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, 2019
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)
|
|
|
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
Trading symbol |
Name of each exchange on which registered |
Common Stock, $.01 par value |
OI |
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None.
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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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 ☐ |
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 March 31, 2019 was 155,230,560.
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 for the year ended December 31, 2018.
1
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
(Dollars in millions, except per share amounts)
(Unaudited)
|
|
Three months ended |
|
|
||||
|
|
March 31, |
|
|
||||
|
|
2019 |
|
2018 |
|
|
||
Net sales |
|
$ |
1,638 |
|
$ |
1,736 |
|
|
Cost of goods sold |
|
|
(1,340) |
|
|
(1,417) |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
298 |
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
Selling and administrative expense |
|
|
(115) |
|
|
(126) |
|
|
Research, development and engineering expense |
|
|
(16) |
|
|
(16) |
|
|
Interest expense, net |
|
|
(65) |
|
|
(62) |
|
|
Equity earnings |
|
|
19 |
|
|
17 |
|
|
Other income (expense), net |
|
|
(10) |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
111 |
|
|
135 |
|
|
Provision for income taxes |
|
|
(27) |
|
|
(32) |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
84 |
|
|
103 |
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
84 |
|
|
103 |
|
|
Net earnings attributable to noncontrolling interests |
|
|
(5) |
|
|
(5) |
|
|
Net earnings attributable to the Company |
|
$ |
79 |
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
Amounts attributable to the Company: |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
79 |
|
$ |
98 |
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
79 |
|
$ |
98 |
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
0.51 |
|
$ |
0.60 |
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
0.51 |
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding (thousands) |
|
|
154,361 |
|
|
162,919 |
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
0.51 |
|
$ |
0.59 |
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
0.51 |
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding (thousands) |
|
|
156,635 |
|
|
165,186 |
|
|
See accompanying notes.
2
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED COMPREHENSIVE INCOME
(Dollars in millions)
(Unaudited)
|
|
Three months ended |
|
|
||||
|
|
March 31, |
|
|
||||
|
|
2019 |
|
2018 |
|
|
||
Net earnings |
|
$ |
84 |
|
$ |
103 |
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
49 |
|
|
126 |
|
|
Pension and other postretirement benefit adjustments, net of tax |
|
|
6 |
|
|
7 |
|
|
Change in fair value of derivative instruments, net of tax |
|
|
5 |
|
|
(5) |
|
|
Other comprehensive income |
|
|
60 |
|
|
128 |
|
|
Total comprehensive income |
|
|
144 |
|
|
231 |
|
|
Comprehensive income attributable to noncontrolling interests |
|
|
(8) |
|
|
(11) |
|
|
Comprehensive income attributable to the Company |
|
$ |
136 |
|
$ |
220 |
|
|
See accompanying notes.
3
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
|
|
March 31, |
|
December 31, |
|
March 31, |
|||
|
|
2019 |
|
2018 |
|
2018 |
|||
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
326 |
|
$ |
512 |
|
$ |
418 |
Trade receivables, net of allowance of $34 million, $35 million, and $36 million at March 31, 2019, December 31, 2018 and March 31, 2018 |
|
|
939 |
|
|
549 |
|
|
1,045 |
Inventories |
|
|
1,038 |
|
|
1,018 |
|
|
1,065 |
Prepaid expenses and other current assets |
|
|
276 |
|
|
278 |
|
|
240 |
Total current assets |
|
|
2,579 |
|
|
2,357 |
|
|
2,768 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
|
3,074 |
|
|
3,085 |
|
|
3,190 |
Goodwill |
|
|
2,507 |
|
|
2,513 |
|
|
2,649 |
Intangibles, net |
|
|
394 |
|
|
400 |
|
|
452 |
Other assets |
|
|
1,598 |
|
|
1,344 |
|
|
1,222 |
Total assets |
|
$ |
10,152 |
|
$ |
9,699 |
|
$ |
10,281 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Share owners' equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
1,065 |
|
$ |
1,321 |
|
$ |
1,115 |
Short-term loans and long-term debt due within one year |
|
|
91 |
|
|
160 |
|
|
194 |
Current portion of asbestos-related liabilities |
|
|
160 |
|
|
160 |
|
|
100 |
Other liabilities |
|
|
544 |
|
|
566 |
|
|
554 |
Other liabilities - discontinued operations |
|
|
|
|
|
|
|
|
115 |
Total current liabilities |
|
|
1,860 |
|
|
2,207 |
|
|
2,078 |
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
5,820 |
|
|
5,181 |
|
|
5,640 |
Asbestos-related liabilities |
|
|
372 |
|
|
442 |
|
|
475 |
Other long-term liabilities |
|
|
1,090 |
|
|
969 |
|
|
969 |
Share owners' equity |
|
|
1,010 |
|
|
900 |
|
|
1,119 |
Total liabilities and share owners' equity |
|
$ |
10,152 |
|
$ |
9,699 |
|
$ |
10,281 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes.
