 million increase to segment
operating profit. Segment operating profit also benefited as operating costs
decreased by $8 million in the current year driven by footprint savings from
prior year capacity reductions in the region and the favorable impact of an
insurance recovery. Higher selling prices increased segment operating profit by
$2 million in the current year.
Interest Expense, net
Net interest expense in 2015 was $251 million compared with $230 million in
2014. The increase was due to higher note repurchase premiums and the writeoff
of finance fees related to refinancing activities in 2015. Exclusive of these
items, net interest expense decreased $1 million in the current year primarily
due to debt management activities and the weaker Euro exchange rate in relation
to the U.S. dollar, partially offset by an increase in net interest expense as a
result of higher debt due to the Vitro Acquisition.
Provision for Income Taxes
The Company's effective tax rate from continuing operations for 2015 was 39.6%,
compared with 30.0% for 2014. The effective tax rate for 2015 was impacted by
several charges that management considered not representative of ongoing
operations, including charges for note repurchase premiums, the write-off of
finance fees, restructuring charges and acquisition fees, for which no tax
benefit was recorded due to the Company's valuation allowance recorded in the
U.S. The effective tax rate for 2014 was impacted by a nonincome tax charge,
which was not deductible for income tax purposes.
Excluding the amounts related to items that management considers not
representative of ongoing operations, the Company's effective tax rate for 2015
was approximately 25%, compared with approximately 22% for 2014. The 2015
effective tax rate was higher due to the geographic mix of earnings and timing
issues associated with the establishment of the legal structure for the acquired
operations in Mexico, the latter of which was resolved by year end 2015.
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests for 2015 was $23 million
compared to $28 million for 2014. The decrease in 2015 was largely attributable
to the unfavorable effect of changes in foreign currency exchange rates.
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Earnings (loss) from Continuing Operations Attributable to the Company
For 2015, the Company recorded earnings from continuing operations attributable
to the Company of $139 million, or $0.85 per share (diluted), compared with
earnings of $187 million, or $1.13 per share (diluted), for 2014. 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
2015 and 2014 as set forth in the following table (dollars in millions).
Net Earnings
Increase
(Decrease)
2015 2014
Description (restated(1)) (restated(1))
Charge for asbestos-related costs $ (16) $ (46)
Restructuring, asset impairment and other charges (69) (67)
Note repurchase premiums and write-off of finance fees (42) (20)
Strategic transaction costs
(26)
Acquisition-related fair value inventory adjustments
(16)
Acquisition-related fair value intangible adjustments
(9)
Tax benefit (charge) for certain tax adjustments (8) 8
Non-income tax charge (69)
Pension settlement charges (55)
Total $ (186) $ (249)
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(1) Certain amounts have been restated to reflect adjustments related to the
correction of an error (see Note 1 to the Consolidated Financial Statements
for additional information).
Foreign Currency Exchange Rates
Given the global nature of its operations, the Company is subject to fluctuations in foreign currency exchange rates. As described above, the Company's reported revenues and segment operating profit in 2015 were reduced due to foreign currency effects compared to 2014.
This trend has continued into 2016 as a result of a strengthening U.S. dollar.
During times of a strengthening U.S. dollar, the reported revenues and segment
operating profit of the Company's international operations will be reduced
because the local currencies will translate into fewer U.S. dollars. The Company
uses certain derivative instruments to mitigate a portion of the risk associated
with changing foreign currency exchange rates.
Executive Overview-Comparison of 2014 with 2013
2014 Highlights
· Segment operating profit decreased due to higher operating costs, partially
offset by higher selling prices and the benefits from the European asset
optimization program
· Entered into a joint venture in Mexico and a longterm supply agreement with
Constellation Brands, Inc. to supply glass containers for their beer business
· Issued $800 million of senior notes due 2022 and 2025 and repurchased
$611 million of exchangeable senior notes
· Strong cash generation improves leverage ratio and continues share repurchases
Net sales decreased by $183 million compared to the prior year due to a 2% decline in glass container shipments and due to the unfavorable effect of changes in foreign currency exchange rates. Higher selling prices had a positive impact on net sales.
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Segment operating profit for reportable segments decreased by $39 million
compared to the prior year. The decrease was mainly attributable to higher
operating costs, driven by cost inflation in most of the regions, higher supply
chain and production costs in North America and lower production volumes in Asia
Pacific and North America. Higher selling prices and the benefits from the
European asset optimization partially offset these costs.
Net interest expense in 2014 increased $1 million compared to 2013. The increase
was due to higher note repurchase premiums and the writeoff of finance fees
related to debt that was repaid during 2014 prior to its maturity than
experienced in 2013. Exclusive of these costs, net interest declined $5 million
in 2014 compared to 2013 due to debt reduction initiatives and lower interest
rates.
Earnings from continuing operations attributable to the Company in 2014 were
$187 million, or $1.13 per share (diluted), compared with $335 million, or $2.02
per share (diluted), for 2013. 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
$249 million, or $1.50 per share, in 2014 and $115 million, or $0.70 per share,
in 2013.
Results of Operations-Comparison of 2014 with 2013
Net Sales
The Company's net sales in 2014 were $6,784 million compared with $6,967 million
in 2013, a decrease of $183 million. Glass container shipments, in tonnes, were
down 2% in 2014 compared to 2013, driven by lower sales in Asia Pacific. Net
sales were also lower due to the unfavorable effects of foreign currency
exchange rate changes, primarily due to a weaker Brazilian real, Colombian peso
and Australian dollar in relation to the U.S. dollar. Net sales in 2014
benefited from higher selling prices.
The change in net sales of reportable segments can be summarized as follows
(dollars in millions):
Net sales- 2013 $ 6,941
Price $ 73
Sales volume (excluding acquisitions) (112)
Effects of changing foreign currency rates (153)
Total effect on net sales (192)
Net sales- 2014 $ 6,749
Europe: Net sales in Europe in 2014 were $2,794 million compared with $2,787 in
2013, an increase of $7 million, or less than 1%. Glass container shipments in
2014 increased 2% compared to the prior year, particularly in the beer and wine
categories. The higher sales volume, which increased net sales by $49 million,
was mainly due to unseasonably warm weather conditions in the first quarter and
the carryover benefits of the Company's wine share recovery efforts from the
prior year. Net sales in Europe decreased by $3 million due to the unfavorable
effects of foreign currency exchange rate changes, as the Euro weakened in
relation to the U.S. dollar. Lower selling prices also reduced sales by
$39 million in 2014.
