O-I Glass, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The unaudited filing covers O-I Glass’s glass-container business, reported in the Americas and Europe segments.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1.743 billion | $1.693 billion | $5.464 billion | $5.163 billion |
| Gross profit | $364 million | $325 million | $1.265 billion | $954 million |
| Earnings attributable to O-I Glass | $51 million | $231 million | $367 million | $571 million |
| Diluted EPS | $0.32 | $1.45 | $2.31 | $3.59 |
| Segment operating profit | $301 million | $266 million | $1.025 billion | $753 million |
Q3 gross margin was approximately 20.9%, up from 19.2%; reported net margin was approximately 2.9%, down from 13.6%. For the nine months, gross margin was approximately 23.2%, up from 18.5%. Segment operating profit is a management measure, not a U.S. GAAP measure.
Q3 sales rose 3%, while glass-container shipments fell approximately 15%. Higher prices added $200 million to reportable-segment sales and favorable currency added $118 million, partly offset by a $271 million impact from lower volume and mix. Segment operating profit increased $35 million, reflecting pricing, currency, operating performance and margin initiatives, partly offset by lower shipments and higher operating costs.
For the first nine months, sales increased 6%; shipments declined approximately 11%. Price added $742 million and currency added $145 million to reportable-segment sales, while lower volume and mix reduced them by $559 million. Segment operating profit increased 36%, to $1.025 billion. Europe’s nine-month segment profit rose to $606 million from $365 million; Americas segment profit was $419 million versus $388 million.
Cash flow, balance sheet and debt
- Operating cash flow for the first nine months was $437 million, versus $224 million used in the prior-year period. The prior year included a $618 million Paddock Trust funding payment; 2023 cash flow was pressured by a $416 million working-capital use, mainly higher inventories.
- Capital expenditures were $465 million, versus $346 million. Operating cash flow less capital expenditures was approximately negative $28 million.
- Cash was $792 million at September 30, 2023, compared with $773 million at December 31, 2022. Current assets were $2.899 billion and current liabilities $2.070 billion.
- Debt was approximately $4.9 billion based on current and long-term balance-sheet debt classifications; cash-adjusted debt was approximately $4.1 billion. Long-term debt was $4.754 billion. The company reported $1.24 billion of unused credit under its credit agreement, and a 6.84% weighted-average rate on credit-agreement borrowings.
- Net interest expense rose to $78 million in Q3 from $63 million and to $263 million for nine months from $175 million. The company was in compliance with its credit agreement covenants at quarter-end; the secured leverage covenant limit is 2.50x.
Material changes and unusual items
- Reported earnings declined substantially despite improved segment profit. Q3 earnings before tax were $82 million versus $278 million; for nine months they were $506 million versus $776 million. Higher interest expense, restructuring charges and the absence of prior-year sale-leaseback gains were significant factors.
- Q3 2023 included $81 million of restructuring, asset-impairment and other charges; the comparable 2022 quarter included $10 million. The 2023 actions included closure of the Waco, Texas plant. The company expects most remaining cash expenditures to be paid over several years.
- Prior-year results included sale-leaseback gains of $153 million in Q3 and $334 million for the first nine months, plus a $55 million gain on the 2022 sale of the Cristar tableware business. Management’s listed unusual items reduced 2023 nine-month earnings by $105 million and increased 2022 nine-month earnings by $265 million.
- In May 2023, the company issued €600 million of 6.25% notes due 2028 and $690 million of 7.25% notes due 2031, using proceeds to repurchase or redeem older notes. Related repurchase and financing charges were approximately $39 million.
- Accounts receivable factoring totaled $536 million at quarter-end; related program expense was $17 million for the first nine months. Outstanding supplier-finance program obligations were approximately $119 million.
Outlook, risks and contingencies
- For Q4 2023, management expected demand to be softer than a year earlier and planned temporary curtailments of approximately 20% of global production to align inventory with demand. Curtailments were expected to raise costs through unabsorbed fixed costs.
- Full-year 2023 operating cash flow guidance was approximately $800–$850 million and capital expenditures approximately $700 million. Management expected benefits from pricing, operating performance and margin initiatives to be partly offset by lower volume, curtailments and higher interest expense.
- For 2024, management anticipated low-to-mid-single-digit sales-volume growth, likely softer in the first half and stronger in the second. Initial capital spending guidance was $550–$575 million; management expected moderately higher interest expense and continued temporary curtailments until volumes improve. Price realization on annual-price-agreement business remains dependent on market conditions.
- Management said the first MAGMA greenfield plant in Kentucky remained on track to start in mid-2024. A strategic review of remaining Asia Pacific businesses could result in divestitures or other transactions and related charges.
- Key exposures include weak consumption and customer destocking, energy-price and supply disruption related to the Russia-Ukraine conflict, interest rates and refinancing costs, foreign exchange, and potential future restructuring or impairment charges. The company cited approximately $26 million of environmental remediation accruals and noted that adverse tax-assessment outcomes could materially affect results, financial position or cash flows.
- Management stated that it expects operating cash flows and available credit to meet funding needs, while noting that the financial effects of geopolitical developments cannot be reasonably estimated and could be material.
Important facts for investors to verify
- Whether demand, shipments and inventory levels stabilize, and how the planned production curtailments affect costs and cash generation.
- Progress against 2023 operating-cash-flow and capital-spending guidance, particularly given working-capital usage and high inventory.
- Debt-service burden, refinancing requirements, interest rates and covenant headroom after the 2023 debt refinancing.
- Whether restructuring, Waco closure and Asia Pacific strategic-review actions lead to further costs, asset impairments or cash expenditures.
- Execution and timing of the Kentucky MAGMA project, and whether 2024 volume, pricing and capital-spending expectations remain achievable.
- Developments in European energy supply and costs, tax examinations, environmental matters and other disclosed contingencies.