O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2019 Form 10-Q
Business context and reporting period
Glass-container manufacturer with Americas, Europe and Asia Pacific reporting segments. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless stated otherwise. Dollar amounts are in millions, except per-share data.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $1,638 | $1,736 |
| Gross profit / gross margin | $298 / 18.2% | $319 / 18.4% |
| Earnings from continuing operations | $84 | $103 |
| Net earnings attributable to the Company | $79 | $98 |
| Diluted EPS | $0.51 | $0.59 |
| Segment operating profit (non-GAAP) | $200 | $224 |
| Cash used in operating activities | $595 | $370 |
| Capital spending | $121 | $142 |
Net margin attributable to the Company was approximately 4.8%, versus 5.6%. Cash and equivalents were $326 at March 31, 2019, down from $512 at year-end 2018. Current assets were $2,579 and current liabilities $1,860. Balance-sheet short- and long-term debt totaled approximately $5,911; net debt was approximately $5,585. The company reported $434 of unused credit under its secured facility, with a 3.88% weighted-average rate on facility borrowings. It was in compliance with debt covenants, including a maximum 4.5x total leverage ratio.
Changes versus the prior comparable period
- Sales fell $98, or nearly 6%. Foreign exchange reduced sales by $97 and volume/mix by $41, partly offset by $42 of higher prices. Glass-container shipments declined approximately 2.5%.
- Segment operating profit declined $24, or nearly 11%, as higher operating costs ($45) and unfavorable currency ($12) outweighed higher prices ($42) and volume/mix effects (-$9). Americas profit fell $34; Europe rose $7 and Asia Pacific rose $3.
- Pre-tax continuing earnings decreased $24 to $111. Net interest expense increased $3 to $65, primarily due to higher debt balances. The effective tax rate was 24.3%, compared with 23.7%.
- Operating cash use rose to $595, including a $697 working-capital use. Management cited higher receivables, lower payables, less receivables factoring than at year-end, and a greater share of sales in markets with longer payment terms. Asbestos payments were $71 versus $7; restructuring payments were $15 versus $6.
Outlook, risks and unusual items
- Management expects a 2019 effective tax rate of approximately 23%–25%, excluding tax on items it considers nonrepresentative of ongoing operations. It expects full-year asbestos-related cash payments of approximately $160.
- Management expects operating cash flow and available credit to fund operating and seasonal working-capital needs, debt service and other obligations. The company also said additional 2019 share repurchases depend on divestiture proceeds and cash generation.
- On April 1, 2019, after quarter-end, the company agreed to acquire a four-furnace glass plant near Mexico City for approximately $188 in cash. Closing, expected in the second half of 2019, is subject to customary conditions, including competition approval.
- Asbestos remains a significant contingency: approximately 1,070 lawsuits were pending at March 31. The balance sheet reported $532 of current and long-term asbestos liabilities. The company described possible outcomes above its recognized accrual and noted substantial uncertainty in future claims, costs and timing. Q1 asbestos payments reflected an accelerated claim-disposition strategy.
- Q1 net earnings exclude the $115 gain from discontinued operations recognized in Q4 2018 following a favorable ruling in the Venezuela expropriation matter. Any further recovery is uncertain and speculative.
- ASC 842 lease adoption added approximately $214 of operating lease liabilities and corresponding right-of-use assets at January 1, 2019, with no material impact on earnings or cash flows. Foreign currency, input-cost inflation, demand and volume, debt refinancing, and asbestos claims are among the disclosed risks.
Most important facts for investors to verify
- Whether cash conversion improves as working capital and receivables factoring normalize, and how liquidity is affected by seasonal needs.
- The company’s debt, covenant headroom and leverage calculation; the filing states covenant compliance but does not provide a clear current leverage-ratio value in the supplied text.
- Developments in asbestos claims, accrual estimates and cash payments, including whether the expected approximately $160 of 2019 payments holds.
- Completion terms, competition approval and financing implications of the approximately $188 Mexico plant acquisition.
- Regional sales, shipment volumes and operating costs, particularly the continuing pressure on Americas segment profit.