10-Q 1 a2110911z10-q.htm FORM 10-Q
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

(Mark One)
ý	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For Quarter Ended March 31, 2003
or
o	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 (State or other jurisdiction of incorporation or organization)	1-9576 (Commission File No.)	22-2781933 (IRS Employer Identification No.)

One SeaGate, Toledo, Ohio (Address of principal executive offices)		43666 (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 ý No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes ý No o

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—147,748,744 shares at April 30, 2003.

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, 2002.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED RESULTS OF OPERATIONS

Three months ended March 31, 2003 and 2002
(Dollars in millions, except share and per share amounts)

		2003		2002
Revenues:
	Net sales	$	1,386.4	$	1,310.9
	Royalties and net technical assistance		6.7		6.8
	Equity earnings		5.8		6.0
	Interest		7.8		5.3
	Other		5.2		9.3

			1,411.9		1,338.3
Costs and expenses:
	Manufacturing, shipping, and delivery		1,140.1		1,019.8
	Research and development		9.9		10.8
	Engineering		10.2		7.8
	Selling and administrative		83.6		80.8
	Interest		111.0		111.8
	Other		2.6		484.0

			1,357.4		1,715.0

Earnings (loss) before items below			54.5		(376.7	)
Provision (credit) for income taxes			17.2		(135.9	)
Minority share owners' interests in earnings of subsidiaries			2.9		4.5

Earnings (loss) before cumulative effect of accounting change			34.4		(245.3	)
Cumulative effect of accounting change					(460.0	)

Net earnings (loss)		$	34.4	$	(705.3	)

Basic net earnings (loss) per share of common stock
	Earnings (loss) before cumulative effect of accounting change	$	0.20	$	(1.72	)
	Cumulative effect of accounting change				(3.14	)

	Net earnings (loss)	$	0.20	$	(4.86	)

Weighted average shares outstanding (thousands)			146,853		146,267

Diluted net earnings (loss) per share of common stock
	Earnings (loss) before cumulative effect of accounting change	$	0.20	$	(1.72	)
	Cumulative effect of accounting change				(3.14	)

	Net earnings (loss)	$	0.20	$	(4.86	)

Weighted diluted average shares (thousands)			147,518		146,267

See accompanying notes.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

March 31, 2003, December 31, 2002, and March 31, 2002
(Dollars in millions)

			March 31, 2003		Dec. 31, 2002		March 31, 2002
Assets
Current assets:
	Cash, including time deposits		$	128.5	$	126.4	$	115.2
	Short-term investments, at cost which approximates market			20.2		17.6		17.3
	Receivables, less allowances for losses and discounts ($51.9 at March 31, 2003, $62.5 at December 31, 2002, and $59.6 at March 31, 2002)			797.2		701.9		774.2
	Inventories			956.6		893.5		897.6
	Prepaid expenses			138.8		147.8		233.7

		Total current assets		2,041.3		1,887.2		2,038.0
Investments and other assets:
	Equity investments			195.4		192.0		163.2
	Repair parts inventories			198.6		196.2		187.8
	Prepaid pension			937.9		925.5		900.2
	Insurance receivable for asbestos-related costs			7.5		12.2		37.0
	Deposits, receivables, and other assets			666.6		640.9		569.0
	Goodwill			2,744.6		2,691.2		2,564.2

		Total other assets		4,750.6		4,658.0		4,421.4
Property, plant, and equipment, at cost				6,112.3		5,978.2		5,834.2
Less accumulated depreciation				2,751.9		2,654.1		2,595.6

	Net property, plant, and equipment			3,360.4		3,324.1		3,238.6

Total assets			$	10,152.3	$	9,869.3	$	9,698.0

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)

March 31, 2003, December 31, 2002, and March 31, 2002
(Dollars in millions)

			March 31, 2003			Dec. 31, 2002			March 31, 2002
Liabilities and Share Owners' Equity
Current liabilities:
	Short-term loans and long-term debt due within one year		$	84.6		$	78.2		$	86.4
	Current portion of asbestos-related liabilities			190.0			195.0			220.0
	Accounts payable and other liabilities			1,005.3			1,024.2			940.1

		Total current liabilities		1,279.9			1,297.4			1,246.5
Long-term debt				5,479.6			5,268.0			5,344.7
Deferred taxes				287.9			278.4			326.1
Nonpension postretirement benefits				288.4			291.5			297.1
Other liabilities				624.7			563.6			427.1
Asbestos-related liabilities				307.5			357.7			492.5
Commitments and contingencies
Minority share owners' interests				139.6			141.9			148.3
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
	Common stock, par value $.01 per share 250,000,000 shares authorized, 160,663,006 shares issued and outstanding, less 12,914,262 treasury shares at March 31, 2003 (160,265,744 issued and outstanding, less 12,914,262 treasury shares at December 31, 2002 and 159,978,518 issued and outstanding, less 12,914,262 treasury shares at March 31, 2002)			1.6			1.6			1.6
Capital in excess of par value				2,226.8			2,224.9			2,220.6
Treasury stock, at cost				(247.6	)		(247.6	)		(247.6	)
Retained earnings (deficit)				(148.1	)		(177.0	)		(406.1	)
Accumulated other comprehensive income				(540.5	)		(583.6	)		(605.3	)

	Total share owners' equity			1,744.7			1,670.8			1,415.7

Total liabilities and share owners' equity			$	10,152.3		$	9,869.3		$	9,698.0

See accompanying notes.

OWENS-ILLINOIS, INC.

CONDENSED CONSOLIDATED CASH FLOWS

Three months ended March 31, 2003 and 2002
(Dollars in millions)

			2003			2002
Cash flows from operating activities:
	Net earnings (loss) before cumulative effect of accounting change		$	34.4		$	(245.3	)
	Non-cash charges (credits):
		Depreciation		114.2			107.4
		Amortization of deferred costs		14.2			12.2
		Future asbestos-related costs					475.0
		Deferred tax provision (credit)		7.4			(161.5	)
		Other		(21.3	)		(40.3	)
	Change in non-current operating assets			5.6			20.3
	Asbestos-related payments			(55.1	)		(61.3	)
	Asbestos-related insurance proceeds			4.7
	Reduction of non-current liabilities						(14.0	)
	Change in components of working capital			(169.0	)		(56.1	)

		Cash provided by (utilized in) operating activities		(64.9	)		36.4
Cash flows from investing activities:
	Additions to property, plant, and equipment			(119.4	)		(112.3	)
	Net cash proceeds from divestitures and asset sales			7.8			17.0
	Acquisitions, net of cash acquired						(2.4	)

		Cash utilized in investing activities		(111.6	)		(97.7	)
Cash flows from financing activities:
	Additions to long-term debt			260.6			1,073.7
	Repayments of long-term debt			(51.6	)		(1,058.5	)
	Increase in short-term loans			5.7			16.2
	Collateral deposits for certain derivative instruments			(33.2	)		8.6
	Payment of finance fees						(18.0	)
	Convertible preferred stock dividends			(5.4	)		(5.4	)
	Issuance of common stock and other			1.1			2.7

		Cash provided by financing activities		177.2			19.3
Effect of exchange rate fluctuations on cash				1.4			1.6

Increase (decrease) in cash				2.1			(40.4	)
Cash at beginning of period				126.4			155.6

Cash at end of period			$	128.5		$	115.2

See accompanying notes.

