UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 2016
or
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9576
OWENS-ILLINOIS, INC.
(Exact name of registrant as specified in its charter)
|
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Delaware |
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22-2781933 |
(State or other jurisdiction of |
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(IRS Employer |
incorporation or organization) |
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Identification No.) |
One Michael Owens Way, Perrysburg, Ohio |
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43551 |
(Address of principal executive offices) |
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(Zip Code) |
Registrant’s telephone number, including area code: (567) 336-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ |
Accelerated filer ☐ |
Non-accelerated filer ☐ |
Smaller reporting company ☐ |
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(Do not check if a |
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smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of common stock, par value $.01, of Owens-Illinois, Inc. outstanding as of March 31, 2016 was 161,918,797.
Part I — FINANCIAL INFORMATION
The Condensed Consolidated Financial Statements of Owens-Illinois, Inc. (the “Company”) presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. All adjustments are of a normal recurring nature. Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2015.
1
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
|
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Three months ended |
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||||
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March 31, |
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|
||||
|
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2016 |
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2015 |
|
|
||
Net sales |
|
$ |
1,588 |
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$ |
1,421 |
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|
Cost of goods sold |
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(1,269) |
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(1,153) |
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|
|
|
|
|
|
|
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Gross profit |
|
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319 |
|
|
268 |
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Selling and administrative expense |
|
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(129) |
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(124) |
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Research, development and engineering expense |
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(15) |
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(15) |
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Interest expense, net |
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(66) |
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(47) |
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|
Equity earnings |
|
|
14 |
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15 |
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Other income (expense), net |
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(22) |
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3 |
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|
|
|
|
|
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Earnings from continuing operations before income taxes |
|
|
101 |
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|
100 |
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|
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Provision for income taxes |
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(27) |
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(25) |
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Earnings from continuing operations |
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74 |
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|
75 |
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Loss from discontinued operations |
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(1) |
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|
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Net earnings |
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73 |
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|
75 |
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Net (earnings) attributable to noncontrolling interests |
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(6) |
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(4) |
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Net earnings attributable to the Company |
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$ |
67 |
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$ |
71 |
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|
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|
|
|
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Amounts attributable to the Company: |
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|
|
|
|
|
|
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Earnings from continuing operations |
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$ |
68 |
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$ |
71 |
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Loss from discontinued operations |
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(1) |
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Net earnings |
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$ |
67 |
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$ |
71 |
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|
|
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Basic earnings per share: |
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|
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|
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Earnings from continuing operations |
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$ |
0.42 |
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$ |
0.44 |
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Loss from discontinued operations |
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(0.01) |
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Net earnings |
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$ |
0.41 |
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$ |
0.44 |
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|
|
|
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Weighted averages shares outstanding (thousands) |
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161,204 |
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162,146 |
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|
|
|
|
|
|
|
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Diluted earnings per share: |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
0.42 |
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$ |
0.44 |
|
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Loss from discontinued operations |
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|
(0.01) |
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|
|
|
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Net earnings |
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$ |
0.41 |
|
$ |
0.44 |
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|
|
|
|
|
|
|
|
|
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Weighted average diluted shares outstanding (thousands) |
|
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161,793 |
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163,287 |
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See accompanying notes.
2
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED COMPREHENSIVE INCOME
(Dollars in millions)
|
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Three months ended |
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||||
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March 31, |
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||||
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2016 |
|
2015 |
|
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||
Net earnings |
|
$ |
73 |
|
$ |
75 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
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Foreign currency translation adjustments |
|
|
94 |
|
|
(257) |
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|
Pension and other postretirement benefit adjustments, net of tax |
|
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(42) |
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37 |
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Change in fair value of derivative instruments, net of tax |
|
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(2) |
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|
|
|
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Other comprehensive income (loss) |
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50 |
|
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(220) |
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Total comprehensive income (loss) |
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123 |
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(145) |
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Comprehensive income attributable to noncontrolling interests |
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(9) |
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Comprehensive income (loss) attributable to the Company |
|
$ |
114 |
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$ |
(145) |
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|
See accompanying notes.
