<PAGE>
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, 1996
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 - 120,374,599
shares at October 31, 1996.
Owens-Illinois Group, Inc. $.01 par value common stock - 100
shares at October 31, 1996.
<PAGE>
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, 1995.
3
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Three months ended September 30, 1996 and 1995
(Millions of dollars, except per-share amounts)
1996 1995
Revenues: -------- --------
Net sales $1,014.1 $ 962.2
Royalties and net technical assistance 5.8 6.8
Equity earnings 4.8 4.4
Interest 4.2 7.3
Other 14.1 11.7
-------- --------
1,043.0 992.4
Costs and expenses:
Manufacturing, shipping, and delivery 788.3 747.9
Research and development 7.7 7.4
Engineering 6.3 6.4
Selling and administrative 47.6 43.3
Interest 76.7 77.0
Other 16.0 15.6
-------- --------
942.6 897.6
-------- --------
Earnings before items below 100.4 94.8
Provision for income taxes 32.7 29.9
Minority share owners' interests in earnings
of subsidiaries 5.7 8.8
-------- --------
Net earnings $ 62.0 $ 56.1
======== ========
Net earnings per share of common stock $ 0.51 $ 0.46
======== ========
Average shares outstanding (thousands) 120,360 119,394
======== ========
See accompanying notes.
4
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED RESULTS OF OPERATIONS
Nine months ended September 30, 1996 and 1995
(Millions of dollars, except per-share amounts)
1996 1995
Revenues: -------- --------
Net sales $2,883.6 $2,870.8
Royalties and net technical assistance 18.0 20.2
Equity earnings 13.2 12.1
Interest 16.3 22.1
Other 44.4 33.6
-------- --------
2,975.5 2,958.8
Costs and expenses:
Manufacturing, shipping, and delivery 2,234.7 2,232.8
Research and development 22.8 22.4
Engineering 19.5 19.9
Selling and administrative 139.6 133.0
Interest 225.0 226.5
Other 46.2 54.4
-------- --------
2,687.8 2,689.0
-------- --------
Earnings before items below 287.7 269.8
Provision for income taxes 97.9 95.5
Minority share owners' interests in earnings
of subsidiaries 21.6 25.9
-------- --------
Net earnings $ 168.2 $ 148.4
======== ========
Net earnings per share of common stock $ 1.39 $ 1.23
======== ========
Average shares outstanding (thousands) 120,235 119,186
======== ========
See accompanying notes.
5
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1996, December 31, 1995, and September 30, 1995
(Millions of dollars)
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
Assets --------- -------- ---------
Current assets:
Cash, including time deposits $ 112.6 $ 109.4 $ 88.4
Short-term investments, at cost which
approximates market 12.5 52.5 80.9
Receivables, less allowances for losses and
discounts ($36.9 at September 30, 1996,
$39.7 at December 31, 1995, and $36.2
at September 30, 1995) 478.7 423.9 489.3
Inventories 494.4 502.2 485.6
Prepaid expenses 112.5 128.8 69.5
-------- -------- --------
Total current assets 1,210.7 1,216.8 1,213.7
Investments and other assets:
Domestic investments and advances 25.0 22.7 21.6
Foreign investments and advances 63.7 61.4 62.7
Repair parts inventories 195.0 156.3 159.9
Prepaid pension 649.7 615.7 634.9
Insurance for asbestos-related costs 274.1 323.5 435.7
Deposits, receivables, and other assets 255.5 234.1 236.2
Excess of purchase cost over net assets
acquired, net of accumulated amortization
($285.8 at September 30, 1996, $262.0
at December 31, 1995, and $254.4 at
September 30, 1995) 998.4 1,023.9 1,030.2
-------- -------- --------
Total investments and other assets 2,461.4 2,437.6 2,581.2
Property, plant, and equipment, at cost 3,345.4 3,087.2 2,985.2
Less accumulated depreciation 1,450.7 1,302.4 1,299.4
-------- -------- --------
Net property, plant, and equipment 1,894.7 1,784.8 1,685.8
-------- -------- --------
Total assets $5,566.8 $5,439.2 $5,480.7
======== ======== ========
6
<PAGE>
CONDENSED CONSOLIDATED BALANCE SHEETS -- continued
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
Liabilities and Share Owners' Equity --------- -------- ---------
Current liabilities:
Short-term loans and long-term debt
due within one year $ 127.8 $ 75.5 $ 93.4
Current portion of asbestos-related
liabilities 145.0 145.0 145.0
Accounts payable and other liabilities 682.2 668.4 681.2
-------- -------- --------
Total current liabilities 955.0 888.9 919.6
Long-term debt 2,755.6 2,757.7 2,746.4
Deferred taxes 146.3 133.4 76.6
Nonpension postretirement benefits 372.3 389.1 391.6
Asbestos-related liabilities 143.2 235.4 289.6
