O-I Glass, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. The unaudited results are compared with the three months ended March 31, 2020. O-I manufactures glass containers; the comparison is affected by the 2020 sale of its Australia and New Zealand businesses (ANZ) and the January 2021 sale of its Argentina plant.
Financial results
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Net sales | $1.500 billion | $1.561 billion |
| Gross profit / gross margin | $244 million / 16.3% | $268 million / 17.2% |
| Segment operating profit, reportable segments | $175 million | $176 million |
| Loss before income taxes | $65 million | Earnings of $81 million |
| Net income (loss) attributable to O-I | $(97) million; $(0.62) per share | $50 million; $0.32 per diluted share |
| Net interest expense | $51 million | $53 million |
| Cash used in operating activities | $56 million | $315 million |
| Capital expenditures | $93 million | $120 million |
Sales declined 4%. Total glass-container shipments were down approximately 8%, mainly because of divestitures; excluding divested businesses, shipments increased slightly. Higher prices added $28 million and favorable currency movements added $35 million to reportable-segment sales, while divestitures reduced them by $127 million. Segment operating profit was nearly flat as cost management, operating performance and margin initiatives largely offset divestitures, COVID-19 effects and severe weather.
Regional sales were $837 million in the Americas, $639 million in Europe and zero in Asia Pacific, versus $831 million, $576 million and $123 million, respectively, in the prior-year quarter. The 2020 Asia Pacific comparison represents ANZ, which was sold in July 2020.
Liquidity, debt and cash flows
- At March 31, 2021, cash and cash equivalents were $742 million, current assets were $2.486 billion and current liabilities were $1.702 billion.
- Balance-sheet short-term loans and current debt were $180 million; long-term debt was $5.168 billion. The secured credit agreement had $1.194 billion of unused availability. Borrowings under that agreement carried a 1.59% weighted-average rate.
- Operating cash use improved year over year, principally because working capital used $229 million, compared with $461 million in Q1 2020. Financing activities provided $288 million, including $290 million of net borrowing changes. Cash ended the quarter at $742 million.
- The company paid no dividend in Q1 2021 and said it had no plans to reinstate the dividend at that time. It expects operating cash flows and available credit to fund anticipated needs, while noting uncertainty related to COVID-19 and other risks.
Material changes, unusual items and risks
- Paddock asbestos matter: The quarter includes a $154 million charge related to O-I’s support agreement for Paddock Enterprises, which is in Chapter 11. The company reported a $625 million support-agreement liability at March 31. On April 26, 2021, after quarter-end, Paddock, asbestos claimants’ representatives and O-I announced an agreement in principle for $610 million of trust funding. It remains subject to definitive documents, a vote by at least 75% of claimants voting, and court approvals. If completed, the plan is intended to resolve current and future claims and protect O-I and specified affiliates through a channeling injunction. Failure or delay could materially affect costs, results, liquidity or financial condition.
- Severe weather: Winter weather in the southern United States and Mexico disrupted energy access and production. O-I estimated an approximately $40 million adverse effect on Americas segment operating profit, including a $20 million accrual for potential energy surcharges. Additional losses could differ materially; the company could not estimate a range.
- COVID-19: The pandemic continued to affect shipments, production and supply chains. Management said future effects remain uncertain and could be material.
- Tax and other contingencies: The company is contesting tax assessments in several jurisdictions; amounts settled above reserves could materially affect results, financial position or cash flows. Other litigation is also pending.
- Debt covenant: O-I reported compliance at March 31, 2021. Its maximum leverage ratio tightens from 5.0x to 4.75x for the June 2021 quarter and 4.50x for the December 2021 quarter and thereafter.
Outlook and management commentary
- Management expected full-year 2021 shipment growth of 3%–4% in tons versus 2020, excluding divestitures, with continued benefits from margin initiatives.
- Operating cash flow was expected to be approximately $615 million or higher, and capital expenditures approximately $375 million. The cash-flow outlook assumes asbestos-related claim payments remain suspended pending confirmation and effectiveness of a Paddock reorganization plan.
- O-I said approximately 75% of its divestiture program was complete, with proceeds used to reduce debt and improve financial flexibility. It also highlighted continued MAGMA technology deployment.
Important facts for investors to verify
- Whether the Paddock agreement in principle becomes a definitive, approved and effective plan, and whether the $625 million recorded liability adequately reflects ultimate funding and related costs.
- Whether the $20 million weather-related accrual is sufficient and how energy costs, downtime and repairs affect subsequent results.
- Progress toward the 3%–4% shipment-growth and $615 million-or-higher operating-cash-flow outlook, including the assumption that asbestos payments remain suspended.
- Debt, leverage-covenant headroom and liquidity as covenant thresholds tighten; also, the duration of the dividend suspension.
- Underlying operating trends apart from divestitures, currency effects, severe weather and the Paddock charge; reported Q1 loss included the $154 million Paddock charge.