O-I Glass, Inc. (Owens-Illinois, Inc.) — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request references 2011 Q4, this is an annual filing; it also provides unaudited quarterly results. Dollar amounts are in millions unless noted.
Business context
The company is a global glass-container manufacturer operating 81 plants in 21 countries, serving food, beverage and pharmaceutical markets. Its four reportable segments are Europe, North America, South America and Asia Pacific. About 76% of 2011 sales came from outside the U.S.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $7,358 | $6,633 |
| Gross profit / gross margin | $1,379 / 18.7% | $1,350 / 20.4% |
| Segment operating profit | $894 | $964 |
| Interest expense | $314 | $249 |
| Continuing-operations earnings (loss) attributable to O-I | $(511) | $258 |
| Net earnings (loss) attributable to O-I | $(510) | $(47) |
| Diluted continuing-operations EPS | $(3.12) | $1.55 |
| Cash from continuing operating activities | $505 | $600 |
| Capital expenditures from continuing operations | $285 | $500 |
| Free cash flow (company-defined, non-GAAP) | $220 | $100 |
Sales rose 11%, reflecting shipments up more than 5% (including acquisition contributions) and favorable currency translation. Segment operating profit fell 7%; the implied segment operating margin was approximately 12.3%, versus 14.6% in 2010. Higher manufacturing and delivery costs included $213 of inflation, $26 of North American production and supply-chain costs, and $9 from Australian flooding; higher utilization and other savings partly offset these pressures.
At year-end, cash was $400, total debt $4,033 and net debt $3,633, compared with cash of $640 and debt of $4,278 in 2010. Working capital was $449, down from $659. The new secured credit agreement provided $804 of unused availability; the company reported covenant compliance and a 2.9x leverage ratio against a 4.0x maximum. Approximately 35% of debt bore variable interest rates. No common dividends had been paid, and none were anticipated in the near term.
Material changes and unusual items
- Fourth-quarter continuing-operations loss attributable to O-I was $774; fourth-quarter net loss attributable to O-I was $771. Annual earnings included $905 of net adverse items, principally the $641 Asia Pacific goodwill impairment, $165 asbestos accrual increase, $91 after-tax restructuring and impairment charges, and $24 after-tax debt-repurchase and financing-fee charges.
- The $641 goodwill impairment reduced Asia Pacific goodwill to zero. Management cited lower projected cash flows, particularly in Australia, where a strong Australian dollar contributed to wine being exported in bulk and bottled nearer destination markets. Management expected weaker Australian bottle demand to continue into the foreseeable future.
- Asbestos cash payments were $170 in 2011; the year-end recorded liability was $471 ($165 current and $306 long-term). The company stated that ultimate asbestos liability could not reasonably be estimated. It recorded approximately $4.0 billion of cumulative accruals through 2011, before insurance recoveries.
- The company entered a new $2 billion secured credit agreement in May 2011 and redeemed $400 of U.S.-dollar and €225 million of euro-denominated senior notes due 2014. It acquired the remaining noncontrolling interest in its southern Brazil operations for approximately $140 and acquired a French glass plant.
- Venezuelan operations, expropriated in 2010, are reported as discontinued. O-I began World Bank arbitration in 2011 over compensation; the amount and timing of any recovery remain uncertain.
Outlook, risks and contingencies
- Management expected the 2012 effective tax rate to be approximately 24%–26%, and estimated 2012 pension contributions of about $95. It expected operating cash flow and available credit to cover operating needs, debt service and other obligations. The filing provides no specific 2012 sales or earnings forecast.
- Management planned to close another Australian furnace in early 2012; further restructuring depended on supply-and-demand conditions and contract negotiations. North American production and inventory issues had stabilized in the second half of 2011, but remained an execution risk.
- Key exposures include asbestos litigation and cash costs; substantial leverage and restrictive debt covenants; energy, raw-material and labor inflation; foreign-exchange movements; economic and customer demand conditions, especially in Australia and Europe; and competition from alternative packaging.
- Additional risks include pension funding needs, environmental regulation and emissions costs, acquisition integration, China plant relocation and compensation timing, and uncertain Venezuelan expropriation compensation. The company reported no off-balance-sheet arrangements.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective at year-end. The global ERP rollout began in North America in Q1 2012.
Investor facts to verify
- Whether operating performance and margins recover after 2011 cost inflation, particularly in North America and Australia.
- Asbestos claim trends, future accrual revisions, insurance recoveries and annual cash payments.
- Debt maturities, variable-rate exposure, covenant headroom and continued access to the secured revolving facility.
- Whether Australian demand, furnace closures and China acquisition integration support recorded asset and goodwill values.
- Timing and recoverability of Venezuelan compensation and China land-sale proceeds, and progress against the company’s 2012 tax and pension expectations.