-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NC9n3L7pS7jah6O8I6aGY9ToCGMUqmNcOZyczLCV0vWznufJIB1aMvVcZUMQrBH6 qfPxoNePPYC5ySXcZl/Lcw== 0000812074-99-000005.txt : 19990517 0000812074-99-000005.hdr.sgml : 19990517 ACCESSION NUMBER: 0000812074-99-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: OWENS ILLINOIS INC /DE/ CENTRAL INDEX KEY: 0000812074 STANDARD INDUSTRIAL CLASSIFICATION: GLASS CONTAINERS [3221] IRS NUMBER: 222781933 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09576 FILM NUMBER: 99623644 BUSINESS ADDRESS: STREET 1: ONE SEAGATE CITY: TOLEDO STATE: OH ZIP: 43666 BUSINESS PHONE: 4192475000 MAIL ADDRESS: STREET 1: ONE SEAGATE CITY: TOLEDO STATE: OH ZIP: 43666 FORMER COMPANY: FORMER CONFORMED NAME: OWENS ILLINOIS HOLDINGS CORP DATE OF NAME CHANGE: 19870512 10-Q 1 MARCH 31, 1999 FORM 10Q 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 March 31, 1999 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Owens-Illinois, Inc. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-9576 22-2781933 - ---------------- ----------- ------------------- (State or other (Commission (IRS Employer jurisdiction of File No.) Identification No.) incorporation or organization) One SeaGate, Toledo, Ohio 43666 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) 419-247-5000 - ------------------------------------------------------------------------------ (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing 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 - 155,864,189 shares at April 30, 1999. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. The Condensed Consolidated Financial Statements presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. Since the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. 2 OWENS-ILLINOIS, INC. CONDENSED CONSOLIDATED RESULTS OF OPERATIONS Three months ended March 31, 1999 and 1998 (Millions of dollars, except share and per share amounts) 1999 1998 Revenues: -------- -------- Net sales $1,307.0 $1,098.5 Royalties and net technical assistance 7.0 6.1 Equity earnings 4.5 4.7 Interest 5.8 5.9 Other 29.0 43.0 -------- -------- 1,353.3 1,158.2 Costs and expenses: Manufacturing, shipping, and delivery 999.8 861.1 Research and development 9.6 7.7 Engineering 9.4 8.0 Selling and administrative 66.6 62.4 Interest 105.2 65.2 Other 43.5 36.7 -------- -------- 1,234.1 1,041.1 -------- -------- Earnings before items below 119.2 117.1 Provision for income taxes 46.2 28.8 Minority share owners' interests in earnings of subsidiaries 3.7 7.9 -------- -------- Net earnings $ 69.3 $ 80.4 ======== ======== Basic net earnings per share of common stock $ 0.41 $ 0.57 ======== ======== Weighted average shares outstanding (thousands) 155,611 140,620 ======= ======= Diluted net earnings per share of common stock $ 0.41 $ 0.56 ======== ======== Weighted diluted average shares (thousands) 157,110 142,405 ======= ======= See accompanying notes. 3 OWENS-ILLINOIS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 1999, December 31, 1998, and March 31, 1998 (Millions of dollars) March 31, Dec. 31, March 31, 1999 1998 1998 --------- --------- --------- Assets Current assets: Cash, including time deposits $ 240.1 $ 271.4 $ 230.0 Short-term investments, at cost which approximates market 30.2 21.1 23.1 Receivables, less allowances for losses and discounts ($50.5 at March 31, 1999, $56.9 at December 31, 1998, and $46.5 at March 31, 1998) 854.7 877.7 708.0 Inventories 858.4 838.1 618.6 Prepaid expenses 168.5 168.8 140.2 --------- --------- -------- Total current assets 2,151.9 2,177.1 1,719.9 Other assets: Equity investments 186.8 195.3 90.9 Repair parts inventories 250.3 254.2 213.5 Prepaid pension 704.7 686.1 673.1 Insurance receivable for asbestos-related costs 212.8 212.8 223.2 Deposits, receivables, and other assets 401.5 383.7 284.2 Net assets held for sale 397.5 409.6 Excess of purchase cost over net assets acquired, net of accumulated amortization ($429.3 at March 31, 1999, $405.3 at December 31, 1999, and $338.2 at March 31, 1998) 3,294.0 3,314.9 1,269.9 --------- --------- -------- Total other assets 5,447.6 5,456.6 2,754.8 Property, plant, and equipment, at cost 5,273.7 5,394.1 4,175.7 Less accumulated depreciation 1,969.9 1,967.1 1,755.2 --------- --------- -------- Net property, plant, and equipment 3,303.8 3,427.0 2,420.5 --------- --------- -------- Total assets $10,903.3 $11,060.7 $6,895.2 ========= ========= ======== 4 CONDENSED CONSOLIDATED BALANCE SHEETS -- continued March 31, Dec. 31, March 31, 1999 1998 1998 --------- --------- --------- Liabilities and Share Owners' Equity Current liabilities: Short-term loans and long-term debt due within one year $ 284.2 $ 249.5 $ 180.2 Current portion of asbestos-related liabilities 85.0 85.0 85.0 Accounts payable and other liabilities 957.3 992.6 737.8 --------- --------- -------- Total current liabilities 1,326.5 1,327.1 1,003.0 Long-term debt 5,667.2 5,667.2 3,207.7 Deferred taxes 336.0 325.0 249.1 Nonpension postretirement benefits 332.8 338.4 349.3 Other liabilities 618.7 690.4 461.0 Commitments and contingencies Minority share owners' interests 211.8 240.6 239.8 Share owners' equity: Convertible preferred stock, par value $.01 per share, liquidation preference $50 per share, 9,050,000 shares authorized, issued and outstanding 452.5 452.5 Exchangeable preferred stock 12.9 18.3 20.1 Common stock, par value $.01 per share (155,813,289 shares outstanding at March 31, 1999; 155,450,173 at December 31, 1998; and 140,766,753 at March 31, 1998) 1.5 1.5 1.4 Capital in excess of par value 2,190.0 2,183.1 1,568.9 Retained earnings (deficit) 71.2 7.3 (9.9) Accumulated other comprehensive income (317.8) (190.7) (195.2) --------- --------- -------- Total share owners' equity 2,410.3 2,472.0 1,385.3 --------- --------- -------- Total liabilities and share owners' equity $10,903.3 $11,060.7 $6,895.2 ========= ========= ======== See accompanying notes. 