<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
(Mark one) FORM 10-Q
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended September 30, 1998
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Owens-Illinois, Inc.
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9576 22-2781933
- - ---------------- ----------- ------------------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation or
organization)
One SeaGate, Toledo, Ohio 43666
- - ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
419-247-5000
- - ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing require-
ments for the past 90 days. Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Owens-Illinois, Inc. $.01 par value common stock - 155,362,462
shares at October 31, 1998.
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2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Condensed Consolidated Financial Statements presented herein are unaudited
but, in the opinion of management, reflect all adjustments necessary to
present fairly such information for the periods and at the dates indicated.
Since the following unaudited condensed consolidated financial statements have
been prepared in accordance with Article 10 of Regulation S-X, they do not
contain all information and footnotes normally contained in annual
consolidated financial statements; accordingly, they should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1997.
3
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 1998 and 1997
(Millions of dollars, except share and per share amounts)
1998 1997
Revenues: -------- --------
Net sales $1,453.6 $1,239.5
Royalties and net technical assistance 7.4 4.6
Equity earnings 1.4 3.7
Interest 7.6 4.8
Other 30.7 26.7
-------- --------
1,500.7 1,279.3
Costs and expenses:
Manufacturing, shipping, and delivery 1,105.7 961.4
Research and development 9.5 7.9
Engineering 8.7 7.6
Selling and administrative 72.4 57.8
Interest 103.5 69.8
Other 20.4 23.9
-------- --------
1,320.2 1,128.4
-------- --------
Earnings before items below 180.5 150.9
Provision for income taxes 63.3 51.5
Minority share owners' interests in earnings
of subsidiaries 3.6 7.6
-------- --------
Earnings before extraordinary items 113.6 91.8
Extraordinary charges from early extinguishment
of debt, net of applicable income taxes (16.4)
-------- --------
Net earnings $ 113.6 $ 75.4
======== ========
Basic earnings per share of common stock:
Earnings before extraordinary items $ 0.70 $ 0.65
Extraordinary charges (0.12)
-------- --------
Net earnings $ 0.70 $ 0.53
======== ========
Weighted average shares outstanding (thousands) 155,346 140,333
======= =======
Diluted earnings per share of common stock:
Earnings before extraordinary items $ 0.69 $ 0.65
Extraordinary charges (0.12)
-------- --------
Net earnings $ 0.69 $ 0.53
======== ========
Weighted diluted average shares (thousands) 165,629 142,182
======= =======
See accompanying notes.
4
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 1998 and 1997
(Millions of dollars, except share and per share amounts)
1998 1997
Revenues: -------- --------
Net sales $3,937.1 $3,520.3
Royalties and net technical assistance 20.6 16.3
Equity earnings 10.6 13.0
Interest 22.1 19.4
Other 100.8 84.2
-------- --------
4,091.2 3,653.2
Costs and expenses:
Manufacturing, shipping, and delivery 2,998.4 2,736.0
Research and development 26.1 22.6
Engineering 25.1 22.8
Selling and administrative 199.5 168.2
Interest 267.8 237.1
Other 92.2 82.6
-------- --------
3,609.1 3,269.3
-------- --------
Earnings before items below 482.1 383.9
Provision for income taxes 154.1 125.7
Minority share owners' interests in earnings
of subsidiaries 19.0 24.9
-------- --------
Earnings before extraordinary items 309.0 233.3
Extraordinary charges from early extinguishment
of debt, net of applicable income taxes (14.1) (100.9)
-------- --------
Net earnings $ 294.9 $ 132.4
======== ========
Basic earnings per share of common stock:
Earnings before extraordinary items $ 2.03 $ 1.77
Extraordinary charges (0.10) (0.77)
-------- --------
Net earnings $ 1.93 $ 1.00
======== ========
Weighted average shares outstanding (thousands) 148,135 131,277
======= =======
Diluted earnings per share of common stock:
Earnings before extraordinary items $ 2.00 $ 1.75
Extraordinary charges (0.09) (0.76)
-------- --------
Net earnings $ 1.91 $ 0.99
======== ========
Weighted diluted average shares (thousands) 154,046 133,453
======= =======
See accompanying notes.
5
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998, December 31, 1997, and September 30, 1997
(Millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
Assets --------- -------- ---------
Current assets:
Cash, including time deposits $ 294.0 $ 218.2 $ 202.5
Short-term investments, at cost which
approximates market 23.1 16.1 74.5
Receivables, less allowances for losses and
discounts ($39.6 at September 30, 1998,
$52.9 at December 31, 1997, and $41.0
at September 30, 1997) 830.0 681.6 715.7
Inventories 801.3 592.4 579.2
Prepaid expenses 169.8 140.0 128.3
--------- -------- --------
Total current assets 2,118.2 1,648.3 1,700.2
Investments and other assets:
Investments and advances 190.1 87.7 128.4
Repair parts inventories 267.2 227.2 237.9
Prepaid pension 683.2 635.3 670.8
Insurance for asbestos-related costs 217.5 239.3 252.7
Deposits, receivables, and other assets 395.1 307.0 277.9
Net assets held for sale 567.0
Excess of purchase cost over net assets
acquired, net of accumulated amortization
($381.2 at September 30, 1998, $328.3
at December 31, 1997, and $323.0 at
September 30, 1997) 3,116.7 1,294.9 1,303.7
--------- -------- --------
Total investments and other assets 5,436.8 2,791.4 2,871.4
Property, plant, and equipment, at cost 5,214.1 4,105.1 3,866.3
Less accumulated depreciation 1,895.0 1,699.7 1,651.1
--------- -------- --------
Net property, plant, and equipment 3,319.1 2,405.4 2,215.2
--------- -------- --------
Total assets $10,874.1 $6,845.1 $6,786.8
========= ======== ========
6
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CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
Liabilities and Share Owners' Equity --------- -------- ---------
Current liabilities:
Short-term loans and long-term debt
due within one year $ 231.8 $ 176.9 $ 165.3
Current portion of asbestos-related
liabilities 70.0 85.0 85.0
Accounts payable and other liabilities 985.1 781.9 753.9
--------- -------- --------
Total current liabilities 1,286.9 1,043.8 1,004.2
Long-term debt 5,602.7 3,146.7 3,197.6
Deferred taxes 313.1 229.2 204.9
Nonpension postretirement benefits 337.7 354.8 354.5
Other liabilities 411.8 482.2 496.4
Commitments and contingencies
Minority share owners' interests 258.8 246.5 240.2
Share owners' equity:
Convertible preferred stock 452.5
Exchangeable preferred stock 20.1 20.4 21.4
Common stock, par value $.01 per share
(155,356,862 shares outstanding
at September 30, 1998; 140,526,195
at December 31, 1997; and 140,431,861
at September 30, 1997) 1.5 1.4 1.4
Capital in excess of par value 2,181.1 1,558.4 1,553.4
Retained earnings (deficit) 199.5 (90.3) (125.8)
Accumulated other comprehensive income (191.6) (148.0) (161.4)
--------- -------- --------
Total share owners' equity 2,663.1 1,341.9 1,289.0
--------- -------- --------
Total liabilities and share owners' equity $10,874.1 $6,845.1 $6,786.8
========= ======== ========
See accompanying notes.
