OI

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

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Owens-Illinois, Inc. for the period ended June 30, 2007. The company operates in the rigid packaging industry, primarily through its Glass Containers segment. A significant strategic development occurred during this period: on June 11, 2007, the company announced the sale of its plastics packaging business to Rexam PLC, which was completed on July 31, 2007, for approximately $1.825 billion. Consequently, the plastics business is reported as a discontinued operation.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased by 14.5% ($252.2 million) for the quarter and 13.8% ($447.5 million) for the six months compared to the prior year. Drivers included improved pricing, increased unit shipments, and favorable foreign currency exchange rates.
• Profitability: Segment Operating Profit for the Glass Containers segment increased by 43.6% ($96.1 million) for the quarter and 38.0% ($146.8 million) for the six months. This was driven by price/mix benefits and productivity gains, partially offset by manufacturing inflation.
• Interest Expense: Interest expense decreased to $82.2 million for the quarter (from $92.5 million) and $163.2 million for the six months (from $176.0 million). The prior year included a $10.2 million write-off of unamortized finance fees.
• Discontinued Operations: The plastics packaging business reported net losses of $4.1 million for the quarter and $6.2 million for the six months, compared to losses of $7.9 million and $11.2 million in the prior year periods.

Guidance, Outlook, Risks, and Unusual Items

• Plastics Divestiture: The sale of the plastics business to Rexam PLC is a major unusual item. Proceeds are expected to be used to repay secured debt. The transaction resulted in the elimination of a financial covenant requiring a specified interest coverage ratio.
• Asbestos Litigation: The company faces substantial asbestos-related liabilities. While the company believes its accrued liability is sufficient, it notes that ultimate liability cannot be estimated with certainty. A $120.0 million charge was recorded in Q4 2006. Future annual reviews may result in additional charges.
• Goodwill Impairment Risk: The company monitors goodwill for impairment. The Asia Pacific Glass reporting unit's fair value exceeded its book value by only approximately 7% in the last test, making it sensitive to changes in cash flow projections or discount rates. A write-down could materially affect results.
• Tax Outlook: The effective tax rate for the first six months of 2007 was 24.6%, compared to 38.9% in 2006. Management anticipates a full-year effective tax rate of approximately 28%.
• Capital Resources: The company has $813.1 million of unused credit available under its Secured Credit Agreement. Management believes operating cash flows and credit availability are sufficient to fund operations and debt service.

Key Facts for Investor Verification

• Plastics Sale Completion: Verify the final closing date and exact net proceeds from the sale of the plastics business to Rexam PLC, and confirm the specific debt repayment schedule.
• Asbestos Accrual Adequacy: Review the company's annual comprehensive review of asbestos liabilities to assess the risk of future charges impacting earnings.
• Goodwill Sensitivity: Monitor the Asia Pacific Glass reporting unit for potential goodwill impairment charges, given the narrow margin between fair value and book value.
• Working Capital Trends: Analyze the improvement in working capital usage ($81.2 million improvement in the first six months of 2007 vs. 2006) to ensure sustainability.
• Debt Covenants: Confirm the specific terms of the amended credit agreement, particularly regarding the removal of the interest coverage ratio covenant and the impact on borrowing costs.