O-I Glass (Owens-Illinois, Inc.) — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. The unaudited statements cover Owens-Illinois, Inc. and subsidiaries.
Business context and financial performance
The company manufactures glass containers and reports four geographic segments: Europe, North America, South America, and Asia Pacific. Amounts below are in millions of dollars except per-share data.
- Second quarter: Net sales were $1,710.9, down 5.3% from $1,807.0. Gross profit was $396.9 versus $407.4. Net earnings attributable to the company were $141.1 versus $149.3; diluted EPS was $0.85 versus $0.88.
- First half: Net sales were $3,293.4, down 1.0% from $3,326.0. Gross profit was $707.7 versus $704.2. Net earnings attributable to the company were $226.4 versus $194.4; diluted EPS was $1.34 versus $1.15.
- Segment operating profit: Reportable segments generated $287.1 in Q2, down 1.6% year over year, and $485.3 in the first half, up 0.3%. This is management’s segment measure, not consolidated operating income.
- Cash flow: First-half operating cash flow was $174.6 versus $183.2. Capital spending was $236.5 versus $124.1; operating cash flow less capital spending was negative $61.9, compared with positive $59.1 in 2009. Cash declined $129.4 during the first half to $682.3.
- Debt and liquidity: Total debt was approximately $3.50 billion at June 30, down from $3.61 billion at December 31, 2009. Cash was $682.3, and $725.2 of unused credit was available under the secured credit agreement. Current assets were $2,728.0 and current liabilities were $1,919.0.
Material changes and notable items
- Q2 sales were reduced by approximately $81 million from foreign-exchange movements and $28 million from lower shipment volumes; improved price and mix contributed approximately $23 million. Glass-container shipments fell 1.8% in Q2 and 1.0% in the first half.
- For the first half, favorable currency movements outside Venezuela increased sales by about $127 million, but Venezuelan currency translation reduced sales by about $118 million. Management cited weak beer markets in North America and Europe, including lost North American contracts.
- Manufacturing savings from footprint actions were approximately $46 million in the first half, partly offset by higher unabsorbed fixed costs and inflation. First-half interest expense rose to $115.6 from $106.0, principally due to higher debt balances.
- In May, a subsidiary issued $690 million of 3.00% exchangeable notes due 2015, receiving approximately $672 million net. In June, it redeemed $450 million of 8.25% senior notes due 2013. The company also repurchased 6.0 million shares for $199.2 million in the first half.
- The company acquired a majority interest in Argentina’s Cristalerias Rosario in March. A joint venture’s acquisition of Malaya Glass was completed July 16, after quarter-end; the company’s stated share of the purchase price was $132.4 million.
Outlook, risks, and contingencies
- Management expected 2010 capital spending of up to $500 million and estimated $10 million to $15 million of contributions to non-U.S. defined-benefit pension plans; it said no U.S. plan cash contribution was required for 2010. Management expected a full-year effective tax rate of approximately 26.5%, excluding specified items.
- Management believed operating cash flow and available credit would fund working capital, capital spending, debt service, and asbestos obligations over the short and long term. This is an expectation, not a guarantee.
- Asbestos litigation remains a significant uncertainty. Approximately 6,400 plaintiffs and claimants were pending at June 30, with about 800 additional potential claims identified. The company stated that ultimate asbestos-related liability cannot reasonably be estimated. Recorded asbestos liabilities were $408.0 million, including current and long-term amounts.
- Venezuela’s currency regime changed in 2010: the company used the parallel-market rate and then the government’s SITME rate after parallel-market trading was suspended. It reported a $40 million first-half adverse impact on South American segment operating profit versus the prior-year comparison and noted restrictions on transferring Venezuelan cash.
- The company recorded $8.0 million of restructuring and impairment charges in the first half. Its broader footprint program had recorded cumulative charges of $409.3 million since 2007 and was expected to reduce the workforce by approximately 3,250 jobs; most remaining estimated cash expenditures were expected by year-end 2010.
- Other stated risks include foreign-exchange and interest-rate movements, market and customer conditions, input and energy costs, packaging preferences, acquisition integration, environmental and safety obligations, and asbestos-related developments. The filing reported no material change in previously disclosed risk factors or market risks.
Important facts for investors to verify
- Whether price and mix improvements can offset weak volumes, inflation, and production underutilization.
- How Venezuelan currency rules, cash-transfer restrictions, and operating conditions affect reported results and liquidity.
- Developments in asbestos claims, recorded reserves, payments, and the company’s ability to estimate future exposure.
- Execution and funding of the capital-spending plan, debt maturities and refinancing needs, and the effects of the exchangeable notes.
- Completion and performance of the Malaya Glass transaction and integration of acquired operations.