OI

Business Context and Reporting Period

Company: Owens-Illinois, Inc. (O-I Glass, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: A leading global manufacturer of glass containers and plastics packaging. The company operates two primary segments: Glass Containers (69% of 2002 sales) and Plastics Packaging (31% of 2002 sales). It is the largest glass container manufacturer in North America, South America, Australia, and New Zealand, and a major player in Europe.

Key Financial Metrics (2002)

*Adjusted EBIT excludes the $475.0 million asbestos charge in 2002 and unusual items/goodwill amortization in 2001.

Material Changes vs. Prior Period

• Net Loss vs. Profit: The company reported a net loss of $460.2 million in 2002 compared to net earnings of $356.6 million in 2001. This reversal was primarily driven by non-cash accounting changes and a significant asbestos reserve adjustment.
• Accounting Change (Goodwill): Adoption of FAS No. 142 resulted in a one-time cumulative effect charge of $460.0 million due to goodwill impairment in the consumer products reporting unit.
• Asbestos Reserve Adjustment: A pretax charge of $475.0 million ($308.8 million after-tax) was recorded to increase the reserve for estimated future asbestos-related costs following a comprehensive review.
• Segment Performance:
  • Glass Containers: Net sales increased 8.5% to $3,875.2 million. Adjusted EBIT increased 13.1% to $709.0 million, driven by North American growth and improved pricing in Europe.
  • Plastics Packaging: Net sales decreased 3.3% to $1,765.2 million due to lower resin cost pass-throughs and pricing pressure. Adjusted EBIT decreased 10.1% to $258.2 million.
• Debt Refinancing: The company issued $1.625 billion in Senior Secured Notes (fixed rate) to replace lower-cost variable rate debt, increasing interest expense but extending maturities.

Guidance, Outlook, and Risks

• Asbestos Contingency: The company faces significant uncertainty regarding ultimate asbestos liability. While it believes current reserves are sufficient, the volatility of litigation and the bankruptcy of co-defendants could accelerate claims. Cash payments for asbestos were $221.1 million in 2002 and are expected to be moderately lower in 2003.
• Pension Obligations: The company expects pension credits to earnings to be approximately 60% lower in 2003 due to lower asset returns and a reduced assumed rate of return (from 9.64% to ~8.75%).
• Interest Expense: The shift to fixed-rate debt is expected to add approximately $25 million to interest expense in 2003.
• Market Risks: Significant exposure to foreign currency exchange rates (particularly in Australia, UK, and South America) and commodity prices (natural gas and plastic resins). The company utilizes derivatives to hedge a portion of these risks.
• Legal Proceedings: Pending patent litigation regarding multi-layer PET containers (Crown Cork & Seal Technologies Corp.) is not expected to have a material adverse effect, though outcomes remain uncertain.

Investor Verification Checklist

• Asbestos Reserve Adequacy: Verify the assumptions used in the $475 million reserve adjustment and monitor the trend of pending claims (24,000 at year-end) versus historical disposition rates.
• Goodwill Impairment: Review the valuation methodology for the $460 million goodwill write-down in the consumer plastics unit and assess the competitive landscape for future impairment risks.
• Debt Covenants: Confirm compliance with financial covenants in the Secured Credit Agreement, specifically the fixed charge coverage and leverage ratios, given the increased interest burden.
• Pension Funding Status: Monitor the funded status of international pension plans (notably the UK plan which triggered a minimum liability recognition) and the impact of market volatility on future pension credits.
• Plastics Segment Margins: Assess the ability of the Plastics Packaging segment to recover margins amidst pricing pressure and resin cost fluctuations.