UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM
(Mark One) | |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended | |
or | |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number
(Exact name of registrant as specified in its charter)
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Registrant’s telephone number, including area code: (
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
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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.
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 ☐
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.
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).
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.
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value (based on the consolidated tape closing price on June 30, 2020) of the voting and non-voting common equity held by non-affiliates of the Company was approximately $
The number of shares of common stock, $.01 par value of O-I Glass, Inc. outstanding as of January 31, 2021 was
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the O-I Glass, Inc. Proxy Statement for the Annual Meeting of Share Owners to be held Tuesday, May 11, 2021 (“2021 Proxy Statement”) are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
General Development of Business
O-I Glass, Inc., a Delaware corporation (the “Company”), through its subsidiaries, is the successor to a business established in 1903. The Company is one of the leading manufacturers of glass containers in the world with 72 glass manufacturing plants in 20 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.
The term “Company,” as used herein and unless otherwise stated or indicated by context, refers to Owens-Illinois, Inc. and its affiliates (“O-I”) prior to the Corporate Modernization (as defined below) and to O-I Glass, Inc. and its affiliates (“O-I Glass”) after the Corporate Modernization.
Corporate Modernization and Paddock’s Chapter 11 Filing
On December 26 and 27, 2019, the Company implemented the Corporate Modernization pursuant to the Agreement and Plan of Merger (the “Merger Agreement”), dated as of December 26, 2019, among O-I, O-I Glass and Paddock Enterprises, LLC (“Paddock”).
The Corporate Modernization was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which permits the creation of a holding company through a merger with a direct or indirect wholly owned subsidiary of the constituent corporation without stockholder approval. The Corporate Modernization involved a series of transactions (together with certain related transactions, the “Corporate Modernization”) pursuant to which (1) O-I formed a new holding company, O-I Glass, as a direct wholly owned subsidiary of O-I and a sister company to Owens-Illinois Group, Inc. (“O-I Group”), (2) O-I Glass formed a new Delaware limited liability company, Paddock, as a direct wholly owned subsidiary of O-I Glass, (3) O-I merged with and into Paddock, with Paddock continuing as the surviving entity and as a direct wholly owned subsidiary of O-I Glass (the “Merger”) and (4) Paddock distributed 100% of the capital stock of O-I Group to O-I Glass, as a result of which O-I Group is a direct wholly owned subsidiary of O-I Glass and sister company to Paddock.
Upon the effectiveness of the Merger, each share of O-I stock held immediately prior to the Merger automatically converted into a right to receive an equivalent corresponding share of O-I Glass stock, having the same designations, rights, powers and preferences and the qualifications, limitations, and restrictions as the corresponding share of O-I stock being converted. Immediately after the Corporate Modernization, O-I Glass had, on a consolidated basis, the same assets, businesses and operations as O-I had immediately prior to the Corporate Modernization. After the Corporate Modernization, O-I’s share owners became share owners of O-I Glass. The Merger is intended to qualify as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended, and as a result, the stockholders of O-I do not recognize gain or loss for U.S. federal income tax purposes upon the conversion of their O-I shares.
On January 6, 2020, Paddock voluntarily filed for relief under Chapter 11 of the United States Bankruptcy Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware to equitably and finally resolve all of its current and future asbestos-related claims. O-I Glass and O-I Group were not included in the Chapter 11 filing. Paddock’s ultimate goal in its Chapter 11 case is to confirm a plan of reorganization under Section 524(g) of the Bankruptcy Code and utilize this specialized provision to establish a trust that will address all current and future asbestos-related claims. Paddock now operates in the ordinary course under court protection from Asbestos Claims (as defined herein) by operation of the automatic stay in Paddock’s Chapter 11 filing, which stays ongoing litigation and submission of claims to Paddock, defers payment of outstanding obligations on account of settled or otherwise determined lawsuits and claims, and will provide a centralized forum to resolve presently pending and anticipated future lawsuits and claims associated with asbestos.
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For a discussion of the effects of the Corporate Modernization and Paddock’s Chapter 11 proceedings on the Company’s financial statements, see Item 1A, Risk Factors – “Corporate Modernization,” “Subsidiary Bankruptcy” and “Asbestos-Related Liability,” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 to the Company’s Consolidated Financial Statements.
Company Strategy
The Company’s vision is to be the most innovative, sustainable, and chosen supplier of brand-building packaging solutions. Its goal is to grow the business and create value for employees, customers, share owners and the community. The Company will realize its vision and goal by achieving its five strategic ambitions including:
| ● | To profitably grow the top line through effective innovation, marketing, and commercialization and excel at serving current customers by significantly improving the customer experience; aligning its activity with customers’ needs and market dynamics; improving quality and flexibility; elevating innovation and new product development; improving its environmental profile; advocating and marketing glass; advancing end-to-end supply chain capabilities, processes, and talent; and enabling profitable growth; |
| ● | To be cost competitive by elevating year-over-year productivity across the business by ensuring asset stability and total systems cost management; elevating factory performance, efficiency, and profitability; leveraging automation and improving quality; cultivating concepts that extend current or create new competitive advantages; and focusing on continuous improvement across all aspects of the business; |
| ● | To disrupt current industry dynamics by creating a new paradigm with MAGMA by leveraging innovation and developing breakthrough technology; commercializing MAGMA; and enabling the full value chain for glass; |
| ● | To become the most sustainable rigid packaging producer by repositioning its Environmental, Social and Governance (ESG) profile, improving its environmental performance; increasing recycling; and actively communicating and advocating for glass packaging; |
| ● | To be a simple, agile, diverse, inclusive, and performance-based organization energized by engaged employees by elevating organizational focus; driving performance, culture, and engagement of its people; developing talent; strengthening diversity and inclusion in the work place; and embedding flexibility to follow market needs and changes. |
Reportable Segments
Historically, the Company had 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.
On July 31, 2020, the Company completed the sale of its Australia and New Zealand (“ANZ”) businesses, which comprised the majority of its businesses in the Asia Pacific region (approximately 85% of net sales in that region for the full year 2019), to Visy Industries Holdings Pty Ltd. (“Visy”). After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment. Thus, after 2020, the Company will no longer report results for the Asia Pacific reportable segment. For the historical periods presented in this report, the results for the Asia Pacific reportable segment reflect only the results of the ANZ businesses. The sales and operating results of the other businesses that
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historically comprised the Asia Pacific segment, and that have been retained by the Company, have been reclassified to Other sales and Retained corporate costs and other, respectively.
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, Molson Coors, Nestle, and PepsiCo.
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.
Sales and Markets
The Company’s principal markets for glass container products are in the Americas and Europe with select operations remaining in the Asia Pacific region after the sale of its ANZ businesses.
Americas. The Company has 35 glass container manufacturing plants in the Americas region located in Argentina, 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 is one of the leaders in 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. After 2020, the Company will no longer report results for the Asia Pacific reportable segment due to the sale of most of this segment. On July 31, 2020, the Company completed the sale of its ANZ businesses, which comprised the majority of its businesses in the Asia Pacific region (approximately 85% of net sales in that region for the full year 2019), to Visy. After the sale of the ANZ businesses, the remaining
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businesses in the Asia Pacific region, which consist of three plants and a joint venture, do not meet the criteria of an individually reportable segment.
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 Ardagh Group, 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.
Seasonality
Sales of many glass container products such as beer, beverages and food are seasonal. Shipments in North America and Europe are typically greater in the second and third quarters of the year, while shipments in Latin America are typically greater in the third and fourth quarters of the year.
Manufacturing
The Company has 72 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., 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.
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% to 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, there is a combination of fixed price contracts, as well as energy pricing linked to variable commodities pricing. Also, in these countries, customer contracts generally allow for annual price adjustments for inflation, variability in energy costs, and foreign currency variation.
In Europe, 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.
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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. 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, known as the MAGMA program, seek 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.
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.
Sustainability, the Environment and Workplace Safety
The Company is committed to sustainability, including reducing the impact its products and operations have on the environment. As part of this commitment, the Company has set sustainability targets, including some for increasing the use of recycled glass in its manufacturing process and reducing energy consumption and carbon dioxide equivalent (“CO2”) emissions, and aligned its sustainability ambitions with the United Nations Sustainable Development Goals. Some specific actions taken by the Company include expanding sustainability corporate governance at the board level, appointing a Chief Sustainability Officer who reports to the CEO, establishing a global sustainability network, 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.
In addition, the Company is committed to ensuring the health and safety of its employees, as well as contractors and visitors in all of the Company’s facilities. Hazards in the workplace are actively identified and management tracks incidents so remedial actions can be taken to improve workplace safety. The coronavirus disease 2019 (“COVID-19”) pandemic has underscored the importance of keeping the Company’s employees safe and healthy. In response to the pandemic, the Company has taken actions aligned with the World Health Organization and the Centers for Disease Control and Prevention to protect its workforce so they can more safely and effectively perform their work.
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, Deposit Return Systems, and Extended Producer Responsibility
The Company is an important contributor to recycling efforts worldwide and is among the largest users of recycled glass. 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, including Extended Producer Responsibility (“EPR”) frameworks. EPR and other packaging
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recycling regulations may impose fees, mandate certain recycling rates, require minimum use of recycled materials, or result in 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-return system (“DRS”) laws and EPR regulations. As of December 31, 2020, there were a number of U.S. states, Canadian provinces and territories and European countries with some form of legal regulation that imposes fees on producers or consumers of various packaging, including glass containers. 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.
Countries, states, and localities in all geographies in which the Company operates have recently considered or are now considering new EPR regulations, various laws and regulations to change curbside recycling, modify or create DRS laws, and create alternatives to traditional recycling systems. Although there is no clear trend in the direction of these various activities, the Company believes these legal and regulatory activities will impact the price and supply 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 the supply of such material in its markets.
Climate Change and Air Emissions
Governments globally are increasingly considering a variety of mandatory or voluntary (e.g. Paris Climate Accord) climate-change or environmental regulatory and legal requirements. The Company is unable to predict what climate-change or environmental legal requirements may be adopted in the future. However, the Company continually monitors its operations in relation to climate-change risks and 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.
In Europe, the European Union Emissions Trading Scheme 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 in any country or state in the U.S. where the Company operates 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 Mexico and other South American countries, national and local governments are also considering potential regulations to reduce GHG emissions.
Workplace Safety
In the U.S., the Company is subject to various state and federal regulatory agencies, such as the Occupational Safety and Health Administration (OSHA), that assure safe and healthy working conditions by
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setting and enforcing standards and by providing training, outreach, education and assistance. Similar regulatory agencies focused on employee safety exist in other countries in which the Company operates around the world.
The Company is unable to predict what workplace safety legal requirements may be adopted in the future. However, the Company continually monitors its operations in relation to workplace safety and invests in projects to enhance employee safety. As such, the Company has made significant expenditures for workplace safety 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 expects to see continued improvement in health and safety as a result of these projects. The Company is unable to predict the impact of future health and safety legal requirements on its results of operations or cash flows.
Human Capital Resources
The Company’s success depends on its ability to attract, develop and retain key personnel. The skills, experience and industry knowledge of key employees significantly benefit the Company’s operations and performance. The Company has approximately 25,000 employees and 72 plants spread across 20 countries. Led by its people’s knowledge and ambition, the Company is innovating to meet its customers’ ever-evolving needs to help build their brands and become valued partners. To facilitate talent attraction and retention, the Company provides a safe, inclusive, diverse, motivating and collaborative work environment with opportunities for its employees to grow and develop in their careers, supported by strong compensation, benefits and health and wellness programs, and by programs that build connections between its employees and their communities.
The Company is committed to a culture of respect and integrity and believes it is better when it reflects the diversity of the world it serves, leading to a broader range of perspectives that yield superior decisions and outcomes. The Company is expanding its employee development programs, with significant focus on leadership development and a greater level of diversity. The Company is focused on increasing all aspects of diversity across its management team, which includes taking steps to increase the representation of women in senior leadership roles. To assess and improve employee retention and engagement, the Company surveys employees with the assistance of third-party consultants, and takes actions to address areas of employee concern.
