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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 September 30, 1994
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)
Owens-Illinois Group, Inc.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-13061 34-1559348
- ---------------- ----------- -------------------
(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
- ------------------------------------------------------------------------------
(Registrants' telephone number, including area code)
Indicate by check mark whether the registrants (1) have 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 registrants were required to file
such reports), and (2) have been subject to such filing require-
ments 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 - 119,079,496
shares at October 31, 1994.
Owens-Illinois Group, Inc. $.01 par value common stock - 100
shares at October 31, 1994.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Condensed Consolidated Financial Statements presented herein are unaudited
but, in the opinion of management, reflect all adjustments necessary to
present fairly such information for the periods and at the dates indicated.
Since the following condensed unaudited 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
Registrants' Annual Report on Form 10-K for the year ended December 31, 1993.
3
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 1994 and 1993
(Millions of dollars, except per-share amounts)
1994 1993
Revenues: -------- --------
Net sales $ 927.9 $ 914.6
Interest and dividends 5.0 3.7
Royalties and net technical assistance 8.0 6.8
Equity earnings 6.7 7.4
Other 3.2 2.6
-------- --------
950.8 935.1
Costs and expenses:
Manufacturing, shipping, and delivery 722.1 718.9
Research and development 7.7 5.3
Engineering 8.3 4.6
Selling and administrative 46.2 43.9
Interest 70.9 72.7
Other 8.0 8.3
-------- --------
863.2 853.7
-------- --------
Earnings before items below 87.6 81.4
Provision for income taxes 35.4 34.0
Minority share owners' interests in earnings
of subsidiaries 5.8 4.5
-------- --------
Earnings before extraordinary item 46.4 42.9
Extraordinary charge from early extinguishment
of debt, net of applicable income taxes (1.0)
-------- --------
Net earnings $ 46.4 $ 41.9
======== ========
Earnings per share of common stock:
Earnings before extraordinary item $ 0.39 $ 0.36
Extraordinary charge (0.01)
-------- --------
Net earnings $ 0.39 $ 0.35
======== ========
See accompanying notes.
4
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 1994 and 1993
(Millions of dollars, except per-share amounts)
1994 1993
Revenues: -------- --------
Net sales $2,682.5 $2,661.7
Interest and dividends 14.2 10.8
Royalties and net technical assistance 21.6 21.6
Equity earnings 15.7 21.0
Other 11.7 7.6
-------- --------
2,745.7 2,722.7
Costs and expenses:
Manufacturing, shipping, and delivery 2,109.4 2,097.2
Research and development 20.9 16.4
Engineering 20.1 14.9
Selling and administrative 141.6 132.8
Interest 207.9 218.3
Other 9.5 30.6
-------- --------
2,509.4 2,510.2
Earnings from continuing operations -------- --------
before items below 236.3 212.5
Provision for income taxes 96.1 86.7
Minority share owners' interests in earnings
of subsidiaries 14.3 13.1
-------- --------
Earnings from continuing operations before
extraordinary item 125.9 112.7
Net earnings from discontinued operations 1.4
Gain on sale of discontinued operations, net of
applicable income taxes 217.0
-------- --------
Earnings before extraordinary item 125.9 331.1
Extraordinary charge from early extinguishment
of debt, net of applicable income taxes (8.4)
-------- --------
Net earnings $ 125.9 $ 322.7
======== ========
Earnings per share of common stock:
Earnings from continuing operations before
extraordinary item $ 1.05 $ 0.94
Net earnings from discontinued operations 0.01
Gain on sale of discontinued operations 1.82
-------- --------
Earnings before extraordinary item 1.05 2.77
Extraordinary charge (0.07)
-------- --------
Net earnings $ 1.05 $ 2.70
======== ========
See accompanying notes.
5
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1994, December 31, 1993, and September 30, 1993
(Millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
1994 1993 1993
Assets -------- -------- --------
Current assets:
Cash, including time deposits $ 60.3 $ 67.1 $ 72.8
Short-term investments, at cost which
approximates market 29.7 26.5 37.7
Receivables, less allowances for losses and
discounts ($30.9 at September 30, 1994,
$31.3 at December 31, 1993, and $30.8
at September 30, 1993) 444.7 340.0 272.5
Inventories 471.9 472.8 529.7
Prepaid expenses 104.6 53.6 36.5
-------- -------- --------
Total current assets 1,111.2 960.0 949.2
Investments and other assets:
Domestic investments and advances 26.0 20.6 88.1
Foreign investments and advances 64.1 81.9 91.5
Repair parts inventories 151.5 137.5 150.3
Deferred taxes 40.7
Prepaid pension 574.6 616.5 664.8
Insurance for asbestos-related costs 650.0 282.9 257.1
Deposits, receivables, and other assets 233.1 180.5 182.4
Excess of purchase cost over net assets
acquired, net of accumulated amortization
($222.6 at September 30, 1994, $198.7
at December 31, 1993, and $198.8 at
September 30, 1993) 1,054.9 1,083.0 1,120.4
-------- -------- --------
Total investments and other assets 2,754.2 2,443.6 2,554.6
Property, plant, and equipment, at cost 2,734.5 2,485.9 2,542.4
Less accumulated depreciation 1,154.7 988.1 1,017.4
-------- -------- --------
Net property, plant, and equipment 1,579.8 1,497.8 1,525.0
-------- -------- --------
Total assets $5,445.2 $4,901.4 $5,028.8
======== ======== ========
See accompanying notes.
