4.5x for the fiscal quarters ending December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, and stepping down to 4.0x for the fiscal quarter ending December 31, 2017 and each fiscal quarter thereafter.
At June 30, 2016, the Agreement, as amended through Amendment No. 4 (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 ($1,525 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 ($558 million net of debt issuance costs) with a final maturity date of September 1, 2022. At June 30, 2016, the Company had unused credit of $636 million available under the Amended Agreement. The weighted average interest rate on borrowings outstanding under the Amended Agreement at June 30, 2016 was 2.57%.
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 the maximum levels set forth in Amendment No. 4 (as more particularly described above). 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.
Failure to comply with these covenants and restrictions could result in an event of default under the Amended Agreement. 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 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 June 30, 2016, 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 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 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.
The Company has a €185 million European accounts receivable securitization program, which extends through March 2019, subject to periodic renewal of backup credit lines.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
In connection with the Company’s acquisition of the food and beverage glass container business of Vitro S.A.B. de C.V. and its subsidiaries as conducted in the United States, Mexico and Bolivia on September 1, 2015 (see Note 15 to the Condensed 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 lines titled “reportable segment totals” in both net sales and segment operating profit, however, are non-GAAP measures 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 and believes this information allows the board of directors, management, investors and analysts to better understand the Company’s financial performance. The Company’s management uses segment operating profit, in combination with net sales and selected cash flow information, to evaluate performance and to allocate resources.
Financial information for the three and six months ended June 30, 2016 and 2015 regarding the Company’s reportable segments is as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
|
June 30,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
646
|
|
$
|
637
|
|
$
|
1,209
|
|
$
|
1,204
|
|
North America
|
|
|
599
|
|
|
530
|
|
|
1,131
|
|
|
1,000
|
|
Latin America
|
|
|
345
|
|
|
207
|
|
|
657
|
|
|
412
|
|
Asia Pacific
|
|
|
158
|
|
|
153
|
|
|
317
|
|
|
316
|
|
Reportable segment totals
|
|
|
1,748
|
|
|
1,527
|
|
|
3,314
|
|
|
2,932
|
|
Other
|
|
|
12
|
|
|
16
|
|
|
34
|
|
|
32
|
|
Net Sales
|
|
$
|
1,760
|
|
$
|
1,543
|
|
$
|
3,348
|
|
$
|
2,964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
|
|
Six months ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Segment operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Europe
|
|
$
|
73
|
|
$
|
64
|
|
$
|
128
|
|
$
|
113
|
North America
|
|
|
92
|
|
|
82
|
|
|
168
|
|
|
153
|
Latin America
|
|
|
57
|
|
|
27
|
|
|
120
|
|
|
57
|
Asia Pacific
|
|
|
11
|
|
|
14
|
|
|
28
|
|
|
32
|
Reportable segment totals
|
|
|
233
|
|
|
187
|
|
|
444
|
|
|
355
|
Items excluded from segment operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained corporate costs and other
|
|
|
(25)
|
|
|
(18)
|
|
|
(57)
|
|
|
(39)
|
Restructuring, asset impairment and other charges
|
|
|
|
|
|
(27)
|
|
|
(12)
|
|
|
(27)
|
Strategic transaction costs
|
|
|
|
|
|
(6)
|
|
|
|
|
|
(6)
|
Interest expense, net
|
|
|
(67)
|
|
|
(74)
|
|
|
(133)
|
|
|
(121)
|
Earnings from continuing operations before income taxes
|
|
|
141
|
|
|
62
|
|
|
242
|
|
|
162
|
Provision for income taxes
|
|
|
(30)
|
|
|
(15)
|
|
|
(57)
|
|
|
(40)
|
Earnings from continuing operations
|
|
|
111
|
|
|
47
|
|
|
185
|
|
|
122
|
Loss from discontinued operations
|
|
|
(2)
|
|
|
(2)
|
|
|
(3)
|
|
|
(2)
|
Net earnings
|
|
|
109
|
|
|
45
|
|
|
182
|
|
|
120
|
Net (earnings) attributable to noncontrolling interests
|
|
|
(4)
|
|
|
(5)
|
|
|
(10)
|
|
|
(9)
|
Net earnings attributable to the Company
|
|
$
|
105
|
|
$
|
40
|
|
$
|
172
|
|
$
|
111
|
Net earnings from continuing operations attributable to the Company
|
|
$
|
107
|
|
$
|
42
|
|
$
|
175
|
|
$
|
113
|
Note: All amounts excluded from reportable segment totals are discussed in the following applicable sections.
Executive Overview — Quarters ended June 30, 2016 and 2015
Second Quarter 2016 Highlights
|
·
|
|
The September 1, 2015 Vitro Acquisition increased net sales by $234 million and segment operating profit by $44 million compared to the prior year quarter
|
|
·
|
|
The unfavorable effect of foreign currency exchange rates reduced net sales by $31 million and segment operating profit by $5 million compared to the prior year quarter
|
|
·
|
|
Driven by the Vitro Acquisition and progress on strategic initiatives, segment operating profit was higher in all regions, except for Asia Pacific, in the second quarter of 2016 compared to the prior year quarter
|
Net sales for the second quarter of 2016 were $217 million higher than the second quarter of the prior year primarily due to approximately $234 million of net sales from the acquired Vitro Business, partially offset by the unfavorable effect of changes in foreign currency exchange rates.
