Business context and reporting period
Owens-Illinois, Inc. (now O-I Glass, Inc.) filed this unaudited Form 10-Q for the quarter ended June 30, 2018. The company manufactures glass containers and reports three geographic segments: Americas, Europe, and Asia Pacific. Effective January 1, 2018, it combined its former North America and Latin America segments into the Americas.
Financial performance and condition
Amounts are in millions of U.S. dollars except per-share data. Comparisons are with the corresponding 2017 period.
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $1,772 | $1,751 | $3,508 | $3,366 |
| Gross profit | $346 | $346 | $665 | $661 |
| Gross margin | 19.5% | 19.8% | 19.0% | 19.6% |
| Segment operating profit | $255 | $252 | $479 | $470 |
| Earnings before tax | $78 | $152 | $213 | $224 |
| Net earnings attributable to company | $50 | $140 | $147 | $188 |
| Diluted EPS | $0.31 | $0.85 | $0.90 | $1.15 |
- Sales and margins: Q2 sales rose 1%; first-half sales rose 4%. Management attributed the first-half increase mainly to favorable foreign exchange ($114) and higher prices ($58), partly offset by lower volume and mix ($19). Glass-container shipments were slightly lower year over year.
- Regional results: Q2 segment operating profit rose 1%, as Europe’s increase to $101 from $80 more than offset declines in the Americas ($152 versus $161) and Asia Pacific ($2 versus $11). First-half segment profit increased 2%; Europe improved to $173 from $139, while Asia Pacific fell to $7 from $31 and Americas was nearly flat at $299.
- Cash flow: Continuing operating activities used $150 in the first half, compared with $156 used in 2017. Working capital used $586, primarily reflecting higher receivables, lower payables, reduced factoring, and a greater mix of sales outside the U.S. Investing activities used $287, including $273 of capital spending; financing provided $322, including $437 of net borrowing and $95 of share repurchases. Cash declined $127 to $365.
- Debt and liquidity: At June 30, total debt was approximately $5.7 billion, comprising $5.398 billion of long-term debt including current maturities and short-term borrowings/current debt. Cash was $365. The company entered a new secured facility of up to $1.910 billion maturing in June 2023; $591 of credit was unused and the weighted-average rate on facility borrowings was 3.18%. The company reported covenant compliance.
- Other balance-sheet items: Total assets were $9.818 billion; current assets were $2.624 billion and current liabilities $2.170 billion. Shareholders’ equity was $899.
Material changes versus prior period
- Q2 pretax earnings fell $74 (49%), despite slightly higher segment operating profit. The main factors were $73 of restructuring, asset impairment and other charges, and an $11 write-off of deferred financing fees; other operating costs also increased.
- First-half pretax earnings declined $11, primarily due to higher restructuring charges. First-half restructuring and related charges were $73, versus $49 in 2017.
- Q2 reported earnings attributable to the company fell to $50 from $140. Management identified special items that reduced Q2 2018 earnings by $75, compared with items that increased Q2 2017 earnings by $17. First-half special items reduced earnings by $75 in 2018 versus $30 in 2017.
- Interest expense was $74 in Q2, up from $62, largely due to the $11 financing-fee write-off. First-half interest expense was $136 versus $141.
- Foreign-currency translation contributed a $268 other-comprehensive-income loss in Q2; total comprehensive loss attributable to the company was $175. This non-cash translation effect materially reduced reported equity-period comprehensive income.
Outlook, risks, contingencies, and unusual items
- Management expected the 2018 full-year effective tax rate to be approximately 22%–24%, excluding tax on items it considers nonrecurring. No full-year revenue or earnings guidance is provided in the filing.
- Management expected cash from operations and available credit to fund operating, seasonal working-capital, debt-service, and other needs. It expected approximately $100 of 2018 share repurchases; the board had authorized up to $400, of which $95 had been used by June 30.
- Restructuring actions, primarily capacity curtailments and an Americas plant closure, were expected to require no significant additional charges; most remaining cash outlays were expected by the end of 2019. Americas restructuring savings were not expected until Q4 2018. The company also said Asia Pacific asset-improvement projects were substantially completed.
- Asbestos claims remain a material contingency. The company reported approximately 1,160 pending plaintiffs and claimants. Its disclosed recorded estimate was $582 at December 31, 2017; reasonably possible losses could result in liabilities as high as $725, and actual exposure could exceed that estimate. First-half asbestos payments were $26.
- The company had received $115 in cash from selling rights to a Venezuela arbitration award, which exceeded $500 including expenses and interest. The award remained subject to annulment and enforcement risk; future proceeds were uncertain, and repayment of some or all of the $115 could be required if the award is annulled. The company deferred recognition of a gain contingency.
- The SEC informed the company on May 11, 2018 that it had concluded its investigation into asbestos-liability accounting and, based on information then available, did not intend to recommend enforcement action.
- Argentina was deemed highly inflationary effective June 30, 2018. Remeasurement from July 1 was expected to increase earnings volatility, though management did not expect a material impact given the company’s limited presence there.
- Management identified risks including foreign exchange and interest rates, inflation and input costs, competition and packaging preferences, operating disruptions, restructuring execution, joint-venture funding, cybersecurity, and uncertainty in asbestos claims. It anticipated the new lease standard would significantly affect the balance sheet; operating-lease commitments were $258 at December 31, 2017.
Important facts for investors to verify
- Whether pricing and currency gains can offset lower shipments, inflation, freight costs, and repair spending, particularly in the Americas and Asia Pacific.
- Underlying cash generation after the substantial working-capital outflow, and the sustainability of receivables factoring and other liquidity sources.
- Debt levels, covenant headroom, financing costs, and the planned termination of the €185 million European receivables securitization program in the second half of 2018.
- Actual restructuring cash costs, timing of expected savings, and whether capacity changes affect customer service or production costs.
- Updates to asbestos assumptions, claims, payments, and potential losses; and the outcome and recoverability of the Venezuela award transaction.
- Progress on the stated 2018 tax-rate outlook, tax-law accounting estimates, and implementation of the lease standard.