3
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
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March 31, |
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December 31, |
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March 31, |
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2016 |
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2015 |
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2015 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
239 |
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$ |
399 |
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$ |
257 |
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Trade receivables, net of allowance of $31 million, $29 million, and $31 million at March 31, 2016, December 31, 2015 and March 31, 2015 |
|
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771 |
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562 |
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667 |
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Inventories |
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1,107 |
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1,007 |
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1,007 |
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Prepaid expenses and other current assets |
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359 |
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366 |
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|
268 |
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Total current assets |
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2,476 |
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2,334 |
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2,199 |
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Property, plant and equipment, net |
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2,996 |
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2,961 |
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2,337 |
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Goodwill |
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2,532 |
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2,489 |
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1,752 |
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Intangibles |
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587 |
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597 |
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Other assets |
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1,097 |
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|
1,040 |
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1,024 |
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Total assets |
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$ |
9,688 |
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$ |
9,421 |
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$ |
7,312 |
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Liabilities and Share Owners' Equity |
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Current liabilities: |
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Short-term loans and long-term debt due within one year |
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$ |
239 |
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$ |
228 |
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$ |
635 |
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Current portion of asbestos-related liabilities |
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130 |
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|
130 |
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143 |
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Accounts payable |
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1,050 |
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1,212 |
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|
919 |
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Other liabilities |
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|
467 |
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|
552 |
|
|
417 |
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Total current liabilities |
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1,886 |
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2,122 |
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2,114 |
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Long-term debt |
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5,662 |
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5,345 |
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2,972 |
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Asbestos-related liabilities |
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|
676 |
|
|
687 |
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|
782 |
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Other long-term liabilities |
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1,048 |
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|
988 |
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|
920 |
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Share owners' equity |
|
|
416 |
|
|
279 |
|
|
524 |
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Total liabilities and share owners' equity |
|
$ |
9,688 |
|
$ |
9,421 |
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$ |
7,312 |
|
See accompanying notes.
4
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in millions)
|
|
Three months ended March 31, |
|
|
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|
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2016 |
|
2015 |
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|
||
Cash flows from operating activities: |
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Net earnings |
|
$ |
73 |
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$ |
75 |
|
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Loss from discontinued operations |
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|
1 |
|
|
|
|
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Non-cash charges |
|
|
|
|
|
|
|
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Depreciation and amortization |
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125 |
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|
95 |
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Pension expense |
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6 |
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7 |
|
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Restructuring, asset impairment and related charges |
|
|
19 |
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Cash payments |
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|
|
|
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Pension contributions |
|
|
(4) |
|
|
(4) |
|
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Asbestos-related payments |
|
|
(11) |
|
|
(15) |
|
|
Cash paid for restructuring activities |
|
|
(13) |
|
|
(10) |
|
|
Change in components of working capital |
|
|
(488) |
|
|
(429) |
|
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Other, net (a) |
|
|
(9) |
|
|
3 |
|
|
Cash utilized in continuing operating activities |
|
|
(301) |
|
|
(278) |
|
|
Cash utilized in discontinued operating activities |
|
|
(1) |
|
|
|
|
|
Total cash utilized in operating activities |
|
|
(302) |
|
|
(278) |
|
|
Cash flows from investing activities: |
|
|
|
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|
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|
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Additions to property, plant and equipment |
|
|
(117) |
|
|
(106) |
|
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Acquisitions, net of cash acquired |
|
|
(22) |
|
|
(52) |
|
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Other, net |
|
|
6 |
|
|
1 |
|
|
Cash utilized in investing activities |
|
|
(133) |
|
|
(157) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
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Changes in borrowings, net |
|
|
274 |
|
|
308 |
|
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Issuance of common stock |
|
|
5 |
|
|
|
|
|
Treasury shares purchased |
|
|
|
|
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(100) |
|
|
Payment of finance fees |
|
|
(3) |
|
|
(1) |
|
|
Cash provided by financing activities |
|
|
276 |
|
|
207 |
|
|
Effect of exchange rate fluctuations on cash |
|
|
(1) |
|
|
(27) |
|
|
Decrease in cash |
|
|
(160) |
|
|
(255) |
|
|
Cash at beginning of period |
|
|
399 |
|
|
512 |
|
|
Cash at end of period |
|
$ |
239 |
|
$ |
257 |
|
|
(a) |
Other, net includes other non-cash charges plus other changes in non-current assets and liabilities. |
See accompanying notes.