Segment operating profit for reportable segments for the second quarter of 2016 was $46 million higher than the second quarter of the prior year. The increase was largely attributable to approximately $44 million of segment operating profit from the acquired Vitro Business. Partially offsetting this was the unfavorable effect of changes in foreign currency exchange rates and higher operating costs due to cost inflation.
Net interest expense for the second quarter of 2016 decreased $7 million compared to the second quarter of 2015. Interest expense in the second quarter of 2015 included $28 million principally due to note repurchase premiums and the write-off of finance fees related to debt redeemed in the quarter. Exclusive of these items, net interest expense increased $21 million in the current year quarter primarily due to higher debt levels due to the Vitro Acquisition.
For the second quarter of 2016, the Company recorded earnings from continuing operations attributable to the Company of $107 million, or $0.65 per share (diluted), compared to $42 million, or $0.26 per share (diluted), in the second quarter of 2015. Earnings in the second quarter of 2015 included items that management considered not representative of ongoing operations. These items decreased net earnings attributable to the Company by $55 million, or $0.34 per share in the second quarter of 2015 as set forth in the following table (dollars in millions).
|
|
|
|
|
|
Net Earnings
|
|
|
Increase
|
|
|
(Decrease)
|
Description
|
|
2015
|
Restructuring, asset impairment and other charges
|
|
$
|
(27)
|
Note repurchase premiums and write-off of finance fees
|
|
|
(28)
|
Strategic transaction costs
|
|
|
(6)
|
Net tax benefit for income tax on items above
|
|
|
6
|
Total
|
|
$
|
(55)
|
Results of Operations — Second Quarter of 2016 compared with Second Quarter of 2015
Net Sales
The Company’s net sales in the second quarter of 2016 were $1,760 million compared with $1,543 million for the second quarter of 2015, an increase of $217 million, or 14%. Driven by incremental shipments related to the Vitro Acquisition, total glass container shipments, in tonnes, were up approximately 15% in the second quarter of 2016 compared to the prior year quarter. This resulted in approximately $234 million of additional sales. Excluding the impact of the Vitro Acquisition, shipments were up approximately 1% for the second quarter of 2016 compared to the same period in 2015, however, an unfavorable sales mix resulted in comparable net sales in the second quarter of 2016. Unfavorable foreign currency exchange rates, primarily due to a weaker Brazilian real, Colombian peso, Canadian dollar and Australian dollar, impacted sales by $31 million in the second quarter of 2016 compared to the second quarter of 2015. Slightly higher selling prices benefited net sales by $18 million in the quarter.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
Reportable segment net sales— 2015
|
|
|
|
|
$
|
1,527
|
|
Price
|
|
$
|
18
|
|
|
|
|
Effects of changing foreign currency rates
|
|
|
(31)
|
|
|
|
|
Vitro acquisition
|
|
|
234
|
|
|
|
|
Total effect on reportable segment net sales
|
|
|
|
|
|
221
|
|
Reportable segment net sales— 2016
|
|
|
|
|
$
|
1,748
|
|
Europe: Net sales in Europe in the second quarter of 2016 were $646 million compared with $637 million for the second quarter of 2015, an increase of $9 million, or 1%. The primary reason for this increase in net sales was $18 million of higher glass shipments, which were up approximately 3% compared to the second quarter of 2015. This increase was primarily driven by higher shipments to beer and wine beverage customers in the quarter. The increase in net sales was partially offset by lower selling prices in Europe, which decreased net sales by $9 million in the second quarter compared to the same period in the prior year. Lower year-over-year pricing trends are expected to be less intense for the remainder of 2016.
North America: Net sales in North America in the second quarter of 2016 were $599 million compared with $530 million for the second quarter of 2015, an increase of $69 million, or 13%. Net sales from the acquired Vitro food and beverage business in the U.S. increased the region’s net sales by $75 million in the quarter. Total glass container shipments in the region were up 8% in the second quarter of 2016 compared to the same quarter in the prior year. Excluding the impact of the newly acquired Vitro food and beverage business in the U.S., glass container shipments were comparable to the prior year quarter, however, an unfavorable sales mix reduced net sales by $13 million in the second quarter of 2016. This impact to sales mix was due to several customers converting a portion of their glass
shipments from carton packaging to bulk shipments. Slightly higher selling prices increased net sales by $9 million in the second quarter of 2016. Unfavorable foreign currency exchange rate changes decreased net sales by $2 million, as the Canadian dollar weakened in relation to the U.S. dollar.
Latin America: Net sales in Latin America in the second quarter of 2016 were $345 million compared with $207 million for the second quarter of 2015, an increase of $138 million, or 67%. Net sales from the newly acquired Vitro food and beverage business in Mexico and Bolivia increased the region’s net sales by $159 million in the quarter. Total glass container shipments in the region were up 94% in the second quarter of 2016 compared to the same quarter in the prior year. Excluding the impact of the newly acquired Vitro food and beverage business in the region, shipments in the region were down nearly 7% in the quarter compared to the same period in 2015 and this decreased sales by $14 million. This impact was primarily due to a general economic slowdown in Brazil. The unfavorable effects of foreign currency exchange rate changes decreased net sales $23 million in the second quarter of 2016 compared to 2015, principally due to a decline in the Brazilian real and Colombian peso in relation to the U.S. dollar. Higher pricing increased net sales by $16 million in the current quarter.