Other liabilities 309.1 335.3 370.5
Commitments and contingencies
Minority share owners' interests 189.0 167.5 170.4
Share owners' equity:
Preferred stock 21.6 21.9 26.3
Common stock, par value $.01 per share
(120,365,799 shares outstanding
at September 30, 1996; 119,966,191
at December 31, 1995; and 119,549,946
at September 30, 1995) 1.2 1.2 1.2
Capital in excess of par value 1,046.4 1,042.8 1,038.4
Deficit (281.1) (449.3) (470.0)
Cumulative foreign currency translation
adjustment (91.8) (84.7) (79.9)
-------- -------- --------
Total share owners' equity 696.3 531.9 516.0
-------- -------- --------
Total liabilities and share owners' equity $5,566.8 $5,439.2 $5,480.7
======== ======== ========
See accompanying notes.
7
<PAGE>
OWENS-ILLINOIS, INC.
CONDENSED CONSOLIDATED CASH FLOWS
Nine months ended September 30, 1996 and 1995
(Millions of dollars)
1996 1995
-------- --------
Cash flows from operating activities:
Net earnings $ 168.2 $ 148.4
Non-cash charges (credits):
Depreciation 163.4 148.4
Amortization of deferred costs 39.0 36.6
Other (32.0) (11.5)
Change in non-current operating assets (72.4) (40.4)
Asbestos-related payments (92.2) (114.8)
Asbestos-related insurance proceeds 49.4 34.4
Reduction of non-current liabilities (8.0) (5.7)
Change in components of working capital 23.4 (153.1)
-------- --------
Cash provided by operating activities 238.8 42.3
Cash flows from investing activities:
Additions to property, plant, and equipment (290.6) (177.4)
Acquisitions and other (18.0)
Net cash proceeds from divestitures 5.3 7.0
-------- --------
Cash utilized in investing activities (285.3) (188.4)
Cash flows from financing activities:
Additions to long-term debt 103.6 160.2
Repayments of long-term debt (114.1) (54.0)
Increase in short-term loans 60.9 15.0
Issuance of subsidiaries' stock 4.0
Issuance of common stock 3.4 3.8
-------- --------
Cash provided by financing activities 57.8 125.0
Effect of exchange rate fluctuations on cash (8.1) .1
-------- --------
Increase (decrease) in cash 3.2 (21.0)
Cash at beginning of period 109.4 109.4
-------- --------
Cash at end of period $ 112.6 $ 88.4
======== ========
See accompanying notes.
8
<PAGE>
OWENS-ILLINOIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Tabular data in millions of dollars
1. Inventories
Major classes of inventory are as follows:
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
--------- -------- ---------
Finished goods $372.5 $381.4 $376.9
Work in process 4.4 3.2 5.7
Raw materials 77.2 80.3 70.4
Operating supplies 40.3 37.3 32.6
------ ------ ------
$494.4 $502.2 $485.6
====== ====== ======
2. Long-Term Debt
The following table summarizes the long-term debt of the Company:
- ------------------------------------------------------------------------------
Sept. 30, Dec. 31, Sept. 30,
1996 1995 1995
Bank Credit Agreement: --------- -------- ---------
Revolving Loans $ 423.4 $ 549.4 $ 490.0
Bid Rate Loans 155.0 61.0 140.0
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 241.8 220.2 184.3
- ------------------------------------------------------------------------------
2,770.2 2,780.6 2,764.3
Less amounts due within one year 14.6 22.9 17.9
- ------------------------------------------------------------------------------
Long-term debt $2,755.6 $2,757.7 $2,746.4
==============================================================================
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
9
<PAGE>
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, 1996, the Company had unused credit available under the Bank
Credit Agreement of $302.8 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, 1996, was 6.34%. 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 Company has commenced discussions with a number of banks, including
present lenders under the Bank Credit Agreement, for the purpose of
refinancing the Agreement. As presently contemplated, the refinancing would,
among other things, increase the immediately available revolving loan
commitments to $1.2 billion, extend the expiration date by three years to
December 2001, and provide, on a contingent basis, additional financing to
support the Company's acquisition strategy. The refinancing has not been
finalized, however, the Company has received commitments exceeding the level
requested. Based on the commitments received and on the current status of
discussions with the potential lenders, the Company expects to finalize the
refinancing during the fourth quarter of 1996.
