The Company's measure of profit for its reportable segments is segment operating
profit, which consists of consolidated earnings (loss) before interest income,
interest expense, and provision (benefit) for income taxes and excludes amounts
related to certain items that management considers not representative of ongoing
operations as well as certain retained corporate costs. The segment data
presented below is prepared in accordance with general accounting principles for
segment reporting. The lines titled "reportable segment totals" in both net
sales and segment operating profit, however, are non-GAAP measures when
presented outside of the financial statement footnotes. Management has included
reportable segment totals below to facilitate the discussion and analysis of
financial condition and results of operations and believes this information
allows the Board of Directors, management, investors and analysts to better
understand the Company's financial performance. The Company's management uses
segment operating profit, in combination with net sales and selected cash flow
information, to evaluate performance and to allocate resources. Segment
operating profit is not, however, intended as an alternative measure of
operating results as determined in accordance with U.S. GAAP and is not
necessarily comparable to similarly titled measures used by other companies.
In March 2020, the World Health Organization categorized COVID-19 as a pandemic,
and it continues to impact the United States and other countries across the
world. To limit the spread of COVID-19, governments have taken various actions,
including the issuance of stay-at-home orders and social distancing guidelines.
As a result, many businesses have adjusted, reduced or suspended operating
activities, either due to requirements under government orders or as a result of
a reduction in demand for many products from direct or ultimate customers.
Fortunately, the manufacture of glass containers has been largely viewed as
essential to the important food and beverage value chain in the countries in
which the Company operates. However, the Company is still impacted by broader
supply chain issues and, in some cases, certain end use categories that it
serves are not deemed essential. While the Company's plants continued to operate
as essential businesses, some plants suspended operations or cut back on shifts
for a portion of 2020 due to government actions to address COVID-19. Additional
suspensions and cutbacks may occur as the impacts from COVID-19 and related
responses continue to develop.
The following discussion describes the Company's consolidated results of
operations for the three and six months ended June 30, 2021. The COVID-19
pandemic impacted the Company's shipment and production levels in 2020 and, to a
lesser extent, the first six months of 2021. The Company is actively monitoring
the continued impact of the pandemic, which could negatively impact its
business, results of operations, cash flows and financial position beyond the
second quarter of 2021.
On July 31, 2020, the Company completed the sale of its Australia and New
Zealand ("ANZ") businesses, which comprised the majority of the Asia Pacific
region (approximately 85% of net sales for the full year 2019), to Visy
Industries Holdings Pty Ltd. After the sale of the ANZ businesses, the
remaining businesses in the Asia Pacific region do not meet the criteria of an
individually reportable segment. For the 2020 results presented below, the
results for the Asia Pacific reportable segment reflect only the results of the
ANZ businesses. The sales and operating results of the other businesses that
historically comprised the Asia Pacific segment, and that have been retained by
the Company, have been reclassified to Other sales and Retained corporate costs
and other, respectively.
Financial information for the three and six months ended June 30, 2021 and 2020
regarding the Company's reportable segments is as follows (dollars in millions):
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Net Sales:
Americas $ 890 $ 724 $ 1,727 $ 1,555
Europe 745 555 1,384 1,132
Asia Pacific 106 229
Reportable segment totals 1,635 1,385 3,111 2,916
Other 25 33 50 63
Net Sales $ 1,660 $ 1,418 $ 3,161 $ 2,979
30
Three months ended Six months ended
June 30, June 30,
2021 2020 2021 2020
Segment operating profit:
Americas $ 124 $ 52 $ 224 $ 155
Europe 108 42 183 103
Asia Pacific 5 17
Reportable segment totals 232 99 407 275
Items excluded from segment operating profit:
Retained corporate costs and other (42) (37) (77) (65)
Brazil indirect tax credit 69 69
Restructuring, asset impairment and other
charges (9) (71) (9) (71)
Charge related to Paddock support agreement
liability (154)
Charge for deconsolidation of Paddock (14)
Pension settlement charges (8) (8)
Strategic transaction costs (4) (4)
Interest expense, net (52) (98) (103) (151)
Earnings (loss) before income taxes 198 (119) 133 (38)
Benefit (provision) for income taxes (75) 18 (100) (8)
Net earnings (loss) 123 (101) 33 (46)
Net earnings attributable to non-controlling
interests (5) (12) (5)
Net earnings (loss) attributable to the Company $ 118 $ (101) $ 21 $ (51)
Note: All amounts excluded from reportable segment totals are discussed in the
following applicable sections.
Executive Overview - Quarters ended June 30, 2021 and 2020
Net sales for the second quarter of 2021 were $242 million higher, or
approximately 17%, than the second quarter of the prior year, primarily due to
stronger shipments than the prior year quarter which was more significantly
impacted by COVID-19. Net sales in the second quarter of 2021 were positively
impacted by the favorable effects of changes in foreign currency exchange rates
and higher prices, but were lower due to the sale of the Company's ANZ
businesses on July 31, 2020 and the sale of the Company's plant in Argentina in
January 2021.
Earnings before income taxes were $198 million in the second quarter of 2021
compared to a loss before income taxes of $119 million in the prior year
quarter. This increase was primarily due to higher segment operating profit, a
gain recorded on a Brazilian indirect tax credit in the second quarter of 2021,
lower restructuring charges and lower interest expense than the prior year
quarter. Segment operating profit for reportable segments for the second quarter
of 2021 was $133 million higher than the second quarter of the prior year. The
increase was largely due to higher sales and production levels, as well as
strong operating performance and the benefit of margin expansion initiatives.
Net interest expense for the second quarter of 2021 decreased by $46 million
compared to the second quarter of 2020, primarily due to lower refinancing fees
and charges and lower debt levels in 2021. Net interest expense in the second
quarter of 2020 included $38 million for note repurchase premiums, third-party
fees and the write-off of deferred finance fees that related to debt that was
repaid prior to its maturity.
For the second quarter of 2021, the Company recorded net earnings attributable
to the Company of $118 million, or $0.73 per share (diluted), compared to a net
loss attributable to the Company of $101 million, or $0.64 per share, in the
second quarter of 2020. As discussed below, earnings (loss) in both periods
included items that management considers not representative of ongoing
operations. These items increased earnings attributable to the Company by $32
million, or $0.19 per share, in the second quarter of 2021 and decreased
earnings attributable to the Company by $102 million, or $0.65 per share, in the
second quarter of 2020.