5
OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data dollars in millions, except per share amounts
1. Segment Information
The Company has four reportable segments based on its geographic locations: Europe, North America, Latin America and Asia Pacific. In connection with the Company’s acquisition (the “Vitro 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 (the “Vitro Business”) on September 1, 2015 (see Note 15), 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. These four segments are aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its global glass operations. Certain assets and activities not directly related to one of the regions or to glass manufacturing are reported with Retained corporate costs and other. These include licensing, equipment manufacturing, global engineering, and certain equity investments. Retained corporate costs and other also includes certain headquarters administrative and facilities costs and certain incentive compensation and other benefit plan costs that are global in nature and are not allocable to the reportable segments.
The Company’s measure of profit for its reportable segments is segment operating profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs. The Company’s management uses segment operating profit, in combination with selected cash flow information, to evaluate performance and to allocate resources. Segment operating profit for reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided.
Financial information for the three months ended March 31, 2016 and 2015 regarding the Company’s reportable segments is as follows:
|
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2016 |
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2015 |
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Net sales: |
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|
|
|
|
|
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Europe |
|
$ |
563 |
|
$ |
567 |
|
North America |
|
|
532 |
|
|
470 |
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Latin America |
|
|
312 |
|
|
205 |
|
Asia Pacific |
|
|
159 |
|
|
163 |
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Reportable segment totals |
|
|
1,566 |
|
|
1,405 |
|
Other |
|
|
22 |
|
|
16 |
|
Net sales |
|
$ |
1,588 |
|
$ |
1,421 |
|
|
|
2016 |
|
2015 |
|
||
Segment operating profit: |
|
|
|
|
|
|
|
Europe |
|
$ |
55 |
|
$ |
49 |
|
North America |
|
|
76 |
|
|
71 |
|
Latin America |
|
|
63 |
|
|
30 |
|
Asia Pacific |
|
|
17 |
|
|
18 |
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Reportable segment totals |
|
|
211 |
|
|
168 |
|
Items excluded from segment operating profit: |
|
|
|
|
|
|
|
Retained corporate costs and other |
|
|
(32) |
|
|
(21) |
|
Restructuring, asset impairment and other |
|
|
(12) |
|
|
|
|
Interest expense, net |
|
|
(66) |
|
|
(47) |
|
Earnings from continuing operations before income taxes |
|
$ |
101 |
|
$ |
100 |
|
6
Financial information regarding the Company’s total assets is as follows:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
|
|
2016 |
|
2015 |
|
2015 |
|
|||
Total assets: |
|
|
|
|
|
|
|
|
|
|
Europe |
|
$ |
3,047 |
|
$ |
2,902 |
|
$ |
2,926 |
|
North America |
|
|
2,550 |
|
|
2,500 |
|
|
2,033 |
|
Latin America |
|
|
2,855 |
|
|
2,807 |
|
|
1,097 |
|
Asia Pacific |
|
|
933 |
|
|
917 |
|
|
942 |
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segment totals |
|
|
9,385 |
|
|
9,126 |
|
|
6,998 |
|
Other |
|
|
303 |
|
|
295 |
|
|
314 |
|
Consolidated totals |
|
$ |
9,688 |
|
$ |
9,421 |
|
$ |
7,312 |
|
2. Inventories
Major classes of inventory at March 31, 2016, December 31, 2015 and March 31, 2015 are as follows:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|
|||
|
|
2016 |
|
2015 |
|
2015 |
|
|
|||
Finished goods |
|
$ |
954 |
|
$ |
858 |
|
$ |
858 |
|
|
Raw materials |
|
|
116 |
|
|
113 |
|
|
109 |
|
|
Operating supplies |
|
|
37 |
|
|
36 |
|
|
40 |
|
|
|
|
$ |
1,107 |
|
$ |
1,007 |
|
$ |
1,007 |
|
|
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets at March 31, 2016, December 31, 2015 and March 31, 2015 are as follows:
|
|
March 31, |
|
December 31, |
|
March 31, |
|||
|
|
2016 |
|
2015 |
|
2015 |
|||
Prepaid expenses |
|
$ |
52 |
|
$ |
52 |
|
$ |
37 |
Value added taxes |
|
|
192 |
|
|
195 |
|
|
44 |
Other |
|
|
115 |
|
|
119 |
|
|
187 |
|
|
$ |
359 |
|
$ |
366 |
|
$ |
268 |
In conjunction with the Vitro Acquisition, part of the total consideration paid by the Company relates to a value added tax receivable of approximately $143 million. This amount is included in “Value added taxes” above and is expected to be refunded to the Company before the end of 2016.
