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8
A
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A
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P
O
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C O N T E N T S
i
1-4
ib
Financial Highlights
Letter to Stakeholders
2008 Form 10-K
Company Information
F I N A N C I A L H I G H L I G H T S
Dollars in millions, except per-share amounts.
Summary of Financial Data
2008
2007
2006
Net sales
$7,884.7
$7,566.7
$6,650.4
Reportable segment operating profi t
1,156.8
1,107.0
Net interest expense1
Earnings (loss) from continuing operations
Net earnings (loss)
Diluted earnings (loss) per share:2
Earnings (loss) from continuing operations
Net earnings (loss)
Continuing operations:
Capital expenditures
Depreciation
Amortization of intangibles
Free cash fl ow3
Total debt
Management working capital as a % of net sales4
Gross profi t %
Operating expense as a % of net sales5
214.4
251.5
258.3
1.48
1.52
361.7
431.0
28.9
345.9
306.3
299.3
1,340.6
1.78
7.99
292.5
423.4
28.9
332.6
734.8
329.8
(3.8)
(27.5)
(0.17)
(0.32)
285.0
427.7
22.3
(46.7)
3,334.1
3,714.4
5,456.6
16.3%
21.3%
7.3%
18.6%
21.1%
7.7%
19.2%
17.6%
8.7%
1 Includes charges for note repurchase premiums of $7.9 million in 2007 and $6.2 million in 2006.
2 The net effect of asbestos-related charges and unusual items in 2008 was a decrease of $2.32 per share. The net effect in 2007 was a decrease of $1.16 per share.
The net effect in 2006 was a decrease of $1.15 per share.
3 Free cash fl ow is defi ned as cash provided by continuing operating activities less capital expenditures for continuing operations.
4 Management working capital is defi ned as accounts receivable, inventory, and repair parts less accounts payable.
5 Operating expense equals selling and administrative expense plus research, development and engineering expense.
i
Pictured on the front cover, representing our more than 23,000 employees worldwide are an engineer in Perrysburg, Ohio, accounts payable team leader in Bussigny,
Switzerland, and an operations employee in Melbourne, Australia.
C O M P A N Y I N F O R M A T I O N
Exchange Listings
Annual Meeting
Share Owners
Owens-Illinois common stock (symbol OI)
is listed on the New York Stock Exchange.
Options on the Company’s common stock
are traded on the Chicago Board Options
Exchange.
The annual meeting of share owners will be
held at 9:00 a.m. on Thursday, April 23, 2009
in Conference Room A, Plaza 2, at the O-I
World Headquarters Campus, Perrysburg, OH.
Transfer Agent for Common Stock
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Forms 10-K and 10-Q
The Company’s Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q, fi led with
the Securities and Exchange Commission, may
be obtained without charge by contacting:
Private couriers and registered mail:
250 Royall Street
Canton, MA 02021
Computershare Web site:
http://www.computershare.com
Phone: (781) 575-2724
Hearing-impaired: TDD 1-800-952-9245
Owens-Illinois, Inc.
Investor Relations
One Michael Owens Way
Perrysburg, OH 43551
Phone: (567) 336-2400
These reports are also available without charge
on the Company’s Web site at www.o-i.com.
Any inquiries regarding your account
or certifi cates should be referred to
Computershare Trust Company, N.A.
Web Site
For further information about O-I, visit the
Company’s Web site at www.o-i.com.
Trustees
8-1/4% Senior Notes, due 2013
U.S. Bank, N.A.
Corporate Trust Services
U.S. Bank Trust Center
180 East Fifth Street, 2nd Floor
St. Paul, MN 55101
6-3/4% Senior Notes, due 2014
Law Debenture Trust Company of New York
400 Madison Avenue, 4th Floor
New York, NY 10017
7.50% Senior Debentures, due 2010
7.80% Senior Debentures, due 2018
Bank of New York
101 Barclay Street
New York, NY 10286
Market for Common Stock
As shown below, the price range for the
Company’s common stock on the New York
Stock Exchange, as reported by The Financial
Industry Regulatory Authority, Inc. was as
follows:
2008 2007
Low
High
High
Low
1st Q $58.68 $38.60 $26.17 $18.48
2nd Q
25.82
41.49
32.66
23.66
3rd Q
39.33
15.20
4th Q
35.11
42.64
50.46
60.60
48.60
29.53
No dividends have been declared or paid on
the common stock since the Company’s initial
public offering in December 1991.
The number of share owners of record
on January 31, 2009 was 1,090.
Approximately 94% of the outstanding
shares were registered in the name of
Depository Trust Company, or CEDE, which
held such shares on behalf of a number of
brokerage fi rms, banks and other fi nancial
institutions. The shares attributed to these
fi nancial institutions, in turn, represented
the interests of more than 25,000
benefi cial owners.
Annual Certifi cations
The most recent certifi cations by the Chief
Executive Offi cer and the Chief Financial
Offi cer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 are fi led as
exhibits to the Company’s Form 10-K. The
Company has also fi led with the New York
Stock Exchange the most recent Annual
CEO Certifi cation as required by Section
303A.12(a) of the New York Stock
Exchange Listed Company Manual.
Corporate Headquarters
Owens-Illinois, Inc.
One Michael Owens Way
Perrysburg, OH 43551
ib
Dear Fellow Stakeholders:
2008 was a year full of challenges – from skyrocketing energy costs to unprecedented credit restrictions that led to a
crippled global economy. While all of these issues certainly had an impact on O-I, I am very proud to report that we had
our best year ever in terms of earnings and productivity. We attribute this success to our adherence to sound fi nancial and
business principles, and to the amazing resilience and adaptability of the 23,000 people who make up this company.
O-I has been in the midst of a transformation for several years, a transformation aimed at becoming a more market-based,
customer-focused global enterprise. We have a strong and proud history of being the leader in the glass industry – and we
have more expertise, more technology and more capabilities than any other manufacturer of glass packaging. Our challenge
has been to reshape the structure of our operations to eliminate over-capacity and improve operational effi ciency, while
refocusing our talents on marketing innovative glass solutions and offering technologies that will help our customers
differentiate themselves in the marketplace. And we have the good fortune to be doing all of this as a maker of the world’s
safest, purest and most recyclable packaging material.
Our fi nancial performance improved signifi cantly
in 2008, especially when compared to our results
of two years prior. Earnings from continuing
operations in 2008, excluding unusual items, were
$3.80 per share, up 29% from $2.94 in 2007,
and nearly four times 2006 earnings per share.
Sales increased from $7.6 billion in 2007 to
$7.9 billion in 2008. And more importantly, we
increased our profi tability signifi cantly – from a
margin of 11.2% in 2006 to margins of 14.8%
in 2007 and 2008.
Many of the steps we took in 2007 to improve
our fi nancial fl exibility, streamline our business
and boost profi tability paid off in 2008.
Reducing our debt by $2.2 billion over the last
Executive Leadership Team, Center photo, left to right:
Steve Malia, Jim Baehren, Al Stroucken, Ed White, Rich Crawford and Ed Snyder.
1
two years and at the same time maintaining free cash fl ow has created a much stronger and sustainable balance sheet.
As a result, our liquidity and fi nancial fl exibility have been unaffected by the credit crisis that began in the latter half of the year.
Focusing on free cash fl ow generation, which was $346 million for full year 2008, allows us to pursue many strategic options,
including the ability to expand our business when and where we deem appropriate. We remain committed to targeted and
profi table growth in our geographic regions and extending our reach to those countries where we are not yet doing business
or are underrepresented. For instance, we are adding new furnaces in our Auckland, New Zealand plant, as well as in Lurin, Peru,
to meet the growing demands of customers in those regions.
Our fi nancial results in 2008 can largely
be attributed to the very rigorous margin
improvement strategy fi rst introduced in 2007.
This strategy emphasizes value over volume
and seeks to establish contract terms with our
customers that provide timely price adjustments
for the most volatile cost components of our
products. The new strategy, which refl ects
more clearly the value and service we bring
to the customer, will continue to serve as the
cornerstone of our profi tability improvement.
Our focus on repairing margins forced us to look at our operations more holistically. We have made great progress in working,
thinking and functioning as one O-I, and we have made steady productivity improvements in all regions of the globe. These
effi ciencies, coupled with the need to adjust for the generally unattractive business we gave up, provided signifi cant opportunity
for consolidation in our installed manufacturing base. Beginning late in 2007 and over the course of 2008, we closed down four
plants and shut down an additional four furnaces, for 11 furnaces total.
In the back half of the year, consumption decreased as the global economy slowed dramatically. In response, we moved
quickly to conserve cash via aggressive temporary production curtailments. We made all of these adjustments, permanent and
temporary, without impacting our ability to meet all of our customer needs.
2
As a manufacturing-based company, with 80% of our employee population working in plants in 22 different countries, we
are perhaps most proud of the progress we have made in improving our operations at all levels. We are working from the
top down and bottom up to achieve this kind of change. Through the use of Lean Six Sigma methodologies and other
plant-based initiatives, we are creating a data-driven culture that values the input of individuals at all levels. We are seeing
tremendous results from these initiatives and expect them to add even more value in the years to come.
Having successfully set our company on the right path over the last couple of years, we took time in 2008 to consider the
path forward. After undertaking a thorough analysis of the business and market developments, we established four strategic
priorities to guide us in the future. These priorities were established to achieve the ultimate goal of increasing shareholder
return. They focus on four critical areas: marketing glass, innovation and technology, strategic and profi table growth, and
operational excellence.
In each of these areas we have identifi ed key objectives and are in the process of mapping out specifi c steps in each of our
geographic regions and in each of our functions to help achieve these goals. We are using the Balanced Scorecard tool and
process to help guide us in this endeavor.
Functioning as an umbrella to all of our priorities is our
commitment to corporate sustainability. In 2008 we created a
leadership position responsible for overseeing the defi nition and
achievement of our sustainability goals as a company. We have
established goals to reduce our emissions, lower our energy
consumption, and increase the amount of cullet (recycled glass)
we use. We are now working to coordinate and develop
processes to achieve these goals. Equally important is the
role we play in the sustainability stories of our customers and
consumers in general. Glass is by far the most environmentally
friendly packaging material available today. This presents us
with an enormous opportunity.
3
As the largest manufacturer of glass packaging worldwide, it is our responsibility to create the future of glass. It is up to us
to serve as ambassadors of glass, and to intensify our marketing to bring about more widespread use of glass packaging for
products currently being provided in plastic and other materials. We are investing in technology and people to develop new
products and new solutions for our customers. We are embarking on marketing programs in which we will partner with
customers and potential customers to identify opportunities for glass. As the only cradle-to-cradle packaging material, glass
offers many unique benefi ts. Not only is recycled glass used to create new glass containers suitable for food and beverages,
glass bottles can be refi lled and reused in their original form. We know there is no better packaging solution and we believe
it is important to educate others about all of the benefi ts of glass, especially in a world growing more and more concerned
about food safety.
I could not be prouder of the results we achieved in 2008, both fi nancially and operationally. All of the strategies and
initiatives undertaken in 2007 continued to bear fruit in 2008, proving we are focusing on the areas of greatest impact. As
I begin my third year as CEO of O-I, I continue to be impressed and moved by the integrity and commitment of the people
who make up this great company. We have asked a lot of them, and they have delivered over and over again. Their resilience
and the way they have embraced change is an indicator of the vast potential yet to be realized. This bodes well for O-I and
our stakeholders. Although we will be facing signifi cant business challenges in 2009 from what appears to be a still weakening
economy, we are in the best position ever to address those challenges – fi nancially and operationally. While we fully recognize
that we will not be immune to these headwinds, we are confi dent of our continued ability to grow, improve and lead the industry
to create the future of glass.
- Al Stroucken, CEO and Chairman of the Board
4
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
(Mark One)
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2008
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-9576
OWENS-ILLINOIS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
One Michael Owens Way, Perrysburg, Ohio
(Address of principal executive offices)
22-2781933
(IRS Employer
Identification No.)
43551
(Zip Code)
Registrant’s telephone number, including area code: (567) 336-5000
Securities registered pursuant to Section 12(b) of the Act:
Ti tle of e ach cl a s s
N a m e of each e x ch a n g e o n
wh ich re giste re d
Common Stock, $.01 par value
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.
Yes
No
(Cover page 1 of 2 pages)
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the
Act.
Yes
No
Indicate by check mark whether the registrant (1) has 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
registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-
accelerated filer or a smaller reporting company. See definitions of “ large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
smaller reporting company)
(do no check if a
Accelerated filer
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).
Yes
No
The aggregate market value (based on the consolidated tape closing price on June 30, 2008) of the voting
and non-voting stock beneficially held by non-affiliates of Owens-Illinois, Inc. was approximately $6,040,359,000.
For the sole purpose of making this calculation, the term “non-affiliate” has been interpreted to exclude directors
and executive officers of the Company. Such interpretation is not intended to be, and should not be construed to be,
an admission by Owens-Illinois, Inc. or such directors or executive officers of the Company that such directors and
executive officers of the Company are “affiliates” of Owens-Illinois, Inc., as that term is defined under the Securities
Act of 1934.
The number of shares of common stock, $.01 par value of Owens-Illinois, Inc. outstanding as of December
31, 2008 was 167,149,476.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Owens-Illinois, Inc. Proxy Statement for The Annual Meeting of Share Owners To Be Held Thursday,
April 23, 2009 (“Proxy Statement”) are incorporated by reference into Part III hereof.
TABLE OF GUARANTORS
Exact Name of Registrant
As Specified In Its Charter
State/Country of
Incorporation
or
Organization
Owens-Illinois Group, Inc........................
Owens-Brockway Packaging, Inc.............
Delaware
Delaware
Primary
Standard
Industrial
Classification
Code
Number
6719
6719
I.R.S
Employee
Identification
Number
34-1559348
34-1559346
The address, including zip code, and telephone number, of each additional registrant’s principal executive
office is One Michael Owens Way, Perrysburg, Ohio 43551; (567) 336-5000. These companies are listed as
guarantors of the debt securities of the registrant. The consolidating condensed financial statements of the Company
depicting separately its guarantor and non-guarantor subsidiaries are presented in the notes to the consolidated
financial statements. All of the equity securities of each of the guarantors set forth in the table above are owned,
either directly or indirectly, by Owens-Illinois, Inc.
(Cover page 2 of 2 pages)
TABLE OF CONTENTS
PART I ....................................................................................................................................................... 1
BUSINESS..................................................................................................................... 1
RISK FACTORS............................................................................................................ 9
UNRESOLVED STAFF COMMENTS.............................................................................16
PROPERTIES .............................................................................................................. 16
LEGAL PROCEEDINGS............................................................................................. 19
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.................... 19
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II.................................................................................................................................................... 19
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHARE
OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.......... 19
SELECTED FINANCIAL DATA ................................................................................ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...................................................... 25
QUALITATIVE AND QUANTITATIVE DISCLOSURES
ABOUT MARKET RISK............................................................................................. 45
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ............................... 48
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................................................. 106
CONTROLS AND PROCEDURES ........................................................................... 106
OTHER INFORMATION .......................................................................................... 109
ITEM 10.
ITEM 11.
ITEM 12.
PART III ................................................................................................................................................ 109
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE ....... 109
EXECUTIVE COMPENSATION ..................................................................................109
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS............................ 110
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
ITEM 13.
DIRECTOR INDEPENDENCE.......................................................................................110
PRINCIPAL ACCOUNTANT FEES AND SERVICES.............................................. 110
ITEM 14.
PART IV ................................................................................................................................................ 111
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.................................... 111
ITEM 15.
SIGNATURES ....................................................................................................................................... 191
EXHIBITS.............................................................................................................................................. E-1
This page intentionally left blank.
PART I
ITEM 1.
BUSINESS
General Development of Business
Owens-Illinois, Inc. (the “Company”), through its subsidiaries, is the successor to a business established
in 1903. The Company is the largest manufacturer of glass containers in the world, with leading positions
in Europe, North America, Asia Pacific and South America.
Strategic Priorities and Competitive Strengths
The Company is pursuing the following strategic priorities aimed at optimizing shareholder return:
Marketing Glass – promote its value added benefits and communicate its earth-friendly
attributes
Strategic & Profitable Growth – expand presence in growing markets and enter growing
markets where we do not have a presence
Innovation & Technology – focus on product innovation that adds value for customers and
develop technology that provides a sustainable advantage
Operational Excellence – continuous productivity improvement, pricing strategy to improve
margins, and disciplined use of cash
Beginning in 2007, the Company commenced a strategic review of its global profitability and
manufacturing footprint. Since undertaking this review, the Company has announced the idling of
capacity or closing of facilities involving 11 furnaces and approximately 1,800 job eliminations. The
Company expects to conclude the current global review in 2009. The Company believes these actions,
combined with its pricing initiatives, will contribute to optimizing shareholder return.
The Company has 80 glass manufacturing plants in 22 countries.
Technology Leader
The Company believes it is a technological leader in the worldwide glass container segment of the rigid
packaging market in which it competes. During the five years ended December 31, 2008, on a continuing
operations basis, the Company invested more than $1.5 billion in capital expenditures (excluding
acquisitions) and more than $264 million in research, development and engineering to, among other
things, improve labor and machine productivity, increase capacity in growing markets and commercialize
technology into new products.
Worldwide Corporate Headquarters
The principal executive office of the Company is located at One Michael Owens Way, Perrysburg, Ohio
43551; the telephone number is (567) 336-5000. The Company’s website is www.o-i.com. The
Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,
and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 can be obtained from this site at no cost. The Company’s Corporate Governance
Guidelines, Code of Business Conduct and Ethics and the charters of the Compensation,
Nominating/Corporate Governance and Audit Committees are also available on the Investor Relations
1
section of the Company’s web site. Copies of these documents are available in print to share owners
upon request, addressed to the Corporate Secretary at the address above.
Financial Information about Reportable Segments
Information as to sales, earnings from continuing operations before interest income, interest expense,
provision for income taxes and minority share owners’ interests in earnings of subsidiaries and excluding
amounts related to certain items that management considers not representative of ongoing operations
("Segment Operating Profit"), and total assets by reportable segment is included in Note 20 to the
Consolidated Financial Statements.
Narrative Description of Business
Below is a description of the business and information to the extent material to understanding the
Company’s business taken as a whole.
Products and Services, Customers, Markets and Competitive Conditions, and Methods of
Distribution
The Company is the largest manufacturer of glass containers in the world. The Company is the leading
glass container manufacturer in 17 of the 22 countries where it competes in the glass container segment of
the rigid packaging market, including the U.S., and the sole manufacturer of glass containers in 8 of these
countries.
Products and Services
The Company produces glass containers for beer, ready-to-drink low alcohol refreshers, spirits, wine,
food, tea, juice and pharmaceuticals. The Company also produces glass containers for soft drinks and
other non-alcoholic beverages, principally outside the U.S. The Company manufactures these products in
a wide range of sizes, shapes and colors. The Company is active in new product development and glass
container innovation.
Customers
In most of the countries where the Company competes, it has the leading position in the glass container
segment of the rigid packaging market based on sales revenue. The largest customers include many of the
leading manufacturers and marketers of glass packaged products in the world. In the U.S., the majority of
customers for glass containers are brewers, wine vintners, distillers and food producers. The Company
also produces glass containers for soft drinks and other non-alcoholic beverages, principally outside the
U.S. The largest U.S. glass container customers include (in alphabetical order) Anheuser-Busch InBev,
Brown Forman, Diageo, Miller/Coors, Pepsico, and Saxco-Demptos, Inc. The largest glass container
customers outside the U.S. include (in alphabetical order) Anheuser-Busch InBev, Carlsberg, Diageo,
Foster's, Heineken, Lion Nathan, Molson/Coors, and SABMiller. The Company is a major glass
container supplier to all of these customers.
The Company sells most of its glass container products directly to customers under annual or multi-year
supply agreements. Multi-year contracts typically provide for price adjustments based on cost changes
with annual limitations. The Company also sells some of its products through distributors. Glass
container production is typically scheduled to maintain reasonable levels of inventory.
2
Markets and Competitive Conditions
The principal markets for glass container products made by the Company are in Europe, North America,
Asia Pacific, and South America. The Company believes it is a low-cost producer in the glass container
segment of the rigid packaging market in many of the countries in which it competes. Much of this cost
advantage is due to proprietary equipment and process technology used by the Company. The
Company’s machine development activities and systematic upgrading of production equipment begun in
the 1990's and early 2000’s support its low-cost leadership position in the glass container segment in
many of the countries in which it competes, a key strength to competing successfully in the rigid
packaging market.
The Company has the leading share of the glass container segment of the U.S. rigid packaging market
based on sales revenue by domestic producers in the U.S. The principal glass container competitors in the
U.S. are Saint-Gobain Containers, Inc., a wholly-owned subsidiary of Compagnie de Saint-Gobain, and
Anchor Glass Container Corporation. In addition, imports from Mexico and other countries compete in
U.S. glass container segments. Additionally, a few major consumer packaged goods companies also self-
manufacture glass containers.
In supplying glass containers outside of the U.S., the Company competes directly with Compagnie de
Saint-Gobain in Europe and Brazil, Ardagh plc in the U.K., Germany, and Poland, Vetropak in the Czech
Republic and Amcor Limited in Australia. In other locations in Europe, the Company competes
indirectly with a variety of glass container firms including Compagnie de Saint-Gobain, Vetropak and
Ardagh plc. Except as mentioned above, the Company does not compete with any large, multi-national
glass container manufacturers in South America or the Asia Pacific region.
In addition to competing with other large, well-established manufacturers in the glass container segment,
the Company competes with manufacturers of other forms of rigid packaging, principally aluminum cans
and plastic containers, on the basis of quality, price, service and the marketing attributes of the container.
The principal competitors producing metal containers are Amcor, Ball Corporation, Crown Holdings,
Inc., Rexam plc, and Silgan Holdings Inc. The principal competitors producing plastic containers are
Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak Packaging, Inc. and
Silgan Holdings Inc. The Company also competes with manufacturers of non-rigid packaging
alternatives, including flexible pouches and aseptic cartons.
The Company’s unit shipments of glass containers in countries outside of the U.S. have grown
substantially from levels in earlier years. The Company has added to its international operations by
acquiring glass container companies, many of which have leading positions in growing or established
markets, increasing capacity at select foreign subsidiaries, and having a global network of glass container
companies that license its technology. In many developing countries, the Company’s international glass
operations have benefited in the last ten years from increased consumer spending power, a trend toward
the privatization of industry, a favorable climate for foreign investment, lowering of trade barriers and
global expansion programs by multi-national consumer companies.
Europe. The Company’s European glass container business, headquartered in Switzerland, has
consolidated manufacturing operations in 11 countries and is the largest in Europe. The Company is a
leading producer of wine and champagne bottles in France. In Italy, the Company is the leading
manufacturer of glass containers. In Germany, the Company’s key customers include Jägermeister,
Unilever, and Nestle Europe. In The Netherlands, the Company is one of the leading suppliers of glass
containers to Heineken. The Company is a leading manufacturer of glass containers for the U.K. spirits
business. In Spain, the Company serves the market for olives in the Sevilla area and the market for wine
bottles in the Barcelona and southern France area. In Poland, the Company is the leading glass container
3
manufacturer and operates two plants. The Company is the leading glass container manufacturer in the
Czech Republic. In Hungary, the Company is the sole glass container manufacturer and serves the
Hungarian food industry. In Finland and the Baltic country of Estonia, the Company is the only
manufacturer of glass containers. The Company coordinates production activities between Finland and
Estonia in order to efficiently serve the Finnish, Baltic and Russian markets. In recent years, Western
European brewers have been establishing beer production facilities in Central Europe and the Russian
Republic. Because these new beer plants use high-speed filling lines, they require high quality glass
containers in order to operate properly. The Company believes it is well positioned to meet this demand.
North America. In addition to the glass container operations in the U.S., the Company’s subsidiary in
Canada is the sole manufacturer of glass containers in that country.
South America. The Company is the sole manufacturer of glass containers in Colombia, Ecuador and
Peru. In both Brazil and Venezuela, the Company is the leading manufacturer of glass containers. In
South America, there is a large infrastructure for returnable/refillable glass containers. However, over the
last several years, unit sales of non-returnable glass containers increased across countries in which the
Company operates.
Asia Pacific. The Company has glass operations in four countries in the Asia Pacific region: Australia,
New Zealand, Indonesia and China. In this region, the Company is the leading manufacturer of glass
containers in most of the countries in which it competes. In Australia, the Company’s subsidiary operates
four glass container plants including a plant focused on serving the needs of the growing Australian wine
industry. In New Zealand, the Company is the sole glass container manufacturer. In Indonesia, the
Company supplies the Indonesian market and exports glass containers to a number of countries. In China,
the glass container segments of the packaging market are regional and highly fragmented with a number
of local competitors. The Company has four glass container plants in China, manufacturing containers to
serve a wide range of customers both domestically and abroad.
The Company continues to focus on serving the needs of leading multi-national consumer companies as
they pursue international growth opportunities. The Company believes that it is often the glass container
partner of choice for such multi-national consumer companies due to its leadership in glass technology
and its status as a high quality producer in most of the markets it serves.
Manufacturing
The Company believes it is a low-cost producer in the North American rigid packaging market, as well as
a low-cost producer in many of the international glass segments in which it competes. Much of this cost
advantage is due to the Company’s proprietary equipment and process technology. The Company
believes its proprietary high volume glass forming machines, developed and refined by its engineering
group, are significantly more efficient and productive than those used by competitors. The Company’s
machine development activities and systematic upgrading of production equipment have given it a low-
cost leadership position in the glass container segment in most of the countries in which it competes, a
key strength to competing successfully in the rigid packaging market.
The Company operates two machine shops that assemble and repair high-productivity glass-forming
machines as well as several mold shops that manufacture molds and related equipment.
4
Methods of Distribution
Due to the significance of transportation costs and the importance of timely delivery, glass container
manufacturing facilities are generally located close to customers. In the U.S., most of the Company’s
glass container products are shipped by common carrier to customers within a 250-mile radius of a given
production site. In addition, the Company’s glass container operations outside the U.S. export some
products to customers beyond their national boundaries, which may include transportation by rail and
ocean delivery in combination with common carriers.
Suppliers and Raw Materials
The primary raw materials used in the Company’s glass container operations are sand, soda ash,
limestone and recycled glass. Each of these materials, as well as the other raw materials used to
manufacture glass containers, has historically been available in adequate supply from multiple sources.
One of the sources is a soda ash mining operation in Wyoming in which the Company has a 25% interest.
For certain raw materials, however, there may be temporary shortages due to weather or other factors,
including disruptions in supply caused by raw material transportation or production delays.
Energy
The Company’s glass container operations require a continuous supply of significant amounts of energy,
principally natural gas, fuel oil, and electrical power. Adequate supplies of energy are generally available
to the Company at all of its manufacturing locations. Energy costs typically account for 15-25% of the
Company’s total manufacturing costs, depending on the cost of energy, the factory location, and its
particular energy requirements. The percentage of total cost related to energy can vary significantly
because of volatility in market prices, particularly for natural gas and fuel oil in volatile markets such as
North America and Europe. In order to limit the effects of fluctuations in market prices for natural gas,
the Company uses commodity futures contracts related to its forecasted requirements in North America.
The objective of these futures contracts is to reduce the potential volatility in cash flows and expense due
to changing market prices. The Company continually evaluates the energy markets with respect to its
forecasted energy requirements in order to optimize its use of commodity futures contracts. If energy
costs increase substantially in the future, the Company could experience a corresponding increase in
operating costs, which may not be fully recoverable through increased selling prices.
Glass Recycling
The Company is an important contributor to the recycling effort in the U.S. and abroad and continues to
melt substantial recycled glass tonnage in its glass furnaces. The Company is the largest user of recycled
glass containers. If sufficient high-quality recycled glass were available on a consistent basis, the
Company has the technology to operate using up to 90% recycled glass. Using recycled glass in the
manufacturing process reduces energy costs and prolongs the operating life of the glass melting furnaces.
ADDITIONAL INFORMATION
Technical Assistance License Agreements
The Company has agreements to license its proprietary glass container technology and provide technical
assistance to 19 companies in 19 countries. These agreements cover areas related to manufacturing and
engineering assistance. The worldwide licensee network provides a stream of revenue to support the
Company's development activities and gives it the opportunity to participate in the rigid packaging market
in countries where it does not already have a direct presence. In addition, the Company's technical
5
agreements enable it to apply "best practices" developed by its worldwide licensee network. In the years
2008, 2007 and 2006, the Company earned $18.6 million, $19.7 million and $16.5 million, respectively,
in royalties and net technical assistance revenue on a continuing operations basis.
Research and Development
The Company believes it is a technological leader in the worldwide glass container segment of the rigid
packaging market. Research, development, and engineering constitute important parts of the Company's
technical activities. On a continuing operations basis, research, development, and engineering
expenditures were $66.6 million, $65.8 million, and $48.7 million for 2008, 2007, and 2006, respectively.
The Company's research, development and engineering activities include new products, manufacturing
process control, automatic inspection and further automation of manufacturing activities.
Environmental and Other Governmental Regulation
The Company's worldwide operations, in common with those of the industry generally, are subject to
extensive laws, ordinances, regulations and other legal requirements relating to environmental protection,
including legal requirements governing investigation and clean-up of contaminated properties as well as
water discharges, air emissions, waste management and workplace health and safety.
In the U.S., Canada, Europe and elsewhere, a number of government authorities have adopted or are
considering legal requirements that would mandate certain rates of recycling, the use of recycled
materials, or limitations on or preferences for certain types of packaging. The Company believes that
governments worldwide will continue to develop and enact legal requirements seeking to, or having the
effect of, guiding customer and end-consumer packaging choices.
In North America, sales of beverage containers are affected by governmental regulation of packaging,
including deposit return laws. As of January 1, 2009, there were 11 U.S. states with bottle deposit laws in
effect, requiring consumer deposits of between 4 and 15 cents, USD, depending on the size of the
container. In Canada, there are 8 provinces with consumer deposits between 5 and 20 cents Canadian,
depending on the size of the container. In Europe a number of countries have some form of consumer
deposit law in effect, including Austria, Belgium, Denmark, Finland, Germany, The Netherlands,
Norway, Sweden and Switzerland. The structure and enforcement of such laws and regulations can
impact the sales of beverage containers in a given jurisdiction. Such laws and regulations also impact the
availability of post-consumer recycled glass for the Company to use in container production.
A number of U.S. states and Canadian provinces have recently considered or are now considering laws
and regulations to encourage curbside, deposit return, and on-premise recycling. Although there is no
clear trend in the direction of these state and provincial laws and regulations, the Company believes that
U.S. states and Canadian provinces, as well as municipalities within those jurisdictions, will continue to
adopt recycling laws which will affect supplies of post-consumer recycled glass. As a large user of post-
consumer recycled glass for bottle-to-bottle production, the Company has an interest in laws and
regulations impacting supplies of such material in its markets.
The European Union Emissions Trading Scheme ("EUETS") commenced January 1, 2005. The EU has
committed to Kyoto Protocol emissions reduction targets and the EUETS is intended to facilitate such
reduction. The Company's manufacturing installations which operate in EU countries will need to restrict
the volume of their CO2 emissions to the level of their individually allocated Emissions Allowances as
set by country regulators. If the actual level of emissions for any installation exceeds its allocated
allowance, additional allowances can be bought on the market to cover deficits; conversely, if the actual
6
level of emissions for such installation is less than its allocation, the excess allowances can be sold on the
same market. No material effect is anticipated as a result of the EUETS.
In Asia Pacific, Australia's ratification of the Kyoto Protocol came into effect in March 2008. In July
2008, the Australian Federal Government issued the Carbon Pollution Reduction Scheme (CPRS) Green
Paper aimed to help reduce the country's carbon emissions. The CPRS recommends an emissions trading
scheme (ETS) be established in Australia in 2010. In New Zealand, parliament passed ETS legislation in
September 2008 and a cap-and-trade system is also likely to be in effect by 2010. Also in Australia, the
National Greenhouse and Energy Reporting Act 2007 commenced on July 1, 2008. The Act establishes a
mandatory reporting system for corporate greenhouse gas emissions and energy production and
consumption. Key features of the Act include the following: (1) reporting of greenhouse gas emissions,
energy consumption and production by large corporations, subject to independent audit; (2) public
disclosure of corporate level greenhouse gas emissions and energy information; and (3) consistent and
comparable data available for government, in particular, the development and administration of the
Carbon Pollution Reduction Scheme.
The Company is unable to predict what environmental legal requirements may be adopted in the future.
However, the Company continually monitors its operations in relation to environmental impacts and
invests in environmentally friendly and emissions reducing projects. As such, the Company has made
significant expenditures for environmental improvements at certain of its factories over the last several
years; however, these expenditures did not have a material adverse affect on the Company’s results of
operations or cash flows. While not expected to be material, the compliance costs associated with legal
environmental requirements are expected to continue.
Intellectual Property Rights
The Company has a large number of patents which relate to a wide variety of products and processes, has
a substantial number of patent applications pending, and is licensed under several patents of others.
While in the aggregate the Company's patents are of material importance to its businesses, the Company
does not consider that any patent or group of patents relating to a particular product or process is of
material importance when judged from the standpoint of any segment or its businesses as a whole.
The Company has a number of intellectual property rights, comprised of both patented and proprietary
technology, that the Company believes makes its glass forming machines more efficient and productive
than those used by its competitors. In addition, the efficiency of the Company's glass forming machines
is enhanced by the Company's overall approach to cost efficient manufacturing technology, which
extends from the raw materials batch house to the finished goods warehouse. This technology is
proprietary to the Company through a combination of issued patents, pending applications, copyrights,
trade secrets and proprietary know-how.
Upstream of the glass forming machines, there is technology to deliver molten glass to the forming
machine at high rates of flow and fully conditioned to be homogeneous in consistency, viscosity and
temperature for efficient forming into glass containers. The Company has proprietary know-how in
(a) the batch house, where raw materials are stored, measured and mixed, (b) the furnace control system
and furnace combustion, and (c) the forehearth and feeding system to deliver such homogeneous glass to
the forming machines.
In the Company's glass container manufacturing processes, computer controls and electro-mechanical
mechanisms are commonly used for a wide variety of applications in the forming machines and auxiliary
processes. Various patents held by the Company are directed to the electro-mechanical mechanisms and
related technologies used to control sections of the machines. Additional U.S. patents held by the
7
Company and various pending applications are directed to the technology used by the Company for the
systems that control the operation of the forming machines and many of the component mechanisms that
are embodied in the machine systems.
Downstream of the glass forming machines, there is patented and unpatented technology for ware
handling, annealing, coating and inspection, which further enhances the overall efficiency of the
manufacturing process.
While the above patents and intellectual property rights are representative of the technology used in the
Company's glass manufacturing operations, there are numerous other pending patent applications, trade
secrets and other proprietary know-how and technology, as supplemented by administrative and
operational best practices, which contribute to the Company's competitive advantage. As noted above,
however, the Company does not consider that any patent or group of patents relating to a particular
product or process is of material importance when judged from the standpoint of any segment or its
businesses as a whole.
Seasonality
Sales of particular glass container products such as beer are seasonal. Shipments in the U.S. and Europe
are typically greater in the second and third quarters of the year, while shipments in the Asia Pacific
region are typically greater in the first and fourth quarters of the year, and shipments in South America
are typically greater in the third and fourth quarters of the year.
Employees
The Company’s worldwide operations employed approximately 23,000 persons as of December 31, 2008.
Approximately 96% of North American employees are hourly workers covered by collective bargaining
agreements. The principal collective bargaining agreement, which at December 31, 2008, covered
approximately 78% of the Company’s union-affiliated employees in North America, will expire on March
31, 2011. Approximately 56% of employees in South America are unionized, although according to the
labor legislation in each country, 100% of employees are covered by collective bargaining agreements.
The average length of these agreements is approximately 2-3 years. In addition, a large number of the
Company’s employees are employed in countries in which employment laws provide greater bargaining
or other rights to employees than the laws of the U.S. Such employment rights require the Company to
work collaboratively with the legal representatives of the employees to effect any changes to labor
arrangements. The Company considers its employee relations to be good and does not anticipate any
material work stoppages in the near term.
Executive Officers of the Registrant
Name and Age
Position
Albert P. L. Stroucken (61)……………………..
Chairman and Chief Executive Officer since
December 2006. Previously Chief Executive Officer
of HB Fuller Company, a manufacturer of adhesives,
sealants, coatings, paints and other specialty
chemical products 1998-2006, and Chairman of HB
Fuller Company from 1999-2006.
Edward C. White (61) .....................................
Chief Financial Officer since 2005; Senior Vice
President and Director of Sales and Marketing for
8
James W. Baehren (58)....................................
L. Richard Crawford (48)……………………...
O-I Europe 2004-2005; Senior Vice President since
2003; Senior Vice President of Finance and
Administration 2003-2004; Controller 1999-2004;
Vice President 2002-2003.
Senior Vice President Strategic Planning since 2006;
Chief Administrative Officer 2004-2006; Senior
Vice President and General Counsel since 2003;
Corporate Secretary since 1998; Vice President and
Director of Finance 2001-2003.
President, Global Glass Operations since 2006;
President, Latin America Glass 2005-2006; Vice
President, Director of Operations and Technology
for O-I Europe 2004-2005; Vice President of Global
Glass Technology 2002-2004; Vice President,
Manufacturing Manager of Domestic Glass
Container 2000-2002.
Financial Information about Foreign and Domestic Operations
Information as to net sales, Segment Operating Profit, and assets of the Company's reportable segments is
included in Note 20 to the Consolidated Financial Statements.
ITEM 1A.
RISK FACTORS
Asbestos-Related Contingent Liability – The Company has made, and will continue to make,
substantial payments to resolve claims of persons alleging exposure to asbestos-containing products
and may need to record additional charges in the future for estimated asbestos-related costs. These
substantial payments have affected and may continue to affect the Company’s cost of borrowing
and the ability to pursue acquisitions.
The Company is one of a number of defendants 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 approximately $40 million of a high-temperature, calcium-silicate based pipe and
block insulation material containing asbestos. The Company exited the pipe and block 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 in some cases, punitive
damages in various amounts (herein referred to as "asbestos claims").
The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other
claim disposition costs plus related legal fees) cannot be estimated with certainty. Beginning with the
initial liability of $975 million established in 1993, the Company has accrued a total of approximately
$3.47 billion through 2008, before insurance recoveries, for its asbestos-related liability. The Company’s
ability reasonably to estimate its liability has been significantly affected by the volatility of asbestos-
related litigation in the United States, the inherent uncertainty of future disease incidence and claiming
patterns, the expanding list of non-traditional defendants that have been sued in this litigation and found
liable for substantial damage awards, the use of mass litigation screenings to generate new lawsuits, the
9
large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but
have no present physical impairment as a result of such exposure, and the significant number of co-
defendants that have filed for bankruptcy.
The Company conducted a comprehensive review of its asbestos-related liabilities and costs in connection
with finalizing and reporting its results of operations for the year ended December 31, 2008 and
concluded that an increase in its reserve for future asbestos-related costs in the amount of $250.0 million
($248.8 million after tax) was required.
The ultimate amount of distributions which may be required to be made by the Company to fund the
Company’s asbestos-related payments cannot be estimated with certainty. The Company’s reported
results of operations for 2008 were materially affected by the $250.0 million ($248.8 million after tax)
fourth quarter charge and asbestos-related payments continue to be substantial. Any future additional
charge may likewise materially affect the Company’s results of operations for the period in which it is
recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected
and may continue to affect the Company’s cost of borrowing and its ability to pursue global or domestic
acquisitions.
Substantial Leverage – The Company’s substantial indebtedness could adversely affect the
Company’s financial health.
The Company has a significant amount of debt. As of December 31, 2008, the Company had
approximately $3.3 billion of total debt outstanding, reduced from $3.7 billion at December 31, 2007.
While the debt level is lower, the Company’s remaining indebtedness could result in the following
consequences:
Increased vulnerability to general adverse economic and industry conditions;
Increased vulnerability to interest rate increases for the portion of the unhedged and fixed rate
borrowing swapped into variable rates;
Require the Company to dedicate a substantial portion of cash flow from operations to payments
on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital
expenditures, acquisitions, development efforts and other general corporate purposes;
Limited flexibility in reacting to the Company’s competitors that have less debt; and
Limit, along with the financial and other restrictive covenants in the documents governing
indebtedness, among other things, the Company’s ability to borrow additional funds.
Ability to Service Debt – To service its indebtedness, the Company will require a significant amount
of cash. The Company’s ability to generate cash depends on many factors beyond its control.
The Company’s ability to make payments on and to refinance its indebtedness and to fund working
capital, capital expenditures, acquisitions, development efforts and other general corporate purposes
depends on its ability to generate cash in the future. The Company has no assurance that it will generate
sufficient cash flow from operations, or that future borrowings will be available under the secured credit
agreement, in an amount sufficient to enable the Company to pay its indebtedness, or to fund other
liquidity needs. If short term interest rates increase, the Company’s debt service cost will increase because
some of its debt is subject to short term variable interest rates. At December 31, 2008, the Company’s
debt subject to variable interest rates, including fixed rate debt swapped to variable rate, represented
approximately 58% of total debt.
10
The Company may need to refinance all or a portion of its indebtedness on or before maturity. If the
Company is unable to generate sufficient cash flow and is unable to refinance or extend outstanding
borrowings on commercially reasonable terms or at all, it may have to:
Reduce or delay capital expenditures planned for replacements, improvements and
expansions;
Sell assets;
Restructure debt; and/or
Obtain additional debt or equity financing.
The Company can provide no assurance that it could effect or implement any of these alternatives on
satisfactory terms, if at all.
Debt Restrictions – The Company may not be able to finance future needs or adapt its business
plans to changes because of restrictions contained in the secured credit agreement and the
indentures and instruments governing other indebtedness.
The secured credit agreement, the indentures governing unsecured notes and debentures, and certain of
the agreements governing other indebtedness contain affirmative and negative covenants that limit the
ability of the Company to take certain actions. For example, some of these indentures restrict, among
other things, the ability of the Company and its restricted subsidiaries to borrow money, pay dividends on,
or redeem or repurchase its stock, make investments, create liens, enter into certain transactions with
affiliates and sell certain assets or merge with or into other companies. These restrictions could adversely
affect the Company’s ability to operate its businesses and may limit its ability to take advantage of
potential business opportunities as they arise.
Failure to comply with these or other covenants and restrictions contained in the secured credit
agreement, the indentures or agreements governing other indebtedness could result in a default under
those agreements, and the debt under those agreements, together with accrued interest, could then be
declared immediately due and payable. If a default occurs under the secured credit agreement, we could
no longer request borrowings under the agreement, and the lenders could cause all of the outstanding debt
obligations under such secured credit agreement to become due and payable, which would result in a
default under a number of other outstanding debt securities and could lead to an acceleration of
obligations related to these debt securities. A default under the secured credit agreement, indentures or
agreements governing other indebtedness could also lead to an acceleration of debt under other debt
instruments that contain cross acceleration or cross-default provisions.
International Operations – The Company is subject to risks associated with operating in foreign
countries.
The Company operates manufacturing and other facilities throughout the world. Net sales from
international operations totaled approximately $6.0 billion, representing approximately 76% of the
Company’s net sales for the year ended December 31, 2008. As a result of its international operations,
the Company is subject to risks associated with operating in foreign countries, including:
Political, social and economic instability;
War, civil disturbance or acts of terrorism;
Taking of property by nationalization or expropriation without fair compensation;
Changes in government policies and regulations;
Devaluations and fluctuations in currency exchange rates;
Imposition of limitations on conversions of foreign currencies into dollars or remittance of
dividends and other payments by foreign subsidiaries;
11
Imposition or increase of withholding and other taxes on remittances and other payments by
foreign subsidiaries;
Hyperinflation in certain foreign countries; and
Impositions or increase of investment and other restrictions or requirements by foreign
governments.
The risks associated with operating in foreign countries may have a material adverse effect on operations.
Competition – The Company faces intense competition from other glass container producers, as
well as from makers of alternative forms of packaging. Competitive pressures could adversely
affect the Company’s financial health.
The Company is subject to significant competition from other glass container producers, as well as from
makers of alternative forms of packaging, such as aluminum cans and plastic containers. The Company
competes with each rigid packaging competitor on the basis of price, quality, service and the marketing
attributes of the container. Advantages or disadvantages in any of these competitive factors may be
sufficient to cause the customer to consider changing suppliers and/or using an alternative form of
packaging. The Company also competes with manufacturers of non-rigid packaging alternatives,
including flexible pouches and aseptic cartons, in serving the packaging needs of juice customers.
Pressures from competitors and producers of alternative forms of packaging have resulted in excess
capacity in certain countries in the past and have led to capacity adjustments and significant pricing
pressures in the rigid packaging market.
High Energy Costs – Higher energy costs worldwide and interrupted power supplies may have a
material adverse effect on operations.
Electrical power, natural gas, and fuel oil are vital to the Company’s operations as it relies on a
continuous power supply to conduct its business. Depending on the location and mix of energy sources,
energy accounts for 15% to 25% of total production costs. Substantial increases and volatility in energy
costs could cause the Company to experience a significant increase in operating costs, which may have a
material adverse effect on operations.
Economic Environment - The Company may be adversely affected by the current economic
environment.
As a result of severely weak credit market conditions (including uncertainties with respect to financial
institutions, and severely diminished liquidity and credit availability), volatility in energy costs and other
macro-economic challenges currently affecting many of the economies in which the Company operates,
customers or vendors may experience serious cash flow problems and as a result, may modify, delay, or
curtail plans to purchase the Company’s products and vendors may significantly and quickly increase
their prices or reduce their output. Additionally, if customers are not successful in generating sufficient
revenue or are precluded from securing financing, they may not be able to pay, or may delay payment of,
accounts receivable that are owed to the Company. Any inability of current and/or potential customers to
pay the Company for its products may adversely affect the Company’s earnings and cash flow. If the
economic conditions in the Company’s key markets deteriorate further, the Company may experience
material adverse impacts to its business and operating results.
12
Business Integration Risks – The Company may not be able to effectively integrate additional
businesses it acquires in the future.
The Company may consider strategic transactions, including acquisitions that will complement,
strengthen and enhance growth in its worldwide glass operations. The Company evaluates opportunities
on a preliminary basis from time to time but these transactions may not advance beyond the preliminary
stages or be completed. Such acquisitions are subject to various risks and uncertainties, including:
The inability to integrate effectively the operations, products, technologies and personnel of the
acquired companies (some of which are located in diverse geographic regions) and achieve
expected synergies;
The potential disruption of existing business and diversion of management’s attention from day-
to-day operations;
The inability to maintain uniform standards, controls, procedures and policies;
The need or obligation to divest portions of the acquired companies; and
The potential impairment of relationships with customers.
In addition, the Company cannot make assurances that the integration and consolidation of newly
acquired businesses will achieve any anticipated cost savings and operating synergies.
Customer Consolidation – The continuing consolidation of the Company’s customer base may
intensify pricing pressures and have a material adverse effect on operations.
Beginning in the early 1990s, many of the Company’s largest customers have acquired companies with
similar or complementary product lines. This consolidation has increased the concentration of the
Company’s business with its largest customers. In many cases, such consolidation has been accompanied
by pressure from customers for lower prices, reflecting the increase in the total volume of products
purchased or the elimination of a price differential between the acquiring customer and the company
acquired. Increased pricing pressures from the Company’s customers may have a material adverse effect
on operations.
Seasonality and Raw Materials – Profitability could be affected by varied seasonal demands and
the availability of raw materials.
Due principally to the seasonal nature of the brewing, iced tea and other beverage industries, in which
demand is stronger during the summer months, sales of the Company’s products have varied and are
expected to vary by quarter. Shipments in the U.S. and Europe are typically greater in the second and
third quarters of the year, while shipments in the Asia Pacific region are typically greater in the first and
fourth quarters of the year, and shipments in South America are typically greater in the third and fourth
quarters of the year. Unseasonably cool weather during peak demand periods can reduce demand for
certain beverages packaged in the Company’s containers.
The raw materials that the Company uses have historically been available in adequate supply from
multiple sources. For certain raw materials, however, there may be temporary shortages due to weather
or other factors, including disruptions in supply caused by raw material transportation or production
delays. These shortages, as well as material volatility in the cost of any of the principal raw materials that
the Company uses, may have a material adverse effect on operations.
