O-I Glass, Inc. (Owens-Illinois, Inc.) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Unaudited results; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
The company manufactures glass containers, reported through Americas, Europe, and Asia Pacific segments. It completed the acquisition of a four-furnace glass plant near Mexico City on June 28, 2019, expanding its Mexican presence and continuing a long-term glass supply agreement with Grupo Modelo.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $1.756 billion | $1.772 billion | $3.393 billion | $3.508 billion |
| Gross profit | $336 million | $346 million | $633 million | $665 million |
| Gross margin | 19.1% | 19.5% | 18.7% | 19.0% |
| Segment operating profit | $236 million | $255 million | $436 million | $479 million |
| Earnings from continuing operations before taxes | $98 million | $78 million | $209 million | $213 million |
| Net earnings attributable to the company | $65 million | $50 million | $144 million | $147 million |
| Diluted EPS, net earnings | $0.42 | $0.31 | $0.92 | $0.90 |
Cash flow, debt and liquidity
- Operating cash flow was a use of $663 million for the six months, versus a use of $151 million in 2018. Working capital used $939 million, compared with $586 million; reduced receivables factoring and higher receivables were important drivers.
- Investing activities used $410 million, including $233 million of capital spending and $157 million paid toward the Nueva Fanal acquisition. Financing activities provided $926 million, principally from net borrowings of $970 million.
- Cash was $371 million at June 30, down from $512 million at year-end 2018. Current assets were $2.943 billion and current liabilities $1.929 billion.
- Long-term debt was $6.235 billion on the balance sheet; the debt note reports $6.265 billion of total long-term debt before amounts due within one year. The company entered a new $3.0 billion secured credit facility maturing in June 2024 and reported $1.1 billion of unused capacity. Its weighted-average rate on facility borrowings was 3.71%.
- The facility requires a maximum leverage ratio of 5.0x, stepping down to 4.50x from the quarter ending December 31, 2020, subject to specified acquisition provisions. The company said it was compliant at June 30 and expected continued compliance.
Changes versus prior period
- Q2 sales declined 1%; six-month sales declined 3%. For the first half, currency movements reduced sales by $156 million and lower volume and mix by $47 million, partly offset by $86 million of higher prices.
- Q2 reportable segment operating profit fell 8%, as $44 million of higher prices was outweighed by $57 million of higher operating costs and $5 million of adverse currency effects. The first-half segment profit decline was 9%, with cost increases and currency effects partly offset by pricing.
- Q2 pretax earnings rose $20 million, largely because restructuring-related charges and debt-fee write-offs were lower. First-half pretax earnings declined $4 million.
- Reported attributable earnings for Q2 improved to $65 million from $50 million, but management-identified items reduced earnings by $42 million in 2019 versus $75 million in 2018. First-half attributable earnings were $144 million versus $147 million.
Outlook, commentary and risks
- Management forecast a 2019 effective tax rate of approximately 24%–26%, excluding tax on items it considers non-recurring. It expected full-year asbestos-related cash payments of approximately $160 million.
- Management expected operating cash flows and available credit to fund operating and seasonal working capital needs, debt service, and other obligations. The filing does not provide quantitative full-year revenue or earnings guidance.
- Operating cost pressures included inflation, commissioning a joint-venture furnace, weather-related downtime, and the timing of an energy credit. Management said 2018–2019 restructuring actions reduced Americas operating costs by $17 million in the first half.
- Asbestos exposure remains a significant uncertainty. About 1,020 lawsuits were pending at June 30. The company disclosed a $602 million asbestos accrual at December 31, 2018 and estimated reasonably possible liabilities of approximately $722 million, while noting ultimate exposure could be higher. It reported $103 million of asbestos cash payments in the first half and expects claims and payment levels to remain variable.
- Tax authorities in multiple countries are examining the company; assessments exceed established reserves, and unfavorable resolutions could materially affect results, financial position, or cash flows. Goodwill impairment is another risk: North America goodwill was approximately $1.04 billion, and its reporting unit had a 12% estimated value cushion in the 2018 annual test. The company planned its next annual test for October 1, 2019.
- In July, the company redeemed €250 million of 6.75% notes due 2020 using cash and revolver borrowings; it expected to record approximately $24 million of premiums and deferred-fee write-offs in Q3. A July dividend of $0.05 per share was declared, subject to the stated payment and record dates.
Most important facts for investors to verify
- Whether working capital and receivables factoring normalize and operating cash flow recovers after the substantial first-half cash use.
- Debt levels, leverage covenant headroom, and the effects of the new credit facility and July note redemption on interest expense and liquidity.
- Whether segment margins improve as pricing offsets inflation, capacity-related costs, weather impacts, and weaker volumes in certain markets.
- Updated asbestos claim trends, accrual estimates, and cash-payment expectations; the disclosed possible liability is uncertain and could be higher.
- The final purchase-price allocation and subsequent contribution of Nueva Fanal, and the outcome of the pending Venezuela arbitration matter.