O-I Glass, Inc. (Owens-Illinois, Inc.) — Q3 2019 Form 10-Q
Business context and reporting period. The unaudited quarter and nine months ended September 30, 2019 cover the company’s glass-container operations in the Americas, Europe and Asia Pacific. Comparisons are with the corresponding 2018 periods; amounts below are in millions of dollars unless stated otherwise.
Financial results and key metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,670 | $1,734 | $5,063 | $5,242 |
| Gross profit | $299 | $324 | $932 | $989 |
| Gross margin | 17.9% | 18.7% | 18.4% | 18.9% |
| Reportable-segment operating profit | $205 | $255 | $641 | $734 |
| Net earnings (loss) attributable to the Company | $(575) | $120 | $(430) | $267 |
| Diluted earnings (loss) per share | $(3.69) | $0.75 | $(2.78) | $1.64 |
- Q3 pretax loss was $536, versus pretax earnings of $168 a year earlier. The $595 non-cash goodwill impairment was the principal unusual charge; management said identified items reduced Q3 earnings attributable to the Company by $659, or $4.23 per share.
- For the first nine months, continuing-operations operating cash flow was a use of $246, versus cash provided of $99 in 2018. Total operating cash flow was a use of $247. Investing activities used $505, including $333 of capital spending and $157 paid toward the Nueva Fanal acquisition; financing provided $518. Cash fell $239 to $273 from year-end 2018.
- At September 30, cash was $273; current assets were $2,534 and current liabilities $2,195. Balance-sheet short-term debt and long-term debt totaled $5,888 ($376 and $5,512, respectively). Shareholders’ equity was $436, down from $900 at December 31, 2018.
- Net interest expense was $83 in Q3 and $215 for the nine months. Q3 included $24 of note-repurchase premiums and deferred financing-fee write-offs. The nine-month figure included $26 of such charges.
Changes versus prior periods
- Q3 sales declined 4%; nine-month sales declined 3%. For the nine months, unfavorable currency effects reduced sales by $219, while higher prices added $134; glass-container shipments were about 1% lower overall.
- Q3 reportable-segment operating profit fell 20%, and nine-month segment profit fell 13%. Higher prices partly offset weaker volumes, currency headwinds and increased operating costs. Americas segment profit was down 22% in Q3 and 17% for the nine months.
- The company cited declining North American alcoholic-beverage shipments, especially beer, and said this trend was likely to continue into the foreseeable future. It recorded a $595 goodwill impairment after lowering projected cash flows for its North American reporting unit and noting a significant share-price decline.
- Goodwill fell to $1,893 from $2,513 at December 31, 2018, largely due to the impairment. Remaining goodwill was identified as susceptible to further impairment if projected cash flows weaken or discount-rate assumptions rise.
Outlook, risks and unusual items
- Management expected the full-year 2019 effective tax rate to be approximately 24%–26%, excluding tax on items it considers nonrepresentative of ongoing operations. The filing provides no broader earnings or sales guidance.
- Management said operating cash flows and available credit were expected to fund operating and seasonal working-capital needs, debt service and other obligations in the short and long term. It expected 2019 asbestos-related cash payments of approximately $160; $135 had been paid in the first nine months.
- The June 2019 secured credit facility provides up to $3.0 billion and matures in June 2024. The company reported $1.2 billion of unused credit and compliance with its covenants at September 30. Its maximum leverage covenant is 5.0x, stepping down to 4.50x for the quarter ending December 31, 2020 and thereafter, subject to specified exceptions.
- The company completed the $195 Nueva Fanal acquisition in Mexico, funded with debt, and expected to pay approximately $42 more by year-end, subject to working-capital adjustment. Purchase-price allocation remained preliminary.
- A strategic portfolio and operating-structure review was ongoing, including evaluation of Australia and New Zealand. It could result in divestitures or other transactions and future restructuring, impairment or disposal charges. The company said no further 2019 share repurchases were expected; the board declared a $0.05-per-share dividend payable December 16, 2019.
- Asbestos exposure remains a significant contingency. The balance sheet showed $467 of asbestos-related liabilities at September 30 ($125 current and $342 long-term). The filing also discusses a $602 accrual at December 31, 2018 and estimated reasonably possible losses that could result in liabilities of approximately $722; ultimate outcomes and payments remain uncertain. Tax assessments in several jurisdictions could also exceed established reserves.
- Other risks highlighted include foreign-exchange movements, debt refinancing and interest rates, demand and packaging preferences, input costs, execution of restructuring and acquisitions, and the company’s ability to avoid further goodwill impairment. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether North American beer and other glass-container demand stabilizes, and whether the impairment assumptions or remaining goodwill require further write-downs.
- How working-capital needs, receivables factoring and asbestos payments affect operating cash flow and liquidity.
- Debt levels, covenant headroom and refinancing needs, including the approaching 2020 senior-note maturity and the leverage-covenant step-down in 2020.
- Progress and potential costs or proceeds from the strategic review, including Australia and New Zealand, and completion of the Nueva Fanal purchase-price allocation and remaining payment.
- Developments in asbestos claims and tax examinations that could change recorded liabilities, cash payments or reported results.