O-I Glass, Inc. (Owens-Illinois, Inc.) — Q1 2010 10-Q
Reporting period: Three months ended March 31, 2010; balance-sheet figures are as of March 31, 2010. The filing is by Owens-Illinois, Inc., the company’s name at the time. Unaudited results are in millions of dollars except per-share amounts.
Financial performance
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Net sales | $1,582.5 | $1,519.0 |
| Gross profit / gross margin | $310.8 / 19.6% | $296.8 / 19.5% |
| Earnings before income taxes | $128.6 | $90.0 |
| Net earnings attributable to the Company | $85.3 | $45.1 |
| Diluted EPS | $0.50 | $0.27 |
| Cash from (used in) operations | $24.5 | $(28.5) |
| Capital spending | $96.8 | $46.6 |
Net sales increased 4.2%; shipments by tonnage were approximately level. Segment operating profit rose to $198.2 from $191.9. Company-attributable net margin was approximately 5.4%, versus 3.0%. Interest expense increased to $55.6 from $48.1; the effective tax rate was 26.6%, compared with 34.7%.
Balance sheet and liquidity
Cash and cash equivalents were $521.4, down from $811.7 at year-end 2009. Current assets were $2,536.7 and current liabilities $1,898.6. Total debt was reported by management at approximately $3.47 billion, versus $3.61 billion at December 31, 2009; $766.1 of unused credit was available under the secured credit agreement. Asbestos-related liabilities totaled $451.2, including $175.0 current. The filing says operating cash flows and available credit are expected to fund working capital, debt service, and other obligations.
Operating cash flow improved year over year, primarily due to inventory management, but working-capital changes used $139.8. Investing activities used $122.1, including $96.8 of capital spending and $25.8 for an acquisition. Financing activities used $189.3, including $144.2 for share repurchases. Cash declined by $290.3 during the quarter.
Material changes and notable items
- Sales benefited from foreign exchange; management estimated a $146 million uplift from currency translation, partly offset by a $56 million adverse Venezuelan translation effect. Segment sales also reflected cost pass-through provisions.
- Segment profit benefited from price and mix and approximately $28 million of savings from capacity curtailments and operational realignment. Temporary production curtailments and Venezuela currency effects offset some gains.
- Europe, North America, South America, and Asia Pacific segment operating profit was $56.4, $63.3, $41.7, and $36.8, respectively; South America declined from $60.0 in the prior-year quarter.
- There were no restructuring or asset-impairment charges in Q1 2010; Q1 2009 included $50.4 of such charges. Management said 2009 EPS was reduced by $0.28 by items it considered nonrecurring.
- The company acquired a majority interest in Cristalerias Rosario, an Argentine glass-container manufacturer, on March 11, 2010.
- In Q1 2010, the company repurchased 4.3 million shares for $144.2 million. Approximately $205.8 million remained under the board’s $350 million authorization.
Outlook, risks, and contingencies
- Management expected 2010 capital spending of up to $500 million and a full-year effective tax rate of approximately 26.5%, subject to specified tax items. It expected $10 million–$15 million of contributions to non-U.S. defined-benefit pension plans; no U.S. plan contribution was required for 2010.
- The company stated that asbestos liabilities cannot reasonably be estimated in total. At March 31, it was named in claims involving approximately 6,700 plaintiffs and claimants; approximately 800 additional claims were considered likely to be asserted in the future. The company had accrued approximately $3.65 billion through 2009 before insurance recoveries. It warned that future charges could materially affect results and that asbestos payments consume substantial cash.
- Venezuela was treated as a highly inflationary economy from January 1, 2010, with the U.S. dollar adopted as the functional currency. Use of the parallel exchange rate and its 17% Q1 devaluation reduced segment profit; approximately $8 million of losses from revaluing Venezuelan net monetary assets was included in other expense.
- Risks cited include foreign-exchange movements, capital availability and interest rates, economic and competitive conditions, packaging preferences, raw-material and energy costs, supply and transport, customer performance, acquisitions, environmental and safety requirements, and asbestos-related events. Management reported no material changes to risk factors or market risks from the 2009 10-K.
- Management said disclosure controls were effective at a reasonable-assurance level and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether reported earnings and segment improvement persist after considering currency effects, Venezuela, and the absence of prior-year restructuring charges.
- Cash conversion and liquidity as capital spending rises, including the effect of working capital, share repurchases, and asbestos payments.
- Debt maturities, borrowing availability, and refinancing needs; confirm the debt totals and current-debt classifications in the full filing.
- Changes in asbestos claims, estimates, payments, and insurance recoveries, given the company’s stated inability to estimate ultimate liability.
- Venezuelan exchange-rate developments and their effect on reported sales, profit, and access to cash.
- Execution and financial impact of the Rosario acquisition and remaining manufacturing-restructuring expenditures.