UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended September 30, 2001
or
( ) Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Owens-Illinois, Inc.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 1-9576 22-2781933
------------------ ------------------ ----------------------
(State or other (Commission (IRS Employer
jurisdiction of File No.) Identification No.)
incorporation or
organization)
One SeaGate, Toledo, Ohio 43666
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
419-247-5000
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Owens-Illinois, Inc. $.01 par value common stock - 146,482,348 shares
at October 31, 2001.
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, 2000.
2
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 2001 and 2000
(Millions of dollars, except share and per share amounts)
2001 2000
------------- -------------
Revenues:
Net sales $ 1,360.2 $ 1,430.3
Royalties and net technical assistance 6.1 6.0
Equity earnings 4.8 6.3
Interest 6.3 8.4
Other 6.4 41.3
------------- -------------
1,383.8 1,492.3
Costs and expenses:
Manufacturing, shipping, and delivery 1,036.9 1,126.4
Research and development 11.1 13.1
Engineering 6.8 5.4
Selling and administrative 69.2 73.6
Interest 105.1 124.2
Other 31.1 843.7
------------- -------------
1,260.2 2,186.4
------------- -------------
Earnings (loss) before items below 123.6 (694.1)
Provision (credit) for income taxes 47.6 (247.4)
Minority share owners' interests in earnings of
subsidiaries 6.6 2.5
------------- -------------
Net earnings (loss) $ 69.4 $ (449.2)
============= =============
Basic net earnings (loss) per share of common stock $ 0.44 $ (3.12)
============= =============
Weighted average shares outstanding (thousands) 146,147 145,716
============= =============
Diluted net earnings (loss) per share of common stock $ 0.44 $ (3.12)
============= =============
Weighted diluted average shares (thousands) 146,228 145,716
============= =============
See accompanying notes.
3
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 2001 and 2000
(Millions of dollars, except share and per share amounts)
2001 2000
------------- -------------
Revenues:
Net sales $ 4,056.1 $ 4,225.1
Royalties and net technical assistance 19.0 19.5
Equity earnings 13.7 14.6
Interest 21.2 23.4
Other 531.6 138.9
------------- -------------
4,641.6 4,421.5
Costs and expenses:
Manufacturing, shipping, and delivery 3,147.9 3,279.9
Research and development 31.5 36.7
Engineering 21.5 24.9
Selling and administrative 249.1 214.5
Interest 335.5 360.8
Other 209.5 944.4
------------- -------------
3,995.0 4,861.2
------------- -------------
Earnings (loss) before items below 646.6 (439.7)
Provision (credit) for income taxes 267.9 (146.6)
Minority share owners' interests in earnings of
subsidiaries 12.8 8.9
------------- -------------
Earnings (loss) before extraordinary item 365.9 (302.0)
Extraordinary charge from early extinguishment of debt,
net of applicable income taxes (4.1)
------------- -------------
Net earnings (loss) $ 361.8 $ (302.0)
============= =============
Basic net earnings (loss) per share of common stock:
Earnings (loss) before extraordinary item $ 2.41 $ (2.18)
Extraordinary charge (0.03)
------------- -------------
Net earnings (loss) $ 2.38 $ (2.18)
============= =============
Weighted average shares outstanding (thousands) 145,225 146,245
============= =============
Diluted net earnings (loss) per share of common stock:
Earnings (loss) before extraordinary item $ 2.38 $ (2.18)
Extraordinary charge (0.03)
------------- -------------
Net earnings (loss) $ 2.35 $ (2.18)
============= =============
Weighted diluted average shares (thousands) 154,036 146,245
============= =============
See accompanying notes.
4
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001, December 31, 2000, and September 30, 2000
(Millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
2001 2000 2000
---------- ----------- -----------
Assets
Current assets:
Cash, including time deposits $ 174.3 $ 229.7 $ 163.6
Short-term investments, at cost which
approximates market 16.6 19.7 31.7
Receivables, less allowances for losses and
discounts ($54.1 at September 30, 2001, $69.9
at December 31, 2000, and $66.3 at
September 30, 2000) 870.9 770.9 912.6
Inventories 792.9 862.4 862.6
Prepaid expenses 201.8 199.0 138.6
---------- ----------- -----------
Total current assets 2,056.5 2,081.7 2,109.1
Investments and other assets:
Equity investments 177.6 181.4 190.7
Repair parts inventories 204.8 232.0 244.4
Prepaid pension 851.8 770.9 751.7
Insurance receivable for
asbestos-related costs 42.5 200.7 203.3
Deposits, receivables, and other assets 584.2 490.6 492.8
Excess of purchase cost over net assets
acquired, net of accumulated
amortization ($666.9 at September 30,
2001, $597.7 at December 31, 2000,
and $574.5 at September 30, 2000) 2,919.3 3,101.0 3,129.9
---------- ----------- -----------
Total other assets 4,780.2 4,976.6 5,012.8
Property, plant, and equipment, at cost 5,554.2 5,662.4 5,606.2
Less accumulated depreciation 2,464.5 2,377.5 2,319.5
---------- ----------- -----------
Net property, plant, and equipment 3,089.7 3,284.9 3,286.7
---------- ----------- -----------
Total assets $ 9,926.4 $ 10,343.2 $ 10,408.6
========== =========== ===========
5
CONDENSED CONSOLIDATED BALANCE SHEETS - continued
Sept. 30, Dec. 31, Sept. 30,
2001 2000 2000
---------- ----------- -----------
Liabilities and Share Owners' Equity
Current liabilities:
Short-term loans and long-term debt
due within one year $ 108.6 $ 120.0 $ 139.6
Current portion of asbestos-related liabilities 220.0 180.0 180.0
Accounts payable and other liabilities 905.8 1,018.0 979.7
---------- ----------- -----------
Total current liabilities 1,234.4 1,318.0 1,299.3
Long-term debt 5,203.9 5,729.8 5,732.3
Deferred taxes 443.5 218.2 186.6
Nonpension postretirement benefits 274.9 296.1 299.5
Other liabilities 352.1 360.5 417.7
Asbestos-related liabilities 137.9 364.7 426.6
Commitments and contingencies
Minority share owners' interests 151.3 172.9 180.4
Share owners' equity:
Convertible preferred stock, par value
$.01 per share, liquidation preference
$50 per share, 9,050,000 shares
authorized, issued and outstanding 452.5 452.5 452.5
Exchangeable preferred stock 3.4 3.4
Common stock, par value $.01 per share
250,000,000 shares authorized, 159,415,245 shares
issued and outstanding, less 12,932,897 treasury
shares at September 30, 2001 (156,973,143 issued
and outstanding, less 12,018,700 treasury shares at
December 31, 2000; and 156,969,643 issued and
outstanding, less 10,937,700 treasury shares
at September 30, 2000) 1.6 1.6 1.6
Capital in excess of par value 2,216.9 2,205.1 2,204.7
Treasury stock, at cost (248.0) (242.8) (237.9)
Retained earnings (deficit) 315.2 (30.4) (34.0)
Accumulated other comprehensive income (609.8) (506.4) (524.1)
---------- ----------- -----------
Total share owners' equity 2,128.4 1,883.0 1,866.2
---------- ----------- -----------
Total liabilities and share owners' equity $ 9,926.4 $ 10,343.2 $ 10,408.6
========== =========== ===========
See accompanying notes.
6
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 2001 and 2000
(Millions of dollars)
2001 2000
---------- --------
Cash flows from operating activities:
Earnings (loss) before extraordinary items $ 365.9 $ (302.0)
Non-cash charges (credits):
Depreciation 299.1 312.1
Amortization of deferred costs 101.2 106.8
Future asbestos-related costs 550.0
Restructuring costs and write-offs of certain assets 122.0 248.3
Gains on asset sales (470.3)
Deferred tax provision (credit) 210.3 (213.6)
Other (86.2) (112.7)
Change in non-current operating assets (12.9) (17.8)
Asbestos-related payments (186.8) (119.6)
Asbestos-related insurance proceeds 158.2 2.0
Reduction of non-current liabilities 4.8 (3.0)
Change in components of working capital (233.5) (164.1)
---------- --------
Cash provided by operating activities 271.8 286.4
Cash flows from investing activities:
Additions to property, plant, and equipment (344.1) (342.0)
Acquisitions, net of cash acquired (31.6) (78.2)
Net cash proceeds from divestitures 594.9 40.2
---------- --------
Cash provided by (utilized in) investing activities 219.2 (380.0)
Cash flows from financing activities:
Additions to long-term debt 3,726.0 519.7
Repayments of long-term debt (4,158.5) (455.6)
Payment of finance fees (62.1)
Payment of convertible preferred stock dividends (16.1) (16.1)
Treasury shares repurchased (5.2) (12.3)
Decrease in short-term loans (2.6) (23.4)
Issuance of common stock and other 1.1 1.3
---------- --------
Cash provided by (utilized in) financing activities (517.4) 13.6
Effect of exchange rate fluctuations on cash (29.0) (13.5)
---------- --------
Decrease in cash (55.4) (93.5)
Cash at beginning of period 229.7 257.1
---------- --------
Cash at end of period $ 174.3 $ 163.6
========== ========
See accompanying notes.