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.
10
<PAGE>
3. Cash Flow Information
Interest paid in cash aggregated $179.4 million and $180.9 million for the
nine months ended September 30, 1996 and September 30, 1995, respectively.
Income taxes paid in cash totaled $25.1 million and $29.3 million for the nine
months ended September 30, 1996 and September 30, 1995, 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
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 personal injury lawsuits and claims relating to such
production and sale of asbestos material typically allege various theories of
liability, including negligence, gross negligence and strict liability and
seek compensatory and punitive damages in various amounts (herein referred to
as "asbestos claims"). As of September 30, 1996, the Company estimates that
it is a named defendant in asbestos claims involving approximately 18,000
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 claims 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, suppliers or related parties.
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
11
<PAGE>
and litigation payments and expenses, but the Company nonetheless believes
that the probable effect of all such claims or cross-claims against the
Company will not be material.
The Company is also one of a number of defendants (typically 30 to 90) in
separate bodily injury lawsuits involving as of September 30, 1996
approximately 200 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. The Company believes that class action treatment of such
maritime claims is inappropriate and, accordingly, intends to oppose class
certification in this suit. 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 18,000 such lawsuits have been filed by the same
attorney. One thousand of these cases dismissed were "with prejudice." On
May 2, 1996, the presiding judge of the Judicial Panel on Multidistrict
Litigation (discussed further below) entered an order administratively
dismissing without prejudice all maritime worker cases pending in the United
States District Court for the Northern District of Ohio. As a result of such
order, on such date there remained pending against the Company individual
lawsuits involving approximately 200 plaintiffs alleging that they are or were
maritime workers and the class action pending in Common Pleas Court in
Cuyahoga County, Ohio (discussed above). 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 does not include them in the description herein of asbestos claims or in
the total number of pending asbestos claims set forth in the first paragraph
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, 1996, the Company was a named defendant in 7 such pending
property damage lawsuits and claims, one of which is a class action, which are
not included in the total number of pending asbestos claims set forth in the
first paragraph above.
The asbestos claims, including both compensatory and punitive damage claims,
against the Company and the other defendants in the bodily injury and property
damage lawsuits and the other 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
12
<PAGE>
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.
In July 1991, the Judicial Panel on Multidistrict Litigation consolidated in
the Eastern District of Pennsylvania virtually all of the 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 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 were before the United
States Court of Appeals for the Third Circuit pursuant to an interlocutory
appeal. In May 1996, the United States Court of Appeals for the Third Circuit
vacated the class certification and remanded the case to the district court
with direction to decertify the class. The members of the Center for Claims
Resolution filed a petition for a writ of certiorari to the United States
Supreme Court.
In August 1993, another of the Company's co-defendants, Fibreboard
Corporation, filed two actions, which were thereafter certified by the
13
<PAGE>
District Court as mandatory settlement classes. One class action resolved all
future asbestos-related claims against Fibreboard and the second class action
resolved all of Fibreboard's insurance coverage claims against its insurers,
which settlements were also approved by the District Court. In July 1996, the
United States Court of Appeals for the Fifth Circuit affirmed the District
Court's orders certifying a mandatory class action and approving the
settlements.
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 and
Fibreboard Corporation class actions described above may have increased the
number of claims and lawsuits against the Company or accelerated the filing of
such claims.
