O-I Glass, Inc. (Owens-Illinois, Inc.) — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Unaudited consolidated results; dollars in millions except per-share amounts. The filing reports four geographic glass-container segments: Europe, North America, South America and Asia Pacific.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $1,781 | $1,766 | $3,422 | $3,505 |
| Gross profit | $369 | $376 | $688 | $754 |
| Earnings from continuing operations attributable to the Company | $135 | $134 | $214 | $256 |
| Net earnings attributable to the Company | $132 | $133 | $201 | $254 |
| Diluted EPS from continuing operations | $0.81 | $0.81 | $1.29 | $1.54 |
| Diluted net EPS | $0.79 | $0.80 | $1.21 | $1.52 |
| Reportable segment operating profit | $267 | $266 | $493 | $526 |
Gross margin was approximately 20.7% in Q2 2013 versus 21.3% a year earlier, and 20.1% for the first half versus 21.5%. Segment operating profit is management’s measure and excludes retained corporate costs and other specified items; it is not a GAAP operating income measure.
Cash flow and liquidity: First-half continuing operating cash flow was $22, up from $6. Capital expenditures were $164, versus $124, resulting in company-defined free cash flow of negative $142 versus negative $118. Working capital used $351 of cash, compared with $380 in the prior-year period. Cash was $249 at June 30, 2013, down from $431 at year-end 2012. Total debt was approximately $3.8 billion, versus $4.0 billion at June 30, 2012; unused credit under the secured credit agreement was $816. The current ratio was approximately 1.27.
Changes and management commentary
- Q2 sales increased 1%, chiefly from higher prices, while glass-container shipments fell 1%. First-half sales declined 2% and shipments declined 3%; higher prices were outweighed by lower volume and unfavorable currency movements.
- Q2 segment operating profit was broadly flat. Footprint changes and cost controls were offset by lower production and fixed-cost absorption, including furnace rebuilds in North and South America. For the first half, segment profit declined 6%, with lower production, shipments and higher manufacturing costs partly offset by cost controls.
- First-half regional results were mixed: Europe segment profit fell $45 to $170; North America fell $7 to $167; South America rose $5 to $90; Asia Pacific rose $14 to $66.
- First-half continuing earnings attributable to the Company included $20 of items management viewed as not representative of ongoing operations, reducing earnings by $0.12 per share. The filing identifies $10 of restructuring, impairment and related charges, and debt-repurchase-related charges; see the filing for the full reconciliation.
- In March, the Company issued €330 million of 4.875% notes due 2021 and discharged €300 million of 6.875% notes due 2017. It also repurchased $46 million of 2015 exchangeable notes. Debt actions generated related premiums and financing-fee write-offs.
Outlook, risks and contingencies
- No specific sales or earnings guidance is provided. Management expected a 2013 full-year effective tax rate of 23%–24%, excluding items deemed nonrepresentative, versus 22.1% in 2012. It stated operating cash flows and available credit should fund operating and seasonal working-capital needs, debt service and other obligations.
- Asbestos litigation remains a significant uncertain exposure. Approximately 2,600 plaintiffs and claimants were pending at June 30. Recorded asbestos liabilities totaled $412 ($155 current and $257 long-term), but the Company said ultimate liability cannot reasonably be estimated; future charges could materially affect results. Management also noted substantial cash payments and potential effects on borrowing costs and acquisitions.
- A foreign tax authority assessment of approximately $90, including penalties and interest, was not accrued because management believed an appeal would likely overturn the ruling. The Company had deposited $24 in installments. An unfavorable final outcome could result in forfeiture of the deposit, a charge of approximately $60 and a $30 non-income tax refund.
- The DOJ informed the Company on July 18, 2013 that it did not presently intend enforcement and was closing its inquiry into possible overseas FCPA matters. The SEC inquiry remained unresolved; the Company could not predict its scope or outcome and did not expect potential actions to materially affect liquidity, results or financial condition.
- The Company continued arbitration over Venezuela’s 2010 expropriation; compensation amount and timing were not predictable. First-half discontinued-operations loss was $13, including $5 of Venezuela-related ongoing costs and $8 of special termination benefits related to a previously disposed business.
- Other stated risks include currency fluctuations, economic and competitive conditions, packaging preferences, energy and raw-material costs, restructuring execution, and environmental and legal matters. Management reported disclosure controls were effective at the reasonable-assurance level; ERP implementation began in South America during Q2.
Important facts for investors to verify
- Progress and cash requirements for asbestos claims, and the assumptions underlying the recorded liability.
- Cash conversion, seasonal working-capital needs and capital spending, given negative first-half free cash flow.
- Debt maturities, refinancing costs, facility availability and the impact of currency movements on debt and earnings.
- Outcome and payment schedule for the $90 foreign tax assessment, and developments in the SEC FCPA inquiry.
- Operating trends in Europe and South America, including shipment volumes, furnace rebuilds, pricing versus inflation, and Argentina’s price controls.