13
Environmental Risks – The Company is subject to various environmental legal requirements and
may be subject to new legal requirements in the future. These requirements may have a material
adverse effect on operations.
The Company’s operations and properties, both in the U.S. and abroad, are subject to extensive laws,
ordinances, regulations and other legal requirements relating to environmental protection, including legal
requirements governing investigation and clean-up of contaminated properties as well as water
discharges, air emissions, waste management and workplace health and safety. Such legal requirements
frequently change and vary among jurisdictions. The Company’s operations and properties, both in the
U.S. and abroad, must comply with these legal requirements. These requirements may have a material
adverse effect on operations.
The Company has incurred, and expects to incur, costs for its operations to comply with environmental
legal requirements, and these costs could increase in the future. Many environmental legal requirements
provide for substantial fines, orders (including orders to cease operations), and criminal sanctions for
violations. These legal requirements may apply to conditions at properties that the Company presently or
formerly owned or operated, as well as at other properties for which the Company may be responsible,
including those at which wastes attributable to the Company were disposed. A significant order or
judgment against the Company, the loss of a significant permit or license or the imposition of a
significant fine may have a material adverse effect on operations.
A number of governmental authorities both in the U.S. and abroad have enacted, or are considering, legal
requirements that would mandate certain rates of recycling, the use of recycled materials and/or
limitations on certain kinds of packaging materials. In addition, some companies with packaging needs
have responded to such developments and/or perceived environmental concerns of consumers by using
containers made in whole or in part of recycled materials. Such developments may reduce the demand for
some of the Company’s products and/or increase the Company’s costs, which may have a material
adverse effect on operations.
Labor Relations – Some of the Company’s employees are unionized or represented by workers’
councils.
The Company is party to a number of collective bargaining agreements with labor unions which at
December 31, 2008, covered approximately 96% of the Company’s hourly employees in North America.
Approximately 56% of employees in South America are unionized, although according to the labor
legislation on each country, 100% of employees are covered by collective bargaining agreements. The
agreement covering substantially all of the Company’s union-affiliated employees in its U.S. glass
container operations expires on March 31, 2011. Agreements in South America typically have an average
term of approximately 2-3 years. Upon the expiration of any collective bargaining agreement, if the
Company is unable to negotiate acceptable contracts with labor unions, it could result in strikes by the
affected workers and increased operating costs as a result of higher wages or benefits paid to union
members. In addition, a large number of the Company’s employees are employed in countries in which
employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such
employment rights require the Company to work collaboratively with the legal representatives of the
employees to effect any changes to labor arrangements. For example, most of the Company’s employees
in Europe are represented by workers’ councils that must approve any changes in conditions of
employment, including salaries and benefits and staff changes, and may impede efforts to restructure the
Company’s workforce. Although the Company believes that it has a good working relationship with its
employees, if the Company’s employees were to engage in a strike or other work stoppage, the Company
could experience a significant disruption of operations and/or higher ongoing labor costs, which may have
a material adverse effect on operations.
14
Accounting – The Company’s financial results are based upon estimates and assumptions that may
differ from actual results.
In preparing the Company’s consolidated financial statements in accordance with U.S. generally accepted
accounting principles, several estimates and assumptions are made that affect the accounting for and
recognition of assets, liabilities, revenues and expenses. These estimates and assumptions must be made
because certain information that is used in the preparation of the Company’s financial statements is
dependent on future events, cannot be calculated with a high degree of precision from data available or is
not capable of being readily calculated based on generally accepted methodologies. In some cases, these
estimates are particularly difficult to determine and the Company must exercise significant judgment.
The Company believes that accounting for long-lived assets, pension benefit plans, contingencies and
litigation, and income taxes involves the more significant judgments and estimates used in the preparation
of its consolidated financial statements. Actual results for all estimates could differ materially from the
estimates and assumptions that the Company uses, which could have a material adverse effect on the
Company’s financial condition and results of operations.
Accounting Standards – The adoption of new accounting standards or interpretations could
adversely impact the Company’s financial results.
The Company’s implementation of and compliance with changes in accounting rules and interpretations
could adversely affect its operating results or cause unanticipated fluctuations in its results in future
periods. The accounting rules and regulations that the Company must comply with are complex and
continually changing. Recent actions and public comments from the SEC have focused on the integrity of
financial reporting generally. The Financial Accounting Standards Board, or FASB, has recently
introduced several new or proposed accounting standards, or is developing new proposed standards,
which would represent a significant change from current industry practices. In addition, many
companies’ accounting policies are being subjected to heightened scrutiny by regulators and the public.
While the Company believes that its financial statements have been prepared in accordance with U.S.
generally accepted accounting principles, the Company cannot predict the impact of future changes to
accounting principles or its accounting policies on its financial statements going forward.
Goodwill – A significant write down of goodwill would have a material adverse effect on the
Company’s reported results of operations and net worth.
As required by FAS No. 142, “Goodwill and Other Intangibles,” the Company evaluates goodwill
annually (or more frequently if impairment indicators arise) for impairment using the required business
valuation methods. Goodwill at December 31, 2008 totaled $2,207.5 million. These methods include the
use of a weighted average cost of capital to calculate the present value of the expected future cash flows
of the Company’s reporting units. Future changes in the cost of capital, expected cash flows, or other
factors may cause the Company’s goodwill to be impaired, resulting in a non-cash charge against results
of operations to write down goodwill for the amount of the impairment. If a significant write down is
required, the charge would have a material adverse effect on the Company’s reported results of operations
and net worth.
Pension Funding – Declines in the fair value of the assets of the pension plans sponsored by the
Company could require increased funding.
The Company's defined benefit pension plans in the U.S. and several other countries are funded through
qualified trusts that hold investments in a broad range of equity and debt securities. Recent deterioration
in the value of such investments, or further reductions driven by a decline in securities markets or
otherwise, could increase the underfunded status of the Company’s funded pension plans, thereby
15
increasing its obligation to make contributions to the plans as required by the laws and regulations
governing each plan. An obligation to make contributions to pension plans could reduce the cash
available for working capital and other corporate uses, and may have an adverse impact on the
Company’s operations, financial condition and liquidity.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The principal manufacturing facilities and other material important physical properties of the Company at
December 31, 2008 are listed below. All properties shown are owned in fee except where otherwise
noted.
North American Operations
United States
Glass Container Plants
Atlanta, GA
Auburn, NY
Brockway, PA
Charlotte, MI
Clarion, PA
Crenshaw, PA
Danville, VA
Lapel, IN
Los Angeles, CA
Muskogee, OK
Canada
Glass Container Plants
Brampton, Ontario
Asia Pacific Operations
Australia
Glass Container Plants
Adelaide
Brisbane
China
Glass Container Plants
Guangzhou
Shanghai
Mold Shop
Tianjin
Indonesia
Glass Container Plant
Jakarta
Oakland, CA
Portland, OR
Streator, IL
Toano, VA
Tracy, CA
Waco, TX
Windsor, CO
Winston-Salem, NC
Zanesville, OH
Montreal, Quebec
Melbourne
Sydney
Tianjin
Wuhan
16
New Zealand
Glass Container Plant
Auckland
European Operations
Czech Republic
Glass Container Plants
Sokolov
Estonia
Glass Container Plant
Jarvakandi
Finland
Glass Container Plant
Karhula
France
Glass Container Plants
Beziers
Gironcourt
Labegude
Puy-Guillaume
Germany
Glass Container Plants
Achern
Bernsdorf
Hungary
Glass Container Plant
Oroshaza
Italy
Glass Container Plants
Asti
Bari (2 plants)
Latina
Trapani
Napoli
The Netherlands
Glass Container Plants
Leerdam
Maastricht
Poland
Glass Container Plants
Antoninek
Teplice
Reims (2 plants)
Vayres
Veauche
Wingles
Holzminden
Rinteln
Pordenone
Terni
Trento
Treviso
Varese
Schiedam
Jaroslaw
17
Spain
Glass Container Plants
Alcala
United Kingdom
Glass Container Plants
Alloa
South American Operations
Brazil
Glass Container Plants
Rio de Janeiro
(glass container and tableware)
Barcelona
Harlow
Sao Paulo
Mold Shop
Manaus
Colombia
Glass Container Plants
Envigado
Soacha
Tableware Plant
Buga
Ecuador
Glass Container Plant
Guayaquil
Peru
Glass Container Plant
Callao
Venezuela
Glass Container Plants
Valencia
Zipaquira (glass container and flat glass)
Lurin (1)
Valera
Other Operations
Machine Shops
Birmingham, United Kingdom (1)
Cali, Colombia
Brockway, Pennsylvania
Corporate Facilities
Perrysburg, OH (1)
----------------------------------------------------
(1) This facility is leased in whole or in part.
The Company believes that its facilities are well maintained and currently adequate for its planned
production requirements over the next three to five years.
18
ITEM 3.
LEGAL PROCEEDINGS
For further information on legal proceedings, see Note 19 to the Consolidated Financial Statements and
the section entitled “Environmental and Other Governmental Regulation” in Item 1.
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the last quarter of the fiscal year ended
December 31, 2008.
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON STOCK AND RELATED
SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
The price range for the Company’s common stock on the New York Stock Exchange, as reported by the
Financial Industry Regulatory Authority, Inc., was as follows:
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2008
2007
High
Low
High
Low
$
58.68
60.60
48.60
29.53
$
38.60
41.49
23.66
15.20
$
26.17
35.11
42.64
50.46
$
18.48
25.82
32.66
39.33
The number of share owners of record on January 31, 2009 was 1,090. Approximately 94% of the
outstanding shares were registered in the name of Depository Trust Company, or CEDE, which held such
shares on behalf of a number of brokerage firms, banks, and other financial institutions. The shares
attributed to these financial institutions, in turn, represented the interests of more than 25,000 unidentified
beneficial owners. No dividends have been declared or paid since the Company’s initial public offering
in December 1991 and the Company does not anticipate paying any dividends in the near future. For
restrictions on payment of dividends on common stock, see Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Capital Resources and Liquidity – Current and Long
Term Debt and Note 6 to the Consolidated Financial Statements.
Information with respect to securities authorized for issuance under equity compensation plans is included
herein under Item 12.
19
PERFORMANCE GRAPH
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG OWENS-ILLINOIS, S&P 500, AND PACKAGING GROUP
$450
$400
$350
$300
$250
$200
$150
$100
$50
Dec-2003
Dec-2004
Dec-2005
Dec-2006
Dec-2007
Dec-2008
Owens-Illinois, Inc.
S&P 500
Packaging Group
Owens-Illinois
S&P 500
Packaging Group
2003
$100.00
$100.00
$100.00
2004
$190.48
$110.87
$131.43
2005
$176.92
$116.31
$135.95
2006
$155.15
$134.66
$155.31
2007
$416.26
$142.05
$180.46
2008
$229.78
$89.51
$133.06
The above graph compares the performance of the Company’s Common Stock with that of a broad
market index (the S&P 500 Composite Index) and a packaging group consisting of companies with lines
of business or product end uses comparable to those of the Company for which market quotations are
available.
The packaging group consists of: AptarGroup, Inc., Ball Corp., Bemis Company, Inc., Crown
Holdings, Inc., Owens-Illinois, Inc., Sealed Air Corp., Silgan Holdings Inc., Sonoco Products Co., and
Vitro Sociedad Anonima (ADSs).
Constar International Inc. was removed from the index because market quotations for its stock are no
longer available. Its removal did not have a significant effect on the performance of the group.
The comparison of total return on investment for each period is based on the investment of $100 on
December 31, 2003 and the change in market value of the stock, including additional shares assumed
purchased through reinvestment of dividends, if any.
20
ITEM 6.
SELECTED FINANCIAL DATA
The selected consolidated financial data presented below relates to each of the five years in the period
ended December 31, 2008. The financial data for each of the five years in the period ended December 31,
2008 was derived from the audited consolidated financial statements of the Company. For more
information, see the “Consolidated Financial Statements” included elsewhere in this document.
Consolidated operating results (a):
Net sales
Manufacturing, shipping and
delivery (b)
2008
2007
Years ended December 31,
2006
(Dollar amounts in millions)
2005
2004
$
7,884.7
$
7,566.7
$
6,650.4
$
6,266.9
$
5,366.1
(6,208.1)
(5,971.4)
(5,481.1)
(5,084.9)
(4,329.6)
Gross profit
1,676.6
1,595.3
1,169.3
1,182.0
1,036.5
Research, engineering, selling,
administrative, and other expense (c)
Other revenue (d)
Earnings before interest expense
and items below
Interest expense (e)
Earnings (loss) from continuing
operations before items below
Provision for income taxes (f)
Minority share owners' interests
in earnings of subsidiaries
Earnings (loss) from continuing
operations
Net earnings (loss) of discontinued
operations (g)
Gain on sale of discontinued
operations
(982.7)
117.5
811.4
(253.0)
558.4
(236.7)
(852.6)
112.5
855.2
(348.6)
506.6
(147.8)
(753.8)
98.6
(1,166.9)
103.2
514.1
(349.0)
165.1
(125.3)
118.3
(325.4)
(207.1)
(379.9)
(598.5)
134.2
572.2
(329.0)
243.2
(17.2)
(70.2)
(59.5)
(43.6)
(35.9)
(32.9)
251.5
299.3
(3.8)
(622.9)
193.1
2.8
(23.7)
63.1
(28.0)
6.8
1,038.5
1.2
70.4
Net earnings (loss)
$
258.3
$
1,340.6
$
(27.5)
$
(558.6)
$
235.5
21
2008
Years ended December 31,
2006
(Dollar amounts in millions, except per share data)
2005
2007
2004
Basic earnings (loss) per share of
common stock:
Earnings (loss) from
continuing operations
Net earnings (loss) of
discontinued operations
Gain on sale of discontinued
operations
$
1.51
$
1.80
$
(0.17)
$
(4.27)
$
1.16
(0.15)
0.02
6.73
0.41
0.01
(0.19)
0.48
0.04
Net earnings (loss)
$
1.55
$
8.55
$
(0.32)
$
(3.85)
$
1.45
Weighted average shares
outstanding (in thousands)
Diluted earnings (loss) per share of
common stock:
Earnings (loss) from
continuing operations
Net earnings (loss) of
discontinued operations
Gain on sale of discontinued
operations
163,178
154,215
152,071
150,910
147,963
$
1.48
$
1.78
$
(0.17)
$
(4.27)
$
1.15
(0.15)
0.02
6.19
0.41
0.01
(0.19)
0.47
0.04
Net earnings (loss)
$
1.52
$
7.99
$
(0.32)
$
(3.85)
$
1.43
Diluted average
shares (in thousands)
169,677
167,767
152,071
150,910
149,680
The Company’s convertible preferred stock was included in the computation of diluted earnings per share
for 2008, to the extent outstanding during 2008, and 2007 on an “if converted” basis since the result was
dilutive. The Company’s convertible preferred stock was not included in the computation of 2004-2006
diluted earnings per share since the result would have been antidilutive. Options to purchase 241,711,
862,906 and 5,067,104 weighted average shares of common stock which were outstanding during 2008,
2007 and 2004, respectively, were not included in the computation of diluted earnings per share because
the options’ exercise price was greater than the average market price of the common shares. For the years
ended December 31, 2006 and 2005, diluted earnings per share of common stock are equal to basic
earnings per share of common stock due to the net losses.
22
2008
2007
Years ended December 31,
2006
(Dollar amounts in millions)
2005
2004
Other data:
The following are included in
net earnings:
Depreciation
Amortization of intangibles
Amortization of deferred
finance fees (included
in interest expense)
$
431.0
28.9
$
423.4
28.9
$
427.7
22.3
$
436.1
22.5
$
406.3
18.8
7.9
8.6
5.7
6.7
6.0
Balance sheet data (at end of period):
Working capital (current assets
less current liabilities)
Total assets
Total debt
Share owners' equity
$
441
$
165
$
67
$
460
$
494
7,977
3,334
1,041
9,325
3,714
2,187
9,321
5,457
357
9,522
5,297
724
10,737
5,360
1,544
(a) Amounts related to the Company’s plastic packaging business have been reclassified to discontinued
operations for 2004-2007 as a result of the sale of that business in 2007. Amounts related to the
Company’s plastic blow-molded container business have been reclassified to discontinued operations
for 2004 as a result of the sale of that business in 2004. Amounts for the year ended December 31,
2004, and all subsequent periods, include the results of BSN from the date of acquisition on June 21,
2004.
(b) Amount for 2006 includes a loss of $8.7 million ($8.4 million after tax) from the mark to market
effect of natural gas hedge contracts.
Amount for 2005 includes a gain of $3.8 million ($2.3 million after tax) from the mark to market
effect of natural gas hedge contracts.
Amount for 2004 includes a gain of $4.9 million ($3.2 million after tax) from the mark to market
effect of natural gas hedge contracts.
(c) Amount for 2008 includes charges of $250.0 million ($248.8 million after tax) to increase the accrual
for estimated future asbestos-related costs and $133.3 million ($110.1 million after tax and minority
share owners’ interests) for restructuring and asset impairments.
Amount for 2007 includes charges of $115.0 million (pretax and after tax) to increase the accrual for
estimated future asbestos-related costs and $100.3 million ($84.1 million after tax) for restructuring
and asset impairments.
Amount for 2006 includes charges of $120.0 million (pretax and after tax) to increase the accrual for
estimated future asbestos-related costs, a charge of $20.8 million ($20.7 million after tax) for CEO
transition costs, and a charge of $29.7 million ($27.7 million after tax) for the closing of the Godfrey,
Illinois machine parts manufacturing operation.
23
Amount for 2005 includes a charge of $135.0 million ($86.0 million after tax) to increase the accrual
for estimated future asbestos-related costs and a charge of $494.0 million (pretax and after tax) to
write down goodwill in the Asia Pacific Glass unit.
Amount for 2004 includes charges totaling $159.0 million ($90.3 million after tax) for the following:
(1) $152.6 million ($84.9 million after tax) to increase the accrual for estimated future asbestos-
related costs; and (2) $6.4 million ($5.4 million after tax) for restructuring a life insurance program in
order to comply with recent statutory and tax regulation changes.
(d) Other revenue in 2006 includes a gain of $15.9 million ($11.2 million after tax) for the curtailment of
postretirement benefits in The Netherlands.
Other revenue in 2005 includes $28.1 million (pretax and after tax) from the sale of the Company’s
glass container facility in Corsico, Italy.
Other revenue in 2004 includes: (1) a gain of $20.6 million ($14.5 million after tax) for the sale of
certain real property; and (2) a gain of $31.0 million ($13.1 million after tax) for a restructuring in the
Italian Specialty Glass business.
(e) Amount for 2007 includes charges of $7.9 million ($7.3 million after tax) for note repurchase
premiums.
Amount for 2006 includes charges of $6.2 million (pretax and after tax) for note repurchase
premiums.
Amount for 2004 includes charges of $28.0 million ($18.3 million after tax) for note repurchase
premiums.
Includes additional interest charges for the write-off of unamortized deferred financing fees related to
the early extinguishment of debt as follows: $1.6 million ($1.5 million after tax) for 2007; $11.3
million ($10.9 million after tax) for 2006; and $2.8 million ($1.8 million after tax) for 2004.
(f) Amount for 2008 includes a net tax expense of $33.3 million ($34.8 million after minority share
owners’ interest) related to tax legislation, restructuring, and other.
Amount for 2007 includes a benefit of $13.5 million for the recognition of tax credits related to
restructuring of investments in certain European operations.
Amount for 2006 includes a benefit of $5.7 million from the reversal of a non-U.S. deferred tax asset
valuation allowance partially offset by charges related to international tax restructuring.
Amount for 2005 includes a charge of $300.0 million to record a valuation allowance related to
accumulated deferred tax assets in the U.S. and a benefit of $5.3 million for the reversal of an accrual
for potential tax liabilities related to a previous divestiture. The accrual is no longer required based
on the Company’s reassessment of potential liabilities.
Amount for 2004 includes a benefit of $33.1 million for a tax consolidation in the Australian glass
business.
24
(g) Amount for 2005 consists principally of a third quarter benefit from the reversal of an accrual for
potential tax liabilities related to a previous divestiture. The accrual is no longer required based on
the Company’s reassessment of the potential liabilities.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Following are the Company’s net sales by segment and segment operating profit for the years ended
December 31, 2008, 2007, and 2006. The Company’s measure of profit for its reportable segments is
Segment Operating Profit, which consists of consolidated earnings from continuing operations before
interest income, interest expense, provision for income taxes and minority share owners’ interests in
earnings of subsidiaries and excludes amounts related to certain items that management considers not
representative of ongoing operations as well as certain retained corporate costs. The segment data
presented below is prepared in accordance with FAS No. 131. The line titled ‘reportable segment totals’,
however, is a non-GAAP measure when presented outside of the financial statement footnotes.
Management has included ‘reportable segment totals’ below to facilitate the discussion and analysis of
financial condition and results of operations. The Company’s management uses Segment Operating
Profit, in combination with selected cash flow information, to evaluate performance and to allocate
resources.
Net Sales:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Other
Net Sales
2008
$
3,497.8
2,209.7
1,135.9
964.1
$
2007
3,298.7
2,271.3
970.7
934.3
$
2006
2,846.6
2,110.4
796.5
804.9
7,807.5
77.2
7,884.7
$
7,475.0
91.7
7,566.7
$
6,558.4
92.0
6,650.4
$
25
Segment Operating Profit:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Items excluded from Segment Operating Profit:
Retained corporate costs and other
Restructuring and asset impairments
Charge for asbestos related costs
CEO and other transition charges
Curtailment of postretirement benefits in The Netherlands
Mark to market effect of natural gas hedge contracts
Interest income
Interest expense
Earnings before income taxes and minority share
owners' interests in earnings of subsidiaries
Provision for income taxes
Minority share owners' interest in earnings
of subsidiaries
Earnings (loss) from continuing operations
Net earnings (loss) of discontinued operations
Gain on sale of discontinued operations
Net earnings (loss)
2008
2007
2006
$
477.8
185.2
331.0
162.8
1,156.8
$
433.0
265.1
254.9
154.0
1,107.0
$
249.6
187.3
195.0
102.9
734.8
(0.7)
(133.3)
(250.0)
(78.8)
(100.3)
(115.0)
38.6
(253.0)
42.3
(348.6)
(76.6)
(29.7)
(120.0)
(20.8)
15.9
(8.7)
19.2
(349.0)
558.4
(236.7)
506.6
(147.8)
165.1
(125.3)
(70.2)
251.5
6.8
258.3
$
$
(59.5)
299.3
2.8
1,038.5
1,340.6
(43.6)
(3.8)
(23.7)
$
(27.5)
Note: all amounts excluded from reportable segment totals are discussed in the following applicable
sections.
Executive Overview – Years ended December 2008 and 2007
Net sales from continuing operations were $318.0 million higher than the prior year principally resulting
from improved pricing and favorable product mix across all regions, as well as favorable foreign
currency exchange rates, principally the Euro. Lower unit shipments partially offset these favorable
increases.
Segment Operating Profit for reportable segments was $49.8 million higher than the prior year. The
benefits of higher selling prices, improved product mix, improvements in glass plant operating
efficiencies, and favorable foreign currency exchange rates were partially offset by inflationary cost
increases in manufacturing and delivery costs and lower sales volume.
Interest expense in 2008 was $253.0 million compared with interest expense from continuing operations
of $348.6 million in 2007. Included in the 2007 interest expense was $9.5 million for both note
repurchase premiums and the write-off of unamortized finance fees related to the November 2007
repurchase of the $625.0 million 8.75% Senior Secured Notes. Exclusive of these items, interest expense
decreased approximately $86.1 million. The decrease is principally due to lower variable interest rates
under the Company’s bank credit agreement and on long term debt variable and swapped rates as well as
lower overall debt levels, partially offset by an increase in foreign currency exchange rates. The decrease
26
is also due to the non-recurrence of interest on debt that was repaid during the fourth quarter of 2007 with
the proceeds from the plastics sale. This interest was previously allocated to discontinued operations until
the date of the sale.
Interest income for continuing operations for 2008 was $38.6 million compared to $42.3 million for 2007.
Net earnings from continuing operations for 2008 were $251.5 million, or $1.48 per share (diluted),
compared to earnings from continuing operations of $299.3 million, or $1.78 per share (diluted) for 2007.
Earnings in both periods included items that management considered not representative of ongoing
operations. These items decreased net earnings in 2008 by $393.7 million, or $2.32 per share, and
decreased net earnings in 2007 by $194.4 million, or $1.16 per share.
Cash payments for asbestos-related costs were $210.2 million for 2008 compared to $347.1 million for
2007. The decrease is due to reduced funding for settlements of certain claims on an accelerated basis.
Capital spending for property, plant and equipment for continuing operations was $361.7 million for 2008
compared to $292.5 million for 2007. The 2008 amount is in a range consistent with long term historical
levels. The increase is also due to changes in foreign currency exchange rates.
Results of Operations - Comparison of 2008 with 2007
Net Sales
The Company’s net sales by segment for 2008 and 2007 are presented in the following table. For further
information, see Segment Information included in Note 20 to the Consolidated Financial Statements.
2008
2007
Europe
North America
South America
Asia Pacific
Reportable segment totals
Other
Net Sales
(dollars in millions)
$
$
3,497.8
2,209.7
1,135.9
964.1
7,807.5
77.2
7,884.7
3,298.7
2,271.3
970.7
934.3
7,475.0
91.7
7,566.7
$
$
The Company’s net sales increased $318.0 million, or 4.2%, over 2007.
The change in net sales of reportable segments can be summarized as follows (dollars in millions):
Net sales - 2007
Net effect of price and mix
Effects of changing foreign currency rates
Decreased sales volume
Total effect on net sales
Net sales - 2008
$ 572.0
274.5
(514.0)
$
7,475.0
332.5
7,807.5
$
27
Segment Operating Profit
Operating Profit for the reportable segments in the table below includes an allocation of some corporate
expenses based on both a percentage of sales and direct billings based on the costs of specific services
provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable
segments’ operations are included in Retained Corporate Costs and Other. For further information, see
Segment Information included in Note 20 to the Consolidated Financial Statements.
E u r o p e
N o r th A m e r ic a
S o u th A m e r ic a
A s ia P a c if ic
R e p o r ta b le s e g m e n t t o t a ls
2 0 0 8
2 0 0 7
$
4 7 7 . 8
1 8 5 . 2
3 3 1 . 0
1 6 2 . 8
1 ,1 5 6 . 8
$
4 3 3 . 0
2 6 5 . 1
2 5 4 . 9
1 5 4 . 0
1 ,1 0 7 . 0
R e t a in e d c o r p o r a t e c o s ts a n d o th e r
( 0 . 7 )
( 7 8 . 8 )
Segment Operating Profit for reportable segments for 2008 increased $49.8 million, or 4.5%, to $1,156.8
million, compared with Segment Operating Profit of $1,107.0 million for 2007.
The change in Segment Operating Profit for reportable segments can be summarized as follows (dollars in
millions):
Segment Operating Profit - 2007
Net effect of price and mix
Effects of changing foreign currency rates
Manufacturing and delivery costs
Decreased sales volume
Operating expense
Other
Total net effect on Segment Operating Profit
Segment Operating Profit -2008
Interest Expense
$
572.0
56.0
(468.0)
(116.0)
(28.0)
33.8
$
1,107.0
49.8
1,156.8
$
Interest expense in 2008 was $253.0 million compared with interest expense from continuing operations
of $348.6 million in 2007. Included in the 2007 interest expense was $9.5 million for both note
repurchase premiums and the write-off of unamortized finance fees related to the November 2007
repurchase of the $625.0 million 8.75% Senior Secured Notes. Exclusive of these items, interest expense
decreased approximately $86.1 million. The decrease is principally due to lower variable interest rates
under the Company’s bank credit agreement and on long term debt variable and swapped rates as well as
lower overall debt levels, partially offset by an increase in foreign currency exchange rates. The decrease
is also due to the non-recurrence of interest on debt that was repaid during the fourth quarter of 2007 with
the proceeds from the plastics sale. This interest was previously allocated to discontinued operations until
the date of the sale.
28
Interest Income
Interest income for continuing operations for 2008 was $38.6 million compared to $42.3 million for 2007.
Provision for Income Taxes
The Company’s effective tax rate from continuing operations for 2008 was 42.4%, compared with 29.2%
for 2007. The provision for 2008 includes a net expense of $33.3 million related to tax legislation,
restructuring, and other. The provision for 2007 includes a benefit of $13.5 million for the recognition of
tax credits related to restructuring of investments in certain European operations. Excluding those items
and the effects in both periods of pretax items for which taxes are separately calculated and recorded in
the period, the Company’s effective tax rate from continuing operations for 2008 was 24.0% compared to
24.4% for 2007. The Company expects that the effective tax rate will not change significantly in 2009.
Minority Share Owners’ Interest in Earnings of Subsidiaries
Minority share owners’ interest in earnings of subsidiaries for 2008 was $70.2 million compared to $59.5
million for 2007. The increase is primarily attributed to higher earnings from the Company’s operations
in South America.
Earnings from Continuing Operations
For 2008, the Company recorded earnings from continuing operations of $251.5 million compared to
earnings from continuing operations of $299.3 million for 2007. The after tax effects of the items
excluded from Segment Operating Profit, the 2008 and 2007 international net tax benefits, and the 2007
additional interest charges, increased or decreased earnings in 2008 and 2007 as set forth in the following
table (dollars in millions).
Description
Net expense related to tax legislation, restructuring, and other
Gain recognition from foreign tax credits
Restructuring and asset impairments
Increase in the accrual for future asbestos related costs
Note repurchase premiums and write-off of finance fees
Total
Net Earnings
Increase (Decrease)
2008
2007
$ (34.8)
$ -
13.5
(84.1)
(110.1)
(115.0)
(248.8)
________ (8.8)
$ (393.7)
$ (194.4)
Executive Overview – Years ended December 2007 and 2006
Net sales from continuing operations were $916.3 million higher than the prior year principally resulting
from improved pricing, increased unit shipments, and favorable foreign currency exchange rates.
Segment Operating Profit for reportable segments was $372.2 million higher than the prior year. The
benefits of higher selling prices, improved productivity, increased unit shipments, and favorable exchange
rates were partially offset by inflationary cost increases.
29
Interest expense from continuing operations for 2007 was $348.6 million compared to $349.0 million for
2006. Included in the 2007 interest expense was $9.5 million for both note repurchase premiums and the
write-off of unamortized finance fees related to the November 2007 repurchase of the $625.0 million
8.75% Senior Secured Notes. Included in the 2006 interest expense was $17.5 million for both note
repurchase premiums and the write-off of unamortized finance fees related to the June 2006 refinancing
of the Company’s previous credit agreement and the July 2006 repurchase of approximately $150 million
principal amount of the 8.875% Senior Secured Notes due 2009. Exclusive of these items, interest
expense increased approximately $7.6 million. A significant portion of the increase is interest on debt
that was repaid during the fourth quarter of 2007 with the proceeds from the plastics sale. This interest
was previously allocated to discontinued operations until the date of the sale.
Interest income for continuing operations for 2007 was $42.3 million compared to $19.2 million for 2006.
The increase of $23.1 million is primarily due to interest earned as a result of investing a portion of the
proceeds from the plastics July 31, 2007 sale until the funds were used to repay senior secured debt in the
fourth quarter of 2007.
Net earnings from continuing operations for 2007 were $299.3 million, or $1.78 per share (diluted),
compared to a loss of $3.8 million, or $0.17 per share (diluted) for 2006. Earnings in both periods
included items that management considered not representative of ongoing operations. These items
decreased net earnings in 2007 by $194.4 million, or $1.16 per share, and decreased net earnings in 2006
by $177.0 million, or $1.15 per share.
Cash payments for asbestos-related costs were $347.1 million for 2007 compared to $162.5 million for
2006. Cash payments increased in part to fund, on an accelerated basis, settlements of certain claims on
terms favorable to the Company. Cash payments were also used, in part, to reduce the deferred amounts
payable for previously settled claims to approximately $34 million as of December 31, 2007, from
approximately $82 million as of December 31, 2006.
Capital spending for property, plant and equipment for continuing operations was $292.5 million for 2007
compared to $285.0 million for 2006.
Results of Operations - Comparison of 2007 with 2006
Net Sales
The Company’s net sales by segment for 2007 and 2006 are presented in the following table. For further
information, see Segment Information included in Note 20 to the Consolidated Financial Statements.
2007
2006
Europe
North America
South America
Asia Pacific
Reportable segment totals
Other
Net Sales
30
(dollars in millions)
$
$
3,298.7
2,271.3
970.7
934.3
7,475.0
91.7
7,566.7
2,846.6
2,110.4
796.5
804.9
6,558.4
92.0
6,650.4
$
$
The Company’s net sales increased $916.3 million, or 13.8%, over 2006.
The change in net sales can be summarized as follows (dollars in millions):
Net sales - 2006
Net effect of price and mix
Increased sales volume
Effects of changing foreign currency rates
Total effect on net sales
Net sales - 2007
$ 322.8
144.7
448.8
$
6,650.4
916.3
7,566.7
$
The increase in reported sales from the effects of changing foreign currency exchange rates resulted
principally from the stronger Euro and Australian dollar.
Segment Operating Profit
Operating Profit for the reportable segments in the table below includes an allocation of some corporate
expenses based on both a percentage of sales and direct billings based on the costs of specific services
provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable
segments’ operations are included in Retained Corporate Costs and Other. For further information, see
Segment Information included in Note 20 to the Consolidated Financial Statements.
Europe
North America
South America
Asia Pacific
Reportable segment totals
2007
2006
(dollars in millions)
$
433.0
265.1
254.9
154.0
1,107.0
$
249.6
187.3
195.0
102.9
734.8
Retained corporate costs and other
(78.8)
(76.6)
Segment Operating Profit for reportable segments for 2007 increased $372.2 million, or 50.7%, to
$1,107.0 million, compared with Segment Operating Profit of $734.8 million for 2006.
31
The change in Segment Operating Profit for reportable segments can be summarized as follows (dollars in
millions):
Segment Operating Profit - 2006
Net effect of price and mix
Productivity and production volume
Effects of changing foreign currency rates
Increased sales volume
Warehouse, delivery and other costs
Operating expense
Manufacturing inflation, net of cost savings
Other
Total net effect on Segment Operating Profit
Segment Operating Profit -2007
Interest Expense
$
323.0
80.0
52.0
34.4
25.9
25.3
(152.0)
(16.4)
$
734.8
372.2
1,107.0
$
Interest expense from continuing operations for 2007 was $348.6 million compared to $349.0 million for
2006. Included in the 2007 interest expense was $9.5 million for both note repurchase premiums and the
write-off of unamortized finance fees related to the November 2007 repurchase of the $625.0 million
8.75% Senior Secured Notes. Included in the 2006 interest expense was $17.5 million for both note
repurchase premiums and the write-off of unamortized finance fees related to the June 2006 refinancing
of the Company’s previous credit agreement and the July 2006 repurchase of approximately $150 million
principal amount of the 8.875% Senior Secured Notes due 2009. Exclusive of these items, interest
expense increased approximately $7.6 million. A significant portion of the increase is interest on debt
that was repaid during the fourth quarter of 2007 with the proceeds from the plastics sale. This interest
was previously allocated to discontinued operations until the date of the sale.
Interest Income
Interest income for continuing operations for 2007 was $42.3 million compared to $19.2 million for 2006.
The increase of $23.1 million is primarily due to interest earned as a result of investing a portion of the
proceeds from the July 31, 2007 plastics sale until the funds were used to repay senior secured debt in the
fourth quarter of 2007.
Provision for Income Taxes
The Company’s effective tax rate from continuing operations for 2007 was 29.2%, compared with 75.9%
for 2006. Excluding the effects of separately taxed items in both periods, the Company’s effective tax rate
from continuing operations for 2007 was 24.4% compared with 40.3% for 2006. The reduction is
principally due to: (1) a change in mix of earnings to jurisdictions where the Company is subject to lower
effective rates, and (2) the effect of higher earnings and lower interest costs in the U.S., where the
Company has recognized a valuation allowance on net deferred tax assets.
Minority Share Owners’ Interest in Earnings of Subsidiaries
Minority share owners’ interest in earnings of subsidiaries for 2007 was $59.5 million compared to $43.6
million for 2006. The increase is primarily attributed to higher earnings from the Company’s operations
in South America.
32
Earnings from Continuing Operations
For 2007, the Company recorded earnings from continuing operations of $299.3 million compared to a
loss from continuing operations of $3.8 million for 2006. The after tax effects of the items excluded from
Segment Operating Profit, the 2007 and 2006 international net tax benefits, and the additional interest
charges, increased or decreased earnings in 2007 and 2006 as set forth in the following table (dollars in
millions).
Description
Net Earnings
Increase (Decrease)
2007
2006
Gain recognition from foreign tax credits
$ 13.5
$ -
Curtailment of postretirement benefits in The Netherlands
Reversal of non-U.S. deferred tax asset valuation allowance partially
offset by charges related to international tax restructuring
Restructuring and asset impairments
Increase in the accrual for future asbestos related costs
CEO transition charge and other
Note repurchase premiums and write-off of finance fees
Loss from the mark to market effect of natural gas hedge contracts
11.2
5.7
(27.7)
(120.0)
(20.7)
(17.1)
(8.4)
(84.1)
(115.0)
(8.8)
_________
Total
$ (194.4)
$ (177.0)
Items Excluded from Reportable Segment Totals
Retained Corporate Costs and Other
Retained corporate costs and other for 2008 was $0.7 million compared with $78.8 million for 2007.
Beginning in 2008, the Company revised its method of allocating corporate expenses. The Company
decreased slightly the percentage allocation based on sales and significantly expanded the number of
functions included in the allocation based on cost of services. It is not practicable to quantify the net
effect of these changes on periods prior to 2008. However, the effect for 2008 was to reduce the amount
of retained corporate costs by approximately $38.0 million. Also contributing to the decrease were lower
accruals for self insured risks and increased pension income in 2008.
Retained corporate costs and other for 2007 was $78.8 million compared with $76.6 million for 2006.
Restructuring and Asset Impairments
During 2008, the Company recorded charges totaling $133.3 million ($110.1 million after tax and
minority share owners’ interests), for additional restructuring and asset impairment principally in North
America and Europe, with additional charges across all segments as well as in Retained Corporate Costs
and Other. The charges reflect the additional decisions reached in the Company’s ongoing strategic
review of its global manufacturing footprint. See Note 17 for additional information.
During the third and fourth quarters of 2007, the Company recorded charges totaling $100.3 million
($84.1 million after tax), for restructuring and asset impairment in South America, Europe, and North
33
America. The charges reflect the initial decisions of the Company’s global profitability review. See Note
17 for additional information.
In September 2006, the Company announced the permanent closing of its Godfrey, Illinois machine parts
manufacturing operation. The facility was closed by the end of the year. This closing is part of a broad
initiative to reduce working capital and improve system costs. The Company also closed a small recycling
facility in Ohio. As a result, the Company recorded a charge of $29.7 million ($27.7 million after tax) in
the third quarter of 2006. The closing of these facilities resulted in the elimination of approximately 260
jobs and a corresponding reduction in the Company’s workforce. The Company anticipates that it will
pay out approximately $11.5 million in cash related to insurance, benefits, plant clean up, and other plant
closing costs. The Company expects that the majority of these costs will be paid out by the end of 2009.
Charge for Asbestos Related Costs
The fourth quarter 2008 charge for asbestos-related costs was $250.0 million ($248.8 million after tax),
compared to the fourth quarter 2007 charge of $115.0 million (pretax and after tax). The larger 2008
charge reflects higher filing rates and average disposition costs for 2008 and the next several years than
previously estimated. These charges resulted from the Company’s comprehensive annual review of
asbestos-related liabilities and costs. In each year, the Company concluded that an increase in the accrued
liability was required to provide for estimated indemnity payments and legal fees arising from asbestos
personal injury lawsuits and claims pending and expected to be filed during the several years following
the completion of the comprehensive review. See “Critical Accounting Estimates” for further
information.
Asbestos-related cash payments for 2008 were $210.2 million, a decrease of $136.9 million from 2007.
As in 2007, cash payments were used in part to fund, on an accelerated basis, settlements of certain
claims on terms favorable to the Company. Deferred amounts payable were approximately $34.0 million
at both December 31, 2008 and 2007.
During 2008, the Company received approximately 5,000 new filings and disposed of approximately
8,000 claims. As of December 31, 2008, the number of asbestos-related claims pending against the
Company was approximately 11,000. The Company anticipates that cash flows from operations and other
sources will be sufficient to meet all asbestos-related obligations on a short-term and long-term basis. See
Note 19 to the Consolidated Financial Statements for further information.
CEO and Other Transition Charges
The Company recorded a 2006 charge of $20.8 million ($20.7 million after tax) associated with the
separation agreement with its former CEO and with several members of the European management team.
The charge also included costs related to the employment agreement with the Company’s new CEO.
Curtailment of Postretirement Benefits in The Netherlands
The Company recorded a 2006 gain of $15.9 million ($11.2 million after tax) related to curtailment of
certain postretirement benefits in The Netherlands as a result of certain improvements in retiree medical
benefits offered by the government.
34
Mark to Market Effect of Natural Gas Hedge Contracts
During the fourth quarter of 2004, the Company determined that the commodity futures contracts related
to forecasted natural gas requirements did not meet all of the documentation requirements to qualify for
special hedge accounting treatment and began to recognize all changes in fair value of these contracts in
current earnings. The Company completed the documentation and re-designation of its natural gas hedge
contracts and began to apply special hedge accounting as of April 1, 2005. The total unrealized pretax
loss recorded in 2006 was $8.7 million.
Tax Benefits and Charges
In 2008 the Company recorded a net tax charge of $33.3 million ($34.8 million after minority share
owners’ interest) related to tax legislation, restructuring, and other.
In 2007 the Company recorded a tax benefit of $13.5 million for recognition of tax credits related to
restructuring of investments in certain European operations.
In 2006 the Company recorded a net tax benefit of $5.7 million from the reversal of a valuation allowance
against certain non-U.S. deferred tax assets due to improving operations, partially offset by charges
related to international tax restructuring.
Discontinued Operations
On July 31, 2007, the Company completed the sale of its plastics packaging business to Rexam PLC for
approximately $1.825 billion in cash. As required by FAS No. 144,“Accounting for the Impairment or
Disposal of Long-Lived Assets,” the Company has presented the results of operations for the plastics
packaging business in the Consolidated Results of Operations for the years ended December 31, 2007 and
2006 as discontinued operations. Interest expense was allocated to the discontinued operations based on
debt that was required by an amendment to the Secured Credit Agreement to be repaid from the net
proceeds. Amounts for the prior periods have been reclassified to conform to this presentation.
35
The following summarizes the revenues and expenses of the discontinued operations as reported in the
consolidated results of operations for the periods indicated:
Net sales
Manufacturing, shipping
and delivery
Gross profit
Selling and administrative
Research, development and
engineering
Interest expense
Other income
Other expense
Earnings (loss) before items below
(Provision) credit for income taxes
Minority share owners' interests
in earnings of subsidiaries
Gain on sale of discontinued operations
Net earnings (loss) from
discontinued operations
Years ended December 31,
2007
2006
$
455.0
$
771.6
(602.9)
168.7
(34.4)
(15.1)
(139.2)
2.9
(5.4)
(22.5)
(1.2)
(343.5)
111.5
(20.7)
(8.3)
(80.6)
(0.1)
(1.2)
0.6
2.4
(0.2)
1,038.5
$
1,041.3
$
(23.7)
The 2007 gain on the sale of discontinued operations of $1,038.5 million includes charges totaling $62.1
million for debt retirement costs, consisting principally of redemption premiums and write-off of
unamortized fees, and a gain of $8.7 million for curtailment and settlement of pension and other
postretirement benefits. The gain also includes a net provision for income taxes of $38.2 million,
consisting of taxes on the gain of $445.0 million that are substantially offset by a credit of $406.8 million
for the reversal of valuation allowances against existing tax loss carryforwards. The sale agreement
provides for an adjustment of the selling price based on working capital levels and certain other factors.
The gain on sale of discontinued operations of $6.8 million reported in 2008 relates to an adjustment of
the 2007 gain on the sale of the plastics packaging business mainly related to finalizing certain tax
allocations and an adjustment to the selling price in accordance with procedures set forth in the final
contract.
Capital Resources and Liquidity
Current and Long-Term Debt
The Company's total debt at December 31, 2008 was $3.33 billion, compared to $3.71 billion at
December 31, 2007.
On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the
“Agreement”). At December 31, 2008, the Agreement included a $900.0 million revolving credit facility,
a 225.0 million Australian dollar term loan, and a 110.8 million Canadian dollar term loan, each of which
has a final maturity date of June 15, 2012. It also included a $191.5 million term loan and a €191.5
million term loan, each of which has a final maturity date of June 14, 2013.
As a result of the bankruptcy of Lehman Brothers Holdings Inc. and several of its subsidiaries, the
Company believes that the maximum amount available under the revolving credit facility was reduced by
36
$32.3 million. After further deducting amounts attributable to letters of credit and overdraft facilities that
are supported by the revolving credit facility, at December 31, 2008 the Company’s subsidiary borrowers
had unused credit of $768.4 million available under the Agreement.
The Agreement contains various covenants that restrict, among other things and subject to certain
exceptions, the ability of the Company to incur certain liens, make certain investments and acquisitions,
become liable under contingent obligations in certain defined instances only, make restricted junior
payments, make certain asset sales within guidelines and limits, make capital expenditures beyond a
certain threshold, engage in material transactions with shareholders and affiliates, participate in sale and
leaseback financing arrangements, alter its fundamental business, amend certain outstanding debt
obligations, and prepay certain outstanding debt obligations.
The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the
Company not to exceed a ratio calculated by dividing consolidated total debt, less cash and cash
equivalents, by Consolidated Adjusted EBITDA, as defined in the Agreement. The Leverage Ratio could
restrict the ability of the Company to undertake additional financing to the extent that such financing
would cause the Leverage Ratio to exceed the specified maximum.
Failure to comply with these covenants and restrictions could result in an event of default under the
Agreement. In such an event, the Company could not request borrowings under the revolving facility,
and all amounts outstanding under the Agreement, together with accrued interest, could then be declared
immediately due and payable. If an event of default occurs under the Agreement and the lenders cause all
of the outstanding debt obligations under the Agreement to become due and payable, this would result in
a default under a number of other outstanding debt securities and could lead to an acceleration of
obligations related to these debt securities. A default or event of default under the Agreement, indentures
or agreements governing other indebtedness could also lead to an acceleration of debt under other debt
instruments that contain cross acceleration or cross-default provisions.
The Leverage Ratio also determines pricing under the Agreement. The interest rate on borrowings under
the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the
Agreement. These rates include a margin linked to the Leverage Ratio and the borrowers’ senior secured
debt rating. The margins range from 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to
0.75% for Base Rate loans. In addition, a facility fee is payable on the revolving credit facility
commitments ranging from 0.20% to 0.50% per annum linked to the Leverage Ratio. The weighted
average interest rate on borrowings outstanding under the Agreement at December 31, 2008 was 4.07%.
As of December 31, 2008, the Company was in compliance with all covenants and restrictions in the
Agreement. In addition, the Company believes that it will remain in compliance and that its ability to
borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.
During the second quarter of 2008, the Company used cash from operations and borrowings under the
Agreement to retire $250 million principal amount of 7.35% Senior Notes which matured in May 2008.
During March 2007, a subsidiary of the Company issued Senior Notes totaling €300.0 million. The notes
bear interest at 6.875% and are due March 31, 2017. The notes are guaranteed by substantially all of the
Company’s domestic subsidiaries. The proceeds were used to retire the $300 million principal amount of
8.10% Senior Notes which matured in May 2007, and to reduce borrowings under the revolving credit
facility.
