<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, 1999
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 - 150,124,709
shares at October 31, 1999.
<PAGE>
2
<PAGE>
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, 1998.
3
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 1999 and 1998
(Millions of dollars, except share and per share amounts)
1999 1998
Revenues: -------- --------
Net sales $1,426.2 $1,453.6
Royalties and net technical assistance 9.4 7.4
Equity earnings 6.6 1.4
Interest 6.7 7.6
Other 30.9 30.7
-------- --------
1,479.8 1,500.7
Costs and expenses:
Manufacturing, shipping, and delivery 1,112.2 1,105.7
Research and development 10.9 9.5
Engineering 9.5 8.7
Selling and administrative 71.9 72.4
Interest 106.1 103.5
Other 39.5 20.4
-------- --------
1,350.1 1,320.2
-------- --------
Earnings before items below 129.7 180.5
Provision for income taxes 49.2 63.3
Minority share owners' interests in earnings
of subsidiaries 3.0 3.6
-------- --------
Net earnings $ 77.5 $ 113.6
======== ========
Basic earnings per share of common stock $ 0.46 $ 0.70
======== ========
Weighted average shares outstanding (thousands) 154,918 155,346
======= =======
Diluted earnings per share of common stock $ 0.46 $ 0.69
======== ========
Weighted diluted average shares (thousands) 156,283 165,629
======= =======
See accompanying notes.
4
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 1999 and 1998
(Millions of dollars, except share and per share amounts)
1999 1998
Revenues: -------- --------
Net sales $4,156.3 $3,937.1
Royalties and net technical assistance 23.6 20.6
Equity earnings 15.6 10.6
Interest 20.2 22.1
Other 133.0 100.8
-------- --------
4,348.7 4,091.2
Costs and expenses:
Manufacturing, shipping, and delivery 3,180.4 2,998.4
Research and development 30.6 26.1
Engineering 27.1 25.1
Selling and administrative 211.1 199.5
Interest 315.1 267.8
Other 147.0 92.2
-------- --------
3,911.3 3,609.1
-------- --------
Earnings before items below 437.4 482.1
Provision for income taxes 167.6 154.1
Minority share owners' interests in earnings
of subsidiaries 12.1 19.0
-------- --------
Earnings before extraordinary items 257.7 309.0
Extraordinary charges from early extinguishment
of debt, net of applicable income taxes (14.1)
-------- --------
Net earnings $ 257.7 $ 294.9
======== ========
Basic earnings per share of common stock:
Earnings before extraordinary items $ 1.55 $ 2.03
Extraordinary charges (0.10)
-------- --------
Net earnings $ 1.55 $ 1.93
======== ========
Weighted average shares outstanding (thousands) 155,465 148,135
======= =======
Diluted earnings per share of common stock:
Earnings before extraordinary items $ 1.54 $ 2.00
Extraordinary charges (0.09)
-------- --------
Net earnings $ 1.54 $ 1.91
======== ========
Weighted diluted average shares (thousands) 156,924 154,046
======= =======
See accompanying notes.
5
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999, December 31, 1998, and September 30, 1998
(Millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
Assets --------- --------- ---------
Current assets:
Cash, including time deposits $ 205.5 $ 271.4 $ 294.0
Short-term investments, at cost which
approximates market 29.3 21.1 23.1
Receivables, less allowances for losses and
discounts ($52.8 at September 30, 1999,
$56.9 at December 31, 1998, and $39.6
at September 30, 1998) 918.7 877.7 830.0
Inventories 851.6 838.1 801.3
Prepaid expenses 162.6 168.8 169.8
--------- --------- ---------
Total current assets 2,167.7 2,177.1 2,118.2
Other assets:
Equity investments 194.5 195.3 190.1
Repair parts inventories 252.6 254.2 267.2
Prepaid pension 753.1 686.1 705.2
Insurance receivable for
asbestos-related costs 209.5 212.8 217.5
Deposits, receivables, and other assets 536.8 383.7 373.1
Net assets held for sale 409.6 567.0
Excess of purchase cost over net assets
acquired, net of accumulated amortization
($478.1 at September 30, 1999, $405.3
at December 31, 1998, and $381.2 at
September 30, 1998) 3,295.2 3,314.9 3,116.7
--------- --------- ---------
Total other assets 5,241.7 5,456.6 5,436.8
Property, plant, and equipment, at cost 5,508.4 5,394.1 5,214.1
Less accumulated depreciation 2,119.0 1,967.1 1,895.0
--------- --------- ---------
Net property, plant, and equipment 3,389.4 3,427.0 3,319.1
--------- --------- ---------
Total assets $10,798.8 $11,060.7 $10,874.1
========= ========= =========
6
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
Liabilities and Share Owners' Equity --------- --------- ---------
Current liabilities:
Short-term loans and long-term debt
due within one year $ 246.5 $ 249.5 $ 231.8
Current portion of asbestos-related
liabilities 85.0 85.0 70.0
Accounts payable and other liabilities 984.8 992.6 985.1
--------- --------- ---------
Total current liabilities 1,316.3 1,327.1 1,286.9
Long-term debt 5,504.5 5,667.2 5,602.7
Deferred taxes 379.7 325.0 313.1
Nonpension postretirement benefits 319.4 338.4 337.7
Other liabilities 579.7 690.4 411.8
Commitments and contingencies
Minority share owners' interests 206.0 240.6 258.8
Share owners' equity:
Convertible preferred stock, par value $.01
per share, liquidation preference $50
per share, 9,050,000 shares authorized,
issued and outstanding 452.5 452.5 452.5
Exchangeable preferred stock 12.9 18.3 20.1
Common stock, par value $.01 per share,
250,000,000 shares authorized,
156,302,489 shares issued and outstanding,
less 3,764,900 treasury shares at
September 30, 1999 (155,450,173 issued and
outstanding at December 31, 1998; and
155,356,862 issued and outstanding
at September 30, 1998) 1.6 1.5 1.5
Capital in excess of par value 2,192.5 2,183.1 2,181.1
Treasury stock, at cost (84.9)
Retained earnings 248.9 7.3 199.5
Accumulated other comprehensive income (330.3) (190.7) (191.6)
--------- --------- ---------
Total share owners' equity 2,493.2 2,472.0 2,663.1
--------- --------- ---------
Total liabilities and share owners' equity $10,798.8 $11,060.7 $10,874.1
========= ========= =========
See accompanying notes.
