ow_Current_Folio_10K

Table of Contents 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


FORM 10‑K

(Mark One)

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


Commission file number 33-13061

OWENS-ILLINOIS GROUP, INC.

(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

34-1559348
(IRS Employer
Identification No.)

One Michael Owens Way, Perrysburg, Ohio
(Address of principal executive offices)

43551
(Zip Code)

 

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☒ No ☐

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, 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 12b2 of the Act). Yes ☐ No ☒

The number of shares of common stock, $.01 par value of Owens-Illinois Group, Inc. outstanding as of January 31, 2019 was 100.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Owens-Illinois, Inc. Proxy Statement for The Annual Meeting of Share Owners To Be Held Thursday, May 16, 2019 (“Proxy Statement”) are incorporated by reference into Part III hereof.

 

 


 

Table of Contents 

TABLE OF CONTENTS

 

 

 

 

PART I 

 

1

ITEM 1. 

BUSINESS

    

1

ITEM 1A. 

RISK FACTORS

 

6

ITEM 1B. 

UNRESOLVED STAFF COMMENTS

 

15

ITEM 2. 

PROPERTIES

 

15

ITEM 3. 

LEGAL PROCEEDINGS

 

17

ITEM 4. 

MINE SAFETY DISCLOSURES

 

17

PART II 

 

18

ITEM 5. 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

18

ITEM 6. 

SELECTED FINANCIAL DATA

 

18

ITEM 7. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

20

ITEM 7A. 

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

 

38

ITEM 8. 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

42

ITEM 9. 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

90

ITEM 9A. 

CONTROLS AND PROCEDURES

 

90

ITEM 9B. 

OTHER INFORMATION

 

91

PART III 

 

92

ITEM 14. 

PRINCIPAL ACCOUNTING FEES AND SERVICES

 

92

PART IV 

 

93

ITEM 15. 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

93

ITEM 16.

FORM 10-K SUMMARY

 

98

 

 

 

 

EXHIBITS 

 

94

 

 

 

SIGNATURES 

 

 

 

 

 

 

 


 

Table of Contents 

PART I

ITEM 1. BUSINESS

General Development of Business

Owens‑Illinois Group, Inc., a Delaware corporation (the “Company”), through its subsidiaries, is the successor to a business established in 1903. The Company is the largest manufacturer of glass containers in the world with 77 glass manufacturing plants in 23 countries. It competes in the glass container segment of the rigid packaging market and is the leading glass container manufacturer in most of the countries where it has manufacturing facilities.

Company Strategy

The Company’s vision is to responsibly provide innovative and competitive packaging solutions for the world’s leading food and beverage companies. Its goal is to enable future success for its customers, employees and share owners. The Company will realize its vision and goal by achieving its strategic ambitions including:

·

To be the preferred supplier for glass packaging in the global food and beverage industry by significantly improving the customer experience; aligning its activity with customers’ value; improving quality and flexibility; and improving innovation and speed of commercialization; as well as increasing sales, marketing, end-to-end supply chain capabilities and talent;

·

To be the most cost effective producer in the global glass packaging segment by ensuring asset stability and total systems cost management; increasing efficiency, leveraging automation, and improving quality; cultivating game changing concepts that create new competitive advantages; and focusing on continuous improvement; and

·

To expand its business in attractive, growing markets and segments by leveraging innovation, growing with strategic customers; expanding into attractive new markets; and evaluating expansion into the value chain.

Reportable Segments

The Company has three reportable 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. 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. 

Products and Services

The Company produces glass containers for alcoholic beverages, including beer, flavored malt beverages, spirits and wine. The Company also produces glass packaging for a variety of food items, soft drinks, teas, juices and pharmaceuticals. The Company manufactures glass containers in a wide range of sizes, shapes and colors and is active in new product development and glass container innovation.

Customers

In most of the countries where the Company competes, it has the leading position in the glass container segment of the rigid packaging market based on sales revenue. The Company’s largest customers consist mainly of the leading global food and beverage manufacturers, including (in alphabetical order) Anheuser‑Busch InBev, Brown-Forman, Carlsberg, Coca-Cola, Constellation, Diageo, Heineken, MillerCoors, Nestle and Pernod Ricard. No customer represents more than 10% of the Company’s consolidated net sales.

1


 

Table of Contents 

The Company sells most of its glass container products directly to customers under annual or multi‑year supply agreements. Multi‑year contracts typically provide for price adjustments based on cost changes. The Company also sells some of its products through distributors. Many customers provide the Company with regular estimates of their product needs, which enables the Company to schedule glass container production to maintain reasonable levels of inventory. Glass container manufacturing facilities are generally located in close proximity to customers.

Markets and Competitive Conditions

The Company’s principal markets for glass container products are in the Americas, Europe and Asia Pacific.

Americas. The Company has 35 glass container manufacturing plants in the Americas region located in Argentina, Bolivia, Brazil, Canada, Colombia, Ecuador, Mexico, Peru, the U.S. and interests in three joint ventures that manufacture glass containers. Also, the Company has a distribution facility in the U.S. used to import glass containers from its business in Mexico. The Company has the leading share of the glass container segment of the U.S. rigid packaging market, based on sales revenue by domestic producers. In South America and Mexico, the Company maintains a diversified portfolio serving several markets, including alcoholic beverages (beer, wine and spirits), non-alcoholic beverages and food, as well as a large infrastructure for returnable/refillable glass containers. 

The principal glass container competitors in the U.S. are the Ardagh Group and Anchor Glass Container. Imports from China, Mexico, Taiwan and other countries also compete in U.S. glass container segments. Additionally, there are several major consumer packaged goods companies that self‑manufacture glass containers.  The Company competes directly with Verallia in Brazil and Argentina, and does not believe that it competes with any other large, multinational glass container manufacturers in the rest of the region.

Europe. The Company has a leading share of the glass container segment of the rigid packaging market in the European countries in which it operates, with 34 glass container manufacturing plants located in the Czech Republic, Estonia, France, Germany, Hungary, Italy, the Netherlands, Poland, Spain and the United Kingdom. These plants primarily produce glass containers for the alcoholic beverages (beer, wine and spirits), non-alcoholic beverages and food markets in these countries. The Company also has interests in two joint ventures that manufacture glass containers in Italy. Throughout Europe, the Company competes directly with a variety of glass container manufacturers including Verallia, Ardagh Group, Vetropack, Vidrala and BA Vidro.

Asia Pacific. The Company has eight glass container manufacturing plants in the Asia Pacific region, located in Australia, China, Indonesia and New Zealand. It also has interests in joint venture operations in China, Malaysia and Vietnam. In Asia Pacific, the Company primarily produces glass containers for the alcoholic beverages (primarily beer and wine), non-alcoholic beverages and food markets. The Company competes directly with Orora Limited in Australia, and does not believe that it competes with any other large, multinational glass container manufacturers in the rest of the region. In China, the glass container segments of the packaging market are regional and highly fragmented with a large number of local competitors.

In addition to competing with other large and well‑established manufacturers in the glass container segment, the Company competes in all regions with manufacturers of other forms of rigid packaging, principally aluminum cans and plastic containers. Competition is based on quality, price, service, innovation and the marketing attributes of the container. The principal competitors producing metal containers include Ball Corporation, Crown Holdings, Inc., and Silgan Holdings Inc. The principal competitors producing plastic containers include Amcor, Consolidated Container Holdings, LLC, Reynolds Group Holdings Limited, Plastipak Packaging, Inc. and Silgan Holdings Inc. The Company also competes with manufacturers of non‑rigid packaging alternatives, including flexible pouches, aseptic cartons and bag‑in‑box containers.

The Company seeks to provide products and services to customers ranging from large multinationals to small local breweries and wineries in a way that creates a competitive advantage for the Company. The Company believes that it is often the glass container partner of choice because of its innovation and branding capabilities, its global footprint and its expertise in manufacturing know‑how and process technology.

2


 

Table of Contents 

Manufacturing

The Company has 77 glass manufacturing plants. It constantly seeks to improve the productivity of these operations through the systematic upgrading of production capabilities, sharing of best practices among plants and effective training of employees.

The Company also provides engineering support for its glass manufacturing operations through facilities located in the U.S., Australia, France, Poland and Peru.

Suppliers and Raw Materials

The primary raw materials used in the Company’s glass container operations are sand, soda ash, limestone and recycled glass. Each of these materials, as well as the other raw materials used to manufacture glass containers, has historically been available in adequate supply from multiple sources. One of the sources is a soda ash mining operation in Wyoming in which the Company has a 25% interest.

Energy

The Company’s glass container operations require a continuous supply of significant amounts of energy, principally natural gas, fuel oil and electrical power. Adequate supplies of energy are generally available at all of the Company’s manufacturing locations. Energy costs typically account for 10-20% of the Company’s total manufacturing costs, depending on the cost of energy, the type of energy available, the factory location and the particular energy requirements. The percentage of total cost related to energy can vary significantly because of volatility in market prices, particularly for natural gas and fuel oil in volatile markets such as North America and Europe.

In the Americas’ businesses in the U.S. and Canada, more than 90% of the sales volume is represented by customer contracts that contain provisions that pass the commodity price of natural gas to the customer, effectively reducing the region’s exposure to changing natural gas market prices. In the Americas’ business in South America and Mexico, the Company primarily enters into fixed price contracts for its energy requirements in most of the countries in which it operates and the remaining energy requirements are subject to changing natural gas market prices and economic impacts. These fixed price contracts typically have terms of one to ten years, and generally include annual price adjustments for inflation and for certain contracts price adjustments for foreign currency variation.

In Europe and Asia Pacific, the Company enters into long term contracts for a significant amount of its energy requirements. These contracts have terms that range from one to five years.

Also, in order to limit the effects of fluctuations in market prices for natural gas, the Company uses commodity forward contracts related to its forecasted requirements. The objective of these forward contracts is to reduce potential volatility in cash flows and expense due to changing market prices. The Company continually evaluates the energy markets with respect to its forecasted energy requirements to optimize its use of commodity forward contracts.

Research, Development and Engineering

Research, development and engineering constitute important parts of the Company’s technical activities.  The Company primarily focuses on advancements in the areas of product innovation, manufacturing process control, melting technology, automatic inspection, light‑weighting and further automation of manufacturing activities. Recently, the Company has increased its focus on advancing melting technology with investments in modular glass melting furnaces.  The Company’s investments in this new technology seeks to reduce the amount of capital required to install, rebuild and operate its furnaces.  This new melting technology is also focused on the ability of these assets to be more easily turned on and off or adjusted based on seasonality and customer demands.  The Company’s research and development activities are conducted principally at its corporate facilities in Perrysburg, Ohio.

3


 

Table of Contents 

The Company holds a large number of patents related to a wide variety of products and processes and has a substantial number of patent applications pending. While the aggregate of the Company’s patents are of material importance to its businesses, the Company does not consider that any patent or group of patents relating to a particular product or process is of material importance when judged from the standpoint of any individual segment or its businesses as a whole.

The Company has agreements to license its proprietary glass container technology and to provide technical assistance to a limited number of companies around the world. These agreements cover areas related to manufacturing and engineering assistance. The worldwide licensee network provides a stream of revenue to help support the Company’s development activities. In 2018, 2017, and 2016, the Company earned $13 million, $11 million and $13 million, respectively, in royalties and net technical assistance revenue.

Sustainability and the Environment

The Company is committed to reducing the impact its products and operations have on the environment. As part of this commitment, the Company has set targets for increasing the use of recycled glass in its manufacturing process, while reducing energy consumption and carbon dioxide equivalent (“CO2”) emissions. Specific actions taken by the Company include working with governments and other organizations to establish and financially support recycling initiatives, partnering with other entities throughout the supply chain to improve the effectiveness of recycling efforts, reducing the weight of glass packaging and investing in research and development to reduce energy consumption in its manufacturing process. The Company invests in technology and training to improve safety, reduce energy use, decrease emissions and increase the amount of cullet, or recycled glass, used in the production process.