A significant portion of the Company’s employees in the Americas are hourly workers covered by collective bargaining agreements. 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.
The Company continues to emphasize collaboration, leveraging its knowledge and expertise, increasing accountability, and aligning incentives with the right results, with a focus on one team, one enterprise and one plan. The Company believes successful execution along these lines will lead to enhanced value for share owners, customers, and employees.
Available Information
The Company’s website is www.o-i.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 can be obtained from this site at no cost. The Securities and Exchange Commission (“SEC”) maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The Company’s Corporate Governance Guidelines, Global Code of Business Conduct and Ethics and the charters of the Audit, Compensation, Nominating/Corporate Governance and Risk Oversight Committees are also available on the “Investors” section of the Company’s website. Copies of these documents are available in print
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to share owners upon request, addressed to the Corporate Secretary at the address above. The information on the Company’s website is not part of this or any other report that the Company files with, or furnishes to, the SEC.
Information About our Executive Officers
In the following table, the Company sets forth certain information regarding those persons currently serving as executive officers of O-I Glass, Inc. as of February 16, 2021.
Name and Age |
| Position |
Andres A. Lopez (58) | Chief Executive Officer since January 2016; President, Glass Containers and Chief Operating Officer 2015; Vice President and President of O-I Americas 2014–2015; Vice President and President of O-I South America 2009–2014; Vice President of Global Manufacturing and Engineering 2006 – 2009. | |
Darrow Abrahams (47) | Senior Vice President, General Counsel and Corporate Secretary since September 2020; Deputy General Counsel April 2020 – August 2020; Associate General Counsel, Dispute Resolution 2017 – 2020; Assistant General Counsel, Litigation 2015 – 2017; Senior Litigator 2012 – 2015. | |
Arnaud Aujouannet (51) | Senior Vice President and Chief Sales and Marketing Officer since October 2017; Vice President of Sales and Marketing, Europe 2015 – 2017. Previously Commercial Associate Director, Oral Care Europe for Procter & Gamble, a multi-national consumer goods company 2012 – 2015; Global Sales & Marketing Chief Sales & Marketing Officer, Swiss Precision Diagnostic/Clearblue (a Procter & Gamble Joint Venture) 2009 – 2012. | |
Giancarlo Currarino (44) | Senior Vice President, Chief Technical Operation Officer since July 2020; Senior Vice President and Chief Technology and Supply Chain Officer 2016 –2020; Vice President and Chief Technology Officer 2012 – 2016; Vice President of Global Engineering 2011 – 2012. | |
John A. Haudrich (53) | Senior Vice President and Chief Financial Officer since April 2019; Senior Vice President and Chief Strategy and Integration Officer 2015 – 2019; Vice President and Acting Chief Financial Officer 2015; Vice President Finance and Corporate Controller 2011 – 2015; Vice President of Investor Relations 2009 – 2011. | |
Vitaliano Torno (62) | President, Business Operations and O-I Europe since July 2020; President, O-I Europe 2016–2020; Managing Director, O-I Europe 2015; Vice President, European countries 2013 – 2015; Vice President, Marketing and sales, Europe 2010 – 2013. |
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ITEM 1A. RISK FACTORS
Risks Related to the Company’s Business and Industry
The COVID-19 pandemic has resulted, and may likely continue to result in material adverse effects on the Company's business, financial position, liquidity, results of operations and cash flows.
The COVID-19 pandemic, and the various governmental, industry and consumer actions related thereto, have had, and may likely continue to have, negative impacts on the Company's business. These impacts include, without limitation, significant volatility or decreases in the demand for the Company's products, changes in customer and consumer behavior and preferences, disruptions in or closures of the Company's manufacturing operations or those of its customers and suppliers, disruptions within the Company's supply chain, limitations on the Company's employees' ability to work and travel, potential financial difficulties of customers and suppliers, significant changes in economic or political conditions, and related financial and commodity volatility, including volatility in raw material and other input costs.
In addition, future changes in the Company's cost of capital, expected cash flows, or other factors as a result of the above may cause the Company's long-lived assets, including goodwill, to be impaired, resulting in a non-cash charge against results of operations to write-down long-lived assets including goodwill for the amount of the impairment.
The COVID-19 pandemic may also have the effect of heightening many of the other risks described in this annual report on Form 10-K for the year ended December 31, 2020, such as those relating to the Company's ability to service its indebtedness; the restrictions placed on the Company under its existing indebtedness; fluctuations in foreign exchange rates; international operations; changes in consumer demand; the global economic environment; operational disruptions; the availability and cost of raw materials; joint ventures; cybersecurity and data privacy; and goodwill; among others.
The degree to which the COVID-19 pandemic and related actions will ultimately impact the Company's business, financial position, liquidity, results of operations and cash flows will depend on factors that are beyond its control, highly uncertain and cannot be predicted, including, but not limited to, the continued spread, duration and severity of the COVID-19 pandemic; the occurrence, spread, duration and severity of any subsequent wave or waves of outbreaks after the initial outbreak has subsided; the actions taken by the U.S. and foreign governments to contain the COVID-19 pandemic, address its impact or respond to the reduction in global and local economic activity; the occurrence, duration and severity of a global, regional or national recession, depression or other sustained adverse market event; the impact of the developments described above on the Company’s customers and suppliers; and how quickly and to what extent normal economic and operating conditions can resume.
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 packaged products.
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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.
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.
New Glass Melting Technologies—The Company’s inability to develop or apply new glass melting technology may affect its competitiveness.
The Company’s success depends partially on its ability to improve its glass melting technology. This technology, known as the MAGMA program, seeks to reduce the amount of capital required to install, rebuild and operate the Company’s furnaces. This new 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 demand. If the Company is unable to continue to improve this glass melting technology through research and development or licensing of new technology, the Company may not be able to remain competitive with other packaging manufacturers. As a result, its business, financial condition or results of operations could be adversely affected.
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 manufacturing 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.
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
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industry standards; however, this insurance coverage may not be adequate to protect the Company from all liabilities and expenses that may arise.
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 and Mexico. Given fluctuations in foreign currency exchange rates, this may cause these regions to experience inflationary or deflationary impacts to their raw material costs.
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 North America and Europe are typically greater in the second and third quarters of the year, while shipments in South America are typically greater in the third and fourth quarters of the year. Unseasonably cool weather during peak demand periods can reduce demand for certain beverages packaged in the Company’s containers.
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 and Europe segments and one joint venture in the Asia Pacific region that is included 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.
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, 2020, covered approximately 74% of the Company’s employees in the U.S. and Canada. The principal collective bargaining agreement, which at December 31, 2020 covered approximately 77% of the Company’s union-affiliated employees in U.S. and Canada, will expire on March 31, 2022. Approximately 80% of employees in South America and Mexico are covered by collective bargaining agreements. The collective bargaining agreements in South America and Mexico 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 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.
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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:
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:
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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.
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, 2020 totaled $1.95 billion, representing approximately 22% of total assets. 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. For example, the Company recorded a non-cash impairment charge of $595 million in the third quarter of 2019, which was equal to the excess of the North American reporting unit's carrying value over its fair value. The goodwill related to the North America reporting unit remains the reporting unit that has the greatest risk of future impairment charges given the difference (approximately 19%) between the business enterprise value and carrying value of this reporting unit as of October 1, 2020.
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 $103 million, $33 million and $34 million to its defined benefit pension plans in 2020, 2019 and 2018, 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.
Risks Related to the Corporate Modernization
Corporate Modernization—The Company may not obtain the anticipated benefits of the Corporate Modernization.
The Company implemented the Corporate Modernization on December 26 and 27, 2019. On December 27, 2019, the Company announced the adoption of a new holding company structure whereby O-I Glass became the new parent entity with O-I Group and Paddock as direct, wholly owned subsidiaries. The Company’s legacy asbestos-related liabilities and certain other liabilities remained within Paddock, while the Company’s glass-making operations remained under O-I Group. The Company believes that the Corporate Modernization improves the Company’s operating efficiency and cost structure, while ensuring the Company remains well-positioned to address its legacy liabilities. The anticipated benefits of the Corporate Modernization may not be obtained if circumstances prevent the Company from taking advantage of the strategic and business opportunities that the Company expects from the Corporate Modernization transactions. As a result, the Company may incur the costs of a corporate reorganization without realizing the anticipated benefits, which could adversely affect the Company’s reputation, financial condition, and operating results. The Company’s management has dedicated, and will continue to dedicate, significant effort to implementing the Corporate Modernization. These efforts may divert management’s focus and resources from the Company’s business, corporate initiatives, or strategic opportunities, which could have an adverse effect on the Company’s businesses, results of operations, financial condition, or prospects.
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As a result of the Corporate Modernization, the name of the Company’s parent holding company changed from Owens-Illinois, Inc. to O-I Glass, Inc. The reorganization efforts related to the Corporate Modernization could confuse and distract the Company’s customers, suppliers and employees. In addition, these reorganization efforts could adversely affect or delay the Company’s development and introduction of new products and technologies, result in the loss of management, technical, or other key personnel, disrupt the Company’s supplier or customer relationships, jeopardize its supplier or sales channels and the Company’s branding and marketing efforts, and increase administrative expense, all of which could affect the Company’s profitability.
For a discussion of the effects of the Corporate Modernization on the Company’s financial statements, see Item 1, “Corporate Modernization and Paddock’s Chapter 11 Filing” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Subsidiary Bankruptcy—The Company’s subsidiary, Paddock, has filed a petition to resolve asbestos litigation and asbestos-related claims under Chapter 11 of the Bankruptcy Code. Risks and uncertainties related to this filing could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows.
On January 6, 2020 (the “Petition Date”), Paddock voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware to equitably and finally resolve all of its current and future asbestos-related liabilities. O-I Glass and O-I Group were not included in the Chapter 11 filing. Paddock’s ultimate goal in its Chapter 11 case is to confirm a plan of reorganization under Section 524(g) of the Bankruptcy Code and utilize this specialized provision to establish a trust that will address all current and future asbestos-related claims. Paddock has been deconsolidated from the Company’s financial statements since the Petition Date.
The amount that will be necessary to fully and finally resolve all of Paddock’s current and future asbestos-related claims is uncertain. Several risks and uncertainties related to Paddock’s Chapter 11 case could have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows, including the value of Paddock, as deconsolidated, reflected in the Company’s financial statements, the ultimate amounts necessary to fund any trust established pursuant to Section 524(g) of the Bankruptcy Code, the potential for the Company’s asbestos-related exposure to extend beyond Paddock arising from corporate veil piercing efforts or other claims by asbestos plaintiffs, the costs of the Chapter 11 proceedings and the length of time necessary to resolve the case, either through settlement or as a result of litigation arising in connection with the Chapter 11 proceeding, and the possibility that Paddock will be unsuccessful in attaining relief under Chapter 11.
As part of the Corporate Modernization transactions, O-I Glass entered into a support agreement with Paddock that requires O-I Glass to provide funding to Paddock for all permitted uses, subject to the terms of the support agreement and that is designed to ensure that Paddock remains solvent. The key objective of the support agreement is to ensure that Paddock has the same ability to fund the costs related to Asbestos Claims (as defined herein) as O-I, which funded asbestos-related liabilities out of cash funded from its subsidiaries.
Paddock also has legacy environmental liabilities, related to, among other things, O-I’s prior operation of certain facilities, including, but not limited to, in Ohio, Kentucky, Connecticut, New Jersey, and Georgia. Paddock’s liabilities with respect to these facilities relate to penalties for site closures, remediation expenses, exposure for cleanup of contamination, and alleged noncompliance with regulations. Paddock also has liabilities associated with O-I’s involvement in a number of other administrative and legal proceedings regarding the responsibility for the cleanup of hazardous waste or damages claimed to be associated with it and with O-I’s involvement in some minor claims for environmental remediation of properties sold to third parties. Paddock also has other contested prepetition liabilities arising from pending non-asbestos-related litigation.