4. Derivative Instruments
The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts. The Company uses an income approach to value these contracts. Natural gas forward rates and foreign exchange rates are the significant inputs into the valuation models. These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy. The Company also evaluates counterparty risk in determining fair values.
Commodity Forward Contracts Designated as Cash Flow Hedges
In several regions, the Company enters into commodity forward contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. In North America, the majority of its customer contracts contain provisions that
7
pass the price of natural gas to its customers. In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time. To limit the effects of fluctuations in cash flows resulting from these customer contracts, the Company enters into commodity forward contracts related to forecasted natural gas requirements. In Asia Pacific, the Company implemented a hedging program in the first quarter of 2016, which included the execution of commodity forward contracts for certain contracted natural gas requirements. At March 31, 2016 and 2015, the Company had entered into commodity forward contracts covering approximately 12,600,000 MM BTUs and 5,400,000 MM BTUs, respectively.
The Company accounts for the above forward contracts as cash flow hedges at March 31, 2016 and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. An unrecognized loss of $4 million and an unrecognized loss of less than $1 million at March 31, 2016 and 2015, respectively, related to the commodity forward contracts was included in Accumulated OCI, and will be reclassified into earnings in the period when the commodity forward contracts expire. Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings. The ineffectiveness related to these natural gas hedges for the three months ended March 31, 2016 and 2015 was not material.
The effect of the commodity forward contracts on the results of operations for the three months ended March 31, 2016 and 2015 is as follows:
|
|
Amount of Gain (Loss) Reclassified from |
|
||||||||
Amount of Gain (Loss) Recognized in OCI on |
|
Accumulated OCI into Income |
|
||||||||
Commodity Forward Contracts |
|
(reported in cost of goods sold) |
|
||||||||
(Effective Portion) |
|
(Effective Portion) |
|
||||||||
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
$ |
(4) |
|
$ |
— |
|
$ |
2 |
|
$ |
— |
|
Foreign Exchange Derivative Contracts and not Designated as Hedging Instruments
The Company may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. The Company may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables, payables, and loans, not denominated in, or indexed to, their functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.
At March 31, 2016 and 2015, the Company had outstanding foreign exchange and option agreements denominated in various currencies covering the equivalent of approximately $660 million and $532 million, respectively, related primarily to intercompany transactions and loans.
The effect of the forward exchange derivative contracts on the results of operations for the three months ended March 31, 2016 and 2015 is as follows:
|
|
Amount of Gain (Loss) |
|
||||
Location of Gain (Loss) |
|
Recognized in Income on |
|
||||
Recognized in Income on |
|
Foreign Exchange Contracts |
|
||||
Foreign Exchange Contracts |
|
2016 |
|
2015 |
|
||
Other expense |
|
$ |
5 |
|
$ |
11 |
|
Balance Sheet Classification
The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) deposits, receivables, and
8
other assets if the instrument has a positive fair value and maturity after one year, and (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year.
