Business context and reporting period
Owens-Illinois, Inc. (now identified in the request as O-I Glass) filed this Form 10-K for the fiscal year ended December 31, 2012. It manufactures glass containers for food, beverage and other customers, operating 79 plants in 21 countries across four reportable regions. Approximately 75% of 2012 sales came from outside the U.S.; no customer accounted for more than 10% of consolidated sales. The filing also provides unaudited fourth-quarter results.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $7.00 billion | $7.36 billion |
| Gross profit / gross margin | $1.374 billion / 19.6% | $1.389 billion / 18.9% |
| Continuing-operations earnings attributable to the Company | $186 million; $1.12 diluted EPS | Loss of $501 million; $(3.06) diluted EPS |
| Net earnings (loss) attributable to the Company | $184 million | Loss of $500 million |
| Cash from continuing operating activities | $580 million | $505 million |
| Capital expenditures / free cash flow | $290 million / $290 million | $285 million / $220 million |
| Cash / total debt at year-end | $431 million / $3.773 billion | $400 million / $4.033 billion |
| Working capital | $486 million | $498 million |
Free cash flow is a company-defined, non-GAAP measure. Year-end net debt was $3.342 billion; unused capacity under the secured credit agreement was $796 million. The company reported a 2.67x net-debt-to-credit-agreement-EBITDA leverage ratio and compliance with debt covenants. Current assets were $2.648 billion and current liabilities $2.162 billion.
Fourth-quarter 2012 sales were $1.748 billion, gross profit was $278 million, and continuing-operations loss attributable to the Company was $162 million, or $(0.99) per diluted share. The comparable fourth-quarter 2011 continuing-operations loss was $774 million, or $(4.71) per share, heavily affected by impairment and other charges.
Material changes versus the prior comparable period
- Annual sales declined 5%; glass-container shipments fell approximately 5%. Lower volume and unfavorable currency translation (notably the euro and Brazilian real) outweighed improved pricing. Segment operating profit increased 4% to $935 million, as pricing, North American manufacturing recovery, Australian footprint savings and cost reductions offset inflation, lower volumes and currency effects.
- Regional segment operating profit changed unevenly: North America rose to $288 million from $222 million and Asia Pacific to $113 million from $83 million; Europe fell to $307 million from $345 million and South America to $227 million from $250 million.
- Interest expense fell to $248 million from $314 million, reflecting refinancing and term-loan prepayments, as well as nonrecurring 2011 refinancing charges.
- Cash from operations and free cash flow increased. Management cited improved earnings and an $81 million working-capital release, partly offset by higher pension contributions. Debt fell by about $260 million.
Outlook, commentary, risks and unusual items
- Management expected 2013 effective tax rate of approximately 25%, pension expense of approximately $106 million, pension contributions of approximately $75 million, and minimum required contributions of approximately $30 million. It expected operating cash flows and available credit to meet liquidity needs.
- 2012 included a $155 million fourth-quarter asbestos accrual charge, $168 million of restructuring, asset impairment and related charges, and a $61 million gain on Chinese land compensation. The $85 million compensation receipt resulted from land returned to the Chinese government. The 2011 comparison included a $641 million Asia Pacific goodwill impairment. No goodwill impairment was recorded in 2012.
- Asbestos liabilities remain a major uncertainty: approximately 2,600 claims were pending at year-end, 2012 cash payments were $165 million, and cumulative accruals through 2012 were approximately $4.3 billion before insurance recoveries. Management stated that ultimate liability cannot reasonably be estimated.
- The company disclosed an internal investigation into possible overseas Foreign Corrupt Practices Act and local-law violations, voluntarily reported to the DOJ and SEC in October 2012. The scope, outcome and any sanctions were unknown. A Clean Air Act settlement also required a $1 million penalty and approximately $38 million of pollution-control equipment, with about $17 million spent and the balance planned for 2013.
- Other key risks include substantial leverage and covenant restrictions; variable-rate debt exposure (about 33% of total debt); foreign exchange, energy and raw-material volatility; pension funding; economic weakness and packaging competition; labor negotiations; environmental regulation; and uncertain compensation from Venezuela expropriation arbitration. The $690 million face-value exchangeable notes mature in 2015.
- The company changed U.S. inventory costing from LIFO to average cost retrospectively and changed pension expense allocation across segments. Auditors issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- Underlying earnings and shipment trends apart from asbestos, restructuring and other excluded items; confirm segment profit reconciliations and the effects of retrospective accounting changes.
- Asbestos claim development, annual reserve assumptions, cash payments and insurance recoveries, including any change in the company’s stated inability to estimate ultimate exposure.
- Progress and costs of European and Asia Pacific restructuring, and whether savings offset volume weakness and inflation.
- Debt maturities, refinancing plans and covenant headroom, particularly the $1.068 billion due in 2015 and variable-rate exposure.
- Outcome and potential financial or operational consequences of the FCPA investigation and Venezuela arbitration.
- Actual 2013 tax rate, pension expense and contributions versus management’s estimates.