Owens-Illinois, Inc., reported on 20 July 2004 that it made 2Q 2004 net earnings of USD 82.0 million, or USD 0.52 per share (diluted), compared with net earnings for the 2Q of 2003 of USD 17.0 million…
Owens-Illinois, Inc., reported on 20 July 2004 that it made 2Q 2004 net earnings of USD 82.0 million, or USD 0.52 per share (diluted), compared with net earnings for the 2Q of 2003 of USD 17.0 million, or USD 0.08 per share (diluted). Results for the 2Q of 2003 included additional interest charges of USD 16.8 million (USD 10.7 million after tax), or USD 0.07 per share, for early retirement of debt, principally note repurchase premiums, and a loss of USD 37.4 million (pretax and after tax), or USD 0.25, per share from the sale of long-term notes receivable. Excluding these items, earnings in the 2Q of 2003 were USD 65.1 million, or USD 0.40 per share. Results for the 2Q of 2004 included a gain on the sale of certain real property of USD 20.6 million (USD 14.5 million after tax), or USD 0.10 per share, and a USD 14.5 million charge (USD 9.1 million after tax), or USD 0.06 per share, related to the settlement of certain intellectual property litigation. Excluding these items, earnings in the 2Q of 2004 were USD 76.6 million or USD 0.48 per share. As a result of improved operations coupled with improved working capital management, recent divestitures and lower capital expenditures, at 30 June 2004, Owens-Illinois reduced its debt and increased its cash balance by around USD 480 million (excluding the additional USD 1.360 billion of debt and USD 87 million of cash related to the acquisition of BSN Glasspack, S.A. on 21 June 2004) compared with the 30 June 2003 balances. “I am gratified by our progress in the 2Q. The businesses are demonstrating good balance in EBIT and cash flow. Our liquidity initiatives are clearly working as we reduce our working capital and capital expenditures. We have a clear focus on free cash, while we maintain an emphasis on fundamental earnings growth,” said Steve McCracken, Owens-Illinois Chairman and Chief Executive Officer. “The BSN integration process is fully engaged with goals and processes set to achieve synergies and to improve the base European businesses. In addition, we are approaching a significant milestone in our liquidity and corporate transformation plans as we near an agreement for the sale of our blow-molded plastic container business.” Business Review Summary Net sales for the 2Q 2004 were USD 1.716 billion compared to USD 1.580 billion for the year-ago period. The recently-acquired BSN businesses contributed USD 51 million of net sales for the ten days to 30 June 2004. Segment EBIT for the 2Q of 2004 was USD 229.9 million, compared to USD 219.0 million for the 2Q of 2003. The main factors behind the increased 2004 Segment EBIT were higher worldwide glass and plastics unit shipments, improved glass pricing, a more favorable product sales mix, greater manufacturing efficiency, and favorable currency translation. The recently-acquired BSN businesses contributed USD 0.4 million of EBIT for the ten days to 30 June 2004 which included a reduction in gross profit of USD 4.6 million related to the step-up of BSN finished goods inventory as required by SFAS No. 141. Glass Containers Segment The Glass Containers segment reported 2Q 2004 net sales of USD 1,220 million compared with 2Q 2003 net sales of USD 1,075 million, up 13.5%. Segment EBIT for the 2Q of 2004 was USD 188.8 million, up USD 5.0 million, or 2.7%, on the 2Q of 2003. The improved Segment EBIT results were driven by higher selling prices, a more favorable product sales mix, more efficient production, and favorable currency translation. Partially offsetting these positive factors were lower production levels because of increased furnace repairs in 2004 and inventory control consistent with the company“s working capital goals, a USD 6.0 million fall in pension income, and a USD 5.7 million write-down of obsolete and slow-moving machine repair parts in connection with the company“s working capital review. Within the segment, European glass container operations reported higher sales and EBIT of circa 31% and 25%, respectively, for the 2Q of 2004 compared with the 2Q of 2003. These improved results were largely due tohigher unit shipments, improved manufacturing efficiency, and favorable currency translation rates. Partially offsetting these positive factors were modestly higher energy costs and a less favorable product sales mix. On 21 June 2004, the company completed the acquisition of BSN Glasspack, S.A., the second largest glass container manufacturer in Europe. The company“s 2Q 2004 results include ten days of net sales and EBIT contributions of circa USD 51 million and USD 0.4 million, respectively, from BSN Glasspack, S.A.. The USD 0.4 million EBIT contribution includes a reduction in gross profit of USD 4.6 million related to the step-up of BSN finished goods inventory as required by SFAS No. 141. The company expects that the balance of this step-up of BSN finished goods inventory will be recorded as increased cost of sales during the 3Q and 4Q of 2004, which will reduce gross profit by an estimated additional USD 26 million. North American glass container operations reported sales up 2%, however, EBIT declined by around 15%. The higher sales resulted from increased selling prices and a more favorable product sales mix as unit shipments fell by about 3%. The decrease in unit shipments was more than accounted for by the loss of a beverage container customer. However, shipments of beer containers in the quarter were up around 4% from the 2Q of 2003. The EBIT decline was mainly due to lower production levels resulting from increased furnace repair activity in 2004 and inventory control consistent with the company“s working capital goals, higher repair and maintenance costs, higher natural gas costs, increased freight expense reflecting higher fuel costs, and a USD 4.5 million reduction in pension income. Partially offsetting these EBIT declines were higher selling prices and a more favorable product sales mix. Asia Pacific glass container operations reported higher sales and EBIT of about 19% and 5%, respectively, for the 2Q of 2004 compared with the 2Q of 