The following table shows the amount and classification (as noted above) of the Company’s derivatives at March 31, 2016, December 31, 2015 and March 31, 2015:
|
|
Fair Value |
|
|
|||||||||
|
|
Balance Sheet |
|
March 31, |
|
December 31, |
|
March 31, |
|
|
|||
|
|
Location |
|
2016 |
|
2015 |
|
2015 |
|
|
|||
Asset derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange derivative contracts |
|
a |
|
$ |
15 |
|
$ |
14 |
|
$ |
21 |
|
|
Total asset derivatives |
|
|
|
$ |
15 |
|
$ |
14 |
|
$ |
21 |
|
|
Liability derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity futures contracts |
|
c |
|
$ |
4 |
|
$ |
3 |
|
$ |
— |
|
|
Derivatives not designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange derivative contracts |
|
c |
|
|
2 |
|
|
2 |
|
|
2 |
|
|
Total liability derivatives |
|
|
|
$ |
6 |
|
$ |
5 |
|
$ |
2 |
|
|
9
5. Restructuring Accruals
Selected information related to the restructuring accruals for the three months ended March 31, 2016 and 2015 is as follows:
|
|
|
|
|
Other |
|
|
|
|
|
|
|
Asia Pacific |
|
Restructuring |
|
Total |
|
|||
|
|
Restructuring |
|
Actions |
|
Restructuring |
|
|||
Balance at January 1, 2016 |
|
$ |
7 |
|
$ |
36 |
|
$ |
43 |
|
Charges |
|
|
1 |
|
|
18 |
|
|
19 |
|
Write-down of assets to net realizable value |
|
|
|
|
|
(7) |
|
|
(7) |
|
Net cash paid, principally severance and related benefits |
|
|
(1) |
|
|
(12) |
|
|
(13) |
|
Other, including foreign exchange translation |
|
|
(1) |
|
|
(1) |
|
|
(2) |
|
Balance at March 31, 2016 |
|
$ |
6 |
|
$ |
34 |
|
$ |
40 |
|
|
|
European |
|
|
|
|
Other |
|
|
|
|
||
|
|
Asset |
|
Asia Pacific |
|
Restructuring |
|
Total |
|
||||
|
|
Optimization |
|
Restructuring |
|
Actions |
|
Restructuring |
|
||||
Balance at January 1, 2015 |
|
$ |
12 |
|
$ |
12 |
|
$ |
36 |
|
$ |
60 |
|
Net cash paid, principally severance and related benefits |
|
|
|
|
|
(1) |
|
|
(9) |
|
|
(10) |
|
Other, including foreign exchange translation |
|
|
(1) |
|
|
(1) |
|
|
(2) |
|
|
(4) |
|
Balance at March 31, 2015 |
|
$ |
11 |
|
$ |
10 |
|
$ |
25 |
|
$ |
46 |
|
The Company’s decisions to curtail selected production capacity have resulted in write downs of certain long-lived assets to the extent their carrying amounts exceeded fair value or fair value less cost to sell. The Company classified the significant assumptions used to determine the fair value of the impaired assets, which was not material, as Level 3 in the fair value hierarchy as set forth in the general accounting principles for fair value measurements.
Asia Pacific Restructuring
During the three months ended March 31, 2016, the Company recorded charges of $1 million. These charges primarily represented other exit costs as part of the Company’s Asia Pacific Restructuring program. The Company has recorded total cumulative charges of $221 million under this program.
Other Restructuring Actions
During the three months ended March 31, 2016, the Company recorded charges of $18 million. These charges primarily represented employee costs, write-down of assets, and other exit costs of $14 million for a plant closure in the first quarter of 2016 in Latin America, $3 million related to a previous plant closure in North America and $1 million related to other restructuring actions.
6. Pension Benefit Plans
The components of the net periodic pension cost for the three months ended March 31, 2016 and 2015 are as follows:
|
|
U.S. |
|
Non-U.S. |
|
||||||||
|
|
2016 |
|
2015 |
|
2016 |
|
2015 |
|
||||
Service cost |
|
$ |
4 |
|
$ |
6 |
|
$ |
4 |
|
$ |
4 |
|
Interest cost |
|
|
24 |
|
|
24 |
|
|
13 |
|
|
12 |
|
Expected asset return |
|
|
(38) |
|
|
(42) |
|
|
(21) |
|
|
(21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
15 |
|
|
19 |
|
|
5 |
|
|
5 |
|
Net periodic pension cost |
|
$ |
5 |
|
$ |
7 |
|
$ |
1 |
|
$ |
— |
|
10
In March 2016, the Company remeasured the liability related to its hourly plan in the U.S. to reflect certain changes in future benefits. The remeasurement resulted in an increase to its pension liability of approximately $60 million and has been reflected in other comprehensive income.
