O-I Glass, Inc. (Owens-Illinois, Inc.) — Q3 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2013. Owens-Illinois manufactures glass containers and reports four geographic segments: Europe, North America, South America and Asia Pacific. The financial statements are unaudited.
Financial performance
Amounts below are in millions of dollars, except per-share data and margins. Comparative periods are the three and nine months ended September 30, 2012.
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,784 | $1,747 | $5,206 | $5,252 |
| Gross profit | $352 | $342 | $1,040 | $1,096 |
| Gross margin (calculated) | 19.7% | 19.6% | 20.0% | 20.9% |
| Segment operating profit (non-GAAP measure) | $259 | $245 | $752 | $771 |
| Continuing earnings attributable to the Company | $132 | $92 | $346 | $348 |
| Diluted continuing EPS | $0.79 | $0.55 | $2.08 | $2.10 |
| Net earnings attributable to the Company | $130 | $90 | $331 | $344 |
| Interest expense | $56 | $61 | $184 | $187 |
Cash flow, debt and liquidity
- For the first nine months, cash from continuing operating activities was $249 million, versus $231 million; total operating cash flow was $242 million, including $7 million used by discontinued operations.
- Capital expenditure was $239 million, up from $178 million. Company-defined free cash flow was $10 million, compared with $53 million.
- Cash declined by $212 million during the nine months to $219 million at September 30, 2013. Total debt was approximately $3.7 billion, versus $3.9 billion at September 30, 2012; balance-sheet current and long-term debt totaled $3.664 billion.
- The Company reported $817 million of unused capacity under its secured credit agreement and a $900 million revolving facility. Borrowings under the agreement had a 2.02% weighted-average rate. The European receivables securitization balance was $287 million.
- Current assets were $2.672 billion and current liabilities $2.087 billion. Asbestos-related liabilities totaled $353 million, including $155 million current.
Material changes versus prior periods
- Q3 sales and segment profit improved: sales rose 2%, and segment operating profit increased 6%. Glass-container shipments rose 2%; higher pricing and volume were partly offset by currency movements and inflation.
- Nine-month results were softer: sales declined 1% and segment operating profit fell 2%. Shipments declined 1%, and currency effects reduced sales; pricing largely offset cost inflation.
- Regional results were mixed. Q3 segment operating profit rose in Europe ($97 million versus $74 million), North America ($87 million versus $75 million) and Asia Pacific ($33 million versus $27 million), but fell in South America ($42 million versus $69 million). For the nine months, Europe and South America declined while North America and Asia Pacific increased.
- Q3 continuing earnings attributable to the Company rose to $132 million from $92 million; management said 2012 Q3 included $23 million of items it considered non-recurring, with no such items in Q3 2013. Nine-month continuing earnings were nearly flat at $346 million versus $348 million; the comparable figures included $20 million and $23 million, respectively, of items management considered non-recurring.
- During 2013 the Company issued €330 million of 4.875% notes due 2021 and discharged €300 million of 6.875% notes due 2017. It also repurchased $46 million of 2015 exchangeable notes and made term-loan repayments.
Outlook, commentary and risks
- Management expected the full-year 2013 effective tax rate, excluding items it considers non-recurring, to be approximately 23%, compared with 22.1% in 2012. The filing provides no specific full-year sales or earnings guidance.
- Management stated that operating cash flow and available credit were expected to cover working capital, debt service, capital spending and other obligations in the short and long term.
- Asbestos litigation remains a significant uncertainty. The Company said ultimate asbestos liability cannot reasonably be estimated; it had accrued approximately $4.3 billion through 2012 before insurance recoveries. It paid $108 million for asbestos-related claims in the first nine months of 2013, versus $86 million a year earlier. Management cautioned that future charges could materially affect results.
- A foreign authority assessed approximately $90 million in non-income taxes, penalties and interest. The Company is appealing and has not accrued the assessment, believing reversal is probable. It had deposited $34 million in installments; an adverse outcome could result in an approximately $60 million charge and a $30 million non-income tax refund.
- The DOJ informed the Company in July 2013 that it did not intend to take enforcement action and was closing its inquiry into potential FCPA matters. The SEC’s inquiry remained unresolved; the Company could not predict its scope or outcome.
- The Company continues arbitration concerning Venezuela’s 2010 expropriation of its subsidiaries and cannot predict the amount or timing of compensation. Nine-month discontinued-operation losses were $15 million, including $7 million of ongoing Venezuela costs and $8 million of special termination benefits.
- Management cited foreign exchange, inflation and input costs, regional economic conditions, packaging preferences, restructuring execution, debt refinancing, asbestos claims and other contingencies as risks to future results.
Important facts for investors to verify
- Whether the Q3 improvement in shipments, segment profit and cost control can be sustained, particularly given South America’s weaker performance.
- Whether free cash flow recovers after higher capital spending and working-capital use, and how much liquidity remains available under credit and securitization arrangements.
- Debt repayment and refinancing needs, including the 2015 exchangeable notes and 2016 maturities, and the effect of financing costs.
- Developments in asbestos claims, annual liability reviews and cash payments; the disputed foreign tax assessment and SEC inquiry; and Venezuela arbitration.
- The basis for management’s approximately 23% full-year tax-rate expectation and any subsequent changes to guidance or key assumptions.