7
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 1999 and 1998
(Millions of dollars)
1999 1998
--------- ---------
Cash flows from operating activities:
Earnings before extraordinary items $ 257.7 $ 309.0
Non-cash charges (credits):
Depreciation 303.3 268.1
Amortization of deferred costs 104.7 73.1
Restructuring costs, writeoffs of certain assets
and settlement of environmental litigation 20.8 16.3
Gains on asset sales (40.8) (18.5)
Other (59.8) (34.9)
Change in non-current operating assets (36.7) (45.0)
Asbestos-related payments (96.7) (70.8)
Asbestos-related insurance proceeds 3.3 21.8
Reduction of non-current liabilities (13.6) (4.1)
Change in components of working capital (106.5) (103.3)
--------- ---------
Cash provided by operating activities 335.7 411.7
Cash flows from investing activities:
Additions to property, plant, and equipment (421.3) (377.3)
Acquisitions, net of cash acquired (34.0) (3,596.5)
Net cash proceeds from divestitures 318.5 40.6
--------- ---------
Cash utilized in investing activities (136.8) (3,933.2)
Cash flows from financing activities:
Additions to long-term debt 311.0 5,160.6
Repayments of long-term debt (495.3) (2,631.2)
Increase in short-term loans 29.9 68.0
Treasury shares purchased (84.9)
Payment of convertible preferred stock dividends (16.1) (5.1)
Issuance of common stock 2.8 640.7
Issuance of convertible preferred stock 439.6
Payment of finance fees and debt retirement costs (61.5)
--------- ---------
Cash provided by (utilized in) financing activities (252.6) 3,611.1
Effect of exchange rate fluctuations on cash (12.2) (13.8)
--------- ---------
Increase (decrease) in cash (65.9) 75.8
Cash at beginning of period 271.4 218.2
--------- ---------
Cash at end of period $ 205.5 $ 294.0
========= =========
See accompanying notes.
8
<PAGE>
OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars,
except share and per share amounts
1. Earnings Per Share
The following table sets forth the computations of basic and diluted earnings
per share:
- -----------------------------------------------------------------------------
Three months ended
September 30,
--------------------------
1999 1998
Numerator: ----------- -----------
Net earnings $ 77.5 $113.6
Preferred stock dividends:
Convertible (5.4) (5.4)
Exchangeable (.2) (.4)
- -----------------------------------------------------------------------------
(5.6) (5.8)
Numerator for basic earnings per
share - income available to common
share owners 71.9 107.8
Effect of dilutive securities -
preferred stock dividends .2 5.8
- -----------------------------------------------------------------------------
Numerator for diluted earnings per
share - income available to common
share owners after assumed exchanges
of preferred stock for common stock $ 72.1 $113.6
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted average
shares outstanding 154,917,816 155,345,678
Effect of dilutive securities:
Stock options and other 613,286 972,251
Exchangeable preferred stock 752,337 722,036
Convertible preferred stock 8,589,355
- -----------------------------------------------------------------------------
Dilutive potential common shares 1,365,623 10,283,642
- -----------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed exchanges
of preferred stock for common stock 156,283,439 165,629,320
=============================================================================
Basic earnings per share $0.46 $0.70
=============================================================================
Diluted earnings per share $0.46 $0.69
=============================================================================
9
<PAGE>
The Convertible preferred stock was not included in the computation of three
months ended September 30, 1999 diluted earnings per share since the result
would have been antidilutive. Options to purchase 2,905,439 and 1,706,898
weighted average shares of common stock which were outstanding during the
three months ended September 30, 1999 and 1998, respectively, 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.