7
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 1998 and 1997
(Millions of dollars)
1998 1997
--------- ---------
Cash flows from operating activities:
Earnings before extraordinary items $ 309.0 $ 233.3
Non-cash charges (credits):
Depreciation 268.1 206.3
Amortization of deferred costs 73.1 45.2
Other (37.1) 9.1
Change in non-current operating assets (45.0) (66.7)
Asbestos-related payments (70.8) (72.2)
Asbestos-related insurance proceeds 21.8 18.7
Reduction of non-current liabilities (4.1) (4.5)
Change in components of working capital (103.3) (138.8)
--------- ---------
Cash provided by operating activities 411.7 230.4
Cash flows from investing activities:
Additions to property, plant, and equipment (377.3) (278.4)
Acquisitions, net of cash acquired (3,596.5) (209.1)
Net cash proceeds from divestitures 40.6 55.7
--------- ---------
Cash utilized in investing activities (3,933.2) (431.8)
Cash flows from financing activities:
Additions to long-term debt 5,160.6 1,704.8
Repayments of long-term debt (2,631.2) (1,810.8)
Payment of finance fees and debt retirement costs (61.5) (159.7)
Increase in short-term loans 68.0 14.0
Issuance of common stock 640.7 502.7
Issuance of convertible preferred stock 439.6
Payment of convertible preferred stock dividends (5.1)
--------- ---------
Cash provided by financing activities 3,611.1 251.0
Effect of exchange rate fluctuations on cash (13.8) (8.0)
--------- ---------
Increase in cash 75.8 41.6
Cash at beginning of period 218.2 160.9
--------- ---------
Cash at end of period $ 294.0 $ 202.5
========= =========
See accompanying notes.
8
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OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars,
except share and per share amounts
1. Acquisition of Worldwide Packaging Businesses of BTR plc
On April 30, 1998, the Company completed the acquisition of the worldwide
glass and plastics packaging businesses of BTR plc in an all cash transaction
valued at approximately $3.6 billion (the "Acquisition"). In the Acquisition,
the Company acquired BTR's glass container operations in the Asia-Pacific
region (i.e. Australia, New Zealand, China and Indonesia) and its plastics
packaging operations in the United States, South America, Australia, Europe
and Asia ("BTR Packaging"), as well as BTR's United Kingdom glass container
manufacturer ("Rockware Glass"). Pursuant to an agreement with the Commission
of the European Communities, the Company has committed to sell Rockware Glass
(the "Rockware Sale"). The Acquisition was initially financed through
additional borrowings under the Company's Second Amended and Restated Credit
Agreement (see Note 6), which was amended on April 30, 1998, to provide, among
other things, additional borrowing capacity for the Acquisition. On May 20,
1998, the $2.2 billion of proceeds received from the offerings of the
Company's common stock, preferred stock, and debt securities were used to
repay a portion of the Term Loan outstanding under the Second Amended and
Restated Credit Agreement (see Note 6).
The acquisition is being accounted for under the purchase method of
accounting. The total purchase cost of approximately $3.6 billion will be
allocated to the tangible and identifiable intangible assets and liabilities
based upon their respective fair values. Such allocations will be based upon
valuations which have not been finalized. Accordingly, the allocation of the
purchase consideration included in the accompanying Condensed Consolidated
Balance Sheet at September 30, 1998, is preliminary. The accompanying
Condensed Consolidated Results of Operations for the nine month period ended
September 30, 1998, includes five months of BTR Packaging operations.
The aggregate purchase cost and its preliminary allocation to the historical
assets and liabilities of BTR Packaging and Rockware Glass are as follows (in
millions of dollars):
Net working capital acquired $ 249
Property, plant and equipment 937
Net assets held for sale 535
Other non-current assets 104
Excess of purchase cost over net assets acquired 1,897
------
3,722
Long-term liabilities (122)
------
Aggregate purchase cost $3,600
======
9
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2. Pro Forma Information - Acquisition of BTR Packaging
Had the acquisition of BTR Packaging described in Note 1 and the related
financing, including the public offerings, described in Note 6 occurred on
January 1, 1998 and 1997, unaudited pro forma consolidated net sales, net
earnings, and net earnings per share of common stock would have been as
follows:
Nine Months ended September 30, 1998
----------------------------------------------------
As BTR Packaging Financing Pro Forma
Reported Adjustments Adjustments As Adjusted
-------- ------------- ----------- -----------
Net sales $3,937.1 $384.1 $4,321.2
======== ========
Net earnings $309.0 $ 32.8 $(31.1) $310.7
====== ======
Basic net earnings per
share of common stock $2.03 $1.89
===== =====
Basic weighted average
shares outstanding
(thousands) 148,135 155,242
Diluted net earnings per
share of common stock $2.00 $1.88
===== =====
Diluted weighted average
shares (thousands) 154,046 165,589
Nine Months ended September 30, 1997
----------------------------------------------------
As BTR Packaging Financing Pro Forma
Reported Adjustments Adjustments As Adjusted
-------- ------------- ----------- -----------
Net sales $3,520.3 $921.1 $4,441.4
======== ========
Net earnings $233.3 $120.1 $(73.7) $279.7
====== ======
Basic net earnings per
share of common stock $1.77 $1.80
===== =====
Basic weighted average
shares outstanding
(thousands) 131,277 145,757
Diluted net earnings per
share of common stock $1.75 $1.78
===== =====
Diluted weighted average
shares (thousands) 133,453 147,933
10
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Shares of common stock issuable upon conversion of the convertible preferred
stock in the 1997 pro forma period were not included in the computation of
1997 pro forma diluted earnings per share because the effect would be
antidilutive.
Certain of the glass container and plastics packaging products produced by BTR
Packaging are subject to seasonal demand. Shipments of glass container
products have typically been greater in the fourth and first quarters of the
year compared to the second and third quarters. Shipments of plastics
packaging products have typically been greater in the second and third
quarters of the year compared to the first and fourth quarters. Net sales of
BTR Packaging for the full year 1997 were approximately $1.2 billion.
The pro forma data does not purport to represent what the results of
operations would actually have been if the Acquisition and the related
financing had in fact occurred on the dates indicated, or to project results
of operations for any future period.
3. Net Assets Held For Sale
In connection with the Acquisition discussed in Note 1, the Company has
committed to sell Rockware Glass. The Company is in the process of
negotiating the sale of Rockware Glass. The accompanying Condensed
Consolidated Results of Operations for the three and nine month periods ended
September 30, 1998, exclude Rockware Glass and related financing costs.
Proceeds from the sale will be used to reduce amounts outstanding under the
Second Amended and Restated Credit Agreement.
11
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4. Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
- - -----------------------------------------------------------------------------
Three months ended
September 30,
--------------------------
1998 1997
Numerator: ----------- -----------
Earnings before extraordinary items $113.6 $91.8
Preferred stock dividends:
Convertible (5.4)
Exchangeable (.4) (.4)
- - -----------------------------------------------------------------------------
(5.8) (.4)
Numerator for basic earnings per
share - income available to common
share owners 107.8 91.4
Effect of dilutive securities -
preferred stock dividends 5.8 .4
- - -----------------------------------------------------------------------------
Numerator for diluted earnings per
share - income available to common
share owners after assumed
exchanges and conversions
of preferred stock $113.6 $91.8
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted average
shares 155,345,678 140,333,028
Effect of dilutive securities:
Stock options 972,251 1,014,384
Exchangeable preferred stock 722,036 834,719
Convertible preferred stock 8,589,355
- - -----------------------------------------------------------------------------
Dilutive potential common shares 10,283,642 1,849,103
- - -----------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
exchanges and conversions
of preferred stock 165,629,320 142,182,131
=============================================================================
Basic earnings per share $0.70 $0.65
=============================================================================
Diluted earnings per share $0.69 $0.65
=============================================================================
Options to purchase 1,706,898 weighted average shares of common stock which
were outstanding during the three months ended September 30, 1998 were not
12
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included in the computation of diluted earnings per share because the options'
exercise price was greater than the average market price of the common shares
and, therefore, the effect would be antidilutive.
