oi_Current Folio_10Q

en 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, 2018

 

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, 2018 was 159,246,666.

 

 

 


 

 

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, 2017.

1


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

 

June 30,

 

June 30,

 

 

 

 

2018

    

2017

    

2018

    

2017

    

 

Net sales

 

$

1,772

 

$

1,751

 

$

3,508

 

$

3,366

 

 

Cost of goods sold

 

 

(1,426)

 

 

(1,405)

 

 

(2,843)

 

 

(2,705)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

346

 

 

346

 

 

665

 

 

661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling and administrative expense

 

 

(126)

 

 

(123)

 

 

(252)

 

 

(242)

 

 

Research, development and engineering expense

 

 

(17)

 

 

(16)

 

 

(33)

 

 

(31)

 

 

Interest expense, net

 

 

(74)

 

 

(62)

 

 

(136)

 

 

(141)

 

 

Equity earnings

 

 

21

 

 

18

 

 

38

 

 

33

 

 

Other expense, net

 

 

(72)

 

 

(11)

 

 

(69)

 

 

(56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations before income taxes

 

 

78

 

 

152

 

 

213

 

 

224

 

 

Provision for income taxes

 

 

(22)

 

 

(9)

 

 

(54)

 

 

(28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

 

56

 

 

143

 

 

159

 

 

196

 

 

Loss from discontinued operations

 

 

 

 

 

 

 

 

(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

 

56

 

 

143

 

 

158

 

 

196

 

 

Net earnings attributable to noncontrolling interests

 

 

(6)

 

 

(3)

 

 

(11)

 

 

(8)

 

 

Net earnings attributable to the Company

 

$

50

 

$

140

 

$

147

 

$

188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts attributable to the Company:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

50

 

$

140

 

$

148

 

$

188

 

 

Loss from discontinued operations

 

 

 

 

 

 

 

 

(1)

 

 

 

 

 

Net earnings

 

$

50

 

$

140

 

$

147

 

$

188

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.31

 

$

0.86

 

$

0.91

 

$

1.16

 

 

Loss from discontinued operations

 

 

 

 

 

 

 

 

(0.01)

 

 

 

 

 

Net earnings

 

$

0.31

 

$

0.86

 

$

0.90

 

$

1.16

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted averages shares outstanding (thousands)

 

 

160,858

 

 

162,716

 

 

161,904

 

 

162,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings from continuing operations

 

$

0.31

 

$

0.85

 

$

0.90

 

$

1.15

 

 

Loss from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

0.31

 

$

0.85

 

$

0.90

 

$

1.15

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average diluted shares outstanding (thousands)

 

 

162,712

 

 

164,482

 

 

163,964

 

 

164,162

 

 

 

See accompanying notes.

2


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

(Dollars in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended

 

Six months ended

 

 

 

 

June 30,

 

June 30,

 

 

 

    

2018

    

2017

    

2018

    

2017

    

 

Net earnings

 

$

56

 

$

143

 

$

158

 

$

196

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(268)

 

 

14

 

 

(141)

 

 

202

 

 

Pension and other postretirement benefit adjustments, net of tax

 

 

29

 

 

 4

 

 

36

 

 

15

 

 

Change in fair value of derivative instruments, net of tax

 

 

(1)

 

 

(4)

 

 

(6)

 

 

(10)

 

 

Other comprehensive income (loss)

 

 

(240)

 

 

14

 

 

(111)

 

 

207

 

 

Total comprehensive income (loss)

 

 

(184)

 

 

157

 

 

47

 

 

403

 

 

Comprehensive income (loss) attributable to noncontrolling interests

 

 

 9

 

 

 7

 

 

(2)

 

 

 

 

 

Comprehensive income (loss) attributable to the Company

 

$

(175)

 

$

164

 

$

45

 

$

403

 

 

 

See accompanying notes.

3


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

2018

 

2017

 

2017

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

365

 

$

492

 

$

335

Trade receivables, net of allowance of $35 million, $34 million, and $35 million at June 30, 2018, December 31, 2017 and June 30, 2017

 

 

1,026

 

 

663

 

 

956

Inventories

 

 

985

 

 

1,036

 

 

1,049

Prepaid expenses and other current assets

 

 

248

 

 

229

 

 

214

Total current assets

 

 

2,624

 

 

2,420

 

 

2,554

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

 

3,025

 

 

3,131

 

 

2,996

Goodwill

 

 

2,533

 

 

2,590

 

 

2,588

Intangibles, net

 

 

419

 

 

439

 

 

486

Other assets

 

 

1,217

 

 

1,176

 

 

1,156

Total assets

 

$

9,818

 

$

9,756

 

$

9,780

 

 

 

 

 

 

 

 

 

 

Liabilities and Share Owners' Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,088

 