North America: Net sales in North America in 2014 were $2,003 million compared
with $2,002 million in 2013, an increase of $1 million. Higher selling prices of
$45 million increased net sales in 2014 due, in part, to the Company's
contractual pass through provisions, as well as from passing through the freight
costs for a large customer. Net sales declined by $30 million in 2014 compared
to the prior year due to a 1% decrease in glass container shipments and a less
favorable sales mix. The primary driver for the decline in the region's volumes
in 2014 was due to lower sales to major domestic beer brands. Unfavorable
foreign currency exchange rates decreased net sales by $14 million, as the
Canadian dollar weakened in relation to the U.S. dollar.
Latin America: Net sales in Latin America in 2014 were $1,159 million compared
with $1,186 million in 2013, a decrease of $27 million, or 2%. The unfavorable
effects of foreign currency exchange rate changes decreased net sales
$96 million in 2014 compared to 2013, principally due to a decline in the
Brazilian real and the Colombian peso in relation to the U.S. dollar. Net sales
increased by $14 million in 2014 driven by a 4% increase in glass container
shipments, partially offset by a change in sales mix. Volume growth was
particularly
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strong in the beer category in 2014 and was evident in most of the countries
where the Company operates in the region. Improved pricing in the current year
benefited net sales by $55 million.
Asia Pacific: Net sales in Asia Pacific in 2014 were $793 million compared with
$966 million for 2013, a decrease of $173 million, or 18%. The decrease in net
sales was primarily due to lower sales volume, which resulted in $145 million of
lower sales in 2014. Glass container shipments were down 20% compared to the
prior year, largely due to the planned plant closures in China, as well as lower
shipments in Australia due to weaker demand in the domestic beer and export wine
markets. To balance supply with demand, the Company permanently closed a furnace
in Australia in the third quarter of 2014. The unfavorable effects of foreign
currency exchange rate changes decreased net sales $40 million in 2014 compared
to 2013, primarily due to the weakening of the Australian dollar in relation to
the U.S. dollar. Higher prices increased net sales by $12 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 2014 was $908 million
compared to $947 million in 2013, a decrease of $39 million, or 4%. The decline
in segment operating profit was primarily due to higher operating costs,
partially offset by the benefits from the European asset optimization program
and higher selling prices. Operating costs increased in the current year due to
cost inflation, higher supply chain and production costs in North America and
lower production volumes in Asia Pacific.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
Segment operating profit - 2013 $ 947
Price $ 73
Sales volume (7)
Operating costs (99)
Effects of changing foreign currency rates (6)
Total net effect on segment operating profit (39)
Segment operating profit - 2014 $ 908
Europe: Segment operating profit in Europe in 2014 was $353 million compared
with $305 million in 2013, an increase of $48 million, or 16%. Lower operating
expenses, driven by cost deflation and benefits from the region's asset
optimization program, had a $70 million positive impact on segment operating
profit in 2014. The increase in sales volume discussed above increased segment
operating profit by $14 million. Partially offsetting these benefits were lower
selling prices, which were down $39 million in the current year due, in part, to
competitive pressures in the region. Foreign currency exchange rates increased
segment profit by $3 million in 2014.
In 2014, the Company continued implementing the European asset optimization
program to increase the efficiency and capability of its European operations.
Through this program, 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 2014 was
$240 million compared with $307 million in 2013, a decrease of $67 million, or
22%. The decrease in segment operating profit was primarily due to higher
operating costs of $102 million in the current year, which were driven by higher
energy, raw material and supply chain costs, as well as lower production and
productivity levels. The decrease in sales volume mentioned above reduced
segment profit by $9 million. Higher selling prices partially offset these
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impacts and increased segment operating profit by $45 million in the current
year. The unfavorable effects of foreign exchange rates decreased segment profit
by $1 million.
Latin America: Segment operating profit in Latin America in 2014 was
$227 million compared with $204 million in 2013, an increase of $23 million, or
11%. Higher selling prices increased segment operating profit in 2014 by
$55 million. The increase in sales volume discussed above increased segment
operating profit by $13 million. Several nonstrategic asset sales also
benefited segment operating profit by $6 million in the current year. Operating
costs were $45 million higher in 2014, primarily driven by cost inflation, and
partially offset by higher productivity in the region. The unfavorable effects
of foreign currency exchange rate changes decreased segment operating profit by
$6 million in the current year.
Asia Pacific: Segment operating profit in Asia Pacific in 2014 was $88 million
compared with $131 million in 2013, a decrease of $43 million, or 33%. Operating
costs increased by $28 million in the current year and were driven by lower
production volumes and cost inflation. The decline in sales volume discussed
above decreased segment operating profit by $25 million. The unfavorable effects
of foreign currency exchange rates decreased segment profit by $2 million.
Higher selling prices increased segment profit by $12 million in the current
year.
Interest Expense, net
Net interest expense in 2014 was $230 million compared with $229 million in
2013. Interest expense for 2014 included $20 million for note repurchase
premiums and the writeoff of finance fees related to the tender offer to
purchase all of its outstanding 3.00% Exchangeable Senior Notes due 2015 (the
"2015 Exchangeable Notes"). Net interest expense for 2013 included $14 million
for note repurchase premiums and the writeoff of finance fees related to the
discharge of the €300 million Senior Notes due 2017 (the "2017 Senior Notes")
and related to the repurchase of a portion of the 2015 Exchangeable Notes.
Exclusive of these items, net interest expense decreased $5 million in the
current year primarily due to debt reduction initiatives and lower
interest rates
Provision for Income Taxes
The Company's effective tax rate from continuing operations for 2014 was 30.0%,
compared with 25.6% for 2013. The effective tax rate for 2014 was impacted by a
nonincome tax charge, which was not deductible for income tax purposes.
Excluding the amounts related to items that management considers not
representative of ongoing operations, the Company's effective tax rate for 2014
was 22.4%, compared with 21.9% for 2013.
Net Earnings Attributable to Noncontrolling Interests
Net earnings attributable to noncontrolling interests for 2014 was $28 million
compared to $13 million for 2013. The increase in 2014 was primarily due to the
nonoccurrence of the impacts from restructuring and asset impairment charges in
2013 at the Company's less than whollyowned facilities in Latin America and
Asia Pacific, as well as higher earnings in the Company's less than whollyowned
subsidiaries in Latin America in 2014.
Earnings from Continuing Operations Attributable to the Company
For 2014, the Company recorded earnings from continuing operations attributable
to the Company of $187 million compared with $335 million for 2013. The after
tax effects of the items excluded from segment
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operating profit, the unusual tax items and the additional interest charges
increased or decreased earnings in 2014 and 2013 as set forth in the following
table (dollars in millions).