- -----------------------------------------------------------------------------
Nine months ended
September 30,
--------------------------
1999 1998
Numerator: ----------- -----------
Earnings before extraordinary items $257.7 $309.0
Preferred stock dividends:
Convertible (16.1) (7.8)
Exchangeable (.7) (1.1)
- -----------------------------------------------------------------------------
(16.8) (8.9)
Numerator for basic earnings per
share - income available to common
share owners 240.9 300.1
Effect of dilutive securities -
preferred stock dividends .7 8.9
- -----------------------------------------------------------------------------
Numerator for diluted earnings per
share - income available to common
share owners after assumed exchanges
of preferred stock for common stock $241.6 $309.0
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted average
shares outstanding 155,464,546 148,135,216
Effect of dilutive securities:
Stock options and other 707,352 1,067,158
Exchangeable preferred stock 752,087 690,648
Convertible preferred stock 4,153,095
- -----------------------------------------------------------------------------
Dilutive potential common shares 1,459,439 5,910,901
- -----------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed exchanges
of preferred stock for common stock 156,923,985 154,046,117
=============================================================================
Basic earnings per share $1.55 $2.03
=============================================================================
Diluted earnings per share $1.54 $2.00
=============================================================================
10
<PAGE>
The Convertible preferred stock was not included in the computation of nine
months ended September 30, 1999 diluted earnings per share since the result
would have been antidilutive. Options to purchase 2,921,247 and 426,725
weighted average shares of common stock which were outstanding during the nine
months ended September 30, 1999 and 1998, respectively, 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.
2. Inventories
Major classes of inventory are as follows:
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
--------- -------- ---------
Finished goods $614.7 $608.9 $584.8
Work in process 30.6 35.0 28.9
Raw materials 125.8 123.6 116.5
Operating supplies 80.5 70.6 71.1
------ ------ ------
$851.6 $838.1 $801.3
====== ====== ======
11
<PAGE>
3. Long-Term Debt
The following table summarizes the long-term debt of the Company:
- ----------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
1999 1998 1998
Bank Credit Agreement: --------- -------- ---------
Revolving Credit Facility:
Revolving Loans $2,230.0 $2,207.0 $2,152.0
Offshore Loans:
1.42 billion (1.39 billion at
December 31, 1998 and September
30, 1998) Australian dollars 908.5 874.0 789.2
235 million (333 million at
December 31, 1998 and
September 30, 1998) British pounds 377.0 549.8 559.4
111 billion (129 billion and 153.5
billion at December 31, 1998 and
September 30, 1998, respectively)
Italian lira 60.7 77.0 88.9
Bid Rate Loans 46.0 50.0
Senior Notes:
7.85%, due 2004 300.0 300.0 300.0
7.15%, due 2005 350.0 350.0 350.0
8.10%, due 2007 300.0 300.0 300.0
7.35%, due 2008 250.0 250.0 250.0
Senior Debentures:
7.50%, due 2010 250.0 250.0 250.0
7.80%, due 2018 250.0 250.0 250.0
Other 251.7 350.6 327.9
- ----------------------------------------------------------------------------
5,573.9 5,758.4 5,667.4
Less amounts due within one year 69.4 91.2 64.7
- ----------------------------------------------------------------------------
Long-term debt $5,504.5 $5,667.2 $5,602.7
============================================================================
In April 1998, the Company entered into the 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 for a $4.5 billion
revolving credit facility (the "Revolving Credit Facility"), which includes a
$1.75 billion fronted offshore loan revolving facility (the "Offshore
Facility") denominated in certain foreign currencies, subject to certain
sublimits, available to certain of the Company's foreign subsidiaries. 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
12
<PAGE>
September 30, 1999, the Company had unused credit of $828.4 million available
under the Bank Credit Agreement.
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 or the Adjusted Offshore Periodic
Rate (as those terms are 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, 1999, was
5.93%. The weighted average interest rate on borrowings outstanding under the
Offshore Facility at September 30, 1999, was 5.43%. 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 unsecured. 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.
4. Cash Flow Information
Interest paid in cash aggregated $242.0 million and $209.2 million for the
nine months ended September 30, 1999 and September 30, 1998, respectively.
Income taxes paid in cash totaled $33.1 million and $28.8 million for the nine
months ended September 30, 1999 and September 30, 1998, respectively. In
connection with the sale of Rockware described in Note 6, the Company received
notes of approximately $135 million.
13
<PAGE>
5. Comprehensive Income
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, 1999 and 1998 amounted to $62.5 million and
$116.9 million, respectively. Total comprehensive income for the nine month
periods ended September 30, 1999 and 1998 amounted to $118.1 million and
$251.3 million, respectively.
6. Acquisition of Worldwide Packaging Businesses of BTR plc and Net Assets
Held for Sale
On April 30, 1998, the Company completed the acquisition of the worldwide
glass and plastics packaging businesses of BTR plc ("BTR Packaging") in an all
cash transaction valued at approximately $3.6 billion (the "Acquisition").
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 Sheets is preliminary.
In connection with the Acquisition, the Company committed to sell BTR's United
Kingdom glass container manufacturer ("Rockware") obtained in the transaction.
Early in the second quarter of 1999, the Company completed the sale of
Rockware to a subsidiary of Ardagh plc, the Irish glass container manufacturer
based in Dublin, Ireland, for total consideration of 240 million pounds
sterling (approximately $390 million). The accompanying Condensed
Consolidated Results of Operations exclude Rockware and related financing
costs. The carrying value was based upon estimated future cash flows
associated with the assets. Proceeds from the sale of Rockware were used for
the reduction of debt and for general corporate purposes.