For a further discussion of the Chapter 11 proceedings and Paddock’s legacy liabilities, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 15 to the Consolidated Financial Statements, included in this report.
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Asbestos-Related Liability—The Company has made substantial payments to resolve claims of persons alleging exposure to asbestos-containing products and the Company has obligations to make further payments to resolve such claims under the terms of the support agreement. These substantial payments and obligations have affected and may continue to affect the Company’s cost of borrowing, its ability to pursue global or domestic acquisitions, its ability to reinvest in its operations, and its ability to pay dividends.
From 1948 to 1958, one of the Company’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium silicate based pipe and block insulation material containing asbestos. The Company exited the insulation business in April 1958. Historically, the Company received claims from individuals alleging bodily injury and death as a result of exposure to asbestos from this product (“Asbestos Claims”). Some Asbestos Claims were brought as personal injury lawsuits that typically allege various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and, in some cases, punitive damages. Predominantly, however, Asbestos Claims were presented to O-I under administrative claims-handling agreements, which O-I had in place with many plaintiffs’ counsel throughout the country.
Beginning with the initial liability of $975 million established in 1993, O-I had accrued a total of approximately $5.0 billion through 2019, before insurance recoveries, for its asbestos-related liability. O-I’s ability to estimate its liability had been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the inherent uncertainty of future disease incidence, the claiming patterns against O-I, the significant expansion of the defendants that are in the litigation, and the continuing changes in the way in which these defendants participate in the resolution of the cases in which O-I was also a defendant.
For many years, O-I conducted an annual comprehensive legal review of its asbestos-related liabilities and costs in connection with finalizing its annual results of operations. In May 2016, O-I revised its method for estimating its asbestos-related liabilities in connection with finalizing and reporting its restated results of operations for the three years ended December 31, 2015. The revised method estimated the total future costs for O-I’s asbestos-related liability. Under this method, O-I provided historical Asbestos Claims’ data to a third party with expertise in determining the impact of disease incidence and mortality on future filing trends to develop information to assist O-I in estimating the total number of future Asbestos Claims likely to be asserted against O-I. O-I used this estimate, along with an estimation of disposition costs and related legal costs, as inputs to develop its best estimate of its total probable liability. The revised methodology led O-I to conclude that an asbestos-related liability of $486 million was required as of December 31, 2019.
Following the Corporate Modernization transactions, asbestos-related liabilities that were previously paid by O-I now reside at Paddock. The Company undertook the Corporate Modernization transactions, which resulted in the legacy liabilities of O-I residing within Paddock, separate from the active operations of the Company’s subsidiaries, while fully maintaining Paddock’s ability to access the value of those operations to support its legacy liabilities through the support agreement. The Corporate Modernization transactions also helped ensure that Paddock has the same ability to fund the costs of defending and resolving present and future Asbestos Claims as O-I previously did, through Paddock’s retention of its own assets to satisfy these claims and through its access to additional funds from the Company through the support agreement. The Company anticipates that, as a result of Paddock’s Chapter 11 filing, Paddock’s asbestos-related liabilities will be assessed and ultimately paid out in connection with a confirmed Chapter 11 plan of reorganization.
The Company continues to believe that Paddock’s ultimate asbestos-related liabilities cannot be estimated with certainty at this time. Historically, as part of its annual comprehensive legal reviews, the Company has reviewed its estimate of total asbestos-related liability, unless significant changes in trends or new developments warranted an earlier review. Such reviews resulted in significant adjustments to the liability accrued at the time of the review. For example, for the years ended December 31, 2019 and 2018, the Company’s comprehensive legal review of asbestos-related liabilities resulted in charges of $35 million and $125 million, respectively.
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The significant assumptions underlying the material components of the Company’s historical accruals have been:
See “Critical Accounting Estimates” and Note 15 to the Consolidated Financial Statements for additional information about the Company’s asbestos-related liability.
The Company’s funding of substantial payments to resolve asbestos-related claims and the obligation to fund asbestos-related payments ultimately paid out in connection with the confirmation of a Chapter 11 plan of reorganization has affected and may continue to affect the Company’s cost of borrowing, its ability to pursue global or domestic acquisitions, its ability to reinvest in its operations, and its ability to pay dividends.
Risks Related to Information Technology, Cybersecurity and Data Privacy
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 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
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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.
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, there can be no assurance 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 the 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.
Risks Related to the Company’s Indebtedness
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, 2020 and December 31, 2019, the Company had approximately $5.1 billion and $5.6 billion of total debt outstanding, respectively.
The Company’s indebtedness could:
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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 endeavors depends on its ability to generate cash in the future. The Company makes 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, 2020, the Company’s debt, including interest rate swaps, that is subject to variable interest rates represented approximately 29% 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 they relate to derivatives, debt and cash markets exposed to USD-LIBOR. Approximately 10% of the Company’s long-term indebtedness is 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:
The Company can provide no assurance that it could effect 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 notes, and certain of the agreements governing other indebtedness contain affirmative and negative covenants that limit the ability of the Company to
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take certain actions. For example, certain of the 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 the indentures governing the Company’s 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.
Risks Related to the Company’s International Operations
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 $4.3 billion, representing approximately 71% of the Company’s net sales for the year ended December 31, 2020. 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; |
| ● | Outbreaks of pandemic disease, such as COVID-19; |
| ● | Taking of property by nationalization or expropriation without fair compensation; |
| ● | Changes in governmental policies and regulations; |
| ● | Devaluations and 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 increases 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 the Company’s non-U.S. earnings or operations; and |
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| ● | Complying with the U.S. Foreign Corrupt Practices Act that 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.
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 is denominated in currencies other than the U.S. dollar, primarily the Euro, Brazilian real, Colombian peso and Mexican peso. 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.
Brexit—The Company’s business may be impacted by the United Kingdom’s withdrawal from the European Union.
Following a national referendum and enactment of legislation by the government of the United Kingdom, the United Kingdom formally withdrew from the European Union and ratified a trade and cooperation agreement governing its future relationship with the European Union. The agreement, which is being applied provisionally from January 1, 2021, until it is ratified by the European Parliament and the Council of the European Union, addresses trade, economic arrangements, law enforcement, judicial cooperation and a governance framework including procedures for dispute resolution, among other things. Because the agreement merely sets forth a framework in many respects and will require complex additional bilateral negotiations between the United Kingdom and the European Union as both parties continue to work on the rules for implementation, significant political and economic uncertainty remains about how the precise terms of the relationship between the parties will differ from the terms before withdrawal.
These developments, or the perception that any related developments could occur, have had and may continue to have a material adverse effect on global economic conditions and financial markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in certain financial markets. Asset valuations, currency exchange rates and credit ratings have been and may continue to be subject to increased market 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 significant political and economic uncertainty surrounding Brexit 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.
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Risks Related to Legal and Regulatory Matters
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 Company’s results of operations. 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.
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 continue to be issued providing further clarification on the application of the U.S. Tax Cuts and Jobs Act and related regulations. 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, such as restrictions on interest deductibility and deductibility of cross-jurisdictional payments, 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 provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable classification and other
21
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, the tax policies of certain EU member states. One of these efforts has been led by the OECD, an international association of more than 35 countries including the United States, which has finalized recommendations to revise corporate tax, transfer pricing, and tax treaty provisions in member countries. One area of focus is base erosion and profit shifting, including situations where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. 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.
Corporate tax reform, anti-base-erosion rules and tax transparency continue to be high priorities in many jurisdictions. As a result, policies regarding corporate income and other taxes in numerous jurisdictions are under heightened scrutiny and tax reform legislation has been, and will likely continue to be, proposed or enacted in a number of jurisdictions in which the Company operates. Further, many jurisdictions have passed legislation, and may pass additional legislation, intended to address the economic burdens of COVID-19 and to fund economic recovery and growth. This could include opportunities to increase tax revenues collected from local corporations.
The results of the U.S. presidential election could lead to changes in tax laws that could negatively impact the Company’s effective tax rate. The proposed changes would raise the tax rate on both domestic and foreign income of U.S. multi-national corporations, impose a new alternative minimum tax on book income, and require a tax surcharge on imported goods. If these proposals are ultimately enacted into legislation, they could materially impact the Company’s tax provision, cash tax liability and effective tax rate.
Any substantial changes in domestic or international corporate tax policies, regulations or guidance, enforcement activities or legislative initiatives may materially adversely affect the Company.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
The principal manufacturing facilities and other material important physical properties of the Company at December 31, 2020 are listed below. All properties are glass container plants and are owned in fee, except where otherwise noted.
Americas Operations |
|
|
Argentina | ||
Rosario | ||
Brazil | ||
Recife | Sao Paulo | |
Rio de Janeiro | Vitoria de Santo Antao | |
Canada | ||
Brampton, Ontario | Montreal, Quebec | |
Colombia | ||
Buga (tableware) | Zipaquira | |
Soacha | ||
Ecuador | ||
Guayaquil | ||
Mexico | ||
Guadalajara | Tlanepantla Estado de Mexico | |
Monterrey | Toluca | |
Queretaro | Tultitlan Estado de Mexico | |
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 | |
European Operations | ||
Czech Republic | ||
Dubi | Nove Sedlo | |
Estonia | ||
Jarvakandi | ||
France | ||
Beziers | Vayres | |
Gironcourt | Veauche | |
Labegude | Vergeze | |
Puy-Guillaume | Wingles | |
Reims | ||
23
Germany | ||
Bernsdorf | Rinteln | |
Holzminden | ||
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 | Jaroslaw, Poland | |
Lurin, Peru | Perrysburg, Ohio | |
Shared Service Centers | ||
Medellin, Colombia | Poznan, Poland(1) | |
Perrysburg, Ohio | ||
Distribution Center | ||
Laredo, TX(1) | ||
China | ||
Tianjin | Zhaoqing | |
Indonesia | ||
Jakarta | ||
Corporate Facilities | ||
Perrysburg, Ohio(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.
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ITEM 3. LEGAL PROCEEDINGS
For information on legal proceedings, see Note 15 to the Consolidated Financial Statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
25
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
On December 26 and 27, 2019, the Company implemented the Corporate Modernization. The Corporate Modernization involved a series of transactions, including the Merger. Upon the effectiveness of the Merger, each share of O-I stock held immediately prior to the Merger automatically converted into a right to receive an equivalent corresponding share of O-I Glass stock, par value $.01 per share (“O-I Glass Common Stock”), having the same designations, rights, powers and preferences, qualifications, limitations, and restrictions as the corresponding share of O-I stock being converted.
Following the implementation of the Corporate Modernization, the Company’s common stock continues to be listed on the New York Stock Exchange on an uninterrupted basis with the symbol OI. The number of share owners of record on December 31, 2020 was 847. Approximately 99% of the outstanding shares were registered in the name of Depository Trust Company, or CEDE & Co., which held such shares on behalf of a number of brokerage firms, banks, and other financial institutions.
In response to the COVID-19 pandemic, the Company has suspended its dividend. However, the payment and amount of future dividends remain within the discretion of the Company's Board of Directors and will depend upon the Company's future earnings, financial condition, capital requirements, and other factors.
Information with respect to securities authorized for issuance under equity compensation plans is included herein under Item 12.
The Company did not purchase any shares of its common stock during the year ended December 31, 2020. In February 2021, the Company’s Board of Directors authorized a $150 million anti-dilutive share repurchase program for the Company’s common stock that the Company intends to use to offset stock-based compensation provided to the Company’s directors, officers and employees. This authorization supersedes and replaces any prior repurchase authorizations.