5 OWENS-ILLINOIS, INC. CONDENSED CONSOLIDATED CASH FLOWS Three months ended March 31, 1999 and 1998 (Millions of dollars) 1999 1998 -------- -------- Cash flows from operating activities: Net earnings $ 69.3 $ 80.4 Non-cash charges (credits): Depreciation 102.4 74.9 Amortization of deferred costs 34.3 15.1 Other (13.3) (23.0) Change in non-current operating assets (14.6) 11.1 Asbestos-related payments (35.0) (23.1) Asbestos-related insurance proceeds 16.1 Reduction of non-current liabilities (2.3) (.8) Change in components of working capital (129.1) (108.5) -------- -------- Cash provided by operating activities 11.7 42.2 Cash flows from investing activities: Additions to property, plant, and equipment (101.8) (103.6) Acquisitions, net of cash acquired (18.1) (27.5) Net cash proceeds from divestitures 1.2 30.1 -------- -------- Cash utilized in investing activities (118.7) (101.0) Cash flows from financing activities: Additions to long-term debt 138.5 110.8 Repayments of long-term debt (87.1) (58.5) Increase in short-term loans 41.1 22.0 Payment of convertible preferred stock dividends (5.4) Issuance of common stock .2 4.3 -------- -------- Cash provided by financing activities 87.3 78.6 Effect of exchange rate fluctuations on cash (11.6) (8.0) -------- -------- Increase (decrease) in cash (31.3) 11.8 Cash at beginning of period 271.4 218.2 -------- -------- Cash at end of period $ 240.1 $ 230.0 ======== ======== See accompanying notes. 6 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: - ----------------------------------------------------------------------------- Three months ended March 31, ---------------------------- 1999 1998 Numerator: ----------- ----------- Net earnings $69.3 $80.4 Preferred stock dividends: Convertible (5.4) Exchangeable (.2) (.4) - ----------------------------------------------------------------------------- (5.6) (.4) Numerator for basic earnings per share - income available to common share owners 63.7 80.0 Effect of dilutive securities - exchangeable preferred stock dividends .2 .4 - ----------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common share owners after assumed exchanges of preferred stock for common stock $63.9 $80.4 ============================================================================= Denominator: Denominator for basic earnings per share - weighted average shares outstanding 155,610,547 140,620,116 Effect of dilutive securities: Stock options 642,055 1,081,849 Exchangeable preferred stock 857,145 702,950 - ----------------------------------------------------------------------------- Dilutive potential common shares 1,499,200 1,784,799 - ----------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed exchanges of preferred stock for common stock 157,109,747 142,404,915 ============================================================================= Basic earnings per share $0.41 $0.57 ============================================================================= Diluted earnings per share $0.41 $0.56 ============================================================================= 7 The Convertible preferred stock was not included in the computation of March 31, 1999 diluted earnings per share since the result would have been antidilutive. Options to purchase 2,933,347 weighted average shares of common stock which were outstanding during the three months ended March 31, 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 and, therefore, the effect would be antidilutive. 2. Inventories Major classes of inventory are as follows: March 31, Dec. 31, March 31, 1999 1998 1998 --------- -------- --------- Finished goods $643.7 $608.9 $487.9 Work in process 35.3 35.0 10.2 Raw materials 115.6 123.6 79.0 Operating supplies 63.8 70.6 41.5 ------ ------ ------ $858.4 $838.1 $618.6 ====== ====== ====== 8 3. Long-Term Debt The following table summarizes the long-term debt of the Company: - ----------------------------------------------------------------------------- March 31, Dec. 31, March 31, 1999 1998 1998 Bank Credit Agreement: --------- -------- --------- Revolving Credit Facility: Revolving Loans $2,235.0 $2,207.0 $2,065.0 Offshore Loans: 1.30 billion (1.39 billion at December 31, 1998) Australian dollars 804.4 874.0 333.0 million (333.0 million at December 31, 1998) British pounds 534.1 549.8 118.0 billion (129.0 billion at December 31, 1998) Italian lira 67.1 77.0 Bid Rate Loans 75.0 178.0 Senior Notes: 7.85%, due 2004 300.0 300.0 300.0 7.15%, due 2005 350.0 350.0 8.10%, due 2007 300.0 300.0 300.0 7.35%, due 2008 250.0 250.0 Senior Debentures: 7.50%, due 2010 250.0 250.0 7.80%, due 2018 250.0 250.0 Other 341.7 350.6 417.6 - ----------------------------------------------------------------------------- 5,757.3 5,758.4 3,260.6 Less amounts due within one year 90.1 91.2 52.9 - ----------------------------------------------------------------------------- Long-term debt $5,667.2 $5,667.2 $3,207.7 ============================================================================= In April 1998, the Company entered into the Second Amended and Restated Credit Agreement (the "Bank Credit Agreement" or "Agreement") with a group of banks which expires on December 31, 2001. The Agreement provides for a $4.5 billion revolving credit facility (the "Revolving Credit Facility"), which includes a $1.75 billion fronted offshore loan revolving facility (the "Offshore Facility") denominated in certain foreign currencies, subject to certain sublimits, available to certain of the Company's foreign subsidiaries. The Agreement includes an Overdraft Account facility providing for aggregate borrowings up to $100 million which reduce the amount available for borrowing under the Revolving Credit Facility. In addition, the terms of the Bank Credit Agreement permit the Company to request Bid Rate Loans from banks participating in the Agreement. Borrowings outstanding under Bid Rate Loans are limited to $750 million and reduce the amount available for borrowing under the Revolving Credit Facility. The Agreement also provides for the issuance of letters of credit totaling up to $500 million, which also reduce the amount available for borrowing under the Revolving Credit Facility. At March 31, 1999, the Company had unused credit of $727.7 million available under the Bank Credit Agreement. 