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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended

June 30, 2019

or

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

For the transition period from to

Commission file number 1-9576

Graphic

OWENS-ILLINOIS, INC.

(Exact name of registrant as specified in its charter)

Delaware

22-2781933

(State or other jurisdiction of

(IRS Employer

incorporation or organization)

Identification No.)

One Michael Owens Way, Perrysburg, Ohio

43551

(Address of principal executive offices)

(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading symbol

Name of each exchange on which registered

Common Stock, $.01 par value

OI

New York Stock Exchange

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares of common stock, par value $.01, of Owens-Illinois, Inc. outstanding as of June 30, 2019 was 155,456,952.

Part I — FINANCIAL INFORMATION

Item 1. Financial Statements.

The Condensed Consolidated Financial Statements of Owens-Illinois, Inc. (the “Company”) presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. All adjustments are of a normal recurring nature. Because the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

1

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

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

Three months ended

Six months ended

June 30,

June 30,

2019

    

2018

    

2019

    

2018

    

 

Net sales

$

1,756

$

1,772

$

3,393

$

3,508

Cost of goods sold

 

(1,420)

 

(1,426)

 

(2,760)

 

(2,843)

Gross profit

 

336

346

633

665

Selling and administrative expense

 

(116)

(126)

(231)

(252)

Research, development and engineering expense

 

(18)

(17)

(34)

(33)

Interest expense, net

 

(68)

(74)

(132)

(136)

Equity earnings

 

19

21

38

38

Other expense, net

 

(55)

(72)

(65)

(69)

Earnings from continuing operations before income taxes

 

98

 

78

 

209

 

213

Provision for income taxes

 

(27)

(22)

(54)

(54)

Earnings from continuing operations

 

71

 

56

 

155

 

159

Loss from discontinued operations

 

(1)

(1)

(1)

Net earnings

 

70

 

56

 

154

 

158

Net earnings attributable to noncontrolling interests

 

(5)

(6)

(10)

(11)

Net earnings attributable to the Company

$

65

$

50

$

144

$

147

Amounts attributable to the Company:

Earnings from continuing operations

$

66

$

50

$

145

$

148

Loss from discontinued operations

 

(1)

(1)

 

(1)

Net earnings

$

65

$

50

$

144

$

147

Basic earnings per share:

Earnings from continuing operations

$

0.42

$

0.31

$

0.94

$

0.91

Loss from discontinued operations

 

 

(0.01)

 

(0.01)

Net earnings

$

0.42

$

0.31

$

0.93

$

0.90

Weighted average shares outstanding (thousands)

155,338

160,858

154,852

161,904

Diluted earnings per share:

Earnings from continuing operations

$

0.42

$

0.31

$

0.93

$

0.90

Loss from discontinued operations

 

 

(0.01)

 

Net earnings

$

0.42

$

0.31

$

0.92

$

0.90

Weighted average diluted shares outstanding (thousands)

156,471

162,712

156,555

163,964

See accompanying notes.

2

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME (LOSS)

(Dollars in millions)

(Unaudited)

Three months ended

Six months ended

June 30,

June 30,

    

2019

    

2018

    

2019

    

2018

    

 

Net earnings

$

70

$

56

$

154

$

158

Other comprehensive income (loss):

Foreign currency translation adjustments

 

1

(268)

50

(141)

Pension and other postretirement benefit adjustments, net of tax

 

16

29

22

36

Change in fair value of derivative instruments, net of tax

 

(9)

(1)

(4)

(6)

Other comprehensive income (loss)

8

(240)

68

(111)

Total comprehensive income (loss)

78

(184)

222

47

Comprehensive income (loss) attributable to noncontrolling interests

 

7

9

(1)

(2)

Comprehensive income (loss) attributable to the Company

$

85

$

(175)

$

221

$

45

See accompanying notes.

