O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Unaudited results; amounts below are U.S. dollars unless stated otherwise.
Business context and results
The company manufactures glass containers and reports four geographic segments: Europe, North America, South America and Asia Pacific. Net sales rose 1% to $1.739 billion, mainly because of higher prices to recover cost inflation; shipments by tonnage declined nearly 2%. Management cited improved manufacturing performance, cost reduction and pricing as key drivers of higher segment operating profit.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $1,739 million | $1,719 million |
| Gross profit / gross margin | $378 million / 21.7% | $343 million / 20.0% |
| Segment operating profit | $260 million | $208 million |
| Earnings from continuing operations before tax | $170 million | $115 million |
| Net earnings attributable to the Company | $121 million | $82 million |
| Diluted EPS, net earnings | $0.72 | $0.50 |
| Cash utilized in continuing operating activities | $94 million | $85 million |
| Capital expenditures | $73 million | $73 million |
| Underlying free cash flow (non-GAAP) | $(164) million | $(158) million |
Segment operating profit increased 25%. The company attributed $22 million of lower manufacturing and delivery costs to cost initiatives and manufacturing performance, and approximately $9 million to the non-recurrence of Australian flood-related costs. Interest expense declined to $64 million from $76 million, primarily following the 2011 refinancing. The continuing-operations effective tax rate was 25.9%, versus 24.3%.
Balance sheet and liquidity
- At March 31, 2012, cash was $299 million, total debt was approximately $4.130 billion, and net debt was approximately $3.831 billion. Cash was $430 million and total debt approximately $4.363 billion at March 31, 2011.
- Current assets were $2.865 billion and current liabilities $2.116 billion; the current ratio was approximately 1.35. Cash declined $101 million during the quarter.
- The secured credit agreement provided $749 million of unused availability under its revolving facility; borrowings under the agreement carried a 2.82% weighted-average interest rate. European receivables securitization borrowings were $276 million.
- Working capital used $275 million of cash, principally as inventories increased ahead of seasonally stronger quarters. Management said operating cash flow and available credit were expected to cover working capital, debt service and other obligations in the short and long term.
Material changes, outlook and risks
- Regional performance: Segment operating profit rose in Europe ($108 million versus $76 million), North America ($78 million versus $63 million) and Asia Pacific ($36 million versus $24 million), but fell in South America ($38 million versus $45 million). Asia Pacific shipments were down more than 10%, including a decline of more than 25% in China, associated in part with furnace rebuilds and a facility closure.
- Accounting changes: Effective January 1, 2012, U.S. inventory valuation changed from LIFO to average cost, applied retrospectively. Management stated that, without the change, Q1 2012 manufacturing expense would have been $6 million lower and net earnings attributable to the Company and EPS each $6 million and $0.04 higher. The 2011 comparative figures were also adjusted. Pension expense allocation to segments was changed and prior periods recast.
- Tax outlook: Management expected a 2012 full-year effective tax rate of 24%–26%, excluding items it considers non-representative of ongoing operations, versus 21.6% for 2011; the expected increase reflects the anticipated geographic mix of earnings. No full-year sales or earnings guidance is provided in the supplied filing text.
- Asbestos: Approximately 4,700 plaintiffs and claimants were pending at March 31, with about 350 additional claims considered likely to be asserted later. The company said ultimate asbestos liability cannot reasonably be estimated. Current and long-term asbestos liabilities totaled $441 million on the balance sheet. Management noted substantial ongoing payments and that any additional charge could materially affect results; it nevertheless believed liquidity would be sufficient to meet obligations. A prior jury verdict included $40 million of punitive damages against the Company; it continued to dispute the allegations and had made no change to its asbestos liability for this case.
- Other contingencies: Venezuela expropriated two subsidiaries in 2010. The Company initiated World Bank ICSID arbitration in 2011 after failing to agree on compensation; the amount and timing of any recovery were uncertain. The quarter included $1 million of discontinued-operation losses, primarily related legal fees.
- Other operating risks: The filing identifies foreign exchange, economic and competitive conditions, inflation and energy/raw-material costs, consumer shifts to alternative packaging, supply-chain and restructuring execution, environmental obligations, and asbestos matters among risks. The North American phased ERP implementation was completed during Q1; management said disclosure controls were effective and no material control change was identified beyond implementation-related process changes.
Most important facts for investors to verify
- Whether pricing and manufacturing improvements can persist as shipments softened and cost inflation, foreign exchange and regional demand remain uncertain.
- Whether inventory buildup converts to seasonal sales and operating cash flow, given negative quarterly free cash flow and higher working-capital use.
- Debt maturities, refinancing access and continued availability of revolving credit and receivables securitization funding.
- Asbestos claims, payments, annual liability review and potential effects of litigation developments; the ultimate liability is not reasonably estimable.
- Progress and possible recovery in the Venezuela arbitration, and timing and adequacy of Chinese land compensation for replacement capacity.
- Comparability of reported earnings following the retrospective inventory and pension-allocation changes; Q1 2011 figures were recast.