- - -----------------------------------------------------------------------------
Nine months ended
September 30,
--------------------------
1998 1997
Numerator: ----------- -----------
Earnings before extraordinary items $309.0 $233.3
Preferred stock dividends:
Convertible (7.8)
Exchangeable (1.1) (1.1)
- - -----------------------------------------------------------------------------
(8.9) (1.1)
Numerator for basic earnings per
share - income available to common
share owners 300.1 232.2
Effect of dilutive securities -
preferred stock dividends 8.9 1.1
- - -----------------------------------------------------------------------------
Numerator for diluted earnings per
share - income available to common
share owners after assumed
exchanges and conversions
of preferred stock $309.0 $233.3
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted average
shares 148,135,216 131,277,324
Effect of dilutive securities:
Stock options 1,067,158 1,189,680
Exchangeable preferred stock 690,648 985,962
Convertible preferred stock 4,153,095
- - -----------------------------------------------------------------------------
Dilutive potential common shares 5,910,901 2,175,642
- - -----------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
exchanges and conversions
of preferred stock 154,046,117 133,452,966
=============================================================================
Basic earnings per share $2.03 $1.77
=============================================================================
Diluted earnings per share $2.00 $1.75
=============================================================================
13
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Options to purchase 426,725 weighted average shares of common stock which were
outstanding during the nine months ended September 30, 1998 were not included
in the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
Earnings per share are computed independently for each period presented. Due
primarily to the issuance of 14,479,522 shares and 16,936,100 shares of common
stock in the second quarters of 1998 and 1997, respectively, the second
quarter of 1998 issuance of convertible preferred stock, which is convertible
into 8,589,355 shares of common stock, and the resultant effect on average
shares, per share amounts calculated on a year-to-date basis may not equal the
sums of such amounts calculated separately for each quarter.
5. Inventories
Major classes of inventory are as follows:
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
--------- -------- ---------
Finished goods $584.8 $447.3 $432.4
Work in process 28.9 9.4 9.0
Raw materials 116.5 92.5 78.6
Operating supplies 71.1 43.2 59.2
------ ------ ------
$801.3 $592.4 $579.2
====== ====== ======
14
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6. Long-Term Debt
The following table summarizes the long-term debt of the Company:
- - ----------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
1998 1997 1997
Bank Credit Agreement: --------- -------- ---------
Revolving Credit Facility:
Revolving Loans $2,152.0 $2,125.0 $1,894.0
Offshore Loans:
1.39 billion Australian dollars 789.2
333 million British pounds 559.4
153.5 billion Italian lira 88.9
Bid Rate Loans 50.0 50.0 218.0
Senior Notes:
7.85%, due 2004 300.0 300.0 300.0
7.15%, due 2005 350.0
8.10%, due 2007 300.0 300.0 300.0
7.35%, due 2008 250.0
Senior Debentures:
7.50%, due 2010 250.0
7.80%, due 2018 250.0
9.95% Senior Subordinated Notes due 2004 100.0
Other 327.9 441.8 429.9
- - ----------------------------------------------------------------------------
5,667.4 3,216.8 3,241.9
Less amounts due within one year 64.7 70.1 44.3
- - ----------------------------------------------------------------------------
Long-term debt $5,602.7 $3,146.7 $3,197.6
============================================================================
On April 30, 1998, in connection with the Acquisition, the Company amended its
former bank credit agreement by entering into a Second Amended and Restated
Credit Agreement (the "Bank Credit Agreement" or "Agreement") with a group of
banks which expires on December 31, 2001. The Agreement provides up to $7.0
billion in credit facilities and consists of (i) a $2.5 billion term loan to
the Company (the "Term Loan") (see last paragraph of Note 6 for repayment of
Term Loan) and (ii) a $4.5 billion revolving credit facility (the "Revolving
Credit Facility") available to the Company, which includes a $1.75 billion
fronted offshore loan revolving facility (the "Offshore Facility") available,
subject to certain sublimits, to certain of the Company's foreign subsidiaries
and denominated in certain foreign currencies. The Agreement includes an
Overdraft Account facility providing for aggregate borrowings up to $100
million which reduce the amount available for borrowing under the Revolving
Credit Facility. In addition, the terms of the Bank Credit Agreement permit
the Company to request Bid Rate Loans from banks participating in the
Agreement. Borrowings outstanding under Bid Rate Loans are limited to $750
million and reduce the amount available for borrowing under the Revolving
Credit Facility. The Agreement also provides for the issuance of letters of
credit totaling up to $500 million, which also reduce the amount available for
borrowing under the Revolving Credit Facility. At September 30, 1998, the
Company had unused credit available under the Bank Credit Agreement of $800.3
million.
15
<PAGE>
Borrowings under the Revolving Loans commitment bear interest, at the
Company's option, at the prime rate or a reserve adjusted Eurodollar rate.
Loans under the Offshore Facility bear interest, at the applicable borrower's
option, at the applicable Offshore Base Rate (as defined in the Bank Credit
Agreement). Borrowings under the Revolving Credit Facility also bear a margin
linked to the Company's Consolidated Leverage Ratio, as defined in the
Agreement. The margin is currently .500% and is limited to a range of .275%
to 1.000%. Overdraft Account loans bear interest at the prime rate minus the
facility fee percentage, defined below. The weighted average interest rate on
borrowings outstanding under the Revolving Loans commitment at September 30,
1998, was 6.04%. The weighted average interest rate on borrowings outstanding
under the Offshore Facility at September 30, 1998, was 6.62%. While no
compensating balances are required by the Agreement, the Company must pay a
facility fee on the Revolving Credit Facility commitments. The facility fee,
currently .250%, is limited to a range of .125% and .500%, based on the
Company's Consolidated Leverage Ratio.
Borrowings outstanding under the Bank Credit Agreement are currently
unsecured. Guarantee and pledge provisions under the Bank Credit Agreement
are linked to the Company's Consolidated Leverage Ratio. Such provisions will
not be executed provided the Company maintains a specified Consolidated
Leverage Ratio through June 30, 1999. All of the obligations of the Company's
foreign subsidiaries under the Offshore Facility are guaranteed by the
Company. The Company's Senior Notes and Senior Debentures rank pari passu
with the obligations of the Company under the Bank Credit Agreement. The Bank
Credit Agreement, Senior Notes, and Senior Debentures are senior in right of
payment to all existing and future subordinated debt of the Company.
Under the terms of the Bank Credit Agreement, dividend payments with respect
to the Company's Preferred or Common Stock and payments for redemption of
shares of its Common Stock are subject to certain limitations. The Agreement
also requires, among other things, the maintenance of certain financial
ratios, and restricts the creation of liens and certain types of business
activities and investments.
On March 6, 1998, the Company filed a Registration Statement on Form S-3 (the
"Registration Statement") with the Securities and Exchange Commission
registering an aggregate of $4.0 billion of debt and equity securities. The
Registration Statement was declared effective by the Securities and Exchange
Commission on April 20, 1998. On May 20, 1998, pursuant to the Registration
Statement, the Company completed the public offerings of: (1) 15,690,000
shares of common stock at a public offering price of $41.8125 per share; (2)
9,050,000 shares of $2.375 convertible preferred stock at a public offering
price of $50.00 per share; (3) $350 million aggregate principal amount of
7.15% Senior Notes due May 15, 2005; (4) $250 million aggregate principal
amount of 7.35% Senior Notes due May 15, 2008; (5) $250 million aggregate
principal amount of 7.50% Senior Debentures due May 15, 2010; and (6) $250
million aggregate principal amount of 7.80% Senior Debentures due May 15, 2018
(collectively the "Offerings"). The Company repaid $2.2 billion of the Term
Loan on May 20, 1998, with proceeds received from the Offerings. In August,
1998 the Company repaid the remainder of the Term Loan with borrowings under
the Revolving Loans commitment.
16
<PAGE>
7. Extraordinary Charges from Early Extinguishment of Debt
During the second quarter of 1998, the Company used proceeds from the
Offerings to repay a portion of the Term Loan due October 30, 1999. As a
result, the Company recorded extraordinary charges for the write-off of
unamortized deferred finance fees totaling $22.8 million, net of applicable
income taxes of $8.7 million.
