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 June 30, 2005. The Company operates in the rigid packaging industry with two reportable segments: Glass Containers and Plastics Packaging. The results reflect the impact of the acquisition of BSN Glasspack, S.A. (completed June 2004) and the divestiture of blow-molded plastic container operations (completed October 2004), which are presented as discontinued operations.

Key Financial Metrics

Note: Total Debt includes short-term loans and long-term debt. Cash includes time deposits and short-term investments.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 30.7% in Q2 2005 and 31.0% for the six-month period compared to 2004. This growth is primarily driven by the BSN Glasspack acquisition and favorable foreign currency translation rates.
• Profitability: Net earnings increased 4.4% in Q2 and 48.2% for the six-month period. Segment Operating Profit for Glass Containers rose significantly due to the BSN acquisition, higher selling prices, and favorable currency effects, partially offset by inflationary cost increases (energy, raw materials).
• Interest Expense: Interest expense increased by $13.9 million in Q2 and $31.5 million for the six months, attributed to higher debt levels from the BSN acquisition and higher variable interest rates.
• Cash Flow: Operating cash flow from continuing activities turned negative ($51.8 million utilized) for the six months ended June 30, 2005, compared to $149.4 million provided in the prior year. This was due to increased working capital requirements from BSN operations, higher inventory levels in Asia Pacific, and cash payments for European restructuring activities.

Guidance, Outlook, and Risks

• Asbestos Litigation: The Company faces substantial asbestos-related liabilities. As of June 30, 2005, there were approximately 33,000 pending claims. The Company expects total asbestos-related cash payments in 2005 to be moderately lower than 2004. However, the ultimate liability cannot be estimated with certainty, and future charges may materially affect results.
• Restructuring: The Company recorded a restructuring accrual of €47.1 million ($56.6 million approx.) in Q2 2005 related to the closure of the Düsseldorf, Germany factory and a furnace shutdown in Reims, France, as part of the BSN integration strategy. This is expected to eliminate ~400 jobs and reduce fixed cash costs by €35 million annually.
• Pension Plans: The Company monitors pension plan funding closely. If the Accumulated Benefit Obligation (ABO) exceeds the fair value of assets for U.S. or Australian plans by year-end 2005, a non-cash charge may be required, potentially reducing net worth significantly.
• Goodwill Impairment: The Company tests goodwill annually. While no impairment was found in late 2004, the Asia Pacific Glass reporting unit had a narrow margin of safety. Modest changes in cash flow projections or cost of capital could trigger an impairment charge.
• Outlook: Management expects the integration of BSN to lead to significant earnings improvements in European operations by the end of 2006. The effective tax rate for the full year 2005 is expected to be approximately 29%.

Investor Verification Checklist

• Asbestos Liability Accuracy: Verify the sufficiency of the accrued asbestos liability given the volatility of litigation and the acceleration of claims due to co-defendant bankruptcies.
• BSN Integration Synergies: Monitor the realization of cost savings and operational efficiencies from the BSN Glasspack acquisition and the associated restructuring costs.
• Pension Asset Valuation: Track the performance of pension plan assets versus the ABO to assess the risk of a potential non-cash charge at year-end 2005.
• Working Capital Trends: Analyze the sustainability of the negative operating cash flow, specifically regarding inventory build-up and accounts payable timing in the context of the BSN acquisition.
• Goodwill Sensitivity: Review the assumptions used in the goodwill impairment test, particularly for the Asia Pacific Glass segment, to gauge the risk of future write-downs.