Asia Pacific: Net sales in Asia Pacific in the second quarter of 2016 were $158 million compared with $153 million for the second quarter of 2015, an increase of $5 million, or 3%. Glass container shipments were up 2% in the second quarter of 2016 compared to the same period in the prior year, primarily due to higher shipments to wine and beer customers, and this resulted in $9 million of higher sales in the quarter. Slightly higher selling prices also increased net sales by $2 million in the current quarter. The unfavorable effects of foreign currency exchange rate changes during the second quarter of 2016, primarily due to the weakening of the Australian dollar in relation to the U.S. dollar, decreased net sales by $6 million.
Earnings from Continuing Operations before Income Taxes and Segment Operating Profit
Earnings from continuing operations were $141 million in the second quarter of 2016 compared with $62 million for the second quarter of 2015, an increase of $79 million, or 127%. This increase was primarily due to higher segment operating profit, partially offset by higher retained corporate costs and other, and lower restructuring and strategic transaction costs in 2016.
Operating profit of the reportable segments includes an allocation of some corporate expenses based on a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained corporate costs and other. For further information, see Segment Information included in Note 1 to the Condensed Consolidated Financial Statements.
Segment operating profit of reportable segments in the second quarter of 2016 was $233 million compared with $187 million for the second quarter of 2015, an increase of $46 million, or 25%. The increase was largely attributable to approximately $44 million of segment operating profit from the acquired Vitro Business. Partially offsetting this was the unfavorable effect of changes in foreign currency exchange rates and higher operating costs due to cost inflation.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
Reportable segment operating profit - 2015
|
|
|
|
|
$
|
187
|
|
Price
|
|
$
|
18
|
|
|
|
|
Operating costs
|
|
|
(11)
|
|
|
|
|
Effects of changing foreign currency rates
|
|
|
(5)
|
|
|
|
|
Vitro acquisition
|
|
|
44
|
|
|
|
|
Total net effect on reportable segment operating profit
|
|
|
|
|
|
46
|
|
Reportable segment operating profit - 2016
|
|
|
|
|
$
|
233
|
|
Europe: Segment operating profit in Europe in the second quarter of 2016 was $73 million compared with $64 million in the second quarter of 2015, an increase of $9 million, or 14%. The increase in sales volume discussed above improved segment operating profit by $4 million. Operating costs were $18 million lower in the second quarter of 2016 than the
prior year quarter due to energy deflation and improved operational performance. In the prior year quarter, production volumes were lower due to asset optimization projects that have now been completed. The unfavorable effects of foreign currency exchange rates decreased segment operating profit by $4 million in the current year quarter. Lower selling prices decreased segment operating profit by $9 million in the current quarter compared to the prior year.
The results of the United Kingdom’s referendum on withdrawal from the European Union in June 2016 is expected to have an unfavorable foreign currency exchange rate impact of approximately $5 million to $10 million (assuming June 30, 2016 exchange rates) on the region’s segment operating profit for the remainder of 2016.
North America: Segment operating profit in North America in the second quarter of 2016 was $92 million compared with $82 million in the second quarter of 2015, an increase of $10 million, or 12%. Segment operating profit from the acquired Vitro food and beverage business in the region contributed $11 million in the quarter. Selling prices increased segment operating profit by $9 million in the current quarter compared to the prior year. Cost inflation contributed to a $7 million increase to operating costs in the second quarter of 2016. The unfavorable sales mix discussed above reduced segment operating profit by $3 million.
Latin America: Segment operating profit in Latin America in the second quarter of 2016 was $57 million compared with $27 million in the second quarter of 2015, an increase of $30 million, or 111%. Segment operating profit from the newly acquired Vitro food and beverage business contributed approximately $33 million to the region in the quarter. Excluding the impact of the acquired Vitro food and beverage business in the region, the decrease in sales volume discussed above impacted segment operating profit by $4 million. The unfavorable effects of foreign currency exchange rates, especially the Brazilian real and the Colombian peso, decreased segment operating profit by $2 million in the current year quarter. Despite management interventions to contain costs and improve asset optimization, segment operating profit was also unfavorably impacted by $13 million of higher operating costs, primarily due to energy and soda ash inflation in Brazil. Higher selling prices increased segment operating profit in the second quarter of 2016 by $16 million.
Asia Pacific: Segment operating profit in Asia Pacific in the second quarter of 2016 was $11 million compared with $14 million in the second quarter of 2015, a decrease of $3 million, or 21%. The increase in sales volume discussed above improved segment operating profit by $3 million. Higher selling prices also increased segment operating profit in the second quarter of 2016 by $2 million. The effects of foreign currency exchange rates increased segment operating profit by $1 million in the current year quarter. However, cost inflation and higher production downtime due to furnace rebuild activity drove operating costs $9 million higher in the second quarter of 2016 compared to the same quarter in the prior year.
Interest Expense, Net
Net interest expense for the second quarter of 2016 was $67 million compared with $74 million for the second quarter of 2015. Interest expense in the second quarter of 2015 included $28 million principally due to note repurchase premiums and the write-off of finance fees related to debt redeemed in the quarter. Exclusive of these items, net interest expense increased $21 million in the current year quarter primarily due to higher debt levels due to the Vitro Acquisition.
