<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 June 30, 2000
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Owens-Illinois, Inc.
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(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
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(Address of principal executive offices) (Zip Code)
419-247-5000
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(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 July 31, 2000.
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2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Condensed Consolidated Financial Statements presented herein are unaudited
but, in the opinion of management, reflect all adjustments necessary to
present fairly such information for the periods and at the dates indicated.
Since the following unaudited condensed consolidated financial statements have
been prepared in accordance with Article 10 of Regulation S-X, they do not
contain all information and footnotes normally contained in annual
consolidated financial statements; accordingly, they should be read in
conjunction with the Consolidated Financial Statements and notes thereto
appearing in the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1999.
3
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended June 30, 2000 and 1999
(Millions of dollars, except share and per share amounts)
2000 1999
-------- --------
Revenues:
Net sales $1,449.2 $1,423.1
Royalties and net technical assistance 6.3 7.2
Equity earnings 5.0 4.5
Interest 8.2 7.7
Other 50.4 73.1
-------- --------
1,519.1 1,515.6
Costs and expenses:
Manufacturing, shipping, and delivery 1,107.6 1,068.4
Research and development 13.1 10.1
Engineering 7.7 8.2
Selling and administrative 65.6 72.6
Interest 121.4 103.8
Other 50.6 64.0
-------- --------
1,366.0 1,327.1
-------- --------
Earnings before items below 153.1 188.5
Provision for income taxes 60.3 72.2
Minority share owners' interests in earnings
of subsidiaries 4.3 5.4
-------- --------
Net earnings $ 88.5 $ 110.9
======== ========
Basic net earnings per share of common stock $ 0.57 $ 0.68
======== ========
Weighted average shares outstanding (thousands) 146,441 155,873
======= =======
Diluted net earnings per share of common stock $ 0.57 $ 0.67
======== ========
Weighted diluted average shares (thousands) 146,917 165,976
======= =======
See accompanying notes.
4
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Six months ended June 30, 2000 and 1999
(Millions of dollars, except share and per share amounts)
2000 1999
-------- --------
Revenues:
Net sales $2,794.8 $2,730.1
Royalties and net technical assistance 13.5 14.2
Equity earnings 8.3 9.0
Interest 15.0 13.5
Other 97.6 102.1
-------- --------
2,929.2 2,868.9
Costs and expenses:
Manufacturing, shipping, and delivery 2,153.5 2,068.2
Research and development 23.6 19.7
Engineering 19.5 17.6
Selling and administrative 140.9 139.2
Interest 236.6 209.0
Other 100.7 107.5
-------- --------
2,674.8 2,561.2
-------- --------
Earnings before items below 254.4 307.7
Provision for income taxes 100.8 118.4
Minority share owners' interests in earnings
of subsidiaries 6.4 9.1
-------- --------
Net earnings $ 147.2 $ 180.2
======== ========
Basic net earnings per share of common stock $ 0.93 $ 1.09
======== ========
Weighted average shares outstanding (thousands) 146,513 155,742
======= =======
Diluted net earnings per share of common stock $ 0.93 $ 1.08
======== ========
Weighted diluted average shares (thousands) 147,050 157,249
======= =======
See accompanying notes.
