O-I Glass, Inc. (Owens-Illinois, Inc.) — Q3 2018 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2018. The company manufactures glass containers and reports three geographic segments: Americas, Europe, and Asia Pacific. Figures below are in millions of U.S. dollars except per-share amounts. The statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,734 | $1,791 | $5,242 | $5,157 |
| Gross profit | $324 | $353 | $989 | $1,014 |
| Gross margin | 18.7% | 19.7% | 18.9% | 19.7% |
| Continuing earnings attributable to company | $120 | $128 | $268 | $316 |
| Diluted EPS from continuing operations | $0.75 | $0.77 | $1.65 | $1.92 |
| Reportable segment operating profit | $255 | $260 | $734 | $730 |
| Net interest expense | $63 | $63 | $199 | $204 |
For the nine months, cash from continuing operations was $99 million, compared with $39 million a year earlier. Capital spending was $383 million versus $292 million, leaving operating cash flow less capital spending of negative $284 million (prior year: negative $253 million). Cash ended at $440 million, down from $492 million at December 31, 2017. Working capital consumed $545 million of cash.
At September 30, 2018, total assets were $9.94 billion, current assets $2.66 billion, and current liabilities $2.02 billion. Cash was $440 million. Long-term debt was $5.49 billion, with $152 million reported as short-term loans and long-term debt due within one year. The company had $653 million of unused availability under its credit agreement. Its new facility had a 3.40% weighted-average borrowing rate; the company reported covenant compliance.
Changes and management commentary
- Q3 sales declined 3%, mainly from unfavorable currency translation ($60 million) and lower sales volume/mix ($38 million), partly offset by higher prices ($40 million). Shipments were down about 2%.
- Nine-month sales increased 2%, supported by higher prices ($98 million) and favorable currency effects ($54 million), despite lower volume/mix ($57 million) and shipments down about 1%.
- Q3 segment operating profit fell 2%. Europe improved, but Asia Pacific declined; higher prices were more than offset by lower sales and currency effects. The company cited inflation and freight costs in the Americas and planned asset-improvement projects in Asia Pacific, which it said were completed.
- Nine-month segment operating profit was slightly higher. Europe’s $40 million increase more than offset a $35 million decline in Asia Pacific; Americas was approximately flat.
- The company consolidated its former North America and Latin America segments into the Americas segment effective January 1, 2018, aiming to simplify management and reduce duplicative costs.
Outlook, risks, and unusual items
- Management expected a full-year 2018 effective tax rate of approximately 22%–23%, excluding tax on items it considers nonrecurring. No broader earnings or revenue guidance is provided in the filing.
- The company expected to repurchase approximately $125 million of shares in 2018; it had repurchased $107 million through September under a $400 million authorization.
- The company recorded $73 million of restructuring, asset-impairment and other charges in the nine-month MD&A presentation, primarily related to capacity curtailments and a plant closure in the Americas. The notes separately report $70 million of charges; the filing text does not clearly reconcile the difference. Most remaining related cash spending was expected by the end of 2019.
- Asbestos-related liabilities on the September 30 balance sheet totaled $542 million ($100 million current and $442 million long term). The company disclosed that reasonably possible losses could result in liabilities as high as $725 million, and noted that actual outcomes could exceed that estimate. It cited uncertainty in future claims, litigation trends, and co-defendant participation. Asbestos payments were $40 million in the first nine months of 2018.
- The SEC informed the company in May 2018 that it had concluded its investigation into accounting and controls related to asbestos liabilities and, based on information then available, did not intend to recommend enforcement action.
- A potential recovery related to the Venezuela arbitration award remains uncertain. The award exceeded $500 million, but the company had sold its rights for $115 million cash and deferred recognition of a possible additional gain pending annulment proceedings. Future recovery is speculative; repayment of some or all of the cash payment may be required if the award is annulled.
- Other key risks identified include currency movements, financing costs and refinancing, inflation and energy/transportation costs, operational disruptions, packaging substitution, execution of restructuring and expansion plans, and asbestos claims. The company said it expected operating cash flow and available credit to fund operating needs and obligations.
Important facts for investors to verify
- Whether working-capital requirements and capital spending continue to constrain cash generation.
- Debt levels, facility availability, borrowing costs, and compliance with the 4.5x maximum leverage covenant.
- The drivers behind Asia Pacific’s profit decline and whether completed improvement projects lead to better results.
- The asbestos liability estimate, payment variability, and exposure relative to the disclosed possible-loss range.
- The restructuring-charge reconciliation ($73 million in MD&A versus $70 million in the notes) and remaining cash costs.
- Developments in the Venezuela annulment and enforcement proceedings, including possible repayment obligations.