14
<PAGE>
7. Pro Forma Information - Acquisition of BTR Packaging
Had the acquisition of BTR Packaging described in Note 6 and the related
financing occurred on January 1, 1998, 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 Adjusted Adjustments As Adjusted
-------- ------------- ----------- -----------
Net Sales $3,937.1 $384.1 $4,321.2
======== ========
Net Earnings $309.0 $31.9 $(33.2) $307.7
====== ======
Basic net earnings per
share of common stock $2.03 $1.87
===== =====
Basic weighted average
shares outstanding
(thousands) 148,135 155,242
Diluted net earnings per
share of common stock $2.00 $1.86
===== =====
Diluted weighted average
shares (thousands) 154,046 157,000
Shares of common stock issuable upon conversion of the Convertible preferred
stock in the pro forma period were not included in the computation of pro
forma diluted earnings per share because the effect would have been
antidilutive.
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 date indicated, or to project results of
operations for any future period.
8. Extraordinary Charges from Early Extinguishment of Debt
During the second quarter of 1998, the Company used proceeds from the May 1998
sale of shares of common stock, convertible preferred stock, and the issuance
of debt for the early retirement of debt incurred in connection with the
Acquisition. 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.
15
<PAGE>
9. 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 approximately $40 million of a
high-temperature, clay-based insulating material containing asbestos. 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, 1999, the Company estimates that it
is a named defendant in asbestos claims involving approximately 18,000
plaintiffs and claimants.
The Company is also a defendant in other asbestos-related lawsuits or claims
involving maritime workers, medical monitoring claimants, co-defendants and
property damage claimants. Based on its past experience, the Company believes
that the foregoing categories of claims will not involve any material
liability and they are not included in the above description of pending
claims.
In 1984, the Company initiated 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). Beginning
in December 1994 and continuing intermittently for approximately one year
thereafter, the Company entered into settlements for approximately $240
million of its coverage claim against OIL to the extent of reinsurance
provided to OIL by the settling reinsurance companies. Following such
settlements, a settlement agreement (the "OIL Settlement") was reached with
OIL. The OIL Settlement 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 approving the OIL Settlement, and specifically finding that
it was a good faith settlement which was fair and reasonable as to OIL and all
of OIL's non-settling reinsurers.
In November 1995, 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 (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.
16
<PAGE>
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, 27 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.
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 $317.2 million. Of the total amount confirmed to date, $300.5
million had been received through September 30, 1999; and the balance of
approximately $16.7 million will be received throughout 1999 and the next
several years. The remainder of the insurance asset of approximately $192.8
million relates principally to the reinsurers who have not yet paid, and
continue to contest, their reinsurance obligations under the OIL Settlement.
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 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.
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. As part of its continual monitoring of asbestos-related matters,
the Company in 1998 conducted a comprehensive review to determine if
adjustments of asbestos-related assets or liabilities were appropriate. As a
result of that review, the Company established an additional liability of $250
million to cover what it now estimates will be the total indemnity payments
and legal fees associated with the resolution of outstanding asbestos personal
injury lawsuits and claims and asbestos personal injury lawsuits and claims
filed during the succeeding five years, after which any remaining liability is
not expected to be material in relation to the Company's Consolidated
Financial Statements.
Based on all the factors and matters relating to the Company's asbestos-
related litigation and claims, 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
17
<PAGE>
OIL Settlement, as described above, and the amount of the charges for
asbestos-related costs previously recorded.
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
to date, that such ultimate liability will not be material in relation to the
Company's Consolidated Financial Statements.
10. Segment Information
The Company operates in the rigid packaging industry. The Company has two
reportable product segments within the rigid packaging industry: (1) Glass
Containers and (2) Plastics Packaging. The Plastics Packaging segment
consists of three business units -- plastic containers, closure and specialty
products, and prescription products. The Other segment consists primarily of
the Company's labels and carriers products business unit.
The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, extraordinary charges,
(collectively "EBIT") and unusual items. EBIT for product segments includes
an allocation of corporate expenses based on both a percentage of sales and
direct billings based on the costs of specific services provided.