Earnings from Continuing Operations Attributable to the Company
For the second quarter of 2016, the Company recorded earnings from continuing operations attributable to the Company of $107 million, or $0.65 per share (diluted), compared to $42 million, or $0.26 per share (diluted), in the second quarter of 2015. Earnings in the second quarter of 2015 included items that management considered not representative of ongoing operations. These items decreased net earnings attributable to the Company by $55 million, or $0.34 per share in the second quarter of 2015 as set forth in the following table (dollars in millions).
|
|
|
|
|
|
Net Earnings
|
|
|
Increase
|
|
|
(Decrease)
|
Description
|
|
2015
|
Restructuring, asset impairment and other charges
|
|
$
|
(27)
|
Note repurchase premiums and write-off of finance fees
|
|
|
(28)
|
Strategic transaction costs
|
|
|
(6)
|
Net tax benefit for income tax on items above
|
|
|
6
|
Total
|
|
$
|
(55)
|
Executive Overview – Six Months ended June 30, 2016 and 2015
2016 Highlights
|
·
|
|
The September 1, 2015 Vitro Acquisition increased net sales by $444 million and segment operating profit by $86 million in the first six months of 2016 compared to the prior year period
|
|
·
|
|
The unfavorable effect of foreign currency exchange rates reduced net sales by $93 million and segment operating profit by $16 million compared to the prior year period
|
|
·
|
|
Driven by the Vitro Acquisition and progress on strategic initiatives, segment operating profit was higher in all regions, except for Asia Pacific, in the first six months of 2016 compared to the prior year period
|
Net sales for the first six months of 2016 were $384 million higher than the same period in the prior year primarily due to approximately $444 million of net sales from the acquired Vitro Business, partially offset by the unfavorable effect of changes in foreign currency exchange rates.
Segment operating profit for reportable segments for the first six months of 2016 was $89 million higher than the same period in the prior year. The increase was largely attributable to approximately $86 million of segment operating profit from the acquired Vitro Business. Partially offsetting this was the unfavorable effect of changes in foreign currency exchange rates and higher operating costs due to cost inflation.
Net interest expense for the first six months of 2016 was $133 million compared with $121 million for the first six months of 2015. Interest expense for 2015 included $28 million due to note repurchase premiums and the write-off of finance fees related to debt redeemed in the second quarter of 2015. Exclusive of these items, net interest expense increased $40 million in the current year period primarily due to higher debt levels due to the Vitro Acquisition.
Net earnings from continuing operations attributable to the Company for the first six months of 2016 was $175 million, or $1.07 per share (diluted), compared with $113 million, or $0.69 per share (diluted), for the first six months of 2015. Earnings in 2016 and 2015 included items that management considered not representative of ongoing operations as set forth in the following table (dollars in millions).
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
Increase
|
|
|
(Decrease)
|
Description
|
|
2016
|
|
2015
|
Restructuring, asset impairment and other charges
|
|
$
|
(19)
|
|
$
|
(27)
|
Gain on China land compensation
|
|
|
7
|
|
|
|
Note repurchase premiums and write-off of finance fees
|
|
|
|
|
|
(28)
|
Strategic transaction costs
|
|
|
|
|
|
(6)
|
Net tax benefit for income tax on items above
|
|
|
4
|
|
|
6
|
Net impact of noncontrolling interests on items above
|
|
|
(2)
|
|
|
|
Total
|
|
$
|
(10)
|
|
$
|
(55)
|
Results of Operations – First six months of 2016 compared with first six months of 2015
Net Sales
The Company’s net sales in the first six months of 2016 were $3,348 million compared with $2,964 million for the first six months of 2015, an increase of $384 million. Driven by incremental shipments related to the Vitro Acquisition, total glass container shipments, in tonnes, were up approximately 14% in the first six months of 2016 compared to the same period in the prior year. This resulted in approximately $444 million of additional sales. Excluding the impact of the Vitro Acquisition, shipments were slightly higher for the first six months of 2016 than the same period in 2015, however, an unfavorable sales mix resulted in slightly lower net sales in 2016. Unfavorable foreign currency exchange rates, primarily due to a weaker Euro, Brazilian real, Colombian peso, Canadian dollar and Australian dollar, impacted sales by $93 million in the first half of 2016 compared to the same period in 2015. Slightly higher selling prices benefited net sales by $37 million in 2016.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
Reportable segment net sales— 2015
|
|
|
|
|
$
|
2,932
|
|
Price
|
|
$
|
37
|
|
|
|
|
Sales volume (excluding Vitro acquisition)
|
|
|
(6)
|
|
|
|
|
Effects of changing foreign currency rates
|
|
|
(93)
|
|
|
|
|
Vitro acquisition
|
|
|
444
|
|
|
|
|
Total effect on reportable segment net sales
|
|
|
|
|
|
382
|
|
Reportable segment net sales— 2016
|
|
|
|
|
$
|
3,314
|
|
Europe: Net sales in Europe in the first six months of 2016 were $1,209 million compared with $1,204 million for the first six months of 2015, an increase of $5 million, or less than 1%. Net sales were higher in the first six months of 2016 due to a 2% increase in glass container shipments driven by higher shipments to beer and wine customers. This increased net sales by $19 million compared to the prior year period. Unfavorable foreign currency exchange rate decreased net sales by $5 million, as the Euro weakened in relation to the U.S. dollar. Selling prices in Europe decreased net sales by $9 million in the first six months of 2016 compared to the same period in the prior year and are expected to trend lower for the remainder of 2016.