5
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000, December 31, 1999, and June 30, 1999
(Millions of dollars)
June 30, Dec. 31, June 30,
2000 1999 1999
--------- --------- ---------
Assets
Current assets:
Cash, including time deposits $ 167.8 $ 257.1 $ 270.8
Short-term investments, at cost which
approximates market 42.5 32.1 30.5
Receivables, less allowances for losses
and discounts ($59.6 at June 30, 2000,
$56.9 at December 31, 1999, and
$51.1 at June 30, 1999) 928.4 856.4 894.6
Inventories 849.7 826.6 861.5
Prepaid expenses 138.0 137.6 179.6
--------- --------- ---------
Total current assets 2,126.4 2,109.8 2,237.0
Investments and other assets:
Equity investments 188.3 195.2 183.1
Repair parts inventories 249.4 234.1 245.5
Prepaid pension 789.1 745.6 732.0
Insurance receivable for
asbestos-related costs 205.0 205.3 212.2
Deposits, receivables, and other assets 508.3 527.8 533.4
Excess of purchase cost over net assets
acquired, net of accumulated
amortization ($550.7 at June 30,
2000, $502.8 at December 31, 1999,
and $453.8 at June 30, 2000) 3,154.0 3,294.4 3,329.8
--------- --------- ---------
Total other assets 5,094.1 5,202.4 5,236.0
Property, plant, and equipment, at cost 5,676.5 5,590.8 5,419.8
Less accumulated depreciation 2,261.5 2,146.7 2,055.2
--------- --------- ---------
Net property, plant, and equipment 3,415.0 3,444.1 3,364.6
--------- --------- ---------
Total assets $10,635.5 $10,756.3 $10,837.6
========= ========= =========
6
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CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
June 30, Dec. 31, June 30,
2000 1999 1999
--------- --------- ---------
Liabilities and Share Owners' Equity
Current liabilities:
Short-term loans and long-term debt
due within one year $ 168.8 $ 205.7 $ 226.0
Current portion of asbestos-related
liabilities 100.0 85.0 85.0
Accounts payable and other liabilities 902.5 982.4 945.8
--------- --------- ---------
Total current liabilities 1,171.3 1,273.1 1,256.8
Long-term debt 5,785.1 5,733.1 5,517.4
Deferred taxes 449.4 407.4 358.2
Nonpension postretirement benefits 301.0 314.9 325.7
Other liabilities 386.8 483.0 635.5
Commitments and contingencies
Minority share owners' interests 182.4 194.9 223.4
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 10,702,000 treasury
shares at June 30, 2000 (156,851,337
issued and outstanding, less
10,000,000 treasury shares at
December 31, 1999; and 156,297,439
issued and outstanding at June 30, 1999) 1.6 1.6 1.6
Capital in excess of par value 2,204.2 2,201.9 2,192.1
Treasury stock, at cost (234.9) (225.6)
Retained earnings 420.6 284.1 176.8
Accumulated other comprehensive income (487.9) (368.6) (315.3)
--------- --------- ---------
Total share owners' equity 2,359.5 2,349.9 2,520.6
--------- --------- ---------
Total liabilities and share owners' equity $10,635.5 $10,756.3 $10,837.6
========= ========= =========
See accompanying notes.
7
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Six months ended June 30, 2000 and 1999
(Millions of dollars)
2000 1999
Cash flows from operating activities: -------- --------
Net earnings $ 147.2 $ 180.2
Non-cash charges (credits):
Depreciation 209.0 198.8
Amortization of deferred costs 71.8 69.6
Restructuring costs, write-offs of certain
assets and settlement of environmental
litigation 20.8
Gains on asset sales (40.8)
Other (39.7) (35.4)
Change in non-current operating assets (18.9) (23.3)
Asbestos-related payments (73.2) (68.0)
Asbestos-related insurance proceeds .3 .6
Reduction of non-current liabilities (1.4) (13.7)
Change in components of working capital (195.3) (154.7)
-------- --------
Cash provided by operating activities 99.8 134.1
Cash flows from investing activities:
Additions to property, plant, and equipment (249.6) (261.4)
Acquisitions, net of cash acquired (49.4) (14.6)
Net cash proceeds from divestitures 25.5 311.7
-------- --------
Cash provided by (utilized in) investing
activities (273.5) 35.7
Cash flows from financing activities:
Additions to long-term debt 457.7 259.1
Repayments of long-term debt (340.7) (415.0)
Payment of convertible preferred stock dividends (10.7) (10.7)
Treasury shares repurchased (9.3)
Increase (decrease) in short-term loans (3.8) 1.0
Issuance of common stock and other .9 2.3
-------- --------
Cash provided by (utilized in) financing
activities 94.1 (163.3)
Effect of exchange rate fluctuations on cash (9.7) (7.1)
-------- --------
Decrease in cash (89.3) (.6)
Cash at beginning of period 257.1 271.4
-------- --------
Cash at end of period $ 167.8 $ 270.8
======== ========
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 computation of basic and diluted earnings
per share:
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Three months ended
June 30,
----------------------
2000 1999
Numerator: ------ ------
Net earnings $ 88.5 $110.9
Preferred stock dividends:
Convertible (5.4) (5.4)
Exchangeable (.1) (.2)
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Numerator for basic earnings per
share - income available to common
share owners 83.0 105.3
Effect of dilutive securities -
exchangeable preferred stock dividends .1 .2
convertible preferred stock dividends 5.4
-----------------------------------------------------------------------------
Numerator for diluted earnings per