18
<PAGE>
Financial information for the three month periods ended September 30, 1999 and
1998 regarding the Company's product segments is as follows:
- -----------------------------------------------------------------------------
Elimina-
tions
Total and Consoli-
Glass Plastics Product Other dated
Containers Packaging Other Segments Retained Totals
- -----------------------------------------------------------------------------
Net sales:
Sept. 30, 1999 $ 982.5 $425.7 $18.0 $1,426.2 $1,426.2
Sept. 30, 1998 1,026.2 408.1 19.3 1,453.6 1,453.6
=============================================================================
EBIT, excluding unusual items:
Sept. 30, 1999 $ 156.0 $ 67.3 $ 1.1 $ 224.4 $4.7 $ 229.1
Sept. 30, 1998 198.7 72.5 2.7 273.9 .6 274.5
=============================================================================
Unusual items:
Sept. 30, 1998:
Loss on sale of
discontinued
operation by
equity
investee $ (5.7) $ (5.7) $ (5.7)
Reduction of
previously
established
reserves $7.6 7.6
=============================================================================
The reconciliation of EBIT to consolidated totals for the three month periods
ended September 30, 1999 and 1998 is as follows:
- -----------------------------------------------------------------------------
Sept. 30, 1999 Sept. 30, 1998
- -----------------------------------------------------------------------------
EBIT:
EBIT, excluding unusual items for
reportable segments $224.4 $273.9
Unusual items excluded from reportable
segment information (5.7)
Eliminations and other retained,
excluding unusual items 4.7 .6
Unusual items excluded from eliminations
and other retained 7.6
Net interest expense (99.4) (95.9)
- -----------------------------------------------------------------------------
Earnings before income taxes and minority
share owners' interests in earnings of
subsidiaries $129.7 $180.5
=============================================================================
19
<PAGE>
Financial information for the nine month periods ended September 30, 1999 and
1998 regarding the Company's product segments is as follows:
- -----------------------------------------------------------------------------
Elimina-
tions
Total and Consoli-
Glass Plastics Product Other dated
Containers Packaging Other Segments Retained Totals
- -----------------------------------------------------------------------------
Net sales:
Sept. 30, 1999 $2,817.8 $1,282.3 $56.2 $4,156.3 $4,156.3
Sept. 30, 1998 2,815.3 1,055.9 65.9 3,937.1 3,937.1
=============================================================================
EBIT, excluding unusual items:
Sept. 30, 1999 $ 467.8 $ 233.4 $ 4.8 $ 706.0 $6.3 $ 712.3
Sept. 30, 1998 515.8 193.3 10.8 719.9 3.8 723.7
=============================================================================
Unusual items:
Sept. 30, 1999:
Gains related
to the sales of
two manufactur-
ing facilities $ 40.8 $ 40.8 $ 40.8
Charges related
principally to
restructuring
costs and write-
offs of certain
assets in
Europe and
South America (20.8) (20.8) (20.8)
Sept. 30, 1998:
Gain on ter-
mination of
license
agreement $18.5 18.5 18.5
Charges for
restructuring
costs at
certain
international
affiliates (7.8) (7.8) (7.8)
Loss on sale of
discontinued
operation by
equity investee (5.7) (5.7) (5.7)
Settlement of
certain
environmental
litigation $(8.5) (8.5)
20
<PAGE>
Reduction of
previously
established
reserves 7.6 7.6
=============================================================================
The reconciliation of EBIT to consolidated totals for the nine month periods
ended September 30, 1999 and 1998 is as follows:
- -----------------------------------------------------------------------------
Sept. 30, 1999 Sept. 30, 1998
- -----------------------------------------------------------------------------
EBIT:
EBIT, excluding unusual items for
reportable segments $706.0 $719.9
Unusual items excluded from reportable
segment information 20.0 5.0
Eliminations and other retained,
excluding unusual items 6.3 3.8
Unusual items excluded from eliminations
and other retained (.9)
Net interest expense (294.9) (245.7)
- -----------------------------------------------------------------------------
Earnings before income taxes, minority
share owners' interests in earnings of
subsidiaries, and extraordinary items $437.4 $482.1
=============================================================================
21
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - Third Quarter 1999 compared with Third Quarter 1998
The Company recorded net earnings of $77.5 million for the third quarter of
1999 compared to $113.6 million for the third quarter of 1998, a decrease of
$36.1 million, or 31.8%. Excluding the effects of the 1998 unusual items
discussed below, the Company's third quarter 1999 net earnings of $77.5
million decreased $34.9 million, or 31.0%, from 1998 third quarter net
earnings of $112.4 million. Consolidated EBIT for the third quarter of 1999
was $229.1 million, a decrease of $45.4 million, or 16.5%, compared to third
quarter of 1998 EBIT of $274.5 million, excluding 1998 unusual items. The
decrease is primarily attributable to lower EBIT for the Glass Containers
segment.
Capsule segment results (in millions of dollars) for the third quarter of 1999
and 1998 were as follows:
- ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
- ----------------------------------------------------------------------------
1999 1998 1999 1998 (b)
-------- -------- -------- --------
Glass Containers $ 982.5 $1,026.2 $ 156.0 $ 193.0
Plastics Packaging 425.7 408.1 67.3 72.5
Other 18.0 19.3 1.1 2.7
- ----------------------------------------------------------------------------
Segment totals 1,426.2 1,453.6 224.4 268.2
Eliminations and other
retained costs 4.7 8.2
- ----------------------------------------------------------------------------
Consolidated totals $1,426.2 $1,453.6 $ 229.1 $ 276.4
============================================================================
(a) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes and minority share owners' interests
in earnings of subsidiaries.
(b) EBIT for 1998 includes: (1) a loss of $5.7 million on the sale of a
discontinued operation by an equity investee, and (2) 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. These items increased (decreased) EBIT as follows: Glass
Containers, $(5.7) million; and Eliminations and other retained costs,
$7.6 million.
