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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, 1995
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
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(Address of principal executive offices) (Zip Code)
419-247-5000
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(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 - 119,550,396
shares at October 31, 1995.
Owens-Illinois Group, Inc. $.01 par value common stock - 100
shares at October 31, 1995.
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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, 1994.
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 1995 and 1994
(Millions of dollars, except per-share amounts)
1995 1994
Revenues: -------- --------
Net sales $ 962.2 $ 927.9
Royalties and net technical assistance 6.8 8.0
Equity earnings 4.4 6.7
Interest 7.3 5.0
Other 11.7 3.2
-------- --------
992.4 950.8
Costs and expenses:
Manufacturing, shipping, and delivery 747.9 722.1
Research and development 7.4 7.7
Engineering 6.4 8.3
Selling and administrative 43.3 46.2
Interest 77.0 70.9
Other 15.6 8.0
-------- --------
897.6 863.2
-------- --------
Earnings before items below 94.8 87.6
Provision for income taxes 29.9 35.4
Minority share owners' interests in earnings
of subsidiaries 8.8 5.8
-------- --------
Net earnings $ 56.1 $ 46.4
======== ========
Net earnings per share of common stock $ 0.46 $ 0.39
======== ========
See accompanying notes.
4
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 1995 and 1994
(Millions of dollars, except per-share amounts)
1995 1994
Revenues: -------- --------
Net sales $2,870.8 $2,682.5
Royalties and net technical assistance 20.2 21.6
Equity earnings 12.1 15.7
Interest 22.1 14.2
Other 33.6 11.7
-------- --------
2,958.8 2,745.7
Costs and expenses:
Manufacturing, shipping, and delivery 2,232.8 2,109.4
Research and development 22.4 20.9
Engineering 19.9 20.1
Selling and administrative 133.0 141.6
Interest 226.5 207.9
Other 54.4 9.5
-------- --------
2,689.0 2,509.4
-------- --------
Earnings before items below 269.8 236.3
Provision for income taxes 95.5 96.1
Minority share owners' interests in earnings
of subsidiaries 25.9 14.3
-------- --------
Net earnings $ 148.4 $ 125.9
======== ========
Net earnings per share of common stock $ 1.23 $ 1.05
======== ========
See accompanying notes.
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1995, December 31, 1994, and September 30, 1994
(Millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
Assets --------- -------- ---------
Current assets:
Cash, including time deposits $ 88.4 $ 109.4 $ 60.3
Short-term investments, at cost which
approximates market 80.9 32.2 29.7
Receivables, less allowances for losses and
discounts ($36.2 at September 30, 1995,
$38.7 at December 31, 1994, and $30.9
at September 30, 1994) 489.3 415.5 444.7
Inventories 485.6 477.1 471.9
Prepaid expenses 69.5 64.9 104.6
-------- -------- --------
Total current assets 1,213.7 1,099.1 1,111.2
Investments and other assets:
Domestic investments and advances 21.6 26.7 26.0
Foreign investments and advances 62.7 65.2 64.1
Repair parts inventories 159.9 137.7 151.5
Prepaid pension 634.9 597.9 574.6
Insurance for asbestos-related costs 435.7 470.1 650.0
Deposits, receivables, and other assets 236.2 235.0 233.1
Excess of purchase cost over net assets
acquired, net of accumulated amortization
($254.4 at September 30, 1995, $230.6
at December 31, 1994, and $222.6 at
September 30, 1994) 1,030.2 1,049.4 1,054.9
-------- -------- --------
Total investments and other assets 2,581.2 2,582.0 2,754.2
Property, plant, and equipment, at cost 2,985.2 2,818.4 2,734.5
Less accumulated depreciation 1,299.4 1,181.9 1,154.7
-------- -------- --------
Net property, plant, and equipment 1,685.8 1,636.5 1,579.8
-------- -------- --------
Total assets $5,480.7 $5,317.6 $5,445.2
======== ======== ========
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CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
Liabilities and Share Owners' Equity --------- -------- ---------
Current liabilities:
Short-term loans and long-term debt
due within one year $ 93.4 $ 65.0 $ 81.5
Current portion of asbestos-related
liabilities 145.0 145.0 140.0
Accounts payable and other liabilities 681.2 718.0 688.9
-------- -------- --------
Total current liabilities 919.6 928.0 910.4
Long-term debt 2,746.4 2,624.7 2,610.0
Deferred taxes 76.6 47.0 85.0
Nonpension postretirement benefits 391.6 405.4 406.8
Asbestos-related liabilities 289.6 404.4 438.1
Other liabilities 370.5 407.0 450.3
Commitments and contingencies
Minority share owners' interests 170.4 125.2 123.0
Share owners' equity:
Preferred stock 26.3 26.3 26.3
Common stock, par value $.01 per share
(119,549,946 shares outstanding
at September 30, 1995; 119,079,496
at December 31, 1994; and 119,003,327
at September 30, 1994) 1.2 1.2 1.2
Capital in excess of par value 1,038.4 1,034.6 1,034.1
Deficit (470.0) (618.4) (570.8)
Cumulative foreign currency translation
adjustment (79.9) (67.8) (69.2)
-------- -------- --------
Total share owners' equity 516.0 375.9 421.6
-------- -------- --------
Total liabilities and share owners' equity $5,480.7 $5,317.6 $5,445.2
======== ======== ========
See accompanying notes.
