UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 (Mark one) FORM 10-Q (x) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For Quarter Ended March 31, 1998 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Owens-Illinois, Inc. - ------------------------------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 1-9576 22-2781933 - ---------------- ----------- ------------------- (State or other (Commission (IRS Employer jurisdiction of File No.) Identification No.) incorporation or organization) One SeaGate, Toledo, Ohio 43666 - ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) 419-247-5000 - ------------------------------------------------------------------------------ (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 requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Owens-Illinois, Inc. $.01 par value common stock - 140,781,303 shares at April 30, 1998.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. The Condensed Consolidated Financial Statements presented herein are unaudited but, in the opinion of management, reflect all adjustments necessary to present fairly such information for the periods and at the dates indicated. Since the following unaudited condensed consolidated financial statements have been prepared in accordance with Article 10 of Regulation S-X, they do not contain all information and footnotes normally contained in annual consolidated financial statements; accordingly, they should be read in conjunction with the Consolidated Financial Statements and notes thereto appearing in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1997. 2
OWENS-ILLINOIS, INC. CONDENSED CONSOLIDATED RESULTS OF OPERATIONS Three months ended March 31, 1998 and 1997 (Millions of dollars, except share and per share amounts) 1998 1997 Revenues: -------- -------- Net sales $1,098.5 $1,056.3 Royalties and net technical assistance 6.1 6.4 Equity earnings 4.7 8.8 Interest 5.9 7.8 Other 43.0 36.9 -------- -------- 1,158.2 1,116.2 Costs and expenses: Manufacturing, shipping, and delivery 861.1 844.9 Research and development 7.7 7.8 Engineering 8.0 7.4 Selling and administrative 62.4 51.0 Interest 65.2 85.9 Other 36.7 34.8 -------- -------- 1,041.1 1,031.8 -------- -------- Earnings before items below 117.1 84.4 Provision for income taxes 28.8 23.4 Minority share owners' interests in earnings of subsidiaries 7.9 6.4 -------- -------- Net earnings $ 80.4 $ 54.6 ======== ======== Basic net earnings per share of common stock $ 0.57 $ 0.44 ======== ======== Weighted average shares outstanding (thousands) 140,620 121,813 ======= ======= Diluted net earnings per share of common stock $ 0.56 $ 0.44 ======== ======== Weighted diluted average shares (thousands) 142,405 124,469 ======= ======= See accompanying notes. 3
OWENS-ILLINOIS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 1998, December 31, 1997, and March 31, 1997 (Millions of dollars) March 31, Dec. 31, March 31, 1998 1997 1997 --------- -------- --------- Assets Current assets: Cash, including time deposits $ 230.0 $ 218.2 $ 211.3 Short-term investments, at cost which approximates market 23.1 16.1 78.5 Receivables, less allowances for losses and discounts ($46.5 at March 31, 1998, $52.9 at December 31, 1997, and $37.7 at March 31, 1997) 708.0 681.6 659.0 Inventories 618.6 592.4 626.8 Prepaid expenses 140.2 140.0 125.5 -------- -------- -------- Total current assets 1,719.9 1,648.3 1,701.1 Investments and other assets: Investments and advances 90.9 87.7 126.5 Repair parts inventories 213.5 227.2 209.3 Prepaid pension 659.5 635.3 639.1 Insurance for asbestos-related costs 223.2 239.3 255.3 Deposits, receivables, and other assets 297.8 307.0 266.7 Excess of purchase cost over net assets acquired, net of accumulated amortization ($338.2 at March 31, 1998, $328.3 at December 31, 1997, and $302.6 at March 31, 1997) 1,269.9 1,294.9 1,313.2 -------- -------- -------- Total investments and other assets 2,754.8 2,791.4 2,810.1 Property, plant, and equipment, at cost 4,175.7 4,105.1 3,732.3 Less accumulated depreciation 1,755.2 1,699.7 1,548.4 -------- -------- -------- Net property, plant, and equipment 2,420.5 2,405.4 2,183.9 -------- -------- -------- Total assets $6,895.2 $6,845.1 $6,695.1 ======== ======== ======== 4