The Company’s worldwide operations, in addition to other companies within the industry, are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean‑up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety. The Company strives to abide by and uphold such laws and regulations.

Glass Recycling and Bottle Deposits

The Company is an important contributor to recycling efforts worldwide and is among the largest users of recycled glass containers. If sufficient high‑quality recycled glass were available on a consistent basis, the Company has the technology to make glass containers containing a high proportion of recycled glass. Using recycled glass in the manufacturing process reduces energy costs and impacts the operating life and efficiency of the glass melting furnaces.

In the U.S., Canada, Europe and elsewhere, government authorities have adopted or are considering legal requirements that would mandate certain recycling rates, the use of recycled materials, or limitations on or preferences for certain types of packaging. The Company believes that governments worldwide will continue to develop and enact legal requirements guiding customer and end‑consumer packaging choices.

Sales of beverage containers are affected by governmental regulation of packaging, including deposit laws and extended producer responsibility regulations. As of December 31, 2018, there were a number of U.S. states, Canadian provinces and territories, European countries and Australian states with some form of incentive for consumer returns of glass bottles in their law. The structure and enforcement of such laws and regulations can impact the sales of beverage containers in a given jurisdiction. Such laws and regulations also impact the availability of post‑consumer recycled glass for the Company to use in container production.

A number of states and provinces have recently considered or are now considering laws and regulations to encourage curbside, deposit and on premise glass recycling. Although there is no clear trend in the direction of these state and provincial laws and proposals, the Company believes that states and provinces, as well as municipalities within those jurisdictions, will continue to adopt recycling laws, which will impact supplies of recycled glass. As a large user of recycled glass for making new glass containers, the Company has an interest in laws and regulations impacting supplies of such material in its markets.

4


 

Table of Contents 

Air Emissions

In Europe, the European Union Emissions Trading Scheme (“EUETS”) is in effect to facilitate emissions reduction. The Company’s manufacturing facilities which operate in EU countries must restrict the volume of their CO2 emissions to the level of their individually allocated emissions allowances as set by country regulators. If the actual level of emissions for any facility exceeds its allocated allowance, additional allowances can be bought to cover deficits; conversely, if the actual level of emissions for any facility is less than its allocation, the excess allowances can be sold. Should the regulators significantly restrict the number of emissions allowances available, it could have a material effect on the Company’s results.

In the Americas, the U.S. and Canada have engaged in significant legislative and regulatory activities relating to greenhouse gas (“GHG”) emissions for years at the federal, state and provincial levels of government.  In the U.S., the Environmental Protection Agency (the “EPA”) regulates emissions of GHG air pollutants under the Clean Air Act, which grants the EPA authority to establish limits for certain air pollutants and to require compliance, levy penalties and bring civil judicial action against violators.  The EPA’s GHG regulations continue to evolve, as the structure and scope of the regulations are often the subject of litigation and federal legislative activity.  New GHG regulations could have a significant long‑term impact on the Company’s operations that are affected by such regulations.  The state of California in the U.S. the Canadian federal government and the province of Quebec  have adopted cap‑and‑trade legislation aimed at reducing GHG emissions.  In Brazil, the government passed a law in 2009 requiring companies to reduce the level of GHG emissions by the year 2020.  In other South American countries, national and local governments are also considering potential regulations to reduce GHG emissions.

In Asia Pacific, the National Greenhouse and Energy Reporting Act 2007 commenced on July 1, 2008 in Australia and established a mandatory reporting system for corporate GHG emissions and energy production and consumption. In July 2014, the Australian government introduced the Emissions Reduction Fund (“ERF”) which comprises an element to credit emissions reductions, a fund to purchase emissions reductions and a safeguard mechanism. The ERF purchases the lowest cost abatement (in the form of Australian carbon credit units) from a wide range of sources, providing an incentive to businesses, households and landowners to proactively reduce their emissions, while the safeguard mechanism (effective from July 1, 2016) ensures that emissions reductions paid for through the crediting and purchasing elements of the ERF are not offset by significant increases in emissions above business-as-usual levels elsewhere in the economy. An emissions trading scheme has been in effect in New Zealand since 2008.

The Company is unable to predict what environmental legal requirements may be adopted in the future. However, the Company continually monitors its operations in relation to environmental impacts and invests in environmentally friendly and emissions‑reducing projects. As such, the Company has made significant expenditures for environmental improvements at certain of its facilities over the last several years; however, these expenditures did not have a material adverse effect on the Company’s results of operations or cash flows. The Company is unable to predict the impact of future environmental legal requirements on its results of operations or cash flows.

Employees

The Company’s worldwide operations employed approximately 26,500 persons as of December 31, 2018. Approximately 68% of employees in the U.S. and Canada are hourly workers covered by collective bargaining agreements. The principal collective bargaining agreement, which at December 31, 2018, covered approximately 77% of the Company’s union‑affiliated employees in the U.S. and Canada, will expire on March 31, 2019. Approximately 71% of employees in South America and Mexico are covered by collective bargaining agreements. The majority of the hourly workers in Australia and New Zealand are also covered by collective bargaining agreements. The collective bargaining agreements in South America, Mexico, Australia and New Zealand have varying terms and expiration dates. In Europe, a large number of the Company’s employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. The Company considers its employee relations to be good and does not anticipate any material work stoppages in the near term.

5


 

Table of Contents 

ITEM 1A. RISK FACTORS

Substantial Leverage—The Company’s indebtedness could adversely affect the Company’s financial health.

The Company has a significant amount of debt. As of December 31, 2018 and December 31, 2017, the Company had approximately $5.3 billion of total debt outstanding.

The Company’s indebtedness could:

·

Increase vulnerability to general adverse economic and industry conditions;

·

Increase vulnerability to interest rate increases for the portion of the debt under the secured credit agreement;

·

Require the Company to dedicate a substantial portion of cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions, share repurchases, development efforts and other general corporate purposes;

·

Limit flexibility in planning for, or reacting to, changes in the Company’s business and the rigid packaging market;

·

Place the Company at a competitive disadvantage relative to its competitors that have less debt; and

·

Limit, along with the financial and other restrictive covenants in the documents governing indebtedness, among other things, the Company’s ability to borrow additional funds.

Ability to Service Debt—To service its indebtedness, the Company will require a significant amount of cash. The Company’s ability to generate cash and refinance certain indebtedness depends on many factors beyond its control.

The Company’s ability to make payments on, to refinance its indebtedness and to fund working capital, capital expenditures, acquisitions, development efforts and other general corporate purposes depends on its ability to generate cash in the future. The Company has no assurance that it will generate sufficient cash flow from operations, or that future borrowings will be available under the secured credit agreement, in an amount sufficient to enable the Company to pay its indebtedness, or to fund other liquidity needs. If short-term interest rates increase, the Company’s debt service cost will increase because some of its debt is subject to short-term variable interest rates. At December 31, 2018, the Company’s debt, including interest rate swaps, that is subject to variable interest rates represented approximately 33% of total debt.

Further, in July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee ("ARRC") has proposed that the Secured Overnight Financing Rate ("SOFR") is the rate that represents best practice as the alternative to USD-LIBOR for use in debt instruments, derivatives and other financial contracts that are currently indexed to USD-LIBOR. ARRC has proposed a paced market transition plan to SOFR from USD-LIBOR and organizations are currently working on industry wide and company specific transition plans as it relates to derivatives, debt and cash markets exposed to USD-LIBOR. Approximately 20% of the Company’s long-term indebtedness are indexed to USD-LIBOR and it is monitoring this activity and evaluating the related risks.  Although an alternative to LIBOR has been contemplated in the Company’s bank credit agreement, it is unclear as to the new method of calculating LIBOR that may evolve and this new method could adversely affect the Company’s interest rates on its indebtedness.

The Company may need to refinance all or a portion of its indebtedness on or before maturity. If the Company is unable to generate sufficient cash flow and is unable to refinance or extend outstanding borrowings on commercially reasonable terms or at all, it may have to take one or more of the following actions:

·

Reduce or delay capital expenditures planned for replacements, improvements and expansions;

·

Sell assets;

6


 

Table of Contents 

·

Restructure debt; and/or

·

Obtain additional debt or equity financing.

The Company can provide no assurance that it could affect or implement any of these alternatives on satisfactory terms, if at all.

Debt Restrictions—The Company may not be able to finance future needs or adapt its business plans to changes because of restrictions placed on it by the secured credit agreement and the indentures and instruments governing other indebtedness.

The secured credit agreement, the indentures governing the senior debentures and notes, and certain of the agreements governing other indebtedness contain affirmative and negative covenants that limit the ability of the Company to take certain actions. For example, these indentures restrict, among other things, the ability of the Company and its restricted subsidiaries to borrow money, pay dividends on, or redeem or repurchase its stock, make certain investments, create liens, enter into certain transactions with affiliates and sell certain assets or merge with or into other companies. These restrictions could adversely affect the Company’s ability to operate its businesses and may limit its ability to take advantage of potential business opportunities as they arise.

Failure to comply with these or other covenants and restrictions contained in the secured credit agreement, the indentures or agreements governing other indebtedness could result in a default under those agreements, and the debt under those agreements, together with accrued interest, could then be declared immediately due and payable. If a default occurs under the secured credit agreement, the Company could no longer request borrowings under the secured credit agreement, and the lenders could cause all of the outstanding debt obligations under such secured credit agreement to become due and payable, which would result in a default under a number of other outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. A default under the secured credit agreement, indentures or agreements governing other indebtedness could also lead to an acceleration of debt under other debt instruments that contain cross-acceleration or cross‑default provisions.

Cash Used to Satisfy Other Obligations – A portion of the Company’s cash flow will be used to make payments to OI Inc. to satisfy certain litigation-related obligations, including settlement of asbestos-related claims.

Although OI Inc. does not conduct any operations, it has substantial obligations to satisfy claims of persons for exposure to asbestos and related expenses and to pay other ordinary-course obligations. OI Inc. relies wholly on distributions from the Company to meet these obligations. OI Inc.’s asbestos-related payments were $105 million, $110 million, and $125 million for the years ended December 31, 2018, 2017 and 2016, respectively.

As a result of the magnitude of OI Inc.’s obligations for asbestos-related lawsuits and its dependence on the Company’s cash flows, the Company expects that a substantial portion of its cash flow will be used to make payments to OI Inc. to enable it to satisfy these obligations. These payments will reduce the cash flow available to the Company for other purposes. For additional information regarding OI Inc.’s asbestos-related lawsuits, claims and payments, see Note 13 to the Consolidated Financial Statements.

Foreign Currency Exchange Rates—The Company is subject to the effects of fluctuations in foreign currency exchange rates, which could adversely impact the Company’s financial results.

The Company’s reporting currency is the U.S. dollar. A significant portion of the Company’s net sales, costs, assets and liabilities are denominated in currencies other than the U.S. dollar, primarily the Euro, Brazilian real, Colombian peso, Mexican peso and Australian dollar. In its consolidated financial statements, the Company remeasures transactions denominated in a currency other than the functional currency of the reporting entity (e.g. soda ash purchases) and translates local currency financial results into U.S. dollars based on the exchange rates prevailing during the reporting period. During times of a strengthening U.S. dollar, the reported revenues and earnings of the Company’s international operations will be reduced because the local currencies will translate into fewer U.S. dollars. This could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.

7


 

Table of Contents 

International Operations—The Company is subject to risks associated with operating in foreign countries.