9 Borrowings under the Revolving Loans commitment bear interest, at the Company's option, at the prime rate or a reserve adjusted Eurodollar rate. Loans under the Offshore Facility bear interest, at the applicable borrower's option, at the applicable Offshore Base Rate (as defined in the Bank Credit Agreement). Borrowings under the Revolving Credit Facility also bear a margin linked to the Company's Consolidated Leverage Ratio, as defined in the Agreement. The margin is currently .500% and is limited to a range of .275% to 1.000%. Overdraft Account loans bear interest at the prime rate minus the facility fee percentage, defined below. The weighted average interest rate on borrowings outstanding under the Revolving Loans commitment at March 31, 1999, was 5.48%. The weighted average interest rate on borrowings outstanding under the Offshore Facility at March 31, 1999, was 5.57%. While no compensating balances are required by the Agreement, the Company must pay a facility fee on the Revolving Credit Facility commitments. The facility fee, currently .250%, is limited to a range of .125% and .500%, based on the Company's Consolidated Leverage Ratio. Borrowings outstanding under the Bank Credit Agreement are unsecured. All of the obligations of the Company's foreign subsidiaries under the Offshore Facility are guaranteed by the Company. The Company's Senior Notes and Senior Debentures rank pari passu with the obligations of the Company under the Bank Credit Agreement. The Bank Credit Agreement, Senior Notes, and Senior Debentures are senior in right of payment to all existing and future subordinated debt of the Company. Under the terms of the Bank Credit Agreement, dividend payments with respect to the Company's Preferred or Common Stock and payments for redemption of shares of its Common Stock are subject to certain limitations. The Agreement also requires, among other things, the maintenance of certain financial ratios, and restricts the creation of liens and certain types of business activities and investments. 4. Cash Flow Information Interest paid in cash aggregated $54.4 million for the first quarter of 1999 and $51.9 million for the first quarter of 1998. Income taxes paid in cash totaled $11.6 million for the first quarter of 1999 and $10.0 million for the first quarter of 1998. 5. Comprehensive Income The Company's components of comprehensive income are net earnings and foreign currency translation adjustments. Total comprehensive income (loss) for the three month periods ended March 31, 1999 and 1998 amounted to $(57.8) million and $33.2 million, respectively. 10 6. Acquisition of Worldwide Packaging Businesses of BTR plc and Net Assets Held for Sale On April 30, 1998, the Company completed the acquisition of the worldwide glass and plastics packaging businesses of BTR plc ("BTR Packaging") in an all cash transaction valued at approximately $3.6 billion (the "Acquisition"). The Acquisition is being accounted for under the purchase method of accounting. The total purchase cost of approximately $3.6 billion will be allocated to the tangible and identifiable intangible assets and liabilities based upon their respective fair values. Such allocations will be based upon valuations which have not been finalized. Accordingly, the allocation of the purchase consideration included in the accompanying Condensed Consolidated Balance Sheets at March 31, 1999 and December 31, 1998, is preliminary. In connection with the Acquisition, the Company committed to sell BTR's United Kingdom glass container manufacturer ("Rockware") obtained in the transaction. Early in the second quarter of 1999, the Company completed the sale of Rockware to a subsidiary of Ardagh plc, the Irish glass container manufacturer based in Dublin, Ireland, for total consideration of 240 million pounds sterling (approximately $390 million). The accompanying Condensed Consolidated Results of Operations for the three months ended March 31, 1999, exclude Rockware and related financing costs. The carrying value at March 31, 1999 and December 31, 1998 is based upon estimated future cash flows associated with the assets. Proceeds from the sale of Rockware will be used for the reduction of debt and for general corporate purposes. 