In April 1986, the Company and Aetna Life & Casualty Company ("Aetna") agreed
to a final settlement fully resolving asbestos bodily injury and property
damage insurance coverage litigation between them (which followed the entry of
partial summary judgment in favor of the Company in such litigation). The
Company has processed claims which have effectively exhausted its coverage
under the Aetna agreement. In 1984, the Company initiated similar litigation
in New Jersey against the Company's insurers, agents and related parties for
the years 1977 through 1985 in which the Company sought damages and a
declaration of coverage for both asbestos bodily injury and property damage
claims under insurance policies in effect during those years (Owens-Illinois,
Inc. v. United Insurance Co., et al, Superior Court of New Jersey, Middlesex
County, November 30, 1984). The total coverage sought in this litigation
before deducting the settlements described below and giving consideration to
reinsurer insolvencies and, in the Company's opinion, applicable to both
bodily injury and property damage was $670 million. In April 1990, the
Company obtained summary judgment for the coverage sought in this litigation
and Owens Insurance Limited ("OIL"), an affiliate of the Company 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 December 1994, the New Jersey Supreme Court issued its decision upholding
the Appellate Division decision in favor of the Company's position on one
issue, but reversing and remanding a second issue to the trial court for
further proceedings.
Shortly before the issuance of the New Jersey Supreme Court decision, the
Company partially settled its coverage claim against OIL to the extent of
14
<PAGE>
reinsurance provided to OIL by certain reinsurance companies representing
approximately 19% of total United Insurance coverage limits. The settlements
resulted in payments totalling approximately $100 million. Subsequently, the
Company reached separate settlements with various other reinsurers, and with
OIL to the extent of reinsurance provided by such settling reinsurance
companies. Such settlements confirmed approximately $140 million of
additional coverage for the Company's asbestos-related losses. These
settlements also included all of the reinsurers who had continued to
participate actively as litigating parties in the United Insurance case.
In November 1995, before all the settlements described above were finalized, a
reinsurer of OIL during the years affected by the United Insurance case
brought a separate suit against OIL seeking a declaratory judgment that it had
no reinsurance obligation to OIL due to alleged OIL fraud and also to OIL not
having joined non-party reinsurers as parties in the United Insurance case as
alleged to be required under New Jersey's "entire controversy" doctrine
(Employer's Mutual vs Owens-Insurance Limited, Superior Court of New Jersey,
Morris County, December 1995). The Company was not a named party to this
cause of action but was subsequently joined in it as a necessary party
defendant.
Following the settlements described above, OIL, through its independent
counsel, advised the Company that in view of the number and terms of the prior
reinsurer settlements, and further in view of the inclusion in such
settlements of all the reinsurers who had previously been participating as
litigating parties in the United Insurance case, OIL's independent directors
had authorized OIL's counsel to pursue settlement negotiations with the
Company. Negotiations thereafter took place between representatives of the
Company and OIL's counsel. The negotiation was also aided by the involvement
of three professional mediators who had been involved in several of the
earlier reinsurer settlements. A settlement agreement (the "OIL Settlement")
was ultimately reached, and endorsed by all the mediators and approved by
OIL's independent directors, calling for the payment of remaining non-settled
reinsurance at 78.5% of applicable reinsurance limits, increasing to 81% and
accruing interest at 10% for any amounts not paid at the 78.5% level within 45
days after receipt of notice from OIL of the OIL Settlement.
In December 1995, the presiding judge in the United Insurance case entered a
Consent Judgment settling the United Insurance case as to all remaining issues
and all parties with the single exception of a broker malpractice claim
asserted by the Company, which remains pending. In the Consent Judgment
Order, the presiding judge specifically found that the OIL Settlement is a
good faith and non-collusive settlement and that it is fair and reasonable as
to OIL and all of OIL's non-settling reinsurers.
Subsequent to the entry of the Consent Judgment Order described above, OIL
gave notice of the OIL Settlement to all nonsettling reinsurers affected by
the United Insurance case, informing all such reinsurers of the terms of the
OIL Settlement and demanding timely payment from such reinsurers pursuant to
such terms. Certain previously nonsettling reinsurers made the payments
called for under the OIL Settlement or otherwise settled their obligations
thereunder. Other nonsettling reinsurers, possibly due to the pendency of the
15
<PAGE>
Employers Mutual case described above, did not, however, make the payments
called for under the OIL Settlement by the date specified therein.