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Years Ending December 31, |
| ||||||||||||||||||
2015 | 2016 | 2017 | 2018 | 2019 | 2020 |
| |||||||||||||
O-I Glass, Inc. |
| $ | 100.00 |
| $ | 99.94 |
| $ | 127.27 |
| $ | 98.97 |
| $ | 69.57 |
| $ | 69.70 | |
S&P 500 |
| 100.00 |
| 111.96 |
| 136.40 |
| 130.42 |
| 171.49 |
| 203.04 | |||||||
Packaging Group |
| 100.00 |
| 105.27 |
| 115.77 |
| 109.04 |
| 143.56 |
| 180.44 | |||||||
The graph above compares the performance of the Company’s Common Stock with that of a broad market index (the S&P 500 Composite Index) and a packaging group consisting of companies with lines of business or product end uses comparable to those of the Company for which market quotations are available.
The packaging group consists of: AptarGroup, Inc., Ardagh Group S.A., Ball Corp., Crown Holdings, Inc., O-I Glass, Inc., Sealed Air Corp., Silgan Holdings Inc., and Sonoco Products Co. The comparison of total return on investment for each period is based on the investment of $100 on December 31, 2015 and the change in market value of the stock, including additional shares assumed purchased through reinvestment of dividends, if any.
27
++
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 lines titled “reportable segment totals” in both net sales and segment operating profit, however, are non-GAAP measures 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 and believes this information allows the Board of Directors, management, investors and analysts to better understand the Company’s financial performance. 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 is not, however, intended as an alternative measure of operating results as determined in accordance with U.S. GAAP and is not necessarily comparable to similarly titled measures used by other companies.
In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it continues to spread throughout the United States and other countries across the world. To limit the spread of COVID-19, governments have taken various actions, including the issuance of stay-at-home orders and social distancing guidelines. As a result, many businesses have adjusted, reduced or suspended operating activities, either due to requirements under government orders or as a result of a reduction in demand for many products from direct or ultimate customers. Fortunately, the manufacture of glass containers has been largely viewed as essential to the important food and beverage value chain in the countries in which the Company operates. However, the Company is still impacted by broader supply chain issues and, in some cases, certain end use categories that it serves are not deemed essential. While the Company’s plants continued to operate as essential businesses, some plants suspended operations or cut back on shifts for a portion of 2020 due to government actions to address COVID-19. Additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop.
The following discussion describes the Company’s consolidated results of operations for the year ended December 31, 2020. The COVID-19 pandemic impacted the Company’s shipment and production levels in 2020, and the Company is actively monitoring the continued impact of the pandemic, which could negatively impact its business, results of operations, cash flows and financial position beyond 2020.
On July 31, 2020, the Company completed the sale of its Australia and New Zealand (“ANZ”) businesses, which comprised the majority of the Asia Pacific region (approximately 85% of net sales for the full year 2019), to Visy. After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment. For the 2020 results presented below, the results for the Asia Pacific reportable segment reflect only seven months of the results of the ANZ businesses. For 2019, the results of the Asia Pacific segment have been recast to reflect only the results of the ANZ businesses. The sales and operating results of the other businesses that historically comprised the Asia Pacific segment, and that have been retained by the Company, have been reclassified to Other sales and Retained corporate costs and other, respectively.
For discussion related to changes in financial condition and the results of operations for 2019 compared to 2018, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on February 21, 2020.
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Financial information regarding the Company’s reportable segments is as follows (dollars in millions):
| 2020 |
| 2019 |
| |||
Net sales: | |||||||
Americas | $ | 3,322 | $ | 3,622 | |||
Europe | 2,364 | 2,387 | |||||
Asia Pacific |
| 281 |
| 534 | |||
Reportable segment totals |
| 5,967 |
| 6,543 | |||
Other |
| 124 |
| 148 | |||
Net sales | $ | 6,091 | $ | 6,691 | |||
| 2020 |
| 2019 |
| |||
Segment operating profit: | |||||||
Americas | $ | 395 | $ | 495 | |||
Europe | 264 | 317 | |||||
Asia Pacific |
| 19 |
| 44 | |||
Reportable segment totals |
| 678 |
| 856 | |||
Items excluded from segment operating profit: | |||||||
Retained corporate costs and other |
| (145) |
| (112) | |||
Gain on sale of ANZ businesses | 275 | ||||||
Charge for goodwill impairment | (595) | ||||||
Charge for asbestos-related costs |
|
| (35) | ||||
Pension settlement charges |
| (26) |
| (26) | |||
Restructuring, asset impairment and other charges |
| (142) |
| (114) | |||
Strategic transaction and corp. modernization costs | (8) | (31) | |||||
Charge for deconsolidation of Paddock | (14) | ||||||
Gain on sale of equity investment | 107 | ||||||
Interest expense, net |
| (265) |
| (311) | |||
Earnings (loss) from continuing operations before income taxes |
| 353 |
| (261) | |||
Provision for income taxes |
| (89) |
| (118) | |||
Earnings (loss) from continuing operations |
| 264 |
| (379) | |||
Loss from discontinued operations |
|
| (3) | ||||
Net earnings (loss) |
| 264 |
| (382) | |||
Net earnings attributable to noncontrolling interests |
| (15) |
| (18) | |||
Net earnings (loss) attributable to the Company | $ | 249 | $ | (400) | |||
Net earnings (loss) from continuing operations attributable to the Company | $ | 249 | $ | (397) | |||
Note: all amounts excluded from reportable segment totals are discussed in the following applicable sections.
Executive Overview—Comparison of 2020 with 2019
| ● | Net sales in 2020 were down approximately 9% compared to 2019, primarily due to lower volumes due to COVID-19, the sale of the Company’s ANZ businesses on July 31, 2020 and the unfavorable effects of changes in foreign currency exchange rates, partially offset by incremental sales from the Nueva Fanal acquisition in mid-2019 and higher prices. |
| ● | Segment operating profit for reportable segments was down approximately 21% in 2020 compared to 2019, primarily due to lower sales volumes and higher operating costs driven by lower production levels to comply with government decrees to manage the pandemic, as well as the Company’s effort to align supply with lower demand and manage inventory. Segment operating profit was also impacted by the sale of the Company’s ANZ businesses and the unfavorable effects of changes in foreign currency |
29
| exchange rates. |
| ● | On January 6, 2020 (the “Petition Date”), Paddock voluntarily filed for relief under Chapter 11 of the Bankruptcy Code to equitably and finally resolve all of its current and future asbestos-related claims. O-I Glass and O-I Group were not included in the Chapter 11 filing. Following the Chapter 11 filing, Paddock became subject to review and oversight by the bankruptcy court. As a result, the Company no longer has exclusive control over Paddock’s activities during the bankruptcy proceedings. Therefore, Paddock was deconsolidated and its assets and liabilities were derecognized from the Company’s consolidated financial statements as of the Petition Date. Simultaneously, the Company recognized a $471 million liability related to its support agreement with Paddock. Taken together, these transactions resulted in a loss of approximately $14 million, which was recorded as a charge in the first quarter of 2020. |
| ● | In May 2020, the Company issued $700 million of senior notes at an interest rate of 6.625% to repay upcoming debt maturities. |
| ● | On July 31, 2020, the Company completed the sale of its ANZ businesses to Visy. Gross proceeds are approximately USD $677 million, and amounts received were used to reduce debt. The Company recorded a gain of approximately $275 million in 2020 related to this sale. |
Net sales in 2020 were $600 million lower than the same period in the prior year primarily due to lower sales volumes driven by COVID-19, the sale of the Company’s ANZ businesses on July 31, 2020, and the unfavorable effects of changes in foreign currency exchange rates, partially offset by incremental sales from the Nueva Fanal acquisition in mid-2019 and higher prices.
Earnings from continuing operations before income taxes were $614 million higher in 2020 than in the prior year, primarily due to a gain on the sale of the ANZ businesses in 2020 and the nonoccurrence of a goodwill impairment charge that was recorded in 2019, partially offset by lower segment operating profit in 2020. Segment operating profit for reportable segments in 2020 was $178 million lower than in the prior year. The decrease was largely due to lower sales volumes and higher operating costs driven by unabsorbed fixed costs from lower production levels to comply with government decrees to manage the pandemic, as well as the Company’s effort to align supply with lower demand and manage inventory. Segment operating profit was also impacted by the sale of the Company’s ANZ businesses and the unfavorable effects of changes in foreign currency exchange rates.
Net interest expense in 2020 decreased $46 million compared to 2019. Net interest expense included $44 million and $65 million for note repurchase premiums, the write-off of deferred finance fees and third-party fees in 2020 and 2019, respectively, that related to debt that was repaid prior to its maturity. Net interest expense decreased in 2020 compared to the prior year due to debt reduction and refinancing activities, as well as lower note repurchase premiums, third-party fees and the write-off of deferred finance fees.
For 2020, the Company recorded net earnings from continuing operations attributable to the Company of $249 million, or $1.57 per share (diluted), compared to a net loss from continuing operations attributable to the Company of $397 million, or $2.56 per share, in 2019. Net earnings (loss) from continuing operations attributable to the Company in 2020 and 2019 included items that management considered not representative of ongoing operations. These items increased net earnings attributable to the Company by $55 million, or $0.35 per share, in 2020 and decreased net earnings attributable to the Company by $748 million, or $4.80 per share, in 2019.
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Results of Operations—Comparison of 2020 with 2019
Net Sales
The Company’s net sales in 2020 were $6,091 million compared to $6,691 million in 2019, a decrease of $600 million, or approximately 9%. Unfavorable foreign currency exchange rates decreased sales by $180 million in 2020 compared to the prior year, as the U.S. dollar strengthened against the Australian dollar, Brazilian real, Mexican peso and the Colombian peso, partially offset by the U.S. dollar weakening against the Euro. Total glass container shipments, in tons, were approximately 7% lower in 2020 compared to the prior year, due in part to the sale of the Company’s ANZ businesses on July 31, 2020 and due to COVID-19. Excluding the ANZ businesses, glass container shipments were down approximately 4% in 2020 compared to 2019, or approximately $248 million, primarily due to COVID-19. The divestiture of the Company’s ANZ businesses decreased net sales by approximately $229 million in 2020. Higher selling prices increased net sales by $81 million in 2020. Other sales, consisting primarily of machine parts, were approximately $24 million lower in 2020 than the prior year.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales— 2019 |
|
|
| $ | 6,543 |
| |
Price | $ | 81 | |||||
Sales volume and mix |
| (248) | |||||
Effects of changing foreign currency rates |
| (180) | |||||
Divestiture (ANZ) | (229) | ||||||
Total effect on net sales |
| (576) | |||||
Net sales— 2020 | $ | 5,967 |
Americas: Net sales in the Americas in 2020 were $3,322 million compared to $3,622 million in 2019, a decrease of $300 million, or 8%. Total glass container shipments in the region were down approximately 4% in 2020 compared to the prior year, driven primarily by lower shipments to alcoholic beverage customers in the U.S. largely due to ongoing trends in beer shipments, and due to a decline in organic sales volumes linked to COVID-19. The net impact of lower organic sales more than offset the additional sales from the Nueva Fanal acquisition and resulted in a $126 million reduction to net sales in 2020 compared to 2019. The unfavorable effects of foreign currency exchange rate changes decreased net sales $204 million in 2020 compared to 2019. Higher selling prices increased net sales by $30 million in 2020.
Europe: Net sales in Europe in 2020 were $2,364 million compared to $2,387 million in 2019, a decrease of $23 million, or 1%. Glass container shipments in 2020 were down approximately 5% compared to 2019, primarily driven by COVID-19, resulting in $115 million of lower net sales. Selling prices in Europe increased net sales by $51 million in 2020 compared to the prior year. Favorable changes in foreign currency exchange rates improved the region’s sales by approximately $41 million in 2020 as the Euro strengthened in relation to the U.S. dollar.
