SEC Filing | Owens-Illinois

View:

Download DOC

Download PDF

Download XLS

Download XBRL

UNITED STATES

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

September 30, 2019

☐

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 September 30, 2019 was 155,630,507.

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, 2018.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

(Dollars in millions, except per share amounts)
(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Net sales	$	1,670	$	1,734	$	5,063	$	5,242
Cost of goods sold		(1,371)		(1,410)		(4,131)		(4,253)

Gross profit		299		324		932		989

Selling and administrative expense		(108)		(115)		(339)		(367)
Research, development and engineering expense		(16)		(17)		(50)		(50)
Interest expense, net		(83)		(63)		(215)		(199)
Equity earnings		17		19		55		57
Other income (expense), net (incl. goodwill impairment)		(645)		20		(709)		(49)

Earnings (loss) from continuing operations before income taxes		(536)		168		(326)		381
Provision for income taxes		(31)		(41)		(86)		(95)

Earnings (loss) from continuing operations		(567)		127		(412)		286
Loss from discontinued operations						(1)		(1)

Net earnings (loss)		(567)		127		(413)		285
Net earnings attributable to noncontrolling interests		(8)		(7)		(17)		(18)
Net earnings (loss) attributable to the Company	$	(575)	$	120	$	(430)	$	267

Amounts attributable to the Company:
Earnings (loss) from continuing operations	$	(575)	$	120	$	(429)	$	268
Loss from discontinued operations						(1)		(1)
Net earnings (loss)	$	(575)	$	120	$	(430)	$	267

Basic earnings per share:
Earnings (loss) from continuing operations	$	(3.69)	$	0.75	$	(2.77)	$	1.67
Loss from discontinued operations						(0.01)		(0.01)
Net earnings (loss)	$	(3.69)	$	0.75	$	(2.78)	$	1.66

Weighted average shares outstanding (thousands)		155,536		159,032		155,083		160,936

Diluted earnings per share:
Earnings (loss) from continuing operations	$	(3.69)	$	0.75	$	(2.77)	$	1.65
Loss from discontinued operations						(0.01)		(0.01)
Net earnings (loss)	$	(3.69)	$	0.75	$	(2.78)	$	1.64

Weighted average diluted shares outstanding (thousands)		155,536		161,035		155,083		162,977

See accompanying notes.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

(Unaudited)


	Three months ended				Nine months ended
	September 30,				September 30,
	2019		2018		2019		2018
Net earnings (loss)	$	(567)	$	127	$	(413)	$	285
Other comprehensive income (loss):
Foreign currency translation adjustments		(118)		32		(67)		(110)
Pension and other postretirement benefit adjustments, net of tax		27		15		49		51
Change in fair value of derivative instruments, net of tax		5		(1)		1		(7)
Other comprehensive income (loss)		(86)		46		(17)		(66)
Total comprehensive income (loss)		(653)		173		(430)		219
Comprehensive income (loss) attributable to noncontrolling interests		14		1		13
Comprehensive income (loss) attributable to the Company	$	(639)	$	174	$	(417)	$	219

See accompanying notes.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)


	September 30,		December 31,		September 30,
	2019		2018		2018
Assets
Current assets:
Cash and cash equivalents	$	273	$	512	$	440
Trade receivables, net of allowance of $31 million, $35 million, and $35 million at September 30, 2019, December 31, 2018 and September 30, 2018		968		549		992
Inventories		1,015		1,018		973
Prepaid expenses and other current assets		278		278		259
Total current assets		2,534		2,357		2,664

Property, plant and equipment, net		3,104		3,085		3,044
Goodwill		1,893		2,513		2,549
Intangibles, net		404		400		422
Other assets		1,613		1,344		1,261
Total assets	$	9,548	$	9,699	$	9,940

Liabilities and Share owners’ equity
Current liabilities:
Accounts payable	$	1,064	$	1,321	$	1,048
Short-term loans and long-term debt due within one year		376		160		152
Current portion of asbestos-related liabilities		125		160		100
Other liabilities		630		566		604
Other liabilities - discontinued operations						115
Total current liabilities		2,195		2,207		2,019

Long-term debt		5,512		5,181		5,487
Asbestos-related liabilities		342		442		442
Other long-term liabilities		1,063		969		925
Share owners' equity		436		900		1,067
Total liabilities and share owners' equity	$	9,548	$	9,699	$	9,940

See accompanying notes.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

(Unaudited)