6
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CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
Sept. 30, Dec. 31, Sept. 30,
1994 1993 1993
Liabilities and Share Owners' Equity -------- -------- --------
Current liabilities:
Short-term loans and long-term debt
due within one year $ 81.5 $ 67.6 $ 107.0
Current portion of asbestos-related
liabilities 140.0
Accounts payable and other liabilities 688.9 658.5 667.0
-------- -------- --------
Total current liabilities 910.4 726.1 774.0
Long-term debt 2,610.0 2,419.3 2,540.1
Deferred taxes 85.0 32.7 112.7
Nonpension postretirement benefits 406.8 415.3 446.8
Asbestos-related liabilities 438.1 325.0
Other liabilities 450.3 597.0 465.6
Commitments and contingencies
Minority share owners' interests 123.0 91.2 75.5
Share owners' equity:
Preferred stock 26.3 26.3 26.3
Common stock, par value $.01 per share
(119,003,327 shares outstanding
at September 30, 1994; 118,978,327
at December 31, 1993 and September
30, 1993) 1.2 1.2 1.2
Capital in excess of par value 1,034.1 1,033.9 1,034.0
Deficit (570.8) (696.7) (378.9)
Cumulative foreign currency translation
adjustment (69.2) (69.9) (68.5)
-------- -------- --------
Total share owners' equity 421.6 294.8 614.1
-------- -------- --------
Total liabilities and share owners' equity $5,445.2 $4,901.4 $5,028.8
======== ======== ========
See accompanying notes.
7
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 1994 and 1993
(Millions of dollars)
1994 1993
-------- --------
Cash flows from operating activities:
Earnings from continuing operations $ 125.9 $ 112.7
Non-cash charges:
Depreciation 139.0 137.7
Amortization of deferred costs 35.5 39.5
Other 13.9 17.4
Dividends from equity affiliates 1.8 3.1
Change in non-current operating assets (27.5) (21.5)
Asbestos-related payments (114.0) (110.4)
Reduction of non-current liabilities (11.2) (2.6)
Change in components of working capital (109.7) 62.0
-------- --------
Cash provided by continuing
operating activities 53.7 237.9
Cash utilized in discontinued
operating activities (7.3)
-------- --------
Cash provided by operating activities 53.7 230.6
Cash flows from investing activities:
Additions to property, plant, and equipment (186.6) (163.0)
Acquisitions and other (46.0) (22.1)
Net cash proceeds from divestitures 12.8 445.7
-------- --------
Cash provided by (utilized in) investing
activities (219.8) 260.6
Cash flows from financing activities:
Additions to long-term debt 476.8 69.8
Repayments of long-term debt (310.7) (557.4)
Increase in short-term loans 9.9 27.0
Issuance of subsidiaries' stock 4.3
Payment of finance fees and debt retirement costs (1.2) (9.9)
Issuance of common stock .2
-------- --------
Cash provided by (utilized in) financing
activities 179.3 (470.5)
Effect of exchange rate fluctuations on cash (20.0) (29.0)
-------- --------
Decrease in cash (6.8) (8.3)
Cash at beginning of period 67.1 81.1
-------- --------
Cash at end of period $ 60.3 $ 72.8
======== ========
See accompanying notes.
8
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OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars
1. Asbestos-related Asset and Liability
In 1994, the Company adopted the provisions of Financial Accounting Standards
Board Interpretation No. 39, "Offsetting of Amounts Related to Certain
Contracts," ("FIN 39"), which prohibits offsetting receivables and payables
unless several specific conditions are met, thereby establishing a valid right
of setoff. Accordingly, the Company increased the receivables under asbestos-
related insurance contracts to the total expected to be received, and
increased the liability for asbestos-related costs by an equal amount
representing the insured portion of anticipated future spending. This change
did not impact earnings and, as provided in FIN 39, statements for periods
prior to 1994 have not been restated.
