O-I Glass, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The unaudited results cover O-I Glass’s glass-container business, with comparative figures for Q1 2019 unless otherwise noted.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1.561 billion | $1.638 billion | Down $77 million, nearly 5% |
| Gross profit / margin | $268 million / 17.2% | $298 million / 18.2% | Margin down about 1.0 percentage point |
| Segment operating profit | $169 million | $200 million | Down 16% |
| Earnings before income taxes | $81 million | $111 million | Down $30 million |
| Net earnings attributable to O-I Glass | $50 million | $79 million | Down $29 million |
| Diluted EPS | $0.32 | $0.51 | Down $0.19 |
| Net interest expense | $53 million | $65 million | Down $12 million |
| Cash used in operating activities | $315 million | $595 million | Cash use improved by $280 million |
| Capital expenditures | $120 million | $121 million | Nearly flat |
Cash and cash equivalents were $891 million at March 31, 2020, versus $551 million at year-end 2019 and $326 million a year earlier. Total current assets were $2.962 billion and current liabilities were $1.824 billion. Long-term debt was $6.115 billion; including $283 million of short-term loans and current maturities, reported debt was approximately $6.398 billion. The company had $673 million of unused credit under its secured facility and reported covenant compliance at quarter-end.
Financing activities provided $849 million, including higher net borrowings. In March, the company drew approximately $600 million on its revolving facility to bolster cash. Cash used in operations included a $461 million working-capital outflow. Receivables factoring was $429 million at quarter-end; reducing factoring during the quarter increased working-capital use.
Material changes and drivers
- Sales declined primarily from $75 million of unfavorable foreign-exchange effects and lower volume, partly offset by $19 million of higher prices and the Nueva Fanal acquisition. Total glass-container shipments fell about 0.8%; excluding Nueva Fanal, they fell about 3%.
- Reportable-segment operating profit declined $31 million, reflecting foreign exchange, lower volumes and higher costs. The prior-year period included energy credits and incentives that did not recur. Higher selling prices and turnaround initiatives partly offset the headwinds.
- Regional segment operating profit was $103 million in the Americas (down $10 million), $61 million in Europe (down $18 million), and $5 million in Asia Pacific (down $3 million).
- Lower interest expense, primarily from prior-year refinancing, partly cushioned the operating decline. The effective tax rate rose to 32.1% from 24.3%, with the filing citing the Paddock deconsolidation charge, earnings mix and regulatory changes.
- Foreign-currency translation contributed a $573 million loss to other comprehensive income; total comprehensive loss attributable to the company was $477 million, versus $136 million of comprehensive income in Q1 2019.
Outlook, risks and unusual items
- COVID-19: Management said the pandemic would negatively affect Q2 2020 results and likely beyond. Shipments and production weakened late in Q1; month-to-date shipments through late April were down in the mid-to-high teens year over year, including temporary stoppages in Mexico and Andean countries. Management cautioned that disruption and inventory adjustments made these figures poor indicators of underlying demand.
- Liquidity and cost actions: Management intended to maintain total committed liquidity of at least $1.25 billion at each 2020 quarter-end. It forecast 2020 capital expenditures of approximately $300 million or lower, expanded SG&A reductions, temporary salary reductions or deferrals, and suspension of dividends and pause of share repurchases. The company anticipated these measures would continue through 2020. Q1 dividends paid were $8 million.
- Paddock / asbestos: Paddock, a subsidiary holding legacy asbestos liabilities, filed for Chapter 11 on January 6, 2020 and was deconsolidated. O-I Glass and O-I Group were not debtors in that filing. O-I Glass recorded a $471 million liability under a support agreement and a $14 million deconsolidation charge. The automatic stay deferred asbestos-related payments, but the eventual funding required and outcome of the bankruptcy cannot be estimated with certainty; the filing identifies risks including claims seeking to extend exposure beyond Paddock.
- Debt: The secured facility provides for up to $3.0 billion and matures in June 2024. Its maximum leverage covenant was 5.0x at quarter-end, with tighter limits scheduled from 2021. The company said it was compliant and expected to remain compliant; pandemic effects could nevertheless pressure cash flows and covenant capacity.
- Other uncertainties: Management warned that COVID-19 could cause long-lived asset or goodwill impairment. It also cited foreign exchange, input costs, customer demand, refinancing, tax assessments and the uncertain pace of divestitures as risks. The Australia and New Zealand strategic review was paused; tactical divestitures were progressing more slowly than anticipated.
- The filing did not provide full-year earnings or sales guidance. It did provide the capital-expenditure and liquidity targets above.
Key facts for investors to verify
- Whether subsequent filings show COVID-19’s actual effects on volumes, margins, cash generation and the company’s $1.25 billion quarter-end liquidity objective.
- How the Paddock Chapter 11 case develops, including the final asbestos trust funding requirement and any claims asserted against O-I Glass or O-I Group.
- Debt balances, revolver availability and covenant headroom as operating conditions change.
- Whether the temporary dividend suspension, share-repurchase pause, salary actions and capital-spending plans continued or changed.
- Whether the decline in segment profit and the large foreign-currency translation loss persisted in later periods.