O-I Glass, Inc. (Owens-Illinois, Inc.) — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Unless otherwise noted, financial amounts are in U.S. dollars and millions.
Business context
The company is a global glass-container manufacturer serving food, beverage and pharmaceutical markets, with 77 manufacturing plants in 23 countries. It reports three segments: Americas, Europe and Asia Pacific. No customer accounted for more than 10% of consolidated sales. Effective January 1, 2018, the former North America and Latin America segments were combined as the Americas segment; prior-year segment figures were recast.
Key financial metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Net sales | $6,877 | $6,869 |
| Gross profit | $1,283 | $1,333 |
| Gross margin | 18.7% | 19.4% |
| Earnings from continuing operations before tax | $277 | $275 |
| Earnings from continuing operations attributable to the company | $144 | $183 |
| Net earnings attributable to the company | $257 | $180 |
| Diluted EPS from continuing operations | $0.89 | $1.11 |
| Diluted net EPS | $1.59 | $1.10 |
| Cash from continuing operating activities | $793 | $724 |
| Capital expenditures | $536 | $441 |
| Cash and total debt at year-end | $512 / $5,341 | $492 / $5,283 |
| Working capital | $150 | $140 |
Segment operating profit, a company-defined non-GAAP measure, was $945 versus $942. By segment, 2018 operating profit was $585 in the Americas, $316 in Europe and $44 in Asia Pacific. The effective tax rate was 39.0%, compared with 25.5%; excluding items management considers unusual, the company estimated an approximately 21% rate in both years.
Fourth-quarter 2018 net sales were $1,635 and gross profit was $294. The company reported a $125 loss from continuing operations attributable to it for the quarter, partly offset by a $115 gain from discontinued operations; net loss attributable to the company was $10.
Changes versus 2017
- Sales were nearly flat: higher prices added $150, while lower volume and unfavorable mix reduced sales by $128 and foreign exchange reduced them by $20. Glass shipments declined approximately 2%.
- Gross profit fell $50 and gross margin declined about 0.7 percentage point. Segment operating profit was nearly unchanged: higher prices were largely offset by operating-cost inflation, lower volume and currency effects.
- Europe segment profit increased $53 to $316, while Americas profit fell $29 to $585 and Asia Pacific fell $21 to $44.
- Continuing-operations earnings attributable to the company declined $39. Reported net earnings rose primarily because of the $115 discontinued-operations gain related to the Venezuela expropriation award; it should not be treated as recurring operating profit.
- Operating cash flow increased $69. Management cited working-capital movements, increased receivables factoring and lower restructuring payments as contributors. Capital spending rose $95.
Liquidity, debt and capital allocation
- Year-end cash was $512, including $481 held outside the United States. Total debt was approximately $5.3 billion; cash less debt implies net debt of about $4.8 billion.
- A new senior secured credit facility entered in June 2018 provides up to $1.91 billion and matures in June 2023. The company reported $988 of unused availability, a 3.97% weighted-average rate on outstanding borrowings and compliance with covenants at year-end. The facility’s maximum total leverage ratio was 4.5x, subject to specified acquisition-related adjustments.
- Cash used in continuing investing activities was $698; financing activities used $53. The company repurchased 8.6 million shares for approximately $163 during 2018 and had approximately $550 of remaining repurchase authorization at year-end.
- The board declared a $0.05-per-share dividend payable in February 2019. Future dividends remain subject to board approval and financial conditions.
Outlook, commentary, risks and unusual items
- The company said operating cash flows and available credit should fund working capital, debt service and other obligations over the short and long term. It expected to repurchase approximately $200 of shares in 2019; this is an expectation, not a guarantee.
- Management expected 2019 asbestos-related payments of approximately $160, up from $105 in 2018, and pension contributions of approximately $36. It also expected pension expense of approximately $32 and a $30 contribution to expand the Constellation Brands joint venture in Mexico.
- The 2018 results included a $125 asbestos charge, $74 of pension settlement charges and $102 of restructuring, asset impairment and other charges. Restructuring charges primarily related to plant and furnace closures. These items materially affected reported earnings.
- Asbestos liabilities were accrued at $602 at year-end; the company estimated reasonably possible losses could bring the liability to approximately $722, while noting ultimate exposure could exceed that estimate. The liability is inherently uncertain.
- Other significant risks include substantial leverage and interest-rate exposure (about 33% of debt was variable-rate, including swaps), foreign exchange, energy and raw-material costs, operational disruptions, competition from alternative packaging, environmental regulation, labor negotiations and goodwill impairment. Goodwill totaled $2.5 billion; the North America reporting unit had approximately 12% headroom in the 2018 impairment test.
- The company acquired a 49.7% interest in Empresas Comegua for approximately $119. It also noted uncertainty around Brexit, tax assessments and future environmental requirements. No formal sales or earnings guidance was provided in the filing.
Most important facts for investors to verify
- Whether price increases can continue to offset volume weakness, mix shifts and cost inflation, particularly in the Americas and Asia Pacific.
- Whether operating cash flow remains sustainable given receivables factoring: receivables sold under factoring programs were $600 at year-end, versus $454 a year earlier.
- Progress on asbestos claims, cash payments and liability estimates, including the expected increase in 2019 payments and the potential exposure above the recorded accrual.
- Debt maturities, interest costs, covenant headroom and the company’s ability to manage variable-rate and foreign-currency exposures.
- Execution and returns from restructuring, the Comegua investment, and the Constellation joint-venture expansion, alongside the company’s planned buybacks and dividend.