4
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(Dollars in millions)
(Unaudited)
|
|
Three months ended March 31, |
|
|
||||
|
|
2019 |
|
2018 |
|
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
84 |
|
$ |
103 |
|
|
Loss from discontinued operations |
|
|
|
|
|
|
|
|
Non-cash charges |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
126 |
|
|
131 |
|
|
Pension expense |
|
|
8 |
|
|
10 |
|
|
Cash payments |
|
|
|
|
|
|
|
|
Pension contributions |
|
|
(11) |
|
|
(10) |
|
|
Asbestos-related payments |
|
|
(71) |
|
|
(7) |
|
|
Cash paid for restructuring activities |
|
|
(15) |
|
|
(6) |
|
|
Change in components of working capital |
|
|
(697) |
|
|
(622) |
|
|
Other, net (a) |
|
|
(19) |
|
|
31 |
|
|
Cash utilized in operating activities |
|
|
(595) |
|
|
(370) |
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Cash payments for property, plant and equipment |
|
|
(121) |
|
|
(142) |
|
|
Contributions and advances to joint ventures |
|
|
(15) |
|
|
(26) |
|
|
Net cash proceeds on disposal of assets |
|
|
1 |
|
|
7 |
|
|
Other, net |
|
|
|
|
|
1 |
|
|
Cash utilized in investing activities |
|
|
(135) |
|
|
(160) |
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Changes in borrowings, net |
|
|
589 |
|
|
488 |
|
|
Issuance of common stock and other |
|
|
(3) |
|
|
|
|
|
Treasury shares repurchased |
|
|
(38) |
|
|
(45) |
|
|
Dividends paid |
|
|
(8) |
|
|
|
|
|
Cash provided by financing activities |
|
|
540 |
|
|
443 |
|
|
Effect of exchange rate fluctuations on cash |
|
|
4 |
|
|
13 |
|
|
Decrease in cash |
|
|
(186) |
|
|
(74) |
|
|
Cash at beginning of period |
|
|
512 |
|
|
492 |
|
|
Cash at end of period |
|
$ |
326 |
|
$ |
418 |
|
|
(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 three reportable segments and three operating segments based on its geographic locations: Americas, Europe and Asia Pacific. These three 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 is a non-GAAP financial measure that 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 net sales and 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, 2019 and 2018 regarding the Company’s reportable segments is as follows:
|
|
Three months ended March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
Net sales: |
|
|
|
|
|
|
|
Americas |
|
$ |
881 |
|
$ |
908 |
|
Europe |
|
|
596 |
|
|
643 |
|
Asia Pacific |
|
|
151 |
|
|
173 |
|
Reportable segment totals |
|
|
1,628 |
|
|
1,724 |
|
Other |
|
|
10 |
|
|
12 |
|
Net sales |
|
$ |
1,638 |
|
$ |
1,736 |
|
|
|
Three months ended March 31, |
|
||||
|
|
2019 |
|
2018 |
|
||
Segment operating profit: |
|
|
|
|
|
|
|
Americas |
|
$ |
113 |
|
$ |
147 |
|
Europe |
|
|
79 |
|
|
72 |
|
Asia Pacific |
|
|
8 |
|
|
5 |
|
Reportable segment totals |
|
|
200 |
|
|
224 |
|
Items excluded from segment operating profit: |
|
|
|
|
|
|
|
Retained corporate costs and other |
|
|
(24) |
|
|
(27) |
|
Interest expense, net |
|
|
(65) |
|
|
(62) |
|
Earnings from continuing operations before income taxes |
|
$ |
111 |
|
$ |
135 |
|
6
Financial information regarding the Company’s total assets is as follows:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|||
|
|
2019 |
|
2018 |
|
2018 |
|
|||
Total assets: |
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
5,621 |
|
$ |
5,497 |
|
$ |
5,637 |
|
Europe |
|
|
3,273 |
|
|
3,036 |
|
|
3,387 |
|
Asia Pacific |
|
|
1,012 |
|
|
918 |
|
|
1,056 |
|
|
|
|
|
|
|
|
|
|
|
|
Reportable segment totals |
|
|
9,906 |
|
|
9,451 |
|
|
10,080 |
|
Other |
|
|
246 |
|
|
248 |
