OI

Owens-Illinois, Inc. (O-I Glass) Q1 2004 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004. Owens-Illinois, Inc. operates in the rigid packaging industry with two primary segments: Glass Containers and Plastics Packaging. The company is currently in the process of acquiring BSN Glasspack, S.A., the second-largest glass container manufacturer in Europe, with closing expected in the second quarter of 2004.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 11.5% year-over-year. The Glass Containers segment drove this growth with a 14.2% increase, attributed to higher pricing, increased shipments (particularly beer containers), and favorable foreign exchange rates. The Plastics Packaging segment grew 6.0% due to a 10% increase in unit shipments, partially offset by lower selling prices.
• Profitability: Net earnings rose 42.5% to $49.0 million. Segment EBIT for Glass Containers increased 30.6%, benefiting from higher capacity utilization and cost savings from plant closures in late 2003. Plastics Packaging EBIT increased 9.4% due to improved manufacturing performance.
• Cash Flow: Operating cash flow improved significantly by $84.3 million, turning from a negative $64.9 million in Q1 2003 to a positive $19.4 million in Q1 2004. This was primarily due to reduced working capital requirements and lower inventory levels.
• Debt Structure: Total debt remained relatively stable, though the company amended its Secured Credit Agreement in March 2004 to facilitate the BSN acquisition. Interest expense increased slightly to $114.4 million due to the issuance of fixed-rate notes in 2003.

Outlook, Risks, and Management Commentary

• Acquisition: The company has entered a definitive agreement to acquire BSN Glasspack for approximately $1.46 billion (including assumed debt). This transaction is expected to increase annual cash interest payments by approximately $94 million.
• Strategic Review: A strategic review of blow-molded plastics operations is underway to explore options to maximize investor value, including a potential divestiture. A decision is expected in Q2 2004.
• Asbestos Litigation: The company faces substantial asbestos-related liabilities. As of March 31, 2004, there were approximately 31,000 pending claims. Management expects total asbestos-related cash payments in 2004 to be moderately lower than in 2003. The ultimate liability cannot be estimated with certainty.
• Goodwill Impairment Risk: The company recorded a $670 million goodwill impairment charge in Q4 2003. Management notes that the Asia Pacific Glass reporting unit remains sensitive to changes in cash flow projections or cost of capital assumptions, which could trigger further impairment charges.
• Pension Plans: The company expects to record less than $1 million in pension expense for the full year 2004, a significant decrease from the $29.9 million credit recorded in 2003. However, if the Accumulated Benefit Obligation exceeds plan assets, a non-cash charge could significantly reduce net worth.

Investor Verification Checklist

• BSN Acquisition Closing: Verify the regulatory approval status and closing date of the BSN Glasspack acquisition, as this will materially impact debt levels and interest expenses.
• Plastics Divestiture: Monitor the outcome of the strategic review for the blow-molded plastics operations to assess potential asset sales or restructuring.
• Asbestos Accruals: Review the annual comprehensive review of asbestos liabilities to ensure the accrued amount remains sufficient to cover future claims and legal fees.
• Goodwill Valuation: Assess the sensitivity of the Asia Pacific Glass reporting unit's goodwill to changes in market conditions and cash flow projections.
• Pension Funding: Track the fair value of pension plan assets relative to the Accumulated Benefit Obligation to gauge the risk of future non-cash charges.