7
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
September 30,
----------------------------------------
2001 2000
--------------- ----------------
Numerator:
Net earnings (loss) $ 69.4 $ (449.2)
Preferred stock dividends:
Convertible (5.4) (5.4)
Exchangeable (0.1)
---------------------------------------------------------------------------------------------
Numerator for basic earnings (loss)
per share -- income (loss) available
to common share owners $ 64.0 $ (454.7)
=============================================================================================
Denominator:
Denominator for basis earnings (loss)
per share -- weighted average
shares outstanding 141,146,848 145,715,930
Effect of dilutive securities:
Stock options 81,198
---------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss)
per share -- weighted average
shares outstanding 141,228,046 145,715,930
=============================================================================================
Basic earnings (loss) per share $ 0.44 $ (3.12)
=============================================================================================
Diluted earnings (loss) per share $ 0.44 $ (3.12)
=============================================================================================
The Convertible preferred stock was not included in the computation of three
months ended September 30, 2001 diluted earnings per share since the result
would have been antidilutive. Options to purchase 7,783,729 weighted average
shares of common stock which were outstanding during the three months ended
September 30, 2001 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 September 30, 2000, diluted earnings per share of
common stock are equal to basic earnings per share of common stock due to the
net loss.
8
---------------------------------------------------------------------------------------------------------------------
Nine months ended
September 30,
-------------------------------------
2001 2000
--------------- ----------------
Numerator:
Earnings (loss) before extraordinary items $ 365.9 $ (302.0)
Preferred stock dividends:
Convertible (16.1) (16.1)
Exchangeable (0.2)
---------------------------------------------------------------------------------------------------------------------
Numerator for basic earnings (loss) per share -
income (loss) available to common share owners 349.8 (318.3)
Effect of dilutive securities -
convertible preferred stock dividends 16.1
---------------------------------------------------------------------------------------------------------------------
Numerator for diluted earnings (loss) per share -
income (loss) available to common share owners
after assumed exchanges of preferred stock
for common stock $ 365.9 $ (318.3)
=====================================================================================================================
Denominator:
Denominator for basic earnings (loss) per share -
weighted average shares outstanding 145,224,536 146,245,456
Effect of dilutive securities:
Stock options 215,347
Exchangeable preferred stock 6,933
Convertible preferred stock 8,589,355
---------------------------------------------------------------------------------------------------------------------
Dilutive potential common shares 8,811,635
---------------------------------------------------------------------------------------------------------------------
Denominator for diluted earnings (loss) per share -
adjusted weighted average shares and
assumed exchanges of preferred stock
for common stock 154,036,171 146,245,456
=====================================================================================================================
Basic earnings (loss) per share $ 2.41 $ (2.18)
=====================================================================================================================
Diluted earnings (loss) per share $ 2.38 $ (2.18)
=====================================================================================================================
Options to purchase 7,785,507 weighted average shares of common stock which were
outstanding during the nine months ended September 30, 2001 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 nine months ended September 30, 2000, diluted earnings per share of
common stock are equal to basic earnings per share of common stock due to the
net loss.
9
2. INVENTORIES
Major classes of inventory are as follows (certain amounts from prior year have
been reclassified to conform to current year presentation):
Sept. 30, Dec. 31, Sept. 30,
2001 2000 2000
-------- -------- --------
Finished goods $ 596.4 $ 651.9 $ 645.4
Work in process 8.1 11.7 12.1
Raw materials 120.0 130.6 124.8
Operating supplies 68.4 68.2 80.3
-------- -------- --------
$ 792.9 $ 862.4 $ 862.6
======== ======== ========
10
3. LONG-TERM DEBT
The following table summarizes the long-term debt of the Company:
--------------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
2001 2000 2000
---------- ---------- ----------
Secured Credit Agreement:
Revolving Credit Facility $ 2,288.8
Term Loan 1,045.0
Second Amended and Restated Credit Agreement:
Revolving Credit Facility:
Revolving Loans $ 2,857.0 $ 2,814.3
Offshore Loans:
Australian Dolllars
1.39 billion at December 31,
2000; 1.39 billion at
September 30, 2000 775.3 802.3
British Pounds
125.0 million at December 31,
2000; 132.0 million at
September 30, 2000 186.8 191.3
Italian Lira
18.0 billion at December 31,
2000; 32.0 billion at
September 30, 2000 8.7 14.7
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 199.8 232.8 236.5
--------------------------------------------------------------------------------------
5,233.6 5,760.6 5,759.1
Less amounts due within one year 29.7 30.8 26.8
--------------------------------------------------------------------------------------
Long-term debt $ 5,203.9 $ 5,729.8 $ 5,732.3
======================================================================================
In April 2001, certain of the Company's subsidiaries (the "Borrowers") entered
into the Secured Credit Agreement (the "Agreement') with a group of banks, which
expires on March 31, 2004. The Agreement provides for a $3.0 billion revolving
credit facility (the "Revolving Credit Facility")
11
and a $1.5 billion term loan (the "Term Loan"). The Agreement includes an
Overdraft Account Facility providing for aggregate borrowings up to $50 million
which 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
borrowings under the Revolving Credit Facility. At September 30, 2001, the
Company had unused credit of $621.4 million available under the Secured Credit
Agreement.
Prior to April 2001, the Company's significant bank financing was provided under
the April 1998 Second Amended and Restated Credit Agreement. The Second Amended
and Restated Credit Agreement provided for a $4.5 billion revolving credit
facility, which included a $1.75 billion fronted offshore loan revolving
facility denominated in certain foreign currencies, subject to certain
sublimits, available to certain of the Company's foreign subsidiaries.
Borrowings under the Secured Credit Agreement were used to repay all amounts
outstanding under, and terminate, the Second Amended and Restated Credit
Agreement.
The interest rate on borrowings under the Revolving Credit Facility is, at the
Borrower's option, the Base Rate or a reserve adjusted Eurodollar rate. The
interest rate on borrowings under the Revolving Credit Facility also includes a
margin linked to the Company's Consolidated Leverage Ratio, as defined in the
Agreement. The margin is limited to ranges of 1.75% to 2.00% for Eurodollar
loans and .75% to 1.00% for Base Rate loans. The interest rate on Overdraft
Account loans is the Base Rate minus .50%. The weighted average interest rate on
borrowings outstanding under the Revolving Credit Facility at September 30, 2001
was 5.19%. While no compensating balances are required by the Agreement, the
Borrowers must pay a facility fee on the Revolving Credit Facility commitments
of .50%.
The interest rate on borrowings under the Term Loan is, at the Borrowers'
option, the Base Rate or a reserve adjusted Eurodollar rate. The interest rate
on borrowings under the Term Loan also includes a margin of 2.50% for Eurodollar
loans and 1.50% for Base Rate loans. The weighted average interest rate on
borrowings outstanding under the Term Loan at September 30, 2001 was 5.15%.
Borrowings under the Agreement are secured by substantially all of the assets of
the Company's domestic subsidiaries and certain foreign subsidiaries. Borrowings
are also secured by a pledge of intercompany debt and equity in most of the
Company's domestic subsidiaries and certain stock of certain foreign
subsidiaries.
Under the terms of the Agreement, payments for redemption of shares of the
Company's common stock are subject to certain limitations. Dividend payments
with respect to the Company's Preferred or Common Stock may be impacted by
certain covenants. 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.
During the second quarter of 2001, the Company sought and received consent from
the holders of a majority of the principal amount of each of its six series of
senior notes and debentures to amend the indenture governing those securities.
The amendments implement a previously announced offer by the Company and two of
its principal subsidiaries to secure the Company's obligations under the
indentures and the securities with a second lien on the intercompany debt and
capital stock held by the two principal subsidiaries that own its glass
container and plastics packaging businesses. In addition, the amendments also
implement a previously announced offer by the two principal subsidiaries to
guarantee the senior notes and debentures on a subordinated basis.