On July 31, 2007, the Company completed the sale of its plastics packaging business to Rexam PLC for
approximately $1.825 billion in cash. In accordance with an amendment of the Agreement that became
effective upon completion of the sale of the plastics business, the Company was required to use the net
37
proceeds (as defined in the Agreement) to repay senior secured debt. In addition, the amendment
provided for modification of certain covenants, including the elimination of the financial covenant
requiring the Company to maintain a specified interest coverage ratio. The Company used a portion of
the net proceeds in the third quarter of 2007 to redeem all $450.0 million of the 7.75% Senior Secured
Notes and repurchase $283.1 million of the 8.875% Senior Secured Notes. The remaining $566.9 million
of the 8.875% Senior Secured Notes were repurchased or discharged in accordance with the indenture in
October 2007. The remaining net proceeds, along with funds from operations and/or additional
borrowings under the revolving credit facility, were used to redeem all $625.0 million of the 8.75%
Senior Secured Notes on November 15, 2007. The Company recorded $9.5 million of additional interest
charges for note repurchase premiums and the related write-off of unamortized finance fees.
During October 2006, the Company entered into a €300 million European accounts receivable
securitization program. The program extends through October 2011, subject to annual renewal of backup
credit lines. In addition, the Company participates in a receivables financing program in the Asia Pacific
region with a revolving funding commitment of 100 million Australian dollars and 25 million New
Zealand dollars that extends through July 2009 and October 2009, respectively.
Information related to the Company’s accounts receivable securitization program is as follows:
Dec. 31,
Dec. 31,
2008
2007
Balance (included in short-term loans)
$
293.7
$
361.8
Weighted average interest rate
5.31%
5.48%
Cash Flows
For 2008, cash provided by continuing operating activities was $707.6 million compared with $625.1
million for 2007. The increase is mainly attributable to improved profit margins, lower interest, and
lower payments for asbestos-related costs, partially offset by higher working capital balances.
Asbestos-related payments for 2008 decreased $136.9 million to $210.2 million, compared with $347.1
million for 2007. The decrease is due to reduced funding for settlements of certain claims on an
accelerated basis.
During the current downturn in global financial markets, some companies may experience difficulties
accessing their cash equivalents, drawing on revolvers, issuing debt, and raising capital generally, which
could have a material adverse impact on their liquidity. Notwithstanding these adverse market conditions,
the Company anticipates that cash flow from its operations and from utilization of credit available under
the Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service
and other obligations on a short-term (twelve-months) and long-term basis. Based on the Company's
expectations regarding future payments for lawsuits and claims 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.
38
Capital spending for property, plant and equipment (continuing operations) was $361.7 million compared
with $292.5 million in the prior year. The Company capitalized $25.6 million and $27.0 million in 2008
and 2007, respectively, under capital lease obligations with the related financing recorded as long-term
debt. The 2008 amount is in a range consistent with long term historical levels. The increase is also due
to changes in foreign currency exchange rates.
Contractual Obligations and Off-Balance Sheet Arrangements
The following information summarizes the Company’s significant contractual cash obligations at
December 31, 2008 (dollars in millions).
Contractual cash obligations:
Total
Long-term debt
Capital lease obligations
Operating leases
Interest (1)
Purchase obligations (2)
Pension benefit plan contributions
Postretirement benefit plan
benefit payments (1)
$
2,883.2
75.3
141.0
1,216.9
820.0
75.0
-
260.3
Payments due by period
Less than
one year
$
8.9
9.3
50.3
207.7
512.0
75.0
1-3 years
3-5 years
$
412.1
27.5
61.2
361.2
268.0
$
1,064.0
21.6
22.1
316.6
35.0
More than 5
years
$
1,398.2
16.9
7.4
331.4
5.0
22.3
43.8
42.7
151.5
Total contractual cash obligations
$
5,471.7
$
885.5
$
1,173.8
$
1,502.0
$
1,910.4
Other commercial commitments:
Total
Amount of commitment expiration per period
Less than
one year
1-3 years
3-5 years
More than 5
years
Standby letters of credit
$
81.3
$
81.3
Total commercial commitments
$
81.3
$
81.3
(1) Amounts based on rates and assumptions at December 31, 2008.
(2) The Company’s purchase obligations included contracted amounts for energy and molds. The
Company did not include ordinary course of business purchase orders in this amount as the majority of
such purchase orders may be canceled. In cases where variable prices are involved, current market prices
have been used. The Company does not believe such purchase orders will adversely affect our liquidity
position.
The Company is unable to make a reasonably reliable estimate as to when cash settlement with taxing
authorities may occur for our unrecognized tax benefits. Therefore, our liability for unrecognized tax
benefits is not included in the table above. See Note 11 to the Consolidated Financial Statements for
additional information.
The Company has no off-balance sheet arrangements.
39
Critical Accounting Estimates
The Company’s analysis and discussion of its financial condition and results of operations are based upon
its consolidated financial statements that have been prepared in accordance with accounting principles
generally accepted in the United States (“U.S. GAAP”). The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and
liabilities. The Company evaluates these estimates and assumptions on an ongoing basis. Estimates and
assumptions are based on historical and other factors believed to be reasonable under the circumstances at
the time the financial statements are issued. The results of these estimates may form the basis of the
carrying value of certain assets and liabilities and may not be readily apparent from other sources. Actual
results, under conditions and circumstances different from those assumed, may differ from estimates.
The impact of, and any associated risks related to, estimates and assumptions are discussed within
Management’s Discussion and Analysis of Financial Condition and Results of Operations, as well as in
the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect
the Company’s reported and expected financial results.
The Company believes that accounting for property, plant and equipment, impairment of long-lived
assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant
judgments and estimates used in the preparation of its consolidated financial statements.
Property, Plant and Equipment
The net carrying amount of property, plant, and equipment (“PP&E”) at December 31, 2008 totaled
$2,645.6 million, representing 33% of total assets. Depreciation expense from continuing operations
during 2008 totaled $431.0 million, representing approximately 5% of total costs and expenses. Given the
significance of PP&E and associated depreciation to the Company’s consolidated financial statements, the
determinations of an asset’s cost basis and its economic useful life are considered to be critical accounting
estimates.
Cost Basis - PP&E is recorded at cost, which is generally objectively quantifiable when assets are
purchased singly. However, when assets are purchased in groups, or as part of a business, costs assigned
to PP&E are based on an estimate of fair value of each asset at the date of acquisition. These estimates
are based on assumptions about asset condition, remaining useful life and market conditions, among
others. The Company frequently employs expert appraisers to aid in allocating cost among assets
purchased as a group.
Included in the cost basis of PP&E are those costs which substantially increase the useful lives or
capacity of existing PP&E. Significant judgment is needed to determine which costs should be
capitalized under these criteria and which costs should be expensed as a repair or maintenance
expenditure. For example, the Company frequently incurs various costs related to its existing glass
melting furnaces and forming machines and must make a determination of which costs, if any, to
capitalize. The Company relies on the experience and expertise of its operations and engineering staff to
make reasonable and consistent judgments regarding increases in useful lives or capacity of PP&E.
Estimated Useful Life – PP&E is generally depreciated using the straight-line method, which deducts
equal amounts of the cost of each asset from earnings each period over its estimated economic useful life.
Economic useful life is the duration of time an asset is expected to be productively employed by the
Company, which may be less than its physical life. Management’s assumptions regarding the following
40
factors, among others, affect the determination of estimated economic useful life: wear and tear, product
and process obsolescence, technical standards, and changes in market demand.
The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in
light of changed business circumstances. For example, technological advances, excessive wear and tear,
or changes in customers’ requirements may result in a shorter estimated useful life than originally
anticipated. In these cases, the Company depreciates the remaining net book value over the new estimated
remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the
estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year
on a prospective basis. Changes in economic useful life assumptions did not have a material impact on
the Company’s reported results in 2008, 2007 or 2006.
Impairment of Long-Lived Assets
Property, Plant, and Equipment –As required by FAS No. 144, the Company tests for impairment of
PP&E whenever events or changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. PP&E held for use in the Company’s business is grouped for impairment testing at
the lowest level for which cash flows can reasonably be identified, typically a geographic region. The
Company evaluates the recoverability of property, plant, and equipment based on undiscounted projected
cash flows, excluding interest and taxes. If an asset group is considered impaired, the impairment loss to
be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair
value. PP&E held for sale is reported at the lower of carrying amount or fair value less cost to sell.
Impairment testing requires estimation of the fair value of PP&E based on the discounted value of
projected future cash flows generated by the asset group. The assumptions underlying cash flow
projections represent management’s best estimates at the time of the impairment review. Factors that
management must estimate include, among other things: industry and market conditions, sales volume
and prices, production costs and inflation. Changes in key assumptions or actual conditions which differ
from estimates could result in an impairment charge. The Company uses reasonable and supportable
assumptions when performing impairment reviews and cannot predict the occurrence of future events and
circumstances that could result in impairment charges.
In mid-2007, the Company began a strategic review of its global manufacturing footprint. The review is
ongoing into 2009. As an initial result of this review, during 2007 and 2008, the Company recorded
charges that included impairments of property, plant, and equipment across all segments including certain
Retained Corporate Costs and Other activities. It is possible that the Company may conclude in the future
that it will close or temporarily idle additional selected facilities or production lines and reduce headcount
to increase operating performance and cash flows. As of December 31, 2008, no other decisions had been
made and no events had occurred that would require an additional evaluation of possible impairment in
accordance with FAS No. 144. For additional information on charges recorded in 2008, 2007 and 2006,
see Note 17 to the Consolidated Financial Statements.
Goodwill – Goodwill at December 31, 2008 totaled $2,207.5 million, representing 27% of total assets.
As required by FAS No. 142, the Company evaluates goodwill annually (or more frequently if
impairment indicators arise) for impairment. The Company conducts its evaluation as of October 1 of
each year. Goodwill impairment testing is performed using the business enterprise value (“BEV”) of each
reporting unit which is calculated as of a measurement date by determining the present value of debt-free,
after-tax projected future cash flows, discounted at the weighted average cost of capital of a hypothetical
third party buyer. This BEV is then compared to the book value of each reporting unit as of the
measurement date to assess whether an impairment of goodwill may exist.
41
During the fourth quarter of 2008, the Company completed its annual testing and determined that no
impairment of goodwill existed.
The testing performed as of October 1, 2008, indicated a significant excess of BEV over book value for
each unit. If the Company’s projected future cash flows were substantially lower, or if the assumed
weighted average cost of capital was substantially higher, the testing performed as of October 1, 2008,
may have indicated an impairment of one or more of the Company’s reporting units and, as a result, the
related goodwill may also have been impaired. However, less significant changes in projected future cash
flows or the assumed weighted average cost of capital would not have indicated an impairment. For
example, if projected future cash flows had been decreased by 5%, or if the weighted average cost of
capital had been increased by 5%, or both, the resulting lower BEV's would still have exceeded the book
value of each reporting unit by a significant margin.
The Company will monitor conditions throughout 2009 that might significantly affect the projections and
variables used in the impairment test to determine if a review prior to October 1 may be appropriate. If
the results of impairment testing confirm that a write down of goodwill is necessary, then the Company
will record a charge in the fourth quarter of 2009, or earlier if appropriate. In the event the Company
would be required to record a significant write down of goodwill, the charge would have a material
adverse effect on reported results of operations and net worth.
Other Long-Lived Assets – Other long-lived assets include, among others, equity investments and repair
parts inventories. The Company’s equity investments are non-publicly traded ventures with other
companies in businesses related to those of the Company. Equity investments are reviewed for
impairment whenever events or changes in circumstances indicate that the carrying amount of the
investment may not be recoverable. In the event that a decline in fair value of an investment occurs, and
the decline in value is considered to be other than temporary, an impairment loss is recognized.
Summarized financial information of equity affiliates is included in Note 5 to the Consolidated Financial
Statements. During 2007 and 2008, the Company recorded charges that included impairments of an equity
investment. For additional information on these charges, see Note 16 to the Consolidated Financial
Statements.
The Company carries a significant amount of repair parts inventories in order to provide a dependable
supply of quality parts for servicing the Company’s PP&E, particularly its glass melting furnaces and
forming machines. The Company evaluates the recoverability of repair parts inventories based on
undiscounted projected cash flows, excluding interest and taxes, when factors indicate that impairment
may exist. If impairment exists, the repair parts are written down to fair value. The Company continually
monitors the carrying value of repair parts for recoverability, especially in light of changing business
circumstances. For example, technological advances related to, and changes in, the estimated future
demand for products produced on the equipment to which the repair parts relate may make the repair parts
obsolete. In these circumstances, the Company writes down the repair parts to fair value. For additional
information on a charge recorded in 2006, see Note 16 to the Consolidated Financial Statements.
Pension Benefit Plans
Significant Estimates - The determination of pension obligations and the related pension expense or
credits to operations involves significant estimates. The most significant estimates are the discount rate
used to calculate the actuarial present value of benefit obligations and the expected long-term rate of
return on plan assets. The Company uses discount rates based on yields of high quality fixed rate debt
securities at the end of the year. At December 31, 2008, the weighted average discount rate for all plans
was 6.29%. The Company uses an expected long-term rate of return on assets that is based on both past
performance of the various plans’ assets and estimated future performance of the assets. Due to the
42
nature of the plans’ assets and the volatility of debt and equity markets, actual returns may vary
significantly from year to year. The Company refers to average historical returns over longer periods (up
to 10 years) in determining its expected rates of return because short-term fluctuations in market values
do not reflect the rates of return the Company expects to achieve based upon its long-term investing
strategy. For purposes of determining pension charges and credits in 2009, the Company’s estimated
weighted average expected long-term rate of return on plan assets is 7.7% compared to 8.1% in 2008.
The Company recorded pension expense (income) from continuing operations of $36.2 million, $3.4
million, and $(24.3) million in 2006, 2007, and 2008, respectively, from its principal defined benefit
pension plans. The improvement in 2008 is principally a result of higher asset values in the U.S. plans at
the beginning of 2008. Depending on currency translation rates, the Company expects to record
approximately $20 million of pension expense for the full year of 2009.
Future effects on reported results of operations depend on economic conditions and investment
performance. For example, a one-half percentage point change in the actuarial assumption regarding the
expected return on assets would result in a change of approximately $18 million in the pretax pension
amount for the full year 2009. In addition, changes in external factors, including the fair values of plan
assets and the discount rates used to calculate plan liabilities, could have a significant effect on the
recognition of funded status as described below.
Recognition of Funded Status –FAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans”, requires employers to adjust the assets and liabilities related to defined
benefit plans so that the amounts reflected on the balance sheet represent the overfunded or underfunded
status of the plans. These funded status amounts are measured as the difference between the fair value of
plan assets and actuarially calculated benefit obligations as of the balance sheet date. At December 31,
2008, the Accumulated Other Comprehensive Loss component of share owners’ equity was increased by
$1,080.1 million ($1,025.0 million after tax) to reflect a net decrease in the funded status of the
Company’s plans at that date.
Funding – Based on exchange rates at the end of 2008, the Company expects to contribute approximately
$70 million to $75 million to its non-U.S. defined benefit pension plans in 2009, compared with $61.2
million in 2008. Depending on a number of factors, the Company may elect to contribute amounts in
excess of minimum required amounts in order to improve the funded status of certain plans. The
Company presently estimates it will not be required to make cash contributions to the U.S. plans during
2009.
Contingencies and Litigation
The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other
claim disposition costs plus related legal fees) cannot be estimated with certainty. The Company’s ability
reasonably to estimate its liability has been significantly affected by the volatility of asbestos-related
litigation in the United States, the inherent uncertainty of future disease incidence and claiming patterns,
the expanding list of non-traditional defendants that have been sued in this litigation and found liable for
substantial damage awards, the use of mass litigation screenings to generate new lawsuits, the large
number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no
present physical impairment as a result of such exposure, and the significant number of co-defendants that
have filed for bankruptcy. The Company continues to monitor trends that may affect its ultimate liability
and continues to analyze the developments and variables affecting or likely to affect the resolution of
pending and future asbestos claims against the Company.
The Company conducts a comprehensive review of its asbestos-related liabilities and costs annually in
connection with finalizing and reporting its annual results of operations, unless significant changes in
43
trends or new developments warrant an earlier review. If the results of an annual comprehensive review
indicate that the existing amount of the accrued liability is insufficient to cover its estimated future
asbestos-related costs, then the Company will record an appropriate charge to increase the accrued
liability. The Company believes that an estimation of the reasonably probable amount of the contingent
liability for claims not yet asserted against the Company is not possible beyond a period of several years.
Therefore, while the results of future annual comprehensive reviews cannot be determined, the Company
expects the addition of one year to the estimation period will result in an annual charge.
In the fourth quarter of 2008, the Company recorded a charge of $250.0 million ($248.8 million after tax)
to increase its accrued liability for asbestos-related costs. This amount was higher than the 2007 charge of
$115.0 million. The larger 2008 charge reflects higher filing rates and average disposition costs for 2008
and the next several years than previously estimated. The factors and developments that particularly
affected the determination of the amount of this increase in the accrual included the following: (i) the
rates and average disposition costs of filings against the Company; (ii) the continuing evidence of
irregularities associated with mass litigation screenings; (iii) the Company's successful litigation record;
(iv) legislative developments and court rulings in several states; (v) the Company’s strategy to accelerate
settlements of certain claims on favorable terms; and (vi) the impact these and other factors had on the
Company’s valuation of existing and future claims.
The Company’s estimates are based on a number of factors as described further in Note 19 to the
Consolidated Financial Statements.
Income Taxes
The Company accounts for income taxes as required by the provisions of FAS No. 109, “Accounting for
Income Taxes,” under which deferred tax assets and liabilities are recognized for the tax effects of
temporary differences between the financial reporting and tax bases of assets and liabilities measured
using enacted tax rates.
Management judgment is required in determining income tax expense and the related balance sheet
amounts. In addition, under FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes”
(“FIN 48”) judgments are required concerning the ultimate outcome of uncertain income tax positions.
Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual
results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise
several years after tax returns have been filed. During 2008, the Company’s estimated unrecognized tax
benefits increased by $44.0 million related to tax positions taken in prior years in non-U.S. jurisdictions.
Deferred tax assets are also recorded for operating losses and tax credit carryforwards. However, FAS No.
109 requires that a valuation allowance be recorded when it is more likely than not that some portion or
all of the deferred tax assets will not be realized. This assessment is dependent upon projected
profitability including the effects of tax planning. Deferred tax assets and liabilities are determined
separately for each tax jurisdiction in which the Company conducts its operations or otherwise incurs
taxable income or losses. In the U.S., the Company has recorded significant deferred tax assets, the
largest of which relate to foreign and other tax credits which amounted to $303.9 million at December 31,
2008, the accrued liability for asbestos-related costs which amounted to $173.4 million at December 31,
2008 that are not deductible until paid and the pension liability which amounted to $122.6 million at
December 31, 2008. The deferred tax assets are partially offset by deferred tax liabilities, the most
significant of which relate to accelerated depreciation. The Company has recorded a valuation allowance
for the portion of U.S. deferred tax assets not offset by deferred tax liabilities. During the third quarter of
2007 the Company sold its discontinued plastics operations. For tax purposes, the gain on the sale was
substantially offset by capital and net operating loss carryforwards. The credit for the corresponding
44
the U.S. dollar is the designated functional currency, however, local currency borrowings expose the
Company to reported losses or gains in the event the foreign currency strengthens or weakens against the
U.S. dollar.
Available excess funds of a subsidiary may be redeployed through intercompany loans to other
subsidiaries for debt repayment, capital investment, or other cash requirements. Generally, each
intercompany loan is denominated in the lender’s local currency giving rise to foreign currency exchange
rate risk for the borrower. To mitigate this risk, the borrower generally enters into a forward exchange
contract which effectively swaps the intercompany loan and related interest to its local currency.
The Company believes the near term exposure to foreign currency exchange rate risk of its foreign
currency risk sensitive instruments was not material at December 31, 2008 and 2007.
Interest Rate Risk
The Company’s interest expense is most sensitive to changes in the general level of U.S. interest rates
applicable to its U.S. dollar indebtedness.
The Company has entered into a series of interest rate swap agreements with a total notional amount of
$700 million that mature in 2010 and 2013. The swaps were executed in order to: (i) convert a portion of
the senior notes and senior debentures fixed-rate debt into floating-rate debt; (ii) maintain a capital
structure containing appropriate amounts of fixed and floating-rate debt; and (iii) reduce net interest
payments and expense in the near-term.
The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. Because the
relevant terms of the swap agreements match the corresponding terms of the notes, there is no hedge
ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a
long-term asset along with a corresponding net increase in the carrying value of the hedged debt.
Under the swaps, the Company receives fixed rate interest amounts (equal to interest on the
corresponding hedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears) plus a
margin spread. The interest rate differential on each swap is recognized as an adjustment of interest
expense during each six-month period over the term of the agreement.
The following table provides information about the Company’s interest rate sensitivity related to its
significant debt obligations and interest rate swaps at December 31, 2008. For debt obligations, the table
presents principal cash flows and related weighted-average interest rates by expected maturity date. For
interest rate swaps, the table presents notional amounts and weighted-average interest rates by contract
maturity date. Notional amounts are used to calculate the contractual cash flows to be exchanged under
the swap contracts.
46
(dollars in millions)
2009
2010
2011
2012
2013
There-
after
Total
Fair
Value at
12/31/2008
Long-term debt at variable rate:
Principal by expected maturity
Avg. principal outstanding
Avg. interest rate
Long-term debt at fixed rate:
Principal by expected maturity
$
18.2
830.8
4.07%
$
20.1
811.7
4.07%
$
160.1
721.6
4.07%
$
153.6
564.7
4.07%
$
462.0
256.9
4.07%
$
25.9
12.9
4.07%
$
839.9
$
839.9
$250.0
$450.0
$1,389.2
$2,089.2
$1,824.5
Avg. principal outstanding
$2,089.2
$1,933.0
$1,839.2
$1,839.2
$1,558.0
$1,389.2
Avg. interest rate
7.31%
7.30%
7.29%
7.29%
7.11%
6.98%
Interest rate swaps (pay
variable/receive fixed):
Notional by expected maturity
Avg. notional outstanding
Avg. pay rate margin
over U.S. LIBOR
Avg. fixed receive rate
$700.0
3.52%
7.98%
$250.0
$543.8
3.61%
8.12%
$450.0
$450.0
$450.0
$450.0
3.70%
8.25%
3.70%
8.25%
3.70%
8.25%
$700.0
($29.4)
The Company believes the near term exposure to interest rate risk of its debt obligations and interest rate
swaps has not changed materially since December 31, 2007.
Commodity Price Risk
The Company has exposure to commodity price risk, principally related to energy. The Company
believes it can mitigate a portion of this risk by passing commodity cost changes through to customers. In
addition, the Company enters into commodity futures contracts related to forecasted natural gas
requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid
for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas
market with respect to its forecasted usage requirements over the next twelve to twenty-four months and
periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements
over that period. Significant transactions related to commodity price risk are as follows:
At December 31, 2008, the Company had entered into commodity futures contracts for
approximately 50% (approximately 10,200,000 MM BTUs) of its estimated North American
usage requirements for the full year of 2009 and approximately 1% (approximately 240,000 MM
BTUs) for the full year of 2010.
The Company believes the near term exposure to commodity price risk of its commodity futures contracts
was not material at December 31, 2008.
Forward Looking Statements
This document contains "forward looking" statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Forward-looking statements reflect
the Company's current expectations and projections about future events at the time, and thus involve
47
uncertainty and risk. It is possible the Company's future financial performance may differ from
expectations due to a variety of factors including, but not limited to the following: (1) foreign currency
fluctuations relative to the U.S. dollar, (2) changes in capital availability or cost, including interest rate
fluctuations, (3) the general political, economic and competitive conditions in markets and countries
where the Company has its operations, including disruptions in capital markets, disruptions in the supply
chain, competitive pricing pressures, inflation or deflation, and changes in tax rates and laws, (4)
consumer preferences for alternative forms of packaging, (5) fluctuations in raw material and labor costs,
(6) availability of raw materials, (7) costs and availability of energy, (8) transportation costs, (9) the
ability of the Company to raise selling prices commensurate with energy and other cost increases, (10)
consolidation among competitors and customers, (11) the ability of the Company to integrate operations
of acquired businesses and achieve expected synergies, (12) unanticipated expenditures with respect to
environmental, safety and health laws, (13) the performance by customers of their obligations under
purchase agreements, and (14) the timing and occurrence of events which are beyond the control of the
Company, including events related to asbestos-related claims. It is not possible to foresee or identify all
such factors. Any forward looking statements in this document are based on certain assumptions and
analyses made by the Company in light of its experience and perception of historical trends, current
conditions, expected future developments, and other factors it believes are appropriate in the
circumstances. Forward-looking statements are not a guarantee of future performance and actual results or
developments may differ materially from expectations. While the Company continually reviews trends
and uncertainties affecting the Company's results of operations and financial condition, the Company
does not assume any obligation to update or supplement any particular forward looking statements
contained in this document.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2008 and 2007
For the years ended December 31, 2008, 2007, and 2006:
Consolidated Results of Operations
Consolidated Share Owners' Equity
Consolidated Cash Flows
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data
Page
49
51-52
50
53-54
55
56
104
48
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Share Owners of
Owens-Illinois, Inc.
We have audited the accompanying consolidated balance sheets of Owens-Illinois, Inc. and subsidiaries
as of December 31, 2008 and 2007, and the related consolidated statements of results of operations, share
owners’ equity, and cash flows for each of the three years in the period ended December 31, 2008. Our
audits also included the financial statement schedule listed in the Index at Item 15(a). These financial
statements and schedule are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Owens-Illinois, Inc. and subsidiaries at December 31, 2008 and 2007,
and the consolidated results of their operations and their cash flows for each of the three years in the
period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Owens-Illinois, Inc.’s internal control over financial reporting as of December 31,
2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission and our report dated February 17, 2009
expressed an unqualified opinion thereon.
As discussed in Note 14 to the consolidated financial statements, the Company changed its method of
accounting for defined benefit pension plans and other postretirement plans in 2006.
/s/ Ernst & Young LLP
Toledo, Ohio
February 17, 2009
49
CONSOLIDATED RESULTS OF OPERATIONS Owens-Illinois, Inc.
Dollars in millions, except per share amounts
Years ended December 31,
2008
2007
2006
Net sales
Manufacturing, shipping, and delivery
Gross profit
Selling and administrative expense
Research, development, and engineering expense
Interest expense
Interest income
Equity earnings
Royalties and net technical assistance
Other income
Other expense
Earnings from continuing operations
before items below
Provision for income taxes
Minority share owners' interests in earnings
of subsidiaries
Earnings (loss) from continuing operations
Net earnings (loss) of discontinued operations
Gain on sale of discontinued operations
$
7,884.7
(6,208.1)
1,676.6
$
7,566.7
(5,971.4)
1,595.3
$
6,650.4
(5,481.1)
1,169.3
(511.9)
(66.6)
(253.0)
38.6
50.8
18.6
9.5
(404.2)
558.4
(236.7)
(70.2)
251.5
6.8
(520.6)
(65.8)
(348.6)
42.3
34.1
19.7
16.4
(266.2)
506.6
(147.8)
(59.5)
299.3
2.8
1,038.5
(530.4)
(48.7)
(349.0)
19.2
23.4
16.5
39.5
(174.7)
165.1
(125.3)
(43.6)
(3.8)
(23.7)
Net earnings (loss)
$
258.3
$
1,340.6
$
(27.5)
Convertible preferred stock dividends
Earnings (loss) available to common share owners
(5.4)
252.9
$
(21.5)
1,319.1
$
(21.5)
(49.0)
$
Basic earnings (loss) per share of common stock:
Earnings (loss) from continuing operations
Net earnings (loss) of discontinued operations
Gain on sale of discontinued operations
$
1.51
$
0.04
$
(0.17)
(0.15)
1.80
0.02
6.73
Net earnings (loss)
$
1.55
$
8.55
$
(0.32)
Diluted earnings (loss) per share of common stock:
Earnings (loss) from continuing operations
Net earnings (loss) of discontinued operations
Gain on sale of discontinued operations
$
1.48
$
0.04
$
(0.17)
(0.15)
1.78
0.02
6.19
Net earnings (loss)
$
1.52
$
7.99
$
(0.32)
See accompanying Notes to the Consolidated Financial Statements.
50
CONSOLIDATED BALANCE SHEETS Owens-Illinois, Inc.
Dollars in millions
December 31,
2008
2007
Assets
Current assets:
Cash, including time deposits of $307.5
($190.8 in 2007)
Short-term investments
Receivables, less allowances of $39.7
($36.0 in 2007) for losses and discounts
Inventories
Prepaid expenses
Total current assets
Other assets:
Equity investments
Repair parts inventories
Prepaid pension
Deposits, receivables, and other assets
Goodwill
Total other assets
Property, plant, and equipment:
Land, at cost
Buildings and equipment, at cost:
Buildings and building equipment
Factory machinery and equipment
Transportation, office, and miscellaneous equipment
Construction in progress
Less accumulated depreciation
Net property, plant, and equipment
Total assets
$
379.5
25.0
$
387.7
59.8
988.8
999.5
51.9
2,444.7
101.7
132.5
444.5
2,207.5
2,886.2
1,185.6
1,020.8
40.7
2,694.6
81.0
155.8
566.4
448.7
2,428.1
3,680.0
248.1
266.4
1,078.4
4,345.3
114.6
196.7
5,983.1
3,337.5
2,645.6
7,976.5
$
1,126.6
4,748.1
132.4
149.6
6,423.1
3,473.1
2,950.0
9,324.6
$
51
CONSOLIDATED BALANCE SHEETS Owens-Illinois, Inc. (continued)
Dollars in millions, except per share amounts
December 31,
Liabilities and Share Owners' Equity
Current liabilities:
Short-term loans
Accounts payable
Salaries and wages
U.S. and foreign income taxes
Current portion of asbestos-related liabilities
Other accrued liabilities
Long-term debt due within one year
Total current liabilities
Long-term debt
Deferred taxes
Pension benefits
Nonpension postretirement benefits
Other liabilities
Asbestos-related liabilities
Commitments and contingencies
Minority share owners' interests
Share owners' equity:
Convertible preferred stock, par value $.01 per share
Common stock, par value $.01 per share, 250,000,000 shares authorized,
178,705,817 shares issued and outstanding, less 11,556,341 treasury
shares at December 31, 2008 (169,063,219 issued and outstanding
less 11,712,278 treasury shares at December 31, 2007)
Capital in excess of par value
Treasury stock, at cost
Retained deficit
Accumulated other comprehensive loss
Total share owners' equity
Total liabilities and share owners' equity
2008
2007
$
375.6
838.2
141.6
78.7
175.0
376.0
18.2
2,003.3
2,940.3
77.6
741.8
239.7
360.1
320.3
$
435.6
957.5
193.1
42.9
210.0
425.1
265.3
2,529.5
3,013.5
109.4
313.7
287.0
386.9
245.5
252.8
1.8
2,913.3
(221.5)
(32.4)
(1,620.6)
1,040.6
251.7
452.5
1.7
2,420.0
(224.6)
(285.3)
(176.9)
2,187.4
$
7,976.5
$
9,324.6
See accompanying Notes to the Consolidated Financial Statements.
52
CONSOLIDATED SHARE OWNERS' EQUITY Owens-Illinois, Inc.
Dollars in millions
Years ended December 31,
2008
2007
2006
Convertible preferred stock
Balance at beginning of year
Conversion or redemption
Balance at end of year
Common stock
Balance at beginning of year
Issuance of common stock
Balance at end of year
Capital in excess of par value
Balance at beginning of year
Issuance of common stock
Balance at end of year
Treasury stock
Balance at beginning of year
Reissuance of common stock
Balance at end of year
$
452.5
(452.5)
$
452.5
$
452.5
$
-
$
452.5
$
452.5
$
1.7
0.1
$
1.7
$
1.7
$
1.8
$
1.7
$
1.7
$
2,420.0
493.3
$
2,329.5
90.5
$
2,297.0
32.5
$
2,913.3
$
2,420.0
$
2,329.5
$
(224.6)
3.1
$
(228.4)
3.8
$
(236.0)
7.6
$
(221.5)
$
(224.6)
$
(228.4)
53
CONSOLIDATED SHARE OWNERS' EQUITY Owens-Illinois, Inc. (continued)
Dollars in millions, except per share amounts
Years ended December 31,
2008
2007
2006
Retained deficit
Balance at beginning of year
Cash dividends on convertible preferred
stock -- $2.375 per share
Net earnings (loss)
$
(285.3)
$
(1,604.4)
$
(1,555.4)
(5.4)
258.3
(21.5)
1,340.6
(21.5)
(27.5)
Balance at end of year
$
(32.4)
$
(285.3)
$
(1,604.4)
Accumulated other comprehensive income (loss)
Balance at beginning of year
Foreign currency translation adjustments
Change in minimum pension liability, net of tax
Employee benefit plans, net of tax
Change in fair value of certain derivative instruments,
net of tax
$
(176.9)
(431.9)
$
(594.2)
325.3
$
(978.9)
(32.9)
63.8
28.2
(235.9)
285.5
22.6
(617.1)
(49.3)
Balance at end of year
$
(1,620.6)
$
(176.9)
$
(594.2)
Total share owners' equity
$
1,040.6
$
2,187.4
$
356.7
Total comprehensive income (loss)
Net earnings (loss)
Foreign currency translation adjustments
Change in minimum pension liability, net of tax
Employee benefit plans, net of tax
Change in fair value of certain derivative instruments,
net of tax
$
258.3
(431.9)
$
1,340.6
325.3
(978.9)
(32.9)
63.8
28.2
$
(27.5)
285.5
22.6
(49.3)
Total comprehensive income (loss)
$
(1,185.4)
$
1,757.9
$
231.3
See accompanying Notes to the Consolidated Financial Statements.
54
Years ended December 31,
Operating activities:
Net earnings (loss)
Net (earnings) loss of discontinued operations
Gain on sale of discontinued operations
Non-cash charges (credits):
Depreciation
Amortization of deferred costs
Amortization of deferred finance fees
Deferred tax provision
Restructuring and asset impairment
CEO and other transition charges
Curtailment of postretirement benefits in The Netherlands
Reverse non-U.S. deferred tax valuation allowance net of tax
restructuring charges
Future asbestos-related costs
Mark to market effect of natural gas hedge contracts
Other
Asbestos-related payments
Change in non-current operating assets
Reduction of non-current liabilities
Change in components of working capital
Cash provided by continuing operating activities
Cash provided by discontinued operating activities
Total cash provided by operating activities
Investing activities:
Additions to property, plant, and equipment - continuing
Additions to property, plant, and equipment - discontinued
Acquisitions, net of cash acquired
Advances to equity affiliate - net
Collections on receivables arising from consolidation of
receivables securitization program
Net cash proceeds from divestitures and other
Cash provided by (utilized in) investing activities
Financing activities:
Additions to long-term debt
Repayments of long-term debt
Increase (decrease) in short-term loans
Net receipts (payments) for hedging activity
Payment of finance fees
Convertible preferred stock dividends
Issuance of common stock
Cash utilized in financing activities
Effect of exchange rate fluctuations on cash
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2008
2007
2006
$
258.3
(6.8)
431.0
28.9
7.9
21.0
133.3
250.0
90.4
(210.2)
1.4
(96.2)
(201.4)
707.6
707.6
(361.7)
(1.6)
(13.9)
(377.2)
686.4
(945.4)
(20.6)
(45.2)
(5.4)
14.5
(315.7)
(22.9)
(8.2)
387.7
379.5
$
$
1,340.6
(2.8)
(1,038.5)
$
(27.5)
23.7
423.4
28.9
8.6
3.2
100.3
115.0
50.1
(347.1)
(7.4)
(85.4)
36.2
625.1
11.3
636.4
(292.5)
(23.3)
(9.8)
427.7
22.3
5.7
4.6
29.7
20.8
(15.9)
(5.7)
120.0
8.7
7.9
(162.5)
(33.3)
(58.1)
(257.1)
111.0
39.3
150.3
(285.0)
(35.3)
1,770.0
1,444.4
406.4
(2,393.2)
(21.5)
5.7
(6.3)
(21.5)
62.8
(1,967.6)
51.8
165.0
222.7
387.7
$
127.3
15.1
(177.9)
1,206.5
(1,341.8)
158.9
(6.8)
(12.3)
(21.5)
8.0
(9.0)
12.7
(23.9)
246.6
222.7
$
See accompanying Notes to the Consolidated Financial Statements.
55
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tabular data dollars in millions, except share and per share amounts
1. Significant Accounting Policies
Basis of Consolidated Statements The consolidated financial statements of Owens-Illinois, Inc.
(“Company”) include the accounts of its subsidiaries. Newly acquired subsidiaries have been included in
the consolidated financial statements from dates of acquisition. Results of operations for the plastics
packaging business sold during 2007 have been presented as a discontinued operation. The format of the
Company’s 2007 and 2006 consolidated income statements has been reclassified to conform to the
presentation used in the current period. The individual captions within the financial statements did not
change.
The Company uses the equity method of accounting for investments in which it has a significant
ownership interest, generally 20% to 50%. Other investments are accounted for at cost. The Company
monitors other than temporary declines in fair value and records reductions in carrying values when
appropriate.
Nature of Operations The Company is a leading manufacturer of glass container products. The
Company’s principal product lines are glass containers for the food and beverage industries. The
Company has glass container operations located in 22 countries. The principal markets and operations for
the Company’s products are in North America, Europe, South America, and Australia.
Use of Estimates The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management of the Company to make estimates and
assumptions that affect certain amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates, at which time the Company would revise its estimates
accordingly. For further information on certain of the Company’s significant estimates relative to
contingent liabilities, see Note 19.
Cash The Company defines “cash” as cash and time deposits with maturities of three months or less
when purchased. Outstanding checks in excess of funds on deposit are included in accounts payable.
Fair Values of Financial Instruments The carrying amounts reported for cash, short-term investments
and short-term loans approximate fair value. In addition, carrying amounts approximate fair value for
certain long-term debt obligations subject to frequently redetermined interest rates. Fair values for the
Company’s significant fixed rate debt obligations are generally based on published market quotations.
Derivative Instruments The Company uses currency swaps, interest rate swaps, options, and
commodity futures contracts to manage risks generally associated with foreign exchange rate, interest rate
and commodity market volatility. Derivative financial instruments are included on the balance sheet at
fair value. Whenever possible, derivative instruments are designated as and are effective as hedges, in
accordance with accounting principles generally accepted in the United States. If the underlying hedged
transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are
recognized in current earnings. The Company does not enter into derivative financial instruments for
trading purposes and is not a party to leveraged derivatives. In accordance with FAS No. 104, cash flows
from fair value hedges of debt and short-term forward exchange contracts are classified as a financing
activity. Cash flows of currency swaps, interest rate swaps, and commodity futures contracts are
classified as operating activities. See Note 9 for additional information related to derivative instruments.
56
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Inventory Valuation The Company values most U.S. inventories at the lower of last-in, first-out (LIFO)
cost or market. Other inventories are valued at the lower of standard costs (which approximate average
costs) or market.
Goodwill Goodwill represents the excess of cost over fair value of assets of businesses acquired.
Goodwill is evaluated annually, as of October 1, for impairment or more frequently if an impairment
indicator exists.
Intangible Assets and Other Long-Lived Assets Intangible assets are amortized over the expected
useful life of the asset. Amortization expense directly attributed to the manufacturing of the Company’s
products is included in manufacturing, shipping, and delivery. Amortization expense related to non-
manufacturing activities is included in selling and administrative and other. The Company evaluates the
recoverability of intangible assets and other long-lived assets based on undiscounted projected cash flows,
excluding interest and taxes, when factors indicate that impairment may exist. If impairment exists, the
asset is written down to fair value.
Property, Plant, and Equipment Property, plant, and equipment (“PP&E”) is carried at cost and
includes expenditures for new facilities and equipment and those costs which substantially increase the
useful lives or capacity of existing PP&E. In general, depreciation is computed using the straight-line
method and recorded over the estimated useful life of the asset. Factory machinery and equipment is
depreciated over periods ranging from 5 to 25 years with the majority of such assets (principally glass-
melting furnaces and forming machines) depreciated over 7-15 years. Buildings and building equipment
are depreciated over periods ranging from 10 to 50 years. Depreciation expense directly attributed to the
manufacturing of the Company’s products is included in manufacturing, shipping, and delivery.
Depreciation expense related to non-manufacturing activities is included in selling and administrative.
Maintenance and repairs are expensed as incurred. Costs assigned to PP&E of acquired businesses are
based on estimated fair values at the date of acquisition. The Company evaluates the recoverability of
property, plant, and equipment based on undiscounted projected cash flows, excluding interest and taxes,
when factors indicate that impairment may exist. If impairment exists, the asset is written down to fair
value.
Revenue Recognition The Company recognizes sales, net of estimated discounts and allowances, when
the title to the products and risk of loss are transferred to customers. Provisions for rebates to customers
are provided in the same period that the related sales are recorded.
Shipping and Handling Costs Shipping and handling costs are included with manufacturing, shipping,
and delivery costs in the Consolidated Statements of Operations.
Income Taxes on Undistributed Earnings In general, the Company plans to continue to reinvest the
undistributed earnings of foreign subsidiaries and foreign corporate joint ventures accounted for by the
equity method. Accordingly, taxes are provided only on that amount of undistributed earnings in excess
of planned reinvestments.
Foreign Currency Translation The assets and liabilities of substantially all subsidiaries and associates
are translated at current exchange rates and any related translation adjustments are recorded directly in
share owners’ equity.
Accounts Receivable Receivables are stated at amounts estimated by management to be the net
realizable value. The Company charges off accounts receivable when it becomes apparent based upon
age or customer circumstances that amounts will not be collected.
57
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Allowance for Doubtful Accounts The allowance for doubtful accounts is established through charges
to the provision for bad debts. The Company evaluates the adequacy of the allowance for doubtful
accounts on a periodic basis. The evaluation includes historical trends in collections and write-offs,
management’s judgment of the probability of collecting accounts and management’s evaluation of
business risk.
New Accounting Standards In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, “Business Combinations” (“FAS No. 141R”). FAS No. 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase. FAS
No. 141R also sets forth the disclosures required to be made in the financial statements to evaluate the
nature and financial effects of the business combination. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Accordingly, FAS No. 141R will be applied
by the Company to business combinations occurring on or after January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“FAS
No. 160”). FAS No. 160 establishes accounting and reporting standards for the non-controlling interest in
a subsidiary and the deconsolidation of a subsidiary. FAS No. 160 is effective for years beginning on or
after December 15, 2008. Adoption of FAS No. 160 is not presently expected to have a material impact
on the Company’s results of operations, financial position or cash flows.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS
No. 161”). FAS No. 161 is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity’s financial condition, financial performance, and cash flows. FAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
Adoption of FAS No. 161 is not presently expected to have a material impact on the Company’s results of
operations, financial position or cash flows.
In June 2008, the FASB issued FSP No. EITF 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities,” which addresses whether instruments
granted in share-based payment awards are participating securities prior to vesting and, therefore, must be
included in the earnings allocation in calculating earnings per share under the two-class method described
in FAS No. 128, “Earnings per Share.” FSP No. EITF 03-6-1 requires that unvested share-based payment
awards that contain non-forfeitable rights to dividends be treated as participating securities in calculating
earnings per share. FSP No. EITF 03-6-1 is effective for fiscal years beginning after December 15, 2008,
and interim periods within those fiscal years, and shall be applied retrospectively to all prior periods. The
adoption of FSP No. EITF 03-6-1 is not presently expected to have a material impact on the Company’s
earnings per share.
In December 2008, the FASB issued a FASB Staff Position on Statement of Financial Accounting
Standards No. 132(R), “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS
No. 132(R)-1”). FSP FAS No. 132(R)-1 requires additional disclosures about the fair value of
postretirement benefit plan assets to provide users of financial statements with useful, transparent and
timely information about the asset portfolios. FSP FAS No. 132(R)-1 is effective for years ending after
December 15, 2009. Adoption of FSP FAS No. 132(R)-1 will have no impact on the Company’s results
of operations, financial position or cash flows.
58
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FSP
157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of
FAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the
beginning of the first quarter of fiscal 2009. The adoption of FAS No. 157 is not expected to have a
significant impact on the Company’s consolidated financial statements when it is applied to non-financial
assets and non-financial liabilities that are not measured at fair value on a recurring basis, beginning in the
first quarter of 2009.
Stock Options and Other Stock-Based Compensation The Company has five non-qualified plans,
which are described more fully in Note 13. In December 2004, the Financial Accounting Standards
Board issued FAS No. 123R, “Share-Based Payment” (“FAS No. 123R”), which requires that the cost
resulting from all share-based payment transactions be recognized in the financial statements. The
statement requires a public entity to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award. That cost is recognized over
the required service period (usually the vesting period). No compensation cost is recognized for equity
instruments for which employees do not render the required service.
The Company adopted the provisions of FAS No. 123R effective January 1, 2006 using the modified-
prospective method of adoption, which requires recognition of compensation cost in the financial
statements beginning on the date of adoption.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions:
2008
2007
2006
Range of expected lives of options (years)
Range of expected stock price volatilities
Weighted average expected stock price volatilities
Range of risk-free interest rates
Expected dividend yield
4.75
29.0%-39.8%
31.4%
1.5%-3.7%
0.0%
4.75
37.1%-40.0%
39.9%
4.1%-4.6%
0.0%
3.50-4.75
32.7%-50.5%
44.9%
4.1%-5.1%
0.0%
The expected life of options is based on the assumption that, on average, options will be exercised at the
mid-point between the vesting date and the expiration date. The expected stock price volatility is
determined by reference to historical prices over a period equal to the expected life.
The fair value of other equity awards, consisting of restricted shares and performance vested restricted
share units, is equal to the quoted market value at the time of grant.
59
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2. Earnings Per Share The following table sets forth the computation of basic and diluted earnings per
share:
Years ended December 31,
Numerator:
Net earnings (loss)
Convertible preferred stock dividends
Numerator for basic earnings (loss) per
share -- income (loss) available to
common share owners
Denominator:
Denominator for basic earnings (loss) per
share -- weighted average shares
outstanding
Effect of dilutive securities:
Convertible preferred stock
Stock options and other
Denominator for diluted earnings (loss) per
share -- adjusted weighted average
shares and assumed exchanges of
preferred stock for common stock
Basic earnings (loss) per share:
Earnings (loss) from continuing operations
Net earnings (loss) of discontinued operations
Gain on sale of discontinued operations
Net earnings (loss)
Diluted earnings (loss) per share:
Earnings (loss) from continuing operations
Net earnings (loss) of discontinued operations
before cumulative effect of accounting change
Gain on sale of discontinued operations
Net earnings (loss)
2008
2007
2006
$
258.3
(5.4)
$
1,340.6
(21.5)
$
(27.5)
(21.5)
$
252.9
$
1,319.1
$
(49.0)
163,177,874
154,215,269
152,071,037
2,147,339
4,352,076
8,589,355
4,962,683
169,677,289
167,767,307
152,071,037
$
1.51
$
0.04
1.55
$
$
$
1.48
$
0.04
1.52
$
$
1.80
0.02
6.73
8.55
1.78
0.02
6.19
7.99
$
(0.17)
(0.15)
$
(0.32)
$
(0.17)
(0.15)
$
(0.32)
The convertible preferred stock was included in the computation of diluted earnings per share for 2008, to
the extent outstanding during 2008, and 2007 on an “if converted” basis since the result was dilutive. The
Company’s convertible preferred stock was not included in the computation of 2006 diluted earnings per
share since the result would have been antidilutive. For purposes of this computation, the preferred stock
dividends were not subtracted from the numerator. Options to purchase 241,711 and 862,906 weighted
average shares of common stock which were outstanding during 2008 and 2007, respectively, were not
included in the computation of diluted earnings per share because the options’ exercise prices were
greater than the average market price of the common shares. For the year ended December 31, 2006,
diluted earnings per share of common stock were equal to basic earnings per share of common stock due
to the net loss.
