O-I Glass, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Financial statements are unaudited. O-I Glass manufactures glass containers and reports its glass operations through the Americas and Europe segments.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1.890 billion | $1.778 billion | $3.721 billion | $3.469 billion |
| Gross profit | $416 million | $325 million | $900 million | $628 million |
| Gross margin | 22.0% | 18.3% | 24.2% | 18.1% |
| Earnings before income taxes | $154 million | $328 million | $424 million | $498 million |
| Net earnings attributable to O-I Glass | $110 million | $252 million | $316 million | $340 million |
| Diluted EPS | $0.69 | $1.59 | $1.98 | $2.14 |
| Reportable segment operating profit | $326 million | $257 million | $724 million | $488 million |
Q2 sales rose 6%, primarily from $241 million of higher selling prices and $47 million of favorable currency effects, partly offset by a $165 million sales impact from lower volume and mix. Shipments by ton declined about 9%. Segment operating profit increased 27%, with price gains, operating performance and margin initiatives outweighing lower volume and certain cost pressures.
For the first half, sales grew 7%, while segment operating profit rose 48%. Higher pricing was the main contributor; lower shipments and mix reduced sales by about $288 million. The Americas and Europe reported Q2 segment operating profit of $126 million and $200 million, respectively; Europe’s improvement was particularly strong.
Interest expense, net, was $118 million in Q2 and $186 million in the first half, up $72 million and $74 million year over year, respectively. The increases reflected higher rates and refinancing-related premiums, fees and charges. Q2 2023 included about $39 million of such charges.
Cash provided by operations was $98 million for the first half, versus $120 million a year earlier. Working capital used $541 million of cash, compared with $250 million in the prior-year period, primarily reflecting higher inventories. Investing activities used $266 million, including $268 million of capital spending. Financing activities provided $132 million; cash ended the period at $754 million.
At June 30, total long-term debt, including amounts due within one year, was $4.939 billion; the balance sheet reported $4.778 billion of long-term debt and $242 million of short-term loans and long-term debt due within one year. The company had $1.24 billion of unused credit under its facilities, and reported a 6.62% weighted-average rate on Credit Agreement borrowings. It was in compliance with its covenants, including the 2.50x maximum secured leverage covenant.
Material changes and unusual items
- Q2 earnings before taxes fell $174 million year over year despite stronger segment operating profit, chiefly because of higher interest expense and the absence of the prior-year $182 million pretax gain on a Brampton plant sale-leaseback.
- First-half 2022 results also included a $55 million pretax gain on the sale of the Cristar tableware business and the $182 million sale-leaseback gain. Management says items it considers outside ongoing operations decreased 2023 first-half earnings by $30 million and increased 2022 first-half earnings by $135 million.
- In May 2023, the company issued €600 million of 6.250% notes due 2028 and $690 million of 7.250% notes due 2031. Proceeds funded tenders for several nearer-term notes. The refinancing contributed to the $39 million of Q2 charges noted above.
- Receivables sold through factoring programs totaled $556 million at June 30, 2023; factoring increased first-half operating cash flow by approximately $21 million. Expenses for these programs were $11 million, up from $3 million in the prior-year period.
Outlook, commentary and risks
- Management expects full-year 2023 shipments, in tons, to decline by a mid-single-digit to high-single-digit percentage versus 2022. Temporary production curtailments to match demand are expected to increase operating costs for the remainder of the year; permanent closures could lead to material charges and cash expenditures.
- Management expects higher selling prices and margin initiatives to continue benefiting results and to more than offset cost inflation, while expansion-project activity and production curtailments remain cost pressures.
- 2023 operating cash flow is expected to be approximately $875 million, subject to sales, mix and working-capital variability. Planned capital expenditures are approximately $700 million to $725 million. The first-half operating cash flow and working-capital outflow make cash conversion an important item to monitor.
- The company says it expects cash from operations and available credit to fund operating needs, debt service and other obligations. Its first MAGMA greenfield plant in Kentucky is expected to start in mid-2024.
- Risks include softer consumer demand and continued destocking; elevated interest expense and refinancing needs; energy supply, availability and price risks related to the Russia-Ukraine conflict; and possible future capacity actions. The company notes European gas coverage through longer-term arrangements but warns suppliers might not deliver contracted volumes or prices.
- Income-tax examinations are ongoing in multiple jurisdictions. The company believes reserves are adequate, but adverse settlements above reserves could materially affect results, financial position or cash flows. It recorded approximately $24 million of environmental remediation accruals and says ultimate costs could exceed that amount; excess losses cannot be estimated.
- Management initiated a strategic review of remaining former Asia Pacific businesses; possible divestitures or other actions could result in future charges. The filing also describes routine and non-routine litigation and related uncertainties.
Important facts for investors to verify
- Whether shipment declines and destocking ease, and whether pricing and margin gains can offset lower utilization and production-curtailment costs.
- Progress toward the $875 million operating cash-flow outlook, including inventory reduction, working-capital movements and reliance on receivables factoring.
- Debt-service costs, future refinancing terms, available revolver capacity and continued covenant compliance after the 2023 refinancing.
- Actual 2023 capital spending and progress, timing and costs for the Kentucky MAGMA plant.
- Developments in European energy supply and the Russia-Ukraine conflict, tax examinations, environmental remediation and the Asia Pacific strategic review.