|
|
201 |
|
Consolidated totals |
|
$ |
10,152 |
|
$ |
9,699 |
|
$ |
10,281 |
|
2. Revenue
Revenue is recognized when obligations under the terms of the Company’s contracts and related purchase orders with its customers are satisfied. This occurs with the transfer of control of glass containers, which primarily takes place when products are shipped from the Company’s manufacturing or warehousing facilities to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimated provisions for rebates, discounts, returns and allowances. Sales, value added, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms are based on customary business practices and can vary by customer type. The term between invoicing and when payment is due is not significant. Also, the Company elected to account for shipping and handling costs as a fulfillment cost at the time of shipment.
For the three month periods ended March 31, 2019 and March 31, 2018, the Company had no material bad debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheet. For the three month periods ended March 31, 2019 and March 31, 2018, revenue recognized from prior periods (for example, due to changes in transaction price) was not material.
The following tables for the three months ended March 31, 2019 and 2018 disaggregates the Company’s revenue by customer end use:
|
|
Three months ended March 31, 2019 |
||||||||||
|
|
Americas |
|
Europe |
|
Asia Pacific |
|
Total |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoholic beverages (beer, wine, spirits) |
|
$ |
564 |
|
$ |
432 |
|
$ |
109 |
|
$ |
1,105 |
Food and other |
|
|
180 |
|
|
103 |
|
|
25 |
|
|
308 |
Non-alcoholic beverages |
|
|
137 |
|
|
61 |
|
|
17 |
|
|
215 |
Reportable segment totals |
|
$ |
881 |
|
$ |
596 |
|
$ |
151 |
|
$ |
1,628 |
Other |
|
|
|
|
|
|
|
|
|
|
|
10 |
Net sales |
|
|
|
|
|
|
|
|
|
|
$ |
1,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018 |
||||||||||
|
|
Americas |
|
Europe |
|
Asia Pacific |
|
Total |
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
Alcoholic beverages (beer, wine, spirits) |
|
$ |
576 |
|
$ |
471 |
|
$ |
127 |
|
$ |
1,174 |
Food and other |
|
|
189 |
|
|
112 |
|
|
24 |
|
|
325 |
Non-alcoholic beverages |
|
|
143 |
|
|
60 |
|
|
22 |
|
|
225 |
Reportable segment totals |
|
$ |
908 |
|
$ |
643 |
|
$ |
173 |
|
$ |
1,724 |
Other |
|
|
|
|
|
|
|
|
|
|
|
12 |
Net sales |
|
|
|
|
|
|
|
|
|
|
$ |
1,736 |
7
3. Inventories
Major classes of inventory at March 31, 2019, December 31, 2018 and March 31, 2018 are as follows:
|
|
March 31, |
|
December 31, |
|
March 31, |
|
|
|||
|
|
2019 |
|
2018 |
|
2018 |
|
|
|||
Finished goods |
|
$ |
868 |
|
$ |
849 |
|
$ |
901 |
|
|
Raw materials |
|
|
126 |
|
|
125 |
|
|
120 |
|
|
Operating supplies |
|
|
44 |
|
|
44 |
|
|
44 |
|
|
|
|
$ |
1,038 |
|
$ |
1,018 |
|
$ |
1,065 |
|
|
4. Derivative Instruments
The Company has certain derivative assets and liabilities, which consist of natural gas forwards, foreign exchange option and forward contracts, interest rate swaps and cross currency swaps. The valuation of these instruments is determined primarily using the income approach, including discounted cash flow analysis on the expected cash flows of each derivative. Natural gas forward rates, foreign exchange rates and interest rates are the significant inputs into the valuation models. The Company also evaluates counterparty risk in determining fair values. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. 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.