31
Results of Operations - Second Quarter of 2021 Compared with Second Quarter of
2020
Net Sales
The Company's net sales in the second quarter of 2021 were $1,660 million
compared with $1,418 million for the second quarter of 2020, an increase of $242
million, or approximately 17%. Total glass container shipments, in tons, were up
approximately 10% in the second quarter of 2021 compared to the prior year
quarter, primarily due to stronger shipments than the prior year quarter which
was more significantly impacted by COVID-19. Net sales were lower due to the
sale of the Company's ANZ businesses on July 31, 2020 and the sale of the
Company's plant in Argentina in January 2021, which together decreased net sales
by approximately $111 million in the second quarter of 2021. Excluding the
divested businesses, glass container shipments increased approximately 18% and
benefited net sales by approximately $255 million in the second quarter of 2021
compared to the same period in 2020. Favorable foreign currency exchange rates
increased net sales by $79 million in the second quarter of 2021 compared to the
prior year quarter, driven by the Euro strengthening against the U.S. dollar.
Higher selling prices increased net sales by $27 million in the quarter. Other
net sales were approximately $8 million lower in the second quarter of 2021 than
the same period in the prior year driven by lower machine parts sales to third
parties.
The change in net sales of reportable segments can be summarized as follows
(dollars in millions):
Reportable segment net sales - 2020 $ 1,385
Price $ 27
Sales volume and mix 255
Effects of changing foreign currency rates 79
Divestitures (111)
Total effect on reportable segment net sales 250
Reportable segment net sales - 2021 $ 1,635
Americas: Net sales in the Americas in the second quarter of 2021 were $890
million compared to $724 million for the second quarter of 2020, an increase of
$166 million, or approximately 23%. Total glass container shipments in the
region were up approximately 16% in the second quarter of 2021 compared to the
prior year quarter, primarily due to stronger shipments as the impacts from
COVID-19 have significantly improved, partially offset by the divestiture of a
plant in Argentina in January 2021. Excluding the divestiture, glass container
shipments were up approximately 17% in the second quarter of 2021. Higher
organic shipments increased net sales by approximately $120 million, while the
divestiture in Argentina reduced net sales by approximately $5 million in the
second quarter of 2021 compared to the same period in 2020. The favorable
effects of foreign currency exchange rate changes increased net sales by $28
million in the second quarter of 2021 compared to 2020 as the Brazilian real and
the Mexican peso strengthened compared to the U.S. dollar. Higher selling prices
in the region increased net sales by $23 million in the second quarter of 2021.
Europe: Net sales in Europe in the second quarter of 2021 were $745 million
compared to $555 million for the second quarter of 2020, an increase of $190
million, or approximately 34%. Glass container shipments in the second quarter
of 2021 were up 22% compared to the second quarter of 2020, resulting in $135
million of higher net sales, primarily driven by higher shipments to alcoholic
beverage and non-alcoholic beverage customers as the impacts from COVID-19 have
significantly improved. Favorable foreign currency exchange rates increased the
region's net sales by approximately $51 million in the second quarter of 2021 as
the Euro strengthened in relation to the U.S. dollar. Higher selling prices in
Europe increased net sales by $4 million in the second quarter of 2021.
Asia Pacific: Net sales in Asia Pacific in the second quarter of 2021 were $0
compared to $106 million for the second quarter of 2020, a decrease of $106
million, due to the sale of the ANZ businesses in the third quarter of 2020.
Earnings (Loss) before Income Taxes and Segment Operating Profit
Earnings before income taxes were $198 million in the second quarter of 2021
compared to a loss before income taxes of $119 million in the second quarter of
2020, an increase in earnings before income taxes of $317 million. This
32
increase was largely due to higher segment operating profit, a gain recorded on
a Brazilian indirect tax credit in the second quarter of 2021, lower
restructuring charges and lower interest expense than the prior year quarter.
Segment operating profit of the reportable segments includes an allocation of
some corporate expenses based on a percentage of sales and direct billings based
on the costs of specific services provided. Unallocated corporate expenses and
certain other expenses not directly related to the reportable segments'
operations are included in Retained corporate costs and other. For further
information, see Segment Information included in Note 1 to the Condensed
Consolidated Financial Statements.
Segment operating profit of reportable segments in the second quarter of 2021
was $232 million, compared to $99 million for the second quarter of 2020, an
increase of $133 million, or approximately 134%. This increase was largely due
to higher sales and production levels, as well as strong operating performance
and the benefit of margin expansion initiatives.
The change in segment operating profit of reportable segments can be summarized
as follows (dollars in millions):
Reportable segment operating profit - 2020 $ 99
Net price (net of cost inflation) $ (6)
Sales volume and mix 62
Operating costs 78
Effects of changing foreign currency rates 2
Divestitures (3)
Total net effect on reportable segment operating profit 133
Reportable segment operating profit - 2021 $ 232
Americas: Segment operating profit in the Americas in the second quarter of 2021
was $124 million compared to $52 million in the second quarter of 2020, an
increase of $72 million, or 138%. The impact of higher organic sales discussed
above increased segment operating profit by $31 million. Lower net selling
prices (net of cost inflation) resulted in a net $2 million decrease to segment
operating profit in the current year quarter.
Operating costs in the Americas in the second quarter of 2021 were $43 million
lower than the same period in the prior year, which improved segment operating
profit. Operating costs benefited from higher production levels than the prior
year quarter as the impacts from COVID-19 have significantly improved, as well
as benefits from the Company's margin expansion cost initiatives. The effects of
foreign currency exchange rates decreased segment operating profit by $2 million
in the current year quarter. The divestiture of the plant in Argentina improved
segment operating profit by approximately $2 million in the second quarter.
Also, the region's closure of a plant in the second quarter of 2020 did not have
a material impact on its profitability this quarter, and significant savings are
not expected in future quarters, but the closure is expected to avoid
anticipated losses from this plant in the future. The outcome of this plant
closure is in-line with management's expectations.