share - income available to common
share owners after assumed
exchanges of preferred stock
for common stock $ 83.1 $110.9
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted average
shares outstanding 146,441,285 155,872,886
Effect of dilutive securities:
Stock options 87,833 866,715
Exchangeable preferred stock 387,849 646,778
Convertible preferred stock 8,589,355
-----------------------------------------------------------------------------
Dilutive potential common shares 475,682 10,102,848
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Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
exchanges of preferred stock for
common stock 146,916,967 165,975,734
=============================================================================
Basic earnings per share $0.57 $0.68
=============================================================================
Diluted earnings per share $0.57 $0.67
=============================================================================
9
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The convertible preferred stock was not included in the computation of June
30, 2000 diluted earnings per share since the result would have been
antidilutive. Options to purchase 6,155,332 and 2,924,956 weighted average
shares of common stock which were outstanding during the three months ended
June 30, 2000 and 1999, 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.
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Six months ended
June 30,
---------------------
2000 1999
Numerator: ------ ------
Net earnings $147.2 $180.2
Preferred stock dividends:
Convertible (10.7) (10.7)
Exchangeable (.1) (.5)
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Numerator for basic earnings per
share - income available to common
share owners 136.4 169.0
Effect of dilutive securities -
exchangeable preferred stock dividends .1 .5
-----------------------------------------------------------------------------
Numerator for diluted earnings per
share - income available to common
share owners after assumed
exchanges of preferred stock
for common stock $136.5 $169.5
=============================================================================
Denominator:
Denominator for basic earnings per
share - weighted average
shares outstanding 146,513,128 155,742,442
Effect of dilutive securities:
Stock options 197,365 754,385
Exchangeable preferred stock 339,827 751,961
-----------------------------------------------------------------------------
Dilutive potential common shares 537,192 1,506,346
-----------------------------------------------------------------------------
Denominator for diluted earnings
per share - adjusted weighted
average shares and assumed
exchanges of preferred stock for
common stock 147,050,320 157,248,788
=============================================================================
Basic earnings per share $0.93 $1.09
=============================================================================
Diluted earnings per share $0.93 $1.08
=============================================================================
10
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The Convertible preferred stock was not included in the computation of six
months ended June 30, 2000 and 1999 diluted earnings per share since the
result would have been antidilutive. Options to purchase 5,388,340 and
2,929,152 weighted average shares of common stock which were outstanding
during the six months ended June 30, 2000 and 1999, 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.
2. Inventories
Major classes of inventory are as follows:
June 30, Dec. 31, June 30,
2000 1999 1999
-------- -------- --------
Finished goods $616.4 $580.0 $634.7
Work in process 30.0 36.3 29.7
Raw materials 127.2 131.3 122.9
Operating supplies 76.1 79.0 74.2
------ ------ ------
$849.7 $826.6 $861.5
====== ====== ======
11
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3. Long-Term Debt
The following table summarizes the long-term debt of the Company:
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June 30, Dec. 31, June 30,
2000 1999 1999
Bank Credit Agreement: -------- -------- --------
Revolving Credit Facility:
Revolving Loans $2,859.0 $2,559.4 $2,257.1
Offshore Loans:
1.39 billion (1.42 billion at
December 31, 1999; 1.39 billion
at June 30, 1999) Australian
dollars 794.9 904.4 905.9
134.0 million (230.0 million at
December 31, 1999; 235.0 million
at June 30, 1999) British pounds 200.8 369.5 380.3
82.0 billion (100.0 billion at
December 31, 1999; 111.0 billion
at June 30, 1999) Italian lira 39.6 52.0 59.9
Bid Rate Loans 15.0
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 226.6 224.6 270.3
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5,820.9 5,809.9 5,588.5
Less amounts due within one year 35.8 76.8 71.1
---------------------------------------------------------------------------
Long-term debt $5,785.1 $5,733.1 $5,517.4
===========================================================================
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
12
<PAGE>
the amount available for borrowing under the Revolving Credit Facility. At
June 30, 2000, the Company had unused credit of $552.2 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 .750% 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 June 30, 2000, was 7.42%.