Commodity Forward Contracts Designated as Cash Flow Hedges
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.
An unrecognized gain of $3 million at March 31, 2019, an unrecognized gain of $1 million at December 31, 2018 and an unrecognized gain of $4 million at March 31, 2018 related to the commodity forward contracts were included in Accumulated OCI, and will be reclassified into earnings in the period when the commodity forward contracts expire.
Foreign Exchange Derivative Contracts Not Designated as Hedging Instruments
The Company uses 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 also uses 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.
Cash Flow Hedges of Foreign Exchange Risk
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 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 foreign exchange risk.
During the first quarter of 2019, one of the Company’s Euro-functional subsidiaries entered into a cross-currency swap that has a pay fixed notional amount of €184 million and a receive notional amount of $210 million. The swap reaches maturity in the fourth quarter of 2019. During 2018, two of the Company’s subsidiaries, a New Zealand dollar functional currency subsidiary and an Australian dollar functional currency subsidiary, entered into a series of cross-currency swaps to U.S. dollar instruments with a fixed notional amount of $109 million and $168 million, respectively. They reach final maturity in 2022. During 2017, one of the Company’s Euro-functional subsidiaries entered into a series
8
of cross-currency swaps that have a pay fixed notional amount of €263 million and a receive notional amount of $310 million. They reach final maturity in 2023.
An unrecognized loss of $11 million at March 31, 2019, an unrecognized loss of $9 million at December 31, 2018 and an unrecognized loss of $6 million at March 31, 2018, related to these cross-currency swaps, were included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.
Interest Rate Swaps Designated as Fair Value Hedges
The Company enters into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. The relevant terms of the swap agreements match the corresponding terms of the notes and therefore there is no hedge ineffectiveness. The Company recorded the net of the fair market values of the swaps as a long-term liability and short-term asset, along with a corresponding net decrease in the carrying value of the hedged debt.
Cash Flow Hedges of Interest Rate Risk
The Company enters into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments. These interest rate swap agreements were used to hedge the variable cash flows associated with variable-rate debt.
An unrecognized loss of less than $1 million at year ended March 31, 2019 and an unrecognized loss of less than $1 million at year ended December 31, 2018, related to these interest rate swaps, was included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.
Net Investment Hedges
The Company is exposed to fluctuations in foreign exchange rates on investments it holds in non-U.S. subsidiaries and uses cross currency swaps to partially hedge this exposure.
9
Balance Sheet Classification
The following table shows the amount and classification (as noted above) of the Company’s derivatives at March 31, 2019, December 31, 2018 and March 31, 2018:
|
|
Fair Value of |
|
Fair Value of |
||||||||||||||
|
|
Hedge Assets |
|
Hedge Liabilities |
||||||||||||||
|
|
March 31, |
|
December 31, |
|
March 31, |
|
March 31, |
|
December 31, |
|
March 31, |
||||||
|
|
2019 |
|
2018 |
|
2018 |
|
2019 |
|
2018 |
|
2018 |
||||||
Derivatives designated as hedging instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts (a) |
|
$ |
3 |
|
$ |
1 |
|
$ |
4 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
Interest rate swaps - fair value hedges (b) |
|
|
18 |
|
|
6 |
|
|
4 |
|
|
|
|
|
1 |
|
|
15 |
Cash flow hedges of foreign exchange risk (c) |
|
|
18 |
|
|
10 |
|
|
6 |
|
|
4 |
|
|
1 |
|
|
26 |
Interest rate swaps - cash flow hedges (d) |
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
Net investment hedges (e) |
|
|
6 |
|
|
6 |
|
|
4 |
|
|
4 |
|
|
8 |
|
|
1 |
Total derivatives accounted for as hedges |
|
$ |
45 |
|
$ |
23 |
|
$ |
18 |
|
$ |
9 |
|
$ |
10 |
|
$ |
42 |
Derivatives not designated as hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange derivative contracts (f) |
|
|
2 |
|
|
2 |
|
|
|
|
|
1 |
|
|
2 |
|
|
|
Total derivatives |
|
$ |
47 |
|
$ |
25 |
|
$ |
18 |
|
$ |
10 |
|
$ |
12 |
|
$ |
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
23 |
|
$ |
19 |
|
$ |
14 |
|
$ |
3 |
|
$ |
3 |
|
$ |
- |
Noncurrent |
|
|
24 |
|
|
6 |
|
|
4 |
|
|
7 |
|
|
9 |
|
|
42 |
Total derivatives |
|
$ |
47 |
|
$ |
25 |
|
$ |
18 |
|
$ |
10 |
|
$ |
12 |
|
$ |
42 |
______________________________________
(a) The notional amounts of the commodity forward contracts were $20 million, $21 million and $31 million at March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The maximum maturity dates were in 2020 for all three periods.