Net Earnings
Increase
(Decrease)
2014 2013
Description (restated(1)) (restated(1))
Charge for asbestos-related costs $ (46) $ (12)
Non-income tax charge
(69)
Restructuring, asset impairment and other charges (67) (92)
Pension settlement charges
(55)
Note repurchase premiums and write-off of finance fees (20) (11)
Tax benefit for certain tax adjustments 8
Total $ (249) $ (115)
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(1) Certain amounts have been restated to reflect adjustments related to the
correction of an error (see Note 1 to the Consolidated Financial Statements
for additional information).
Foreign Currency Exchange Rates
Given the global nature of its operations, the Company is subject to fluctuations in foreign currency exchange rates. As described above, the Company's reported revenues and segment operating profit in 2014 were reduced due to foreign currency effects compared to 2013.
This trend has continued into 2015 as a result of a strengthening U.S.
dollar. During times of a strengthening U.S. dollar, the reported revenues and
segment operating profit of the Company's international operations will be
reduced because the local currencies will translate into fewer U.S. dollars. The
Company uses certain derivative instruments to mitigate a portion of the risk
associated with changing foreign currency exchange rates.
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
Retained corporate costs and other for 2015 were $70 million compared with $100 million for 2014. Retained corporate costs and other declined in 2015 compared to 2014 due to lower pension expense, lower management incentive compensation expense and the favorable impact from currency hedges.
Retained corporate costs and other for 2014 were $100 million compared with $119 million for 2013. Retained corporate costs and other declined in 2014 compared to 2013 due to lower pension expense.
Charge for AsbestosRelated Costs
In April 2016, the Company determined that it had incorrectly applied the
provisions of ASC 450, Contingencies, in measuring its liability related to
unasserted claims and related legal costs arising from the Company's previous
sale of products containing asbestos (see Note 12 to the Consolidated Financial
Statements).
Beginning in 2003, the Company had estimated its asbestos-related liability
based on an analysis of how far in the future it could reasonably estimate the
number of claims it would receive. Subsequent to the filing of its Annual Report
on Form 10-K for the year ended December 31, 2015 ("2015 Annual Report"), the
Company has concluded that its method for estimating its future asbestos-related
liability was not consistent with ASC 450. Therefore, with the assistance of an
external consultant, and utilizing a model with actuarial inputs, the Company
has developed a new method for reasonably estimating its total asbestos-related
liability. See Note 12 to the Consolidated Financial Statements for additional
detail. Using the new model, the Company calculated a total
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asbestos-related liability of $817 million as of December 31, 2015, which is
$295 million higher than previously calculated. The revised liability is
reflected in the balance sheet as of December 31, 2015. Using the same model
with actuarial inputs, the Company also revised its total asbestos-related
liability as of December 31, 2014 to $939 million.
In light of the foregoing, the Company amended its 2015 Annual Report to restate
the financial statements contained therein to reflect the effects of its new
method for estimating its total asbestos-related liability and to make certain
corresponding disclosures related thereto (see Note 1 to the Consolidated
Financial Statements). The restated charges for asbestosrelated costs were
$16 million, $46 million, and $12 million for the years ended December 31, 2015,
2014 and 2013, respectively.
The Company continues to believe that its ultimate asbestos-related liability
cannot be estimated with certainty. As part of its future comprehensive annual
reviews, the Company will estimate its total asbestos-related liability and such
reviews may result in adjustments to the liability accrued at the time of the
review.
See "Critical Accounting Estimates" and Note 12 to the Consolidated Financial Statements for additional information.
Restructuring, Asset Impairment and Other Charges
During 2015, the Company recorded charges totaling $80 million for restructuring, asset impairment and other charges. These charges reflect $63 million of completed furnace closures, primarily in the North America and Latin America regions and other charges of $17 million.
During 2014, the Company recorded charges totaling $91 million for restructuring, asset impairment and other charges. These charges reflect $76 million of completed and planned furnace closures in Europe and Asia Pacific and other charges of $15 million.
During 2013, the Company recorded charges totaling $119 million for
restructuring, asset impairment and related charges. These charges reflect
completed and planned plant and furnace closures in Europe, Latin America and
Asia Pacific, as well as global headcount reduction initiatives. These charges
also include an asset impairment charge related to the Company's operations in
Argentina, primarily due to macroeconomic issues in that country.
See Note 8 to the Consolidated Financial Statements for additional information.
Acquisition-related Fair Value Adjustments and Strategic Transaction Costs
During 2015, the Company recorded charges of $22 million for acquisition-related
fair value inventory adjustments related to the Vitro Acquisition. These charges
were due to the accounting rules requiring inventory purchased in a business
combination to be marked up to fair value and then recorded as an increase to
cost of goods sold as the inventory is sold. During 2015, the Company also
recorded charges of $10 million for acquisition-related fair value intangible
asset adjustments related to trademark assets with short-term lives acquired as
part of the Vitro Acquisition.
During 2015, the Company recorded charges of $23 million for strategic transaction costs related to the Vitro Acquisition.
Nonincome tax charge
In 2014, the Company recorded a $69 million charge based on a ruling on a nonincome tax assessment.
Pension Settlement Charges
During 2014, the Company recorded charges totaling $65 million for pension settlements in the United States and the Netherlands.
See Note 9 to the Consolidated Financial Statements for additional information.
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Discontinued Operations
On March 10, 2015, a tribunal constituted under the auspices of the
International Centre for Settlement of Investment Disputes ("ICSID") awarded a
subsidiary of the Company more than $455 million in an international arbitration
against Venezuela related to the 2010 expropriation of the Company's majority
interest in two plants in that country. On July 10, 2015, ICSID confirmed that
it had received from Venezuela a petition to annul the award. The annulment
process can take up to several years to complete. The Company is unable at this
stage to predict the amount or timing of compensation it will ultimately receive
under the award. Therefore, the Company has not recognized this award in its
financial statements.
A separate arbitration is pending with ICSID to obtain compensation primarily
for third-party minority shareholders' lost interests in the two expropriated
plants.
The loss from discontinued operations of $4 million for the year ended December
31, 2015 relates to ongoing costs for the Venezuelan expropriation. The loss
from discontinued operations of $23 million for the year ended December 31, 2014
included a settlement of a dispute with the purchaser of a previously disposed
business, as well as ongoing costs related to the Venezuela expropriation.
Acquisition of Vitro, S.A.B. de C.V.'s Food and Beverage Glass Container Business
On September 1, 2015, the Company completed the Vitro Acquisition in a cash
transaction valued at approximately $2.297 billion, subject to a working capital
adjustment and certain other adjustments. The Vitro Business in Mexico is the
largest supplier of glass containers in that country, manufacturing glass
containers across multiple end uses, including food, soft drinks, beer, wine and
spirits. The Vitro Acquisition included five food and beverage glass container
plants in Mexico, a plant in Bolivia and a North American distribution business,
and provided the Company with a competitive position in the glass packaging
market in Mexico. The results of the Vitro Business have been included in the
Company's consolidated financial statements since September 1, 2015. Vitro's
food and beverage glass container operations in Mexico and Bolivia are included
in the Latin American operating segment while its distribution business is
included in the North American operating segment.