	Nine months ended September 30,
	2019		2018
Cash flows from operating activities:
Net earnings (loss)	$	(413)	$	285
Loss from discontinued operations		1		1
Non-cash charges
Depreciation and amortization		380		384
Pension expense		24		25
Restructuring, asset impairment and related charges		56		70
Pension settlement charges		13
Goodwill impairment charge		595
Cash payments
Pension contributions		(29)		(26)
Asbestos-related payments		(135)		(40)
Cash paid for restructuring activities		(41)		(21)
Change in components of working capital		(661)		(545)
Other, net (a)		(36)		(34)
Cash provided by (utilized in) continuing operating activities		(246)		99
Cash utilized in discontinued operating activities		(1)		(1)
Total cash provided by (utilized in) operating activities		(247)		98
Cash flows from investing activities:
Cash payments for property, plant and equipment		(333)		(383)
Acquisitions, net of cash acquired		(157)
Contributions and advances to joint ventures		(22)		(48)
Net cash proceeds on disposal of assets		2		10
Other, net		5
Cash utilized in investing activities		(505)		(421)
Cash flows from financing activities:
Changes in borrowings, net		593		413
Issuance of common stock and other		(3)		1
Treasury shares repurchased		(38)		(107)
Payment of finance fees and note repurchase premiums		(31)		(13)
Distributions to noncontrolling interests		(7)		(9)
Dividends paid		(24)
Net cash proceeds for hedging activity		28
Cash provided by financing activities		518		285
Effect of exchange rate fluctuations on cash		(5)		(14)
Decrease in cash		(239)		(52)
Cash at beginning of period		512		492
Cash at end of period	$	273	$	440

(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 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 and nine months ended September 30, 2019 and 2018 regarding the Company’s reportable segments is as follows:


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Net sales:
Americas	$	918	$	939	$	2,733	$	2,777
Europe		588		613		1,834		1,930
Asia Pacific		152		165		455		491
Reportable segment totals		1,658		1,717		5,022		5,198
Other		12		17		41		44
Net sales	$	1,670	$	1,734	$	5,063	$	5,242


	Three months ended September 30,				Nine months ended September 30,
	2019		2018		2019		2018
Segment operating profit:
Americas	$	123	$	158	$	380	$	458
Europe		79		87		248		260
Asia Pacific		3		10		13		16
Reportable segment totals		205		255		641		734
Items excluded from segment operating profit:
Retained corporate costs and other		(20)		(24)		(71)		(81)
Charge for goodwill impairment		(595)				(595)
Restructuring, asset impairment, pension settlement and other charges		(43)				(86)		(73)
Interest expense, net		(83)		(63)		(215)		(199)
Earnings (loss) from continuing operations before income taxes	$	(536)	$	168	$	(326)	$	381

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


	September 30,		December 31,		September 30,
	2019		2018		2018
Total assets:
Americas	$	5,241	$	5,497	$	5,455
Europe		3,053		3,036		3,220
Asia Pacific		1,021		918		999

Reportable segment totals		9,315		9,451		9,674
Other		233		248		266
Consolidated totals	$	9,548	$	9,699	$	9,940

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 and nine month periods ended September 30, 2019 and September 30, 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 and nine month periods ended September 30, 2019 and September 30, 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 September 30, 2019 and 2018 disaggregates the Company’s revenue by customer end use:


	Three months ended September 30, 2019
	Americas		Europe		Asia Pacific		Total

Alcoholic beverages (beer, wine, spirits)	$	591	$	409	$	106	$	1,106
Food and other		192		119		26		337
Non-alcoholic beverages		135		60		20		215
Reportable segment totals	$	918	$	588	$	152	$	1,658
Other								12
Net sales							$	1,670


	Three months ended September 30, 2018
	Americas		Europe		Asia Pacific		Total

Alcoholic beverages (beer, wine, spirits)	$	582	$	419	$	121	$	1,122
Food and other		209		127		24		360
Non-alcoholic beverages		148		67		20		235
Reportable segment totals	$	939	$	613	$	165	$	1,717
Other								17
Net sales							$	1,734

The following tables for the nine months ended September 30, 2019 and 2018 disaggregates the Company’s revenue by customer end use:


	Nine months ended September 30, 2019
	Americas		Europe		Asia Pacific		Total

Alcoholic beverages (beer, wine, spirits)	$	1,744	$	1,315	$	320	$	3,379
Food and other		564		331		80		975
Non-alcoholic beverages		425		188		55		668
Reportable segment totals	$	2,733	$	1,834	$	455	$	5,022
Other								41
Net sales							$	5,063


