O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. Financial statements are unaudited. The company manufactures glass containers and reports four geographic segments: Europe, North America, South America, and Asia Pacific.
Financial performance
| Metric | Q1 2011 | Q1 2010 |
|---|---|---|
| Net sales | $1.719 billion | $1.546 billion |
| Gross profit | $333 million | $299 million |
| Earnings from continuing operations | $77 million | $91 million |
| Continuing earnings attributable to the company | $73 million | $82 million |
| Net earnings attributable to the company | $72 million | $85 million |
| Diluted EPS from continuing operations | $0.44 | $0.48 |
| Cash from continuing operating activities | $(85) million | $16 million |
| Capital expenditures | $73 million | $96 million |
| Free cash flow (company-defined, non-GAAP) | $(158) million | $(80) million |
- Gross margin was approximately 19.4%, versus 19.3% a year earlier.
- Reportable-segment operating profit was $199 million, up $6 million (3%). Net sales increased 11%, and glass-container shipments rose 7%.
- At March 31, cash was $430 million; short-term debt and long-term debt totaled approximately $4.36 billion. This compares with $496 million of cash and approximately $3.47 billion of debt at March 31, 2010.
- The company reported $728 million of unused credit under its secured credit agreement. Current assets were $2.785 billion and current liabilities $2.077 billion.
Changes versus the prior-year quarter
- Sales growth reflected higher shipments, acquisitions in Argentina, Brazil, and China, and favorable currency movements. Acquisitions accounted for more than 5 percentage points of the 7% volume increase; the remainder was attributed to improving economic conditions.
- Segment operating profit improved despite cost inflation and Australian flooding. Higher manufacturing and delivery costs included $49 million of inflation and $9 million of flood-related costs, partly offset by $52 million of savings, mainly from better capacity utilization and completed footprint realignment.
- Interest expense rose $20 million to $76 million, principally because of debt issued in 2010 to fund acquisitions. Higher interest payments and increased working capital contributed to weaker operating cash flow; working capital absorbed $239 million, versus $144 million in Q1 2010.
- Regional segment operating profit was Europe $71 million (up from $56 million), North America $59 million (down from $63 million), South America $45 million (up from $37 million), and Asia Pacific $24 million (down from $37 million).
- Q1 2010 included $3 million of earnings from Venezuela in discontinued operations; Q1 2011 reported a $1 million discontinued-operations loss, mainly legal costs related to negotiations with the Venezuelan government.
Outlook, risks, and unusual items
- Management expected the 2011 full-year effective tax rate, excluding items it considers nonrepresentative of ongoing operations, to be approximately 26.2%. The filing provides no specific revenue or earnings guidance.
- Management said higher European natural-gas prices were likely to raise energy costs for the remainder of 2011. Raw-material inflation, especially soda ash, was also affecting costs. The company uses customer contract provisions and hedges to manage some energy-price exposure.
- The company was discussing refinancing options with its bank group for credit-agreement facilities with maturities in 2012 and 2013. Its European receivables securitization program ran through October 2011, subject to annual renewal of backup credit lines.
- Management expected operating cash flow and available credit to cover working capital, debt service, and other obligations. It also stated that asbestos-related cash payments were substantial and could affect borrowing costs and acquisition capacity.
- Asbestos claims remained a significant contingency: approximately 5,900 plaintiffs and claimants were pending, with about 550 additional claims believed likely to be asserted in the future. The company said it could not reasonably estimate its ultimate asbestos liability. It had accrued approximately $443 million at March 31, 2011 for current and long-term asbestos-related liabilities.
- On March 11, 2011, a jury awarded nearly $90 million against four defendants in an asbestos case, including $40 million in punitive damages against the company. The company disputed the conspiracy allegations, planned to challenge the verdict, and made no change to its asbestos liability for this matter.
- Venezuela expropriated two company subsidiaries in October 2010. The company was negotiating compensation but could not predict its amount or timing; any compensation will be recorded when received.
- The company recorded $8 million in Q1 restructuring charges for an Asia Pacific plant closing and relocation. It was pursuing a sale of the property. Australian flooding also disrupted operations.
Important facts for investors to verify
- Progress and terms of refinancing the secured credit agreement, including the 2012 maturities and availability of the $728 million in unused credit.
- Whether working-capital investment and negative free cash flow reverse as anticipated, and how elevated input and energy costs affect margins through the rest of 2011.
- Developments in asbestos litigation, the challenged jury verdict, claim trends, and any effect on accruals, cash payments, or borrowing costs.
- Whether the company obtains compensation for the Venezuelan expropriation, and the amount and timing of any recovery.
- Ongoing impacts of Australian flooding, restructuring actions, and acquisitions on regional profitability and cash flow.