Business context and reporting period
Owens-Illinois, Inc. (O-I Glass) filed this unaudited Form 10-Q for the three months ended March 31, 2013. The company manufactures glass containers and reports four geographic segments: Europe, North America, South America and Asia Pacific. Comparisons are with the three months ended March 31, 2012 unless stated otherwise.
Financial results and key metrics
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $1.641 billion | $1.739 billion |
| Gross profit / margin | $319 million / 19.4% | $378 million / 21.7% |
| Segment operating profit | $226 million | $260 million |
| Continuing earnings attributable to the company | $79 million; $0.48 diluted EPS | $122 million; $0.73 diluted EPS |
| Net earnings attributable to the company | $69 million; $0.42 diluted EPS | $121 million; $0.72 diluted EPS |
| Cash utilized in continuing operating activities | $134 million | $94 million |
| Capital expenditures | $94 million | $73 million |
| Free cash flow (company-defined, non-GAAP) | $(228) million | $(167) million |
At March 31, 2013, cash was $359 million, total debt was approximately $3.9 billion and total shareholders’ equity was $1.155 billion. Cash was down $72 million from year-end 2012. The company reported $717 million of unused credit under its secured credit agreement; borrowings under that agreement carried a 2.20% weighted average rate. Current assets were $2.683 billion and current liabilities were $1.929 billion.
Segment sales and operating profit were: Europe $650 million and $59 million; North America $469 million and $74 million; South America $269 million and $53 million; Asia Pacific $247 million and $40 million. The company recorded $10 million of restructuring, asset impairment and related charges, primarily related to its European Asset Optimization program. Discontinued operations incurred a $10 million loss, including $8 million of special termination benefits and $2 million of Venezuela-related costs.
Changes versus the prior-year quarter
- Sales decreased 6%, while glass-container shipments fell 5%. Management attributed the decline primarily to lower volume, especially in Europe, and unfavorable foreign exchange; higher prices largely offset cost inflation.
- Segment operating profit fell 13%. Lower volume and manufacturing and delivery costs were principal pressures; cost-control initiatives partly offset them. Europe’s segment profit declined 45%, while South America’s rose 39% and Asia Pacific’s rose 11%.
- Continuing earnings attributable to the company fell to $79 million from $122 million. Interest expense rose $7 million to $71 million, including $11 million of note repurchase premiums and finance-fee write-offs.
- Free cash flow was more negative by $61 million. Working-capital changes used $301 million, versus $275 million a year earlier; management cited higher receivables, partly reflecting customer payments delayed by a holiday-weekend quarter end.
- Cash and total debt were $359 million and approximately $3.9 billion, respectively, versus $299 million and $4.1 billion at March 31, 2012.
Outlook, risks and unusual items
- Management expects operating cash flows and available credit to be sufficient for operating and seasonal working capital needs, debt service and other obligations over both the short and long term.
- Management expected the full-year 2013 effective tax rate, excluding items it considered nonrepresentative of ongoing operations, to exceed 2012’s 22.1%, citing a changed geographic mix of earnings. No numeric full-year earnings or sales guidance is provided.
- The company issued €330 million of 4.875% senior notes due 2021 and discharged €300 million of 6.875% notes due 2017 in March 2013. The company recorded related repurchase premiums and finance-fee write-offs.
- Asbestos litigation remains a material uncertainty: approximately 2,600 plaintiffs and claimants were pending at quarter-end. Recorded asbestos-related liabilities totaled $444 million ($155 million current and $289 million long-term), but the company stated that its ultimate liability cannot reasonably be estimated. It expects future annual reviews may result in additional charges and notes that asbestos payments consume substantial cash.
- An internal investigation into possible overseas conduct violating the FCPA and other laws was voluntarily disclosed to the DOJ and SEC in October 2012. The company cannot predict the investigation’s scope or outcome, or quantify potential sanctions; it did not expect them to materially adversely affect liquidity, results or financial condition.
- The company continues arbitration over Venezuela’s 2010 expropriation of its subsidiaries and cannot predict the amount or timing of compensation. Other identified risks include foreign exchange, economic conditions, input costs, refinancing, competitive pressures and execution of restructuring plans.
Investor verification priorities
- Check subsequent filings for shipment trends, European performance and whether planned production phasing and cost controls improve margins.
- Monitor working capital, operating cash flow, capital spending, cash balances and reliance on the revolving facility and receivables securitization program.
- Review debt maturities, refinancing terms and the effects of the 2021-note issuance and 2017-note repayment on interest costs.
- Track asbestos claims, payments, annual liability reviews and any new accruals; the ultimate liability is not estimable from this filing.
- Follow DOJ/SEC developments in the FCPA matter and the status and potential recovery from the Venezuela arbitration.