2. Inventories
Major classes of inventory were as follows:
Sept. 30, Dec. 31, Sept. 30,
1994 1993 1993
Manufacturing: -------- -------- --------
Finished goods $371.0 $370.4 $400.9
Work in process 4.8 7.6 28.4
Raw materials 72.5 67.2 70.8
Operating supplies 23.6 27.6 29.6
------ ------ ------
$471.9 $472.8 $529.7
====== ====== ======
3. Accounts Receivable
In February 1993, certain operating subsidiaries of the Company entered into a
five-year agreement pursuant to which they sold without recourse on a
revolving basis substantially all of their receivables to another subsidiary
of the Company. Certificates representing a $140 million senior undivided
interest in the receivables were purchased by a group of insurance companies
and commercial banks. These transactions were reflected as a sale of
receivables in the Company's financial statements. To the extent seasonally
lower shipments limited the amount of receivables available for sale, cash
collections from receivables previously sold were temporarily invested in a
collateral equalization account. At September 30, 1993 the equalization
account totalled $13.2 million and was included in short-term investments in
the condensed consolidated balance sheet. Following the termination of the
program in late 1993, the certificates were repaid and the remaining
collateral was returned to the Company.
9
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4. Long-Term Debt
The following table summarizes the long-term debt of the Company:
Sept. 30, Dec. 31, Sept. 30,
1994 1993 1993
Bank Credit Agreement: --------- -------- ---------
Revolving Loans $ 351.2 $ 57.6
Working Capital and Swing Line Loans $ 125.0
Bid Rate Loans 155.0 55.0
Senior Notes and Debentures:
Senior Debentures, 11%,
due 1999 to 2003 1,000.0 1,000.0 1,000.0
Senior Variable Rate Notes 268.9 268.9
Senior Subordinated Notes:
10-1/4%, due 1999 250.0 250.0 250.0
10-1/2%, due 2002 150.0 150.0 150.0
10%, due 2002 250.0 250.0 250.0
9-3/4%, due 2004 200.0 200.0 200.0
9.95%, due 2004 100.0 100.0 100.0
Other 176.7 161.2 158.4
-------- -------- --------
2,632.9 2,437.7 2,557.3
Less amounts due within one year 22.9 18.4 17.2
-------- -------- --------
Long-term debt $2,610.0 $2,419.3 $2,540.1
======== ======== ========
In December 1993, the Company entered into an agreement with a group of banks
("Bank Credit Agreement" or "Agreement") which provides Revolving Loan
Commitments under which the Company may borrow up to $1 billion through
December 1998. Amounts outstanding under the Company's previous credit
agreement were repaid. The Agreement includes Swing Line and Overdraft
Account facilities providing for aggregate borrowings up to $50 million which
reduce the amount available for borrowing under the Revolving Loan
Commitments. In addition, the terms of the Bank Credit Agreement permit the
Company to request Bid Rate Loans from banks participating in the Agreement
and to issue Commercial Paper notes to other purchasers. Borrowings
outstanding under Bid Rate Loans and Commercial Paper notes are limited to
$450 million in the aggregate and reduce the amount available for borrowing
under the Revolving Loan Commitments. The Revolving Loan Commitments also
provide for the issuance of letters of credit totaling up to $300 million.
At September 30, 1994, the Company had unused credit available under the Bank
Credit Agreement of $401.6 million.
Revolving loans bear interest, at the Company's option, at the prime rate or a
Eurodollar deposit-based rate plus a margin linked to published ratings of the
Company's senior debt instruments. The margin is currently .875% and is
limited to a range of .625% to 1%. Swing Line and Overdraft Account loans
bear interest at the prime rate minus the commitment fee percentage, defined
below. The weighted average interest rate on borrowings outstanding under the
Bank Credit Agreement at September 30, 1994, was 5.73%. While no compensating
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balances are required by the Agreement, the Company must pay a commitment fee
on the excess of the Revolving Loan Commitments over the aggregate amount of
Revolving Loans outstanding. The commitment fee, currently .375%, is subject
to reduction to .25%, also based on changes in published ratings.
The capital stock and intercompany debt obligations of most of the Company's
domestic subsidiaries are pledged as collateral for borrowings under the
Agreement and certain other obligations. While these pledges do not directly
encumber the operating assets owned by these subsidiaries, the Agreement
restricts the creation of liens on them. The Agreement also requires the
maintenance of certain financial ratios, restricts the incurrence of
indebtedness and other contingent financial obligations, and restricts certain
types of business activities and investments.
The Senior Debentures rank pari passu with the obligations of the Company
under the Bank Credit Agreement and other senior indebtedness, and senior in
right of payment to all existing and future subordinated debt of the Company.
The Senior Debentures are guaranteed on a senior basis by the Company's wholly
owned subsidiary, Owens-Illinois Group, Inc. ("Group"), and most of the
Company's domestic subsidiaries and secured by a pledge of the capital stock
of, and intercompany indebtedness of, Group and such subsidiaries.
