<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
(X) Quarterly Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act
of 1934
For Quarter Ended September 30, 2000
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
requirements 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 - 146,031,943 shares at October
31, 2000.
<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, 1999.
2
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 2000 and 1999
(Millions of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
2000 1999
---------- ------------
<S> <C> <C>
Revenues:
Net sales $ 1,430.3 $ 1,426.2
Royalties and net technical assistance 6.0 9.4
Equity earnings 6.3 6.6
Interest 8.4 6.7
Other 41.3 30.9
------------- -------------
1,492.3 1,479.8
Costs and expenses:
Manufacturing, shipping, and delivery 1,126.4 1,112.2
Research and development 13.1 10.9
Engineering 5.4 9.5
Selling and administrative 73.6 71.9
Interest 124.2 106.1
Other 843.7 39.5
------------- -------------
2,186.4 1,350.1
------------- -------------
Earnings (loss) before items below (694.1) 129.7
Provision (credit) for income taxes (247.4) 49.2
Minority share owners' interests in earnings of
subsidiaries 2.5 3.0
------------- -------------
Net earnings (loss) $ (449.2) $ 77.5
============= =============
Basic net earnings (loss) per share of common stock $ (3.12) $ 0.46
============= =============
Weighted average shares outstanding (thousands) 145,716 154,918
============= =============
Diluted net earnings (loss) per share of common stock $ (3.12) $ 0.46
============== =============
Weighted diluted average shares (thousands) 145,716 156,283
============= =============
</TABLE>
See accompanying notes.
3
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 2000 and 1999
(Millions of dollars, except share and per share amounts)
<TABLE>
<CAPTION>
2000 1999
-------------- -------------
<S> <C> <C>
Revenues:
Net sales $ 4,225.1 $ 4,156.3
Royalties and net technical assistance 19.5 23.6
Equity earnings 14.6 15.6
Interest 23.4 20.2
Other 138.9 133.0
------------- -------------
4,421.5 4,348.7
Costs and expenses:
Manufacturing, shipping, and delivery 3,279.9 3,180.4
Research and development 36.7 30.6
Engineering 24.9 27.1
Selling and administrative 214.5 211.1
Interest 360.8 315.1
Other 944.4 147.0
------------- -------------
4,861.2 3,911.3
------------- -------------
Earnings (loss) before items below (439.7) 437.4
Provision (credit) for income taxes (146.6) 167.6
Minority share owners' interests in earnings of
subsidiaries 8.9 12.1
------------- -------------
Net earnings (loss) $ (302.0) $ 257.7
============= =============
Basic net earnings (loss) per share of common stock $ (2.18) $ 1.55
============= ==============
Weighted average shares outstanding (thousands) 146,245 155,465
============= =============
Diluted net earnings (loss) per share of common stock $ (2.18) $ 1.54
============== =============
Weighted diluted average shares (thousands) 146,245 156,924
============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2000, December 31, 1999, and September 30, 1999
(Millions of dollars)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
---------- ---------- ----------
<S> <C> <C> <C>
Assets
Current assets:
Cash, including time deposits $ 163.6 $ 257.1 $ 205.5
Short-term investments, at cost which
approximates market 31.7 32.1 29.3
Receivables, less allowances for losses and
discounts ($66.3 at September 30, 2000,
$56.9 at December 31, 1999, and $52.8 at
September 30, 1999) 912.6 856.4 918.7
Inventories 862.6 826.6 851.6
Prepaid expenses 138.6 137.6 162.6
----------- ----------- -----------
Total current assets 2,109.1 2,109.8 2,167.7
Investments and other assets:
Equity investments 190.7 195.2 194.5
Repair parts inventories 244.4 234.1 252.6
Prepaid pension 751.7 745.6 753.1
Insurance receivable for
asbestos-related costs 203.3 205.3 209.5
Deposits, receivables, and other assets 492.8 527.8 536.8
Excess of purchase cost over net assets
acquired, net of accumulated
amortization ($574.5 at September 30,
2000, $502.8 at December 31, 1999,
and $478.1 at September 30, 1999) 3,129.9 3,294.4 3,295.2
----------- ----------- -----------
Total other assets 5,012.8 5,202.4 5,241.7
Property, plant, and equipment, at cost 5,606.2 5,590.8 5,508.4
Less accumulated depreciation 2,319.5 2,146.7 2,119.0
----------- ----------- -----------
Net property, plant, and equipment 3,286.7 3,444.1 3,389.4
----------- ----------- -----------
Total assets $ 10,408.6 $ 10,756.3 $ 10,798.8
=========== =========== ===========
</TABLE>
See accompanying notes.
