O-I Glass, Inc. (filed as Owens-Illinois, Inc.) — Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2016, with comparative results for the first quarter of 2015. The company manufactures glass containers and reports four geographic segments: Europe, North America, Latin America, and Asia Pacific. The 2015 Vitro food and beverage glass-container acquisition is included in results from September 1, 2015 onward; accordingly, 2016 results include acquired operations that were absent from the prior-year quarter.
Key financial results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net sales | $1.588 billion | $1.421 billion; up 12% |
| Gross profit / margin | $319 million / 20.1% | $268 million / 18.9% |
| Earnings from continuing operations attributable to the company | $68 million; $0.42 diluted EPS | $71 million; $0.44 diluted EPS |
| Net earnings attributable to the company | $67 million; $0.41 diluted EPS | $71 million; $0.44 diluted EPS |
| Segment operating profit, reportable segments | $211 million | $168 million; up 26% |
| Net interest expense | $66 million | $47 million |
| Cash used in continuing operations | $301 million | $278 million |
| Capital expenditures | $117 million | $106 million |
| Free cash flow, company-defined | $(418) million | $(384) million |
Cash and total debt at March 31, 2016 were $239 million and approximately $5.9 billion, respectively, versus $257 million and $3.6 billion a year earlier. The balance sheet reported $5.662 billion of long-term debt and $239 million of short-term loans and current debt. Cash fell $160 million during the quarter to $239 million. Current assets were $2.476 billion and current liabilities $1.886 billion (a 1.31 current ratio). Share owners’ equity was $416 million.
The company had $586 million of unused availability under its amended secured credit agreement; the weighted-average rate on borrowings under that agreement was 2.53%. Debt is substantially secured by specified assets. The company was in compliance with its covenants at quarter-end.
Material changes versus the prior comparable period
- Vitro contributed approximately $210 million in sales and $42 million in segment operating profit. It was the principal driver of the reported year-over-year sales and segment-profit increases.
- Foreign exchange reduced sales by $62 million and segment operating profit by $11 million. Excluding the acquisition, shipments were broadly comparable overall; sales volume excluding the acquisition reduced sales by $6 million.
- Higher selling prices added $19 million to sales and segment operating profit. Higher operating costs reduced segment operating profit by $7 million.
- Net interest expense increased $19 million, primarily reflecting acquisition-related debt. Reported company-attributable continuing earnings and diluted EPS declined despite higher gross profit and segment operating profit.
- Latin America sales rose 52%, substantially due to Vitro; excluding Vitro, regional shipments declined nearly 5% amid Brazil’s economic slowdown. Europe segment profit improved, while Asia Pacific profit edged lower.
Outlook, commentary, risks, and unusual items
- Management forecast a 2016 full-year effective tax rate of 26%–28%, excluding tax on items it considers nonrepresentative of ongoing operations. The filing gives no general earnings or revenue guidance.
- Management expected operating cash flow and available credit to fund operating and seasonal working-capital needs, debt service, and other obligations over both the next 12 months and the longer term. First-quarter operating cash use reflected a $488 million working-capital outflow, primarily from lower accounts payable.
- A February 2016 credit amendment raised the maximum total-leverage covenant to 5.0x through September 2016, then steps it down to 4.5x through September 2017 and 4.0x thereafter. Management said it expected continued covenant compliance; covenant breaches could restrict borrowing or accelerate debt.
- Q1 restructuring, asset impairment, and related charges were $19 million, principally including a Latin American plant closure. The company also recorded a $7 million gain on China land compensation. Management said items it considered nonrepresentative reduced Q1 company-attributable earnings by $10 million, or $0.06 per share.
- Asbestos-related liabilities totaled $806 million at March 31 ($130 million current and $676 million long-term). The company disclosed that reasonably possible asbestos losses could be as high as $950 million beyond the amount recognized; ultimate exposure depends on uncertain future claims, costs, and litigation developments.
- An ICSID committee allowed the company’s subsidiary to pursue enforcement of a Venezuela arbitration award exceeding $485 million including interest. The award remains unpaid, annulment proceedings remain pending, collection presents practical challenges, and no recovery was recorded. A separate arbitration also remains pending.
- Disclosure controls and procedures were deemed ineffective at quarter-end because of a material weakness in controls over estimating probable liabilities for unasserted asbestos claims. Management planned remediation and expected to complete it as part of the annual asbestos review in Q4 2016; the weakness remained until remediation is implemented and tested.
- The company continued to be unable to predict the scope or outcome of a possible SEC investigation into previously disclosed overseas conduct. It said it did not expect potential sanctions or remedial measures to materially adversely affect liquidity, results, or financial condition.
- Principal stated risks include Vitro integration and synergy realization, high debt and refinancing costs, foreign-exchange movements, input-cost inflation, packaging substitution, asbestos estimates and litigation, and the internal-control weakness.
Important facts for investors to verify
- How much of sales and profit growth is sustainable apart from the Vitro acquisition, and whether integration and expected synergies are progressing.
- Debt reduction, cash generation after seasonal working-capital needs, and headroom under the tightening leverage covenant.
- Whether asbestos assumptions, the stated potential additional loss exposure, and the planned internal-control remediation are supported by subsequent disclosures.
- The status, likely timing, and collectability of the Venezuela award and the separate arbitration; no award recovery is reflected in these results.
- Whether actual 2016 effective taxes remain within the stated 26%–28% range and whether Europe pricing, Latin America conditions, and currency or input-cost pressures develop as described.