60
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
3. Supplemental Cash Flow Information Changes in the components of working capital related to
operations (net of the effects related to acquisitions and divestitures) were as follows:
Decrease (increase) in current assets:
Short-term investments
Receivables
Inventories
Prepaid expenses
Increase (decrease) in current liabilities:
Accounts payable
Accrued liabilities
Salaries and wages
U.S. and foreign income taxes
Continuing operations
Discontinued operations
2008
2007
2006
$
36.8
57.8
(74.1)
(1.6)
$
(27.0)
(16.5)
63.0
5.6
$
22.5
(162.8)
(31.2)
(2.6)
(56.7)
(95.7)
(37.2)
(30.7)
(201.4)
$
(2.9)
(63.2)
38.3
24.5
21.8
$
$
(201.4)
$
36.2
(14.4)
51.9
(82.1)
(24.4)
(24.1)
(252.8)
(257.1)
4.3
$
$
$
(201.4)
$
21.8
$
(252.8)
Interest paid in cash, including note repurchase premiums in 2007 and 2006, aggregated $251.9 million
for 2008, $452.4 million for 2007, and $461.0 million for 2006.
Income taxes paid (received) in cash were as follows:
Domestic
Foreign
4. Inventories Major classes of inventory are as follows:
2008
2007
2006
$
(1.2)
162.5
$
31.8
151.1
$
(1.2)
126.8
$
161.3
$
182.9
$
125.6
Finished goods
Work in process
Raw materials
Operating supplies
2008
2007
$
831.7
0.8
109.8
57.2
$
861.1
1.4
90.5
67.8
$
999.5
$
1,020.8
If the inventories which are valued on the LIFO method had been valued at standard costs, which
approximate current costs, consolidated inventories would be higher than reported by $32.5 million and
$29.1 million at December 31, 2008 and 2007, respectively.
Inventories which are valued at the lower of standard costs (which approximate average costs) or market
at December 31, 2008 and 2007 were approximately $861.7 million and $874.6 million, respectively.
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
5. Equity Investments Summarized information pertaining to the Company’s equity associates follows:
At end of year:
Equity in undistributed earnings:
Foreign
Domestic
Total
For the year:
Equity in earnings:
Foreign
Domestic
Total
Dividends received
2008
2007
$
36.4
15.2
$
51.6
$
23.4
18.7
$
42.1
2008
2007
2006
$
14.1
36.7
$
5.3
28.8
$
2.0
21.4
$
50.8
$
34.1
$
23.4
$
24.5
$
21.7
$
43.5
Summarized combined financial information for equity associates is as follows:
At end of year:
Current assets
Non-current assets
Total assets
Current liabilities
Other liabilities and deferred items
Total liabilities and deferred items
Net assets
For the year:
Net sales
Gross profit
Net earnings
2008
2007 (a)
$
208.3
325.9
534.2
167.5
182.5
350.0
$
191.3
302.4
493.7
117.0
265.5
382.5
$
184.2
$
111.2
2008
2007 (a)
2006
$
635.8
$
535.9
$
564.0
$
227.5
$
176.5
$
132.2
$
153.9
$
112.4
$
69.4
(a) Amounts for 2007 exclude the Company's Caribbean investment due to the impairment recorded during 2007.
62
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s significant equity method investments include: (1) 43.5% of the common shares of Vetri
Speciali SpA, a specialty glass manufacturer; (2) a 25% partnership interest in General Chemical Soda
Ash (Partners), a soda ash supplier; and (3) a 50% partnership interest in Rocky Mountain Bottle
Company, a glass container manufacturer.
6. Debt The following table summarizes the long-term debt of the Company at December 31, 2008 and
2007:
Secured Credit Agreement:
Revolving Credit Facility:
Revolving Loans
Term Loans:
Term Loan A (225.0 million AUD at Dec. 31, 2008)
Term Loan B
Term Loan C (110.8 million CAD at Dec. 31, 2008)
Term Loan D (€191.5 million at Dec. 31, 2008)
Senior Notes:
7.35%, due 2008
8.25%, due 2013
6.75%, due 2014
6.75%, due 2014 (€225 million)
6.875%, due 2017 (€300 million)
Senior Debentures:
7.50%, due 2010
7.80%, due 2018
Other
Total long-term debt
Less amounts due within one year
Long-term debt
2008
2007
$
18.7
$
-
155.7
191.5
90.9
269.6
470.0
400.0
316.8
422.4
259.5
250.0
113.4
2,958.5
18.2
2,940.3
$
$
198.1
191.5
113.2
281.8
249.8
450.6
400.0
331.1
441.5
253.0
250.0
118.2
3,278.8
265.3
3,013.5
On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the
“Agreement”). At December 31, 2008, the Agreement included a $900.0 million revolving credit facility,
a 225.0 million Australian dollar term loan, and a 110.8 million Canadian dollar term loan, each of which
has a final maturity date of June 15, 2012. It also included a $191.5 million term loan and a €191.5
million term loan, each of which has a final maturity date of June 14, 2013.
As a result of the bankruptcy of Lehman Brothers Holdings Inc. and several of its subsidiaries, the
Company believes that the maximum amount available under the revolving credit facility was reduced by
$32.3 million. After further deducting amounts attributable to letters of credit and overdraft facilities that
are supported by the revolving credit facility, at December 31, 2008 the Company’s subsidiary borrowers
had unused credit of $768.4 million available under the Agreement.
The Agreement contains various covenants that restrict, among other things and subject to certain
exceptions, the ability of the Company to incur certain liens, make certain investments and acquisitions,
become liable under contingent obligations in certain defined instances only, make restricted junior
payments, make certain asset sales within guidelines and limits, make capital expenditures beyond a
certain threshold, engage in material transactions with shareholders and affiliates, participate in sale and
leaseback financing arrangements, alter its fundamental business, amend certain outstanding debt
obligations, and prepay certain outstanding debt obligations.
63
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the
Company not to exceed a ratio calculated by dividing consolidated total debt, less cash and cash
equivalents, by Consolidated Adjusted EBITDA, as defined in the Agreement. The Leverage Ratio could
restrict the ability of the Company to undertake additional financing to the extent that such financing
would cause the Leverage Ratio to exceed the specified maximum.
Failure to comply with these covenants and restrictions could result in an event of default under the
Agreement. In such an event, the Company could not request borrowings under the revolving facility,
and all amounts outstanding under the Agreement, together with accrued interest, could then be declared
immediately due and payable. If an event of default occurs under the Agreement and the lenders cause all
of the outstanding debt obligations under the Agreement to become due and payable, this would result in
a default under a number of other outstanding debt securities and could lead to an acceleration of
obligations related to these debt securities. A default or event of default under the Agreement, indentures
or agreements governing other indebtedness could also lead to an acceleration of debt under other debt
instruments that contain cross acceleration or cross-default provisions.
The leverage ratio also determines pricing under the Agreement. The interest rate on borrowings under
the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the
Agreement. These rates include a margin linked to the leverage ratio and the borrowers’ senior secured
debt rating. The margins range from 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to
0.75% for Base Rate loans. In addition, a facility fee is payable on the revolving credit facility
commitments ranging from 0.20% to 0.50% per annum linked to the leverage ratio. The weighted
average interest rate on borrowings outstanding under the Agreement at December 31, 2008 was 4.07%.
As of December 31, 2008, the Company was in compliance with all covenants and restrictions in the
Agreement. In addition, the Company believes that it will remain in compliance and that its ability to
borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.
Borrowings under the Agreement are secured by substantially all of the assets of the Company’s domestic
subsidiaries and certain foreign subsidiaries, which have a book value of approximately $2.1 billion.
Borrowings are also secured by a pledge of intercompany debt and equity in most of the Company’s
domestic subsidiaries and stock of certain foreign subsidiaries. All borrowings under the agreement are
guaranteed by substantially all domestic subsidiaries of the Company for the term of the Agreement.
During the second quarter of 2008, the Company used cash from operations and borrowings under the
Agreement to retire $250 million principal amount of 7.35% Senior Notes which matured in May 2008.
During March 2007, a subsidiary of the Company issued Senior Notes totaling €300.0 million. The notes
bear interest at 6.875% and are due March 31, 2017. The notes are guaranteed by substantially all of the
Company’s domestic subsidiaries. The proceeds were used to retire the $300 million principal amount of
8.10% Senior Notes which matured in May 2007, and to reduce borrowings under the revolving credit
facility.
On July 31, 2007, the Company completed the sale of its plastics packaging business to Rexam PLC for
approximately $1.825 billion in cash. In accordance with an amendment of the Agreement that became
effective upon completion of the sale of the plastics business, the Company was required to use the net
proceeds (as defined in the Agreement) to repay senior secured debt. In addition, the amendment
provides for modification of certain covenants, including the elimination of the financial covenant
requiring the Company to maintain a specified interest coverage ratio. The Company used a portion of
the net proceeds in the third quarter of 2007 to redeem all $450.0 million of the 7.75% Senior Secured
Notes and repurchase $283.1 million of the 8.875% Senior Secured Notes. The remaining $566.9 million
of the 8.875% Senior Secured Notes were repurchased or discharged in accordance with the indenture in
64
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
October 2007. The remaining net proceeds, along with funds from operations and/or additional
borrowings under the revolving credit facility, were used to redeem all $625.0 million of the 8.75%
Senior Secured Notes on November 15, 2007. The Company recorded $9.5 million of additional interest
charges for note repurchase premiums and the related write-off of unamortized finance fees. See Note 22
for additional charges for note repurchase premiums and the related write-off of unamortized finance fees
included in the gain on sale of the Company’s plastics business.
During October 2006, the Company entered into a €300 million European accounts receivable
securitization program. The program extends through October 2011, subject to annual renewal of backup
credit lines. In addition, the Company participates in a receivables financing program in the Asia Pacific
region with a revolving funding commitment of 100 million Australian dollars and 25 million New
Zealand dollars that extends through July 2009 and October 2009, respectively. Information related to the
Company’s accounts receivable securitization program is as follows:
Dec. 31,
Dec. 31,
2008
2007
Balance (included in short-term loans)
$
293.7
$
361.8
Weighted average interest rate
5.31%
5.48%
The Company capitalized $25.6 million and $27.0 million in 2008 and 2007, respectively, under capital
lease obligations with the related financing recorded as long term debt. These amounts are included in
other in the long-term debt table above.
Annual maturities for all of the Company’s long-term debt through 2013 are as follows: 2009, $18.2
million; 2010, $279.5 million; 2011, $160.1 million; 2012, $153.6 million; and 2013, $932.0 million.
Fair values at December 31, 2008, of the Company’s significant fixed rate debt obligations were as
follows:
Senior Notes:
8.25%, due 2013
6.75%, due 2014
6.75%, due 2014 (€225 million)
6.875%, due 2017 (€300 million)
Senior Debentures:
7.50%, due 2010
7.80%, due 2018
Principal Amount
(millions of
dollars)
Indicated
Market
Price
Fair Value
(millions of
dollars)
Hedge Value
(millions of
dollars)
450.0
400.0
316.8
422.4
250.0
250.0
96.00
92.75
77.63
74.13
97.50
87.50
432.0
371.0
245.9
313.1
243.8
218.8
470.0
259.5
7. Operating Leases Rent expense attributable to all warehouse, office buildings and equipment
operating leases was $98.9 million in 2008, $92.8 million in 2007, and $82.1 million in 2006. Minimum
65
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
future rentals under operating leases are as follows: 2009, $50.3 million; 2010, $37.9 million; 2011,
$23.3 million; 2012, $14.7 million; 2013, $7.4 million; and 2014 and thereafter, $7.4 million.
8. Foreign Currency Transactions Aggregate foreign currency exchange gains (losses) included in
other costs and expenses were $0.6 million in 2008, $(8.1) million in 2007, and $(1.7) million in 2006.
9. Derivative Instruments At December 31, 2008, the Company had the following derivative
instruments related to its various hedging programs:
Interest Rate Swaps Designated as Fair Value Hedges
In the fourth quarter of 2003 and the first quarter of 2004, the Company entered into a series of interest
rate swap agreements with a current total notional amount of $700 million that mature in 2010 and 2013.
The swaps were executed in order to: (i) convert a portion of the senior notes and senior debentures fixed-
rate debt into floating-rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed
and floating-rate debt; and (iii) reduce net interest payments and expense in the near-term.
The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. Because the
relevant terms of the swap agreements match the corresponding terms of the notes, there is no hedge
ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a
long-term asset (liability) along with a corresponding net increase (decrease) in the carrying value of the
hedged debt.
Under the swaps, the Company receives fixed rate interest amounts (equal to interest on the
corresponding hedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears) plus a
margin spread (see table below). The interest rate differential on each swap is recognized as an
adjustment of interest expense during each six-month period over the term of the agreement.
The following selected information relates to fair value swaps at December 31, 2008:
Amount
Hedged
Receive
Rate
Average
Spread
Asset
Recorded
Senior Debentures due 2010
Senior Notes due 2013
250.0
450.0
7.50%
8.25%
Total
$
700.0
3.2%
3.7%
9.4
20.0
$
29.4
Commodity Hedges
The Company enters into commodity futures contracts related to forecasted natural gas requirements, the
objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas
and the related volatility in cash flows. The Company continually evaluates the natural gas market with
respect to its forecasted usage requirements over the next twelve to twenty-four months and periodically
enters into commodity futures contracts in order to hedge a portion of its usage requirements over that
period. At December 31, 2008, the Company had entered into commodity futures contracts for
approximately 50% (approximately 10,200,000 MM BTUs) of its estimated North American usage
requirements for the full year of 2009 and approximately 1% (approximately 240,000 MM BTUs) for the
full year of 2010.
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
The Company accounts for the above futures contracts on the balance sheet at fair value. The effective
portion of changes in the fair value of a derivative that is designated as, and meets the required criteria
for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share
owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the
underlying hedged item affects earnings. Any material portion of the change in the fair value of a
derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current
earnings.
The above futures contracts are accounted for as cash flow hedges at December 31, 2008.
At December 31, 2008, an unrecognized loss of $31.8 million (pretax and after tax), related to the
domestic commodity futures contracts, was included in OCI, which will be reclassified into earnings over
the next twelve months. The ineffectiveness related to these natural gas hedges for the year ended
December 31, 2008 was not material.
Other Hedges
The Company’s subsidiaries may enter into short-term forward exchange or option agreements to
purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to
fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or
commodities that are denominated in currencies other than the subsidiaries’ functional currency.
Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables
and payables not denominated in, or indexed to, their functional currencies. The Company records these
short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value
are recognized in current earnings.
Balance Sheet Classification
The Company records the fair values of derivative financial instruments on the balance sheet as follows:
(1) receivables if the instrument has a positive fair value and maturity within one year, (2) deposits,
receivables, and other assets if the instrument has a positive fair value and maturity after one year, (3)
accounts payable and other current liabilities if the instrument has a negative fair value and maturity
within one year, and (4) other liabilities if the instrument has a negative fair value and maturity after one
year.
10. Accumulated Other Comprehensive Income (Loss) The components of comprehensive income
are: (a) net earnings; (b) change in fair value of certain derivative instruments; (c) pension and other
postretirement benefit adjustments; and (d) foreign currency translation adjustments. The net effect of
exchange rate fluctuations generally reflects changes in the relative strength of the U.S. dollar against
major foreign currencies between the beginning and end of the year.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
The following table lists the beginning balance, yearly activity and ending balance of each component of
accumulated other comprehensive income (loss):
Net Effect of
Exchange Rate
Fluctuations
Deferred Tax
Effect for
Translation
Change in
Minimum
Pension
Liability
Change in
Certain
Derivative
Instruments
Total
Accumulated
Comprehensive
Income (Loss)
Employee
Benefit Plans
Balance on January 1, 2006
$
(117.5)
$
12.7
$
(145.5)
$
14.4
$
-
$
(235.9)
2006 Change
Translation effect
Tax effect
Balance on Dec. 31, 2006
2007 Change
Translation effect
Reclass
Tax effect
Balance on Dec. 31, 2007
2008 Change
Translation effect
Tax effect
Balance on Dec. 31, 2008
285.5
168.0
325.3
493.3
(431.9)
55.0
(17.6)
(14.8)
12.7
(122.9)
122.9
12.7
-
(49.3)
(639.9)
22.8
(617.1)
79.1
(6.7)
(125.1)
(8.6)
(678.4)
(34.9)
28.2
2.2
(4.5)
(32.9)
(348.7)
(17.6)
8.0
(594.2)
432.6
(6.7)
-
(8.6)
(176.9)
(1,080.1)
46.1
55.1
(1,657.3)
(1,544.9)
46.1
55.1
(1,620.6)
$
$
61.4
$
12.7
$
-
$
(37.4)
$
For 2008 and 2007, respectively, foreign currency translation adjustments include a loss of approximately
$19.9 million and $35.1 million related to a hedge of the Company’s net investment in a non-U.S.
subsidiary.
11. Income Taxes Deferred income taxes reflect: (1) the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes; and (2) carryovers and credits for income tax purposes.
68
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2008 and
2007 are as follows:
Deferred tax assets:
Accrued postretirement benefits
Asbestos-related liabilities
Foreign tax credit
Tax loss and credit carryovers
Capital loss carryovers
Alternative minimum tax credits
Accrued liabilities
Pension liability
Other
Total deferred tax assets
Deferred tax liabilities:
Property, plant, and equipment
Prepaid pension costs
Inventory
Other
Total deferred tax liabilities
Valuation allowance
Net deferred taxes
2008
2007
$
84.0
173.4
295.5
342.9
23.7
20.5
159.3
181.0
26.5
1,306.8
151.1
13.4
49.3
213.8
(1,047.5)
$
95.8
159.5
417.0
264.8
32.7
21.4
178.5
38.2
1,207.9
229.3
147.0
20.0
59.1
455.4
(728.0)
$
45.5
$
24.5
Deferred taxes are included in the Consolidated Balance Sheets at December 31, 2008 and 2007 as
follows:
Prepaid expenses
Deposits, receivables, and other assets
Deferred taxes
Net deferred taxes
2008
2007
$
24.1
99.0
(77.6)
$
9.2
124.7
(109.4)
$
45.5
$
24.5
The Company reviews the likelihood that it will realize the benefit of its deferred tax assets and therefore
the need for valuation allowances on a quarterly basis, or whenever events indicate that a review is
required. In determining the requirement for a valuation allowance, the historical and projected financial
results of the legal entity or consolidated group recording the net deferred tax asset is considered, along
with other positive and negative evidence.
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following details the Valuation Allowance activity:
Owens-Illinois, Inc.
Year
2006
2007
2008
Beginning
Year Balance
(1,024.7)
$
(1,262.3)
(728.0)
Foreign Currency
Translation
$
(16.4)
(17.4)
21.6
Other Changes
$
(44.2)
514.1
(12.9)
Goodwill
44.2
$
24.9
0.6
Other
Comprehensive
Income
$
(221.2)
12.7
(328.8)
Ending Year
Balance
$
(1,262.3)
(728.0)
(1,047.5)
In 2007, the Company reduced the valuation allowance recorded against its deferred tax assets in the
United States by $466.0 million through the utilization of net operating and capital loss carryforwards.
Other international valuation allowances approximating $66 million were established principally in prior
years in allocation of the costs of acquisitions. Beginning January 1, 2009, under FAS No.141R,
“Business Combinations,” any future reductions of these components will result in an increase to income
versus the reduction to goodwill required in previous years.
The provision (benefit) for income taxes consists of the following:
Current:
U.S. Federal
State
Foreign
Deferred:
U.S. Federal
State
Foreign
Total:
U.S. Federal
State
Foreign
Total for continuing operations
Total for dis continued operations
2008
2007
2006
$
(2.7)
0.6
213.0
$
-
31.1
145.2
$
-
2.0
113.7
210.9
176.3
115.7
14.6
(2.0)
8.4
21.0
11.9
(1.4)
221.4
8.0
1.0
(1.7)
7.3
8.0
32.1
143.5
9.2
(14.6)
16.2
10.8
9.2
(12.6)
129.9
$
231.9
$
183.6
$
126.5
$
$
236.7
(4.8)
231.9
$
$
147.8
35.8
183.6
$
$
125.3
1.2
126.5
70
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The provision (benefit) for income taxes was calculated based on the following components of earnings
(loss) before income taxes:
Continuing operations
Domestic
Foreign
Discontinued operations
Domestic
Foreign
2008
2007
2006
$
(140.6)
699.0
$
(180.7)
687.3
$
(294.1)
459.2
$
558.4
$
506.6
$
165.1
2008
$
2007
2006
2.0
-
$
(1.1)
1.7
$
(19.7)
(2.8)
$
2.0
$
0.6
$
(22.5)
A reconciliation of the provision (benefit) for income taxes based on the statutory U.S. Federal tax rate of
35% to the provision for income taxes is as follows:
Tax provision (benefit) on pretax earnings (loss) from continuing
operations at statutory U.S. Federal tax rate
Increase (decrease) in provision for income taxes
due to:
Valuation allowance - U.S.
Foreign subsidiary ownership restructuring and incentives
Foreign source income taxable in the U.S.
Reversal of non-U.S. tax valuation allowance
Foreign tax credit utilization
State taxes, net of federal benefit
Rate differences on non-U.S. earnings
Adjustment for non-U.S. tax law changes
Other items
2008
2007
2006
$
195.4
$
177.3
$
57.8
70.6
35.1
11.3
-
-
3.8
(55.3)
(20.1)
(4.1)
(466.0)
535.9
29.3
(13.4)
(40.4)
(2.9)
(65.7)
(9.9)
3.6
104.6
30.8
1.8
(34.7)
(13.5)
(23.8)
(1.6)
3.9
Provision for income taxes
$
236.7
$
147.8
$
125.3
In 2007 the Company implemented a plan to restructure the ownership and intercompany obligations of
certain foreign subsidiaries. These actions resulted in the taxation of a significant portion of previously
unremitted foreign earnings. The Company also realigned its debt service obligations to operations
outside the U.S. in order to better balance its future operating cash flows with its global financing costs.
The foreign earnings reported as taxable in the U.S. were offset by net operating loss carryforwards and
foreign tax credits. Foreign tax credit carryforwards arising from the restructuring were fully offset by an
increase in the valuation allowance.
The Company has recognized tax benefits as a result of incentives in certain non-U.S. jurisdictions which
expire between 2012 to 2015.
At December 31, 2008, before valuation allowance, the Company has unused research tax credits of $8.4
million expiring from 2009 to 2029 and foreign tax credits of $295.5 million expiring in 2017. The
71
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Company also has unused alternative minimum tax credits of $20.5 million which do not expire and
which will be available to offset future U.S. Federal income tax. Approximately $72.3 million of the
deferred tax assets relate to net operating and capital loss carryforwards that can be carried over
indefinitely with the remaining $286.0 million expiring between 2009 and 2028. As a result of U.S. tax
legislation enacted in 2008, the Company realized $2.3 million of benefits from its research and
alternative minimum tax credit carryforwards. The related valuation on these credits was reduced
accordingly.
At December 31, 2008, the Company’s equity in the undistributed earnings of foreign subsidiaries for
which income taxes had not been provided approximated $1,583.2 million. The Company intends to
reinvest these earnings indefinitely in the non-U.S. operations. It is not practicable to estimate the U.S.
and foreign tax which would be payable should these earnings be distributed.
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes,” (“FIN
48”) as of January 1, 2007. This interpretation was issued to clarify the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109,
“Accounting for Income Taxes.” FIN 48 defines criteria that a tax position must meet for any part of the
benefit of that position to be recognized in an enterprise’s financial statements and also includes
requirements for measuring the amount of the benefit to be recognized in the financial statements.
As a result of the adoption of FIN 48, the Company recognized no adjustment to retained earnings for
unrecognized income tax benefits. The Company reclassified $28.5 million of deferred tax assets related
to general business credits and net operating losses that were previously offset by a full valuation
allowance to the liability for unrecognized income tax benefits. This balance sheet reclassification had no
effect on share owners’ equity. In connection with the adoption of FIN 48, the Company is maintaining its
historical method of accruing interest and penalties associated with unrecognized income tax benefits as a
component of its income tax expense.
The following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year
ended December 31, 2008:
2008
2007
Balance at January 1
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions based on tax positions related to the current year
Reductions due to the lapse of the applicable statute of limitations
Reductions due to settlements
Balance at December 31
$
$
53.0
51.2
(2.1)
6.1
(3.1)
(2.0)
103.1
45.8
0.1
(2.5)
11.0
(1.4)
-
53.0
$
$
At December 31, 2008 and December 31, 2007, accrued interest and penalties related to unrecognized tax
benefits were $14.5 million and $3.9 million, respectively. Tax expense for the year ended December 31,
2008 includes interest and penalties of $5.4 million on unrecognized tax benefits for prior years.
The unrecognized tax benefit liability, including interest and penalties, as of December 31, 2008 and
December 31, 2007 was $117.6 million and $56.9 million respectively. Approximately $72.7 million and
$41.1 million as of December 31, 2008 and December 31, 2007, respectively, relate to unrecognized tax
benefits, which if recognized, would impact the Company’s effective income tax rate. This amount
differs from the gross unrecognized tax benefits presented in the table above because of the unrecognized
tax benefits that would result in the utilization of certain tax attribute carryforwards that are currently
subject to a full valuation allowance due to uncertainties about their future period utilization.
72
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company and/or one of its subsidiaries files a U.S. federal income tax return as well as income tax
returns in multiple state and foreign jurisdictions. Tax years through 1999 have been settled with the U.S.
Internal Revenue Service and there is no current IRS examination in progress. Due to the existence of tax
attribute carryforwards (which are currently offset by full valuation allowances) in the U.S., the Company
treats certain post-1999 tax positions as unsettled because of the taxing authorities’ ability to modify these
attributes. The 2000 tax year is the earliest open year for the Company’s other major tax jurisdictions.
The Company does not anticipate a significant change in the total amount of unrecognized income tax
benefits within the next twelve months.
12. Convertible Preferred Stock On February 29, 2008, the Company announced that all outstanding
shares of convertible preferred stock would be redeemed on March 31, 2008, if not converted by holders
prior to that date. All conversions and redemptions were completed by March 31 through the issuance of
8,584,479 shares of common stock. The conversions and redemptions resulted in an increase in common
stock and capital in excess of par value.
13. Stock Options and Other Stock Based Compensation The Company has five nonqualified plans
under which it has granted stock options, restricted shares and performance vested restricted share units:
(1) the Stock Option Plan for Key Employees of Owens-Illinois, Inc.; (2) the Stock Option Plan for
Directors of Owens-Illinois, Inc.; (3) the 1997 Equity Participation Plan of Owens-Illinois, Inc.; (4) the
2004 Equity Incentive Plan for Directors of Owens-Illinois, Inc.; and (5) the 2005 Equity Incentive Plan
of Owens-Illinois, Inc. At December 31, 2008, there were 2,174,949 shares authorized and available for
grants under these plans. Total compensation cost for all grants of shares and units under all of these
plans was $21.4 million ($19.1 million after tax) for the year ended December 31, 2008. Total
compensation cost for grants of shares and units was $23.6 million ($21.9 million after tax) in 2007 and
$21.7 million ($20.4 million after tax) in 2006. The cost in 2006 included $3.1 million for accelerated
vesting of options, shares and units held by the former CEO at the time of his separation in November
2006 and $1.9 million for fully vested options granted to the new CEO in December 2006.
Stock Options
For options granted prior to March 22, 2005, no options may be exercised in whole or in part during the
first year after the date granted. In general, subject to accelerated exercisability provisions related to the
performance of the Company’s common stock or change of control, 50% of the options become
exercisable on the fifth anniversary of the date of the option grant, with the remaining 50% becoming
exercisable on the sixth anniversary date of the option grant. In general, options expire following
termination of employment or the day after the tenth anniversary date of the option grant.
For options granted after March 21, 2005, no options may be exercised in whole or in part during the first
year after the date granted. In general, subject to change in control, these options become exercisable
25% per year beginning on the first anniversary. In general, options expire following termination of
employment or the seventh anniversary of the option grant.
The fair value of options granted before March 22, 2005, is amortized ratably over five years or a shorter
period if the grant becomes subject to accelerated exercisability provisions related to the performance of
the Company’s common stock. The fair value of options granted after March 21, 2005, is amortized over
the vesting periods which range from one to four years.
73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock option information at December 31, 2008 and for the year then ended is as follows:
Owens-Illinois, Inc.
Options outstanding at Dec. 31, 2007
Granted
Exercised
Forfeited or expired
Options outstanding at Dec. 31, 2008
Options vested or expected to vest
at Dec. 31, 2008
Options exercisable at Dec. 31, 2008
Weighted
Average
Exercise
Price
(per share)
$
20.54
52.33
23.98
46.00
23.56
Number of
Shares
(thousands)
3,462
428
(604)
(73)
3,213
3,171
1,870
$
23.56
$
18.03
Weighted
Average
Remaining
Contractual
Term
(years)
Aggregate
Intrinsic
Value
4.7
4.7
4.3
$
22.9
$
22.6
$
17.4
Certain additional information related to stock options is as follows for the periods indicated:
Weighted average grant-date fair
value of options granted (per share)
2008
2007
2006
$
16.21
$
9.87
$
7.91
Aggregate intrinsic value of options exercised
$
17.3
$
44.5
$
3.7
Aggregate cash received from options exercised
$
14.5
$
62.8
$
7.6
Restricted Shares
Shares granted to employees prior to March 22, 2005, generally vest after three years or upon retirement,
whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning on the first
anniversary and unvested shares are forfeited upon termination of employment. Shares granted to
directors prior to 2008 were immediately vested but may not be sold until the third anniversary of the
share grant or the end of the director’s then current term on the board, whichever is later. Shares granted
to directors after 2007 vest after one year.
The fair value of the shares is equal to the market price of the shares on the date of the grant. The fair
value of restricted shares granted before March 22, 2005, is amortized ratably over the vesting period.
The fair value of restricted shares granted after March 21, 2005, is amortized over the vesting periods
which range from one to four years.
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Restricted share activity is as follows:
Number of
Restricted
Shares
(thousands)
501
64
(72)
(1)
492
Weighted
Average
Grant-Date
Fair Value
(per share)
$
18.61
52.02
20.80
22.14
22.63
$
$
26.07
18.74
Nonvested at January 1, 2008
Granted
Vested
Forfeited
Nonvested at Dec. 31, 2008
Awards granted during 2007
Awards granted during 2006
Total fair value of shares vested
2008
$
2.9
2007
$
10.9
2006
$
7.7
Performance Vested Restricted Share Units
Restricted share units vest on January 1 of the third year following the year in which they are granted.
Holders of vested units receive 0.5 to 1.5 shares of the Company’s common stock for each unit,
depending upon the attainment of consolidated performance goals established by the Compensation
Committee of the Company’s Board of Directors. If minimum goals are not met, no shares will be issued.
Granted but unvested restricted share units are forfeited upon termination of employment, unless certain
retirement criteria are met.
The fair value of each restricted share unit is equal to the product of the fair value of the Company’s
common stock on the date of grant and the estimated number of shares into which the restricted share unit
will be converted. The fair value of restricted share units is amortized ratably over the vesting period.
Should the estimated number of shares into which the restricted share unit will be converted change, an
adjustment will be recorded to recognize the accumulated difference in amortization between the revised
and previous estimates.
75
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Performance vested restricted share unit activity is as follows:
Owens-Illinois, Inc.
Number of
Restricted
Weighted
Average
Grant-Date
Shares Units Fair Value
(per unit)
(thousands)
963
166
(222)
(21)
886
$
21.47
52.23
24.22
22.86
26.51
$
$
24.18
18.24
Nonvested at January 1, 2008
Granted
Vested
Forfeited
Nonvested at Dec. 31, 2008
Awards granted during 2007
Awards granted during 2006
Number of shares issued to holders of vested units (thousands)
Fair value of shares at issuance date
2008
316
$
16.9
As of December 31, 2008, there was $18.0 million of total unrecognized compensation cost related to all
unvested stock options, restricted shares and performance vested restricted share units. That cost is
expected to be recognized over a weighted average period of approximately four years.
14. Pension Benefit Plans and Other Postretirement Benefits
Pension Benefit Plans
Net expense (income) to results of operations for all of the Company’s pension plans and certain deferred
compensation arrangements amounted to $(3.5) million in 2008, $24.9 million in 2007, and $41.9 million
in 2006.
The Company has defined benefit pension plans covering substantially all employees located in the
United States, the United Kingdom, The Netherlands, Canada and Australia, as well as many employees
in Germany and France. Benefits generally are based on compensation for salaried employees and on
length of service for hourly employees. The Company’s policy is to fund pension plans such that
sufficient assets will be available to meet future benefit requirements. The Company’s defined benefit
pension plans use a December 31 measurement date. The following tables relate to the Company’s
principal defined benefit pension plans.
76
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
The changes in the pension benefit obligations for the year were as follows:
2008
2007
Obligations at beginning of year
$
3,817.7
$
3,879.2
Change in benefit obligations:
Service cost
Interest cost
Actuarial gain, including effect of changing
discount rates
Curtailments
Special termination benefits
Settlements
Participant contributions
Benefit payments
Plan amendments
Foreign currency translation
Other
Net change in benefit obligations
46.3
215.2
(108.5)
(9.5)
4.4
8.8
(257.8)
3.0
(284.2)
(382.3)
54.0
212.0
(73.6)
(21.9)
(55.8)
10.0
(325.1)
(3.5)
136.4
6.0
(61.5)
Obligations at end of year
$
3,435.4
$
3,817.7
The changes in the fair value of the pension plans’ assets for the year were as follows:
Fair value at beginning of year
Change in fair value:
Actual gain (loss) on plan assets
Benefit payments
Employer contributions
Participant contributions
Foreign currency translation
Other
2008
2007
$
4,084.9
$
4,043.5
(973.2)
(257.8)
61.2
8.8
(213.7)
(3.3)
177.6
(325.1)
63.9
10.0
115.0
Net change in fair value of assets
(1,378.0)
41.4
Fair value at end of year
$
2,706.9
$
4,084.9
77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The funded status of the pension plans at year end was as follows:
Owens-Illinois, Inc.
Plan assets at fair value
Projected benefit obligations
2008
2007
$
2,706.9
3,435.4
$
4,084.9
3,817.7
Plan assets greater (less) than projected benefit obligations
(728.5)
267.2
Items not yet recognized in pension expense:
Actuarial loss
Prior service credit
1,748.1
(15.6)
1,732.5
700.4
(18.7)
681.7
Net amount recognized
$
1,004.0
$
948.9
The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2008 and
2007 as follows:
2008
2007
P repaid pension
Current pension liability, included with Other accrued liabilities
Noncurrent pension liability, included with Pension benefits
Accumulated other comprehensive income
$
-
(8.0)
(720.5)
1,732.5
$
566.4
(9.2)
(290.0)
681.7
Net amount recognized
$
1,004.0
$
948.9
The following changes in plan assets and benefit obligations were recognized in accumulated other
comprehensive income at December 31, 2008 as follows:
Current year actuarial loss
Amortization of actuarial loss
Current year prior service cost
Amortization of prior service credit
Curtailment
Translation
Pretax
$
1,148.8
(30.3)
3.0
1.1
(8.5)
1,114.1
Tax
Effect
$
(62.2)
1.1
(0.1)
2.4
(58.8)
$
1,114.1
$
(58.8)
After-tax
$
1,086.6
(29.2)
3.0
1.0
(6.1)
1,055.3
(44.9)
1,010.4
$
The accumulated benefit obligation for all defined benefit pension plans was $3,157.0 million and
$3,566.0 million at December 31, 2008 and 2007, respectively.
78
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the net pension expense (income) for the year were as follows:
Owens-Illinois, Inc.
Service cost
Interest cost
Expected asset return
Settlement cost
Special termination benefits
Curtailment (gain) loss
Other
Amortization:
Prior service credit
Loss
Net amortization
Net expense (income)
2008
2007
2006
$
46.3
215.2
(318.3)
$
54.0
212.0
(317.6)
18.6
$
60.8
204.3
(298.4)
4.4
0.1
(1.2)
(1.1)
30.3
29.2
(1.5)
5.1
(0.8)
38.2
37.4
9.2
(0.6)
61.5
60.9
$
(24.3)
$
8.0
$
36.8
Total for continuing operations
Total for discontinued operations
$
(24.3)
$
(24.3)
$
$
$
$
3.4
4.6
8.0
36.2
0.6
36.8
Amounts that will be amortized from accumulated other comprehensive income into net pension expense
during 2009:
Amortization:
Loss
Prior service cost
Net amortization
$
43.6
(1.0)
$
42.6
The following information is for plans with projected and accumulated benefit obligations in excess of the
fair value of plan assets at year end:
Projected benefit obligations
Fair value of plan assets
Accumulated benefit obligations
2008
2007
$
3,435.4
2,706.9
3,157.0
$
1,125.1
816.1
1,015.4
79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The weighted average assumptions used to determine benefit obligations were as follows:
Owens-Illinois, Inc.
Discount rate
Rate of compensation increase
2008
2007
6.29%
4.34%
5.87%
4.32%
The weighted average assumptions used to determine net periodic pension costs were as follows:
Discount rate
Rate of compensation increase
Expected long-term rate of return on assets
2008
2007
2006
5.87%
4.32%
8.09%
5.49%
4.34%
8.08%
5.30%
4.54%
8.08%
Future benefits are assumed to increase in a manner consistent with past experience of the plans, which,
to the extent benefits are based on compensation, includes assumed salary increases as presented above.
Amortization included in net pension expense (credits) is based on the average remaining service of
employees.
For 2008, the Company’s weighted average expected long-term rate of return on assets was 8.09%. In
developing this assumption, the Company evaluated input from its third party pension plan asset
managers, including their review of asset class return expectations and long-term inflation assumptions.
The Company also considered its historical 10-year average return (through December 31, 2007), which
was in line with the expected long-term rate of return assumption for 2008.
The weighted average actual asset allocations and weighted average target allocation ranges by asset
category for the Company’s pension plan assets were as follows:
Asset Category
Equity securites
Debt securities
Real estate
Other
Total
Actual Allocation
2008
2007
48%
43%
6%
3%
100%
63%
28%
5%
4%
100%
Target
Allocation
Ranges
48-58%
30-40%
3-13%
0-9%
It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of
asset classes within the above target asset allocation ranges. The investment risk of the assets is limited
by appropriate diversification both within and between asset classes. The assets for both the U.S. and
non-U.S. plans are primarily invested in a broad mix of domestic and international equities, domestic and
international bonds, and real estate, subject to the target asset allocation ranges. The assets are managed
with a view to ensuring that sufficient liquidity will be available to meet expected cash flow requirements.
80
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Based on exchange rates at the end of 2008, the Company expects to contribute approximately $70
million to $75 million to its non-U.S. defined benefit pension plans in 2009.
The following estimated future benefit payments, which reflect expected future service, as appropriate,
are expected to be paid in the years indicated:
Year(s)
2009
2010
2011
2012
2013
2014 - 2018
Amount
262.4
234.1
234.7
238.7
241.8
1,241.1
The Company also sponsors several defined contribution plans for all salaried and hourly U.S. employees.
Participation is voluntary and participants’ contributions are based on their compensation. The Company
matches contributions of participants, up to various limits, in substantially all plans. Company
contributions to these plans amounted to $7.1 million in 2008, $6.7 million in 2007, and $6.4 million in
2006.
Postretirement Benefits Other Than Pensions
The Company provides certain retiree health care and life insurance benefits covering substantially all
U.S. salaried and certain hourly employees, substantially all employees in Canada and in The
Netherlands. Employees are generally eligible for benefits upon retirement and completion of a specified
number of years of creditable service. The Company uses a December 31 measurement date to measure
its Postretirement Benefit Obligations.
The changes in the postretirement benefit obligations for the year were as follows:
Obligations at beginning of year
Change in benefit obligations:
Service cost
Interest cost
Actuarial gain, including the effect of changing
discount rates
Curtailments
Special termination benefits
Benefit payments
Foreign currency translation
Other
Net change in benefit obligations
Obligations at end of year
81
2008
2007
$
309.5
$
317.6
2.2
17.2
(30.0)
(2.9)
0.9
(19.9)
(16.7)
(49.2)
3.0
17.5
(9.5)
(9.1)
(24.4)
14.4
(8.1)
$
260.3
$
309.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The funded status of the postretirement benefit plans at year end was as follows:
Owens-Illinois, Inc.
Postretirement benefit obligations
Items not yet recognized in net postretirement benefit cost:
Prior service credit
Actuarial loss
Net amount recognized
2008
2007
$
260.3
$
309.5
20.7
(39.7)
(19.0)
23.8
(78.2)
(54.4)
$
241.3
$
255.1
The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2008 and
2007 as follows:
Current nonpension postretirement benefit, included with
Other accrued liabilities
Nonpension postretirement benefits
Accumulated other comprehensive income
Net amount recognized
2008
2007
$
(22.3)
(238.0)
19.0
$
(24.3)
(285.2)
54.4
$
(241.3)
$
(255.1)
The following changes in benefit obligations were recognized in accumulated other comprehensive
income at December 31, 2008 as follows:
Current year actuarial gain
Amortization of actuarial loss
Amortization of prior service credit
Curtailment
Translation
Pretax
$
(28.4)
(6.2)
3.1
(2.5)
(34.0)
Tax
Effect
After-tax
$
3.0
$
0.7
3.7
(25.4)
(6.2)
3.1
(1.8)
(30.3)
(1.2)
(31.5)
$
(34.0)
$
3.7
$
82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The components of the net postretirement benefit cost for the year were as follows:
Owens-Illinois, Inc.
Service cost
Interest cost
Curtailment gain
Special termination benefit
Other
Amortization:
Prior service credit
Loss
Net amortization
2008
2007
2006
$
2.2
17.2
$
3.0
17.4
(14.9)
$
4.3
16.8
(15.9)
0.9
(3.1)
6.2
3.1
0.9
(4.3)
3.9
(0.4)
(3.8)
5.8
2.0
Net postretirement benefit cost
$
23.4
$
7.5
$
5.7
Total for continuing operations
Total for discontinued operations
23.4
$
23.4
20.7
(13.2)
7.5
$
3.2
2.5
5.7
$
Amounts that will be amortized from accumulated other comprehensive income into net postretirement
benefit cost during 2009:
Amortization:
Loss
Prior service credit
Net amortization
$
3.9
(3.1)
$
0.8
The weighted average discount rate used to determine the accumulated postretirement benefit obligation
was 6.40% and 5.86% at December 31, 2008 and 2007, respectively.
The weighted average discount rate used to determine net postretirement benefit cost was 5.86%, 5.56%,
and 5.45% at December 31, 2008, 2007, and 2006, respectively.
The weighted average assumed health care cost trend rates at December 31 were as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2008
7.38%
2007
8.51%
5.67%
2010
5.64%
2010
83
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assumed health care cost trend rates affect the amounts reported for the postretirement benefit plans. A
one-percentage-point change in assumed health care cost trend rates would have the following effects:
Effect on total of service and interest cost
Effect on accumulated postretirement benefit obligations
$
8.9
15.9
$
(7.6)
(13.4)
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Amortization included in net postretirement benefit cost is based on the average remaining service of
employees.
The following estimated future benefit payments, which reflect expected future service, as appropriate,
are expected to be paid in the years indicated:
Year(s)
2009
2010
2011
2012
2013
2014 - 2018
Amount
22.3
22.0
21.8
21.5
21.2
102.6
Benefits provided by the Company for certain hourly retirees are determined by collective bargaining.
Most other domestic hourly retirees receive health and life insurance benefits from a multi-employer trust
established by collective bargaining. Payments to the trust as required by the bargaining agreements are
based upon specified amounts per hour worked and were $8.9 million in 2008, $7.4 million in 2007, and
$7.4 million in 2006. Postretirement health and life benefits for retirees of foreign subsidiaries are
generally provided through the national health care programs of the countries in which the subsidiaries
are located.
15. Other Income Other income in 2006 includes a gain of $15.9 million ($11.2 million after tax)
related to curtailment of certain postretirement benefits in The Netherlands.
16. Other Expense Other expense for the year ended December 31, 2008 included the following:
The Company recorded charges totaling $132.4 million ($110.1 million after tax and minority
shareowners’ interests), for restructuring and asset impairment. The charges reflect the additional
decisions reached in the Company’s ongoing strategic review of its global manufacturing
footprint. See Note 17 for additional information.
During the fourth quarter of 2008, the Company recorded a charge of $250.0 million ($248.8
million after tax) to increase the reserve for estimated future asbestos-related costs as a result of
the findings from the annual review of asbestos-related liabilities. See Note 19 for additional
information.
84
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Other costs and expenses for the year ended December 31, 2007 included the following:
In the South American Segment’s 50%-owned Caribbean affiliate, declining productivity and
cash flows resulted in impairment of the Company’s equity investment, establishment of
valuation allowances against advances to the affiliate, and accrual of certain contingent
obligations for total charges of $45.0 million ($43.9 million after tax) recorded in 2007 with an
additional $0.9 million (before and after tax) recorded in the first quarter of 2008.
The Company recorded charges totaling $55.3 million ($40.2 million after tax), for restructuring
and asset impairment. The charges reflect the additional decisions reached in the Company’s
ongoing strategic review of its global manufacturing footprint. See Note 17 for additional
information.
During the fourth quarter of 2007, the Company recorded a charge of $115.0 million (pretax and
after tax) to increase the reserve for estimated future asbestos-related costs as a result of the
findings from the annual review of asbestos-related liabilities. See Note 19 for additional
information.
Other costs and expenses for the year ended December 31, 2006 included the following:
During the third quarter of 2006, the Company recorded a charge of $29.7 million ($27.7 million
after tax), principally related to the closing of its Godfrey, Illinois machine parts manufacturing
operation.
During the fourth quarter of 2006, the Company recorded a charge of $120.0 million (pretax and
after tax) to increase the reserve for estimated future asbestos-related costs as a result of the
findings from the annual review of asbestos-related liabilities. See Note 19 for additional
information.
17. Restructuring Accruals Beginning in 2007, the Company commenced a strategic review of its
global profitability and manufacturing footprint. The combined 2007 and 2008 charges, amounting to
$187.7 million ($150.3 million after tax and minority shareowners’ interests) and approximately 1,800
jobs and corresponding reduction in the Company’s workforce, reflect the decisions reached through
December 31, 2008 in the Company’s ongoing strategic review of its global manufacturing footprint
commenced in mid-2007. Amounts recorded by the Company do not include any gains that may be
realized upon the ultimate sale or disposition of closed facilities.
2007
During the third and fourth quarters of 2007, the Company recorded restructuring charges totaling $55.3
million ($40.2 million after tax), for restructuring and asset impairment in Europe and North America.
As a result of its strategic review, the Company decided to curtail selected production capacity. Because
the future undiscounted cash flows of the related asset groups were not sufficient to recover their carrying
amounts, certain assets were considered impaired. As a result, those assets were written down to the
extent their carrying amounts exceeded fair value. The curtailment of plant capacity resulted in
elimination of approximately 560 jobs and a corresponding reduction in the Company’s workforce. The
Company accrued certain employee separation costs, plant clean up, and other exit costs.
85
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
2008
During 2008, the Company recorded restructuring charges totaling $132.4 million ($110.1 million after
tax and minority share owners’ interests). The 2008 charges consisted primarily of $85.5 million for the
closure of two Canadian plants with additional charges across all segments as well as in Retained
Corporate Costs and Other.
As a continuation of the Company’s strategic review in 2008, the Company decided to curtail and realign
selected production capacity and other activities across all segments as well as in Retained Corporate
Costs and Other. Because the future undiscounted cash flows of the related asset groups were not
sufficient to recover their carrying amounts, certain assets were considered impaired. As a result, those
assets were written down to the extent their carrying amounts exceeded fair value. The curtailment of
plant capacity and realignment of selected operations will result in elimination of approximately 1,240
jobs and a corresponding reduction in the Company’s workforce. The Company accrued certain
employee separation costs, plant clean up, and other exit costs.
Probable cash expenditures for the 2007 and 2008 charges are expected to total approximately $110
million. The Company expects that the majority of these costs will be paid out by the end of 2009.
Selected information related to the restructuring accrual is as follows:
Employee
Costs
Asset
Impairment
Other
Total
2007 Charges
Write-down of assets to net realizable value
Total restructuring accrual at December 31, 2007
2008 charges
Write-down of assets to net realizable value
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining restructuring accrual
as of December 31, 2008
$
22.3
(22.3)
-
32.5
(32.5)
$
26.1
-
26.1
70.1
(35.6)
(13.0)
$
6.9
(2.4)
4.5
29.8
(4.7)
(7.2)
(6.1)
$
55.3
(24.7)
30.6
132.4
(37.2)
(42.8)
(19.1)
$
47.6
$
-
$
16.3
$
63.9
BSN Acquisition
During the second quarter of 2005, the Company concluded its evaluation of acquired capacity in
connection with the acquisition of BSN Glasspack S.A. and announced the permanent closing of its
Düsseldorf, Germany glass container factory, and the shutdown of a furnace at its Reims, France glass
container facility, both in 2005. These actions were part of the European integration strategy to optimally
align the manufacturing capacities with the market and improve operational efficiencies. As a result, the
Company recorded an accrual of €47.1 million through an adjustment to goodwill.
