OI

Business Context and Reporting Period

Company: Owens-Illinois, Inc. (O-I Glass, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2003
Business Overview: The Company operates in the rigid packaging industry with two reportable segments: Glass Containers and Plastics Packaging. Operations span North America, Europe, Asia Pacific, and South America.

Key Financial Metrics

Note: Q1 2002 Net Loss included a $475.0 million asbestos charge and a $460.0 million cumulative effect of accounting change for goodwill.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.8% to $1,386.4 million, driven by a 7.0% increase in Glass Containers (due to higher international volumes and prices) and a 3.4% increase in Plastics Packaging (due to volume growth and resin cost pass-throughs).
• Profitability Decline: Segment EBIT decreased 21.4% to $177.5 million.
  • Glass Containers: EBIT fell $24.5 million due to higher energy costs ($11.2 million), lower pension income ($10 million), and severe winter weather reducing North American beer container demand. A national strike in Venezuela idled two plants, reducing EBIT by approximately $10 million.
  • Plastics Packaging: EBIT fell $23.9 million due to unfavorable product mix, lower selling prices, and the loss of a major customer in the advanced technology systems business.
• Cash Flow: Operating cash flow turned negative at $(64.9) million, compared to positive $36.4 million in Q1 2002. This was primarily due to increased accounts receivable from higher sales and the lack of a significant collection of past-due receivables from a Canadian acquisition that occurred in Q1 2002.
• Debt Structure: Total debt increased to $5.56 billion. The Company issued $900 million in new Senior Notes in May 2003 (post-period) to repurchase maturing debt and reduce the revolving credit facility.

Outlook, Risks, and Contingencies

• Asbestos Litigation: The Company faces approximately 24,000 pending asbestos claims. While Q1 2002 included a $475 million charge, management expects total asbestos-related payments in 2003 to be moderately lower than 2002. The ultimate liability cannot be estimated with certainty due to litigation volatility and co-defendant bankruptcies.
• Pension Obligations: Pension credits to earnings are expected to be approximately 60% lower in 2003 than 2002 due to reduced asset values and a lower assumed rate of return (8.75% vs. 9.64%). If the Accumulated Benefit Obligation exceeds plan assets, a significant non-cash charge may be required.
• Interest Expense: Management expects interest expense to increase by approximately $48 million in 2003 compared to 2002 due to the shift from variable-rate debt to higher-cost fixed-rate debt.
• Legal Proceedings: A patent infringement suit by Crown Cork & Seal Technologies regarding plastic containers is pending. Management believes an adverse decision would not have a material adverse effect due to alternative technologies and potential indemnification.

Investor Verification Checklist

• Asbestos Reserve Adequacy: Verify the sufficiency of the accrued liability for future asbestos claims given the acceleration of claims due to co-defendant bankruptcies.
• Pension Asset Valuation: Monitor the funded status of pension plans; a decline in asset values could trigger a significant balance sheet charge.
• Working Capital Trends: Assess the sustainability of the increase in accounts receivable and its impact on future operating cash flows.
• Debt Refinancing: Confirm the finalization of the amended Secured Credit Agreement and the successful execution of the tender offer for the 7.85% Senior Notes due 2004.
• Regional Operations: Evaluate the ongoing impact of the Venezuela strike and energy supply curtailments on South American operations.