2003. The positive impacts of higher unit shipments, improved manufacturing efficiencies, and favorable currency translation rates were partially offset by higher warehousing costs and lower equity earnings. In the South American glass operations, 2Q 2004 sales and EBIT increased by about 11% and 20%, respectively, compared with the 2Q of 2003. These improved results were largely due to higher production and shipment activity, increased selling prices, and improved manufacturing efficiencies. Plastics Packaging Segment For the 2Q of 2004, the Plastics Packaging segment reported net sales of USD 496.6 million compared with net sales of USD 505.0 million for the 2Q of 2003. Segment EBIT for the 2Q of 2004 was USD 59.0 million compared with USD 54.2 million for the 2Q of 2003. On 18 June 2004, a subsidiary of the company, ACI Packaging, sold a substantial part of its plastics packaging business in Australia and New Zealand to Visy Industrial Plastics. Interest Expense Interest expense in the 2Q of 2004 of USD 116.2 million compares with interest expense in the 2Q of 2003, excluding charges of USD 16.8 million for early debt retirement, of USD 121.6 million. The lower interest expense in 2004 was mainly due to the savings from the December 2003 repricing of the Senior Secured Credit Agreement and about USD 6.7 million in interest savings as a result of the company“s fixed-to- floating interest rate swap program on a portion of its fixed-rate debt. As previously disclosed, the company expects interest expense to increase by around USD 94 million on an annual basis resulting from the acquisition of BSN. The incremental interest expense included in the company“s 2Q results related to BSN for the ten days to 30 June 2004, was about USD 2.8 million. Consolidated debt at the end of the 2Q of 2004 was USD 6.702 billion compared with USD 5.426 billion at year-end 2003, an increase of USD 1.276 billion. The acquisition of BSN increased debt by USD 1.360 billion. Capital Spending Capital spending for the 2Q of 2004 totaled USD 101.4 million, compared with USD 101.3 million for the 2Q of 2003. 2Q 2004 capital spending was hit by greater furnace rebuild activity in North American glass container compared with the 2Q of 2003, and expenditures for the new container plant in Windsor, Colorado. For the 1H 2004, capital spending of USD 183.9 million compares with USD 220.7 for the year-ago period. Six-Month Results For the 1H 2004, the company reported net earnings of USD 131.0 million, or USD 0.81 per share (diluted), compared with net earnings of USD 51.4 million, or USD 0.28 per share for the 1H 2003. Results for the 1H of 2003 included additional interest charges of USD 16.8 million (USD 10.7 million after tax), or USD 0.07 per share, for early retirement of debt, principally note repurchase premiums, and a loss of USD 37.4 million (pretax and after tax), or USD 0.25 per share, from the sale of long-term notes receivable. Excluding these items, earnings in the 1H of 2003 were USD 99.5 million, or USD 0.60 per share. Results for the 1H of 2004 included a gain on the sale of certain real property of USD 20.6 million (USD 14.5 million after tax), or USD 0.10 per share, and a USD 14.5 million charge (USD 9.1 million after tax), or USD 0.06 per share related to the settlement of certain intellectual property litigation. Excluding these items, earnings in the 2H of 2004 were USD 125.6 million or USD 0.77 per share. Effective Tax Rate The company“s effective tax rate for the 1H 2004 was 28.9% compared with 29.0% for FY 2003 (excluding separately taxed items in both periods.) Asbestos Asbestos-related cash payments in the 2Q of 2004 were USD 45.5 million, compared to USD 44.8 million for the 2Q of 2003. For the 1H 2004, asbestos-related payments of USD 95.9 million compare with USD 99.9 million for the 1H 2003. New claim filings in the 2Q of 2004 continued to decline. For the 1H 2004, new filings have declined about 55% from the 1H June 2003. As of 30 June 2004, the number of asbestos-related lawsuits and claims pending against the company was circa 32,000, up from around 29,000 pending claims at 31 December 2003, due to a lower rate of claim disposition than in the comparable earlier period. Restructuring of Blow-Molded Plastic Container Business The company has undertaken a restructuring of its blow-molded plastic container business and to that end the business will continue to operate for health care customers and will be combined with the Closure and Prescription Products businesses. The company will pursue a divestiture of the balance of its blow-molded plastic container business in order to pay down debt. Benefit Plan Changes Owens-Illinois plans to change its benefit plans in line with a change to Medicare: in 2006, Medicare coverage of prescription drug costs will begin. Accordingly, the company will eliminate coverage for prescription drugs as of 1 January 2006 for all Medicare-eligible salaried retirees. The company is also looking at changing its salaried retirement plan for active employees. The company estimates that the annual expense reduction from both of these cost reduction initiatives will be about USD 20 million commencing in 2005. Outlook As previously disclosed, the company expects interest expense to go up by about USD 94 million on an annual basis resulting from the acquisition of BSN, or circa USD 23.5 million per quarter. As required by SFAS No. 141, the company stepped-up the value of the BSN acquired finished goods inventory. For the ten days to 30 June 2004, such step-up reduced gross profit by USD 4.6 million in the 2Q of 2004. The company expects that the balance of this step-up of BSN finished goods inventory will be recorded as increased cost of sales during the third and 4Qs of 2004 which will reduce gross profit by an estimated additional USD 26 million. While the company has about 75% of its 2004 North American natural gas usage hedged, the continued increase in the cost of natural gas will affect the remaining 25% that is not hedged. The company estimates that at current natural gas prices, its North American glass container operations will incur about USD 5 million inadditional energy costs during the 2H 2004, compared with the 2H 2003.