OI

Business Context and Reporting Period

Company: Owens-Illinois, Inc. (O-I Glass, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 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

All figures in millions of dollars unless otherwise noted.

Note: Total Debt calculated as Long-term debt ($5,649.3) + Short-term loans/debt due within one year ($108.1).

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 5.5% in Q2 2003 ($1,579.6M) compared to Q2 2002 ($1,497.3M). For the six-month period, sales rose 5.6% to $2,966.0M. Growth was driven by higher prices and increased unit shipments in Europe, partially offset by lower shipments in North America (due to cool weather affecting beer demand) and South America (Venezuelan strike).
• Profitability Decline: Net earnings dropped significantly to $17.0M in Q2 2003 from $96.9M in Q2 2002. Segment EBIT decreased 12.2% to $238.0M in Q2 2003. The decline was attributed to higher energy costs, lower pension income, and unfavorable product mix/pricing in the Plastics Packaging segment.
• Unusual Items: Q2 2003 results included a $37.4M loss on the sale of long-term notes receivable and $16.8M in additional interest charges related to debt refinancing. Q2 2002 results were impacted by a $475M asbestos-related charge recorded in Q1 2002.
• Cash Flow: Operating cash flow turned negative at $(28.3)M for the first six months of 2003, compared to positive $240.2M in the same period of 2002. This was due to increased working capital requirements (higher receivables and inventories) and the absence of a significant collection of past-due accounts from a Canadian acquisition that occurred in 2002.

Guidance, Outlook, and Risks

• Debt Strategy: The Company issued $900M in fixed-rate notes in May 2003 to refinance variable-rate debt. Management expects this to increase interest expense by approximately $22M in the second half of 2003 compared to the second half of 2002.
• Asbestos Contingencies: Pending asbestos claims increased to approximately 30,000 as of June 30, 2003. The Company expects total asbestos-related payments in 2003 to be moderately lower than in 2002. Management believes current reserves are sufficient, though ultimate liability cannot be estimated with certainty.
• Pension Outlook: Due to lower assumed rates of return on assets and market declines, pretax pension credits to earnings are expected to be approximately 60% lower in 2003 than in 2002.
• Liquidity: The Company maintains a $1.9B credit facility with $144.2M unused as of June 30, 2003. Management anticipates operating cash flows and credit availability will be sufficient to fund obligations.
• Risks: Key risks include foreign currency fluctuations, energy cost volatility, competitive pricing pressures, and the timing of asbestos claim resolutions.

Investor Verification Checklist

• Asbestos Reserve Adequacy: Verify the sufficiency of the accrued liability given the increase in pending claims to 30,000 and the acceleration of claims due to co-defendant bankruptcies.
• Pension Asset Valuation: Monitor the fair value of pension plan assets relative to the Accumulated Benefit Obligation (ABO) to assess potential future non-cash charges if assets fall below ABO.
• Working Capital Trends: Review the sustainability of the increase in accounts receivable and inventory levels that contributed to negative operating cash flow in the first half of 2003.
• Debt Service Costs: Confirm the impact of the shift from variable to fixed-rate debt on future interest expense and earnings.
• Segment Performance: Analyze the divergence between sales growth and EBIT decline in the Plastics Packaging segment to understand pricing pressure and product mix shifts.