In June 1996, the Superior Court of New Jersey, Morris County granted OIL
summary judgment on the "entire controversy" doctrine claim in the Employers
Mutual case.
As a result of payments and commitments that have been made by reinsurers
pursuant to the OIL Settlement and the earlier settlement agreements described
above and certain other available insurance, the Company has to date confirmed
coverage for its asbestos-related costs of approximately $297 million. Of the
total amount confirmed to date, $236 million had been received through
September 30, 1996; and the balance of approximately $61 million will be
received throughout 1996 and the next several years. The remainder of the
insurance asset of approximately $213 million relates principally to the
reinsurers who have not yet paid their reinsurance obligations under the OIL
Settlement.
The Company believes, based on the rulings of the trial court, the Appellate
Division and the New Jersey Supreme Court, as well as its understanding of the
facts and legal precedents (including specifically the legal precedent
requiring that reinsurers "follow the fortunes" of and adhere to any good
faith, fair and reasonable settlement entered into by the primary carrier
which such reinsurers had agreed to reinsure) and based on advice of counsel,
McCarter & English, that it is probable substantial additional payments will
be received to cover the Company's asbestos-related claim losses, in addition
to the amounts already received or to be received as a result of the
settlements described above.
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 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
jurisdictions, and taking into account the expected reimbursement 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 and established a reserve for probable asbestos-related
liabilities and costs of $975 million and recorded an insurance asset of $650
million, which amount was principally based on the Company's expected recovery
16
<PAGE>
and reimbursement in the United Insurance case. In December 1994, as a result
of the settlements described above and other relevant factors including the
status of the United Insurance litigation at that time, 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 December 1994 settlements described above). The
Company recorded a charge of $100 million in 1994 to reflect this lower
insurance asset valuation. Additionally, as a result of the OIL Settlement
and analysis of various factors related thereto, the Company has determined
that this asset should be reduced further by $40 million (in addition to the
approximately $140 million of insurance proceeds received or to be received as
a result of the 1995 settlements described above). As a consequence, the
Company recorded a pretax charge of $40 million in the fourth quarter of 1995
to reflect this lower valuation.
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 OIL Settlement
of that case, as described above, 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 and review of such matters and experience
to date, that such ultimate liability will not be material in relation to the
Company's Consolidated Financial Statements.
17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations - Third Quarter 1996 compared with Third Quarter 1995
The Company recorded net earnings of $62.0 million for the third quarter of
1996, an increase of 10.5% over third quarter 1995 net earnings of $56.1
million. Consolidated operating profit for the third quarter of 1996 was
$168.1 million, an increase of $8.0 million, compared to the same period in
1995. The increase is attributable to higher operating profit for both the
Glass Containers segment and Plastics and Closures segment.
Capsule segment results (in millions of dollars) for the third quarter of 1996
and 1995 were as follows:
- ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- ----------------------------------------------------------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Glass Containers $ 747.1 $ 712.3 $ 126.6 $ 123.5
Plastics and Closures 266.6 249.5 42.8 36.8
Eliminations and other
retained costs .4 .4 (1.3) (.2)
- ----------------------------------------------------------------------------
Consolidated total $1,014.1 $ 962.2 $ 168.1 $ 160.1
============================================================================
Net sales of the Glass Containers segment, led by international operations,
increased $34.8 million, or 4.9%, over 1995. The combined U.S. dollar sales
of the segment's foreign affiliates increased over prior year, reflecting
higher unit shipments by several of the foreign affiliates. The inclusion of
recently acquired glass container operations in Hungary, Finland, and Estonia
more than offset lower unit shipments in Venezuela, India and Brazil and the
effects of devaluations of the Venezuelan currency in late 1995 and early
1996. Domestically, glass container unit shipments were slightly below prior
year levels due in part to the absence in 1996 of sales of soft drink bottles
as a result of the conversion from glass to plastic containers. For the
Company, this conversion is completed but is affecting 1996 comparisons to
prior year periods. Increased shipments to U.S. brewers more than offset
lower demand for food containers, including iced tea and juice bottles. Net
sales of the Plastics and Closures segment increased $17.1 million, or 6.9%,
over the prior year. The increase resulted from higher unit shipments of
closures and plastic containers for personal care, health care and household
products, and the reported sales of the recently acquired plastic container
operations in Finland.
