O-I Glass, Inc. /DE/ - Quarter Report: 2014 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended

June 30, 2014

 

or

 

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

 

For the transition period from        to        

 

Commission file number 1-9576

 

 

OWENS-ILLINOIS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

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

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

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

 

Large accelerated filer x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o
		(Do not check if a
		smaller reporting company)

 

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

 

The number of shares of common stock, par value $.01, of Owens-Illinois, Inc. outstanding as of June 30, 2014 was 164,843,793.

 

 

 

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, 2013.

 

1

 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

 (Dollars in millions, except per share amounts)

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Net sales		$	1,797		$	1,781		$	3,436		$	3,422
Cost of goods sold		(1,439		)	(1,412		)	(2,757		)	(2,734		)
Gross profit		358			369			679			688
Selling and administrative expense		(131		)	(129		)	(264		)	(258		)
Research, development and engineering expense		(17		)	(15		)	(32		)	(30		)
Interest expense, net		(54		)	(56		)	(108		)	(124		)
Equity earnings		19			16			35			33
Other income (expense), net		4			(8		)	3			(15		)
Earnings from continuing operations before income taxes		179			177			313			294
Provision for income taxes		(39		)	(37		)	(66		)	(70		)
Earnings from continuing operations		140			140			247			224
Loss from discontinued operations		(20		)	(3		)	(21		)	(13		)
Net earnings		120			137			226			211
Net earnings attributable to noncontrolling interests		(6		)	(5		)	(11		)	(10		)
Net earnings attributable to the Company		$	114		$	132		$	215		$	201
Amounts attributable to the Company:
Earnings from continuing operations		$	134		$	135		$	236		$	214
Loss from discontinued operations		(20		)	(3		)	(21		)	(13		)
Net earnings		$	114		$	132		$	215		$	201
Basic earnings per share:
Earnings from continuing operations		$	0.81		$	0.82		$	1.43		$	1.30
Loss from discontinued operations		(0.12		)	(0.02		)	(0.13		)	(0.08		)
Net earnings		$	0.69		$	0.80		$	1.30		$	1.22
Weighted average shares outstanding (thousands)		164,906			164,369			164,833			164,220
Diluted earnings per share:
Earnings from continuing operations		$	0.80		$	0.81		$	1.42		$	1.29
Loss from discontinued operations		(0.12		)	(0.02		)	(0.13		)	(0.08		)
Net earnings		$	0.68		$	0.79		$	1.29		$	1.21
Weighted average diluted shares outstanding (thousands)		166,258			165,731			166,212			165,617

 

See accompanying notes.

 

2

 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED COMPREHENSIVE INCOME

(Dollars in millions)

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Net earnings		$	120		$	137		$	226		$	211
Other comprehensive income (loss):
Foreign currency translation adjustments		49			(162		)	81			(194		)
Pension and other postretirement benefit adjustments, net of tax		14			90			37			135
Change in fair value of derivative instruments		(1		)	(4		)
Other comprehensive income (loss):		62			(76		)	118			(59		)
Total comprehensive income		182			61			344			152
Comprehensive income attributable to noncontrolling interests		(8		)	(3		)	(10		)	(4		)
Comprehensive income attributable to the Company		$	174		$	58		$	334		$	148

 

See accompanying notes.

 

3

 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in millions)

 

		June 30,			December 31,			June 30,
		2014			2013			2013
Assets
Current assets:
Cash and cash equivalents		$	194		$	383		$	249
Receivables		1,147			943			1,159
Inventories		1,204			1,117			1,175
Prepaid expenses		103			107			110
Total current assets		2,648			2,550			2,693
Property, plant and equipment, net		2,661			2,632			2,600
Goodwill		2,065			2,059			2,031
Other assets		1,217			1,178			1,086
Total assets		$	8,591		$	8,419		$	8,410
Liabilities and Share Owners’ Equity
Current liabilities:
Short-term loans and long-term debt due within one year		$	1,027		$	322		$	437
Current portion of asbestos-related liabilities		150			150			155
Accounts payable		1,123			1,144			982
Other liabilities		538			638			545
Total current liabilities		2,838			2,254			2,119
Long-term debt		2,620			3,245			3,336
Asbestos-related liabilities		256			298			257
Other long-term liabilities		955			1,019			1,504
Share owners’ equity		1,922			1,603			1,194
Total liabilities and share owners’ equity		$	8,591		$	8,419		$	8,410

 

See accompanying notes.

