Owens-Illinois, Inc. — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed February 10, 2010. The filing identifies the registrant as Owens-Illinois, Inc. (glass-container manufacturer), not “O-I Glass, Inc.”
Business context
The company was the world’s largest glass-container manufacturer, operating 78 plants in 21 countries across Europe, North America, South America and Asia Pacific. It serves food, beverage and pharmaceutical markets. Management’s priorities include profitable growth, innovation, operational efficiency, pricing and disciplined cash use.
Financial performance and liquidity
| Metric | 2009 | 2008 |
|---|---|---|
| Net sales | $7,066.5 million | $7,884.7 million |
| Gross profit / gross margin | $1,483.9 million / 21.0% | $1,676.6 million / 21.3% |
| Earnings from continuing operations | $197.8 million | $321.7 million |
| Net earnings attributable to the company | $161.8 million | $258.3 million |
| Diluted EPS from continuing operations | $0.95 | $1.48 |
| Cash provided by continuing operating activities | $800.0 million | $757.2 million |
| Capital expenditures | $427.6 million | $361.7 million |
| Cash and cash equivalents at year-end | $811.7 million | $379.5 million |
| Total debt at year-end | $3.610 billion | $3.334 billion |
| Working capital | $763 million | $441 million |
Fourth-quarter 2009 sales were $1,865.9 million and gross profit was $331.0 million. The company reported a fourth-quarter net loss attributable to the company of $159.3 million, including substantial asbestos, restructuring and Venezuela-related charges. The filing reports no dividends paid and says none are anticipated in the near future.
Changes versus prior year
- Sales fell 10.4%, primarily from lower volume and unfavorable foreign-exchange effects; price and mix partly offset the decline. Reportable-segment sales volume fell by $819.8 million and currency effects reduced sales by $343.7 million, partly offset by $377.0 million from price and mix.
- Reportable-segment operating profit, a company-defined non-GAAP measure, declined 13.9% to $996.0 million. Management cited lower volume, approximately $302 million of higher unabsorbed fixed costs—mainly from production curtailments—and inflationary costs; pricing, mix and savings from capacity actions partly offset these pressures.
- Operating cash flow rose by $42.8 million, helped by lower working-capital balances, interest payments and asbestos payments, despite lower earnings and higher restructuring payments and pension contributions.
- Cash increased substantially, while debt also rose. The company issued $600 million face amount of 7.375% senior notes due 2016, using proceeds partly to refinance 2010 debentures and reduce revolving-credit borrowings.
Outlook, risks and unusual items
- Asbestos: A $180 million fourth-quarter charge increased the accrual for estimated future costs; asbestos cash payments were $190.3 million in 2009. Management says ultimate liability cannot reasonably be estimated. About 7,000 claims were pending at year-end.
- Restructuring: The 2007–2009 global footprint review led to charges totaling $401.3 million and plans for approximately 3,250 job eliminations. Final actions were expected in the first half of 2010; most remaining restructuring cash expenditures were expected by year-end 2010.
- Venezuela: Currency restrictions led the company to translate Venezuelan subsidiaries at the parallel-market rate, about 60% below the official rate at year-end. The company recorded $28 million in exchange losses and a $17.3 million remeasurement charge; translation adjustments also reduced equity. Venezuela became highly inflationary for accounting purposes on January 1, 2010. A January 2010 official-rate devaluation added uncertainty, and management was still assessing its effects.
- Debt and liquidity: Approximately 31% of debt was variable-rate. The company had $760 million of unused credit under its secured facility and said it was compliant with covenants at year-end. Debt maturities, covenants, refinancing access and cash-flow generation remain material risks.
- Management outlook: Management expected the effective tax rate not to change significantly in 2010 and anticipated lower non-U.S. pension contributions and no required U.S. plan contributions, subject to market and other factors. It stated that operating cash flow and available credit should fund operating needs, debt service and obligations.
- Other principal exposures include weak economic conditions, competition from alternative packaging, energy and raw-material costs, foreign-exchange movements, environmental regulation, labor relations and pension funding. The company reported no goodwill impairment in its 2009 annual test.
Important facts for investors to verify
- How asbestos claim trends, the annual liability reassessment and cash payments could affect future earnings, liquidity and borrowing costs.
- The 2010 operating and cash-flow effects of Venezuela’s exchange-rate regime, hyperinflation accounting and subsequent bolivar devaluation.
- Debt maturities, covenant headroom, variable-rate exposure and the availability of revolving and receivables-financing facilities.
- Whether planned capacity reductions and cost savings offset lower volume and fixed-cost under-absorption, and whether restructuring actions are completed on schedule.
- The assumptions behind pension expense and contributions, and the sensitivity of goodwill and other asset values to projected cash flows and discount rates.