CONDENSED CONSOLIDATED BALANCE SHEETS -- continued March 31, Dec. 31, March 31, 1998 1997 1997 --------- -------- --------- Liabilities and Share Owners' Equity Current liabilities: Short-term loans and long-term debt due within one year $ 180.2 $ 176.9 $ 161.9 Current portion of asbestos-related liabilities 85.0 85.0 110.0 Accounts payable and other liabilities 737.8 781.9 779.7 -------- -------- -------- Total current liabilities 1,003.0 1,043.8 1,051.6 Long-term debt 3,207.7 3,146.7 3,407.7 Deferred taxes 249.1 229.2 231.4 Nonpension postretirement benefits 349.3 354.8 366.2 Other liabilities 461.0 482.2 646.5 Commitments and contingencies Minority share owners' interests 239.8 246.5 234.4 Share owners' equity: Preferred stock 20.1 20.4 21.4 Common stock, par value $.01 per share (140,766,753 shares outstanding at March 31, 1998; 140,526,195 at December 31, 1997; and 122,673,393 at March 31, 1997) 1.4 1.4 1.2 Capital in excess of par value 1,568.9 1,558.4 1,074.4 Deficit (9.9) (90.3) (203.6) Accumulated other comprehensive income (195.2) (148.0) (136.1) -------- -------- -------- Total share owners' equity 1,385.3 1,341.9 757.3 -------- -------- -------- Total liabilities and share owners' equity $6,895.2 $6,845.1 $6,695.1 ======== ======== ======== See accompanying notes. 5
OWENS-ILLINOIS, INC. CONDENSED CONSOLIDATED CASH FLOWS Three months ended March 31, 1998 and 1997 (Millions of dollars) 1998 1997 -------- -------- Cash flows from operating activities: Net earnings $ 80.4 $ 54.6 Non-cash charges (credits): Depreciation 74.9 67.7 Amortization of deferred costs 15.1 14.3 Other (23.0) 1.1 Change in non-current operating assets 11.1 (12.4) Asbestos-related payments (23.1) (19.8) Asbestos-related insurance proceeds 16.1 16.1 Reduction of non-current liabilities (.8) (.1) Change in components of working capital (108.5) (69.5) -------- -------- Cash provided by operating activities 42.2 52.0 Cash flows from investing activities: Additions to property, plant, and equipment (103.6) (76.6) Acquisitions, net of cash acquired (27.5) (104.7) Net cash proceeds from divestitures 30.1 46.4 -------- -------- Cash utilized in investing activities (101.0) (134.9) Cash flows from financing activities: Additions to long-term debt 110.8 117.3 Repayments of long-term debt (58.5) (5.5) Increase in short-term loans 22.0 1.3 Issuance of common stock 4.3 26.8 -------- -------- Cash provided by financing activities 78.6 139.9 Effect of exchange rate fluctuations on cash (8.0) (6.6) -------- -------- Increase in cash 11.8 50.4 Cash at beginning of period 218.2 160.9 -------- -------- Cash at end of period $ 230.0 $ 211.3 ======== ======== See accompanying notes. 6
OWENS-ILLINOIS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Tabular data in millions of dollars, except share and per share amounts 1. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per share: - ---------------------------------------------------------------------------- Three months ended March 31, ------------------------- 1998 1997 ----------- ----------- Numerator: Net earnings $80.4 $54.6 Preferred stock dividends (.4) (.4) - ---------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common share owners 80.0 54.2 Effect of dilutive securities - preferred stock dividends .4 .4 - ---------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common share owners after assumed exchanges of preferred stock for common stock $80.4 $54.6 ============================================================================ Denominator: Denominator for basic earnings per share - weighted average shares 140,620,116 121,812,815 Effect of dilutive securities: Stock options 1,081,849 1,508,066 Exchangeable preferred stock 702,950 1,148,337 - ---------------------------------------------------------------------------- Dilutive potential common shares 1,784,799 2,656,403 - ---------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed exchanges of preferred stock for common stock 142,404,915 124,469,218 ============================================================================ Basic earnings per share $0.57 $0.44 ============================================================================ Diluted earnings per share $0.56 $0.44 ============================================================================ 7
See Note 4 regarding the Company's intentions to issue additional equity securities. 