7. Income Taxes
The Company performs a quarterly review of the annual effective tax rate and makes changes if necessary based on new information or events. The estimated annual effective tax rate is forecasted quarterly using actual historical information and forward-looking estimates. The estimated annual effective tax rate may fluctuate due to changes in forecasted annual operating income; changes in the forecasted mix of earnings by country; changes to the valuation allowance for deferred tax assets (such changes would be recorded discretely in the quarter in which they occur); changes to actual or forecasted permanent book to tax differences (non-deductible expenses); impacts from future tax settlements with state, federal or foreign tax authorities (such changes would be recorded discretely in the quarter in which they occur); or impacts from tax law changes. To the extent such changes impact deferred tax assets/liabilities, these changes would generally be recorded discretely in the quarter in which they occur. Additionally, the annual effective tax rate differs from the statutory U.S. Federal tax rate of 35% primarily because of valuation allowances in some jurisdictions and varying non-U.S. tax rates.
8. Debt
The following table summarizes the long-term debt of the Company:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
|
|
2016 |
|
2015 |
|
2015 |
|
|||
Secured Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility: |
|
|
|
|
|
|
|
|
|
|
Revolving Loans |
|
$ |
288 |
|
$ |
— |
|
$ |
— |
|
Term Loans: |
|
|
|
|
|
|
|
|
|
|
Term Loan A |
|
|
1,534 |
|
|
1,546 |
|
|
|
|
Term Loan A (€279 million at March 31, 2016) |
|
|
309 |
|
|
301 |
|
|
|
|
Term Loan B |
|
|
558 |
|
|
563 |
|
|
|
|
Previous Secured Credit Agreement: |
|
|
|
|
|
|
|
|
|
|
Revolving Credit Facility: |
|
|
|
|
|
|
|
|
|
|
Revolving Loans |
|
|
|
|
|
|
|
|
264 |
|
Term Loans: |
|
|
|
|
|
|
|
|
|
|
Term Loan B (USD tranche) |
|
|
|
|
|
|
|
|
389 |
|
Term Loan C (CAD tranche) |
|
|
|
|
|
|
|
|
59 |
|
Term Loan D (EUR tranche) |
|
|
|
|
|
|
|
|
91 |
|
Senior Notes: |
|
|
|
|
|
|
|
|
|
|
3.00%, Exchangeable, due 2015 |
|
|
|
|
|
|
|
|
18 |
|
7.375%, due 2016 |
|
|
|
|
|
|
|
|
595 |
|
6.75%, due 2020 (€500 million) |
|
|
561 |
|
|
542 |
|
|
534 |
|
4.875%, due 2021 (€330 million) |
|
|
370 |
|
|
357 |
|
|
352 |
|
5.00%, due 2022 |
|
|
494 |
|
|
494 |
|
|
493 |
|
5.875%, due 2023 |
|
|
680 |
|
|
680 |
|
|
|
|
5.375%, due 2025 |
|
|
296 |
|
|
296 |
|
|
296 |
|
6.375%, due 2025 |
|
|
294 |
|
|
293 |
|
|
|
|
Senior Debentures: |
|
|
|
|
|
|
|
|
|
|
7.80%, due 2018 |
|
|
250 |
|
|
250 |
|
|
249 |
|
Capital Leases |
|
|
58 |
|
|
62 |
|
|
66 |
|
Other |
|
|
32 |
|
|
29 |
|
|
24 |
|
Total long-term debt |
|
|
5,724 |
|
|
5,413 |
|
|
3,430 |
|
Less amounts due within one year |
|
|
62 |
|
|
68 |
|
|
458 |
|
Long-term debt |
|
$ |
5,662 |
|
$ |
5,345 |
|
$ |
2,972 |
|
11
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), 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 March 31, 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 ($1,534 million net of debt issuance costs), and a €279 million term loan A facility ($309 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 March 31, 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 March 31, 2016 was 2.53%.
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 March 31, 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
12
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:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
|
|
2016 |
|
2015 |
|
2015 |
|
|||
Balance (included in short-term loans) |
|
$ |
157 |
|
$ |
158 |
|
$ |
171 |
|
Weighted average interest rate |
|
|
1.03 |
% |
|
1.21 |
% |
|
1.36 |
% |
The carrying amounts reported for the accounts receivable securitization program, and certain long-term debt obligations subject to frequently redetermined interest rates, approximate fair value. Fair values for the Company’s significant fixed rate debt obligations are based on published market quotations, and are classified as Level 1 in the fair value hierarchy.