The weighted average interest rate on borrowings outstanding under the
Offshore Facility at June 30, 2000, was 6.90%. 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 $237.2 million and $180.7 million for the six
months ended June 30, 2000 and June 30, 1999, respectively. Income taxes paid
in cash totaled $34.1 million and $22.9 million for the six months ended
June 30, 2000 and June 30, 1999, respectively.
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 June 30, 2000 and 1999 amounted to $8.8 million and $113.4
million, respectively. Total comprehensive income for the six month periods
ended June 30, 2000 and 1999 amounted to $27.9 million and $55.6 million,
respectively.
13
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6. 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 June 30, 2000, 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.
14
<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, 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, $305.0
million had been received through June 30, 2000; and the balance of
approximately $12.5 million will be received throughout 2000 and 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) 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. In 1998, an additional liability of $250 million was established
to cover what the Company estimated to 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
was not expected to be material in relation to the Company's Consolidated
Financial Statements.
Since establishing the additional liability in 1998, the Company has continued
to monitor the trends of matters which may affect its ultimate liability and
has 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. As a result, the asbestos liability may
not be sufficient for the five year period originally anticipated in 1998.
15
<PAGE>
As part of its continual monitoring of asbestos-related matters, during the
third quarter of 2000 the Company expects to complete its comprehensive review
to determine if further adjustments of asbestos-related assets or liabilities
are appropriate. The Company cannot presently predict the outcome of the
review, however, the Company expects a net charge to result.
Subject to completion of the comprehensive review in 2000 noted above, 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 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.
7. 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 June 30, 2000 and 1999
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:
June 30, 2000 $952.1 $478.4 $ 18.7 $1,449.2 $1,449.2
June 30, 1999 962.2 441.3 19.6 1,423.1 1,423.1
=============================================================================
EBIT, excluding unusual items:
June 30, 2000 $180.6 $ 76.5 $ 0.2 $ 257.3 $9.0 $ 266.3
June 30, 1999 171.5 86.4 2.0 259.9 4.7 264.6
=============================================================================
Unusual items:
June 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)
=============================================================================
The reconciliation of EBIT to consolidated totals for the three month periods
ended June 30, 2000 and 1999 is as follows:
-----------------------------------------------------------------------------
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------
Earnings before income taxes and minority
share owners' interests in earnings of
subsidiaries:
EBIT, excluding unusual items for
reportable segments $257.3 $259.9
Unusual items excluded from reportable
segment information 20.0
Eliminations and other retained 9.0 4.7
Net interest expense (113.2) (96.1)
-----------------------------------------------------------------------------
Total $153.1 $188.5
=============================================================================
17
<PAGE>
Financial information for the six month periods ended June 30, 2000 and 1999
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:
June 30, 2000 $1,836.0 $921.6 $37.2 $2,794.8 $2,794.8
June 30, 1999 1,835.3 856.6 38.2 2,730.1 2,730.1
=============================================================================
EBIT, excluding unusual items:
June 30, 2000 $ 315.6 $148.0 $ 0.1 $ 463.7 $12.3 $ 476.0
June 30, 1999 311.8 166.1 3.7 481.6 1.6 483.2
=============================================================================
Unusual items:
June 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)
=============================================================================
The reconciliation of EBIT to consolidated totals for the six month periods
ended June 30, 2000 and 1999 is as follows:
-----------------------------------------------------------------------------
June 30, 2000 June 30, 1999
-----------------------------------------------------------------------------
Earnings before income taxes and minority
share owners' interests in earnings of
subsidiaries:
EBIT, excluding unusual items for
reportable segments $463.7 $481.6
Unusual items excluded from reportable
segment information 20.0
Eliminations and other retained 12.3 1.6
Net interest expense (221.6) (195.5)
-----------------------------------------------------------------------------
Total $254.4 $307.7
=============================================================================
18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - Second Quarter 2000 compared with Second Quarter 1999
The Company recorded net earnings of $88.5 million for the second quarter of
2000 compared to $110.9 million for the second quarter of 1999. Excluding the
effects of the 1999 unusual items discussed below, the Company's second
quarter 2000 earnings of $88.5 million decreased $12.8 million, or 12.6% from
1999 second quarter earnings of $101.3 million. Consolidated EBIT for the
second quarter of 2000 was $266.3 million, an increase of $1.7 million, or
0.6%, compared to the second quarter of 1999 EBIT, excluding unusual items, of
$264.6 million. The increase is attributable to higher EBIT for the Glass
Containers segment which was mostly offset by lower EBIT for the Plastics
Packaging segment. Interest expense, net of interest income, increased $17.1
million from the 1999 period due principally to higher interest rates.
