Owens Illinois profit up; company sees moderating asbestos trends, better debt picture

By Paul Deckelman

New York, July 21 - Owens-Illinois Inc. posted strong results Wednesday for the second quarter ended June 30 - and said that its expects the level of asbestos-related claims against the company to now moderate after having spiked up in the year-ago quarter.

The Toledo, Ohio-based maker of packaging products also said that while its overall debt load grew to $6.7 billion at the end of the quarter from $5.8 billion a year ago, the increase was attributable to its nearly $1.4 billion debt-funded acquisition of European packaging maker BSN Glasspack SA, which closed on June 21, just before the quarter's end.

Apart from the debt associated with that transaction, Owens-Illinois said that its liquidity picture, in terms of debt plus cash on hand, improved substantially during the quarter.

It also anticipates making efforts to lower debt while improving EBITDA to bring its debt/EBITDA ratio down to around the 3.5 times area over the next several years.

The company reported second-quarter net earnings of $82 million (52 cents per share), well up from $17 million (eight cents a share) a year earlier. Excluding unusual, non-recurring items, such as a $20.6 million gain on the sale of certain real property and a $14.5 million charge related to the settlement of certain intellectual property litigation in the latest quarter, or $16.8 million of charges for early debt retirement and a $37.4 million loss from the sale of long-term notes receivable a year ago, the company earned $76.6 million (48 cents per share) in the latest period, up from $65.1 million, (40 cents per share) a year ago.

Of perhaps more interest to debt investors, segment EBITDA for the quarter totaled $335 million, an increase of $13 million or 4% from the year-ago quarter.

On a morning conference call with investors and analysts following the release of its quarterly results, the company's chief financial officer, Thomas Young, said that as of the end of the second quarter consolidated debt was about $6.7 billion, up from around $5.8 billion a year earlier, while Owens-Illinois' cash balance was $302 million, up from $150 million.

He attributed the jump in the debt load to the BSN acquisition, which included, besides the debt-funded cost of buying the French company's equity, the assumption of some $588 million of BSN debt and the refinancing of another $288 million, for a total increase in Owens-Illinois' debt of $1.36 billion. The transaction also added $87 million in cash to the Ohio company's balance sheet.

However, Young pointed out, excluding the effects of that BSN transaction, the company had reduced its debt and increased its cash balance by the end of the 2004 second quarter by a net total of $480 million from year-earlier levels.

"Clearly our liquidity-improvement initiatives and increased focus on free cash flow were having a very positive effect," Young declared.

Aiming for 3.5 times

When asked by an analyst during the question-and-answer portion of the program following the formal presentation of results whether Owens-Illinois has any kind of targeted leverage level it would like to reach going forward, company president and chief executive officer Steven McCracken said that "where we are [right now] is very manageable, and I think longer term, if you wanted a marker, we would like to get our debt-to-EBITDA [ratio] down. 3.5 [times] or below is kind of a near-term objective for us - but we've shown that we can handle the debt level we have.

"Given good growth opportunities, we tend to focus on the debt/EBITDA rather than total debt. But 3.5 [times] would be the objective we've set over time."

But he refused to be pinned down to whether Owens-Illinois would be shooting for that goal in either 2005 or 2006, saying only that "over the next couple of years is when we'd like to get there but we can't be more precise than that."

He noted as well that the company has other, perhaps competing, financial objectives besides debt reduction, including increasing earnings and cash flow, and "exploiting really value-added good-return growth opportunities."

In response to an analyst's question asking whether the company's previously announced restructuring of its blow-molded plastic containers business, which is expected to result in the divestment of some assets, would have any effect on the secured bonds of Owens-Illinois' Owens-Brockway Glass Container Inc. unit, which are backed by the blow-plastic assets, among other collateral, Young said that "the divested assets will be removed from the collateral package - but the offset of that is the debt will be paid down by the proceeds."

Young said that the company's interest expense in the second quarter was $116.2 million, down $5.4 million from $121.6 million a year earlier, which excludes the $16.8 million for early debt retirement charges.

The company was able to cut its interest payments by some $6.7 million as a result of the fixed-to- floating interest rate swap program it carried out on about $1.2 billion of what had previously been fixed-rate debt, as well as $1.3 million in savings from its repricing last December of its senior secured credit agreement.

This was partly offset by 10 days of interest accrual, totaling $2.8 million, on the additional debt it took on as part of the BSN acquisition.

In its earnings release, Owens-Illinois reiterated its previously disclosed guidance of anticipated additional interest expense of about $94 million on an annual basis resulting from the BSN acquisition.

Asbestos claims heading down

Turning to the asbestos issue, Young said that the company's asbestos spending during the quarter was $45.5 million, up a bit from $44.8 million a year earlier - but he noted that for the six months ended on June 30, the asbestos costs fell to $95.9 million from $99.9 million in the comparable year-earlier period.

Even more important to the company than that 4% drop, Young noted that the filing of new claims by people seeking damages "continued the downward trend," and were down some 55% from a year ago.

He pointed out that a year ago, the company had received some 7,000 new cases filed in advance of changes in the tort laws in Mississippi, which passed reform legislation last year aimed at correcting flaws in the legal structure that made the state a favorite venue for bringing costly class-action suits against corporate defendants. Even throwing out the effect of those 7,000 Mississippi filings, Young said that new claims were down 25% year-over-year.

At the end of the quarter, there were about 32,000 pending lawsuits and claims against the company, versus about 29,000 as of the end of the previous fiscal year on Dec. 31, an increase he attributed to a lower rate of disposition of claims than in the earlier period. About 45% of the pending cases, he said, were being heard in Mississippi "and may ultimately be determined to have been improperly filed in view of recent decisions of the Mississippi Supreme Court."

He also indicated that "the possibility of legislative reforms, at both the federal and state level, have accelerated the number of filings." Owens-Illinois, he said, believes that "a significant number of those filings are cases with exposure dates after our 1958 exit from the business for which the company takes the position that it has no liability."

Owens-Illinois is the former corporate parent, along with Corning Co., of insulation maker Owens Corning, which began life as a joint venture between the two companies in 1935 and which was spun off as an independent company in 1938, although its two founding parents retained majority stakes. Owens Corning, based in Toledo, just like Owens-Illinois, is currently in Chapter 11, forced there by a flood of lawsuits related to its use of the fire-retardant asbestos - now considered a deadly carcinogen - in past decades in the making of insulation. However, both Owens-Illinois and Corning divested themselves of their holdings in the company in the 1950s, and the two Toledo companies have been separate for decades. Some packaging companies also used asbestos in certain industrial applications in past decades, but Owens-Illinois said 1958 was the last year it was involved with the material.

"Not withstanding the distorting effect that legislative reform efforts can have on asbestos statistics and activity," Young concluded, "the company continues its very active support of legislative initiatives on the federal and state levels to reform asbestos litigation."

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