5. Discontinued Operations
On June 24, 1993, the Company and Group completed the sale of all the issued
and outstanding shares of stock of Group's wholly owned subsidiary, Libbey
Inc. ("Libbey"), through an underwritten initial public offering. Libbey
operated the glass tableware business of the Company, which is presented as a
discontinued operation in the accompanying financial statements. The gain on
the sale of the Libbey business amounted to $270.5 million, less applicable
income taxes of $53.5 million. Applicable income taxes have been reduced by
the previously unrecognized benefit of a capital loss carryover.
Summary results of operations information for the Libbey business is as
follows:
Period
ended
June 18, 1993
-------------
Total revenues $ 118.1
Costs and expenses 97.9
--------
Earnings before interest and taxes 20.2
Interest expense 17.7
--------
Earnings before income taxes 2.5
Provision for income taxes 1.1
--------
Net earnings $ 1.4
========
Interest expense allocated to discontinued operations is based on the
indebtedness expected to be repaid with the proceeds from the sale of the
Libbey business at applicable interest rates in effect during the period.
11
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6. Extraordinary Charge from Early Extinguishment of Debt
In August 1993, the Company redeemed the entire $52.9 million of 9.35% and
7-5/8% debentures outstanding and repurchased $71.1 million of Senior Variable
Rate Notes with a portion of the proceeds received from the sale of the Libbey
business in June 1993. Previously, on July 29, 1993, the Company redeemed the
entire $130 million principal amount of its 12-1/2% Senior Notes following an
"in-substance defeasance" on June 25, 1993. As a result, for the nine-month
period ended September 30, 1993, the Company recorded extraordinary charges
for the write-off of unamortized deferred finance fees and redemption premiums
totalling $13.4 million, net of applicable income tax effects of $5.0 million.
7. Cash Flow Information
Interest paid in cash aggregated $165.3 million and $199.7 million for the
nine months ended September 30, 1994 and September 30, 1993, respectively.
Income taxes paid in cash totaled $9.3 million and $11.0 million for the nine
months ended September 30, 1994 and September 30, 1993, respectively.
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 a high-temperature, clay-based
insulating material containing asbestos. The insulation material was used in
limited industrial applications such as shipyards, power plants and chemical
plants. During its ten years in the high-temperature insulation business, the
Company's aggregate sales of insulation material containing asbestos were less
than $40 million. The Company exited the insulation business in April 1958.
The lawsuits 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. As of September 30, 1994, the Company estimates that it is a
named defendant in asbestos bodily injury lawsuits and claims involving
approximately 35,000 plaintiffs and claimants.
The Company's indemnity payments per claim have varied, and are expected to
continue to vary considerably over time. They are affected by a multitude of
factors, including the type and severity of the disease sustained by the
claimant; the occupation of the claimant; the extent of the claimant's
exposure to asbestos-containing insulation products manufactured or sold by
the Company; the extent of the claimant's exposure to asbestos-containing
products manufactured or sold by other producers; the number and financial
resources of other producer defendants; the jurisdiction of suit; the presence
or absence of other possible causes of the claimant's illness; the
availability of legal defenses such as the statute of limitations or state of
the art; and whether the claim was resolved on an individual basis or as part
of a group settlement. Approximately 30% of the claims filed in 1993 were
from claimants who claim so called "in place" exposure to asbestos containing
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products. These cases appear to involve significantly less serious disease
and less exposure to the Company's product compared to traditional filings.
Indemnity payments in bodily injury lawsuits and the property damage lawsuits
referred to below may also be affected by settlement and judgment payments by
other defendants, which may take the form of a judgment credit for such
settlements. Because the scope and extent of such third party contribution
vary considerably according to applicable state law, the Company is unable to
estimate the extent to which such contribution may affect indemnity payments.
The Company is also one of a number of defendants (typically 15 to 30) in a
number of lawsuits and claims, some of which are class actions, brought by or
on behalf of public or private property owners, alleging damages as a result
of the presence of asbestos-containing insulation in various properties.
These lawsuits typically assert multiple theories of liability, including
negligence, breach of warranty and strict liability, and seek various forms of
monetary and equitable relief, including compensatory and punitive monetary
damages, restitution and removal of asbestos-containing material. As of
September 30, 1994, the Company was a named defendant in 19 such pending
property damage lawsuits and claims.