 

4

 

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

(Dollars in millions)

 

		Six months ended June 30,
		2014			2013
Cash flows from operating activities:
Net earnings		$	226		$	211
Loss from discontinued operations		21			13
Non-cash charges
Depreciation and amortization		229			215
Pension expense		29			52
Restructuring, asset impairment and related charges					10
Cash payments
Pension contributions		(20		)	(17		)
Asbestos-related payments		(42		)	(49		)
Cash paid for restructuring activities		(38		)	(47		)
Change in components of working capital		(354		)	(351		)
Other, net (a)		(82		)	(15		)
Cash provided by (utilized in) continuing operating activities		(31		)	22
Cash utilized in discontinued operating activities		(2		)	(5		)
Total cash provided by (utilized in) operating activities		(33		)	17
Cash flows from investing activities:
Additions to property, plant and equipment		(196		)	(164		)
Other, net		18			2
Cash utilized in investing activities		(178		)	(162		)
Cash flows from financing activities:
Changes in borrowings, net		71			9
Issuance of common stock		5			6
Treasury shares purchased		(12		)	(10		)
Distributions to noncontrolling interests		(35		)	(21		)
Other, net		(3		)	(13		)
Cash provided by (utilized in) financing activities		26			(29		)
Effect of exchange rate fluctuations on cash		(4		)	(8		)
Decrease in cash		(189		)	(182		)
Cash at beginning of period		383			431
Cash at end of period		$	194		$	249

 

(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 four reportable segments based on its geographic locations:  Europe, North America, South America and Asia Pacific.  These four 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 sales, global engineering, and non-glass 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 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, 2014 and 2013 regarding the Company’s reportable segments is as follows:

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Net sales:
Europe		$	790		$	746		$	1,496		$	1,396
North America		541			527			1,026			996
South America		274			269			513			538
Asia Pacific		184			231			387			478
Reportable segment totals		1,789			1,773			3,422			3,408
Other		8			8			14			14
Net sales		$	1,797		$	1,781		$	3,436		$	3,422

 

6

 

		Three months ended June 30,						Six months ended June 30,
		2014			2013			2014			2013
Segment operating profit:
Europe		$	109		$	111		$	196		$	170
North America		83			93			148			167
South America		53			37			94			90
Asia Pacific		17			26			42			66
Reportable segment totals		262			267			480			493
Items excluded from segment operating profit:
Retained corporate costs and other		(29		)	(34		)	(59		)	(65		)
Restructuring, asset impairment and related charges											(10		)
Interest expense, net		(54		)	(56		)	(108		)	(124		)
Earnings from continuing operations before income taxes		$	179		$	177		$	313		$	294

 

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

 

		June 30,			December 31,			June 30,
		2014			2013			2013
Total assets:
Europe		$	3,667		$	3,509		$	3,452
North America		2,087			1,995			2,029
South America		1,436			1,467			1,495
Asia Pacific		1,127			1,150			1,178
Reportable segment totals		8,317			8,121			8,154
Other		274			298			256
Consolidated totals		$	8,591		$	8,419		$	8,410

 

2.  Receivables

 

Receivables consist of the following:

 

		June 30, 2014			December 31, 2013			June 30, 2013
Trade accounts receivable		$	976		$	757		$	1,008
Less: allowances for doubtful accounts and discounts		40			39			42
Net trade receivables		936			718			966
Other receivables		211			225			193
		$	1,147		$	943		$	1,159

 

The Company uses various factoring programs to sell certain receivables to financial institutions as part of managing its cash flows. The amount of receivables sold by the Company was $190 million, $192 million, and $90 million at June 30, 2014, December 31, 2013, and June 30, 2013, respectively. The Company has no continuing involvement with the sold receivables.

 

3.  Inventories

 

Major classes of inventory are as follows:

 

7

 

		June 30,			December 31,			June 30,
		2014			2013			2013
Finished goods		$	1,032		$	958		$	1,006
Raw materials		127			113			125
Operating supplies		45			46			44
		$	1,204		$	1,117		$	1,175

 

4. Derivative Instruments

 

The Company has certain derivative assets and liabilities which consist of natural gas forwards and foreign exchange option and forward contracts.  The Company uses an income approach to valuing these contracts.  Natural gas forward rates and foreign exchange rates are the significant inputs into the valuation models.  These inputs are observable in active markets over the terms of the instruments the Company holds, and accordingly, the Company classifies its derivative assets and liabilities as Level 2 in the hierarchy.  The Company also evaluates counterparty risk in determining fair values.

