Owens-Illinois, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. The unaudited filing reports the glass-container manufacturer’s results against Q1 2014; dollar amounts are in millions except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $1,421 | $1,639 |
| Gross profit / gross margin | $268 / 18.9% | $321 / 19.6% |
| Segment operating profit | $168 | $218 |
| Continuing-operations earnings attributable to the Company | $71; diluted EPS $0.44 | $102; diluted EPS $0.62 |
| Net earnings attributable to the Company | $71 | $101 |
| Net interest expense | $47 | $54 |
| Cash used in continuing operations | $278 | $202 |
| Capital expenditures | $106 | $108 |
| Free cash flow, as defined by the Company | $(384) | $(310) |
Revenue declined 13%, while reportable-segment operating profit fell 23%. Segment operating profit margin was approximately 11.9%, compared with 13.3% a year earlier. The effective tax rate was 24.7%, versus 20.1%; management attributed the increase mainly to a prior-year tax benefit.
Liquidity, debt and balance sheet
- At March 31, cash was $257, total debt was approximately $3.6 billion, and net debt was approximately $3.4 billion. Current assets of $2.199 billion exceeded current liabilities of $2.116 billion (current ratio approximately 1.04).
- Cash declined $255 during the quarter. Operating cash use was driven principally by a $429 working-capital outflow, including lower accounts payable; financing provided $207, including a $308 net increase in borrowings.
- Investing cash use was $157, including $106 of capital spending and $52 for acquisitions, primarily a North American glass-container plant.
- On April 22, 2015, after quarter-end, the Company replaced its prior credit agreement with a new secured facility maturing in 2020. The new facility includes revolving and term-loan commitments and a maximum 4.0x leverage-ratio covenant, subject to specified acquisition-related adjustments. At March 31, the Company reported compliance with the prior agreement.
- The Company repurchased $100 of shares through an accelerated share repurchase in Q1 and expected to repurchase at least another $25 during 2015.
Changes versus Q1 2014
- Foreign exchange reduced sales by $199 and segment operating profit by $35; management cited weaker currencies including the euro, Brazilian real, Colombian peso, Canadian dollar and Australian dollar.
- Global glass-container shipments fell approximately 2.5%. Lower volume reduced reportable-segment sales by $40, while higher pricing added $11. Lower production volumes and cost inflation also pressured operating profit; improved pricing partly offset these effects.
- Europe’s segment profit fell to $49 from $87, reflecting currency, furnace rebuilds and asset-optimization work, and lower prices. North America’s profit increased to $71 from $65, supported by lower energy, supply-chain and logistics costs. South America and Asia Pacific profits declined to $30 and $18, respectively, from $41 and $25.
- Net interest expense improved by $7, primarily because of lower debt levels and euro weakness. Retained corporate costs and other declined to $21 from $30.
- Foreign-currency translation drove a $257 loss in other comprehensive income and contributed to total comprehensive loss of $145, versus comprehensive income of $162 in Q1 2014.
Outlook, risks and unusual items
- Management forecast a 2015 full-year effective tax rate of 23%–25%, excluding taxes on items it considers nonrepresentative of ongoing operations. It expected operating cash flow and available credit to fund working capital, debt service and other obligations; no broader earnings or revenue guidance is provided in the filing.
- Management said European competitive pricing pressure was expected to continue in Q2. It also expected at least $25 of additional 2015 share repurchases.
- An ICSID tribunal awarded a subsidiary more than $455 in its arbitration over Venezuela’s 2010 expropriation of two plants. Venezuela began an annulment process that could take several years; the Company did not recognize the award and could not predict the amount or timing of any recovery. A separate arbitration remained pending.
- Asbestos remains a major contingency: approximately 2,200 plaintiffs and claimants were pending at March 31. The Company said ultimate asbestos liability cannot reasonably be estimated; asbestos-related payments are substantial, and future charges could materially affect results. Recorded current and long-term asbestos liabilities totaled $421.
- The DOJ closed its FCPA inquiry without enforcement action in 2013; the Company could not predict the scope or outcome of any SEC investigation or action. It did not expect potential sanctions or remedial measures to materially adversely affect liquidity, results or financial condition.
- Other cited risks include foreign-exchange volatility, refinancing and borrowing costs, competitive pricing, inflation and availability of inputs, execution of restructuring and acquisitions, and legal, environmental and expropriation exposures.
Most important facts for investors to verify
- Whether currency movements, shipment volumes and pricing trends continue to pressure sales and segment profitability, particularly in Europe and Asia Pacific.
- Working-capital needs, cash generation and dependence on borrowing; the quarter’s operating cash use and negative free cash flow were substantial.
- Debt maturities, the terms and availability of the April 2020 credit facility, and compliance with its leverage covenant.
- Developments in the Venezuela award and annulment process, and any eventual recovery or further costs.
- Changes in asbestos claims, payments, reserves and annual liability estimates, as the Company says ultimate exposure cannot be reasonably estimated.
- Completion and final share count under the accelerated repurchase, and the extent of further buybacks.