The damage claims, including both compensatory and punitive damage claims,
against the Company and the other defendants in the asbestos bodily injury and
property damage lawsuits and claims referred to above exceed several billion
dollars in the aggregate. Additionally, since 1982 a number of former
producers and/or miners of asbestos or asbestos-containing products which were
or would be co-defendants with the Company in the bodily injury lawsuits and
claims and/or in the property damage lawsuits and claims have filed for
reorganization under Chapter 11 of the United States Bankruptcy Code ("Co-
Defendant Bankruptcies") including, most recently, Keene Corporation, which
filed in 1993. Pending lawsuits have been stayed as to all but one of these
entities, but continue against the Company and the other defendants. Also,
the trust created by the Manville Chapter 11 Reorganization Plan and charged
with the responsibility for resolving asbestos bodily injury claims against
Manville was found to be a limited fund by the United States District Court
for the Eastern District of New York and virtually all proceedings against the
trust have been stayed. A mandatory settlement class was certified against
the trust resolving all claims by both plaintiffs and co-defendants; however,
the United States Court of Appeals for the Second Circuit reversed the
decision approving the settlement and remanded the case for further
proceedings. The outcome of this matter is uncertain at this time.
In July, 1991, the Judicial Panel on Multidistrict Litigation consolidated in
the Eastern District of Pennsylvania virtually all of the approximately 30,000
federal cases for possible coordinated and aggregate disposition and other
processing techniques (the "MDL Case"). Included in the MDL Case is a case in
the Eastern District of Texas where a petition had been filed to certify a
nationwide litigation class action with respect to all asbestos-related bodily
injury claims pending in the United States both in federal and state court.
The Company believes that such a nationwide litigation class action is not
supported by the existing case law. The number of plaintiffs in the cases
pending in the MDL case in which the Company is a defendant is included in the
reported pending plaintiffs and claimants. In 1992, the court entered an
13
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order severing and retaining any claims for punitive damages in cases remanded
for trial of the compensatory damage claims. The court, through various
administrative orders, is giving priority to claims involving malignancies and
serious asbestosis both in terms of settlement activity and in terms of remand
for trial where a settlement with all defendants is not possible.
In addition, in January, 1993, in an action in which the Company was not a
party, a class action complaint, an answer and a stipulation of settlement of
such class action complaint were filed contemporaneously in the United States
District Court for the Eastern District of Pennsylvania. The lawsuit and
settlement are between a proposed class of persons occupationally or
secondarily exposed to asbestos but who did not have bodily injury suits
pending as of January 15, 1993, and a group of 20 companies who manufactured
or sold asbestos products and whose asbestos claims are managed by the Center
for Claims Resolution. The Company and a number of other former producers of
asbestos-containing products are not members of the Center for Claims
Resolution. The proposed settlement, negotiated between the member companies
and class counsel, seeks to create an administrative mechanism to process
future asbestos-related claims against such companies. Under the proposed
settlement, in order to receive compensation, claimants would be required to
satisfy objective medical and product exposure criteria. The class action and
proposed settlement raise a number of novel and complex issues, including the
potential impact of the proposed settlement on the Company's contribution and
settlement credit rights. In August, 1993, another of the Company's co-
defendants filed an action, which was thereafter provisionally certified as a
mandatory settlement class of all future asbestos-related claims. This action
was integrally related to separate settlements by this co-defendant of all of
its non-future asbestos claims and of its insurance coverage claims against
its insurers.
The precise impact on the Company of the Co-Defendant Bankruptcies and other
proceedings mentioned above is not determinable. These filings and
proceedings have created a substantial number of unprecedented and complex
issues. However, the Company believes the Co-Defendant Bankruptcies probably
have adversely affected the Company's share of the total liability to
plaintiffs in previously settled or otherwise determined lawsuits and claims
and also may adversely affect the Company's share of the total liability to
plaintiffs in the future. Additionally, the Company believes that the
dissemination of the required class notice in the Center for Claims Resolution
class action described above may increase the number of claims and lawsuits
against the Company.
In April, 1986, the Company and Aetna Life & Casualty Company ("Aetna") agreed
to a final settlement fully resolving litigation between them (which followed
the entry of partial summary judgment in favor of the Company in such
litigation). Under its agreement with Aetna, in 1990 the Company began paying
along with Aetna the costs incurred in connection with asbestos bodily injury
lawsuits and claims; these payments by the Company also reduced the policy
limits. The Company has processed claims, or identified claims to be
processed, which has effectively exhausted its coverage under the Aetna
agreement. The Company presently has similar litigation pending in New Jersey
against the Company's insurers, agents and related parties for the years 1977
14
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through 1985 in which the Company seeks 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.) The total coverage sought in this litigation and, in the Company's
opinion, applicable to both bodily injury and property damage is in excess of
$600 million. The annual self-insurance applicable to such coverage is $1.0
million. The Company is also seeking additional coverage applicable solely to
property damage claims. In April 1990, the Company obtained summary judgment
for the coverage sought in this litigation and one of the defendant insurers,
in turn, obtained summary judgment under certain reinsurance contracts. The
defendants appealed the summary judgment granted to the Company and in April,
1993, the New Jersey Superior Court, Appellate Division affirmed the trial
court on all policy interpretation issues but remanded for trial certain other
issues. All parties petitioned the New Jersey Supreme Court for review. In
January, 1994, the New Jersey Supreme Court granted certification on two
policy interpretation issues, namely, the application of the continuous
trigger theory of coverage and the consequent apportionment of liability. The
Company believes that the New Jersey Supreme Court will decide these issues
sometime in 1994 or early 1995 and that its decision will be favorable to the
Company. Following such decision, the trial of the issues remanded by the
Appellate Division will take place and will likely be concluded sometime in
1995.