11 7. Pro Forma Information - Acquisition of BTR Packaging Had the acquisition of BTR Packaging described in Note 6 and the related financing occurred on January 1, 1998, unaudited pro forma consolidated net sales, net earnings, and net earnings per share of common stock would have been as follows: Three Months ended March 31, 1998 ---------------------------------------------------- As BTR Packaging Financing Pro Forma Reported Adjustments Adjustments As Adjusted -------- ------------- ----------- ----------- Net sales $1,098.5 $285.4 $1,383.9 ======== ======== Net earnings $80.4 $17.4 $(26.1) $71.7 ===== ===== Basic net earnings per share of common stock $0.57 $0.43 ===== ===== Basic weighted average shares outstanding (thousands) 140,620 155,100 Diluted net earnings per share of common stock $0.56 $0.42 ===== ===== Diluted weighted average shares (thousands) 142,405 156,182 Shares of common stock issuable upon exchange of the Exchangeable preferred stock and upon conversion of the Convertible preferred stock in the pro forma period were not included in the computation of pro forma diluted earnings per share because the effect would have been antidilutive. The pro forma data does not purport to represent what the results of operations would actually have been if the Acquisition and the related financing had in fact occurred on the date indicated, or to project results of operations for any future period. 8. 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 12 "asbestos claims"). As of March 31, 1999, the Company estimates that it is a named defendant in asbestos claims involving approximately 15,000 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. Subsequent to the entry of the Consent Judgment Order in the United Insurance case described above, OIL gave notice of the OIL Settlement to all non- settling reinsurers affected by the United Insurance case, informing all such reinsurers of the terms of the OIL Settlement and demanding timely payment from such reinsurers pursuant to such terms. Since the date of the OIL Settlement, 27 previously non-settling reinsurers have made the payments called for under the OIL Settlement or otherwise settled their obligations thereunder. Other non-settling solvent reinsurers, all of which are parties to the Employers Mutual case described above, have not, however, made the payments called for under the OIL Settlement. As a result of payments and commitments that have been made by reinsurers pursuant to the OIL Settlement and the earlier settlement agreements described above in the United Insurance case and certain other available insurance, the 13 Company has to date confirmed coverage for its asbestos-related costs of approximately $314.5 million. Of the total amount confirmed to date, $297.2 million had been received through March 31, 1999; and the balance of approximately $17.3 million will be received throughout 1999 and the next several years. The remainder of the insurance asset of approximately $195.5 million relates principally to the reinsurers who have not yet paid, and continue to contest, their reinsurance obligations under the OIL Settlement. The Company believes, based on the rulings of the trial court, the Appellate Division and the New Jersey Supreme Court in the United Insurance case, as well as its understanding of the facts and legal precedents and based on advice of counsel, McCarter & English L.L.P., that it is probable substantial additional payments will be received to cover the Company's asbestos-related claim losses. The Company believes that its ultimate asbestos-related contingent liability (i.e., its indemnity or other claim disposition costs plus related litigation expenses) is difficult to estimate with certainty. However, in 1993, the Company established a liability of $975 million to cover what it then estimated would be the total indemnity payments and legal fees associated with the resolution of then outstanding and all expected future asbestos lawsuits and claims. As part of its continual monitoring of asbestos-related matters, the Company in 1998 conducted a comprehensive review to determine if adjustments of asbestos-related assets or liabilities were appropriate. As a result of that review, the Company established an additional liability of $250 million to cover what it now estimates will be the total indemnity payments and legal fees associated with the resolution of outstanding asbestos personal injury lawsuits and claims and asbestos personal injury lawsuits and claims filed during the succeeding five years, after which any remaining liability is not expected to be material in relation to the Company's Consolidated Financial Statements. Based on all the factors and matters relating to the Company's asbestos- related litigation and claims, the Company presently believes that its asbestos-related costs and liabilities will not exceed by a material amount the sum of the available insurance reimbursement the Company believes it has and will have principally as a result of the United Insurance case, and the 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, that such ultimate liability will not be material in relation to the Company's Consolidated Financial Statements. 14 9. Segment Information The Company operates in the rigid packaging industry. The Company has two reportable product segments within the rigid packaging industry: (1) Glass Containers and (2) Plastics Packaging. The Plastics Packaging segment consists of three business units -- plastic containers, closure and specialty products, and prescription products. The Other segment consists primarily of the Company's labels and carriers products business unit. The Company evaluates performance and allocates resources based on earnings before interest income, interest expense, provision for income taxes, minority share owners' interests in earnings of subsidiaries, extraordinary charges, (collectively "EBIT") and unusual items. EBIT for product segments includes an allocation of corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided. Financial information for the three month periods ended March 31, 1999 and 1998 regarding the Company's product segments is as follows: - ----------------------------------------------------------------------------- Elimina- tions Total and Consoli- Glass Plastics Product