The Company operates manufacturing and other facilities throughout the world. Net sales from non‑U.S. operations totaled approximately $4.9 billion, representing approximately 71% of the Company’s net sales for the year ended December 31, 2018. As a result of its non‑U.S. operations, the Company is subject to risks associated with operating in foreign countries, including:

·

Political, social and economic instability;

·

War, civil disturbance or acts of terrorism;

·

Taking of property by nationalization or expropriation without fair compensation;

·

Changes in governmental policies and regulations;

·

Devaluations and fluctuations in currency exchange rates;

·

Fluctuations in currency exchange rates;

·

Imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries;

·

Imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;

·

Hyperinflation in certain foreign countries;

·

Impositions or increase of investment and other restrictions or requirements by foreign governments;

·

Loss or non‑renewal of treaties or other agreements with foreign tax authorities;

·

Changes in tax laws, or the interpretation thereof, including those affecting foreign tax credits or tax deductions relating to our non‑U.S. earnings or operations; and

·

Complying with the U.S. Foreign Corrupt Practices Act, which prohibits companies and their intermediaries from engaging in bribery or other prohibited payments to foreign officials for the purposes of obtaining or retaining business or gaining an unfair business advantage and requires companies to maintain accurate books and records and effective internal controls.

The risks associated with operating in foreign countries may have a material adverse effect on operations.

 

Brexit—The Company’s business may be impacted by the United Kingdom’s proposed exit from the European Union.

In 2016, the United Kingdom held a referendum in which voters approved an exit from the European Union, commonly referred to as "Brexit." As a result of the referendum, the United Kingdom parliament voted in March 2017 to commence the United Kingdom’s official withdrawal process from the European Union. Negotiations between the United Kingdom and the European Union remain ongoing and are complex, and there can be no assurance regarding the terms, timing or consummation of any resulting agreements. The United Kingdom is due to leave the European Union automatically on March 29, 2019, unless the negotiations are extended by unanimous consent of the European Council.

The initial Brexit vote in 2016 caused significant volatility in currency exchange rates and continued uncertainty regarding Brexit may result in future exchange rate volatility. Such volatility, and any adverse effect that Brexit has on the currency regimes to which the Company is subject, could adversely affect the Company’s sales volumes and costs. The Company has two manufacturing facilities in the United Kingdom. Further, the uncertainty surrounding the Brexit negotiations continues to create economic uncertainty, which may cause the Company’s customers to closely monitor their costs, terminate or reduce the scope of existing contracts, decrease or postpone currently planned contracts, or negotiate for more favorable deal terms, each of which may have a negative impact on the Company’s financial condition, results of operations and cash flows.  

8


 

Table of Contents 

Competition—The Company faces intense competition from other glass container producers, as well as from makers of alternative forms of packaging. Competitive pressures could adversely affect the Company’s financial health.

The Company is subject to significant competition from other glass container producers, as well as from makers of alternative forms of packaging, such as aluminum cans and plastic containers. The Company also competes with manufacturers of non‑rigid packaging alternatives, including flexible pouches and aseptic cartons, in serving the packaging needs of certain end‑use markets, including juice customers. The Company competes with each rigid packaging competitor on the basis of price, quality, service and the marketing and functional attributes of the container. Advantages or disadvantages in any of these competitive factors may be sufficient to cause the customer to consider changing suppliers and/or using an alternative form of packaging. The adverse effects of consumer purchasing decisions may be more significant in periods of economic downturn and may lead to longer-term reductions in consumer spending on glass-job act packaged products.

Pressures from competitors and producers of alternative forms of packaging have resulted in excess capacity in certain countries in the past and have led to capacity adjustments and significant pricing pressures in the rigid packaging market. These pressures could have a material adverse effect on the Company’s operations.

Lower Demand Levels—Changes in consumer preferences may have a material adverse effect on the Company’s financial results.

Changes in consumer preferences for the food and beverages they consume can reduce demand for the Company’s products. Because many of the Company’s products are used to package consumer goods, the Company’s sales and profitability could be negatively impacted by changes in consumer preferences for those products. Examples of changes in consumer preferences include, but are not limited to, lower sales of major domestic beer brands and shifts from beer to wine or spirits that results in the use of fewer glass containers. In periods of lower demand, the Company’s sales and production levels may decrease causing a material adverse effect on the Company’s profitability.

Energy Costs—Higher energy costs worldwide and interrupted power supplies may have a material adverse effect on operations.

Electrical power, natural gas, and fuel oil are vital to the Company’s operations as it relies on a continuous energy supply to conduct its business. Depending on the location and mix of energy sources, energy accounts for 10% to 20% of total production costs. Substantial increases and volatility in energy costs could cause the Company to experience a significant increase in operating costs, which may have a material adverse effect on operations.

Global Economic Environment—The global credit, financial and economic environment could have a material adverse effect on operations and financial condition.

The global credit, financial and economic environment could have a material adverse effect on operations, including the following:

·

Downturns in the business or financial condition of any of the Company’s customers or suppliers could result in a loss of revenues or a disruption in the supply of raw materials;

·

Tightening of credit in financial markets could reduce the Company’s ability, as well as the ability of the Company’s customers and suppliers, to obtain future financing;

·

Volatile market performance could affect the fair value of the Company’s pension assets and liabilities, potentially requiring the Company to make significant additional contributions to its pension plans to maintain prescribed funding levels;

·

The deterioration of any of the lending parties under the Company’s revolving credit facility or the creditworthiness of the counterparties to the Company’s derivative transactions could result in such parties’ failure to satisfy their obligations under their arrangements with the Company; and

9


 

Table of Contents 

·

A significant weakening of the Company’s financial position or results of operations could result in noncompliance with the covenants under the Company’s indebtedness.

Business Integration Risks—The Company may not be able to effectively integrate additional businesses it acquires in the future.

The Company may consider strategic transactions, including acquisitions that will complement, strengthen and enhance growth in its worldwide glass operations. The Company evaluates opportunities on a preliminary basis from time to time, but these transactions may not advance beyond the preliminary stages or be completed. Such acquisitions are subject to various risks and uncertainties, including:

·

The inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which may be located in diverse geographic regions) and achieve expected synergies;

·

The potential disruption of existing business and diversion of management’s attention from day‑to‑day operations;

·

The inability to maintain uniform standards, controls, procedures and policies;

·

The need or obligation to divest portions of the acquired companies;

·

The potential impairment of relationships with customers;

·

The potential failure to identify material problems and liabilities during due diligence review of acquisition targets;

·

The potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired businesses; and

·

The challenges associated with operating in new geographic regions.

In addition, the Company cannot make assurances that the integration and consolidation of newly acquired businesses will achieve any anticipated cost savings and operating synergies.

Customer Consolidation—The continuing consolidation of the Company’s customer base may intensify pricing pressures and have a material adverse effect on operations.

Many of the Company’s largest customers have acquired companies with similar or complementary product lines. This consolidation has increased the concentration of the Company’s business with its largest customers. In many cases, such consolidation has been accompanied by pressure from customers for lower prices, reflecting the increase in the total volume of products purchased or the elimination of a price differential between the acquiring customer and the company acquired. Increased pricing pressures from the Company’s customers may have a material adverse effect on operations.

Operational Disruptions—Profitability could be affected by unanticipated operational disruptions.

The Company’s glass container manufacturing process is asset intensive and includes the use of large furnaces and machines. The Company periodically experiences unanticipated disruptions to its assets and these events can have an adverse effect on its business operations and profitability. The impacts of these operational disruptions include, but are not limited to, higher maintenance, production changeover and shipping costs, higher capital spending, as well as lower absorption of fixed costs during periods of extended downtime. The Company maintains insurance policies in amounts and with coverage and deductibles that are reasonable and in line with industry standards; however, this insurance coverage may not be adequate to protect the Company from all liabilities and expenses that may arise.

10


 

Table of Contents 

Seasonality—Profitability could be affected by varied seasonal demands.

Due principally to the seasonal nature of the consumption of beer and other beverages, for which demand is stronger during the summer months, sales of the Company’s products have varied and are expected to vary by quarter. Shipments in the U.S. and Europe are typically greater in the second half of the year, while shipments in the Asia Pacific region are typically greater in the first and fourth quarters of the year, and shipments in South America are typically greater in the last three quarters of the year. Unseasonably cool weather during peak demand periods can reduce demand for certain beverages packaged in the Company’s containers.

Raw Materials—Profitability could be affected by the availability and cost of raw materials.

The raw materials that the Company uses have historically been available in adequate supply from multiple sources. For certain raw materials, however, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by transportation or production delays. These shortages, as well as material volatility in the cost of any of the principal raw materials that the Company uses, may have a material adverse effect on operations.

In addition, the Company purchases its soda ash raw materials in U.S. dollars in South America, Mexico and Asia Pacific. Given fluctuations in foreign currency exchange rates, this may cause these regions to experience inflationary or deflationary impacts to their raw material costs.

Environmental Risks—The Company is subject to various environmental legal requirements and may be subject to new legal requirements in the future. These requirements may have a material adverse effect on operations.

The Company’s operations and properties are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean‑up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety. Such legal requirements frequently change and vary among jurisdictions. The Company’s operations and properties must comply with these legal requirements. These requirements may have a material adverse effect on operations.

The Company has incurred, and expects to incur, costs for its operations to comply with environmental legal requirements, and these costs could increase in the future. Many environmental legal requirements provide for substantial fines, orders (including orders to cease operations), and criminal sanctions for violations. These legal requirements may apply to conditions at properties that the Company presently or formerly owned or operated, as well as at other properties for which the Company may be responsible, including those at which wastes attributable to the Company were disposed. A significant order or judgment against the Company, the loss of a significant permit or license or the imposition of a significant fine may have a material adverse effect on operations.

A number of governmental authorities have enacted, or are considering enacting, legal requirements that would mandate certain rates of recycling, the use of recycled materials and/or limitations on certain kinds of packaging materials. In addition, some companies with packaging needs have responded to such developments and/or perceived environmental concerns of consumers by using containers made in whole or in part of recycled materials. Such developments may reduce the demand for some of the Company’s products and/or increase the Company’s costs, which may have a material adverse effect on operations.

Governmental authorities have also enacted, or are considering enacting, legal requirements restricting the volume of GHG emissions that manufacturing facilities can produce with penalties for companies that do not comply. A reduction in the quantity of permitted GHG emissions under existing rules, or the introduction of new GHG emissions rules, in jurisdictions where the Company operates, could have a material effect on the its results. The Company is not able to predict what environmental legal requirements may be adopted in the future nor the impact such future environmental legal requirements may have on its results of operations or cash flows.

11


 

Table of Contents 

Taxes—Potential tax law and U.S. trade policy changes could adversely affect net income and cash flow.

The Company is subject to income tax in the numerous jurisdictions in which it operates. Increases in income tax rates or other tax law changes, as well as ongoing audits by domestic and international authorities, could reduce the Company’s net income and cash flow from affected jurisdictions. In particular, additional guidance is likely to be issued providing further clarification on the application of the U.S. Tax Cuts and Jobs Act, which was signed into law on December 22, 2017, and proposed regulations that have subsequently been issued with respect to the provisions enacted pursuant to such law. Further, it is reasonable to expect that global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the U.S. legislation. This additional guidance, along with the potential for additional global tax legislation changes, could have a material adverse impact on net income and cash flow by impacting significant deductions or income inclusions. In addition, the Company’s products are subject to import and excise duties and/or sales or value‑added taxes in many jurisdictions in which it operates. Increases in these indirect taxes could affect the affordability of the Company’s products and, therefore, reduce demand.

 

In addition, existing free trade laws and regulations, such as the North American Free Trade Agreement, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other requirements. Changes in laws or policies governing the terms of foreign trade, and in particular increased trade restrictions, tariffs or taxes on imports from countries where the Company manufactures products, such as Mexico, could have a material adverse effect on its business and financial results. Also, a government’s adoption of “buy national” policies or retaliation by another government against such policies may affect the prices of and demand for the Company’s products and could have a negative impact on the Company’s results of operations.