OWENS-ILLINOIS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Tabular data dollars in millions,
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,
			2003			2002
Numerator:
	Earnings (loss) before cumulative effect of accounting change		$	34.4		$	(245.3	)
	Convertible preferred stock dividends			(5.4	)		(5.4	)

	Numerator for basic earnings (loss) per share- income (loss) available to common share owners		$	29.0		$	(250.7	)

Denominator:
	Denominator for basic earnings (loss) per share- weighted average shares outstanding			146,853,426			146,267,373
	Effect of dilutive securities:
		Stock options and other		664,996

	Denominator for diluted earnings (loss) per share- adjusted weighted average shares and assumed exchanges of preferred stock for common stock			147,518,422			146,267,373

Basic earnings (loss) per share			$	0.20		$	(1.72	)

Diluted earnings (loss) per share			$	0.20		$	(1.72	)

The convertible preferred stock was not included in the computation of March 31, 2003 diluted earnings per share since the result would have been antidilutive. Options to purchase 7,237,090 weighted average shares of common stock that were outstanding during the three months ended March 31, 2003, 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. For the three months ended March 31, 2002, diluted earnings per share of common stock are equal to basic earnings per share of common stock due to the net loss.

2. Inventories

Major classes of inventory are as follows:

	March 31, 2003		Dec. 31, 2002		March 31, 2002
Finished goods	$	757.7	$	684.9	$	701.0
Work in process		6.3		7.4		9.9
Raw materials		124.2		133.2		119.7
Operating supplies		68.4		68.0		67.0

	$	956.6	$	893.5	$	897.6

3. Long-Term Debt

The following table summarizes the long-term debt of the Company:

			March 31, 2003		Dec. 31, 2002		March 31, 2002
Secured Credit Agreement:
	Revolving Credit Facility:
		Revolving Loans	$	2,051.5	$	1,825.0	$	2,424.1
	Term Loan							65.0
Senior Secured Notes:
	8.875%, due 2009			1,000.0		1,000.0		1,000.0
	8.75%, due 2012			625.0		625.0
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				133.1		148.7		184.5

				5,509.6		5,298.7		5,373.6
	Less amounts due within one year			30.0		30.7		28.9

		Long-term debt	$	5,479.6	$	5,268.0	$	5,344.7

At March 31, 2003, the Company's subsidiary borrowers had unused credit of $297.5 million available under the Secured Credit Agreement.

The weighted average interest rate on borrowings outstanding under the Revolving Credit Facility at March 31, 2003 was 3.33%. Including the effects of cross-currency swap agreements related to Revolving Credit Facility borrowings by the Company's Australian, U.K., and Canadian subsidiaries, the weighted average interest rate was 5.39%.

The Company's subsidiary borrowers intend to amend and restate the Agreement during the second quarter of 2003 to, among other things, extend the maturity through April 1, 2007. As of May 15, 2003, the Company had non-cancelable commitments to the proposed amended and restated Agreement in excess of the amount of borrowings outstanding at March 31, 2003. The Company expects that the proposed amended and restated credit agreement will be finalized during the second quarter of 2003.

During May 2003, a subsidiary of the Company issued Senior Secured Notes totaling $450 million and Senior Notes totaling $450 million. The notes bear interest at 7.75% and 8.25%, respectively, and are due May 15, 2011 and May 15, 2013, respectively. Both series of notes are guaranteed by substantially all of the Company's domestic subsidiaries. In addition, the assets of substantially all of the Company's domestic subsidiaries are pledged as security for the Senior Secured Notes. The indenture for the 7.75% Senior Secured Notes has substantially the same restrictions as the 8.875% and 8.75% Senior Secured Notes. The indenture for the 8.25% Senior Notes contains similar restrictions. The issuing subsidiary will use the net proceeds from the notes of approximately $880 million to repurchase in a tender offer scheduled to expire on May 23, 2003, and/or otherwise repurchase, all of the 7.85% Senior Notes due 2004 and permanently reduce the revolving credit facility under the Agreement.

4. Cash Flow Information

Interest paid in cash aggregated $83.6 million for the first quarter of 2003 and $54.7 million for the first quarter of 2002. Income taxes paid in cash totaled $7.6 million for the first quarter of 2003 and $5.4 million for the first quarter of 2002.

5. Comprehensive Income

The components of comprehensive income (loss) are: (a) net earnings (loss); (b) change in fair value of certain derivative adjustments; (c) adjustment of minimum pension liabilities; and, (d) foreign currency translation adjustments. Total comprehensive income (loss) for the three month periods ended March 31, 2003 and 2002 amounted to $77.5 million and $(734.3) million, respectively.

6. Stock Options

The Company has three nonqualified stock option plans. The Company has adopted the disclosure-only provisions (intrinsic value method) of Statement of Financial Accounting Standards (FAS) No. 123, "Accounting for Stock-Based Compensation." All options have been granted at prices equal to the market price of the Company's common stock on the date granted. Accordingly, the Company recognizes no compensation expense related to the stock option plans.

If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as allowed by FAS No. 123, pro forma net income (loss) and earnings (loss) per share would have been as follows:

		Three months ended March 31,
		2003			2002
Net income (loss):
	As reported	$	34.4		$	(705.3	)
	Total stock-based employee compensation expense determined under fair value based method, net of related tax effects		(2.2	)		(2.5	)

	Pro forma	$	32.2		$	(707.8	)

Basic earnings (loss) per share:
	As reported	$	0.20		$	(4.86	)
	Pro forma		0.18			(4.88	)
Diluted earnings (loss) per share:
	As reported		0.20			(4.86	)
	Pro forma		0.18			(4.88	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

	2003		2002
Expected life of options	5 years		5 years
Expected stock price volatility	72.7	%	71.5	%
Risk-free interest rate	3.20	%	4.50	%
Expected dividend yield	0.00	%	0.00	%

7. Contingencies

The Company is one of a number of defendants 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, calcium-silicate based pipe and block insulation material containing asbestos. The Company exited the pipe and block 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 in some cases, punitive damages in various amounts (herein referred to as "asbestos claims").

As of March 31, 2003, the Company has determined that it is a named defendant in asbestos lawsuits and claims involving approximately 24,000 plaintiffs and claimants. Based upon an analysis of the claims and lawsuits pending as of December 31, 2002, approximately 55% of the claims and lawsuits pending as of that date involved multiple claimants, and virtually all such pending claims and lawsuits named a number of additional defendants (typically from 20 to 100 or more). Approximately 40% of the claimants and plaintiffs do not specify the monetary damages sought. Another 39% of the plaintiffs merely recite that the amount of damages sought exceeds the required jurisdictional minimum damages in the court of jurisdiction in which the suit is filed. Approximately 14% of the plaintiffs specify the maximum damages sought in amounts from $10 million to $40 million. Lastly, fewer than 7% of the plaintiffs are involved in lawsuits which specify precise damage amounts, with approximately 5.8% specifying amounts up to $20 million; approximately 0.2% specifying amounts from $20 million to $75 million; and, approximately 0.5% specifying amounts from $75 million to $125 million. In addition, one lawsuit, pending since 1991 and involving fewer than 0.2% of the plaintiffs and approximately 60 defendants, specifies damages of $11 billion.

As indicated by the foregoing summary, modern pleading practice permits considerable variation in the assertion of monetary damages. This variability, together with the actual experience discussed further below of litigating or resolving through settlement hundreds of thousands of asbestos claims and lawsuits over an extended period, demonstrates that the monetary relief which may be specified in a lawsuit or claim bears little relevance to its merits or disposition value. Rather, the amount potentially recoverable for a specific claimant is determined by other factors such as the claimant's severity of disease, product identification evidence against specific defendants, the defenses available to those defendants, the specific jurisdiction in which the claim is made, the claimant's history of smoking or exposure to other possible disease-causative factors, and the various other matters discussed further below.

