oi_Current Folio_10Q

mple

 

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

June 30, 2017

 

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

 

Picture 1

 

OWENS-ILLINOIS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

22-2781933

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

 

 

One Michael Owens Way, Perrysburg, Ohio

 

43551

(Address of principal executive offices)

 

(Zip Code)

 

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒  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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. 

 

 

 

 

Large accelerated filer ☒

Accelerated filer ☐

Non-accelerated filer ☐

(Do not check if a

smaller reporting company)

 

 

 

Smaller reporting company ☐

Emerging growth company ☐

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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 June 30, 2017 was 162,875,946.

 

 

 


 

 

Part I — FINANCIAL INFORMATION

 

Item 1.  Financial Statements.

 

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 for the year ended December 31, 2016.

1


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

 

June 30,

    

June 30,

 

 

 

 

2017

    

2016

    

2017

    

2016

    

 

Net sales

 

$

1,751

 

$

1,760

 

$

3,366

 

$

3,348

 

 

Cost of goods sold

 

 

(1,405)

 

 

(1,418)

 

 

(2,705)

 

 

(2,687)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

346

 

 

342

 

 

661

 

 

661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

 

(123)

 

 

(126)

 

 

(242)

 

 

(254)

 

 

Research, development and engineering expense

 

 

(16)

 

 

(16)

 

 

(31)

 

 

(32)

 

 

Interest expense, net

 

 

(62)

 

 

(67)

 

 

(141)

 

 

(133)

 

 

Equity earnings

 

 

18

 

 

15

 

 

33

 

 

29

 

 

Other expense, net

 

 

(11)

 

 

(7)

 

 

(56)

 

 

(29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

 

152

 

 

141

 

 

224

 

 

242

 

 

Provision for income taxes

 

 

(9)

 

 

(30)

 

 

(28)

 

 

(57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

 

143

 

 

111

 

 

196

 

 

185

 

 

Loss from discontinued operations

 

 

 

 

 

(2)

 

 

 

 

 

(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

143

 

 

109

 

 

196

 

 

182

 

 

Net earnings attributable to noncontrolling interests

 

 

(3)

 

 

(4)

 

 

(8)

 

 

(10)

 

 

Net earnings attributable to the Company

 

$

140

 

$

105

 

$

188

 

$

172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to the Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

140

 

$

107

 

$

188

 

$

175

 

 

Loss from discontinued operations

 

 

 

 

 

(2)

 

 

 

 

 

(3)

 

 

Net earnings

 

$

140

 

$

105

 

$

188

 

$

172

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.86

 

$

0.66

 

$

1.16

 

$

1.08

 

 

Loss from discontinued operations

 

 

 

 

 

(0.01)

 

 

 

 

 

(0.02)

 

 

Net earnings

 

$

0.86

 

$

0.65

 

$

1.16

 

$

1.06

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted averages shares outstanding (thousands)

 

 

162,716

 

 

161,945

 

 

162,553

 

 

161,574

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.85

 

$

0.65

 

$

1.15

 

$

1.07

 

 

Loss from discontinued operations

 

 

 

 

 

(0.01)

 

 

 

 

 

(0.02)

 

 

Net earnings

 

$

0.85

 

$

0.64

 

$

1.15

 

$

1.05

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding (thousands)

 

 

164,482

 

 

162,820

 

 

164,162

 

 

162,307

 

 

 

See accompanying notes.

2


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

 

June 30,

 

June 30,

 

 

 

    

2017

    

2016

    

2017

    

2016

    

 

Net earnings

 

$

143

 

$

109

 

$

196

 

$

182

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

14

 

 

(108)

 

 

202

 

 

(14)

 

 

Pension and other postretirement benefit adjustments, net of tax

 

 

 4

 

 

26

 

 

15

 

 

(16)

 

 

Change in fair value of derivative instruments, net of tax

 

 

(4)

 

 

 8

 

 

(10)

 

 

 6

 

 

Other comprehensive income (loss)

 

 

14

 

 

(74)

 

 

207

 

 

(24)

 

 

Total comprehensive income (loss)

 

 

157

 

 

35

 

 

403

 

 

158

 

 

Comprehensive (income) loss attributable to noncontrolling interests

 

 

 7

 

 

 8

 

 

 

 

 

(2)

 

 

Comprehensive income attributable to the Company

 

$

164

 

$

43

 

$

403

 

$

156

 

 

 

See accompanying notes.