During the third quarter of 1997, the Company used borrowings under its Bank
Credit Agreement to retire $450 million of higher cost debt. As a result, the
Company recorded extraordinary charges for the write-off of unamortized
deferred finance fees and redemption premiums totaling $26.6 million, net of
applicable income taxes of $10.2 million. In addition, during the second
quarter of 1997, the Company used proceeds from the May 1997 sale of shares of
common stock and the issuance of debt securities pursuant to public offerings
to retire approximately $1.4 billion of higher cost debt. As a result, the
Company recorded extraordinary charges for the write-off of unamortized
deferred finance fees and redemption premiums totaling $136.9 million, net of
applicable income taxes of $52.4 million.
8. Convertible Preferred Stock
In conjunction with the Offerings, on May 20, 1998, the Company issued
9,050,000 shares of convertible preferred stock at a public offering price of
$50.00 per share (see Note 6). Annual cumulative dividends of $2.375 per
share accruing from the date of issuance are payable in cash quarterly
commencing August 15, 1998. The convertible preferred stock is convertible at
the option of the holder at any time, unless previously redeemed, into shares
of common stock of the Company at an initial conversion rate of 0.9491 shares
of common stock for each share of convertible stock, subject to adjustment in
certain events. The convertible preferred stock may not be redeemed prior to
May 15, 2001. At any time on or after such date, the convertible preferred
stock may be redeemed only in shares of common stock of the Company at the
option of the Company at predetermined redemption prices plus accrued and
unpaid dividends, if any, to the redemption date.
Holders of the convertible preferred stock have no voting rights, except as
required by applicable law and except that among other things, whenever
accrued and unpaid dividends on the convertible preferred stock are equal to
or exceed the equivalent of six quarterly dividends payable on the convertible
preferred stock such holders will be entitled to elect two directors to the
Company's board of directors until the dividend arrearage has been paid or
amounts have been set apart for such payment. In addition, certain changes
that would be materially adverse to the rights of holders of the convertible
preferred stock cannot be made without the vote of holders of two-thirds of
the outstanding convertible preferred stock. The convertible preferred stock
is senior to the common stock and the exchangeable preferred stock with
respect to dividends and liquidation events.
17
<PAGE>
9. Cash Flow Information
Interest paid in cash aggregated $209.2 million and $222.9 million for the
nine months ended September 30, 1998 and September 30, 1997, respectively.
Income taxes paid in cash totaled $28.8 million and $59.2 million for the nine
months ended September 30, 1998 and September 30, 1997, respectively.
10. Contingencies
The Company is one of a number of defendants (typically 10 to 20) in a
substantial number of lawsuits filed in numerous state and federal courts by
persons alleging bodily injury (including death) as a result of exposure to
dust from asbestos fibers. From 1948 to 1958, one of the Company's former
business units commercially produced and sold a high-temperature, clay-based
insulating material containing asbestos. The insulation material was used in
limited industrial applications such as shipyards, power plants and chemical
plants. During its ten years in the high-temperature insulation business, the
Company's aggregate sales of insulation material containing asbestos were less
than $40 million. The Company exited the insulation business in April 1958.
The traditional asbestos personal injury lawsuits and claims relating to such
production and sale of asbestos material typically allege various theories of
liability, including negligence, gross negligence and strict liability and
seek compensatory and punitive damages in various amounts (herein referred to
as "asbestos claims"). As of September 30, 1998, the Company estimates that
it is a named defendant in asbestos claims involving approximately 13,000
plaintiffs and claimants.
The Company's indemnity payments for these claims have varied on a per claim
basis, and are expected to continue to vary considerably over time. They are
affected by a multitude of factors, including the type and severity of the
disease sustained by the claimant; the occupation of the claimant; the extent
of the claimant's exposure to asbestos-containing insulation products
manufactured or sold by the Company; the extent of the claimant's exposure to
asbestos-containing products manufactured or sold by other producers; the
number and financial resources of other defendants and the nature and extent
of indemnity or contribution claims that may be asserted by or against such
other defendants; the jurisdiction of suit; the presence or absence of other
possible causes of the claimant's illness; the availability of legal defenses
such as the statute of limitations or state of the art; and whether the claim
was resolved on an individual basis or as part of a group settlement.
The Company's indemnity payments may also be affected by co-defendant
bankruptcy and class action filings. Since 1982 a number of former producers
of asbestos-containing products have filed for reorganization under Chapter 11
of the United States Bankruptcy Code ("Co-Defendant Bankruptcies"). Pending
lawsuits are generally stayed as to these entities, but continue against the
Company and other defendants. The precise impact on the Company of these
Co-Defendant Bankruptcies is not determinable. However, the Company believes
that the Co-Defendant Bankruptcies probably have adversely affected, and may
adversely affect in the future, the Company's share of the total liability to
plaintiffs in previously settled or otherwise determined lawsuits and claims.
18
<PAGE>
The Company is also one of a number of defendants in (i) bodily injury
lawsuits involving plaintiffs who allege that they are or were maritime
workers ("Maritime Claims"), (ii) a lawsuit on behalf of individuals in
Pennsylvania who have no asbestos-related impairment, but nevertheless seek
the costs of future medical monitoring ("Medical Monitoring Claims"), (iii)
defendants' claims for contribution ("Contribution Claims") and (iv) lawsuits
brought by public or private property owners alleging damages to their various
properties ("Property Damage Claims"). Certain of these Maritime Claims,
Medical Monitoring Claims and Property Damage Claims seek class action
treatment. Based on its past experience, the Company presently believes that
the probable ultimate disposition of these Maritime Claims, Medical Monitoring
Claims, Contribution Claims and Property Damage Claims will not involve any
material additional liability and does not include them in the description
herein of asbestos claims or in the total number of pending asbestos claims
above.
In April 1986, the Company and Aetna Life & Casualty Company ("Aetna") agreed
to a final settlement fully resolving asbestos bodily injury and property
damage insurance coverage litigation between them (which followed the entry of
partial summary judgment in favor of the Company in such litigation). The
Company has processed claims which have effectively exhausted its coverage
under the Aetna agreement. In 1984, the Company initiated similar litigation
in New Jersey against the Company's insurers, including its wholly-owned
captive insurer Owens Insurance Limited ("OIL"), and certain other parties for
the years 1977 through 1985 in which the Company sought damages and a
declaration of coverage for both asbestos bodily injury and property damage
claims under insurance policies in effect during those years (Owens-Illinois,
Inc. v. United Insurance Co., et al, Superior Court of New Jersey, Middlesex
County, November 30, 1984).
In December 1994, the Company partially settled for approximately $100 million
its coverage claim against OIL to the extent of reinsurance provided to OIL by
certain reinsurance companies representing approximately 19% of total United
Insurance coverage limits. Subsequently, the Company reached separate
settlements for approximately $140 million with various other reinsurers, and
with OIL to the extent of reinsurance provided by such settling reinsurance
companies. These settlements also included all of the reinsurers who had
participated actively as litigating parties in the United Insurance case.
Following the settlements described above, a settlement agreement (the "OIL
Settlement") was reached with OIL. The OIL Settlement, which was endorsed by
three mediators and approved by OIL's independent directors, called for the
payment of remaining non-settled reinsurance at 78.5% of applicable
reinsurance limits, increasing to 81% on approximately March 1, 1996 and
accruing interest thereafter at 10% per annum.
In December 1995, the presiding judge in the United Insurance case entered a
Consent Judgment settling the United Insurance case as to all remaining issues
and all parties with the single exception of a broker malpractice claim
asserted by the Company, which remains pending. In the Consent Judgment
Order, the presiding judge specifically found that the OIL Settlement was a
19
<PAGE>
good faith and non-collusive settlement and that it was fair and reasonable as
to OIL and all of OIL's non-settling reinsurers.
