O-I: continued earnings momentum in 2Q 2005 results

Reporting its 2Q 2005 financial results on 20 July 2005, Owens-Illinois, Inc., highlighted net earnings of USD 0.53 per share (diluted) up USD 0.01 year-on-year, earnings from continuing operations of…

Reporting its 2Q 2005 financial results on 20 July 2005, Owens-Illinois, Inc., highlighted net earnings of USD 0.53 per share (diluted) up USD 0.01 year-on-year, earnings from continuing operations of USD 0.53 per share (including unusual items) unchanged year-on-year, and earnings from continuing operations (exclusive of unusual items) of USD 0.56 per share compared to USD 0.43 per share in 2004. Sales and unit shipments increased 31% and 32% respectively in the quarter, segment operating profit rose 28%, and asbestos cash payments declined by 10.4%. Steve McCracken, O-I Chairman and Chief Executive Officer said: “We are pleased with our continued earnings progress, despite some difficult conditions during the quarter. European synergies, unit volume growth, improved pricing and productivity overcame inflationary pressures and several localized operational issues to provide positive earnings growth. While 2Q cash flow was impacted by quarter-specific expenditures, cash generation for debt reduction remains our primary focus and we expect positive progress during the remainder of the year”. RECONCILIATION OF 2Q 2004 EARNINGS TO 2Q 2005 Earnings per share from continuing operations, excluding certain items the company considers not consistent with ongoing operations, were USD 0.56 per share for the 2Q of 2005 compared with USD 0.43 per share for the 2Q of 2004. Included in the 2005 results were favorable adjustments of depreciation and amortization in connection with finalizing the fair values of the BSN Glasspack assets acquired in June 2004. The difference between the estimated amounts recorded in 2004 and the final amounts related to 2004 accounted for a benefit of USD 0.04 per share in the 2Q. Second quarter earnings also include an additional tax charge of USD 0.05 to reduce net operating loss benefits in Ohio, where the corporate income tax is being phased out and replaced with a gross receipts tax. Exclusive of these items, the company earned USD 0.57 per share in the 2Q of 2005 compared with USD 0.43 per share in the 2004 quarter, excluding unusual items in both periods. During the 2Q of 2005, the principal earnings drivers were the positive impact of the BSN acquisition, higher unit shipments, productivity improvements and cost reductions, improved pricing, and a more favorable product sales mix. These factors accounted for an increase of USD 0.26 per share. Additionally, currency translation rates resulted in an increase of USD 0.02 per share. Partially offsetting these positive factors were higher energy costs, which reduced earnings per share by USD 0.06. All other cost inflation items, excluding energy, decreased earnings by another USD 0.06 per share. Earnings in the 2Q of 2005 were also lower by USD 0.01 per share as a result of divestitures of the company“s 20% interest in Consol Limited in October 2004 and a glass plant in Corsico, Italy, in January 2005. The combination of all other items accounted for a decrease of USD 0.01 per share. BUSINESS REVIEW GLASS CONTAINERS SEGMENT Segment Operating Profit in the 2Q of 2005 for the Glass Containers segment grew by USD 56.7 million, or 30.0%, from the 2Q of 2004. Contributing to the quarter-over-quarter increase was the incremental benefit of the BSN acquisition coupled with higher unit shipments, improved pricing, product sales mix and productivity, and favorable currency translation. Shipments of champagne and wine containers were particularly strong across all regions. Partially offsetting these positive factors were weaker beer container shipments, as well as increasing energy, raw material, and transportation costs. PLASTICS PACKAGING SEGMENT Segment Operating Profit for the 2Q of 2005 was USD 33.8 million, level with USD 33.8 million in the 2Q of 2004. INTEREST EXPENSE Interest expense in the 2Q of 2005 was USD 116.6 million versus USD 102.7 million for the 2Q of 2004. The interest expense for the 2Q of 2004 represents continuing operations only, as the interest expense related to the debt for the divested blow-molded plastic container business has been reclassified to discontinued operations. The higher interest expense in the 2Q of 2005 includes approximately USD 10.3 million for higher debt primarily related to the BSN acquisition, partially offset by voluntary prepayments of debt in the third and 4Qs of 2004 and the 1Q of 2005. In addition, higher interest rates on the company“s variable rate debt increased interest expense by approximately USD 4.5 million during the quarter versus the prior year quarter. Partially offsetting these increases was USD 0.9 million lower