3

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

(Unaudited)

June 30,

December 31,

June 30,

2019

2018

2018

Assets

Current assets:

Cash and cash equivalents

$

371

$

512

$

365

Trade receivables, net of allowance of $34 million, $35 million, and $35 million at June 30, 2019, December 31, 2018 and June 30, 2018

 

1,275

 

549

 

1,026

Inventories

 

1,015

 

1,018

 

985

Prepaid expenses and other current assets

 

282

 

278

 

248

Total current assets

 

2,943

 

2,357

 

2,624

Property, plant and equipment, net

3,216

3,085

3,025

Goodwill

2,527

2,513

2,533

Intangibles, net

422

400

419

Other assets

1,615

1,344

1,217

Total assets

$

10,723

$

9,699

$

9,818

Liabilities and Share owners' equity

Current liabilities:

Accounts payable

$

1,074

$

1,321

$

1,088

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

96

160

291

Current portion of asbestos-related liabilities

135

160

100

Other liabilities

624

566

576

Other liabilities - discontinued operations

115

Total current liabilities

 

1,929

 

2,207

 

2,170

Long-term debt

6,235

5,181

5,377

Asbestos-related liabilities

364

442

456

Other long-term liabilities

1,105

969

916

Share owners' equity

1,090

900

899

Total liabilities and share owners' equity

$

10,723

$

9,699

$

9,818

See accompanying notes.

4

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

(Unaudited)

Six months ended June 30,

    

2019

    

2018

 

 

Cash flows from operating activities:

Net earnings

$

154

$

158

Loss from discontinued operations

 

1

 

1

Non-cash charges

Depreciation and amortization

 

253

254

Pension expense

 

16

17

Restructuring, asset impairment and related charges

 

32

70

Pension settlement charges

2

Cash payments

Pension contributions

 

(19)

(18)

Asbestos-related payments

 

(103)

(26)

Cash paid for restructuring activities

 

(29)

(12)

Change in components of working capital

 

(939)

(586)

Other, net (a)

(30)

(8)

Cash utilized in operating activities

 

(662)

 

(150)

Cash utilized in discontinued operating activities

 

(1)

 

(1)

Total cash utilized in operating activities

 

(663)

 

(151)

Cash flows from investing activities:

Cash payments for property, plant and equipment

 

(233)

(273)

Acquisitions, net of cash acquired

 

(157)

Contributions and advances to joint ventures

(22)

(25)

Net cash proceeds on disposal of assets

1

9

Other, net

 

1

2

Cash utilized in investing activities

 

(410)

 

(287)

Cash flows from financing activities:

Changes in borrowings, net

970

437

Treasury shares repurchased

(38)

(95)

Payment of finance fees

(8)

(12)

Distributions to noncontrolling interests

(7)

(8)

Dividends paid

(16)

Net cash proceeds for hedging activity

28

Other, net

(3)

Cash provided by financing activities

 

926

 

322

Effect of exchange rate fluctuations on cash

 

6

(11)

Decrease in cash

 

(141)

 

(127)

Cash at beginning of period

 

512

492

Cash at end of period

$

371

$

365

(a)Other, net includes other non-cash charges plus other changes in non-current assets and liabilities.

See accompanying notes.

5

OWENS-ILLINOIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tabular data dollars in millions, except per share amounts

1. Segment Information

The Company has three reportable segments and three operating segments based on its geographic locations: Americas, Europe and Asia Pacific. These three segments are aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its global glass operations. Certain assets and activities not directly related to one of the regions or to glass manufacturing are reported with Retained corporate costs and other. These include licensing, equipment manufacturing, global engineering, and certain equity investments. Retained corporate costs and other also includes certain headquarters administrative and facilities costs and certain incentive compensation and other benefit plan costs that are global in nature and are not allocable to the reportable segments.

The Company’s measure of profit for its reportable segments is segment operating profit, which is a non-GAAP financial measure that consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations, as well as certain retained corporate costs. The Company’s management uses segment operating profit, in combination with net sales and selected cash flow information, to evaluate performance and to allocate resources. Segment operating profit for reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided.

