O-I Glass, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. Unless stated otherwise, amounts are in U.S. dollars and millions. The filing reports annual results and selected quarterly data; it is not a standalone Q4 filing.
Business context
O-I Glass is a global glass-container manufacturer, operating 78 plants in 23 countries. Its three reportable segments are Americas, Europe and Asia Pacific. No customer accounted for more than 10% of consolidated sales. The company completed its Corporate Modernization in December 2019, placing O-I Glass above operating subsidiary O-I Group and legacy-liability subsidiary Paddock.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $6,691 | $6,877 |
| Gross profit | $1,208 | $1,283 |
| Gross margin | 18.1% | 18.7% |
| Segment operating profit | $841 | $945 |
| Loss/earnings from continuing operations attributable to O-I Glass | $(397) | $144 |
| Net loss/earnings attributable to O-I Glass | $(400) | $257 |
| Diluted EPS | $(2.58) | $1.59 |
| Cash from continuing operating activities | $408 | $793 |
| Capital expenditures | $426 | $536 |
| Total debt at year-end | $5,559 | $5,341 |
| Cash and cash equivalents at year-end | $551 | $512 |
| Working capital at year-end | $493 | $150 |
Reported sales fell 3%. Currency translation reduced sales by approximately $239; higher prices added $176, while lower organic sales reduced sales by $96. Total glass-container shipments declined approximately 1% including the Nueva Fanal acquisition, and approximately 2% excluding it. Segment operating profit declined 11%; the filing attributes the decrease to operating-cost increases, currency effects and lower volumes, partly offset by pricing.
Segment results: Americas sales were $3,622 and operating profit $495, down from $3,638 and $585; Europe sales were $2,387 and operating profit $317, versus $2,489 and $316; Asia Pacific sales were $634 and operating profit $29, versus $675 and $44. Segment operating profit is a company-defined non-GAAP measure.
Operating cash flow declined by $385, reflecting lower earnings, higher asbestos and restructuring payments, and a $176 working-capital cash use versus a $15 source in 2018. Investing activities used $437, including $426 of capital spending and the $190 Nueva Fanal acquisition; asset-sale proceeds were $197, primarily from the soda-ash investment sale. Financing activities provided $68. The company had $1.5 billion of unused credit under its secured facility at year-end.
Debt was approximately $5.6 billion. The new secured facility provides up to $3.0 billion and matures in June 2024; its year-end weighted-average borrowing rate was 3.41%. The company reported covenant compliance at December 31, 2019. The leverage covenant maximum was 5.0x, stepping down to 4.75x in mid-2021 and 4.50x thereafter. About 26% of debt, including swaps, was variable-rate. The 2019 debt refinancing included issuing €500 million of 2.875% notes due 2025 and redeeming higher-coupon notes.
The company declared dividends of $0.15 per share in 2019 and repurchased $38 of stock. Management anticipated continued quarterly dividends but noted that future payments remain at the board’s discretion. The filing gives no formal earnings or revenue guidance.
Material changes and unusual items
- Net loss from continuing operations included a $595 non-cash goodwill impairment charge for the North American reporting unit. The impairment followed lower projected cash flows and a decline in the share price; remaining goodwill was $1.9 billion, including $446 for North America.
- Other significant items included $114 of restructuring, asset impairment and other charges; $35 of asbestos-related charges; $26 of pension settlement charges; $31 of strategic transaction and Corporate Modernization costs; and a $107 gain on sale of the soda-ash equity investment. Net items management identified as not representative of ongoing operations reduced 2019 earnings attributable to the company by $748, or $4.80 per share.
- Interest expense, net increased to $311 from $261, including $65 of note-repurchase premiums, third-party fees and deferred-financing-fee write-offs. Excluding those items, net interest expense decreased $4 year over year.
- In Q4 2019, sales were $1,628 and gross profit was $276; earnings from continuing operations attributable to the company were $32 and net earnings attributable to the company were $31. Q4 2018 sales were $1,635 and gross profit was $294; continuing operations attributable to the company recorded a $125 loss, while net earnings were $(10), including a $115 discontinued-operations gain.
Outlook, risks and contingencies
- Paddock Chapter 11 and asbestos: Paddock filed for Chapter 11 on January 6, 2020, after the year-end balance-sheet date, seeking a Section 524(g) trust to resolve current and future asbestos claims. O-I Glass and O-I Group were not included in the filing. Paddock was deconsolidated from the company’s financial statements as of the petition date. The company recorded a $471 support-agreement liability and expects an approximately $14 charge in Q1 2020; deconsolidation also implies a $47 investing cash outflow. The ultimate trust funding and any exposure beyond Paddock are uncertain. The company said it did not expect to make asbestos-claim payments in 2020 under the Chapter 11 process.
- At December 31, 2019, asbestos-related liabilities were $486, and 2019 asbestos cash payments were $151. The support agreement requires O-I Glass to fund Paddock for permitted uses, subject to its terms. The bankruptcy stay suspends ongoing claims and defers certain payments, but the eventual resolution and funding requirement cannot be estimated with certainty.
- Management expected operating cash flows and available credit to cover short- and long-term operating, seasonal working-capital and debt-service needs. This outlook is subject to debt service, operating performance, working-capital swings and the Chapter 11 support obligations.
- Key business risks include substantial leverage and covenant limits; asbestos-related litigation and bankruptcy outcomes; North American beer-related shipment declines and further goodwill impairment; currency movements; competition from alternative packaging; energy and raw-material costs; operational disruptions; pension funding; and environmental, tax, labor and cybersecurity exposures.
- The strategic portfolio review remained ongoing and could lead to divestitures or other transactions and further charges. The company was also evaluating its Australia and New Zealand operations. Brexit, economic uncertainty and foreign-exchange volatility could affect sales and costs.
Important facts for investors to verify
- Progress, costs and final funding terms in Paddock’s Chapter 11 case, including the scope of O-I Glass’s support-agreement obligations and any claims asserted beyond Paddock.
- Cash generation, working-capital requirements, debt maturities and covenant headroom against the scheduled reductions in the leverage-ratio limit.
- Whether North American demand and projected cash flows support the remaining goodwill carrying value, and whether further impairment indicators arise.
- Whether operating costs, shipment trends and pricing in each segment improve after 2019’s lower segment operating profit.
- Final purchase-price allocation and working-capital adjustment for the Nueva Fanal acquisition, which remained preliminary at year-end.
The audited financial statements received an unqualified audit opinion. Management and the auditor also reported effective internal control over financial reporting as of December 31, 2019; the assessment excluded the recently acquired Nueva Fanal business.