O-I Glass, Inc. — FY2010 Form 10-K
Business and period: Owens-Illinois, Inc. (O-I), a global glass-container manufacturer, reported for the fiscal year ended December 31, 2010. Results are compared primarily with FY2009. Venezuelan operations were reclassified as discontinued operations for all periods shown after the government expropriated them in October 2010.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $6,633 | $6,652 |
| Gross profit | $1,350 | $1,335 |
| Gross margin | 20.4% | 20.1% |
| Continuing earnings attributable to O-I | $258; diluted EPS $1.55 | $110; diluted EPS $0.65 |
| Net earnings (loss) attributable to O-I | $(47); diluted EPS $(0.28) | $162; diluted EPS $0.95 |
| Continuing operating cash flow | $600 | $729 |
| Capital expenditures from continuing operations | $500 | $407 |
| Free cash flow, as defined by the company | $100 | $322 |
| Cash at year-end | $640 | $755 |
| Total debt | $4,278 | $3,608 |
| Working capital | $659 | $763 |
Reportable-segment operating profit, a management-defined non-GAAP measure, was $964, up 8.2% from $891; approximately 14.6% of reportable-segment sales versus 13.5% in 2009. Interest expense rose to $249 from $222, principally reflecting debt issued to fund acquisitions. O-I reported $4,021 of long-term debt, including $97 due within one year, in addition to short-term loans. It had $732 of unused availability under its secured credit agreement and reported compliance with its covenants at year-end. About 22% of debt was subject to variable rates.
Changes versus FY2009
- Sales were down $19, or 0.3%; glass-container shipments declined 1.0%. Lower shipments and customer cost pass-through provisions were partly offset by favorable currency translation.
- Segment operating profit increased $73. Management cited lower manufacturing and delivery costs, currency effects, and stronger South American mix. Manufacturing and delivery costs declined $38, partly offset by $20 of inflation.
- South American segment sales increased to $975 from $689, supported by acquisitions and approximately 20% organic shipment growth excluding acquisitions. Europe and North America sales declined.
- Operating cash flow fell $129, largely reflecting a $71 working-capital use in 2010 versus a $156 source in 2009, as inventories rebounded from the prior-year reduction. Capital spending and acquisitions also increased.
- O-I acquired glass operations in Argentina, Brazil and China and invested in a Southeast Asian joint venture. Cash paid for acquisitions was $817. It issued $690 of 3.00% exchangeable notes due 2015 and €500 of 6.75% notes due 2020, while redeeming $450 of senior notes due 2013.
Outlook, commentary and material risks
- Outlook: Management described 2010 as a transition year, with the footprint review completed and strategy shifting toward profitable growth in emerging markets. It expected the 2011 effective tax rate to be broadly similar to 2010, non-U.S. pension contributions of approximately $50–$60, no required U.S. pension contribution, and total 2011 pension expense of approximately $90. Management expected operating cash flow and available credit to cover operating, seasonal working-capital, debt-service and other needs. No specific consolidated 2011 revenue or earnings forecast is provided.
- Venezuela: Government expropriation resulted in a $331 disposal loss attributable to O-I, including write-offs of net assets and cumulative currency translation losses. The company is seeking compensation but cannot estimate its amount or timing; any compensation will be recognized when received. Venezuelan operations had FY2010 sales of $129 before disposal, versus $415 in 2009.
- Asbestos: O-I recorded a fourth-quarter $170 charge to increase its estimated future asbestos liability; asbestos cash payments were $179 in 2010. Approximately 6,000 claims were pending at year-end. The company states ultimate liability cannot reasonably be estimated and further charges may materially affect results, cash use, borrowing costs and acquisition capacity.
- Other risks: Significant leverage and debt covenants; refinancing and interest-rate exposure; foreign currency and political risks; intense competition from other packaging materials; energy and raw-material volatility; environmental obligations; customer concentration and pricing pressure; labor negotiations; pension funding and actuarial assumptions; and possible goodwill impairment. Goodwill was $2,821, with no impairment identified in the 2010 annual test.
- Other items: O-I repurchased 6 million shares for $199 and reported no common dividends and no near-term dividend plans. The FY2010 results include $170 of asbestos charges, $13 of restructuring and impairment, and $32 of acquisition-related inventory, restructuring, transaction and financing costs. The company reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the $258 of continuing earnings attributable to O-I with the $(47) reported net loss, particularly the Venezuela disposal loss and discontinued-operations presentation.
- Review asbestos claim trends, annual reserve assumptions, cash payments, insurance recoveries, and the potential for additional charges; the ultimate exposure is not estimable.
- Assess debt maturities, covenant headroom, refinancing needs and liquidity after acquisitions and the $199 share repurchase.
- Test whether the 2010 improvement in segment profit and South American growth can persist despite weak beer volumes in North America and Europe, cost inflation and currency movements.
- Evaluate acquisition integration, the carrying value of $2,821 in goodwill, and the uncertain compensation outcome for expropriated Venezuelan assets.
- Note that the independent auditor issued an unqualified opinion on the financial statements and internal controls; controls at the 2010 Argentina, Brazil and China acquisitions were excluded from the year-end assessment and were to be evaluated by the end of 2011.