2. Inventories Major classes of inventory are as follows: March 31, Dec. 31, March 31, 1998 1997 1997 --------- -------- --------- Finished goods $487.9 $447.3 $500.0 Work in process 10.2 9.4 7.2 Raw materials 79.0 92.5 83.7 Operating supplies 41.5 43.2 35.9 ------ ------ ------ $618.6 $592.4 $626.8 ====== ====== ====== 3. Long-Term Debt The following table summarizes the long-term debt of the Company: - ----------------------------------------------------------------------------- March 31, Dec. 31, March 31, 1998 1997 1997 Bank Credit Agreement: --------- -------- --------- Revolving Loans $2,065.0 $2,125.0 $1,110.0 Bid Rate Loans 178.0 50.0 90.0 Senior Notes: 7.85% due 2004 300.0 300.0 8.10%, due 2007 300.0 300.0 Senior Debentures, 11%, due 1999 to 2003 42.6 42.6 1,000.0 Senior Subordinated Notes: 10-1/4%, due 1999 250.0 10-1/2%, due 2002 150.0 10%, due 2002 250.0 9-3/4%, due 2004 200.0 9.95%, due 2004 100.0 Other 375.0 399.2 308.4 - ----------------------------------------------------------------------------- 3,260.6 3,216.8 3,458.4 Less amounts due within one year 52.9 70.1 50.7 - ----------------------------------------------------------------------------- Long-term debt $3,207.7 $3,146.7 $3,407.7 ============================================================================= In May 1997, the Company entered into an agreement with a group of banks ("Bank Credit Agreement" or "Agreement") which provided Revolving Loan Commitments under which the Company could borrow up to $3.0 billion through December 31, 2001. The Agreement included an Overdraft Account facility providing for aggregate borrowings up to $50 million which reduced the amount available for borrowing under the Revolving Loan Commitments. In addition, the terms of the Bank Credit Agreement permitted the Company to request Bid Rate Loans from banks participating in the Agreement. Borrowings outstanding 8
under Bid Rate Loans were limited to $750 million and reduced the amount available for borrowing under the Revolving Loan Commitments. The Revolving Loan Commitments also provided for the issuance of letters of credit totaling up to $300 million. At March 31, 1998, the Company had unused credit available under the Bank Credit Agreement of $679.7 million. The weighted average interest rate on borrowings outstanding under the Bank Credit Agreement at March 31, 1998, was 6.06%. The Company's Senior Notes due 2004 and the Senior Notes due 2007 rank pari passu with the obligations of the Company under the Bank Credit Agreement and the 11% Senior Debentures. The Bank Credit Agreement, Senior Notes, and 11% Senior Debentures are senior in right of payment to all existing and future subordinated debt of the Company. On April 30, 1998, the Company amended its current Agreement by entering into a Second Amended and Restated Credit Agreement (the "Amended Bank Credit Agreement") with a group of banks. The Amended Bank Credit Agreement provides up to $7.0 billion in credit facilities and consists of (i) a $2.5 billion term loan to the Company (the "Term Loan") due October 30, 1999 and (ii) a $4.5 billion revolving credit facility (the "Revolving Credit Facility") available to the Company, including a $1.75 billion fronted offshore loan revolving facility (the "Offshore Facility" and together with the Term Loan and the Revolving Credit Facility, the "Credit Facilities") available, subject to certain sublimits, to certain of the Company's foreign subsidiaries and denominated in certain foreign currencies. The Revolving Credit Facility, including the Offshore Facility, will terminate on December 31, 2001. All of the obligations of the Company's foreign subsidiaries under the Offshore Facility are guaranteed by the Company. The Company intends to repay the Term Loan with the proceeds from the Offerings (see Note 4) and the Rockware Sale (see Note 8). Loans under the Term Loan and the Revolving Credit Facility bear interest, at the Company's option, at the prime rate or a reserve adjusted eurodollar rate plus a margin linked to the Company's leverage ratio. Loans under the Offshore Facility bear interest, at the applicable borrower's option, at the applicable Offshore Base Rate (as defined in the Amended Bank Credit Agree- ment) or the applicable reserve Adjusted Offshore Periodic Rate (as defined in the Amended Bank Credit Agreement) plus a margin linked to the Company's leverage ratio. The Company will pay the lenders a facility fee, initially established at 1/2% per annum on the outstanding principal amount of the Term Loan and the total Revolving Credit Facility commitments, subject to reduction (or increase, but not above 1/2%) based on attaining (or failing to attain) certain leverage ratios. The Credit Facilities are unsecured. However, in the event the Company's leverage ratio exceeds a specified level as of June 30, 1999, the Company will be required to (i) cause its direct wholly owned subsidiary, Owens-Illinois Group, Inc. ("Group") and the first- and second-tier subsidiaries of Group to guaranty the Credit Facilities and (ii) cause the Credit Facilities, the Company guaranty and the subsidiary guarantees to be secured by pledges of the 9
