Owens-Illinois, Inc. (O-I Glass) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2009. The filing presents unaudited consolidated results and was signed October 29, 2009.
Financial performance
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $1,874.6 million | $2,008.6 million | $5,200.6 million | $6,179.7 million |
| Gross profit | $448.7 million | $407.3 million | $1,152.9 million | $1,389.3 million |
| Gross margin | 23.9% | 20.3% | 22.2% | 22.5% |
| Net earnings attributable to the Company | $126.7 million | $78.6 million | $321.1 million | $488.0 million |
| Diluted EPS | $0.74 | $0.46 | $1.89 | $2.86 |
| Cash provided by operating activities | Not provided for the quarter | $579.4 million | $580.9 million |
- Third-quarter reportable-segment operating profit, a management measure, increased 10.1% to $316.6 million. For the nine months it declined 19.9% to $800.4 million.
- At September 30, cash and cash equivalents were $1,017.1 million; current assets were $3,245.5 million and current liabilities $2,099.5 million (current ratio approximately 1.55).
- Total debt was reported as $3.72 billion, versus $3.33 billion at December 31, 2008. Cash less total debt was approximately $2.70 billion. Unused credit under the secured credit agreement was $761.2 million.
- Nine-month capital expenditures were $193.7 million, down from $238.5 million. Cash increased $637.6 million from year-end 2008, reflecting operating cash flow and financing activity, partly offset by investment spending.
Changes and drivers
- Q3 sales fell 6.7%; lower shipments and unfavorable currency effects outweighed higher pricing and improved mix. Segment sales were lower in Europe, North America and South America; Asia Pacific sales rose slightly.
- Q3 segment operating profit increased despite lower sales, primarily from price and mix, lower energy and operating costs, and about $34 million of savings from permanent capacity curtailments. Temporary production curtailments drove about $61 million of higher unabsorbed fixed costs.
- Nine-month sales fell 15.8%, reflecting lower volume and unfavorable currency translation. Segment profit fell as lower volume and production curtailments contributed to about $256 million of increased unabsorbed fixed costs, alongside inflationary costs.
- Q3 interest expense declined to $58.6 million from $66.3 million, principally due to lower variable rates and favorable currency effects. Nine-month interest expense was $164.6 million, including $5.2 million of debt-tender and related charges.
- Q3 and nine-month 2009 results included restructuring and impairment charges of $57.5 million and $113.1 million, respectively. The ongoing footprint plan is expected to reduce the workforce by approximately 2,500 jobs in total across 2007–2009 actions; the 2009 actions account for about 700 jobs.
Outlook, risks and unusual items
- Management expected a 2009 full-year effective tax rate of 26%–27% for continuing operations, excluding restructuring and other separately taxed items. It expected 2009 capital spending of up to $440 million, depending on market conditions.
- The Company expected 2009 contributions of approximately $75–$80 million to non-U.S. pension plans and no required U.S. plan contributions. It anticipated moderately higher non-U.S. contributions in 2010, subject to investment returns and discount rates.
- Management said operating cash flow and available credit should be sufficient for operating needs, debt service and other obligations. This assessment includes substantial asbestos-related payments; cash payments for asbestos were $122.4 million in the first nine months of 2009.
- Asbestos liability is difficult to estimate. The Company had about 7,000 pending plaintiffs and claimants at September 30, 2009, plus approximately 760 claims it believed likely to be asserted later. It stated future annual reviews may result in additional charges; the 2008 fourth-quarter charge was $250 million.
- About 19% of reported cash was held in Venezuela, where currency-transfer restrictions limit access at the official exchange rate. Parallel-market transactions during Q3 generated $14.7 million of foreign-exchange losses. Management warned that a devaluation or highly inflationary accounting could adversely affect reported Venezuelan results.
- Other stated risks include currency and interest-rate movements, demand and packaging preferences, energy, raw-material and labor costs, pricing, competition, supply-chain disruptions, environmental and safety obligations, and asbestos claims. No material changes in risk factors were reported from the 2008 Form 10-K.
Important facts for investors to verify
- Whether the Q3 improvement in gross margin and segment operating profit can persist amid weak shipments and production underutilization.
- Accessible liquidity, including the location and transferability of the Venezuelan cash balance and the availability of committed credit.
- Debt maturities, borrowing costs and the effect of the 2016 notes issuance and 2010 debenture tender on leverage and future interest expense.
- Updated asbestos liability estimates, claim trends, cash payments and any additional charges after the filing date.
- Execution and remaining costs of restructuring, pension funding needs, and the outcome of the October 1, 2009 goodwill impairment review; the review was still underway in the filing.