amortization of deferred finance fees. CAPITAL SPENDING Capital spending for continuing operations for the 2Q of 2005 totaled USD 109.2 million, compared with USD 93.4 million for the year ago quarter. For the six months ended June 2005, capital spending of USD 185.5 million compared with USD 169.3 million for the six months ended June 2004. The combination of the new glass plant in Windsor, Colorado, and spending related to the acquired BSN operations for the 2Q and 1H 2005 amounted to approximately USD 37 million and USD 65 million, respectively. CONSOLIDATED DEBT AND CASH FLOWS Consolidated debt at 30 June 2005, was USD 5.381 billion, compared with USD 5.255 billion at 31 March 2005. Cash and short-term investments ended the 2Q at USD 211.8 million compared with USD 228.3 million at the end of the 1Q. The combination of the change in debt and the change in cash represents an approximate USD 143 million increase in net debt. More than accounting for this net debt increase in the 2Q was USD 293.5 million of cash outflows related to the following items: 1) USD 65 million for the settlement of two foreign cross currency swaps; 2) USD 39 million to Graham Packaging as a post-closing purchase price adjustment based largely on changes in certain working capital components of the divested plastic business; 3) USD 28 million related to European integration and restructuring; and 4) higher cash interest in the 2Q of USD 161.5 million, USD 94 million higher than the 1Q 2005, principally due to semi-annual interest payments on the company“s fixed rate public debt. These 2Q payments approximate slightly more than one-third of the company“s annual cash interest payments. ASBESTOS Asbestos-related cash payments in the 2Q of 2005 were USD 40.8 million compared with USD 45.5 million for the 2Q of 2004, a reduction of USD 4.7 million, or 10.4%. New claim filings in the 1H of 2005 were approximately 5,300, down approximately 29% from the 1H of 2004. As of 30 June 2005, the number of asbestos-related lawsuits and claims pending against the company was approximately 33,000, compared with 35,000 at 31 December, 2004. The company believes that a significant number of these pending cases have exposure dates after the company“s 1958 exit from the business, for which the company takes the position that it has no liability or are subject to dismissal because they were filed in improper forums. The company anticipates that cash flows from operations and other sources will be sufficient to meet its asbestos-related obligations on a short-term and long- term basis. SIX-MONTH RESULTS For the first six months of 2005, the company reported earnings from continuing operations of USD 203.7 million, or USD 1.26 per share (diluted) compared with USD 137.4 million, or USD 0.81 per share, for the first six months of 2004. Earnings from continuing operations, excluding the items listed in Note (1), were USD 1.00 per share for the 1H of 2005, compared with USD 0.67 per share for the 2004 period. Results for the 1H of 2005 include the favorable 2Q depreciation and amortization adjustments of USD 0.04 per share and the additional tax charge of USD 0.05 per share discussed above. Also included are favorable adjustments of USD 0.04 per share from a reduction of the company“s accruals for self-insured risks and USD 0.03 per share from a reduction of the tax provision primarily to recognize changes in deferred taxes at several international subsidiaries, both recognized in the 1Q of 2005. Exclusive of these items, the company earned USD 0.94 per share in the 1H of 2005, compared with USD 0.71 per share in the 1H of 2004. EFFECTIVE TAX RATE Excluding the effects of separately taxed unusual items in both years, the company“s effective tax rate for the first six months of 2005 was 29.2% compared with 27.4% in the first six months of 2004, and 26.9% for the full year 2004. The higher 2005 effective tax rate is principally due to a change in the mix of earnings toward higher tax international jurisdictions, the recent tax legislation in Ohio and recognition of other discrete changes in deferred taxes during the 1H of 2005. The company expects its full year 2005 effective tax rate, exclusive of separately taxed items and discrete adjustments, to be approximately 29%. OUTLOOK “Although we hit a few bumps in the road during the 2Q, our financial turnaround and business transformation remain on track as we continue to focus on our core priorities and primary strategies. We remain confident in our ability to deliver solid earnings and cash flows from operations for the remainder of the year, despite inflationary pressures and the negative cash impacts of financing and European integration. Our European leadership team is now firmly in place and our global supply chain and procurement initiatives are underway with positive momentum,” said McCracken.