Europe: Segment operating profit in Europe in the second quarter of 2021 was
$108 million compared to $42 million in the second quarter of 2020, an increase
of $66 million, or 157%. The impact of higher shipments discussed above
increased segment operating profit by $31 million. The effects of foreign
currency exchange rates increased segment operating profit by $4 million in the
current year quarter. Operating costs in the second quarter of 2021
were approximately $35 million favorable to the same period in the prior
year reflecting higher production levels as the impacts from COVID-19 have
significantly improved, as well as benefits from the Company's margin expansion
cost initiatives. Lower net selling prices decreased segment operating profit by
$4 million in the current quarter compared to the prior year quarter.
Asia Pacific: Segment operating profit in Asia Pacific in the second quarter of
2021 was $0 compared to $5 million in the second quarter of 2020, a decrease of
$5 million, due to the sale of the ANZ businesses in the third quarter of 2020.
Interest Expense, Net
33
Net interest expense for the second quarter of 2021 was $52 million compared to
$98 million for the second quarter of 2020. This decrease was primarily due to
lower refinancing fees and charges and lower debt levels in 2021. Net interest
expense in the second quarter of 2020 included $38 million for note repurchase
premiums, third-party fees and the write-off of deferred finance fees that
related to debt that was repaid prior to its maturity.
Benefit (Provision) for Income Taxes
The Company's effective tax rate from operations for the three months ended June
30, 2021 was 37.9% compared to 15.1% for the three months ended June 30, 2020.
The effective tax rate for the second quarter of 2021 was higher than the second
quarter of 2020 primarily due to certain charges recorded in the second quarter
of 2020 whereby no tax benefit was recorded and the geographic mix of earnings.
Net Earnings (Loss) Attributable to the Company
For the second quarter of 2021, the Company recorded net earnings attributable
to the Company of $118 million, or $0.73 per share (diluted), compared to a net
loss attributable to the Company of $101 million, or $0.64 per share, in the
second quarter of 2020. Earnings in 2021 and 2020 included items that management
considered not representative of ongoing operations as set forth in the
following table (dollars in millions):
Net Earnings
Increase
(Decrease)
Description 2021 2020
Restructuring, asset impairment and other charges $ (9) $ (71)
Pension settlement charges (8)
Strategic transaction costs (4)
Charges for note repurchase premiums and write-off of finance fees (38)
Brazil indirect tax credit 69
Net (provision) benefit for income tax on items above (28) 19
Total $ 32 $ (102)Executive Overview - Six months ended June 30, 2021 and 2020
Net sales for the first six months of 2021 were $182 million, or approximately
6%, higher than the same period in the prior year primarily due to stronger
shipments than the prior year period, which was more significantly impacted by
COVID-19. Net sales were lower due to the sale of the Company's ANZ businesses
in 2020, the sale of the Company's plant in Argentina in January 2021 and the
impact of severe weather in the southern United States in February 2021. Net
sales were positively impacted by the favorable effects of changes in foreign
currency exchange rates and higher prices.
Earnings before income taxes were $171 million higher in the first six months of
2021 compared to the same period in the prior year. This increase was primarily
due to higher segment operating profit, a gain recorded on a Brazilian indirect
tax credit in the second quarter of 2021, lower restructuring charges and lower
interest expense than the prior year period, partially offset by a higher
Paddock-related charge in the current year period. Segment operating profit for
reportable segments for the first six months of 2021 was $132 million higher
than the same period in the prior year, primarily due to higher sales and
production levels, as well as strong operating performance and the benefit of
margin expansion initiatives.
On April 26, 2021, the Company announced that its subsidiary, Paddock, had
reached an agreement in principle to accept the terms of a mediator's proposal
regarding a consensual plan of reorganization in Paddock's Chapter 11 bankruptcy
case. The agreement in principle provides for total consideration of $610
million to fund a trust established
34
under section 524(g) of the Bankruptcy Code on the effective date of a plan of
reorganization, which is subject to definitive documentation and satisfaction of
certain conditions. The Company recorded a charge of $154 million related to its
potential liability under the Paddock support agreement during the first fiscal
quarter of 2021 primarily related to an increase to Paddock's asbestos reserve
estimate in consideration for the channeling injunction to be included in the
Plan protecting O-I Glass and its affiliates from Asbestos Claims.
Net interest expense for the first half of 2021 decreased $48 million compared
to the same period in 2020, primarily due to lower refinancing fees and charges
and lower debt levels in 2021.
For the first six months of 2021, the Company recorded net earnings attributable
to the Company of $21 million, or $0.13 per share (diluted), compared to a net
loss attributable to the Company of $51 million, or $0.32 per share, in the
first six months of 2020. As discussed below, earnings (loss) in both periods
included items that management considers not representative of ongoing
operations. These items decreased earnings attributable to the Company by $122
million, or $0.76 per share, in the first six months of 2021 and decreased
earnings attributable to the Company by $116 million, or $0.74 per share, in the
first six months of 2020.
Results of Operations - First six months of 2021 compared with first six months
of 2020
Net Sales
The Company's net sales in the first six months of 2021 were $3,161 million
compared with $2,979 million for the first six months of 2020, an increase of
$182 million, or approximately 6%. Total glass container shipments, in tons,
were up approximately 1% in the first half of 2021 compared to the prior year
period, despite the impact of the sale of the Company's ANZ businesses on July
31, 2020 and the sale of the Company's plant in Argentina in January 2021, which
together decreased sales by approximately $238 million in the current period.
Excluding the divested businesses, glass container shipments increased
approximately 9%, or approximately $265 million, in the first six months of 2021
compared to the same period in 2020 which were more significantly impacted by
COVID-19. Favorable foreign currency exchange rates increased net sales by $113
million in the first six months of 2021 compared to the prior year period,
driven by the strengthening of the Euro, Mexican peso and the Colombian peso
compared to the U.S. dollar. Higher selling prices increased net sales by $55
million in the first half of 2021. Other sales were approximately $13 million
lower in the first half of 2021 than the same period in the prior year driven by
lower machine parts sales to third parties.