stock and intercompany debt obligations of Group and the other subsidiary guarantors. The Amended Bank Credit Agreement requires, among other things, the maintenance of certain financial ratios, restricts the creation of liens and incurrence of indebtedness, and restricts certain types of business activities and investments. 4. Proposed Repayment of a Portion of the Term Loan The Company intends to use the proceeds from the offering of an estimated 12,600,000 shares (14,490,000 shares if the underwriters' overallotment option is exercised in full) of the Company's common stock (the "Common Stock Offering"); the offering of an estimated 7,000,000 shares of Convertible Preferred Stock, liquidation preference $50.00 per share (the "Preferred Stock Offering" and together with the Common Stock Offering, the "Equity Offer- ings"); the offering of $250 million aggregate principal amount of Senior Notes due 2005, $300 million aggregate principal amount of Senior Notes due 2008, $300 million aggregate principal amount of Senior Debentures due 2010, and $250 million aggregate principal amount of Senior Debentures due 2018 (collectively, the "Debt Offerings" and, together with the Equity Offerings, the "Offerings") to repay a portion of the Term Loan incurred in connection with the BTR Transaction (see Note 8). Consummation of the Debt Offerings is conditioned upon the consummation of the Equity Offerings. Consummation of the Equity Offerings is not subject to consummation of the Debt Offerings. On March 6, 1998, the Company filed a Registration Statement on Form S-3 (the "Registration Statement") with the Securities and Exchange Commission registering an aggregate of $4.0 billion of debt and equity securities. The Registration Statement was declared effective by the Securities and Exchange Commission on April 20, 1998. On April 30, 1998, the Company filed with the Securities and Exchange Commission preliminary Prospectus Supplements with respect to the Offerings along with a Prospectus dated April 20, 1998. The amounts offered and the terms of each offering will be determined based on a number of factors and, therefore, the Offerings as described above may not be completed as presently proposed. 5. Cash Flow Information Interest paid in cash aggregated $51.9 million for the first quarter of 1998 and $49.5 million for the first quarter of 1997. Income taxes paid in cash totaled $10.0 million for the first quarter of 1998 and $5.3 million for the first quarter of 1997. 6. 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 10
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 March 31, 1998, the Company estimates that it is a named defendant in asbestos claims involving approximately 14,000 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 defendants and the nature and extent of indemnity or contribution claims that may be asserted by or against such other 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. The Company's indemnity payments may also be affected by co-defendant bankruptcy and class action filings. Since 1982 a number of former producers of asbestos-containing products have filed for reorganization under Chapter 11 of the United States Bankruptcy Code ("Co-Defendant Bankruptcies"). Pending lawsuits are generally stayed as to these entities, but continue against the Company and other defendants. The precise impact on the Company of these Co-Defendant Bankruptcies is not determinable. However, the Company believes that the Co-Defendant Bankruptcies probably have adversely affected, and may adversely affect in the future, the Company's share of the total liability to plaintiffs in previously settled or otherwise determined lawsuits and claims. The Company is also one of a number of defendants in (i) bodily injury lawsuits involving plaintiffs who allege that they are or were maritime workers ("Maritime Claims"), (ii) a lawsuit on behalf of individuals in Pennsylvania who have no asbestos-related impairment, but nevertheless seek the costs of future medical monitoring ("Medical Monitoring Claims"), (iii) defendants' claims for contribution ("Contribution Claims") and (iv) lawsuits brought by public or private property owners alleging damages to their various properties ("Property Damage Claims"). Certain of these Maritime Claims, Medical Monitoring Claims and Property Damage Claims seek class action treatment. Based on its past experience, the Company presently believes that the probable ultimate disposition of these Maritime Claims, Medical Monitoring Claims, Contribution Claims and Property Damage Claims will not involve any material additional liability and does not include them in the description herein of asbestos claims or in the total number of pending asbestos claims above. 11