North America: Net sales in North America in the first six months of 2016 were $1,131 million compared with $1,000 million for the first six months of 2015, an increase of $131 million, or 13%. Net sales from the acquired Vitro food and beverage business in the U.S. increased the region’s net sales by $143 million in the first six months of 2016. Total glass container shipments in the region were up 9% in the first six months of 2016 compared to the same period in the prior year. Excluding the impact of the newly acquired Vitro food and beverage business in the U.S., glass container shipments were comparable to the prior year period, however, an unfavorable sales mix reduced net sales by $18 million in the first six months of 2016. This impact to sales mix was due to several customers converting a portion of their glass shipments from carton packaging to bulk shipments. Slightly higher selling prices increased net sales by $10 million in the first six months of 2016. Unfavorable foreign currency exchange rate changes decreased net sales by $4 million, as the Canadian dollar weakened in relation to the U.S. dollar.
Latin America: Net sales in Latin America in the first six months of 2016 were $657 million compared with $412 million for the first six months of 2015, an increase of $245 million, or 59%. Net sales from the newly acquired Vitro food and beverage business in Mexico and Bolivia increased the region’s net sales by $301 million in the first six months of 2016. Total glass container shipments in the region were up 89% in the first half of 2016 compared to the same period in the prior year. Excluding the impact of the newly acquired Vitro food and beverage business in the region, shipments were down nearly 6% compared to the same period in the prior year and this decreased sales by $20 million. This impact was primarily due to a general economic slowdown in Brazil. The unfavorable effects of foreign currency exchange rate changes decreased net sales $68 million in the first six months of 2016 compared to 2015, principally due to a decline in the Brazilian real and Colombian peso in relation to the U.S. dollar. Higher pricing increased net sales by $32 million in the first half of 2016.
Asia Pacific: Net sales in Asia Pacific in the first six months of 2016 were $317 million compared with $316 million for the first six months of 2015, an increase of $1 million, or less than 1%. Glass container shipments were up 1% compared to the same period in the prior year, primarily due to higher shipments of wine bottles, which resulted in $13 million of higher sales. Slightly higher selling prices also increased net sales by $4 million in the first half of 2016. The unfavorable effects of foreign currency exchange rate changes during the first six months of 2016, primarily due to the weakening of the Australian dollar in relation to the U.S. dollar, decreased net sales by $16 million.
Earnings from Continuing Operations before Income Taxes and Segment Operating Profit
Earnings from continuing operations were $242 million in the first six months of 2016 compared with $162 million for the same period in 2015, an increase of $80 million, or 49%. This increase was primarily due to higher segment operating profit, partially offset by higher retained corporate costs and other, and lower restructuring and strategic transaction costs in 2016.
Operating profit of the reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained corporate costs and other. For further information, see Segment Information included in Note 1 to the Condensed Consolidated Financial Statements.
Segment operating profit of reportable segments in the first six months of 2016 was $444 million compared with $355 million for the first six months of 2015, an increase of $89 million, or 25%. The increase was largely attributable to approximately $86 million of segment operating profit from the acquired Vitro Business. Partially offsetting this was the unfavorable effect of changes in foreign currency exchange rates and higher operating costs due to cost inflation.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
|
|
|
|
|
|
|
|
Reportable segment operating profit - 2015
|
|
|
|
|
$
|
355
|
|
Price
|
|
$
|
37
|
|
|
|
|
Operating costs
|
|
|
(18)
|
|
|
|
|
Effects of changing foreign currency rates
|
|
|
(16)
|
|
|
|
|
Vitro acquisition
|
|
|
86
|
|
|
|
|
Total net effect on reportable segment operating profit
|
|
|
|
|
|
89
|
|
Reportable segment operating profit - 2016
|
|
|
|
|
$
|
444
|
|
Europe: Segment operating profit in Europe in the first six months of 2016 was $128 million compared with $113 million in the first six months of 2015, an increase of $15 million, or 13%. The increase in sales volume discussed above improved segment operating profit by $5 million. Operating costs were $23 million lower in the first six months of 2016 than the prior year period due to energy deflation and improved operational performance. In the prior year period, production volumes were lower due to asset optimization projects that have now been completed. The unfavorable effects of foreign currency exchange rates, especially the Euro, decreased segment operating profit by $4 million in the first six months of 2016. Lower selling prices also decreased segment operating profit in the first half of 2016 by $9 million.
North America: Segment operating profit in North America in the first six months of 2016 was $168 million compared with $153 million in the first six months of 2015, an increase of $15 million, or 10%. Segment operating profit from the acquired Vitro food and beverage business in the region contributed $16 million in the first six months of 2016. Higher selling prices increased segment operating profit by $10 million in the first half of 2016 compared to the same period in the prior year. Cost inflation contributed to a $7 million increase to operating costs in the first half of 2016. The unfavorable sales mix discussed above reduced segment operating profit by $4 million.
Latin America: Segment operating profit in Latin America in the first six months of 2016 was $120 million compared with $57 million in the first six months of 2015, an increase of $63 million, or 111%. Segment operating profit from the newly acquired Vitro food and beverage business contributed approximately $70 million to the region in the first six months of 2016. Excluding the impact of the acquired Vitro food and beverage business in the region, the decrease in sales volume discussed above impacted segment operating profit by $6 million. The unfavorable effects of foreign currency exchange rates, especially the Brazilian real and the Colombian peso, decreased segment operating profit by $11 million in the first half of 2016. Despite management interventions to contain costs and improve asset optimization, segment operating profit was also unfavorably impacted by $22 million of higher operating costs, primarily due to energy and soda ash inflation in Brazil. Partially offsetting these declines were higher selling prices that increased segment operating profit in the first six months of 2016 by $32 million.