The change in net sales of reportable segments can be summarized as follows
(dollars in millions):
Reportable segment net sales - 2020 $ 2,916
Price $ 55
Sales volume and mix 265
Effects of changing foreign currency rates 113
Divestitures
(238)
Total effect on reportable segment net sales 195
Reportable segment net sales - 2021 $ 3,111Americas: Net sales in the Americas in the first six months of 2021 were $1,727
million compared to $1,555 million for the first six months of 2020, an increase
of $172 million, or approximately 11%. Total glass container shipments in the
region were up approximately 6% in the first half of 2021 compared to the prior
year period, primarily due to stronger shipments compared to the same period in
the prior year, which was more significantly impacted from COVID-19. The impact
of severe weather that affected the southern United States in February 2021 and
the divestiture of a plant in Argentina in January 2021 reduced sales in the
first six months of 2021. Excluding the divestiture, glass container shipments
were up approximately 7% in the first half of 2021. Higher organic shipments
increased net sales by approximately $117 million in the first half of 2021,
partially offset by the divestiture in Argentina which reduced net sales by
approximately $9 million. The favorable effects of foreign currency exchange
rate changes increased net sales by $15 million in the first six months of 2021
compared to 2020 as the Mexican peso and the Colombian peso strengthened in
relation to the U.S. dollar. Higher selling prices in the region increased net
sales by $49 million in the first half of 2021.
35
Europe: Net sales in Europe in the first six months of 2021 were $1,384 million
compared to $1,132 million for the first half of 2020, an increase of $252
million, or approximately 22%. Glass container shipments in the first six months
of 2021 were up 12% compared to the first half of 2020, resulting in $148
million of higher net sales. Favorable foreign currency exchange rates increased
the region's net sales by approximately $98 million in the first half of 2021 as
the Euro strengthened in relation to the U.S. dollar. Higher selling prices in
Europe increased net sales by $6 million in the first six months of 2021.
Asia Pacific: Net sales in Asia Pacific in the first six months of 2021 were $0
compared to $229 million for the first six months of 2020, a decrease of $229
million, due to the sale of the ANZ businesses in the third quarter of 2020.
Earnings (Loss) before Income Taxes and Segment Operating Profit
Earnings before income taxes were $133 million in the first half of 2021
compared to a loss before income taxes of $38 million in the first half of 2020,
an increase in earnings before income taxes of $171 million. This increase was
primarily due to higher segment operating profit, a gain recorded on a Brazilian
indirect tax credit in the second quarter of 2021, lower restructuring charges
and lower interest expense than the same period in the prior year, partially
offset by a higher Paddock-related charge in the current year period.
Segment operating profit of the reportable segments includes an allocation of
some corporate expenses based on a percentage of sales and direct billings based
on the costs of specific services provided. Unallocated corporate expenses and
certain other expenses not directly related to the reportable segments'
operations are included in Retained corporate costs and other. For further
information, see Segment Information included in Note 1 to the Condensed
Consolidated Financial Statements.
Segment operating profit of reportable segments in the first half of 2021 was
$407 million, compared to $275 million for the first half of 2020, an increase
of $132 million, or approximately 48%. This increase was primarily due to higher
sales and production levels in the first six months of 2021.
The change in segment operating profit of reportable segments can be summarized
as follows (dollars in millions):
Reportable segment operating profit - 2020 $ 275
Net price (net of cost inflation) $ (26)
Sales volume and mix 64
Operating costs 97
Effects of changing foreign currency rates 12
Divestitures (15)
Total net effect on reportable segment operating profit 132
Reportable segment operating profit - 2021 $ 407
Americas: Segment operating profit in the Americas in the first six months of
2021 was $224 million compared to $155 million in the same period of 2020, an
increase of $69 million, or 45%. The impact of higher organic sales discussed
above increased segment operating profit by $30 million. Cost inflation exceeded
selling prices resulting in a net $19 million decrease to segment operating
profit in the current year period.
Operating costs in the first half of 2021 were $54 million lower than the same
period in the prior year, which improved segment operating profit. Included
within these operating costs were benefits from the region's margin expansion
initiatives and higher production volumes, which more than offset the
significant impact of severe weather that swept across the southern United
States in February of 2021 and resulted in production downtime, unplanned
repairs and higher outbound freight costs. The effects of foreign currency
exchange rates increased segment operating profit by $2 million in the current
year period.
Included in the above discussion of the factors impacting the region's results,
the Company estimates that segment operating profit in the first six months in
the Americas was negatively impacted by approximately $43 million from the
severe weather that occurred in February of 2021, which includes surcharges for
usage or excess usage of electricity and natural gas during the period of severe
weather (see Note 10 to the Condensed Consolidated Financial Statements), as
36
well as the estimated impacts of higher energy costs, lost production downtime,
lost sales, and the cost of incremental repairs. The divestiture of the plant
in Argentina improved segment operating profit by approximately $2 million in
the first six months of 2021. Also, the region's closure of a plant in the
second quarter of 2020 did not have a material impact on its profitability in
2021, and significant savings are not expected in future quarters, but the
closure is expected to avoid anticipated losses from this plant in the future.
The outcome of this plant closure is in-line with management's expectations.
Europe: Segment operating profit in Europe in the first half of 2021 was $183
million compared to $103 million in the same period of 2020, an increase of $80
million, or 78%. The impact of higher shipments discussed above increased
segment operating profit by $34 million. The effects of foreign currency
exchange rates increased segment operating profit by $10 million in the current
year period. Higher production volumes and benefits from margin expansion
initiatives and cost control measures reduced the region's operating costs and
increased segment operating profit by approximately $43 million in the first
half of 2021 compared to the same period in the prior year. Lower net selling
prices (net of cost inflation) decreased segment operating profit by $7 million
in the current period compared to the prior year period.
Asia Pacific: Segment operating profit in Asia Pacific in the first six month of
2021 was $0 compared to $17 million in the first half of 2020, a decrease of $17
million, due to the sale of the ANZ businesses in the third quarter of 2020.
Interest Expense, Net
Net interest expense for the first six months of 2021 was $103 million compared
to $151 million for the same period of 2020. This decrease was primarily due to
lower refinancing fees and charges and lower debt levels in 2021. Net interest
expense in the first six months of 2020 included $38 million for note repurchase
premiums, third-party fees and the write-off of deferred finance fees that
related to debt that was repaid prior to its maturity.
Provision for Income Taxes
The Company's effective tax rate from operations for the six months ended June
30, 2021 was 75.2% compared to (21.1%) for the six months ended June 30, 2020.
The effective tax rate for the first six months of 2021 differed from the first
six months of 2020 due to the charge related to the Paddock support agreement
liability recorded without a tax benefit in the first quarter of 2021, as well
as to a change in geographic earnings.