 

Commodity Futures Contracts Designated as Cash Flow Hedges

 

The significant majority of the Company’s sales volume in North America is tied to customer contracts that contain provisions that pass the price of natural gas to the customer.  In certain of these contracts, the customer has the option of fixing the natural gas price component for a specified period of time. When the customer exercises that option the Company enters into commodity futures contracts for the related natural gas requirements, in order to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows.  At June 30, 2014 and 2013, the Company had entered into commodity futures contracts covering approximately 2,900,000 MM BTUs and 7,400,000 MM BTUs, respectively, primarily related to customer requests to lock the price of natural gas.

 

The Company accounts for these futures contracts as cash flow hedges and recognizes them on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. An unrecognized gain of $1 million at June 30, 2014 and an unrecognized loss of $1 million at June 30, 2013 related to the commodity futures contracts was included in Accumulated OCI, and will be reclassified into earnings over the next twelve months.  Any material portion of the change in the fair value of a derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current earnings.  The ineffectiveness related to these natural gas hedges for the three and six months ended June 30, 2014 and 2013 was not material.

 

The effect of the commodity futures contracts on the results of operations for the three months ended June 30, 2014 and 2013 is as follows:

 

8

 

						Amount of Gain
Amount of Gain (Loss)						Reclassified from
Recognized in OCI on						Accumulated OCI into Income
Commodity Futures Contracts						(reported in Cost of goods sold)
(Effective Portion)						(Effective Portion)
2014			2013			2014			2013
$	—		$	(3	)	$	1		$	1

 

The effect of the commodity futures contracts on the results of operations for the six months ended June 30, 2014 and 2013 is as follows:

 

						Amount of Gain
Amount of Gain						Reclassified from
Recognized in OCI on						Accumulated OCI into Income
Commodity Futures Contracts						(reported in Cost of goods sold)
(Effective Portion)						(Effective Portion)
2014			2013			2014			2013
$	2		$	—		$	2		$	—

 

Forward Exchange Contracts not Designated as Hedging Instruments

 

The Company’s subsidiaries may enter into short-term forward exchange or option agreements to purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or commodities that are denominated in currencies other than the subsidiaries’ functional currency. Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables and payables, including intercompany receivables and payables, not denominated in, or indexed to, their functional currencies. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

 

At June 30, 2014 and 2013, various subsidiaries of the Company had outstanding forward exchange and option agreements denominated in various currencies covering the equivalent of approximately $510 million and $740 million, respectively, related primarily to intercompany transactions and loans.

 

The effect of the forward exchange contracts on the results of operations for the three months ended June 30, 2014 and 2013 is as follows:

 

		Amount of Gain (Loss)
Location of Gain (Loss)		Recognized in Income on
Recognized in Income on		Forward Exchange Contracts
Forward Exchange Contracts		2014			2013
Other expense, net		$	—		$	(9	)

 

The effect of the forward exchange contracts on the results of operations for the six months ended June 30, 2014 and 2013 is as follows:

 

9

 

		Amount of Gain (Loss)
Location of Gain (Loss)		Recognized in Income on
Recognized in Income on		Forward Exchange Contracts
Forward Exchange Contracts		2014			2013
Other expense, net		$	(1	)	$	(12	)

 

Balance Sheet Classification

 

The Company records the fair values of derivative financial instruments on the balance sheet as follows: (a) receivables if the instrument has a positive fair value and maturity within one year, (b) other assets if the instrument has a positive fair value and maturity after one year, (c) other liabilities (current) if the instrument has a negative fair value and maturity within one year, and (d) other long-term liabilities if the instrument has a negative fair value and maturity after one year.  The following table shows the amount and classification (as noted above) of the Company’s derivatives:

 

		Balance		Fair Value
		Sheet Location		June 30, 2014			December 31, 2013			June 30, 2013
Asset Derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts		a		$	1		$	1		$	—
Derivatives not designated as hedging instruments:
Forward exchange contracts		a		3			3			2
Total asset derivatives				$	4		$	4		$	2
Liability Derivatives:
Derivatives designated as hedging instruments:
Commodity futures contracts		c		$	—		$	—		$	1
Derivatives not designated as hedging instruments:
Forward exchange contracts		c		2			7			9
Total liability derivatives				$	2		$	7		$	10