Asia Pacific: Segment operating profit in Asia Pacific in the first six months of 2016 was $28 million compared with $32 million in the first six months of 2015, a decrease of $4 million, or 13%. Cost inflation and higher production downtime due to furnace rebuild activity drove operating costs $12 million higher in the first six months of 2016 compared to the same period in the prior year. The unfavorable effects of foreign currency exchange rates, especially the Australian dollar, decreased segment operating profit by $1 million in the first six months of 2016. The increase in sales
volume discussed above improved segment operating profit by $5 million. Higher selling prices also increased segment operating profit in the first half of 2016 by $4 million
Interest Expense, Net
Net interest expense for the first six months of 2016 was $133 million compared with $121 million for the first six months of 2015. Interest expense for the first six months of 2015 included $28 million due to note repurchase premiums and the write-off of finance fees related to debt redeemed in the second quarter of 2015. Exclusive of these items, net interest expense increased $40 million in the current year period primarily due to higher debt levels due to the Vitro Acquisition.
Provision for Income Taxes
The Company’s effective tax rate from continuing operations for the six months ended June 30, 2016 was 23.6% compared with 24.7% for the six months ended June 30, 2015.
The Company expects that the full year effective tax rate for 2016 will range between 25% and 26% compared with 24.6% for 2015 (excluding items that management considers not representative of ongoing operations). The increase in expected effective tax rate for the full year 2016 is due to the Company’s current expected change in mix of earnings by jurisdictions.
Earnings from Continuing Operations Attributable to the Company
For the first six months of 2015, the Company recorded earnings from continuing operations attributable to the Company of $175 million, or $1.07 per share (diluted), compared $113 million, or $0.69 per share (diluted), in the first six months of 2015. Earnings in 2016 and 2015 included items that management considered not representative of ongoing operations as set forth in the following table (dollars in millions).
|
|
|
|
|
|
|
|
|
Net Earnings
|
|
|
Increase
|
|
|
(Decrease)
|
Description
|
|
2016
|
|
2015
|
Restructuring, asset impairment and other charges
|
|
$
|
(19)
|
|
$
|
(27)
|
Gain on China land compensation
|
|
|
7
|
|
|
|
Note repurchase premiums and write-off of finance fees
|
|
|
|
|
|
(28)
|
Strategic transaction costs
|
|
|
|
|
|
(6)
|
Net tax benefit for income tax on items above
|
|
|
4
|
|
|
6
|
Net impact of noncontrolling interests on items above
|
|
|
(2)
|
|
|
|
Total
|
|
$
|
(10)
|
|
$
|
(55)
|
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
Retained corporate costs and other for the second quarter of 2016 were $25 million compared with $18 million for the second quarter of 2015, and $57 million for the first six months of 2016 compared with $39 million for the first six months of 2015. These costs were higher in the second quarter and first six months of 2016 compared to the same periods in the prior year primarily due to the unfavorable year-over-year impact from currency hedges as well as higher management incentive accruals.
Restructuring, Asset Impairments and Other Charges
During the six months ended June 30, 2016, the Company recorded net restructuring, asset impairment and other charges of $12 million. These charges primarily related to $19 million of restructuring in the Latin America region. Partially offsetting this was a $7 million gain related to compensation received for land that the Company was required to be
returned to the Chinese government.
During the three and six months ended June 30, 2015, the Company recorded restructuring, asset impairment and related charges of $22 million, primarily related to the Latin America, Asia Pacific and North America regions. See Note 5 to the Condensed Consolidated Financial Statements for additional information.
During the three and six months ended June 30, 2015, the Company recorded a charge of $5 million to equity earnings.
During the three and six months ended June 30, 2015, the Company recorded charges of $6 million for strategic transaction costs related to the Vitro Acquisition of the food and beverage glass container business of Vitro, S.A.B. de C.V. and its subsidiaries.
Discontinued Operations
On April 4, 2016, the annulment committee formed by the World Bank’s International Centre for Settlement of Investment Disputes (“ICSID”) ruled that a subsidiary of the Company is free to pursue the enforcement of a prior arbitration award against Venezuela. That award amounts to more than $485 million after including interest from the date of the expropriation by Venezuela (October 26, 2010). Venezuela’s application to annul the award is still pending and can take up to several years to complete. The Company intends to take appropriate steps to vigorously enforce and collect the award, which is enforceable in approximately 150 member states that are party to the ICSID Convention. However, even with the lifting of the stay of enforcement, the Company recognizes that the collection of the award may present significant practical challenges. Because the award has yet to be satisfied and the annulment proceeding is pending, the Company is unable at this stage to reasonably predict the efforts that will be necessary to successfully enforce collection of the award, the amount of the award or the timing of any such collection efforts. 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 $3 million and $2 million for the six months ended June 30, 2016 and 2015, respectively, is related to 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 senior notes offerings, cash on hand and the incremental term loan facilities (see Note 8 to the Condensed Consolidated Financial Statements).