In addition to the pending claims set forth above, the Company has claims-handling agreements in place with many plaintiffs' counsel throughout the country. These agreements require evaluation and negotiation regarding whether particular claimants qualify under the criteria established by such agreements. The criteria for such claims include verification of a compensable illness and a reasonable probability of exposure to a product manufactured by the Company's former business unit during its manufacturing period ending in 1958. Some plaintiffs' counsel have historically withheld claims under these agreements for later presentation while focusing their attention on active litigation in the tort system. The Company believes that as of March 31, 2003 there are no more than 18,000 of such preexisting but presently unasserted claims against the Company that are not included in the total of pending claims set forth above. The Company further believes that the bankruptcies of additional co-defendants, as discussed below, have resulted in an acceleration of the presentation and disposition of a number of these previously withheld preexisting claims under such agreements, which claims would otherwise have been presented and disposed of over the next several years. This acceleration is reflected in an increased number of pending asbestos claims and, to the extent disposed, contributes to an increase in asbestos-related payments which is expected to continue in the near term.

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 upon its past experience, the Company believes that these categories of lawsuits and claims will not involve any material liability and they are not included in the above description of pending matters or in the following description of disposed matters.

Since receiving its first asbestos claim, the Company, as of March 31, 2003, has disposed of the asbestos claims of approximately 291,000 plaintiffs and claimants at an average indemnity payment per claim of approximately $5,600. The Company's indemnity payments for these claims have varied on a per claim basis, and are expected to continue to vary considerably over time. As discussed above, a part of the Company's objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling agreements. Under such agreements, qualification by meeting certain illness and exposure criteria has tended to reduce the number of claims presented to the Company that would ultimately be dismissed or rejected due to the absence of impairment or product exposure evidence. The Company expects that as a result, although aggregate spending may be lower, there may be an increase in the per claim average indemnity payment involved in such resolution. In this regard, although the average of such payments has been somewhat higher following the implementation of the claims-handling agreements in the mid-1990s, the annual average amount has not varied materially from year to year in recent years.

The Company believes that its ultimate asbestos-related contingent liability (i.e., its indemnity or other claim disposition costs plus related legal fees) cannot be estimated with certainty. In 1993, the Company established a liability of $975 million to cover indemnity payments and legal fees associated with the resolution of outstanding and expected future asbestos lawsuits and claims. In 1998, an additional liability of $250 million was established. During the third quarter of 2000, the Company established an additional liability of $550 million to cover the Company's estimated indemnity payments and legal fees arising from outstanding asbestos personal injury lawsuits and claims and asbestos personal injury lawsuits and claims expected to be filed in the ensuing several years. In early March 2002, the Company initiated a comprehensive review to determine whether further adjustment of asbestos-related liabilities was appropriate. At the conclusion of this review in April, the Company determined that an additional charge of $475 million would be appropriate to adjust the reserve for estimated future asbestos-related costs. The Company's ability to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the continued use of litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the growing number of co-defendants that have filed for bankruptcy. In 2002, North American Refractories Co., Kaiser Aluminum Corporation, Harbison Walker Refractories Group, A.P. Green Industries, Inc., Porter Hayden Company, Plibrico Company, Shook & Fletcher Insulation Co., Artra Group (Synkoloid Company), AC&S, A-Best Company and JT Thorpe Co. declared bankruptcy. These companies join others, such as G-I Holdings (GAF), USG Corporation, Federal-Mogul Corporation, Burns & Roe Enterprises, Inc., W.R. Grace & Co., Owens Corning, Fibreboard Corporation, Pittsburgh-Corning, Babcock & Wilcox, Armstrong World Industries and approximately 40 other asbestos defendants who have sought protection under Chapter 11 of the Bankruptcy Code.

The Company has continued to monitor trends which may affect its ultimate liability and has continued to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company. The Company expects that the gross amount of total asbestos-related payments will be moderately lower in 2003 compared to 2002 and will continue to decline thereafter as the preexisting but presently unasserted claims withheld under the claims handling agreements are presented to the Company and as the number of potential future claimants

continues to decrease. The material components of the Company's accrual, including this additional accrued amount, are the following: (i) the Company's estimate at that date of the reasonably probable contingent liability for asbestos claims already asserted against the Company, (ii) the Company's estimate at that date of the contingent liability for preexisting but unasserted asbestos claims for prior periods arising under its administrative claims-handling agreements with various plaintiffs' counsel, (iii) the Company's estimate at that time of the contingent liability for asbestos claims not yet asserted against the Company, but which the Company believes it is reasonably probable will be asserted in the next several years, to the degree that such an estimation as to future claims is possible, and (iv) the Company's estimate of legal defense costs likely to be incurred in connection with the foregoing types of claims.

The significant assumptions underlying the material components of the Company's accrual are:

a): the extent to which settlements are limited to claimants who were exposed to the Company's asbestos-containing insulation prior to its exit from that business in 1958;
b): the extent to which claims are resolved under the Company's administrative claims agreements or on terms comparable to those set forth in those agreements;
c): the extent of reduction in the inventory of pending serious disease cases;
d): the extent to which the Company is able to successfully defend itself at trial;
e): the extent of actions by courts to eliminate or reduce the diversion of financial resources for unimpaired claimants and so-called forum shopping;
f): the extent to which additional defendants with substantial resources and assets are required to participate significantly in the resolution of future asbestos cases and claims;
g): the number and timing of co-defendant bankruptcies; and
h): the extent to which the resolution of co-defendant bankruptcies divert resources to unimpaired claimants.

The Company believes that any possible loss or range of loss in addition to the foregoing charge cannot be reasonably estimated. While the Company cannot reasonably estimate the precise timing of payment, the Company believes that its liabilities for the next several years will not exceed the amount accrued, based on its expectation of continuing moderate declines in annual spending for asbestos-related costs.

The Company has previously pursued recovery of its losses from third parties, particularly its insurance carriers, and has largely resolved all of its significant coverage claims. The Company expects some further recovery from deferred payment provisions of existing settlement agreements and from pursuing certain additional reimbursement claims. However, the Company does not expect to recover additional material amounts in excess of the recorded receivable of $7.5 million at March 31, 2003.

In April 1999, Crown Cork & Seal Technologies Corporation ("CCS") filed suit against Continental PET Technologies, Inc. ("CPT"), a wholly-owned subsidiary of the Company, in the United States District Court for the District of Delaware alleging that certain plastic containers manufactured by CPT, primarily multi-layer PET containers with barrier properties, infringe CCS's U.S. Patent 5,021,515 relating to an oxygen-scavenging material. CCS is a party to an agreement with Chevron Philips Chemical Company ("Chevron") under which Chevron has rights to sublicense certain CCS patents, including, Chevron believed, the patent involved in the suit against CPT. To avoid the cost of litigation, CPT took a sublicense from Chevron under the patent in suit and other patents. Chevron then entered the suit to defend and assert its right to sublicense the patent in suit to CPT. In November 2002, the Delaware District Court concluded that Chevron did not have the rights it purported to sublicense to CPT.

In an order entered on March 31, 2003, the Court did not certify Chevron's request for interlocutory appeal of this decision. The decision will allow CCS to pursue its lawsuit against CPT, which is in its initial stages and was stayed pending resolution of the Chevron claims. In the lawsuit, CCS seeks certain monetary damages and injunctive relief. CPT intends to pursue all defenses available to it. However, if the Court were to reach conclusions adverse to CPT on the claims for monetary damages asserted by CCS, the Company believes such determination would not have a material adverse effect on the Company's consolidated results of operations and financial position, and any such damages could be covered in part by third-party indemnification. Additionally, an adverse decision with respect to CCS's request for injunctive relief is not likely to have a material adverse effect on the Company because it believes that it can pursue alternative technologies for the manufacture of multi-layer PET containers with barrier properties.

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. The Company's reported results of operations for 2002 were materially affected by the $475 million first-quarter charge and asbestos-related payments continue to be substantial. Any possible future additional accrual would likewise materially affect the Company's results of operations in the period in which it might be recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and will continue to affect the Company's cost of borrowing and its ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash flows and other sources of liquidity will be sufficient to pay its obligations for asbestos-related costs and to fund its working capital and capital expenditure requirements on a short-term and long-term basis.