Capsule segment results (in millions of dollars) for the second quarter of
2000 and 1999 were as follows:
----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
----------------------------------------------------------------------------
2000 1999 2000 1999
-------- -------- -------- --------
Glass Containers $ 952.1 $ 962.2 $ 180.6 $ 191.5(b)
Plastics Packaging 478.4 441.3 76.5 86.4
Other 18.7 19.6 .2 2.0
----------------------------------------------------------------------------
Segment totals 1,449.2 1,423.1 257.3 279.9
Eliminations and other
retained costs 9.0 4.7
----------------------------------------------------------------------------
Consolidated totals $1,449.2 $1,423.1 $ 266.3 $ 284.6
============================================================================
(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 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.
Consolidated net sales for the second quarter of 2000 increased $26.1 million,
or 1.8%, over the prior year. Net sales of the Glass Containers segment
decreased $10.1 million, or 1.0%, from 1999. In the United States, increased
shipments of containers for beer producers were partially offset by lower
shipments of certain food containers. The combined U.S. dollar sales of the
19
<PAGE>
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 $37.1 million,
or 8.4%, 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 $25 million compared to the second
quarter of 1999.
Excluding the effects of the 1999 unusual items, segment EBIT for the second
quarter of 2000 decreased $2.6 million, or 1.0%, to $257.3 million from the
1999 segment EBIT of $259.9 million. EBIT of the Glass Containers segment
increased $9.1 million to $180.6 million, compared to $171.5 million in 1999.
The combined U.S. dollar EBIT of the segment's foreign affiliates increased
slightly 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, expenses associated with the scheduled rebuild of a glass melting
furnace in Australia, and lower shipments from the Company's operations in the
United Kingdom. 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 $9.9 million, or 11.5%, to $76.5 million
compared to $86.4 million in 1999. Increased shipments of plastic containers
for juices and closures for food and beverages were more than offset by lower
shipments of 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 $4.3
million from 1999 reflecting principally higher net financial services income.
The second quarter 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.
First Six Months 2000 compared with First Six Months 1999
For the first six months of 2000, the Company recorded net earnings of $147.2
million compared to $180.2 million for the first six months of 1999.