In November 1995, before all the settlements described above were finalized, a
reinsurer of OIL during the years affected by the United Insurance case
brought a separate suit against OIL seeking a declaratory judgment that it had
no reinsurance obligation to OIL due to alleged OIL fraud and also to OIL
not having joined non-party reinsurers as parties in the United Insurance case
as alleged to be required under New Jersey's "entire controversy" doctrine
(Employer's Mutual v. Owens-Insurance Limited, Superior Court of New Jersey,
Morris County, December 1995). The Company was not a named party to this
cause of action but was subsequently joined in it as a necessary party
defendant.
Subsequent to the entry of the Consent Judgment Order in the United Insurance
case described above, OIL gave notice of the OIL Settlement to all non-
settling reinsurers affected by the United Insurance case, informing all such
reinsurers of the terms of the OIL Settlement and demanding timely payment
from such reinsurers pursuant to such terms.
Since the date of the OIL settlement, 20 previously non-settling reinsurers
have made the payments called for under the OIL Settlement or otherwise
settled their obligations thereunder. Other non-settling solvent reinsurers,
all of which are parties to the Employers Mutual case described above, have
not, however, made the payments called for under the OIL Settlement.
In June 1996, the Superior Court of New Jersey, Morris County granted OIL
summary judgment on the "entire controversy" doctrine claim in the Employers
Mutual case. A petition for interlocutory appeal of this summary judgment by
certain non-settling OIL reinsurers was rejected first by the Appellate
Division of the New Jersey Superior Court and thereafter by the New Jersey
Supreme Court.
As a result of payments and commitments that have been made by reinsurers
pursuant to the OIL Settlement and the earlier settlement agreements described
above in the United Insurance case and certain other available insurance, the
Company has to date confirmed coverage for its asbestos-related costs of
approximately $314.5 million. Of the total amount confirmed to date, $292.5
million had been received through September 30, 1998; and the balance of
approximately $22.0 million will be received throughout 1998 and the next
several years. The remainder of the insurance asset of approximately $195.5
million relates principally to the reinsurers who have not yet paid, and
continue to contest, their reinsurance obligations under the OIL Settlement.
This $195.5 million asset valuation at September 30, 1998 also reflects 1994
and 1995 reductions of $100 million and $40 million, respectively, in the
insurance asset valuation of $650 million established in 1993, which had been
made to reflect settlement activity and litigation developments in the United
Insurance case.
The Company believes, based on the rulings of the trial court, the Appellate
Division and the New Jersey Supreme Court in the United Insurance case, as
well as its understanding of the facts and legal precedents (including
20
<PAGE>
specifically the legal precedent requiring that reinsurers "follow the
fortunes" of and adhere to any good faith, fair and reasonable settlement
entered into by the primary carrier which such reinsurers had agreed to
reinsure) and based on advice of counsel, McCarter & English L.L.P., that it
is probable substantial additional payments will be received to cover the
Company's asbestos-related claim losses, in addition to the amounts already
received or to be received as a result of the settlements described above.
As a result of the Co-Defendant Bankruptcies and the continuing efforts in
various federal and state courts to resolve asbestos lawsuits and claims in
nontraditional manners, as well as the continued filings of new lawsuits and
claims, the Company believes that its ultimate asbestos-related contingent
liability (i.e., its indemnity or other claim disposition costs plus related
litigation expenses) is difficult to estimate with certainty. However, in
1993, the Company established a liability of $975 million to cover what it
then estimated would be the total indemnity payments and legal fees associated
with the resolution of then outstanding and all expected future asbestos
lawsuits and claims.
Since establishing this liability, the Company has continually monitored the
trends of matters which may affect its ultimate liability and continually
analyzes the trends, developments and variables affecting or likely to affect
the resolution of pending and future asbestos claims against the Company.
While the number of asbestos lawsuits and claims pending and filed against the
Company has declined significantly, as anticipated when this liability was
established, the costs to resolve lawsuits and claims during the current
fiscal year have exceeded historical norms. As a result, the asbestos
liability may be exhausted within the next fiscal year.
As part of its continual monitoring of asbestos-related matters, the Company
is conducting a comprehensive review to determine if adjustments of asbestos-
related assets or liabilities are appropriate. The Company cannot presently
predict the outcomes of such reviews.
Based on all the factors and matters relating to the Company's asbestos-
related litigation and claims and subject to the completion of the review
process described above, the Company presently believes that its asbestos-
related costs and liabilities will not exceed by a material amount the sum of
the available insurance reimbursement the Company believes it has and will
have principally as a result of the United Insurance case, and the OIL
Settlement, as described above, and the amount of previous charges for
asbestos-related costs.
Other litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine and involve compensatory,
punitive or treble damage claims as well as other types of relief. The
ultimate legal and financial liability of the Company in respect to the
lawsuits and proceedings referred to above, in addition to other pending
litigation, cannot be estimated with certainty. However, the Company
believes, based on its examination and review of such matters and experience
21
<PAGE>
to date, that such ultimate liability will not be material in relation to the
Company's Consolidated Financial Statements.
11. New Accounting Standards
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("FAS No. 130"). FAS No.
130 establishes new rules for the reporting and display of comprehensive
income and its components. The Company's components of comprehensive income
are net earnings and foreign currency translation adjustments. Total
comprehensive income for the three month periods ended September 30, 1998 and
1997 amounted to $116.9 million and $53.0 million, respectively. Total
comprehensive income for the nine month periods ended September 30, 1998 and
1997 amounted to $251.3 million and $53.3 million, respectively.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS No. 131"), which is effective for
financial statements for periods beginning after December 15, 1997. FAS No.
131 need not, however, be applied to interim financial statements in the
initial year of its application. FAS No. 131 establishes revised standards
for determining an entity's operating segments and the type and level of
financial information to be presented related to such operating segments. The
impact of FAS No. 131 on the Company's disclosures of operating segment
information has not been determined.
In February 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions
and Other Postretirement Benefits" ("FAS No. 132"), which is effective for
financial statements for fiscal years beginning after December 15, 1997. FAS
No. 132 establishes revised standards for disclosures about pensions and other
postretirement benefits. The impact of FAS No. 132 on the Company's
disclosures of pension and other postretirement benefits has not been
determined.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS No. 133"), which is effective for financial
statements for all fiscal quarters of fiscal years beginning after June 15,
1999. FAS No. 133 establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that all
derivative instruments be recognized as either assets or liabilities in the
statement of financial position and that such instruments be measured at fair
value. The impact of FAS No. 133 on the Company's reporting and disclosure of
derivative instruments has not been determined.
22
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - Third Quarter 1998 compared with Third Quarter 1997
The Company recorded earnings before extraordinary items of $113.6 million for
the third quarter of 1998 compared to $91.8 million for the third quarter of
1997. Excluding the effects of unusual items for 1998 discussed on page 27,
the Company's third quarter 1998 earnings before extraordinary items of $112.4
million increased $20.6 million, or 22.4%, over third quarter 1997 earnings
before extraordinary items of $91.8 million. The third quarter of 1998
includes amounts relating to the April 30, 1998, acquisition of the glass and
plastics packaging businesses of BTR plc (see Note 1 to the financial state-
ments). Consolidated segment operating profit for the third quarter of 1998,
excluding the effects of an unusual item, was $267.4 million, an increase of
$55.2 million, or 26.0%, compared to the same period in 1997. The increase is
principally attributable to higher operating profit for both the Glass
Containers segment and the Plastics Packaging segment. Interest expense, net
of interest income, increased $30.9 million from the 1997 period due princi-
pally to the financings related to the acquisition of the BTR glass and
plastics packaging businesses. The increase in interest expense resulting
from the acquisition was partially offset by lower borrowing costs resulting
from the 1997 refinancing of higher cost debt, which began in May 1997. The
decrease in minority share owners' interests in earnings of subsidiaries
resulted from lower net earnings of certain foreign affiliates, principally
from the affiliate located in Colombia. Net earnings of $75.4 million for the
third quarter of 1997 reflect $16.4 million of extraordinary charges from the
early extinguishment of debt. The additional earnings of the businesses
acquired from BTR combined with the dilutive effects of the related financings
resulted in a dilution of $0.05 in earnings per share in the third quarter of
1998.
