Restatement of Consolidated Financial Statements

12 Months Ended

Dec. 31, 2015

Restatement of Consolidated Financial Statements

Restatement of Consolidated Financial Statements

1.  Restatement of Consolidated Financial Statements

In April 2016, the Company determined that it had incorrectly applied the provisions of ASC 450, Contingencies, in measuring its liability related to unasserted claims and related legal costs arising from the Company’s previous sale of products containing asbestos (see Note 12).

Beginning in 2003, the Company had estimated its asbestos-related liability based on an analysis of how far in the future it could reasonably estimate the number of claims it would receive.  Subsequent to the filing of its Annual Report on Form 10-K for the year ended December 31, 2015 (“2015 Annual Report”), the Company has concluded that its method for estimating its future asbestos-related liability was not consistent with ASC 450. Therefore, with the assistance of an external consultant, and utilizing a model with actuarial inputs, the Company has developed a new method for reasonably estimating its total asbestos-related liability. See Note 12 for additional detail. Using the new model, the Company calculated a total asbestos-related liability of $817 million as of December 31, 2015, which is $295 million higher than previously calculated.  The revised liability is reflected in the balance sheet as of December 31, 2015.  Using the same model with actuarial inputs, the Company also revised its total asbestos-related liability as of December 31, 2014 to $939 million.

In light of the foregoing, the Company is amending its 2015 Annual Report to restate the financial statements contained therein to reflect the effects of its new method for estimating its total asbestos-related liability and to make certain corresponding disclosures related thereto.

The Company continues to believe that its ultimate asbestos-related liability cannot be estimated with certainty.  As part of its comprehensive annual review, the Company will in the future estimate its total asbestos-related liability and such reviews may result in adjustments to the liability.

The Consolidated Balance Sheets, Consolidated Results of Operations, Consolidated Statement of Comprehensive Income, Consolidated Statement of Share Owners’ Equity, and Consolidated Statement of Cash Flows, Notes 2, 10, 12, 15, 17, 20 and 22, as well as Financial Statement Schedule II were updated to reflect the restatement.

1. Restatement of Consolidated Financial Statements (Continued)

The following tables identify each financial statement line item affected by the restatement.

CONSOLIDATED RESULTS OF OPERATIONS

Dollars in millions, except per share amounts

Years ended December 31,	2015						2014						2013
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Other expense, net	$	(320)	$	209	$	(111)	$	(283)	$	89	$	(194)	$	(266)	$	133	$	(133)
Earnings from continuing operations before income taxes		59		209		268		218		89		307		335		133		468
Provision for income taxes		(106)				(106)		(92)				(92)		(120)				(120)
Earnings (loss) from continuing operations		(47)		209		162		126		89		215		215		133		348
Loss from discontinued operations		(4)				(4)		(23)				(23)		(18)				(18)
Net earnings (loss)		(51)		209		158		103		89		192		197		133		330
Net earnings attributable to noncontrolling interests		(23)				(23)		(28)				(28)		(13)				(13)
Net earnings (loss) attributable to the Company	$	(74)	$	209	$	135	$	75	$	89	$	164	$	184	$	133	$	317
Amounts attributable to the Company:
Earnings (loss) from continuing operations	$	(70)	$	209	$	139	$	98	$	89	$	187	$	202	$	133	$	335
Loss from discontinued operations		(4)				(4)		(23)				(23)		(18)				(18)
Net earnings (loss)	$	(74)	$	209	$	135	$	75	$	89	$	164	$	184	$	133	$	317
Basic earnings per share:
Earnings (loss) from continuing operations	$	(0.44)	$	1.30	$	0.86	$	0.60	$	0.54	$	1.14	$	1.22	$	0.81	$	2.03
Loss from discontinued operations		(0.03)				(0.03)		(0.14)				(0.14)		(0.11)				(0.11)
Net earnings (loss)	$	(0.47)	$	1.30	$	0.83	$	0.46	$	0.54	$	1.00	$	1.11	$	0.81	$	1.92
Diluted earnings per share:
Earnings (loss) from continuing operations	$	(0.44)	$	1.29	$	0.85	$	0.59	$	0.54	$	1.13	$	1.22	$	0.80	$	2.02
Loss from discontinued operations		(0.03)				(0.03)		(0.14)				(0.14)		(0.11)				(0.11)
Net earnings (loss)	$	(0.47)	$	1.29	$	0.82	$	0.45	$	0.54	$	0.99	$	1.11	$	0.80	$	1.91