Fair values at March 31, 2016 of the Company’s significant fixed rate debt obligations are as follows:
|
|
Principal |
|
Indicated |
|
|
|
|||
|
|
Amount |
|
Market Price |
|
Fair Value |
|
|||
Senior Notes: |
|
|
|
|
|
|
|
|
|
|
6.75%, due 2020 (€500 million) |
|
$ |
566 |
|
$ |
117.13 |
|
$ |
663 |
|
4.875%, due 2021 (€330 million) |
|
|
374 |
|
|
109.69 |
|
|
410 |
|
5.00%, due 2022 |
|
|
500 |
|
|
101.25 |
|
|
506 |
|
5.875%, due 2023 |
|
|
700 |
|
|
104.38 |
|
|
731 |
|
5.375%, due 2025 |
|
|
300 |
|
|
100.13 |
|
|
300 |
|
6.375%, due 2025 |
|
|
300 |
|
|
105.13 |
|
|
315 |
|
Senior Debentures: |
|
|
|
|
|
|
|
|
|
|
7.80%, due 2018 |
|
|
250 |
|
|
110.45 |
|
|
276 |
|
13
9. Contingencies
Asbestos
The Company is a defendant in numerous lawsuits alleging bodily injury and death as a result of exposure to asbestos. From 1948 to 1958, one of the Company's former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based insulation material containing asbestos. The Company sold its insulation business unit at the end of April 1958. The typical asbestos personal injury lawsuit alleges various theories of liability, including negligence, gross negligence and strict liability and seeks compensatory and, in some cases, punitive damages in various amounts (herein referred to as "asbestos claims").
As of March 31, 2016, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 2,000 plaintiffs and claimants. Based on an analysis of the lawsuits pending as of December 31, 2015, approximately 82% of plaintiffs either do not specify the monetary damages sought, or in the case of court filings, claim an amount sufficient to invoke the jurisdictional minimum of the trial court. Approximately 11% of plaintiffs specifically plead damages above the jurisdictional minimum up to, and including, $15 million or less, and 7% of plaintiffs specifically plead damages greater than $15 million but less than or equal to $100 million.
As indicated by the foregoing summary, current pleading practice permits considerable variation in the assertion of monetary damages. The Company’s experience resolving hundreds of thousands of asbestos claims and lawsuits over an extended period demonstrates that the monetary relief alleged in a complaint bears little relevance to a claim’s merits or disposition value. Rather, the amount potentially recoverable is determined by such factors as the type and severity of the plaintiff’s asbestos disease, the plaintiff’s medical history and exposure to other disease-causing agents, the product identification evidence against the Company and other co-defendants, the defenses available to the Company and other co-defendants, the specific jurisdiction in which the claim is made, and the plaintiff’s firm representing the claimant.
In addition to the pending claims set forth above, the Company has claims-handling agreements in place with many plaintiffs’ counsel throughout the country. These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by the Company's former business unit during its manufacturing period ending in 1958.
The Company has also been a defendant in other asbestos-related lawsuits or claims involving maritime workers, medical monitoring claimants, co-defendants and property damage claimants. Based upon its past experience, the Company believes that these categories of lawsuits and claims will not involve any material liability and they are not included in the above description of pending matters or in the following description of disposed matters.
Since receiving its first asbestos claim, the Company as of March 31, 2016, has disposed of the asbestos claims of approximately 396,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $9,200. The Company’s asbestos indemnity payments have varied on a per claim basis, and are expected to continue to vary considerably over time. Asbestos-related cash payments for 2015, 2014 and 2013 were $138 million, $148 million, and $158 million, respectively. The Company’s cash payments per claim disposed (inclusive of legal costs) were approximately $95,000, $81,000 and $93,000 for the years ended December 31, 2015, 2014 and 2013, respectively.
