Edgar Filing: OWENS ILLINOIS INC /DE/

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

☐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)


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.

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.

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.

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.

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.

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


	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

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

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.

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