$

1,324

 

$

1,065

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

 

 

291

 

 

162

 

 

271

Current portion of asbestos-related liabilities

 

 

100

 

 

100

 

 

115

Other liabilities

 

 

576

 

 

579

 

 

564

Other liabilities - discontinued operations

 

 

115

 

 

115

 

 

 

Total current liabilities

 

 

2,170

 

 

2,280

 

 

2,015

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

5,377

 

 

5,121

 

 

5,471

Asbestos-related liabilities

 

 

456

 

 

482

 

 

551

Other long-term liabilities

 

 

916

 

 

946

 

 

964

Share owners' equity

 

 

899

 

 

927

 

 

779

Total liabilities and share owners' equity

 

$

9,818

 

$

9,756

 

$

9,780

 

 

 

 

 

 

 

 

 

 

See accompanying notes.

4


 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended

June 30,

 

 

 

    

2018

    

2017

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

158

 

$

196

 

 

Loss from discontinued operations

 

 

 1

 

 

 —

 

 

Non-cash charges

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

254

 

 

245

 

 

Pension expense

 

 

17

 

 

15

 

 

Restructuring, asset impairment and related charges

 

 

70

 

 

48

 

 

Cash payments

 

 

 

 

 

 

 

 

Pension contributions

 

 

(18)

 

 

(20)

 

 

Asbestos-related payments

 

 

(26)

 

 

(26)

 

 

Cash paid for restructuring activities

 

 

(12)

 

 

(16)

 

 

Change in components of working capital

 

 

(586)

 

 

(585)

 

 

Other, net (a)

 

 

(8)

 

 

(13)

 

 

Cash utilized in continuing operating activities

 

 

(150)

 

 

(156)

 

 

Cash utilized in discontinued operating activities

 

 

(1)

 

 

 

 

 

Cash utilized in operating activities

 

 

(151)

 

 

(156)

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(273)

 

 

(186)

 

 

Acquisitions, net of cash acquired

 

 

(25)

 

 

(27)

 

 

Net cash proceeds on disposal of assets

 

 

 9

 

 

 6

 

 

Other, net

 

 

 2

 

 

 2

 

 

Cash utilized in investing activities

 

 

(287)

 

 

(205)

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Changes in borrowings, net

 

 

437

 

 

215

 

 

Treasury shares repurchased

 

 

(95)

 

 

 

 

 

Distributions to noncontrolling interests

 

 

(8)

 

 

(9)

 

 

Payment of finance fees

 

 

(12)

 

 

(21)

 

 

Cash provided by financing activities

 

 

322

 

 

185

 

 

Effect of exchange rate fluctuations on cash

 

 

(11)

 

 

19

 

 

Decrease in cash

 

 

(127)

 

 

(157)

 

 

Cash at beginning of period

 

 

492

 

 

492

 

 

Cash at end of period

 

$

365

 

$

335

 

 


(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.  As previously disclosed, to better leverage its scale and presence across a larger geography and market, the Company completed the consolidation of the former North America and Latin America segments into one segment, named the Americas, effective January 1, 2018.  The consolidation resulted in the leadership roles of the former North America and Latin America segments being combined into one position, President of the Americas, reporting to the Company’s chief operating decision maker (“CODM”), who is the Company’s Chief Executive Officer.  Beginning January 1, 2018, the CODM reviews the operating results at the Americas level to make resource allocation decisions and to assess performance. The consolidation also resulted in the elimination of duplicative costs as certain functions of the former North America and Latin America segments were combined to simplify the management of the new Americas segment.  For example, the Company consolidated its business shared service centers in North America and Latin America into one Americas shared service center. 

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 six months ended June 30, 2018 and 2017 regarding the Company’s reportable segments is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

Three months ended June 30,

 

Six months ended June 30,

 

 

 

2018

    

2017

    

2018

 

2017

 

Net sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

930

 

$

942

 

$

1,838

 

$

1,811

 

Europe

 

 

674

 

 

635

 

 

1,317

 

 

1,189

 

Asia Pacific

 

 

153

 

 

155

 

 

326

 

 

328

 

Reportable segment totals

 

 

1,757

 

 

1,732

 

 

3,481

 

 

3,328

 

Other

 

 

15

 

 

19

 

 

27

 

 

38

 

Net sales

 

$

1,772

 

$

1,751

 

$

3,508

 

$

3,366

 

 

6


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30,

 

Six months ended June 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

$

152

 

$

161

 

$

299

 

$

300

 

Europe

 

 

101

 

 

80

 

 

173

 

 

139

 

Asia Pacific

 

 

 2

 

 

11

 

 

 7

 

 

31

 

Reportable segment totals

 

 

255

 

 

252

 

 

479

 

 

470

 

Items excluded from segment operating profit:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained corporate costs and other

 

 