1. Restatement of Consolidated Financial Statements (Continued)

CONSOLIDATED COMPREHENSIVE INCOME

Dollars in millions

Years ended December 31,	2015						2014						2013
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Net earnings (loss)	$	(51)	$	209	$	158	$	103	$	89	$	192	$	197	$	133	$	330
Total comprehensive income (loss)		(590)		209		(381)		(291)		89		(202)		576		133		709
Comprehensive income (loss) attributable to the Company	$	(597)	$	209	$	(388)	$	(298)	$	89	$	(209)	$	569	$	133	$	702

CONSOLIDATED BALANCE SHEETS

Dollars in millions

	Dec. 31, 2015						Dec. 31, 2014
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Asbestos-related liabilities	$	392	$	295	$	687	$	292	$	504	$	796
Retained loss	$	(10)	$	(295)	$	(305)	$	64	$	(504)	$	(440)
Total share owners' equity of the Company	$	466	$	(295)	$	171	$	1,158	$	(504)	$	654
Total share owners' equity	$	574	$	(295)	$	279	$	1,275	$	(504)	$	771

CONSOLIDATED CASH FLOWS

Dollars in millions

Years ended December 31,	2015						2014						2013
	As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated		As Reported		Adjustments		As Restated
Net Earnings (loss)	$	(51)	$	209	$	158	$	103	$	89	$	192	$	197	$	133	$	330
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Charge for asbestos-related costs	$	225	$	(209)	$	16	$	135	$	(89)	$	46	$	145	$	(133)	$	12

1. Restatement of Consolidated Financial Statements (Continued)

CONSOLIDATED SHARE OWNERS' EQUITY

Dollars in millions

	Retained earnings (loss)		Total share owners' equity
January 1, 2013
As  Reported	$	(195)	$	1,055
Adjustments		(726)		(726)
As Restated	$	(921)	$	329
December 31, 2013
As  Reported	$	(11)	$	1,603
Adjustments		(593)		(593)
As Restated	$	(604)	$	1,010
December 31, 2014
As  Reported	$	64	$	1,275
Adjustments		(504)		(504)
As Restated	$	(440)	$	771
December 31, 2015
As  Reported	$	(10)	$	574
Adjustments		(295)		(295)
As Restated	$	(305)	$	279

Significant Accounting Policies

1A.   Significant Accounting Policies

Basis of Consolidated Statements  The consolidated financial statements of Owens-Illinois, Inc. (the “Company”) include the accounts of its subsidiaries.  Newly acquired subsidiaries have been included in the consolidated financial statements from dates of acquisition.

The Company uses the equity method of accounting for investments in which it has a significant ownership interest, generally 20% to 50%.  Other investments are accounted for at cost.  The Company monitors other than temporary declines in fair value and records reductions in carrying values when appropriate.

Nature of Operations  The Company is a leading manufacturer of glass container products.  The Company’s principal product lines are glass containers for the food and beverage industries.  The Company has glass container operations located in 23 countries.  The principal markets and operations for the Company’s products are in Europe, North America, Latin America and Asia Pacific.

Use of Estimates  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management of the Company to make estimates and assumptions that affect certain amounts reported in the financial statements and accompanying notes.  Actual results may differ from those estimates, at which time the Company would revise its estimates accordingly.

Foreign Currency Translation  The assets and liabilities of non-U.S. subsidiaries are translated into U.S. dollars at year-end exchange rates.  Any related translation adjustments are recorded in accumulated other comprehensive income in share owners’ equity.

Revenue Recognition  The Company recognizes sales, net of estimated discounts and allowances, when the title to the products and risk of loss are transferred to customers.  Provisions for rebates to customers are provided in the same period that the related sales are recorded.

Shipping and Handling Costs   Shipping and handling costs are included with cost of goods sold in the Consolidated Results of Operations.

Stock-Based Compensation   The Company has various stock-based compensation plans consisting of stock option grants and restricted share awards.  Costs resulting from all share-based compensation plans are required to be recognized in the financial statements.  A public entity is required to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.  That cost is recognized over the required service period (usually the vesting period).  No compensation cost is recognized for equity instruments for which employees do not render the required service.

Cash  The Company defines “cash” as cash and time deposits with maturities of three months or less when purchased.  Outstanding checks in excess of funds on deposit are included in accounts payable.

Accounts Receivable   Receivables are stated at amounts estimated by management to be the net realizable value.  The Company charges off accounts receivable when it becomes apparent based upon age or customer circumstances that amounts will not be collected.

Allowance for Doubtful Accounts   The allowance for doubtful accounts is established through charges to the provision for bad debts.  The Company evaluates the adequacy of the allowance for doubtful accounts on a periodic basis.  The evaluation includes historical trends in collections and write-offs, management’s judgment of the probability of collecting accounts and management’s evaluation of business risk.