Other dated Containers Packaging Other Segments Retained Totals - ----------------------------------------------------------------------------- Net sales: March 31, 1999 $873.1 $415.3 $18.6 $1,307.0 $1,307.0 March 31, 1998 812.4 262.6 23.5 1,098.5 1,098.5 ============================================================================= EBIT, excluding unusual items: March 31, 1999 $140.3 $ 79.7 $ 1.7 $ 221.7 $(3.1) $ 218.6 March 31, 1998 123.8 45.8 3.1 172.7 1.5 174.2 ============================================================================= Unusual items: March 31, 1998: Gain on ter- mination of license agreement $18.5 $ 18.5 $ 18.5 Charges for restructuring costs at certain international affiliates $ (7.8) (7.8) (7.8) Settlement of certain environmental litigation $(8.5) (8.5) ============================================================================= 15 The reconciliation of EBIT to consolidated totals for the three month periods ended March 31 1999 and 1998 is as follows: - ----------------------------------------------------------------------------- March 31, 1999 March 31, 1998 - ----------------------------------------------------------------------------- EBIT: EBIT, excluding unusual items for reportable segments $221.7 $172.7 Unusual items excluded from reportable segment information 10.7 Eliminations and other retained, excluding unusual items (3.1) 1.5 Unusual items excluded from eliminations and other retained (8.5) Net interest expense (99.4) (59.3) - ----------------------------------------------------------------------------- Earnings before income taxes and minority share owners' interests in earnings of subsidiaries $119.2 $117.1 ============================================================================= 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations - First Quarter 1999 compared with First Quarter 1998 The Company recorded net earnings of $69.3 million for the first quarter of 1999 compared to $80.4 million for the first quarter of 1998. Excluding the effects of the 1998 unusual items discussed below, the Company's first quarter 1999 net earnings of $69.3 million increased $5.3 million, or 8.3%, over 1998 net earnings of $64.0 million. The first quarter of 1999 includes amounts relating to the April 30, 1998 acquisition of the worldwide glass and plastics packaging businesses of BTR plc. Consolidated EBIT for the first quarter of 1999 was $218.6 million, an increase of $44.4 million, or 25.5%, compared to the first quarter of 1998 EBIT of $174.2 million, excluding 1998 unusual items. The increase is attributable to higher EBIT for both the Glass Containers segment and the Plastics Packaging segment. Interest expense, net of interest income, increased $40.1 million from the 1998 period due princi- pally to the financings related to the acquisition of the BTR glass and plastics packaging businesses. The decrease in minority share owners' interests in earnings of subsidiaries resulted from lower net earnings of certain foreign affiliates, principally the affiliates located in Colombia and Brazil. The Company's estimated effective tax rate for the first quarter of 1999 was 38.8%. This compares with an estimated rate of 37.5% for the first quarter of 1998 and the actual rate of 37.3% for the full year 1998, excluding the effects of the adjustment to Italy's net deferred income tax liabilities discussed below and other unusual items. Increased goodwill amortization resulting from the acquisition of the former BTR packaging businesses is the primary reason for the 1999 increase. Capsule segment results (in millions of dollars) for the first quarter of 1999 and 1998 were as follows: - ---------------------------------------------------------------------------- Net sales (Unaffiliated customers) EBIT (a) - ---------------------------------------------------------------------------- 1999 1998 1999 1998 (b) -------- -------- -------- -------- Glass Containers $ 873.1 $ 812.4 $ 140.3 $ 116.0 Plastics Packaging 415.3 262.6 79.7 45.8 Other 18.6 23.5 1.7 21.6 - ---------------------------------------------------------------------------- Segment totals 1,307.0 1,098.5 221.7 183.4 Eliminations and other retained costs (3.1) (7.0) - ---------------------------------------------------------------------------- Consolidated totals $1,307.0 $1,098.5 $ 218.6 $ 176.4 ============================================================================ (a) EBIT consists of consolidated earnings before interest income, interest expense, provision for income taxes, and minority share owners' interests in earnings of subsidiaries. 17 (b) EBIT for 1998 includes: (1) a gain of $18.5 million related to the termination of a licensing agreement, net of charges for related equipment writeoffs and capacity adjustments, and (2) charges totaling $16.3 million for the settlement of certain environmental litigation and severance costs at certain international affiliates. These items increased (decreased) EBIT as follows: Glass Containers, $(7.8) million; Other, $18.5 million; and eliminations and other retained costs, $(8.5) million. Consolidated net sales for the first quarter of 1999 increased $208.5 million, or 19.0%, over the prior year. Net sales of the Glass Containers segment increased $60.7 million, or 7.5%, from 1998. The combined U.S. dollar sales of the segment's foreign affiliates increased over the prior year, reflecting the Asia Pacific glass container businesses recently acquired from BTR (which contributed approximately $133 million to first quarter 1999 U.S. dollar sales), partially offset by soft market conditions experienced by the Company's affiliates located in Latin America and Europe. Domestically, increased