O-I Glass, Inc. (Owens-Illinois, Inc.) — FY 2015 Form 10-K
Reporting period: Year ended December 31, 2015. The filing includes unaudited quarterly results; it is an annual report, not a standalone fourth-quarter filing. Amounts below are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Business context
The company manufactures glass containers for food, beverages and pharmaceuticals, operating 80 glass manufacturing plants across 23 countries. Its reportable segments are Europe, North America, Latin America and Asia Pacific. On September 1, 2015, it acquired Vitro’s food and beverage glass container business in the United States, Mexico and Bolivia for approximately $2.297 billion.
Financial performance and liquidity
| Metric | 2015 | 2014 |
|---|---|---|
| Net sales | $6,156 | $6,784 |
| Gross profit; gross margin | $1,110; approximately 18.0% | $1,253; approximately 18.5% |
| Segment operating profit (management measure) | $740 | $908 |
| Net earnings (loss) attributable to O-I | $(74) | $75 |
| Diluted EPS | $(0.47) | $0.45 |
| Cash provided by continuing operating activities | $612 | $698 |
| Capital expenditures | $402 | $369 |
| Free cash flow (non-GAAP) | $210 | $329 |
| Cash and cash equivalents at year-end | $399 | $512 |
| Total debt at year-end | $5,573 | $3,445 |
| Working capital | $212 | $43 |
O-I’s reported net sales fell about 9% year over year. Foreign currency movements reduced sales by $881 million and segment operating profit by $141 million; the Vitro business contributed approximately $258 million of sales and $46 million of segment operating profit after acquisition. Excluding specified items, segment operating profit still declined, reflecting currency, cost inflation and weaker European operating performance. Net interest expense increased to $251 million from $230 million, including refinancing-related charges.
Cash used in investing activities was $2,748 million, primarily reflecting $2,351 million of acquisition spending. Financing activities provided $2,057 million, including new debt raised to fund the acquisition. The amended credit agreement provided $872 million of unused credit at year-end; the stated weighted-average rate on its borrowings was 2.37%. The company reported covenant compliance at December 31, 2015, with a 4.0x total leverage ratio against a 4.5x acquisition-related limit then in effect.
Material changes and fourth-quarter results
- Net sales declined by $628 million, driven principally by currency translation; reported glass-container shipments rose about 3%, largely due to Vitro, and were comparable to 2014 excluding the acquisition.
- Segment operating profit declined by $168 million, or 19%. Europe fell $144 million, while North America increased $25 million; Latin America and Asia Pacific also declined.
- O-I recorded a $225 million fourth-quarter asbestos charge, up from $135 million in 2014. Other 2015 items included $80 million of restructuring and related charges, $23 million of strategic transaction costs, and acquisition-related inventory and intangible adjustments of $22 million and $10 million, respectively.
- Fourth-quarter earnings attributable to O-I were a loss of $202 million, compared with a $200 million loss in fourth-quarter 2014. The filing identifies $265 million of after-tax unusual charges attributable to O-I in Q4 2015; the asbestos charge was the largest item.
- Year-end shareholders’ equity fell to $574 million from $1,275 million. Other comprehensive loss was $539 million, including $529 million of foreign-currency translation losses.
Outlook, risks and contingencies
- Management said cash from operations and available credit should fund operating needs, seasonal working capital, debt service and other obligations over the short and long term. It expected the leverage ratio to rise during the first three quarters of 2016 because of seasonal working capital needs.
- On February 3, 2016, the company amended its credit agreement to raise the maximum leverage covenant to 5.0x for the quarters ending March 31, June 30 and September 30, 2016; 4.5x through September 30, 2017; and 4.0x thereafter.
- Management cited continued U.S.-dollar strength, competitive pricing in Europe, and a Brazilian economic slowdown expected to continue into 2016. It provided no clear numerical revenue, earnings or cash-flow guidance.
- Asbestos remains a major uncertainty: the company recorded $522 million of asbestos liabilities at year-end and paid $138 million in 2015. It states ultimate liability cannot reasonably be estimated; additional charges could materially affect results, cash flow and financial flexibility.
- A 2015 international arbitration award against Venezuela exceeded $455 million, but Venezuela petitioned to annul it. O-I has not recognized the award and cannot predict recovery amount or timing.
- The Vitro purchase-price allocation remained provisional at year-end. Integration, realization of anticipated benefits, and the timing of a roughly $143 million acquired VAT receivable refund are items to monitor.
- Other key exposures include substantial leverage and variable-rate debt (about 46% of total debt), foreign exchange, energy and raw-material costs, pension funding, environmental regulation, labor negotiations and competition from alternative packaging. The principal North American collective bargaining agreement was due to expire March 31, 2016.
- The DOJ closed its inquiry into previously disclosed potential FCPA matters, but the SEC’s review remained unresolved. The SEC had also not confirmed completion of its review of the company’s 2014 Form 10-K comments concerning asbestos accrual methodology.
Most important facts for investors to verify
- Reconcile the $74 million GAAP net loss attributable to O-I, the $70 million loss from continuing operations attributable to O-I, and management’s exclusions for unusual items.
- Assess whether post-acquisition cash generation and integration can support the higher debt load and comply with the amended leverage covenant as it steps down.
- Review the assumptions and sensitivity behind the $522 million asbestos liability, future payments and potential additional charges.
- Track Vitro’s finalized purchase-price allocation, integration performance, synergies and the VAT receivable refund.
- Monitor currency effects, regional volumes and pricing—particularly Europe and Brazil—and whether operating performance stabilizes.
- Note that the auditor gave an unqualified opinion on the financial statements and internal control, but the internal-control assessment excluded the recently acquired Vitro business, which represented approximately 26% of total assets at year-end.