Inventory Valuation  Inventories are valued at the lower of average costs or market.

Goodwill  Goodwill represents the excess of cost over fair value of net assets of businesses acquired.  Goodwill is evaluated annually, as of October 1, for impairment or more frequently if an impairment indicator exists.

Intangible Assets and Other Long-Lived Assets Intangible assets are amortized over the expected useful life of the asset.  Amortization expense directly attributed to the manufacturing of the Company’s products is included in cost of goods sold.  Amortization expense related to non-manufacturing activities is included in selling and administrative and other. The Company evaluates the recoverability of intangible assets and other long-lived assets based on undiscounted projected cash flows, excluding interest and taxes, when factors indicate that impairment may exist.  If impairment exists, the asset is written down to fair value.

Property, Plant and Equipment   Property, plant and equipment (“PP&E”) is carried at cost and includes expenditures for new facilities and equipment and those costs which substantially increase the useful lives or capacity of existing PP&E.  In general, depreciation is computed using the straight-line method and recorded over the estimated useful life of the asset.  Factory machinery and equipment is depreciated over periods ranging from 5 to 25 years with the majority of such assets (principally glass-melting furnaces and forming machines) depreciated over 7 to 15 years.  Buildings and building equipment are depreciated over periods ranging from 10 to 50 years. Depreciation expense directly attributed to the manufacturing of the Company’s products is included in cost of goods sold.  Depreciation expense related to non-manufacturing activities is included in selling and administrative. Depreciation expense includes the amortization of assets recorded under capital leases.  Maintenance and repairs are expensed as incurred.  Costs assigned to PP&E of acquired businesses are based on estimated fair values at the date of acquisition.  The Company evaluates the recoverability of PP&E based on undiscounted projected cash flows, excluding interest and taxes, when factors indicate that impairment may exist.  If impairment exists, the asset is written down to fair value.

Derivative Instruments   The Company uses forward exchange contracts, options and commodity forward contracts to manage risks generally associated with foreign exchange rate and commodity market volatility.  Derivative financial instruments are included on the balance sheet at fair value.  When appropriate, derivative instruments are designated as and are effective as hedges, in accordance with accounting principles generally accepted in the United States.  If the underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings.  The Company does not enter into derivative financial instruments for trading purposes and is not a party to leveraged derivatives. Cash flows from short-term forward exchange contracts not designated as hedges are classified as a financing activity.  Cash flows of commodity forward contracts are classified as operating activities.

Fair Value Measurements  Fair value is defined as the amount that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants.  Generally accepted accounting principles defines a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1:  Observable inputs such as quoted prices in active markets;

Level 2:  Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3:  Unobservable inputs for which there is little or no market data, which requires the Company to develop assumptions.

The carrying amounts reported for cash and short-term loans approximate fair value.  In addition, carrying amounts approximate fair value for certain long-term debt obligations subject to frequently redetermined interest rates.  Fair values for the Company’s significant fixed rate debt obligations are generally based on published market quotations.

The Company’s derivative assets and liabilities 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.

Reclassifications   Certain reclassifications of prior years’ data have been made to conform to the current year presentation.

New Accounting Standards

Revenue from Contracts with Customers - In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers", which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers”, which delayed by one year the effective date of the new revenue recognition standard, which will be effective for the Company on January 1, 2018. The Company is currently evaluating the effect this standard will have on its consolidated financial statements and related disclosures.  The Company has not yet selected a transition method nor determined the effect of the standard on its ongoing financial reporting. 

Presentation of Debt Issuance Costs - In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs." This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge (asset). In the third quarter 2015, the Company elected to adopt this new guidance.

As a result of the adoption of ASU No. 2015-03 certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations for any period. Previously, the Company had classified these debt issuance costs as an asset in “other assets”. Accordingly, the Company has revised the classification to report these debt issuance costs under the “long-term debt” caption on the balance sheet. For the period ended December 31, 2014, the total of debt issuance costs that was previously classified as “other assets” was $15 million.

Business Combinations – In September 2015, the FASB issued ASU No. 2015-16, “Simplifying the Accounting for Measurement-Period Adjustments”. This standard allows for the acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting periods in which the adjustment amounts are determined. The Company elected to adopt this new guidance as of the third quarter of 2015.

Deferred Taxes – In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”. This standard requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet. The Company elected to adopt this new guidance prospectively in the fourth quarter of 2015. Prior periods were not retrospectively adjusted.