The Company believes, based upon the rulings of the trial court and Appellate
Division as well as its understanding of the facts and legal precedents and
advice of counsel, McCarter & English, that it is probable this litigation
ultimately will be resolved in such a manner as to confirm a substantial
amount of coverage. The date, however, of a final resolution with respect to
both coverage and damage recovery is uncertain. The coverage and any damage
recovery obtained as a result of this litigation could be applied to reimburse
the Company with respect to its payments under the Aetna agreement, as well as
other payments made by the Company. The Company has made a claim against
certain United Insurance Co. insurers for all such payments to date which
amounted to $396.9 million as of September 30, 1994.
As a result of Chapter 11 filings, the recent class action filings, and the
continuing efforts in various federal and state courts to resolve asbestos
lawsuits and claims in nontraditional manners, as well as the continued
filings of new lawsuits and claims, the Company believes, as it always has,
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, the Company has continually
monitored the trends of matters which may affect its ultimate liability.
Furthermore, as previously reported, in the fourth quarter of 1993 the Company
completed a detailed analysis of the trends, developments and variables
affecting or likely to affect the resolution of pending and future asbestos
claims against the Company.
Based on the trends and developments and their effect on the Company's ability
to estimate probable costs of pending and likely future asbestos-related
claims, the higher than expected costs of disposing of claims in certain
15
<PAGE>
jurisdictions, and taking into account the reimbursement it expects to receive
in the future principally as a result of the United Insurance case, the
Company determined that it will likely have probable asbestos-related
liabilities and costs which exceed its probable asbestos-related insurance
reimbursement in the approximate amount of $325 million. Accordingly, the
Company recorded a charge of such amount against its Consolidated Results of
Operations for the fourth quarter of 1993. The Company 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 as a result of the United Insurance case and the amount of such
charge.
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, proceedings, and investigations referred to above, in addition to
other pending litigation, cannot be estimated with certainty. However, the
Company believes, based on its examination of such matters and experience to
date and discussions with counsel, that such ultimate liability will not be
material in relation to the Company's Consolidated Financial Statements.
16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - Third Quarter 1994 compared with Third Quarter 1993
The Company recorded earnings before extraordinary item of $46.4 million for
the third quarter of 1994 compared to $42.9 million in 1993. Increased
operating profit in the Glass Containers segment more than offset the absence
of operating profit from the Specialized Glass segment and an increase in
other retained costs. The former Specialized Glass segment consisted of the
Kimble pharmaceutical and laboratory glassware business. As a result of the
December 31, 1993 sale of 51% of the Kimble business, the Company is recording
its share of Kimble's results of operations on an equity basis beginning in
1994.
Capsule segment results (in millions of dollars) for the third quarter of 1994
and 1993 were as follows:
- ------------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- ------------------------------------------------------------------------------
1994 1993 1994 1993
-------- -------- -------- --------
Glass Containers $ 682.5 $ 629.6 $ 116.5 $ 95.9
Plastics and Closures 245.2 233.1 37.6 39.4
Specialized Glass 51.6 7.1
Eliminations and other
retained costs 0.2 0.3 (7.3) .6
- ------------------------------------------------------------------------------
Consolidated total $ 927.9 $ 914.6 $ 146.8 $ 143.0
==============================================================================
Consolidated net sales for the third quarter of 1994 increased 7.5%, or $64.9
million over the third quarter of 1993, excluding the former Specialized Glass
segment. Net sales of the Glass Containers segment increased $52.9 million,
or 8.4%, over 1993. Domestic glass container sales and unit shipments both
increased over 3.0% compared to the prior year third quarter. Increased
shipments of beer containers, partially due to the March 31, 1994 acquisition
of a customer's glass container manufacturing facility, more than offset lower
soft drink container volumes. Higher U.S. dollar sales were reported by all
of the segment's foreign affiliates, with the exception of the operations in
Venezuela. The economic effects of exchange and price controls instituted in
late June 1994 contributed to lower unit shipments by the Venezuelan
affiliates. Net sales of the Plastics and Closures segment increased $12.1
million, or 5.2%, over the prior year. Increased unit shipments along with
additional sales reported by the segment's Mexican affiliate, acquired near
the end of the third quarter of 1993, accounted for the increase.