7
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OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 1995 and 1994
(Millions of dollars)
1995 1994
-------- --------
Cash flows from operating activities:
Net earnings $ 148.4 $ 125.9
Non-cash charges (credits):
Depreciation 148.4 139.0
Amortization of deferred costs 36.6 35.5
Other (12.2) 13.9
Dividends from equity affiliates .7 1.8
Change in non-current operating assets (40.4) (27.5)
Asbestos-related payments (114.8) (114.0)
Asbestos-related insurance proceeds 34.4
Reduction of non-current liabilities (5.7) (11.2)
Change in components of working capital (153.1) (109.7)
-------- --------
Cash provided by operating activities 42.3 53.7
Cash flows from investing activities:
Additions to property, plant, and equipment (177.4) (186.6)
Acquisitions and other (18.0) (46.0)
Net cash proceeds from divestitures 7.0 12.8
-------- --------
Cash utilized in investing activities (188.4) (219.8)
Cash flows from financing activities:
Additions to long-term debt 160.2 476.8
Repayments of long-term debt (54.0) (310.7)
Increase in short-term loans 15.0 9.9
Issuance of common stock 3.8 .2
Issuance of subsidiaries' stock 4.3
Payment of finance fees and debt retirement costs (1.2)
-------- --------
Cash provided by financing activities 125.0 179.3
Effect of exchange rate fluctuations on cash .1 (20.0)
-------- --------
Decrease in cash (21.0) (6.8)
Cash at beginning of period 109.4 67.1
-------- --------
Cash at end of period $ 88.4 $ 60.3
======== ========
See accompanying notes.
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OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars
1. Inventories
Major classes of inventory were as follows:
Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
Manufacturing: --------- -------- ---------
Finished goods $376.9 $377.4 $371.0
Work in process 5.7 4.2 4.8
Raw materials 70.4 73.0 72.5
Operating supplies 32.6 22.5 23.6
------ ------ ------
$485.6 $477.1 $471.9
====== ====== ======
2. Long-Term Debt
The following table summarizes the long-term debt of the Company:
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Sept. 30, Dec. 31, Sept. 30,
1995 1994 1994
Bank Credit Agreement: --------- -------- ---------
Revolving Loans $ 490.0 $ 450.3 $ 351.2
Bid Rate Loans 140.0 65.0 155.0
Senior Debentures, 11%,
due 1999 to 2003 1,000.0 1,000.0 1,000.0
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 184.3 180.1 176.7
- ------------------------------------------------------------------------------
2,764.3 2,645.4 2,632.9
Less amounts due within one year 17.9 20.7 22.9
- ------------------------------------------------------------------------------
Long-term debt $2,746.4 $2,624.7 $2,610.0
==============================================================================
The Company has 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. 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
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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, 1995, the Company had unused credit available under the Bank
Credit Agreement of $301.3 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, 1995, was 6.65%. While no compensating
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.
3. Cash Flow Information
Interest paid in cash aggregated $180.9 million and $165.3 million for the
nine months ended September 30, 1995 and September 30, 1994, respectively.
Income taxes paid in cash totaled $29.3 million and $9.3 million for the nine
months ended September 30, 1995 and September 30, 1994, respectively.