 

Many international legislative and regulatory bodies have proposed legislation and begun investigations of the tax practices of multinational companies and, in the European Union (EU), the tax policies of certain EU member states. One of these efforts has been led by the OECD, an international association of 36 countries including the United States, which has finalized recommendations to revise corporate tax, transfer pricing, and tax treaty provisions in member countries. Since 2013, the European Commission (EC) has been investigating tax rulings granted by tax authorities in a number of EU member states with respect to specific multinational corporations to determine whether such rulings comply with EU rules on state aid, as well as more recent investigations of the tax regimes of certain EU member states. If the EC determines that a tax ruling or tax regime violates the state aid restrictions, the tax authorities of the affected EU member state may be required to collect back taxes for the period of time covered by the ruling. Due to the large scale of the Company’s U.S. and international business activities, many of these proposed changes to the taxation of the Company’s activities, if enacted, could increase the Company’s worldwide effective tax rate and harm results of operations.

Labor Relations—Some of the Company’s employees are unionized or represented by workers’ councils.

The Company is party to a number of collective bargaining agreements with labor unions which at December 31, 2018, covered approximately 68% of the Company’s employees in the U.S. and Canada. The principal collective bargaining agreement, which at December 31, 2018 covered approximately 77% of the Company’s union‑affiliated employees in U.S. and Canada, will expire on March 31, 2019. Approximately 71% of employees in South America and Mexico are covered by collective bargaining agreements. The majority of the hourly workers in Australia and New Zealand are also covered by collective bargaining agreements. The collective bargaining agreements in South America, Mexico, Australia and New Zealand have varying terms and expiration dates. Upon the expiration of any collective bargaining agreement, if the Company is unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. In Europe, a large number of the Company’s employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of the Company’s employees in Europe are represented by workers’ councils that must approve any changes in conditions of employment, including salaries and benefits and staff changes, and may impede

12


 

Table of Contents 

efforts to restructure the Company’s workforce. In addition, if the Company’s employees were to engage in a strike or other work stoppage, the Company could experience a significant disruption of operations and/or higher ongoing labor costs, which may have a material adverse effect on operations.

Key Management and Personnel Retention—Failure to retain key management and personnel could have a material adverse effect on operations.

The Company believes that its future success depends, in part, on its experienced management team and certain key personnel. The loss of certain key management and personnel could limit the Company’s ability to implement its business plans and meet its objectives.

Joint Ventures—Failure by joint venture partners to observe their obligations could have a material adverse effect on operations.

A portion of the Company’s operations is conducted through joint ventures, including joint ventures in the Americas, Europe, and Asia Pacific segments and in retained corporate costs and other. If the Company’s joint venture partners do not observe their obligations or are unable to commit additional capital to the joint ventures, it is possible that the affected joint venture would not be able to operate in accordance with its business plans, which could have a material adverse effect on the Company’s financial condition and results of operations.

 

Information Technology—Failure or disruption of the Company’s information technology, or those of third parties, could have a material adverse effect on its business and the results of operations.

The Company employs information technology (“IT”) systems and networks to support the business and relies on them to operate its plants, to communicate with its employees, customers and suppliers, to store sensitive business information and intellectual property, and to report financial and operating results. As with any IT system, the Company’s IT system, or any third party’s system on which the Company relies, could fail on its own accord or may be vulnerable to a variety of interruptions due to events, including, but not limited to, natural disasters, terrorist attacks, power outages, fire, sabotage, equipment failures, cybersecurity vulnerabilities, and cyber-related attacks or computer crimes, any of which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. 

 

Cybersecurity and Data Privacy - Security breaches could disrupt the Company’s business operations, result in the loss of critical and confidential information, and have a material adverse effect on its business, reputation and results of operations.

The Company has been subject to cyberattacks in the past, including phishing and malware incidents, and although no such attack has had a material adverse effect on its business, this may not be the case with future attacks. As the prevalence of cyberattacks continues to increase, the Company’s IT systems, or those of third parties, may be subject to increased security threats and the Company may incur additional costs to upgrade and maintain its security measures in place to prevent and detect such threats. The Company’s security measures may be unable to prevent certain security breaches, and any such breaches could result in transactional errors, business disruptions, loss of or damage to intellectual property, loss of customers and business opportunities, unauthorized access to or disclosure of confidential or personal information (which could cause a breach of applicable data protection legislation), regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensatory costs, and additional compliance costs, any of which could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. Any resulting costs or losses may not be covered by, or may exceed the coverage limits of, the Company’s cyber insurance. 

13


 

Table of Contents 

The Company is increasingly reliant on third parties to provide software, support and management with respect to its IT systems. The security and privacy measures the Company’s vendors implement may not be sufficient to prevent and detect cyberattacks that could have a material adverse effect on the Company’s financial condition, results of operations and cash flows.  While the Company’s IT vendor agreements typically contain provisions that seek to eliminate or limit the Company’s exposure to liability for damages from a cyberattack, the Company cannot assure that such provisions will withstand legal challenges or cover all or any such damages.  If the Company’s business continuity and/or disaster recovery plans do not effectively and timely resolve issues resulting from a cyberattack, the Company may suffer material adverse effects on its financial condition, results of operations and cash flows.

In addition, new global privacy rules are being enacted and existing ones are being updated and strengthened. In May 2018, the European Union (EU) implemented the General Data Protection Regulation (GDPR) that stipulates data protection and privacy regulations for all individuals within the EU and the European Economic Area (EEA).  The Company has significant operations in the EEA and is subject to the GDPR. The GDPR imposes several stringent requirements for controllers and processors of personal data and could make it more difficult and/or more costly for the Company to use and share personal data.  Although the Company takes reasonable efforts to comply with all applicable laws and regulations, there can be no assurance that the Company will not be subject to regulatory action, including fines, in the event of an incident. To comply with the new data protection rules imposed by GDPR and other applicable data protection legislation, the Company may be required to put in place additional mechanisms which could adversely affect its financial condition, results of operations and cash flows.

Accounting Estimates—The Company’s financial results are based upon estimates and assumptions that may differ from actual results.

In preparing the Company’s consolidated financial statements in accordance with U.S. generally accepted accounting principles, several estimates and assumptions are made that affect the accounting for and recognition of assets, liabilities, revenues and expenses. These estimates and assumptions must be made due to certain information used in the preparation of the Company’s financial statements which is dependent on future events, cannot be calculated with a high degree of precision from data available or is not capable of being readily calculated based on generally accepted methodologies. The Company believes that accounting for long‑lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements. Actual results for all estimates could differ materially from the estimates and assumptions that the Company uses, which could have a material adverse effect on the Company’s financial condition and results of operations.

Accounting Standards—The adoption of new accounting standards or interpretations could adversely impact the Company’s financial results.

New accounting standards or pronouncements could adversely affect the Company’s operating results or cause unanticipated fluctuations in its results in future periods. The accounting rules and regulations that the Company must comply with are complex and continually changing. In addition, many companies’ accounting policies are being subjected to heightened scrutiny by regulators and the public. The Company cannot predict the impact of future changes to accounting principles or its accounting policies on its financial statements going forward. In February 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-02, “Leases”, which requires all operating leases with lease terms longer than twelve months be recorded as lease assets and lease liabilities on the Company’s consolidated balance sheets. Implementing changes required by this new standard will require a significant expenditure of time, attention and resources, including significant upgrades to and investments in the Company’s lease administration systems and other accounting systems, and will materially impact the Company’s financial statements as the Company has a significant number of leases.

14


 

Table of Contents 

Goodwill—A significant write down of goodwill would have a material adverse effect on the Company’s reported results of operations and net worth.

Goodwill at December 31, 2018 totaled $2.5 billion. The Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment using the required business valuation methods. These methods include the use of a weighted average cost of capital to calculate the present value of the expected future cash flows of the Company’s reporting units. Future changes in the cost of capital, expected cash flows, or other factors may cause the Company’s goodwill to be impaired, resulting in a non‑cash charge against results of operations to write down goodwill for the amount of the impairment. If a significant write down is required, the charge would have a material adverse effect on the Company’s reported results of operations and net worth.

Pension Funding—An increase in the underfunded status of the Company’s pension plans could adversely impact the Company’s operations, financial condition and liquidity.

The Company contributed $34 million, $31 million and $38 million to its defined benefit pension plans in 2018, 2017, and 2016, respectively. The amount the Company is required to contribute to these plans is determined by the laws and regulations governing each plan, and is generally related to the funded status of the plans. A deterioration in the value of the plans’ investments or a decrease in the discount rate used to calculate plan liabilities generally would increase the underfunded status of the plans. An increase in the underfunded status of the plans could result in an increase in the Company’s obligation to make contributions to the plans, thereby reducing the cash available for working capital and other corporate uses, and may have an adverse impact on the Company’s operations, financial condition and liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The principal manufacturing facilities and other material important physical properties of the Company at December 31, 2018 are listed below. All properties are glass container plants and are owned in fee, except where otherwise noted.

 

 

 

 

 

 

Americas Operations

    

      

Argentina

 

 

Rosario

 

 

Bolivia

 

 

Cochabamba

 

 

 

 

 

Brazil

 

 

Recife

 

Sao Paulo

Rio de Janeiro

 

 

 

 

 

Canada

 

 

Brampton, Ontario

 

Montreal, Quebec

 

 

 

Colombia

 

 

Buga (tableware)

 

Soacha

Envigado

 

Zipaquira

 

 

 

Ecuador

 

 

Guayaquil

 

 

 

 

 

15


 

Table of Contents 

Mexico

 

 

Guadalajara

 

Queretaro

Los Reyes

 

Toluca

Monterrey

 

 

 

 

 

Peru

 

 

Callao

 

Lurin(1)

 

 

 

United States

 

 

Auburn, NY

 

Portland, OR

Brockway, PA

 

Streator, IL

Crenshaw, PA

 

Toano, VA

Danville, VA

 

Tracy, CA

Kalama, WA(1)

 

Waco, TX

Lapel, IN

 

Windsor, CO

Los Angeles, CA

 

Winston‑Salem, NC

Muskogee, OK

 

Zanesville, OH

 

 

 

Asia Pacific Operations

 

 

Australia

 

 

Adelaide

 

Melbourne

Brisbane

 

Sydney

 

 

 

China

 

 

Tianjin

 

Zhaoqing

 

 

 

Indonesia

 

 

Jakarta

 

 

 

 

 

New Zealand

 

 

Auckland

 

 

 

 

 

European Operations

 

 

Czech Republic

 

 

Dubi

 

Nove Sedlo

 

 

 

Estonia

 

 

Jarvakandi

 

 

 

 

 

France

 

 

Beziers

 

Vayres

Gironcourt

 

Veauche

Labegude

 

Vergeze

Puy‑Guillaume

 

Wingles

Reims

 

 

 

 

 

Germany

 

 

Bernsdorf

 

Rinteln

Holzminden

 

 

 

 

 

16


 

Table of Contents 

Hungary

 

 

Oroshaza

 

 

 

 

 

Italy

 

 

Aprilia

 

Origgio

Asti

 

Ottaviano

Bari

 

San Gemini

Marsala

 

San Polo

Mezzocorona

 

Villotta

 

 

 

The Netherlands

 

 

Leerdam

 

Maastricht

 

 

 

Poland

 

 

Jaroslaw

 

Poznan

 

 

 

Spain

 

 

Barcelona(1)

 

Sevilla

 

 

 

United Kingdom

 

 

Alloa

 

Harlow

 

 

 

Other Operations

 

 

Engineering Support Centers

 

 

Brockway, Pennsylvania

 

Melbourne, Australia(1)

Jaroslaw, Poland

 

Perrysburg, Ohio

Lurin, Peru

 

Villeurbanne, France

 

 

 

Shared Service Centers

 

 

Medellin, Colombia

 

Poznan, Poland(1)

Perrysburg, Ohio

 

 

 

 

 

Distribution Center

 

 

Laredo, TX(1)

 

 

 

 

 

Corporate Facilities

 

 

Melbourne, Australia(1)

 

Perrysburg, Ohio(1)

Miami, Florida(1)

 

Vufflens‑la‑Ville, Switzerland(1)


(1)

This facility is leased in whole or in part.