(30)

 

 

(28)

 

 

(57)

 

 

(56)

 

Restructuring, asset impairment and other

 

 

(73)

 

 

(10)

 

 

(73)

 

 

(49)

 

Interest expense, net

 

 

(74)

 

 

(62)

 

 

(136)

 

 

(141)

 

Earnings from continuing operations before income taxes

 

$

78

 

$

152

 

$

213

 

$

224

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

    

2018

 

2017

 

2017

 

Total assets:

 

 

 

 

 

 

 

 

 

 

Americas

 

$

5,402

 

$

5,411

 

$

5,511

 

Europe

 

 

3,232

 

 

3,133

 

 

3,074

 

Asia Pacific

 

 

981

 

 

1,001

 

 

987

 

 

 

 

 

 

 

 

 

 

 

 

Reportable segment totals

 

 

9,615

 

 

9,545

 

 

9,572

 

Other

 

 

203

 

 

211

 

 

208

 

Consolidated totals

 

$

9,818

 

$

9,756

 

$

9,780

 

 

2.  Revenue

On January 1, 2018, the Company adopted accounting standard ASC 606, Revenue from Contracts with Customers, and selected the modified retrospective transition method. The adoption of this new standard did not impact the Company’s consolidated results of operations or balance sheet and there was no cumulative effect of initially applying this new revenue standard to the opening balance of retained earnings.

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 six months ended June 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 six months ended June 30, 2018, revenue recognized from prior periods (for example, due to changes in transaction price) was not material.

7


 

The following table for three months ended June 30, 2018 disaggregates the Company’s revenue by customer end use:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended June 30, 2018

 

    

Americas

 

Europe

 

Asia Pacific

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Alcoholic beverages (beer, wine, spirits)

 

$

585

 

$

493

 

$

113

 

$

1,191

Food and other

 

 

197

 

 

112

 

 

23

 

 

332

Non-alcoholic beverages

 

 

148

 

 

69

 

 

17

 

 

234

Reportable segment totals

 

$

930

 

$

674

 

$

153

 

$

1,757

Other

 

 

 

 

 

 

 

 

 

 

 

15

Net sales

 

 

 

 

 

 

 

 

 

 

$

1,772

The following table for six months ended June 30, 2018 disaggregates the Company’s revenue by customer end use:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2018

 

    

Americas

 

Europe

 

Asia Pacific

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Alcoholic beverages (beer, wine, spirits)

 

$

1,161

 

$

964

 

$

240

 

$

2,365

Food and other

 

 

386

 

 

224

 

 

47

 

 

657

Non-alcoholic beverages

 

 

291

 

 

129

 

 

39

 

 

459

Reportable segment totals

 

$

1,838

 

$

1,317

 

$

326

 

$

3,481

Other

 

 

 

 

 

 

 

 

 

 

 

27

Net sales

 

 

 

 

 

 

 

 

 

 

$

3,508

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3.  Inventories

Major classes of inventory at June 30, 2018, December 31, 2017 and June 30, 2017 are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30,

 

December 31,

 

June 30,

 

 

 

    

2018

    

2017

    

2017

   

 

Finished goods

 

$

821

 

$

873

 

$

879

 

 

Raw materials

 

 

123

 

 

122

 

 

130

 

 

Operating supplies

 

 

41

 

 

41

 

 

40

 

 

 

 

$

985

 

$

1,036

 

$

1,049

 

 

 

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.

8


 

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 the Americas, some 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 that included the execution of commodity forward contracts for certain contracted natural gas requirements.  The Company had entered into commodity forward contracts covering approximately 8,000,000 MM BTUs at June 30, 2018, 8,800,000 MM BTUs at December 31, 2017 and 9,800,000 MM BTUs at June 30, 2017, respectively.

The Company accounts for the above forward contracts as cash flow hedges at June 30, 2018 and recognizes them on the Condensed Consolidated 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 gain of $7 million at June 30, 2018, an unrecognized gain of $3 million at December 31, 2017 and an unrecognized loss of $1 million at June 30, 2017 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, 2018 and 2017 was not material.

The effect of the commodity forward contracts on the results of operations for the three months ended June 30, 2018 and June 30, 2017 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)

 

2018

    

2017

    

2018

    

2017

 

$

 

 4

 

$

(2)

 

$

 —

 

$

 —

 

The effect of the commodity forward contracts on the results of operations for the six months ended June 30, 2018 and June 30, 2017 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)

 

2018

    

2017

    

2018

    

2017

 

$

 

 5

 

$

 4

 

$

(1)

 

$

 —

 

 

9


 

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, 2018 and 2017, the Company had outstanding foreign exchange and option agreements denominated in various currencies covering the equivalent of approximately $380 million and $340 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 and six months ended June 30, 2018 and June 30, 2017 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

 

2018

 

2017

 

Other expense, net

    

$

 —

    

$

 4

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Gain

 

Location of Gain

 

Recognized in Income on

 

Recognized in Income on

 

Foreign Exchange Contracts

 

Foreign Exchange Contracts

 

2018

 

2017

 

Other expense

    

$

 —

    

$

 6

 

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 OCI and is subsequently reclassified into earnings in the period for which the hedged forecasted transaction affects earnings. If there is an ineffective portion of the change in fair value of the derivative it is recognized directly in earnings.

