Earnings: O-I reported full-year net income of $0.95 per share (diluted) and a fourth-quarter net loss of $0.95 per share. Full-year adjusted earnings (non-GAAP) were $2.93 per share, one of the Company's best results since the 1991 IPO. Fourth-quarter adjusted earnings were $0.49 per share, up from $0.45 per share in fourth quarter 2008.
Sales and shipments: O-I's fourth-quarter sales increased 9 percent from the prior year, as higher prices and favorable currency translation more than offset modestly lower shipment levels.
Costs: O-I's strategic footprint initiative reduced fixed costs by $122 million in 2009, partially offsetting higher unabsorbed fixed costs from temporary production curtailments. Curtailments helped reduce inventory 11 percent.
Free cash flow: Strong working capital management helped generate $372 million of free cash flow in 2009. In the fourth quarter, the Company applied $113 million of cash to reduce debt and to accelerate 2010 pension contributions.
Capital structure: Cash increased to $812 million at year end 2009, while net debt decreased to $2.8 billion.
Fourth quarter 2009: Strong operating performance offset higher non-operational costs
Fourth-quarter net sales were $1.9 billion in 2009, up from $1.7 billion in the prior year. Improved price and mix and a favorable foreign currency translation effect more than offset lower shipments.
The loss from continuing operations in the fourth quarter of 2009 was $159.3 million, or $0.95 per share, compared with a loss from continuing operations of $228.6 million, or $1.38 per share, in the prior year. Exclusive of the items not representative of ongoing operations, fourth-quarter 2009 adjusted net earnings were $84.2 million, or $0.49 per share (diluted), up from adjusted net earnings of $76.2 million, or $0.45 per share (diluted), in the prior year fourth quarter. A description of items that management considers not representative of ongoing operations and a reconciliation of the GAAP to non-GAAP earnings and earnings per share can be found in Note 1 provided below and in charts on the Company's Web site, www.o-i.com.
Commenting on the fourth quarter, Chairman and Chief Executive Officer Al Stroucken said, "Our business performed very well in the quarter, offsetting expected higher non-operational costs. While volumes were down modestly from the prior year, glass shipments have gradually recovered and our year-over-year volume comparisons have improved each quarter throughout the year. Our strong cash flow in 2009 allowed us to invest in capital projects, reduce debt and accelerate pension contributions in the fourth quarter, all of which should improve our operating and financial flexibility going forward."
O-I reported fourth-quarter 2009 segment operating profit of $195.6 million, up from $157.0 million in the prior year. Operating profits benefited from a 4 percent improvement in sales due to price and mix and a $26 million favorable foreign currency translation effect. Glass container shipments, in tonnes, declined 5 percent from fourth quarter 2008, representing the smallest quarterly decline on a year-over-year basis since the onset of the global economic recession. Continued temporary production curtailments to match supply with lower demand and to reduce inventories primarily resulted in $24 million of additional unabsorbed fixed costs compared to fourth quarter 2008. Proactive efforts to better manage working capital reduced inventory levels, in tonnes, by 11 percent from December 2008. Non-operational costs increased from the prior year, primarily due to higher year-over-year pension expense and a higher effective tax rate (excluding the effect of items listed in Note 1 below) in the fourth quarter of 2009.
The Company continued to implement its strategic footprint alignment initiative, focused on optimizing global assets. O-I has permanently closed a total of 21 furnaces since the program's inception in 2007, including two furnaces in South America and one furnace in North America during the fourth quarter. Compared to 2008, fixed costs were down $18 million in the fourth quarter and $122 million for the year. In the fourth quarter, O-I recorded a restructuring charge of $100.5 million ($93.8 million after tax amount attributable to O-I), principally for North American capacity realignment actions in 2010.