8. Segment Information

The Company operates in the rigid packaging industry. The Company has two reportable product segments within the rigid packaging industry: (1) Glass Containers and (2) Plastics Packaging. The Glass Containers segment includes operations in North America, Europe, the Asia Pacific region, and South America. The Plastics Packaging segment consists of two business units—consumer products (plastic containers and closures) and prescription products.

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 cumulative effect of accounting change (collectively "EBIT") excluding amounts related to certain items that management considers not representative of ongoing operations. 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. For the Company's U.S. pension plans, net periodic pension cost (credit) has been allocated to product segments.

Financial information for the three-month periods ended March 31, 2003 and 2002 regarding the Company's product segments is as follows:

			Glass Containers		Plastics Packaging		Total Product Segments		Eliminations and Other Retained			Consolidated Totals
Net sales:
	March 31, 2003		$	930.6	$	455.8	$	1,386.4				$	1,386.4
	March 31, 2002			870.1		440.8		1,310.9					1,310.9

EBIT, excluding item noted below:
	March 31, 2003		$	126.6	$	50.9	$	177.5	$	(19.8	)	$	157.7
	March 31, 2002			151.1		74.8		225.9		(21.1	)		204.8

Item excluded from EBIT above:
	March 31, 2002
		Charge for asbestos-related costs							$	(475.0	)	$	(475.0	)

The reconciliation of EBIT to earnings (loss) before income taxes, minority share owners' interests in earnings of subsidiaries, and cumulative effect of accounting change for the three-month periods ended March 31, 2003 and 2002 is as follows:

	March 31, 2003			March 31, 2002
EBIT, excluding certain items for reportable segments	$	177.5		$	225.9
Item excluded from reportable segment information					(475.0	)
Eliminations and other retained items		(19.8	)		(21.1	)
Interest expense		(111.0	)		(111.8	)
Interest income		7.8			5.3

Total	$	54.5		$	(376.7	)

9. New Accounting Standards

FAS No. 145. In April 2002, the FASB issued FAS No. 145, "Rescission of FASB Statements No. 4, No. 44, and No. 64, Amendment of FASB Statement No. 13, and Technical Corrections". Among other things, FAS No. 145 requires gains and losses from early extinguishment of debt to be included in income from continuing operations instead of being classified as extraordinary items as previously required by generally accepted accounting principles. FAS No.145 is effective for fiscal years beginning after May 15, 2002 and was adopted by the Company on January 1, 2003. Any gain or loss on early extinguishment of debt that was classified as an extraordinary item in periods prior to adoption must be reclassified into income from continuing operations. The Company has reclassified $6.7 million of extraordinary charges for the three months ended March 31, 2002 to increase interest expense by $10.9 million and decrease the provision for income taxes by $4.2 million.

FAS No. 146. In June 2002, the FASB issued FAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". FAS No. 146 requires that a liability for costs associated with exit or disposal activities be recognized when the liability is incurred. The statement further requires that fair value be used for initial measurement of the liability. FAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002 and was adopted by the Company on January 1, 2003. The adoption of FAS No. 146 did not have a material impact on the reported results of operations or financial position of the Company.

10. Derivative Instruments

Under the terms of the April 2001 Secured Credit Agreement, the Company's affiliates in Australia and the United Kingdom are required to borrow in U.S. dollars. In order to manage the international affiliates' exposure to fluctuating foreign exchange rates, the Company's affiliates in Australia and the United Kingdom have entered into currency swaps for the principal portion of their initial borrowings under the Agreement and for their interest payments due under the Agreement.

As of March 31, 2003, the Company's affiliate in Australia had swapped $650 million of borrowings into $1,275 million Australian dollars. This swap matured on May 2, 2003 and had interest resets every 90 days. The interest reset terms of the swap approximated the terms of the U.S. dollar borrowings. This derivative instrument swapped both the interest and principal from U.S. dollars to Australian dollars and also swapped the interest rate from a U.S.-based rate to an Australian-based rate. The Company's affiliate in the United Kingdom had swapped $200 million of bank loans and intercompany borrowings into 139 million British pounds. This swap also matured on May 2, 2003, and had interest resets every 90 days. This derivative instrument swapped both the interest and principal from U.S. dollars to British pounds and also swapped the interest rate from a U.S.-based rate to a British-based rate.

On May 2, 2003, the Company's affiliate in Australia entered into a number of agreements that swap a total of $491 million of borrowings into 789 million Australian dollars. These derivative instruments swap both the interest and principal from U.S. dollars to Australian dollars and also swap the interest rate from a U.S.-based rate to an Australian-based rate.

As of March 31, 2003, the Company's Canadian affiliate has swapped $60 million of borrowings into $94.7 million Canadian dollars. This swap matures on October 1, 2003. This derivative instrument swaps both the interest and principal from U.S. dollars to Canadian dollars and also swaps the interest rate from a U.S.-based rate to a Canadian-based rate.

The Company's affiliates in Australia, Canada, the United Kingdom and several other European countries have also entered in short term forward exchange contracts which effectively swap additional intercompany and external borrowings at each of these affiliates to its local currency. These hedges swap both the interest and principal of additional borrowings in excess of borrowings covered by the swap contracts described above.

The Company recognizes the above derivatives on the balance sheet at fair value. The Company accounts for the above swaps as fair value hedges. Accordingly, the changes in the value of the swaps are recognized in current earnings and are expected to substantially offset any exchange rate gains or losses on the related U.S. dollar borrowings. For the three months ended March 31, 2003, the amount not offset was immaterial.

The Company also uses commodity futures contracts related to forecasted natural gas requirements. The objective of these futures contracts is to limit the fluctuations in prices paid for natural gas and the potential volatility in earnings or cash flows from future market price movements. The Company continually evaluates the natural gas market in respect to its future usage requirements. The Company generally evaluates the natural gas market for the next twelve months and continually enters into commodity futures contracts in order to have a portion of its usage requirements hedged through the next twelve months. At March 31, 2003, the Company has entered into commodity futures contracts for approximately 25% of its expected North American natural gas usage through the end of 2003 (approximately 6,000 MM BTUs).

The Company accounts for the above futures contracts on the balance sheet at fair value. The effective portion of changes in the fair value of a derivative that is designated as, and meets the required criteria for, a cash flow hedge is recorded in accumulated other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the underlying hedged item affects earnings. The ineffective portion of the change in the fair value of a derivative designated as a cash flow hedge is recognized in current earnings.

The above futures contracts are accounted for as cash flow hedges at March 31, 2003. Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting anticipated cash flows of the hedged transactions. For hedged forecasted transactions, hedge accounting will be discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses will be recorded to earnings immediately.

At March 31, 2003, an unrealized net gain of $1.5 million, after tax of $0.8 million, related to these commodity futures contracts was included in OCI. There was no ineffectiveness recognized during the three-month periods ended March 31, 2003 and March 31, 2002.

The Company's international affiliates may enter into short-term forward exchange agreements to purchase foreign currencies at set rates in the future. These foreign currency forward exchange agreements are used to limit exposure to fluctuations in foreign currency exchange rates for all significant planned purchases of fixed assets or commodities that are denominated in a currency other than the affiliate's functional currency. Affiliates may also use forward exchange agreements to offset the foreign currency risk for receivables and payables not denominated in their functional currency. The Company records these short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value are recognized in current earnings.

11. Financial Information for Subsidiary Guarantors and Non-Guarantors

The following presents condensed consolidating financial information for the Company, segregating: (1) Owens-Illinois, Inc., the issuer of six series of senior notes and debentures (the "Parent"); (2) the two subsidiaries which have guaranteed the senior notes and debentures on a subordinated basis (the "Guarantor Subsidiaries"); and (3) all other subsidiaries (the "Non-Guarantor Subsidiaries"). The Guarantor Subsidiaries are wholly-owned direct and indirect subsidiaries of the Company and their guarantees are full, unconditional and joint and several. They have no operations and function only as intermediate holding companies.