Asia Pacific: Net sales in Asia Pacific in 2020 were $281 million compared to $534 million in 2019, a decrease of $253 million, or 47%. The decline in sales in 2020 was due to approximately $17 million of unfavorable changes in foreign currency exchange rates and approximately $236 million of lower sales volumes, primarily due to the sale of the ANZ businesses in the third quarter of 2020. On July 31, 2020, the Company completed the sale of its ANZ businesses, which comprised the majority of the Asia Pacific region, to Visy. For 2020, the results for the Asia Pacific reportable segment reflect only seven months of the results of the ANZ businesses.
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Earnings from Continuing Operations before Income Taxes and Segment Operating Profit
Earnings from continuing operations before income taxes were $353 million in 2020 compared to a loss of $261 million from continuing operations before income taxes in 2019, an increase of $614 million. This increase was primarily due to the gain on the sale of the ANZ businesses in 2020 and the nonoccurrence of a goodwill impairment charge that was recorded in 2019, partially offset by lower segment operating profit in 2020 compared to the prior year.
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 Consolidated Financial Statements.
Segment operating profit of reportable segments in 2020 was $678 million compared to $856 million in 2019, a decrease of $178 million, or 21%. The decrease was largely due to lower sales volumes and higher operating costs as a result of the COVID-19 pandemic, the sale of the Company’s ANZ businesses in the third quarter of 2020 and the unfavorable effects of changes in foreign currency exchange rates. The Company’s operating costs were impacted by an approximate 7.5% decrease in production levels in 2020, which reflected required curtailments to comply with government decrees to manage the pandemic, as well as the Company’s effort to align supply with lower demand and manage inventory. The Company’s turnaround initiatives, strong operating performance and cost control measures partially offset the impact of lower production levels.
The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):
Segment operating profit - 2019 |
|
|
| $ | 856 |
| |
Net price (net of cost inflation) | $ | 3 | |||||
Sales volume |
| (83) | |||||
Operating costs |
| (55) | |||||
Effects of changing foreign currency exchange rates | (19) | ||||||
Divestiture (ANZ) | (24) | ||||||
Total net effect on segment operating profit |
| (178) | |||||
Segment operating profit - 2020 | $ | 678 |
Americas: Segment operating profit in the Americas in 2020 was $395 million compared to $495 million in 2019, a decrease of $100 million, or 20%. The decrease in sales volume discussed above decreased segment operating profit in 2020 by $54 million. The effects of changes in foreign currency exchange rates decreased segment operating profit by $19 million in 2020. Despite temporary production downtime due to the impacts of COVID-19, improved operating performance and lower costs drove operating costs lower and increased segment operating profit by $11 million in 2020. The region’s closure of a plant in 2020 did not have a material impact on its profitability this year, and significant savings are not expected in future years, but the closure is expected to avoid anticipated losses from this plant in the future. Cost inflation more than offset higher selling prices resulting in a net $38 million decrease to segment operating profit in the current year.
Europe: Segment operating profit in Europe in 2020 was $264 million compared to $317 million in 2019, a decrease of $53 million, or 17%. The decrease in sales volume discussed above decreased segment operating profit in 2020 by $27 million. The region’s operating costs in 2020 were approximately $78 million higher driven by temporary production downtime associated with COVID-19, which decreased segment operating profit compared to the same period in the prior year. Higher net selling prices (net of cost inflation) increased segment operating profit by $51 million in 2020 compared to the prior year. The effects of changes in foreign currency exchange rates increased segment operating profit by $1 million in 2020.
Asia Pacific: Segment operating profit in 2020 was $19 million compared to $44 million in 2019, a decrease of $25 million, or 57%. For 2020, the results for the Asia Pacific reportable segment reflect only seven months of
32
the results of the ANZ businesses since those businesses were sold on July 31, 2020. This divestiture resulted in a decrease of approximately $24 million in 2020 compared to the prior year. Prior to this sale, lower sales volumes reduced segment operating profit in 2020 by $2 million. Lower net selling prices (net of cost inflation) decreased segment operating profit by $10 million in 2020 compared to the prior year. The effects of changes in foreign currency exchange rates decreased segment operating profit by $1 million in 2020. Partially offsetting this, the region’s operating costs in 2020 were approximately $12 million lower due to improved factory performance, which increased segment operating profit compared to the same period in the prior year.
Interest Expense, Net
Net interest expense in 2020 was $265 million compared to $311 million in 2019. Net interest expense included $44 million and $65 million in 2020 and 2019, respectively, for the write-off of deferred finance fees and third-party fees that were related to debt that was repaid prior to its maturity. Net interest expense decreased in 2020 compared to the prior year due to debt reduction and refinancing activities, as well as lower note repurchase premiums, third-party fees and the write-off of deferred finance fees.
Provision for Income Taxes
The Company’s effective tax rate from continuing operations for 2020 was 25.2% compared to (45.2%) for 2019. The effective tax rate for 2020 differed from 2019 primarily due to minimal tax on the gain on the sale of the ANZ businesses due to utilization of tax attributes in 2020 and the goodwill impairment charge recorded in 2019, which was not deductible for income tax purposes.
Net Earnings (Loss) from Continuing Operations Attributable to the Company
For 2020, the Company recorded earnings from continuing operations attributable to the Company of $249 million, or $1.57 per share (diluted), compared to a loss from continuing operations attributable to the Company of $397 million, or $2.56 per share, in 2019. Earnings in 2020 and 2019 included items that are not representative of ongoing operations as set forth in the following table (dollars in millions):
Net Earnings |
| ||||||
Increase |
| ||||||
(Decrease) |
| ||||||
Description | 2020 | 2019 |
| ||||
Gain on sale of ANZ business | $ | 275 | $ | — | |||
Charge for goodwill impairment | (595) | ||||||
Charge for asbestos-related costs | (35) | ||||||
Restructuring, asset impairment and other charges |
| (142) | (114) | ||||
Charge for deconsolidation of Paddock | (14) | ||||||
Pension settlement charges | (26) | (26) | |||||
Strategic transaction costs | (8) | (31) | |||||
Note repurchase premiums, the write-off of unamortized finance fees and third party fees |
| (44) |
| (65) | |||
Gain on sale of equity investment | 107 | ||||||
Net benefit for income tax on items above | 13 | 13 | |||||
Other tax charges | (3) | ||||||
Net impact of noncontrolling interests on items above | 1 | 1 | |||||
Total | $ | 55 | $ | (748) | |||
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 2020 were decreased due to foreign currency effects compared to 2019.
33
This trend may continue into 2021. 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.
Forward Looking Operational and Financial Impacts from the COVID-19 Pandemic
| ● | The Company expects that full year 2021 sales shipment growth to be 2 to 4 percent (in tons) compared to 2020, representing a partial volume recovery to 2019 levels. Likewise, the Company expects continued benefits from its initiatives to expand margins. These incremental savings should more than offset the headwind from temporary cost reduction efforts in 2020 to mitigate the impact of the COVID-19 pandemic that will not repeat in 2021. |
| ● | The Company will continue to focus on long-term value creation, including advancing the MAGMA deployment. Also, the Company has substantially completed its strategic and tactical divestiture program with proceeds used to reduce debt and improve financial flexibility. Finally, the Company will continue to advance the Paddock Chapter 11 process to establish a final, certain and equitable resolution of its legacy asbestos-related claims liabilities. |
| ● | Cash provided by continuing operating activities is expected to approximate $615 million or higher in 2021. This outlook assumes capital expenditures of approximately $375 million and the continued suspension of all asbestos-related claims payments, pending final resolution of the Paddock Chapter 11. |
| ● | The Company will continue to actively monitor the impact of the COVID-19 pandemic. The extent to which the Company’s operations will be impacted by the pandemic will depend largely on future developments, which are highly uncertain and cannot be accurately predicted, including new information that may emerge concerning the severity of the outbreak and actions by government authorities to contain the outbreak or treat its impact, among other things. |
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment. Starting on August 1, 2020 and for the historical periods, the operating results of the other businesses that were historically included in the Asia Pacific segment and that have been retained by the Company have been reclassified to Retained corporate costs and other. The results of these entities were not significant for the years ending December 31, 2020 and 2019.
Retained corporate costs and other for 2020 were $145 million compared to $112 million in 2019. These costs were higher in the 2020 periods primarily due to the nonoccurrence of equity earnings from a soda ash joint venture that was sold by the Company in the fourth quarter of 2019, higher research and development costs and higher incentive compensation, partially offset by efforts to reduce costs.
Restructuring, Asset Impairment and Other Charges
During 2020, the Company recorded charges totaling $142 million for restructuring, asset impairment and other charges. These charges reflect $96 million of employee costs, such as severance, benefit-related costs, asset impairments and other exit costs primarily related to a reduction-in-force program for certain salaried employees and a plant closure in the Americas. The Company expects that the majority of the remaining cash expenditures related to the accrued employee and other exit costs will be paid out over the next several years. These charges also reflect approximately $46 million of other charges, which included approximately $36 million of non-cash impairment charges related to an equity investment (Retained corporate costs and other).
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During 2019, the Company recorded charges totaling $114 million for restructuring, asset impairment and other charges. These charges reflect $69 million of employee costs, such as severance, benefit-related costs and other exit costs primarily related to a severance program for certain salaried employees at the Company’s corporate and Americas headquarters and a furnace closure in the Americas. These charges also reflect approximately $45 million of other charges, including approximately $22 million of non-cash asset impairment charges related to the Company’s operations in Argentina and China, primarily due to macroeconomic conditions in those countries.
See Notes 6 and 10 to the Consolidated Financial Statements for additional information.
Strategic Transaction and Corporate Modernization Costs
For the year ended December 31, 2020, the Company recorded charges totaling $8 million for strategic transaction costs, which relate to activities that are aimed at exploring options to maximize investor value, focused on aligning the Company’s business with demand trends and improving the Company’s operating efficiency, cost structure and working capital management. These activities are ongoing and may result in tactical divestitures, corporate transactions or similar actions, and could cause the Company to incur restructuring, impairment, disposal or other related charges in future periods.
For the year ended December 31, 2019, the Company incurred costs of $31 million related to the Corporate Modernization and a strategic portfolio review. See Note 15 to the Consolidated Financial Statements for further information.
Pension Settlement Charges
In the past several years, the Company has settled a portion of its pension obligations, which resulted in settlement charges as noted below.
During 2020, the Company recorded charges totaling $26 million for pension settlements, primarily in Canada, Mexico and the United States.
During 2019, the Company recorded charges totaling $26 million for pension settlements, primarily in the United States and the United Kingdom.
Charge for Paddock Deconsolidation
Following its Chapter 11 filing, the activities of Paddock are now subject to review and oversight by the bankruptcy court. As a result, the Company no longer has exclusive control over Paddock’s activities during the bankruptcy proceedings. Therefore, Paddock was deconsolidated as of the Petition Date, and its assets and liabilities, which primarily included $47 million of cash, the legacy asbestos-related liabilities, as well as certain other assets and liabilities, were derecognized from the Company’s consolidated financial statements. Simultaneously, the Company recognized a liability related to the support agreement of $471 million, based on the accrual required under applicable accounting standards. Taken together, these transactions resulted in a loss of approximately $14 million, which was recorded as a charge in the first quarter of 2020.
See Note 15 to the Consolidated Financial Statements for further information.
Gain on Sale of the ANZ Businesses
On July 31, 2020, the Company completed the sale of its ANZ businesses, which comprised the majority of its businesses in the Asia Pacific region (approximately 85% of net sales in that region for the full year 2019), to Visy. As a result, the Company recorded a net gain (including costs directly attributable to the sale of ANZ) of approximately $275 million.
