O-I Glass, Inc. (then Owens-Illinois, Inc.) — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited results; dollars in millions except per-share data. The company manufactures glass containers and reports four geographic segments.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,741.2 | $1,874.6 | $5,034.6 | $5,200.6 |
| Gross profit | $377.1 | $448.7 | $1,084.8 | $1,152.9 |
| Gross margin | 21.7% | 23.9% | 21.6% | 22.2% |
| Net earnings attributable to company | $138.7 | $126.7 | $365.1 | $321.1 |
| Diluted EPS | $0.84 | $0.74 | $2.18 | $1.89 |
| Segment operating profit | $298.6 | $316.6 | $783.9 | $800.4 |
- Q3 sales fell 7.1%; management attributed the decline mainly to currency translation (about $90 million adverse) and lower shipments (about $40 million adverse). Shipments were down 2.4% year over year. Price and mix were approximately flat.
- For the first nine months, sales fell 3.2%. Lower volume, currency effects and customer cost-pass-through provisions outweighed improved price and mix. Shipments declined 1.3%.
- Segment operating profit declined 5.7% in Q3 and 2.1% for the nine-month period. Inflation, start-up and restart costs, and currency pressure were partly offset by restructuring savings and favorable mix/price effects.
- Reported net earnings improved despite lower sales and segment profit, partly reflecting substantially lower restructuring and impairment charges than in 2009. Management said items it deemed not representative of ongoing operations reduced company-attributable earnings by $9.4 million in Q3 2010 versus $36.0 million in Q3 2009, and by $17.3 million versus $94.1 million for the nine-month periods.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $405.0 million, down from $579.4 million. The company cited a $144.1 million working-capital use, principally inventory growth, and higher cash interest payments.
- Capital expenditures were $391.6 million versus $193.7 million; management expected full-year 2010 capital spending of up to $500 million. Operating cash flow less reported capital expenditures was $13.4 million.
- Investing cash use was $1,144.7 million, including $754.3 million for acquisitions. Financing provided $628.3 million. Cash declined from $811.7 million at year-end 2009 to $700.2 million.
- Total debt was approximately $4.35 billion at September 30, 2010, up from $3.61 billion at December 31, 2009. Long-term debt was $4,005.7 million; short-term loans and debt due within one year were $339.3 million. Interest expense was $61.0 million in Q3 and $176.6 million year to date.
- Current assets were $2,965.6 million and current liabilities $2,155.9 million (current ratio approximately 1.38). The company had $724.0 million of unused secured revolving credit; the weighted average rate on secured agreement borrowings was 2.76%.
- Debt actions included issuing $690 million face value of 3.00% exchangeable notes in May, redeeming $450 million of 8.25% notes in June, and issuing €500 million of 6.75% notes due 2020 in September. The exchangeable notes’ principal is payable in cash upon exchange; the premium may be settled in shares.
Business changes, outlook and risks
- Acquisitions expanded the company’s emerging-market footprint: Brazilian glassmaker CIV was acquired September 1 for $603 million in total consideration, including acquired debt; the purchase-price allocation remained preliminary. The company also acquired a majority interest in an Argentine producer and completed a joint-venture acquisition of Malaya Glass in Southeast Asia.
- On October 26, 2010, after quarter-end, Venezuela decreed expropriation of the company’s operations. The company reported approximately $80 million of attributable net assets there, about 3% of global sales volume and less than 5% of segment operating profit; compensation, if any, was unclear. Approximately 6% of quarter-end cash was held in Venezuela.
- Venezuelan currency restrictions and exchange-rate changes reduced South American segment operating profit by approximately $12 million in Q3 and $52 million year to date versus 2009. The filing cites cumulative translation losses of approximately $260 million related to Venezuela.
- Asbestos liabilities remain a significant uncertainty. The company was named in claims involving approximately 6,500 plaintiffs/claimants and said ultimate asbestos liability could not reasonably be estimated. Recorded asbestos liabilities totaled $371.5 million at September 30, 2010; cash payments were $113.6 million for the first nine months.
- The company expected operating cash flow and available credit to cover operating needs, debt service and other obligations. It expected a 2010 effective tax rate of approximately 26.5%, excluding separately calculated tax items, and $10–15 million of non-U.S. pension contributions; no U.S. plan contributions were required for 2010.
- Other stated risks include foreign-exchange movements, energy and raw-material inflation, demand and packaging preferences, customer and competitor conditions, acquisition integration, and asbestos claims. The company provided no specific earnings guidance in this filing.
Most important facts to verify
- Developments in Venezuela, including control of operations, cash access, asset impairment and any compensation.
- Asbestos claim trends, annual liability review, cash payments and potential additional charges.
- Debt maturities, covenant headroom, refinancing needs and terms of the exchangeable notes.
- Whether operating cash flow can support the elevated capital program, acquisition spending and working-capital needs.
- CIV’s final purchase-price allocation and whether acquired businesses deliver expected growth and synergies.
- Underlying segment margins after separating currency effects, inflation, restructuring savings and nonrecurring items.