Wholly-owned subsidiaries are presented on the equity basis of accounting. Certain reclassifications have been made to conform all of the financial information to the financial presentation on a consolidated basis. The principal eliminations relate to investments in subsidiaries and inter-company balances and transactions.

		March 31, 2003
		Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Balance Sheet
Current assets:
	Accounts receivable	$	—		$	—	$	797.2	$	—		$	797.2
	Inventories							956.6					956.6
	Other current assets		66.5					221.0					287.5

Total current assets			66.5			—		1,974.8		—			2,041.3
Investments in and advances to subsidiaries			3,763.2			2,063.2				(5,826.4	)		—
Goodwill								2,744.6					2,744.6
Other non-current assets			7.5					1,998.5					2,006.0

Total other assets			3,770.7			2,063.2		4,743.1		(5,826.4	)		4,750.6
Property, plant and equipment, net								3,360.4					3,360.4

Total assets		$	3,837.2		$	2,063.2	$	10,078.3	$	(5,826.4	)	$	10,152.3

Current liabilities:
	Accounts payable and accrued liabilities	$	—		$	—	$	1,005.3	$	—		$	1,005.3
	Current portion of asbestos liability		190.0										190.0
	Short-term loans and long-term debt due within one year							84.6					84.6

Total current liabilities			190.0			—		1,089.9		—			1,279.9
Long-term debt			1,700.0					5,479.6		(1,700.0	)		5,479.6
Asbestos-related liabilities			307.5										307.5
Other non-current liabilities and minority interests			(105.0	)				1,445.6					1,340.6
Capital structure			1,744.7			2,063.2		2,063.2		(4,126.4	)		1,744.7

Total liabilities and share owners' equity		$	3,837.2		$	2,063.2	$	10,078.3	$	(5,826.4	)	$	10,152.3

		December 31, 2002
		Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Balance Sheet
Current assets:
	Accounts receivable	$	—		$	—	$	701.9	$	—		$	701.9
	Inventories							893.5					893.5
	Other current assets		68.3					223.5					291.8

Total current assets			68.3			—		1,818.9		—			1,887.2
Investments in and advances to subsidiaries			3,722.1			2,022.1				(5,744.2	)		—
Goodwill								2,691.2					2,691.2
Other non-current assets			12.2					1,954.6					1,966.8

Total other assets			3,734.3			2,022.1		4,645.8		(5,744.2	)		4,658.0
Property, plant and equipment, net								3,324.1					3,324.1

Total assets		$	3,802.6		$	2,022.1	$	9,788.8	$	(5,744.2	)	$	9,869.3

Current liabilities:
	Accounts payable and accrued liabilities	$	—		$	—	$	1,024.2	$	—		$	1,024.2
	Current portion of asbestos liability		195.0										195.0
	Short-term loans and long-term debt due within one year							78.2					78.2

Total current liabilities			195.0			—		1,102.4		—			1,297.4
Long-term debt			1,700.0					5,268.0		(1,700.0	)		5,268.0
Asbestos-related liabilities			357.7										357.7
Other non-current liabilities and minority interests			(120.9	)				1,396.3					1,275.4
Capital structure			1,670.8			2,022.1		2,022.1		(4,044.2	)		1,670.8

Total liabilities and share owners' equity		$	3,802.6		$	2,022.1	$	9,788.8	$	(5,744.2	)	$	9,869.3

		March 31, 2002
		Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Balance Sheet
Current assets:
	Accounts receivable	$	—		$	—	$	774.2	$	—		$	774.2
	Inventories							897.6					897.6
	Other current assets		77.0			—		289.2		—			366.2

Total current assets			77.0			—		1,961.0		—			2,038.0
Investments in and advances to subsidiaries			3,554.8			1,854.8				(5,409.6	)		—
Goodwill								2,564.2					2,564.2
Other non-current assets			37.0					1,820.2					1,857.2

Total other assets			3,591.8			1,854.8		4,384.4		(5,409.6	)		4,421.4
Property, plant and equipment, net								3,238.6					3,238.6

Total assets		$	3,668.8		$	1,854.8	$	9,584.0	$	(5,409.6	)	$	9,698.0

Current liabilities:
	Accounts payable and accrued liabilities	$	—		$	—	$	940.1	$	—		$	940.1
	Current portion of asbestos liability		220.0										220.0
	Short-term loans and long-term debt due within one year							86.4					86.4

Total current liabilities			220.0			—		1,026.5		—			1,246.5
Long-term debt			1,700.0					5,344.7		(1,700.0	)		5,344.7
Asbestos-related liabilities			492.5										492.5
Other non-current liabilities and minority interests			(159.4	)				1,358.0					1,198.6
Capital structure			1,415.7			1,854.8		1,854.8		(3,709.6	)		1,415.7

Total liabilities and share owners' equity		$	3,668.8		$	1,854.8	$	9,584.0	$	(5,409.6	)	$	9,698.0

		Three months ended March 31, 2003
		Parent		Guarantor Subsidiaries		Non- Guarantor Subsidiaries		Eliminations			Consolidated
Results of Operations
Net sales		$	—	$	—	$	1,386.4	$	—		$	1,386.4
External interest income							7.8					7.8
Intercompany interest income			33.1		33.1				(66.2	)		—
Equity earnings from subsidiaries			34.4		34.4				(68.8	)		—
Other equity earnings							5.8					5.8
Other revenue							11.9					11.9

	Total revenue		67.5		67.5		1,411.9		(135.0	)		1,411.9
Manufacturing, shipping, and delivery							1,140.1					1,140.1
Research, engineering, selling, administrative, and other							106.3					106.3
External interest expense			33.1				77.9					111.0
Intercompany interest expense					33.1		33.1		(66.2	)		—

	Total costs and expense		33.1		33.1		1,357.4		(66.2	)		1,357.4
Earnings before items below			34.4		34.4		54.5		(68.8	)		54.5
Provision for income taxes							17.2					17.2
Minority share owners' interests in earnings of subsidiaries							2.9					2.9

Net income		$	34.4	$	34.4	$	34.4	$	(68.8	)	$	34.4

		Three months ended March 31, 2002
		Parent			Guarantor Subsidiaries			Non- Guarantor Subsidiaries			Eliminations			Consolidated
Results of Operations
Net sales		$	—		$	—		$	1,310.9		$	—		$	1,310.9
External interest income									5.3						5.3
Intercompany interest income			44.0			44.0						(88.0	)		—
Equity earnings from subsidiaries			59.3			(396.5	)					337.2			—
Other equity earnings									6.0						6.0
Other revenue									16.1						16.1

	Total revenue		103.3			(352.5	)		1,338.3			249.2			1,338.3
Manufacturing, shipping, and delivery									1,019.8						1,019.8
Research, engineering, selling, administrative, and other			475.0						108.4						583.4
External interest expense			44.0						67.8						111.8
Intercompany interest expense						44.0			44.0			(88.0	)		—

	Total costs and expense		519.0			44.0			1,240.0			(88.0	)		1,715.0
Earnings (loss) before items below			(415.7	)		(396.5	)		98.3			337.2			(376.7	)
Provision (credit) for income taxes			(170.4	)					34.5						(135.9	)
Minority share owners' interests in earnings of subsidiaries									4.5						4.5

Earnings (loss) before cumulative effect of accounting change			(245.3	)		(396.5	)		59.3			337.2			(245.3	)
Cumulative effect of accounting change			(460.0	)					(460.0	)		460.0			(460.0	)

Net loss		$	(705.3	)	$	(396.5	)	$	(400.7	)	$	797.2		$	(705.3	)