Financial information for the three and six months ended June 30, 2019 and 2018 regarding the Company’s reportable segments is as follows:

    

Three months ended June 30,

Six months ended June 30,

2019

    

2018

    

2019

 

2018

 

Net sales:

Americas

$

934

$

930

$

1,815

$

1,838

Europe

 

650

 

674

 

1,246

1,317

Asia Pacific

 

152

 

153

 

303

326

Reportable segment totals

 

1,736

 

1,757

 

3,364

 

3,481

Other

 

20

15

29

27

Net sales

$

1,756

$

1,772

$

3,393

$

3,508

Three months ended June 30,

Six months ended June 30,

    

2019

    

2018

    

2019

    

2018

 

Segment operating profit:

Americas

$

144

$

152

$

257

$

299

Europe

 

90

 

101

 

169

 

173

Asia Pacific

 

2

 

2

 

10

 

7

Reportable segment totals

 

236

 

255

 

436

 

479

Items excluded from segment operating profit:

Retained corporate costs and other

 

(28)

(30)

(53)

(57)

Restructuring, asset impairment and other

 

(42)

(73)

(42)

(73)

Interest expense, net

 

(68)

(74)

(132)

(136)

Earnings from continuing operations before income taxes

$

98

$

78

$

209

$

213

6

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

June 30,

December 31,

June 30,

    

2019

2018

2018

Total assets:

Americas

 

$

5,994

 

$

5,497

 

$

5,402

Europe

 

3,342

 

3,036

 

3,232

Asia Pacific

 

1,045

 

918

 

981

Reportable segment totals

 

10,381

 

9,451

 

9,615

Other

 

342

248

203

Consolidated totals

 

$

10,723

 

$

9,699

 

$

9,818

2. Revenue

Revenue is recognized when obligations under the terms of the Company’s contracts and related purchase orders with its customers are satisfied. This occurs with the transfer of control of glass containers, which primarily takes place when products are shipped from the Company’s manufacturing or warehousing facilities to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods, which includes estimated provisions for rebates, discounts, returns and allowances. Sales, value added, and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. The Company’s payment terms are based on customary business practices and can vary by customer type. The term between invoicing and when payment is due is not significant. Also, the Company elected to account for shipping and handling costs as a fulfillment cost at the time of shipment.

For the three and six month periods ended June 30, 2019 and June 30, 2018, the Company had no material bad debt expense and there were no material contract assets, contract liabilities or deferred contract costs recorded on the Condensed Consolidated Balance Sheet. For the three and six month periods ended June 30, 2019 and June 30, 2018, revenue recognized from prior periods (for example, due to changes in transaction price) was not material.

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

Three months ended June 30, 2019

    

Americas

Europe

Asia Pacific

Total

Alcoholic beverages (beer, wine, spirits)

 

$

590

 

$

474

 

$

105

$

1,169

Food and other

 

191

 

109

 

29

 

329

Non-alcoholic beverages

 

153

 

67

 

18

 

238

Reportable segment totals

$

934

$

650

$

152

$

1,736

Other

 

20

Net sales

 

$

1,756

Three months ended June 30, 2018

    

Americas

Europe

Asia Pacific

Total

Alcoholic beverages (beer, wine, spirits)

 

$

585

$

493

$

113

$

1,191

Food and other

 

197

112

23

 

332

Non-alcoholic beverages

 

148

69

17

 

234

Reportable segment totals

$

930

$

674

$

153

$

1,757

Other

 

15

Net sales

 

$

1,772

7

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

Six months ended June 30, 2019

    

Americas

Europe

Asia Pacific

Total

Alcoholic beverages (beer, wine, spirits)

 

$

1,153

$

907

$

214

$

2,274

Food and other

 

372

211

54

 

637

Non-alcoholic beverages

 

290

128

35

 

453

Reportable segment totals

$

1,815

$

1,246

$

303

$

3,364

Other

 

29

Net sales

 

$

3,393

Six months ended June 30, 2018

    

Americas

Europe

Asia Pacific

Total

Alcoholic beverages (beer, wine, spirits)

 

$

1,161

$

964

$

240

$

2,365

Food and other

 

386

224

47

 

657

Non-alcoholic beverages

 

291

129

39

 

459

Reportable segment totals

$

1,838

$

1,317

$

326

$

3,481

Other

 