5
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
------------ ----------- -----------
<S> <C> <C> <C>
Liabilities and Share Owners' Equity
Current liabilities:
Short-term loans and long-term debt
due within one year $ 139.6 $ 205.7 $ 246.5
Current portion of asbestos-related liabilities 180.0 85.0 85.0
Accounts payable and other liabilities 979.7 982.4 984.8
----------- ----------- -----------
Total current liabilities 1,299.3 1,273.1 1,316.3
Long-term debt 5,732.3 5,733.1 5,504.5
Deferred taxes 186.6 407.4 379.7
Nonpension postretirement benefits 299.5 314.9 319.4
Other liabilities 417.7 391.8 463.4
Asbestos-related liabilities 426.6 91.2 116.3
Commitments and contingencies
Minority share owners' interests 180.4 194.9 206.0
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 3.4 4.0 12.9
Common stock, par value $.01 per share
250,000,000 shares authorized, 156,969,643
shares issued and outstanding, less
10,937,700 treasury shares at September
30, 2000 (156,851,337 issued and outstanding,
less 10,000,000 treasury shares at
December 31, 1999; and 156,302,489 issued
and outstanding, less 3,764,900 treasury
shares at September 30, 1999) 1.6 1.6 1.6
Capital in excess of par value 2,204.7 2,201.9 2,192.5
Treasury stock, at cost (237.9) (225.6) (84.9)
Retained earnings (deficit) (34.0) 284.1 248.9
Accumulated other comprehensive income (524.1) (368.6) (330.3)
----------- ----------- -----------
Total share owners' equity 1,866.2 2,349.9 2,493.2
----------- ----------- -----------
Total liabilities and share owners' equity $ 10,408.6 $ 10,756.3 $ 10,798.8
=========== =========== ===========
</TABLE>
See accompanying notes.
6
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 2000 and 1999
(Millions of dollars)
<TABLE>
<CAPTION>
2000 1999
----------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (302.0) $ 257.7
Non-cash charges (credits):
Depreciation 312.1 303.3
Amortization of deferred costs 106.8 104.7
Future asbestos-related costs 550.0
Restructuring costs and write-offs of certain assets 248.3 20.8
Gains on asset sales (40.8)
Deferred tax provision (credit) (213.6) 30.3
Other (112.7) (90.1)
Change in non-current operating assets (17.8) (36.7)
Asbestos-related payments (119.6) (96.7)
Asbestos-related insurance proceeds 2.0 3.3
Reduction of non-current liabilities (3.0) (13.6)
Change in components of working capital (164.1) (106.5)
-------- --------
Cash provided by operating activities 286.4 335.7
Cash flows from investing activities:
Additions to property, plant, and equipment (342.0) (421.3)
Acquisitions, net of cash acquired (78.2) (34.0)
Net cash proceeds from divestitures 40.2 318.5
-------- --------
Cash utilized in investing activities (380.0) (136.8)
Cash flows from financing activities:
Additions to long-term debt 519.7 311.0
Repayments of long-term debt (455.6) (495.3)
Payment of convertible preferred stock dividends (16.1) (16.1)
Treasury shares repurchased (12.3) (84.9)
Increase (decrease) in short-term loans (23.4) 29.9
Issuance of common stock and other 1.3 2.8
-------- --------
Cash provided by (utilized in) financing activities 13.6 (252.6)
Effect of exchange rate fluctuations on cash (13.5) (12.2)
-------- --------
Decrease in cash (93.5) (65.9)
Cash at beginning of period 257.1 271.4
-------- --------
Cash at end of period $ 163.6 $ 205.5
======== ========
</TABLE>
See accompanying notes.
7
<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 computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Three months ended
September 30,
------------------------------
2000 1999
-------------- ------------
<S> <C> <C>
Numerator:
Net earnings (loss) ($449.2) $77.5
Preferred stock dividends:
Convertible (5.4) (5.4)
Exchangeable (0.1) (0.2)
----------------------------------------------------------------------------------
Numerator for basic earnings (loss) per share -
income (loss) available to common share owners (454.7) 71.9
Effect of dilutive securities -
exchangeable preferred stock dividends 0.2
----------------------------------------------------------------------------------
Numerator for diluted earnings (loss) per share
income (loss) available to common share owners
after assumed exchanges of preferred stock
for common stock ($454.7) $72.1
==================================================================================
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares outstanding 145,715,930 154,917,816
Effect of dilutive securities:
Stock options 613,286
Exchangeable preferred stock 752,337
----------------------------------------------------------------------------------
Dilutive potential common shares 1,365,623
----------------------------------------------------------------------------------
Denominator for diluted earnings (loss)
per share adjusted weighted average shares
and assumed exchanges of preferred stock
for common stock 145,715,930 156,283,439
==================================================================================
Basic earnings (loss) per share ($3.12) $0.46
==================================================================================
Diluted earnings (loss) per share ($3.12) $0.46
==================================================================================
</TABLE>
See accompanying notes.
8
<PAGE>
For the three months ended September 30, 2000, diluted earnings per share of
common stock are equal to basic earnings per share of common stock due to the
net loss. The Convertible preferred stock was not included in the computation of
September 30, 1999 diluted earnings per share since the result would have been
antidilutive. Options to purchase 2,905,439 weighted average shares of common
stock which were outstanding during the three months ended September 30, 1999
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.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
------------------------------------------
2000 1999
------------------ ------------------
<S> <C> <C>
Numerator:
Net earnings (loss) ($302.0) $257.7
Preferred stock dividends:
Convertible (16.1) (16.1)
Exchangeable (0.2) (0.7)
------------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings (loss) per share -
income (loss) available to common share owners (318.3) 240.9
Effect of dilutive securities -
exchangeable preferred stock dividends 0.7
------------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings (loss) per share -
income (loss) available to common share owners
after assumed exchanges of preferred stock
for common stock ($318.3) $241.6
========================================================================================================================
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares outstanding 146,245,456 155,464,546
Effect of dilutive securities:
Stock options 707,352
Exchangeable preferred stock 752,087
------------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 1,459,439
------------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and
assumed exchanges of preferred stock
for common stock 146,245,456 156,923,985
========================================================================================================================
Basic earnings (loss) per share ($2.18) $1.55
========================================================================================================================
Diluted earnings (loss) per share ($2.18) $1.54
========================================================================================================================
</TABLE>
9
<PAGE>
For the nine months ended September 30, 2000, diluted earnings per share of
common stock are equal to basic earnings per share of common stock due to the
net loss. 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 weighted average
shares of common stock which were outstanding during the nine months ended
September 30, 1999 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.
