O-I Glass, Inc. (Owens-Illinois, Inc.) — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. The filing identifies the registrant as Owens-Illinois, Inc. Financial statements are unaudited. Amounts below are in U.S. dollars unless noted.
Business context and reporting period
The company manufactures glass containers and reports four geographic segments: Europe, North America, Latin America, and Asia Pacific. On September 1, 2015, it completed its approximately $2.15 billion cash acquisition of Vitro’s food and beverage glass container business in Mexico, Bolivia, and the United States. Vitro’s results are included only from the acquisition date; the acquired business contributed approximately $61 million of Q3 sales and $14 million of segment operating profit.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,566 million | $1,745 million | $4,530 million | $5,181 million |
| Gross profit / margin | $276 million / 17.6% | $337 million / 19.3% | $818 million / 18.1% | $1,016 million / 19.6% |
| Continuing earnings attributable to the company | $18 million | $61 million | $131 million | $297 million |
| Net earnings attributable to the company | $17 million | $60 million | $128 million | $275 million |
| Diluted EPS, continuing operations | $0.11 | $0.37 | $0.81 | $1.79 |
| Segment operating profit | $199 million | $248 million | $554 million | $728 million |
- Q3 sales fell 10%; nine-month sales fell about 13%. Management attributed the declines primarily to currency translation: unfavorable exchange rates reduced sales by $243 million in Q3 and $682 million year to date. Q3 shipments rose about 4% including Vitro; excluding the acquisition, shipments were comparable.
- Segment operating profit declined 20% in Q3 and 24% year to date. Management cited foreign exchange, operating-cost inflation, and lower production volumes; Vitro partly offset the declines. Q3 costs included about $20 million of inflation.
- Q3 net interest expense was $67 million, up $14 million year over year, including debt redemption premiums and finance-fee write-offs. Nine-month net interest expense was $188 million, up $27 million; the period included $42 million of such charges.
- Nine-month cash from continuing operations was $106 million, down from $209 million. Capital expenditures were $299 million, producing company-defined free cash flow of negative $193 million, versus negative $81 million in 2014. Working capital used $326 million of cash.
Financial position and liquidity
- At September 30, 2015, cash was $270 million and total debt was approximately $5.9 billion, compared with $264 million and approximately $3.5 billion at September 30, 2014. Balance-sheet long-term debt was $5.609 billion, with $250 million of short-term and current debt.
- The company had $641 million of unused availability under its amended credit agreement. The weighted-average rate on its outstanding borrowings under that agreement was 2.26%. It reported compliance with debt covenants at quarter-end.
- The credit agreement’s leverage limit was increased to 4.5x for the four fiscal quarters ending June 30, 2016 following the Vitro acquisition; the agreement otherwise specifies a 4.0x maximum. Debt is secured by specified assets and subject to restrictive covenants.
- Cash from financing activities included a $2.522 billion net increase in borrowings. Investing cash use included $2.342 billion of acquisitions and $299 million of capital spending. The company repurchased $100 million of shares during the first nine months; no shares were repurchased in Q3.
Material changes, outlook, and risks
- Vitro acquisition and financing: The acquisition expanded the company’s presence in Mexico and added plants and distribution operations. Preliminary acquisition accounting included $1.073 billion of goodwill and $406 million of intangible assets; the purchase-price allocation remained incomplete. The company said it expected to resolve working-capital adjustments with the seller in Q4 2015.
- Tax outlook: Management expected a 2015 full-year effective tax rate of 25%–27%, excluding tax on items it considered nonrepresentative of ongoing operations. The U.S. deferred-tax-asset valuation allowance remained in place; its December 31, 2014 balance was $927 million.
- Management liquidity view: The company expected operating cash flows and available credit to fund operating and seasonal working-capital needs, debt service, and other obligations. This outlook depends on operating performance, liquidity access, and other assumptions.
- Asbestos: The company reported approximately 2,100 plaintiffs and claimants in pending asbestos matters. Balance-sheet asbestos liabilities totaled $378 million at September 30, 2015. Management said ultimate liability cannot reasonably be estimated and that future charges could materially affect results; asbestos payments remain a significant cash use.
- Venezuela arbitration: An arbitration tribunal awarded a subsidiary more than $455 million for the 2010 expropriation of two plants. Venezuela petitioned to annul the award, and the company recognized no award income because timing and recovery were uncertain.
- Other uncertainties: An SEC inquiry related to a previously disclosed overseas anti-bribery investigation remained unresolved; the DOJ had said in 2013 it did not intend to take enforcement action and was closing its inquiry. The company also cited integration and synergy risks, foreign exchange, inflation and input costs, market conditions, and debt and refinancing risks. It stated no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Vitro integration progress, realized synergies, final purchase-price allocation, and working-capital adjustment.
- Post-acquisition leverage, covenant headroom, debt-service costs, and remaining liquidity.
- Whether operating cash flow improves and capital spending is funded without sustained negative free cash flow.
- Currency, inflation, and regional shipment trends—especially performance excluding Vitro and foreign-exchange effects.
- Changes in asbestos claims, payments, and accruals; status and collectability of the Venezuela award; and developments in the SEC matter.
- Whether the company achieves its stated 2015 tax-rate outlook and maintains its U.S. deferred-tax valuation allowance.