	Three months ended March 31, 2003
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations		Consolidated
Cash Flows
Cash used in operating activities	$	(50.4	)	$	—	$	(14.5	)	$	—	$	(64.9	)
Cash used in investing activities							(111.6	)				(111.6	)
Cash provided by financing activities		50.4					126.8					177.2
Effect of exchange rate change on cash							1.4					1.4

Net change in cash		—			—		2.1			—		2.1
Cash at beginning of period							126.4					126.4

Cash at end of period	$	—		$	—	$	128.5		$	—	$	128.5

	Three months ended March 31, 2002
	Parent			Guarantor Subsidiaries		Non- Guarantor Subsidiaries			Eliminations		Consolidated
Cash Flows
Cash provided by (used in) operating activities	$	(61.3	)	$	—	$	97.7		$	—	$	36.4
Cash provided by (used in) investing activities							(97.7	)				(97.7	)
Cash provided by (used in) financing activities		61.3					(42.0	)				19.3
Effect of exchange rate change on cash							1.6					1.6

Net change in cash		—			—		(40.4	)		—		(40.4	)
Cash at beginning of period							155.6					155.6

Cash at end of period	$	—		$	—	$	115.2		$	—	$	115.2

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Results of Operations—First Quarter 2003 compared with First Quarter 2002

Net Sales

The Company's net sales by segment (in millions of dollars) for the first quarters of 2003 and 2002 are presented in the following table. For further information, see Segment Information included in Note 8 to the Condensed Consolidated Financial Statements.

	2003		2002
Glass Containers	$	930.6	$	870.1
Plastics Packaging		455.8		440.8

Segment and consolidated net sales	$	1,386.4	$	1,310.9

Consolidated net sales for the first quarter of 2003 increased $75.5 million, or 5.8%, to $1,386.4 million from $1,310.9 million in the first quarter of 2002.

Net sales of the Glass Containers segment increased $60.5 million, or 7.0%, over the first quarter of 2002. In North America, a $13.7 million decrease in sales was primarily attributed to lower unit shipments. Severe winter weather conditions caused lower demand, principally for beer containers. The combined U.S. dollar sales of the segment's affiliates outside of North America increased $74.2 million, or 17.6% over the first quarter of 2002. The increase was partially attributed to an 11% increase in unit shipments and higher prices in the European businesses as well as a 9% increase in shipments in the Asia Pacific region. These increases were partially offset by overall decreased sales in South America, principally resulting from the effects of a national strike in Venezuela that began in early December 2002. The strike caused energy supply curtailments that forced the Company to idle its two plants in the country, adversely affecting net sales in the first quarter of 2003 by approximately $20 million. In addition, the effects of changing foreign currency exchange rates increased reported U.S. dollar sales of the segment's affiliates in Europe and the Asia Pacific region by approximately $61 million and decreased reported U.S. dollar sales of the segment's affiliates in South America by approximately $15 million.

Net sales of the Plastics Packaging segment increased $15.0 million, or 3.4%, over the first quarter of 2002. Unit shipments increased by approximately 8.0% overall, led by increased shipments of plastic containers for food, health and personal care, juices, water and prescription packaging, and closures for beverages and food. These increases were offset by lower selling prices for certain of the segment's plastic products. The effects of higher resin cost pass-throughs increased sales in the first quarter of 2003 by approximately $16 million compared to the first quarter of 2002.

EBIT

The Company's Segment EBIT results (in millions of dollars) for the first quarter of 2003 and 2002 are presented in the following table. For further information, see Segment Information included in Note 8 to the Condensed Consolidated Financial Statements.

		2003			2002
Glass Containers		$	126.6		$	151.1
Plastics Packaging			50.9			74.8

Product EBIT			177.5			225.9
	Eliminations and other retained items		(19.8	)		(21.1	)

Consolidated Segment EBIT		$	157.7		$	204.8

Total product EBIT for the first quarter of 2003 decreased $48.4 million, or 21.4%, to $177.5 million from the first quarter of 2002 product EBIT of $225.9 million.

EBIT of the Glass Containers segment for the first quarter of 2003 decreased $24.5 million to $126.6 million, compared to EBIT of $151.1 million in the first quarter of 2002. In North America, EBIT for the first quarter of 2003 decreased $37.2 million from the first quarter of 2002. The decrease resulted from higher energy costs of $11.2 million, lower pension income of approximately $10 million and lower unit shipments, particularly beer containers, resulting primarily from severe winter weather conditions, partially offset by an overall improvement in unit pricing compared to the first quarter of 2002. The combined U.S. dollar EBIT of the segment's affiliates outside North America increased $12.7 million over the first quarter of 2002. The increase was partially attributed to increased unit shipments, improved productivity, and higher prices in the European businesses as well as increased shipments in the Asia Pacific region. These increases were partially offset by increased energy costs of approximately $11 million in Europe and the Asia Pacific region and overall decreased sales in South America principally resulting from the effects of a national strike in Venezuela that began in early December 2002. The strike caused energy supply curtailments that forced the Company to idle its two plants in the country, adversely affecting EBIT in the first quarter of 2003 by approximately $10 million. In addition, the effects of changing foreign currency exchange rates increased reported U.S. dollar EBIT of the segment's affiliates in Europe and the Asia Pacific region by approximately $9 million and decreased reported U.S. dollar EBIT of the segment's affiliates in South America by approximately $2 million.

EBIT of the Plastics Packaging segment for the first quarter of 2003 decreased $23.9 million, or 32.0%, to $50.9 million compared to EBIT of $74.8 million in the first quarter of 2002. Unit shipments increased approximately 8% overall, led by plastic containers for food, health and personal care, juices and water, and prescription packaging, and closures for beverages and food. However, the change in product mix and lower selling prices for certain of the segment's plastic products more than offset the effects of increased shipments, reducing EBIT by $9.8 million compared to the first quarter of 2002. Other factors that unfavorably affected EBIT in the first quarter of 2003 compared to the first quarter of 2002 were: (1) reduced EBIT of $7.5 million for the segment's advanced technology systems business, as a major customer discontinued production in the U.S. and relocated that production to Singapore; (2) increased manufacturing costs of $2.7 million from the start-up of new products in the segment's Closure and Specialty business; and (3) lower pension income of approximately $2 million. The Plastics Packaging segment operates in a number of highly competitive markets and has incurred significant pricing pressure in some product lines which the Company expects to partially offset with increased unit volume, improved productivity and reduced costs.

Eliminations and other retained items for the first quarter of 2003 increased $1.3 million over the first quarter of 2002.

Consolidated EBIT for the three months ended March 31, 2002, included a charge for asbestos-related costs of $475.0 million discussed further below.

Interest Expense

Interest expense decreased to $111.0 million in the first quarter of 2003 from $111.8 million in the first quarter of 2002. Interest expense for the first quarter of 2002 included $10.9 million which was reclassified from extraordinary items as required by FAS No. 145. For further information, see Note 9 to the Condensed Consolidated Financial Statements. Exclusive of this reclassification, interest expense in the first quarter of 2003 was $10.1 million higher than in the first quarter of 2002. The higher interest expense in 2003 was mainly due to the issuance during 2002 of $1.625 billion of fixed rate Senior Secured Notes. The proceeds from the Senior Secured Notes were used to repay lower cost, variable rate debt borrowed under the Company's Secured Credit Agreement. Lower interest rates in 2003 on the Company's remaining variable rate debt partially offset the increase.

Provision for Income Taxes

The Company's effective tax rate in the first quarter of 2003 was 31.6%. Excluding the effects of the first quarter 2002 asbestos-related charge, the Company's effective tax rate was 30.8% in the first quarter of 2002 and 29.8% for the full year 2002.