2. INVENTORIES
Major classes of inventory are as follows:
<TABLE>
<CAPTION>
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
------------- -------------- --------------
<S> <C> <C> <C>
Finished goods $618.0 $580.0 $614.7
Work in process 39.5 36.3 30.6
Raw materials 124.8 131.3 125.8
Operating supplies 80.3 79.0 80.5
------------- -------------- --------------
$862.6 $826.6 $851.6
============= ============== ==============
</TABLE>
10
<PAGE>
3. LONG-TERM DEBT
The following table summarizes the long-term debt of the Company:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
2000 1999 1999
--------------- ----------------- --------------
<S> <C> <C> <C>
Bank Credit Agreement:
Revolving Credit Facility:
Revolving Loans $ 2,814.3 $ 2,559.4 $ 2,230.0
Offshore Loans:
1.39 billion (1.42 billion at
December 31, 1999; 1.42 billion
at September 30, 1999) Australian
dollars 802.3 904.4 908.5
132.0 million (230.0 million at
December 31, 1999; 235.0 million
at September 30, 1999) British pounds 191.3 369.5 377.0
32.0 billion (100.0 billion at
December 31, 1999; 111.0 billion
at September 30, 1999) Italian lira 14.7 52.0 60.7
Bid Rate Loans 46.0
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 236.5 224.6 251.7
------------------------------------------------------------------------------------------------------------------
5,759.1 5,809.9 5,573.9
Less amounts due within one year 26.8 76.8 69.4
------------------------------------------------------------------------------------------------------------------
Long-term debt $ 5,732.3 $ 5,733.1 $ 5,504.5
==================================================================================================================
</TABLE>
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
11
<PAGE>
Overdraft Account facility providing for aggregate borrowings up to $50 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, 2000, the Company had unused credit
of $621.7 million available under the Bank Credit Agreement.
The interest rate on borrowings under the Revolving Loans commitment is, at the
Company's option, the prime rate or a reserve adjusted Eurodollar rate. The
interest rate on loans under the Offshore Facility is, at the applicable
borrower's option, the applicable Offshore Base Rate or the Adjusted Offshore
Periodic Rate (as those terms are defined in the Bank Credit Agreement). The
interest rate on borrowings under the Revolving Credit Facility also includes a
margin linked to the Company's Consolidated Leverage Ratio, as defined in the
Agreement. The margin is currently .750% and is limited to a range of .275% to
1.000%. The interest rate on Overdraft Account loans is 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,
2000, was 7.38%. The weighted average interest rate on borrowings outstanding
under the Offshore Facility at September 30, 2000, was 7.08%. 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 .375%, 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 $323.3 million and $242.0 million for the nine
months ended September 30, 2000 and September 30, 1999, respectively. Income
taxes paid in cash totaled $39.3 million and $33.1 million for the nine months
ended September 30, 2000 and September 30, 1999, respectively.
5. COMPREHENSIVE INCOME
The Company's components of comprehensive income (loss) are net earnings (loss)
and foreign currency translation adjustments. Total comprehensive income (loss)
for the three month periods ended September 30, 2000 and 1999 amounted to
$(485.4) million and $62.5 million, respectively. Total comprehensive income
(loss) for the nine month periods ended September 30, 2000 and 1999 amounted to
$(457.5) million and $118.1 million, respectively.
12
<PAGE>
6. OTHER COSTS AND EXPENSES
Other costs and expenses for the three and nine months ended September 30, 2000
includes: (1) $550.0 million related to adjustment of the reserve for estimated
future asbestos-related indemnity payments and legal fees, and (2) $248.3
million principally related to a restructuring and capacity realignment program.
The restructuring and capacity realignment program, initiated in the third
quarter of 2000, includes the consolidation of manufacturing capacity and a
reduction of 350 employees in the U.S. salaried work force, or about 10%,
principally as a result of early retirement incentives. Also included in the
program are a write-down of plant and equipment for the Company's glass
container affiliate in India and certain other asset write-offs. Manufacturing
capacity consolidations principally involve U.S. glass container facilities and
reflect technology-driven improvements in productivity, conversions from some
juice and similar products to plastic containers, Company and customer decisions
regarding pricing and volume, and the further concentration of production in the
most strategically-located facilities. Selected information relating to the
third quarter 2000 charges, excluding asbestos-related items, follows:
<TABLE>
<CAPTION>
Retirement Write-down
Incentives of Property, Other,
and Special Plant and Principally
Capacity Termination Equipment Software
Realignment Benefits in India Write-off Total
-------------- -------------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Third quarter 2000
restructuring charges $122.4 $52.4 $40.0 $33.5 $248.3
Write-down of assets to net
realizable value (43.5) (40.0) (31.5) (115.0)
Reduction of prepaid
pension asset (14.2) (45.8) (60.0)
Increase in nonpension
postretirement benefit
liability (0.6) (5.4) (6.0)
----------------------------------------------------------------------------------
Remaining liabilities related to
third quarter 2000 charges
as of September 30, 2000 $ 64.1 $ 1.2 $ - $ 2.0 $ 67.3
==================================================================================
</TABLE>
13
<PAGE>
As a result of a 10% reduction of the U.S. salaried workforce in 2000, the
Company recognized a settlement gain of approximately $40 million related to its
defined benefit pension plan. This gain has been included in the net charge of
$52.4 million for retirement incentives and special termination benefits.