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Charge for Goodwill Impairment
As part of its on going assessment of goodwill, the Company determined that indicators of impairment had occurred during the third quarter of 2019. The triggering events were management’s update to its long-range plan, which indicated lower projected future cash flows for its North American reporting unit (in the Americas segment) as compared to the projections used in the most recent goodwill impairment test performed as of October 1, 2018, and a significant reduction in the Company’s share price. The Company’s business in North America has experienced declining shipments to its alcoholic beverage customers, primarily in the beer category, and this trend is likely to continue into the foreseeable future. These factors, combined with the narrow difference between the estimated fair value and carrying value of the North American reporting unit as of December 31, 2018, resulted in the Company performing an interim impairment analysis during the third quarter of 2019. As a result, the Company recorded a non-cash impairment charge of $595 million in the third quarter of 2019, which was equal to the excess of the North American reporting unit's carrying value over its fair value. Goodwill related to the Company’s other reporting units was determined to not be impaired as a result of the interim impairment analysis.
See Note 7 to the Consolidated Financial Statements for further information.
Charge for Asbestos-Related Costs
For the year ended December 31, 2019, the Company’s comprehensive legal review of its asbestos-related liabilities resulted in a $35 million charge. This charge was primarily due to a 9% increase in the estimated average disposition cost per claim (including related legal costs), driven primarily by plaintiffs leveraging a changing litigation environment, and an immaterial decrease in the estimated number of claims likely to be asserted against the Company in the future.
Following the Corporate Modernization transactions, asbestos-related liabilities that were previously paid by O-I now reside at Paddock. On January 6, 2020, Paddock voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware, to equitably and finally resolve all of its current and future asbestos-related claims. O-I Glass and O-I Group were not included in the Chapter 11 filing. Paddock’s ultimate goal in its Chapter 11 case is to confirm a plan of reorganization under Section 524(g) of the Bankruptcy Code and utilize this specialized provision to establish a trust that will address all current and future asbestos-related claims. The Company undertook the Corporate Modernization transactions to improve the Company’s operating efficiency and cost structure, which resulted in the legacy liabilities of O-I residing within Paddock, separate from the active operations of the Company’s subsidiaries, while fully maintaining Paddock’s ability to access the value of those operations to support its legacy liabilities through the support agreement. The Corporate Modernization transactions also helped ensure that Paddock has the same ability to fund the costs of defending and resolving present and future Asbestos Claims as O-I previously did, through Paddock’s retention of its own assets to satisfy these claims and through its access to additional funds from the Company through the support agreement. The ultimate amount that the Company may be required to fund on account of asbestos-related liabilities paid out in connection with a confirmed Chapter 11 plan of reorganization cannot be estimated with certainty at this time.
The Company anticipates that cash flows in 2021 will continue to benefit from the operation of the automatic stay in Paddock’s Chapter 11 filing, which stays ongoing litigation and submission of claims and defers payment in connection with asbestos-related liabilities.
Following the Chapter 11 filing, the activities of Paddock became subject to review and oversight by the bankruptcy court. As a result, the Company no longer has exclusive control over Paddock’s activities during the bankruptcy proceedings. Therefore, Paddock was deconsolidated as of the Chapter 11 filing date of January 6, 2020, and its assets and liabilities were derecognized from the Company’s consolidated financial statements on a prospective basis.
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See “Critical Accounting Estimates” and Note 15 to the Consolidated Financial Statements for additional information.
Gain on Sale of Equity Investment
During 2019, the Company recorded a gain of approximately $107 million related to the sale of the Company’s 25% interest in Tata Chemicals (Soda Ash) Partners, which was an equity investment of the Company.
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 two other subsidiaries of the Company -- Fabrica de Vidrios Los Andes, C.A. (“Favianca”), and Owens-Illinois de Venezuela, C.A. (“OIDV”) -- 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, OIDV and Favianca submitted to ICSID an application to annul the November 13, 2017 award; on November 22, 2019, OIDV and Favianca’s request to annul the award was rejected by an ICSID ad hoc committee. The two subsidiaries are evaluating potential next steps.
The Company incurred $0 and $3 million in 2020 and 2019, respectively, for losses from discontinued operations for matters related to the Venezuelan expropriation.
Capital Resources and Liquidity
On June 25, 2019, certain of the Company’s subsidiaries entered into a Senior Secured Credit Facility Agreement (as amended by that certain Amendment No. 1 to the Third Amended and Restated Credit Agreement and Syndicated Facility Agreement dated as of December 13, 2019, and as further amended by that certain Amendment No. 2 to the Third Amended and Restated Credit Agreement and Syndicated Facility Agreement dated as of December 19, 2019, 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
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under the Previous Agreement. The Company recorded $4 million of additional interest charges for third-party fees and the write-off of unamortized fees related to the Agreement during 2019.
The Agreement provides for up to $3.0 billion of borrowings pursuant to term loans and revolving credit facilities. The term loans mature, and the revolving credit facilities terminate, in June 2024. At December 31, 2020, the Agreement includes a $300 million revolving credit facility, a $1.2 billion multicurrency revolving credit facility, and a $1.5 billion term loan A facility ($1,067 million outstanding balance at December 31, 2020, net of debt issuance costs). At December 31, 2020, the Company had unused credit of $1.5 billion available under the Agreement. The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2020 was 1.68%.
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 5.0x calculated by dividing consolidated total debt, less cash and cash equivalents, by Consolidated EBITDA, with such Leverage Ratio decreasing to (a) 4.75x for the quarter ending June 30, 2021 and (b) 4.50x for the quarter ending December 31, 2021 and thereafter, as defined and described 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, provided that the Leverage Ratio shall not exceed 5.0x. 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 the indentures governing the Company’s outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. As of December 31, 2020, 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.
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 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.
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In July 2019, the Company redeemed €250 million aggregate principal amount of its outstanding 6.75% senior notes due 2020. The redemption was funded with cash on hand and revolver borrowings.
In November 2019, the Company issued €500 million aggregate principal amount of senior notes. The senior notes bear interest at a rate of 2.875% per annum and mature on February 15, 2025. The senior 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 €492 million and were used to redeem the remaining €250 million aggregate principal amount of the Company’s outstanding 6.75% senior notes due 2020 and €212 million aggregate principal amount of the Company’s outstanding 4.875% senior notes due 2021.
In December 2019, subsidiaries of the Company completed consent solicitations to amend and waive certain provisions of the indentures governing certain of their senior notes. On December 11, 2019, those subsidiaries entered into supplemental indentures reflecting the amendments and waivers, which were obtained to facilitate the implementation of the Corporate Modernization. The Company recorded approximately $5 million of additional interest charges for third-party fees in 2019 related to these activities.
The Company recorded approximately $56 million of additional interest charges for note repurchase premiums and the write-off of unamortized finance fees related to the senior note redemptions conducted during 2019.
In May 2020, the Company issued $700 million aggregate principal amount of senior notes. The senior notes bear interest at a rate of 6.625% per annum and mature on May 13, 2027. The senior 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 $690 million and were used to redeem the remaining $130 million aggregate principal amount of the Company’s outstanding 4.875% senior notes due 2021, approximately $419 million aggregate principal amount of the Company’s outstanding 5.00% senior notes due 2022 and approximately $105 million of other secured borrowings. The Company recorded approximately $38 million of additional interest charges for note repurchase premiums and write-off of unamortized finance fees related to these redemptions.
In August 2020, the Company redeemed the remaining $81 million aggregate principal amount of the Company’s outstanding 5.00% senior notes due 2022. The Company recorded approximately $6 million of additional interest charges for note repurchase premiums and write-off of unamortized finance fees related to this redemption.
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 9 to the 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.
Cash Flows
Operating activities: Cash provided by continuing operating activities was $457 million for 2020, compared to $408 million for 2019. The increase in cash provided by continuing operating activities in 2020 was largely due to the staying of all asbestos-related payments as a result of Paddock’s Chapter 11 filing in early January 2020. The Company made $0 and $151 million of asbestos-related payments in 2020 and 2019, respectively. The Company anticipates that cash flows in 2021 will continue to benefit from the operation of the automatic stay in Paddock’s Chapter 11 filing, which stays ongoing litigation and submission of claims and defers payment in
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connection with asbestos-related liabilities. See Note 15 to the Consolidated Financial Statements for additional information on Paddock.
Working capital was a use of cash of $181 million in 2020, compared to a use of cash of $176 million in 2019. The higher use of cash from working capital in 2020 compared to the prior year was primarily due to accounts receivable. The Company reduced the amount of its trade receivables that were factored by approximately $103 million at year-end 2020 compared to 2019, which resulted in a larger use of working capital in 2020. Excluding the impact of accounts receivable factoring, the Company’s days sales outstanding were slightly lower as of December 31, 2020 compared to December 31, 2019. Partially offsetting the impact of lower factored receivables was a decline in inventory levels. As a result of COVID-19, the Company reduced production levels to align with lower sales demand, and this resulted in approximately $75 million of a lower use of cash from working capital in 2020 compared to 2019.
During 2020, the Company contributed $103 million to its defined benefit pension plans, compared with $33 million in 2019. As part of these contributions, the Company elected to make $50 million and $0 in 2020 and 2019, respectively, in discretionary contributions. Cash payments for restructuring activities were $37 million in 2020 compared to $54 million in 2019. In addition, the Company experienced a $103 million increase in cash provided by other operating items for 2020 compared to the prior year, which included the impact of higher dividends received from equity affiliates, lower equity earnings due to the sale of a soda ash joint venture in December 2019 and less cash spent on pallets and repair parts.
Investing activities: Cash provided by investing activities was $93 million for 2020, compared to $437 million utilized in investing activities for 2019. In response to the COVID-19 pandemic in 2020, the Company took a number of measures, including limiting its capital expenditures, to reduce costs and preserve its financial flexibility. Capital spending for property, plant and equipment was $311 million during 2020, compared to $426 million in 2019. The Company estimates that its full year 2021 capital expenditures will be approximately $375 million. Cash paid for acquisitions was $0 and $190 million for 2020 and 2019, respectively. On June 28, 2019, the Company completed its acquisition of Nueva Fábrica Nacional de Vidrio, S. de R.L. de C.V., a four-furnace glass plant located near Mexico City, Mexico, from Grupo Modelo, a wholly owned affiliate of Anheuser-Busch InBev SA/NV. Contributions and advances to joint ventures were $0 and $22 million in 2020 and 2019, respectively. No significant contributions are planned to the Company’s joint ventures in 2021.
On July 31, 2020, the Company completed the sale of its ANZ businesses to Visy. Cash proceeds, net of costs directly attributable to the sale of ANZ, of approximately $441 million were received in the third quarter of 2020. Approximately 95% of proceeds were received at the time of closing and the remaining balance will be paid within 12 months of closing without conditions precedent. In addition and as discussed below, the Company received proceeds for a sale leaseback transaction executed in conjunction with the ANZ sale.
The Company received approximately $10 million and $197 million in 2020 and 2019, respectively, of net proceeds from the disposal of assets. In 2019, these net proceeds primarily related to the sale of the Company’s 25% equity interest in Tata Chemicals (Soda Ash) Partners.
Following the Chapter 11 filing in January 2020, the activities of Paddock are now subject to review and oversight by the bankruptcy court. As a result, the Company no longer has exclusive control over Paddock’s activities during the bankruptcy proceedings. Therefore, Paddock was deconsolidated and its assets and liabilities were derecognized from the Company’s financial statements, which resulted in an investing outflow of $47 million in the Company’s 2020 consolidated cash flows. See Note 15 to the Consolidated Financial Statements for more information.
Financing activities: Cash utilized in financing activities was $557 million for 2020, compared to $68 million of cash provided by financing activities for 2019. Financing activities in 2020 included additions to long-term debt of $1,845 million, which included the issuance of $700 million of senior notes. Financing activities in 2020 also included the repayment of long-term debt of $2,460 million, which included the paydown of approximately $410 million of the Term Loan A facility, the repurchase of the remaining €118 million aggregate principal amount of the Company’s outstanding 4.875% senior notes due 2021, approximately $500 million aggregate principal amount of the Company’s outstanding 5.00% senior notes due 2022 and approximately $230 million of other secured
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borrowings. Financing activities in 2019 included additions to long-term debt of $4,265 million, which included the issuance of €500 million of senior notes and the refinancing of the Company’s Senior Secured Credit Facility. Financing activities in 2019 also included the repayment of long-term debt of $4,099 million, which included the repayment of the previous credit facility and the repurchase of the outstanding €500 million aggregate principal amount of outstanding 6.75% senior notes due 2020 and the partial redemption of €212 million outstanding 4.875% senior notes due 2021.