The Company believes that its facilities are well maintained and currently adequate for its planned production requirements over the next three to five years.

ITEM 3. LEGAL PROCEEDINGS

For information on legal proceedings, see Note 13 to the Consolidated Financial Statements.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

 

17


 

Table of Contents 

PART II

 

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

All of the outstanding common stock of the Company (its only class of equity securities) is owned by its parent company, Owens-Illinois, Inc. The common stock is not traded on any stock exchange. All of the Company’s issued and outstanding equity securities are owned by a single holder, and there is not an established public trading market for its common stock. The Company has never paid a cash dividend on its common stock. The Company presently intends to retain future earnings, if any, for use in the operation of the business and does not anticipate paying any cash dividends in the foreseeable future.

 

ITEM 6. SELECTED FINANCIAL DATA

The selected consolidated financial data presented below relates to each of the five years in the period ended December 31, 2018, which was derived from the audited consolidated financial statements of the Company.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

 

(Dollars in millions)

 

Consolidated operating results (a):

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net sales

 

$

6,877

 

$

6,869

 

$

6,702

 

$

6,156

 

$

6,784

 

Cost of goods sold (b)

 

 

(5,594)

 

 

(5,536)

 

 

(5,392)

 

 

(5,046)

 

 

(5,481)

 

Gross profit

 

 

1,283

 

 

1,333

 

 

1,310

 

 

1,110

 

 

1,253

 

Selling and administrative, research, development and engineering (b)

 

 

(553)

 

 

(544)

 

 

(568)

 

 

(540)

 

 

(586)

 

Other expense, net (b)

 

 

(67)

 

 

(246)

 

 

(114)

 

 

(35)

 

 

(134)

 

Earnings before interest expense and items below

 

 

663

 

 

543

 

 

628

 

 

535

 

 

583

 

Interest expense, net

 

 

(261)

 

 

(268)

 

 

(272)

 

 

(251)

 

 

(230)

 

Earnings from continuing operations before income taxes

 

 

402

 

 

275

 

 

356

 

 

284

 

 

353

 

Provision for income taxes

 

 

(108)

 

 

(70)

 

 

(119)

 

 

(106)

 

 

(92)

 

Earnings from continuing operations

 

 

294

 

 

205

 

 

237

 

 

178

 

 

261

 

Gain (loss) from discontinued operations

 

 

113

 

 

(3)

 

 

(7)

 

 

(4)

 

 

(23)

 

Net earnings

 

 

407

 

 

202

 

 

230

 

 

174

 

 

238

 

Net (earnings) attributable to noncontrolling interests

 

 

(25)

 

 

(22)

 

 

(21)

 

 

(23)

 

 

(28)

 

Net earnings attributable to the Company

 

$

382

 

$

180

 

$

209

 

$

151

 

$

210

 

 

18


 

Table of Contents 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

 

(Dollars in millions)

 

Other data:

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following are included in earnings from continuing operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

$

388

 

$

387

 

$

375

 

$

323

 

$

335

 

Amortization of intangibles

 

 

106

 

 

101

 

 

103

 

 

86

 

 

83

 

Amortization of deferred finance fees (included in interest expense)

 

 

13

 

 

13

 

 

13

 

 

15

 

 

30

 

Balance sheet data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working capital (current assets less current liabilities)

 

$

310

 

$

240

 

$

309

 

$

342

 

$

186

 

Total assets

 

 

9,699

 

 

9,756

 

 

9,135

 

 

9,421

 

 

7,843

 

Total debt

 

 

5,341

 

 

5,283

 

 

5,328

 

 

5,573

 

 

3,445

 

Total share owner's equity

 

$

1,502

 

$

1,509

 

$

1,055

 

$

1,096

 

$

1,710

 


(a)

Note that the items below relate to items management considers not representative of ongoing operations.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Years ended December 31,

 

 

 

2018

 

2017

 

2016

 

2015

 

2014

 

 

 

(Dollars in millions)

 

Cost of goods sold (b)

    

 

    

    

 

    

    

 

    

    

 

    

    

 

    

 

Acquisition-related fair value inventory adjustments

 

$

 —

 

$

 —

 

$

 —

 

$

22

 

$

 —

 

Restructuring, asset impairment and related charges

 

 

 5

 

 

 

 

 

 

 

 

 

 

 

 8

 

Other expense, net (b)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restructuring, asset impairment and other charges

 

 

97

 

 

77

 

 

129

 

 

75

 

 

78

 

Pension settlement charges

 

 

74

 

 

218

 

 

98

 

 

 

 

 

65

 

Gain on China land sale

 

 

 

 

 

 

 

 

(71)

 

 

 

 

 

 

 

Strategic transaction costs

 

 

 

 

 

 

 

 

 

 

 

23

 

 

 

 

Non-income tax charge

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69

 

Acquisition-related fair value intangible adjustments

 

 

 

 

 

 

 

 

 

 

 

10

 

 

 

 

Equity earnings related charges

 

 

 

 

 

 

 

 

 

 

 

 5

 

 

 5

 

Interest expense, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note repurchase premiums and additional interest charges for the write-off of unamortized deferred financing fees related to the early extinguishment of debt

 

 

11

 

 

18

 

 

 9

 

 

42

 

 

20

 

Provision for income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net tax (benefit) expense for income tax on items above

 

 

(14)

 

 

(27)

 

 

 1

 

 

(15)

 

 

(34)

 

Tax expense (benefit) recorded for certain tax adjustments

 

 

 

 

 

(29)

 

 

(8)

 

 

 8

 

 

(8)

 

Net earnings attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net impact of noncontrolling interests on items above

 

 

(1)

 

 

(3)

 

 

 2

 

 

 

 

 

 

 

 

 

$

172

 

$

254

 

$

160

 

$

170

 

$

203

 

(b)  As a result of a new accounting standard, Accounting Standards Update No. 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,” the Company reclassified $200 million, $98 million and $50 million of pension settlement charges from Cost of goods sold to Other expense, net for the years ended December 31, 2017, 2016 and 2014, respectively. The Company also reclassified $18 million and $15 million of pension settlement charges from Selling and administrative expense to Other expense, net for the years ended December 31, 2017 and 2014, respectively.

 

 

 

19


 

Table of Contents 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Company’s measure of profit for its reportable segments is segment operating profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs. The segment data presented below is prepared in accordance with general accounting principles for segment reporting. The line titled “reportable segment totals”, however, is a non‑GAAP measure when presented outside of the financial statement footnotes. Management has included reportable segment totals below to facilitate the discussion and analysis of financial condition and results of operations. The Company’s management uses segment operating profit, in combination with selected cash flow information, to evaluate performance and to allocate resources.

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.  Amounts for 2017 and 2016 in the following tables are presented on the redefined basis for the Americas segment.

Financial information regarding the Company’s reportable segments is as follows (dollars in millions):

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

    

2017

    

2016

 

Net sales:

 

 

 

 

 

 

 

 

 

 

Americas

 

$

3,638

 

$

3,711

 

$

3,652

 

Europe

 

 

2,489

 

 

2,375

 

 

2,300

 

Asia Pacific

 

 

675

 

 

714

 

 

684

 

Reportable segment totals

 

 

6,802

 

 

6,800

 

 

6,636

 

Other

 

 

75

 

 

69

 

 

66

 

Net sales

 

$

6,877

 

$

6,869

 

$

6,702

 

 

20


 

Table of Contents 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

    

2017

    

2016

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

 

Americas

 

$

585

 

$

614

 

$

568

 

Europe

 

 

316

 

 

263

 

 

237

 

Asia Pacific

 

 

44

 

 

65

 

 

77

 

Reportable segment totals

 

 

945

 

 

942

 

 

882

 

Items excluded from segment operating profit:

 

 

 

 

 

 

 

 

 

 

Retained corporate costs and other

 

 

(106)

 

 

(104)

 

 

(98)

 

Pension settlement charges

 

 

(74)

 

 

(218)

 

 

(98)

 

Restructuring, asset impairment and other charges

 

 

(102)

 

 

(77)

 

 

(129)

 

Gain on China land sale

 

 

 

 

 

 

 

 

71

 

Interest expense, net

 

 

(261)

 

 

(268)

 

 

(272)

 

Earnings from continuing operations before income taxes

 

 

402

 

 

275

 

 

356

 

Provision for income taxes

 

 

(108)

 

 

(70)

 

 

(119)

 

Earnings from continuing operations

 

 

294

 

 

205

 

 

237

 

Gain (loss) from discontinued operations

 

 

113

 

 

(3)

 

 

(7)

 

Net earnings

 

 

407

 

 

202

 

 

230

 

Net earnings attributable to noncontrolling interests

 

 

(25)

 

 

(22)

 

 

(21)

 

Net earnings attributable to the Company

 

$

382

 

$

180

 

$

209

 

Net earnings from continuing operations attributable to the Company

 

$

269

 

$

183

 

$

216

 

Note: all amounts excluded from reportable segment totals are discussed in the following applicable sections.

Executive Overview—Comparison of 2018 with 2017

2018 Highlights

·

Net sales in 2018 were up slightly from the same period in 2017, driven by higher prices but partially offset by lower volumes and an unfavorable effect of changes in foreign currency exchange rates.

·

Segment operating profit for reportable segments was up slightly in 2018 compared to 2017.  Higher segment operating profit in Europe more than offset lower segment operating profit in the other regions.

·

The Company combined the North America and Latin America segments into one segment, named the Americas, to better leverage its scale and presence across a larger geography and market, and to reduce costs.

·

The Company acquired a 49.7 percent interest in Empresas Comegua S.A., the leading manufacturer of glass containers for the Central American and Caribbean markets, for approximately $119 million.

·

The Company entered into a new $1.91 billion senior secured credit facility with a final maturity date of June 2023.

Net sales in 2018 increased by $8 million compared to the same period in the prior year primarily due to higher prices, but partially offset by lower volumes and an unfavorable effect of changes in foreign currency exchange rates.

Earnings from continuing operations before income taxes were $127 million higher in 2018 than in the prior year, primarily due to lower pension settlement charges in 2018. Segment operating profit for reportable segments in 2018 was $3 million higher compared to the prior year. Higher segment operating profit in Europe more than offset lower segment operating profit in the other regions.

Net interest expense in 2018 decreased $7 million compared to 2017.  The decrease was primarily due to lower note repurchase premiums and write-offs of deferred finance fees recorded in 2018 than in 2017.

For 2018, the Company recorded net earnings from continuing operations attributable to the Company of $269 million compared with $183 million in 2017.

21


 

Table of Contents 

Earnings in both periods included items that management considered not representative of ongoing operations.  These items decreased earnings from continuing operations attributable to the Company by $172 million in 2018 and $254 million in 2017.