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, including its wholly-owned captive insurer Owens Insurance Limited ("OIL"), and certain other parties for the years 1977 through 1985 in which the Company sought damages and a declaration of coverage for both asbestos bodily injury and property damage claims under insurance policies in effect during those years (Owens-Illinois, Inc. v. United Insurance Co., et al, Superior Court of New Jersey, Middlesex County, November 30, 1984). In December 1994, the Company partially settled for approximately $100 million its coverage claim against OIL to the extent of reinsurance provided to OIL by certain reinsurance companies representing approximately 19% of total United Insurance coverage limits. Subsequently, the Company reached separate settlements for approximately $140 million with various other reinsurers, and with OIL to the extent of reinsurance provided by such settling reinsurance companies. These settlements also included all of the reinsurers who had participated actively as litigating parties in the United Insurance case. Following the settlements described above, a settlement agreement (the "OIL Settlement") was reached with OIL. The OIL Settlement, which was endorsed by three mediators and approved by OIL's independent directors, called for the payment of remaining non-settled reinsurance at 78.5% of applicable reinsurance limits, increasing to 81% on approximately March 1, 1996 and accruing interest thereafter at 10% per annum. In December 1995, the presiding judge in the United Insurance case entered a Consent Judgment 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 was a good faith and non-collusive settlement and that it was fair and reasonable as to OIL and all of OIL's non-settling reinsurers. 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. Subsequent to the entry of the Consent Judgment Order in the United Insurance case described above, OIL gave notice of the OIL Settlement to all nonsettling reinsurers affected by the United Insurance case, informing all such 12
reinsurers of the terms of the OIL Settlement and demanding timely payment from such reinsurers pursuant to such terms. Since the date of the OIL settlement, 17 previously nonsettling reinsurers have made the payments called for under the OIL Settlement or otherwise settled their obligations thereunder. Other nonsettling solvent reinsurers, all of which are parties to the Employers Mutual case described above, have not, however, made the payments called for under the OIL Settlement. 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. A petition for interlocutory appeal of this summary judgment by certain nonsettling OIL reinsurers was rejected first by the Appellate Division of the New Jersey Superior Court and thereafter by the New Jersey Supreme Court. In January 1998, this same court granted OIL partial summary judgment barring the nonsettling OIL reinsurers' fraud claims. The nonsettling OIL reinsurers have petitioned for interlocutory appeal of this grant of partial summary judgment, but this petition has been rejected by the Appellate Division. As a result of payments and commitments that have been made by reinsurers pursuant to the OIL Settlement and the earlier settlement agreements described above in the United Insurance case and certain other available insurance, the Company has to date confirmed coverage for its asbestos-related costs of approximately $308.9 million. Of the total amount confirmed to date, $286.8 million had been received through March 31, 1998; and the balance of approximately $22.1 million will be received throughout 1998 and the next several years. The remainder of the insurance asset of approximately $201.1 million relates principally to the reinsurers who have not yet paid, and continue to contest, their reinsurance obligations under the OIL Settlement. This $201.1 million asset valuation at March 31, 1998 also reflects 1994 and 1995 reductions of $100 million and $40 million, respectively, in the insurance asset valuation of $650 million established in 1993, which had been made to reflect settlement activity and litigation developments in the United Insurance case. The Company believes, based on the rulings of the trial court, the Appellate Division and the New Jersey Supreme Court in the United Insurance case, as well as its understanding of the facts and legal precedents (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 the Co-Defendant Bankruptcies 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 13