3


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

    

2017

    

2016

    

2016

 

Assets

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

335

 

$

492

 

$

334

 

Trade receivables, net of allowance of $35 million, $32 million, and $31 million at June 30, 2017, December 31, 2016 and June 30, 2016

 

 

956

 

 

580

 

 

831

 

Inventories

 

 

1,049

 

 

983

 

 

1,051

 

Prepaid expenses and other current assets

 

 

214

 

 

199

 

 

358

 

Total current assets

 

 

2,554

 

 

2,254

 

 

2,574

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

2,996

 

 

2,880

 

 

2,932

 

Goodwill

 

 

2,588

 

 

2,462

 

 

2,536

 

Intangibles, net

 

 

486

 

 

464

 

 

517

 

Other assets

 

 

1,156

 

 

1,075

 

 

1,108

 

Total assets

 

$

9,780

 

$

9,135

 

$

9,667

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Share Owners' Equity

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

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

 

$

271

 

$

195

 

$

305

 

Current portion of asbestos-related liabilities

 

 

115

 

 

115

 

 

130

 

Accounts payable

 

 

1,065

 

 

1,135

 

 

1,042

 

Other liabilities

 

 

564

 

 

615

 

 

518

 

Total current liabilities

 

 

2,015

 

 

2,060

 

 

1,995

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

5,471

 

 

5,133

 

 

5,549

 

Asbestos-related liabilities

 

 

551

 

 

577

 

 

663

 

Other long-term liabilities

 

 

964

 

 

1,002

 

 

1,002

 

Share owners' equity

 

 

779

 

 

363

 

 

458

 

Total liabilities and share owners' equity

 

$

9,780

 

$

9,135

 

$

9,667

 

 

See accompanying notes.

4


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30,

 

 

 

    

2017

    

2016

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

196

 

$

182

 

 

Loss from discontinued operations

 

 

 

 

 

 3

 

 

Non-cash charges

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

245

 

 

250

 

 

Pension expense

 

 

15

 

 

15

 

 

Restructuring, asset impairment and related charges

 

 

48

 

 

19

 

 

Cash payments

 

 

 

 

 

 

 

 

Pension contributions

 

 

(20)

 

 

(9)

 

 

Asbestos-related payments

 

 

(26)

 

 

(24)

 

 

Cash paid for restructuring activities

 

 

(16)

 

 

(17)

 

 

Change in components of working capital

 

 

(585)

 

 

(491)

 

 

Other, net (a)

 

 

(13)

 

 

(35)

 

 

Cash utilized in continuing operating activities

 

 

(156)

 

 

(107)

 

 

Cash utilized in discontinued operating activities

 

 

 

 

 

(3)

 

 

Total cash utilized in operating activities

 

 

(156)

 

 

(110)

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(186)

 

 

(207)

 

 

Acquisitions, net of cash acquired

 

 

(27)

 

 

(31)

 

 

Net foreign exchange derivative activity

 

 

 2

 

 

14

 

 

Net cash proceeds related to the sale of assets

 

 

 6

 

 

34

 

 

  Cash utilized in investing activities

 

 

(205)

 

 

(190)

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Changes in borrowings, net

 

 

215

 

 

246

 

 

Issuance of common stock and other

 

 

 

 

 

 5

 

 

Distributions to noncontrolling interests

 

 

(9)

 

 

(10)

 

 

Payment of finance fees

 

 

(21)

 

 

(3)

 

 

Cash provided by financing activities

 

 

185

 

 

238

 

 

Effect of exchange rate fluctuations on cash

 

 

19

 

 

(3)

 

 

Decrease in cash

 

 

(157)

 

 

(65)

 

 

Cash at beginning of period

 

 

492

 

 

399

 

 

Cash at end of period

 

$

335

 

$

334

 

 


(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.  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.

 

Intercompany sales in Latin America totaled $30 million and $63 million for the three and six months ended June 30, 2017, respectively, and $43 million and $93 million for the three and six months ended June 30, 2016, respectively.