Capsule segment results (in millions of dollars) for the third quarter of 1998
and 1997 were as follows:
- - ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- - ----------------------------------------------------------------------------
1998 1997 1998 1997
-------- -------- -------- --------
Glass Containers $1,026.2 $ 957.5 $ 192.1 $ 162.8
Plastics Packaging 427.0 281.6 74.5 46.4
Eliminations and other
retained costs (a) .4 .4 8.4 3.0
- - ----------------------------------------------------------------------------
Consolidated total $1,453.6 $1,239.5 $ 275.0 $ 212.2
============================================================================
(a) Operating profit for 1998 includes a benefit of $7.6 million from the
reduction of previously established reserves for guarantees of certain
obligations of a business divested several years ago.
23
<PAGE>
Consolidated net sales for the third quarter of 1998 increased $214.1 million,
or 17.3%, over the prior year. Net sales of the Glass Containers segment
increased $68.7 million, or 7.2%, from 1997. The combined U.S. dollar sales
of the segment's foreign affiliates increased over the prior year, reflecting
the Asia-Pacific glass container businesses recently acquired from BTR (which
contributed approximately $118 million to third quarter 1998 U.S. dollar
sales), and increased unit shipments in Hungary and Venezuela, which were
partially offset by soft market conditions in Brazil, Colombia, and the United
Kingdom. The effect of foreign currency movements reduced the third quarter
1998 U.S. dollar sales of the segment's foreign affiliates by approximately
$20 million in comparison to third quarter 1997. Domestically, glass
container unit volume nearly equaled prior year, reflecting increased ship-
ments of beer, iced tea, and juice bottles, offset by lower shipments of
certain food containers. Net sales of the Plastics Packaging segment
increased $145.4 million, or 51.6%, over 1997, reflecting the plastics
businesses recently acquired from BTR (which contributed approximately $144
million to third quarter 1998 U.S. dollar sales), and increased unit shipments
of closures. The Plastics Packaging segment net sales comparison to prior
year was adversely affected by the first quarter 1998 termination of a license
agreement under which the Company had produced plastic multipack carriers for
beverage cans and the effects of lower resin costs on pass-through arrange-
ments with customers.
Consolidated operating profit for the third quarter of 1998, excluding the
effect of an unusual item, increased $55.2 million, or 26.0%, to $267.4
million from third quarter 1997 operating profit of $212.2 million. The
operating profit of the Glass Containers segment increased $29.3 million to
$192.1 million, compared to $162.8 million in the third quarter of 1997. The
combined U.S. dollar operating profit of the segment's foreign affiliates
increased from the third quarter of 1997. The Asia-Pacific glass container
businesses recently acquired from BTR contributed approximately $27 million to
third quarter 1998 U.S. dollar operating profit. Improved results at the
segment's affiliates in Italy and Hungary were offset by soft market condi-
tions in the United Kingdom and Colombia. The effect of foreign currency
movements reduced the third quarter 1998 U.S. dollar operating profit of the
segment's foreign affiliates by approximately $3 million in comparison to
third quarter 1997. Domestically, operating profit of the Glass Containers
segment increased from the third quarter of 1997 due an improved cost
structure. The operating profit of the Plastics Packaging segment increased
$28.1 million, or 60.6%, compared to the third quarter of 1997. The plastics
businesses recently acquired from BTR contributed approximately $20 million to
third quarter 1998 operating profit. Higher shipments of plastic containers,
and closures for beverage containers were partially offset by lower shipments
of labels and carriers, including the shipments of plastic multipack carriers
for beverage cans due to the termination of a license agreement. Other
retained costs, excluding the 1998 unusual item, were $.8 million income for
the third quarter of 1998 compared to $3.0 million income for the third
quarter of 1997, reflecting higher net financial services income, offset by
the nonrecurrence of a reported gain on an asset sale in 1997.
24
<PAGE>
Late in the third quater of 1998, weak economic conditions began to adversely
affect the Company's foreign affiliates who serve markets in South America,
and selected markets in the United Kingdom and Central Europe. Although
weakening economic conditions in these markets did not have a material impact
on the Company's results of operations for third quarter 1998 compared to
third quarter 1997, such conditions are continuing into, and are expected to
adversely affect, the fourth quarter of 1998 and may continue into 1999.
Because these macroeconomic conditions vary by geographic region and differ
from the Company's historical precedents, the Company is not able to project
the precise magnitude or duration of such conditions or their effects on
future operating results.
First Nine Months 1998 compared with First Nine Months 1997
For the first nine months of 1998, the Company recorded earnings before
extraordinary items of $309.0 million compared to $233.3 million for the first
nine months of 1997. Excluding the effects of the unusual items for both 1998
and 1997 discussed below, the Company's first nine months of 1998 earnings
before extraordinary items of $291.4 million increased $65.7 million, or
29.1%, over first nine months of 1997 earnings before extraordinary items of
$225.7 million. The first nine months of 1998 includes amounts relating to
the April 30, 1998, acquisition of the glass and plastics packaging businesses
of BTR plc (see Note 1 to the financial statements). Consolidated segment
operating profit, excluding both the 1998 and 1997 unusual items, was $707.4
million for the first nine months of 1998, an increase of $121.0 million, or
20.6%, compared to $586.4 million for the same 1997 period. The increase is
attributable to higher operating profit for both the Glass Containers segment
and the Plastics Packaging segment, along with lower retained costs. Interest
expense, net of interest income, increased $28.0 million from the 1997 period
due principally to the financings related to the acquisition of the BTR glass
and plastics packaging businesses. The increase in interest expense resulting
from the acquisition was partially offset by lower borrowing costs resulting
from the 1997 refinancing of higher cost debt, which began in May 1997. The
decrease in minority share owners' interests in earnings of subsidiaries
resulted from lower net earnings of certain foreign affiliates, principally
those in Brazil and Colombia. The Company's estimated effective tax rate for
the first nine months of 1998, excluding the effects of the adjustment to
Italy's net deferred tax liabilities discussed below, was 35.1%. This
compares with 34.1% for the full year 1997, excluding the effect of the gain
on the 1997 sale of the remaining 49% interest in Kimble Glass discussed
below. Net earnings of $294.9 million and $132.4 million for the first nine
months of 1998 and 1997, respectively, reflect $14.1 million and $100.9
million, respectively, of extraordinary charges from the early extinguishment
of debt. The additional earnings of the businesses acquired from BTR combined
with the dilutive effects of the related financings resulted in a dilution of
$0.06 in earnings per share in the first nine months of 1998.
25
<PAGE>
Capsule segment results (in millions of dollars) for the first nine months of
1998 and 1997 were as follows:
- - ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- - ----------------------------------------------------------------------------
1998 1997 1998 (a) 1997
-------- -------- -------- --------
Glass Containers $2,815.3 $2,664.2 $ 492.7 $ 428.9
Plastics Packaging 1,120.7 855.0 221.4 155.6
Eliminations and other
retained costs (b) 1.1 1.1 3.1 4.1
- - ----------------------------------------------------------------------------
Consolidated total $3,937.1 $3,520.3 $ 717.2 $ 588.6
============================================================================
(a) Operating profit for 1998 includes: (1) a net gain of $18.5 million
related to the termination of a licensing agreement, including charges
for related equipment writeoffs and capacity adjustments, and (2) charges
totaling $16.3 million for the settlement of certain environmental
litigation and severance costs at certain international affiliates.
These items increased (decreased) operating profit as follows: Glass
Containers, $(7.8) million; Plastics Packaging, $18.5 million; and other
retained costs, $(8.5) million. These items were recorded in the first
quarter of 1998.