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 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, as described above, and the amount of previous charges for asbestos-related costs. 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. 7. New Accounting Standards As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS No. 130"). FAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components. The Company's components of comprehensive income are net earnings and foreign currency translation adjustments. Total compre- hensive income for the three month periods ended March 31, 1998 and 1997 amounted to $33.2 million and $0.8 million, respectively. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("FAS No. 131"), which is effective for financial statements for periods beginning after December 15, 1997. FAS No. 131 need not, however, be applied to interim financial statements in the initial year of its application. FAS No. 131 establishes revised standards for determining an entity's operating segments and the type and level of financial information to be presented related to such operating segments. The impact of FAS No. 131 on the Company's disclosures of operating segment information has not been determined. In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("FAS No. 132"), which is effective for financial statements for fiscal years beginning after December 15, 1997. FAS No. 132 establishes revised standards for disclosures about pensions and other 14
postretirement benefits. The impact of FAS No. 132 on the Company's disclosures of pension and other postretirement benefits has not been determined. 8. Subsequent Event - Acquisition of Worldwide Packaging Businesses of BTR plc On April 30, 1998, the Company completed the acquisition of the worldwide glass and plastics packaging businesses of BTR plc in an all cash transaction valued at approximately $3.6 billion (the "BTR Transaction"). In the BTR Transaction, the Company acquired BTR's glass container operations in the Asia-Pacific region (i.e. Australia, New Zealand, China and Indonesia) and its plastics packaging operations in the United States, South America, Australia, Europe, and Asia ("BTR Packaging"), as well as BTR's United Kingdom glass container manufacturer ("Rockware Glass"). Pursuant to an agreement with the Commission of the European Communities, the Company has committed to sell Rockware Glass (the "Rockware Sale"). The BTR Transaction was financed through additional borrowings under the Company's Second Amended and Restated Credit Agreement (see Note 3), which was amended on April 30, 1998 to provide, among other things, additional borrowing capacity for the BTR Transaction. The acquisition will be accounted for under the purchase method of accounting. The total purchase cost of approximately $3.6 billion will be allocated to the tangible and identifiable intangible assets and liabilities based upon their respective fair values. BTR Packaging had 1997 net sales of approximately $1.2 billion. 15
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations - First Quarter 1998 compared with First Quarter 1997 The Company recorded net earnings of $80.4 million for the first quarter of 1998 compared to $54.6 million for the first quarter of 1997. Excluding the effects of the unusual items for both 1998 and 1997 discussed below, the Company's first quarter 1998 net earnings of $64.0 million increased $17.0 million over first quarter 1997 net earnings of $47.0 million. Consolidated segment operating profit, excluding the 1998 and 1997 unusual items, was $169.5 million for the first quarter of 1998 compared to $151.5 million for the first quarter of 1997, an increase of $18.0 million, or 11.9%. The increase is attributable to higher operating profit for the Glass Containers segment along with lower other retained costs. Interest expense, net of interest income, for the first quarter of 1998 decreased $18.8 million from that of the first quarter of 1997 as a result of the refinancing initiated in the second quarter of 1997. The Company's estimated effective tax rate for the first quarter of 1998, excluding the effects of the adjustment to Italy's net deferred tax liabilities discussed below, was 37.5%. This compares with 34.4% estimated in the first quarter of 1997 and the actual rate of 34.1% for the full year 1997, excluding the effect of the gain on the 1997 sale of the remaining 49% interest in Kimble Glass discussed below. The increase in the 1998 estimated rate is primarily the result of the non-recurrence of certain foreign tax credits which benefited 1997 results. Capsule segment results (in millions of dollars) for the first quarter of 1998 and 1997 were as follows: - ---------------------------------------------------------------------------- Net sales (Unaffiliated