Consolidated operating profit for the third quarter of 1994 increased $10.9
million, or 8.0%, compared to the same period of 1993, excluding the former
Specialized Glass segment. The operating profit of the Glass Containers
segment increased $20.6 million, or 21.5%. Domestically, increased unit
17
<PAGE>
shipments of beer containers combined with improvements in machine and labor
productivity more than offset continuing lower sales of soft drink containers
and increased research and development and engineering expenditures.
Internationally, higher combined U.S. dollar operating profit of the segment's
foreign affiliates benefited from increased unit shipments and more favorable
margins, particularly at the Colombian affiliate. The segment's Brazilian
operations also reported favorable quarter-to-quarter results reflecting an
improvement in economic conditions resulting from recent programs designed to
reduce inflation in that country. The economic effects of exchange and price
controls instituted in Venezuela in June 1994 negatively affected the third
quarter 1994 operating profit and are likely to adversely affect the fourth
quarter 1994 operating profit. Similar programs and controls instituted in
prior years have had a temporary adverse effect on the operating profit of the
Company's affiliates; however, the Company is not able to project the
magnitude or timing of such effects which may result from the measures
recently enacted. The Plastics and Closures segment operating profit
decreased $1.8 million, or 4.6%, compared to the same 1993 period. The
favorable effect of higher unit shipments in the closures business was more
than offset by the effect of lower shipments in the segment's labels and
carriers business as a result of declining glass container soft drink sales.
In addition, the beneficial effect of higher unit shipments in the plastic
bottles business was more than offset by lower selling prices for some plastic
bottle product lines. Other retained costs were $7.9 million higher due to
continuing implementation expenses associated with the restructuring program
and higher retained costs.
First Nine Months 1994 compared with First Nine Months 1993
For the first nine months of 1994, the Company recorded earnings from
continuing operations of $125.9 million compared to $112.7 million in 1993.
Increased operating profit in the Glass Containers segment and lower interest
expense more than offset the increase in research and development and
engineering expenditures and the absence of the Specialized Glass segment.
Capsule segment results (in millions of dollars) for the first nine months of
1994 and 1993 were as follows:
- ------------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- ------------------------------------------------------------------------------
1994 1993 1994 1993
-------- -------- -------- --------
Glass Containers $1,950.4 $1,818.6 $ 318.0 $ 267.8
Plastics and Closures 731.3 691.7 114.8 117.0
Specialized Glass 150.5 17.3
Eliminations and other
retained costs .8 .9 (18.5) (3.1)
- ------------------------------------------------------------------------------
Consolidated total $2,682.5 $2,661.7 $ 414.3 $ 399.0
==============================================================================
18
<PAGE>
Consolidated net sales for the first nine months of 1994 increased 6.8%, or
$171.3 million, over the first nine months of 1993, excluding the former
Specialized Glass segment. Sales of the Glass Containers segment were 7.2%,
or $131.8 million, higher in 1994. Acquisitions and higher glass container
unit sales volumes for both domestic glass operations and foreign affiliates
accounted for the increase. In the Plastics and Closures segment, net sales
increased $39.6 million, or 5.7%, due to increased shipments in the closures
and plastic bottles businesses, and the addition of the sales of the segment's
Mexican affiliate acquired near the end of the third quarter of 1993.
Continued growth in the plastic bottles and closures businesses was led by
stronger demand from makers of personal care and health care products.
Consolidated operating profit for the first nine months of 1994 increased
8.5%, or $32.6 million, over the same 1993 period, excluding the former
Specialized Glass segment. The operating profit in the Glass Containers
segment improved 18.7%, or $50.2 million, over the prior year. Over two-
thirds of the increase was attributable to the domestic glass operations as a
result of improved labor and machine productivity and higher unit shipments.
Internationally, the Company's Colombian affiliate, along with a majority of
the other foreign affiliates, reported increased U.S. dollar operating profit
for the Glass Containers segment; however, the economic effects of exchange
and price controls instituted in Venezuela in June 1994 have negatively
affected the nine month 1994 operating profit of the foreign affiliates in
that country. The Plastics and Closures segment operating profit was lower by
$2.2 million, or 1.9%, compared to the first nine months of 1993. The
favorable effect of higher unit shipments for both the plastic bottles and
closures businesses was offset by the effect of lower sales of soft drink
labels and carriers and lower unit selling prices in certain segments of the
plastic bottles business. Other retained costs were $15.4 million higher than
the first nine months of 1993 due to the restructuring program, expenses
related to previous divestitures and higher retained costs.
Capital Resources and Liquidity
The Company's total debt at September 30, 1994 was $2.69 billion compared to
$2.49 billion at December 31, 1993 and $2.65 billion at September 30, 1993.