The pretax charge of $40.0 million related to the write-down of property, plant,
and equipment in India. Based on the Company's expectation of future net cash
flows of its affiliate in India, the related property, plant, and equipment have
been written down to realizable values in accordance with Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of."
7. 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, 2000, the Company estimates that it is a named defendant in
asbestos claims involving approximately 17,000 plaintiffs and claimants.
Additionally, the Company has claims-handling agreements in place with many
plaintiff's counsel throughout the country. These agreements require
evaluation and negotiation regarding whether particular claimants qualify
under the criteria established by such agreements. The criteria for such
claims include verification of a compensable illness, exposure to a product
manufactured by the Company's former business unit during its manufacturing
period ending in 1958, and viability of such claims under applicable statutes
of limitations. The Company believes that the outcome of evaluations and
negotiations currently in process could result in resolution of a substantial
number of prospective claims pursuant to such agreements in addition to the
resolution of certain of the asbestos claims described in the last sentence
of the preceding paragraph.
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 these 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
14
<PAGE>
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, 28
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 $317.5 million. Of the total amount confirmed to date, $306.7
million had been received through September 30, 2000; and the balance of
approximately $10.8 million will be received throughout the next several years.
The remainder of the insurance asset of approximately $192.5 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) cannot be estimated with certainty. In 1993, the Company established a
liability of $975 million to cover indemnity payments and legal fees associated
with the resolution of outstanding and expected future asbestos lawsuits and
claims. In 1998, an additional liability of $250 million was established.
After establishing the additional liability in 1998, the Company continued
to monitor the trends of matters which may affect its ultimate liability and
continued to analyze the trends, developments and variables affecting or likely
to affect the resolution of pending and future asbestos claims against the
Company. The number of asbestos lawsuits and claims pending and filed against
the Company since 1998 has exceeded the number estimated at that time. The trend
of costs to resolve lawsuits and claims since 1998 has also been unfavorable
compared to expectations. In addition, during 2000, Pittsburgh-Corning, Babcock
& Wilcox, Owens Corning, and Fibreboard Corporation sought protection under
Chapter 11 of the Bankruptcy Code.
During the third quarter of 2000, the Company conducted a comprehensive review
to determine whether further adjustments of asbestos-related assets or
liabilities were appropriate. As a result of that review, as of September 30,
2000, the Company established an additional liability of $550 million to cover
the Company's estimated indemnity payments and legal fees arising from
outstanding asbestos personal injury lawsuits and claims and asbestos personal
injury lawsuits and claims filed in the next several years, during which period
the Company expects to
15
<PAGE>
receive the majority of the future asbestos-related lawsuits and claims that
could involve the Company. Based on all the factors and matters relating to
the Company's asbestos-related lawsuits and claims, the Company presently
believes that its asbestos-related costs and liabilities, to the extent it is
able reasonably to estimate such cost 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 the
charges for asbestos-related costs described above.
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 and subject to the matters discussed above, that such ultimate
liability will not be material in relation to the Company's Consolidated
Financial Statements.
8. 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, and extraordinary charges,
(collectively "EBIT") excluding 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.
16
<PAGE>
Financial information for the three-month periods ended September 30, 2000 and
1999 regarding the Company's product segments is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Elimina-
tions
Total and Consoli-
Glass Plastics Product Other dated
Containers Packaging Other Segments Retained Totals
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Sept. 30, 2000 $948.2 $ 465.5 $ 16.6 $ 1,430.3 $ 1,430.3
Sept. 30, 1999 982.5 425.7 18.0 1,426.2 1,426.2
=============================================================================================================================
EBIT, excluding unusual items:
Sept. 30, 2000 $145.1 $ 68.0 $ (0.2) $ 212.9 $ 7.1 $ 220.0
Sept. 30, 1999 156.0 67.3 1.1 224.4 4.7 229.1
=============================================================================================================================
Unusual items:
Sept. 30, 2000
Adjustment of reserve
for estimated
future asbestos-
related costs $ (550.0) $ (550.0)
Charges related to
consolidation of
manufacturing
capacity $ (120.4) $ (2.0) $(122.4) (122.4)
Charges related to
early retirement
incentives and
special termination
benefits (22.0) (9.2) (31.2) (21.2) (52.4)
Charges related to
impairment of
property, plant and
equipment in India (40.0) (40.0) (40.0)
Other charges,
principally related
to the write-off
of software (3.6) (3.6) (29.9) (33.5)
=============================================================================================================================
</TABLE>
17
<PAGE>
The reconciliation of EBIT to consolidated totals for the three-month periods
ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Sept. 30, 2000 Sept. 30, 1999
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings (loss) before income taxes and minority share
owners' interests in earnings of subsidiaries:
EBIT, excluding unusual items for
reportable segments $212.9 $224.4
Unusual items excluded from reportable
segment information (197.2)
Eliminations and other retained,
excluding unusual items 7.1 4.7
