O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. The filing is by Owens-Illinois, Inc. and reports global glass-container operations across Europe, North America, Latin America and Asia Pacific. Unaudited financial statements are in millions of dollars, except per-share amounts.
Financial results and key metrics
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $1,615 million | $1,588 million |
| Gross profit / margin | $315 million / 19.5% | $319 million / 20.1% |
| Segment operating profit | $218 million | $211 million |
| Continuing-operations earnings attributable to the company | $49 million; $0.30 diluted EPS | $68 million; $0.42 diluted EPS |
| Net earnings attributable to the company | $49 million | $67 million |
| Cash used in operating activities | $337 million | $302 million |
| Capital expenditures | $98 million | $117 million |
| Cash and cash equivalents at quarter-end | $312 million | $239 million at March 31, 2016 |
Sales increased 2%, while gross profit declined $4 million. Segment operating profit rose 3%; its margin on segment sales was approximately 13.7%, versus 13.5%. Earnings from continuing operations before tax fell to $73 million from $101 million. The filing attributes $46 million, or $0.28 per share, of the company’s Q1 2017 earnings reduction to items management considered outside ongoing operations.
Working capital changes used $542 million of cash, primarily reflecting higher receivables. Cash used in investing activities was $114 million, including $17 million for acquisitions, principally contributions to the Nava, Mexico joint venture. Financing activities provided $257 million; cash declined $180 million during the quarter.
At March 31, 2017, current assets were $2,419 million and current liabilities $1,859 million. Short-term loans and current debt were $196 million; long-term debt was $5,431 million. Together, balance-sheet current and long-term debt totaled $5,627 million, compared with $5,328 million at December 31, 2016. The company reported $599 million of unused credit under its secured credit agreement and said it was in covenant compliance. Asbestos-related liabilities on the balance sheet totaled $680 million.
Changes versus the prior comparable period
- Sales rose $27 million, driven by $26 million from shipment volume and mix and $10 million from pricing, partly offset by $6 million of unfavorable currency effects. Total glass-container shipments increased approximately 3%.
- Segment operating profit increased $7 million: favorable price and volume/mix were partly offset by operating-cost inflation and currency effects.
- By segment, sales increased in Latin America and Asia Pacific but declined in Europe and North America. Segment profit improved in Europe, North America and Asia Pacific; Latin America fell $9 million to $54 million, primarily due to substantial cost inflation.
- Net interest expense rose $12 million to $78 million, including $17 million of debt-repurchase premiums and write-off of deferred financing fees. Excluding those items, net interest expense decreased $5 million, which management attributed to prior deleveraging and refinancing.
- Restructuring, asset impairment and other charges were $39 million versus $19 million in Q1 2016. The prior-year quarter also included a $7 million gain on China land compensation.
Outlook, risks and unusual items
- Management expected a 2017 full-year effective tax rate of approximately 25%, excluding tax on items considered nonrecurring. It provided no specific sales or earnings guidance in the supplied filing text.
- Management anticipated operating cash flows and available credit would fund operating and seasonal working-capital needs, debt service and other obligations over both the next 12 months and longer term.
- The company issued €225 million of additional 3.125% notes due 2024 in March 2017, using approximately $237 million of net proceeds to repay part of its revolving facility. It also repurchased approximately $228 million of 7.80% debentures due 2018; about $22 million remained outstanding.
- Q1 restructuring charges primarily related to capacity curtailments in Latin America and Europe and other regional actions. The company planned to reallocate affected production and expected most remaining cash expenditures to be paid by the end of 2018.
- Asbestos claims remain a significant contingency. The company reported approximately 1,400 plaintiffs and claimants at March 31, 2017. Its annual review had established a $692 million asbestos liability as of December 31, 2016; the filing says reasonably possible losses could be as high as $825 million, with the ultimate liability potentially higher. Estimates depend on uncertain future claims, disease incidence, costs and co-defendant participation.
- The SEC is investigating accounting and control matters related to asbestos-liability estimates. The company restated its 2013–2015 financial statements in May 2016 and said it could not predict the investigation’s outcome or quantify its potential impact.
- A Venezuela arbitration award exceeding $500 million including interest remains unrecognized because annulment proceedings are pending and collection is uncertain. A separate arbitration is also pending.
- Other identified risks include currency movements, inflation and input costs, refinancing and interest rates, market and political conditions, alternative packaging preferences, restructuring execution, environmental obligations and the accuracy of asbestos estimates. Disclosure controls were judged effective at the reasonable-assurance level; no material change in internal controls was reported.
Important facts for investors to verify
- Whether improved sales and segment operating profit can translate into stronger consolidated earnings after restructuring costs, financing charges and regional cost pressures.
- Working-capital trends and seasonal cash use, given $337 million of operating cash outflow and the increase in receivables.
- Debt levels, refinancing costs, available credit and compliance with the leverage covenant, which tightens from 4.5x to 4.0x beginning in Q4 2017.
- Developments in the SEC asbestos-related investigation, future asbestos accrual assumptions and actual claims payments versus estimates.
- Any progress, costs or recoveries involving the unrecognized Venezuela award, and any financial effect of the pending proceedings.
- Whether the stated 2017 tax-rate expectation and liquidity outlook remain consistent with subsequent filings and results.