Business context and reporting period
Owens-Illinois, Inc. (now O-I Glass, Inc.) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. The company manufactures glass containers and reports four geographic segments: Europe, North America, Latin America, and Asia Pacific. Amounts below are in U.S. dollars; financial-statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,791 | $1,712 | $5,157 | $5,060 |
| Gross profit | $353 | $336 | $1,014 | $997 |
| Gross margin | 19.7% | 19.6% | 19.7% | 19.7% |
| Continuing-operations earnings attributable to company | $128 | $111 | $316 | $286 |
| Diluted EPS from continuing operations | $0.77 | $0.68 | $1.92 | $1.75 |
| Net earnings attributable to company | $126 | $108 | $314 | $280 |
Q3 pretax earnings were $172 million versus $153 million; nine-month pretax earnings were $396 million versus $395 million. Reportable-segment operating profit, a management performance measure, rose 10% to $260 million in Q3 and 7% to $730 million for the nine months. Q3 segment operating profit benefited from price increases and currency effects, partly offset by operating costs.
For the nine months, continuing operating cash flow was $39 million, down from $226 million, primarily reflecting a $601 million working-capital use versus $320 million in 2016. Capital spending was $292 million. Total operating cash flow was $37 million; cash declined $153 million to $339 million. The company attributed the working-capital increase mainly to the nonrecurrence of a prior-year VAT refund and higher receivables, including less receivables factoring.
At September 30, cash was $339 million, current assets $2,667 million, and current liabilities $2,177 million. Balance-sheet debt comprised $243 million of current loans and debt due within one year and $5,378 million of long-term debt. The company reported $5,426 million of total long-term debt before deducting amounts due within one year. Its credit agreement had a 2.57% weighted-average borrowing rate; reported unused credit is $652 million in the debt note and $655 million in MD&A. The company was compliant with its debt covenants.
Material changes versus prior period
- Q3 sales increased 5%: foreign exchange added $53 million and pricing added $24 million; volume and mix reduced sales by $1 million. Nine-month sales increased 2%, with $51 million from price and $42 million from currency, partly offset by unfavorable mix.
- Regional trends diverged. Q3 Europe, Latin America, and Asia Pacific sales increased, while North America sales fell 5% amid a 5% shipment decline, including weather-related effects late in the quarter. For the nine months, North America sales fell 3%, while Latin America rose 10%.
- Q3 net interest expense declined $3 million to $63 million. Nine-month interest expense rose to $204 million from $199 million, including $17 million of tender premiums and debt-fee write-offs; excluding these charges, management said interest expense fell $12 million.
- The nine-month effective tax rate was 16.4% versus 23.5%, principally reflecting the reversal of about $26 million in tax accruals after resolution of a foreign tax matter.
- Working-capital pressure reduced cash generation. Cash provided by continuing operations declined to $39 million from $226 million.
Outlook, commentary, risks, and unusual items
- Management expected a 2017 full-year effective tax rate of approximately 22%, excluding items it considers nonrepresentative of ongoing operations. It expected operating cash flows and available credit to fund working capital, debt service, and other obligations over the short and long term.
- Management disclosed expected noncash pension settlement charges exceeding $100 million in Q4 2017, relating to planned settlements of certain U.S. and Canadian pension liabilities.
- During the nine months, the company recorded $49 million of restructuring, impairment, and related charges, primarily in Latin America ($33 million), Europe ($13 million), and North America ($3 million). Most associated cash expenditures were expected by the end of 2018. Capacity curtailments and a European plant closure were among the actions.
- In late October, the company agreed to expand its Constellation joint venture with a fifth furnace, estimated to cost approximately $140 million, funded equally by the partners in 2018–2019 and expected to be operational by the end of 2019.
- The company received $115 million in July for selling its rights to a Venezuela arbitration award exceeding $500 million. Future proceeds are uncertain; if the award is annulled, the company could be required to repay some or all of the cash payment. The company deferred recognition of a gain pending the annulment decision.
- Asbestos litigation remains a significant contingency. The balance sheet includes $643 million of asbestos-related liabilities at September 30, 2017. The filing describes approximately 1,400 pending plaintiffs and claimants and substantial uncertainty in estimating future claims, costs, and timing. The company also disclosed an SEC investigation into accounting and controls relating to asbestos liabilities, following a restatement of 2013–2015 financial statements; it could not predict the investigation’s outcome or quantify its potential impact.
- Other stated risks include currency movements, inflation and input costs, customer and consumer shifts toward alternative packaging, refinancing and covenant risks, tax examinations, and the ability to manage restructuring and achieve cost savings. The company said disclosure controls were effective at a reasonable-assurance level and reported no material change in internal controls during the quarter.
- The company anticipated no significant timing or income impact from adopting the revenue standard in 2018, but expected the lease standard effective in 2019 to significantly affect its financial statements because of its leases.
Important facts for investors to verify
- Clarify the available-credit figure: the debt note reports $652 million, while MD&A reports $655 million.
- Track working-capital conversion, factoring and receivables levels, and the recovery of operating cash flow relative to earnings and capital spending.
- Assess debt maturities, refinancing needs, covenant headroom, and the effects of the amended leverage-ratio calculation.
- Monitor asbestos liability assumptions, future cash payments, and developments in the SEC investigation and related prior-period restatement.
- Follow the ICSID decision and any repayment exposure or future recovery tied to the Venezuela award sale.
- Verify the timing and amount of Q4 pension settlement charges and the execution, cost, and financing of the Constellation expansion.