Unusual items excluded from eliminations and other
retained (601.1)
Net interest expense (115.8) (99.4)
-------------------------------------------------------------------------------------------------------------------------
Total ($694.1) $129.7
=========================================================================================================================
</TABLE>
18
<PAGE>
Financial information for the nine-month periods ended September 30, 2000 and
1999 regarding the Company's product segments is as follows:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
Elimina-
tions
Total and Consoli-
Glass Plastics Product Other dated
Containers Packaging Other Segments Retained Totals
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales:
Sept. 30, 2000 $2,784.2 $1,387.1 $ 53.8 $ 4,225.1 $ 4,225.1
Sept. 30, 1999 2,817.8 1,282.3 56.2 4,156.3 4,156.3
=============================================================================================================================
EBIT, excluding unusual items:
Sept. 30, 2000 $ 460.7 $ 216.0 $ (0.1) $ 676.6 $ 19.4 $ 696.0
Sept. 30, 1999 467.8 233.4 4.8 706.0 6.3 712.3
=============================================================================================================================
Unusual items:
Sept. 30, 2000
Adjustment of reserve
for estimated
future asbestos-
related costs $ (550.0) $ (550.0)
Charges related to
consolidation of
manufacturing
capacity $(120.4) $ (2.0) $(122.4) (122.4)
Charges related to
early retirement
incentives and
special termination
benefits (22.0) (9.2) (31.2) (21.2) (52.4)
Charges related to
impairment of
property, plant and
equipment in India (40.0) (40.0) (40.0)
Other charges,
principally related
to the write-off
of software (3.6) (3.6) (29.9) (33.5)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Elimina-
tions
Total and Consoli-
Glass Plastics Product Other dated
Containers Packaging Other Segments Retained Totals
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unusual items:
Sept. 30, 1999
Gains related to the
sales of two manu-
facturing 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)
======================================================================================================================
</TABLE>
The reconciliation of EBIT to consolidated totals for the nine-month periods
ended September 30, 2000 and 1999 is as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
Sept. 30, 2000 Sept. 30, 1999
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings (loss) before income taxes and minority share
owners' interests in earnings of subsidiaries:
EBIT, excluding unusual items for
reportable segments $676.6 $706.0
Unusual items excluded from reportable
segment information (197.2) 20.0
Eliminations and other retained,
excluding unusual items 19.4 6.3
Unusual items excluded from eliminations and other
retained (601.1)
Net interest expense (337.4) (294.9)
------------------------------------------------------------------------------------------------------------------------
Total ($439.7) $437.4
========================================================================================================================
</TABLE>
20
<PAGE>
9. NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (as amended by Statements Nos. 137 and 138) ("FAS No.
133"), which is effective for financial statements for fiscal years beginning
after June 15, 2000. 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 is not expected to be material to the Company's financial
position or results of operations.
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), which is effective no later than the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. SAB 101 summarizes certain of the
Commission staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. The impact of SAB 101 is not
expected to be material to the Company's financial position or results of
operations.
21
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS - THIRD QUARTER 2000 COMPARED WITH THIRD QUARTER 1999
The Company recorded a net loss of $449.2 million for the third quarter of 2000
compared to net earnings of $77.5 million for the third quarter of 1999.
Excluding the effects of the 2000 unusual items discussed below, the Company's
third quarter 2000 net earnings of $63.9 million decreased $13.6 million, or
17.5% from 1999 third quarter net earnings of $77.5 million. Consolidated EBIT
for the third quarter of 2000, excluding unusual items, was $220.0 million, a
decrease of $9.1 million, or 4.0%, compared to the third quarter of 1999 EBIT of
$229.1 million. The decrease is attributable to lower EBIT for the Glass
Containers segment. Interest expense, net of interest income, increased $16.4
million from the 1999 period due principally to higher interest rates.
Capsule segment results (in millions of dollars) for the third quarter of 2000
and 1999 were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
---------------------------------------------------------------------------------------------------------------------
2000 1999 2000 (b) 1999
--------------- -------------- ------------- -----------------
<S> <C> <C> <C> <C>
Glass Containers $ 948.2 $ 982.5 $(40.9) $156.0
Plastics Packaging 465.5 425.7 56.8 67.3
Other 16.6 18.0 (0.2) 1.1
---------------------------------------------------------------------------------------------------------------------
Segment totals 1,430.3 1,426.2 15.7 224.4
Eliminations and other
retained costs (594.0) 4.7
---------------------------------------------------------------------------------------------------------------------
Consolidated totals $ 1,430.3 $ 1,426.2 $(578.3) $229.1
=====================================================================================================================
</TABLE>
(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 2000 includes charges totaling $798.3 million for the
following: (1) $550.0 million related to adjustment of the reserve for
estimated future asbestos-related costs; (2) $122.4 million related to
the consolidation of manufacturing capacity; (3) a net charge of $52.4
million related to early retirement incentives and special termination
benefits for 350 United States salaried employees; (4) $40.0 million
related to the impairment of property, plant and equipment at the
Company's facilities in India; and (5) $33.5 million related
principally to the write-off of software and related development costs.