The Company financed the Vitro Acquisition with the proceeds from its recently completed senior notes offering, cash on hand and the incremental term loan facilities (see Note 11 to the Consolidated Financial Statements).
Capital Resources and Liquidity
As of December 31, 2015, the Company had cash and total debt of $399 million and
$5.6 billion, respectively, compared to $512 million and $3.4 billion,
respectively, as of December 31, 2014. A significant portion of the cash was
held in mature, liquid markets where the Company has operations, such as the
U.S., Europe and Australia, and is readily available to fund global liquidity
requirements. The amount of cash held in nonU.S. locations as of December 31,
2015 was $393 million.
Current and LongTerm Debt
On April 22, 2015, certain of the Company's subsidiaries entered into a new
Senior Secured Credit Facility (the "Agreement"), which amended and restated the
previous credit agreement (the "Previous Agreement"). The proceeds from the
Agreement were used to repay all outstanding amounts under the Previous
Agreement and the 7.375% senior notes due 2016. The Company recorded $42 million
of additional interest charges for note repurchase premiums and the related
write-off of unamortized finance fees in 2015.
In connection with the closing of the Vitro Acquisition on September 1, 2015
(see Note 19 to the Consolidated Financial Statements), the Company entered into
Amendment No. 2 ("Amendment No. 2") to the Agreement, which provided for
additional incremental availability under the incremental dollar cap in the
Agreement of up to $1,250 million. In addition, in connection with the closing
of the Vitro Acquisition on September 1, 2015, the Company entered into the
First Incremental Amendment to the Agreement (the "Incremental Amendment")
pursuant to which the Company incurred $1,250 million of senior secured
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incremental term loan facilities, comprised of (i) a $675 million term loan A
facility (the "incremental term loan A facility") on substantially the same
terms and conditions (including as to maturity) as the term loan A facility in
the Agreement and (ii) a $575 million term loan B facility (the "incremental
term loan B facility") maturing seven years after the closing of the Vitro
Acquisition using its incremental capacity under the Agreement.
At December 31, 2015, the Agreement, as amended by Amendment No. 2 and the
Incremental Amendment (the "Amended Agreement"), includes a $300 million
revolving credit facility, a $600 million multicurrency revolving credit
facility, a $1,575 million term loan A facility ($1,546 million net of debt
issuance costs), and a €279 million term loan A facility ($301 million net of
debt issuance costs), each of which has a final maturity date of April 22,
2020. The Amended Agreement also includes a $575 million term loan B facility
($563 million net of debt issuance costs) with a final maturity date of
September 1, 2022. At December 31, 2015, the Company had unused credit of $872
million available under the Amended Agreement. The weighted average interest
rate on borrowings outstanding under the Amended Agreement at December 31, 2015
was 2.37%.
The Amended Agreement contains various covenants that restrict, among other
things and subject to certain exceptions, the ability of the Company to incur
certain liens, make certain investments, become liable under contingent
obligations in certain defined instances only, make restricted payments, make
certain asset sales within guidelines and limits, engage in certain affiliate
transactions, participate in sale and leaseback financing arrangements, alter
its fundamental business, and amend certain subordinated debt obligations.
The Amended Agreement also contains one financial maintenance covenant, a Total
Leverage Ratio, that requires the Company as of the last day of a fiscal quarter
not to exceed a ratio of 4.0x calculated by dividing consolidated total debt,
less cash and cash equivalents, by consolidated EBITDA, as defined in the
Amended Agreement. The maximum Total Leverage Ratio is subject to an increase of
0.5x for the four fiscal quarters commencing on and following the consummation
of certain qualifying acquisitions as defined in the Amended Agreement. In
connection with the Vitro Acquisition on September 1, 2015, the Company elected
to increase such maximum Total Leverage Ratio to 4.5x for the four fiscal
quarters ending June 30, 2016. The Total Leverage Ratio could restrict the
ability of the Company to undertake additional financing or acquisitions to the
extent that such financing or acquisitions would cause the Total Leverage Ratio
to exceed the specified maximum.
On February 3, 2016, the Company entered into Amendment No. 4 ("Amendment No.
4") to the Amended Agreement, which provided for an increase in the maximum
Total Leverage Ratio for purposes of the financial covenant in the Amended
Agreement to 5.0x for the fiscal quarters ending March 31, 2016, June 30, 2016
and September 30, 2016, 4.50x for the fiscal quarters ending December 31, 2016,
March 31, 2017, June 30, 2017 and September 30, 2017, and stepping back down to
4.0x for the fiscal quarter ending December 31, 2017 and each fiscal quarter
ending thereafter. At December 31, 2015, the Company's Total Leverage Ratio was
4.0x, which was below the 4.5x specified maximum level at that date. The Company
expects its Total Leverage Ratio to increase in the first three quarters of
2016, yet remain below the amended levels stated above, due to seasonal working
capital requirements.
Failure to comply with these covenants and restrictions could result in an event
of default under the Amended Agreement as amended by Amendment No. 4. In such an
event, the Company could not request borrowings under the revolving facility,
and all amounts outstanding under the Amended Agreement, together with accrued
interest, could then be declared immediately due and payable. If an event of
default occurs under the Amended Agreement as amended by Amendment No. 4 and the
lenders cause all of the outstanding debt obligations under the Amended
Agreement to become due and payable, this would result in a default under a
number of other outstanding debt securities and could lead to an acceleration of
obligations related to these debt securities. As of December 31, 2015, the
Company was in compliance with all covenants and restrictions in the Amended
Agreement. In addition, the Company believes that it will remain in compliance
and that its ability to borrow funds under the Amended Agreement as amended by
Amendment No. 4 will not be adversely affected by the covenants and
restrictions.
The interest rates on borrowings under the Amended Agreement are, at the
Company's option, the Base Rate or the Eurocurrency Rate, as defined in the
Amended Agreement, plus an applicable margin. The applicable margin for the term
loan A facility and the revolving credit facility is linked to the Company's
Total Leverage
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Ratio and ranges from 1.25% to 1.75% for Eurocurrency Rate loans and from 0.25%
to 0.75% for Base Rate loans. In addition, a facility fee is payable on the
revolving credit facility commitments ranging from 0.20% to 0.30% per annum
linked to the Total Leverage Ratio. The applicable margin for the term loan B
facility is 2.75% for Eurocurrency Rate loans and 1.75% for Base Rate loans. The
incremental term loan B facility is subject to a LIBOR floor of 0.75%.