Capital Resources and Liquidity
As of June 30, 2016, the Company had cash and total debt of $334 million and $5.9 billion, respectively, compared to $378 million and $3.8 billion, respectively, as of June 30, 2015. 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 non-U.S. locations as of June 30, 2016 was $288 million.
Current and Long-Term Debt
On April 22, 2015, certain of the Company’s subsidiaries entered into a 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.
In connection with the closing of the Vitro Acquisition on September 1, 2015 (see Note 15 to the Condensed 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 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.
On February 3, 2016, the Company entered into Amendment No. 4 (“Amendment No. 4”) to the Agreement which provided for an increase in the maximum Total Leverage Ratio (which is calculated by dividing consolidated total debt, less cash and cash equivalents, by consolidated EBITDA, as defined in the Agreement) for purposes of the financial covenant in the Agreement to 5.0x for the fiscal quarters ending March 31, 2016, June 30, 2016 and September 30, 2016, 4.5x for the fiscal quarters ending December 31, 2016, March 31, 2017, June 30, 2017 and September 30, 2017, and stepping down to 4.0x for the fiscal quarter ending December 31, 2017 and each fiscal quarter thereafter.
At June 30, 2016, the Agreement, as amended through Amendment No. 4 (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 ($1,525 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 ($558 million net of debt issuance costs) with a final maturity date of September 1, 2022. At June 30, 2016, the Company had unused credit of $586 million available under the Amended Agreement. The weighted average interest rate on borrowings outstanding under the Amended Agreement at June 30, 2016 was 2.57%.
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 the maximum levels set forth in Amendment No. 4 (as more particularly described above). 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.
Failure to comply with these covenants and restrictions could result in an event of default under the Amended Agreement. 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 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 June 30, 2016, 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 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 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.
The Company has a €185 million European accounts receivable securitization program, which extends through March 2019, subject to periodic renewal of backup credit lines.
Information related to the Company’s accounts receivable securitization program is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
June 30,
|
|
|
|
2016
|
|
2015
|
|
2015
|
|
Balance (included in short-term loans)
|
|
$
|
173
|
|
$
|
158
|
|
$
|
192
|
|
Weighted average interest rate
|
|
|
0.70
|
%
|
|
1.21
|
%
|
|
1.12
|
%
|
Cash Flows
Cash flows for the six months ended June 30, 2016 and 2015 are as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Cash utilized in continuing operating activities
|
|
$
|
(107)
|
|
$
|
(110)
|
|
Cash utilized in investing activities
|
|
$
|
(190)
|
|
$
|
(254)
|
|
Cash provided by financing activities
|
|
$
|
238
|
|
$
|
252
|
|
|
|
|
|
|
|
|
|
Free cash flow for the six months ended June 30, 2016 and 2015 is calculated as follows (dollars in millions):
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Cash utilized in continuing operating activities
|
|
$
|
(107)
|
|
$
|
(110)
|
|
Additions to property, plant and equipment
|
|
|
(207)
|
|
|
(208)
|
|
Free cash flow
|
|
$
|
(314)
|
|
$
|
(318)
|
|
Free cash flow was $(314) million for the first six months of 2016 compared to $(318) million for the first six months of 2015. The Company defines free cash flow as cash provided by (utilized in) continuing operating activities less additions to property, plant and equipment from continuing operations. 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 analysts to better understand the Company’s financial performance.
Operating activities: Cash utilized in continuing operating activities was $107 million for the six months ended June 30, 2016, compared with $110 million for the six months ended June 30, 2015. The primary driver for cash utilized in continuing operating activities in both periods related to changes in working capital, which were a use of cash of $491 million and $401 million in the first six months of 2016 and 2015, respectively. These working capital needs reflect the
normal seasonality of the business in the first half of the year. Partially offsetting this were higher net earnings and higher non-cash charges, such as depreciation and amortization, in the first six months of 2016.
Investing activities: Cash utilized in investing activities was $190 million for the six months ended June 30, 2016, compared to $254 million for the six months ended June 30, 2015. Capital spending for property, plant and equipment was $207 million during the first six months of 2016 and $208 million in the same period in 2015. Cash utilized for acquisition activities in 2016 was $31 million and primarily related to additional contributions made to the Company’s investment in a joint venture in Nava, Mexico. Cash utilized for acquisition activities in 2015 was $52 million and primarily related to the Company’s acquisition of a glass container plant in North America. During the first half of 2016, the Company received $34 million in proceeds on the disposal of assets, which were primarily related to cash received from the Chinese government as partial compensation to sell land use rights and related properties.
Financing activities: Cash provided by financing activities was $238 million for the six months ended June 30, 2016, compared to $252 million for the six months ended June 30, 2015. The decrease in cash provided by financing activities was primarily due to lower net borrowings in 2016, partially offset by the Company not repurchasing any shares of its common stock in the first six months of 2016 compared to $100 million of repurchases in the same period in 2015.
The Company anticipates that cash flows from its opera
tions and from utiliza
tion of credit available under the Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short-term (twelve-months) and long-term basis. Based on the Company's expecta
tions regarding future payments for lawsuits and claims and also based on the Company's expected operating cash flow, the Company believes that the payment of any deferred amounts of previously settled or otherwise determined lawsuits and claims, and the resolution of presently pending and anticipated future lawsuits and claims associated with asbestos, will not have a material adverse effect upon the Company's liquidity on a short-term or long-term basis.
Critical Accounting Estimates
The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates.
The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Condensed Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.