shipments of containers for beer producers more than offset lower shipments of food containers, including tea and juice bottles. Net sales of the Plastics Packaging segment increased $152.7 million, or 58.1%, over 1998, reflecting the plastics businesses recently acquired from BTR (which contributed approximately $143 million to first quarter 1999 U.S. dollar sales), and increased unit shipments of closures and prescription containers. The Other segment net sales comparison to prior year was adversely affected by the end of the first quarter 1998 termination of a license agreement under which the Company had produced plastic multipack carriers for beverage cans. Excluding the effects of the 1998 unusual items, segment EBIT for 1999 increased $49.0 million, or 28.4%, to $221.7 million from 1998 segment EBIT of $172.7 million. EBIT of the Glass Containers segment, excluding the 1998 unusual items, increased $16.5 million to $140.3 million, compared to $123.8 million in 1998. The Asia Pacific glass container businesses recently acquired from BTR contributed approximately $35 million to first quarter 1999 U.S. dollar EBIT. The contributions of the acquired businesses were partially offset by soft market conditions for most of the affiliates located in Europe and Latin America. The adverse economic conditions in Latin America and Eastern Europe and the weaker than normal conditions in other parts of Europe are continuing into the second quarter. As a result, second quarter 1999 operating results of the Company's affiliates located in these geographic areas may be below those reported in the same 1998 period. Domestically, Glass Container EBIT increased from 1998 as a result of increased shipments. The EBIT of the Plastics Packaging segment increased $33.9 million, or 74.0%, compared to 1998. Contributing to this increase were the plastics businesses recently acquired from BTR (which contributed approximately $22 million to first quarter 1999 EBIT), increased shipments of closures for beverage and health care products, and strong demand for prescription packaging, including the new 1-Clic(TM) prescription vial. The Other segment EBIT, excluding the 1998 unusual items, was lower due to lower shipments of labels and plastic multipack carriers for beverage cans. 18 The first quarter of 1998 results include the following unusual items: (1) a tax benefit of $15.1 million to adjust net deferred income tax liabilities as a result of a reduction in Italy's statutory income tax rate; (2) a gain of $18.5 million ($11.4 million aftertax) related to the termination of a license agreement, net of charges for related equipment writeoffs and capacity adjustments, under which the Company had produced plastic multipack carriers for beverage cans; and (3) charges of $16.3 million ($10.1 million aftertax) for the settlement of certain environmental litigation and severance costs at certain international affiliates. Capital Resources and Liquidity The Company's total debt at March 31, 1999 was $5.95 billion, compared to $5.92 billion at December 31, 1998 and $3.39 billion at March 31, 1998. At March 31, 1999, the Company had available credit totaling $4.5 billion under its agreement with a group of banks ("Bank Credit Agreement") expiring in December 2001, of which $727.7 million had not been utilized. At December 31, 1998, the Company had $731.0 million of credit which had not been utilized under the Bank Credit Agreement. Cash provided by operating activities was $11.7 million for the first three months of 1999 compared to $42.2 million for the first three months of 1998. On April 1, 1999, the Company received cash consideration of approximately $280 million from the sale of (1) Rockware (see Note 6 to the financial statements), and (2) its domestic glass container manufacturing plant which was dedicated principally to the production of borosilicate pharmaceutical glassware. The cash received from these transactions was utilized for the reduction of debt and general corporate purposes. The Company anticipates that cash flow from its operations and from utiliza- tion of credit available through December 2001 under the Bank Credit Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations. The Company faces additional demands upon its liquidity for asbestos-related payments. Based on the Company's expecta- tions regarding favorable trends which should lower its aggregate payments for lawsuits and claims and its expectation of the collection of its insurance coverage and reimbursement for such lawsuits and claims, and also based on the Company's expected operating cash flow, the Company believes that the payment of any deferred amounts of previously settled or otherwise determined lawsuits and claims, and the resolution of presently pending and anticipated future lawsuits and claims associated with asbestos, will not have a material adverse effect upon the Company's liquidity on a short-term or long-term basis. In May 1999, the Company announced that its Board of Directors authorized management to repurchase up to 10 million shares of the Company's common stock. Such repurchases may occur from time to time on the open market depending on market conditions and other considerations. The Company believes that cash flows from its operations and from utilization of credit available under the Bank Credit Agreement will be sufficient to fund such repurchases in addition to the obligations mentioned in the previous paragraph. 