Consolidated net sales for the third quarter of 1999 decreased $27.4 million,
or 1.9%, from the prior year. Net sales of the Glass Containers segment
decreased $43.7 million, or 4.3%, from 1998. The combined U.S. dollar sales
of the segment's foreign affiliates decreased over the prior year. Quarter
over quarter increases in U.S. dollar sales of the Asia Pacific glass contain-
er businesses were more than offset by weak economic conditions in markets
22
<PAGE>
served by the Company's operations in Latin America and Europe. The effect of
foreign currency movements reduced the third quarter 1999 U.S. dollar sales of
the segment's foreign affiliates by approximately $20 million in comparison to
third quarter 1998. Domestically, sales from increased shipments of contain-
ers for beer, juice and tea partially offset lower shipments of certain food,
liquor, drug, and chemical containers, and the adverse year to year compara-
tive effects resulting from the April 1, 1999 sale of a specialized glass
manufacturing facility. Net sales of the Plastics Packaging segment increased
$17.6 million, or 4.3%, over 1998, reflecting increased unit shipments of
containers for automotive, food, health care, and personal care end uses;
closures and trigger pumps; and prescription containers.
Excluding the effect of the 1998 unusual item, segment EBIT for 1999 decreased
$49.5 million, or 18.1%, to $224.4 million from 1998 segment EBIT of $273.9
million. EBIT of the Glass Containers segment, excluding the 1998 unusual
item, decreased $42.7 million to $156.0 million, compared to $198.7 million in
1998. The majority of this decrease is attributable to soft market conditions
for most of the affiliates located in Europe and Latin America. The adverse
economic conditions in Latin America and Eastern Europe and the weaker than
normal conditions in other parts of Europe are continuing into the fourth
quarter. As a result, fourth quarter 1999 operating results of the Company's
affiliates located in these geographic areas may be below those reported in
the same 1998 period. The EBIT of the Plastics Packaging segment decreased
$5.2 million, or 7.2%, compared to 1998. Increased shipments in all business
units were offset principally by changes in product mix.
The third quarter of 1998 results include the following unusual items: (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.
First Nine Months 1999 compared with First Nine Months 1998
For the first nine months of 1999, the Company recorded earnings before
extraordinary items of $257.7 million compared to $309.0 million for the first
nine months of 1998. Excluding the effects of unusual items for both 1999 and
1998, the Company's first nine months of 1999 earnings before extraordinary
items of $248.1 million decreased $43.3 million, or 14.9%, from 1998 first
nine months earnings before extraordinary items of $291.4 million. The first
nine months of 1999 and 1998 includes amounts relating to the April 30, 1998
acquisition of the worldwide glass and plastics packaging businesses of BTR
plc. Consolidated EBIT, excluding both the 1999 and 1998 unusual items, was
$712.3 million for the first nine months of 1999, a decrease of $11.4 million,
or 1.6%, compared to $723.7 million for the same 1998 period. The decrease is
attributable to lower EBIT for the Glass Containers segment. Interest
expense, net of interest income, increased $49.2 million from the 1998 period
due principally to the financings related to the acquisition of the BTR glass
and plastics packaging businesses. The decrease in minority share owners'
interests in earnings of subsidiaries resulted from lower net earnings of
certain foreign affiliates, principally the affiliate located in Colombia.
Exclusive of unusual items, the Company's estimated effective tax rate for the
23
<PAGE>
first nine months of 1999 was 37.9%. This compares with an estimated rate of
35.1% for the first nine months of 1998 and the actual rate of 37.3% for the
full year 1998, excluding the effects of the adjustment to Italy's net
deferred income tax liabilities discussed below and other unusual items.
Increased non-deductible goodwill amortization resulting from the acquisition
of the former BTR packaging businesses is the primary reason for the 1999
increase. Net earnings of $294.9 million for the first nine months of 1998
reflect $14.1 million of extraordinary charges from the early extinguishment
of debt.
Capsule segment results (in millions of dollars) for the first nine months of
1999 and 1998 were as follows:
- ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
- ----------------------------------------------------------------------------
1999 1998 1999 1998 (c)
-------- -------- -------- --------
Glass Containers $2,817.8 $2,815.3 $ 487.8(b) $ 502.3
Plastics Packaging 1,282.3 1,055.9 233.4 193.3
Other 56.2 65.9 4.8 29.3
- ----------------------------------------------------------------------------
Segment totals 4,156.3 3,937.1 726.0 724.9
Eliminations and other
retained costs 6.3 2.9
- ----------------------------------------------------------------------------
Consolidated totals $4,156.3 $3,937.1 $ 732.3 $ 727.8
============================================================================
(a) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, minority share owners' interests in
earnings of subsidiaries, and extraordinary items.
(b) EBIT for 1999 includes: (1) gains totaling $40.8 million related to the
sales of a U.S. glass container plant and a mold manufacturing business
in Colombia, and (2) charges totaling $20.8 million related principally
to restructuring costs and write-offs of certain assets in Europe and
South America. These items were recorded in the second quarter of 1999.
(c) EBIT for 1998 includes: (1) a gain of $18.5 million related to the
termination of a licensing agreement, net of charges for related
equipment write-offs and capacity adjustments, (2) charges totaling $16.3
million for the settlement of certain environmental ligitation and
severance costs at certain international affiliates, (3) a loss of $5.7
million on the sale of a discontinued operation by an equity investee,
and (4) 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. These items increased (decreased) EBIT as
follows: Glass Containers, $(13.5) million; Other, $18.5 million; and
Eliminations and other retained costs, ($0.9) million.