Results of Operations—Comparison of 2018 with 2017

Net Sales

The Company’s net sales in 2018 were $6,877 million compared with $6,869 million in 2017, an increase of $8 million, or less than 1%. Higher selling prices benefited net sales by $150 million in 2018.  Unfavorable foreign currency exchange rates, driven by a weaker Brazilian real and the Mexican peso, decreased net sales by $20 million in 2018 compared to the prior year. Total glass container shipments, in tonnes, were down approximately 2% in 2018 compared to the prior year and were driven by the transfer of production to the Company’s joint venture in Mexico, the ongoing trends in U.S. beer shipments, the Brazil transportation strike and capacity constraints in both the Americas and Europe. Lower sales volume and an unfavorable sales mix decreased net sales by $128 million.

The change in net sales of reportable segments can be summarized as follows (dollars in millions):

 

 

 

 

 

 

 

 

Net sales— 2017

    

 

    

    

$

6,800

 

Price

 

$

150

 

 

 

 

Sales volume

 

 

(128)

 

 

 

 

Effects of changing foreign currency rates

 

 

(20)

 

 

 

 

Total effect on net sales

 

 

 

 

 

 2

 

Net sales— 2018

 

 

 

 

$

6,802

 

Americas:  Net sales in the Americas in 2018 were $3,638 million compared with $3,711 million for the same period in 2017, a decrease of $73 million, or 2%. Higher selling prices increased net sales by $117 million in 2018. Total glass container shipments in the region were down 3% in 2018 compared to the prior year with higher shipments to food customers offset by lower shipments to alcoholic beverage customers. Despite the transportation strike and capacity constraints, year over year shipments in Brazil were also strong in 2018. In the U.S., solid year over year growth in shipments to food customers in 2018 were more than offset by a decline in shipments to alcoholic beverage customers, owing to the ongoing trends in beer shipments and the transfer of production to the Company’s joint venture with Constellation Brands. Overall, the change in sales volume and mix in the region decreased net sales by $98 million in 2018. The effects of foreign currency exchange rate changes decreased net sales $92 million in 2018 compared to 2017, primarily due to the weakening of the Brazilian real and the Mexican peso in relation to the U.S. dollar.

Europe:  Net sales in Europe in 2018 were $2,489 million compared with $2,375 million for the same period in 2017, an increase of $114 million, or 5%. The effects of foreign currency exchange rates increased net sales in the region by approximately $95 million in 2018 as the Euro strengthened in relation to the U.S. dollar. Glass container shipments in 2018 were down less than 1% compared to the same period in 2017, partially due to certain production capacity constraints.  These slightly lower shipments in the region in 2018 resulted in $5 million of lower net sales. Selling prices in Europe increased net sales by $24 million in 2018 compared to the prior year.  

Asia Pacific:  Net sales in Asia Pacific in 2018 were $675 million compared with $714 million in 2017, a decrease of $39 million, or 5%. Glass container shipments in 2018 were down 3% compared to 2017, primarily driven by lower shipments to alcoholic beverage customers in Australia, resulting in $25 million of lower net sales. Slightly higher selling prices increased net sales by $9 million in 2018. The unfavorable effects of foreign currency exchange rate changes decreased net sales by $23 million as the Australian Dollar and New Zealand Dollar weakened in relation to the U.S. dollar.

22


 

Table of Contents 

Earnings from Continuing Operations before Income Taxes and Segment Operating Profit

Earnings from continuing operations before income taxes were $402 million in 2018 compared to $275 million for the same period in 2017, an increase of $127 million, or approximately 46%, and were up primarily due to lower pension settlement charges in 2018.

Operating profit of the reportable segments includes an allocation of some corporate expenses based on a percentage of sales and direct billings based on the costs of specific services provided.  Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained corporate costs and other.  For further information, see Segment Information included in Note 2 to the Condensed Consolidated Financial Statements.

Segment operating profit of reportable segments in 2018 was $945 million compared to $942 million for 2017, an increase of $3 million, or less than 1%. Higher selling prices in 2018 slightly outpaced higher costs, lower sales volumes and an unfavorable impact from the effects of foreign currency exchange rates. Higher segment operating profit in Europe more than offset lower segment operating profit in the other regions.

The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):

 

 

 

 

 

 

 

 

Segment operating profit - 2017

    

 

    

    

$

942

 

Price

 

$

150

 

 

 

 

Sales volume

 

 

(25)

 

 

 

 

Operating costs

 

 

(119)

 

 

 

 

Effects of changing foreign currency rates

 

 

(3)

 

 

 

 

Total net effect on segment operating profit

 

 

 

 

 

 3

 

Segment operating profit - 2018

 

 

 

 

$

945

 

Americas:  Segment operating profit in the Americas in 2018 was $585 million compared with $614 million in 2017, a decrease of $29 million, or 5%. The change in sales volume and mix discussed above decreased segment operating profit in the current year by $16 million. Selling prices were $117 million higher in the current year period compared to the prior year. Segment operating profit was impacted by $149 million of higher operating costs in 2018 than in the same period in the prior year, driven by cost inflation, the transportation strike in Brazil, a raw material batch disruption issue at a plant in Mexico, and higher transportation costs due to freight rate inflation. The region also benefitted from $11 million of insurance proceeds in 2018. In addition, the region recorded a $19 million gain in 2018 based on a favorable court ruling in Brazil, which will allow the region to recover revenue tax paid in previous years.  The region’s previous restructuring actions have reduced operating costs by approximately $6 million in 2018, in line with management’s expectations. The effects of foreign currency exchange rates decreased segment operating profit by $17 million in 2018, which included $4 million from the impact of highly-inflationary basis of accounting in the region’s operations in Argentina.

Europe:  Segment operating profit in Europe in 2018 was $316 million compared with $263 million in 2017, an increase of $53 million, or 20%. The effects of foreign currency exchange rates increased segment operating profit by $15 million in the current year period. Selling prices were $24 million higher in 2018 compared to the prior year period. Segment operating profit in 2018 improved due to approximately $5 million of lower operating costs compared to the same period in the prior year.  Lower production volumes in the region were partially offset by an approximate $11 million gain related to an asset sale.  In addition, the prior year permanent footprint adjustment in the region contributed to lower operating costs in 2018, in line with management’s expectations when the restructuring activities were initiated. The change in sales volume and mix described above reduced segment operating profit by $2 million.

Asia Pacific:  Segment operating profit in Asia Pacific in 2018 was $44 million compared with $65 million in 2017, a decrease of $21 million, or 32%. As anticipated, cost inflation and asset improvement projects in the region drove operating costs higher and decreased segment operating profit by $22 million in 2018 compared to the same period in the prior year. The decrease in sales volume discussed above reduced segment operating profit by $7 million. Higher selling prices increased segment operating profit in 2018 by $9 million. The effects of foreign currency exchange rates decreased segment operating profit by $1 million in 2018.

23


 

Table of Contents 

Interest Expense, Net

Net interest expense for 2018 was $261 million compared with $268 million in 2017.  Net interest expense included $11 million and $18 million in 2018 and 2017, respectively, for note repurchase premiums and the write-off of deferred finance fees that were related to debt that was repaid prior to its maturity.  Exclusive of these items, net interest expense was comparable in 2018 to the prior year. 

 

Provision for Income Taxes

The Company’s effective tax rate from continuing operations for 2018 was 26.9% compared with 25.5% for 2017.  The effective tax rate for 2018 was higher than the same period in 2017 primarily due to the nonoccurrence of a resolution of a tax matter in 2017 that resulted in approximately $26 million of tax accruals being reversed. The effective tax rates for both 2018 and 2017 were also impacted by several charges that management considered not representative of ongoing operations, including charges for restructuring, pension settlements, and the write-off of finance fees, for which no tax benefit was recorded due to the Company’s valuation allowance recorded in the U.S.  

Excluding the amounts related to items that management considers not representative of ongoing operations, the Company’s effective tax rate was approximately 21% in 2018 and 2017.

Net Earnings from Continuing Operations Attributable to the Company

For 2018, the Company recorded net earnings from continuing operations attributable to the Company of $269 million compared to $183 million in 2017. Earnings in 2018 and 2017 included items that management considered not representative of ongoing operations as set forth in the following table (dollars in millions):

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

 

 

Increase (Decrease)

 

Description

    

2018

    

2017

 

Pension settlement charges

 

$

(74)

    

$

(218)

 

Restructuring, asset impairment and other charges

 

 

(102)

 

 

(77)

 

Note repurchase premiums and write-off of finance fees

 

 

(11)

 

 

(18)

 

Tax benefit for certain tax adjustments

 

 

 

 

 

29

 

Net benefit for income tax on items above

 

 

14

 

 

27

 

Net impact of noncontrolling interests on items above

 

 

 1

 

 

 3

 

Total

 

$

(172)

 

$

(254)

 

Foreign Currency Exchange Rates

Given the global nature of its operations, the Company is subject to fluctuations in foreign currency exchange rates. As described above, the Company’s reported revenues and segment operating profit in 2018 were decreased due to foreign currency effects compared to 2017.

This trend may continue into 2019. During times of a strengthening U.S. dollar, the reported revenues and segment operating profit of the Company’s international operations will be reduced because the local currencies will translate into fewer U.S. dollars. The Company uses certain derivative instruments to mitigate a portion of the risk associated with changing foreign currency exchange rates.

Executive Overview—Comparison of 2017 with 2016

2017 Highlights

·

Net sales were up nearly 3% compared to the prior year, driven by higher shipments, higher prices and the favorable effects of changes in foreign currency exchange rates

·

Driven by higher shipments and progress on strategic initiatives, segment operating profit was higher in all regions, except for Asia Pacific, compared to the prior year

·

Issued €225 million and $310 million of senior notes and repaid higher-cost debt

24


 

Table of Contents 

·

Received $115 million from selling the Company’s right, title and interest in amounts due under a prior arbitration award in Venezuela 

Net sales increased by $167 million compared to the prior year primarily due to the favorable effect of changes in foreign currency exchange rates, higher shipments and higher prices.

Earnings from continuing operations before income taxes were $81 million lower in 2017 than the prior year primarily due to higher pension settlement charges, partially offset by higher segment operating profit. Segment operating profit for reportable segments increased by $60 million compared to the prior year. For 2017, segment operating profit in all regions, except for Asia Pacific, exceeded prior year amounts.

Net interest expense in 2017 decreased $4 million compared to 2016. Net interest expense included $18 million and $9 million in 2017 and 2016, respectively, for note repurchase premiums and the write‑off of finance fees related to debt that was repaid prior to its maturity. Exclusive of these items, net interest expense decreased $13 million in 2017 primarily due to deleveraging and refinancing actions.

For 2017, the Company recorded earnings from continuing operations attributable to the Company of $183 million compared with earnings of $216 million for 2016. Earnings in both periods included items that management considered not representative of ongoing operations. These items decreased earnings from continuing operations attributable to the Company by $254 million in 2017 and $160 million in 2016.

Results of Operations—Comparison of 2017 with 2016

Net Sales

The Company’s net sales in 2017 were $6,869 million compared with $6,702 million in 2016, an increase of $167 million, or approximately 3%. Higher selling prices benefited net sales by $61 million in 2017. Total glass container shipments, in tonnes, were up approximately 1% in 2017 compared to the same period in the prior year. However, an unfavorable sales mix resulted in approximately $3 million of lower sales. Favorable foreign currency exchange rates, primarily due to a stronger Euro, Brazilian real, Colombian peso, Australian dollar and New Zealand dollar, increased sales by $106 million.

The change in net sales of reportable segments can be summarized as follows (dollars in millions):

 

 

 

 

 

 

 

 

Net sales— 2016

    

 

    

    

$

6,636

 

Price

 

$

61

 

 

 

 

Sales volume (excluding acquisitions)

 

 

(3)

 

 

 

 

Effects of changing foreign currency rates

 

 

106

 

 

 

 

Total effect on net sales

 

 

 

 

 

164

 

Net sales— 2017

 

 

 

 

$

6,800

 

Americas:  Net sales in the Americas in 2017 were $3,711 million compared with $3,652 million in 2016, an increase of $59 million, or 2%. Higher selling prices increased net sales by $59 million in 2017. Total glass shipments in the region were comparable in 2017 to the prior year. Strong shipments in Mexico and higher shipments in Brazil were nearly offset by lower shipments to beer customers in the U.S. An unfavorable sales mix resulted in $32 million of lower sales in 2017 and was partially due to several customers converting a portion of their glass shipments from carton packaging to bulk shipments. Favorable foreign currency exchange rates increased net sales by $32 million, principally due to a strengthening of the Brazilian real and Colombian peso in relation to the U.S. dollar.

