O-I Glass, Inc. (Owens-Illinois, Inc.) — Q2 2009 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2009. Financial statements are unaudited. Unless otherwise noted, amounts are in U.S. dollars.
Business context and reporting period
The company operates glass-packaging businesses across Europe, North America, South America, and Asia Pacific. Results were affected by lower shipments, unfavorable foreign-exchange movements, and production curtailments amid weaker demand. Comparisons are with the corresponding 2008 periods.
Financial performance and liquidity
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $1,807.0 million | $2,210.6 million | $3,326.0 million | $4,171.1 million |
| Gross profit | $407.4 million | $525.2 million | $704.2 million | $982.0 million |
| Gross margin | 22.6% | 23.8% | 21.2% | 23.5% |
| Continuing-operations earnings attributable to the Company | $149.3 million | $227.5 million | $194.4 million | $401.5 million |
| Diluted EPS from continuing operations | $0.88 | $1.33 | $1.15 | $2.35 |
| Operating cash flow | Not provided separately | Not provided separately | $183.2 million | $272.2 million |
| Capital expenditures | $77.5 million | $83.6 million | $124.1 million | $129.0 million |
- Q2 sales declined 18.3%; first-half sales declined 20.3%. Management attributed the declines primarily to lower shipment volume and unfavorable currency effects, partly offset by higher prices and improved mix.
- Reportable-segment operating profit was $291.9 million in Q2, down $98.2 million, or 25.1%; first-half profit was $483.8 million, down $228.4 million, or 32.1%. North America was the exception: segment operating profit rose to $103.1 million in Q2 from $68.1 million and to $165.8 million for the half from $123.5 million.
- Management cited approximately $95 million of additional unabsorbed fixed costs in Q2 and approximately $195 million for the first half, compared with the 2008 periods, largely due to production curtailments and inflation. Higher prices, improved mix, and restructuring savings partly offset the pressure.
- Net earnings attributable to the Company were $149.3 million in Q2 and $194.4 million for the half. The 2008 comparisons included gains on discontinued operations of $3.8 million and $7.9 million, respectively; the 2009 periods reported no such gain.
- At June 30, cash and cash equivalents were $677.2 million, versus $379.5 million at December 31, 2008. Current assets were $2,917.4 million and current liabilities $1,957.9 million. Cash rose largely because of second-quarter financing.
- Total debt was approximately $3.64 billion, versus $3.33 billion at December 31, 2008 and $3.79 billion at June 30, 2008. The company reported $799.4 million of unused credit under its secured credit agreement; the facility’s maximum availability was reduced by $32.3 million following Lehman Brothers’ bankruptcy.
- In May 2009, a subsidiary issued $600 million face value of 7.375% senior notes due 2016, at an effective interest rate of 8.00%. Net proceeds of approximately $568 million funded a tender for 2010 debentures, reduced revolver borrowings, and increased cash. The transaction generated $5.2 million of additional interest charges.
- Six-month cash flow from financing was $225.3 million, compared with cash used of $154.3 million in 2008. First-half working-capital changes used $155.9 million of cash; asbestos payments were $84.2 million.
Outlook, risks, contingencies, and unusual items
- Management expected 2009 capital spending of up to $440 million, depending on market conditions, and a full-year effective tax rate comparable to 2008’s 24.0% for continuing operations, excluding separately taxed items.
- The company expected 2009 contributions of approximately $75 million to $80 million to non-U.S. defined-benefit pension plans and no required U.S. plan contributions. It anticipated non-U.S. contributions would be moderately higher in 2010, subject to market and actuarial factors.
- Management stated that operating cash flows and available credit were expected to fund operating and seasonal working-capital needs, debt service, and other obligations in the short and long term. This assessment includes substantial asbestos-related obligations.
- Asbestos exposure remained a significant contingency: approximately 7,000 plaintiffs and claimants were pending at June 30, with about 800 additional claims against other defendants considered likely to be asserted later. The company said its ultimate asbestos liability cannot be estimated with certainty. It reported $411.1 million of current and long-term asbestos-related liabilities at June 30 and $84.2 million of first-half asbestos payments. The annual comprehensive liability review may result in additional charges.
- The company’s strategic manufacturing-footprint review produced cumulative 2007–2009 charges of $243.3 million and is expected to reduce the workforce by approximately 2,050 jobs. First-half 2009 restructuring and impairment charges were $55.6 million; the company expected most remaining cash expenditures for the actions to be paid by year-end.
- Approximately 25% of cash at June 30 was held in Venezuela, where government restrictions slowed conversion to U.S. dollars. The filing described the parallel-market bolivar value as about 70% below the official rate. A devaluation or highly inflationary accounting designation could adversely affect reported results; Venezuelan operations accounted for about one-third of South America segment operating profit in 2008.
- Other stated risks include foreign-currency and interest-rate changes, demand and competitive pricing, raw-material, energy and transport costs, pension assumptions and asset returns, potential impairment charges, and environmental, safety, and health obligations.
- Management reported effective disclosure controls as of June 30, 2009 and no material quarterly change in internal control over financial reporting. The filing reports no material change in risk factors from the 2008 Form 10-K.
Most important facts for investors to verify
- Whether shipment volumes, segment profitability, and factory utilization recover, and whether anticipated restructuring savings offset fixed-cost under-absorption.
- Debt maturities, covenant terms, available revolver capacity, and the cost and refinancing implications of the 2016 notes and receivables-financing programs.
- The assumptions and potential range of the asbestos liability, future claims, cash payments, and any need for additional accruals.
- Whether Venezuelan cash can be converted and repatriated at the official rate, and the potential financial effect of currency or inflation changes.
- Actual full-year capital spending, pension contributions, tax rate, and remaining restructuring cash outlays compared with management’s expectations.