Net Earnings (Loss) Attributable to the Company
For the first six months of 2021, the Company recorded net earnings attributable
to the Company of $21 million, or $0.13 per share (diluted), compared to a net
loss attributable to the Company of $51 million, or $0.32 per share, in the
first six months of 2020. Earnings in the first six months of 2021 and 2020
included items that management considered not representative of ongoing
operations as set forth in the following table (dollars in millions):
Net Earnings
Increase
(Decrease)
Description 2021 2020
Restructuring, asset impairment and other charges $ (9) $ (71)
Charge related to Paddock support agreement liability (154)
Charge for deconsolidation of Paddock (14)
Pension settlement charges (8)
Strategic transaction costs (4)
Charges for note repurchase premiums and write-off of finance fees (38)
Brazil indirect tax credit 69
Net (provision) benefit for income tax on items above (28) 19
Total $ (122) $ (116)
37
Forward Looking Operational and Financial Impacts from the COVID-19 Pandemic
The Company expects full year 2021 sales shipment growth to be 4 to 5% (in
tons) compared to 2020 (excluding the impact of divestitures), representing a
partial volume recovery to 2019 levels. Likewise, the Company expects continued
? benefits from its initiatives to expand margins. These incremental savings
should more than offset the headwind from the temporary cost reduction efforts
that were put in place in 2020 to mitigate the impact of the COVID-19 pandemic
and that will not repeat in 2021.
The Company will continue to focus on long-term value creation, including
advancing the MAGMA deployment. Also, the Company has completed more than 80%
of its divestiture program with proceeds used to reduce debt and improve
financial flexibility. Finally, the Company will continue to advance the
? Paddock Chapter 11 process to document and finalize the terms of a plan of
reorganization pursuant to section 524(g) of the Bankruptcy Code, consistent
with the agreement in principle announced on April 26, 2021, which is expected
to achieve a final, certain and equitable resolution of its legacy
asbestos-related claims liabilities.
Cash provided by operating activities is expected to approximate $660 million
or higher in 2021. This outlook assumes the continued suspension of all
? asbestos-related claims payments, pending confirmation and effectiveness of a
plan of reorganization for Paddock. In addition, capital expenditures in 2021
are expected to be approximately $400 million.
The Company will continue to actively monitor the impact of the COVID-19
pandemic. The extent to which the Company's operations will be impacted by the
? pandemic will depend largely on future developments, which are highly uncertain
and cannot be accurately predicted, including new information that may emerge
concerning the severity of the outbreak and actions by government authorities
to contain the outbreak or treat its impact, among other things.
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
After the sale of the ANZ businesses, the remaining businesses in the Asia
Pacific region do not meet the criteria of an individually reportable segment.
Starting on August 1, 2020 and for the historical periods, the operating results
of the other businesses that were historically included in the Asia Pacific
segment and that have been retained by the Company have been reclassified to
Retained corporate costs and other. The results of these entities were not
significant for the six-month periods ended June 30, 2021 or June 30, 2020.
Retained corporate costs and other for the second quarter of 2021 were $42
million compared to $37 million in the second quarter of 2020 and were $77
million for the first six months of 2021 compared to $65 million for the first
six months of 2020. These costs were higher in the 2021 periods primarily due to
additional research and development expenses related to MAGMA, higher marketing
expense for the Company's glass advocacy campaign and higher management
incentive expense.
Gain on Brazil Indirect Tax Credit
In the second quarter of 2021, the Company recorded a $69 million gain based on
a favorable court ruling in Brazil that will allow the Company to recover
indirect taxes paid in previous years. This gain was recorded to Other income
(expense), net on the Condensed Consolidated Results of Operations.
Restructuring, Asset Impairment and Other Charges
For the three and six months ended June 30, 2021, the Company recorded charges
totaling $9 million for restructuring, asset impairment and other charges
consisting of employee costs, such as severance, benefit-related costs and other
exit costs at a number of the Company's businesses in the Americas and Europe.
The Company expects that
38
the majority of the remaining cash expenditures related to the accrued employee
and other exit costs will be paid out over the next several years.
For the three and six months ended June 30, 2020, the Company recorded charges
totaling $71 million for restructuring, asset impairment and other charges.
These charges reflect $23 million of employee costs, such as
severance, benefit-related costs and other exit costs primarily related to a
reduction in force program for certain salaried employees and a plant closure in
the Americas. These charges also reflect approximately $48 million of other
charges, primarily relating to asset impairment charges related to these
restructuring actions. The Company expects that the majority of the remaining
cash expenditures related to the accrued employee and other exit costs will be
paid out over the next several years.
Charge for Paddock Support Agreement Liability
On April 26, 2021, the Company announced that its subsidiary, Paddock, had
reached an agreement in principle to accept the terms of a mediator's proposal
regarding a consensual plan of reorganization in Paddock's Chapter 11 bankruptcy
case. The agreement in principle provides for total consideration of $610
million to fund a trust under section 524(g) of the Bankruptcy Code on the
effective date of a plan of reorganization, which is subject to definitive
documentation and satisfaction of certain conditions. The Company has recorded a
charge of $154 million related to its potential liability under the Paddock
support agreement during the first fiscal quarter of 2021, primarily related to
an increase to Paddock's asbestos reserve estimate in consideration for the
channeling injunction to be included in the Plan protecting O-I Glass and its
affiliates from Asbestos Claims.
See Note 10 to the Condensed Consolidated Financial Statements for further
information.
Charge for Deconsolidation of Paddock
Following its Chapter 11 filing in January 2020, the activities of Paddock are
now subject to review and oversight by the bankruptcy court. As a result, the
Company no longer has exclusive control over Paddock's activities during the
bankruptcy proceedings. Therefore, Paddock was deconsolidated as of the Petition
Date, and its assets and liabilities, which primarily included $47 million of
cash, the legacy asbestos-related liabilities, as well as certain other assets
and liabilities, were derecognized from the Company's consolidated financial
statements. Simultaneously, the Company recognized a liability related to the
support agreement of $471 million, based on the accrual required under
applicable accounting standards. Taken together, these transactions resulted in
a loss of approximately $14 million, which was recorded as a charge in the first
quarter of 2020.
See Note 10 to the Condensed Consolidated Financial Statements for further
information.
