O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2018 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2018, compared with Q1 2017. The company manufactures glass containers and reports three geographic segments: Americas, Europe, and Asia Pacific. It combined its former North America and Latin America segments into the Americas effective January 1, 2018.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,736 million | $1,615 million |
| Gross profit / gross margin | $319 million / 18.4% | $315 million / 19.5% |
| Earnings from continuing operations | $103 million | $53 million |
| Net earnings attributable to the Company | $98 million | $49 million |
| Diluted EPS | $0.59 | $0.30 |
| Cash used in operating activities | $370 million | $337 million |
| Cash used in investing activities | $160 million | $114 million |
| Cash provided by financing activities | $443 million | $257 million |
| Cash and cash equivalents at quarter-end | $418 million | $312 million at March 31, 2017 |
At March 31, 2018, total assets were $10.281 billion, current assets $2.768 billion, and current liabilities $2.078 billion. Balance-sheet debt comprised $5.640 billion of long-term debt and $194 million of short-term loans and debt due within one year. The company had $412 million of unused credit under its secured credit agreement. Its weighted-average rate on agreement borrowings was 2.98%; it was in compliance with the agreement’s covenants, including the 4.0x maximum total leverage ratio.
Material changes versus Q1 2017
- Sales rose $121 million, or nearly 8%. Foreign exchange added $99 million, higher prices added $28 million, and volume and mix added $1 million; glass shipments by tonnage were comparable overall.
- Reportable-segment operating profit increased 3% to $224 million. Higher prices and favorable currency effects were partly offset by $33 million of higher operating costs, including inflation, lower production volumes, and increased asset repairs.
- Profit growth was uneven by region: Americas operating profit was $147 million versus $139 million; Europe was $72 million versus $59 million; Asia Pacific fell to $5 million from $20 million.
- Pre-tax continuing earnings increased to $135 million from $73 million. The comparison benefited from the absence of $39 million of restructuring and related charges and $17 million of debt-repurchase premiums and finance-fee write-offs recorded in Q1 2017, as well as higher segment profit. Management estimated these prior-year items reduced attributable earnings by $46 million after tax and noncontrolling interests.
- Net interest expense fell to $62 million from $78 million, principally because Q1 2017 included the $17 million of debt-related charges. Excluding those items, interest expense increased $1 million.
- Cash used in operations increased to $370 million, mainly reflecting a $622 million working-capital use, versus $542 million in the prior-year quarter. Management cited a larger decline in accounts payable. Capital spending increased to $142 million from $98 million.
Outlook, management commentary, risks, and unusual items
- Management expected the 2018 full-year effective tax rate to be approximately 23%–25%, excluding taxes on items it considers nonrecurring. No broader full-year sales or earnings guidance is stated in the provided filing text.
- The company expected to repurchase approximately $100 million of shares during 2018 under a $400 million authorization; it repurchased about 2.0 million shares for $45 million in Q1.
- Management expected operating cash flow and available credit to fund operating and seasonal working-capital needs, debt service, and other obligations. It also expected Asia Pacific asset-improvement projects to continue into Q2 2018 and reduce that region’s profit versus Q2 2017.
- A fifth furnace for the company’s Constellation Brands joint venture in Mexico was planned to meet customer demand, with an estimated cost of approximately $140 million, funded equally by the partners during 2018–2019 and expected to operate by the end of 2019.
- Asbestos remains a significant contingency. The balance sheet included $575 million of asbestos-related liabilities at March 31, 2018. The company reported a $582 million recognized estimate at December 31, 2017 and estimated reasonably possible asbestos liabilities could reach $725 million; it cautioned the ultimate amount could be higher. Cash payments were $7 million in Q1 2018. The estimates depend on uncertain future claim volumes, disease patterns, legal outcomes, and co-defendant participation.
- The SEC is investigating accounting and controls related to asbestos-liability estimates. The company had restated its 2013–2015 financial statements in 2016 to correct an error in its estimation method and said it could not predict the investigation’s outcome or quantify its potential impact.
- The company had received $115 million from selling rights to a Venezuela arbitration award exceeding $500 million, but deferred recognizing a gain pending an annulment decision. Future recoveries are uncertain, and the company could be required to repay up to the cash payment if the award is annulled.
- Other risks identified include foreign-exchange and interest-rate exposure, raw-material, energy, labor and transport costs, packaging substitution, operational disruptions, cybersecurity, tax uncertainty, and the ability to manage debt and generate cash. The company said it was still refining its accounting estimates for the 2017 U.S. tax-law changes.
Important facts for investors to verify
- Whether sales growth and segment profit gains persist after separating currency and pricing effects from underlying volume and cost trends.
- Working-capital seasonality, cash conversion, and the funding required for elevated capital spending and the Mexico joint-venture expansion.
- Debt, borrowing availability, interest costs, and continued compliance with the 4.0x leverage covenant.
- Updates to asbestos estimates, payments, litigation trends, and the SEC investigation, including any effects on reported results or controls.
- The outcome of the Venezuela award annulment and any resulting repayment obligation or future proceeds.
- Execution and cost of Asia Pacific improvement projects, and the timing and returns of the planned share repurchases.