	Nine months ended September 30, 2018
	Americas		Europe		Asia Pacific		Total

Alcoholic beverages (beer, wine, spirits)	$	1,743	$	1,383	$	361	$	3,487
Food and other		594		351		72		1,017
Non-alcoholic beverages		440		196		58		694
Reportable segment totals	$	2,777	$	1,930	$	491	$	5,198
Other								44
Net sales							$	5,242

3. Inventories

Major classes of inventory at September 30, 2019, December 31, 2018 and September 30, 2018 are as follows:


	September 30,		December 31,		September 30,
	2019		2018		2018
Finished goods	$	836	$	849	$	808
Raw materials		134		125		119
Operating supplies		45		44		46
	$	1,015	$	1,018	$	973

4. Goodwill

The changes in the carrying amount of goodwill as of September 30, 2018, December 31, 2018, and September 30, 2019 are as follows:



	Europe		Americas		Other		Total
Balance as of September 30, 2018	$	889	$	1,655	$	5	$	2,549
Translation effects		(15)		(21)				(36)
Balance as of December 31, 2018		874		1,634		5		2,513
Translation effects		(36)		(9)				(45)
Acquisition related adjustments				20				20
Impairment				(595)				(595)
Balance as of September 30, 2019	$	838	$	1,050	$	5	$	1,893

As part of its on-going assessment of goodwill, the Company determined that indicators of impairment had occurred during the the third quarter of 2019. The triggering events were management’s update to its long-range plan, which indicated lower projected future cash flows for its North American reporting unit (in the Americas segment) as

compared to the projections used in the most recent goodwill impairment test performed as of October 1, 2018, and a significant reduction in the Company’s share price. The Company’s business in North America has experienced declining shipments to its alcoholic beverage customers, primarily in the beer category, and this trend is likely to continue into the foreseeable future. These factors, combined with the narrow difference between the estimated fair value and carrying value of the North American reporting unit as of December 31, 2018, resulted in the Company performing an interim impairment analysis during the third quarter of 2019. As a result, the Company recorded a non-cash impairment charge of $595 million in the third quarter of 2019, which was equal to the excess of the North American reporting unit's carrying value over its fair value. Goodwill related to the Company’s other reporting units was determined to not be impaired as a result of the interim impairment analysis.

When performing its test for goodwill impairment, the Company compares the business enterprise value (“BEV”) of each reporting unit with its carrying value. The BEV is computed based on estimated future cash flows, discounted at the weighted average cost of capital of a hypothetical third-party buyer. If the BEV is less than the carrying value for any reporting unit, then any excess of the carrying value over the BEV is recorded as an impairment loss. The calculations of the BEV are based on significant internal and external inputs, such as projected future cash flows of the reporting units, discount rates, terminal business value, among other assumptions. The valuation approach utilized by management represents a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company’s use of unobservable inputs. The Company’s projected future cash flows incorporates management’s best estimates of the expected future results including, but not limited to, price trends, customer demand, material costs, asset replacement costs and any other known factors.

The remaining balances of goodwill remain susceptible to future impairment charges. If the Company’s projected future cash flows were substantially lower, or if the assumed weighted average cost of capital were substantially higher, the testing performed during the third quarter of 2019 may have indicated an impairment in one of the Company’s other reporting units or additional impairment of the North American reporting unit’s goodwill. Any impairment charges that the Company may take in the future could be material to its consolidated results of operations and financial condition.

The acquisition-related adjustment in 2019 relates to the Nueva Fanal acquisition that the Company completed on June 28, 2019. See Note 19 for additional details.

Goodwill for the Asia Pacific segment is $0 and net of accumulated impairment losses of $1,135 million as of September 30, 2018, December 31, 2018, and September 30, 2019.

5. 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 $1 million at September 30, 2019, an unrecognized gain of $1 million at December 31, 2018 and an unrecognized loss of $8 million at September 30, 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 second quarter of 2019, the Company terminated a portion of its cross-currency swaps, which resulted in a $15 million cash inflow recognized in the Cash flows from financing activities section of the Condensed Consolidated Cash Flows.

An unrecognized loss of $19 million at September 30, 2019, an unrecognized loss of $9 million at December 31, 2018 and an unrecognized loss of $9 million at September 30, 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.

During the second quarter of 2019, the Company terminated a portion of its interest rate swaps, which resulted in a $13 million cash inflow recognized in the Cash flows from financing activities section of the Condensed Consolidated Cash Flows.

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 $2 million at September 30, 2019, an unrecognized loss of less than $1 million at December 31, 2018 and an unrecognized gain of less than $1 million at September 30, 2018 related to these interest rate swaps, were included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.

Net Investment Hedges