Business context and reporting period
Owens-Illinois, Inc. (now known as O-I Glass, Inc.) filed this Form 10-K for the fiscal year ended December 31, 2017. The company is a global glass-container manufacturer, operating 78 plants in 23 countries and reporting four geographic segments: Europe, North America, Latin America and Asia Pacific. The filing provides annual results; quarterly figures are noted below where relevant. Amounts are in U.S. dollars.
Key financial metrics
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $6.869 billion | $6.702 billion |
| Gross profit / gross margin | $1.133 billion / 16.5% | $1.212 billion / 18.1% |
| Earnings from continuing operations before taxes | $275 million | $356 million |
| Net earnings attributable to the company | $180 million | $209 million |
| Diluted EPS | $1.10 | $1.28 |
| Cash from continuing operating activities | $724 million | $758 million |
| Capital expenditures | $441 million | $454 million |
| Cash and total debt at year-end | $492 million / $5.283 billion | $492 million / $5.328 billion |
| Working capital | $140 million | $194 million |
Reported gross margin was approximately 16.5%, down from 18.1%. Segment operating profit, a company-defined measure excluding specified items and retained corporate costs, was $942 million, up 7% from $882 million. Reported pretax earnings included $268 million of net interest expense; net debt was approximately $4.79 billion. The current ratio was approximately 1.06 based on reported current assets and liabilities.
Material changes versus the prior comparable period
- Sales increased 2.5% year over year, reflecting $61 million of higher prices and $106 million of favorable currency effects, partly offset by $3 million from volume and mix. Total container shipments rose approximately 1%.
- Segment operating profit rose $60 million. Europe, North America and Latin America improved; Asia Pacific declined 16% to $65 million, due mainly to cost inflation, supply-chain expense and asset-improvement work.
- Despite stronger segment results, pretax earnings fell $81 million and company-attributable earnings from continuing operations declined to $183 million from $216 million. The principal reported drag was pension settlement charges of $218 million versus $98 million in 2016.
- Operating cash flow declined $34 million, chiefly reflecting an $89 million working-capital use in 2017 versus a $90 million source in 2016, including the nonrecurrence of a $128 million VAT refund received in 2016.
- Debt was broadly stable. The company issued €225 million of 3.125% notes due 2024 and $310 million of 4.0% notes due 2023, repaid higher-cost and floating-rate borrowings, and repurchased its remaining 7.8% notes due 2018.
Fourth-quarter 2017 sales were $1.712 billion and the company reported a $133 million loss attributable to the company, including $224 million of after-tax charges management considered nonrepresentative of ongoing operations. The filing reports fourth-quarter 2016 sales of $1.642 billion and a $71 million attributable loss.
Outlook, commentary, risks and unusual items
- Outlook and capital allocation: Management said operating cash flow and available credit should fund operating needs, seasonal working capital, debt service and other obligations over the short and long term. No formal earnings or sales guidance is provided. Management expected Asia Pacific operating profit in first-half 2018 to be below the prior-year period because of continuing asset-improvement projects. The company planned approximately $140 million to expand its Constellation Brands joint venture, funded equally by the partners through 2018–2019; O-I expected to contribute about $70 million.
- Debt and liquidity: The company had $888 million of unused credit under its secured facility and reported covenant compliance at year-end. The facility’s maximum total leverage ratio was 4.0x. Approximately 41% of debt, including interest-rate swaps, was subject to variable rates. Debt service, refinancing needs and restrictive covenants remain important risks.
- Asbestos: The recorded liability was $582 million at year-end, down from $692 million in 2016; asbestos cash payments were $110 million in 2017. The company said reasonably possible asbestos liabilities could reach $725 million and that ultimate exposure cannot be estimated with certainty.
- SEC investigation: The SEC Enforcement Division was investigating accounting and control matters related to asbestos-liability estimates. The company said it was cooperating and could not predict the outcome or quantify its potential impact. The company had restated 2013–2015 statements in 2016 to correct its asbestos estimation method.
- Venezuela award: O-I received $115 million in cash from selling rights to a prior arbitration award. The award remained subject to an annulment proceeding; the company could be required to repay up to the cash received if the award is annulled. The company deferred recognizing a gain and said future recoveries were uncertain.
- Tax reform: The Tax Cuts and Jobs Act prompted provisional tax accounting, including a $162 million deferred-tax charge offset by a valuation-allowance adjustment, an $11 million deferred-tax benefit, and a provisional $2 million net transition-tax expense. The accounting was incomplete and subject to refinement.
- Other risks and items: Key exposures include foreign exchange, energy and raw-material costs, competition from alternative packaging, operational disruptions, pension funding, environmental rules, labor relations, customer consolidation and goodwill impairment. Goodwill was $2.59 billion; the 2017 annual impairment test found no impairment. The company reported no dividends since its 1991 IPO and did not expect near-term dividends. In January 2018, the board authorized a $400 million repurchase program, with about $100 million expected in 2018.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2017.
Important facts for investors to verify
- Reconcile reported earnings with the large pension-settlement and restructuring charges, and assess whether segment-profit gains translate into sustained cash generation.
- Review debt maturities, variable-rate exposure, covenant headroom and the company’s ability to meet the 2020 secured-facility maturity and ongoing capital needs.
- Track asbestos claims, payments, estimate assumptions and developments in the SEC investigation; compare the $582 million accrual with the stated potential exposure of up to $725 million.
- Monitor the Venezuela annulment proceeding and any repayment obligation related to the $115 million cash payment.
- Confirm final tax-reform accounting and the effect of future guidance, foreign tax credits and deferred-tax-asset valuation allowances.
- Assess the return and funding demands of the Constellation joint-venture expansion and the planned share repurchases against leverage and liquidity priorities.