O-I Glass, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Unaudited results; dollars in millions except per-share amounts. O-I manufactures glass containers. It sold its Australia and New Zealand (ANZ) businesses on July 31, 2020, changing its Asia Pacific segment comparability.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,616 | $1,670 | $4,595 | $5,063 |
| Gross profit / gross margin | $277 / 17.1% | $299 / 17.9% | $708 / 15.4% | $932 / 18.4% |
| Segment operating profit | $204 | $206 | $478 | $653 |
| Net earnings (loss) attributable to O-I | $328 | $(575) | $278 | $(430) |
| Diluted earnings (loss) per share | $2.06 | $(3.69) | $1.76 | $(2.78) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $128 | $(247) |
- Q3 income included a $280 million gain on the ANZ sale; management said unusual items increased earnings attributable to O-I by $263 million. The prior-year quarter included a $595 million non-cash goodwill impairment; unusual items reduced earnings by $659 million.
- Cash and equivalents were $606 million at September 30, 2020, versus $551 million at December 31, 2019. Current assets were $2,384 million and current liabilities $1,697 million.
- Balance-sheet short-term loans and current debt were $212 million; long-term debt was $5,163 million. Separately, the debt note reports $5,296 million in total long-term debt including amounts due within one year. The filing reports $1,295 million of unused credit under the secured facility.
- Nine-month operating cash flow was $128 million, versus cash use of $246 million from continuing operations in 2019. Working capital used $402 million, compared with $661 million in 2019. The company attributed improved operating cash flow partly to the stay of asbestos-related payments after Paddock’s Chapter 11 filing.
Material changes versus comparable periods
- Q3 sales fell 3%; shipments were down about 3% overall, primarily reflecting the ANZ sale. Excluding ANZ, shipments rose 1.7%. Higher prices partly offset the sale and unfavorable currency effects.
- Q3 segment operating profit declined $2 million. Lower net prices and higher costs were partly offset by volume and currency benefits. Sales and earnings rebounded strongly from Q2, and plants had returned to normal operating levels by quarter-end.
- For the first nine months, sales declined 9% and reportable-segment operating profit fell 27%. Management cited COVID-related volume declines, higher operating costs and unfavorable currency, as well as the ANZ divestiture.
- Q3 pretax earnings improved by $912 million year over year, mainly because of the ANZ gain and the absence of 2019’s goodwill impairment—not solely because of underlying operating improvement.
- Net interest expense was $61 million in Q3, down from $83 million; nine-month expense was $212 million versus $215 million. 2020 included $44 million of debt-repurchase premiums, fees and deferred-finance-cost write-offs over nine months.
Outlook, risks and unusual items
- Based on trends through late October, management expected full-year 2020 sales volume to decline 3%–5% versus 2019, normalized for the ANZ sale; Q4 volume was expected to be approximately flat to slightly higher year over year. These are volume outlooks, not earnings guidance.
- Management targeted at least $1.25 billion of liquidity at each 2020 quarter-end and net debt at or below 2019 levels by year-end. It planned to limit capital spending to maintenance and MAGMA investments; full-year capital expenditures were estimated at approximately $300 million or less.
- COVID-19 had negatively affected Q1–Q3 and was expected to continue affecting Q4 and potentially later periods. Risks include demand volatility, operating or supply-chain disruption, customer and supplier financial stress, input-cost volatility and possible asset impairments. In sensitivity analysis, a 0.5 percentage-point higher discount rate or lower perpetuity growth rate would have indicated approximately $70 million or $40 million, respectively, of North American goodwill impairment.
- At September 30, 2020, the company said it complied with debt covenants. The maximum net leverage ratio was 5.0x, scheduled to tighten to 4.75x in Q2 2021 and 4.50x in Q4 2021 and thereafter.
- Paddock, the entity holding legacy asbestos liabilities, filed for Chapter 11 in January 2020 and was deconsolidated. O-I Glass recognized a $471 million support-agreement liability; the eventual funding needed to resolve claims through a potential trust cannot be estimated with certainty. The automatic stay deferred asbestos claim payments while proceedings continue.
- The company suspended its quarterly dividend and paused share repurchases in response to the pandemic, anticipating these measures would continue through 2020. It was also conducting a strategic portfolio and operating-structure review that could lead to further transactions or charges.
- The company reported no Q3 goodwill impairment trigger, but North American goodwill had only an approximately 2% valuation cushion in the Q2 2020 test. Future impairment remains possible.
Important facts for investors to verify
- How much of reported earnings reflects the ANZ sale gain and other non-recurring items, versus continuing operating performance.
- Actual sales volumes, margins, cash generation and capital expenditures relative to management’s late-October outlook and liquidity targets.
- Progress and potential funding obligations in Paddock’s Chapter 11 case, including the support agreement and exposure to claims beyond Paddock.
- Debt levels, refinancing costs and covenant headroom as leverage limits tighten, including reconciliation of debt-note totals to balance-sheet current debt.
- North American goodwill valuation assumptions and whether subsequent demand, cash-flow or discount-rate changes could trigger impairment.