Business Context and Reporting Period
Company: Owens-Illinois, Inc. (O-I Glass, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2008
Business Overview: The Company manufactures glass containers for food, beverage, and other products. Following the sale of its plastics packaging business in July 2007, the Company operates four geographic segments: Europe, North America, South America, and Asia Pacific. The 2007 results have been reclassified to present the plastics business as discontinued operations.
Key Financial Metrics
All figures in millions of dollars, except per share data.
| Metric | Three Months Ended Sep 30, 2008 | Nine Months Ended Sep 30, 2008 |
|---|---|---|
| Net Sales | $2,008.6 | $6,179.7 |
| Gross Profit | $407.3 | $1,389.3 |
| Earnings from Continuing Operations | $78.6 | $480.1 |
| Net Earnings | $78.6 | $488.0 |
| Diluted EPS (Continuing Ops) | $0.46 | $2.81 |
| Cash from Operating Activities | N/A | $534.8 |
| Total Debt | $3,457.5 (Short-term + Long-term) | $3,457.5 |
| Cash and Equivalents | $410.5 | $410.5 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4.2% in the third quarter and 10.2% for the nine-month period compared to 2007. Growth was driven by improved pricing, favorable product mix, and foreign currency exchange rates, partially offset by lower unit shipments.
- Profitability: Earnings from continuing operations increased slightly in the quarter ($78.6M vs. $75.6M) and significantly for the nine months ($480.1M vs. $284.7M). Segment Operating Profit for reportable segments decreased $11.7M in the quarter but increased $192.4M for the nine months.
- Cost Structure: Interest expense decreased significantly due to lower variable interest rates and reduced debt levels ($66.3M in Q3 2008 vs. $97.0M in Q3 2007).
- Restructuring: The Company recorded $90.6M in restructuring and asset impairment charges in Q3 2008 (totaling $111.7M for the nine months), primarily related to the closure of two Canadian plants and a strategic review of the global manufacturing footprint.
- Asbestos Payments: Cash payments for asbestos-related costs decreased to $36.7M in Q3 2008 from $132.5M in Q3 2007, reflecting reduced accelerated funding for settlements.
Guidance, Outlook, and Risks
- Liquidity and Credit: Total debt stands at approximately $3.46 billion. The Company has a $900 million revolving credit facility; however, availability was reduced by $32.3 million due to the pending bankruptcy of Lehman Brothers Holdings Inc. Unused credit remains at $745.3 million.
- Asbestos Contingency: The Company faces significant uncertainty regarding ultimate asbestos liability. While cash payments are expected to decrease in 2008 compared to 2007, the Company anticipates an annual charge in future comprehensive reviews to cover estimated future costs. Approximately 13,000 plaintiffs are currently named in lawsuits.
- Goodwill Impairment: The Company is conducting its annual goodwill impairment test as of October 1, 2008. If projected cash flows are lower or the cost of capital is higher than assumed, a material write-down could occur in the fourth quarter.
- Economic Environment: The Company notes risks associated with the global credit market crisis, including potential customer cash flow problems, supply chain disruptions, and increased energy costs.
- Capital Spending: Capital spending for the first nine months of 2008 was $238.5 million, returning to normal levels after a lower spend in 2007.
Investor Verification Checklist
- Asbestos Liability Accrual: Verify the sufficiency of the accrued liability given the volatility of litigation and the expectation of an annual charge in future reviews.
- Goodwill Valuation: Monitor the outcome of the October 1, 2008, goodwill impairment test, as a write-down could materially impact Q4 results.
- Credit Facility Availability: Confirm the impact of the Lehman Brothers bankruptcy on the $900 million revolving credit facility and the Company's ability to access liquidity.
- Restructuring Execution: Track the progress of the $111.7M restructuring charges, specifically the closure of Canadian plants, to ensure expected cost savings are realized.
- Foreign Currency Impact: Assess the sustainability of revenue growth driven by favorable foreign exchange rates, given the volatility of global currencies.