Pension Settlement Charges
For the three and six months ended June 30, 2020, the Company settled a portion
of its pension obligations in Canada and recorded approximately $8 million of
pension settlement charges.
Strategic Transaction Costs
For the three and six months ended June 30, 2020, the Company recorded charges
totaling $4 million for strategic transaction costs, which relate to activities
that are aimed at exploring options to maximize investor value, focused on
aligning the Company's business with demand trends, improving the Company's
operating efficiency, cost structure and working capital management.
Discontinued Operations
On December 6, 2018, an ad hoc committee for the World Bank's International
Centre for Settlement of Investment Disputes ("ICSID") rejected the request by
the Bolivarian Republic of Venezuela ("Venezuela") to annul the award issued by
an ICSID tribunal in favor of OI European Group B.V. ("OIEG") related to the
2010 expropriation of OIEG's
39
majority interest in two plants in Venezuela (the "Award"). The annulment
proceeding with respect to the Award is now concluded.
On July 31, 2017, OIEG sold its right, title and interest in amounts due under
the Award to an Ireland-domiciled investment fund. Under the terms of the sale,
OIEG received a payment, in cash, at closing equal to $115 million (the "Cash
Payment"). OIEG may also receive additional payments in the future ("Deferred
Amounts") calculated based on the total compensation that is received from
Venezuela as a result of collection efforts or as settlement of the Award with
Venezuela. OIEG's right to receive any Deferred Amounts is subject to the
limitations described below.
OIEG's interest in any amounts received in the future from Venezuela in respect
of the Award is limited to a percentage of such recovery after taking into
account reimbursement of the Cash Payment to the purchaser and reimbursement of
legal fees and expenses incurred by the Company and the purchaser. OIEG's
percentage of such recovery will also be reduced over time. Because the Award
has yet to be satisfied and the ability to successfully enforce the Award in
countries that are party to the ICSID Convention is subject to significant
challenges, the Company is unable to reasonably predict the amount of recoveries
from the Award, if any, to which the Company may be entitled in the future. Any
future amounts that the Company may receive from the Award are highly
speculative and the timing of any such future payments, if any, is highly
uncertain. As such, there can be no assurance that the Company will receive any
future payments under the Award beyond the Cash Payment.
A separate arbitration involving two other subsidiaries of the Company --
Fabrica de Vidrios Los Andes, C.A. ("Favianca"), and Owens-Illinois de
Venezuela, C.A. ("OIDV") -- was initiated in 2012 to obtain compensation
primarily for third-party minority shareholders' lost interests in the two
expropriated plants. However, on November 13, 2017, ICSID issued an award that
dismissed this arbitration on jurisdiction grounds. In March 2018, OIDV and
Favianca submitted to ICSID an application to annul the November 13, 2017 award;
on November 22, 2019, OIDV and Favianca's request to annul the award was
rejected by an ICSID ad hoc committee. The two subsidiaries are evaluating
potential next steps.
For each of the three- and six-month periods ended June 30, 2021 and June 30,
2020, the Company did not incur any significant losses from discontinued
operations.
Capital Resources and Liquidity
On June 25, 2019, certain of the Company's subsidiaries entered into a Senior
Secured Credit Facility Agreement (as amended by that certain Amendment No. 1 to
the Third Amended and Restated Credit Agreement and Syndicated Facility
Agreement dated as of December 13, 2019, and as further amended by that certain
Amendment No. 2 to the Third Amended and Restated Credit Agreement and
Syndicated Facility Agreement dated as of December 19, 2019, the "Agreement"),
which amended and restated the previous credit agreement (the "Previous
Agreement"). The proceeds from the Agreement were used to repay all outstanding
amounts under the Previous Agreement.
The Agreement provides for up to $3.0 billion of borrowings pursuant to term
loans and revolving credit facilities. The term loans mature, and the revolving
credit facilities terminate in June 2024. At June 30, 2021, the Agreement
includes a $300 million revolving credit facility, a $1.2 billion multicurrency
revolving credit facility, and a $1.5 billion term loan A facility ($1,068
million outstanding balance at June 30, 2021, net of debt issuance costs). At
June 30, 2021, the Company had unused credit of $1,406 million available under
the Agreement. The weighted average interest rate on borrowings outstanding
under the Agreement at June 30, 2021 was 1.60%.
The Agreement contains various covenants that restrict, among other things and
subject to certain exceptions, the ability of the Company to incur certain
indebtedness and liens, make certain investments, become liable under contingent
obligations in certain defined instances only, make restricted payments, make
certain asset sales within guidelines and limits, engage in certain affiliate
transactions, participate in sale and leaseback financing arrangements, alter
its fundamental business, and amend certain subordinated debt obligations.
The Agreement also contains one financial maintenance covenant, a Total Leverage
Ratio (the "Leverage Ratio"), that requires the Company not to exceed a ratio of
5.0x calculated by dividing consolidated total debt, less cash and cash
equivalents, by Consolidated EBITDA, with such Leverage Ratio decreasing to (a)
4.75x for the quarter ending June 30,
40
2021 and (b) 4.50x for the quarter ending December 31, 2021 and thereafter, as
defined and described in the Agreement. The maximum Leverage Ratio is subject to
an increase of 0.5x for (i) any fiscal quarter during which certain qualifying
acquisitions (as specified in the Agreement) are consummated and (ii) the
following three fiscal quarters, provided that the Leverage Ratio shall not
exceed 5.0x. The Leverage Ratio could restrict the ability of the Company to
undertake additional financing or acquisitions to the extent that such financing
or acquisitions would cause the Leverage Ratio to exceed the specified maximum.
Failure to comply with these covenants and other customary restrictions could
result in an event of default under the Agreement. In such an event, the Company
could not request borrowings under the revolving facilities, and all amounts
outstanding under the Agreement, together with accrued interest, could then be
declared immediately due and payable. Upon the occurrence and for the duration
of a payment event of default, an additional default interest rate equal to 2.0%
per annum will apply to all overdue obligations under the Agreement. If an event
of default occurs under the Agreement and the lenders cause all of the
outstanding debt obligations under the Agreement to become due and payable, this
would result in a default under the indentures governing the Company's
outstanding debt securities and could lead to an acceleration of obligations
related to these debt securities. As of June 30, 2021, the Company was in
compliance with all covenants and restrictions in the Agreement. In addition,
the Company believes that it will remain in compliance and that its ability to
borrow funds under the Agreement will not be adversely affected by the covenants
and restrictions.