These actions resulted in the elimination of approximately 400 jobs and a corresponding reduction in the
Company’s workforce. The Company anticipates that it will pay a total of approximately €110.9 million
in cash related to severance, benefits, plant clean-up, and other plant closing costs related to restructuring
accruals.
The European restructuring accrual recorded in the second quarter of 2005 was in addition to the initial
estimated accrual of €63.8 million recorded in 2004.
86
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Selected information related to the restructuring accrual is as follows, with 2008 activity translated from
Euros into dollars at the December 31, 2008 exchange rate:
Remaining European restructuring accrual
as of January 1, 2006
Net cash paid, principally severance and related benefits
Partial reversal of accrual (goodwill adjustment)
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2006
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2007
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2008
80.9
(33.7)
(7.6)
(1.5)
38.1
(17.8)
7.4
$
27.7
(6.1)
(4.8)
$
16.8
18. Additional Interest Charges from Early Extinguishment of Debt During 2007, the Company
recorded additional interest charges of $9.5 million ($8.8 million after tax) for note repurchase premiums
and the write-off of unamortized finance fees related to debt that was repaid prior to its maturity. During
2006, the Company recorded additional interest charges of $17.5 million ($17.1 million after tax) for note
repurchase premiums and the write-off of unamortized finance fees related to debt that was repaid prior to
its maturity.
19. Contingencies The Company is one of a number of defendants 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 approximately $40 million of a high-temperature, calcium-silicate based
pipe and block insulation material containing asbestos. The Company exited the pipe and block
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 in some cases, punitive
damages in various amounts (herein referred to as "asbestos claims").
The following table shows the approximate number of plaintiffs and claimants who had asbestos claims
pending against the Company at the beginning of each listed year, the number of claims disposed of
during that year, the year’s filings and the claims pending at the end of each listed year (eliminating
duplicate filings):
Pending at beginning of year
Disposed
Filed
Pending at end of year
2008
2007
2006
14,000
8,000
5,000
11,000
18,000
13,000
9,000
14,000
32,000
21,000
7,000
18,000
Based on an analysis of the lawsuits pending as of December 31, 2008, approximately 84% of plaintiffs
either do not specify the monetary damages sought, or in the case of court filings, claim an amount
87
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
sufficient to invoke the jurisdictional minimum of the trial court. Approximately 15% of plaintiffs
specifically plead damages of $15 million or less, and 0.4% of plaintiffs specifically plead damages
greater than $15 million but less than $100 million. Fewer than 1% of plaintiffs specifically plead
damages $100 million or greater but less than $122 million.
As indicated by the foregoing summary, current pleading practice permits considerable variation in the
assertion of monetary damages. The Company’s experience resolving hundreds of thousands of asbestos
claims and lawsuits over an extended period, demonstrates that the monetary relief which may be alleged
in a complaint bears little relevance to a claim’s merits or disposition value. Rather, the amount
potentially recoverable is determined by such factors as the plaintiff’s severity of disease, the product
identification evidence against specific defendants, the defenses available to those defendants, the specific
jurisdiction in which the claim is made, and the plaintiff’s history of smoking or exposure to other
possible disease-causative factors.
In addition to the pending claims set forth above, the Company has claims-handling agreements in place
with many plaintiffs’ counsel throughout the country. These agreements require evaluation and
negotiation regarding whether particular claimants qualify under the criteria established by such
agreements. The criteria for such claims include verification of a compensable illness and a reasonable
probability of exposure to a product manufactured by the Company's former business unit during its
manufacturing period ending in 1958. Some plaintiffs’ counsel have historically withheld claims under
these agreements for later presentation while focusing their attention on active litigation in the tort
system. The Company believes that as of December 31, 2008 there are approximately 1,000 claims
against other defendants which are likely to be asserted some time in the future against the Company.
These claims are not included in the pending “lawsuits and claims” totals set forth above.
The Company is also a defendant in other asbestos-related lawsuits or claims involving maritime workers,
medical monitoring claimants, co-defendants and property damage claimants. Based upon its past
experience, the Company believes that these categories of lawsuits and claims will not involve any
material liability and they are not included in the above description of pending matters or in the following
description of disposed matters.
Since receiving its first asbestos claim, the Company as of December 31, 2008, has disposed of the
asbestos claims of approximately 367,000 plaintiffs and claimants at an average indemnity payment per
claim of approximately $7,300. Certain of these dispositions have included deferred amounts payable
over a number of years. Deferred amounts payable totaled approximately $34.0 million at December 31,
2008 ($34.0 million at December 31, 2007) and are included in the foregoing average indemnity payment
per claim. 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. As discussed above, a part of the Company’s
objective is to achieve, where possible, resolution of asbestos claims pursuant to claims-handling
agreements. Failure of claimants to meet certain medical and product exposure criteria in the Company’s
administrative claims handling agreements has generally reduced the number of marginal or suspect
claims that would otherwise have been received. This may have the effect of increasing the Company’s
per-claim average indemnity payment over time.
The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other
claim disposition costs plus related legal fees) cannot be estimated with certainty. Beginning with the
initial liability of $975 million established in 1993, the Company has accrued a total of approximately
$3.47 billion through 2008, before insurance recoveries, for its asbestos-related liability. The Company’s
ability reasonably to estimate its liability has been significantly affected by the volatility of asbestos-
related litigation in the United States, the inherent uncertainty of future disease incidence and claiming
patterns, the expanding list of non-traditional defendants that have been sued in this litigation and found
88
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
liable for substantial damage awards, the use of mass litigation screenings to generate new lawsuits, the
large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but
have no present physical impairment as a result of such exposure, and the significant number of co-
defendants that have filed for bankruptcy.
The Company has continued to monitor trends which may affect its ultimate liability and has continued to
analyze the developments and variables affecting or likely to affect the resolution of pending and future
asbestos claims against the Company The material components of the Company’s accrued liability are
based on amounts estimated by the Company in connection with its annual comprehensive review and
consist of the following: (i) the reasonably probable contingent liability for asbestos claims already
asserted against the Company; (ii) the contingent liability for preexisting but unasserted asbestos claims
for prior periods arising under its administrative claims-handling agreements with various plaintiffs’
counsel; (iii) the contingent liability for asbestos claims not yet asserted against the Company, but which
the Company believes it is reasonably probable will be asserted in the next several years, to the degree
that an estimation as to future claims is possible, and (iv) the legal defense costs likely to be incurred in
connection with the foregoing types of claims.
The significant assumptions underlying the material components of the Company’s accrual are:
a) the extent to which settlements are limited to claimants who were exposed to the Company’s
asbestos-containing insulation prior to its exit from that business in 1958;
b) the extent to which claims are resolved under the Company’s administrative claims agreements or
on terms comparable to those set forth in those agreements;
c) the extent to which the Company’s accelerated settlements in 2007 and 2008 impact the number
and type of future claims and lawsuits;
d) the extent of decrease or increase in the incidence of serious disease cases and claiming patterns for
such cases;
e) the extent to which the Company is able to defend itself successfully at trial;
f) the extent to which courts and legislatures eliminate, reduce or permit the diversion of financial
resources for unimpaired claimants and so-called forum shopping;
g) the extent to which additional defendants with substantial resources and assets are required to
participate significantly in the resolution of future asbestos lawsuits and claims;
h) the number and timing of additional co-defendant bankruptcies; and
i) the extent to which co-defendant bankruptcy trusts direct resources to resolve claims that are also
presented to the Company and the timing of the payments made by the bankruptcy trusts.
As noted above, the Company conducts a comprehensive review of its asbestos-related liabilities and
costs annually in connection with finalizing and reporting its annual results of operations, unless
significant changes in trends or new developments warrant an earlier review. If the results of an annual
comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its
estimated future asbestos-related costs, then the Company will record an appropriate charge to increase
the accrued liability. The Company believes that an estimation of the reasonably probable amount of the
contingent liability for claims not yet asserted against the Company is not possible beyond a period of
89
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
several years. Therefore, while the results of future annual comprehensive reviews cannot be determined,
the Company expects the addition of one year to the estimation period will result in an annual charge.
Other litigation is pending against the Company, in many cases involving ordinary and routine claims
incidental to the business of the Company and in others presenting allegations that are non-routine and
involve compensatory, punitive or treble damage claims as well as other types of relief. In accordance
with FAS No. 5, the Company records a liability for such matters when it is both probable that the
liability has been incurred and the amount of the liability can be reasonably estimated. Recorded amounts
are reviewed and adjusted to reflect changes in the factors upon which the estimates are based including
additional information, negotiations, settlements, and other events.
The ultimate legal and financial liability of the Company with respect to the lawsuits and proceedings
referred to above, in addition to other pending litigation, cannot be estimated with certainty. The
Company’s reported results of operations for 2008 were materially affected by the $250.0 million ($248.8
million after tax) fourth quarter charge for asbestos-related costs and asbestos-related payments continue
to be substantial. Any future additional charge would likewise materially affect the Company’s results of
operations for the period in which it is recorded. Also, the continued use of significant amounts of cash
for asbestos-related costs has affected and will continue to affect the Company’s cost of borrowing and its
ability to pursue global or domestic acquisitions. However, the Company believes that its operating cash
flows and other sources of liquidity will be sufficient to pay its obligations for asbestos-related costs and
to fund its working capital and capital expenditure requirements on a short-term and long-term basis.
20. Segment Information The Company’s former Plastics Packaging segment has been reclassified to
discontinued operations as a result of the July 31, 2007 sale of that business. Following the sale, the
Company redefined its reportable segments and divided the former Glass Containers segment into four
geographic segments: (1) North America; (2) Europe; (3) Asia Pacific; (4) South America. These four
segments are aligned with the Company’s internal approach to managing, reporting, and evaluating
performance of its global glass operations. In connection with this change, certain assets and activities
not directly related to one of the regions or to glass manufacturing are reported with Retained Corporate
Costs and Other. These include licensing, equipment manufacturing, global engineering, and non-glass
equity investments. Retained Corporate Costs and Other also includes certain headquarters administrative
and facilities costs and certain incentive compensation and other benefit plan costs that are global in
nature and are not allocable to the reportable segments. Amounts for 2006 in the following tables are
presented on the redefined basis.
The Company’s measure of profit for its reportable segments is Segment Operating Profit, which consists
of consolidated earnings from continuing operations before interest income, interest expense, provision
for income taxes and minority share owners’ interests in earnings of subsidiaries and excludes amounts
related to certain items that management considers not representative of ongoing operations as well as
certain retained corporate costs. The Company’s management uses Segment Operating Profit, in
combination with selected cash flow information, to evaluate performance and to allocate resources.
Segment Operating Profit for reportable segments includes an allocation of some corporate expenses
based on both a percentage of sales and direct billings based on the costs of specific services provided.
Beginning in 2008, the Company revised its method of allocating corporate expenses. The Company
decreased slightly the percentage allocation based on sales and significantly expanded the number of
functions included in the allocation based on cost of services. It is not practicable to quantify the net
effect of these changes on periods prior to 2008. However, the effect for 2008 was to reduce the amount
of retained corporate costs by approximately $38.0 million. The information below is presented on a
continuing operations basis, and therefore, the 2007 and 2006 amounts exclude amounts related to the
discontinued operations. See Note 22 for more information.
90
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Financial information regarding the Company’s reportable segments is as follows:
2008
$
3,497.8
2,209.7
1,135.9
964.1
$
2007
3,298.7
2,271.3
970.7
934.3
$
2006
2,846.6
2,110.4
796.5
804.9
7,807.5
77.2
7,884.7
$
7,475.0
91.7
7,566.7
$
6,558.4
92.0
6,650.4
$
2008
2007
2006
$
477.8
185.2
331.0
162.8
1,156.8
$
433.0
265.1
254.9
154.0
1,107.0
$
249.6
187.3
195.0
102.9
734.8
(0.7)
(133.3)
(250.0)
(78.8)
(100.3)
(115.0)
38.6
(253.0)
42.3
(348.6)
(76.6)
(29.7)
(120.0)
(20.8)
15.9
(8.7)
19.2
(349.0)
$
558.4
$
506.6
$
165.1
Net Sales:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Other
Net sales
Segment Operating Profit:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Items excluded from Segment Operating Profit:
Retained corporate costs and other
Restructuring and asset impairments
Charge for asbestos related costs
CEO and other transition charges
Curtailment of postretirement benefits in The Netherlands
Mark to market effect of natural gas hedge contracts
Interest income
Interest expense
Earnings before income taxes and minority share
owners' interests in earnings of subsidiaries
91
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
North
America
Europe
Asia
Pacific
South
America
Reportable
Segment
Totals
Retained
Corp Costs
and Other
Consoli-
dated
Totals
3,758.4
4,124.1
3,838.0
$
$
$
90.5
$
$
$
12.6
10.4
10.5
1,802.9
1,946.9
1,777.0
Total assets:
2008
2007
2006
Equity earnings:
2008
2007
2006
Capital expenditures (1):
2008
Continuing
2007
Continuing
Discontinued
2006
Continuing
Discontinued
Depreciation and amortization expense:
2008
Continuing
Discontinued
2007
Continuing
Discontinued
2006
Continuing
Discontinued
$
107.3
110.2
65.9
57.8
98.7
$
14.1
8.0
6.9
151.9
129.2
105.4
222.0
210.3
203.3
$
1,239.6
1,558.1
1,454.4
$
976.2
965.7
765.7
$
7,777.1
8,594.8
7,835.1
$
199.4
729.8
1,485.6
$
7,976.5
9,324.6
9,320.7
$
-
$
-
(2.7)
(4.8)
$
26.7
15.7
12.6
$
24.1
18.4
10.8
$
50.8
34.1
23.4
$
57.6
$
57.3
$
357.3
$
4.4
$
361.7
42.0
51.1
288.2
47.8
59.2
270.2
4.3
23.3
14.8
35.3
292.5
23.3
285.0
35.3
$
80.4
$
56.5
$
457.6
$
10.2
$
467.8
81.7
54.3
453.6
81.4
56.3
451.2
7.3
23.3
4.5
53.5
460.9
23.3
455.7
53.5
(1) Retained Corporate Costs and Other includes assets of discontinued operations.
(2) Excludes property, plant and equipment acquired through acquisitions.
92
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s net property, plant, and equipment by geographic segment are as follows:
Owens-Illinois, Inc.
2008
2007
2006
United
States
Foreign
Total
$
679.5
678.9
712.5
$
1,966.1
2,271.1
2,162.0
$
2,645.6
2,950.0
2,874.5
The Company's net sales by geographic segment are as follows:
2008
2007
2006
United
States
Foreign
Total
$
1,894.8
1,920.6
1,793.7
$
5,989.9
5,646.1
4,856.7
$
7,884.7
7,566.7
6,650.4
Operations in individual countries outside the United States that accounted for more than 10% of
consolidated net sales from continuing operations were in Italy (2008 - 10.7%, 2007 - 10.1%)
and France (2008 - 14.7%, 2007 - 19.3%, 2006 - 19.3%).
21. Goodwill The changes in the carrying amount of goodwill for the years ended December 31, 2006,
2007 and 2008 are as follows:
Balance as of January 1, 2006
Translation effects
Other changes, principally adjustments to
reverse foreign deferred tax valuation
allowances
Balance as of December 31, 2006
Translation effects
Other changes
Balance as of December 31, 2007
Translation effects
Other changes
Balance as of December 31, 2008
North
America
747.5
2.8
$
$
Europe
926.7
99.5
Asia
Pacific
$
470.8
31.3
South
America
$
-
Other
$
14.7
$
Total
2,159.7
133.6
(28.7)
721.6
25.1
(1.1)
745.6
(28.8)
$
716.8
(9.2)
1,017.0
115.3
(13.0)
1,119.3
(58.2)
(10.1)
1,051.0
$
502.1
54.6
556.7
(123.1)
-
-
$
433.6
$
-
(0.2)
14.5
(8.0)
6.5
0.3
(0.7)
6.1
$
(38.1)
2,255.2
195.0
(22.1)
2,428.1
(209.8)
(10.8)
2,207.5
$
During the fourth quarters of 2008, 2007 and 2006, the Company completed its annual impairment testing
and determined that no impairment existed.
22. Discontinued Operations On July 31, 2007, the Company completed the sale of its plastics
packaging business to Rexam PLC for approximately $1.825 billion in cash. As required by FAS No.
144, the Company has presented the results of operations for the plastics packaging business in the
Consolidated Results of Operations for the years ended December 31, 2007 and 2006 as discontinued
operations. Interest expense was allocated to the discontinued operations based on debt that was required
93
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
by an amendment to the Secured Credit Agreement to be repaid from the net proceeds. Amounts for the
prior periods have been reclassified to conform to this presentation.
The following summarizes the revenues and expenses of the discontinued operations as reported in the
consolidated results of operations for the periods indicated:
Net sales
Manufacturing, shipping
and delivery
Gross profit
Selling and administrative
Research, development and
engineering
Interest expense
Other income
Other expense
Earnings (loss) before items below
(Provision) credit for income taxes
Minority share owners' interests
in earnings of subsidiaries
Gain on sale of discontinued operations
Net earnings (loss) from
discontinued operations
Years ended
December 31,
2007
2006
$
455.0
$
771.6
(602.9)
168.7
(34.4)
(15.1)
(139.2)
2.9
(5.4)
(22.5)
(1.2)
(343.5)
111.5
(20.7)
(8.3)
(80.6)
(0.1)
(1.2)
0.6
2.4
(0.2)
1,038.5
$
1,041.3
$
(23.7)
The 2007 gain on the sale of discontinued operations of $1,038.5 million includes charges totaling $62.1
million for debt retirement costs, consisting principally of redemption premiums and write off of
unamortized fees, and a gain of $8.7 million for curtailment and settlement of pension and other
postretirement benefits. The gain also includes a net provision for income taxes of $38.2 million,
consisting of taxes on the gain of $445.0 million that are substantially offset by a credit of $406.8 million
for the reversal of valuation allowances against existing tax loss carryforwards. The sale agreement
provides for an adjustment of the selling price based on working capital levels and certain other factors.
The gain on sale of discontinued operations of $6.8 million reported in 2008 relates to an adjustment of
the 2007 gain on the sale of the plastics packaging business mainly related to finalizing certain tax
allocations and an adjustment to the selling price in accordance with procedures set forth in the final
contract.
23. Fair Value Measurements In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (FAS No. 157), which defines fair value, establishes a
framework for measuring fair value and enhances disclosure about fair value measurements. On
February 2, 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) which delays the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on at least an annual basis. Where the
measurement objective specifically requires the use of “fair value” the Company has adopted the
94
Owens-Illinois, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
provisions of FAS No. 157 related to financial assets and financial liabilities as of January 1, 2008. The
adoption of FAS No. 157 had no impact on the Company.
FAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants. FAS No. 157 establishes a three-
tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or
indirectly; and
Level 3: Unobservable inputs for which there is little or no market data, which requires the
Company to develop assumptions.
The Company’s derivative assets and liabilities consist of interest rate swaps, natural gas forwards, and
foreign exchange option and forward contracts. The Company uses an income approach to valuing these
contracts. Interest rate yield curves, natural gas forward rates, and foreign exchange rates are the
significant inputs into the valuation models. These inputs are observable in active markets over the terms
of the instruments the Company holds, and accordingly, the Company classifies the $0.4 million net
derivative liability as Level 2 in the hierarchy. The Company also evaluates counterparty risk in
determining fair values.
The Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“FAS
No. 159”), effective January 1, 2008. This standard permits entities to choose to measure many financial
instruments and certain other items at fair value. While FAS No. 159 became effective January 1, 2008,
the Company did not elect the fair value measurement option for any of its financial assets or liabilities.
24. Financial Information for Subsidiary Guarantors and Non-Guarantors The following presents
condensed consolidating financial information for the Company, segregating: (1) Owens-Illinois, Inc.,
the issuer of two series of senior notes and debentures (the “Parent”); (2) the two subsidiaries which have
guaranteed the senior notes and debentures on a subordinated basis (the “Guarantor Subsidiaries”); and
(3) all other subsidiaries (the “Non-Guarantor Subsidiaries”). The Guarantor Subsidiaries are 100%
owned direct and indirect subsidiaries of the Company and their guarantees are full, unconditional and
joint and several. They have no operations and function only as intermediate holding companies.
Wholly-owned subsidiaries are presented on the equity basis of accounting. Certain reclassifications have
been made to conform all of the financial information to the financial presentation on a consolidated
basis. The principal eliminations relate to investments in subsidiaries and inter-company balances and
transactions.
95
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Parent
Guarantor
Subsidiaries
December 31, 2008
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Balance Sheet
Current assets:
Accounts receivable
Inventories
Other current assets
Total current assets
Investments in and ad-
vances to subsidiaries
Goodwill
Other non-current assets
Total other assets
Property, plant and
equipment, net
$
-
$
-
$
988.8
999.5
456.4
$
-
$
988.8
999.5
456.4
-
-
2,444.7
-
2,035.9
1,535.9
(3,571.8)
2,035.9
1,535.9
2,207.5
678.7
2,886.2
2,645.6
(3,571.8)
2,444.7
-
2,207.5
678.7
2,886.2
2,645.6
Total assets
$
2,035.9
$
1,535.9
$
7,976.5
$
(3,571.8)
$
7,976.5
Current liabilities :
Accounts payable and
accrued liabilities
Current portion of
asbestos liability
Short-term loans and
long-term debt due
within one year
Total current liabilities
Long-term debt
Asbestos-related liabilities
Other non-current liabilities
and minority interests
Capital structure
Total liabilities and
share owners' equity
$
-
$
-
$
1,434.5
$
-
$
1,434.5
175.0
175.0
508.9
320.3
(8.9)
1,040.6
-
1,535.9
393.8
1,828.3
2,931.4
1,680.9
1,535.9
-
(500.0)
(3,071.8)
175.0
393.8
2,003.3
2,940.3
320.3
1,672.0
1,040.6
$
2,035.9
$
1,535.9
$
7,976.5
$
(3,571.8)
$
7,976.5
96
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
P arent
Guaran t o r
Subsidiaries
Decem ber 3 1, 2007
N o n -
Guar a n t o r
Subsidiaries
Elim in at io n s
Co n solidat ed
Balan ce Sh eet
Current asset s:
Accoun t s receivable
Inventories
Ot h er current asset s
T o t al curren t asset s
Invest m e n t s in and ad-
vances t o subsidiaries
Go odwill
O t h er non-current asset s
T o t al o t h er asset s
P roperty, plant and
equip m e n t , n et
T o t al assets
Current liabilit ies :
Accoun t s p ay able an d
accrued liabilit ies
Curren t p o r t io n o f
asbest os liabilit y
Sh o r t - t e r m lo ans and
lo n g-term debt due
within one year
T o t al curren t liabilit ies
L o n g-term debt
A sbest os-relat ed liabilit ies
O t h er non-current liabilit ies
and m in o r it y in terest s
Capit a l st ruc t ure
T o t al liabilit ies an d
sh are own ers' equit y
$
-
$
-
$
-
-
3,392.9
2 ,6 4 2 . 9
3,392.9
2 ,6 4 2 . 9
1 ,1 8 5 .6
1 ,0 2 0 .8
4 8 8 .2
2 ,6 9 4 .6
2 ,4 2 8 .1
1 ,2 5 1 .9
3 ,6 8 0 .0
2 ,9 5 0 .0
$
-
$
-
( 6 , 0 3 5 . 8 )
( 6 , 0 3 5 . 8 )
1 , 1 8 5 .6
1 , 0 2 0 .8
4 8 8 .2
2 , 6 9 4 .6
-
2 , 4 2 8 .1
1 , 2 5 1 .9
3 , 6 8 0 .0
2 , 9 5 0 .0
$
3,392.9
$
2 ,6 4 2 . 9
$
9 ,3 2 4 .6
$
( 6 , 0 3 5 . 8 )
$
9 , 3 2 4 .6
$
-
$
-
$
1 ,6 1 8 .6
$
-
$
1 , 6 1 8 .6
2 1 0 . 0
2 5 0 . 0
4 6 0 . 0
5 0 0 . 3
2 4 5 . 5
-
(0 . 3 )
2,187.4
2 ,6 4 2 . 9
7 0 0 .9
2 ,3 1 9 .5
3 ,0 1 3 .2
1 ,3 4 9 .0
2 ,6 4 2 .9
( 2 5 0 . 0 )
( 2 5 0 . 0 )
( 5 0 0 . 0 )
( 5 , 2 8 5 . 8 )
2 1 0 .0
7 0 0 .9
-
2 , 5 2 9 .5
3 , 0 1 3 .5
2 4 5 .5
1 , 3 4 8 .7
2 , 1 8 7 .4
$
3,392.9
$
2 ,6 4 2 . 9
$
9 ,3 2 4 .6
$
( 6 , 0 3 5 . 8 )
$
9 , 3 2 4 .6
97
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Year ended December 31, 2008
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Results of Operations
Net sales
Manufacturing, shipping,
and delivery
Gross profit
Research, engineering, selling,
administrative, and other
External interest expense
Intercompany interest expense
External interest income
Intercompany interest income
Equity earnings from subsidiaries
Other equity earnings
Other revenue
Earnings from continuing operations
before items below
Provision for income taxes
Minority share owners' interests
in earnings of subsidiaries
Earnings from continuing operations
Net earnings of discontinued
operations
Net earnings
(250.0)
(45.8)
45.8
500.3
250.3
1.2
(982.7)
(253.0)
-
38.6
-
-
50.8
28.1
558.4
(236.7)
(70.2)
251.5
$
-
$
-
$
7,884.7
$
-
$
7,884.7
-
-
-
(6,208.1)
1,676.6
(6,208.1)
1,676.6
(732.7)
(207.2)
(45.8)
38.6
50.8
28.1
(45.8)
45.8
500.3
91.6
(91.6)
(1,000.6)
500.3
808.4
(1,000.6)
(237.9)
(70.2)
500.3
(1,000.6)
251.5
500.3
6.8
258.3
$
6.8
507.1
$
6.8
507.1
$
(13.6)
(1,014.2)
$
6.8
258.3
$
98
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Year ended December 31, 2007
Non-
Guarantor
Guarantor
Parent
Subsidiaries
Sub s idiaries
Eliminations
Consolidated
Results of Operations
Net s ales
Manufacturing, s hipping,
and delivery
Gro s s profit
Research, engineering, s elling,
adminis trative, and other
External interest expense
Intercompany interest expense
External interest income
Intercompany interest income
Equity earnings from subsidiaries
Other equity earnings
Other revenue
$
-
$
-
$
7,566.7
$
-
$
7,566.7
-
-
(5,971.4)
1,595.3
-
(5,971.4)
1,595.3
(115.0)
(66.9)
66.9
414.3
(66.9)
66.9
414.3
(737.6)
(281.7)
(66.9)
42.3
34.1
36.1
621.6
(147.8)
(59.5)
414.3
133.8
(133.8)
(828.6)
(828.6)
(828.6)
(852.6)
(348.6)
-
42.3
-
-
34.1
36.1
506.6
(147.8)
(59.5)
299.3
Earning s from continuing operations
before items below
299.3
414.3
Provision for income taxes
M inority share owners ' interes ts
in earning s of subsidiaries
Earning s from continuing operations
299.3
414.3
Net earnings of dis continued
operations
Net earnings
1,041.3
1,041.3
1,041.3
(2,082.6)
1,041.3
$
1,340.6
$
1,455.6
$
1,455.6
$
(2,911.2)
$
1,340.6
99
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Year ended December 31, 2006
Non-
Guarantor
Guarantor
Parent
Sub s idiaries
Subs idiaries
Eliminations
Consolidated
$
-
$
-
$
6,650.4
$
-
$
6,650.4
-
-
(5,481.1)
1,169.3
-
(5,481.1)
1,169.3
Results of Operations
Net s ales
Manufacturing, s hipping,
and delivery
Gro s s profit
Research, engineering, selling,
adminis trative, and other
External interes t expense
Intercompany interes t expense
External interes t income
Intercompany interes t income
Equity earnings from subsidiaries
Other equity earnings
Other revenue
(120.0)
(82.4)
82.4
116.2
(82.4)
82.4
116.2
Earning s (los s ) from continuing operations
before items below
(3.8)
116.2
Provision for income taxes
M inority s h are owners ' interests
in earnings of subsidiaries
Earning s (los s ) from continuing operations
(3.8)
116.2
Net losses of dis continued
operations
Net earnings (los s )
(633.8)
(266.6)
(82.4)
19.2
23.4
56.0
285.1
(125.3)
(43.6)
116.2
164.8
(164.8)
(232.4)
(232.4)
(232.4)
(753.8)
(349.0)
-
19.2
-
-
23.4
56.0
165.1
(125.3)
(43.6)
(3.8)
(23.7)
(23.7)
(23.7)
(23.7)
47.4
$
(27.5)
$
92.5
$
92.5
$
(185.0)
$
(27.5)
100
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Year ended December 31, 2008
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Cash Flows
Cash provided by
(utilized in) operating
activities
Cash utilized in investing
activities
Cash provided by
(utilized in) financing
activities
Effect of exchange
rate change on cash
Net change in cash
Cash at beginning
of period
Cash at end
of period
$
(209.0)
$
-
$
916.6
$
-
$
707.6
209.0
-
-
(377.2)
(524.7)
(22.9)
(8.2)
387.7
(377.2)
(315.7)
(22.9)
(8.2)
387.7
-
$
-
$
-
$
379.5
$
-
$
379.5
101
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Year ended December 31, 2007
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Cash Flows
Cash provided by
(utilized in) operating
activities
Cash provided by investing
activities
Cash provided by
(utilized in) financing
activities
Effect of exchange
rate change on cash
Net change in cash
Cash at beginning
of period
Cash at end
of period
$
(347.1)
$
-
$
983.5
$
-
$
636.4
1,444.4
1,444.4
347.1
(2,314.7)
(1,967.6)
-
-
51.8
165.0
222.7
-
51.8
165.0
222.7
$
-
$
-
$
387.7
$
-
$
387.7
102
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Owens-Illinois, Inc.
Year ended December 31, 2006
Parent
Guarantor
Subsidiaries
Non-
Guarantor
Subsidiaries
Eliminations
Consolidated
Cash Flows
Cash provided by
(utilized in) operating
activities
Cash utilized in investing
activities
Cash provided by
(utilized in) financing
activities
Effect of exchange
rate change on cash
Net change in cash
Cash at beginning
of period
Cash at end
of period
$
(161.3)
$
-
$
311.6
$
-
$
150.3
161.3
-
-
(177.9)
(170.3)
12.7
(23.9)
246.6
(177.9)
(9.0)
12.7
(23.9)
246.6
-
$
-
$
-
$
222.7
$
-
$
222.7
103
Selected Quarterly Financial Data (unaudited) The following tables present selected financial data by
quarter for the years ended December 31, 2008 and 2007:
2008
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
to
Date
Net sales - continuing operations
$
1,960.5
$
2,210.6
$
2,008.6
$
1,705.0
$
7,884.7
Gross profit - continuing operations
$
456.8
$
525.2
$
407.3
$
287.3
$
1,676.6
Earnings (loss) from continuing
operations (a)
Gain (loss) on sale of discontinued
operations
Net earnings (loss)
174.0
4.1
178.1
$
227.5
78.6
3.8
231.3
$
$
78.6
$
(228.6)
(1.1)
(229.7)
251.5
6.8
258.3
$
Earnings (loss) per share
of common stock (b):
Basic:
Earnings (loss) from continuing
operations
Gain (loss) on sale of discontinued
operations
Net earnings (loss)
Diluted:
Earnings (loss) from continuing
operations
Gain (loss) on sale of discontinued
operations
Net earnings (loss)
$
1.08
$
1.38
$
0.47
$
(1.38)
$
1.51
0.03
1.11
$
0.02
1.40
$
$
0.47
$
(0.01)
(1.39)
0.04
1.55
$
$
1.02
$
1.33
$
0.46
$
(1.38)
$
1.48
0.02
1.04
$
0.02
1.35
$
$
0.46
$
(0.01)
(1.39)
0.04
1.52
$
(a)
Amount for the first quarter includes charges of $12.9 million ($9.7 million after tax) for
restructuring and asset impairment. The effect of these charges is a reduction in earnings per
share of $0.06.
Amount for the second quarter includes charges of $8.2 million ($4.2 million after tax and
minority share owners’ interests) for restructuring and asset impairment. The effect of these
charges is a reduction in earnings per share of $0.02.
Amount for the third quarter includes charges of $90.6 million ($79.7 million after tax) for
restructuring and asset impairment. The effect of these charges is a reduction in earnings per
share of $0.47. Amount for the third quarter also includes a net benefit of $6.2 million ($4.6
million after minority share owners’ interests) related to tax legislation and restructuring in
Europe. The effect of this benefit is an increase in earnings per share of $0.03.
104
Amount for the fourth quarter includes charges totaling $271.6 million ($265.3 million after tax)
for the following: (1) $250.0 million ($248.8 million after tax) to increase the accrual for
estimated future asbestos-related costs; and (2) $21.6 million ($16.5 million after tax) for
restructuring and asset impairment. The effect of these charges is a reduction in earnings per
share of $1.56.
Amount for the fourth quarter includes expense of $39.5 million related to tax restructuring and
other. The effect of this expense is a decrease in earnings per share of $0.23.
(b)
Earnings per share are computed independently for each period presented. As such, the sums of
the amounts calculated separately for each quarter do not equal the year-to-date amount.
Net sales - continuing operations
Net sales - discontinued operations
Gross profit - continuing operations
Gross profit - discontinued operations
Earnings from continuing
operations (d)
Net earnings (loss) of
discontinued operations
Gain (loss) on sale of discontinued
operations
Net earnings (loss)
Earnings (loss) per share
of common stock (e):
Basic:
Earnings from continuing
operations
Net earnings (loss) of
discontinued operations
Gain (loss) on sale of discontinued
operations
Net earnings (loss)
Diluted:
Earnings from continuing
operations
Net earnings (loss) of
discontinued operations
Gain (loss) on sale of discontinued
operations
Net earnings (loss)
7,566.7
455.0
1,595.3
111.5
299.3
2.8
First
Quarter
$
1,684.0
188.3
$
327.8
44.0
2007 (c)
Second
Quarter
Third
Quarter
Fourth
Quarter
Year
to Date
$
1,997.0
200.9
$
1,928.4
65.8
$
429.4
47.7
$
417.2
19.8
$
1,957.3
$
$
420.9
$
55.3
(2.1)
153.8
(4.1)
75.6
9.0
14.6
$
53.2
$
149.7
$
1,071.9
1,156.5
(33.4)
(18.8)
1,038.5
1,340.6
$
$
$
0.32
$
0.97
$
0.46
$
0.06
$
1.80
(0.01)
(0.03)
$
0.31
$
0.94
$
0.05
6.93
7.44
(0.21)
(0.15)
$
$
0.02
6.73
8.55
$
0.31
$
0.92
$
0.45
$
0.06
$
1.78
(0.01)
(0.03)
$
0.30
$
0.89
$
0.05
6.36
6.86
(0.21)
(0.15)
$
$
0.02
6.19
7.99
105
(c)
(d)
Amounts related to the Company's plastics packaging business have been reclassified to
discontinued operations following as a result of the July 2007 sale of that business.
Amount for the second quarter includes a benefit of $13.5 million for the recognition of tax
credits related to restructuring of investments in certain European operations. The effect of this
benefit is an increase in earnings per share of $0.08.
Amount for the third quarter includes charges of $61.9 million ($55.1 million after tax) for
restructuring and asset impairment. The effect of these charges is a reduction in earnings per
share of $0.33.
Amount for the fourth quarter includes charges totaling $162.9 million ($152.8 million after tax)
for the following: (1) $115.0 million (pretax and after tax) to increase the accrual for estimated
future asbestos-related costs; (2) $38.4 million ($29.0 million after tax) for restructuring and asset
impairment; and (3) $9.5 million ($8.8 million after tax) for note repurchase premiums and the
write-off of finance fees related to debt that was repaid prior to its maturity. The effect of these
charges is a reduction in earnings per share of $0.94.
(e)
Earnings per share are computed independently for each period presented. As such, the sums of
the amounts calculated separately for each quarter do not equal the year-to-date amount.
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Company’s Exchange Act reports is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange Commission’s rules and forms
and that such information is accumulated and communicated to the Company’s management, including its
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives, and management is required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Also, the
Company has investments in certain unconsolidated entities. As the Company does not control or
manage these entities, its disclosure controls and procedures with respect to such entities are necessarily
substantially more limited than those maintained with respect to its consolidated subsidiaries.
As required by Rule 13a-15(b) of the Exchange Act, the Company carried out an evaluation, under the
supervision and with the participation of management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls
and procedures as of the end of the period covered by this report. Based on the foregoing, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls
and procedures were effective at the reasonable assurance level as of December 31, 2008.
Management concluded that the Company’s system of internal control over financial reporting was
effective as of December 31, 2008. There has been no change in the Company’s internal controls over
financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company’s internal controls over financial reporting. The
106
Company is undertaking the phased implementation of a global Enterprise Resource Planning software
system and believes it is maintaining and monitoring appropriate internal controls during the
implementation period. The Company believes that the internal control environment will be enhanced as
a result of implementation.
Management’s Report on Internal Control over Financial Reporting
The management of Owens-Illinois, Inc. is responsible for establishing and maintaining adequate internal
control over financial reporting. The Company’s internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles in
the United States. However, all internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can provide only reasonable
assurance with respect to financial statement preparation and reporting.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of
December 31, 2008. In making this assessment management used the criteria for effective internal
control over financial reporting as described in “Internal Control – Integrated Framework” issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO framework).
Based on this assessment, using the criteria above, management concluded that the Company’s system of
internal control over financial reporting was effective as of December 31, 2008.
The Company’s independent registered public accounting firm, Ernst & Young LLP, that audited the
Company’s consolidated financial statements, has issued an attestation report on the Company’s internal
control over financial reporting which is included below.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Share Owners of
Owens-Illinois, Inc.
We have audited Owens-Illinois, Inc.’s internal control over financial reporting as of December 31, 2008 based on criteria
established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Owens-Illinois, Inc.’s management is responsible for maintaining effective internal control
over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Owens-Illinois, Inc. maintained, in all material respects, effective internal control over financial reporting as of
December 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Owens-Illinois, Inc. and subsidiaries as of December 31, 2008 and 2007, and the related
consolidated statements of results of operations, share owners’ equity, and cash flows for each of the three years in the period
ended December 31, 2008 and our report dated February 17, 2009 expressed an unqualified opinion thereon.
Toledo, Ohio
February 17, 2009
/s/ Ernst & Young LLP
108
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information with respect to non-officer directors and corporate governance is included in the 2009 Proxy
Statement in the sections entitled “Election of Directors” and “Section 16(a) Beneficial Ownership
Reporting Compliance” and such information is incorporated herein by reference.
Information with respect to executive officers is included herein on pages 8-9.
Code of Business Conduct and Ethics
The Company’s Code of Business Conduct and Ethics, which is applicable to all directors, officers and
employees of the Company, including the principal executive officer, the principal financial officer and
the principal accounting officer, is available on the Investor Relations section of the Company's web site
(www.o-i.com). A copy of the Code is also available in print to share owners upon request, addressed to
the Corporate Secretary at Owens-Illinois, Inc., One Michael Owens Way, Perrysburg, Ohio 43551. The
Company intends to post amendments to or waivers from its Code of Business Conduct and Ethics (to the
extent applicable to the Company's directors, executive officers or principal financial officers) at this
location on its web site.
ITEM 11.
EXECUTIVE COMPENSATION
The section entitled “Director and Executive Compensation and Other Information,” exclusive of the
subsections entitled “Board Compensation Committee Report on Executive Compensation” which is
included in the 2009 Proxy Statement is incorporated herein by reference.
109
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The section entitled “Security Ownership of Certain Beneficial Owners and Management” which is
included in the 2009 Proxy Statement is incorporated herein by reference.
The following table summarizes securities authorized for issuance under equity compensation plans as of
December 31, 2008.
Equity Compensation Plan Information
(a)
(b)
Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights (1)
(thousands)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(c)
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding securities
reflected in column (a))
(thousands)
3,213
$
23.56
-
-
3,213
$
23.56
2,951
-
2,951
Plan Category
Equity compensation
plans approved by
security holders
Equity compensation
plans not approved by
security holders
Total
(1) Represents options to purchase shares of the Company's common stock. There are no
outstanding warrants or rights.
ITEM 13.
DIRECTOR INDEPENDENCE
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
The section entitled “Director and Executive Compensation and Other Information,” exclusive of the
subsections entitled “Board Compensation Committee Report on Executive Compensation” and
“Performance Graph,” which is included in the 2009 Proxy Statement is incorporated herein by reference.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accountant fees and services is included in the 2009 Proxy
Statement in the section entitled “Independent Registered Public Accounting Firm” and such information
is incorporated herein by reference.
110
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
Index of Financial Statements and Financial Statement Schedules Covered by Report of Independent
Auditors.
(i) Registrant
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2008 and 2007
For the years ended December 31, 2008, 2007, and 2006
Consolidated Results of Operations
Consolidated Share Owners' Equity
Consolidated Cash Flows
Notes to the Consolidated Financial Statements
Exhibit Index
Financial Statement Schedule
For the years ended December 31, 2008, 2007, and 2006:
II - Valuation and Qualifying Accounts (Consolidated)
All other schedules have been omitted since the required information is not present or
not present in amounts sufficient to require submission of the schedule.
(ii) Separate Financial Statements of Affiliates Whose Securities Are
Pledged As Collateral
Page
49
51-52
50
53-54
55
56
112
Schedule Page
S-1
116
111
EXHIBIT INDEX
S-K Item 601 No.
Document
3.1
3.2
4.1
4.2
-- Restated Certificate of Incorporation of Owens-Illinois, Inc. (filed as Exhibit 3.1 to
Owens-Illinois, Inc.’s Form S-2, File No. 33-43224, and incorporated herein by
reference).
-- Amended and Restated Bylaws of Owens-Illinois, Inc., (filed as Exhibit 3.1 to
Owens-Illinois, Inc.’s Form 8-K dated April 1, 2008, File No. 1-9576, and
incorporated herein by reference).
Indenture dated as of May 15, 1997, between Owens-Illinois, Inc. and The Bank of
New York, as Trustee (filed as Exhibit 4.1 to Owens-Illinois, Inc.’s Form 8-K dated
May 16, 1997, File No. 1-9576, and incorporated herein by reference).
--
-- Officers' Certificate, dated May 20, 1998, establishing the terms of the 7.50% Senior
Notes due 2010; including the Form of 7.50% Senior Note due 2010 (filed as
Exhibits 4.4 and 4.8, respectively, to Owens-Illinois, Inc.’s Form 8-K dated May 20,
1998, File No. 1-9576, and incorporated herein by reference).
4.3
-- Officers' Certificate, dated May 20, 1998, establishing the terms of the 7.80% Senior
4.4
4.5
4.6
4.7
4.8
--
--
--
--
--
Notes due 2018; including the Form of 7.80% Senior Note due 2018 (filed as
Exhibits 4.5 and 4.9, respectively, to Owens-Illinois, Inc.’s Form 8-K dated May 20,
1998, File No. 1-9576, and incorporated herein by reference).
Supplemental Indenture, dated as of June 26, 2001 among Owens-Illinois, Inc.,
Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc. and The Bank of New
York, as Trustee (May 20, 1998 Indenture) (filed as Exhibit 4.1 to Owens-Illinois
Inc.’s Form 10-Q for the quarter ended September 30, 2001, File No. 1-9576, and
incorporated herein by reference).
Second Supplemental Indenture, dated as of December 1, 2004 among Owens-
Illinois, Inc., Owens-Illinois Group, Inc., Owens-Brockway Packaging, Inc. and The
Bank of New York, as Trustee (filed as Exhibit 4.1 to Owens-Illinois Inc.’s Form 8-
K dated December 1, 2004, File No. 1-9576, and incorporated herein by reference).
Indenture, dated as of January 24, 2002, among Owens-Brockway Glass Container,
Inc., the Guarantors (as defined therein) and U.S. Bank National Association, as
Trustee (filed as Exhibit 4.1 to Owens-Illinois Group, Inc.’s Form S-4 dated April 5,
2002, File No. 333-85690, and incorporated herein by reference).
First Supplemental Indenture, dated as of January 24, 2002, among Owens-
Brockway Glass Container, Inc., the Guarantors (as defined therein) and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.2 to Owens-Illinois Group, Inc.’s
Form S-4 dated April 5, 2002, File No. 333-85690, and incorporated herein by
reference).
Second Supplemental Indenture, dated as of August 5, 2002, among Owens-
Brockway Glass Container, Inc., the Guarantors (as defined therein) and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.1 to Owens-Illinois Group Inc.'s
Form 10-Q for the quarter ended September 30, 2002, File No. 33-13061, and
incorporated herein by reference).
112
S-K Item 601 No.
Document
4.9
--
4.10
--
4.11
--
4.12
--
Third Supplemental Indenture, dated as of November 13, 2002, among Owens-
Brockway Glass Container Inc., the Guarantors (as defined therein) and U.S. Bank
National Association, as Trustee (filed as Exhibit 4.4 to Owens-Illinois Group, Inc.’s
Form S-4 dated February 14, 2003, File No. 333-103263, and incorporated herein by
reference).
Fourth Supplemental Indenture, dated as of May 6, 2003, among Owens-Brockway
Glass Container Inc., the Guarantors (as defined therein) and U.S. Bank National
Association, as Trustee (filed as Exhibit 4.2 to Owens-Illinois Group, Inc.’s
Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, File No. 33-
13061, and incorporated herein by reference).
Second Amended and Restated Security Agreement, dated as of June 14, 2006,
between Owens-Illinois Group, Inc., each of the direct and indirect subsidiaries of
Owens-Illinois Group, Inc. signatory thereto, and Deutsche Bank Trust Company
Americas, as Collateral Agent (as defined therein) (filed as exhibit 4.4 to Owens-
Illinois Group, Inc.’s Form 8-K dated June 14, 2006, File No. 33-13061, and
incorporated herein by reference).
Second Amendment to Credit Agreement and Consent, dated June 11, 2007 (filed as
Exhibit 4.1 to Owens-Illinois, Inc.’s and Owens-Illinois Group, Inc.’s Form 8-K
dated June 11, 2007, File Nos. 1-9576 and 33-13061, and incorporated herein by
reference).
10.1*
-- Amended and Restated Owens-Illinois Supplemental Retirement Benefit Plan (filed
10.2*
--
10.3*
--
10.4*
--
10.5*
10.6*
10.7*
--
--
--
as Exhibit 10.1 to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended June 30,
1998, File No. 1-9576, and incorporated herein by reference).
First Amendment to Amended and Restated Owens-Illinois Supplemental
Retirement Benefit Plan (filed as Exhibit 10.3 to Owens-Illinois, Inc.’s Form 10-K
for the year ended December 31, 2000, File No. 1-9576, and incorporated herein by
reference).
Second Amendment to Amended and Restated Owens-Illinois Supplemental
Retirement Benefit Plan (filed as Exhibit 10.1 to Owens-Illinois, Inc.'s Form 10-Q
for the quarter ended March 31, 2002, File No. 1-9576, and incorporated herein by
reference).
Third Amendment to Amended and Restated Owens-Illinois Supplemental
Retirement Benefit Plan (filed as Exhibit 10.1 to Owens-Illinois, Inc.'s Form 10-Q
for the quarter ended March 31, 2003, File No. 1-9576, and incorporated herein by
reference).
Form of Employment Agreement between Owens-Illinois, Inc. and various
Employees (filed as Exhibit 10(m) to Owens-Illinois, Inc.’s Form 10-K for the year
ended December 31, 1987, File No. 1-9576, and incorporated herein by reference).