As discussed above, the Company’s objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements. Failure of claimants to meet certain medical and product exposure criteria in the Company’s administrative claims handling agreements has generally reduced the number of claims that would otherwise have been received by the Company in the tort system. In addition, certain court orders and legislative acts have reduced or eliminated the number of claims that the Company otherwise would have received by the Company in the tort system. These developments generally have had the effect of increasing the Company’s per-claim average indemnity payment over time.
Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $4.9 billion through 2015, before insurance recoveries, for its asbestos-related liability. The Company’s estimates of its liability have been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the inherent uncertainty of future disease incidence and claiming patterns against the Company, the significant expansion of the
14
defendants that are now sued in this litigation, and the continuing changes in the extent to which these defendants participate in the resolution of cases in which the Company is also a defendant.
The Company continues to monitor trends that may affect its ultimate liability and analyze the developments and variables likely to affect the resolution of pending and future asbestos claims against the Company. The material components of the Company’s accrued liability are determined by the Company in connection with its annual comprehensive legal review and consist of the following estimates, to the extent it is probable that such liabilities have been incurred and can be reasonably estimated: (i) the liability for asbestos claims already asserted against the Company; (ii) the liability for asbestos claims not yet asserted against the Company; and (iii) the legal defense costs estimated to be incurred in connection with the claims already asserted and those claims the Company believes will be asserted.
As noted above, 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 with expertise in determining the impact of disease incidence and mortality on future filing trends to develop information to assist the Company in estimating the total number of future claims to be filed. The Company uses this estimate of total future claims, along with an estimation of disposition costs and related legal costs as inputs to develop its best 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 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 asbestos‑containing 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 asbestos‑related 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 co‑defendant bankruptcies do not change significantly the assets available to participate in the resolution of cases in which the Company is a defendant; and |
f) |
co-defendants with substantial resources and assets continue to participate significantly in the resolution of future asbestos lawsuits and claims. |
The Company revised its method for estimating its asbestos-related liabilities in connection with finalizing and reporting its restated results of operations for the year ended December 31, 2015 and 2014 and concluded that an accrual in the amount of $817 million and $939 million as of December 31, 2015 and 2014, respectively was required. These amounts have not been discounted for the time value of money. The application of the revised method also resulted in charges of $16 million, $46 million and $12 million for the years ending December 31, 2015, 2014 and 2013, respectively.
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 and legal costs. The Company believes this estimate is consistent with the level of variability it has experienced when comparing actual results to recent near-term projections. However, it is also possible that the ultimate asbestos-related liability could be above this estimate.
The Company expects a significant majority of the total number of claims to be received in the next ten years. This timeframe appropriately reflects the mortality of current and expected claimants in light of the Company’s sale of its insulation business unit in 1958.
15
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 significantly.
Other Matters
The Company conducted an internal investigation into conduct in certain of its overseas operations that may have violated the anti-bribery provisions of the United States Foreign Corrupt Practices Act (the “FCPA”), the FCPA’s books and records and internal controls provisions, the Company’s own internal policies, and various local laws. In October 2012, the Company voluntarily disclosed these matters to the U.S. Department of Justice (the “DOJ”) and the Securities and Exchange Commission (the “SEC”).
On July 18, 2013, the Company received a letter from the DOJ indicating that it presently did not intend to take any enforcement action and is closing its inquiry into the matter.
As disclosed in previous periods, the Company is presently unable to predict the duration, scope or result of an investigation by the SEC, if any, or whether the SEC will commence any legal action. The SEC has a broad range of civil sanctions under the FCPA and other laws and regulations including, but not limited to, injunctive relief, disgorgement, penalties, and modifications to business practices. The Company could also be subject to investigation and sanctions outside the United States. While the Company is currently unable to quantify the impact of any potential sanctions or remedial measures, it does not expect such actions will have a material adverse effect on the Company’s liquidity, results of operations or financial condition.
Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are non-routine and involve compensatory, punitive or treble damage claims as well as other types of relief. The Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated. Recorded amounts are reviewed and adjusted to reflect changes in the factors upon which the estimates are based, including additional information, negotiations, settlements and other events.
10. Share Owners’ Equity
The activity in share owners’ equity for the three months ended March 31, 2016 and 2015 is as follows:
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Share Owners’ Equity of the Company |
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Capital in |
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Other |
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