Minority Share Owners' Interest in Earnings of Subsidiaries

Minority share owners' interest in earnings of subsidiaries for the first quarter of 2003 was $2.9 million compared to $4.5 million for the first quarter of 2002. The decrease is attributable to lower net income for certain of the Company's subsidiaries, particularly in Venezuela where the effects of a national strike caused the Company to close its facilities during the first part of the quarter.

Net Earnings

For the first quarter of 2003, the Company recorded net earnings of $34.4 million compared to a net loss of $705.3 million for the first quarter of 2002. The following items were included in the net loss for the first quarter of 2002: (1) a $460.0 million charge from the cumulative effect of the change in method of accounting for goodwill; (2) a charge of $475.0 million ($308.8 million after tax) for future asbestos-related costs; and (3) additional charges to interest expense of $10.9 million ($6.7 million after tax) for the write-off of deferred finance fees related to the early extinguishment of debt which had been reported as an extraordinary item in 2002, but was reclassified to interest expense as required by FAS No. 145.

Asbestos-Related Charge

The asbestos-related charge of $475.0 million ($308.8 million after tax) recorded in the first quarter of 2002 represented an increase in the reserve for estimated future asbestos-related costs. Following the completion of a comprehensive review of its asbestos-related liabilities and costs in April 2002, the Company concluded that an increase in the reserve was required to provide for estimated indemnity payments and legal fees arising from asbestos personal injury lawsuits and claims expected to be filed in the next several years. The Company anticipates that cash flows from operations and other resources will be sufficient to meet all asbestos-related obligations.

A former business unit of the Company produced a minor amount of specialized high-temperature insulation material containing asbestos from 1948 until 1958, when the business was sold. In line with its limited involvement with an asbestos-containing product and its exit from that business 45 years ago, the Company will continue to work aggressively to minimize the number of incoming cases and will continue to limit payments to only those impaired claimants who were exposed to the Company's products and whose claims have merit under applicable state law. During the first quarter of 2003, the number of asbestos-related claims pending decreased slightly from the previously reported level of approximately 24,000 at December 31, 2002.

Capital Resources and Liquidity

The Company's total debt at March 31, 2003 was $5.56 billion, compared to $5.35 billion at December 31, 2002 and $5.43 billion at March 31, 2002.

During April 2001, certain of the Company's subsidiaries entered into the Secured Credit Agreement (the "Agreement") with a group of banks, which expires on March 31, 2004. The Agreement provides for a $2.45 billion ($3.0 billion initially) revolving credit facility.

At March 31, 2003, the Company had available credit totaling $2.450 billion under the Agreement, of which $297.5 million had not been utilized. Cash provided by (utilized in) operating activities was $(64.9) million for the first three months of 2003 compared to $36.4 million for the first three months of 2002. The decrease in cash provided by operations is due in part to an increase in accounts receivable as a result of increased sales in Europe and increased plastic product and machine sales domestically. The first quarter of 2003 also lacks the benefit of a significant collection of past due accounts receivable from the Canadian acquisition which were collected in the first quarter of 2002. Additional borrowings under the Agreement were necessary to fund these working capital requirements.

During May 2003, a subsidiary of the Company issued Senior Secured Notes totaling $450 million and Senior Notes totaling $450 million. The notes bear interest at 7.75% and 8.25%, respectively, and are due May 15, 2011 and May 15, 2013, respectively. Both series of notes are guaranteed by substantially all of the Company's domestic subsidiaries. In addition, the assets of substantially all of the Company's domestic subsidiaries are pledged as security for the Senior Secured Notes. The indenture for the 7.75% Senior Secured Notes has substantially the same restrictions as the 8.875% and 8.75% Senior Secured Notes. The indenture for the 8.25% Senior Notes contains similar restrictions. The issuing subsidiary will use the net proceeds from the notes of approximately $880 million to repurchase in a tender offer scheduled to expire on May 23, 2003, and/or otherwise repurchase, all $300 million of the Company's 7.85% Senior Notes due 2004 and permanently reduce the revolving credit facility under the Agreement.

The Senior Secured Notes totaling $2.075 billion and Senior Notes totaling $450 million that were issued during 2002 and 2003 were part of the Company's plan to improve financial flexibility by issuing long-term fixed rate debt. While this strategy extends the maturity of the Company's debt, the long-term fixed rate debt increases the cost of borrowing compared to the shorter term, variable rate debt. The Company expects that the effects of additional higher cost fixed rate debt and the proposed amended and restated credit agreement referred to above, will add approximately $48 million to interest expense for the full year of 2003 compared to the full year of 2002 before consideration of charges related to the early repayment of debt. The Company presently does not expect to issue additional notes, other than those discussed above, during 2003.

The Company anticipates that cash flow from its operations and from utilization of credit available under the Agreement and the proposed amended and restated agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short-term and long-term basis. The Company expects that its total asbestos-related payments in 2003 will be moderately lower than 2002. Based on the Company's expectations regarding future payments for 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.

Critical Accounting Estimates

The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis, including but not limited to those related to pension benefit plans, contingencies and litigation, and goodwill. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates. The impact and any associated risks related to estimates and assumptions are discussed within Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to Condensed Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company's reported and expected financial results.

The Company believes that accounting for pension benefit plans, contingencies and litigation, and goodwill involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Pension Benefit Plans Funded Status

Because of their historically well-funded status, the Company's principal defined benefit pension plans contributed pretax credits to earnings of approximately $7.9 million for the first three months of 2003 and approximately $20.7 million for the first three months of 2002. The 2003 decrease in pretax pension credits is attributed to several factors discussed below.

The determination of pension obligations and the related pension credits involves significant estimates. The most significant estimates are the discount rate used to calculate the actuarial present value of benefit obligations and the expected long-term rate of return on assets used in calculating the pension credits for the year. The Company uses a discount rate based on yields of highly rated fixed income debt securities at the end of the year. At December 31, 2002, the weighted average discount rate for all plans was 6.52%. The Company uses an expected long-term rate of return that is based on the past performance of the various plans' assets and an estimate of the future performance of the assets. Declines in the stock market over the last few years have reduced the fair value of the Company's pension plan assets, which, in turn, has caused reduced credits to earnings. In 2003, the Company has reduced its assumed rate of return on pension assets to a weighted average expected long-term rate of approximately 8.75%, compared to 9.64% for the year ended December 31, 2002. The lower assumed rate, combined with a lower asset base, will cause the pretax credits to earnings to be substantially lower for the full year of 2003 as compared to 2002. The Company expects that these credits will be approximately $50 million, or 60%, lower for the full year of 2003 than for 2002.

Future effects on reported results of operations depend on economic conditions and investment performance. For example, a one-half percentage point change in the actuarial assumption regarding the expected return on assets would result in a change of approximately $15 million in pretax pension credits for the full year. In addition, changes in external factors, including the fair values of plan assets and the discount rate used to calculate plan liabilities, could result in possible future balance sheet recognition of additional minimum pension liabilities.

If the Accumulated Benefit Obligation ("ABO") of the Company's principal pension plans in the U.S. and Australia exceeds the fair value of their assets at the next measurement date of December 31, 2003, the Company will be required to write off most of its prepaid pension asset ($937.9 million at March 31, 2003) and record a liability equal to the excess of the ABO over the fair value of the assets. The noncash charge would resilt in a decrease in the Accumulated Other Compensation Income component of share owners' equity that would significantly reduce net worth.

Contingencies and Litigation

The Company believes that its ultimate asbestos-related contingent liability (i.e., its indemnity or other claim disposition costs plus related legal fees) cannot be estimated with certainty. The Company's ability to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the continued use of litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the growing number of co-defendants that have filed for bankruptcy. The Company believes that the bankruptcies of additional co-defendants have resulted in an acceleration of the presentation and disposition of a number of claims, which would otherwise have been presented and disposed of over the next several years. The Company continues to monitor trends which may affect its ultimate liability and continues to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company.