Borrowings under the Amended Agreement are secured by substantially all of the
assets, excluding real estate and certain other excluded assets, of certain of
the Company's domestic subsidiaries and certain foreign subsidiaries. Borrowings
are also secured by a pledge of intercompany debt and equity investments in
certain of the Company's domestic subsidiaries and, in the case of foreign
borrowings, of stock of certain foreign subsidiaries. All borrowings under the
Amended Agreement are guaranteed by certain domestic subsidiaries of the Company
for the term of the Amended Agreement.
Also, in connection with the Vitro Acquisition, during August 2015, the Company
issued senior notes with a face value of $700 million that bear interest at
5.875% and are due August 15, 2023 (the "Senior Notes due 2023") and senior
notes with a face value of $300 million that bear interest at 6.375% and are due
August 15, 2025 (together with the Senior Notes due 2023, the "2015 Senior
Notes"). The 2015 Senior Notes were issued via a private placement and are
guaranteed by certain of the Company's domestic subsidiaries. The net proceeds
from the 2015 Senior Notes, after deducting the debt discount and debt issuance
costs, totaled approximately $972 million and were used to finance, in part, the
Vitro Acquisition.
During December 2014, the Company issued senior notes with a face value of $500
million that bear interest at 5.00% and are due January 15, 2022 (the "Senior
Notes due 2022"). The Company also issued senior notes with a face value of $300
million that bear interest at 5.375% and are due January 15, 2025 (together with
the Senior Notes due 2022, the "2014 Senior Notes"). The 2014 Senior Notes were
issued via a private placement and are guaranteed by certain of the Company's
domestic subsidiaries. The net proceeds from the 2014 Senior Notes, after
deducting debt issuance costs, totaled approximately $790 million and were used
to purchase $611 million aggregate principal amount of the Company's 3.00% 2015
Exchangeable Senior Notes. The remaining balance of the Exchangeable Senior
Notes was repaid in the second quarter of 2015.
The Company assesses its capital raising and refinancing needs on an ongoing
basis and may enter into additional credit facilities and seek to issue equity
and/or debt securities in the domestic and international capital markets if
market conditions are favorable. Also, depending on market conditions, the
Company may elect to repurchase portions of its debt securities in the open
market.
The Company has a €185 million European accounts receivable securitization
program, which extends through September 2016, subject to periodic renewal of
backup credit lines. Information related to the Company's accounts receivable
securitization program as of December 31, 2015 and 2014 is as follows:
2015 2014
Balance (included in short-term loans) $ 158 $ 122
Weighted average interest rate 1.21 % 1.41 %
Cash Flows
Free cash flow was $210 million for 2015 compared to $329 million for 2014. The
Company defines free cash flow as cash provided by continuing operating
activities less additions to property, plant and equipment. Free cash flow does
not conform to U.S. GAAP and should not be construed as an alternative to the
cash flow measures reported in accordance with U.S. GAAP. The Company uses free
cash flow for internal reporting, forecasting and budgeting and believes this
information allows the board of directors, management, investors and
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analysts to better understand the Company's financial performance. Free cash
flow for the years ended December 31, 2015 and 2014 is calculated as follows
(dollars in millions):
2015 2014
Cash provided by continuing operating activities $ 612 $ 698
Additions to property, plant and equipment (402) (369)
Free cash flow $ 210 $ 329
Operating activities: Cash provided by continuing operating activities was
$612 million for 2015 compared to $698 million for 2014. The decrease in cash
provided by continuing operating activities in 2015 was primarily due to lower
earnings. Lower working capital benefited cash provided by continuing operating
activities by $88 million in 2015 compared to 2014, primarily due to an increase
in accounts payable.
Lower year-over-year pension contributions, asbestos-related payments, and cash
paid for restructuring activities also benefited cash provided by continuing
operating activities in 2015 compared to 2014. In addition, the Company
experienced a $71 million year-over-year decline in cash paid for non-current
assets and liabilities in 2015 compared to 2014. This decrease was primarily due
to less cash paid for returnable packaging and installment payments related to a
non-income tax assessment that was resolved with a foreign tax authority in
2015.
Investing activities: Cash utilized in investing activities was $2,748 million
for 2015 compared to $455 million for 2014. Capital spending for property, plant
and equipment during 2015 was $402 million, compared with $369 million in the
prior year, reflecting higher spending for the construction of a new furnace in
Mexico.
Investing activities in 2015 also included $2,351 million paid for acquisitions,
primarily related to the Vitro Acquisition. Investing activities in 2014
included $114 million paid for acquisitions, primarily related to the Company's
investment in a joint venture with Constellation Brands, Inc. (NYSE: STZ)
("Constellation") to operate and expand a glass container plant in Nava, Mexico.
To help meet current and rising demand from Constellation's adjacent brewery,
the joint venture plans to expand the plant from one furnace to four over the
next three years. The Company contributed an additional $20 million to this
joint venture in 2015 and expects to contribute approximately $140 million
through 2017 for the joint venture's future expansion plans.
Financing activities: Cash provided by financing activities was $2,057 million
for 2015 compared to $70 million of cash utilized for 2014. Financing activities
in 2015 included additions to long-term debt of $4,538 million, primarily
related to the borrowings for the Vitro Acquisition and the refinancing of the
Company's Senior Secured Credit Facility. Financing activities in 2015 also
included the repayment of long-term debt of $2,321, which includes the repayment
of the Previous Agreement and the repayment of the senior notes due in 2016.
Borrowings under short-term loans increased by $51 million in 2015. The Company
paid approximately $90 million in note repurchase premiums and finance fees in
2015 compared to $11 million in 2014.
The Company paid $22 million and $37 million in distributions to noncontrolling
interests in 2015 and 2014, respectively. The Company also repurchased shares of
its common stock for $100 million in 2015 compared to $32 million repurchased in
2014. The repurchases were completed using cash on hand and included an
accelerated share repurchase program. Additional details about the Company's
share repurchase activities are provided in Note 17 to the Consolidated
Financial Statements.
The Company anticipates that cash flows from its operations and from utilization
of credit available under the Agreement will be sufficient to fund its operating
and seasonal working capital needs, debt service and other obligations on a
shortterm (twelve months) and longterm basis. Based on the Company's
expectations regarding future payments for lawsuits and claims and also based on
the Company's expected operating cash flow, the Company believes that the
payment of any deferred amounts of previously settled or otherwise determined
lawsuits and claims, and the resolution of presently pending and anticipated
future lawsuits and claims associated with asbestos, will not have a material
adverse effect upon the Company's liquidity on a shortterm or longterm basis.