12
4. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
The following presents condensed consolidating financial information for the
Company, segregating: (1) Owens-Illinois, Inc. which issued the 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
eliminating entries eliminate investments in subsidiaries and inter-company
balances and transactions.
The following unaudited information presents consolidating statements of
operations, statements of cash flows, and balance sheets for the periods and as
of the dates indicated.
13
September 30, 2001
-------------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
Balance Sheet
--------------------------
Current assets:
Accounts receivable $ -- $ -- $ 870.9 $ -- $ 870.9
Inventories 792.9 792.9
Other current
assets 83.2 309.5 392.7
---------- ---------- ---------- ---------- ----------
Total current assets 83.2 -- 1,973.3 -- 2,056.5
Investments in and ad-
vances to subsidiaries 4,055.3 4,055.3 -- (8,110.6) --
Goodwill 2,919.3 2,919.3
Other non-current assets 59.1 1,801.8 1,860.9
---------- ---------- ---------- ---------- ----------
Total other assets 4,114.4 4,055.3 4,721.1 (8,110.6) 4,780.2
Property, plant and
equipment, net 3,089.7 3,089.7
---------- ---------- ---------- ---------- ----------
Total assets $ 4,197.6 $ 4,055.3 $ 9,784.1 $ (8,110.6) $ 9,926.4
========== ========== ========== ========== ==========
Current liabilities :
Accounts payable and
accrued liabilities $ 47.4 $ -- $ 858.4 $ -- $ 905.8
Current portion of
asbestos liability 220.0 220.0
Other current liabilities 108.6 108.6
---------- ---------- ---------- ---------- ----------
Total current liabilities 267.4 -- 967.0 -- 1,234.4
Long-term debt 1,700.0 3,503.9 5,203.9
Asbestos-related liabilities 137.9 137.9
Other non-current
liabilities (36.1) 1,257.9 1,221.8
Investment by and ad-
vances from parent 4,055.3 4,055.3 (8,110.6) --
Share owners' equity 2,128.4 2,128.4
---------- ---------- ---------- ---------- ----------
Total liabilities and
share owners' equity $ 4,197.6 $ 4,055.3 $ 9,784.1 $ (8,110.6) $ 9,926.4
========== ========== ========== ========== ==========
14
December 31, 2000
----------------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
Balance Sheet
------------------------
Current assets:
Accounts receivable $ -- $ -- $ 770.9 $ -- $ 770.9
Inventories 862.4 862.4
Other current
assets 68.0 380.4 448.4
---------- ---------- ----------- ----------- -----------
Total current assets 68.0 -- 2,013.7 -- 2,081.7
Investments in and ad-
vances to subsidiaries 6,651.9 6,651.9 -- (13,303.8) --
Goodwill 3,101.0 3,101.0
Other non-current assets 226.7 1,648.9 1,875.6
---------- ---------- ----------- ----------- -----------
Total other assets 6,878.6 6,651.9 4,749.9 (13,303.8) 4,976.6
Property, plant and
equipment, net 3,284.9 3,284.9
---------- ---------- ----------- ----------- -----------
Total assets $ 6,946.6 $ 6,651.9 $ 10,048.5 $ (13,303.8) $ 10,343.2
========== ========== =========== =========== ===========
Current liabilities :
Accounts payable and
accrued liabilities $ 23.9 $ -- $ 994.1 $ -- $ 1,018.0
Current portion of
asbestos liability 180.0 180.0
Other current liabilities 120.0 120.0
---------- ---------- ----------- ----------- -----------
Total current liabilities 203.9 -- 1,114.1 -- 1,318.0
Long-term debt 4,557.0 1,172.8 5,729.8
Asbestos-related liabilities 364.7 364.7
Other non-current
liabilities (62.0) 1,109.7 1,047.7
Investment by and ad-
vances from parent 6,651.9 6,651.9 (13,303.8) --
Share owners' equity 1,883.0 1,883.0
---------- ---------- ----------- ----------- -----------
Total liabilities and
share owners' equity $ 6,946.6 $ 6,651.9 $ 10,048.5 $ (13,303.8) $ 10,343.2
========== ========== =========== =========== ===========
15
September 30, 2000
----------------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
---------- ------------ ------------ ------------ ------------
Balance Sheet
--------------------------
Current assets:
Accounts receivable $ -- $ -- $ 912.6 $ -- $ 912.6
Inventories 862.6 862.6
Other current
assets 68.0 265.9 333.9
---------- ---------- ----------- ----------- -----------
Total current assets 68.0 -- 2,041.1 -- 2,109.1
Investments in and ad-
vances to subsidiaries 6,649.1 6,649.1 -- (13,298.2) --
Goodwill 3,129.9 3,129.9
Other non-current assets 231.8 1,651.1 1,882.9
---------- ---------- ----------- ----------- -----------
Total other assets 6,880.9 6,649.1 4,781.0 (13,298.2) 5,012.8
Property, plant and
equipment, net 3,286.7 3,286.7
---------- ---------- ----------- ----------- -----------
Total assets $ 6,948.9 $ 6,649.1 $ 10,108.8 $ (13,298.2) $ 10,408.6
========== ========== =========== =========== ===========
Current liabilities :
Accounts payable and
accrued liabilities $ 55.5 $ -- $ 924.2 $ -- $ 979.7
Current portion of-
asbestos-liability 180.0 180.0
Other current liabilities 139.6 139.6
---------- ---------- ----------- ----------- -----------
Total current liabilities 235.5 -- 1,063.8 -- 1,299.3
Long-term debt 4,505.0 1,227.3 5,732.3
Asbestos-related liabilities 426.6 426.6
Other non-current
liabilities (84.4) 1,168.6 1,084.2
Investment by and ad-
vances from parent 6,649.1 6,649.1 (13,298.2) --
Share owners' equity 1,866.2 1,866.2
---------- ---------- ----------- ----------- -----------
Total liabilities and
share owners' equity $ 6,948.9 $ 6,649.1 $ 10,108.8 $ (13,298.2) $ 10,408.6
========== ========== =========== =========== ===========
16
Three Months Ended September 30, 2001
------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Results of Operations
------------------------------
Net sales $ -- $ -- $ 1,360.2 $ -- $ 1,360.2
Interest 33.3 78.3 6.3 (111.6) 6.3
Equity earnings 69.3 24.4 4.8 (93.7) 4.8
Other revenue 12.5 12.5
-------- -------- ---------- -------- ----------
Total revenue 102.6 102.7 1,383.8 (205.3) 1,383.8
Manufacturing, shipping,
and delivery 1,036.9 1,036.9
Other selling and
administrative costs 118.2 118.2
Interest expense 33.0 33.3 150.4 (111.6) 105.1
-------- -------- ---------- -------- ----------
Total costs and expense 33.0 33.3 1,305.5 (111.6) 1,260.2
Earnings before items below 69.6 69.4 78.3 (93.7) 123.6
Provision for income taxes 0.2 0.1 47.3 47.6
Minority share owners' interests
in earnings of subsidiaries 6.6 6.6
-------- -------- ---------- -------- ----------
Net income (loss) $ 69.4 $ 69.3 $ 24.4 $ (93.7) $ 69.4
======== ======== ========== ======== ==========
17
Three Months Ended September 30, 2000
----------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
Results of Operations
-----------------------------
Net sales $ -- $ -- $ 1,430.3 $ -- $ 1,430.3
Interest 88.2 149.5 8.4 (237.7) 8.4
Equity earnings (109.1) (164.4) 6.3 273.5 6.3
Other revenue -- 47.3 47.3
-------- -------- ---------- -------- ----------
Total revenue (20.9) (14.9) 1,492.3 35.8 1,492.3
Manufacturing, shipping,
and delivery 1,126.4 1,126.4
Other selling and
administrative costs 550.0 385.8 935.8
Interest expense 90.8 88.2 182.9 (237.7) 124.2
-------- -------- ---------- -------- ----------
Total costs and expense 640.8 88.2 1,695.1 (237.7) 2,186.4
Earnings before items below (661.7) (103.1) (202.8) 273.5 (694.1)
Provision for income taxes (212.5) 6.0 (40.9) (247.4)
Minority share owners' interests
in earnings of subsidiaries 2.5 2.5
-------- -------- ---------- -------- ----------
Net income (loss) $ (449.2) $ (109.1) $ (164.4) $ 273.5 $ (449.2)
======== ======== ========== ======== ==========
18
Nine Months Ended September 30, 2001
-------------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
----------- ------------ ------------ ------------ ------------
Results of Operations
----------------------------
Net sales $ -- $ -- $ 4,056.1 $ -- $ 4,056.1
Interest 164.1 210.0 21.2 (374.1) 21.2
Equity earnings 367.5 322.0 13.7 (689.5) 13.7
Other revenue 550.6 550.6
-------- -------- ---------- ---------- ----------
Total revenue 531.6 532.0 4,641.6 (1,063.6) 4,641.6
Manufacturing, shipping,
and delivery 3,147.9 3,147.9
Other selling and
administrative costs 511.6 511.6
Interest expense 166.6 164.1 378.9 (374.1) 335.5
-------- -------- ---------- ---------- ----------
Total costs and expense 166.6 164.1 4,038.4 (374.1) 3,995.0