4. 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
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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 traditional asbestos 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, 1995, the Company
estimates that it is a named defendant in such asbestos bodily injury lawsuits
and claims involving approximately 28,000 plaintiffs and claimants.
The Company's indemnity payments for these claims have varied on a per-claim
basis, and are expected to continue to vary considerably over time. 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.
Total indemnity, claim disposition and litigation payments and expenses in
asbestos bodily injury lawsuits and related proceedings may also be affected
by (i) settlement and judgment payments by other defendants (which may take
the form of a judgment credit for such settlements), (ii) claims or cross-
claims by other asbestos manufacturers or suppliers seeking indemnity or
contribution from the Company, and (iii) the Company's claims or cross-claims
for contribution or indemnity from other asbestos manufacturers and suppliers.
Because the scope and extent of all such contribution and indemnity claims
vary considerably according to factual circumstances and applicable law, the
Company is unable to estimate the precise extent to which such contribution or
indemnity claims may affect the Company's total indemnity, claim disposition
and litigation payments and expenses, but the Company nonetheless believes
that the probable effect of all these particular claims or cross-claims
against the Company will not be material.
The Company is also one of a number of defendants (typically over 90) in
separate bodily injury lawsuits involving approximately 11,000 plaintiffs who
allege that they are or were maritime workers. On March 31, 1995, a class
action against the Company was filed in Common Pleas Court in Cuyahoga County,
Ohio which purports to consist of all maritime claimants alleging exposure to
the Company's asbestos-containing insulation products. These maritime
plaintiffs, who are all represented by the same attorney, primarily allege so-
called "in-place" exposure to asbestos-containing products while serving
aboard merchant marine vessels. Such cases as a group appear to involve
significantly less serious disease compared to traditional filings and the
vast majority may not involve any medical condition attributable to exposure
to the Company's product. Since 1988, approximately 8,000 such lawsuits filed
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by the same attorney have been dismissed by various courts for procedural
deficiencies. One thousand of these cases dismissed were "with prejudice,"
and many of the other dismissals involved the same claimants in duplicate or
repetitive suit filings. In view of these factors, the Company presently
believes that the probable ultimate disposition of these maritime claims will
not involve any material additional indemnity liability and no longer includes
them in the total number of pending claims and lawsuits set forth above.
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, 1995, the Company was a named defendant in 15 such pending
property damage lawsuits and claims, which are not included in the total
number of pending lawsuits and claims set forth in the first paragraph hereof.
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"). 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. In 1994, the District Court approved a $35 million
settlement fund intended to partially reimburse co-defendants, including the
Company, for verdicts and judgments entered against such companies from August
1992 to the date of the settlement. The amount to be received by the Company
from such fund 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
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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
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. The trial court has resolved some, but not all of
those issues in ruling on the fairness of the proposed settlement to personal
injury claimants. Several of the trial court's rulings are currently before
the United States Court of Appeals for the Third Circuit pursuant to an
interlocutory appeal. In August, 1993, another of the Company's co-defendants
filed an action, which was thereafter certified by the District Court 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. That settlement has been finally approved at the trial court
level and is on appeal to the United States Court of Appeals for the Fifth
Circuit.
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 class notices in the Center for Claims Resolution class
action described above may have increased the number of claims and lawsuits
against the Company or accelerated the filing of such claims.
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Currently, Congress and numerous state legislatures have under active
consideration tort reform legislation that would apply to future asbestos
claims and suits. While the scope and prospects for passage of all such
legislation cannot be predicted at this time, passage of legislation which is
currently proposed in Congress and various states likely would positively
affect the Company's future asbestos claims litigation experience over the
long term, although the short-term effect may be to accelerate filings of
asbestos lawsuits in advance of the anticipated effective dates of such
legislation.
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
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), some of which claims were settled in December 1994 as described
further below. After deducting the settlements the total remaining coverage
sought in this litigation and, in the Company's opinion, applicable to both
bodily injury and property damage is approximately $500 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 or allocation of
liability.
In December, 1994, the New Jersey Supreme Court issued its decision upholding
the Company's position on the trigger issue, but reversing and remanding the
allocation issue for a determination by a special master of how the Company's
losses or "risk" of asbestos-related losses should be allocated among the
Company and the United Insurance Co. carriers according to the time on the
risk and degree of risk transferred (in the case of insured years) or retained
(in the case of self-insured years when insurance was available).