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Contractual Obligations and OffBalance Sheet Arrangements
The following information summarizes the Company's significant contractual cash obligations at December 31, 2015 (dollars in millions).
Payments due by period
Less than More than
Total one year 1 - 3 years 3 - 5 years 5 years
Contractual cash obligations:
Long-term debt $ 5,351 $ 57 $ 432 $ 2,189 $ 2,673
Capital lease obligations 62 11 12 13 26
Operating leases 405 82 151 130 42
Interest(1) 1,442 237 468 362 375
Purchase obligations(2) 2,038 643 777 140 478
Pension benefit plan contributions(3) 25 25
Postretirement benefit plan benefit
payments(1) 104 11 22 22 49
Equity affiliate investment
obligation(4) 140 80 60
Total contractual cash obligations $ 9,567 $ 1,146 $
1,922 $ 2,856 $ 3,643
Amount of
commitment expiration per period
Less than More than
Total one year 1 - 3 years 3 - 5 years 5 years
Other commercial commitments:
Standby letters of credit $ 28 $ 28 $ - $ - $ -
Total commercial commitments $ 28 $ 28 $ - $ - $ -
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(1) Amounts based on rates and assumptions at December 31, 2015.
(2) The Company's purchase obligations consist principally of contracted amounts
for energy and molds. In cases where variable prices are involved, current
market prices have been used. The amount above does not include ordinary
course of business purchase orders because the majority of such purchase
orders may be canceled. The Company does not believe such purchase orders
will adversely affect its liquidity position.
(3) In order to maintain minimum funding requirements, the Company is required to
make contributions to its defined benefit pension plans of approximately
$25 million in 2016. Future funding requirements for the Company's pension
plans will depend largely on actual asset returns and future actuarial
assumptions, such as discount rates, and can vary significantly.
(4) In 2014, the Company entered into a joint venture agreement with
Constellation Brands, Inc. to operate a glass container plant in Nava,
Mexico. To help meet current and rising demand from Constellation's adjacent
brewery, the joint venture plans to expand the plant from one furnace to four
over the next three years. The Company expects to contribute approximately
$140 million for the joint venture's expansion plans through 2017.
The Company is unable to make a reasonably reliable estimate as to when cash
settlement with taxing authorities may occur for its unrecognized tax benefits.
Therefore, the liability for unrecognized tax benefits is not included in the
table above. See Note 10 to the Consolidated Financial Statements for additional
information.
Critical Accounting Estimates
The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP"). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. The Company evaluates
these estimates and assumptions on an ongoing basis. Estimates and assumptions
are based on historical and other
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factors believed to be reasonable under the circumstances at the time the
financial statements are issued. The results of these estimates may form the
basis of the carrying value of certain assets and liabilities and may not be
readily apparent from other sources. Actual results, under conditions and
circumstances different from those assumed, may differ from estimates.
The impact of, and any associated risks related to, estimates and assumptions
are discussed within Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as in the Notes to the Consolidated Financial
Statements, if applicable, where estimates and assumptions affect the Company's
reported and expected financial results.
The Company believes that accounting for property, plant and equipment,
impairment of longlived assets, pension benefit plans, contingencies and
litigation related to asbestos liability, and income taxes involves the more
significant judgments and estimates used in the preparation of its consolidated
financial statements.
Property, Plant and Equipment
The net carrying amount of property, plant and equipment ("PP&E") at
December 31, 2015 totaled $3 billion, representing 31% of total assets.
Depreciation expense during 2015 totaled $323 million, representing
approximately 6% of total costs of goods sold. Given the significance of PP&E
and associated depreciation to the Company's consolidated financial statements,
the determinations of an asset's cost basis and its economic useful life are
considered to be critical accounting estimates.
Cost Basis-PP&E is recorded at cost, which is generally objectively quantifiable
when assets are purchased individually. However, when assets are purchased in
groups, or as part of a business, costs assigned to PP&E are based on an
estimate of fair value of each asset at the date of acquisition. These estimates
are based on assumptions about asset condition, remaining useful life and market
conditions, among others. The Company frequently employs expert appraisers to
aid in allocating cost among assets purchased as a group.
Included in the cost basis of PP&E are those costs which substantially increase
the useful lives or capacity of existing PP&E. Significant judgment is needed to
determine which costs should be capitalized under these criteria and which costs
should be expensed as a repair or maintenance expenditure. For example, the
Company frequently incurs various costs related to its existing glass melting
furnaces and forming machines and must make a determination of which costs, if
any, to capitalize. The Company relies on the experience and expertise of its
operations and engineering staff to make reasonable and consistent judgments
regarding increases in useful lives or capacity of PP&E.
Estimated Useful Life-PP&E is generally depreciated using the straightline
method, which deducts equal amounts of the cost of each asset from earnings each
period over its estimated economic useful life. Economic useful life is the
duration of time an asset is expected to be productively employed by the
Company, which may be less than its physical life. Management's assumptions
regarding the following factors, among others, affect the determination of
estimated economic useful life: wear and tear, product and process obsolescence,
technical standards, and changes in market demand.
The estimated economic useful life of an asset is monitored to determine its
appropriateness, especially in light of changed business circumstances. For
example, technological advances, excessive wear and tear, or changes in
customers' requirements may result in a shorter estimated useful life than
originally anticipated. In these cases, the Company depreciates the remaining
net book value over the new estimated remaining life, thereby increasing
depreciation expense per year on a prospective basis. Likewise, if the estimated
useful life is increased, the adjustment to the useful life decreases
depreciation expense per year on a prospective basis. Changes in economic useful
life assumptions did not have a material impact on the Company's reported
results in 2015, 2014 or 2013.
Impairment of LongLived Assets
Property, Plant and Equipment-The Company tests for impairment of PP&E whenever
events or changes in circumstances indicate that the carrying amount of the
assets may not be recoverable. PP&E held for use in the Company's business is
grouped for impairment testing at the lowest level for which cash flows can
reasonably be
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identified, typically a segment or a component of a segment. The Company
evaluates the recoverability of PP&E based on undiscounted projected cash flows,
excluding interest and taxes. If an asset group is considered impaired, the
impairment loss to be recognized is measured as the amount by which the asset
group's carrying amount exceeds its fair value. PP&E held for sale is reported
at the lower of carrying amount or fair value less cost to sell.
Impairment testing requires estimation of the fair value of PP&E based on the
discounted value of projected future cash flows generated by the asset group.
The assumptions underlying cash flow projections represent management's best
estimates at the time of the impairment review. Factors that management must
estimate include, among other things: industry and market conditions, sales
volume and prices, production costs and inflation. Changes in key assumptions or
actual conditions which differ from estimates could result in an impairment
charge. The Company uses reasonable and supportable assumptions when performing
impairment reviews and cannot predict the occurrence of future events and
circumstances that could result in impairment charges.
