Owens Illinois says it cut debt $1.2 billion in 4th quarter, sees another $300 million possible in 2005

By Paul Deckelman

New York, Jan. 27 - Owens Illinois Inc. reported sharply better fourth-quarter and full-year numbers on Thursday and said that it was able to chop nearly $1.23 billion of debt from its balance sheet in the fourth-quarter alone, utilizing the proceeds from its sale last year of its blow-molded plastics business. And the Toledo, Ohio-based producer of glass and plastic containers anticipates continued de-leveraging this year to the tune of some $300 million.

In the fourth quarter ended Dec. 31, Owens Illinois reported net earnings of $21.7 million (11 cents per share) - a sharp turnaround from its year-earlier quarterly loss of $1.071 billion (a $7.33 per share loss).

On a continuing operations basis, the company lost $32.7 million (25 cents per share) due to a provision for on-going asbestos claim litigation and other one-time items, although it noted that this still represented an improvement over the comparable 2003 fourth-quarter continuing operations loss of $392.1 million (a $2.70 per share loss).

For all of 2004, the company had neat earnings of $235.5 million ($1.43 per share), versus a year-earlier net loss of $990.8 million (a $6.89 per share loss). Full-year earnings from continuing operations were $171.5 million ($1 per share) in 2004 versus a 2003 continuing operations loss of $330.1 million (a $2.39 per share loss).

The company's president and chief executive officer, Steven R. McCracken, declared on a morning conference call with analysts following the release of the results that Owens Illinois - which has moved aggressively to shed underperfoming or non-core assets, including the blow-molded plastics operation - has "made good progress in the quarter and the year on our turnaround and transformation progress."

One analyst on the call echoed those sentiments, declaring that the session was "a totally different conference call than a year or two ago."

The company's chief financial officer, Thomas L. Young, told the conference call that Owens-Illinois had reduced its debt by $1.227 billion in the quarter, chiefly by paying down $1.191 billion of term loan debt on Oct. 7 using the blow-molded plastics business sale proceeds.

That brought its consolidated debt at year-end to $5.3604 billion - down from $5.425 billion at the end of 2003 and, in fact, the lowest level since 1997. It had been at $6.59 billion as of the end of the third quarter on Sept. 30, just prior to the paydown, having risen from the 2003 year-end figure due to the company's incurrence of $1.36 billion to finance its acquisition of European packaging concern BSN-Glasspack, which closed in June.

Owens Illinois was able to further cut debt later in October, using $81.8 million cash proceeds from its sale of its 20% stake in Consol Ltd. of South Africa.

More fixed than floating debt

With this fourth quarter debt pay down, since the term-loan debt paid carried a variable interest rate, the company's mix of fixed- to variable-rate debt is now about 60% fixed , 40% variable - a flip-flop of the 40% fixed, 60% variable breakdown at the end of the second quarter. The CFO said Owens-Illinois "views [this] as an advantageous shift, in the current interest rate-cycle environment."

Young said that the company's strong cash flow, combined with the debt paydowns from the blow-molded business and the Consol stake, improved the company's balance sheet by $180.5 million.

For the full year 2004, cash from operating activities rose to $617.7 million from $351.1 million for full-year 2003. The principal drivers behind this change were improved operations and significantly improved working capital. Free cash flow for the full year was $155.9 million versus negative $78.4 million in 2003 - a $234 million turnaround.

Young said that strong operating cash flows in the fourth quarter "were somewhat masked" by the nearly $100 million of debt repurchase premiums, finance fees and accelerated interest payments related to Owens Illinois' "opportunistic and highly successful" November refinancing of notes associated with BSN, which saw the European company's existing 9¼% and 10¼% notes replaced by new 6¾% notes issued by Owens Illinois.

"But even with this masking effect," Young proclaimed, "it should be abundantly clear that our liquidity improvement initiatives and increased focus on free cash flow are having a very positive effect."

Cash flow, asset sales to cut debt further

For 2005, he said, the company plans to continue its de-leveraging strategy by reducing debt by $300 million, using the fruits of its "continued strong operating cash flow," plus the proceeds from its previously announced divestiture of two European glass plants.

Interest expense from continuing operations in the fourth quarter was $150.5 million, up from $104.9 million in the 2003 fourth quarter. Included in the expense for the latest period was $30.8 million for the write-off of unamortized finance fees related to early extinguishment of debt with the proceeds from the blow-molded plastic container divestiture, as well as the repurchase premiums from the refinancing of the BSN notes. Excluding these unusual items, fourth-quarter interest expense was $119.7 million. The higher interest in last year's fourth quarter was primarily due to a $14.2 million increase related to the BSN acquisition, as well as the impact of currency translation rates on dollar reported interest expense by approximately $4.3 million. Partially offsetting the interest expense increases was $3.7 million of savings due to lower interest rates resulting from the December 2003 repricing of the company's senior secured credit agreement, as well as interest savings resulting from Owens Illinois' fixed-to-floating interest rate swap program, completed in the first quarter of 2004, on a portion of its fixed-rate debt.

Smaller rise in asbestos reserves

One of the things which impacted on Owens Illinois' income from continued operations in 2004 was charges related to the company's management of its potential asbestos liabilities. After conducting its annual comprehensive review of its asbestos- related liabilities and costs, Owens Illinois decided to increase its reserve for possible future asbestos-related costs by $152.6 million, a considerably smaller increase than the $450 million rise in the asbestos reserve it reported a year earlier.

Even as it raised its provision for potential future asbestos-related costs, Owens Illinois reported that asbestos-related cash payments in the fourth quarter came to $39.8 million, down 5% from $41.8 million for the fourth quarter of 2003. For the full year 2004, asbestos-related payments of $190.1 million were down 4.5% from $199 million a year earlier.

Owens Illinois said new claim filings in the fourth quarter increased by about 900, although 95% of the increased filings were non-malignant or non-impaired cases. New-claim filings for the full year 2004 meanwhile fell 42% from a year earlier. As of Dec. 31, there were some 35,000 asbestos-related lawsuits and claims pending against the company, up from around 30,000 at the end of 2003. Owens Illinois attributed the higher number of claims to a lower rate of claim dispositions for non-serious cases than in the comparable earlier period.

Young also said that "the possibility of legislative reforms at the federal and state levels accelerated the number of case filings."

The company believes that "a significant number" of the pending cases either are subject to dismissal because they were filed in improper forums, or they have exposure dates after Owens Illinois' 1958 exit from the business (Owens-Illinois, along with Corning Inc., was one of the original corporate parents of Toledo, Ohio-based insulation maker Owens Corning, currently in bankruptcy due to massive asbestos claims, but the unit was spun off and restructured as a public company in 1952, with Owens Illinois subsequently shedding its remaining stake in the joint venture over the next few years).

It said that its cash flows from operations and other sources "will be sufficient" to meet its asbestos-related obligations on a short-term and long-term basis.

McCracken, in assessing the company's status, said that "we believe that we're making progress - progress in liquidity and underlying earnings and progress in our five core priorities and three core strategies that concentrate on high-gain, low-hanging fruit. We're not trying to do everything all at the same time in this turnaround transformation progress."

All told, he predicted, "we expect another positive year in 2005."

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