OI

Owens-Illinois, Inc. 2003 10-K Summary

Business Context and Reporting Period

This report covers the fiscal year ended December 31, 2003. Owens-Illinois, Inc. (O-I) is a leading global manufacturer of glass containers and plastics packaging. The company operates two primary segments: Glass Containers (69% of 2003 sales) and Plastics Packaging (31% of 2003 sales). O-I is the largest glass container manufacturer in North America, South America, Australia, and New Zealand, and a major player in Europe. The company employs approximately 29,800 people worldwide.

Key Financial Metrics (2003)

Note: Segment EBIT excludes non-recurring items such as goodwill impairments and asbestos charges.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 7.4% to $6.059 billion, driven by a 7.9% increase in Glass Containers sales and a 6.3% increase in Plastics Packaging sales. Currency fluctuations and higher unit shipments/prices in Europe and Asia Pacific contributed to growth, partially offset by lower North American glass shipments due to weather and product conversion to plastic.
• Significant Loss: The company reported a net loss of $990.8 million, a deterioration from the $460.2 million loss in 2002. This was primarily due to non-cash charges totaling approximately $1.36 billion, including a $720 million goodwill impairment and a $450 million increase in asbestos reserves.
• Operating Performance: Segment EBIT declined 16.4% to $743.5 million. Glass Containers EBIT fell 7.1% due to higher energy costs and lower pension income. Plastics Packaging EBIT dropped 33.6% due to lower selling prices and unfavorable product mix.
• Cash Flow: Operating cash flow decreased 41% to $353.1 million, largely due to increased working capital requirements (higher inventories and receivables).

Guidance, Outlook, and Risks

• Acquisition: In February 2004, O-I announced exclusive negotiations to acquire BSN Glasspack, S.A. (Europe's second-largest glass container manufacturer) for approximately $1.46 billion. The deal is expected to close in Q2 2004 and increase debt by approximately $1.5 billion.
• Divestitures: The company is reviewing its blow-molded plastics operations for potential divestiture to maximize investor value, with a decision expected in Q2 2004.
• Asbestos Liability: O-I recorded a $450 million charge to increase reserves for future asbestos-related costs. Approximately 29,000 claims were pending as of year-end. The company expects 2004 payments to be moderately lower than 2003.
• Plant Closures: The company permanently closed three glass container factories (Hayward, CA; Milton, Ontario; Perth, Australia) in 2003, recording $72.5 million in capacity curtailment charges. These closures are expected to generate annual savings of approximately $29.5 million.
• Goodwill Impairment: A $670 million goodwill impairment was recorded in the consumer products reporting unit due to competitive pricing pressures and lower cash flow projections. The Asia Pacific Glass reporting unit remains close to impairment thresholds.

Investor Verification Checklist

• Asbestos Reserve Adequacy: Verify the assumptions used for the $450 million asbestos charge and the trajectory of future claim filings and payments.
• Goodwill Valuation: Assess the sensitivity of the Asia Pacific Glass reporting unit to changes in cash flow projections or discount rates, as it was close to impairment.
• Debt Capacity: Confirm the ability to secure additional financing for the BSN Glasspack acquisition and the impact of increased interest expense on future liquidity.
• Plastics Divestiture: Monitor the progress of the strategic review of blow-molded plastics operations and the potential impact of divestitures on future revenue and earnings.
• Energy Costs: Evaluate the impact of rising natural gas prices on the Glass Containers segment, which is energy-intensive.