At September 30, 1994, the Company had available credit totaling $1.0 billion
under the Bank Credit Agreement of which $401.6 million had not been utilized.
At December 31, 1993, the Company had $558.6 million of credit which had not
been utilized under the agreement, after giving consideration to the effect of
the redemption of the remaining $268.9 million of Senior Variable Rate notes.
The increased utilization during the first nine months of 1994 resulted from
acquisitions, capital expenditures, asbestos-related payments, and normal
seasonal working capital requirements, partially offset by cash provided by
operations. Cash provided by continuing operating activities was $53.7
million for the first nine months of 1994 compared to $237.9 million in 1993.
Cash provided by continuing operating activities in the first nine months of
1993 included the sale of trade receivables for $140.0 million and the related
investment in a collateral equalization account of $13.2 million as of
September 30, 1993, resulting in a one-time improvement in cash flow of $126.8
million.
19
<PAGE>
In the twelve-month period commencing October 1, 1994, the Company anticipates
that cash flow from its operations and from utilization of available credit
under the Bank Credit Agreement will be sufficient to fund its operating and
seasonal working capital needs, debt service and other obligations, including
cash payments required in connection with the restructuring program undertaken
in 1993. During the first nine months of 1994, cash expenditures related to
the fourth quarter 1993 restructuring charge were not significant. The
Company faces additional demands upon its liquidity for asbestos-related
payments until the United Insurance litigation is resolved; the date of the
resolution is uncertain. Based on the Company's expectations regarding future
payments for lawsuits and claims and its expectation of substantial insurance
coverage and reimbursement for such lawsuits and claims as a result of the
United Insurance litigation 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.
Over the five-year term of the Bank Credit Agreement ending in December 1998,
the Company expects that the utilization of available credit thereunder,
combined with cash flows from operations, will be sufficient to fund its
operating and seasonal working capital needs, debt service, and other
obligations. Beyond that, based upon current levels of operations and
anticipated growth, the Company anticipates that it will have to refinance
existing indebtedness, sell assets and/or otherwise raise funds in either the
private or public markets to make all of the principal payments when due under
its outstanding debt securities, beginning with principal payments due in 1999
under the 10-1/4% Senior Subordinated Notes. There can be no assurance that
the Company will be able to refinance existing indebtedness or otherwise raise
funds in a timely manner or that the proceeds therefrom will be sufficient to
make all such principal payments.
20
<PAGE>
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 23 Consent of McCarter & English
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this Report is filed.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized.
OWENS-ILLINOIS, INC.
Date November 14, 1994 By /s/ Lee A. Wesselmann
----------------- -----------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
Date November 14, 1994 By /s/ David G. Van Hooser
----------------- -----------------------------------------------
David G. Van Hooser, Vice President, Treasurer
and Comptroller (Principal Accounting Officer)
OWENS-ILLINOIS GROUP, INC.
Date November 14, 1994 By /s/ Lee A. Wesselmann
----------------- -----------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
Date November 14, 1994 By /s/ David G. Van Hooser
----------------- -----------------------------------------------
David G. Van Hooser, Vice President, Treasurer
and Comptroller (Principal Accounting Officer)
22
<PAGE>
INDEX TO EXHIBITS
Exhibit
23 Consent of McCarter & English.
27 Financial Data Schedule.
23
EXHIBIT 23
CONSENT OF MCCARTER & ENGLISH
November 10, 1994
Ladies and Gentlemen:
We consent to the incorporation by reference of the reference to our
firm in the "Contingencies" section of the Company's report on Form 10-Q for
the quarter ended September 30, 1994.
Very truly yours,
/s/McCarter & English
---------------------
McCarter & English
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1994 condensed consolidated balance sheet, and the condensed
consolidated results of operations for the nine-month period then ended
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 90,000,000
<SECURITIES> 0
<RECEIVABLES> 444,700,000
<ALLOWANCES> 30,900,000
<INVENTORY> 471,900,000
<CURRENT-ASSETS> 1,111,200,000
<PP&E> 2,734,500,000
<DEPRECIATION> 1,154,700,000
<TOTAL-ASSETS> 5,445,200,000
<CURRENT-LIABILITIES> 910,400,000
<BONDS> 2,632,900,000
<COMMON> 1,200,000
0
26,300,000
<OTHER-SE> 394,100,000
<TOTAL-LIABILITY-AND-EQUITY> 5,445,200,000
<SALES> 2,682,500,000
<TOTAL-REVENUES> 2,745,700,000
<CGS> 2,109,400,000
<TOTAL-COSTS> 2,109,400,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 207,900,000
<INCOME-PRETAX> 236,300,000
<INCOME-TAX> 96,100,000
<INCOME-CONTINUING> 125,900,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,900,000
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.05
</TABLE>