The operating profit of the Glass Containers segment increased $3.1 million to
$126.6 million, compared to $123.5 million in the third quarter of 1995.
Domestically, operating profit was favorably impacted by the effects of an
improved cost structure and increased productivity, which nearly offset the
effects of inflation and slightly lower unit pricing in some product lines.
The combined U.S. dollar operating profit of the segment's foreign affiliates
18
<PAGE>
increased from the third quarter of 1995. Increased operating profit from the
United Kingdom affiliate along with positive contributions from the recently
acquired glass container operations in Hungary, Finland and Estonia more than
offset soft market conditions in Brazil and Venezuela and recent currency
devaluations in Venezuela. The operating profit of the Plastics and Closures
segment increased $6.0 million, or 16.3%, compared to the third quarter of
1995. The increase resulted from higher unit shipments in most businesses and
the recent restructuring of the labels and carriers business.
First Nine Months 1996 compared with First Nine Months 1995
For the first nine months of 1996, the Company recorded net earnings of $168.2
million, an increase of 13.3% over the first nine months of 1995 net earnings
of $148.4 million. Consolidated operating profit for the first nine months of
1996 was $483.2 million, an increase of $21.1 million, or 4.6%, compared to
the same 1995 period. The increase is attributable to higher operating profit
in the Plastics and Closures segment. The estimated effective tax rate for
the first nine months of 1996 was 34.0%, compared with 35.4% estimated for the
first nine months of 1995 and the actual rate of 32.5% for the full year 1995.
Capsule segment results (in millions of dollars) for the first nine months of
1996 and 1995 were as follows:
- ----------------------------------------------------------------------------
Net sales
(Unaffiliated customers) Operating profit
- ----------------------------------------------------------------------------
1996 1995 1996 1995
-------- -------- -------- --------
Glass Containers $2,086.0 $2,089.3 $ 355.8 $ 360.0
Plastics and Closures 796.3 780.5 135.7 112.8
Eliminations and other
retained costs 1.3 1.0 (8.3) (10.7)
- ----------------------------------------------------------------------------
Consolidated total $2,883.6 $2,870.8 $ 483.2 $ 462.1
============================================================================
Net sales of the Glass Containers segment for the first nine months of 1996
nearly equaled the first nine months of 1995. The reported sales of recently
acquired glass container operations in Hungary, Finland and Estonia more than
offset the effects of currency devaluation on reported U.S. dollar sales in
Venezuela and Colombia and lower unit shipments in Brazil. Domestically,
glass container unit shipments declined in part due to the absence in 1996 of
sales of soft drink containers as a result of the conversion of soft drink
containers from glass to plastic. As a result of obtaining additional
business and increased consumer demand for premium and specialty beers, the
increase in shipments to U.S. brewers more than offset the lower shipments of
food containers, including iced tea and juice bottles. In the Plastics and
Closures segment, net sales increased $15.8 million, or 2.0%, over 1995.
Increased unit shipments in most businesses and the reported sales of the
recently acquired plastic container operations in Finland more than offset the
effects of lower resin prices on pass-through arrangements with customers.
19
<PAGE>
The operating profit of the Glass Containers segment decreased 1.2%, or $4.2
million, from the prior year. Domestically, operating profit increased over
1995 as a result of an improved cost structure, which more than offset lower
unit shipments and slightly lower unit pricing in some product lines.