Excluding the effects of the 1999 unusual items, the Company's first six
months of 2000 earnings of $147.2 million decreased $23.4 million, or 13.7%
from 1999 first six months earnings of $170.6 million. Consolidated EBIT for
the first six months of 2000 was $476.0 million, a decrease of $7.2 million,
or 1.5%, compared to the first six months of 1999 EBIT, excluding unusual
items, of $483.2 million. Higher EBIT for the Glass Containers segment was
20
<PAGE>
more than offset by lower EBIT for the Plastics Packaging segment. Interest
expense, net of interest income, increased $26.1 million from the 1999 period
due principally to higher interest rates. The Company's estimated effective
tax rate for the first six months of 2000 was 39.6%. This compares with an
estimated rate of 38.5% for the first six 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 six months of
2000 and 1999 were as follows:
----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
----------------------------------------------------------------------------
2000 1999 2000 1999
-------- -------- -------- ----------
Glass Containers $1,836.0 $1,835.3 $ 315.6 $ 331.8(b)
Plastics Packaging 921.6 856.6 148.0 166.1
Other 37.2 38.2 .1 3.7
----------------------------------------------------------------------------
Segment totals 2,794.8 2,730.1 463.7 501.6
Eliminations and other
retained costs 12.3 1.6
----------------------------------------------------------------------------
Consolidated totals $2,794.8 $2,730.1 $ 476.0 $ 503.2
============================================================================
(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 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 six months of 2000 increased $64.7
million, or 2.4%, over the prior year. Net sales of the Glass Container
segment increased $0.7 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 slightly 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 $90
million. Net sales of the Plastics Packaging segment increased $65.0 million,
or 7.6%, over 1999, reflecting increased shipments of plastic containers for
juices, closures for food and beverages, and the effects of higher resin costs
21
<PAGE>
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 $50 million compared to the first
six months of 1999.
Excluding the effects of the 1999 unusual items, segment EBIT for the first
half of 2000 decreased $17.9 million, or 3.7%, to $463.7 million from the 1999
segment EBIT of $481.6 million. EBIT of the Glass Containers segment
increased $3.8 million, or 1.2%, to $315.6 million, compared to $311.8 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 $18.1 million, or 10.9%, to $148.0 million, compared to $166.1 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 $10.7 million from 1999
principally due to higher net financial services income.
Restructuring Program and Asbestos Review
During the third quarter of 2000, the Company began to develop a restructuring
program to further reduce operating expenses and other costs. Cost reduction
opportunities exist in part as a result of plans to return to more moderate
levels of capital investment following the completion of a number of major
capital investment projects designed to improve productivity and expand
capacity to serve key customers. The further integration of recently acquired
businesses and plans to divest certain non-strategic operations offer
additional opportunities for cost reduction. In addition, as part of its
continual monitoring of asbestos-related matters, during the third quarter of
2000 the Company expects to complete its comprehensive review to determine if
adjustments of its asbestos-related assets or liabilities are appropriate.
While the results of this review and the restructuring program cannot be
estimated at this time, the Company expects to record charges related to these
activities in the third quarter of 2000.
Capital Resources and Liquidity
The Company's total debt at June 30, 2000 was $5.95 billion, compared to $5.94
billion at December 31, 1999 and $5.74 billion at June 30, 1999.
At June 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 $552.2 million had not been utilized. At December 31,
1999, the Company had $565.3 million of credit which had not been utilized
22
<PAGE>
under the Bank Credit Agreement. Cash provided by operating activities was
$99.8 million for the first six months of 2000 compared to $134.1 million for
the first six months of 1999.
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 future 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.
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 second quarter of 2000, the Company repurchased 702,000 shares for $9.3
million. Since July 1999, the Company has repurchased 10,702,000 shares for
$234.9 million. The Company intends to purchase its common stock from time to
time on the open market depending on market 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,
23
<PAGE>
(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 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.
24
<PAGE>
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. MDEQ is
seeking a total penalty of $143,000. Discussions with MDEQ are on-going
regarding settlement of this matter.
For further information on legal proceedings, see Note 6 to the Condensed
Consolidated Financial Statements, "Contingencies," that is included in
Part I of this Report, which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of Owens-Illinois' share owners was held on May 10, 2000.
Each of the nominees for a three-year term on the Company's Board of Directors
was elected by vote of the share owners as follows:
Broker
Name For Withheld Abstention Non-Votes
-------------------- ----------- --------- ---------- ---------
Joseph H. Lemieux 121,459,802 1,733,695 1,724,323 -
Michael W. Michelson 121,398,613 1,794,884 1,724,323 -
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
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 second quarter of 2000.
25
<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 August 14, 2000 By /s/ David G. Van Hooser
--------------- ----------------------------------------------
David G. Van Hooser, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
26
<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
27