Earnings before items below 365.0 367.9 603.2 (689.5) 646.6
Provision for income taxes (0.9) 0.4 268.4 267.9
Minority share owners' interests
in earnings of subsidiaries 12.8 12.8
-------- -------- ---------- ---------- ----------
Earnings before
extraordinary item 365.9 367.5 322.0 (689.5) 365.9
Extraordinary charge (4.1) (4.1) (4.1) 8.2 (4.1)
-------- -------- ---------- ---------- ----------
Net income (loss) $ 361.8 $ 363.4 $ 317.9 $ (681.3) $ 361.8
======== ======== ========== ========== ==========
19
Nine Months Ended September 30, 2000
-----------------------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
------------- -------------- --------------- --------------------------------
Results of Operations
----------------------------
Net sales $ -- $ -- $ 4,225.1 $ -- $ 4,225.1
Interest 252.5 298.1 23.4 (550.6) 23.4
Equity earnings 42.2 (6.3) 14.6 (35.9) 14.6
Other revenue 4.8 153.6 158.4
---------- ---------- ---------- -------- ----------
Total revenue 294.7 296.6 4,416.7 (586.5) 4,421.5
Manufacturing, shipping,
and delivery 3,279.9 3,279.9
Other selling and
administrative costs 550.0 670.5 1,220.5
Interest expense 261.7 252.5 397.2 (550.6) 360.8
---------- ---------- ---------- -------- ----------
Total costs and expense 811.7 252.5 4,347.6 (550.6) 4,861.2
Earnings before items below (517.0) 44.1 69.1 (35.9) (439.7)
Provision for income taxes (215.0) 1.9 66.5 (146.6)
Minority share owners' interests
in earnings of subsidiaries 8.9 8.9
---------- ---------- ---------- -------- ----------
Net income (loss) $ (302.0) $ 42.2 $ (6.3) $ (35.9) $ (302.0)
========== ========== ========== ======== ==========
20
Nine Months Ended September 30, 2001
---------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Cash Flows
--------------------------
Cash provided by
(used in) operating
activities $ 13.4 $ 45.5 $ 212.9 $ -- $ 271.8
Cash provided by
(used in) investing
activities 219.2 219.2
Cash provided by
(used in) financing
activities (13.4) (45.5) (458.5) (517.4)
Effect of exchange
rate change on cash (29.0) (29.0)
------- ------- -------- ----- --------
Net change in cash -- -- (55.4) -- (55.4)
Cash at beginning
of period 229.7 229.7
------- ------- -------- ----- --------
Cash at end
of period $ -- $ -- $ 174.3 $ -- $ 174.3
======= ======= ======== ===== ========
21
Nine Months Ended September 30, 2000
-------------------------------------------------------------------
Non-
Guarantor Guarantor
Parent Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------ ------------ ------------
Cash Flows
-------------------------
Cash provided by
(used in) operating
activities $ (41.7) $ 43.7 $ 284.4 $ -- $ 286.4
Cash provided by
(used in) investing
activities -- 12.5 (392.5) -- (380.0)
Cash provided by
(used in) financing
activities 41.7 (56.2) 28.1 -- 13.6
Effect of exchange
rate change on cash -- -- (13.5) -- (13.5)
------- ------- -------- ------ --------
Net change in cash -- -- (93.5) -- (93.5)
Cash at beginning
of period -- -- 257.1 -- 257.1
------- ------- -------- ------ --------
Cash at end
of period $ -- $ -- $ 163.6 $ -- $ 163.6
======= ======= ======== ====== ========
5. CASH FLOW INFORMATION
Interest paid in cash aggregated $279.0 million and $323.3 million for the nine
months ended September 30, 2001 and September 30, 2000, respectively. Income
taxes paid in cash totaled $45.1 million and $39.3 million for the nine months
ended September 30, 2001 and 2000, respectively.
6. COMPREHENSIVE INCOME
The Company's components of comprehensive income (loss) are net earnings (loss),
change in fair value of certain derivative adjustments, and foreign currency
translation adjustments. Total comprehensive income (loss) for the three month
periods ended September 30, 2001 and 2000 amounted to $79.6 million and $(485.4)
million, respectively. Total comprehensive income (loss) for the nine month
periods ended September 30, 2001 and 2000 amounted to $258.4 million and
$(457.5) million, respectively.
22
7. CONTINGENCIES
The Company is one of a number of defendants (typically from 20 to 100 or more)
in a substantial number of lawsuits filed in numerous state and federal courts
by persons alleging bodily injury (including death) as a result of exposure to
dust from asbestos fibers. From 1948 to 1958, one of the Company's former
business units commercially produced and sold approximately $40 million of a
high-temperature, clay-based insulating material containing asbestos. The
Company exited the insulation business in April 1958. The traditional asbestos
personal injury lawsuits and claims relating to such production and sale of
asbestos material typically allege various theories of liability, including
negligence, gross negligence and strict liability and seek compensatory and
punitive damages in various amounts (herein referred to as "asbestos claims").
As of September 30, 2001 the Company estimates that it is a named defendant in
asbestos lawsuits and claims involving approximately 27,000 plaintiffs and
claimants.
Additionally, the Company has claims-handling agreements in place with many
plaintiff's counsel throughout the country. These agreements require evaluation
and negotiation regarding whether particular claimants qualify under the
criteria established by such agreements. The criteria for such claims include
verification of a compensable illness, exposure to a product manufactured by the
Company's former business unit during its manufacturing period ending in 1958,
and viability of such claims under applicable statutes of limitations. The
Company believes that the bankruptcies of additional co-defendants, as
discussed below, have resulted in an acceleration of the presentation and
disposition of a number of 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.
The Company is also a defendant in other asbestos-related lawsuits or claims
involving maritime workers, medical monitoring claimants, co-defendants and
property damage claimants. Based on its past experience, the Company believes
that these categories of claims will not involve any material liability and they
are not included in the above description of pending claims.
The Company believes that its ultimate asbestos-related contingent liability
(i.e., its indemnity or other claim disposition costs plus related litigation
expenses) cannot be estimated with certainty. In 1993, the Company established a
liability of $975 million to cover indemnity payments and legal fees associated
with the resolution of outstanding and expected future asbestos lawsuits and
claims. In 1998, an additional liability of $250 million was established.
After establishing the additional liability in 1998, the Company continued to
monitor the trends of matters which may affect its ultimate liability and
continued to analyze the trends, developments and variables affecting or likely
to affect the resolution of pending and future asbestos claims against the
Company. The number of asbestos lawsuits and claims pending and filed against
the Company since 1998 has exceeded the number estimated at that time. The trend
of costs to resolve lawsuits and claims since 1998 has also been unfavorable
compared to expectations. In addition, during 2000, Pittsburgh-Corning, Babcock
& Wilcox, Owens Corning, and Fibreboard Corporation sought protection under
Chapter 11 of the Bankruptcy Code and during 2001, Armstrong World Industries,
W.R. Grace & Co., G-I Holdings (GAF), USG Corporation, and Federal-Mogul
Corporation sought protection under Chapter 11 of the Bankruptcy Code.
During the third quarter of 2000, the Company conducted a comprehensive review
to determine whether further adjustments of asbestos-related assets or
liabilities were appropriate. As a result of that review, as of September 30,
2000, the Company established an additional liability
23
of $550 million to cover the Company's estimated indemnity payments and legal
fees arising from outstanding asbestos personal injury lawsuits and claims
and asbestos personal injury lawsuits and claims filed in the ensuing several
years, during which period the Company expects to receive the majority of the
future asbestos-related lawsuits and claims that could involve the Company.