24
<PAGE>
Consolidated net sales for the first nine months of 1999 increased $219.2
million, or 5.6%, over the prior year. Net sales of the Glass Containers
segment increased $2.5 million over 1998. The combined U.S. dollar sales of
the segment's foreign affiliates increased over the prior year, reflecting the
Asia Pacific glass container businesses acquired from BTR on April 30, 1998
(an increase of approximately $210 million from first nine months 1998 to
first nine months 1999). This increase was partially offset by weak economic
conditions in markets served by the Company's operations in Latin America and
Europe. The effect of foreign currency movements reduced the first nine
months of 1999 U.S. dollar sales of the segment's foreign affiliates by
approximately $85 million in comparison to the first nine months of 1998.
Domestically, increased glass container unit shipments of containers for the
beer industry partially offset the adverse year to year comparative effects of
the April 1, 1999 sale of a specialized glass manufacturing facility and lower
shipments of food containers. Net sales of the Plastics Packaging segment in-
creased $226.4 million, or 21.4%, over 1998, reflecting the plastics business-
es acquired on April 30, 1998 from BTR (an increase of approximately $190
million from first nine months 1998 to first nine months 1999), and increased
unit shipments from all business units.
Segment EBIT for the first nine months of 1999, excluding the 1999 and 1998
unusual items, decreased $13.9 million, or 1.9%, to $706.0 million from first
nine months 1998 segment EBIT of $719.9 million. EBIT of the Glass Containers
segment, excluding the 1999 and 1998 unusual items, decreased $48.0 million to
$467.8 million, compared to $515.8 million in the first nine months of 1998.
EBIT of the Asia Pacific glass container businesses acquired from BTR on April
30, 1998 increased approximately $40 million from first nine months of 1998 to
first nine months of 1999. The contributions of the acquired businesses were
more than offset by soft market conditions for most of the affiliates located
in Europe and Latin America. The adverse economic conditions in Latin America
and Eastern Europe and the weaker than normal conditions in other parts of
Europe are continuing into the fourth quarter. The EBIT of the Plastics
Packaging segment increased $40.1 million, or 20.7%, compared to the first
nine months of 1998. Contributing to this increase were the plastics
businesses acquired on April 30, 1998 from BTR (an increase of approximately
$25 million from first nine months 1998 to first nine months 1999), increased
shipments of containers for health care and personal care products, closures
and trigger pumps, and strong demand for prescription packaging, including the
new 1-Clic(TM) prescription vial. The Other segment EBIT comparison to prior
year, excluding the 1998 unusual item, was adversely affected by the end of
the first quarter 1998 termination of a license agreement under which the
Company had produced plastic multipack carriers for beverage cans, and lower
shipments of labels.
The first nine months of 1999 results include the following unusual items:
(1) gains totaling $40.8 million ($23.6 million after tax and minority share
owners' interests) related to the sales of a U.S. glass container plant and a
mold manufacturing business in Colombia; and (2) charges totaling $20.8
million ($14.0 million after tax and minority share owners' interests) related
principally to restructuring costs and write-offs of certain assets in Europe
and South America.
25
<PAGE>
The first nine months of 1998 results include the following unusual items:
(1) a tax benefit of $15.1 million to adjust net deferred income tax liabili-
ties as a result of a reduction in Italy's statutory income tax rate; (2) a
gain of $18.5 million ($11.4 million aftertax) related to the termination of a
license agreement, net of charges for related equipment write-offs and
capacity adjustments, under which the Company had produced plastic multipack
carriers for beverage cans; (3) charges of $16.3 million ($10.1 million
aftertax) for the settlement of certain environmental litigation and severance
costs at certain international affiliates; and (4) a net benefit of $1.9
million ($1.2 million aftertax) of third quarter items previously described .
Capital Resources and Liquidity
The Company's total debt at September 30, 1999 was $5.75 billion, compared to
$5.92 billion at December 31, 1998 and $5.83 billion at June 30, 1998.
At September 30, 1999, the Company had available credit totaling $4.5 billion
under its agreement with a group of banks ("Bank Credit Agreement") expiring
in December 2001, of which $828.4 million had not been utilized. At December
31, 1998, the Company had $731.0 million of credit which had not been utilized
under the Bank Credit Agreement. Cash provided by operating activities was
$335.7 million for the first nine months of 1999 compared to $411.7 million
for the first nine months of 1998.
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. The Company faces additional demands upon
its liquidity for asbestos-related payments. Based on the Company's expecta-
tions regarding favorable trends which should lower its aggregate payments for
lawsuits and claims and its expectation of the collection 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.
In May 1999, the Company announced that its Board of Directors authorized
management to repurchase up to 10 million shares of the Company's common
stock. During the third quarter of 1999, the Company purchased 3,764,900
shares of its common stock pursuant to its repurchase plan for $84.9 million.
Board authorization remains for the purchase of an additional 6,235,100
shares. The Company intends to continue to purchase its common stock from
time to time on the open market depending on market conditions and other
considerations. The Company believes that cash flows from its operations and
from utilization of credit available under the Bank Credit Agreement will be
sufficient to fund such purchases in addition to the obligations mentioned in
the previous paragraph.