Second Amended and Restated Stock Option Plan for Key Employees of Owens-
Illinois, Inc. (filed as Exhibit 10.20 to Owens-Illinois, Inc.’s Form 10-K for the year
ended December 31, 1994, File No. 1-9576, and incorporated herein by reference).
First Amendment to Second Amended and Restated Stock Option Plan for Key
Employees of Owens-Illinois, Inc. (filed as Exhibit 10.13 to Owens-Illinois, Inc.’s
Form 10-K for the year ended December 31, 1995, File No. 1-9576, and
incorporated herein by reference).
113
S-K Item 601 No.
Document
10.8*
--
10.9*
--
10.10*
--
Second Amendment to Second Amended and Restated Stock Option Plan for Key
Employees of Owens-Illinois, Inc. (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s
Form 10-Q for the quarter ended June 30, 1997, File No. 1-9576, and incorporated
herein by reference).
Third Amendment to Second Amended and Restated Stock Option Plan for Key
Employees of Owens-Illinois, Inc. (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s
Form 10-Q for the quarter ended September 30, 2000, File No. 1-9576, and
incorporated herein by reference.)
Form of Non-Qualified Stock Option Agreement for use under the Second Amended
and Restated Stock Option Plan for Key Employees of Owens-Illinois, Inc. (filed as
Exhibit 10.21 to Owens-Illinois, Inc.’s Form 10-K for the year ended December 31,
1994, File No. 1-9576, and incorporated herein by reference).
10.11*
-- Amended and Restated Owens-Illinois, Inc. Performance Award Plan (filed as
10.12*
10.13*
10.14*
10.15*
--
Exhibit 10.16 to Owens-Illinois, Inc.’s Form 10-K for the year ended December 31,
1993, File No. 1-9576, and incorporated herein by reference).
First Amendment to Amended and Restated Owens-Illinois, Inc. Performance
Award Plan (filed as Exhibit 10.4 to Owens-Illinois, Inc.’s Form 10-Q for the
quarter ended June 30, 1997, File No. 1-9576, and incorporated herein by reference).
-- Owens-Illinois, Inc. Directors Deferred Compensation Plan (filed as Exhibit 10.26 to
Owens-Illinois, Inc.’s Form 10-K for the year ended December 31, 1995, File No. 1-
9576, and incorporated herein by reference).
First Amendment to Owens-Illinois, Inc. Directors Deferred Compensation Plan
(filed as Exhibit 10.27 to Owens-Illinois, Inc.’s Form 10-K for the year ended
December 31, 1995, File No. 1-9576, and incorporated herein by reference).
Second Amendment to Owens-Illinois, Inc. Directors Deferred Compensation Plan
(filed as Exhibit 10.2 to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended
March 31, 1997, File No. 1-9576, and incorporated herein by reference).
--
--
10.16*
-- Amended and Restated 1997 Equity Participation Plan of Owens-Illinois, Inc. (filed
10.17*
--
as Exhibit 10.1 to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended June 30,
1999, File No. 1-9576, and incorporated herein by reference).
First Amendment to Amended and Restated 1997 Equity Participation Plan of
Owens-Illinois, Inc. (filed as Exhibit 10.1 to Owens-Illinois, Inc.’s Form 10-Q for
the quarter ended June 30, 2002, File No. 1-9576, and incorporated herein by
reference).
10.18*
-- Owens-Illinois, Inc. Executive Deferred Savings Plan (filed as Exhibit 10.1 to
10.19*
--
Owens-Illinois, Inc.’s Form 10-Q for the quarter ended September 30, 2001, File
No. 1-9576, and incorporated herein by reference).
2004 Equity Incentive Plan for Directors of Owens-Illinois, Inc. (filed as Exhibit
10.1 to Owens-Illinois, Inc.’s Form 10-Q for the quarter ended June 30, 2004, File
No. 1-9576, and incorporated herein by reference).
10.20*
-- Owens-Illinois, Inc. Incentive Bonus Plan (filed as Exhibit 10.2 to Owens-Illinois,
Inc.’s Form 10-Q for the quarter ended June 30, 2004, File No. 1-9576, and
incorporated herein by reference).
10.21*
-- Owens-Illinois 2004 Executive Life Insurance Plan (filed as Exhibit 10.32 to
10.22*
Owens-Illinois, Inc.’s Form 10-K for the year ended December 31, 2004, File No. 1-
9576, and incorporated herein by reference).
-- Owens-Illinois 2004 Executive Life Insurance Plan for Non-U.S. Employees (filed
as Exhibit 10.33 to Owens-Illinois, Inc.’s Form 10-K for the year ended December
31, 2004, File No. 1-9576, and incorporated herein by reference).
114
S-K Item 601 No.
Document
10.23*
10.24*
--
Second Amended and Restated Owens-Illinois, Inc. Senior Management Incentive
Plan (filed as Exhibit 10.34 to Owens-Illinois, Inc.’s Form 10-K for the year ended
December 31, 2004, File No. 1-9576, and incorporated herein by reference).
-- Owens-Illinois, Inc. 2005 Incentive Award Plan (filed as Exhibit 10.28 to Owens-
10.25*
--
10.26*
--
10.27*
--
10.28*
--
10.29*
--
10.30*
10.31*
--
--
Illinois, Inc.’s Form 10-K for the year ended December 31, 2005, File No. 1-9576,
and incorporated herein by reference).
First Amendment to 2005 Incentive Award Plan of Owens-Illinois, Inc. dated as of
December 4, 2006 (filed as Exhibit 10.29 to Owens-Illinois, Inc.’s Form 10-K for
the year ended December 31, 2006, File No. 1-9576, and incorporated herein by
reference).
Form of Non-Qualified Stock Option Agreement for use under the Owens-Illinois,
Inc. 2005 Incentive Award Plan (filed as Exhibit 10.29 to Owens-Illinois, Inc.’s
Form 10-K for the year ended December 31, 2005, File No. 1-9576, and
incorporated herein by reference).
Form of Restricted Stock Agreement for use under the Owens-Illinois, Inc. 2005
Incentive Award Plan (filed as Exhibit 10.30 to Owens-Illinois, Inc.’s Form 10-K for
the year ended December 31, 2005, File No. 1-9576, and incorporated herein by
reference).
Form of Phantom Stock Agreement for use under the Owens-Illinois, Inc. 2005
Incentive Award Plan (filed as Exhibit 10.31 to Owens-Illinois, Inc.’s Form 10-K for
the year ended December 31, 2005, File No. 1-9576, and incorporated herein by
reference).
Form of Restricted Stock Unit Agreement for use under the Owens-Illinois, Inc.
2005 Incentive Award Plan (filed as Exhibit 10.32 to Owens-Illinois, Inc.’s Form
10-K for the year ended December 31, 2005, File No. 1-9576, and incorporated
herein by reference).
Letter agreement between Owens-Illinois, Inc. and Albert P.L. Stroucken (filed as
Exhibit 10.2 to Owens-Illinois, Inc.’s Form 8-K dated November 8, 2006, File No.
1-9576, and incorporated herein by reference).
Employment agreement between Owens-Illinois, Inc. and Albert P.L. Stroucken,
dated January 3, 2007 (filed as exhibit 10.37 to Owens-Illinois, Inc.’s Form 10-K for
the year ended December 31, 2006, File No. 1-9576, and incorporated herein by
reference).
12
21
23
24
31.1
31.2
32.1
32.2
-- Computation of Ratio of Earnings to Fixed Charges and Earnings to Combined
Fixed Charges and Preferred Stock Dividends (filed herewith).
Subsidiaries of Owens-Illinois, Inc. (filed herewith).
--
-- Consent of Independent Registered Public Accounting Firm (filed herewith).
-- Owens-Illinois, Inc. Power of Attorney (filed herewith).
-- Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith).
-- Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002 (filed herewith).
-- Certification of Principal Executive Officer pursuant to 18 U.S.C Section 1350 (filed
--
herewith).
Certification of Principal Financial Officer pursuant to 18 U.S.C Section 1350 (filed
herewith).
*
Indicates a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this form pursuant to Item 15(c).
115
SEPARATE FINANCIAL STATEMENTS OF AFFILIATES WHOSE SECURITIES ARE
PLEDGED AS COLLATERAL.
1) Financial statements of Owens-Brockway Packaging, Inc. and subsidiaries including consolidated
balance sheets as of December 31, 2008 and 2007, and the related statements of operations, net parent
investment, and cash flows for the years ended December 31, 2008, 2007 and 2006.
2) Financial statements of Owens-Brockway Glass Container Inc. and subsidiaries including
consolidated balance sheets as of December 31, 2008 and 2007, and the related statements of
operations, net parent investment, and cash flows for the years ended December 31, 2008, 2007 and
2006.
116
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Share Owner of
Owens-Brockway Packaging, Inc.
We have audited the accompanying consolidated balance sheets of Owens-Brockway Packaging, Inc. and
subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of results of
operations, net Parent investment, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Owens-Brockway Packaging, Inc. and subsidiaries at December 31,
2008 and 2007, and the consolidated results of their operations and their cash flows for each of the three
years in the period ended December 31, 2008, in conformity with U.S. generally accepted accounting
principles.
As discussed in Note 13 to the consolidated financial statements, the Company changed its method of
accounting for defined benefit pension plans and other postretirement plans in 2006.
/s/ Ernst & Young LLP
Toledo, Ohio
February 17, 2009
117
CONSOLIDATED RESULTS OF OPERATIONS Owens-Brockway Packaging, Inc.
Dollars in millions
Years ended December 31,
Net sales
Manufacturing, shipping, and delivery
Gross profit
Selling and administrative
Research, development, and engineering
Net intercompany interest
Other interest expense
Other expense
Other income
Earnings before items below
Provision for income taxes
Minority share owners' interests in earnings
of subsidiaries
Net earnings
2008
2007
2006
$
7,884.7
(6,212.3)
1,672.4
$
7,566.7
(5,968.6)
1,598.1
$
6,692.4
(5,529.6)
1,162.8
(440.7)
(66.7)
(32.3)
(205.3)
(149.2)
111.9
890.1
(223.8)
(401.5)
(65.8)
4.0
(360.2)
(142.3)
92.4
724.7
(139.1)
(410.2)
(49.0)
3.0
(404.6)
(55.0)
86.5
333.5
(138.8)
(70.2)
(59.5)
(43.7)
$
596.1
$
526.1
$
151.0
See accompanying Notes to the Consolidated Financial Statements.
118
CONSOLIDATED BALANCE SHEETS Owens-Brockway Packaging, Inc.
Dollars in millions
December 31,
2008
2007
Assets
Current assets:
Cash, including time deposits of $307.5
($154.4 in 2007)
Receivables including amount from related parties
of $3.8 ($3.8 in 2007), less allowances of $38.1
($35.1 in 2007) for losses and discounts
Inventories
Prepaid expenses
Total current assets
Other assets:
Equity investments
Repair parts inventories
Prepaid pension
Deposits, receivables, and other assets
Goodwill
Total other assets
Property, plant, and equipment:
Land, at cost
Buildings and equipment, at cost:
Buildings and building equipment
Factory machinery and equipment
Transportation, office, and miscellaneous equipment
Construction in progress
Less accumulated depreciation
Net property, plant, and equipment
Total assets
$
397.9
$
401.9
988.2
999.1
46.8
2,432.0
101.7
132.5
418.3
2,207.5
2,860.0
1,201.1
1,020.3
35.1
2,658.4
79.9
155.8
58.1
418.0
2,428.1
3,139.9
243.3
261.7
1,021.9
4,339.0
96.9
194.2
5,895.3
3,292.9
2,602.4
1,070.7
4,742.1
114.9
146.7
6,336.1
3,431.9
2,904.2
$
7,894.4
$
8,702.5
119
CONSOLIDATED BALANCE SHEETS Owens-Brockway Packaging, Inc. (continued)
Dollars in millions
December 31,
2008
2007
Liabilities and Net Parent Investment
Current liabilities:
Short-term loans
Accounts payable including amount to related
parties of $7.1 ($9.3 in 2007)
Salaries and wages
U.S. and foreign income taxes
Other accrued liabilities
Long-term debt due within one year
Total current liabilities
External long-term debt
Deferred taxes
Other liabilities
Minority share owners' interests
Net Parent investment:
Investment by and advances from Parent
Accumulated other comprehensive loss
Total net Parent investment
$
375.6
$
435.6
811.8
138.2
152.4
295.2
18.2
1,791.4
2,413.1
117.5
729.8
253.2
2,798.6
(209.2)
2,589.4
926.5
176.3
118.7
311.4
15.2
1,983.7
2,494.1
147.2
701.0
252.2
2,769.1
355.2
3,124.3
Total liabilities and net Parent investment
$
7,894.4
$
8,702.5
See accompanying Notes to the Consolidated Financial Statements.
120
CONSOLIDATED NET PARENT INVESTMENT Owens-Brockway Packaging, Inc.
Dollars in millions
Years ended December 31,
2008
2007
2006
Investment by and advances to Parent
Balance at beginning of year
Net intercompany transactions
Net earnings
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Foreign currency translation adjustments
Change in minimum pension liability, net of tax
Employee benefit plans, net of tax
Change in fair value of certain derivative instruments, net of tax
Balance at end of year
Total net Parent investment
Total comprehensive income
$
2,769.1
(566.6)
596.1
$
1,287.2
955.8
526.1
$
1,313.9
(177.7)
151.0
$
2,798.6
$
2,769.1
$
1,287.2
$
355.2
(431.9)
$
(4.5)
305.3
$
(99.6)
(32.9)
26.2
28.2
(215.3)
284.9
22.6
(47.4)
(49.3)
$
(209.2)
$
355.2
$
(4.5)
$
2,589.4
$
3,124.3
$
1,282.7
Net earnings
Foreign currency translation adjustments
Change in minimum pension liability, net of tax
Employee benefit plans, net of tax
Change in fair value of certain derivative instruments, net of tax
$
596.1
(431.9)
-
(99.6)
(32.9)
$
526.1
305.3
-
26.2
28.2
$
151.0
284.9
22.6
(49.3)
Total comprehensive income
$
31.7
$
885.8
$
409.2
See accompanying Notes to the Consolidated Financial Statements
121
CONSOLIDATED CASH FLOWS Owens-Brockway Packaging, Inc.
Dollars in millions
Years ended December 31,
Operating activities:
Net earnings
Non-cash charges (credits):
Depreciation
Amortization of deferred costs
Deferred tax provision (credit)
Restructuring and asset impairment
Reverse non-U.S. deferred tax valuation allowance net of
restructuring charges
Goodwill impairment
Curtailment of postretirement benefits in The Netherlands
Other
Change in non-current operating assets
Change in non-current liabilities
Change in components of working capital
Cash provided by operating activities
Investing activities:
Additions to property, plant, and equipment
Advances to equity affiliate - net
Collections on accounts receivable arising from consolidation
of receivables securitization program
Net cash proceeds from divestitures and other
Cash utilized in investing activities
Financing activities:
Additions to long-term debt
Repayments of long-term debt
Increase (decrease) in short-term loans
Net change in intercompany debt
Net receipts (payments) for hedging activity
Payment of finance fees
Cash utilized in financing activities
Effect of exchange rate fluctuations on cash
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2008
2007
2006
$
596.1
$
526.1
$
151.0
427.5
32.7
10.6
133.3
53.4
8.7
(88.1)
(190.1)
984.1
(360.9)
(1.6)
3.0
(359.5)
686.4
(695.4)
(20.6)
(530.9)
(45.2)
(605.7)
(22.9)
(4.0)
419.7
36.1
(5.6)
100.3
(20.7)
6.4
(23.8)
26.2
1,064.7
426.5
32.6
25.4
27.5
(5.7)
(15.9)
20.7
(10.1)
(52.1)
(221.7)
378.2
(290.4)
(271.5)
14.1
(276.3)
406.4
(2,092.2)
(21.5)
1,032.8
0.7
(6.3)
(680.1)
51.8
160.1
127.3
13.6
(130.6)
1,206.5
(1,341.7)
158.9
(266.9)
(6.8)
(12.3)
(262.3)
12.6
(2.1)
401.9
397.9
$
241.8
401.9
$
243.9
241.8
$
See Accompanying Notes to Consolidated Financial Statements.
122
Owens-Brockway Packaging, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Consolidated Statements The consolidated financial statements of Owens-Brockway
Packaging, Inc. (“Company”) include the accounts of its subsidiaries. Newly acquired subsidiaries have
been included in the consolidated financial statements from dates of acquisition.
The Company uses the equity method of accounting for investments in which it has a significant
ownership interest, generally 20% to 50%. Other investments are accounted for at cost. The Company
monitors investments for other than temporary declines in fair value and records reductions in carrying
values when appropriate.
Relationship with Owens-Illinois Group, Inc. and Owens-Illinois, Inc. The Company is a
wholly-owned subsidiary of Owens-Illinois Group, Inc. ("OI Group”) and an indirect subsidiary of Owens-
Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conduct any operations, it has substantial obligations
related to outstanding indebtedness, dividends for preferred stock and asbestos-related payments. OI Inc.
relies primarily on distributions from its direct and indirect subsidiaries to meet these obligations.
For federal and certain state income tax purposes, the taxable income of the Company is included in the
consolidated tax returns of OI Inc. and income taxes are allocated to the Company on a basis consistent
with separate returns.
Nature of Operations The Company is a leading manufacturer of glass container products. The
Company’s principal product lines in the Glass Containers product segment are glass containers for the
food and beverage industries. The Company has glass container operations located in 22 countries. The
principal markets and operations for the Company’s glass products are in North America, Europe, South
America, and Australia.
Use of Estimates The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management of the Company to make estimates and
assumptions that affect certain amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates, at which time the Company would revise its estimates
accordingly.
Cash The Company defines “cash” as cash and time deposits with maturities of three months or less
when purchased. Outstanding checks in excess of funds on deposit are included in accounts payable.
Fair Values of Financial Instruments The carrying amounts reported for cash, short-term investments
and short-term loans approximate fair value. In addition, carrying amounts approximate fair value for
certain long-term debt obligations subject to frequently redetermined interest rates. Fair values for the
Company’s significant fixed rate debt obligations are generally based on published market quotations.
Derivative Instruments The Company uses currency swaps, interest rate swaps, options, and
commodity futures contracts to manage risks generally associated with foreign exchange rate, interest rate
and commodity market volatility. Derivative financial instruments are included on the balance sheet at
fair value. Whenever possible, derivative instruments are designated as and are effective as hedges, in
accordance with accounting principles generally accepted in the United States. If the underlying hedged
transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are
recognized in current earnings. The Company does not enter into derivative financial instruments for
trading purposes and is not a party to leveraged derivatives. In accordance with FAS No. 104, cash flows
from fair value hedges of debt and short-term forward exchange contracts are classified as a financing
123
activity. Cash flows of currency swaps, interest rate swaps, and commodity futures contracts are
classified as operating activities. See Note 9 for additional information related to derivative instruments.
Inventory Valuation The Company values most U.S. inventories at the lower of last-in, first-out (LIFO)
cost or market. Other inventories are valued at the lower of standard costs (which approximate average
costs) or market.
Goodwill Goodwill represents the excess of cost over fair value of assets of businesses acquired.
Goodwill is evaluated annually, as of October 1, for impairment or more frequently if an impairment
indicator exists.
Intangible Assets and Other Long-Lived Assets Intangible assets are amortized over the expected
useful life of the asset. Amortization expense directly attributed to the manufacturing of the Company’s
products is included in manufacturing, shipping, and delivery. Amortization expense related to non-
manufacturing activities is included in selling and administrative and other. The Company evaluates the
recoverability of intangible assets and other long-lived assets based on undiscounted projected cash flows,
excluding interest and taxes, when factors indicate that impairment may exist. If impairment exists, the
asset is written down to fair value.
Property, Plant, and Equipment Property, plant, and equipment (“PP&E”) is carried at cost and
includes expenditures for new facilities and equipment and those costs which substantially increase the
useful lives or capacity of existing PP&E. In general, depreciation is computed using the straight-line
method and recorded over the estimated useful life of the asset. Factory machinery and equipment is
depreciated over periods ranging from 5 to 25 years with the majority of such assets (principally glass-
melting furnaces and forming machines) depreciated over 7-15 years. Buildings and building equipment
are depreciated over periods ranging from 10 to 50 years. Depreciation expense directly attributed to the
manufacturing of the Company’s products is included in manufacturing, shipping, and delivery.
Depreciation expense related to non-manufacturing activities is included in selling and administrative.
Maintenance and repairs are expensed as incurred. Costs assigned to PP&E of acquired businesses are
based on estimated fair values at the date of acquisition. The Company evaluates the recoverability of
property, plant, and equipment based on undiscounted projected cash flows, excluding interest and taxes,
when factors indicate that impairment may exist. If impairment exists, the asset is written down to fair
value.
Revenue Recognition The Company recognizes sales, net of estimated discounts and allowances, when
the title to the products and risk of loss are transferred to customers. Provisions for rebates to customers
are provided in the same period that the related sales are recorded.
Shipping and Handling Costs Shipping and handling costs are included with manufacturing, shipping,
and delivery costs in the Consolidated Statements of Operations.
Income Taxes on Undistributed Earnings In general, the Company plans to continue to reinvest the
undistributed earnings of foreign subsidiaries and foreign corporate joint ventures accounted for by the
equity method. Accordingly, taxes are provided only on that amount of undistributed earnings in excess
of planned reinvestments.
Foreign Currency Translation The assets and liabilities of substantially all subsidiaries and associates
are translated at current exchange rates and any related translation adjustments are recorded directly in net
Parent investment.
124
Accounts Receivable Receivables are stated at amounts estimated by management to be the net
realizable value. The Company charges off accounts receivable when it becomes apparent based upon
age or customer circumstances that amounts will not be collected.
Allowance for Doubtful Accounts The allowance for doubtful accounts is established through charges
to the provision for bad debts. The Company evaluates the adequacy of the allowance for doubtful
accounts on a periodic basis. The evaluation includes historical trends in collections and write-offs,
management’s judgment of the probability of collecting accounts and management’s evaluation of
business risk.
New Accounting Standards In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, “Business Combinations” (“FAS No. 141R”). FAS No. 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase. FAS
No. 141R also sets forth the disclosures required to be made in the financial statements to evaluate the
nature and financial effects of the business combination. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Accordingly, FAS No. 141R will be applied
by the Company to business combinations occurring on or after January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“FAS
No. 160”). FAS No. 160 establishes accounting and reporting standards for the non-controlling interest in
a subsidiary and the deconsolidation of a subsidiary. FAS No. 160 is effective for years beginning on or
after December 15, 2008. Adoption of FAS No. 160 is not presently expected to have a material impact
on the Company’s results of operations, financial position or cash flows.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS
No. 161”). FAS No. 161 is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity’s financial condition, financial performance, and cash flows. FAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
Adoption of FAS No. 161 is not presently expected to have a material impact on the Company’s results of
operations, financial position or cash flows.
In December 2008, the FASB issued a FASB Staff Position on Statement of Financial Accounting
Standards No. 132(R), “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS
No. 132(R)-1”). FSP FAS No. 132(R)-1 requires additional disclosures about the fair value of
postretirement benefit plan assets to provide users of financial statements with useful, transparent and
timely information about the asset portfolios. FSP FAS No. 132(R)-1 is effective for years ending after
December 15, 2009. Adoption of FSP FAS No. 132(R)-1 will have no impact on the Company’s results
of operations, financial position or cash flows.
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FSP
157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of
FAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the
beginning of the first quarter of fiscal 2009. The adoption of FAS No. 157 is not expected to have a
significant impact on the Company’s consolidated financial statements when it is applied to non-financial
125
assets and non-financial liabilities that are not measured at fair value on a recurring basis, beginning in the
first quarter of 2009.
Participation in OI Inc. Stock Option Plans and Other Stock Based Compensation The Company
participates in the equity compensation plans of OI Inc. under which employees of the Company may be
granted options to purchase common shares of OI Inc., restricted common shares of OI Inc., or restricted
share units of OI Inc.
Stock Options
For options granted prior to March 22, 2005, no options may be exercised in whole or in part during the
first year after the date granted. In general, subject to accelerated exercisability provisions related to the
performance of OI Inc.’s common stock or change of control, 50% of the options become exercisable on
the fifth anniversary of the date of the option grant, with the remaining 50% becoming exercisable on the
sixth anniversary date of the option grant. In general, options expire following termination of
employment or the day after the tenth anniversary date of the option grant.
For options granted after March 21, 2005, no options may be exercised in whole or in part during the first
year after the date granted. In general, subject to change in control, these options become exercisable
25% per year beginning on the first anniversary. In general, options expire following termination of
employment or the seventh anniversary of the option grant.
The fair value of options granted before March 22, 2005, is amortized ratably over five years or a shorter
period if the grant becomes subject to accelerated exercisability provisions related to the performance of
OI Inc.’s common stock. The fair value of options granted after March 21, 2005, is amortized over the
vesting periods which range from one to four years.
Restricted Shares
Shares granted to employees prior to March 22, 2005, generally vest after three years or upon retirement,
whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning on the first
anniversary and unvested shares are forfeited upon termination of employment. Shares granted to
directors prior to 2008 were immediately vested but may not be sold until the third anniversary of the
share grant or the end of the director’s then current term on the board, whichever is later. Share granted
to the directors after 2007 vest after one year.
The fair value of the shares is equal to the market price of the shares on the date of the grant. The fair
value of restricted shares granted before March 22, 2005, is amortized ratably over the vesting period.
The fair value of restricted shares granted after March 21, 2005, is amortized over the vesting periods
which range from one to four years.
Performance Vested Restricted Share Units
Restricted share units vest on January 1 of the third year following the year in which they are granted.
Holders of vested units receive 0.5 to 1.5 shares of OI Inc.’s common stock for each unit, depending upon
the attainment of consolidated performance goals established by the Compensation Committee of OI
Inc.’s Board of Directors. If minimum goals are not met, no shares will be issued. Granted but unvested
restricted share units are forfeited upon termination of employment, unless certain retirement criteria are
met.
The fair value of each restricted share unit is equal to the product of the fair value of OI Inc.’s common
stock on the date of grant and the estimated number of shares into which the restricted share unit will be
126
converted. The fair value of restricted share units is amortized ratably over the vesting period. Should
the estimated number of shares into which the restricted share unit will be converted change, an
adjustment will be recorded to recognize the accumulated difference in amortization between the revised
and previous estimates.
Accounting
OI Inc. adopted the provisions of FAS No. 123R “Share-Based Payment” (FAS No. 123R) effective
January 1, 2006 using the modified-prospective method of adoption, which requires recognition of
compensation cost in the financial statements beginning on the date of adoption.
As discussed in Note 11, costs incurred under these plans by OI Inc. related to stock-based compensation
awards granted directly to the Company's employees are included in the allocable costs charged to the
Company and other operating subsidiaries of OI Inc. on an intercompany basis.
2. Supplemental Cash Flow Information Changes in the components of working capital related to
operations (net of the effects related to acquisitions and divestitures) were as follows:
Decrease (increase) in current assets:
Receivables
Inventories
Prepaid expenses
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities
Salaries and wages
U.S. and foreign income taxes
2008
2007
2006
$
$
73.8
(77.8)
(7.0)
(166.7)
(18.8)
6.4
(30.1)
70.5
6.8
(13.5)
24.9
(32.4)
$
(173.9)
(36.8)
2.4
(28.1)
(13.8)
28.5
$
(190.1)
$
26.2
$
(221.7)
Interest paid in cash, including note repurchase premiums in 2007 and 2006, aggregated $209.3 million
for 2008, $390.3 million for 2007, and $380.0 million for 2006.
Income taxes paid (received) in cash were as follows:
2008
2007
2006
Domestic
Foreign
3. Inventories Major classes of inventory are as follows:
$
Finished goods
Work in process
Raw materials
Operating supplies
127
$
$
$
(0.3)
158.4
158.1
0.2
149.2
149.4
$
$
(0.4)
126.8
126.4
2008
2007
$
831.7
0.8
109.8
56.8
$
861.1
1.4
90.5
67.3
$
999.1
$
1,020.3
If the inventories which are valued on the LIFO method had been valued at standard costs, which
approximate current costs, consolidated inventories would be higher than reported by $32.5 million and
$29.1 million, at December 31, 2008 and 2007, respectively.
Inventories which are valued at the lower of standard costs (which approximate average costs), or market
at December 31, 2008 and 2007 were approximately $861.4 million and $872.8 million, respectively.
4. Equity Investments Summarized information pertaining to the Company’s equity associates follows:
At end of year:
Equity in undistributed earnings:
Foreign
Domestic
Total
For the year:
Equity in earnings:
Foreign
Domestic
Total
Dividends received
2008
2007
$
$
35.4
15.2
50.6
$
$
22.4
18.7
41.1
2008
2007
2006
$
14.1
36.7
$
$
50.8
24.5
$
5.3
28.8
$
$
34.1
21.7
$
2.0
21.4
$
$
23.4
43.5
Summarized combined financial information for equity associates is as follows:
At end of year:
Current assets
Non-current assets
Total assets
Current liabilities
Other liabilities and deferred items
Total liabilities and deferred items
Net assets
For the year:
Net sales
Gross profit
Net earnings
2008
2007 (a)
$
208.3
325.9
534.2
167.5
182.5
350.0
$
191.3
302.4
493.7
117.0
265.5
382.5
$
184.2
$
111.2
2008
2007 (a)
2006
$
635.8
$
535.9
$
564.0
$
227.5
$
176.5
$
132.2
$
153.9
$
112.4
$
69.4
(a) Amounts for 2007 exclude the Company's Caribbean investment due to the impairment recorded during 2007.
The Company’s significant equity method investments include: (1) 43.5% of the common shares of Vetri
Speciali SpA, a specialty glass manufacturer; (2) a 25% partnership interest in General Chemical Soda
128
Ash (Partners), a soda ash supplier; and (3) a 50% partnership interest in Rocky Mountain Bottle
Company, a glass container manufacturer.
5. External Debt The following table summarizes the external long-term debt of the Company at
December 31, 2008 and 2007:
Secured Credit Agreement:
Revolving Credit Facility:
Revolving Loans
Term Loans:
Term Loan A (225.0 million AUD at Dec. 31, 2008)
Term Loan B
Term Loan C (110.8 million CAD at Dec. 31, 2008)
Term Loan D (€191.5 million at Dec. 31, 2008)
Senior Notes:
8.25%, due 2013
6.75%, due 2014
6.75%, due 2014 (€225 million)
6.875%, due 2017 (€300 million)
Other
Less amounts due within one year
External long-term debt
2008
2007
$
18.7
$
-
155.7
191.5
90.9
269.6
461.1
400.0
316.8
422.4
104.6
198.1
191.5
113.2
281.8
450.3
400.0
331.1
441.5
101.8
2,431.3
18.2
2,509.3
15.2
$
2,413.1
$
2,494.1
On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the
“Agreement”). At December 31, 2008, the Agreement included a $900.0 million revolving credit facility,
a 225.0 million Australian dollar term loan, and a 110.8 million Canadian dollar term loan, each of which
has a final maturity date of June 15, 2012. It also included a $191.5 million term loan and a €191.5
million term loan, each of which has a final maturity date of June 14, 2013.
As a result of the bankruptcy of Lehman Brothers Holdings Inc. and several of its subsidiaries, the
Company believes that the maximum amount available under the revolving credit facility was reduced by
$32.3 million. After further deducting amounts attributable to letters of credit and overdraft facilities that
are supported by the revolving credit facility, at December 31, 2008 the Company’s subsidiary borrowers
had unused credit of $768.4 million available under the Agreement.
The Agreement contains various covenants that restrict, among other things and subject to certain
exceptions, the ability of the Company to incur certain liens, make certain investments and acquisitions,
become liable under contingent obligations in certain defined instances only, make restricted junior
payments, make certain asset sales within guidelines and limits, make capital expenditures beyond a
certain threshold, engage in material transactions with shareholders and affiliates, participate in sale and
leaseback financing arrangements, alter its fundamental business, amend certain outstanding debt
obligations, and prepay certain outstanding debt obligations.
The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the
Company not to exceed a ratio calculated by dividing consolidated total debt, less cash and cash
equivalents, by Consolidated Adjusted EBITDA, as defined in the Agreement. The Leverage Ratio could
restrict the ability of the Company to undertake additional financing to the extent that such financing
would cause the Leverage Ratio to exceed the specified maximum.
129
Failure to comply with these covenants and restrictions could result in an event of default under the
Agreement. In such an event, the Company could not request borrowings under the revolving facility,
and all amounts outstanding under the Agreement, together with accrued interest, could then be declared
immediately due and payable. If an event of default occurs under the Agreement and the lenders cause all
of the outstanding debt obligations under the Agreement to become due and payable, this would result in
a default under a number of other outstanding debt securities and could lead to an acceleration of
obligations related to these debt securities. A default or event of default under the Agreement, indentures
or agreements governing other indebtedness could also lead to an acceleration of debt under other debt
instruments that contain cross acceleration or cross-default provisions.
The leverage ratio also determines pricing under the Agreement. The interest rate on borrowings under
the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the
Agreement. These rates include a margin linked to the leverage ratio and the borrowers’ senior secured
debt rating. The margins range from 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to
0.75% for Base Rate loans. In addition, a facility fee is payable on the revolving credit facility
commitments ranging from 0.20% to 0.50% per annum linked to the leverage ratio. The weighted
average interest rate on borrowings outstanding under the Agreement at December 31, 2008 was 4.07%.
As of December 31, 2008, the Company was in compliance with all covenants and restrictions in the
Agreement. In addition, the Company believes that it will remain in compliance and that its ability to
borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.
Borrowings under the Agreement are secured by substantially all of the assets of the Company’s domestic
subsidiaries and certain foreign subsidiaries, which have a book value of approximately $2.0 billion.
Borrowings are also secured by a pledge of intercompany debt and equity in most of the Company’s
domestic subsidiaries and stock of certain foreign subsidiaries. All borrowings under the agreement are
guaranteed by substantially all domestic subsidiaries of the Company for the term of the Agreement.
During March 2007, a subsidiary of the Company issued Senior Notes totaling €300.0 million. The notes
bear interest at 6.875% and are due March 31, 2017. The notes are guaranteed by substantially all of the
Company’s domestic subsidiaries. The proceeds were used to retire the $300 million principal amount of
OI Inc.’s 8.10% Senior Notes which matured in May 2007, and to reduce borrowings under the revolving
credit facility.
On July 31, 2007, the OI Inc. completed the sale of its plastics packaging business to Rexam PLC for
approximately $1.825 billion in cash. In accordance with an amendment of the Agreement that became
effective upon completion of the sale of the plastics business, the Company was required to use the net
proceeds (as defined in the Agreement) to repay senior secured debt. In addition, the amendment
provides for modification of certain covenants, including the elimination of the financial covenant
requiring the Company to maintain a specified interest coverage ratio. OI Inc. used a portion of the net
proceeds in the third quarter of 2007 to redeem all $450.0 million of the 7.75% Senior Secured Notes and
repurchase $283.1 million of the 8.875% Senior Secured Notes. The remaining $566.9 million of the
8.875% Senior Secured Notes were repurchased or discharged in accordance with the indenture in
October 2007. The remaining net proceeds, along with funds from operations and/or additional
borrowings under the revolving credit facility, were used to redeem all $625.0 million of the 8.75%
Senior Secured Notes on November 15, 2007. The Company recorded $9.5 million of additional interest
charges for note repurchase premiums and the related write-off of unamortized finance fees.
During October 2006, the Company entered into a €300 million European accounts receivable
securitization program. The program extends through October 2011, subject to annual renewal of backup
credit lines. In addition, the Company participates in a receivables financing program in the Asia Pacific
130
region with a revolving funding commitment of 100 million Australian dollars and 25 million New
Zealand dollars that extends through July 2009 and October 2009, respectively. Information related to the
Company’s accounts receivable securitization program is as follows:
Dec. 31,
Dec. 31,
2008
2007
Balance (included in short-term loans)
$
293.7
$
361.8
Weighted average interest rate
5.31%
5.48%
The Company capitalized $25.6 million and $27.0 million in 2008 and 2007, respectively, under capital
lease obligations with the related financing recorded as long term debt. These amounts are included in
other in the long-term debt table above.
Annual maturities for all of the Company’s long-term debt through 2013 are as follows: 2009, $18.2
million; 2010, $19.0 million; 2011, $159.0 million; 2012, $152.4 million; and 2013, $930.7 million.
Fair values at December 31, 2008, of the Company’s significant fixed rate debt obligations were as
follows:
Senior Notes:
8.25%, due 2013
6.75%, due 2014
6.75%, due 2014 (€225 million)
6.875%, due 2017 (€300 million)
Principal Amount
(millions of
dollars)
Indicated
Market
Price
Fair Value
(millions of
dollars)
Hedge Value
(millions of
dollars)
$
450.0
400.0
316.8
422.4
96.00
92.75
77.63
74.13
$
432.0
371.0
245.9
313.1
$
461.1
6. Guarantees of Debt OI Group and the Company guarantee OI Inc.’s senior notes and debentures on a
subordinated basis. The fair value of the OI Inc. debt being guaranteed was $462.6 at December 31,
2008.
7. Operating Leases Rent expense attributable to all warehouse, office buildings, and equipment
operating leases was $95.4 million in 2008, $87.4 million in 2007, and $75.7 million in 2006. Minimum
future rentals under operating leases are as follows: 2009, $45.5 million; 2010, $34.4 million; 2011,
$22.6 million; 2012, $14.6 million; 2013, $7.4 million; and 2014 and thereafter, $7.4 million.
8. Foreign Currency Transactions Aggregate foreign currency exchange gains (losses) included in
other costs and expenses were $0.6 million in 2008, $(8.1) million in 2007, and $(1.0) million in 2006.
9. Derivative Instruments At December 31, 2008, the Company had the following derivative
instruments related to its various hedging programs:
131
Interest Rate Swaps Designated as Fair Value Hedges
In the fourth quarter of 2003 and the first quarter of 2004, the Company entered into a series of interest
rate swap agreements with a current total notional amount of $500 million that mature in 2010 and 2013.
The swaps were executed in order to: (i) convert a portion of the senior notes and senior debentures fixed-
rate debt into floating-rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed
and floating-rate debt; and (iii) reduce net interest payments and expense in the near-term.
The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. Because the
relevant terms of the swap agreements match the corresponding terms of the notes, there is no hedge
ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a
long-term asset (liability) along with a corresponding net increase (decrease) in the carrying value of the
hedged debt.
Under the swaps, the Company receives fixed rate interest amounts (equal to interest on the
corresponding hedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears) plus a
margin spread (see table below). The interest rate differential on each swap is recognized as an
adjustment of interest expense during each six-month period over the term of the agreement.
The following selected information relates to fair value swaps at December 31, 2008:
Amount
Hedged
Average
Receive
Rate
Average
Spread
Asset
(Liability)
Recorded
OI Inc. public notes swapped by the company through intercompany loans:
Senior Debentures due 2010
250.0
7.50%
Notes issued by OBGC:
Senior Notes due 2013
250.0
8.25%
3.2%
3.7%
9.4
11.1
Total
$
500.0
$
20.5
Commodity Hedges
The Company enters into commodity futures contracts related to forecasted natural gas requirements, the
objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas
and the related volatility in cash flows. The Company continually evaluates the natural gas market with
respect to its forecasted usage requirements over the next twelve to twenty-four months and periodically
enters into commodity futures contracts in order to hedge a portion of its usage requirements over that
period. At December 31, 2008, the Company had entered into commodity futures contracts for
approximately 50% (approximately 10,200,000 MM BTUs) of its estimated North American usage
requirements for the full year of 2009 and approximately 1% (approximately 240,000 MM BTUs) for the
full year of 2010.
The Company accounts for the above futures contracts on the balance sheet at fair value. The effective
portion of changes in the fair value of a derivative that is designated as, and meets the required criteria
for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share
owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the
underlying hedged item affects earnings. Any material portion of the change in the fair value of a
132
derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current
earnings.
The above futures contracts are accounted for as cash flow hedges at December 31, 2008.
At December 31, 2008, an unrecognized loss of $31.8 million (pretax and after tax), related to the
domestic commodity futures contracts, was included in OCI, which will be reclassified into earnings over
the next twelve months. The ineffectiveness related to these natural gas hedges for the year ended
December 31, 2008 was not material.
Other Hedges
The Company’s subsidiaries may enter into short-term forward exchange or option agreements to
purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to
fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or
commodities that are denominated in currencies other than the subsidiaries’ functional currency.
Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables
and payables not denominated in, or indexed to, their functional currencies. The Company records these
short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value
are recognized in current earnings.
Balance Sheet Classification
The Company records the fair values of derivative financial instruments on the balance sheet as follows:
(1) receivables if the instrument has a positive fair value and maturity within one year, (2) deposits,
receivables, and other assets if the instrument has a positive fair value and maturity after one year, (3)
accounts payable and other current liabilities if the instrument has a negative fair value and maturity
within one year, and (4) other liabilities if the instrument has a negative fair value and maturity after one
year.
10. Accumulated Other Comprehensive Income (Loss) The components of comprehensive income
are: (a) net earnings; (b) change in fair value of certain derivative instruments; (c) pension and other
postretirement benefit adjustments; and (d) foreign currency translation adjustments. The net effect of
exchange rate fluctuations generally reflects changes in the relative strength of the U.S. dollar against
major foreign currencies between the beginning and end of the year.
133
The following table lists the beginning balance, yearly activity and ending balance of each component of
accumulated other comprehensive income (loss):
N et Effect of
Exchange Rate
Fluctuations
D eferred T ax
Effect for
T ranslation
Change in
M inimum
Pension
Liabilit y
Change in
Certain
D erivative
Instruments
Emp loy ee
Benefit
Plans
Total
Accumulated
Comp rehensive
Income (Loss)
Balance on Jan. 1, 2006
$
(97.0)
$
12.8
$
(145.5)
$
14.4
$
-
$
(215.3)
2006 Change
T ranslation effect
T ax effect
Balance on D ec. 31, 2006
2007 Change
T ranslation effect
Reclass
T ax effect
Balance on D ec. 31, 2007
2008 Change
T ranslation effect
T ax effect
284.9
187.9
305.3
493.2
(431.9)
(49.3)
(71.0)
55.0
(17.6)
(14.8)
12.8
(122.9)
(34.9)
28.2
122.9
2.2
12.8
-
(4.5)
(32.9)
219.6
(17.6)
8.8
(4.5)
375.0
(6.7)
-
(8.6)
355.2
(665.6)
46.1
55.1
23.6
(47.4)
41.5
(6.7)
(125.1)
(8.6)
(146.3)
(200.8)
46.1
55.1
Balance on D ec. 31, 2008
$
61.3
$
12.8
$
-
$
(37.4)
$
(245.9)
$
(209.2)
For 2008 and 2007, respectively, foreign currency translation adjustments include a loss of approximately
$19.9 million and $35.1 million related to a hedge of the Company’s net investment in a non-U.S.
subsidiary.
11. Income Taxes Deferred income taxes reflect: (1) the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes and (2) carryovers and credits for income tax purposes.
134
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2008 and
2007 are as follows:
Deferred tax assets:
Tax loss carryovers
Capital loss carryovers
Accrued postretirement benefits
Other, principally accrued liabilities
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Inventory
Other
Total deferred tax liabilities
Valuation allowance
Net deferred tax liabilities
2008
2007
$
233.5
23.7
20.2
190.0
467.4
$
242.1
32.7
24.4
195.5
494.7
143.9
13.4
46.1
203.4
(255.4)
221.8
20.0
49.7
291.5
(213.9)
$
8.6
$
(10.7)
Deferred taxes are included in the Consolidated Balance Sheets at December 31, 2008 and 2007 as
follows:
Prepaid expenses
Deposits, receivables, and other assets
Deferred taxes
Net deferred tax liabilities
2008
2007
$
24.8
101.3
(117.5)
$
11.8
124.7
(147.2)
$
8.6
$
(10.7)
135
The provision for income taxes consists of the following:
Current:
U.S. Federal
State
Foreign
Deferred:
U.S. Federal
State
Foreign
Total:
U.S. Federal
State
Foreign
2008
2007
2006
$
(0.4)
0.6
213.0
$
-
0.4
144.3
$
-
0.3
113.1
213.2
144.7
113.4
4.0
(3.2)
9.8
10.6
3.6
(2.6)
222.8
0.3
(4.0)
(1.9)
(5.6)
0.3
(3.6)
142.4
12.9
(3.6)
16.1
25.4
12.9
(3.3)
129.2
$
223.8
$
139.1
$
138.8
The provision for income taxes was calculated based on the following components of earnings (loss)
before income taxes:
Domestic
Foreign
2008
2007
2006
$
191.2
698.9
$
37.4
687.3
$
(119.1)
452.6
$
890.1
$
724.7
$
333.5
136
A reconciliation of the provision for income taxes based on the statutory U.S. Federal tax rate of 35% to
the provision for income taxes is as follows:
2008
2007
2006
Tax provision (benefit) on pretax earnings (loss) from continuing
operations at statutory U.S. Federal tax rate
Increase (decrease) in provision for income taxes
due to:
Valuation allowance - U.S.
Foreign subsidiary ownership restructuring and incentives
Foreign source income taxable in the U.S.
Reversal of non-U.S. tax valuation allowance
Foreign tax credit utilization
State taxes, net of federal benefit
Rate differences on non-U.S. earnings
Adjustment for non-U.S. tax law changes
Other items
$
311.5
$
253.7
$
116.7
(53.7)
35.1
11.3
-
-
(1.3)
(55.3)
(20.1)
(3.7)
(538.3)
535.9
29.3
(13.4)
(47.9)
(4.8)
(65.8)
(9.9)
0.3
46.5
30.8
1.8
(34.7)
(0.3)
(22.1)
(1.6)
1.7
Provision for income taxes
$
223.8
$
139.1
$
138.8
In 2007 the Company implemented a plan to restructure the ownership and intercompany obligations of
certain foreign subsidiaries. These actions resulted in taxation of a significant portion of previously
unremitted foreign earnings and will transfer a portion of the Company’s debt service obligations to
operations outside the U.S. in order to better balance operating cash flows with financing costs on a
global basis. The foreign earnings reported as taxable in the U.S. were offset by net operating loss
carryforwards and foreign tax credits. Foreign tax credit carryforwards arising from the restructuring were
fully offset by an increase in the valuation allowance.
The Company has recognized tax benefits as a result of incentives in certain non-U.S. jurisdictions which
expire between 2012 and 2015.
The Company is included in OI Inc.’s consolidated tax returns. OI Inc. has net operating losses, capital
losses, alternative minimum tax credits, and research and development credits available to offset future
U.S. Federal income tax.
At December 31, 2008, the Company’s equity in the undistributed earnings of foreign subsidiaries for
which income taxes had not been provided approximated $1,583.2 million. The Company intends to
reinvest these earnings indefinitely in the non-U.S. operations. It is not practicable to estimate the U.S.
and foreign tax which would be payable should these earnings be distributed.
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes,” (“FIN
48”) as of January 1, 2007. This interpretation was issued to clarify the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109,
“Accounting for Income Taxes.” FIN 48 defines criteria that a tax position must meet for any part of the
benefit of that position to be recognized in an enterprise’s financial statements and also includes
requirements for measuring the amount of the benefit to be recognized in the financial statements.
137
As a result of the adoption of FIN 48, the Company recognized no adjustment to retained earnings for
unrecognized income tax benefits. The Company reclassified $28.5 million of deferred tax assets related
to general business credits and net operating losses that were previously offset by a full valuation
allowance to the liability for unrecognized income tax benefits. This balance sheet reclassification had no
effect on share owners’ equity. In connection with the adoption of FIN 48, the Company is maintaining its
historical method of accruing interest and penalties associated with unrecognized income tax benefits as a
component of its income tax expense.
The following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year
ended December 31, 2008:
2008
2007
Balance at January 1
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions based on tax positions related to the current year
Reductions due to the lapse of the applicable statute of limitations
Reductions due to settlements
Balance at December 31
$
$
53.0
51.2
(2.1)
6.1
(3.1)
(2.0)
103.1
45.8
0.1
(2.5)
11.0
(1.4)
-
53.0
$
$
At December 31, 2008 and December 31, 2007, accrued interest and penalties related to unrecognized tax
benefits were $14.5 million and $3.9 million, respectively. Tax expense for the year ended December 31,
2008 includes interest and penalties of $5.4 million on unrecognized tax benefits for prior years.