The Company expects its asbestos-related payments for the year ended December
31, 2001, to be between $240 million and $250 million. The Company expects
that total payments in 2002 will be moderately lower. The Company will
continue to monitor trends which may affect its ultimate liability. If trends
in 2002 do not improve significantly, the Company will conduct a
comprehensive review to determine whether further adjustments of
asbestos-related liabilities are appropriate. Based on all the factors and
matters relating to the Company's asbestos-related lawsuits and claims, the
Company presently believes that its asbestos-related costs and liabilities,
to the extent it is able reasonably to estimate such 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 and the amount of the
charges for asbestos-related costs described above.
8. SEGMENT INFORMATION
The Company operates in the rigid packaging industry. The Company has two
reportable product segments within the rigid packaging industry: (1) Glass
Containers and (2) Plastics Packaging. The Plastics Packaging segment consists
of three business units -- plastic containers, closure and specialty products,
and prescription products. The Other segment consists primarily of the Company's
labels and carriers products business unit, substantially all of which was
divested in early 2001.
The Company evaluates performance and allocates resources based on earnings
before interest income, interest expense, provision for income taxes, minority
share owners' interests in earnings of subsidiaries, and extraordinary charges,
(collectively "EBIT") excluding unusual items. EBIT for product segments
includes an allocation of corporate expenses based on both a percentage of sales
and direct billings based on the costs of specific services provided.
Certain amounts from prior year have been reclassified to conform to current
year presentation.
24
Financial information for the three-month periods ended September 30, 2001 and
2000 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:
Sept. 30, 2001 $ 898.1 $ 459.9 $ 2.2 $ 1,360.2 $ 1,360.2
Sept. 30, 2000 948.2 465.5 16.6 1,430.3 1,430.3
===========================================================================================================
EBIT, excluding unusual items:
Sept. 30, 2001 $ 165.7 $ 72.8 $ (0.9) $ 237.6 $ (15.2) $ 222.4
Sept. 30, 2000 145.1 66.9 0.9 212.9 7.1 220.0
===========================================================================================================
Unusual items:
Sept. 30, 2000
Adjustment of reserve
for estimated
future asbestos-
related costs $ (550.0) $ (550.0)
Charges related to
consolidation of
manufacturing
capacity $ (120.4) $ (2.0) $ (122.4) (122.4)
Charges related to
early retirement
incentives and
special termination
benefits (22.0) (9.2) (31.2) (21.2) (52.4)
Charges related to
impairment of
property, plant and
equipment in India (40.0) (40.0) (40.0)
Other charges,
principally related
to the write-off
of software (3.6) (3.6) (29.9) (33.5)
===========================================================================================================
25
The reconciliation of EBIT to earnings (loss) before income taxes and minority
share owners' interests in earnings of subsidiaries for the three-month periods
ended September 30, 2001 and 2000 is as follows:
-----------------------------------------------------------------------------------------------------
Sept. 30, 2001 Sept. 30, 2000
-----------------------------------------------------------------------------------------------------
EBIT, excluding unusual items for
reportable segments $ 237.6 $ 212.9
Unusual items excluded from reportable
segment information (197.2)
Eliminations and other retained,
excluding unusual items (15.2) 7.1
Unusual items excluded from eliminations and other
retained (601.1)
Net interest expense (98.8) (115.8)
-----------------------------------------------------------------------------------------------------
Total $ 123.6 $ (694.1)
=====================================================================================================
26
Financial information for the nine-month periods ended September 30, 2001 and
2000 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:
Sept. 30, 2001 $ 2,639.0 $ 1,405.2 $ 11.9 $ 4,056.1 $ 4,056.1
Sept. 30, 2000 2,784.2 1,387.1 53.8 4,225.1 4,225.1
===============================================================================================================
EBIT, excluding unusual items:
Sept. 30, 2001 $ 440.4 $ 209.2 $ (2.6) $ 647.0 $ (37.2) $ 609.8
Sept. 30, 2000 460.7 212.9 3.0 676.6 19.4 696.0
===============================================================================================================
Unusual items:
Sept. 30, 2001
Gain on the sale of a
minerals business in
Australia $ 10.3 $ 10.3 $ 10.3
Gain on the sale of the
Company's label
business $ 2.8 2.8 2.8
Gain on the sale of
the Company's
Harbor Capital
business $ 457.3 457.3
Restructuring and
impairment
charges (64.3) $ (15.6) (79.9) (79.9)
Special employee
benefit programs (7.6) (3.5) (11.1) (19.8) (30.9)
Contingencies
related to a
previous
acquisition (8.5) (8.5) (8.5)
===============================================================================================================
27
-----------------------------------------------------------------------------------------------------------
Elimina-
tions
Total and Consoli-
Glass Plastics Product Other dated
Containers Packaging Other Segments Retained Totals
-----------------------------------------------------------------------------------------------------------
Unusual items:
Sept. 30, 2000
Adjustment of reserve
for estimated
future asbestos-
related costs -- -- - -- $ (550.0) $ (550.0)
Charges related to
consolidation of
manufacturing
capacity $ (120.4) $ (2.0) - $ (122.4) -- (122.4)
Charges related to
early retirement
incentives and
special termination
benefits (22.0) (9.2) - (31.2) (21.2) (52.4)
Charges related to
impairment of
property, plant and
equipment in India (40.0) -- - (40.0) -- (40.0)
Other charges,
principally related
to the write-off
of software (3.6) -- - (3.6) (29.9) (33.5)
===========================================================================================================
28
The reconciliation of EBIT to earnings (loss) before income taxes and minority
share owners' interests in earnings of subsidiaries for the nine-month periods
ended September 30, 2000 and 1999 is as follows:
-----------------------------------------------------------------------------------------------------
Sept. 30, 2001 Sept. 30, 2000
-----------------------------------------------------------------------------------------------------
EBIT, excluding unusual items for
reportable segments $ 647.0 $ 676.6
Unusual items excluded from reportable
segment information (86.4) (197.2)
Eliminations and other retained,
excluding unusual items (37.2) 19.4
Unusual items excluded from eliminations and other
retained 437.5 (601.1)
Net interest expense (314.3) (337.4)
-----------------------------------------------------------------------------------------------------
Total $ 646.6 $ (439.7)
=====================================================================================================
9. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("FAS No. 141")
which is effective for business combinations completed after June 30, 2001. Also
in July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("FAS No. 142"), which is effective for goodwill acquired after June 30, 2001.
For goodwill acquired prior to June 30, 2001, FAS No. 142 will be effective for
fiscal years beginning after December 15, 2001. Under FAS No. 142, goodwill and
intangible assets with indefinite lives will no longer be amortized but will be
reviewed annually (or more frequently if impairment indicators arise) for
impairment. The Company has not assessed the impact on earnings that the
elimination of the amortization of goodwill will have on future earnings nor the
effect that the impairment test will have on recorded goodwill. As provided in
FAS No. 142, impairment testing will be completed during 2002.
10. RESTRUCTURING ACCRUALS
In the second quarter of 2001, the Company recorded charges of $79.9 million,
principally related to restructuring and impairment at certain of the Company's
international and domestic operations. The majority of the charges ($48.4
million) relates to the impairment of assets at the Company's affiliate in
Puerto Rico and the consolidation of manufacturing capacity and the closing of a
facility in Venezuela. The balance of the charges principally relates to
consolidation of capacity at certain domestic and international facilities in
response to decisions about pricing and market strategy. The Company expects its
actions related to these restructuring and impairment charges to be completed
during the next several quarters.
In the third quarter of 2000, the Company recorded a charge of $122.4 million
for capacity realignment and consolidation. The manufacturing capacity
consolidations principally involved the closing of three U.S. glass container
facilities and reflect technology-driven improvements in productivity,
conversions from some juice and similar products to plastic containers, Company
and customer decisions regarding pricing and volume, and the further
concentration of production in the most strategic facilities. The Company
expects that it will continue to make
29
cash payments over the next several quarters for severance, benefits, and
on-going closing costs related to the closing of these facilities.
