O-I Glass, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited results; amounts are in U.S. dollars unless stated otherwise.
Business context and financial performance
O-I manufactures glass containers across the Americas, Europe and Asia Pacific. COVID-19 materially reduced demand and production in the quarter; some facilities suspended operations or cut shifts, particularly in Mexico and the Andean countries. Glass packaging production was generally treated as essential.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,418m | $1,756m | $2,979m | $3,393m |
| Gross profit | $163m | $336m | $431m | $633m |
| Gross margin | 11.5% | 19.1% | 14.5% | 18.7% |
| Reportable segment operating profit | $95m | $236m | $264m | $436m |
| Net earnings (loss) attributable to O-I | $(101)m | $65m | $(51)m | $144m |
| Diluted EPS | $(0.64) | $0.42 | $(0.32) | $0.92 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $(134)m | $(663)m |
Segment operating profit is a company-defined, non-GAAP measure. Q2 reported pre-tax loss was $119m, versus pre-tax earnings of $98m a year earlier. Interest expense, net was $98m in Q2, including $38m of debt-repurchase premiums, fees and deferred-financing-cost write-offs. The filing does not provide a consolidated operating margin measure.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $1,067m, versus $551m at December 31, 2019. Current assets were $3,012m and current liabilities $1,886m.
- Balance-sheet debt was approximately $6.5bn, including $6,103m of long-term debt and $404m of short-term loans and debt due within one year. Net debt was approximately $5.4bn based on reported cash.
- The company had $667m of unused availability under its secured credit agreement. It reported compliance with debt covenants; the maximum leverage ratio was 5.0x at June 30, 2020, tightening in 2021.
- First-half investing cash outflow was $233m, including $189m of capital spending; financing cash inflow was $904m. Cash rose by $516m during the period.
- First-half operating cash outflow was lower than in 2019, in part because Paddock’s Chapter 11 filing stayed asbestos-related payments and because working-capital use was lower. The company also noted reduced receivables factoring versus the prior year.
Changes, unusual items and management commentary
- Q2 sales fell 19% year over year; glass-container shipments fell about 15%. Lower volume and mix reduced reportable-segment sales by $255m, unfavorable foreign exchange by $88m, while higher prices added $18m. Segment operating profit declined about 60%, reflecting lower volumes, pandemic-related downtime and higher operating costs.
- For the first half, sales fell 12% and segment operating profit declined 39%. Management said June volumes were down about 3% year over year, compared with an approximately 18% decline in April and May.
- Q2 restructuring, asset-impairment and other charges were $71m; pension settlement charges were $8m. The first-half loss also included a $14m Paddock deconsolidation charge. Management identified $102m of Q2 and $116m of first-half after-tax items it considered not representative of ongoing operations.
- COVID-19 prompted a quantitative interim goodwill test. No impairment was recorded, but North America’s estimated business enterprise value exceeded carrying value by only about 2%. The filing says a 0.5 percentage-point increase in discount rate could have indicated an approximately $70m impairment, and a 0.5-point lower perpetual growth rate approximately $40m.
- Paddock, the entity holding legacy asbestos liabilities, filed for Chapter 11 in January 2020 and was deconsolidated. O-I recognized a $471m support-agreement liability; the ultimate amount needed to fund a future asbestos trust cannot be estimated with certainty. The bankruptcy process and potential claims against O-I remain material risks.
- In May, O-I issued $700m of 6.625% senior notes due 2027, using proceeds to refinance debt. On July 31, after quarter-end, it completed the sale of its Australia and New Zealand businesses for gross proceeds of about $677m; net proceeds were expected to be used principally to reduce debt.
- The company suspended its quarterly dividend and paused share repurchases, anticipated these measures would continue through 2020, and estimated full-year capital expenditures of about $300m or less.
Outlook and risks
Based on trends through July, management expected full-year 2020 sales volume to decline 4%–7% and Q3 volume to be approximately flat to slightly down year over year; both outlooks were normalized for the ANZ sale. Management targeted quarter-end liquidity of at least $1.25bn through 2020 and net debt at or below 2019 year-end levels by the end of 2020. These are forward-looking targets, not guarantees. The company warned that the duration and severity of the pandemic, customer and supplier impacts, operating disruptions, refinancing needs, and Paddock’s asbestos proceedings could materially affect results, liquidity and cash flows.
Important facts for investors to verify
- Whether sales, production and margins recovered as expected after the June and July improvement, and how the ANZ divestiture affects comparisons and guidance.
- Actual liquidity, cash generation, capital spending and net debt against management’s 2020 targets; confirm the use of ANZ sale proceeds.
- Developments in Paddock’s Chapter 11 case, the support agreement’s ultimate funding requirement and any efforts to assert asbestos-related exposure against O-I or O-I Group.
- Goodwill valuation assumptions and impairment headroom, particularly for North America, as pandemic-related forecasts change.
- Debt covenant headroom, refinancing costs and the impact of the 6.625% notes and future covenant tightening.