Europe:  Net sales in Europe in 2017 were $2,375 million compared with $2,300 million in 2016, an increase of $75 million, or 3%. Net sales in 2017 were benefited by a 1% increase in glass container shipments driven by higher shipments to beer, spirits and wine customers. This increased net sales by $28 million compared to the prior year. Favorable foreign currency exchange rates increased net sales by $57 million, as the Euro strengthened in relation to the U.S. dollar. As a result of the pass through of 2016 cost deflation to customers under contractual price adjustment formulas, selling prices in Europe were $10 million lower in 2017 compared to the same period in the prior year.   

25


 

Table of Contents 

Asia Pacific:  Net sales in Asia Pacific in 2017 were $714 million compared with $684 million in 2016, an increase of $30 million, or 4%. The favorable effects of foreign currency exchange rates changes during 2017, primarily due to the strengthening of the Australian dollar and New Zealand dollar in relation to the U.S. dollar, increased net sales by $17 million. Glass container shipments were down 1% in 2017 as higher shipments to food customers were more than offset by lower shipments to beer and non-alcoholic beverage customers. This resulted in a slightly favorable sales mix, which contributed to $1 million of higher sales in 2017. Slightly higher selling prices also increased net sales by $12 million in 2017.

Earnings from Continuing Operations before Income Taxes and Segment Operating Profit

Earnings from continuing operations before income taxes were $275 million in 2017 compared with $356 million for the same period in 2016, a decrease of $81 million, or 23%. This decrease was primarily due to higher pension settlement charges, partially offset by higher segment operating profit.

Operating profit of the 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. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained corporate costs and other. For further information, see Segment Information included in Note 2 to the Consolidated Financial Statements.

Segment operating profit of reportable segments in 2017 was $942 million compared to $882 million in 2016, an increase of $60 million, or 7%. Higher selling prices increased segment operating profit by $61 million and the favorable effects of foreign currency exchange rates increased segment operating profit by $11 million in 2017. Partially offsetting this was $12 million of higher operating costs.

The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):

 

 

 

 

 

 

 

 

Segment operating profit - 2016

    

 

    

    

$

882

 

Price

 

$

61

 

 

 

 

Sales volume (excluding acquisitions)

 

 

 —

 

 

 

 

Operating costs

 

 

(12)

 

 

 

 

Effects of changing foreign currency rates

 

 

11

 

 

 

 

Total net effect on segment operating profit

 

 

 

 

 

60

 

Segment operating profit - 2017

 

 

 

 

$

942

 

Americas:  Segment operating profit in the Americas in 2017 was $614 million compared with $568 million in 2016, an increase of $46 million, or 8%. Selling prices were $59 million higher in 2017 compared to the prior year. The unfavorable sales mix discussed above decreased segment operating profit by $7 million. Operating costs in 2017 were higher than the same period in the prior year and this decreased segment operating profit by $16 million. Despite significant benefits from cost savings initiatives and higher equity earnings from the Company’s joint-venture with Constellation Brands (“Constellation Brands”) in Mexico, these benefits were more than offset by substantial cost inflation. Beginning in the first quarter of 2017, equity earnings from this joint-venture were recorded in the Americas region. In prior years, equity earnings from this joint-venture were recorded in retained corporate costs and other as it was mostly in construction mode. In addition, approximately $5 million in gains related to non-strategic asset sales were recognized by the region in 2017. The favorable effects of foreign currency exchange rates increased segment operating profit by $5 million in 2017.

Europe:  Segment operating profit in Europe in 2017 was $263 million compared with $237 million in 2016, an increase of $26 million, or 11%. Operating costs were $25 million lower in 2017 than the prior year period due to cost savings initiatives, benefits realized from a permanent footprint adjustment and cost deflation. The increase in sales volume discussed above improved segment operating profit by $6 million. Lower selling prices decreased segment operating profit in 2017 by $10 million. The favorable effects of foreign currency exchange rates increased segment operating profit by $5 million in 2017.

26


 

Table of Contents 

Asia Pacific:  Segment operating profit in Asia Pacific in 2017 was $65 million compared with $77 million in 2016, a decrease of $12 million, or 16%. Despite cost containment efforts, cost inflation, higher supply chain costs and higher costs related to asset improvement projects in the region increased operating costs and decreased segment operating profit by $30 million in 2017. Costs associated with these asset improvement projects are planned to continue and will result in lower segment operating profit in the first half of 2018 in the region than the same period in 2017. Also, in 2017, higher selling prices increased segment operating profit by $12 million and the change in sales volume and mix discussed above increased segment operating profit by $1 million. In addition, the region recorded $4 million of gain related to a land sale in 2017. The favorable effects of foreign currency exchange rates increased segment operating profit by $1 million in 2017.

Interest Expense, net

Net interest expense in 2017 was $268 million compared with $272 million in 2016. Net interest expense included $18 million and $9 million in 2017 and 2016, respectively, for note repurchase premiums and the write‑off of finance fees related to debt that was repaid prior to its maturity. Exclusive of these items, net interest expense decreased $13 million in 2017 primarily due to deleveraging and refinancing actions.

Provision for Income Taxes

The Company’s effective tax rate from continuing operations for 2017 was 25.5%, compared with 33.4% for 2016. The Company’s effective tax rate for 2017 was lower than 2016 primarily due to the resolution of a tax matter that resulted in approximately $26 million of tax accruals reversed in 2017.

Excluding the amounts related to items that management considers not representative of ongoing operations, the Company’s effective tax rate for 2017 was approximately 21%, compared with approximately 24% for 2016. The rate for 2017 was lower than 2016 due to favorable resolution of certain tax matters during 2017.

The U.S. Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced earnings. See Note 11 to the Consolidated Financial Statements for additional information.

Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests for 2017 was $22 million compared to $21 million for 2016.

27


 

Table of Contents 

Earnings from Continuing Operations Attributable to the Company

For 2017, the Company recorded earnings from continuing operations attributable to the Company of $183 million compared with earnings of $216 million for 2016. The after tax effects of the items excluded from segment operating profit, the unusual tax items and the additional interest charges increased or decreased earnings in 2017 and 2016 as set forth in the following table (dollars in millions).

 

 

 

 

 

 

 

 

 

 

Net Earnings

 

 

 

Increase (Decrease)

 

Description

    

2017

    

2016

 

Pension settlement charges

 

$

(218)

 

$

(98)

 

Restructuring, asset impairment and other charges

 

 

(77)

    

 

(129)

 

Note repurchase premiums and write-off of finance fees

 

 

(18)

 

 

(9)

 

Gain on China land sale

 

 

 

 

 

71

 

Tax benefit (charge) for certain tax adjustments

 

 

29

 

 

 8

 

Net benefit (charge) for income tax on items above

 

 

27

 

 

(1)

 

Net impact of noncontrolling interests on items above

 

 

 3

 

 

(2)

 

Total

 

$

(254)

 

$

(160)

 

Foreign Currency Exchange Rates

Given the global nature of its operations, the Company is subject to fluctuations in foreign currency exchange rates. As described above, the Company’s reported revenues and segment operating profit in 2017 were increased due to foreign currency effects compared to 2016.

This trend may not continue into 2018. During times of a strengthening U.S. dollar, the reported revenues and segment operating profit of the Company’s international operations will be reduced because the local currencies will translate into fewer U.S. dollars. The Company uses certain derivative instruments to mitigate a portion of the risk associated with changing foreign currency exchange rates.

Items Excluded from Reportable Segment Totals

Retained Corporate Costs and Other

Retained corporate costs and other for 2018 were $106 million compared with $104 million for 2017.  Planned increases in research and development costs in 2018 were partially offset by lower selling and administrative expenses.

Retained corporate costs and other for 2017 were $104 million compared with $98 million for 2016. These costs were higher in 2017 primarily due to lower equity earnings from the Company’s joint-venture with Constellation Brands in Mexico. Beginning in the first quarter of 2017, equity earnings from this joint-venture were recorded in the Americas region. In prior years, equity earnings from this joint-venture were recorded in Retained Corporate Costs and Other as it was mostly in construction mode.

Pension Settlement Charges

In the past several years, the Company has settled a portion of its pension obligations through retiree annuity contract purchase transactions, which resulted in settlement charges as noted below.  The Company may purchase annuity contracts in the future, which would result in additional settlement charges.

During 2018, the Company recorded charges totaling $74 million for pension settlements, primarily in the United States and United Kingdom.

During 2017, the Company recorded charges totaling $218 million for pension settlements in the United States, Canada and United Kingdom.

During 2016, the Company recorded charges totaling $98 million for pension settlements in the United States.

28


 

Table of Contents 

See Note 10 to the Consolidated Financial Statements for additional information.

Restructuring, Asset Impairment and Other Charges

During 2018, the Company recorded charges totaling $102 million for restructuring, asset impairment and other charges. These charges reflect $92 million of plant and furnace closures, primarily in the Americas region, and other charges of $10 million.

During 2017, the Company recorded charges totaling $77 million for restructuring, asset impairment and other charges. These charges reflect $72 million of plant and furnace closures, primarily in the Americas and European regions, and other charges of $5 million.

During 2016, the Company recorded charges totaling $129 million for restructuring, asset impairment and other charges. These charges reflect $98 million of plant and furnace closures, primarily in the Europe and Americas regions. In addition, other charges of $31 million were recorded during 2016, primarily related to an impairment charge recorded at one of the Company’s equity investments.

See Note 9 to the Consolidated Financial Statements for additional information.

Gain on China Land Compensation

During 2016, the Company recorded a gain of $71 million related to compensation received for land that the Company was required to return to the Chinese government.

Discontinued Operations

On December 6, 2018, an ad hoc committee for the World Bank’s International Centre for Settlement of Investment Disputes (“ICSID”) rejected the request by the Bolivarian Republic of Venezuela (“Venezuela”) to annul the award issued by an ICSID tribunal in favor of OI European Group B.V. (“OIEG”)  related to the 2010 expropriation of OIEG’s majority interest in two plants in Venezuela (the “Award”).  The annulment proceeding with respect to the Award is now concluded.

On July 31, 2017, OIEG sold its right, title and interest in amounts due under the Award to an Ireland-domiciled investment fund.  Under the terms of the sale, OIEG received a payment, in cash, at closing equal to $115 million (the “Cash Payment”).  OIEG may also receive additional payments in the future (“Deferred Amounts”) calculated based on the total compensation that is received from Venezuela as a result of collection efforts or as settlement of the Award with Venezuela.  OIEG’s right to receive any Deferred Amounts is subject to the limitations described below.

OIEG’s interest in any amounts received in the future from Venezuela in respect of the Award is limited to a percentage of such recovery after taking into account reimbursement of the Cash Payment to the purchaser and reimbursement of legal fees and expenses incurred by the Company and the purchaser. OIEG’s percentage of such recovery will also be reduced over time.  Because the Award has yet to be satisfied and the ability to successfully enforce the Award in countries that are party to the ICSID Convention is subject to significant challenges, the Company is unable to reasonably predict the amount of recoveries from the Award, if any, to which the Company may be entitled in the future.  Any future amounts that the Company may receive from the Award are highly speculative and the timing of any such future payments, if any, is highly uncertain.  As such, there can be no assurance that the Company will receive any future payments under the Award beyond the Cash Payment. 