19 Year 2000 General - ------- The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs or hardware that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations or a temporary inability to engage in normal business activities. The Company uses a significant number of computer software programs and operating systems across its entire organization, including applications used in financial business systems, manufacturing, and various administrative functions. To the extent that the Company's software applications contain source code that is unable to appropriately interpret the upcoming calendar year 2000 and beyond, modification, replacement, or retire- ment of such applications will be necessary. The Company has determined that it will be required to modify or replace portions of its software and hardware so that the affected systems will properly utilize dates beyond December 31, 1999. Project - ------- The Company has undertaken a Year 2000 Project (the "Project") to identify and mitigate Year 2000 compliance issues in its critical information technology ("IT") and non-IT systems. Such systems include manufacturing information systems, process control and embedded systems, business applications, and information technology infrastructure. The general phases of the Project are: (1) inventorying/identification of Year 2000 items and issues; (2) assessment and solution definition; (3) remediation/conversion of Year 2000 items and issues identified; (4) acceptance testing; and (5) implementation. The results of the assessment and solution definition phase to date has indicated that certain of the Company's significant systems are not Year 2000 compliant. The results have also indicated that certain software and hardware (embedded chips) used in building and machine maintenance, production, and manufacturing systems also are at risk. The Company has completed the inventorying/identification and the assessment and solution definition phases of the Project. Activities involving the remaining phases of remediation/conversion, acceptance testing, and implementation are ongoing and will continue into the second half of calendar year 1999. The Company expects to have its critical IT and non-IT systems Year 2000 compliant by September 1999. 20 The Company relies on numerous third-party vendors and suppliers for a wide variety of goods and services, including raw materials, transportation, and utilities such as electricity and natural gas. The Project includes identify- ing and prioritizing critical suppliers and customers and communicating with them about their plans and progress in addressing Year 2000 compliance issues. Information requests have been distributed and replies are being evaluated. The replies received to date indicate that most suppliers, vendors and customers will not provide any assurance that they will be Year 2000 compli- ant. The process of evaluating the Company's critical suppliers is ongoing and scheduled for completion by September 1999. The Company cannot be certain when or if suppliers and customers will be Year 2000 compliant. Although it is not presently expected, the inability of customers and suppliers to complete their Year 2000 compliance efforts in a timely fashion could materially impact the Company. Costs The Company is utilizing both internal and external resources to reprogram or replace, test, and implement the software and equipment for Year 2000 modifi- cations. The total cost associated with the Project, including certain previously scheduled replacements of software and equipment which have been accelerated due to Year 2000 issues, is estimated to be approximately $75 million and is being funded through operating cash flows. The majority of these costs are attributable to the purchase of new software and operating equipment, and will therefore, be capitalized. To date, the Company has incurred approximately $30 million related to all phases of the Project. Risks The Project undertaken by the Company is expected to significantly reduce the Company's level of uncertainty about Year 2000 compliance issues. As previously noted, the Company has not yet completed all necessary phases of the Project. The failure to correct a Year 2000 compliance issue could result in an interruption in, or a failure of, certain normal business activities or operations. Although it is not presently expected, such failures could materially and adversely affect the Company's results of operations, liquidity, and financial condition. Due to the general uncertainty inherent in Year 2000 compliance issues, resulting in part from the uncertainty of Year 2000 readiness of third-party suppliers and customers, the Company is unable to determine at this time the consequences of Year 2000 failures on the Company's results of operations, liquidity, or financial condition. Contingency Plans The Company is developing contingency plans for certain of its applications. Those contingency plans involve, among other actions, manual workarounds, increasing inventories, adjusting staffing strategies, and planned shutdowns of non-critical equipment prior to January 1, 2000. Actions related to the development of contingency plans have not been completed as the necessity of such contingency plans depend upon the progress of Year 2000 compliance efforts. 