O-I Glass, Inc. (filed as Owens-Illinois, Inc.) — Q2 2014 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. The company operates glass-container businesses across Europe, North America, South America and Asia Pacific.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $1,797m | $1,781m | $3,436m | $3,422m |
| Gross profit | $358m | $369m | $679m | $688m |
| Gross margin | 19.9% | 20.7% | 19.8% | 20.1% |
| Continuing earnings attributable to company | $134m | $135m | $236m | $214m |
| Net earnings attributable to company | $114m | $132m | $215m | $201m |
| Diluted EPS, continuing operations | $0.80 | $0.81 | $1.42 | $1.29 |
| Diluted EPS, net earnings | $0.68 | $0.79 | $1.29 | $1.21 |
| Segment operating profit | $262m | $267m | $480m | $493m |
Q2 sales increased 1%, reflecting $25m of price benefit and $15m from currency, partly offset by a $24m volume impact; glass-container shipments declined 1%. Six-month sales rose $14m, as higher prices offset adverse currency and mix effects. Segment operating profit declined $5m in Q2 and $13m for the half, as higher costs outweighed pricing and shipment benefits.
- Q2 regional segment profit: Europe $109m (down $2m); North America $83m (down $10m); South America $53m (up $16m); Asia Pacific $17m (down $9m). South American Q2 profit included $6m benefit from non-strategic asset sales.
- Asia Pacific sales fell 20% in Q2 and 19% for the half, chiefly due to lower shipments following planned China plant closures and weaker Australian demand. North America faced higher supply-chain costs and elevated inventory; Europe benefited over the half from stronger volume and cost reductions.
Cash flow, debt and liquidity
- For the first half, continuing operating cash flow was negative $31m, versus positive $22m a year earlier. Capital expenditures were $196m, versus $164m; reported free cash flow was negative $227m, versus negative $142m.
- Working capital used $354m of cash, with North American inventory and supply-chain challenges contributing. Other net cash outflows were $82m, primarily related to returnable packaging and deferred customer contracts. Cash fell $189m during the half to $194m.
- At June 30, cash was $194m and total debt was approximately $3.6bn, versus $249m and $3.8bn at June 30, 2013. The balance sheet reported $1.027bn of current loans and debt and $2.620bn of long-term debt. Current assets were $2.648bn and current liabilities $2.838bn.
- The company had $727m of unused availability under its secured credit agreement. The 2015 exchangeable notes had a $611m balance, classified as current and due June 1, 2015; management said it intends to refinance them. Management expected operating cash flow and available credit to cover operating needs, seasonal working capital, debt service and other obligations.
- Net interest expense was $108m for the half, down from $124m, reflecting lower debt and the absence of prior-year debt-repurchase and extinguishment charges.
Outlook, risks and notable items
- Management expected the 2014 full-year effective tax rate to be comparable with 21.9% in 2013, excluding taxes on items it considered non-recurring. The first-half 2014 rate was 21.1%, including a $13m benefit from reductions in uncertain tax positions.
- Q2 discontinued-operations loss was $20m; the first-half loss was $21m, including a settlement dispute with a purchaser of a previously disposed business and continuing costs related to the Venezuela expropriation.
- Asbestos litigation remains a significant uncertainty: about 2,500 plaintiffs and claimants were pending at June 30. The company said ultimate asbestos liability cannot reasonably be estimated; first-half asbestos payments were $42m. It cited substantial future cash use and the potential for future charges.
- A foreign non-income-tax assessment of approximately $90m, including penalties and interest, was being contested. The company had paid $70m in required installments and recorded the amount in other assets; it had not accrued the assessment, believing an appeal would likely succeed. An unfavorable outcome could result in forfeiture of the deposit, a charge of about $60m and a $30m non-income-tax refund.
- The DOJ closed its inquiry into disclosed possible overseas FCPA matters in July 2013. The SEC’s investigation status and outcome remained uncertain; the company did not expect potential sanctions or remedial measures to materially affect its financial condition, results or liquidity.
- Other stated risks include currency movements, refinancing and interest-rate conditions, demand and packaging preferences, input and transport costs, supply-chain disruption, cost-saving execution, and asbestos-related developments. The company reported no material change in risk factors or market-risk disclosures from its 2013 Form 10-K.
Important facts for investors to verify
- Progress and terms for refinancing the $611m exchangeable notes due June 2015, and continued access to the credit facility.
- Whether operating cash flow improves as working capital and inventory normalize; first-half free cash flow was negative $227m.
- Whether operating-cost inflation and supply-chain pressures continue to erode margins, especially in North America and Asia Pacific.
- Developments in asbestos claims, future accruals and cash payments, given management’s inability to estimate ultimate liability.
- Outcome of the foreign tax-assessment appeal and any SEC action concerning the overseas conduct investigation.
- Effect of planned China plant closures and Australian demand on Asia Pacific volumes and profitability.