O-I Glass, Inc. (Owens-Illinois, Inc.) — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. The unaudited statements are in millions of dollars, except per-share amounts. The filing was signed October 25, 2012.
Business context and financial performance
The company manufactures glass containers and reports four geographic segments: Europe, North America, South America and Asia Pacific. Third-quarter results reflected weaker sales and volume overall, with significant regional differences.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,747 | $1,862 | $5,252 | $5,540 |
| Gross profit | $342 | $387 | $1,096 | $1,085 |
| Gross margin | 19.6% | 20.8% | 20.9% | 19.6% |
| Continuing-operations earnings attributable to the company | $92 | $119 | $348 | $273 |
| Diluted continuing-operations EPS | $0.55 | $0.72 | $2.10 | $1.64 |
| Net earnings attributable to the company | $90 | $116 | $344 | $271 |
| Segment operating profit | $245 | $268 | $771 | $700 |
Gross margins above are calculated from reported sales and gross profit. Q3 sales fell 6% year over year, mainly from unfavorable currency effects and lower shipments; reported glass-container tonnage declined about 5%. Nine-month sales fell 5%, with tonnage down about 4%. Higher pricing helped offset cost inflation in both periods.
Cash flow, debt and liquidity
- Cash from continuing operating activities was $231 for the first nine months, versus $281 in 2011. Capital spending was $178, versus $204; company-defined free cash flow was $53, versus $77.
- Working capital consumed $325 of cash, compared with $235 in the prior-year period. Management attributed the increase principally to lower accounts payable and higher inventory.
- Cash was $336 at September 30, 2012. Total debt was approximately $3.9 billion, compared with $4.1 billion a year earlier. The $900 million revolving facility had $807 million of unused credit available; weighted-average interest on borrowings under the secured credit agreement was 2.52%.
- Current assets were $2,788 and current liabilities were $2,038. The European receivables securitization balance was $276, at a 1.13% weighted-average rate.
- Interest expense was $61 in Q3 and $187 for nine months, down from $70 and $246, respectively. The filing cites lower rates and debt levels for the quarter, and refinancing of higher-cost debt for the nine-month improvement.
Management stated that operating cash flow and available credit should be sufficient for working capital, debt service, capital spending and other obligations in the short and long term.
Material changes and management commentary
- Regional trends: Q3 Europe sales declined 15% and segment operating profit fell to $74 from $111, amid lower shipments and production curtailments. Management said curtailments would likely continue in Europe through the rest of 2012. North America and South America segment profit rose to $75 and $69, respectively; Asia Pacific rose to $27.
- Nine-month segment profit: Increased 10% to $771. North America improved to $249 from $180, and Asia Pacific to $79 from $56; Europe declined to $289 from $299 and South America to $154 from $165. Management credited manufacturing improvements, cost reductions and pricing, partly offset by lower volume and foreign exchange.
- Restructuring: Q3 included $33 of restructuring and asset-impairment charges, primarily associated with closing a furnace in Europe and one in Asia Pacific. Restructuring accruals were $70 at quarter end.
- Tax outlook: Excluding items management viewed as nonrecurring, the expected 2012 full-year effective tax rate was 24%–25%, compared with 21.6% in 2011, due mainly to the anticipated geographic mix of earnings. The filing does not provide a broader earnings or revenue forecast.
- Accounting changes: Effective January 1, 2012, U.S. inventory valuation changed from LIFO to average cost, applied retrospectively. The company also changed pension-expense allocation to segments retrospectively. These changes affect comparability; the filing quantifies the inventory-method effect on 2012 earnings.
Risks, contingencies and unusual items
- Asbestos: The company reported approximately 4,500 pending plaintiffs and claimants and about 350 additional claims it believes may be asserted. It stated that ultimate asbestos liability cannot reasonably be estimated. Recorded asbestos liabilities totaled $385 at September 30, 2012, and payments were substantial; a future additional charge could materially affect results. Management nevertheless expected liquidity to be sufficient.
- FCPA investigation: The company was conducting an internal investigation into possible violations in certain overseas operations and voluntarily disclosed the matter to the DOJ and SEC in October 2012. It could not predict the investigations’ scope or outcome or quantify potential sanctions, but did not expect a material adverse effect on liquidity, results or financial condition.
- Venezuela: The government expropriated two subsidiaries in 2010. The company initiated international arbitration in 2011 and could not predict the amount or timing of any compensation. Q3 and nine-month discontinued-operations losses were $2 and $4, primarily ongoing legal fees.
- Other items: The company received $42 from the Chinese government as partial compensation for land it must return, but deferred recognition of any gain pending satisfaction of recognition criteria. It also reported that a trial judge vacated damages against the company in an asbestos case; the plaintiff appealed.
- Key stated risks include foreign-exchange movements, European and Australian economic conditions, energy and other input costs, pricing pressures, restructuring execution, environmental obligations, and asbestos claims. Management reported effective disclosure controls as of September 30, 2012.
Important facts for investors to verify
- Whether European demand, shipments and production curtailments improve or continue to pressure segment profitability.
- Whether cash conversion and free cash flow recover from the working-capital outflow, and how capital spending and debt repayment evolve.
- The status and potential financial consequences of the FCPA investigations and asbestos claims, including future accrual changes and payments.
- Progress and financial implications of the Venezuela arbitration and Chinese land compensation.
- How the retrospective inventory and pension-allocation changes affect comparisons with earlier reported periods, and whether the expected 24%–25% tax rate is realized.