(b) The notional amounts of the interest rate swaps designated as fair value hedges were €725 million at March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The maximum maturity dates were in 2024 for all three periods.
(c) The notional amounts of the cash flow hedges of foreign exchange risk were $797 million, $587 million and $310 million at March 31, 2019, December 31, 2018 and March 31, 2018, respectively. The maximum maturity dates were in 2023 for all three periods.
(d) The notional amounts of the interest rate swaps designated as cash flow hedges were $180 million and maximum maturity dates were 2020 at March 31, 2019 and December 31, 2018.
(e) The notional amounts of the net investment hedges were €160 million and maximum maturity dates were 2020 at March 31, 2019 and December 31, 2018.
(f) The notional amounts of the foreign exchange derivative contracts were $625 million, $470 million and $350 million and maximum maturity dates were 2019, 2019, and 2018 at March 31, 2019, December 31, 2018 and March 31, 2018, respectively.
10
|
|
Gain (Loss) Recognized in OCI (Effective Portion) |
|
Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion) (1) |
||||||||||
|
|
March 31, |
|
March 31, |
|
|
March 31, |
|
March 31, |
|
||||
Derivatives designated as hedging instruments: |
|
2019 |
|
2018 |
|
|
2019 |
|
2018 |
|
||||
Cash Flow Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts (a) |
|
$ |
2 |
|
$ |
1 |
|
|
$ |
— |
|
$ |
— |
|
Cash flow hedges of foreign exchange risk (b) |
|
|
7 |
|
|
(13) |
|
|
|
(10) |
|
|
(8) |
|
Cash flow hedges of interest rate risk (c) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Hedges |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Investment Hedges |
|
|
5 |
|
|
|
|
|
|
(2) |
|
|
|
|
|
|
$ |
14 |
|
$ |
(12) |
|
|
$ |
(12) |
|
$ |
(8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Recognized in Other income (expense), net |
|
|
|
|
|
|
|
|||||
|
|
March 31, |
|
March 31, |
|
|
|
|
|
|
|
|
||
Derivatives not designated as hedges: |
|
2019 |
|
2018 |
|
|
|
|
|
|
|
|
||
Foreign exchange derivative contracts |
|
$ |
6 |
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Gains and losses reclassified from accumulated OCI and recognized in income are recorded to (a) cost of goods sold, (b) other expense, net or (c) interest expense, net. |
5. Restructuring Accruals
Selected information related to the restructuring accruals for the three months ended March 31, 2019 and 2018 is as follows:
|
|
Employee |
|
Other |
|
Total |
|||
|
|
Costs |
|
Exit Costs |
|
Restructuring |
|||
Balance at January 1, 2019 |
|
$ |
47 |
|
$ |
22 |
|
$ |
69 |
Net cash paid, principally severance and related benefits |
|
|
(13) |
|
|
(2) |
|
|
(15) |
Other, including foreign exchange translation |
|
|
|
|
|
(1) |
|
|
(1) |
Balance at March 31, 2019 |
|
$ |
34 |
|
$ |
19 |
|
$ |
53 |
|
|
Employee |
|
Other |
|
Total |
|||
|
|
Costs |
|
Exit Costs |
|
Restructuring |
|||
Balance at January 1, 2018 |
|
$ |
52 |
|
$ |
33 |
|
$ |
85 |
Net cash paid, principally severance and related benefits |
|
|
(5) |
|
|
(1) |
|
|
(6) |
Other, including foreign exchange translation |
|
|
1 |
|
|
— |
|
|
1 |
Balance at March 31, 2018 |
|
$ |
48 |
|
$ |
32 |
|
$ |
80 |
In the past several years, the Company implemented several discrete restructuring initiatives and recorded restructuring, asset impairment and other charges associated with those actions. These charges consisted of employee costs, write-down of assets and other exit costs primarily related to plant and furnace closures in the Americas region. These restructuring charges were discrete actions and are expected to approximate the total cumulative costs for those actions as no significant additional costs are expected to be incurred. For the three months ended March 31, 2019 and 2018, the Company has paid severance and related benefits that were associated with the past restructuring actions. The Company expects that the majority of the remaining cash expenditures related to the accrued employee costs will be paid out over the next several years.