 

Financial information for the three and six months ended June 30, 2017 and 2016 regarding the Company’s reportable segments is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2017

    

2016

    

2017

 

2016

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

635

 

$

646

 

$

1,189

 

$

1,209

 

North America

 

 

572

 

 

599

 

 

1,100

 

 

1,131

 

Latin America

 

 

370

 

 

345

 

 

711

 

 

657

 

Asia Pacific

 

 

155

 

 

158

 

 

328

 

 

317

 

Reportable segment totals

 

 

1,732

 

 

1,748

 

 

3,328

 

 

3,314

 

Other

 

 

19

 

 

12

 

 

38

 

 

34

 

Net sales

 

$

1,751

 

$

1,760

 

$

3,366

 

$

3,348

 

 

 

 

 

 

 

 

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

    

2017

    

2016

    

2017

    

2016

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Europe

 

$

80

 

$

73

 

$

139

 

$

128

 

North America

 

 

92

 

 

92

 

 

177

 

 

168

 

Latin America

 

 

69

 

 

57

 

 

123

 

 

120

 

Asia Pacific

 

 

11

 

 

11

 

 

31

 

 

28

 

Reportable segment totals

 

 

252

 

 

233

 

 

470

 

 

444

 

Items excluded from segment operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained corporate costs and other

 

 

(28)

 

 

(25)

 

 

(56)

 

 

(57)

 

Restructuring, asset impairment and other

 

 

(10)

 

 

 

 

 

(49)

 

 

(12)

 

Interest expense, net

 

 

(62)

 

 

(67)

 

 

(141)

 

 

(133)

 

Earnings from continuing operations before income taxes

 

$

152

 

$

141

 

$

224

 

$

242

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

    

    

2017

    

2016

    

2016

Total assets:

 

 

 

 

 

 

 

 

 

 

Europe

 

$

3,074

 

$

2,792

 

$

2,977

 

North America

 

 

2,781

 

 

2,522

 

 

2,562

 

Latin America

 

 

2,730

 

 

2,537

 

 

2,798

 

Asia Pacific

 

 

987

 

 

926

 

 

981

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

 

9,572

 

 

8,777

 

 

9,318

 

Other

 

 

208

 

 

358

 

 

349

 

Consolidated totals

 

$

9,780

 

$

9,135

 

$

9,667

 

 

 

2.  Inventories

Major classes of inventory at June 30, 2017, December 31, 2016 and June 30, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

    

2017

    

2016

    

2016

   

 

Finished goods

 

$

879

 

$

827

 

$

892

 

 

Raw materials

 

 

130

 

 

118

 

 

121

 

 

Operating supplies

 

 

40

 

 

38

 

 

38

 

 

 

 

$

1,049

 

$

983

 

$

1,051

 

 

 

 

3.  Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets at June 30, 2017, December 31, 2016 and June 30, 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

    

2017

    

2016

    

2016

Prepaid expenses

 

$

61

 

$

50

 

$

70

Value added taxes

 

 

39

 

 

46

 

 

172

Other

 

 

114

 

 

103

 

 

116

 

 

$

214

 

$

199

 

$

358

 

 

7


 

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 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 June 30, 2017 and 2016, the Company had entered into commodity forward contracts covering approximately 9,800,000 MM BTUs and 11,300,000 MM BTUs, respectively.

The Company accounts for the above forward contracts as cash flow hedges at June 30, 2017 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 $1 million at June 30, 2017, an unrecognized gain of $6 million at December 31, 2016 and an unrecognized gain of $3 million at June 30, 2016 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 and six months ended June 30, 2017 and 2016 was not material.

The effect of the commodity forward contracts on the results of operations for the three months ended June 30, 2017 and 2016 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)

 

2017

    

2016

    

2017

    

2016

 

$

(2)

 

$

 7

 

$

 —

 

$

(2)

 

 

The effect of the commodity forward contracts on the results of operations for the six months ended June 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain (Loss) Reclassified from

 

Amount of Gain Recognized in OCI on

 

Accumulated OCI into Income

 

Commodity Forward Contracts

 

(reported in cost of goods sold)

 

(Effective Portion)

 

(Effective Portion)

 

2017

    

2016

    

2017

    

2016

 

$

 4

 

$

 3

 

$

 —

 

$

 —

 

 

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 foreign exchange agreements to offset the foreign

8


 

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 foreign exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

At June 30, 2017 and 2016, the Company had outstanding foreign exchange and option agreements denominated in various currencies covering the equivalent of approximately $340 million and $524 million, respectively, related primarily to intercompany transactions and loans.