Such items are included as follows in consolidated EBIT for the three
months ended September 30, 2000:
22
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Glass Containers $186.0
Plastics Packaging 11.2
------
Total Product Segments 197.2
Eliminations and other retained costs 601.1
------
Consolidated Totals $798.3
======
</TABLE>
Consolidated net sales for the third quarter of 2000 increased $4.1 million, or
0.3%, over the prior year. Net sales of the Glass Containers segment decreased
$34.3 million, or 3.5%, from 1999. In the United States, increased shipments of
containers for beer producers were more than offset by lower shipments of
certain food containers and lower sales of glass-forming machines and equipment
to licensees. The combined U.S. dollar sales of the segment's foreign affiliates
decreased from the prior year. Increased shipments from the Company's operations
throughout most of Europe, South America, and the Asia Pacific region were more
than offset by the effects of a strong U.S. dollar and lower shipments from the
Company's operations in the United Kingdom. The effect of changing foreign
currency exchange rates reduced U.S. dollar sales of the segment's foreign
affiliates by approximately $60 million. Net sales of the Plastics Packaging
segment increased $39.8 million, or 9.3%, over 1999, reflecting increased
shipments of plastic containers for juices, closures for food and beverages, and
the effects of higher resin costs on pass-through arrangements with customers,
partially offset by lower shipments of health care and personal care containers.
The effects of higher resin cost pass-throughs increased sales approximately $20
million compared to the third quarter of 1999.
Excluding the effects of the 2000 unusual items, segment EBIT for the third
quarter of 2000 decreased $11.5 million, or 5.1%, to $212.9 million from the
1999 segment EBIT of $224.4 million. EBIT of the Glass Containers segment
decreased $10.9 million to $145.1 million, compared to $156.0 million in 1999.
The combined U.S. dollar EBIT of the segment's foreign affiliates increased from
prior year. Increased shipments from the Company's operations throughout most of
Europe, South America, and the Asia Pacific region were partially offset by the
effects of a strong U.S. dollar, higher energy costs worldwide, and lower
shipments from the Company's operations in the United Kingdom. In the United
States, Glass Container EBIT decreased from 1999 principally as a result of
higher costs for energy and corrugated boxes, as well as lower shipments of
certain food containers due to conversions of juice and iced tea bottles from
glass to plastic containers. EBIT of the Plastics Packaging segment increased
$0.7 million, or 1.0%, to $68.0 million compared to $67.3 million in 1999.
Increased shipments of plastic containers for juices and closures for food and
beverages were partially offset by lower shipments of health care and personal
care containers. Eliminations and other retained costs improved $2.4 million
from 1999 reflecting principally higher net financial services income.
The third quarter of 2000 includes pretax charges totaling $798.3 million
($513.1 million after tax and minority share owners' interests) for the
following: (1) $550.0 million ($342.1 million aftertax) related to adjustment of
the reserve for estimated future asbestos-related costs; (2) $122.4 million
($77.3 million after tax and minority share owners' interests) related to the
consolidation of manufacturing capacity; (3) a net charge of $52.4 million
($32.6 million aftertax) related to early retirement incentives and special
termination benefits for 350 United States salaried employees; (4) $40.0 million
($40.0 million aftertax) related to the impairment of property, plant and
equipment at the Company's facilities in India; and (5) $33.5 million ($21.1
million after tax and minority share owners' interests) related principally to
the write-off of software and related development costs.
23
<PAGE>
FIRST NINE MONTHS 2000 COMPARED WITH FIRST NINE MONTHS 1999
For the first nine months of 2000, the Company recorded a net loss of $302.0
million compared to net earnings of $257.7 million for the first nine months of
1999. Excluding the effects of the 2000 and 1999 unusual items, the Company's
first nine months of 2000 net earnings of $211.1 million decreased $37.0
million, or 14.9% from 1999 first nine months net earnings of $248.1 million.
Consolidated EBIT, excluding unusual items, for the first nine months of 2000
was $696.0 million, a decrease of $16.3 million, or 2.3%, compared to the first
nine months of 1999 EBIT, excluding unusual items, of $712.3 million. The
decrease is attributable to lower EBIT for both the Glass Containers segment and
the Plastics Packaging segment. Interest expense, net of interest income,
increased $42.5 million from the 1999 period due principally to higher interest
rates. Exclusive of unusual items, the Company's estimated effective tax rate
for the first nine months of 2000 was 38.5%. This compares with an estimated
rate of 37.9% for the first nine months of 1999 and the actual rate of 36.9% for
the full year of 1999, excluding unusual items. The increase in the 2000
estimated rate is primarily the result of the non-recurrence of certain foreign
tax credits which benefited 1999 results.
Capsule segment results (in millions of dollars) for the first nine months of
2000 and 1999 were as follows
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
----------------------------------------------------------------------------------------------------------------------
2000 1999 2000 (b) 1999
--------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Glass Containers $ 2,784.2 $ 2,817.8 $274.7 $487.8 (c)
Plastics Packaging 1,387.1 1,282.3 204.8 233.4
Other 53.8 56.2 (0.1) 4.8
----------------------------------------------------------------------------------------------------------------------
Segment totals 4,225.1 4,156.3 479.4 726.0
Eliminations and other
retained costs (581.7) 6.3
----------------------------------------------------------------------------------------------------------------------
Consolidated totals $ 4,225.1 $ 4,156.3 $(102.3) $732.3
======================================================================================================================
</TABLE>
(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 2000 includes charges totaling $798.3 million for the
following: (1) $550.0 million related to adjustment of the reserve for
estimated future asbestos-related costs; (2) $122.4 million related to
the consolidation of manufacturing capacity; (3) a net charge of $52.4
million related to early retirement incentives and special termination
benefits for 350 United States salaried employees; (4) $40.0 million
related to the impairment of property, plant and equipment at the
Company's facilities in India; and (5) $33.5 million related
principally to the write-off of software and related development costs.