While the New Jersey Supreme Court's opinion on the allocation issue is unique
and somewhat unprecedented, the Company believes, following intensive review
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of the decision and consultation with counsel, that its coverage claims in the
United Insurance case have not been fundamentally or materially impaired as a
result of the Supreme Court's ruling on the allocation issue.
Shortly before the issuance of the New Jersey Supreme Court decision, the
Company partially settled its coverage claim against its primary captive
insurer, Owens Insurance Ltd. ("OIL") to the extent of reinsurance provided to
OIL by certain reinsurance companies representing approximately 19% of total
United Insurance coverage limits. This settlement required payment of 78.5%
of applicable coverage limits within 60 days, which payments in the total
amount of approximately $100 million were received in December, 1994 and in
the first quarter of 1995.
The Company believes, based upon the rulings and decisions of the trial court,
the Appellate Division and the Supreme Court, as well as its understanding of
the facts and legal precedents, and upon 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 in addition to
that received pursuant to previous settlements. The date, however, of a final
resolution with respect to both coverage and damage recovery is uncertain.
The principal remaining issues in the litigation (namely, the issues remanded
for trial by the Appellate Division and the special master allocation
proceeding) have all been remanded for such resolution to the Middlesex County
Court, Chancery Division in New Jersey.
The coverage and any damage recovery obtained as a result of the United
Insurance 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. Such payments to date are included in
the total insurance asset reflected on the Company's balance sheet. At
September 30, 1995, the net amount receivable for unreimbursed payments was
$417.8 million, which amount reflects receipt of the previously described
settlements. Accordingly, the amounts of such payments covered by this
receivable have not been and are not expected to be reflected in the Company's
Consolidated Results of Operations.
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 and
continually analyzes 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
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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 in 1993 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. That determination was based on
the Company's $650 million insurance asset also recorded in the fourth quarter
of 1993, which asset amount was in turn principally based upon the Company's
expected recovery and reimbursement in the United Insurance case. In view of
the settlements described above and other relevant factors including the
possible litigation and collection delay caused by the reversal and remand
mandated by the December 1994 decision of the New Jersey Supreme Court, the
Company further determined that the $650 million insurance asset should be
reduced by $100 million (in addition to the approximately $100 million of
insurance proceeds received as a result of the settlements described above).
As a consequence, the Company recorded a further charge of $100 million in the
fourth quarter of 1994 to reflect this lower insurance asset valuation, which
does not, however, reflect the full value of all coverage and other claims the
Company is asserting in the United Insurance litigation.
Based on all the factors and matters relating to the Company's asbestos-
related litigation and claims, 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
principally as a result of the United Insurance case and the amount of such
charges described in the preceding paragraph.
Other litigation is pending against the Company, in many cases involving
ordinary and routine claims incidental to the business of the Company and in
others presenting allegations that are nonroutine and involve compensatory,
punitive or treble damage claims as well as other types of relief. The
ultimate legal and financial liability of the Company in respect to the
lawsuits and proceedings referred to above, in addition to other pending
litigation, cannot be estimated with certainty. However, the Company
believes, based on its examination 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 1995 compared with Third Quarter 1994
The Company recorded net earnings of $56.1 million for the third quarter of
1995, an increase of 20.9% over third quarter 1994 net earnings of $46.4
million. Consolidated operating profit for the third quarter of 1995 was
$160.1 million, an increase of $13.3 million, compared to the same period in
1994. The operating profit increase was partially offset by higher interest
expense and minority share owners' interests in earnings of subsidiaries.
