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
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(Address of principal executive offices) (Zip Code)
419-247-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Owens-Illinois, Inc. $.01 par value common stock - 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
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
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
5
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