The Company expects to complete a comprehensive review of its asbestos-related liabilities and costs in connection with finalizing and reporting its results for 2003, and annually thereafter, unless significant changes in trends or new developments warrant an earlier review. If the results of this annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated liabilities, then the Company will record an appropriate charge to increase the accrual. The Company's estimates are based on a number of factors as described further in Note 7 to the Condensed Consolidated Financial Statements.

Goodwill

The Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment as of October 1 of each year. Goodwill impairment testing is performed using the business enterprise value ("BEV") of each reporting unit which is calculated as of a measurement date by determining the present value of debt-free, after tax future cash flows, discounted at the weighted average cost of capital of a hypothetical third-party buyer. This BEV is then compared to the book value of each reporting unit as of the measurement date to assess whether an impairment exists. The annual impairment testing performed as of October 1, 2002 indicated that there was no impairment of any of the reporting units of the Company.

If the Company's projected debt-free, after tax cash flows were substantially lower, or if the assumed weighted average cost of capital were substantially higher, the testing may have indicated an impairment of one or more reporting units and, as a result, the related goodwill would have been written down. However, based on the Company's testing as of October 1, 2002, modest changes in the projected cash flows or cost of capital would not create impairment in reporting units. For example, if projected debt-free, after tax cash flows were decreased by 5%, or alternatively if the weighted average cost of capital were increased by 5%, the resulting lower BEV's would still exceed the book value of each reporting unit and no impairment would exist. In the event the Company would be required to record a significant write down of goodwill, the charge would have a material adverse effect on reported results of operations and net worth.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

All borrowings under the April 2001 Secured Credit Agreement, including borrowings by foreign subsidiaries, are denominated in U.S. dollars. As described in Note 10 to the financial statements, certain amounts borrowed under the agreement by foreign subsidiaries have been swapped into the subsidiaries' functional currencies.

The Company's subsidiary borrowers intend to amend and restate the Agreement during the second quarter of 2003, to, among other things, extend the maturity through April 1, 2007. As of May 15, 2003, the Company had non-cancelable commitments to the proposed amended and restated Agreement in excess of the amount of borrowings outstanding at March 31, 2003. The Company expects that the proposed amended and restated credit agreement will be finalized during the second quarter of 2003.

The Senior Secured Notes totaling $2.075 billion and Senior Notes totaling $450 million that were issued during 2002 and 2003 were part of the Company's plan to improve financial flexibility by issuing long-term fixed rate debt. While this strategy extends the maturity of the Company's debt, the long-term fixed rate debt increases the cost of borrowing compared to the shorter term, variable rate debt. The Company expects that the effects of additional higher cost fixed rate debt and the proposed amended and restated credit agreement referred to above, will add approximately $48 million to interest expense for the full year of 2003 compared to the full year of 2002. The Company presently does not expect to issue additional notes, other than those discussed above, during 2003.

Forward Looking Statements

This document may contain "forward looking" statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Forward looking statements reflect the Company's current expectations and projections about future events 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) changes 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 disruptions in the supply chain, competitive pricing pressures, inflation or deflation, and changes in tax rates and laws, (4) consumer preferences for alternative forms of packaging, (5) fluctuations in raw material and labor costs, (6) availability of raw materials, (7) costs and availability of energy, (8) transportation costs, (9) consolidation among competitors and customers, (10) the ability of the Company to integrate operations of acquired businesses, (11) unanticipated expenditures with respect to environmental, safety and health laws, (12) the performance by customers of their obligations under purchase agreements, and (13) the timing and occurrence of events which are beyond the control of the Company, including events related to asbestos-related claims. 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.

Item 4. Controls and Procedures.

The Company maintains disclosure controls and procedures that are designed with the objective of providing reasonable assurance that the information required to be disclosed by the Company in reports that the Company files or submits under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to management of the Company, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the Company's disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the Company has investments in certain unconsolidated entities. As the Company does not control or manage these entities, its disclosure controls and procedures with respect to such entities are necessarily substantially more limited than those maintained by the Company with respect to its consolidated subsidiaries.

Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of management, including its principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective.

Since the date the Company completed its evaluation to the date of this report, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

In August 1998, the Company received a Notice of Violation from the United States Environmental Protection Agency regarding alleged opacity violations at its Oakland, California glass container plant from the period of 1994 through 1997. Certain furnaces at the plant are equipped with monitors that continuously monitor opacity. During this period, these furnaces had occasional upset and breakdown conditions that caused opacity excursions that were reported to the State of California as required. In each instance an opacity violation notice was given by the State of California and in each case the matter was settled. This action by the U.S. EPA involves the same incidents that were resolved with the State of California. The Company has reached a settlement with the U.S. EPA under which it paid monetary penalties of $200,000, without requiring any additional permits or abatement equipment.

For further information on legal proceedings, see Note 7 to the Condensed Consolidated Financial Statements, "Contingencies," that is included in Part I of this Report and is incorporated herein by reference.

Item 6. Exhibits and Reports on Form 8-K.

(a): Exhibits:

Exhibit 4.1		Fourth Amendment to Secured Credit Agreement, dated April 16, 2003
Exhibit 4.2		Fourth Supplemental Indenture, dated as of May 6, 2003, among Owens-Brockway Glass Container, Inc., the Guarantors (as defined therein) and U.S. Bank National Association, as Trustee
Exhibit 4.3		Indenture, dated as of May 6, 2003, among Owens-Brockway Glass Container, Inc., the Guarantors (as defined therein) and U.S. Bank National Association, as Trustee
Exhibit 10.1		Third Amendment to Amended and Restated Owens-Illinois Supplemental Retirement Benefit Plan
Exhibit 12		Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
Exhibit 99.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
Exhibit 99.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350

(b): Reports on Form 8-K:

On March 28, 2003, the Registrant filed a Form 8-K which included a press release dated March 27, 2003 announcing the election of Thomas L. Young to the position of chief financial officer.

On March 31, 2003, the Registrant filed a Form 8-K which included a press release dated March 28, 2003 announcing revised earnings projections for the full year 2003.

*: This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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 15, 2003		By:	/s/ EDWARD C. WHITE Edward C. White, Vice President and Controller (Principal Accounting Officer)

CERTIFICATIONS

I, Joseph H. Lemieux, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Owens-Illinois, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: May 15, 2003		/s/ JOSEPH H. LEMIEUX
		Joseph H. Lemieux Chairman and Chief Executive Officer

CERTIFICATIONS

I, Thomas L. Young, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Owens-Illinois, Inc.;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors:

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

Date: May 15, 2003

/s/ THOMAS L. YOUNG

Thomas L. Young
Executive Vice President and Chief Financial Officer

INDEX TO EXHIBITS

Exhibits
4.1		Fourth Amendment to Secured Credit Agreement, dated April 16, 2003
4.2		Fourth Supplemental Indenture, dated as of May 6, 2003, among Owmns-Brockway Glass Container, Inc., the Guarantors (as defined therein) and U.S. Bank National Association, as Trustee
4.3		Indenture, dated as of May 6, 2003, among Owens-Brockway Glass Container, Inc., the Guarantors (as defined therein) and U.S. Bank National Association, as Trustee
10.1		Third Amendment to Amended and Restated Owens-Illinois Supplemental Retirement Third Amendment to Amended and Restated Owens-Illinois Supplemental Retirement Benefit Plan
12		Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends
99.1*		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350
99.2*		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350

*: This exhibit shall not be deemed "filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.

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Part I—FINANCIAL INFORMATION

Item 1. Financial Statements.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Item 3. Quantitative and Qualitative Disclosure About Market Risk.

Item 4. Controls and Procedures.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Item 6. Exhibits and Reports on Form 8-K.

SIGNATURES