Capsule segment results (in millions of dollars) for the third quarter of 1995
and 1994 were as follows:
- ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- ----------------------------------------------------------------------------
1995 1994 1995 1994
-------- -------- -------- --------
Glass Containers $ 712.3 $ 682.5 $ 123.5 $ 116.5
Plastics and Closures 249.5 245.2 36.8 37.6
Eliminations and other
retained costs .4 .2 (.2) (7.3)
- ----------------------------------------------------------------------------
Consolidated total $ 962.2 $ 927.9 $ 160.1 $ 146.8
============================================================================
Net sales of the Glass Containers segment increased $29.8 million, or 4.4%
over 1994. The U.S. dollar sales of the segment's foreign affiliates
increased reflecting higher unit shipments at virtually all foreign affili-
ates, led by Brazil where economic conditions have improved significantly
since the prior year's third quarter. Net sales for the third quarter of 1995
also reflect the consolidation of recently acquired glass container operations
in Poland and India. Domestically, glass container unit shipments declined as
a result of the continuing conversion of soft drink containers from glass to
plastic and lower demand for food containers, including iced tea and juice
bottles. These declines were partially offset by an increase in shipments to
U.S. brewers, as consumer demand for premium and specialty beers increased the
glass share of the beer packaging mix. Net sales of the Plastics and Closures
segment increased $4.3 million, or 1.8%, over the prior year. Higher unit
pricing caused by higher resin costs and increased volumes in the closure and
prescription products businesses resulted in higher reported sales. Higher
unit shipments of closures and prescription containers were offset by lower
shipments of plastic containers, especially bottles used for personal care and
household products, due in part to the closing of two plastic bottle
manufacturing facilities in late 1994.
The operating profit of the Glass Containers segment increased $7.0 million,
or 6.0%, over 1994. Higher U.S. dollar operating profit of the segment's
foreign affiliates resulted principally from increased unit shipments. The
segment's Venezuelan operations reported favorable results compared to the
17
<PAGE>
prior year third quarter reflecting improved market conditions. The
international increase was partially offset by lower unit shipments in the
domestic glass container business and the significantly higher cost of
corrugated boxes, which are used extensively in packaging and shipping many of
the Company's finished products. Cost reductions and productivity improve-
ments achieved throughout the Company partially offset the effect of lower
domestic glass container unit shipments. The operating profit of the Plastics
and Closures segment decreased $0.8 million, or 2.1%, compared to the third
quarter of 1994. The decrease was more than accounted for by the labels and
carriers business which continues to be adversely affected by lower unit
shipments resulting from the soft drink conversion from glass to plastic and
by higher raw material costs. Excluding the labels and carriers business, the
segment's operating profit was up approximately 10% over 1994. Results in the
closures and prescription containers businesses were favorable compared to
prior year due principally to increased unit shipments, improved capacity
utilization and higher pricing based on higher resin costs. Other retained
costs of $0.2 million decreased $7.1 million compared to the third quarter of
1994 principally as a result of lower employee benefit costs and higher net
financial services income.
First Nine Months 1995 compared with First Nine Months 1994
For the first nine months of 1995, the Company recorded net earnings of $148.4
million, an increase of 17.9% over the first nine months of 1994 net earnings
of $125.9 million. Consolidated operating profit for the first nine months of
1995 was $462.1 million, an increase of $47.8 million, or 11.5%, compared to
the same period in 1994. Interest expense, net of interest income, increased
$10.7 million due in part to debt assumed in connection with acquisitions.
The Company's overall effective tax rate was 35.4% for the first nine months
of 1995, compared with 40.7% in 1994. The lower 1995 rate is primarily the
result of a higher mix of foreign earnings which, on average, are expected to
benefit from lower effective tax rates in 1995. In addition, the Company's
goodwill amortization had a smaller percentage impact on the increased pretax
earnings reported in 1995. The increased foreign net earnings also resulted
in an increase in minority share owners' interests in earnings of subsidiar-
ies, principally in Brazil, Colombia, and Poland.
Capsule segment results (in millions of dollars) for the first nine months of
1995 and 1994 were as follows:
- ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- ----------------------------------------------------------------------------
1995 1994 1995 1994
-------- -------- -------- --------
Glass Containers $2,089.3 $1,950.4 $ 360.0 $ 318.0
Plastics and Closures 780.5 731.3 112.8 114.8
Eliminations and other
retained costs 1.0 .8 (10.7) (18.5)
- ----------------------------------------------------------------------------
Consolidated total $2,870.8 $2,682.5 $ 462.1 $ 414.3
============================================================================
18
<PAGE>
Net sales of the Glass Containers segment increased $138.9 million, or 7.1%
over 1994. Higher glass container unit shipments by foreign affiliates and
recently acquired glass container operations in Poland and India accounted for
the increase. Consistent with domestic glass industry trends, the Company's
domestic glass container unit shipments were approximately 5% below the first
nine months of 1994. This decrease is principally a result of the continuing
conversion of soft drinks from glass to plastic, a trend which the Company
expects will continue to adversely affect year-to-year comparisons. In the
Plastics and Closures segment, net sales increased $49.2 million, or 6.7%, due
to higher unit prices based on higher resin costs and increased shipments of
closures and prescription containers.