11
6. Pension Benefit Plans
The components of the net periodic pension cost for the three months ended March 31, 2019 and 2018 are as follows:
|
|
U.S. |
|
Non-U.S. |
|
||||||||
|
|
2019 |
|
2018 |
|
2019 |
|
2018 |
|
||||
Service cost |
|
$ |
3 |
|
$ |
4 |
|
$ |
3 |
|
$ |
4 |
|
Interest cost |
|
|
15 |
|
|
15 |
|
|
8 |
|
|
8 |
|
Expected asset return |
|
|
(22) |
|
|
(25) |
|
|
(12) |
|
|
(13) |
|
Amortization of actuarial loss |
|
|
10 |
|
|
13 |
|
|
3 |
|
|
4 |
|
Net periodic pension cost |
|
$ |
6 |
|
$ |
7 |
|
$ |
2 |
|
$ |
3 |
|
7. Leases
In the first quarter of 2019, the Company adopted ASC 842, Leases, and selected the modified retrospective transition as of the effective date of January 1, 2019 (the effective date method). Under the effective date method, financial results reported in periods prior to 2019 are unchanged.
The Company determines if an arrangement is a lease at inception. A contract is or contains a lease if it conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Right-of-use assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term.
The Company uses an estimated incremental borrowing rate at the lease commencement date to determine the present value of lease payments. The Company’s incremental borrowing rate reflects a fully secured rate based on recent debt issuances, the credit rating of the Company, changes in currency, repayment timing of the lease, as well as publicly available data for instruments with similar characteristics when calculating incremental borrowing rates.
Certain lease agreements include terms with options to extend the lease, however none of these have been recognized in the Company’s right-of-use assets or lease liabilities since those options were not reasonably certain to be exercised. Leases with a term of 12 months or less are not recorded on the balance sheet and lease expense for these leases is recognized on a straight-line basis over the lease term. The Company’s lease agreements include lease payments that are largely fixed, do not contain material residual value guarantees or variable lease payments and no lease transactions with related parties. For the three months ended March 31, 2019, the Company’s lease costs associated with leases with terms less than 12 months or variable lease costs were immaterial. Certain leases include options to purchase the leased property. The depreciable life of assets and leasehold improvements are limited by the lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s leases do not contain restrictions or covenants that restrict the Company from incurring other financial obligations.
The Company leases warehouses, office buildings and equipment under both operating and finance lease arrangements. Information related to leases is as follows:
|
|
Three months ended |
|
|
|
|
March 31, |
|
|
|
|
2019 |
|
|
Lease cost |
|
|
|
|
Finance lease cost: |
|
|
|
|
Amortization of right-of-use assets (included in Cost of goods sold and Selling and administrative expense) |
|
$ |
2 |
|
Interest on lease liabilities (included in Interest expense, net) |
|
|
1 |
|
Operating lease cost (included in Cost of goods sold and Selling and administrative expense) |
|
|
20 |
|
Total lease cost |
|
$ |
23 |
|
|
|
|
|
|
Other information |
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
Operating cash flows from operating leases |
|
$ |
20 |
|
12
Operating cash flows from finance leases |
|
|
1 |
|
Financing cash flows from finance leases |
|
|
2 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities |
|