Goodwill -Goodwill is tested for impairment annually as of October 1 (or more
frequently if impairment indicators arise) using a two-step process. Step 1
compares the business enterprise value ("BEV") of each reporting unit with its
carrying value. The BEV is computed based on estimated future cash flows,
discounted at the weighted average cost of capital of a hypothetical third-party
buyer. If the BEV is less than the carrying value for any reporting unit, then
Step 2 must be performed. Step 2 compares the implied fair value of goodwill
with the carrying amount of goodwill. Any excess of the carrying value of the
goodwill over the implied fair value will be recorded as an impairment loss. The
calculations of the BEV in Step 1 and the implied fair value of goodwill in Step
2 are based on significant unobservable inputs, such as projected future cash
flows of the reporting units, discount rates, and terminal business value, and
are classified as Level 3 in the fair value hierarchy. The Company's projected
future cash flows incorporates management's best estimates of the expected
future results including, but not limited to, price trends, customer demand,
material costs, asset replacement costs and any other known factors.
Goodwill is tested for impairment at the reporting unit level, which is the
operating segment or one level below the operating segment, also known as a
component. Two or more components of an operating segment shall be aggregated
into a single reporting unit if the components have similar economic
characteristics, based on an assessment of various factors. The Company has
determined that the Europe and North America segments are reporting units. The
Company aggregated the components of the Latin America and Asia Pacific segments
into single reporting units equal to the reportable segments. The aggregation of
the components of these segments was based on their economic similarity as
determined by the Company using a number of quantitative and qualitative
factors, including gross margins, the manner in which the Company operates the
business, the consistent nature of products, services, production processes,
customers and methods of distribution, as well as the level of shared resources
and assets between the components.
During the fourth quarter of 2015, the Company completed its annual impairment
testing and determined that no impairment of goodwill existed. Goodwill at
December 31, 2015 totaled $2.5 billion, representing 26% of total assets. The
Company has four reporting units of which three of the reporting units have
goodwill and include; $840 million of recorded goodwill to the Company's Europe
segment, $624 million of recorded goodwill to the Company's Latin America
segment and $1 billion of recorded goodwill to the Company's North America
segment. The testing performed as of October 1, 2015, indicated a significant
excess of BEV over book value for North America. Both Europe and Latin America
exceeded their carrying values by approximately 11% and 20%, respectively, and
are determined to be the reporting units having the greatest risk of future
impairment if actual results fall modestly short of expectations. If the
Company's projected future cash flows were substantially lower, or if the
assumed weighted average cost of capital was substantially higher, the testing
performed as of October 1, 2015, may have indicated an impairment of one or more
of these reporting units and, as a result, the related goodwill may also have
been impaired. Any impairment charges that the Company may take in the future
could be material to its consolidated results of operations and financial
condition. However, less significant changes in projected future cash flows or
the assumed weighted average cost of capital would not have indicated an
impairment. For example, if projected future cash flows had been decreased by
5%, or if the weighted average
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cost of capital had been increased by 5%, or both, the resulting lower BEV's would still have exceeded the book value of each of these reporting units.
During the time subsequent to the annual evaluation, and at December 31, 2015,
the Company considered whether any events and/or changes in circumstances had
resulted in the likelihood that the goodwill of any of its reporting units may
have been impaired and has determined that no such events have occurred. The
Company will monitor conditions throughout 2016 that might significantly affect
the projections and variables used in the impairment test to determine if a
review prior to October 1 may be appropriate. If the results of impairment
testing confirm that a write down of goodwill is necessary, then the Company
will record a charge in the fourth quarter of 2016, or earlier if
appropriate. In the event the Company would be required to record a significant
write down of goodwill, the charge would have a material adverse effect on
reported results of operations and net worth.
Other Long-Lived Assets - Intangibles - Other long-lived assets consist
primarily of purchased customer relationships intangibles and are amortized
using the accelerated amortization method over their estimated useful lives. The
Company reviews these assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. In the event that a decline in fair value of an asset occurs, and
the decline in value is considered to be other than temporary, an impairment
loss is recognized. The test for impairment would require the Company to make
estimates about fair value, which may be determined based on discounted cash
flows, third party appraisals or other methods that provide appropriate
estimates of value. The Company continually monitors the carrying value of their
assets.
Pension Benefit Plans
Significant Estimates-The determination of pension obligations and the related
pension expense or credits to operations involves significant estimates. The
most significant estimates are the discount rate used to calculate the actuarial
present value of benefit obligations and the expected longterm rate of return
on plan assets. The Company uses discount rates based on yields of high quality
fixed rate debt securities at the end of the year. At December 31, 2015, the
weighted average discount rate was 4.43% and 3.82% for U.S. and nonU.S. plans,
respectively. The Company uses an expected longterm rate of return on assets
that is based on both past performance of the various plans' assets and
estimated future performance of the assets. Due to the nature of the plans'
assets and the volatility of debt and equity markets, actual returns may vary
significantly from year to year. The Company refers to average historical
returns over longer periods (up to 10 years) in determining its expected rates
of return because shortterm fluctuations in market values do not reflect the
rates of return the Company expects to achieve based upon its longterm
investing strategy. For purposes of determining pension charges and credits in
2015, the Company's estimated weighted average expected longterm rate of return
on plan assets is 8.00% for U.S. plans and 7.21% for nonU.S. plans compared to
8.00% for U.S. plans and 7.23% for nonU.S. plans in 2014. The Company recorded
pension expense from continuing operations of $24 million, $19 million, and
$60 million for the U.S. plans in 2015, 2014 and 2013, respectively, and
$7 million, $24 million, and $41 million for the nonU.S. plans in 2015, 2014,
and 2013, respectively from its principal defined benefit pension plans.
Depending on currency translation rates, the Company expects to record
approximately $29 million of total pension expense for the full year of 2016.
The 2016 pension expense will reflect a 7.5% expected long-term rate of return
for the U.S. assets.
Future effects on reported results of operations depend on economic conditions
and investment performance. For example, a onehalf percentage point change in
the actuarial assumption regarding discount rates or in the expected rate of
return used to calculate plan liabilities would result in a change of
approximately $8 million and $15 million, respectively, in the pretax pension
expense for the full year 2016.
Recognition of Funded Status-The Company recognizes the funded status of each
pension benefit plan on the balance sheet. The funded status of each plan is
measured as the difference between the fair value of plan assets and actuarially
calculated benefit obligations as of the balance sheet date. Actuarial gains and
losses are accumulated in Other Comprehensive Income and the portion of each
plan that exceeds 10% of the greater of that plan's assets or projected benefit
obligation is amortized to income on a straightline basis over the average
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remaining service period of employees still accruing benefits or the expected
life of participants not accruing benefits if all, or almost all, of the plan's
participants are no longer accruing benefits.