21 The foregoing statements as to costs and dates relating to the Project are forward looking and are made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. They are based on the Company's best estimates which may be updated as additional information becomes available. The Company's forward looking statements are also based on assumptions about many important factors, including the availability of certain resources, the technical skills of employees and independent contractors, the representations and preparedness of third parties, the ability of vendors and suppliers to deliver goods or perform services required by the Company and the collateral effects of Year 2000 compliance issues on the Company's business partners and customers. While the Company believes its assumptions are reasonable, it cautions that it is impossible to predict the impact of certain factors that could cause actual costs or timetables to differ materially from the expected results. No assurance can be given that these estimates will be achieved, or that there will not be a delay in, or increased costs associated with, the Project. Introduction of Euro Currency On January 1, 1999, a new currency called the "euro" was introduced in eleven of the fifteen Economic and Monetary Union ("EMU") countries. The Company has affiliates located in the following countries which participated in the euro introduction: Finland, Italy, the Netherlands, and Spain. In addition, the Company transacts business in other countries in which the euro has been introduced. The Company has initiated an assessment of the potential impact that the euro introduction will have on its information systems, financial reporting, banking facilities, purchases and the sale of its products. Based upon the assessment to date, the Company does not believe the conversion to the euro and the cost of implementing required system changes will be material to the Company's consolidated financial statements. Item 3. Quantitative and Qualitative Disclosure About Market Risk. The Bank Credit Agreement provides, among other things, a $1.75 billion offshore revolving loan facility which is available to certain of the Company's foreign subsidiaries and denominated in certain foreign currencies. For further information about the facility and related foreign currency loan amounts outstanding, see Note 3 to the financial statements. Cautionary Statement Concerning Forward-Looking Statements. Management's Discussion and Analysis of Financial Condition and Results of Operations may contain forward looking statements that involve risks and uncertainties that could cause actual results to differ materially from those projected. Forward looking statements are necessarily projections which are subject to change upon the occurrence of events that may affect the business. In addition, acquisitions involve a number of risks that can cause actual results to be materially different from expected results. 22 PART II -- OTHER INFORMATION Item 1. Legal Proceedings. (a) Contingencies. Note 8 to the Condensed Consolidated Financial Statements, "Contingencies," that is included in Part I of this Report, is incorporated herein by reference. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits: Exhibit 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 first quarter of 1999. 23 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 May 14, 1999 By /s/ David G. Van Hooser ------------ ---------------------------------------------- David G. Van Hooser, Senior Vice President and Chief Financial Officer (Principal Financial Officer) 24 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 25 EX-12 2 STATEMENT REGARDING COMPUTATION OF RATIOS Exhibit 12 OWENS-ILLINOIS, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS (Millions of dollars, except ratios) Three Months ended March 31, ----------------------------------- Pro Forma As Adjusted For BTR Packaging Acquisition 1999 1998 1998 Earnings before income taxes, and ------ ------ --------------- minority share owners' interests . $119.2 $117.1 $142.3 Less: Equity earnings . . . . . . . (4.5) (4.7) (5.4) Add: Total fixed charges deducted from earnings . . . . . . . 112.1 70.3 113.8 Proportional share of pre-tax earnings (loss) of 50% owned associates. . . . . . . . . 1.2 1.2 2.2 ------ ------ ------ Earnings available for payment of fixed charges. . . . . . $228.0 $183.9 $252.9 ====== ====== ====== Fixed charges (including the Company's proportional share of 50% owned associates): Interest expense. . . . . . . $103.1 $ 64.5 $104.0 Portion of operating lease rental deemed to be interest . . . 6.9 5.1 6.4 Amortization of deferred financing costs and debt discount expense. . . . . . 2.1 .7 3.4 ------ ------ ------ Total fixed charges deducted from earnings and fixed charges. $112.1 $ 70.3 $113.8 Preferred stock dividends (increased to assumed pre-tax amount). . . . . . 9.1 .5 7.6 ------ ------ ------ Combined fixed charges and preferred stock dividends. . . . . . . . . . $121.2 $ 70.8 $121.4 ====== ====== ====== Ratio of earnings to fixed charges . 2.0 2.6 2.2 Ratio of earnings to combined fixed charges and preferred stock dividends. . . . . . . . . . . . . 1.9 2.6 2.1 EX-23 3 CONSENT OF MCCARTER & ENGLISH, LLP EXHIBIT 23 CONSENT OF MCCARTER & ENGLISH, LLP May 14, 1999 Ladies and Gentlemen: We consent to the incorporation by reference in this Quarterly Report on Form 10-Q of Owens-Illinois, Inc. for the quarter ended March 31, 1999, of the reference to our firm under the caption "Legal Proceedings." Very truly yours, /s/ McCarter & English, LLP --------------------------- McCarter & English, LLP EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the March 31, 1999 condensed consolidated balance sheet, and the condensed consolidated results of operations for the three-month period then ended and is qualified in its entirety by reference to such financial statements. 3-MOS DEC-31-1999 MAR-31-1999 270,300,000 0 854,700,000 50,500,000 858,400,000 2,151,900,000 5,273,700,000 1,969,900,000 10,903,300,000 1,326,500,000 5,757,300,000 0 465,400,000 1,500,000 1,943,400,000 10,903,300,000 1,307,000,000 1,353,300,000 999,800,000 999,800,000 0 0 105,200,000 119,200,000 46,200,000 69,300,000 0 0 0 69,300,000 0.41 0.41
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