O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2014 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2014. The company manufactures glass containers and reports four geographic segments: Europe, North America, South America and Asia Pacific. Financial statements are unaudited; amounts below are in millions except per-share data.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $1,639 | $1,641 |
| Gross profit | $321 | $319 |
| Gross margin | 19.6% | 19.4% |
| Continuing-operations earnings attributable to the company | $102 | $79 |
| Net earnings attributable to the company | $101 | $69 |
| Diluted EPS | $0.61 | $0.42 |
| Cash used in continuing operating activities | $202 | $134 |
| Capital expenditures | $108 | $94 |
| Free cash flow (company-defined, non-GAAP) | $(310) | $(228) |
- Segment operating profit was $218, down $8 (4%) year over year. The measure excludes retained corporate costs and certain other items.
- Cash and cash equivalents were $201 at March 31, 2014, down from $383 at December 31, 2013. Total debt was approximately $3.7 billion, compared with $3.9 billion at March 31, 2013; balance-sheet debt was $3.702 billion, including $331 million due within one year.
- The company had $660 million of unused availability under its secured credit agreement. Working capital was a major seasonal cash use: changes in working-capital components used $352 million, versus $301 million a year earlier.
- Current assets were $2,577 and current liabilities $2,082 at quarter end. The filing does not provide a formal liquidity ratio.
- Interest expense, net, was $54, down from $68. The 2013 comparison included $11 million of debt repurchase premiums and finance-fee write-offs.
Changes versus the prior comparable period
- Sales were essentially flat: higher shipments and prices were offset by unfavorable currency movements. Global glass-container shipments increased 2%.
- Regional sales were Europe $706 (up 9%), North America $485 (up 3%), South America $239 (down 11%) and Asia Pacific $203 (down 18%). Currency effects particularly weighed on South America and Asia Pacific.
- Europe segment operating profit rose to $87 from $59, supported by volume, production and structural cost improvements. North America fell to $65 from $74, South America to $41 from $53, and Asia Pacific to $25 from $40.
- Management attributed lower segment profit overall to higher operating costs, including North American energy and logistics costs from severe winter weather, Asia Pacific energy inflation, and lower fixed-cost absorption during South American furnace rebuilds. Price, volume and structural savings partly offset these pressures.
- Continuing-operations earnings attributable to the company rose to $102 from $79. Management said Q1 2013 included items it considered non-recurring that reduced earnings by $20, or $0.12 per share; it identified no such items in Q1 2014. Discontinued-operations losses narrowed to $1 from $10, with the 2014 loss related to ongoing Venezuela expropriation costs.
- Comprehensive income attributable to the company was $160, versus $90, including a favorable $32 million currency translation adjustment compared with a $32 million adverse adjustment in Q1 2013.
Outlook, risks and contingencies
- Management expected the full-year 2014 effective tax rate to be comparable with or slightly higher than 2013’s 21.9% rate, excluding taxes on items it considered non-recurring. Q1’s effective rate was 20.1%, including a $6 million benefit from reductions in uncertain tax positions.
- No specific revenue or earnings guidance was provided. Management expected operating cash flows and available credit to fund operating and seasonal working-capital needs, debt service and other obligations over the short and long term.
- Asbestos litigation remains a substantial uncertainty. Approximately 2,500 plaintiffs and claimants were pending at March 31, 2014. The company said ultimate asbestos liability cannot reasonably be estimated; it reported $433 million of asbestos-related liabilities on the balance sheet and noted a $145 million asbestos charge in Q4 2013. It warned future charges could materially affect results and that payments continue to use significant cash.
- A foreign tax authority assessment of approximately $90 million, including penalties and interest, was upheld by a lower court. The company is appealing and has not accrued the assessment, believing reversal is probable. It had deposited $60 million in installments by March 31, 2014, recorded in other assets. An unfavorable final outcome could result in forfeiture of the deposit, a roughly $60 million charge and a $30 million non-income-tax refund.
- The DOJ closed its inquiry into the company’s voluntary disclosure of potential overseas FCPA matters without enforcement action in July 2013. The company could not predict the scope or outcome of any SEC investigation or potential action, but did not expect sanctions or remedial measures to materially adversely affect liquidity, results or financial condition.
- Key stated risks include currency fluctuations, refinancing and capital-market conditions, energy and raw-material costs, inflation, competitive and packaging trends, restructuring execution, supply-chain disruption, environmental obligations, and asbestos claims. The company reported no material changes in risk factors or market-risk disclosures from its 2013 Form 10-K.
Important facts for investors to verify
- Whether working-capital use and negative free cash flow reverse as seasonal inventory and receivables normalize.
- Progress in segment profitability, especially the cost and production pressures in North America, South America and Asia Pacific.
- Debt maturities and refinancing needs, including the secured credit agreement’s May 2016 maturity and the company’s continued access to its revolving facility.
- Developments in asbestos claim trends, related payments and the annual liability review, given management’s inability to estimate ultimate exposure.
- The appeal outcome and cash recovery or loss related to the foreign tax assessment deposit, and any material SEC developments concerning the FCPA matter.
- Whether the full-year effective tax rate tracks management’s stated expectation; the filing provides no clear broader financial forecast.