customers) Operating Profit - ---------------------------------------------------------------------------- 1998 1997 1998 (a) 1997 -------- -------- -------- -------- Glass Containers $ 812.4 $ 775.6 $ 111.5 $ 101.1 Plastics Packaging 285.7 280.4 67.3 51.7 Eliminations and other retained costs (b) .4 .3 (7.1) .9 - ---------------------------------------------------------------------------- Consolidated total $1,098.5 $1,056.3 $ 171.7 $ 153.7 ============================================================================ (a) Operating profit for 1998 includes: (1) a net gain of $18.5 million related to the termination of a licensing agreement, including charges for related equipment writeoffs and capacity adjustments, and (2) charges totaling $16.3 million for the settlement of certain environmental litigation and severance costs at certain international affiliates. These items increased (decreased) operating profit as follows: Glass Containers, $(7.8) million; Plastics Packaging, $18.5 million; and other retained costs, $(8.5) million. 16
(b) Operating profit for 1997 includes: (1) a gain of $16.3 million on the sale of the remaining 49% interest in Kimble Glass, and (2) charges of $14.1 million principally for the estimated cost of guaranteed lease obligations of a previously divested business. Consolidated net sales for the first quarter of 1998 increased $42.2 million, or 4.0%, over the prior year. Net sales of the Glass Containers segment increased $36.8 million, or 4.7%, over 1997. The combined U.S. dollar sales of the segment's foreign affiliates increased over the prior year, reflecting the February 1997 acquisition of AVIR S.p.A., the largest manufacturer of glass containers in Italy. Also, increased unit shipments at several of the Company's affiliates, including those in Venezuela, Ecuador, Finland and China more than offset lower unit shipments in Colombia. Domestically, glass container unit shipments of containers for the beer, tea and juice, and liquor and wine industries increased over the prior year. Net sales of the Plastics Packaging segment increased $5.3 million, or 1.9%, over the prior year. Higher shipments of plastic containers were partially offset by lower shipments of prescription containers, reflecting strong unit shipments in the first quarter of 1997 in advance of a price increase, and of child resistant closures. Consolidated operating profit for the first quarter of 1998, excluding the 1998 and 1997 unusual items, increased $18.0 million, or 11.9%, to $169.5 million from first quarter of 1997 operating profit of $151.5 million. The operating profit of the Glass Containers segment, excluding the 1998 unusual items, increased $18.2 million to $119.3 million, compared to $101.1 million in the first quarter of 1997. The combined U.S. dollar operating profit of the segment's foreign affiliates increased from the first quarter of 1997. The February 1997 acquisition of AVIR S.p.A. and improved results at several of the segment's affiliates, including those in Venezuela, Ecuador, Finland and China contributed to the increase. Domestically, operating profit increased from the first quarter of 1997 as a result of higher unit shipments for most end uses. The operating profit of the Plastics Packaging segment, excluding the 1998 unusual items, decreased $2.9 million, or 5.6%, compared to the first quarter of 1997. Higher shipments of plastic containers were more than offset by lower shipments of prescription containers, reflecting strong sales in the first quarter of 1997 in advance of a price increase. Lower shipments of child resistant closures also contributed to lower operating profit. Other retained costs, excluding the 1998 and 1997 unusual items discussed below, were $1.4 million income for the first quarter of 1998 compared to $1.3 million expense for the first quarter of 1997, reflecting higher net financial services income. The first quarter 1998 results include the following unusual items: (1) a tax benefit of $15.1 million to adjust net deferred income tax liabilities as a result of changes in Italy's tax laws; (2) a net gain of $18.5 million ($11.4 million aftertax) related to the termination of a license agreement, including charges for related equipment writeoffs and capacity adjustments, under which the Company had produced plastic multipack carriers for beverage cans; and (3) charges of $16.3 million ($10.1 million aftertax) for the settlement of certain environmental litigation and for severance costs at certain international affiliates. The first quarter 1997 results include the 17