During the fourth quarter of 2017, one of the Company’s Euro-functional subsidiaries entered into a series of cross-currency interest rate swaps to manage its exposure to fluctuations in the Euro-U.S. dollar exchange rate arising from a U.S. dollar denominated borrowing.  These swaps involve exchanging fixed rate Euro interest payments for fixed rate U.S. dollar interest receipts, both of which will occur at the forward exchange rates in effect upon entering into the instrument. An unrecognized loss of $8 million at June 30, 2018 and an unrecognized loss of less than $1 million at December 31, 2017, related to these cross-currency interest rate swaps, were included in Accumulated OCI, and will be reclassified into earnings within the next twelve months. These instruments, in the aggregate, have a pay fixed notional amount of €263 million and a receive notional amount of $310 million. They reach final maturity in 2023. There was no ineffectiveness related to these cross-currency interest rate swaps for the three and six months ended June 30, 2018.

10


 

During the second quarter of 2018, two of the Company’s subsidiaries, a New Zealand dollar (“NZD”) functional currency subsidiary and an Australian dollar (“AUD”) functional currency subsidiary, entered into a series of cross-currency interest rate swaps to manage its exposure to fluctuations in the NZD-U.S. dollar exchange rate and the AUD-U.S. dollar exchange rate arising from U.S. dollar denominated borrowings. These swaps involve exchanging floating rate U.S. dollar interest receipts for fixed rate NZD and AUD interest payments, both of which will occur at the forward exchange rates in effect upon entering into the instrument. An unrecognized loss of $3 million at June 30, 2018 related to these cross-currency interest rate swaps, was included in Accumulated OCI, and will be reclassified into earnings within the next twelve months. The NZD to U.S. dollar instruments, in the aggregate, have a pay fixed notional amount of NZD $161 million and a receive notional amount of $110 million. They reach final maturity in 2022. The AUD to U.S. dollar instruments, in the aggregate, have a pay fixed notional amount of AUD $231 million and a receive notional amount of $170 million. They reach final maturity in 2022. There was no ineffectiveness related to these cross-currency interest rate swaps for the three and six months ended June 30, 2018.

The effect of the cross-currency interest rate swaps on the results of operations for the three months ended June 30, 2018 is as follows:

 

 

 

 

 

 

 

 

Amount of gain (loss) Reclassified from

Amount of gain (loss) Recognized in OCI on

 

Accumulated OCI into Income

Hedges of Multiple Risks

 

(reported in Other expense, net)

(Effective Portion)

 

(Effective Portion)

$

 

14

 

$

18

The effect of the cross-currency interest rate swaps on the results of operations for the six months ended June 30, 2018 is as follows:

 

 

 

 

 

 

 

 

Amount of gain (loss) Reclassified from

Amount of gain (loss) Recognized in OCI on

 

Accumulated OCI into Income

Hedges of Multiple Risks

 

(reported in Other expense, net)

(Effective Portion)

 

(Effective Portion)

$

 

 1

 

$

10

Interest Rate Swaps Designated as Fair Value Hedges

During 2017, the Company entered into a series of interest rate swap agreements with a total notional amount of €725 million that reach final maturity in 2024. The swaps were executed in order to maintain a capital structure containing appropriate amounts of fixed and floating-rate debt.

The Company’s fixed-to-variable interest rate swaps were 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.

Under the swaps, the Company receives fixed rate interest amounts (equal to the interest on the corresponding hedged note) and pays interest at a six-month Euribor rate (set in arrears) plus a margin spread (see table below). The interest rate differential on each swap is recognized as an adjustment of interest expense during each six-month period over the term of the agreement.

The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. 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.  The Company has determined that the majority of the inputs used to value these derivatives fall within Level 2 of the fair value hierarchy.

11


 

The following selected information relates to fair value swaps at June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount Hedged

 

 

Receive Rate

 

 

Average Spread

 

Senior Notes due 2024

725

 

 

3.125

%

 

 

2.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

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, (c) other accrued liabilities or other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other accrued liabilities or other liabilities if the instrument has a negative fair value and maturity after one year.

The following table shows the amount and classification (as noted above) of the Company’s derivatives at June 30, 2018, December 31, 2017 and June 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair Value

 

 

 

 

Current Balance

 

June 30, <