The operating profit of the Glass Containers segment improved 13.2%, or $42.0
million, over the prior year. Increased unit shipments at all foreign
affiliates, improved market conditions for the segment's Venezuelan opera-
tions, and higher margins at the Brazilian and Colombian operations resulted
in higher combined U.S. dollar operating profits. Exchange and price controls
were instituted in Venezuela in June 1994. 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 duration of such effects on future operating results.
Domestic glass container operating profit decreased from 1994 as a result of
decreased unit shipments and significantly higher corrugated box costs. The
Plastics and Closures segment operating profit was lower by $2.0 million, or
1.7%, compared to the first nine months of 1994. Lower margins and decreased
unit shipments in the labels and carriers business more than offset the
effects of increased unit shipments of closures and prescription containers.
Excluding the labels and carriers business, the segment's operating profit was
up approximately 10% over 1994. Also, the segment's operations in Mexico were
adversely affected by weak economic conditions during the first nine months of
1995 following the December 1994 devaluation of the peso. Other retained
costs were lower principally due to lower employee benefit costs and higher
net financial services income.
Capital Resources and Liquidity
The Company's total debt at September 30, 1995 was $2.84 billion compared to
$2.69 billion at December 31, 1994 and September 30, 1994.
At September 30, 1995, the Company had available credit totaling $1 billion
under the Bank Credit Agreement expiring in December 1998, of which $301.3
million had not been utilized. At December 31, 1994, the Company had $400.2
million of credit which had not been utilized under the Agreement. The
increased utilization during the first nine months of 1995 resulted from
capital expenditures, acquisitions, asbestos-related payments, and normal
seasonal working capital requirements, partially offset by cash provided by
operations, including cash received for settlement of a portion of the
insurance asset for asbestos-related costs. Cash provided by operating
activities was $42.3 million for the first nine months of 1995 compared to
$53.7 million in 1994. During the first nine months of 1995, cash
expenditures related to the fourth quarter 1993 restructuring charge were
approximately $20 million.
19
<PAGE>
In the twelve-month period commencing October 1, 1995, 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. The
Company faces additional demands upon its liquidity for asbestos-related
payments until the United Insurance litigation is fully resolved; the date of
the resolution is uncertain. Based on the Company's expectations regarding
favorable trends which should lower its aggregate 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 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 including relatively modest
scheduled principal payments, 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 4 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 9, 1995 By /s/ Lee A. Wesselmann
---------------- --------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
OWENS-ILLINOIS GROUP, INC.
Date November 9, 1995 By /s/ Lee A. Wesselmann
---------------- --------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
22
<PAGE>
INDEX TO EXHIBITS
Exhibit
23 Consent of McCarter & English.
27 Financial Data Schedule.
23
EXHIBIT 23
CONSENT OF MCCARTER & ENGLISH
November 9, 1995
Ladies and Gentlemen:
We consent to the incorporation by reference in this Quarterly Report on
Form 10-Q of Owens-Illinois, Inc. and Owens-Illinois Group, Inc. for the
quarter ended September 30, 1995, of the reference to our firm under the
caption "Legal Proceedings."
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, 1995 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-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 169,300,000
<SECURITIES> 0
<RECEIVABLES> 489,300,000
<ALLOWANCES> 36,200,000
<INVENTORY> 485,600,000
<CURRENT-ASSETS> 1,213,700,000
<PP&E> 2,985,200,000
<DEPRECIATION> 1,299,400,000
<TOTAL-ASSETS> 5,480,700,000
<CURRENT-LIABILITIES> 919,600,000
<BONDS> 2,764,300,000
<COMMON> 1,200,000
0
26,300,000
<OTHER-SE> 488,500,000
<TOTAL-LIABILITY-AND-EQUITY> 5,480,700,000
<SALES> 2,870,800,000
<TOTAL-REVENUES> 2,958,800,000
<CGS> 2,232,800,000
<TOTAL-COSTS> 2,232,800,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 226,500,000
<INCOME-PRETAX> 269,800,000
<INCOME-TAX> 95,500,000
<INCOME-CONTINUING> 148,400,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 148,400,000
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