following unusual items: (1) a gain of $16.3 million ($16.3 million aftertax) on the sale of the Company's remaining 49% interest in Kimble Glass, and (2) charges of $14.1 million ($8.7 million aftertax) principally for guarantees of certain lease obligations of a previously divested business. Capital Resources and Liquidity The Company's total debt at March 31, 1998 was $3.39 billion, compared to $3.32 billion at December 31, 1997 and $3.57 billion at March 31, 1997. At March 31, 1998, the Company had available credit totaling $3.0 billion under the Bank Credit Agreement expiring in December 2001, of which $679.7 million had not been utilized. At December 31, 1997, the Company had $741.0 million of credit which had not been utilized under the Agreement. The increased utilization and corresponding higher debt balances at March 31, 1998 resulted in large part from borrowings for capital expenditures, partially offset by cash provided by operations. Cash provided by operating activities was $42.2 million for the first three months of 1998 compared to $52.0 million for the first three months of 1997. On April 30, 1998, the Company amended it current Bank Credit Agreement by entering into a Second Amended and Restated Credit Agreement with a group of banks (see Note 3). The Company anticipates that cash flow from its opera- tions and from utilization of credit available through December 2001 under the Revolving Credit Facility portion of the Amended 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. If the Offerings (see Note 4) are not consummated as currently contemplated, capacity under the Revolving Credit Facility portion of the Amended Bank Credit Agreement, proceeds from the Rockware Sale (see Note 8) and cash flows from operations may not be sufficient to repay the Company's Term Loan portion of the Amended Bank Credit Agreement due October 30, 1999. There can be no assurance that the Company will be able to raise funds in a timely manner or that the proceeds therefrom will be sufficient to repay the Term Loan. Interest rate, guarantee and pledge provisions under the Term Loan and Revolving Credit Facility are linked to the Company's leverage ratio. If the Offerings and/or the Rockware Sale are not consummated as currently contemplated, interest rates applicable to the Amended Bank Credit Agreement could increase and/or the Company could be required to execute the guarantees and pledges. 18
PART II -- OTHER INFORMATION Item 1. Legal Proceedings. (a) Contingencies. Note 6 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 4.1 Second Amended and Restated Credit Agreement, dated as of April 30, 1998, among Owens-Illinois, Inc. and certain of its subsidiaries and the lenders listed therein, including those named as managing agents, co-agents, lead managers, arrangers, offshore administrative agents, The Bank of Nova Scotia, NationsBank, N.A., Bank of America National Trust and Savings Association, and Bankers Trust Company including exhibits and schedules thereto. Exhibit 12 Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends. Exhibit 23 Consent of McCarter & English. Exhibit 27 Financial Data Schedule. (b) Reports on Form 8-K: (1) On March 2, 1998, the Registrant filed a Form 8-K which included a press release dated March 1, 1998, announcing the signing of a definitive agreement to acquire the worldwide glass and plastics packaging businesses of BTR plc in an all-cash transaction valued at $3.6 billion. (2) On March 4, 1998, the Registrant filed a Form 8-K/A, Amendment No. 1, amending the Current Report on Form 8-K dated March 1, 1998 (filed on March 2, 1998). Such Amendment included additional information regarding the acquisition of the worldwide glass and plastics packaging businesses of BTR plc. No other reports on Form 8-K were filed by the Registrant during the first quarter of 1998. 19
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. OWENS-ILLINOIS, INC. Date May 13, 1998 By /s/ Lee A. Wesselmann ------------ -------------------------------------------- Lee A. Wesselmann, Senior Vice President and Chief Financial Officer (Principal Financial Officer) 20
INDEX TO EXHIBITS Exhibits - -------- 4.1 Second Amended and Restated Credit Agreement, dated as of April 30, 1998, among Owens-Illinois, Inc. and certain of its subsidiaries and the lenders listed therein, including those named as managing agents, co-agents, lead managers, arrangers, offshore administrative agents, The Bank of Nova Scotia, NationsBank, N.A., Bank of America National Trust and Savings Association, and Bankers Trust Company including exhibits and schedules thereto 12 Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends 23 Consent of McCarter & English 27 Financial Data Schedule 21