Business context and reporting period
Owens-Illinois, Inc. (O-I) filed this Form 10-K for the fiscal year ended December 31, 2014. It is a global glass-container manufacturer, operating 75 plants in 21 countries across Europe, North America, South America and Asia Pacific. Figures are in U.S. dollars; financial results below are annual unless identified as fourth-quarter.
Financial performance and liquidity
| Metric | 2014 | 2013 |
|---|---|---|
| Net sales | $6.784 billion | $6.967 billion |
| Gross profit / gross margin | $1.253 billion / 18.5% | $1.331 billion / 19.1% |
| Continuing-operations earnings attributable to O-I | $98 million; diluted EPS $0.59 | $202 million; diluted EPS $1.22 |
| Net earnings attributable to O-I | $75 million; diluted EPS $0.45 | $184 million; diluted EPS $1.11 |
| Cash from continuing operations | $698 million | $700 million |
| Capital expenditures | $369 million | $361 million |
| Free cash flow (non-GAAP) | $329 million | $339 million |
| Cash / total debt at year end | $512 million / $3.460 billion | $383 million / $3.567 billion |
| Working capital | $43 million | $296 million |
Segment operating profit, a management measure excluding specified items, was $908 million, down 4% from $947 million. By segment, 2014 profit was Europe $353 million, North America $240 million, South America $227 million and Asia Pacific $88 million. O-I reported $230 million of net interest expense and a 42.2% effective tax rate; the tax rate excluding specified unusual items was 22.4%.
At year end, O-I had $804 million of unused credit under its secured credit agreement. The agreement matures in May 2016 and includes a maximum 4.0x leverage covenant; O-I reported compliance. The current ratio was approximately 1.02, based on current assets of $2.371 billion and current liabilities of $2.328 billion.
Material changes versus the prior comparable period
- Sales fell $183 million (2.6%); glass-container shipments declined 2%, and unfavorable currency translation reduced sales. Higher prices partly offset these pressures.
- Segment operating profit declined $39 million: $73 million of pricing benefit was outweighed chiefly by $99 million of higher operating costs. Europe improved, while North America and Asia Pacific weakened.
- Net earnings attributable to O-I fell $109 million. Reported results included substantial unusual charges in both years, totaling $338 million of after-tax impact in 2014 versus $248 million in 2013, as identified by management.
- Working capital decreased by $253 million. Cash from operations was nearly flat, while free cash flow declined $10 million.
- Total debt decreased by $107 million. O-I issued $800 million of notes due 2022 and 2025 and used proceeds primarily to repurchase $611 million principal amount of exchangeable notes due 2015; approximately $18 million of those notes remained outstanding.
Fourth-quarter results, outlook and significant matters
- Fourth-quarter 2014 sales were $1.603 billion and gross profit was $237 million. O-I reported a $200 million net loss attributable to the company for the quarter, including a $199 million loss from continuing operations attributable to O-I.
- Fourth-quarter unusual charges included a $135 million asbestos accrual increase, a $69 million non-income-tax charge, $65 million of pension settlement charges, $20 million of debt-repurchase and financing-fee charges, and restructuring and impairment charges. The filing states these items reduced quarterly earnings per share by $1.67.
- Asbestos remains a major contingency: O-I accrued approximately $4.4 billion cumulatively through 2014 before insurance recoveries, but says ultimate liability cannot reasonably be estimated. It paid $148 million in asbestos-related costs in 2014; approximately 2,220 claims were pending at year end.
- A foreign authority’s approximately $85 million non-income-tax assessment was upheld on appeal; O-I recorded a $69 million charge. It had paid $76 million in installments and expected a net refund of approximately $7 million. Separately, a previously disclosed FCPA matter remained subject to possible SEC action; the DOJ had closed its inquiry without enforcement action.
- Management cited a stronger U.S. dollar as a continuing 2015 headwind to reported international sales and segment profit. Other key risks include demand and pricing pressure, energy and raw-material costs, operating disruptions, leverage and refinancing, pensions, environmental requirements, and foreign exchange. Goodwill testing found no impairment in 2014.
- Management expected operating cash and available credit to cover operating needs, debt service and other obligations. It expected approximately $20 million of pension contributions in 2015, planned at least $125 million of 2015 share repurchases, and expected to contribute approximately $160 million over time to expand the Constellation Brands joint-venture plant in Mexico. O-I did not anticipate near-term common dividends.
Important facts for investors to verify
- Underlying earnings and margins excluding the unusual items, and whether cost inflation and weaker volumes persist.
- Near-term refinancing and covenant headroom, particularly the May 2016 credit-agreement maturity and 2015–2016 debt maturities.
- Future asbestos claims, accrual assumptions, cash payments and any additional charges.
- Execution, funding and returns of the Mexico joint venture and ongoing footprint-restructuring plans.
- Effects of currency movements, the non-income-tax assessment, pension funding and any further SEC developments related to the FCPA matter.
The filing reports unqualified independent-auditor opinions on the consolidated financial statements and internal control over financial reporting.