There have been no other material changes in critical accounting estimates at June 30, 2016 from those described in the Company’s Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2015.
Forward-Looking Statements
This document contains "forward-looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and Section 27A of the Securities Act of 1933. Forward-looking statements reflect the Company's current expectations and projections about future events at the time, and thus involve uncertainty and risk. The words “believe,” “expect,” “anticipate,” “will,” “could,” “would,” “should,” “may,” “plan,” “estimate,” “intend,” “predict,” “potential,” “continue,” and the negatives of these words and other similar expressions generally identify forward looking statements. It is possible the Company's future financial performance may differ from expectations due to a variety of factors including, but not limited to the following: (1) the Company’s ability to integrate the Vitro Business in a timely and cost effective manner, to maintain on existing terms the permits, licenses and other
approvals required for the Vitro Business to operate as currently operated, and to realize the expected synergies from the Vitro Acquisition, (2) risks related to the impact of integration of the Vitro Acquisition on earnings and cash flow, (3) risks associated with the significant transaction costs and additional indebtedness that the Company incurred in financing the Vitro Acquisition, (4) the Company’s ability to realize expected growth opportunities and cost savings from the Vitro Acquisition, (5) foreign currency fluctuations relative to the U.S. dollar, specifically the Euro, Brazilian real, Mexican peso, Colombian peso and Australian dollar, (6) changes in capital availability or cost, including interest rate fluctuations and the ability of the Company to refinance debt at favorable terms, (7) the general political, economic and competitive conditions in markets and countries where the Company has operations, including uncertainties related to economic and social conditions, disruptions in capital markets, disruptions in the supply chain, competitive pricing pressures, inflation or deflation, and changes in tax rates and laws, (8) impacts from the United Kingdom’s referendum of withdrawal from the European Union on foreign currency exchange rates and the Company’s business, (9) consumer preferences for alternative forms of packaging, (10) cost and availability of raw materials, labor, energy and transportation, (11) the Company’s ability to manage its cost structure, including its success in implementing restructuring plans and achieving cost savings, (12) consolidation among competitors and customers, (13) the ability of the Company to acquire businesses and expand plants, integrate operations of acquired businesses and achieve expected synergies, (14) unanticipated expenditures with respect to environmental, safety and health laws, (15) the Company’s ability to further develop its sales, marketing and product development capabilities, (16) the timing and occurrence of events which are beyond the control of the Company, including any expropriation of the Company’s operations, floods and other natural disasters, events related to asbestos-related claims, (17) the Company’s ability to accurately estimate its total asbestos-related liability, and (18) the Company’s ability to successfully remediate the material weakness in its internal control over financial reporting, and the other risk factors discussed in the Company’s Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2015 and any subsequently filed Quarterly Report on Form 10-Q. It is not possible to foresee or identify all such factors. Any forward-looking statements in this document are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. While the Company continually reviews trends and uncertainties affecting the Company's results of operations and financial condition, the Company does not assume any obligation to update or supplement any particular forward-looking statements contained in this document.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
There have been no material changes in market risk at June 30, 2016 from those described in the Company’s Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2015.
Item 4. Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those maintained with respect to its consolidated subsidiaries.
The Company’s Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of its disclosure controls and procedures (as defined in Sections 13a-15(e) and 15d-15(e) Exchange Act as of June 30, 2016.
As a result of the material weakness described below, management has concluded that its disclosure controls and procedures were not effective as of June 30, 2016.
Notwithstanding the material weakness, the Chief Executive Officer and Chief Financial Officer concluded that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles in the United States.
Changes in Internal Control Over Financial Reporting
As described in the Company’s Amendment No. 1 to the Annual Report on Form 10-K/A for the year ended December 31, 2015, management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015, and concluded that the matter described below was a material weakness in the Company’s internal control over financial reporting and that the Company did not maintain effective internal control over financial reporting as of December 31, 2015.
Determination of asbestos-related liabilities
- The Company identified a deficiency in the design of its control activities for the estimation of liabilities related to probable losses for unasserted asbestos claims. The Company did not have sufficient controls in place to provide reasonable assurance that a material error would be prevented or detected related to the application of ASC 450 to the estimation of probable losses from unasserted asbestos claims.
Planned remediation of material weakness
– The Company is responsible for implementing changes and improvements to internal control over financial reporting to remediate the control deficiency described above.
To remediate the material weakness described above, the Company is in the process of establishing policies and procedures for the review, approval and application of generally accepted accounting principles to, and disclosure with respect to, unasserted asbestos claims. In particular, the Company intends to complement its revised method of determining its asbestos-related liability (see Note 9 to the Condensed Consolidated Financial Statements) with appropriate analytical and review controls to ensure that the Company’s liability and related disclosures comply with generally accepted accounting principles.
As the Company continues to evaluate and improve the effectiveness of internal control over financial reporting, the Company may determine to take additional measures to address its material weakness or determine to modify the remediation efforts described above. Until the remediation efforts discussed above, including any additional remediation efforts that the Company identifies as necessary, are implemented, tested and deemed to be operating effectively, the material weakness described above will continue to exist. The Company currently expects that these activities will be completed as part of its annual comprehensive legal review of asbestos-related liabilities and costs (as described in Note 9 to the Condensed Consolidated Financial Statements) to be completed in the fourth quarter 2016.
Other than the matter described above, there were no changes in the Company’s internal control over financial reporting during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.