Owens-Illinois, Inc. (O-I) — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The unaudited filing reports global glass-container operations across Europe, North America, South America and Asia Pacific; dollar amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,745 | $1,784 | $5,181 | $5,206 |
| Gross profit | $337 | $352 | $1,016 | $1,040 |
| Gross margin | 19.3% | 19.7% | 19.6% | 20.0% |
| Segment operating profit | $248 | $259 | $728 | $752 |
| Continuing-operations earnings attributable to O-I | $61 | $132 | $297 | $346 |
| Diluted continuing-operations EPS | $0.37 | $0.79 | $1.79 | $2.08 |
| Net earnings attributable to O-I | $60 | $130 | $275 | $331 |
- Cash flow: Nine-month cash from continuing operations was $209, down from $249. Capital expenditures were $290, versus $239; company-defined free cash flow was negative $81, compared with positive $10. Cash declined $119 during the period to $264.
- Balance sheet and liquidity: September 30 cash was $264 and total debt was approximately $3.5 billion, versus $219 and $3.7 billion, respectively, a year earlier. Current assets were $2,523 against current liabilities of $2,788. The secured credit agreement had $736 of unused availability. The filing says the company expects operating cash flows and available credit to fund needs and obligations.
- Debt maturities: $616 of 3.00% exchangeable notes due June 2015 were classified as current; management said it intended to refinance them before maturity. The credit agreement facilities mature in May 2016.
Material changes and management commentary
- Q3 sales fell 2%, reflecting a 3% drop in shipments and unfavorable currency effects, partly offset by pricing. Segment operating profit declined 4%, as higher operating costs and weaker volumes outweighed price gains.
- For the first nine months, sales decreased less than 1% and segment operating profit fell 3%. Higher prices and some volume gains were offset by cost inflation, higher North American supply-chain and production costs, and lower Asia Pacific production.
- Regional performance diverged. Q3 South American sales rose 11% and segment profit rose 45%; Europe segment profit increased 7%. North American segment profit fell 24%, and Asia Pacific segment profit fell 48%. Asia Pacific shipments were pressured by planned China plant closures and weaker Australian demand; a furnace in Australia was permanently closed in Q3.
- Q3 earnings included unusual restructuring, asset-impairment and related items that management said reduced attributable earnings by $63, or $0.38 per share; there were no comparable items in Q3 2013. The company recorded $79 of restructuring, asset-impairment and related charges during the first nine months, primarily for Asia Pacific restructuring.
- Management expected the full-year 2014 effective tax rate to be slightly above 2013’s 21.9% rate, excluding items considered nonrepresentative of ongoing operations. The nine-month 2014 effective rate was 22.0%, including a $21 tax benefit from tax examinations and expired limitation periods.
Outlook, contingencies and notable events
- In October 2014, O-I agreed to a 50-50 joint venture with Constellation Brands to operate the Nava, Mexico glass plant. Each partner expected to contribute about $100 in Q4 2014. The planned four-furnace expansion is expected to cost about $350 over four years, funded equally by the partners.
- On October 22, 2014, the board authorized a $500 share-repurchase program through December 31, 2017; the company expected to repurchase at least $100 of shares in 2015.
- Asbestos: O-I reported about 2,500 pending plaintiffs and claimants and had disposed of claims for approximately 394,000. It said ultimate asbestos liability cannot reasonably be estimated; asbestos payments remain substantial and future charges could materially affect results. Recorded asbestos-related liabilities totaled $376 at September 30.
- Foreign tax dispute: A foreign tax authority’s assessment was approximately $90 including interest and penalties. O-I had paid $77 into a deposit, recorded in other assets, and established no accrual because it believed the assessment would probably be overturned. An adverse outcome could result in an approximately $70 charge and a net refund of about $20; a higher-court decision was not expected before Q1 2015.
- Other exposures: The DOJ closed its FCPA inquiry without enforcement action, while the SEC’s potential investigation or action remained uncertain. O-I said it did not expect potential sanctions to materially adversely affect liquidity, results or financial condition. A Netherlands pension settlement completed October 1 was expected to produce a non-cash Q4 charge of about $35 ($25 after tax).
- Key stated risks include foreign-exchange movements, refinancing and borrowing costs, competitive and economic conditions, input costs, restructuring execution, packaging preferences, environmental and safety requirements, and asbestos claims. The filing reported no material changes to previously disclosed risk factors or market risks.
Important facts for investors to verify
- Progress and terms of refinancing the $616 of exchangeable notes due in 2015, and continued availability under the credit agreement.
- Whether shipment trends, cost inflation and production utilization improve, particularly in North America and Asia Pacific, and whether the announced furnace closures deliver expected savings.
- Cash conversion and capital-spending trajectory after negative nine-month free cash flow; also assess the funding and cash commitments for the Mexico joint venture and planned share repurchases.
- Developments in asbestos claims and annual liability reviews, the higher-court ruling on the foreign tax assessment, and any SEC action related to the FCPA matter.
- Q4 accounting impact of the Netherlands pension settlement and the full-year tax rate relative to management’s stated outlook.