The Leverage Ratio also determines pricing under the Agreement. The interest
rate on borrowings under the Agreement is, at the Company's option, the Base
Rate or the Eurocurrency Rate, as defined in the Agreement, plus an applicable
margin. The applicable margin is linked to the Leverage Ratio. The margins range
from 1.00% to 1.50% for Eurocurrency Loans and from 0.00% to 0.50% for Base Rate
Loans. In addition, a commitment fee is payable on the unused revolving credit
facility commitments ranging from 0.20% to 0.30% per annum linked to the
Leverage Ratio.
Obligations under the Agreement are secured by substantially all of the assets,
excluding real estate and certain other excluded assets, of certain of the
Company's domestic subsidiaries and certain foreign subsidiaries. Such
obligations are also secured by a pledge of intercompany debt and equity
investments in certain of the Company's domestic subsidiaries and, in the case
of foreign obligations, of stock of certain foreign subsidiaries. All
obligations under the Agreement are guaranteed by certain domestic subsidiaries
of the Company, and certain foreign obligations under the Agreement are
guaranteed by certain foreign subsidiaries of the Company.
In May 2020, the Company issued $700 million aggregate principal amount of
senior notes. The senior notes bear interest at a rate of 6.625% per annum and
mature on May 13, 2027. The senior notes were issued via a private placement and
are guaranteed by certain of the Company's domestic subsidiaries. The net
proceeds, after deducting debt issuance costs, totaled approximately $690
million and were used to redeem the remaining $130 million aggregate principal
amount of the Company's outstanding 4.875% senior notes due 2021, approximately
$419 million aggregate principal amount of the Company's outstanding 5.00%
senior notes due 2022 and approximately $105 million of other secured
borrowings. The Company recorded approximately $38 million of additional
interest charges for note repurchase premiums and write-off of unamortized
finance fees related to these redemptions.
In August 2020, the Company redeemed the remaining $81 million aggregate
principal amount of the Company's outstanding 5.00% senior notes due 2022. The
Company recorded approximately $6 million of additional interest charges for
note repurchase premiums and write-off of unamortized finance fees related to
this redemption.
In order to maintain a capital structure containing appropriate amounts of fixed
and floating-rate debt, the Company has entered into a series of interest rate
swap agreements. These interest rate swap agreements were accounted for as
either fair value hedges or cash flow hedges (see Note 5 for more information).
The Company assesses its capital raising and refinancing needs on an ongoing
basis and may enter into additional credit facilities and seek to issue equity
and/or debt securities in the domestic and international capital markets if
market conditions are favorable. Also, depending on market conditions, the
Company may elect to repurchase portions of its debt securities in the open
market.
41
Cash Flows
Operating activities: Cash provided by operating activities was $143 million for
the six months ended June 30, 2021, compared to $134 million utilized in
operating activities for the six months ended June 30, 2020. The increase in
cash provided by operating activities in the first half of 2021 was primarily
due to higher net earnings and a lower use of cash from working capital than in
the same period in 2020. In the first half of both 2021 and 2020, all
asbestos-related payments were stayed as a result of Paddock's Chapter 11 filing
in early January 2020. See Note 10 to the Condensed Consolidated Financial
Statements for additional information on Paddock.
Working capital was a use of cash of $229 million in the first six months of
2021, compared to a use of cash of $415 million in the same period in 2020. The
use of cash from working capital was lower in the first half of 2021, primarily
due to lower inventories and higher accounts payable, partially offset by higher
accounts receivable as sales levels improved in 2021 as COVID-19 restrictions
abated. For the six months ended June 30, 2021 and 2020, the Company's use of
its accounts receivable factoring programs resulted in an increase of $4 million
to cash from operating activities and a $102 million decrease to cash from
operating activities, respectively. Excluding the impact of accounts receivable
factoring, the Company's days sales outstanding as of June 30, 2021 were
comparable to June 30, 2020.
Investing activities: Cash utilized in investing activities was $109 million for
the six months ended June 30, 2021, compared to $233 million utilized for the
six months ended June 30, 2020. Capital spending for property, plant and
equipment was $175 million during the first six months of 2021, compared to $189
million in the same period in 2020. The Company estimates that its full year
2021 capital expenditures should be approximately $400 million.
On July 31, 2020, the Company completed the sale of its ANZ businesses to Visy.
Approximately 95% of proceeds were received at time of closing, and the
remaining balance of $58 million was received by the Company in the first
quarter of 2021. The Company also received approximately $8 million from the
sale of miscellaneous assets and other businesses, which included the sale of
its plant in Argentina in the first quarter of 2021.
Following Paddock's Chapter 11 filing in January 2020, the activities of Paddock
are now subject to review and oversight by the bankruptcy court. As a result,
the Company no longer has exclusive control over Paddock's activities during the
bankruptcy proceedings. Therefore, Paddock was deconsolidated, and its assets
and liabilities were derecognized from the Company's financial statements, which
resulted in an investing outflow of $47 million in the Company's first quarter
of 2020 Condensed Consolidated Cash Flows. See Note 10 to the Condensed
Consolidated Financial Statements for more information.
Financing activities: Cash utilized in financing activities was $68 million for
the six months ended June 30, 2021, compared to $904 million of cash provided by
financing activities for the six months ended June 30, 2020. The decrease in
cash provided by financing activities was primarily due to lower net borrowings
in the first half of 2021. In March 2020, the Company borrowed approximately
$600 million on its $1.5 billion revolving credit facility to bolster
cash-on-hand as a proactive measure to ensure financial flexibility at the onset
of the COVID-19 pandemic. The Company did not borrow at the same level in the
first half of 2021. The Company paid $45 million for finance fees related to
financing activities in the first six months of 2020, whereas no fees were paid
in the same period in 2021. Also, the Company paid approximately $10 million
and received approximately $42 million related to hedging activity in the first
six months of 2021 and 2020, respectively.