(b) Operating profit for 1998 includes a benefit of $7.6 million from the
reduction of previously established reserves for guarantees of certain
obligations of a business divested several years ago. This item was
recorded in the third quarter of 1998.
Operating profit for 1997 includes: (1) a gain of $16.3 million on the
sale of the remaining 49% interest in Kimble Glass, and (2) charges of
$14.1 million principally for the estimated cost of guaranteed lease
obligations of a previously divested business. These items were recorded
in the first quarter of 1997.
Consolidated net sales for the first nine months of 1998 increased $416.8
million, or 11.8%, over the prior year. Net sales of the Glass Containers
segment increased $151.1 million, or 5.7%, over 1997. The combined U.S.
dollar sales of the segment's foreign affiliates increased over the prior
year, reflecting the Asia-Pacific glass container businesses recently acquired
from BTR (which contributed approximately $206 million to first nine months
1998 U.S. dollar sales), the February 1997 acquisition of AVIR S.p.A., the
largest manufacturer of glass containers in Italy, and increased unit ship-
ments in Poland and Venezuela, all of which were partially offset by soft
market conditions in Brazil, Colombia, and the United Kingdom. The effect of
foreign currency movements reduced the first nine months of 1998 U.S. dollar
sales of the segment's foreign affiliates by approximately $90 million in
comparison to the first nine months of 1997. Domestically, glass container
unit volume nearly equaled the prior year, reflecting increased shipments of
containers for the beer, tea and juice, and liquor and wine industries, offset
by lower shipments of certain food containers. Net sales of the Plastics
26
<PAGE>
Packaging segment increased $265.7 million, or 31.1%, over 1997, reflecting
the plastics businesses recently acquired from BTR (which contributed approxi-
mately $259 million to first nine months 1998 U.S. dollar sales), and
increased unit shipments of closures. The Plastics Packaging segment net
sales comparison to prior year was adversely affected by the first quarter
1998 termination of a license agreement under which the Company had produced
plastic multipack carriers for beverage cans and the effects of lower resin
costs on pass-through arrangements with customers.
Consolidated operating profit for the first nine months of 1998, excluding the
1998 and 1997 unusual items, increased $121.0 million, or 20.6%, to $707.4
million from first nine months 1997 operating profit of $586.4 million. The
operating profit of the Glass Containers segment, excluding the 1998 unusual
items, increased $71.6 million to $500.5 million, compared to $428.9 million
in the first nine months of 1997. The Asia-Pacific glass container businesses
recently acquired from BTR contributed approximately $43 million to first nine
months 1998 U.S. dollar operating profit. Improved results at the segment's
affiliates in Italy, Hungary, and Venezuela were partially offset by soft
market conditions in Brazil and Colombia, which adversely affected results of
affiliates located in those countries. The effect of foreign currency
movements reduced the first nine months of 1998 U.S. dollar operating profit
of the segment's foreign affiliates by approximately $15 million in comparison
to the first nine months of 1997. Domestically, operating profit increased
from the first nine months of 1997 as a result of an improved cost structure.
The operating profit of the Plastics Packaging segment, excluding the 1998
unusual items, increased $47.3 million, or 30.4%, compared to the first nine
months of 1997. The plastics businesses recently acquired from BTR
contributed approximately $42 million to first nine months 1998 operating
profit. Higher shipments of plastic containers and closures, and improved
manufacturing performance were partially offset by lower shipments of labels
and carriers, including the shipments of plastic multipack carriers for
beverage cans due to the termination of a license agreement. Other retained
costs, excluding the 1998 and 1997 unusual items discussed below, were $4.0
million income for the first nine months of 1998 compared to $1.9 million
expense for the first nine months of 1997, reflecting higher net financial
services income, offset by the nonrecurrence of a reported gain on an asset
sale in 1997.
The first nine months 1998 results include the following unusual items
recorded in the third quarter of 1998: (1) a loss of $5.7 million ($3.5
million aftertax) on the sale of a discontinued operation by an equity
investee; and (2) a benefit of $7.6 million ($4.7 million aftertax) from the
reduction of previously established reserves for guarantees of certain
obligations of a business divested several years ago. The first nine months
1998 results also include the following unusual items recorded in the first
quarter of 1998: (1) a tax benefit of $15.1 million to adjust net deferred
income tax liabilities as a result of a reduction in Italy's statutory income
tax rate; (2) a net gain of $18.5 million ($11.4 million aftertax) related to
the termination of a license agreement, including charges for related equip-
ment writeoffs and capacity adjustments, under which the Company had produced
plastic multipack carriers for beverage cans; and (3) charges of $16.3 million
($10.1 million aftertax) for the settlement of certain environmental litiga-
27
<PAGE>
tion and for severance costs at certain international affiliates. The first
nine months 1997 results include the following unusual items recorded in the
first quarter of 1997: (1) a gain of $16.3 million ($16.3 million aftertax)
on the sale of the Company's remaining 49% interest in Kimble Glass, and (2)
charges of $14.1 million ($8.7 million aftertax) principally for guarantees of
certain lease obligations of a previously divested business.
Capital Resources and Liquidity
The Company's total debt at September 30, 1998 was $5.83 billion, compared to
$3.32 billion at December 31, 1997 and $3.36 billion at September 30, 1997.
At September 30, 1998, the Company had available credit totaling $4.5 billion
under its recently amended agreement with a group of banks ("Bank Credit
Agreement") expiring in December 2001, of which $800.3 million had not been
utilized. At December 31, 1997, total commitments under the Company's
previous credit facility were $3.0 billion of which $741.0 million had not
been utilized. The increased commitment, utilization and corresponding higher
debt balances at September 30, 1998 resulted in large part from borrowings for
the acquisition of the worldwide glass and plastics packaging businesses of
BTR plc. Utilization was also higher as a result of borrowings for capital
expenditures, partially offset by cash provided by operations. Cash provided
by operating activities was $411.7 million for the first nine months of 1998
compared to $230.4 million for the first nine months of 1997.
The Company anticipates that cash flow from its operations and from utiliza-
tion of credit available through December 2001 under the Bank Credit Agreement
will be sufficient to fund its operating and seasonal working capital needs,
debt service and other obligations. As discussed in Note 3, the Company plans
to use the proceeds received from the sale of Rockware Glass to reduce amounts
outstanding under the Bank Credit Agreement. The Company faces additional
demands upon its liquidity for asbestos-related payments. Based on the
Company's expectations regarding favorable trends which should lower its
aggregate payments for lawsuits and claims and its expectation of the collec-
tion of its insurance coverage and reimbursement for such lawsuits and claims,
and also based on the Company's expected operating cash flow, the Company
believes that the payment of any deferred amounts of previously settled or
otherwise determined lawsuits and claims, and the resolution of presently
pending and anticipated future lawsuits and claims associated with asbestos,
will not have a material adverse effect upon the Company's liquidity on a
short-term or long-term basis.
28
<PAGE>
Year 2000 Update
General
- - -------
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations or a temporary inability to engage in normal
business activities. The Company uses a significant number of computer
software programs and operating systems across its entire organization,
including applications used in financial business systems, manufacturing, and
various administrative functions. To the extent that the Company's software
applications contain source code that is unable to appropriately interpret the
upcoming calendar year 2000 and beyond, modification, replacement, or retire-
ment of such applications will be necessary. The Company has determined that
it will be required to modify or replace portions of its software and hardware
so that the affected systems will properly utilize dates beyond December 31,
1999.
Project
- - -------
The Company has undertaken a Year 2000 Project (the "Project") to identify and
mitigate Year 2000 compliance issues in its critical information technology
("IT") and non-IT systems. Such systems include manufacturing information
systems, process control and embedded systems, business applications, and
information technology infrastructure. The general phases of the Project are:
(1) inventorying/identification of Year 2000 items and issues; (2) assessment
and solution definition; (3) remediation/conversion of Year 2000 items and
issues identified; (4) acceptance testing; and (5) implementation. The
results of the assessment and solution definition phase to date has indicated
that certain of the Company's significant systems are not Year 2000 compliant.
