O-I Glass, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited results; comparisons are with the corresponding 2020 periods. The 2020 comparison was affected by COVID-19, and the July 2020 sale of the Australia and New Zealand businesses reduces comparability.
Key financial results
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,660 million | $1,418 million | $3,161 million | $2,979 million |
| Gross profit | $306 million | $163 million | $552 million | $431 million |
| Gross margin | 18.4% | 11.5% | 17.5% | 14.5% |
| Earnings (loss) attributable to O-I Glass | $118 million | $(101) million | $21 million | $(51) million |
| Diluted earnings (loss) per share | $0.73 | $(0.64) | $0.13 | $(0.32) |
| Operating cash flow | Not separately reported | Not separately reported | $143 million | $(134) million |
Q2 reportable-segment operating profit, a non-GAAP measure, was $232 million versus $99 million; first-half segment operating profit was $407 million versus $275 million. Net interest expense was $52 million in Q2 and $103 million in the first half, down from $98 million and $151 million, respectively.
Performance and material changes
- Q2 sales rose 17%; glass-container shipments increased approximately 10% overall and 18% excluding divested businesses. Higher volume and mix added $255 million to reportable-segment sales, foreign exchange added $79 million, and price added $27 million; divestitures reduced sales by $111 million.
- First-half sales rose 6%. Total shipments increased approximately 1%, or 9% excluding divestitures. Favorable currency added $113 million and higher prices added $55 million to reportable-segment sales; divestitures reduced them by $238 million.
- Management attributed improved segment profit chiefly to higher sales and production, operating performance and margin-expansion initiatives. In the first half, cost inflation outpaced selling prices in the Americas, while operating-cost benefits supported results in both Americas and Europe.
- Q2 results included a $69 million gain from a favorable Brazilian indirect-tax ruling and $28 million of related income-tax expense. First-half results included a $154 million Paddock support-agreement charge, recorded in Q1. Management identified these and other items as not representative of ongoing operations; such items increased Q2 earnings by $32 million and reduced first-half earnings by $122 million.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $531 million, current assets $2.399 billion and current liabilities $1.687 billion. Long-term debt was $4.977 billion; current loans and debt due within one year were $85 million on the balance sheet.
- The credit agreement had $1.406 billion of unused availability. The term loan A balance was $1.068 billion, and the weighted-average rate on credit-agreement borrowings was 1.60%. The company reported compliance with its covenants, including its leverage covenant.
- First-half operating cash flow of $143 million compared with cash use of $134 million in 2020. Working capital used $229 million, versus $415 million a year earlier. Capital expenditures were $175 million; investing activities used $109 million and financing activities used $68 million. Cash declined $32 million from year-end 2020.
- The company reported $440 million of receivables sold through factoring programs at June 30. It repurchased $20 million of shares under its anti-dilutive program. The dividend remained suspended, with no current plan to reinstate it.
Outlook, risks and contingencies
- 2021 guidance: shipment growth of 4%–5% in tons versus 2020, excluding divestitures; operating cash flow of approximately $660 million or higher; and capital expenditures of approximately $400 million. The cash-flow outlook assumes asbestos-related claim payments remain suspended pending confirmation and effectiveness of a Paddock reorganization plan.
- Paddock and asbestos claim representatives reached an agreement in principle for $610 million to fund a trust. Implementation depends on definitive plan documents, approval by at least 75% of voting claimants, and court approvals. The support-agreement liability was $625 million at June 30. Failure or delay in confirming the plan, or a change in its terms or costs, could materially affect results, liquidity and cash flows.
- February 2021 severe weather disrupted U.S. and Mexican energy access. Management estimated a $43 million first-half segment-profit impact in the Americas; $13 million remained accrued for possible energy surcharges at June 30, and the company could not estimate the potential additional loss.
- COVID-19 continued to affect operations and supply chains, with possible future impacts uncertain. Other stated risks include inflation and availability of energy, labor, raw materials and transport; foreign-exchange movements; debt and refinancing needs; and cybersecurity and data-privacy incidents.
- An Oregon regulator assessed approximately $1 million in penalties over alleged air-emissions violations at a facility; the company appealed. Tax examinations and assessments in multiple jurisdictions also remain a contingency, although management believes tax reserves are adequate.
Important facts for investors to verify
- Progress, approvals, final funding terms and timing for the Paddock plan, including the relationship between the $610 million proposed trust funding and the $625 million recorded liability.
- Whether operating cash flow meets the approximately $660 million-or-higher outlook, particularly given working-capital needs and the assumed continued asbestos-payment stay.
- Shipment growth, price realization versus cost inflation, and the persistence of margin-expansion benefits after the COVID-19 recovery comparison.
- Energy-surcharge exposure beyond the $13 million accrued, and the extent to which severe-weather effects or other supply disruptions recur.
- Debt, covenant headroom, available credit and the continued suspension of dividends; also consider the company’s use of receivables factoring when assessing liquidity and cash generation.