The unrecognized tax benefit liability, including interest and penalties, as of December 31, 2008 and
December 31, 2007 was $117.6 million and $56.9 million respectively. Approximately $72.7 million and
$41.1 million as of December 31, 2008 and December 31, 2007, respectively, relate to unrecognized tax
benefits, which if recognized, would impact the Company’s effective income tax rate. This amount
differs from the gross unrecognized tax benefits presented in the table above because of the unrecognized
tax benefits that would result in the utilization of certain tax attribute carryforwards that are currently
subject to a full valuation allowance due to uncertainties about their future period utilization.
For federal and certain state income tax purposes, the taxable income of the Company is included in the
consolidated tax returns of OI Inc. and income taxes are allocated to the Company on a basis consistent
with separate returns. Tax years through 1999 have been settled with the U.S. Internal Revenue Service
and there is no current IRS examination in progress. Due to the existence of tax attribute carryforwards
(which are currently offset by full valuation allowances) in the U.S., the Company treats certain post-1999
tax positions as unsettled because of the taxing authorities’ ability to modify these attributes. The 2000
tax year is the earliest open year for the Company’s other major tax jurisdictions.
The Company does not anticipate a significant change in the total amount of unrecognized income tax
benefits within the next twelve months.
12. Related Party Transactions Charges for administrative services are allocated to the Company by
OI Inc. based on an annual utilization level. Such services include compensation and benefits
administration, payroll processing, use of certain general accounting systems, auditing, income tax
planning and compliance, and treasury services. Beginning in 2008, the Company revised its method of
allocating corporate expenses. The Company decreased slightly the percentage allocation based on sales
and significantly expanded the number of functions included in the allocation based on cost of services.
138
Allocated costs also include charges associated with OI Inc.’s equity compensation plans. A substantial
number of the options, restricted shares and restricted share units granted under these plans have been
granted to key employees of another subsidiary of OI Inc., some of whose compensation costs, including
stock-based compensation, are included in an allocation of costs to all operating subsidiaries of OI Inc.,
including the Company.
Management believes that such transactions are on terms no less favorable to the Company than those that
could be obtained from unaffiliated third parties.
The following information summarizes the Company’s significant related party transactions:
Revenues:
Sales to affiliated companies
Expenses:
Administrative services
Corporate management fee
Trademark royalties
Total expenses
Years ended December 31,
2007
2008
2006
$
-
$
0.3
$
0.5
15.0
60.9
19.9
95.8
$
19.5
29.1
25.5
27.1
$
48.6
$
52.6
The above expenses are recorded in the statement of operations as follows:
Cost of sales
Selling, general, and
adminstrative expenses
Total expenses
Years ended December 31,
2007
2008
2006
$
0.9
$
16.9
$
22.6
94.9
31.7
30.0
$
95.8
$
48.6
$
52.6
Intercompany interest is charged to the Company from OI Inc. based on intercompany debt balances. An
interest rate is calculated monthly based on OI Inc.’s total consolidated monthly external debt balance and
the related interest expense, including finance fee amortization and commitment fees. The calculated rate
(6.3% at December 31, 2008) is applied monthly to the intercompany debt balance to determine
intercompany interest expense.
13. Pension Benefit Plans and Other Postretirement Benefits
Pension Benefit Plans
The Company participates in OI Inc.’s defined benefit pension plans for substantially all employees
located in the United States. Benefits generally are based on compensation for salaried employees and on
length of service for hourly employees. OI Inc.’s policy is to fund pension plans such that sufficient
assets will be available to meet future benefit requirements. Independent actuaries determine pension
costs for each subsidiary of OI Inc. included in the plans; however, accumulated benefit obligation
information and plan assets pertaining to each subsidiary have not been separately determined. As such,
the accumulated benefit obligation and the plan assets related to the pension plans for domestic
employees have been retained by another subsidiary of OI Inc. Net credits to results of operations for the
139
Company’s allocated portion of the domestic pension costs amounted to $39.9 million in 2008, $23.0
million in 2007, and $7.7 million in 2006.
OI Inc. also sponsors several defined contribution plans for all salaried and hourly U.S. employees of the
Company. Participation is voluntary and participants’ contributions are based on their compensation. OI
Inc. matches contributions of participants, up to various limits, in substantially all plans. OI Inc. charges
the Company for its share of the match. The Company’s share of the contributions to these plans
amounted to $6.0 million in 2008, $5.7 million in 2007, and $5.5 million in 2006.
The Company’s subsidiaries in the United Kingdom, the Netherlands, Canada, Australia, and many
employees of Germany and France also have pension plans covering substantially all employees. The
following tables relate to the Company’s principal defined benefit pension plans in the United Kingdom,
the Netherlands, Canada, Australia, Germany and France (the International Pension Plans).
The International Pension Plans use a December 31 measurement date.
The changes in the International Pension Plans benefit obligations for the year were as follows:
Obligations at beginning of year
Change in benefit obligations:
Service cost
Interest cost
Actuarial gain, including the effect of change in discount rates
Participant contributions
Benefit payments
Plan amendments
Curtailments
Special termination benefits
Foreign currency translation
Other
Net change in benefit obligations
2008
2007
$
1,617.1
$
1,544.4
22.0
82.9
(52.7)
8.8
(89.4)
(9.5)
4.4
(284.2)
(317.7)
25.0
78.8
(92.1)
10.0
(85.5)
(3.5)
(2.6)
136.4
6.2
72.7
Obligations at end of year
$
1,299.4
$
1,617.1
140
The changes in the fair value of the International Pension Plans’ assets for the year were as follows:
Fair value at beginning of year
Change in fair value:
Actual gain (loss) on plan assets
Benefit payments
Employer contributions
Participant contributions
Foreign currency translation
Net change in fair value of assets
2008
2007
$
1,376.8
$
1,253.3
(220.6)
(89.4)
60.1
8.8
(213.7)
(454.8)
24.4
(85.5)
59.6
10.0
115.0
123.5
Fair value at end of year
$
922.0
$
1,376.8
The funded status of the International Pension Plans at year end was as follows:
Plan assets at fair value
Projected benefit obligations
Plan assets less than projected benefit obligations
Items not yet recognized in pension expense:
Actuarial loss
Prior service credit
Net amount recognized
2008
2007
$
922.0
1,299.4
$
1,376.8
1,617.1
(377.4)
(240.3)
362.9
(15.1)
347.8
212.0
(14.7)
197.3
$
(29.6)
$
(43.0)
The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2008 and
2007 as follows:
Prepaid pension
Current pension liability, included with Other accrued liabilities
Noncurrent pension liability, included with Pension benefits
Accumulated other comprehensive income
Net amount recognized
2008
2007
$
-
(7.2)
(370.2)
347.8
$
58.1
(8.5)
(289.9)
197.3
$
(29.6)
$
(43.0)
141
The following changes in plan assets and benefit obligations were recognized in accumulated other
comprehensive income at December 31, 2008 as follows:
Current year actuarial (gain) loss
Amortization of actuarial loss
Amortization of prior service credit
Curtailment
Translation
Pretax
$
226.7
(5.2)
0.6
(8.5)
213.6
Tax
Effect
$
(62.2)
1.1
(0.1)
2.4
(58.8)
$
213.6
$
(58.8)
After-tax
$
164.5
(4.1)
0.5
(6.1)
154.8
(44.9)
109.9
$
The accumulated benefit obligation for all defined benefit pension plans was $1,463.8 million and
$1,129.5 million at December 31, 2007 and 2008, respectively.
The components of the International Pension Plans’ net pension expense were as follows:
Service cost
Interest cost
Expected asset return
Curtailment loss
Special termination benefit
Other
Amortization:
Prior service cost (credit)
Loss
Net amortization
Net expense
2008
2007
2006
$
21.9
82.9
(96.5)
0.1
4.4
(1.1)
(0.6)
5.2
4.6
$
25.0
78.8
(94.5)
0.1
$
28.1
69.1
(81.5)
5.2
(0.1)
11.4
11.3
0.2
15.8
16.0
$
16.3
$
25.9
$
31.7
Amounts that will be amortized from accumulated other comprehensive income into net pension expense
during 2009:
Amortization:
Loss
Prior service credit
Net amortization
$
5.2
(0.8)
$
4.4
142
The following information is for plans with projected benefit obligations in excess of the fair value of
plan assets at year end:
P rojected benefit obligations
Fair value of plan assets
2008
2007
$
1,299.4
922.0
$
1,114.6
816.1
The following information is for plans with accumulated benefit obligations in excess of the fair value of
plan assets at year end:
Accumulated benefit obligations
Fair value of plan assets
2008
2007
$
1,129.5
922.0
$
1,008.3
816.1
The weighted average assumptions used to determine benefit obligations were as follows:
Discount rate
Rate of compensation increase
2008
2007
5.88%
2.65%
5.46%
3.39%
The weighted average assumptions used to determine net periodic pension costs were as follows:
Discount rate
Rate of compensation increase
Expected long-term rate of return on assets
2008
2007
2006
5.46%
3.39%
6.96%
4.92%
3.34%
7.16%
4.57%
3.78%
7.15%
Future benefits are assumed to increase in a manner consistent with past experience of the plans, which,
to the extent benefits are based on compensation, includes assumed salary increases as presented above.
Amortization included in net pension expense is based on the average remaining service of employees.
For 2008, the Company’s weighted average expected long-term rate of return on assets was 6.96%. In
developing this assumption, the Company evaluated input from its third party pension plan asset
managers, including their review of asset class return expectations and long-term inflation assumptions.
The Company also considered its historical 10-year average return (through December 31, 2007), which
was in line with the expected long-term rate of return assumption for 2008.
143
The weighted average actual asset allocations and weighted average target allocation ranges by asset
category for the Company’s pension plan assets were as follows:
Asset Category
Equity securites
Debt securities
Real estate
Other
Total
Actual Allocation
2008
2007
31%
56%
5%
8%
100%
63%
28%
5%
4%
100%
Target
Allocation
Ranges
28-38%
44-54%
0-10%
8-18%
It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of
asset classes within the above target asset allocation ranges. The investment risk of the assets is limited
by appropriate diversification both within and between asset classes. The assets are primarily invested in
a broad mix of domestic and international equities, domestic and international bonds, and real estate,
subject to the target asset allocation ranges. The assets are managed with a view to ensuring that
sufficient liquidity will be available to meet expected cash flow requirements.
Based on exchange rates at the end of 2008, the Company expects to contribute approximately $70
million to $75 million to its defined benefit pension plans in 2009.
The following estimated future benefit payments, which reflect expected future service, as appropriate,
are expected to be paid in the years indicated:
Year(s)
2009
2010
2011
2012
2013
2014 - 2018
Amount
97.0
70.0
70.0
74.0
76.9
400.2
Postretirement Benefits Other Than Pensions
OI Inc. provides certain retiree health care and life insurance benefits covering substantially all U.S.
salaried and certain hourly employees and substantially all employees in Canada and The Netherlands.
Employees are generally eligible for benefits upon retirement and completion of a specified number of
years of creditable service. Independent actuaries determine postretirement benefit costs for each
subsidiary of OI Inc.; however, accumulated postretirement benefit obligation information pertaining to
each subsidiary has not been separately determined. As such, the accumulated postretirement benefit
obligation has been retained by another subsidiary of OI Inc.
The Company’s net periodic postretirement benefit cost, as allocated by OI Inc., for domestic employees
was $5.8 million, $8.1 million, and $14.7 million, at December 31, 2008, 2007, and 2006, respectively.
144
The Company’s subsidiaries in Canada and the Netherlands also have postretirement benefit plans
covering substantially all employees. The following tables relate to the Company’s postretirement benefit
plan in Canada and the Netherlands (the International Postretirement Benefit Plans).
The changes in the International Postretirement Benefit Plans obligations were as follows:
Obligations at beginning of year
Change in benefit obligations:
Service cost
Interest cost
Actuarial (gain) loss, including the effect of changing discount rates
Curtailments
Special termination benefits
Benefit payments
Foreign currency translation
Net change in benefit obligations
Obligations at end of year
2008
2007
$
95.0
$
76.9
1.2
4.5
(11.9)
(2.9)
0.9
(3.1)
(16.7)
1.3
4.0
2.5
(0.8)
(3.3)
14.4
(28.0)
18.1
$
67.0
$
95.0
The funded status of the International Postretirement Benefit Plans at year end was as follows:
Postretirement benefit obligations
Items not yet recognized in net postretirement benefit cost:
Actuarial gain
Net amount recognized
2008
2007
$
67.0
$
95.0
6.8
(7.3)
$
73.8
$
87.7
The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2008 and
2007 as follows:
Current nonpension postretirement benefit, included with
Other accrued liabilities
Nonpension postretirement benefits
Accumulated other comprehensive income
Net liability recognized
2008
2007
$
(3.1)
(63.9)
(6.8)
$
(3.7)
(91.3)
7.3
$
(73.8)
$
(87.7)
145
The following changes in benefit obligations were recognized in accumulated other comprehensive
income at December 31, 2008 as follows:
Current year actuarial loss
Amortization of actuarial loss
Curtailment
Translation
Pretax
$
(10.4)
0.1
(2.5)
(12.8)
Tax
Effect
After-tax
$
3.0
$
0.7
3.7
(7.4)
0.1
(1.8)
(9.1)
(1.2)
(10.3)
$
(12.8)
$
3.7
$
The Company’s nonpension postretirement benefit obligations are included with other long term
liabilities on the balance sheet.
The components of International Postretirement Benefit Plans net postretirement benefit cost were as
follows:
Service cost
Interest cost
Curtailment
Special termination benefit
Other
Amortization:
Gain
2008
2007
2006
$
1.2
4.5
0.9
0.1
$
1.3
4.0
$
1.9
4.2
(15.9)
0.6
(0.1)
(0.3)
(1.0)
Net postretirement benefit cost
$
6.6
$
5.0
$
(10.2)
The weighted average discount rate used to determine the accumulated postretirement benefit obligation
was 6.4% and 4.8% at December 31, 2008 and 2007, respectively.
The weighted average discount rate used to determine net postretirement benefit cost was 4.8% at
December 31, 2008, 5.2% at December 31, 2007, and 4.8% at December 31, 2006.
The weighted average assumed health care cost trend rates at December 31 were as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2008
9.00%
2007
9.65%
5.00%
2010
4.82%
2010
146
Assumed health care cost trend rates affect the amounts reported for the postretirement benefit plans. A
one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on total of service and interest cost
Effect on accumulated postretirement benefit obligations
$
0.9
9.3
$
0.7
7.7
Amortization included in net postretirement benefit cost is based on the average remaining service of
employees.
The following estimated future benefit payments, which reflect expected future service, as appropriate,
are expected to be paid in the years indicated:
Year(s)
2009
2010
2011
2012
2013
2014 - 2018
Amount
$
3.1
3.4
3.7
4.1
4.4
25.9
Benefits provided by OI Inc. for certain hourly retirees of the Company are determined by collective
bargaining. Most other domestic hourly retirees receive health and life insurance benefits from a multi-
employer trust established by collective bargaining. Payments to the trust as required by the bargaining
agreements are based upon specified amounts per hour worked and were $8.9 million in 2008, $7.4
million in 2007, and $6.6 million in 2006. Postretirement health and life benefits for retirees of foreign
subsidiaries are generally provided through the national health care programs of the countries in which
the subsidiaries are located.
14. Other Income Other income in 2006 includes a gain of $15.9 million ($11.2 million after tax)
related to curtailment of certain postretirement benefits in The Netherlands.
15. Other Expense Other expense for the year ended December 31, 2008 included the following:
The Company recorded charges totaling $132.4 million ($110.1 million after tax and minority
shareowners’ interests), for restructuring and asset impairment. The charges reflect the additional
decisions reached in the Company’s ongoing strategic review of its global manufacturing
footprint. See Note 16 for additional information.
Other costs and expenses for the year ended December 31, 2007 included the following:
In the South American Segment’s 50%-owned Caribbean affiliate, declining productivity and
cash flows resulted in impairment of the Company’s equity investment, establishment of
147
valuation allowances against advances to the affiliate, and accrual of certain contingent
obligations for total charges of $45.0 million ($43.9 million after tax) recorded in 2007 with an
additional $0.9 million (before and after tax) recorded in the first quarter of 2008.
The Company recorded charges totaling $55.3 million ($40.2 million after tax), for restructuring
and asset impairment. The charges reflect the additional decisions reached in the Company’s
ongoing strategic review of its global manufacturing footprint. See Note 16 for additional
information.
Other costs and expenses for the year ended December 31, 2006 included the following:
During the third quarter of 2006, the Company recorded a charge of $27.5 million ($25.6 million
after tax), principally related to the closing of its Godfrey, Illinois machine parts manufacturing
operation.
16. Restructuring Accruals Beginning in 2007, the Company commenced a strategic review of its
global profitability and manufacturing footprint. The combined 2007 and 2008 charges, amounting to
$187.7 million ($150.3 million after tax and minority shareowners’ interests) and approximately 1,800
jobs and corresponding reduction in the Company’s workforce, reflect the decisions reached through
December 31, 2008 in the Company’s ongoing strategic review of its global manufacturing footprint
commenced in mid-2007. Amounts recorded by the Company do not include any gains that may be
realized upon the ultimate sale or disposition of closed facilities.
2007
During the third and fourth quarters of 2007, the Company recorded restructuring charges totaling $55.3
million ($40.2 million after tax), for restructuring and asset impairment in Europe and North America.
As a result of its strategic review, the Company decided to curtail selected production capacity. Because
the future undiscounted cash flows of the related asset groups were not sufficient to recover their carrying
amounts, certain assets were considered impaired. As a result, those assets were written down to the
extent their carrying amounts exceeded fair value. The curtailment of plant capacity resulted in
elimination of approximately 560 jobs and a corresponding reduction in the Company’s workforce. The
Company accrued certain employee separation costs, plant clean up, and other exit costs.
2008
During 2008, the Company recorded restructuring charges totaling $132.4 million ($110.1 million after
tax and minority share owners’ interests). The 2008 charges consisted primarily of $85.5 million for the
closure of two Canadian plants with additional charges across all segments as well as in Retained
Corporate Costs and Other.
As a continuation of the Company’s strategic review in 2008, the Company decided to curtail and realign
selected production capacity and other activities across all segments as well as in Retained Corporate
Costs and Other. Because the future undiscounted cash flows of the related asset groups were not
sufficient to recover their carrying amounts, certain assets were considered impaired. As a result, those
assets were written down to the extent their carrying amounts exceeded fair value. The curtailment of
plant capacity and realignment of selected operations will result in elimination of approximately 1,240
jobs and a corresponding reduction in the Company’s workforce. The Company accrued certain
employee separation costs, plant clean up, and other exit costs.
Probable cash expenditures for the 2007 and 2008 charges are expected to total approximately $110
million. The Company expects that the majority of these costs will be paid out by the end of 2009.
148
Selected information related to the restructuring accrual is as follows:
Employee
Costs
Asset
Impairment
Other
Total
2007 Charges
Write-down of assets to net realizable value
Total restructuring accrual at December 31, 2007
2008 charges
Write-down of assets to net realizable value
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining restructuring accrual
as of December 31, 2008
$
22.3
(22.3)
-
32.5
(32.5)
$
26.1
-
26.1
70.1
(35.6)
(13.0)
$
6.9
(2.4)
4.5
29.8
(4.7)
(7.2)
(6.1)
$
55.3
(24.7)
30.6
132.4
(37.2)
(42.8)
(19.1)
$
47.6
$
-
$
16.3
$
63.9
BSN Acquisition
During the second quarter of 2005, the Company concluded its evaluation of acquired capacity in
connection with the acquisition of BSN Glasspack S.A. and announced the permanent closing of its
Düsseldorf, Germany glass container factory, and the shutdown of a furnace at its Reims, France glass
container facility, both in 2005. These actions were part of the European integration strategy to optimally
align the manufacturing capacities with the market and improve operational efficiencies. As a result, the
Company recorded an accrual of €47.1 million through an adjustment to goodwill.
These actions resulted in the elimination of approximately 400 jobs and a corresponding reduction in the
Company’s workforce. The Company anticipates that it will pay a total of approximately €110.9 million
in cash related to severance, benefits, plant clean-up, and other plant closing costs related to restructuring
accruals.
The European restructuring accrual recorded in the second quarter of 2005 was in addition to the initial
estimated accrual of €63.8 million recorded in 2004. Selected information related to the restructuring
accrual is as follows, with 2008 activity translated from Euros into dollars at the December 31, 2008
exchange rate:
Remaining European restructuring accrual
as of January 1, 2006
Net cash paid, principally severance and related benefits
Partial reversal of accrual (goodwill adjustment)
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2006
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2007
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2008
149
$
80.9
(33.7)
(7.6)
(1.5)
38.1
(17.8)
7.4
27.7
(6.1)
(4.8)
$
16.8
17. Contingencies Certain 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. In
accordance with FAS No. 5, “Accounting for Contingencies,” the Company records a liability for such
matters when it is both probable that the liability has been incurred and the amount of the liability can be
reasonably estimated. Recorded amounts are reviewed and adjusted to reflect changes in the factors upon
which the estimates are based including additional information, negotiations, settlements, and other
events. The ultimate legal and financial liability of the Company in respect to this 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 have a material adverse
effect on its results of operations or financial condition.
18. Segment Information The Company has four reportable segments based on its four geographic
locations: (1) North America; (2) Europe; (3) Asia Pacific; (4) South America. These four segments are
aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its
global glass operations. Certain assets and activities not directly related to one of the regions or to glass
manufacturing are reported with Other. These include licensing, equipment manufacturing, global
engineering, and non-glass equity investments.
The Company’s measure of profit for its reportable segments is Segment Operating Profit, which consists
of consolidated earnings before interest income, interest expense, provision for income taxes and minority
share owners’ interests in earnings of subsidiaries and excludes amounts related to certain items that
management considers not representative of ongoing operations. The Company’s management uses
Segment Operating Profit, in combination with selected cash flow information, to evaluate performance
and to allocate resources.
Segment Operating Profit for reportable segments includes an allocation of some corporate expenses
based on both a percentage of sales and direct billings based on the costs of specific services provided.
Beginning in 2008, the OI Inc. revised its method of allocating corporate expenses. OI Inc. decreased
slightly the percentage allocation based on sales and significantly expanded the number of functions
included in the allocation based on cost of services. It is not practicable to quantify the net effect of these
changes on periods prior to 2008.
Financial information regarding the Company’s reportable segments is as follows:
Net Sales:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Other
Net sales
2008
$
3,497.8
2,209.7
1,135.9
964.1
$
2007
3,298.7
2,271.3
970.7
934.3
$
2006
2,846.6
2,110.4
796.5
804.9
7,807.5
77.2
7,884.7
$
7,475.0
91.7
7,566.7
$
6,558.4
134.0
6,692.4
$
150
Segment Operating Profit:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Items excluded from Segment Operating Profit:
Other
Restructuring and asset impairments
CEO and other transition charges
Curtailment of postretirement benefits in The Netherlands
Mark to market effect of natural gas hedge contracts
2008
2007
2006
$
477.8
185.2
331.0
162.8
1,156.8
$
433.0
265.1
254.9
154.0
1,107.0
$
249.6
187.3
195.0
102.9
734.8
68.1
(133.3)
47.3
(100.3)
10.0
(27.5)
(6.0)
15.9
(8.7)
Interest income
Interest expense
Earnings before income taxes and minority share
owners' interests in earnings of subsidiaries
36.1
(237.6)
26.9
(356.2)
16.6
(401.6)
$
890.1
$
724.7
$
333.5
North
America
Europe
Asia
Pacific
South
America
Total
Reportable
Segments
Other
Consoli-
dated
Totals
3,758.4
4,124.1
3,838.0
$
$
$
$
12.6
10.4
10.5
1,792.3
1,936.0
1,765.7
Total assets:
2008
2007
2006
Equity earnings:
2008
2007
2006
Capital expenditures (1):
2008
$
2007
2006
Depreciation and amortization expense:
2008
2007
2006
98.7
107.3
110.2
90.5
65.9
57.8
$
$
$
14.1
8.0
6.9
151.9
129.2
105.4
222.0
210.3
203.3
$
1,239.6
1,558.1
1,454.4
$
976.2
965.7
765.7
$
7,766.5
8,583.9
7,823.8
$
127.9
94.6
307.8
$
7,894.4
8,678.5
8,131.6
$
-
$
-
(2.7)
(4.8)
$
26.7
15.7
12.6
$
24.1
18.4
10.8
$
50.8
34.1
23.4
$
57.6
42.0
47.8
$
80.4
81.7
81.4
$
$
57.3
51.1
59.2
56.5
54.3
56.3
$
357.3
288.2
270.2
$
3.6
2.2
1.3
$
457.6
453.6
451.2
$
2.6
2.2
7.9
$
$
360.9
290.4
271.5
460.2
455.8
459.1
(1) Excludes property, plant and equipment acquired through acquisitions.
151
The Company’s net property, plant, and equipment by geographic segment are as follows:
2008
2007
2006
United
States
Foreign
Total
$
636.3
633.1
668.4
$
1,966.1
2,271.1
2,172.8
$
2,602.4
2,904.2
2,841.2
The Company's net sales by geographic segment are as follows:
2008
2007
2006
United
States
Foreign
Total
$
1,894.8
1,920.6
1,787.6
$
5,989.9
5,646.1
4,904.8
$
7,884.7
7,566.7
6,692.4
Operations in individual countries outside the United States that accounted for more than 10% of
consolidated net sales were in Italy (2008 - 10.7%, 2007 - 10.1%) and France (2008 - 14.7%,
2007 - 19.3%, 2006 - 19.3%).
19. Additional Interest Charges from Early Extinguishment of Debt During 2007, the Company
recorded additional interest charges of $9.5 million ($8.8 million after tax) for note repurchase premiums
and the write-off of unamortized finance fees related to debt that was repaid prior to its maturity. During
2006, the Company recorded additional interest charges of $17.5 million ($17.1 million after tax) for note
repurchase premiums and the write-off of unamortized finance fees related to debt that was repaid prior to
its maturity.
20. Goodwill The changes in the carrying amount of goodwill for the years ended December 31, 2006,
2007 and 2008 are as follows:
Balance as of January 1, 2006
Translation effects
Other changes, principally adjustments to
reverse foreign deferred tax valuation
allowances
Balance as of December 31, 2006
Translation effects
Other changes
Balance as of December 31, 2007
Translation effects
Other changes
Balance as of December 31, 2008
North
America
747.5
2.8
$
$
Europe
926.7
99.5
Asia
Pacific
$
470.8
31.3
South
America
$
-
Other
$
14.7
$
Total
2,159.7
133.6
(28.7)
721.6
25.1
(1.1)
745.6
(28.8)
$
716.8
(9.2)
1,017.0
115.3
(13.0)
1,119.3
(58.2)
(10.1)
1,051.0
$
502.1
54.6
556.7
(123.1)
-
-
$
433.6
$
-
(0.2)
14.5
(8.0)
6.5
0.3
(0.7)
6.1
$
(38.1)
2,255.2
195.0
(22.1)
2,428.1
(209.8)
(10.8)
2,207.5
$
During the fourth quarters of 2008, 2007 and 2006, the Company completed its annual impairment testing
and determined that no impairment existed.
152
21. Fair Value Measurements In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (FAS No. 157), which defines fair value, establishes a
framework for measuring fair value and enhances disclosure about fair value measurements. On
February 2, 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) which delays the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on at least an annual basis. Where the
measurement objective specifically requires the use of “fair value” the Company has adopted the
provisions of FAS No. 157 related to financial assets and financial liabilities as of January 1, 2008. The
adoption of FAS No. 157 had no impact on the Company.
FAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants. FAS No. 157 establishes a three-
tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly;
and
Level 3: Unobservable inputs for which there is little or no market data, which requires the Company to
develop assumptions.
The Company’s derivative assets and liabilities consist of interest rate swaps, natural gas forwards, and
foreign exchange option and forward contracts. The Company uses an income approach to valuing these
contracts. Interest rate yield curves, natural gas forward rates, and foreign exchange rates are the
significant inputs into the valuation models. These inputs are observable in active markets over the terms
of the instruments the Company holds, and accordingly, the Company classifies the $0.4 net derivative
liability as Level 2 in the hierarchy. The Company also evaluates counterparty risk in determining fair
values.
The Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“FAS
No. 159”), effective January 1, 2008. This standard permits entities to choose to measure many financial
instruments and certain other items at fair value. While FAS No. 159 became effective January 1, 2008,
the Company did not elect the fair value measurement option for any of its financial assets or liabilities.
153
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Share Owner of
Owens-Brockway Glass Container Inc.
We have audited the accompanying consolidated balance sheets of Owens-Brockway Glass Container
Inc. and subsidiaries as of December 31, 2008 and 2007, and the related consolidated statements of results
of operations, net Parent investment, and cash flows for each of the three years in the period ended
December 31, 2008. These financial statements are the responsibility of the Company’s management.
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement. We were not engaged
to perform an audit of the Company’s internal control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the
consolidated financial position of Owens-Brockway Glass Container Inc. and subsidiaries at December
31, 2008 and 2007, and the consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S. generally accepted
accounting principles.
As discussed in Note 12 to the consolidated financial statements, the Company changed its method of
accounting for defined benefit pension plans and other postretirement plans in 2006.
/s/ Ernst & Young LLP
Toledo, Ohio
February 17, 2009
154
CONSOLIDATED RESULTS OF OPERATIONS Owens-Brockway Glass Container Inc.
Dollars in millions
Years ended December 31,
Net sales
Manufacturing, shipping, and delivery
Gross profit
Selling and administrative
Research, development, and engineering
Net intercompany interest
Other interest expense
Other expense
Other income
Earnings before items below
Provision for income taxes
Minority share owners' interests in earnings
of subsidiaries
Net earnings
2008
2007
2006
$
7,884.7
(6,212.3)
1,672.4
$
7,566.7
(5,968.6)
1,598.1
$
6,692.4
(5,529.6)
1,162.8
(440.7)
(66.7)
(32.3)
(205.3)
(149.2)
111.9
890.1
(223.8)
(401.5)
(65.8)
4.0
(360.2)
(142.3)
92.4
724.7
(139.1)
(410.2)
(49.0)
3.0
(404.6)
(55.0)
86.5
333.5
(138.8)
(70.2)
(59.5)
(43.7)
$
596.1
$
526.1
$
151.0
See accompanying Notes to the Consolidated Financial Statements.
155
CONSOLIDATED BALANCE SHEETS Owens-Brockway Glass Container Inc.
Dollars in millions
December 31,
2008
2007
Assets
Current assets:
Cash, including time deposits of $307.5
($154.4 in 2007)
Receivables including amount from related parties
of $3.8 ($3.8 in 2007), less allowances of $38.1
($35.1 in 2007) for losses and discounts
Inventories
Prepaid expenses
Total current assets
Other assets:
Equity investments
Repair parts inventories
Prepaid pension
Deposits, receivables, and other assets
Goodwill
Total other assets
Property, plant, and equipment:
Land, at cost
Buildings and equipment, at cost:
Buildings and building equipment
Factory machinery and equipment
Transportation, office, and miscellaneous equipment
Construction in progress
Less accumulated depreciation
Net property, plant, and equipment
Total assets
$
397.9
$
401.9
988.2
999.1
46.8
2,432.0
101.7
132.5
418.3
2,207.5
2,860.0
1,201.1
1,020.3
35.1
2,658.4
79.9
155.8
58.1
418.0
2,428.1
3,139.9
243.3
261.7
1,021.9
4,339.0
96.9
194.2
5,895.3
3,292.9
2,602.4
1,070.7
4,742.1
114.9
146.7
6,336.1
3,431.9
2,904.2
$
7,894.4
$
8,702.5
156
CONSOLIDATED BALANCE SHEETS Owens-Brockway Glass Container Inc. (continued)
Dollars in millions
December 31,
2008
2007
Liabilities and Net Parent Investment
Current liabilities:
Short-term loans
Accounts payable including amount to related
parties of $7.1 ($9.3 in 2007)
Salaries and wages
U.S. and foreign income taxes
Other accrued liabilities
Long-term debt due within one year
Total current liabilities
External long-term debt
Deferred taxes
Other liabilities
Minority share owners' interests
Net Parent investment:
Investment by and advances from Parent
Accumulated other comprehensive loss
Total net Parent investment
$
375.6
$
435.6
811.8
138.2
152.4
295.2
18.2
1,791.4
2,413.1
117.5
729.8
253.2
2,798.6
(209.2)
2,589.4
926.5
176.3
118.7
311.4
15.2
1,983.7
2,494.1
147.2
701.0
252.2
2,769.1
355.2
3,124.3
Total liabilities and net Parent investment
$
7,894.4
$
8,702.5
See accompanying Notes to the Consolidated Financial Statements.
157
CONSOLIDATED NET PARENT INVESTMENT Owens-Brockway Glass Container Inc.
Dollars in millions
Years ended December 31,
2008
2007
2006
Investment by and advances to Parent
Balance at beginning of year
Net intercompany transactions
Net earnings
Balance at end of year
Accumulated other comprehensive loss
Balance at beginning of year
Foreign currency translation adjustments
Change in minimum pension liability, net of tax
Employee benefit plans, net of tax
Change in fair value of certain derivative instruments, net of tax
Balance at end of year
Total net Parent investment
Total comprehensive income
$
2,769.1
(566.6)
596.1
$
1,287.2
955.8
526.1
$
1,313.9
(177.7)
151.0
$
2,798.6
$
2,769.1
$
1,287.2
$
355.2
(431.9)
$
(4.5)
305.3
$
(99.6)
(32.9)
26.2
28.2
(215.3)
284.9
22.6
(47.4)
(49.3)
$
(209.2)
$
355.2
$
(4.5)
$
2,589.4
$
3,124.3
$
1,282.7
Net earnings
Foreign currency translation adjustments
Change in minimum pension liability, net of tax
Employee benefit plans, net of tax
Change in fair value of certain derivative instruments, net of tax
$
596.1
(431.9)
-
(99.6)
(32.9)
$
526.1
305.3
-
26.2
28.2
$
151.0
284.9
22.6
(49.3)
Total comprehensive income
$
31.7
$
885.8
$
409.2
See accompanying Notes to the Consolidated Financial Statements.
158
CONSOLIDATED CASH FLOWS Owens-Brockway Glass Container Inc.
Dollars in millions
Years ended December 31,
Operating activities:
Net earnings
Non-cash charges (credits):
Depreciation
Amortization of deferred costs
Deferred tax provision (credit)
Restructuring and asset impairment
Reverse non-U.S. deferred tax valuation allowance net of
restructuring charges
Goodwill impairment
Curtailment of postretirement benefits in The Netherlands
Other
Change in non-current operating assets
Change in non-current liabilities
Change in components of working capital
Cash provided by operating activities
Investing activities:
Additions to property, plant, and equipment
Advances to equity affiliate - net
Collections on accounts receivable arising from consolidation
of receivables securitization program
Net cash proceeds from divestitures and other
Cash utilized in investing activities
Financing activities:
Additions to long-term debt
Repayments of long-term debt
Increase (decrease) in short-term loans
Net change in intercompany debt
Net receipts (payments) for hedging activity
Payment of finance fees
Cash utilized in financing activities
Effect of exchange rate fluctuations on cash
Increase (decrease) in cash
Cash at beginning of year
Cash at end of year
2008
2007
2006
$
596.1
$
526.1
$
151.0
427.5
32.7
10.6
133.3
53.4
8.7
(88.1)
(190.1)
984.1
(360.9)
(1.6)
3.0
(359.5)
686.4
(695.4)
(20.6)
(530.9)
(45.2)
(605.7)
(22.9)
(4.0)
419.7
36.1
(5.6)
100.3
(20.7)
6.4
(23.8)
26.2
1,064.7
426.5
32.6
25.4
27.5
(5.7)
(15.9)
20.7
(10.1)
(52.1)
(221.7)
378.2
(290.4)
(271.5)
14.1
(276.3)
406.4
(2,092.2)
(21.5)
1,032.8
0.7
(6.3)
(680.1)
51.8
160.1
127.3
13.6
(130.6)
1,206.5
(1,341.7)
158.9
(266.9)
(6.8)
(12.3)
(262.3)
12.6
(2.1)
401.9
397.9
$
241.8
401.9
$
243.9
241.8
$
See accompanying Notes to the Consolidated Financial Statements.
159
Owens-Brockway Glass Container Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
Basis of Consolidated Statements The consolidated financial statements of Owens-Brockway Glass
Container Inc. (“Company”) include the accounts of its subsidiaries. Newly acquired subsidiaries have
been included in the consolidated financial statements from dates of acquisition.
The Company uses the equity method of accounting for investments in which it has a significant
ownership interest, generally 20% to 50%. Other investments are accounted for at cost. The Company
monitors investments for other than temporary declines in fair value and records reductions in carrying
values when appropriate.
Relationship with Owens-Brockway Packaging, Inc., Owens-Illinois Group, Inc. and
Owens-Illinois, Inc. The Company is a wholly-owned subsidiary of Owens-Brockway Packaging, Inc.
(“OB Packaging”), and an indirect subsidiary of Owens-Illinois Group, Inc. ("OI Group”) and Owens-
Illinois, Inc. (“OI Inc.”). Although OI Inc. does not conduct any operations, it has substantial obligations
related to outstanding indebtedness, dividends for preferred stock and asbestos-related payments. OI Inc.
relies primarily on distributions from its direct and indirect subsidiaries to meet these obligations.
For federal and certain state income tax purposes, the taxable income of the Company is included in the
consolidated tax returns of OI Inc. and income taxes are allocated to the Company on a basis consistent
with separate returns.
Nature of Operations The Company is a leading manufacturer of glass container products. The
Company’s principal product lines in the Glass Containers product segment are glass containers for the
food and beverage industries. The Company has glass container operations located in 22 countries. The
principal markets and operations for the Company’s glass products are in North America, Europe, South
America, and Australia.
Use of Estimates The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management of the Company to make estimates and
assumptions that affect certain amounts reported in the financial statements and accompanying notes.
Actual results may differ from those estimates, at which time the Company would revise its estimates
accordingly.
Cash The Company defines “cash” as cash and time deposits with maturities of three months or less
when purchased. Outstanding checks in excess of funds on deposit are included in accounts payable.
Fair Values of Financial Instruments The carrying amounts reported for cash, short-term investments
and short-term loans approximate fair value. In addition, carrying amounts approximate fair value for
certain long-term debt obligations subject to frequently redetermined interest rates. Fair values for the
Company’s significant fixed rate debt obligations are generally based on published market quotations.
Derivative Instruments The Company uses currency swaps, interest rate swaps, options, and
commodity futures contracts to manage risks generally associated with foreign exchange rate, interest rate
and commodity market volatility. Derivative financial instruments are included on the balance sheet at
fair value. Whenever possible, derivative instruments are designated as and are effective as hedges, in
accordance with accounting principles generally accepted in the United States. If the underlying hedged
transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are
recognized in current earnings. The Company does not enter into derivative financial instruments for
trading purposes and is not a party to leveraged derivatives. In accordance with FAS No. 104, cash flows
from fair value hedges of debt and short-term forward exchange contracts are classified as a financing
160
activity. Cash flows of currency swaps, interest rate swaps, and commodity futures contracts are
classified as operating activities. See Note 9 for additional information related to derivative instruments.
Inventory Valuation The Company values most U.S. inventories at the lower of last-in, first-out (LIFO)
cost or market. Other inventories are valued at the lower of standard costs (which approximate average
costs) or market.
Goodwill Goodwill represents the excess of cost over fair value of assets of businesses acquired.
Goodwill is evaluated annually, as of October 1, for impairment or more frequently if an impairment
indicator exists.
Intangible Assets and Other Long-Lived Assets Intangible assets are amortized over the expected
useful life of the asset. Amortization expense directly attributed to the manufacturing of the Company’s
products is included in manufacturing, shipping, and delivery. Amortization expense related to non-
manufacturing activities is included in selling and administrative and other. The Company evaluates the
recoverability of intangible assets and other long-lived assets based on undiscounted projected cash flows,
excluding interest and taxes, when factors indicate that impairment may exist. If impairment exists, the
asset is written down to fair value.
Property, Plant, and Equipment Property, plant, and equipment (“PP&E”) is carried at cost and
includes expenditures for new facilities and equipment and those costs which substantially increase the
useful lives or capacity of existing PP&E. In general, depreciation is computed using the straight-line
method and recorded over the estimated useful life of the asset. Factory machinery and equipment is
depreciated over periods ranging from 5 to 25 years with the majority of such assets (principally glass-
melting furnaces and forming machines) depreciated over 7-15 years. Buildings and building equipment
are depreciated over periods ranging from 10 to 50 years. Depreciation expense directly attributed to the
manufacturing of the Company’s products is included in manufacturing, shipping, and delivery.
Depreciation expense related to non-manufacturing activities is included in selling and administrative.
Maintenance and repairs are expensed as incurred. Costs assigned to PP&E of acquired businesses are
based on estimated fair values at the date of acquisition. The Company evaluates the recoverability of
property, plant, and equipment based on undiscounted projected cash flows, excluding interest and taxes,
when factors indicate that impairment may exist. If impairment exists, the asset is written down to fair
value.
Revenue Recognition The Company recognizes sales, net of estimated discounts and allowances, when
the title to the products and risk of loss are transferred to customers. Provisions for rebates to customers
are provided in the same period that the related sales are recorded.
Shipping and Handling Costs Shipping and handling costs are included with manufacturing, shipping,
and delivery costs in the Consolidated Statements of Operations.
Income Taxes on Undistributed Earnings In general, the Company plans to continue to reinvest the
undistributed earnings of foreign subsidiaries and foreign corporate joint ventures accounted for by the
equity method. Accordingly, taxes are provided only on that amount of undistributed earnings in excess
of planned reinvestments.
Foreign Currency Translation The assets and liabilities of substantially all subsidiaries and associates
are translated at current exchange rates and any related translation adjustments are recorded directly in net
Parent investment.
161
Accounts Receivable Receivables are stated at amounts estimated by management to be the net
realizable value. The Company charges off accounts receivable when it becomes apparent based upon
age or customer circumstances that amounts will not be collected.
Allowance for Doubtful Accounts The allowance for doubtful accounts is established through charges
to the provision for bad debts. The Company evaluates the adequacy of the allowance for doubtful
accounts on a periodic basis. The evaluation includes historical trends in collections and write-offs,
management’s judgment of the probability of collecting accounts and management’s evaluation of
business risk.
New Accounting Standards In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, “Business Combinations” (“FAS No. 141R”). FAS No. 141R establishes principles
and requirements for how an acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree and recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase. FAS
No. 141R also sets forth the disclosures required to be made in the financial statements to evaluate the
nature and financial effects of the business combination. SFAS No. 141R applies prospectively to
business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Accordingly, FAS No. 141R will be applied
by the Company to business combinations occurring on or after January 1, 2009.
In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160,
“Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51” (“FAS
No. 160”). FAS No. 160 establishes accounting and reporting standards for the non-controlling interest in
a subsidiary and the deconsolidation of a subsidiary. FAS No. 160 is effective for years beginning on or
after December 15, 2008. Adoption of FAS No. 160 is not presently expected to have a material impact
on the Company’s results of operations, financial position or cash flows.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures
about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“FAS
No. 161”). FAS No. 161 is intended to improve financial reporting about derivative instruments and
hedging activities by requiring enhanced disclosures to enable investors to better understand their effects
on an entity’s financial condition, financial performance, and cash flows. FAS No. 161 is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008.
Adoption of FAS No. 161 is not presently expected to have a material impact on the Company’s results of
operations, financial position or cash flows.
In December 2008, the FASB issued a FASB Staff Position on Statement of Financial Accounting
Standards No. 132(R), “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP FAS
No. 132(R)-1”). FSP FAS No. 132(R)-1 requires additional disclosures about the fair value of
postretirement benefit plan assets to provide users of financial statements with useful, transparent and
timely information about the asset portfolios. FSP FAS No. 132(R)-1 is effective for years ending after
December 15, 2009. Adoption of FSP FAS No. 132(R)-1 will have no impact on the Company’s results
of operations, financial position or cash flows.
In February 2008, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FSP
157-2, “Effective Date of FASB Statement No. 157” (FSP 157-2). FSP 157-2 delays the effective date of
FAS No. 157 for all non-financial assets and non-financial liabilities, except for items that are recognized
or disclosed at fair value in the financial statements on a recurring basis (at least annually), until the
beginning of the first quarter of fiscal 2009. The adoption of FAS No. 157 is not expected to have a
significant impact on the Company’s consolidated financial statements when it is applied to non-financial
162
assets and non-financial liabilities that are not measured at fair value on a recurring basis, beginning in the
first quarter of 2009.
Participation in OI Inc. Stock Option Plans and Other Stock Based Compensation The Company
participates in the equity compensation plans of OI Inc. under which employees of the Company may be
granted options to purchase common shares of OI Inc., restricted common shares of OI Inc., or restricted
share units of OI Inc.
Stock Options
For options granted prior to March 22, 2005, no options may be exercised in whole or in part during the
first year after the date granted. In general, subject to accelerated exercisability provisions related to the
performance of OI Inc.’s common stock or change of control, 50% of the options become exercisable on
the fifth anniversary of the date of the option grant, with the remaining 50% becoming exercisable on the
sixth anniversary date of the option grant. In general, options expire following termination of
employment or the day after the tenth anniversary date of the option grant.
For options granted after March 21, 2005, no options may be exercised in whole or in part during the first
year after the date granted. In general, subject to change in control, these options become exercisable
25% per year beginning on the first anniversary. In general, options expire following termination of
employment or the seventh anniversary of the option grant.
The fair value of options granted before March 22, 2005, is amortized ratably over five years or a shorter
period if the grant becomes subject to accelerated exercisability provisions related to the performance of
OI Inc.’s common stock. The fair value of options granted after March 21, 2005, is amortized over the
vesting periods which range from one to four years.
Restricted Shares
Shares granted to employees prior to March 22, 2005, generally vest after three years or upon retirement,
whichever is later. Shares granted after March 21, 2005, vest 25% per year beginning on the first
anniversary and unvested shares are forfeited upon termination of employment. Shares granted to
directors prior to 2008 were immediately vested but may not be sold until the third anniversary of the
share grant or the end of the director’s then current term on the board, whichever is later. Share granted
to the directors after 2007 vest after one year.
The fair value of the shares is equal to the market price of the shares on the date of the grant. The fair
value of restricted shares granted before March 22, 2005, is amortized ratably over the vesting period.
The fair value of restricted shares granted after March 21, 2005, is amortized over the vesting periods
which range from one to four years.
Performance Vested Restricted Share Units
Restricted share units vest on January 1 of the third year following the year in which they are granted.
Holders of vested units receive 0.5 to 1.5 shares of OI Inc.’s common stock for each unit, depending upon
the attainment of consolidated performance goals established by the Compensation Committee of OI
Inc.’s Board of Directors. If minimum goals are not met, no shares will be issued. Granted but unvested
restricted share units are forfeited upon termination of employment, unless certain retirement criteria are
met.
The fair value of each restricted share unit is equal to the product of the fair value of OI Inc.’s common
stock on the date of grant and the estimated number of shares into which the restricted share unit will be
163
converted. The fair value of restricted share units is amortized ratably over the vesting period. Should
the estimated number of shares into which the restricted share unit will be converted change, an
adjustment will be recorded to recognize the accumulated difference in amortization between the revised
and previous estimates.
Accounting
OI Inc. adopted the provisions of FAS No. 123R “Share-Based Payment” (FAS No. 123R) effective
January 1, 2006 using the modified-prospective method of adoption, which requires recognition of
compensation cost in the financial statements beginning on the date of adoption.
As discussed in Note 11, costs incurred under these plans by OI Inc. related to stock-based compensation
awards granted directly to the Company's employees are included in the allocable costs charged to the
Company and other operating subsidiaries of OI Inc. on an intercompany basis.