Borrowings under short-term loans decreased by $15 million in 2020. As a result of financing activities, the Company paid finance fees of $51 million and $85 million for 2020 and 2019, respectively. Also, the Company paid approximately $8 million and received $28 million in proceeds related to hedging activity in 2020 and 2019, respectively.
The Company paid $8 million and $31 million in dividends in 2020 and 2019, respectively. In 2020 and 2019, the Company repurchased $0 and $38 million, respectively, of the Company’s stock. In response to the COVID-19 pandemic, the Company suspended its quarterly dividend after the first quarter of 2020 and paused share repurchases for 2020. In February 2021, the Company’s Board of Directors authorized a $150 million anti-dilutive share repurchase program for the Company’s common stock that the Company intends to use to offset stock-based compensation provided to the Company’s directors, officers and employees. This authorization supersedes and replaces any prior repurchase authorizations. The Company expects to repurchase approximately $35 million of the Company’s common stock in 2021.
In addition, the Company received approximately $155 million in proceeds for a sale leaseback transaction in 2020 that was executed in conjunction with the ANZ sale.
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 (12 months) and long-term basis. However, as the Company cannot predict the duration or scope of the COVID-19 pandemic and its impact on its customers and suppliers, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material. The Company is actively managing the business to maintain cash flow and it has significant liquidity. The Company believes that these factors will allow it to meet its anticipated funding requirements. The Company anticipates that cash flows in 2021 will continue to benefit from the operation of the automatic stay in Paddock’s Chapter 11 filing, which stays ongoing litigation and submission of claims and defers payment in connection with asbestos-related liabilities.
Contractual Obligations and Off-Balance Sheet Arrangements
The following information summarizes the Company’s significant contractual cash obligations at December 31, 2020 (dollars in millions).
Payments due by period |
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Less than | More than |
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Total | one year | 1 - 3 years | 3 - 5 years | 5 years |
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Contractual cash obligations: |
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Long-term debt | $ | 4,979 | $ | 125 | $ | 1,068 | $ | 3,093 | $ | 693 | ||||||
Finance lease obligations |
| 108 |
| 16 | 29 | 25 | 38 | |||||||||
Operating leases |
| 138 |
| 3 | 39 | 14 | 82 | |||||||||
Interest(1) |
| 829 |
| 185 | 365 | 208 | 71 | |||||||||
Purchase obligations(2) |
| 1,773 |
| 551 | 876 | 279 | 67 | |||||||||
Pension benefit plan contributions(3) |
| 60 |
| 60 | ||||||||||||
Postretirement benefit plan benefit payments(1) |
| 51 |
| 5 | 10 | 10 | 26 | |||||||||
Total contractual cash obligations | $ | 7,938 | $ | 945 | $ | 2,387 | $ | 3,629 | $ | 977 | ||||||
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Amount of commitment expiration per period |
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Less than | More than |
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Total | one year | 1 - 3 years | 3 - 5 years | 5 years |
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Other commercial commitments: |
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|
|
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Standby letters of credit | $ | 41 | $ | 41 | $ | $ | $ | |||||||||
Total commercial commitments | $ | 41 | $ | 41 | $ | — | $ | — | $ | — | ||||||
| (1) | Amounts based on rates and assumptions at December 31, 2020. |
| (2) | The Company’s purchase obligations consist principally of contracted amounts for energy and molds. In cases where variable prices are involved, current market prices have been used. The amount above does not include ordinary course of business purchase orders because the majority of such purchase orders may be canceled. The Company does not believe such purchase orders will adversely affect its liquidity position. |
| (3) | In order to maintain minimum funding requirements, the Company is required to make contributions to its defined benefit pension plans of approximately $60 million in 2021. Future funding requirements for the Company’s pension plans will depend largely on actual asset returns and future actuarial assumptions, such as discount rates, and can vary significantly. |
The Company is unable to make a reasonably reliable estimate as to when cash settlement with taxing authorities may occur for its unrecognized tax benefits. Therefore, the liability for unrecognized tax benefits is not included in the table above. See Note 13 to the Consolidated Financial Statements for additional information.
Critical Accounting Estimates
The Company’s analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates.
The impact of, and any associated risks related to, estimates and assumptions are discussed within Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company’s reported and expected financial results.
The Company believes that accounting for the impairment of long-lived assets, pension benefit plans, contingencies and litigation related to its asbestos-related liability, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.
Impairment of Long-Lived Assets
Property, Plant and Equipment (PP&E) - The Company tests for impairment of PP&E whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. PP&E held for use in the Company’s business is grouped for impairment testing at the lowest level for which cash flows can reasonably be identified, typically a segment or a component of a segment. The Company evaluates the recoverability of PP&E based on undiscounted projected cash flows, excluding interest and taxes. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset
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group’s carrying amount exceeds its fair value. PP&E held for sale is reported at the lower of carrying amount or fair value less cost to sell.
Impairment testing requires estimation of projected future cash flows generated by the asset group. The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review. Factors that management must estimate include, among other things: industry and market conditions, sales volume and prices, production costs and inflation. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. The Company uses reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.
Goodwill – Goodwill is tested for impairment annually as of October 1 (or more frequently if impairment indicators arise). When performing a quantitative test for goodwill impairment, the Company compares the business enterprise value (“BEV”) of each reporting unit with its carrying value. The BEV is computed based on estimated future cash flows, discounted at the weighted average cost of capital of a hypothetical third-party buyer. If the BEV is less than the carrying value for any reporting unit, then any excess of the carrying value over the BEV is recorded as an impairment loss. The calculations of the BEV are based on internal and external inputs, such as projected future cash flows of the reporting units, discount rates, terminal business value, among other assumptions. The valuation approach utilized by management represents a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company’s use of unobservable inputs. The Company’s projected future cash flows incorporate management’s best estimates of the expected future results including, but not limited to, price trends, customer demand, material costs, asset replacement costs and any other known factors.
Goodwill is tested for impairment at the reporting unit level, which is the operating segment or one level below the operating segment, also known as a component. Two or more components of an operating segment shall be aggregated into a single reporting unit based on an assessment of various factors. The aggregation of the components of the Company’s reporting units was based on their economic similarity as determined by the Company using a number of quantitative and qualitative factors, including gross margins, the manner in which the Company operates the business, the consistent nature of products, services, production processes, customers and methods of distribution, as well as the level of shared resources and assets between the components. Despite the consolidation of the Americas segment effective January 1, 2018, the Company has not changed the reporting units within this reportable segment or the goodwill allocated to its reporting units. The Americas reportable segment is comprised of two reporting units – North America and Latin America. The Company has determined that the Europe segment is also a reporting unit. Prior to 2020, the Company aggregated the components of the Asia Pacific segment, which had no goodwill, into a single reporting unit equal to the reportable segment. On July 31, 2020, the Company completed the sale of its ANZ businesses, which comprised the majority of its businesses in the Asia Pacific region (approximately 85% of net sales in that region for the full year 2019). After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment.
The COVID-19 pandemic had an adverse impact on the Company’s business during the second quarter of 2020, resulting in a significant decline in revenue and earnings, along with a decline in the Company’s stock price and associated market capitalization. The Company determined that the impact of COVID-19 was a triggering event that required the Company to perform a quantitative interim goodwill impairment test in the second quarter of 2020. This interim test indicated that the BEV of each of the Company’s reporting units exceeded its respective carrying amount in the second quarter of 2020; therefore, no goodwill impairment existed. As part of its on going assessment of goodwill in 2019, the Company determined that indicators of impairment had occurred during the third quarter of 2019. The triggering events were management’s update to its long-range plan, which indicated lower projected future cash flows for its North American reporting unit (in the Americas segment) as compared to the projections used in the most recent goodwill impairment test performed as of October 1, 2018, and a significant reduction in the Company’s share price. As a result, the Company recorded a non-cash impairment charge of $595 million in the third quarter of 2019, which was equal to the excess of the
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North American reporting unit's carrying value over its fair value. Goodwill related to the Company’s other reporting units was determined to not be impaired as a result of the 2019 interim impairment analysis.
During the fourth quarter of 2020, the Company completed its annual impairment testing and determined that no impairment of goodwill existed. Goodwill at December 31, 2020 totaled approximately $1.95 billion, representing 22% of total assets. As of December 31, 2020, the Company has three reporting units and includes approximately $933 million of recorded goodwill to the Company’s Europe reporting unit, approximately $446 million of recorded goodwill to the Company’s North America reporting unit and approximately $572 million of recorded goodwill to the Company’s Latin America reporting unit. There can be no assurance that anticipated financial results will be achieved, and the goodwill balances remain susceptible to future impairment charges. The goodwill related to the North America reporting unit remains the reporting unit that has the greatest risk of future impairment charges given the difference (approximately 19%) between the BEV and carrying value of this reporting unit as of October 1, 2020. Future changes in the Company’s cost of capital or expected cash flows may cause the Company’s goodwill to become impaired, resulting in a non-cash charge against the Company’s results of operations. For example, if the Company’s assumed perpetuity growth rate, which would impact projected future cash flows, were one percentage point lower and the Company’s assumed weighted average cost of capital were one percentage point higher, the testing performed as of October 1, 2020, would have indicated a goodwill impairment of approximately $25 million related to the Company’s North American reporting unit. The BEVs of the Company’s Europe and Latin America reporting units more substantially exceeded their carrying values. Any impairment charges that the Company may take in the future could be material to its consolidated results of operations and financial condition.
During the time subsequent to the annual evaluation, and at December 31, 2020, the Company considered whether any events and/or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired and has determined that no such events have occurred. The Company will monitor conditions throughout 2021 that might significantly affect the projections and variables used in the impairment test to determine if a review prior to October 1 may be appropriate. If the results of impairment testing confirm that a write-down of goodwill is necessary, then the Company will record a charge at that time. In the event the Company would be required to record a significant write-down of goodwill, the charge would have a material adverse effect on reported results of operations and net worth.
Other Long-Lived Assets - Intangibles – Other long-lived assets consist primarily of purchased customer relationships intangibles and are amortized using the accelerated amortization method over their estimated useful lives. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In the event that a decline in fair value of an asset occurs, and the decline in value is considered to be other than temporary, an impairment loss is recognized. The test for impairment would require the Company to make estimates about fair value, which may be determined based on discounted cash flows, third-party appraisals or other methods that provide appropriate estimates of value. The Company continually monitors the carrying value of its assets.
Pension Benefit Plans
Estimates - The determination of pension obligations and the related pension expense or credits to operations involves certain estimations. The most critical estimates are the discount rate used to calculate the actuarial present value of benefit obligations and the expected long-term rate of return on plan assets. The Company uses discount rates based on yields of high quality fixed rate debt securities at the end of the year. At December 31, 2020, the weighted average discount rate was 2.61% and 1.92% for U.S. and non-U.S. plans, respectively. The Company uses an expected long-term rate of return on assets that is based on both past performance of the various plans’ assets and estimated future performance of the assets. Due to the nature of the plans’ assets and the volatility of debt and equity markets, actual returns may vary significantly from year to year. The Company refers to average historical returns over longer periods (up to 10 years) in determining its expected rates of return because short-term fluctuations in market values do not reflect the rates of return the Company expects to achieve based upon its long-term investing strategy. For purposes of determining pension charges and credits in 2020, the
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Company’s estimated weighted average expected long-term rate of return on plan assets is 7.15% for U.S. plans and 5.23% for non-U.S. plans compared to 7.25% for U.S. plans and 5.50% for non-U.S. plans in 2019. The Company recorded pension expense from continuing operations (exclusive of settlement charges) of $32 million, $25 million, and $26 million for the U.S. plans in 2020, 2019, and 2018, respectively, and $6 million, $7 million, and $6 million for the non-U.S. plans in 2020, 2019, and 2018, respectively. Depending on currency translation rates, the Company expects to record approximately $35 million of total pension expense for the full year of 2021. The 2021 pension expense will reflect a 6.85% and 5.20% expected long-term rate of return for the U.S. assets and non-U.S. assets, respectively.