The results have also indicated that certain software and hardware (embedded
chips) used in building and machine maintenance, production, and manufacturing
systems also are at risk.
The Company is nearing completion of the inventorying/identification and the
assessment and solution definition phases of the Project. These phases are
expected to be completed by March 1999. Activities involving the remaining
phases of remediation/conversion, acceptance testing, and implementation are
ongoing and will continue into the second half of calendar year 1999. The
Company expects to have its critical IT and non-IT systems Year 2000 compliant
by September 1999.
The Company relies on numerous third-party vendors and suppliers for a wide
variety of goods and services, including raw materials, transportation, and
utilities such as electricity and natural gas. The Project includes identify-
ing and prioritizing critical suppliers and customers and communicating with
them about their plans and progress in addressing Year 2000 compliance issues.
Information requests have been distributed and replies are being evaluated.
The replies received to date indicate that most suppliers, vendors and
29
<PAGE>
customers will not provide any assurance that they will be Year 2000 compli-
ant. The process of evaluating the Company's critical suppliers is ongoing
and scheduled for completion by September 1999. The Company cannot be certain
when suppliers and customers will be Year 2000 compliant. The inability of
customers and suppliers to complete their Year 2000 compliance efforts in a
timely fashion could materially impact the Company.
Costs
- - -----
The Company is utilizing both internal and external resources to reprogram, or
replace, test, and implement the software and equipment for Year 2000 modifi-
cations. The total cost associated with the Project, including certain
previously scheduled replacement of software and equipment which has been
accelerated due to Year 2000 issues, is estimated to be approximately $50
million and is being funded through operating cash flows. The majority of
these costs are attributable to the purchase of new software and operating
equipment, and will therefore, be capitalized. To date, the Company has
incurred approximately $20 million related to all phases of the Project.
Risks
- - -----
The Project undertaken by the Company is expected to significantly reduce the
Company's level of uncertainty about Year 2000 compliance issues. As noted
above, the Company has not yet completed all necessary phases of the Project.
The failure to correct a Year 2000 compliance issue could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
results of operations, liquidity, and financial condition. Due to the general
uncertainty inherent in Year 2000 compliance issues, resulting in part from
the uncertainty of Year 2000 readiness of third-party suppliers and customers,
the Company is unable to determine at this time the consequences of Year 2000
failures on the Company's results of operations, liquidity, or financial
condition.
Contingency Plans
- - -----------------
The Company is developing contingency plans for certain of its applications.
Those contingency plans involve, among other actions, manual workarounds,
increasing inventories, adjusting staffing strategies, and planned shutdowns
of non-critical equipment prior to January 1, 2000. Actions related to the
implementation of contingency plans have not been undertaken as the necessity
of such contingency plans depend upon the progress of Year 2000 compliance
efforts.
The foregoing statements as to costs and dates relating to the Project are
forward looking and are made in reliance on the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. They are based on the
Company's best estimates which may be updated as additional information
becomes available. The Company's forward looking statements are also based on
assumptions about many important factors, including the availability of
certain resources, the technical skills of employees and independent
contractors, the representations and preparedness of third parties, the
30
<PAGE>
ability of vendors and suppliers to deliver goods or perform services required
by the Company and the collateral effects of Year 2000 compliance issues on
the Company's business partners and customers. While the Company believes its
assumptions are reasonable, it cautions that it is impossible to predict the
impact of certain factors that could cause actual costs or timetables to
differ materially from the expected results. No assurance can be given that
these estimates will be achieved, or that there will not be a delay in, or
increased costs associated with, the Project.
Introduction of Euro Currency
A new currency called the "euro" is scheduled to be introduced in eleven of
the fifteen Economic and Monetary Union ("EMU") countries. On January 1,
1999, the participating EMU member countries will establish fixed conversion
rates between their legacy currencies and the euro. As of January 1, 1999,
the participating countries no longer will control their own monetary policies
by directing independent interest rates for the legacy currencies. Instead,
the authority to direct monetary policy, including money supply and official
interest rates for the euro, will be exercised by the new European Central
Bank. The legacy currencies in the participating countries will continue to
be used as legal tender through January 1, 2002. Thereafter, the legacy
currencies will be canceled and euro bills and coins will be used for cash
transactions in the participating countries. The Company has affiliates
located in the following countries which are scheduled to participate in the
euro introduction: Finland, Italy, the Netherlands, and Spain. In addition,
the Company transacts business in other countries in which the euro is sched-
uled to be introduced. The Company has initiated an assessment of the
potential impact that the euro introduction will have on its information
systems, financial reporting, banking facilities, purchases and the sale of
its products. Based upon the assessment to date, the Company does not believe
the conversion to the euro and the cost of implementing required system
changes will be material to the Company's consolidated financial statements.
Management's Discussion and Analysis of Financial Condition and Results of
Operations may contain forward looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
projected. Forward looking statements are necessarily projections which are
subject to change upon the occurrence of events that may affect the business.
In addition, acquisitions involve a number of risks that can cause actual
results to be materially different from expected results.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
In connection with the April 30, 1998, acquisition of the worldwide glass and
plastics packaging businesses of BTR, the Bank Credit Agreement was amended to
provide, among other things, a $1.75 billion offshore loan revolving facility
which is available to certain of the Company's foreign subsidiaries and
denominated in certain foreign currencies. For further information about the
facility and related foreign currency loan amounts outstanding at September
30, 1998, see Note 6 to the financial statements.
31
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
(a) Contingencies. Note 10 to the Condensed Consolidated Financial
Statements, "Contingencies," that is included in Part I of this Report, is
incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 23 Consent of McCarter & English, LLP.
Exhibit 27 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this Report is filed.
32
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OWENS-ILLINOIS, INC.
Date November 16, 1998 By /s/ David G. Van Hooser
----------------- ------------------------------------------
David G. Van Hooser, Senior Vice President
and Chief Financial Officer (Principal
Financial Officer)
33
<PAGE>
INDEX TO EXHIBITS
Exhibit
23 Consent of McCarter & English, LLP.
27 Financial Data Schedule.
34
EXHIBIT 23
CONSENT OF MCCARTER & ENGLISH, LLP
November 12, 1998
Ladies and Gentlemen:
We consent to the incorporation by reference in this Quarterly Report on
Form 10-Q of Owens-Illinois, Inc. for the quarter ended September 30, 1998, of
the reference to our firm under the caption "Legal Proceedings."
Very truly yours,
/s/McCarter & English, LLP
--------------------------
McCarter & English, LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1998 condensed consolidated balance sheet, and the condensed
consolidated results of operations for the nine-month period then ended
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 317,100,000
<SECURITIES> 0
<RECEIVABLES> 830,000,000
<ALLOWANCES> 39,600,000
<INVENTORY> 801,300,000
<CURRENT-ASSETS> 2,118,200,000
<PP&E> 5,214,100,000
<DEPRECIATION> 1,895,000,000
<TOTAL-ASSETS> 10,874,100,000
<CURRENT-LIABILITIES> 1,286,900,000
<BONDS> 5,667,400,000
0
472,600,000
<COMMON> 1,500,000
<OTHER-SE> 2,189,000,000
<TOTAL-LIABILITY-AND-EQUITY> 10,874,100,000
<SALES> 3,937,100,000
<TOTAL-REVENUES> 4,091,200,000
<CGS> 2,998,400,000
<TOTAL-COSTS> 2,998,400,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 267,800,000
<INCOME-PRETAX> 482,100,000
<INCOME-TAX> 154,100,000
<INCOME-CONTINUING> 309,000,000
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<EXTRAORDINARY> (14,100,000)
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<NET-INCOME> 294,900,000
<EPS-PRIMARY> 1.93
<EPS-DILUTED> 1.91
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