O-I Glass, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; amounts in U.S. dollars, millions except per-share data. O-I Glass manufactures glass containers and reports Americas and Europe segments.
Financial performance and liquidity
- Third-quarter revenue: $1,693, up 5% from $1,609. Higher prices added $221; foreign exchange reduced sales by $110, divestiture-related sales by $20, and volume and mix by $4.
- Third-quarter profit: Gross profit was $325 versus $302, with gross margin of approximately 19.2% versus 18.8%. Earnings from continuing operations attributable to O-I Glass were $231, or diluted EPS of $1.45, versus $78 and $0.48. The 2022 result included a $153 pretax gain on a plant sale-leaseback; management says identified unusual items increased earnings by $130.
- Nine-month results: Revenue was $5,163, up 8%; gross profit was $954 versus $854. Earnings from continuing operations attributable to O-I Glass were $571, or diluted EPS of $3.59, versus $99 and $0.61. Identified unusual items increased 2022 earnings by $265; 2021 items reduced earnings by $138.
- Segment operating profit: Q3 was $266 versus $243: Americas $130 versus $133; Europe $136 versus $110. Nine-month segment operating profit was $753 versus $650: Americas $388 versus $357; Europe $365 versus $293. This is a non-GAAP measure.
- Cash flow: Continuing operating activities used $224 in the first nine months, compared with $449 provided in 2021. The period included $618 of operating cash outflow for the Paddock Trust and related expenses. Investing activities provided $108, including sale-leaseback proceeds; capital spending was $346. Cash declined $202 to $523.
- Debt and liquidity: Debt schedule reported total long-term debt of $4,560, including $280 due within one year; cash was $523. The company reported $1.24 billion of unused credit and a 4.81% weighted-average rate on Credit Agreement borrowings. Current assets were $2,430 and current liabilities $2,096. The company said it was in compliance with debt covenants, including the 2.50x secured leverage limit.
- Other metrics: Net interest expense was $63 in Q3 and $175 for nine months, up from $50 and $153, respectively. Nine-month effective tax rate was 21.1%, versus 55.4%.
Material changes and unusual items
- Pricing passed through cost inflation and supported profit growth. Q3 segment profit also benefited from operating performance and margin initiatives, but was partly offset by foreign exchange, production downtime, elevated project activity and divestitures.
- In 2022, sale-leasebacks of the Vernon, California and Brampton, Ontario plants generated $334 in nine-month pretax gains and $368 in proceeds. The company leased both properties back under initial 10-year operating leases.
- The Cristar tableware business sale generated a $55 pretax gain. The Paddock asbestos reorganization became effective in July: the trust was funded with $610 total consideration, and the company regained control of reorganized Paddock and reconsolidated it.
- O-I Glass refinanced its credit agreement, drew $600 for the Paddock settlement and subsequently retired that delayed-draw loan using amended term-loan proceeds and cash. It also redeemed $300 of 5.875% notes due 2023 in August.
Outlook, commentary and risks
- Management expected full-year 2022 shipment growth of approximately 1% in tons, operating cash flow of approximately $155 including the Paddock funding or $775 excluding it, and capital expenditures of approximately $575.
- The company expected pricing and margin initiatives to more than offset cost inflation, while expansion-project activity would pressure operating costs. It remained on track to start its first MAGMA greenfield plant in Kentucky in 2024; supply-chain challenges had delayed technology development.
- European natural-gas supply and pricing remain significant risks amid the Russia-Ukraine conflict. Long-term supply arrangements provided some protection, but interruptions could increase costs or halt deliveries to plants. Management said potential effects on its 2022 outlook were uncertain.
- Other cited uncertainties include recession signals, a possible U.S. rail strike, COVID-19 impacts, inflation, supply-chain disruption, labor availability and costs, foreign exchange and interest rates. The company said it had significant liquidity and expected operating cash and available credit to cover requirements.
- Tax examinations were ongoing in multiple jurisdictions; assessments above reserves could materially affect results, financial position or cash flow. The company said it had made adequate provisions.
Important facts for investors to verify
- How much reported earnings growth reflects ongoing operations versus the sale-leaseback and divestiture gains and other adjustments.
- Whether cash generation improves after the one-time Paddock Trust payment, given negative nine-month operating cash flow and working-capital usage.
- Debt maturities, refinancing costs, borrowing rates and covenant headroom, particularly as interest rates and financing needs evolve.
- Whether pricing continues to cover input-cost inflation and whether European energy supply risks affect production or margins.
- Execution, timing and expected returns for planned capital projects and MAGMA, alongside the stated 2022 shipment and cash-flow outlook.
- Potential outcomes of tax assessments, litigation and other contingencies, including any obligations remaining after the Paddock settlement.