OI

O-I Glass, Inc. (Owens-Illinois, Inc.) 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for the period ended March 31, 2009. Owens-Illinois, Inc. is a global manufacturer of glass packaging. The financial statements are unaudited and reflect the adoption of new accounting standards (FAS No. 160 and FSP No. EITF 03-6-1) effective January 1, 2009, which required retrospective reclassification of prior period data regarding noncontrolling interests and earnings per share.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by $441.5 million (22.5%) year-over-year. This was driven by a $296.0 million decrease in sales volume and a $245.8 million negative impact from foreign currency exchange rates, partially offset by a $121.0 million positive effect from price and mix.
• Profitability Compression: Segment Operating Profit for reportable segments fell $130.2 million (40.4%) to $191.9 million. The decline was attributed to lower sales volume, unabsorbed fixed costs from temporary shutdowns (~$100 million), and inflationary cost increases.
• Restructuring Charges: The Company recorded $50.4 million in restructuring and asset impairment charges in Q1 2009, compared to $12.9 million in Q1 2008. These charges relate to the curtailment of plant capacity and workforce reductions (approx. 250 jobs in Q1 2009).
• Interest Expense: Interest expense decreased to $48.1 million from $64.3 million due to lower variable interest rates, reduced debt levels, and favorable foreign currency rates.
• Cash Flow Reversal: Operating activities utilized $28.5 million in cash in Q1 2009, a reversal from the $50.9 million provided in Q1 2008, primarily due to lower net earnings and increased restructuring payments.

Guidance, Outlook, and Risks

• Outlook: Management expects glass shipment volumes to decrease in Q2 2009 compared to Q2 2008 but improve compared to Q1 2009 due to seasonality and inventory destocking abatement. Net inflation for the full year 2009 is expected to range up to $150 million.
• Capital Spending: Total capital spending for 2009 is projected to be between $380 million and $440 million.
• Liquidity: The Company maintains $641.8 million in unused credit under its revolving credit facility. Management believes operating cash flows and credit availability are sufficient to fund operations, debt service, and asbestos obligations.
• Asbestos Contingency: The Company faces significant uncertainty regarding asbestos-related liabilities. A $250 million charge was recorded in Q4 2008. Cash payments for asbestos costs were $34.8 million in Q1 2009. The ultimate liability cannot be estimated with certainty.
• Goodwill Impairment Risk: While no impairment was found in the Q4 2008 annual test, management notes that if projected future cash flows decrease significantly or the weighted average cost of capital increases, a goodwill write-down could occur in 2009.

Investor Verification Checklist

• Asbestos Liability Accuracy: Verify the sufficiency of the accrued asbestos liability given the volatility in filing rates and the $250 million charge taken in the prior year.
• Restructuring Execution: Monitor the realization of cost savings from the $50.4 million restructuring charge and the timeline for cash outflows (expected majority by end of 2009).
• Foreign Currency Impact: Assess the sensitivity of future earnings to foreign exchange rate fluctuations, which negatively impacted sales by $245.8 million in Q1 2009.
• Goodwill Valuation: Review future quarterly reports for indicators of goodwill impairment, particularly if market conditions or cash flow projections deteriorate further.
• Working Capital Trends: Analyze the continued utilization of cash in operating activities and the impact of inventory levels on liquidity.