In February 2021, the Company's Board of Directors authorized a $150 million
anti-dilutive share repurchase program for the Company's common stock that the
Company intends to use to offset stock-based compensation provided to the
Company's directors, officers, and employees. This authorization supersedes and
replaces any prior repurchase authorizations. Through the first six months ended
June 30, 2021, the Company repurchased $20 million of shares of the Company's
common stock under this program. No share repurchases were made during the six
months ended June 30, 2020. The Company paid $8 million in dividends in the
first half of 2020 and did not pay any dividends in the first half of 2021. In
response to the COVID-19 pandemic, the Company suspended its dividend after the
first quarter of 2020 and has no plans to reinstate it at this time.
The Company anticipates that cash flows from its operations and from
utilization of credit available under the Agreement will be sufficient to fund
its operating and seasonal working capital needs, debt service and other
obligations on a short-term (12 months) and long-term basis. However, as the
Company cannot predict the duration or scope of the COVID-19 pandemic and its
impact on its customers and suppliers. The negative financial impact to the
Company's results cannot be reasonably estimated but could be material. The
Company is actively managing its business to
42
maintain cash flow and it has significant liquidity. The Company believes that
these factors will allow it to meet its anticipated funding requirements. The
Company anticipates that cash flows in 2021 will continue to benefit from the
operation of the automatic stay in Paddock's Chapter 11 filing, which stays
ongoing litigation and submission of claims outside the Bankruptcy Court and
defers payment in connection with asbestos-related liabilities until a plan of
reorganization is confirmed and becomes effective.
Critical Accounting Estimates
The Company's analysis and discussion of its financial condition and results of
operations are based upon its consolidated financial statements that have been
prepared in accordance with accounting principles generally accepted in the
United States ("U.S. GAAP"). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses,
and the disclosure of contingent assets and liabilities. The Company evaluates
these estimates and assumptions on an ongoing basis. Estimates and assumptions
are based on historical and other factors believed to be reasonable under the
circumstances at the time the financial statements are issued. The results of
these estimates may form the basis of the carrying value of certain assets and
liabilities and may not be readily apparent from other sources. Actual results,
under conditions and circumstances different from those assumed, may differ from
estimates.
The impact of, and any associated risks related to, estimates and assumptions
are discussed within Management's Discussion and Analysis of Financial Condition
and Results of Operations, as well as in the Notes to the Condensed Consolidated
Financial Statements, if applicable, where estimates and assumptions affect the
Company's reported and expected financial results.
There have been no other material changes in critical accounting estimates at
June 30, 2021 from those described in the Company's Annual Report on Form 10-K
for the year ended December 31, 2020.
Forward-Looking Statements
This document contains "forward-looking" statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and Section 27A of the Securities Act of 1933. Forward-looking statements
reflect the Company's current expectations and projections about future events
at the time, and thus involve uncertainty and risk. The words "believe,"
"expect," "anticipate," "will," "could," "would," "should," "may," "plan,"
"estimate," "intend," "predict," "potential," "continue," and the negatives of
these words and other similar expressions generally identify forward-looking
statements.
It is possible that the Company's future financial performance may differ from
expectations due to a variety of factors including, but not limited to, the
following: (1) the risk that the proposed plan of reorganization may not be
approved by the bankruptcy court or that other conditions necessary to implement
the agreement in principle may not be satisfied, (2) the actions and decisions
of participants in the bankruptcy proceeding, and the actions and decisions of
third parties, including regulators, that may have an interest in the bankruptcy
proceedings, (3) the terms and conditions of any reorganization plan that may
ultimately be approved by the bankruptcy court, (4) delays in the confirmation
or consummation of a plan of reorganization due to factors beyond the Company's
and Paddock's control, (5) risks with respect to the receipt of the consents
necessary to effect the reorganization, (6) risks inherent in, and potentially
adverse developments related to, the bankruptcy proceeding, that could adversely
affect the company and the company's liquidity or results of operations, (7) the
impact of the COVID-19 pandemic and the various governmental, industry and
consumer actions related thereto, (8) the Company's ability to obtain the
benefits it anticipates from the Corporate Modernization, (9) the Company's
ability to manage its cost structure, including its success in implementing
restructuring or other plans aimed at improving the Company's operating
efficiency and working capital management, achieving cost savings, and remaining
well-positioned to address the Company's legacy liabilities, (10) the Company's
ability to acquire or divest businesses, acquire and expand plants, integrate
operations of acquired businesses and achieve expected benefits from
acquisitions, divestitures or expansions, (11) the Company's ability to achieve
its strategic plan, (12) the Company's ability to improve its glass melting
technology, known as the MAGMA program, (13) foreign currency fluctuations
relative to the U.S. dollar, (14) changes in capital availability or cost,
including interest rate fluctuations and the ability of the Company to refinance
debt on favorable terms, (15) the general political, economic and competitive
conditions in markets and countries where the Company has operations, including
uncertainties related
43
to Brexit, economic and social conditions, disruptions in the supply chain,
competitive pricing pressures, inflation or deflation, changes in tax rates and
laws, natural disasters and weather, (16) the Company's ability to generate
sufficient future cash flows to ensure the Company's goodwill is not impaired,
(17) consumer preferences for alternative forms of packaging, (18) cost and
availability of raw materials, labor, energy and transportation, (19)
consolidation among competitors and customers, (20) unanticipated expenditures
with respect to data privacy, environmental, safety and health laws, (21)
unanticipated operational disruptions, including higher capital spending, (22)
the Company's ability to further develop its sales, marketing and product
development capabilities, (23) the failure of the Company's joint venture
partners to meet their obligations or commit additional capital to the joint
venture, (24) the ability of the Company and the third parties on which it
relies for information technology system support to prevent and detect security
breaches related to cybersecurity and data privacy, (25) changes in U.S. trade
policies, and the other risk factors discussed in the Company's Annual Report on
Form 10-K for the year ended December 31, 2020 and any subsequently filed Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q or the Company's other
filings with the Securities and Exchange Commission.
It is not possible to foresee or identify all such factors. Any forward-looking
statements in this document are based on certain assumptions and analyses made
by the Company in light of its experience and perception of historical trends,
current conditions, expected future developments, and other factors it believes
are appropriate in the circumstances. Forward-looking statements are not a
guarantee of future performance and actual results or developments may differ
materially from expectations. While the Company continually reviews trends and
uncertainties affecting the Company's results of operations and financial
condition, the Company does not assume any obligation to update or supplement
any particular forward-looking statements contained in this document.
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