The effect of the foreign exchange derivative contracts on the results of operations for the three months ended June 30, 2017 and 2016 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

 

2017

 

2016

 

Other expense

    

$

 4

    

$

(1)

 

The effect of the foreign exchange derivative contracts on the results of operations for the six months ended June 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

 

 

Amount of Gain

 

Location of Gain

 

Recognized in Income on

 

Recognized in Income on

 

Foreign Exchange Contracts

 

Foreign Exchange Contracts

 

2017

 

2016

 

Other expense

    

$

6

    

$

4

 

 

Hedges of Multiple Risks

 

The Company has variable-interest rate borrowings denominated in currencies other than the functional currency of the borrowing subsidiaries. As a result, the Company is exposed to fluctuations in both the underlying variable interest rate and the currency of the borrowing against the subsidiaries’ functional currency.  The Company uses derivatives to manage these exposures and designates these derivatives as cash flow hedges of both interest rate and foreign exchange risks.  The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of both interest rate risk and foreign exchange risk is recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period for which the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly in earnings.

 

During the second quarter of 2017, one of the Company’s Euro-functional subsidiaries entered into a cross-currency interest rate swap to manage its exposure to fluctuations in the variable interest rate and the U.S. dollar-Euro exchange rate arising from a U.S. dollar denominated borrowing.  This swap involves exchanging fixed rate Euro interest payments for floating rate U.S. dollar interest receipts both of which will occur at the forward exchange rates in effect upon entering into the instrument. This instrument, expected to settle in the third quarter of 2017, has a pay fixed notional amount of €81 million and a receive notional amount of $90 million.

 

Balance Sheet Classification

The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) deposits, receivables, and other assets if the instrument has a positive fair value and maturity after one year, and (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year.

9


 

The following table shows the amount and classification (as noted above) of the Company’s derivatives at June 30, 2017, December 31, 2016 and June 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

Balance Sheet

 

June 30,

 

December 31,

 

June 30,

 

 

 

    

Location

    

2017

    

2016

    

2016

 

 

Asset derivatives:

    

    

    

 

    

    

 

    

 

 

    

    

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

a

 

$

 —

 

$

 6

 

$

 3

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

a

 

 

 2

 

 

 9

 

 

 6

 

 

Total asset derivatives

 

 

 

$

 2

 

$

15

 

$

 9

 

 

Liability derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity futures contracts

 

c

 

$

 1

 

$

 —

 

$

 —

 

 

Hedges of multiple risks

 

c

 

 

 3

 

 

 

 

 

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange derivative contracts

 

c

 

 

 3

 

 

 5

 

 

 3

 

 

Total liability derivatives

 

 

 

$

 7

 

$

 5

 

$

 3

 

 

 

 

 

5.  Restructuring Accruals

Selected information related to the restructuring accruals for the three months ended June 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

    

Other

 

 

 

Restructuring

 

 

    

Actions

 

Balance at April 1, 2017

 

$

104

 

Charges

 

 

10

 

Write-down of assets to net realizable value

 

 

 

 

Net cash paid, principally severance and related benefits

 

 

(8)

 

Other, including foreign exchange translation

 

 

 5

 

Balance at June 30, 2017

 

$

111

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Asia Pacific

 

Restructuring

 

Total

 

 

 

Restructuring

 

Actions

    

Restructuring

 

Balance at April 1, 2016

 

$

 6

 

$

34

 

$

40

 

Net cash paid, principally severance and related benefits

 

 

 

 

 

(4)

 

 

(4)

 

Other, including foreign exchange translation

 

 

 

 

 

(2)

 

 

(2)

 

Balance at June 30, 2016

 

$

 6

 

$

28

 

$

34

 

 

 

Selected information related to the restructuring accruals for the six months ended June 30, 2017 and 2016 is as follows:

 

 

 

 

 

 

 

 

Other

 

 

 

Restructuring

 

 

 

Actions

 

Balance at January 1, 2017

 

$

85

 

Charges

 

 

48

 

Write-down of assets to net realizable value

 

 

(9)

 

Net cash paid, principally severance and related benefits

 

 

(16)

 

Other, including foreign exchange translation

 

 

3

 

Balance at June 30, 2017

 

$

111

 

 

10