These items were
24
<PAGE>
recorded in the third quarter of 2000. Such items are included as
follows in consolidated EBIT for the nine months ended September 30,
2000:
<TABLE>
<CAPTION>
<S> <C>
Glass Containers $186.0
Plastics Packaging 11.2
-------
Total Product Segments 197.2
Eliminations and other retained costs 601.1
-------
Consolidated Totals $798.3
======
</TABLE>
(c) 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.
Consolidated net sales for the first nine months of 2000 increased $68.8
million, or 1.7%, over the prior year. Net sales of the Glass Containers segment
decreased $33.6 million from 1999. In the United States, the effect of increased
shipments of containers for beer producers was partially offset by lower
shipments of certain food containers. The combined U.S. dollar sales of the
segment's foreign affiliates decreased from the prior year due to the strength
of the U.S. dollar. Increased shipments from the Company's operations throughout
most of Europe, South America, and the Asia Pacific region were more than offset
by lower shipments from the Company's operations in the United Kingdom and the
effects of a strong U.S. dollar. The effect of changing foreign currency
exchange rates reduced U.S. dollar sales of the segment's foreign affiliates by
approximately $150 million. Net sales of the Plastics Packaging segment
increased $104.8 million, or 8.2%, over 1999, reflecting increased shipments of
plastic containers for juices, closures for food and beverages, and the effects
of higher resin costs on pass-through arrangements with customers, partially
offset by lower shipments of household, health care, and personal care
containers. The effects of higher resin costs increased sales by approximately
$70 million compared to the first six months of 1999.
Excluding the effects of the 2000 and 1999 unusual items, segment EBIT for the
first nine months of 2000 decreased $29.4 million, or 4.2%, to $676.6 million
from the 1999 segment EBIT of $706.0 million. EBIT of the Glass Containers
segment decreased $7.1 million, or 1.5%, to $460.7 million, compared to $467.8
million in 1999. The combined U.S. dollar EBIT of the segment's foreign
affiliates decreased from prior year. Increased shipments from the Company's
operations throughout most of Europe, South America, and the Asia Pacific
region, and a gain from the restructuring of the ownership in two small joint
ventures in South America were more than offset by the effects of a strong U.S.
dollar, higher energy costs worldwide, and expenses associated with the
scheduled rebuild of a glass melting furnace in Australia. In the United States,
Glass Container EBIT increased from 1999 principally as a result of further
improvements in cost structure. EBIT of the Plastics Packaging segment decreased
$17.4 million, or 7.5%, to $216.0 million, compared to $233.4 million in 1999.
Increased shipments of plastic containers for juices and closures for food and
beverages were more than offset by lower shipments of household, health care,
and personal care containers and costs incurred in connection with the start-up
of new custom PET capacity, including a new plastic bottle plant. Eliminations
and other retained costs improved $13.1 million from 1999 principally due to
higher net financial services income.
25
<PAGE>
The first nine months of 2000 includes pretax charges totaling $798.3 million
($513.1 million after tax and minority share owners' interests) for the
following: (1) $550.0 million ($342.1 million aftertax) related to adjustment of
the reserve for estimated future asbestos-related costs; (2) $122.4 million
($77.3 million after tax and minority share owners' interests) related to the
consolidation of manufacturing capacity; (3) a net charge of $52.4 million
($32.6 million aftertax) related to early retirement incentives and special
termination benefits for 350 United States salaried employees; (4) $40.0 million
($40.0 million aftertax) related to the impairment of property, plant and
equipment at the Company's facilities in India; and (5) $33.5 million ($21.1
million after tax and minority share owners' interests) related principally to
the write-off of software and related development costs.
The first nine months of 1999 include the following unusual items recorded in
the second quarter: (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.
RESTRUCTURING AND CAPACITY REALIGNMENT PROGRAM
The third quarter of 2000 operating results include a pretax charge of $248.3
million, principally related to a restructuring and capacity realignment
program. The restructuring and capacity realignment program, initiated in the
third quarter of 2000, includes the consolidation of manufacturing capacity and
a reduction of 350 employees in the U.S. salaried work force, or about 10%,
principally as a result of early retirement incentives. Also included in the
charge are a write-down of plant and equipment for the company's glass container
affiliate in India and certain other asset write-offs, including $27.9 million
for software which has been abandoned. Manufacturing capacity consolidations
principally involve U.S. glass container facilities and reflect
technology-driven improvements in productivity, conversions from some juice and
similar products to plastic containers, Company and customer decisions regarding
pricing and volume, and the further concentration of production in the most
strategically-located facilities.
The Company expects the actions associated with the restructuring and capacity
realignment program, including the orderly transition of production to other
facilities, to be substantially completed by the first half of 2001. Cash
expenditures associated with these actions, principally for severance, are
expected to approximate $80 million, which does not include amounts funded from
the Company's defined benefit pension plan. The majority of the cash
expenditures related to these actions are expected to occur in the first quarter
2001, with the remainder occurring throughout the year 2001. The remaining $170
million consists of non-cash charges principally for asset write-offs and
reduction of the asset associated with the Company's defined benefit pension
plans. Upon completion of the restructuring activities, the Company expects to
realize EBIT improvement of approximately $50 million on an annualized basis.
