O-I Glass, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The financial statements are unaudited. O-I Glass manufactures glass containers and reports Americas and Europe as its principal operating segments.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1.778 billion | $1.660 billion | $3.469 billion | $3.161 billion |
| Gross profit | $325 million | $306 million | $628 million | $552 million |
| Gross margin | 18.3% | 18.4% | 18.1% | 17.5% |
| Segment operating profit | $257 million | $232 million | $488 million | $407 million |
| Earnings attributable to O-I Glass | $252 million | $118 million | $340 million | $21 million |
| Diluted earnings per share | $1.59 | $0.73 | $2.14 | $0.13 |
| Net interest expense | $46 million | $52 million | $112 million | $103 million |
- Q2 sales increased 7%; higher prices added $208 million, while unfavorable foreign exchange reduced sales by $95 million and the Cristar divestiture reduced sales by about $11 million. Shipment volume was up nearly 1%.
- First-half sales rose 10%. Higher prices added $348 million and shipment volume and mix added $72 million; currency effects reduced sales by $130 million and divestitures by about $15 million.
- Q2 segment operating profit increased 11%, to $257 million. Higher net prices, sales and production, operating performance, and margin initiatives were partly offset by currency, logistics costs and engineering activity. Segment operating profit is a non-GAAP measure.
- Reported earnings include significant non-recurring gains. Q2 included a $182 million pretax gain on a Brampton, Ontario sale-leaseback. First-half results also included a $55 million pretax gain on the Cristar sale. Management estimated these and other listed adjustments increased attributable earnings by $137 million in Q2 and $135 million in the first half of 2022.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $120 million, versus $143 million a year earlier. Capital expenditures were $199 million, implying operating cash flow less capital expenditures of approximately negative $79 million.
- Cash and equivalents were $661 million at June 30, 2022, down from $725 million at year-end 2021. Current assets were $2.617 billion and current liabilities $1.785 billion.
- Balance-sheet debt was approximately $4.49 billion, comprising $4.427 billion of long-term debt and $65 million of short-term loans and current debt. Cash-adjusted debt was approximately $3.83 billion.
- The March 2022 refinancing agreement provides up to $2.8 billion of facilities. At quarter-end, $1.24 billion of unused credit was available and the weighted average rate on agreement borrowings was 3.13%. The company reported compliance with its covenants, including a secured leverage ratio limit of 2.50x.
- First-half net debt repayments were $213 million; cash used in financing activities was $243 million. Working capital used $250 million of cash, with higher receivables and less factoring contributing. Receivables sold through factoring programs totaled $453 million at quarter-end.
Material developments, outlook and risks
- Outlook: Management expects full-year 2022 shipment growth of about 1%, continued margin and pricing benefits expected to more than offset cost inflation, and capital expenditures of approximately $600 million. Full-year operating cash flow is expected to be about $775 million excluding the Paddock Trust funding and related costs, or approximately $155 million including them.
- Paddock asbestos settlement: After quarter-end, the reorganization plan became effective on July 8, 2022, providing a channeling injunction for asbestos claims. O-I funded the trust in July using a $600 million delayed-draw term loan and $1.5 million of cash; Paddock’s $8.5 million trust note was later redeemed. The company estimates the funding and related costs will result in about $620 million of third-quarter operating cash outflow. Paddock was reconsolidated in July after the trust was funded and control regained.
- Energy and geopolitics: The Russia-Ukraine conflict has raised European natural-gas prices and volatility. Long-term supply arrangements currently provide some protection, but interruptions or unavailable supply could raise costs or disrupt plant operations. About 20% of European capacity could run on oil at the time of filing; management expected this to reach about 50% by year-end.
- Other risks: Management cited ongoing supply-chain constraints, inflation, labor availability and costs, foreign-exchange movements, COVID-19 uncertainty, and delays to MAGMA glass-melting technology development. Furnace events in North America caused repair costs and unplanned downtime. Energy accounts for 10%–20% of manufacturing costs, according to the filing.
- Other notable items: The Brampton property was sold for net proceeds of about $190 million and leased back for an initial ten-year term. O-I settled a Mexican tax audit for $38 million in Q2, against previously established reserves. The company recorded $12 million of restructuring and related charges in the first half.
Important facts for investors to verify
- How much of reported earnings growth reflects sustainable operations versus the Brampton and Cristar gains and other adjusting items.
- Whether pricing continues to cover inflation, and how energy, logistics, currency and production interruptions affect segment margins.
- Actual third-quarter cash outflow and debt added for the Paddock Trust, and the related impact on leverage and liquidity after reconsolidation.
- Progress against 2022 shipment, capital expenditure and operating cash flow guidance, including the substantial working-capital use and reliance on receivables factoring.
- European natural-gas supply and energy-switching readiness, plus compliance with credit-agreement covenants as financing costs and debt levels evolve.