O-I Glass, Inc. (Owens-Illinois, Inc.) — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The filing reports unaudited results for the glass-container manufacturer’s Europe, North America, Latin America and Asia Pacific segments. Unless noted otherwise, amounts are in millions of dollars.
Financial results and liquidity
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $1,751 | $1,760 | $3,366 | $3,348 |
| Gross profit | $346 | $342 | $661 | $661 |
| Gross margin | 19.8% | 19.4% | 19.6% | 19.7% |
| Continuing earnings attributable to company | $140 | $107 | $188 | $175 |
| Diluted EPS from continuing operations | $0.85 | $0.65 | $1.15 | $1.07 |
| Interest expense, net | $62 | $67 | $141 | $133 |
- Operating performance: Q2 reportable-segment operating profit was $252, up $19 (8%). Higher prices and lower operating costs more than offset lower volume and mix. Pretax continuing earnings rose to $152 from $141. The Q2 effective tax rate was 5.9%, versus 21.3%, primarily reflecting reversal of about $26 of tax accruals after resolution of a tax matter.
- First-half earnings: Pretax continuing earnings fell to $224 from $242, despite segment operating profit increasing to $470 from $444. Results included $49 of restructuring, impairment and other charges and $17 of debt-repurchase premiums and financing-fee write-offs. First-half net interest expense was $8 higher; excluding the $17 debt-related charge, it declined $9.
- Cash flow: Operations used $156 in the first half, versus $110 in the prior-year period. Working capital used $585, mainly due to higher receivables. Investing used $205, including $186 of capital expenditures. Financing provided $185, including $215 of net borrowings. Cash decreased $157 to $335.
- Debt and liquidity: At June 30, total debt was approximately $5,742 (including current maturities); cash was $335, implying net debt of about $5,407. The company had $675 of unused credit under its secured facility and reported covenant compliance. Current assets were $2,554 and current liabilities $2,015.
- Balance sheet: Total assets were $9,780 and shareholders’ equity $779 at June 30, compared with $9,135 and $363 at December 31, 2016. Asbestos-related liabilities totaled $666, including current and long-term portions.
Changes and segment trends
- Q2 sales declined less than 1%. Reported segment sales fell $16: $17 of price gains were outweighed by $28 from volume and mix and $5 from foreign exchange. The quarter had fewer shipping days, contributing about $28 of lower sales.
- Latin America led Q2 growth: sales rose 7% to $370 and segment operating profit increased 21% to $69. Europe’s segment profit rose to $80 from $73 despite lower sales. North America sales fell 5% to $572 while segment profit held at $92; Asia Pacific sales declined 2% to $155.
- First-half sales increased $18. Higher prices added $27 and volume and mix reduced sales by $2, while foreign exchange reduced sales by $11. Latin America sales rose 8%; Europe and North America sales fell 2% and 3%, respectively.
Outlook, risks and unusual items
- Management expects a 2017 full-year effective tax rate of approximately 23%, excluding items it considers nonrepresentative of ongoing operations. No broader earnings or sales guidance is stated in the provided filing text.
- Management expects operating cash flow and available credit to cover operating and seasonal working capital needs, debt service and other obligations over the short and long term.
- Restructuring charges in the first half were concentrated in Latin America ($33), Europe ($13) and North America ($3). Most remaining cash expenditures are expected by the end of 2018; affected production was largely reallocated within the regions.
- Asbestos exposure: About 1,400 plaintiffs and claimants were pending at June 30. The company reported a $692 accrued liability at December 31, 2016 and estimated reasonably possible losses as high as $825; the ultimate liability could exceed that estimate. The estimate depends on uncertain future claims, disease incidence, litigation outcomes and co-defendant participation.
- SEC investigation: The SEC is investigating accounting and control matters relating to asbestos liabilities. The company restated its 2013–2015 financial statements in 2016 to correct an error in its estimation method, is cooperating, and cannot predict the investigation’s outcome or quantify its potential financial effect.
- Venezuela award, subsequent event: On July 31, 2017, a subsidiary sold its interest in an arbitration award exceeding $500 for $115 cash, with potential additional proceeds tied to future recoveries. The cash payment may be repayable, up to the full amount, if the award is annulled. The company had not recognized the transaction in its June 30 financial statements; future recoveries are uncertain.
- Other key risks include foreign exchange, inflation and input costs, refinancing and interest rates, market and packaging competition, execution of cost savings and acquisitions, goodwill impairment, environmental obligations, cybersecurity, and the company’s ability to estimate asbestos liabilities.
Investor verification priorities
- Review the asbestos accrual assumptions, the stated $825 maximum reasonably possible loss estimate, and developments in the SEC investigation.
- Assess the sustainability of earnings growth after the approximately $26 tax-accrual reversal and other items management excludes from ongoing results.
- Monitor working-capital absorption, operating cash flow, cash balances, net debt and covenant headroom as leverage limits tighten to 4.0x beginning with Q4 2017.
- Track restructuring execution and regional volume, pricing, cost inflation and foreign-exchange trends.
- Verify the Venezuela award sale terms, potential repayment obligation and any eventual proceeds; the filing states that future amounts and timing are highly uncertain.