OI

Business Context and Reporting Period

Company: Owens-Illinois, Inc. (O-I)
Reporting Period: Fiscal year ended December 31, 2004
Business Overview: O-I is the world's largest manufacturer of glass containers and a leading manufacturer of health care packaging and plastic closures. The company operates in two primary segments: Glass Containers and Plastics Packaging. In 2004, the company significantly realigned its portfolio by acquiring BSN Glasspack, S.A. (a major European glass container manufacturer) and divesting its blow-molded plastic container operations.

Key Financial Metrics (2004)

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 23.2% to $6.13 billion, driven primarily by the acquisition of BSN Glasspack (adding $768.6 million in sales), higher selling prices, and favorable foreign exchange rates.
• Profitability Turnaround: The company returned to profitability from continuing operations ($171.5 million) compared to a loss of $330.1 million in 2003. This improvement was due to higher segment operating profits and a significantly reduced charge for asbestos-related costs ($84.9 million after-tax in 2004 vs. $292.5 million in 2003).
• Portfolio Realignment:
  • Acquisition: Acquired BSN Glasspack for approximately $1.3 billion in June 2004, strengthening the European glass container position.
  • Divestiture: Sold blow-molded plastic container operations for approximately $1.2 billion in October 2004. Proceeds were used to repay term loans.
• Debt Management: Total debt decreased slightly to $5.36 billion. The company refinanced debt related to the BSN acquisition and repurchased a portion of its senior notes.

Guidance, Outlook, and Risks

• Strategic Priorities: Management focuses on European integration, improving liquidity, reducing leverage, and building growth momentum. The company expects significant earnings improvement from European operations by the end of 2006 following the BSN integration.
• Asbestos Litigation: A significant ongoing risk. The company recorded a $152.6 million charge in 2004 to increase reserves. Approximately 35,000 claims were pending as of year-end. The company anticipates cash payments will be moderately lower in 2005 but remains substantial.
• Market Risks:
  • Energy Costs: Energy accounts for 15-20% of manufacturing costs. The company uses commodity futures to hedge natural gas prices but remains exposed to volatility.
  • Foreign Exchange: Significant operations in Europe, Asia Pacific, and South America expose the company to currency fluctuations. The company uses currency swaps to mitigate this risk.
  • Goodwill Impairment: The Asia Pacific Glass reporting unit had a business enterprise value only 6% above its book value, making it susceptible to impairment if cash flow projections decline or the cost of capital increases.
• Unusual Items: 2004 results included a $31.0 million gain from an Italian restructuring and a $4.9 million gain from mark-to-market adjustments on commodity futures contracts.

Key Facts for Investor Verification

• Asbestos Reserve Adequacy: Verify the assumptions used for the $152.6 million asbestos charge and the trajectory of pending claims (35,000 pending) versus cash outflows ($190.1 million in 2004).
• BSN Integration Synergies: Monitor the realization of cost reduction synergies and the completion of the purchase price allocation (currently preliminary with $786.6 million in unallocated goodwill).
• Debt Covenants: Review compliance with the Third Amended and Restated Secured Credit Agreement, specifically regarding leverage ratios and fixed charge coverage, given the high debt load ($5.36 billion).
• Goodwill Sensitivity: Assess the stability of the Asia Pacific Glass reporting unit, which showed a narrow margin between fair value and book value during the annual impairment test.
• Plastics Segment Focus: Confirm the performance of the remaining Plastics Packaging segment (Healthcare and Closures) following the divestiture of the blow-molded container business.