27

Net sales

 

$

3,508

3. Inventories

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

June 30,

December 31,

June 30,

    

2019

    

2018

    

2018

    

 

Finished goods

$

838

$

849

$

821

Raw materials

 

131

 

125

 

123

Operating supplies

 

46

 

44

 

41

$

1,015

$

1,018

$

985

4. Derivative Instruments

The Company has certain derivative assets and liabilities, which consist of natural gas forwards, foreign exchange option and forward contracts, interest rate swaps and cross currency swaps. The valuation of these instruments is determined primarily using the income approach, including discounted cash flow analysis on the expected cash flows of each derivative. Natural gas forward rates, foreign exchange rates and interest rates are the significant inputs into the valuation models. The Company also evaluates counterparty risk in determining fair values. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy.

8

Commodity Forward Contracts Designated as Cash Flow Hedges

The Company enters into commodity forward contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows.

An unrecognized gain of $2 million at June 30, 2019, an unrecognized gain of $1 million at December 31, 2018 and an unrecognized gain of $7 million at June 30, 2018 related to the commodity forward contracts were included in Accumulated OCI, and will be reclassified into earnings in the period when the commodity forward contracts expire.

Foreign Exchange Derivative Contracts Not Designated as Hedging Instruments

The Company uses short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. The Company also uses foreign exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables, payables, and loans, not denominated in, or indexed to, their functional currencies.

Cash Flow Hedges of Foreign Exchange Risk

The Company has variable-interest rate borrowings denominated in currencies other than the functional currency of the borrowing subsidiaries. As a result, the Company is exposed to fluctuations in the currency of the borrowing against the subsidiaries’ functional currency.  The Company uses derivatives to manage these exposures and designates these derivatives as cash flow hedges of foreign exchange risk.

During the second quarter of 2019, the Company terminated a portion of its cross-currency swaps, which resulted in a $15 million cash inflow recognized in the Cash flows from financing activities section of the Condensed Consolidated Cash Flows.

An unrecognized loss of $18 million at June 30, 2019, an unrecognized loss of $9 million at December 31, 2018 and an unrecognized loss of $8 million at June 30, 2018, related to these cross-currency swaps, were included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.

Interest Rate Swaps Designated as Fair Value Hedges

The Company enters into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. The relevant terms of the swap agreements match the corresponding terms of the notes and therefore there is no hedge ineffectiveness. The Company recorded the net of the fair market values of the swaps as a long-term liability and short-term asset, along with a corresponding net decrease in the carrying value of the hedged debt.

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

Cash Flow Hedges of Interest Rate Risk

The Company enters into interest rate swaps in order to maintain a capital structure containing targeted amounts of fixed and floating-rate debt and manage interest rate risk. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments. These interest rate swap agreements were used to hedge the variable cash flows associated with variable-rate debt.

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

Net Investment Hedges

The Company is exposed to fluctuations in foreign exchange rates on investments it holds in non-U.S. subsidiaries and uses cross-currency swaps to partially hedge this exposure.  

9

An unrecognized gain of $5 million at June 30, 2019 and an unrecognized gain of $4 million at year ended December 31, 2018, related to these net investment hedges, was included in Accumulated OCI, and will be reclassified into earnings within the next twelve months.

Balance Sheet Classification

The following table shows the amount and classification (as noted above) of the Company’s derivatives at June 30, 2019, December 31, 2018 and June 30, 2018:

Fair Value of

Fair Value of

Hedge Assets

Hedge Liabilities

June 30,

December 31,

June 30,

June 30,

December 31,

June 30,

    

2019

    

2018

    

2018

    

2019

    

2018

    

2018

Derivatives designated as hedging instruments:

    

    

    

    

    

    

Commodity forward contracts (a)

$

2

$

1

$

7

$

1

$

-

$

-

Interest rate swaps - fair value hedges (b)

15

6

6

1

8

Cash flow hedges of foreign exchange risk (c)

20

10

5

30

1

12

Interest rate swaps - cash flow hedges (d)

1

2