O-I Glass (then Owens-Illinois, Inc.) — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The company manufactured glass containers through 79 plants in 23 countries, serving food, beverage and pharmaceutical customers across four geographic segments. Financial amounts below are in U.S. dollars; millions unless noted.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $6,702 | $6,156 |
| Gross profit / gross margin | $1,212 / 18.1% | $1,110 / 18.0% |
| Earnings from continuing operations | $237 | $162 |
| Net earnings attributable to the company | $209 | $135 |
| Diluted EPS from continuing operations | $1.32 | $0.85 |
| Cash provided by continuing operating activities | $758 | $612 |
| Capital expenditures | $454 | $402 |
| Cash and total debt at year-end | $492 / $5,328 | $399 / $5,573 |
| Working capital | $194 | $212 |
Gross margin is calculated from reported sales and gross profit. Continuing operating cash flow less capital expenditures was approximately $304 million in 2016, a simple derived measure, not a company-reported free-cash-flow metric. The company had $884 million of unused credit under its secured credit facilities and reported compliance with its debt covenants. Its current ratio was approximately 1.09, calculated from reported current assets and liabilities.
Reportable-segment operating profit, a non-GAAP measure, was $882 million, up 19% from $740 million. Segment margins were not reported as a single consolidated GAAP metric. Approximately 34% of debt was subject to variable interest rates. The company paid $125 million in asbestos-related claims and contributed $38 million to defined-benefit pension plans in 2016.
Changes versus the prior year
- Sales rose 9%, but the increase was largely acquisition-driven: the Vitro business contributed about $608 million of incremental sales and $122 million of segment operating profit. Excluding Vitro, shipments were comparable year over year.
- Pricing added $79 million to sales; foreign-exchange movements reduced sales by $108 million, and unfavorable mix reduced them by $41 million. Higher prices and Vitro contributions supported segment profit, partly offset by currency effects and inflation.
- Reported earnings improved, while net interest expense rose to $272 million from $251 million, primarily reflecting higher debt associated with the Vitro acquisition, excluding refinancing-related items.
- Year-end debt declined from $5.6 billion to $5.3 billion. The company issued €500 million of 3.125% notes due 2024 and used proceeds to repay its higher-cost floating-rate term loan B.
- Fourth-quarter 2016 sales were $1,642 million; the company reported a $70 million loss from continuing operations attributable to it and a $71 million net loss attributable to it. Fourth-quarter results included $150 million of after-tax charges management considered non-recurring.
Outlook, commentary and material risks
- The filing gives no formal consolidated revenue or earnings guidance. Management said it expected operating cash flows and available credit to fund seasonal working capital, debt service and other obligations over the short and long term.
- Management expected economic weakness in Brazil and Ecuador to continue into 2017 and European pricing pressure to persist into the first quarter of 2017. A stronger U.S. dollar was continuing to weigh on reported international sales and segment profit.
- 2016 unusual items included $129 million of restructuring, asset-impairment and related charges; $98 million of U.S. pension-settlement charges; and a $71 million gain from Chinese government compensation for returned land. The company also recorded a $25 million impairment of an equity investment.
- The company reported $692 million of accrued asbestos liability at year-end and stated that reasonably possible losses could exceed the accrual, with additional reasonably possible losses estimated as high as $825 million. The ultimate liability remains uncertain.
- The SEC’s Enforcement Division was investigating accounting and control matters concerning asbestos-liability estimates. The company said it was cooperating and could not predict the outcome or quantify any potential financial impact. It had restated 2013–2015 financial statements in May 2016 over an error in its asbestos estimation method. Management reported that the related material weakness was remediated during 2016; management and the auditor concluded internal control over financial reporting was effective at year-end. The financial-statement audit opinion was unqualified.
- A Venezuela arbitration award exceeding $485 million, including interest, had not been collected and was not recognized in the financial statements. The company noted practical collection challenges and uncertainty about timing and amount.
- Other material risks include substantial leverage and refinancing needs, debt covenants, foreign-exchange exposure, energy and raw-material costs, competition from alternative packaging, pension funding, environmental requirements and integration of the Vitro acquisition. The company declared no dividends and did not expect to pay them in the near future.
Investor verification priorities
- Reconcile reported earnings with the significant excluded charges and gains, particularly fourth-quarter restructuring and pension-settlement items.
- Assess whether Vitro’s contribution, pricing gains and the company’s cost actions can be sustained as currency headwinds, inflation and regional demand pressures continue.
- Review leverage, variable-rate exposure, the 2020 secured-facility maturity, covenant headroom and the ability to generate cash after capital spending and asbestos payments.
- Track asbestos claim trends, future liability estimates, the SEC investigation and the effectiveness of the remediated controls.
- Monitor the status and collectability of the Venezuela award; it is not included as an asset in the reported financial statements.