Full Year 2009: Strong financial performance amid a challenging global market
Full-year 2009 net sales were $7.1 billion, down from $7.9 billion in the prior year. 2009 net sales benefited from 5 percent higher price and mix, which was more than offset by unfavorable foreign currency translation effects and 10 percent lower global shipments.* Earnings from continuing operations for full year 2009 were $161.8 million, or $0.95 per share (diluted), compared with earnings from continuing operations of $251.5 million, or $1.48 per share (diluted), in the prior year. Exclusive of the items listed in Note 1 that management considers not representative of ongoing operations, full-year 2009 adjusted net earnings were $499.5 million, or $2.93 per share (diluted) compared with $645.2 million, or $3.80 per share (diluted) in 2008. Lower 2009 adjusted net earnings reflected the impact of less volume, cost inflation and unfavorable currency translation despite higher price and mix and benefits from the Company's strategic footprint initiative program. * Financial highlights: Strong free cash flow generation supports strategic priorities
The Company reported total debt of $3.61 billion and cash of $812 million at December 31, 2009. Net debt was $2.80 billion, down $157 million from the prior year. This reduction in net debt primarily reflected $372 million of free cash flow generated in 2009, which more than offset $172 million of unfavorable foreign currency translation. Free cash flow was driven by improved working capital management and is net of capital expenditures of $428 million. Given the strong free cash flow generation in 2009, the Company elected to repay $63 million of debt in the fourth quarter, as well as to accelerate $50 million of 2010 contributions to non-U.S. pension plans. In addition to significant cash at year end to support future strategic priorities, O-I had approximately $760 million available under its global revolving credit facility, which does not mature until June 2012.
Regarding the Company's Venezuelan operations, in mid-year 2009, O-I recognized that market conditions were negatively impacting the official Venezuelan currency exchange process. To avoid increased exposure to the Venezuelan currency, the Company began remitting bolivars in the parallel exchange market and incurred a foreign currency exchange loss of $28 million ($19.5 million after tax amount attributable to O-I) in the second half of 2009. The Company translated its year-end balance sheet in that country at the parallel exchange rate rather than the historic official rate, which had remained stable for a number of years. This resulted in a charge to total shareholders' equity of $179 million. In early 2010, the Venezuelan government devalued its currency and established a multi-tiered official exchange rate system that now includes the parallel market rate. Furthermore, Venezuela was officially deemed a highly inflationary economy as of January 1, 2010. Beginning in 2010, the Company does not expect to incur further foreign exchange losses on cash remittances, as it will translate Venezuelan financial results at the parallel rate instead of the historic official rate. The incremental impact of reporting Venezuelan results at the parallel rate for a full year and slightly higher imported raw material costs is currently expected to negatively impact 2010 earnings by $0.10 to $0.15 per share.
Asbestos-related cash payments during the fourth quarter and full year 2009 were $67.9 million and $190.3 million, respectively. This compared with $69.9 million and $210.2 million for the same periods last year. The deferred amount payable for previously settled claims was approximately $36.3 million at the end of 2009, up slightly from year end 2008. New lawsuits and claims filed during full year 2009 were approximately 6,000, compared with approximately 5,000 in 2008. The number of pending asbestos-related lawsuits and claims approximated 7,000 as of December 31, 2009, compared with approximately 11,000 at year end 2008. * The Company conducted its annual comprehensive review of asbestos-related liabilities in the fourth quarter. As a result of that review, O-I recorded a non-cash charge of $180.0 million (before and after tax amount) compared to the 2008 charge of $250.0 million ($248.8 million after tax amount). The lower 2009 asbestos charge reflected, in part, the significantly lower level of pending asbestos-related lawsuits at year end 2009 compared to 2008. The accrued balance for future asbestos-related costs as of December 31, 2009, was $485.1 million.
The Company successfully renegotiated several North American customer contracts, effective in 2010. Regarding these new agreements, Stroucken said, "We will earn higher profit margin percentages on this business, and attain greater margin stability in the future. To achieve these objectives, shipment levels in the region will likely decline. As a result, we will incur additional temporary production curtailments in the first half of 2010 until we permanently reduce capacity due to this change in business mix. In 2010, we intend to maintain the strong North American operating profits achieved in 2009, while long-term profits will improve considerably once capacity has been realigned."
Commenting on the Company's outlook for full year 2010, Stroucken said, "Globally, higher prices should more than offset cost inflation, which we anticipate will remain modest throughout the year. As the economy continues to recover, we expect global glass shipments will improve from the prior year. Results should benefit from lower fixed costs due to the Company's strategic footprint initiative, while non-operational costs will increase primarily due to higher pension expense. Despite the challenges of the global economic recession during the past two years, O-I enters 2010 well positioned to drive profitable growth as markets recover and we execute on our strategic priorities."