Date: 1 February 2008
Fourth Quarter Net Sales Increase 15.2%The Company reported net sales from continuing operations of $1.957 billion for the fourth quarter of 2007, compared with $1.699 billion a year ago, an increase of $258 million or 15.2%.Approximately two-thirds of the quarter's sales increase is attributable to favorable currency translation. Improved prices and product sales mix accounted for the remaining one third of the sales increase. Sales volume, measured in terms of glass tons shipped was down approximately 1% in the fourth quarter of 2007, compared with the same quarter in 2006 and for the full year, volume was up 2%.
Fourth Quarter Results Improve by More Than $100 Million
The Company reported earnings from continuing operations for the fourth quarter of 2007 of $14.6 million compared with a fourth quarter loss of $90.0 million, a year ago. Both quarters include items that management considers not representative of ongoing operations. A description of these items is shown below in Note 1. Exclusive of these items, 2007 fourth quarter earnings from continuing operations rose to $167.4 million, compared with $35.7 million last year.
The increase in earnings excluding Note 1 items was primarily attributable to better operating profit margins driven by: (1) improved prices and product sales mix, (2) lower warehouse, delivery and other cost of sales and (3) reduced operating expenses. Favorable foreign currency translation and a lower worldwide effective tax rate also contributed to the earnings improvement.
Fourth Consecutive Quarter of Positive EPS
The Company earned $0.06 per share (diluted) from continuing operations in the fourth quarter of 2007 compared with a loss of $0.63 per share for the fourth quarter of 2006. Exclusive of the items listed in Note 1, earnings per share (diluted) from continuing operations increased to $1.00 in the fourth quarter 2007 from $0.19 in the same quarter last year. A description of the items management considers not representative of ongoing operations and a reconciliation of the GAAP to non-GAAP earnings.
Full Year Results Improve by more than $300 Million
Net sales from continuing operations for 2007 increased 14% to $7.567 billion from $6.650 billion in 2006. The $917 million increase was driven by: (1) favorable currency translation, principally of the Euro and Australian dollar, (2) improved prices and product sales mix across all regions, and (3) a 2% increase in the tons of glass sold globally.
For the full year 2007, the Company reported earnings from continuing operations of $299.3 million or $1.78 per share (diluted), compared with a loss from continuing operations of $3.8 million or $0.17 per share last year.
Exclusive of the items listed in Note 2 that management considers not representative of ongoing operations, the Company earned $493.7 million or $2.94 per share (diluted) in 2007, compared with $173.2 million or $0.98 per share (diluted) in 2006, an increase of 185%. The reported results for both years exclude the plastics packaging business which was sold on July 31, 2007. The increased earnings in 2007 were primarily the result of improved prices and product sales mix, improvements in glass factory operating efficiencies, favorable foreign currency translation, and a lower worldwide effective tax rate.
"2007 was clearly a successful year for O-I. Our team achieved this success through manufacturing efficiencies, operating cost improvements, pricing discipline and procurement initiatives," said Al Stroucken, Chairman and Chief Executive Officer. "We also significantly improved our capital structure. We now have greater flexibility to build on our global leadership position."
2007 Cash Flow Improves, Supported by Working Capital and Capital Spending
Cash provided by continuing operating activities was $154.6 million in the fourth quarter of 2007, compared with $232.4 million in the same quarter of 2006. Free Cash Flow (defined as cash provided by continuing operations, plus collections on receivables arising from securitization, less capital spending for continuing operations) was $26.8 million in the fourth quarter of 2007, compared with $126.1 million during the same quarter in 2006. For the year 2007, the Company increased its generation of Free Cash Flow to $332.6 million, compared with negative Free Cash Flow of $46.7 million in 2006. The $379.3 million year-over-year increase in Free Cash Flow resulted principally from improved profit margins. Higher cash from the change in working capital substantially offset the additional spending to settle asbestos-related claims and lawsuits in the third and fourth quarters. Management expects that Free Cash Flow generation will exceed $425 million in 2008.