The Company is contemplating further restructuring activities, including
consolidation of manufacturing facilities and sales of non-core businesses and
assets. As a result, additional unusual items may be recorded in the fourth
quarter of 2000 and throughout 2001.
26
<PAGE>
ASBESTOS-RELATED CHARGE
The asbestos-related pretax charge of $550.0 million was established to cover
estimated indemnity payments and legal fees arising from outstanding asbestos
personal injury lawsuits and claims and asbestos personal injury lawsuits and
claims filed in the next several years, during which period the Company expects
to receive the majority of the future asbestos-related lawsuits and claims that
could involve the Company. The estimate is based on a comprehensive review of
the Company's asbestos-related assets and liabilities completed during the third
quarter of 2000. The estimate includes consideration of the negative impact of
recent bankruptcy filings, particularly the most recent filing by Owens Corning
and Fibreboard Corporation on October 5, 2000. The estimate does not include the
possibility of partial relief in the form of tax or other legislation that could
result in funds to compensate asbestos claimants.
A former business unit of the Company produced a minor amount of specialized
high-temperature insulation material containing asbestos from 1948 until 1958,
when the business was sold to Owens Corning. In line with its limited
involvement with an asbestos-containing product and its exit from that business
over 42 years ago, the Company will continue to work aggressively to minimize
the number of incoming cases and will continue to limit payments to only those
impaired claimants who were exposed to the Company's products and whose claims
have merit under applicable state law.
CAPITAL RESOURCES AND LIQUIDITY
The Company's total debt at September 30, 2000 was $5.87 billion, compared to
$5.94 billion at December 31, 1999 and $5.75 billion at September 30, 1999.
At September 30, 2000, 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 $621.7 million had not been utilized. At December 31,
1999, the Company had $565.3 million of credit which had not been utilized under
the Bank Credit Agreement. Cash provided by operating activities was $286.4
million for the first nine months of 2000 compared to $335.7 million for the
first nine months of 1999.
The Company anticipates that cash flow from its operations and from utilization
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 is contemplating sales of non-core
businesses and assets, the completion of which will provide additional cash. The
Company faces additional demands upon its liquidity for asbestos-related
payments. Based on the Company's expectations regarding future payments for
lawsuits and claims and its expectation of the collection of its insurance
coverage for partial 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.
The Company's Board of Directors has authorized the management of the Company to
repurchase up to 20 million shares of the Company's common stock. During the
third quarter of 2000, the Company repurchased 235,700 shares for $3.0 million.
Since July 1999, the Company has repurchased 10,937,000 shares for $237.9
million. The Company intends to purchase its common stock from time to time on
the open market depending on market
27
<PAGE>
conditions and other factors. 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 repurchases in addition to the
obligations mentioned in the previous paragraph.
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.
FORWARD LOOKING STATEMENTS
This document may contain "forward looking" statements as defined in the Private
Securities Litigation Reform Act of 1995. Forward looking statements reflect the
Company's best assessment at the time, and thus involve uncertainty and risk. It
is possible the Company's future financial performance may differ from
expectations due to a variety of factors including, but not limited to the
following: (1) foreign currency fluctuations relative to the U.S. dollar, (2)
change in capital availability or cost, including interest rate fluctuations,
(3) the general political, economic and competitive conditions in markets and
countries where the Company has operations, including competitive pricing
pressures, inflation or deflation, and changes in tax rates, (4) consumer
preferences for alternative forms of packaging, (5) fluctuations in raw material
and labor costs, (6) availability of raw materials, (7) costs and availability
of energy, (8) transportation costs, (9) consolidation among competitors and
customers, (10) the ability of the Company to integrate operations of acquired
businesses, (11) the performance by customers of their obligations under
purchase agreements, and (12) the timing and occurrence of events, including
events related to asbestos lawsuits and claims, which are beyond the control of
the Company. It is not possible to foresee or identify all such factors. Any
forward looking statements in this document are based on certain assumptions and
analyses made by the Company in light of its experience and perception of
historical trends, current conditions, expected future developments, and other
factors it believes are appropriate in the circumstances. Forward looking
statements are not a guarantee of future performance and actual results or
developments may differ materially from expectations. While the Company
continually reviews trends and uncertainties affecting the Company's results of
operations and financial condition, the Company does not intend to update any
particular forward looking statements contained in this document.
28
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On or about November 2, 1999 and December 21, 1999, Michigan Department of
Environmental Quality ("MDEQ") issued Letters of Violation to the Company's
subsidiary Owens-Brockway Glass Container Inc. relating to its facility in
Charlotte, Michigan alleging violations of Permit to Install No. 11-99, and
Stipulation for Entry of Final Order by Consent AQD No. 12-1999. The Company and
MDEQ have agreed to a settlement including a total penalty of $110,000. The
settlement will be made available by MDEQ for public comment in the fourth
quarter of 2000.
For further information on legal proceedings, see Note 7 to the Condensed
Consolidated Financial Statements, "Contingencies," that is included in Part I
of this Report, which is incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 10.1 Third Amendment to Second Amended and
Restated Stock Option Plan for Key Employees
of Owens-Illinois, Inc.
Exhibit 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 2000.
29
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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 14, 2000 By /s/ David G. Van Hooser
----------------- ---------------------------------------------
David G. Van Hooser
Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
30
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INDEX TO EXHIBITS
EXHIBITS
10.1 Third Amendment to Second Amended and Restated Stock Option Plan for
Key Employees of Owens-Illinois, Inc.
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
31