Selected information relating to the restructuring accruals follows:
Third Second
Quarter of Quarter of
2000 2001
charges charges Total
---------- ---------- --------
Accrual as of
June 30, 2001 $ 36.4 $ 9.2 $ 45.6
Restructuring charges -- -- --
Write-down of assets
to net realizable value (2.0) -- (2.0)
Net cash paid (3.1) (1.0) (4.1)
------- ------ -------
Remaining accrual
as of September 30, 2001 $ 31.3 $ 8.2 $ 39.5
======= ====== =======
11. DERIVATIVE INSTRUMENTS
The terms of the Company's former bank credit agreement provided for foreign
currency borrowings by certain of its international affiliates. Such borrowings
provided a natural hedge against a portion of the Company's investment. Under
the April 2001 Secured Credit Agreement, international affiliates are only
permitted to borrow in U.S. dollars. The Company's affiliates in Australia and
the United Kingdom have entered into currency swaps covering their initial
borrowings under the Agreement. These swaps are being used to manage the
affiliates exposure to fluctuating foreign exchange rates by swapping the
principal and interest payments due under the Secured Credit Agreement.
As of September 30, 2001, the Company's affiliate in Australia has swapped
$650.0 million of borrowings into $1,275.0 million Australian dollars. This swap
matures on March 31, 2003, with interest resets every 90 days. The interest
reset terms of the swap approximate the terms of the U.S. dollar borrowings.
This derivative instrument swaps both the interest and principal from U.S.
dollars to Australian dollars. The Company's affiliate in the United Kingdom has
swapped $200.0 million of borrowings into 139.0 million British pounds. This
swap also matures on March 31, 2003, with interest resets every 90 days. This
derivative instrument swaps both the interest and principal from U.S. dollars to
British pounds.
The Company recognizes all derivatives on the balance sheet at fair value. The
Company accounts for the above swaps as fair value hedges. As such, the changes
in the value of the swaps are included in other expense and are expected to
substantially offset any exchange rate gains or losses on the related U.S.
dollar borrowings. For the three and nine months ended September 30, 2001, the
amount not offset was immaterial.
The Company also uses commodity futures contracts related to forecasted future
natural gas requirements. The objective of these futures contracts is to limit
the fluctuations in prices paid
30
and the potential volatility in earnings or cash flows from future price
movements. During the third quarter of 2001, the Company entered into commodity
futures contracts for approximately 25% of its domestic natural gas usage
(approximately 400 million BTUs) over a nine-month period.
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 are
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 above futures contracts are accounted for as cash flow hedges at September
30, 2001. 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.
During the three months ended September 30, 2001, an unrealized net loss of $1.5
million (net of tax) related to these commodity futures contracts was included
in OCI. The ineffectiveness portion of the change in the fair value of a
derivative designated as a cash flow hedge is recognized in current earnings.
There was no ineffectiveness recognized during the third quarter of 2001.
31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS - THIRD QUARTER 2001 COMPARED WITH THIRD QUARTER 2000
The Company recorded net earnings of $69.4 million for the third quarter of 2001
compared to a net loss of $449.2 million for the third quarter of 2000.
Excluding the effects of the 2000 unusual items discussed below, the Company's
third quarter 2001 earnings of $69.4 million increased $5.5 million, or 8.6%
from 2000 third quarter earnings of $63.9 million. Consolidated EBIT for the
third quarter of 2001 was $222.4 million, an increase of $2.4 million, or 1.1%,
compared to the third quarter of 2000 EBIT of $220.0 million, excluding unusual
items. The increase is attributable to higher EBIT for both the Glass Containers
and Plastics Packaging segments, partially offset by a net increase in other
retained costs as discussed further below. Interest expense, net of interest
income, decreased $17.0 million from the 2000 period due principally to lower
interest rates and reduced debt levels.
Capsule segment results (in millions of dollars) for the second quarter of 2001
and 2000 were as follows:
--------------------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
--------------------------------------------------------------------------------------
2001 2000 2001 2000(b)
---------- ---------- -------- -------------
Glass Containers $ 898.1 $ 948.2 $ 165.7 $ (40.9)
Plastics Packaging 459.9 465.5 72.8 55.7
Other 2.2 16.6 (0.9) 0.9
--------------------------------------------------------------------------------------
Segment totals 1,360.2 1,430.3 237.6 15.7
Eliminations and other
retained costs -- -- (15.2) (594.0)
--------------------------------------------------------------------------------------
Consolidated totals $ 1,360.2 $ 1,430.3 $ 222.4 $ (578.3)
======================================================================================
(a) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, and minority share owners' interests
in earnings of subsidiaries.
(b) Amount for the three months ended September 30, 2000 includes charges
totaling $798.3 million for the following: (1) $550.0 million related to
adjustment of the reserve for estimated future asbestos-related costs; (2)
$122.4 million related to the consolidation of manufacturing capacity; (3)
a net charge of $52.4 million related to early retirement incentives and
special termination benefits for 350 United States salaried employees; (4)
$40.0 million related to the impairment of property, plant and equipment
at the Company's facilities in India; and (5) $33.5 million related
principally to the write-off of software and related development costs.
Such items are included as follows in consolidated EBIT for the three
months ended September 30, 2000:
32
Glass Containers $ 186.0
Plastics Packaging 11.2
--------
Total Product Segments 197.2
Eliminations and other retained costs 601.1
--------
Consolidated Totals $ 798.3
========
Consolidated net sales for the third quarter of 2001 decreased $70.1 million, or
4.9%, from the prior year. Net sales of the Glass Containers segment decreased
$50.1 million, or 5.3%, from 2000. In the United States, decreased sales were
due in part to lower shipments of beer containers and conversions of certain
juice and iced tea from glass to plastic containers. The combined U.S. dollar
sales of the segment's foreign affiliates decreased from the prior year.
Increased shipments from the Company's operations throughout most of South
America and parts of Europe were more than offset by the effects of a strong
U.S. dollar and lower shipments from most of the Company's operations in the
Asia Pacific region. The effect of changing foreign currency exchange rates
reduced U.S. dollar sales of the segment's foreign affiliates by approximately
$35 million. Net sales of the Plastics Packaging segment decreased $5.6 million,
or 1.2%, from 2000. Increased shipments of plastic containers for food and
health care and closures for beverages, food, and health care were more than
offset by lower shipments of plastic containers for beverages and the effect of
changing foreign currency exchange rates, principally in Australia.
Excluding the effects of the 2000 unusual items, segment EBIT for the third
quarter of 2001 increased $24.7 million, or 11.6%, to $237.6 million from the
2000 segment EBIT of $212.9 million. EBIT of the Glass Containers segment
increased $20.6 million to $165.7 million, compared to $145.1 million in 2000.
The combined U.S. dollar EBIT of the segment's foreign affiliates increased from
prior year. Increased shipments from the Company's operations throughout most of
South America and parts of Europe were partially offset by the effects of a
strong U.S. dollar, principally in Australia and Brazil, and lower shipments
from the Company's operations in the Asia Pacific region. In the United States,
Glass Container EBIT increased from 2000 principally due to improved pricing,
favorable product mix, and lower energy costs. EBIT of the Plastics Packaging
segment increased $5.9 million, or 8.8%, to $72.8 million compared to $66.9
million in 2000. Increased shipments of plastic containers for food and health
care and closures for beverages and food, as well as a shift to a more favorable
product mix, were partially offset by lower shipments of plastic containers for
beverages and personal care. Eliminations and other retained costs declined
$22.3 million from 2000 reflecting lower net financial services income due to
the sale of the Company's Harbor Capital business and certain employee benefit
costs increases.
The third quarter of 2000 includes pretax charges totaling $798.3 million
($513.1 million after tax and minority share owners' interests) for the
following: (1) $550.0 million ($342.1 million after tax) related to adjustment
of the reserve for estimated future asbestos-related costs; (2) $122.4 million
($77.3 million after tax and minority share owners' interests) related to the
consolidation of manufacturing capacity; (3) a net charge of $52.4 million
($32.6 million after tax) related to early retirement incentives and special
termination benefits for 350 United States salaried employees; (4) $40.0 million
($40.0 million after tax) related to the impairment of property, plant and
equipment at the Company's facilities in India; and (5) $33.5 million ($21.1
million after tax and minority share owners' interests) related principally to
the write-off of software and related development costs.