During the fourth quarter of 2007, working capital was a $53.9 million source of cash for the Company, compared with a $116.9 million source during the same period in 2006. For the full year 2007, working capital was a $36.2 million source of cash for the Company, as compared with a $129.8 million use of cash last year, including collections on receivables arising from securitization.
For the year 2007, the Company reported $292.5 million in capital expenditures plus $27.0 million capitalized under financing arrangements and $452.3 million of depreciation and amortization expense. The Company expects that the level of capital expenditures for continuing operations in 2008 will increase, but will not exceed 80% to 85% of the depreciation and amortization expense for the year.
Debt Reduced by More than $1.7 Billion
The Company repaid approximately $1.9 billion in debt during 2007. This was primarily achieved by applying the net proceeds from the sale of the plastics business along with cash generated from operations. As of December 31, 2007, the Company had a total debt balance of $3.714 billion compared with $5.457 billion at year end 2006. The amount of debt reported on the balance sheet at the end of 2007 does not reflect the full amount of cash used for debt repayment due to the unfavorable effect of approximately $200 million in foreign currency translation on the debt balance. The Company also had more than $800 million of available capacity under its secured revolving credit facility at year end 2007.
Effective Tax Rate Decreases
The Company's reported tax rate was 29.2% in 2007, and 75.9% in 2006. Excluding the items presented in Note 2, the Company's worldwide effective tax rate from continuing operations was 24.4% in 2007. This compares to an effective tax rate for continuing operations of 40.3% in 2006. The reduction is principally due to: (1) a change in mix of earnings to jurisdictions where the Company is subject to lower effective rates, and (2) the effect of higher earnings and lower interest costs in the U.S., where the Company has recognized a valuation allowance on net deferred tax assets. Cash tax payments for the full year 2007, excluding cash taxes on the sale of the plastics business, amounted to $152.5 million, compared to $125.5 million for 2006. The cash tax increase is a result of improved earnings, the unfavorable effect of foreign currency translation, and the impact of restructuring tax costs for the continuing business. The Company expects that the effective tax rate will not change significantly in 2008 and cash taxes will be in the range of $175 million to $185 million.
Asbestos Payments Increase; Accrued Liability, Deferred Amounts Payable and Pending Cases Decline
Asbestos-related cash payments during the fourth quarter and full year of 2007 totaled $120.9 million and $347.1 million, respectively. This compares with $34.9 million and $162.5 million for the same periods last year. Cash payments increased in part to fund, on an accelerated basis, settlements of certain claims on terms favorable to the Company. Cash payments were also used, in part, to reduce the deferred amounts payable for previously settled claims to approximately $34 million as of December 31, 2007, from approximately $82 million as of December 31, 2006.
New asbestos-related lawsuits and claims reported in 2007 were approximately 9,000 compared with 7,000 during 2006. The Company believes that without its accelerated settlement of claims, the number of new asbestos- related lawsuits and claims would have been down year-over-year. In addition, the number of pending asbestos-related lawsuits and claims was down 26% to approximately 14,000 as of December 31, 2007, compared with approximately 19,000 pending as of year end 2006.
The Company conducted a comprehensive review of its asbestos-related liabilities and costs in connection with finalizing and reporting its results for the full year 2007. As a result of that review, the Company recorded a non-cash charge of $115.0 million (pretax and after tax) to increase the accrual for future asbestos-related costs. In 2006, the Company increased its accrual for future asbestos-related costs by $120.0 million (pretax and after tax). The balance of the accrual for future asbestos-related costs as of December 31, 2007, was $455.5 million, compared with $687.6 million as of December 31, 2006.
Company Optimistic about 2008
The Company expects to continue building on its 2007 successes. "The operational progress we've made over the last year will serve as a solid foundation for our business going forward," continued Stroucken. "I'm confident that we are capable of much more. While we continue to build a stronger, leaner and more flexible company, we will begin to focus more on marketing and innovation to maximize the value of the products and services we offer our customers. Having a stronger balance sheet will also give us the financial flexibility we need to tap new markets and expand in others."
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