A separate arbitration involving other subsidiaries of the Company was initiated in 2012 to obtain compensation primarily for third-party minority shareholders’ lost interests in the two expropriated plants. However, on November 13, 2017, ICSID issued an award that dismissed this arbitration on jurisdiction grounds.  In March 2018, the two subsidiaries of the Company submitted to ICSID an application to annul the November 13, 2017 award; they have since submitted a pleading seeking annulment.

29


 

Table of Contents 

As a result of the favorable ruling by an ICSID ad hoc committee rejecting Venezuela’s request to annul the Award, and thereby concluding those annulment proceedings, the Company has recognized a $115 million gain from discontinued operations in 2018.  The gain from discontinued operations of $113 million, and the losses from discontinued operations of $3 million and $7 million for the years ended December 31, 2018, 2017 and 2016, respectively, reflect the gain in 2018 and the ongoing costs for the Venezuelan expropriation in all three years.

Capital Resources and Liquidity

As of December 31, 2018, the Company had cash and total debt of $512 million and $5.3 billion, respectively, compared to $492 million and $5.3 billion, respectively, as of December 31, 2017. A significant portion of the cash was held in mature, liquid markets where the Company has operations, such as the U.S., Europe and Australia, and is readily available to fund global liquidity requirements. The amount of cash held in non‑U.S. locations as of December 31, 2018 was $481 million.

Current and Long‑Term Debt

On June 27, 2018, certain of the Company’s subsidiaries entered into a new Senior Secured Credit Facility (the “Agreement”), which amended and restated the previous credit agreement (the “Previous Agreement”).  The proceeds from the Agreement were used to repay all outstanding amounts under the Previous Agreement.  The Company recorded $11 million of additional interest charges for the write-off of unamortized fees during 2018.

The Agreement provides for up to $1.91 billion of borrowings pursuant to term loans and revolving credit facilities.  The term loans mature, and the revolving credit facilities terminate, in June 2023.  At December 31, 2018, the Agreement includes a $300 million revolving credit facility, a $700 million multicurrency revolving credit facility, and a $910 million term loan A facility ($897 million net of debt issuance costs).  At December 31, 2018, the Company had unused credit of $988 million available under the Agreement. The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2018 was 3.97%.

The Agreement contains various covenants that restrict, among other things and subject to certain exceptions, the ability of the Company to incur certain indebtedness and liens, make certain investments, become liable under contingent obligations in certain defined instances only, make restricted payments, make certain asset sales within guidelines and limits, engage in certain affiliate transactions, participate in sale and leaseback financing arrangements, alter its fundamental business, and amend certain subordinated debt obligations.

The Agreement also contains one financial maintenance covenant, a Total Leverage Ratio (the “Leverage Ratio”), that requires the Company not to exceed a ratio of 4.5x calculated by dividing consolidated total debt, less cash and cash equivalents, by Consolidated EBITDA, as defined in the Agreement.  The maximum Leverage Ratio is subject to an increase of 0.5x for (i) any fiscal quarter during which certain qualifying acquisitions (as specified in the Agreement) are consummated and (ii) the following three fiscal quarters. The Leverage Ratio could restrict the ability of the Company to undertake additional financing or acquisitions to the extent that such financing or acquisitions would cause the Leverage Ratio to exceed the specified maximum.

Failure to comply with these covenants and other customary restrictions could result in an event of default under the Agreement.  In such an event, the Company could not request borrowings under the revolving facilities, and all amounts outstanding under the Agreement, together with accrued interest, could then be declared immediately due and payable.  Upon the occurrence and for the duration of a payment event of default, an additional default interest rate equal to 2.0% per annum will apply to all overdue obligations under the Agreement.  If an event of default occurs under the Agreement and the lenders cause all of the outstanding debt obligations under the Agreement to become due and payable, this would result in a default under a number of other outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. As of December 31, 2018, the Company was in compliance with all covenants and restrictions in the Agreement.  In addition, the Company believes that it will remain in compliance and that its ability to borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.

30


 

Table of Contents 

The Leverage Ratio also determines pricing under the Agreement.  The interest rate on borrowings under the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the Agreement, plus an applicable margin.  The applicable margin is linked to the Leverage Ratio. The margins range from 1.00% to 1.50% for Eurocurrency Rate loans and from 0.00% to 0.50% for Base Rate Loans.  In addition, a commitment fee is payable on the unused revolving credit facility commitments ranging from 0.20% to 0.30% per annum linked to the Leverage Ratio.

Obligations under the Agreement are secured by substantially all of the assets, excluding real estate and certain other excluded assets, of certain of the Company’s domestic subsidiaries and certain foreign subsidiaries.  Such obligations are also secured by a pledge of intercompany debt and equity investments in certain of the Company’s domestic subsidiaries and, in the case of foreign obligations, of stock of certain foreign subsidiaries.  All obligations under the Agreement are guaranteed by certain domestic subsidiaries of the Company, and certain foreign obligations under the Agreement are guaranteed by certain foreign subsidiaries of the Company.

In March 2017, the Company expanded its borrowings under the Senior Notes due 2024 by issuing €225 million of additional notes that bear interest at 3.125% and are due November 15, 2024.  The notes were issued via a private placement and are guaranteed by certain of the Company’s domestic subsidiaries.  The net proceeds, after deducting debt issuance costs, totaled approximately $237 million and were used to repay a portion of the Company’s revolving credit facility.

During March 2017, OI Inc. purchased in a tender offer approximately $228 million aggregate principal amount of its 7.80% Senior Debentures due in 2018.  In November 2017, the remaining $22 million of the 7.80% Senior Debentures were repurchased by OI Inc., the indenture relating thereto was discharged, and all collateral and guarantees thereunder were released. The Company recorded $18 million of additional interest charges for note repurchase premiums and the write-off of unamortized finance fees related to these actions.

During December 2017, the Company issued senior notes with a face value of $310 million that bear interest at 4.00% and are due March 15, 2023.  The notes were issued via a private placement and are guaranteed by certain of the Company’s domestic subsidiaries.  The net proceeds, after deducting debt issuance costs, totaled approximately $305 million and were used to repay a portion of the term loan A facility under the Previous Agreement. 

In the third quarter of 2018, the Company terminated a €185 million European accounts receivable securitization program.

In order to maintain a capital structure containing appropriate amounts of fixed and floating-rate debt, the Company has entered into a series of interest rate swap agreements. These interest rate swap agreements were accounted for as either fair value hedges or cash flow hedges (See Note 8 to Consolidated Financial Statements for more information).

The Company assesses its capital raising and refinancing needs on an ongoing basis and may enter into additional credit facilities and seek to issue equity and/or debt securities in the domestic and international capital markets if market conditions are favorable. Also, depending on market conditions, the Company may elect to repurchase portions of its debt securities in the open market.

The carrying amounts reported for certain long-term debt obligations subject to frequently redetermined interest rates, approximate fair value.  Fair values for the Company’s significant fixed rate debt obligations are based on published market quotations, and are classified as Level 1 in the fair value hierarchy.

Cash Flows

Operating activities:  Cash provided by continuing operating activities was $898 million for 2018 compared to $834 million for 2017. The increase in cash provided by continuing operating activities in 2018 was primarily due to a year-over-year decrease in working capital of $15 million compared to a year-over-year increase of $89 million in 2017.  In 2018, working capital was affected by higher accounts payable and inventory balances and lower trade receivables balances compared to year end 2017.  In 2018, the Company has experienced higher sales levels in Europe and Brazil and lower sales levels in the U.S. compared to the prior year.  This change in the sales mix has impacted trade receivables as longer payment terms are more common outside the U.S.  Also, the

31


 

Table of Contents 

Company factored approximately $145 million more trade receivables at year end 2018 compared to 2017. Together, the net impact of more factoring and a higher mix of sales outside the U.S. have had a favorable impact on the Company’s operating cash flows in 2018. 

Also, operating cash flows have been favorably impacted in 2018 as payments for restructuring activities were $30 million lower than in the prior year due to the timing of restructuring actions undertaken.  In addition, the Company experienced a $44 million year-over-year increase in cash utilized for other operating items, which included the impact of higher spending on non-current assets and lower charges for the write-off of deferred financing fees.

Investing activities:  Cash utilized in continuing investing activities was $698 million for 2018 compared to $466 million for 2017. Capital spending for property, plant and equipment during 2018 was $536 million compared with $441 million in the prior year, reflecting the payment in 2018 of a higher level of vendor invoices accrued at the end of 2017, as well as a higher level of project activity in the Asia Pacific region.

Acquisition activities were $175 million and $39 million in 2018 and 2017, respectively.  In 2018, the Company paid approximately $119 million for a nearly 50 percent interest in Empresas Comegua S.A., which is the leading manufacturer of glass containers for the Central American and Caribbean markets.  In addition, in both 2018 and 2017, the Company made contributions to the Company’s joint venture with Constellation Brands in Nava, Mexico. In October 2017, the Company signed an agreement to expand its joint venture with Constellation. To meet rising demand from Constellation’s adjacent brewery, the newly-expanded relationship provides for the addition of a fifth furnace, which is expected to be operational by the end of 2019. This capacity expansion will be financed by equal contributions from both partners with the Company’s contribution expected to be approximately $30 million in 2019. The term of the joint venture agreement was also expanded for ten additional years, to 2034.

Also, in 2017, a subsidiary of the Company received $115 million from selling its right, title and interest in amounts due under a prior arbitration award against Venezuela related to a discontinued operation. See Note 19 to the Consolidated Financial Statements for additional information.

Financing activities:  Cash utilized in financing activities was $158 million for 2018 compared to $502 million of cash utilized by financing activities for 2017. Finance activities in 2018 included additions to long-term debt of $2,511 million and repayments of long-term debt of $2,353 million, both driven by the refinancing of the Agreement in 2018.  Financing activities in 2017 included additions to long-term debt of $1,458 million, which included the issuances of €225 million and $310 million of senior notes. Financing activities in 2017 also included the repayment of long-term debt of $1,764 million, which included the repayment of floating-rate debt in the Company’s Senior Secured Credit Facility and the repurchase of the 2018 Senior Debentures. Borrowings under short-term loans decreased by $18 million in 2018. The Company paid approximately $13 million in finance fees in 2018 compared to $28 million in note repurchase premiums and finance fees in 2017. The Company paid $22 million and $17 million in distributions to noncontrolling interests in 2018 and 2017, respectively.  In addition, the Company’s distributions to parent were $268 million in 2018 compared to $109 million in 2017.

The Company anticipates that cash flows from its operations and from utilization of credit available under the Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short‑term (twelve months) and long‑term basis.

32


 

Table of Contents 

Contractual Obligations and Off‑Balance Sheet Arrangements

The following information summarizes the Company’s significant contractual cash obligations at December 31, 2018 (dollars in millions).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments due by period

 

 

 

 

 

 

Less than

 

 

 

 

 

 

 

More than

 

 

 

Total

 

one year

 

1 - 3 years

 

3 - 5 years

 

5 years

 

Contractual cash obligations:

    

 

    

    

 

    

    

 

    

    

 

    

    

 

 

 

Long-term debt

 

$

5,169

 

$

26

 

$

1,436

 

$

2,288

 

$

1,419

 

Capital lease obligations

 

 

45

 

 

 7

 

 

13

 

 

10

 

 

15

 

Operating leases

 

 

252

 

 

67

 

 

90

 

 

62

 

 

33

 

Interest (1)

 

 

881

 

 

230

 

 

379

 

 

202

 

 

70

 

Purchase obligations (2)

 

 

2,031

 

 

586

 

 

707

 

 

350

 

 

388

 

Pension benefit plan contributions (3)