 

10

 

5.  Restructuring Accruals

 

Selected information related to the restructuring accruals for the three months ended June 30, 2014 and 2013 is as follows:

 

		European Asset Optimization			Asia Pacific Restructuring			Other Restructuring Actions			Total Restructuring
Balance at April 1, 2014		$	27		$	12		$	46		$	85
Net cash paid, principally severance and related benefits		(3		)	(9		)	(5		)	(17		)
Other, including foreign exchange translation		(4		)				1			(3		)
Balance at June 30, 2014		$	20		$	3		$	42		$	65

 

		European Asset Optimization			Asia Pacific Restructuring			Other Restructuring Actions			Total Restructuring
Balance at April 1, 2013		$	37		$	4		$	54		$	95
Net cash paid, principally severance and related benefits		(7		)	(1		)	(5		)	(13		)
Other, including foreign exchange translation		1									1
Balance at June 30, 2013		$	31		$	3		$	49		$	83

 

Selected information related to the restructuring accruals for the six months ended June 30, 2014 and 2013 is as follows:

 

		European Asset Optimization			Asia Pacific Restructuring			Other Restructuring Actions			Total Restructuring
Balance at January 1, 2014		$	30		$	20		$	64		$	114
Net cash paid, principally severance and related benefits		(5		)	(13		)	(20		)	(38		)
Other, including foreign exchange translation		(5		)	(4		)	(2		)	(11		)
Balance at June 30, 2014		$	20		$	3		$	42		$	65

 

		European Asset Optimization			Asia Pacific Restructuring			Other Restructuring Actions			Total Restructuring
Balance at January 1, 2013		$	53		$	6		$	64		$	123
Charges		7			2			1			10
Write-down of assets to net realizable value		(2		)							(2		)
Net cash paid, principally severance and related benefits		(27		)	(5		)	(15		)	(47		)
Other, including foreign exchange translation								(1		)	(1		)
Balance at June 30, 2013		$	31		$	3		$	49		$	83

 

The Company’s decisions to curtail selected production capacity have resulted in write downs of certain long-lived assets to the extent their carrying amounts exceeded fair value or fair value less cost to sell.  The Company classified the significant assumptions used to determine the fair value of the impaired assets, which was not material, as Level 3 in the fair value hierarchy as set forth in the general accounting principles for fair value measurements.

 

11

 

European Asset Optimization

 

During the six months ended June 30, 2013, the Company recorded charges of $7 million related to the European Asset Optimization program. These charges represented additional employee costs that the Company was required to record for the furnace closures announced during the fourth quarter of 2012.

 

6.  Pensions Benefit Plans and Other Postretirement Benefits

 

The components of the net periodic pension cost for the three months ended June 30, 2014 and 2013 are as follows:

 

		U.S.						Non-U.S.
		2014			2013			2014			2013
Service cost		$	5		$	7		$	7		$	8
Interest cost		26			27			19			17
Expected asset return		(44		)	(46		)	(24		)	(22		)
Amortization:
Prior Service cost								(1		)
Actuarial loss		19			27			7			8
Net periodic pension cost		$	6		$	15		$	8		$	11

 

The components of the net periodic pension cost for the six months ended June 30, 2014 and 2013 are as follows:

 

		U.S.						Non-U.S.
		2014			2013			2014			2013
Service cost		$	12		$	14		$	14		$	16
Interest cost		53			54			37			34
Expected asset return		(87		)	(92		)	(46		)	(45		)
Amortization:
Prior Service cost								(1		)
Actuarial loss		36			55			11			16
Net periodic pension cost		$	14		$	31		$	15		$	21

 

The U.S. pension expense for the six months ended June 30, 2013 excludes $8 million of special termination benefits that were recorded in discontinued operations in 2013.

 

During the second quarter of 2013, the Company recorded a curtailment gain of $5 million related to modifications made to one of its U.S. postretirement benefit plans that reduced or eliminated certain health care and life insurance benefits. These modifications also resulted in a $55 million reduction in the postretirement benefit obligation that was recognized in accumulated other comprehensive income.

 

7.  Income Taxes

 

The Company performs a quarterly review of the annual effective tax rate and makes changes if necessary based on new information or events. The estimated annual effective tax rate is

 

12