33
FIRST NINE MONTHS 2001 COMPARED WITH FIRST NINE MONTHS 2000
For the first nine months of 2001, the Company recorded earnings before
extraordinary items of $365.9 million compared to a net loss of $302.0 million
for the first nine months of 2000. Net earnings of $361.8 million for 2001
reflect $4.1 million of extraordinary charges from the early extinguishment of
debt. Excluding the effects of the 2001 and 2000 unusual items, the Company's
first nine months of 2001 earnings of $166.9 million decreased $44.2 million, or
20.9% from 2000 first nine months earnings of $211.1 million. Consolidated EBIT
for the first nine months of 2001, excluding unusual items, was $609.8 million,
a decrease of $86.2 million, or 12.4%, compared to the first nine months of 2000
EBIT, excluding unusual items, of $696.0 million. The decrease is largely
attributable to lower EBIT for both the Glass Containers and Plastics Packaging
segments, as discussed below. Interest expense, net of interest income and
unusual items, decreased $27.1 million from the 2000 period due principally to
lower interest rates and decreased levels of debt. The Company's estimated
effective tax rate for the first nine months of 2001, excluding unusual items,
was 38.5%. This compares with an estimated rate, excluding unusual items, of
38.5% for the first nine months of 2000 and the actual rate of 36.9% for the
full year of 2000, excluding unusual items. The increase in the 2001 estimated
rate compared to the full year of 2000 is primarily the result of the
non-recurrence of certain international and domestic tax benefits and credits.
Capsule segment results (in millions of dollars) for the first nine months of
2001 and 2000 were as follows:
------------------------------------------------------------------------------------
Net sales
(Unaffiliated customers) EBIT (a)
------------------------------------------------------------------------------------
2001 2000 2001 (b) 2000 (c)
---------- ---------- --------- ---------
Glass Containers $ 2,639.0 $ 2,784.2 $ 378.8 $ 274.7
Plastics Packaging 1,405.2 1,387.1 181.6 201.7
Other 11.9 53.8 0.2 3.0
------------------------------------------------------------------------------------
Segment totals 4,056.1 4,225.1 560.6 479.4
Eliminations and other
retained costs 400.3 (581.7)
------------------------------------------------------------------------------------
Consolidated totals $ 4,056.1 $ 4,225.1 $ 960.9 $ (102.3)
====================================================================================
(a) EBIT consists of consolidated earnings before interest income, interest
expense, provision for income taxes, and minority share owners' interests
in earnings of subsidiaries.
(b) Amount for the nine months ended September 30, 2001 includes a net gain of
$351.1 million related to the following: (1) A gain of $457.3 million
related to the sale of the Company's Harbor Capital business; (2) Charges
of $79.9 million related to restructuring and impairment charges at
certain of the Company's international glass operations, principally
Venezuela and Puerto Rico, as well as certain other domestic and
international
34
operations; (3) Charges of $30.9 million related to special employee
benefit programs; (4) A charge of $8.5 million for contingencies related
to a previous acquisition; (5) A gain of $10.3 million from the sale of a
minerals business in Australia; (6) A gain of $2.8 million from the sale
of the Company's labels business.
Such charges (gains) are included as follows in consolidated EBIT for the
nine months ended September 30, 2001:
Glass Containers $ 61.6
Plastics Packaging 27.6
Other (2.8)
--------
Total Product Segments 86.4
Eliminations and other
retained costs (437.5)
--------
Consolidated Totals $ (351.1)
========
(c) Amount for the nine months ended September 30, 2000 includes charges
totaling $798.3 million for the following: (1) $550.0 million related to
adjustment of the reserve for estimated future asbestos-related costs; (2)
$122.4 million related to the consolidation of manufacturing capacity; (3)
a net charge of $52.4 million related to early retirement incentives and
special termination benefits for 350 United States salaried employees; (4)
$40.0 million related to the impairment of property, plant and equipment
at the Company's facilities in India; and (5) $33.5 million related
principally to the write-off of software and related development costs.
These items were recorded in the third quarter of 2000. Such items are
included as follows in consolidated EBIT for the nine months ended
September 30, 2000:
Glass Containers $ 186.0
Plastics Packaging 11.2
--------
Total Product Segments 197.2
Eliminations and other retained costs 601.1
--------
Consolidated Totals $ 798.3
========
Consolidated net sales for the first nine months of 2001 decreased $169.0
million, or 4.0%, from the prior year. Net sales of the Glass Containers segment
decreased $145.2 million, or 5.2%, from 2000. In the United States, decreased
sales were due in part to lower shipments of beer containers and conversions of
certain juice and iced tea from glass to plastic containers. The combined U.S.
dollar sales of the segment's foreign affiliates decreased from the prior year.
Increased shipments from the Company's operations throughout most of Europe and
South America were more than offset by the effects of a strong U.S. dollar and
lower shipments from most of the Company's operations in the Asia Pacific
region. The effect of changing foreign currency exchange rates reduced U.S.
dollar sales of the segment's foreign affiliates by
35
approximately $135 million. Net sales of the Plastics Packaging segment
increased $18.1 million, or 1.3%, over 2000, reflecting increased shipments of
plastic containers and closures for food and health care and the effects of
higher resin costs on pass-through arrangements with customers, partially offset
by lower shipments of plastic containers for juice and other beverages and the
effect of changing foreign currency exchange rates, principally in Australia.
The effects of higher resin costs increased sales by approximately $34 million
compared to the first nine months of 2000.
Excluding the effects of the 2001 and 2000 unusual items, segment EBIT for the
first half of 2001 decreased $29.6 million, or 4.4%, to $647.0 million from the
2000 segment EBIT of $676.6 million. EBIT of the Glass Containers segment
decreased $20.3 million, or 4.4%, to $440.4 million, compared to $460.7 million
in 2000. The combined U.S. dollar EBIT of the segment's foreign affiliates
increased from prior year. Increased shipments from the Company's operations
throughout most of Europe and South America were partially offset by the effects
of a strong U.S. dollar, higher energy costs worldwide, and lower shipments from
the Company's operations in the Asia Pacific region. In the United States, Glass
Container EBIT decreased from 2000 principally due to higher energy costs, which
have not been fully recovered through price adjustments. EBIT of the Plastics
Packaging segment decreased $3.7 million, or 1.7%, to $209.2 million, compared
to $212.9 million in 2000. Increased shipments of plastic containers and
closures for food and health care were more than offset by lower shipments of
plastic containers for juice and other beverages and one-time costs associated
with the relocation of a U.S. manufacturing operation to a new and larger
facility to accommodate a growing business base. Eliminations and other retained
costs declined $56.6 million from 2000 reflecting lower net financial services
income due to the sale of the Company's Harbor Capital business and certain
employee benefit costs increases.
The first nine months of 2001 includes pretax gains recorded in the first
quarter totaling $13.1 million ($12.0 million after tax) related to the sale of
the Company's label business and the sale of a minerals business in Australia.
The first nine months of 2001 earnings before extraordinary items also includes
the following unusual and other largely one-time items recorded in the second
quarter: (1) A gain of $457.3 million ($284.4 million after tax) related to the
sale of the Company's Harbor Capital Advisors business; (2) Charges of $30.9
million ($19.4 million after tax) related to special employee benefit programs;
(3) A net interest charge of $4.0 million ($2.8 million after tax) related to
interest on the resolution of the transfer of pension assets and liabilities for
a previous acquisition and divestiture; (4) Charges of $79.9 million ($63.9
million after tax and minority share owners' interests) related to restructuring
and impairment charges at certain of the Company's international glass
operations, principally Venezuela and Puerto Rico, as well as certain other
domestic and international operations; (5) A charge of $8.5 million ($5.3
million after tax) for contingencies related to a previous acquisition; (6) A
$6.0 million charge to adjust tax liabilities in Italy as a result of recent
legislation.
RESTRUCTURING AND IMPAIRMENT CHARGE
The first nine months of 2001 operating results include a pretax charge of $79.9
million recorded in the second quarter, principally related to a restructuring
program and impairment at certain of the Company's international and domestic
operations. The charge includes the impairment of assets at the Company's
affiliate in Puerto Rico and the consolidation of manufacturing capacity and the
closing of a facility in Venezuela. The program includes consolidation of
capacity at certain other international and domestic facilities in response to
decisions about pricing and
36
market strategy. The Company expects its actions related to these restructuring
and impairment charges to be completed during the next several quarters.
The first nine months of 2000 operating results included a pretax charge of
$248.3 million recorded in the third quarter, principally related to a
restructuring and capacity realignment program. The restructuring and capacity
realignment program, initiated in the third quarter of 2000, included the
consolidation of manufacturing capacity and a reduction of 350 employees in the
U.S. salaried work force, or about 10%, principally as a result of early
retirement incentives. Also included in the charge was a write-down of plant and
equipment for the company's glass container affiliate in India and certain other
asset write-offs, including $27.9 million for software which had been abandoned.