Internationally, soft market conditions in Brazil and Venezuela and recent
currency devaluations in Venezuela resulted in lower U.S. dollar operating
profit of the segment's affiliates located in those countries. The operating
profit of the Plastics and Closures segment improved 20.3%, or $22.9 million,
compared to the first nine months of 1995. The increase resulted from higher
unit shipments, improved manufacturing performance, the recent restructuring
of the labels and carriers business, and a consolidation of manufacturing
capacity in the specialty products business. Also, the segment's operations
in Mexico compared favorably to the first nine months of 1995, when results
were adversely affected by the December 1994 devaluation of the peso. Other
retained costs of $8.3 million for the first nine months of 1996 compared to
$10.7 million for the first nine months of 1995 reflecting lower employee
benefit costs and higher net financial services income.
Capital Resources and Liquidity
The Company's total debt at September 30, 1996 was $2.88 billion compared to
$2.83 billion at December 31, 1995 and $2.84 billion at September 30, 1995.
At September 30, 1996, the Company had available credit totaling $1 billion
under the Bank Credit Agreement expiring in December 1998, of which $302.8
million had not been utilized. At December 31, 1995, the Company had $322.0
million of credit which had not been utilized under the Agreement. Cash
provided by operating activities was $238.8 million for the first nine months
of 1996 compared to $42.3 million in 1995.
In the twelve-month period commencing October 1, 1996, 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. Based on the Company's expectations regarding favorable trends
which should lower its aggregate payments for lawsuits and claims and its
expectation of the collection of its insurance coverage and reimbursement for
such lawsuits, and also based on the Company's expected operating cash flow,
the Company believes that the payment of any deferred amounts of previously
settled or otherwise determined lawsuits and claims, and the resolution of
presently pending and anticipated future lawsuits and claims associated with
asbestos, will not have a material adverse effect upon the Company's liquidity
on a short-term or long-term basis.
The Company has commenced discussions with a number of banks, including
present lenders under the Bank Credit Agreement, for the purpose of
refinancing the Agreement. As presently contemplated, the refinancing would,
among other things, increase the immediately available revolving loan
commitments to $1.2 billion, extend the expiration date by three years to
December 2001, and provide, on a contingent basis, additional financing to
support the Company's acquisition strategy. The refinancing has not been
20
<PAGE>
finalized, however, the Company has received commitments exceeding the level
requested. Based on the commitments received and on the current status of
discussions with the potential lenders, the Company expects to finalize the
refinancing during the fourth quarter of 1996.
Upon the finalization of the refinancing, the Company expects that the
utilization of available credit under the Bank Credit Agreement, 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 through early 1999.
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.
21
<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.
22
<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 1, 1996 By /s/ Lee A. Wesselmann
---------------- --------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
OWENS-ILLINOIS GROUP, INC.
Date November 1, 1996 By /s/ Lee A. Wesselmann
---------------- --------------------------------------------
Lee A. Wesselmann, Senior Vice President and
Chief Financial Officer (Principal Financial
Officer)
23
<PAGE>
INDEX TO EXHIBITS
Exhibit
23 Consent of McCarter & English.
27 Financial Data Schedule.
24
<PAGE>
CONSENT OF MCCARTER & ENGLISH
October 30, 1996
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, 1996, of the reference to our firm under the
caption "Legal Proceedings."
Very truly yours,
/s/McCarter & English
---------------------
McCarter & English
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
September 30, 1996 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>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 125,100,000
<SECURITIES> 0
<RECEIVABLES> 478,700,000
<ALLOWANCES> 36,900,000
<INVENTORY> 494,400,000
<CURRENT-ASSETS> 1,210,700,000
<PP&E> 3,345,400,000
<DEPRECIATION> 1,450,700,000
<TOTAL-ASSETS> 5,566,800,000
<CURRENT-LIABILITIES> 955,000,000
<BONDS> 2,770,200,000
0
21,600,000
<COMMON> 1,200,000
<OTHER-SE> 673,500,000
<TOTAL-LIABILITY-AND-EQUITY> 5,566,800,000
<SALES> 2,883,600,000
<TOTAL-REVENUES> 2,975,500,000
<CGS> 2,234,700,000
<TOTAL-COSTS> 2,234,700,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 225,000,000
<INCOME-PRETAX> 287,700,000
<INCOME-TAX> 97,900,000
<INCOME-CONTINUING> 168,200,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 168,200,000
<EPS-PRIMARY> 1.39
<EPS-DILUTED> 1.39
</TABLE>