Future effects on reported results of operations depend on economic conditions and investment performance. For example, a one-half percentage point change in the actuarial assumption regarding discount rates used to calculate plan liabilities or in the expected rate of return on plan assets would result in a change of approximately $6 million and $11 million, respectively, in the pretax pension expense for the full year of 2021.
Recognition of Funded Status - The Company recognizes the funded status of each pension benefit plan on the balance sheet. The funded status of each plan is measured as the difference between the fair value of plan assets and actuarially calculated benefit obligations as of the balance sheet date. Actuarial gains and losses are accumulated in Other Comprehensive Income, and the portion of each plan that exceeds 10% of the greater of that plan’s assets or projected benefit obligation is amortized to income on a straight-line basis over the average remaining service period of employees still accruing benefits or the expected life of participants not accruing benefits if all, or almost all, of the plan’s participants are no longer accruing benefits.
Contingencies and Litigation Related to Asbestos Liability
For many years, the Company has conducted an annual comprehensive legal review of its asbestos-related liabilities and costs in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review. As part of its annual comprehensive legal review for the year ended December 31, 2019, the Company provided historical claims filing data to a third-party consultant with expertise in predicting future claims filings based on actuarial inputs such as disease incidence and mortality. The Company used those estimates of total future claims, along with its legal judgment regarding an estimation of future disposition costs and related legal costs, as inputs to develop a reasonable estimate of probable liability.
Following the Corporate Modernization transactions, asbestos-related liabilities that were previously paid by O-I now reside at Paddock. On January 6, 2020, Paddock voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware, to equitably and finally resolve all of its current and future asbestos-related claims. O-I Glass and O-I Group were not included in the Chapter 11 filing. Paddock’s ultimate goal in its Chapter 11 case is to confirm a plan of reorganization under Section 524(g) of the Bankruptcy Code and utilize this specialized provision to establish a trust that will address all current and future asbestos-related claims. Although the Chapter 11 proceedings are progressing, it is not possible to predict the form of any ultimate resolution or when an ultimate resolution might occur at this time. The Company undertook the Corporate Modernization transactions to improve the Company’s operating efficiency and cost structure, which resulted in the legacy liabilities of O-I residing within Paddock, separate from the active operations of the Company’s subsidiaries, while fully maintaining Paddock’s ability to access the value of those operations to support its legacy liabilities through the support agreement. The Corporate Modernization transactions also helped ensure that Paddock has the same ability to fund the costs of defending and resolving present and future Asbestos Claims as O-I previously did, through Paddock’s retention of its own assets to satisfy these claims and through its access to additional funds from the Company through the support agreement. The ultimate amount that the Company may be required to fund on account of such asbestos-related liabilities paid out in connection with a confirmed Chapter 11 plan of reorganization cannot be estimated with certainty at this time.
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Income Taxes
The Company accounts for income taxes as required by general accounting principles under which management judgment is required in determining income tax expense/(benefit) and the related balance sheet amounts. This judgment includes estimating and analyzing historical and projected future operating results, the reversal of taxable and tax deductible temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the effective settlement of uncertain tax positions. The Company has received tax assessments in excess of established reserves for uncertain tax positions. The Company is contesting these tax assessments, and will continue to do so, including pursuing all available remedies such as appeals and litigation, if necessary.
The Company believes that adequate provisions for all income tax uncertainties have been made. However, if tax assessments are settled against the Company at amounts in excess of established reserves, it could have a material impact to the Company’s results of operations, financial position or cash flows. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on the Company’s results of operations and financial condition.
Deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using enacted tax rates and for tax attributes such as operating losses and tax credit carryforwards. Deferred tax assets and liabilities are determined separately for each tax jurisdiction on a separate or on a consolidated tax filing basis, as applicable, in which the Company conducts its operations or otherwise incurs taxable income or losses. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:
| ● | taxable income in prior carryback years; |
| ● | future reversals of existing taxable temporary differences; |
| ● | future taxable income exclusive of reversing temporary differences and carryforwards; and |
| ● | prudent and feasible tax planning strategies that the Company would be willing to undertake to prevent a deferred tax asset from otherwise expiring. |
The assessment regarding whether a valuation allowance is required or whether a change in judgment regarding the valuation allowance has occurred also considers all available positive and negative evidence, including, but not limited to:
| ● | nature, frequency, and severity of cumulative losses in recent years; |
| ● | duration of statutory carryforward and carryback periods; |
| ● | statutory limitations against utilization of tax attribute carryforwards against taxable income; |
| ● | historical experience with tax attributes expiring unused; and |
| ● | near- and medium-term financial outlook. |
The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, it is generally difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company uses the actual results for the last two years and current year results as the primary measure of cumulative losses in recent years.
The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events recognized in the financial statements or tax returns and future profitability. The recognition of deferred
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tax assets represents the Company’s best estimate of those future events. Changes in the current estimates, due to unanticipated events or otherwise, could have a material effect on the Company’s results of operations and financial condition.
In certain tax jurisdictions, the Company’s analysis indicates that it has cumulative losses in recent years. This is considered significant negative evidence which is objective and verifiable and, therefore, difficult to overcome. However, the cumulative loss position is not solely determinative, and, accordingly, the Company considers all other available positive and negative evidence in its analysis. Based on its analysis, the Company has recorded a valuation allowance for the portion of deferred tax assets where based on the weight of available evidence it is unlikely to realize those deferred tax assets.
Based on the evidence available, including a lack of sustainable earnings, the Company in its judgment previously recorded a valuation allowance against substantially all of its net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, the Company will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period. The utilization of tax attributes to offset taxable income reduces the amount of deferred tax assets subject to a valuation allowance.
In 2017, the Company elected to treat Global Intangible Low Taxed Income (“GILTI”), which was effective in 2018 for the Company, as a period cost.
The U.S. Tax Cuts and Jobs Act (the “Act”) was enacted on December 22, 2017. Additional guidance related to the Act continues to be issued providing further clarification on the application of the Act, including regulations related to the GILTI high-tax exception, interest deductibility, base erosion and anti-abuse tax, and foreign tax credits. In addition, global taxing authorities will be reviewing current legislation for potential modifications in reaction to the implementation of the Act. This additional guidance, along with the potential for additional global tax legislation changes, such as restrictions on interest deductibility and deductibility of cross-jurisdictional payments, could have a material adverse impact on net income and cash flow by impacting significant deductions or income inclusions.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company’s operations result primarily from fluctuations in foreign currency exchange rates, and changes in interest rates. To mitigate some of the near term volatility in the Company’s earnings and cash flows, the Company manages certain of its exposures through the use of derivative instruments. These instruments carry varying degrees of counterparty credit risk. To mitigate this risk, the Company has defined a financial counterparty policy that established criteria to select qualified counterparties based on credit ratings and credit default spreads. The policy also limits the exposure with individual counterparties. The Company monitors these exposures quarterly. The Company does not enter into derivative financial instruments for trading purposes. A discussion of the Company’s accounting policies for derivative financial instruments, as well as the Company’s exposure to market risk, is included in Notes 1 and 9 to the Consolidated Financial Statements.
For purposes of disclosing the market risk inherent in its derivative financial instruments, the Company utilizes sensitivity analyses which assume no changes to factors other than foreign currency exchange rates and interest rates. The analyses do not reflect the complex market reactions that normally would arise from the market shifts modeled.
Foreign Currency Exchange Rate Risk
A substantial portion of the Company’s operations are conducted by subsidiaries outside the U.S. The primary international markets served by the Company’s subsidiaries are in Canada, China, Latin America (principally Brazil, Colombia, and Mexico), and Europe (principally France, Germany, Italy, the Netherlands, Poland, Spain, and the United Kingdom). In general, revenues earned and costs incurred by the Company’s major international operations are denominated in their respective local currencies. Consequently, the Company’s reported financial results could be affected by factors such as changes in foreign currency exchange rates or highly inflationary economic conditions in the international markets in which the Company’s subsidiaries operate. When the U.S. dollar strengthens against foreign currencies, the reported U.S. dollar value of local currency earnings generally decreases; when the U.S. dollar weakens against foreign currencies, the reported U.S. dollar value of local currency earnings generally increases. The Company has hedged a portion of the net investment in international subsidiaries against fluctuations in the European Euro through derivative financial instruments. The net fair value of these instruments was a net liability of approximately $51 million at December 31, 2020 and net asset of approximately $2 million at December 31, 2019.
In addition, because the Company’s subsidiaries operate within their local economic environment, the Company believes it is appropriate to finance those operations with borrowings denominated in the local currency to the extent practicable where debt financing is desirable or necessary. This strategy mitigates the risk of reported losses or gains in the event the foreign currency strengthens or weakens against the U.S. dollar. Considerations which influence the amount of such borrowings include long- and short-term business plans, tax implications, and the availability of borrowings with acceptable interest rates and terms. However, the Company has certain 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. At December 31, 2020 and 2019, the net fair value of such swap contracts was a net liability of approximately $109 million and a net asset of approximately $4 million, respectively.
As of December 31, 2020, the potential change in fair value for such financial instruments from a change of 10% in the quoted foreign exchange rates would be approximately $168 million.
Interest Rate Risk
The Company’s interest expense is most sensitive to changes in the general level of interest rates applicable to the term loans under its Agreement (see Note 14 to the Consolidated Financial Statements for further
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information). The Company’s interest rate risk management objective is to limit the impact of interest rate changes on net income and cash flow, while minimizing interest payments and expense. To achieve this objective, the Company regularly evaluates its mix of fixed and floating-rate debt and, from time-to-time, may enter into interest rate swap agreements. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from (or payment of variable amounts to) a counterparty in exchange for the Company making (or receiving) fixed-rate payments. In 2019 and 2020, the Company has used interest rate swap agreements to effectively convert fixed-rate debt to variable-rate debt. At December 31, 2020 and 2019, the net fair value of such swap contracts was a net asset of approximately $17 million and approximately $5 million, respectively. As of December 31, 2020, based on the outstanding balances on the Company’s variable-rate debt (including the effect of the swap contracts), a one percentage point change in interest rates would change the Company’s annual net interest expense by $15 million.
The following table provides information about the Company’s interest rate sensitivity related to its significant debt obligations, including interest rate swap agreements, at December 31, 2020. The table presents principal cash flows and related weighted-average interest rates by expected maturity date.
Fair Value at | ||||||||||||||||||||||||
(Dollars in millions) |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total |
| 12/31/2020 | ||||||||
Long-term debt at variable rate: | ||||||||||||||||||||||||
Principal by expected maturity | $ | 11 | $ | 9 | $ | 16 | $ | 1,415 | $ | 10 | $ | 29 | $ | 1,490 | $ | 1,500 | ||||||||
Avg. principal outstanding | $ | 1,485 | $ | 1,475 | $ | 1,462 | $ | 746 | $ | 34 | $ | 29 | ||||||||||||
Avg. interest rate |
| 2.40 | % |
| 2.40 | % |
| 2.41 | % |
| 2.41 | % |
| 1.55 | % |
| 1.60 | % | ||||||
Long-term debt at fixed rate: | ||||||||||||||||||||||||
Principal by expected maturity | $ | 131 | $ | 36 | $ | 1,035 | $ | 490 | $ | 1,204 | $ | 701 | $ | 3,597 | $ | 3,823 | ||||||||
Avg. principal outstanding | $ | 3,531 | $ | 3,447 | $ | 2,912 | ||||||||||||||||||