OI

O-I Glass, Inc. (Owens-Illinois, Inc.) - Q1 2005 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2005. The Company operates in the rigid packaging industry with two primary segments: Glass Containers and Plastics Packaging. The reporting period reflects the integration of the BSN Glasspack, S.A. acquisition (completed June 2004) and the completion of the sale of the Company's blow-molded plastic container operations (completed October 2004), which are now reported as discontinued operations. Prior period data for 2004 has been restated to conform to this presentation.

Key Financial Metrics

Note: Net Earnings for Q1 2005 excludes discontinued operations as the plastic container business was sold in late 2004. Q1 2004 Net Earnings includes $7.6 million from discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 31.2% to $1,663.3 million. The Glass Containers segment drove this growth with a 37.7% increase, primarily due to the BSN acquisition ($375.3 million in additional sales), favorable currency exchange rates, and higher selling prices. The Plastics Packaging segment saw a slight decline of 2.5% due to divestitures and lower unit volumes.
• Profitability: Earnings from continuing operations more than doubled to $117.5 million. Segment Operating Profit for Glass Containers rose 22.5% to $202.3 million, while Plastics Packaging profit remained relatively flat at $30.9 million.
• Non-Operating Items: The quarter included a $28.1 million gain on the sale of the Corsico, Italy glass facility and a $28.4 million unrealized gain on natural gas futures contracts (due to a change in hedge accounting treatment). These items increased net earnings by approximately $45.1 million.
• Interest Expense: Increased to $118.5 million from $100.9 million, driven by debt incurred for the BSN acquisition and higher variable interest rates.
• Cash Flow: Operating cash flow turned negative ($130.3 million utilized) compared to a minimal use in the prior year. This was primarily due to seasonal working capital increases in European operations (BSN) and higher inventory levels in Asia Pacific.

Guidance, Outlook, and Risks

• Asbestos Litigation: The Company faces significant contingent liabilities related to asbestos exposure. Cash payments for asbestos costs were $45.5 million in Q1 2005, a 9.7% decrease from the prior year. Management expects total asbestos payments in 2005 to be moderately lower than 2004. However, the ultimate liability cannot be estimated with certainty, and future charges may be required based on annual reviews.
• Goodwill Impairment: The Company holds significant goodwill, particularly in the Asia Pacific Glass reporting unit ($1.0 billion). While no impairment was found in the 2004 annual test, the margin was narrow (6%). Modest changes in projected cash flows or cost of capital could trigger a write-down in 2005.
• Pension Obligations: The Company monitors pension plan assets against obligations. If the Accumulated Benefit Obligation exceeds asset fair value at the next measurement date (Dec 31, 2005), a non-cash charge could significantly reduce net worth, though cash contributions are not expected for several years.
• Integration: The Company expects the integration of BSN operations to lead to significant earnings improvements by the end of 2006. Capacity evaluations for acquired plants are ongoing.

Investor Verification Checklist

• Asbestos Accrual Adequacy: Verify the assumptions used in the annual review of asbestos liabilities, specifically regarding the acceleration of claims due to co-defendant bankruptcies.
• Goodwill Sensitivity: Review the sensitivity of the Asia Pacific Glass reporting unit's goodwill to changes in projected cash flows and discount rates.
• Working Capital Trends: Monitor the seasonal cash burn in European operations and inventory levels in Asia Pacific to assess liquidity needs.
• Non-Recurring Gains: Adjust earnings analysis to exclude the $28.1 million facility sale gain and $28.4 million commodity futures gain to assess core operational performance.
• Debt Maturity Profile: Review the maturity schedule of the $5.2 billion debt load, noting the weighted average interest rate of 8.31% (including swaps).