Contingencies and Litigation Related to Asbestos Liability
The Company conducts a comprehensive legal 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. As part of its annual comprehensive
legal review, the Company provides historical claims filing data to a third
party consultant with expertise in predicting future claims filings based on
actuarial inputs, such as the impact of disease incidence and mortality. The
Company uses these estimates of total future claims, along with its legal
judgment regarding an estimation of future disposition costs and related legal
costs, as inputs to develop a reasonable estimate of probable liability. If the
results of the annual comprehensive legal review indicate that the existing
amount of the accrued liability is lower (higher) than its reasonably estimable
asbestos-related costs, then the Company will record an appropriate charge
(credit) to the Company's results of operations to increase (decrease) the
accrued liability.
The significant assumptions and legal judgments underlying the material components of the Company's accrual are:
a) settlements will continue to be limited almost exclusively to claimants who
were exposed to the Company's asbestoscontaining insulation prior to its exit
from that business in 1958;
b) claims will continue to be resolved primarily under the Company's
administrative claims agreements or on terms comparable to those set forth in
those agreements;
c) the incidence of serious asbestosrelated disease cases and claiming patterns
against the Company for such cases do not change materially;
d) the Company is substantially able to defend itself successfully at trial and
on appeal;
e) the number and timing of additional codefendant bankruptcies do not change
significantly the assets available to participate in the resolution of cases
in which the Company is a defendant; and
f) codefendants with substantial resources and assets continue to participate
significantly in the resolution of future asbestos lawsuits and claims.
As noted above, the Company's asbestos-related liability is based on a
projection of new claims that will eventually be filed against the Company and
the estimated average disposition cost of these claims and related legal costs.
Changes in the significant assumptions noted above have the potential to impact
these key factors, which are critical to the estimation of the Company's
asbestos-related liability.
If trends relating to the Company's actual claims filings materially differ, up
or down, from the amounts predicted, the total number of estimated claims
indicated by future actuarial analyses could change significantly. Significant
changes in the total number of predicted claims could impact the total predicted
asbestos-related liability, which in turn could result in a material charge or
credit to the Company's results of operations.
The Company uses historical data for both indemnity and related legal costs, as
well as its legal judgment and expectations about future inflationary and
deflationary drivers, to predict the estimated disposition cost per claim and
the legal costs for the remainder of the litigation. If trends relating to the
actual per claim cost differ materially, up or down, from the previously
estimated amount, the Company may in the future revise its prediction of per
claim cost. The same may also be true with respect to legal costs. Significant
changes in the projected cost per claim or legal costs could impact the total
predicted asbestos-related liability, which in turn could result in a material
charge or credit to the Company's results of operations.
The Company believes it is reasonably possible that it will incur a loss for its
asbestos-related liabilities in excess of the amount currently recognized, which
is $817 million as of December 31, 2015. The Company estimates that reasonably
possible losses could be as high as $950 million. This estimate of additional
reasonably possible loss reflects a legal judgment about the number and cost of
potential future claims. The Company believes this estimate is consistent with
the level of variability it has experienced when comparing actual results
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to recent near-term projections. However, it is also possible that the ultimate asbestos-related liability could be above this estimate.
Income Taxes
The Company accounts for income taxes as required by general accounting
principles under which management judgment is required in determining income tax
expense and the related balance sheet amounts. This judgment includes estimating
and analyzing historical and projected future operating results, the reversal of
taxable temporary differences, tax planning strategies, and the ultimate outcome
of uncertain income tax positions. Actual income taxes paid may vary from
estimates, depending upon changes in income tax laws, actual results of
operations, and the final audit of tax returns by taxing authorities. Tax
assessments may arise several years after tax returns have been filed. Changes
in the estimates and assumptions used for calculating income tax expense and
potential differences in actual results from estimates could have a material
impact on the Company's results of operations and financial condition.
Deferred tax assets and liabilities are recognized for the tax effects of
temporary differences between the financial reporting and tax bases of assets
and liabilities measured using enacted tax rates and for operating losses and
tax credit carryforwards. Deferred tax assets and liabilities are determined
separately for each tax jurisdiction in which the Company conducts its
operations or otherwise incurs taxable income or losses. A valuation allowance
is recorded when it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The realization of deferred tax assets
depends on the ability to generate sufficient taxable income within the
carryback or carryforward periods provided for in the tax law for each
applicable tax jurisdiction. The Company considers the following possible
sources of taxable income when assessing the realization of deferred tax assets:
· future reversals of existing taxable temporary differences;
· future taxable income exclusive of reversing temporary differences and
carryforwards;
· taxable income in prior carryback years; and
· tax planning strategies
The assessment regarding whether a valuation allowance is required or should be
adjusted also considers all available positive and negative evidence, including
but not limited to:
· nature, frequency, and severity of recent losses;
· duration of statutory carryforward periods;
· historical experience with tax attributes expiring unused; and
· near and mediumterm financial outlook.
The weight given to the positive and negative evidence is commensurate with the
extent to which the evidence may be objectively verified. Accordingly, it is
difficult to conclude a valuation allowance is not required when there is
significant objective and verifiable negative evidence, such as cumulative
losses in recent years. The Company uses the actual results for the last three
years and current year anticipated results as the primary measure of cumulative
losses in recent years.
The evaluation of deferred tax assets requires judgment in assessing the likely
future tax consequences of events recognized in the financial statements or tax
returns and future profitability. The recognition of deferred tax assets
represents the Company's best estimate of those future events. Changes in the
current estimates, due to unanticipated events or otherwise, could have a
material effect on the Company's results of operations and financial condition.
In certain foreign jurisdictions, the Company's analysis indicates that it has
cumulative losses in recent years. This is considered significant negative
evidence which is objective and verifiable and, therefore, difficult to
overcome. However, the cumulative loss position is not solely determinative and,
accordingly, the Company
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considers all other available positive and negative evidence in its analysis.
Based on its analysis, the Company has recorded a valuation allowance for the
portion of deferred tax assets where based on the weight of available evidence
it is unlikely to realize those deferred tax assets.
The utilization of tax attributes to offset taxable income reduces the overall
level of deferred tax assets subject to a valuation allowance. Additionally, the
Company's recorded effective tax rate is lower than the applicable statutory tax
rate, due primarily to income earned in jurisdictions for which a valuation
allowance is recorded. The effective tax rate will approach the statutory tax
rate in periods after valuation allowances are released. In the period in which
valuation allowances are released, the Company will record a material tax
benefit, which could result in a negative effective tax rate.
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