Business context and reporting period
Owens-Illinois, Inc. (now commonly known as O-I Glass) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2015. It manufactures glass containers and reports four geographic segments: Europe, North America, South America, and Asia Pacific. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $1,543 | $1,797 | $2,964 | $3,436 |
| Gross profit | $274 | $358 | $542 | $679 |
| Gross margin | 17.8% | 19.9% | 18.3% | 19.8% |
| Continuing-operations earnings attributable to the Company | $42 | $134 | $113 | $236 |
| Net earnings attributable to the Company | $40 | $114 | $111 | $215 |
| Diluted EPS, continuing operations | $0.26 | $0.80 | $0.69 | $1.42 |
| Net interest expense | $74 | $54 | $121 | $108 |
- Reportable-segment operating profit, a company-defined measure, was $187 in Q2, down 29%, and $355 for the first half, down 26%. The filing attributes the declines primarily to foreign exchange, higher operating costs, and lower volumes.
- Q2 sales fell 14%; the first-half decline was 14%. Foreign exchange reduced sales by $240 in Q2 and $439 in the first half. Global container shipments fell about 1% and 2%, respectively.
- Cash used in continuing operations was $110 for the first half, versus $31 used in 2014. Working capital consumed $401, mainly reflecting lower accounts payable. Capital expenditures were $208. Company-defined free cash flow was negative $318, compared with negative $227.
- At June 30, cash was $378; total debt was approximately $3.8 billion, comprising $555 of short-term/current debt and $3,217 of long-term debt. Unused credit under the new facility was $860. The current ratio, calculated from reported balances, was about 1.1.
- Total assets were $7,618 and share owners’ equity was $1,095 at June 30. Cash decreased by $134 during the first half; net borrowings increased $400 and share repurchases used $100.
Material changes versus the prior comparable period
- All segments reported lower Q2 sales. Europe’s sales declined 19% and South America’s 24%, largely due to currency translation; South American shipments also weakened amid Brazil’s economic slowdown. North America segment profit was nearly flat, while Europe, South America, and Asia Pacific segment profits decreased.
- Q2 segment operating profit was reduced by $36 from foreign exchange and $31 from operating costs; the latter included approximately $19 of cost inflation. First-half segment profit was reduced by $71 from foreign exchange and $49 from operating costs.
- Q2 continuing-operations earnings attributable to the Company fell to $42 from $134. The 2015 period included $55 of items management deemed not representative of ongoing operations, including $28 of debt redemption premiums and finance-fee write-offs, $22 of restructuring and related charges, and $6 of Vitro transaction costs. No comparable excluded items were reported for 2014.
- The company entered a new senior secured credit facility on April 22, 2015, refinancing the prior facility and repaying $300 of 7.375% notes due 2016. The new facility includes revolving commitments and term loans with maturities in 2020. The company reported covenant compliance at June 30.
Outlook, risks, contingencies, and unusual items
- Management forecast a 2015 effective tax rate of 23%–25%, excluding tax effects of items it considers non-recurring. The filing does not provide broader quantified earnings or sales guidance.
- The company agreed to acquire Vitro’s food and beverage glass-container business in the U.S., Mexico, and Bolivia for approximately $2.15 billion in cash, plus certain value-added taxes. Closing was expected in the second half of 2015, subject to customary conditions and regulatory approvals. Financing commitments were obtained, but the transaction had no financing condition. Management expected interest payments to increase substantially after closing.
- The new credit agreement has a maximum leverage ratio of 4.0x, with a possible temporary 0.5x increase after qualifying acquisitions. Breach could restrict borrowing and trigger debt acceleration. The company stated it expected to remain compliant.
- Asbestos liabilities on the balance sheet totaled $401 at June 30 ($143 current and $258 long-term). The company said its ultimate asbestos liability cannot reasonably be estimated; future charges and substantial cash payments remain possible. It believed operating cash flows and other liquidity sources would be sufficient for obligations and investment needs.
- An ICSID tribunal awarded a subsidiary more than $455 in its Venezuela expropriation arbitration. Venezuela petitioned to annul the award in July 2015; the process could take years. The company had not recognized the award and could not predict the amount or timing of any recovery.
- The company disclosed an ongoing SEC matter concerning possible FCPA violations in certain overseas operations; the DOJ had closed its inquiry without enforcement action in 2013. The company could not predict the SEC matter’s outcome, but did not expect a material adverse effect on liquidity, results, or financial condition.
- Foreign exchange movements, competitive pricing, economic weakness, input-cost inflation, acquisition execution and financing, asbestos claims, and regulatory or legal matters are among the stated risks. Disclosure controls were concluded effective at June 30, 2015; management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the Vitro acquisition closed on the expected terms and timing, the final financing mix, incremental debt and interest costs, and realized integration benefits.
- Whether operating cash flow and working-capital trends improved, given first-half operating cash use of $110 and negative free cash flow of $318.
- Segment sales, margins, and volumes, particularly the effects of currency, Brazil’s economic conditions, European pricing, and cost inflation.
- Debt levels, available borrowing capacity, and compliance with the leverage covenant after any acquisition or other financing.
- Developments in asbestos claims and the Venezuela arbitration, including any changes in accrued liabilities, cash payments, or potential recovery.
- Progress on restructuring actions and the stated 2015 tax-rate outlook.