Manufacturing capacity consolidations principally involved U.S. glass container
facilities and reflect technology-driven improvements in productivity,
conversions from some juice and similar products to plastic containers, Company
and customer decisions regarding pricing and volume, and the further
concentration of production in the most strategically-located facilities.
CAPITAL RESOURCES AND LIQUIDITY
The Company's total debt at September 30, 2001 was $5.31 billion, compared to
$5.85 billion at December 31, 2000 and $5.87 billion at September 30, 2000.
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 $3.0 billion revolving credit
facility and a $1.5 billion term loan. Borrowings under the Agreement were used
to repay all amounts outstanding under, and terminate, the Company's Second
Amended and Restated Credit Agreement.
At September 30, 2001, the Company had available credit totaling $4.045 billion
under its April 2001 Secured Credit Agreement, of which $621.4 million had not
been utilized. At December 31, 2000, the Company had $597.8 million of credit
which had not been utilized under the Company's Second Amended and Restated
Credit Agreement. Cash provided by operating activities was $271.8 million for
the first nine months of 2001 compared to $286.4 million for the first nine
months of 2000.
On October 1, 2001, the Company completed its acquisition of the Canadian
glass container assets of Consumers Packaging Inc. for a purchase price of
approximately US$150 million. The transaction was approved by the Ontario
Superior Court of Justice as part of a restructuring plan by Consumers
Packaging. The purchase price was financed by borrowings under the Agreement.
In connection with the purchase of such assets, the Company also agreed to
purchase the shares of Consumers U.S., Inc. held by Consumers Packaging for a
purchase price of Cdn$5 million. Consumers U.S., Inc. holds approximately
59.5% of the outstanding equity shares of Anchor Glass Container Corporation
(on a fully diluted basis). The Company has until December 31, 2002 to close
on the acquisition of such shares. The Company previously entered into a
non-binding letter of intent to sell the shares of Consumers U.S., Inc. to
John Ghaznavi, which letter of intent has been terminated by the Company.
The Company anticipates that cash flow from its operations and from
utilization of credit available through March 2004 under the Agreement will
be sufficient to fund its operating and seasonal working capital needs, debt
service and other obligations. During 2002, certain of the Company's
subsidiaries expect to refinance all or part of the term loan portion of the
Secured Credit Agreement by issuing longer term, fixed rate debt. This will
allow the Company to extend the maturity of a portion of its indebtedness,
however, will result in higher interest rates. The Company expects its
asbestos-related payments for the year ended December 31, 2001, to be between
$240 million and $250 million. The Company expects that total payments in
2002 will be moderately lower. Based on the Company's expectations regarding
future payments for lawsuits and claims and its expectation of the collection
of its insurance coverage for partial reimbursement for such lawsuits and
claims, and also based on the Company's expected operating cash flow, the
Company believes that the payment of any deferred amounts of previously
settled or otherwise determined lawsuits and claims, and the resolution of
presently pending and anticipated future lawsuits and claims associated with
asbestos, will not have a material adverse effect upon the Company's
liquidity on a short-term or long-term basis.
The Company's Board of Directors has authorized the management of the Company to
repurchase up to 20 million shares of the Company's common stock. During the
first quarter of 2001, the Company redeemed the remaining outstanding shares of
exchangeble preferred
37
stock that were issued in 1993. The redeemed exchangeable preferred shares were
equivalent to 910,697 shares of the Company's common stock. The Company
repurchased these shares pursuant to its share repurchase plan for $5.2 million.
During the third quarter of 2001, the Company repurchased 3,500 shares. Since
July 1999, the Company has repurchased 12,932,897 shares for $248.0 million. The
Company may purchase its common stock from time to time on the open market
depending on market conditions and other factors. During the term of the
Agreement, the Company's total share repurchases are limited to the lesser of
two million shares or $25 million. The Company believes that cash flows from its
operations and from utilization of credit available under the Agreement will be
sufficient to fund any such repurchases in addition to the obligations mentioned
in the previous paragraph.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The terms of the Company's former bank credit agreement provided, among other
things, a $1.75 billion offshore revolving loan facility which was available to
certain of the Company's foreign subsidiaries and denominated in certain foreign
currencies. For further information about that facility and related foreign
currency loan amounts outstanding, see Note 3 to the financial statements. All
outstanding amounts were repaid with borrowings under the April 2001 Secured
Credit Agreement, which are denominated in U.S. dollars. As described in Note 11
to the financial statements, amounts borrowed under the new agreement by foreign
subsidiaries have been swapped into the subsidiaries' functional currencies.
FORWARD LOOKING STATEMENTS
This document may contain "forward looking" statements as defined in the Private
Securities Litigation Reform Act of 1995. Forward looking statements reflect the
Company's best assessment at the time, and thus involve uncertainty and risk. It
is possible the Company's future financial performance may differ from
expectations due to a variety of factors including, but not limited to the
following: (1) foreign currency fluctuations relative to the U.S. dollar, (2)
change in capital availability or cost, including interest rate fluctuations,
(3) the general political, economic and competitive conditions in markets and
countries where the Company has operations, including competitive pricing
pressures, inflation or deflation, and changes in tax rates, (4) consumer
preferences for alternative forms of packaging, (5) fluctuations in raw material
and labor costs, (6) availability of raw materials, (7) costs and availability
of energy, (8) transportation costs, (9) consolidation among competitors and
customers, (10) the ability of the Company to integrate operations of acquired
businesses, (11) the performance by customers of their obligations under
purchase agreements, and (12) the timing and occurrence of events, including
events related to asbestos lawsuits and claims, which are beyond the control of
the Company. It is not possible to foresee or identify all such factors. Any
forward looking statements in this document are based on certain assumptions and
analyses made by the Company in light of its experience and perception of
historical trends, current conditions, expected future developments, and other
factors it believes are appropriate in the circumstances. Forward looking
statements are not a guarantee of future performance and actual results or
developments may differ materially from expectations. While the Company
continually reviews trends and uncertainties affecting the Company's results of
operations and financial condition, the Company does not intend to update any
particular forward looking statements contained in this document.
38
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
For further information on legal proceedings, see Note 7 to the Condensed
Consolidated Financial Statements, "Contingencies," that is included in Part I
of this Report, which is incorporated herein by reference
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 4.1 Supplemental Indenture Agreement between
Owens-Illinois Group, Inc. and
Owens-Brockway Packaging, Inc. and The
Bank of New York for the Indenture dated
May 20, 1998.
Exhibit 4.2 Supplemental Indenture Agreement between
Owens-Illinois Group, Inc. and
Owens-Brockway Packaging, Inc. and The
Bank of New York for the Indenture dated
May 15, 1997.
Exhibit 4.3 Pledge Agreement between Owens-Illinois
Group, Inc. and Owens-Brockway Packaging,
Inc. and Bankers Trust Company
Exhibit 4.4 Intercreditor Agreement between Bankers
Trust Company and the lenders under the
Secured Credit Agreement
Exhibit 10.1 Owens-Illinois, Inc. Executive Deferred
Savings Plan
Exhibit 12 Computation of Ratio of Earnings to Fixed
Charges and Earnings to Combined Fixed
Charges and Preferred Stock Dividends.
(b) Reports on Form 8-K:
On August 3, 2001, the Registrant filed a Form 8-K
which included a press release dated August 3, 2001
announcing that it has entered into an agreement in
principle to acquire substantially all of the
Canadian glass container assets of Consumers
Packaging Inc.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
OWENS-ILLINOIS, INC.
Date November 14, 2001 By /s/ Edward C. White
------------------- ----------------------------------
Edward C. White
Controller (Principal Accounting
Officer)
40
INDEX TO EXHIBITS
EXHIBITS
4.1 Supplemental Indenture Agreement between Owens-Illinois Group, Inc.
and Owens-Brockway Packaging, Inc. and The Bank of New York for the
Indenture dated May 20, 1998.
4.2 Supplemental Indenture Agreement between Owens-Illinois Group, Inc.
and Owens-Brockway Packaging, Inc. and The Bank of New York for the
Indenture dated May 15, 1997.
4.3 Pledge Agreement between Owens-Illinois Group, Inc. and Owens-Brockway
Packaging, Inc. and Bankers Trust Company
4.4 Intercreditor Agreement between Bankers Trust Company and the lenders
under the Secured Credit Agreement
10.1 Owens-Illinois, Inc. Executive Deferred Savings Plan
12 Computation of Ratio of Earnings to Fixed Charges and Earnings to
Combined Fixed Charges and Preferred Stock Dividends
41