26
<PAGE>
Year 2000
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 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 has completed the inventorying/identification and the assessment
and solution definition phases of the Project. Activities involving the
phases of remediation/conversion and acceptance testing are nearing
completion, while the implementation phase is ongoing and will continue into
the fourth quarter of calendar year 1999. The Company's critical IT and non-
IT systems which are necessary to transact business with vendors and customers
are Year 2000 compliant. Other critical IT and non-IT systems which are used
in certain of the Company's internal processes are expected to be Year 2000
compliant by December 31, 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.
27
<PAGE>
Information requests have been distributed and replies are being evaluated.
The replies received to date indicate that most suppliers, vendors and
customers will not provide any assurance that they will be Year 2000 compli-
ant. The Company cannot be certain when or if suppliers and customers will be
Year 2000 compliant. Although it is not presently expected, 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 replacements of software and equipment which have been
accelerated due to Year 2000 issues, is estimated to be approximately $75
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 $65 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
previously noted, 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. Although it is not presently expected, 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
development of contingency plans have not been completed as the necessity of
such contingency plans depend upon the progress of Year 2000 compliance
efforts.
28
<PAGE>
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
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
On January 1, 1999, a new currency called the "euro" was introduced in eleven
of the fifteen Economic and Monetary Union ("EMU") countries. The Company has
affiliates located in the following countries which participated in the euro
introduction: Finland, Italy, the Netherlands, and Spain. In addition, the
Company transacts business in other countries in which the euro has been
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.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
The Bank Credit Agreement provides, among other things, a $1.75 billion
offshore revolving loan 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, see Note 3 to the financial statements.
Cautionary Statement Concerning Forward-Looking 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.
29
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings.
(a) Contingencies. Note 9 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:
Eshibit 12 Computation of Ratio of Earnings to Fixed
Charges and Earnings to Combined Fixed Charges
and Preferred Stock Dividends.
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 by the Registrant during the
third quarter of 1999.
30
<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 12, 1999 By /s/ David G. Van Hooser
----------------- --------------------------------------------
David G. Van Hooser, Senior Vice President
and Chief Financial Officer (Principal
Financial Officer)
31
<PAGE>
INDEX TO EXHIBITS
Exhibits
- --------
12 Computation of Ratio of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
23 Consent of McCarter & English, LLP
27 Financial Data Schedule
32
<PAGE>
Exhibit 12
OWENS-ILLINOIS, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(Millions of dollars, except ratios)
Nine Months ended September 30,
-----------------------------------
Pro Forma
As Adjusted For
BTR Packaging
Acquisition
1999 1998 1998
Earnings before income taxes, and ------ ------ ---------------
minority share owners' interests . $437.4 $482.1 $529.3
Less: Equity earnings . . . . . . . (15.6) (10.6) (11.5)
Add: Total fixed charges deducted
from earnings . . . . . . . 335.8 287.5 342.9
Proportional share of pre-tax
earnings (loss) of 50% owned
associates. . . . . . . . . 7.6 6.1 7.4
Dividends received from less
than 50% owned associates . 7.2 4.1 4.1
------ ------ ------
Earnings available for payment
of fixed charges. . . . . . $772.4 $769.2 $872.2
====== ====== ======
Fixed charges (including the Company's
proportional share of 50% owned
associates):
Interest expense. . . . . . . $308.4 $262.6 $312.9
Portion of operating lease rental
deemed to be interest . . . 20.7 19.6 21.3
Amortization of deferred
financing costs and debt
discount expense. . . . . . 6.7 5.3 8.7
------ ------ ------
Total fixed charges deducted from
earnings and fixed charges. 335.8 287.5 342.9
Preferred stock dividends (increased to
assumed pre-tax amount). . . . . . 27.2 13.0 25.3
------ ------ ------
Combined fixed charges and preferred
stock dividends. . . . . . . . . . $363.0 $300.5 $368.2
====== ====== ======
Ratio of earnings to fixed charges . 2.3 2.7 2.5
Ratio of earnings to combined fixed
charges and preferred stock
dividends. . . . . . . . . . . . . 2.1 2.6 2.4
<PAGE>
EXHIBIT 23
CONSENT OF MCCARTER & ENGLISH, LLP
November 12, 1999
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, 1999,
of the reference to our firm under the caption "Legal Proceedings."
Very truly yours,
/s/McCarter & English, LLP
--------------------------
McCarter & English, LLP
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1999 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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 234,800,000
<SECURITIES> 0
<RECEIVABLES> 918,700,000
<ALLOWANCES> 52,800,000
<INVENTORY> 851,600,000
<CURRENT-ASSETS> 2,167,700,000
<PP&E> 5,508,400,000
<DEPRECIATION> 2,119,000,000
<TOTAL-ASSETS> 10,798,800,000
<CURRENT-LIABILITIES> 1,316,300,000
<BONDS> 5,573,900,000
0
465,400,000
<COMMON> 1,600,000
<OTHER-SE> 2,026,200,000
<TOTAL-LIABILITY-AND-EQUITY> 10,798,800,000
<SALES> 4,156,300,000
<TOTAL-REVENUES> 4,348,700,000
<CGS> 3,180,400,000
<TOTAL-COSTS> 3,180,400,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 315,100,000
<INCOME-PRETAX> 437,400,000
<INCOME-TAX> 167,600,000
<INCOME-CONTINUING> 257,700,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257,700,000
<EPS-BASIC> 1.55
<EPS-DILUTED> 1.54
</TABLE>
