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. (O-I Glass, Inc.) for the period ended September 30, 2006. The company operates in the rigid packaging industry with two primary segments: Glass Containers (Europe, Americas, Asia Pacific) and Plastics Packaging (primarily North America healthcare and prescription containers). The financial statements are unaudited.

Key Financial Metrics

All figures in millions of dollars, except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 5.8% in Q3 2006 and 4.2% for the nine-month period, driven primarily by the Glass Containers segment due to higher pricing, favorable currency exchange rates, and increased beer container shipments.
• Profitability Decline: Net earnings from continuing operations dropped significantly compared to 2005. Q3 earnings fell from $56.6M to $8.4M; nine-month earnings fell from $260.3M to $75.3M.
• Cost Pressures: Segment Operating Profit for Glass Containers decreased $52.2M year-to-date. While pricing and productivity improved, these gains were offset by significant inflationary cost increases, particularly higher energy costs ($137.0M impact YTD) and raw material costs.
• Discontinued Operations: The 2005 period included a $63.0M benefit from discontinued operations (reversal of tax accruals), which did not recur in 2006.
• Interest Expense: Interest expense increased to $122.2M in Q3 2006 (from $113.3M in 2005) and $372.0M for the nine months (from $348.4M), partly due to $17.5M in charges related to debt refinancing and note repurchases.

Guidance, Outlook, Risks, and Unusual Items

• Restructuring Charges: The company recorded a $29.7M charge in Q3 2006 for the permanent closure of its Godfrey, Illinois machine parts manufacturing operation, eliminating approximately 260 jobs. Remaining cash costs for this closure are estimated at $11.5M.
• Asbestos Litigation: The company faces substantial asbestos-related liabilities. Cash payments for asbestos costs were $127.6M for the first nine months of 2006, compared to $135.2M in 2005. Management expects 2006 full-year payments to be moderately lower than 2005. The ultimate liability cannot be estimated with certainty.
• Accounting Changes (FAS 158): The company will adopt FAS 158 effective December 31, 2006. This requires recognizing the funded status of pension plans on the balance sheet, which will result in a significant non-cash write-off of the prepaid pension asset (approx. $994.2M as of Sept 30, 2006) and a reduction in reported net worth.
• Goodwill Impairment Risk: Annual goodwill impairment testing is underway as of October 1, 2006. A significant write-down could materially affect results of operations and net worth.
• Debt Refinancing: In June 2006, the company entered a new Secured Credit Agreement with $900M in revolving credit and various term loans. Unused credit available was $557.6M as of September 30, 2006.

Investor Verification Checklist

• Asbestos Liability Trends: Verify the trajectory of asbestos claim filings and settlement costs to assess the adequacy of the accrued liability.
• Energy Cost Exposure: Monitor natural gas and fuel oil prices, as energy costs significantly impacted operating margins in 2006.
• Pension Funded Status: Review the impact of the upcoming FAS 158 adoption on the balance sheet and net worth, specifically the write-off of the prepaid pension asset.
• Goodwill Valuation: Await the results of the annual goodwill impairment test to determine if further non-cash charges are required.
• Working Capital Management: Assess the company's ability to manage working capital, given the negative operating cash flow of $85.4M for the first nine months of 2006.