2. Supplemental Cash Flow Information Changes in the components of working capital related to
operations (net of the effects related to acquisitions and divestitures) were as follows:
Decrease (increase) in current assets:
Receivables
Inventories
Prepaid expenses
Increase (decrease) in current liabilities:
Accounts payable and accrued liabilities
Salaries and wages
U.S. and foreign income taxes
2008
2007
2006
$
$
73.8
(77.8)
(7.0)
(166.7)
(18.8)
6.4
(30.1)
70.5
6.8
(13.5)
24.9
(32.4)
$
(173.9)
(36.8)
2.4
(28.1)
(13.8)
28.5
$
(190.1)
$
26.2
$
(221.7)
Interest paid in cash, including note repurchase premiums in 2007 and 2006, aggregated $209.3 million
for 2008, $390.3 million for 2007, and $380.0 million for 2006.
Income taxes paid (received) in cash were as follows:
Domestic
Foreign
3. Inventories Major classes of inventory are as follows:
Finished goods
Work in process
Raw materials
Operating supplies
2008
2007
2006
$
(0.3)
158.4
$
0.2
149.2
$
(0.4)
126.8
$
158.1
$
149.4
$
126.4
2008
2007
$
831.7
0.8
109.8
56.8
$
861.1
1.4
90.5
67.3
$
999.1
$
1,020.3
164
If the inventories which are valued on the LIFO method had been valued at standard costs, which
approximate current costs, consolidated inventories would be higher than reported by $32.5 million and
$29.1 million, at December 31, 2008 and 2007, respectively.
Inventories which are valued at the lower of standard costs (which approximate average costs), or market
at December 31, 2008 and 2007 were approximately $861.4 million and $872.8 million, respectively.
4. Equity Investments Summarized information pertaining to the Company’s equity associates follows:
At end of year:
Equity in undistributed earnings:
Foreign
Domestic
Total
For the year:
Equity in earnings:
Foreign
Domestic
Total
Dividends received
2008
2007
$
$
35.4
15.2
50.6
$
$
22.4
18.7
41.1
2008
2007
2006
$
14.1
36.7
$
$
50.8
24.5
$
5.3
28.8
$
$
34.1
21.7
$
2.0
21.4
$
$
23.4
43.5
Summarized combined financial information for equity associates is as follows:
At end of year:
Current assets
Non-current assets
Total assets
Current liabilities
Other liabilities and deferred items
Total liabilities and deferred items
Net assets
For the year:
Net sales
Gross profit
Net earnings
2008
2007 (a)
$
208.3
325.9
534.2
167.5
182.5
350.0
$
191.3
302.4
493.7
117.0
265.5
382.5
$
184.2
$
111.2
2008
2007 (a)
2006
$
635.8
$
535.9
$
564.0
$
227.5
$
176.5
$
132.2
$
153.9
$
112.4
$
69.4
(a) Amounts for 2007 exclude the Company's Caribbean investment due to the impairment recorded during 2007.
The Company’s significant equity method investments include: (1) 43.5% of the common shares of Vetri
Speciali SpA, a specialty glass manufacturer; (2) a 25% partnership interest in General Chemical Soda
165
Ash (Partners), a soda ash supplier; and (3) a 50% partnership interest in Rocky Mountain Bottle
Company, a glass container manufacturer.
5. External Debt The following table summarizes the external long-term debt of the Company at
December 31, 2008 and 2007:
Secured Credit Agreement:
Revolving Credit Facility:
Revolving Loans
Term Loans:
Term Loan A (225.0 million AUD at Dec. 31, 2008)
Term Loan B
Term Loan C (110.8 million CAD at Dec. 31, 2008)
Term Loan D (€191.5 million at Dec. 31, 2008)
Senior Notes:
8.25%, due 2013
6.75%, due 2014
6.75%, due 2014 (€225 million)
6.875%, due 2017 (€300 million)
Other
Less amounts due within one year
External long-term debt
2008
2007
$
18.7
$
-
155.7
191.5
90.9
269.6
461.1
400.0
316.8
422.4
104.6
198.1
191.5
113.2
281.8
450.3
400.0
331.1
441.5
101.8
2,431.3
18.2
2,509.3
15.2
$
2,413.1
$
2,494.1
On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the
“Agreement”). At December 31, 2008, the Agreement included a $900.0 million revolving credit facility,
a 225.0 million Australian dollar term loan, and a 110.8 million Canadian dollar term loan, each of which
has a final maturity date of June 15, 2012. It also included a $191.5 million term loan and a €191.5
million term loan, each of which has a final maturity date of June 14, 2013.
As a result of the bankruptcy of Lehman Brothers Holdings Inc. and several of its subsidiaries, the
Company believes that the maximum amount available under the revolving credit facility was reduced by
$32.3 million. After further deducting amounts attributable to letters of credit and overdraft facilities that
are supported by the revolving credit facility, at December 31, 2008 the Company’s subsidiary borrowers
had unused credit of $768.4 million available under the Agreement.
The Agreement contains various covenants that restrict, among other things and subject to certain
exceptions, the ability of the Company to incur certain liens, make certain investments and acquisitions,
become liable under contingent obligations in certain defined instances only, make restricted junior
payments, make certain asset sales within guidelines and limits, make capital expenditures beyond a
certain threshold, engage in material transactions with shareholders and affiliates, participate in sale and
leaseback financing arrangements, alter its fundamental business, amend certain outstanding debt
obligations, and prepay certain outstanding debt obligations.
The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the
Company not to exceed a ratio calculated by dividing consolidated total debt, less cash and cash
equivalents, by Consolidated Adjusted EBITDA, as defined in the Agreement. The Leverage Ratio could
restrict the ability of the Company to undertake additional financing to the extent that such financing
would cause the Leverage Ratio to exceed the specified maximum.
166
Failure to comply with these covenants and restrictions could result in an event of default under the
Agreement. In such an event, the Company could not request borrowings under the revolving facility,
and all amounts outstanding under the Agreement, together with accrued interest, could then be declared
immediately due and payable. If an event of default occurs under the Agreement and the lenders cause all
of the outstanding debt obligations under the Agreement to become due and payable, this would result in
a default under a number of other outstanding debt securities and could lead to an acceleration of
obligations related to these debt securities. A default or event of default under the Agreement, indentures
or agreements governing other indebtedness could also lead to an acceleration of debt under other debt
instruments that contain cross acceleration or cross-default provisions.
The leverage ratio also determines pricing under the Agreement. The interest rate on borrowings under
the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the
Agreement. These rates include a margin linked to the leverage ratio and the borrowers’ senior secured
debt rating. The margins range from 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to
0.75% for Base Rate loans. In addition, a facility fee is payable on the revolving credit facility
commitments ranging from 0.20% to 0.50% per annum linked to the leverage ratio. The weighted
average interest rate on borrowings outstanding under the Agreement at December 31, 2008 was 4.07%.
As of December 31, 2008, the Company was in compliance with all covenants and restrictions in the
Agreement. In addition, the Company believes that it will remain in compliance and that its ability to
borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.
Borrowings under the Agreement are secured by substantially all of the assets of the Company’s domestic
subsidiaries and certain foreign subsidiaries, which have a book value of approximately $2.0 billion.
Borrowings are also secured by a pledge of intercompany debt and equity in most of the Company’s
domestic subsidiaries and stock of certain foreign subsidiaries. All borrowings under the agreement are
guaranteed by substantially all domestic subsidiaries of the Company for the term of the Agreement.
During March 2007, a subsidiary of the Company issued Senior Notes totaling €300.0 million. The notes
bear interest at 6.875% and are due March 31, 2017. The notes are guaranteed by substantially all of the
Company’s domestic subsidiaries. The proceeds were used to retire the $300 million principal amount of
OI Inc.’s 8.10% Senior Notes which matured in May 2007, and to reduce borrowings under the revolving
credit facility.
On July 31, 2007, the OI Inc. completed the sale of its plastics packaging business to Rexam PLC for
approximately $1.825 billion in cash. In accordance with an amendment of the Agreement that became
effective upon completion of the sale of the plastics business, the Company was required to use the net
proceeds (as defined in the Agreement) to repay senior secured debt. In addition, the amendment
provides for modification of certain covenants, including the elimination of the financial covenant
requiring the Company to maintain a specified interest coverage ratio. OI Inc. used a portion of the net
proceeds in the third quarter of 2007 to redeem all $450.0 million of the 7.75% Senior Secured Notes and
repurchase $283.1 million of the 8.875% Senior Secured Notes. The remaining $566.9 million of the
8.875% Senior Secured Notes were repurchased or discharged in accordance with the indenture in
October 2007. The remaining net proceeds, along with funds from operations and/or additional
borrowings under the revolving credit facility, were used to redeem all $625.0 million of the 8.75%
Senior Secured Notes on November 15, 2007. The Company recorded $9.5 million of additional interest
charges for note repurchase premiums and the related write-off of unamortized finance fees.
During October 2006, the Company entered into a €300 million European accounts receivable
securitization program. The program extends through October 2011, subject to annual renewal of backup
credit lines. In addition, the Company participates in a receivables financing program in the Asia Pacific
167
region with a revolving funding commitment of 100 million Australian dollars and 25 million New
Zealand dollars that extends through July 2009 and October 2009, respectively. Information related to the
Company’s accounts receivable securitization program is as follows:
Dec. 31,
Dec. 31,
2008
2007
Balance (included in short-term loans)
$
293.7
$
361.8
Weighted average interest rate
5.31%
5.48%
The Company capitalized $25.6 million and $27.0 million in 2008 and 2007, respectively, under capital
lease obligations with the related financing recorded as long term debt. These amounts are included in
other in the long-term debt table above.
Annual maturities for all of the Company’s long-term debt through 2013 are as follows: 2009, $18.2
million; 2010, $19.0 million; 2011, $159.0 million; 2012, $152.4 million; and 2013, $930.7 million.
Fair values at December 31, 2008, of the Company’s significant fixed rate debt obligations were as
follows:
Senior Notes:
8.25%, due 2013
6.75%, due 2014
6.75%, due 2014 (€225 million)
6.875%, due 2017 (€300 million)
Principal Amount
(millions of
dollars)
Indicated
Market
Price
Fair Value
(millions of
dollars)
Hedge Value
(millions of
dollars)
$
450.0
400.0
316.8
422.4
96.00
92.75
77.63
74.13
$
432.0
371.0
245.9
313.1
$
461.1
6. Operating Leases Rent expense attributable to all warehouse, office buildings, and equipment
operating leases was $95.4 million in 2008, $87.4 million in 2007, and $75.7 million in 2006. Minimum
future rentals under operating leases are as follows: 2009, $45.5 million; 2010, $34.4 million; 2011,
$22.6 million; 2012, $14.6 million; 2013, $7.4 million; and 2014 and thereafter, $7.4 million.
7. Foreign Currency Transactions Aggregate foreign currency exchange gains (losses) included in
other costs and expenses were $0.6 million in 2008, $(8.1) million in 2007, and $(1.0) million in 2006.
8. Derivative Instruments At December 31, 2008, the Company had the following derivative
instruments related to its various hedging programs:
Interest Rate Swaps Designated as Fair Value Hedges
In the fourth quarter of 2003 and the first quarter of 2004, the Company entered into a series of interest
rate swap agreements with a current total notional amount of $500 million that mature in 2010 and 2013.
The swaps were executed in order to: (i) convert a portion of the senior notes and senior debentures fixed-
168
rate debt into floating-rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed
and floating-rate debt; and (iii) reduce net interest payments and expense in the near-term.
The Company’s fixed-to-variable interest rate swaps are accounted for as fair value hedges. Because the
relevant terms of the swap agreements match the corresponding terms of the notes, there is no hedge
ineffectiveness. Accordingly, the Company recorded the net of the fair market values of the swaps as a
long-term asset (liability) along with a corresponding net increase (decrease) in the carrying value of the
hedged debt.
Under the swaps, the Company receives fixed rate interest amounts (equal to interest on the
corresponding hedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears) plus a
margin spread (see table below). The interest rate differential on each swap is recognized as an
adjustment of interest expense during each six-month period over the term of the agreement.
The following selected information relates to fair value swaps at December 31, 2008:
Amount
Hedged
Average
Receive
Rate
Average
Spread
Asset
(Liability)
Recorded
OI Inc. public notes swapped by the company through intercompany loans:
Senior Debentures due 2010
250.0
7.50%
Notes issued by OBGC:
Senior Notes due 2013
250.0
8.25%
3.2%
3.7%
9.4
11.1
Total
$
500.0
$
20.5
Commodity Hedges
The Company enters into commodity futures contracts related to forecasted natural gas requirements, the
objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas
and the related volatility in cash flows. The Company continually evaluates the natural gas market with
respect to its forecasted usage requirements over the next twelve to twenty-four months and periodically
enters into commodity futures contracts in order to hedge a portion of its usage requirements over that
period. At December 31, 2008, the Company had entered into commodity futures contracts for
approximately 50% (approximately 10,200,000 MM BTUs) of its estimated North American usage
requirements for the full year of 2009 and approximately 1% (approximately 240,000 MM BTUs) for the
full year of 2010.
The Company accounts for the above futures contracts on the balance sheet at fair value. The effective
portion of changes in the fair value of a derivative that is designated as, and meets the required criteria
for, a cash flow hedge is recorded in the Accumulated Other Comprehensive Income component of share
owners’ equity (“OCI”) and reclassified into earnings in the same period or periods during which the
underlying hedged item affects earnings. Any material portion of the change in the fair value of a
derivative designated as a cash flow hedge that is deemed to be ineffective is recognized in current
earnings.
The above futures contracts are accounted for as cash flow hedges at December 31, 2008.
169
At December 31, 2008, an unrecognized loss of $31.8 million (pretax and after tax), related to the
domestic commodity futures contracts, was included in OCI, which will be reclassified into earnings over
the next twelve months. The ineffectiveness related to these natural gas hedges for the year ended
December 31, 2008 was not material.
Other Hedges
The Company’s subsidiaries may enter into short-term forward exchange or option agreements to
purchase foreign currencies at set rates in the future. These agreements are used to limit exposure to
fluctuations in foreign currency exchange rates for significant planned purchases of fixed assets or
commodities that are denominated in currencies other than the subsidiaries’ functional currency.
Subsidiaries may also use forward exchange agreements to offset the foreign currency risk for receivables
and payables not denominated in, or indexed to, their functional currencies. The Company records these
short-term forward exchange agreements on the balance sheet at fair value and changes in the fair value
are recognized in current earnings.
Balance Sheet Classification
The Company records the fair values of derivative financial instruments on the balance sheet as follows:
(1) receivables if the instrument has a positive fair value and maturity within one year, (2) deposits,
receivables, and other assets if the instrument has a positive fair value and maturity after one year, (3)
accounts payable and other current liabilities if the instrument has a negative fair value and maturity
within one year, and (4) other liabilities if the instrument has a negative fair value and maturity after one
year.
9. Accumulated Other Comprehensive Income (Loss) The components of comprehensive income
are: (a) net earnings; (b) change in fair value of certain derivative instruments; (c) pension and other
postretirement benefit adjustments; and (d) foreign currency translation adjustments. The net effect of
exchange rate fluctuations generally reflects changes in the relative strength of the U.S. dollar against
major foreign currencies between the beginning and end of the year.
170
The following table lists the beginning balance, yearly activity and ending balance of each component of
accumulated other comprehensive income (loss):
N et Effect of
Exchange Rate
Fluctuations
D eferred T ax
Effect for
T ranslation
Change in
M inimum
Pension
Liabilit y
Change in
Certain
D erivative
Instruments
Emp loy ee
Benefit
Plans
Total
Accumulated
Comp rehensive
Income (Loss)
Balance on Jan. 1, 2006
$
(97.0)
$
12.8
$
(145.5)
$
14.4
$
-
$
(215.3)
2006 Change
T ranslation effect
T ax effect
Balance on D ec. 31, 2006
2007 Change
T ranslation effect
Reclass
T ax effect
Balance on D ec. 31, 2007
2008 Change
T ranslation effect
T ax effect
284.9
187.9
305.3
493.2
(431.9)
(49.3)
(71.0)
55.0
(17.6)
(14.8)
12.8
(122.9)
(34.9)
28.2
122.9
2.2
12.8
-
(4.5)
(32.9)
219.6
(17.6)
8.8
(4.5)
375.0
(6.7)
-
(8.6)
355.2
(665.6)
46.1
55.1
23.6
(47.4)
41.5
(6.7)
(125.1)
(8.6)
(146.3)
(200.8)
46.1
55.1
Balance on D ec. 31, 2008
$
61.3
$
12.8
$
-
$
(37.4)
$
(245.9)
$
(209.2)
For 2008 and 2007, respectively, foreign currency translation adjustments include a loss of approximately
$19.9 million and $35.1 million related to a hedge of the Company’s net investment in a non-U.S.
subsidiary.
10. Income Taxes Deferred income taxes reflect: (1) the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts
used for income tax purposes and (2) carryovers and credits for income tax purposes.
171
Significant components of the Company’s deferred tax assets and liabilities at December 31, 2008 and
2007 are as follows:
Deferred tax assets:
Tax loss carryovers
Capital loss carryovers
Accrued postretirement benefits
Other, principally accrued liabilities
Total deferred tax assets
Deferred tax liabilities:
Property, plant and equipment
Inventory
Other
Total deferred tax liabilities
Valuation allowance
Net deferred tax liabilities
2008
2007
$
233.5
23.7
20.2
190.0
467.4
$
242.1
32.7
24.4
195.5
494.7
143.9
13.4
46.1
203.4
(255.4)
221.8
20.0
49.7
291.5
(213.9)
$
8.6
$
(10.7)
Deferred taxes are included in the Consolidated Balance Sheets at December 31, 2008 and 2007 as
follows:
Prepaid expenses
Deposits, receivables, and other assets
Deferred taxes
Net deferred tax liabilities
2008
2007
$
24.8
101.3
(117.5)
$
11.8
124.7
(147.2)
$
8.6
$
(10.7)
172
The provision for income taxes consists of the following:
Current:
U.S. Federal
State
Foreign
Deferred:
U.S. Federal
State
Foreign
Total:
U.S. Federal
State
Foreign
2008
2007
2006
$
(0.4)
0.6
213.0
$
-
0.4
144.3
$
-
0.3
113.1
213.2
144.7
113.4
4.0
(3.2)
9.8
10.6
3.6
(2.6)
222.8
0.3
(4.0)
(1.9)
(5.6)
0.3
(3.6)
142.4
12.9
(3.6)
16.1
25.4
12.9
(3.3)
129.2
$
223.8
$
139.1
$
138.8
The provision for income taxes was calculated based on the following components of earnings (loss)
before income taxes:
Domestic
Foreign
2008
2007
2006
$
191.2
698.9
$
37.4
687.3
$
(119.1)
452.6
$
890.1
$
724.7
$
333.5
173
A reconciliation of the provision for income taxes based on the statutory U.S. Federal tax rate of 35% to
the provision for income taxes is as follows:
2008
2007
2006
Tax provision (benefit) on pretax earnings (loss) from continuing
operations at statutory U.S. Federal tax rate
Increase (decrease) in provision for income taxes
due to:
Valuation allowance - U.S.
Foreign subsidiary ownership restructuring and incentives
Foreign source income taxable in the U.S.
Reversal of non-U.S. tax valuation allowance
Foreign tax credit utilization
State taxes, net of federal benefit
Rate differences on non-U.S. earnings
Adjustment for non-U.S. tax law changes
Other items
$
311.5
$
253.7
$
116.7
(53.7)
35.1
11.3
-
-
(1.3)
(55.3)
(20.1)
(3.7)
(538.3)
535.9
29.3
(13.4)
(47.9)
(4.8)
(65.8)
(9.9)
0.3
46.5
30.8
1.8
(34.7)
(0.3)
(22.1)
(1.6)
1.7
Provision for income taxes
$
223.8
$
139.1
$
138.8
In 2007 the Company implemented a plan to restructure the ownership and intercompany obligations of
certain foreign subsidiaries. These actions resulted in taxation of a significant portion of previously
unremitted foreign earnings and will transfer a portion of the Company’s debt service obligations to
operations outside the U.S. in order to better balance operating cash flows with financing costs on a
global basis. The foreign earnings reported as taxable in the U.S. were offset by net operating loss
carryforwards and foreign tax credits. Foreign tax credit carryforwards arising from the restructuring were
fully offset by an increase in the valuation allowance.
The Company has recognized tax benefits as a result of incentives in certain non-U.S. jurisdictions which
expire between 2012 and 2015.
The Company is included in OI Inc.’s consolidated tax returns. OI Inc. has net operating losses, capital
losses, alternative minimum tax credits, and research and development credits available to offset future
U.S. Federal income tax.
At December 31, 2008, the Company’s equity in the undistributed earnings of foreign subsidiaries for
which income taxes had not been provided approximated $1,583.2 million. The Company intends to
reinvest these earnings indefinitely in the non-U.S. operations. It is not practicable to estimate the U.S.
and foreign tax which would be payable should these earnings be distributed.
The Company adopted FASB Interpretation 48, “Accounting for Uncertainty in Income Taxes,” (“FIN
48”) as of January 1, 2007. This interpretation was issued to clarify the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109,
“Accounting for Income Taxes.” FIN 48 defines criteria that a tax position must meet for any part of the
benefit of that position to be recognized in an enterprise’s financial statements and also includes
requirements for measuring the amount of the benefit to be recognized in the financial statements.
174
As a result of the adoption of FIN 48, the Company recognized no adjustment to retained earnings for
unrecognized income tax benefits. The Company reclassified $28.5 million of deferred tax assets related
to general business credits and net operating losses that were previously offset by a full valuation
allowance to the liability for unrecognized income tax benefits. This balance sheet reclassification had no
effect on share owners’ equity. In connection with the adoption of FIN 48, the Company is maintaining its
historical method of accruing interest and penalties associated with unrecognized income tax benefits as a
component of its income tax expense.
The following is a reconciliation of the Company’s total gross unrecognized tax benefits for the year
ended December 31, 2008:
2008
2007
Balance at January 1
Additions for tax positions of prior years
Reductions for tax positions of prior years
Additions based on tax positions related to the current year
Reductions due to the lapse of the applicable statute of limitations
Reductions due to settlements
Balance at December 31
$
$
53.0
51.2
(2.1)
6.1
(3.1)
(2.0)
103.1
45.8
0.1
(2.5)
11.0
(1.4)
-
53.0
$
$
At December 31, 2008 and December 31, 2007, accrued interest and penalties related to unrecognized tax
benefits were $14.5 million and $3.9 million, respectively. Tax expense for the year ended December 31,
2008 includes interest and penalties of $5.4 million on unrecognized tax benefits for prior years.
The unrecognized tax benefit liability, including interest and penalties, as of December 31, 2008 and
December 31, 2007 was $117.6 million and $56.9 million respectively. Approximately $72.7 million and
$41.1 million as of December 31, 2008 and December 31, 2007, respectively, relate to unrecognized tax
benefits, which if recognized, would impact the Company’s effective income tax rate. This amount
differs from the gross unrecognized tax benefits presented in the table above because of the unrecognized
tax benefits that would result in the utilization of certain tax attribute carryforwards that are currently
subject to a full valuation allowance due to uncertainties about their future period utilization.
For federal and certain state income tax purposes, the taxable income of the Company is included in the
consolidated tax returns of OI Inc. and income taxes are allocated to the Company on a basis consistent
with separate returns. Tax years through 1999 have been settled with the U.S. Internal Revenue Service
and there is no current IRS examination in progress. Due to the existence of tax attribute carryforwards
(which are currently offset by full valuation allowances) in the U.S., the Company treats certain post-1999
tax positions as unsettled because of the taxing authorities’ ability to modify these attributes. The 2000
tax year is the earliest open year for the Company’s other major tax jurisdictions.
The Company does not anticipate a significant change in the total amount of unrecognized income tax
benefits within the next twelve months.
11. Related Party Transactions Charges for administrative services are allocated to the Company by
OI Inc. based on an annual utilization level. Such services include compensation and benefits
administration, payroll processing, use of certain general accounting systems, auditing, income tax
planning and compliance, and treasury services. Beginning in 2008, the Company revised its method of
allocating corporate expenses. The Company decreased slightly the percentage allocation based on sales
and significantly expanded the number of functions included in the allocation based on cost of services.
175
Allocated costs also include charges associated with OI Inc.’s equity compensation plans. A substantial
number of the options, restricted shares and restricted share units granted under these plans have been
granted to key employees of another subsidiary of OI Inc., some of whose compensation costs, including
stock-based compensation, are included in an allocation of costs to all operating subsidiaries of OI Inc.,
including the Company.
Management believes that such transactions are on terms no less favorable to the Company than those that
could be obtained from unaffiliated third parties.
The following information summarizes the Company’s significant related party transactions:
Revenues:
Sales to affiliated companies
Expenses:
Administrative services
Corporate management fee
Trademark royalties
Total expenses
Years ended December 31,
2007
2008
2006
$
-
$
0.3
$
0.5
15.0
60.9
19.9
95.8
$
19.5
29.1
25.5
27.1
$
48.6
$
52.6
The above expenses are recorded in the statement of operations as follows:
Cost of sales
Selling, general, and
adminstrative expenses
Total expenses
Years ended December 31,
2007
2008
2006
$
0.9
$
16.9
$
22.6
94.9
31.7
30.0
$
95.8
$
48.6
$
52.6
Intercompany interest is charged to the Company from OI Inc. based on intercompany debt balances. An
interest rate is calculated monthly based on OI Inc.’s total consolidated monthly external debt balance and
the related interest expense, including finance fee amortization and commitment fees. The calculated rate
(6.3% at December 31, 2008) is applied monthly to the intercompany debt balance to determine
intercompany interest expense.
12. Pension Benefit Plans and Other Postretirement Benefits
Pension Benefit Plans
The Company participates in OI Inc.’s defined benefit pension plans for substantially all employees
located in the United States. Benefits generally are based on compensation for salaried employees and on
length of service for hourly employees. OI Inc.’s policy is to fund pension plans such that sufficient
assets will be available to meet future benefit requirements. Independent actuaries determine pension
costs for each subsidiary of OI Inc. included in the plans; however, accumulated benefit obligation
information and plan assets pertaining to each subsidiary have not been separately determined. As such,
the accumulated benefit obligation and the plan assets related to the pension plans for domestic
employees have been retained by another subsidiary of OI Inc. Net credits to results of operations for the
176
Company’s allocated portion of the domestic pension costs amounted to $39.9 million in 2008, $23.0
million in 2007, and $7.7 million in 2006.
OI Inc. also sponsors several defined contribution plans for all salaried and hourly U.S. employees of the
Company. Participation is voluntary and participants’ contributions are based on their compensation. OI
Inc. matches contributions of participants, up to various limits, in substantially all plans. OI Inc. charges
the Company for its share of the match. The Company’s share of the contributions to these plans
amounted to $6.0 million in 2008, $5.7 million in 2007, and $5.5 million in 2006.
The Company’s subsidiaries in the United Kingdom, the Netherlands, Canada, Australia, and many
employees of Germany and France also have pension plans covering substantially all employees. The
following tables relate to the Company’s principal defined benefit pension plans in the United Kingdom,
the Netherlands, Canada, Australia, Germany and France (the International Pension Plans).
The International Pension Plans use a December 31 measurement date.
The changes in the International Pension Plans benefit obligations for the year were as follows:
Obligations at beginning of year
Change in benefit obligations:
Service cost
Interest cost
Actuarial gain, including the effect of change in discount rates
Participant contributions
Benefit payments
Plan amendments
Curtailments
Special termination benefits
Foreign currency translation
Other
Net change in benefit obligations
2008
2007
$
1,617.1
$
1,544.4
22.0
82.9
(52.7)
8.8
(89.4)
(9.5)
4.4
(284.2)
(317.7)
25.0
78.8
(92.1)
10.0
(85.5)
(3.5)
(2.6)
136.4
6.2
72.7
Obligations at end of year
$
1,299.4
$
1,617.1
177
The changes in the fair value of the International Pension Plans’ assets for the year were as follows:
Fair value at beginning of year
Change in fair value:
Actual gain (loss) on plan assets
Benefit payments
Employer contributions
Participant contributions
Foreign currency translation
Net change in fair value of assets
2008
2007
$
1,376.8
$
1,253.3
(220.6)
(89.4)
60.1
8.8
(213.7)
(454.8)
24.4
(85.5)
59.6
10.0
115.0
123.5
Fair value at end of year
$
922.0
$
1,376.8
The funded status of the International Pension Plans at year end was as follows:
Plan assets at fair value
Projected benefit obligations
Plan assets less than projected benefit obligations
Items not yet recognized in pension expense:
Actuarial loss
Prior service credit
2008
2007
$
922.0
1,299.4
$
1,376.8
1,617.1
(377.4)
(240.3)
362.9
(15.1)
347.8
212.0
(14.7)
197.3
Net amount recognized
$
(29.6)
$
(43.0)
The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2008 and
2007 as follows:
2008
2007
Prepaid pension
Current pension liability, included with Other accrued liabilities
Noncurrent pension liability, included with Pension benefits
Accumulated other comprehensive income
Net amount recognized
178
$
$
-
(7.2)
(370.2)
347.8
(29.6)
58.1
(8.5)
(289.9)
197.3
(43.0)
$
$
The following changes in plan assets and benefit obligations were recognized in accumulated other
comprehensive income at December 31, 2008 as follows:
Current year actuarial (gain) loss
Amortization of actuarial loss
Amortization of prior service credit
Curtailment
Translation
Pretax
$
226.7
(5.2)
0.6
(8.5)
213.6
Tax
Effect
$
(62.2)
1.1
(0.1)
2.4
(58.8)
$
213.6
$
(58.8)
After-tax
$
164.5
(4.1)
0.5
(6.1)
154.8
(44.9)
109.9
$
The accumulated benefit obligation for all defined benefit pension plans was $1,463.8 million and
$1,129.5 million at December 31, 2007 and 2008, respectively.
The components of the International Pension Plans’ net pension expense were as follows:
Service cost
Interest cost
Expected asset return
Curtailment loss
Special termination benefit
Other
Amortization:
Prior service cost (credit)
Loss
Net amortization
Net expense
2008
2007
2006
$
21.9
82.9
(96.5)
0.1
4.4
(1.1)
(0.6)
5.2
4.6
$
25.0
78.8
(94.5)
0.1
$
28.1
69.1
(81.5)
5.2
(0.1)
11.4
11.3
0.2
15.8
16.0
$
16.3
$
25.9
$
31.7
Amounts that will be amortized from accumulated other comprehensive income into net pension expense
during 2009:
Amortization:
Loss
Prior service credit
Net amortization
$
5.2
(0.8)
$
4.4
179
The following information is for plans with projected benefit obligations in excess of the fair value of
plan assets at year end:
P rojected benefit obligations
Fair value of plan assets
2008
2007
$
1,299.4
922.0
$
1,114.6
816.1
The following information is for plans with accumulated benefit obligations in excess of the fair value of
plan assets at year end:
Accumulated benefit obligations
Fair value of plan assets
2008
2007
$
1,129.5
922.0
$
1,008.3
816.1
The weighted average assumptions used to determine benefit obligations were as follows:
Discount rate
Rate of compensation increase
2008
2007
5.88%
2.65%
5.46%
3.39%
The weighted average assumptions used to determine net periodic pension costs were as follows:
Discount rate
Rate of compensation increase
Expected long-term rate of return on assets
2008
2007
2006
5.46%
3.39%
6.96%
4.92%
3.34%
7.16%
4.57%
3.78%
7.15%
Future benefits are assumed to increase in a manner consistent with past experience of the plans, which,
to the extent benefits are based on compensation, includes assumed salary increases as presented above.
Amortization included in net pension expense is based on the average remaining service of employees.
For 2008, the Company’s weighted average expected long-term rate of return on assets was 6.96%. In
developing this assumption, the Company evaluated input from its third party pension plan asset
managers, including their review of asset class return expectations and long-term inflation assumptions.
The Company also considered its historical 10-year average return (through December 31, 2007), which
was in line with the expected long-term rate of return assumption for 2008.
180
The weighted average actual asset allocations and weighted average target allocation ranges by asset
category for the Company’s pension plan assets were as follows:
Asset Category
Equity securites
Debt securities
Real estate
Other
Total
Actual Allocation
2008
2007
31%
56%
5%
8%
100%
63%
28%
5%
4%
100%
Target
Allocation
Ranges
28-38%
44-54%
0-10%
8-18%
It is the Company’s policy to invest pension plan assets in a diversified portfolio consisting of an array of
asset classes within the above target asset allocation ranges. The investment risk of the assets is limited
by appropriate diversification both within and between asset classes. The assets are primarily invested in
a broad mix of domestic and international equities, domestic and international bonds, and real estate,
subject to the target asset allocation ranges. The assets are managed with a view to ensuring that
sufficient liquidity will be available to meet expected cash flow requirements.
Based on exchange rates at the end of 2008, the Company expects to contribute approximately $70
million to $75 million to its defined benefit pension plans in 2009.
The following estimated future benefit payments, which reflect expected future service, as appropriate,
are expected to be paid in the years indicated:
Year(s)
2009
2010
2011
2012
2013
2014 - 2018
Amount
97.0
70.0
70.0
74.0
76.9
400.2
Postretirement Benefits Other Than Pensions
OI Inc. provides certain retiree health care and life insurance benefits covering substantially all U.S.
salaried and certain hourly employees and substantially all employees in Canada and The Netherlands.
Employees are generally eligible for benefits upon retirement and completion of a specified number of
years of creditable service. Independent actuaries determine postretirement benefit costs for each
subsidiary of OI Inc.; however, accumulated postretirement benefit obligation information pertaining to
each subsidiary has not been separately determined. As such, the accumulated postretirement benefit
obligation has been retained by another subsidiary of OI Inc.
The Company’s net periodic postretirement benefit cost, as allocated by OI Inc., for domestic employees
was $5.8 million, $8.1 million, and $14.7 million, at December 31, 2008, 2007, and 2006, respectively.
181
The Company’s subsidiaries in Canada and the Netherlands also have postretirement benefit plans
covering substantially all employees. The following tables relate to the Company’s postretirement benefit
plan in Canada and the Netherlands (the International Postretirement Benefit Plans).
The changes in the International Postretirement Benefit Plans obligations were as follows:
Obligations at beginning of year
Change in benefit obligations:
Service cost
Interest cost
Actuarial (gain) loss, including the effect of changing discount rates
Curtailments
Special termination benefits
Benefit payments
Foreign currency translation
Net change in benefit obligations
Obligations at end of year
2008
2007
$
95.0
$
76.9
1.2
4.5
(11.9)
(2.9)
0.9
(3.1)
(16.7)
1.3
4.0
2.5
(0.8)
(3.3)
14.4
(28.0)
18.1
$
67.0
$
95.0
The funded status of the International Postretirement Benefit Plans at year end was as follows:
Postretirement benefit obligations
Items not yet recognized in net postretirement benefit cost:
Actuarial gain
Net amount recognized
2008
2007
$
67.0
$
95.0
6.8
(7.3)
$
73.8
$
87.7
The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2008 and
2007 as follows:
Current nonpension postretirement benefit, included with
Other accrued liabilities
Nonpension postretirement benefits
Accumulated other comprehensive income
Net liability recognized
2008
2007
$
(3.1)
(63.9)
(6.8)
$
(3.7)
(91.3)
7.3
$
(73.8)
$
(87.7)
182
The following changes in benefit obligations were recognized in accumulated other comprehensive
income at December 31, 2008 as follows:
Current year actuarial loss
Amortization of actuarial loss
Curtailment
Translation
Pretax
$
(10.4)
0.1
(2.5)
(12.8)
Tax
Effect
After-tax
$
3.0
$
0.7
3.7
(7.4)
0.1
(1.8)
(9.1)
(1.2)
(10.3)
$
(12.8)
$
3.7
$
The Company’s nonpension postretirement benefit obligations are included with other long term
liabilities on the balance sheet.
The components of International Postretirement Benefit Plans net postretirement benefit cost were as
follows:
Service cost
Interest cost
Curtailment
Special termination benefit
Other
Amortization:
Gain
2008
2007
2006
$
1.2
4.5
0.9
0.1
$
1.3
4.0
$
1.9
4.2
(15.9)
0.6
(0.1)
(0.3)
(1.0)
Net postretirement benefit cost
$
6.6
$
5.0
$
(10.2)
The weighted average discount rate used to determine the accumulated postretirement benefit obligation
was 6.4% and 4.8% at December 31, 2008 and 2007, respectively.
The weighted average discount rate used to determine net postretirement benefit cost was 4.8% at
December 31, 2008, 5.2% at December 31, 2007, and 4.8% at December 31, 2006.
The weighted average assumed health care cost trend rates at December 31 were as follows:
Health care cost trend rate assumed for next year
Rate to which the cost trend rate is assumed to decline
(ultimate trend rate)
Year that the rate reaches the ultimate trend rate
2008
9.00%
2007
9.65%
5.00%
2010
4.82%
2010
183
Assumed health care cost trend rates affect the amounts reported for the postretirement benefit plans. A
one-percentage-point change in assumed health care cost trend rates would have the following effects:
1-Percentage-
Point Increase
1-Percentage-
Point Decrease
Effect on total of service and interest cost
Effect on accumulated postretirement benefit obligations
$
0.9
9.3
$
0.7
7.7
Amortization included in net postretirement benefit cost is based on the average remaining service of
employees.
The following estimated future benefit payments, which reflect expected future service, as appropriate,
are expected to be paid in the years indicated:
Year(s)
2009
2010
2011
2012
2013
2014 - 2018
Amount
$
3.1
3.4
3.7
4.1
4.4
25.9
Benefits provided by OI Inc. for certain hourly retirees of the Company are determined by collective
bargaining. Most other domestic hourly retirees receive health and life insurance benefits from a multi-
employer trust established by collective bargaining. Payments to the trust as required by the bargaining
agreements are based upon specified amounts per hour worked and were $8.9 million in 2008, $7.4
million in 2007, and $6.6 million in 2006. Postretirement health and life benefits for retirees of foreign
subsidiaries are generally provided through the national health care programs of the countries in which
the subsidiaries are located.
13. Other Income Other income in 2006 includes a gain of $15.9 million ($11.2 million after tax)
related to curtailment of certain postretirement benefits in The Netherlands.
14. Other Expense Other expense for the year ended December 31, 2008 included the following:
The Company recorded charges totaling $132.4 million ($110.1 million after tax and minority
shareowners’ interests), for restructuring and asset impairment. The charges reflect the additional
decisions reached in the Company’s ongoing strategic review of its global manufacturing
footprint. See Note 15 for additional information.
Other costs and expenses for the year ended December 31, 2007 included the following:
In the South American Segment’s 50%-owned Caribbean affiliate, declining productivity and
cash flows resulted in impairment of the Company’s equity investment, establishment of
valuation allowances against advances to the affiliate, and accrual of certain contingent
184
obligations for total charges of $45.0 million ($43.9 million after tax) recorded in 2007 with an
additional $0.9 million (before and after tax) recorded in the first quarter of 2008.
The Company recorded charges totaling $55.3 million ($40.2 million after tax), for restructuring
and asset impairment. The charges reflect the additional decisions reached in the Company’s
ongoing strategic review of its global manufacturing footprint. See Note 15 for additional
information.
Other costs and expenses for the year ended December 31, 2006 included the following:
During the third quarter of 2006, the Company recorded a charge of $27.5 million ($25.6 million
after tax), principally related to the closing of its Godfrey, Illinois machine parts manufacturing
operation.
15. Restructuring Accruals Beginning in 2007, the Company commenced a strategic review of its
global profitability and manufacturing footprint. The combined 2007 and 2008 charges, amounting to
$187.7 million ($150.3 million after tax and minority shareowners’ interests) and approximately 1,800
jobs and corresponding reduction in the Company’s workforce, reflect the decisions reached through
December 31, 2008 in the Company’s ongoing strategic review of its global manufacturing footprint
commenced in mid-2007. Amounts recorded by the Company do not include any gains that may be
realized upon the ultimate sale or disposition of closed facilities.
2007
During the third and fourth quarters of 2007, the Company recorded restructuring charges totaling $55.3
million ($40.2 million after tax), for restructuring and asset impairment in Europe and North America.
As a result of its strategic review, the Company decided to curtail selected production capacity. Because
the future undiscounted cash flows of the related asset groups were not sufficient to recover their carrying
amounts, certain assets were considered impaired. As a result, those assets were written down to the
extent their carrying amounts exceeded fair value. The curtailment of plant capacity resulted in
elimination of approximately 560 jobs and a corresponding reduction in the Company’s workforce. The
Company accrued certain employee separation costs, plant clean up, and other exit costs.
2008
During 2008, the Company recorded restructuring charges totaling $132.4 million ($110.1 million after
tax and minority share owners’ interests). The 2008 charges consisted primarily of $85.5 million for the
closure of two Canadian plants with additional charges across all segments as well as in Retained
Corporate Costs and Other.
As a continuation of the Company’s strategic review in 2008, the Company decided to curtail and realign
selected production capacity and other activities across all segments as well as in Retained Corporate
Costs and Other. Because the future undiscounted cash flows of the related asset groups were not
sufficient to recover their carrying amounts, certain assets were considered impaired. As a result, those
assets were written down to the extent their carrying amounts exceeded fair value. The curtailment of
plant capacity and realignment of selected operations will result in elimination of approximately 1,240
jobs and a corresponding reduction in the Company’s workforce. The Company accrued certain
employee separation costs, plant clean up, and other exit costs.
Probable cash expenditures for the 2007 and 2008 charges are expected to total approximately $110
million. The Company expects that the majority of these costs will be paid out by the end of 2009.
185
Selected information related to the restructuring accrual is as follows:
Employee
Costs
Asset
Impairment
Other
Total
2007 Charges
Write-down of assets to net realizable value
Total restructuring accrual at December 31, 2007
2008 charges
Write-down of assets to net realizable value
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining restructuring accrual
as of December 31, 2008
$
22.3
(22.3)
-
32.5
(32.5)
$
26.1
-
26.1
70.1
(35.6)
(13.0)
$
6.9
(2.4)
4.5
29.8
(4.7)
(7.2)
(6.1)
$
55.3
(24.7)
30.6
132.4
(37.2)
(42.8)
(19.1)
$
47.6
$
-
$
16.3
$
63.9
BSN Acquisition
During the second quarter of 2005, the Company concluded its evaluation of acquired capacity in
connection with the acquisition of BSN Glasspack S.A. and announced the permanent closing of its
Düsseldorf, Germany glass container factory, and the shutdown of a furnace at its Reims, France glass
container facility, both in 2005. These actions were part of the European integration strategy to optimally
align the manufacturing capacities with the market and improve operational efficiencies. As a result, the
Company recorded an accrual of €47.1 million through an adjustment to goodwill.
These actions resulted in the elimination of approximately 400 jobs and a corresponding reduction in the
Company’s workforce. The Company anticipates that it will pay a total of approximately €110.9 million
in cash related to severance, benefits, plant clean-up, and other plant closing costs related to restructuring
accruals.
The European restructuring accrual recorded in the second quarter of 2005 was in addition to the initial
estimated accrual of €63.8 million recorded in 2004. Selected information related to the restructuring
accrual is as follows, with 2008 activity translated from Euros into dollars at the December 31, 2008
exchange rate:
Remaining European restructuring accrual
as of January 1, 2006
Net cash paid, principally severance and related benefits
Partial reversal of accrual (goodwill adjustment)
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2006
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2007
Net cash paid, principally severance and related benefits
Other, principally foreign exchange translation
Remaining European restructuring accrual
as of December 31, 2008
186
$
80.9
(33.7)
(7.6)
(1.5)
38.1
(17.8)
7.4
27.7
(6.1)
(4.8)
$
16.8
16. Contingencies Certain 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. In
accordance with FAS No. 5, “Accounting for Contingencies,” the Company records a liability for such
matters when it is both probable that the liability has been incurred and the amount of the liability can be
reasonably estimated. Recorded amounts are reviewed and adjusted to reflect changes in the factors upon
which the estimates are based including additional information, negotiations, settlements, and other
events. The ultimate legal and financial liability of the Company in respect to this 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 have a material adverse
effect on its results of operations or financial condition.
17. Segment Information The Company has four reportable segments based on its four geographic
locations: (1) North America; (2) Europe; (3) Asia Pacific; (4) South America. These four segments are
aligned with the Company’s internal approach to managing, reporting, and evaluating performance of its
global glass operations. Certain assets and activities not directly related to one of the regions or to glass
manufacturing are reported with Other. These include licensing, equipment manufacturing, global
engineering, and non-glass equity investments.
The Company’s measure of profit for its reportable segments is Segment Operating Profit, which consists
of consolidated earnings before interest income, interest expense, provision for income taxes and minority
share owners’ interests in earnings of subsidiaries and excludes amounts related to certain items that
management considers not representative of ongoing operations. The Company’s management uses
Segment Operating Profit, in combination with selected cash flow information, to evaluate performance
and to allocate resources.
Segment Operating Profit for reportable segments includes an allocation of some corporate expenses
based on both a percentage of sales and direct billings based on the costs of specific services provided.
Beginning in 2008, the OI Inc. revised its method of allocating corporate expenses. OI Inc. decreased
slightly the percentage allocation based on sales and significantly expanded the number of functions
included in the allocation based on cost of services. It is not practicable to quantify the net effect of these
changes on periods prior to 2008.
Financial information regarding the Company’s reportable segments is as follows:
Net Sales:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Other
Net sales
2008
$
3,497.8
2,209.7
1,135.9
964.1
$
2007
3,298.7
2,271.3
970.7
934.3
$
2006
2,846.6
2,110.4
796.5
804.9
7,807.5
77.2
7,884.7
$
7,475.0
91.7
7,566.7
$
6,558.4
134.0
6,692.4
$
187
Segment Operating Profit:
Europe
North America
South America
Asia Pacific
Reportable segment totals
Items excluded from Segment Operating Profit:
Other
Restructuring and asset impairments
CEO and other transition charges
Curtailment of postretirement benefits in The Netherlands
Mark to market effect of natural gas hedge contracts
2008
2007
2006
$
477.8
185.2
331.0
162.8
1,156.8
$
433.0
265.1
254.9
154.0
1,107.0
$
249.6
187.3
195.0
102.9
734.8
68.1
(133.3)
47.3
(100.3)
10.0
(27.5)
(6.0)
15.9
(8.7)
Interest income
Interest expense
Earnings before income taxes and minority share
owners' interests in earnings of subsidiaries
36.1
(237.6)
26.9
(356.2)
16.6
(401.6)
$
890.1
$
724.7
$
333.5
North
America
Europe
Asia
Pacific
South
America
Total
Reportable
Segments
Other
Consoli-
dated
Totals
3,758.4
4,124.1
3,838.0
$
$
$
$
12.6
10.4
10.5
1,792.3
1,936.0
1,765.7
Total assets:
2008
2007
2006
Equity earnings:
2008
2007
2006
Capital expenditures (1):
2008
$
2007
2006
Depreciation and amortization expense:
2008
2007
2006
98.7
107.3
110.2
90.5
65.9
57.8
$
$
$
14.1
8.0
6.9
151.9
129.2
105.4
222.0
210.3
203.3
$
1,239.6
1,558.1
1,454.4
$
976.2
965.7
765.7
$
7,766.5
8,583.9
7,823.8
$
127.9
94.6
307.8
$
7,894.4
8,678.5
8,131.6
$
-
$
-
(2.7)
(4.8)
$
26.7
15.7
12.6
$
24.1
18.4
10.8
$
50.8
34.1
23.4
$
57.6
42.0
47.8
$
80.4
81.7
81.4
$
$
57.3
51.1
59.2
56.5
54.3
56.3
$
357.3
288.2
270.2
$
3.6
2.2
1.3
$
457.6
453.6
451.2
$
2.6
2.2
7.9
$
$
360.9
290.4
271.5
460.2
455.8
459.1
(1) Excludes property, plant and equipment acquired through acquisitions.
188
The Company’s net property, plant, and equipment by geographic segment are as follows:
2008
2007
2006
United
States
Foreign
Total
$
636.3
633.1
668.4
$
1,966.1
2,271.1
2,172.8
$
2,602.4
2,904.2
2,841.2
The Company's net sales by geographic segment are as follows:
2008
2007
2006
United
States
Foreign
Total
$
1,894.8
1,920.6
1,787.6
$
5,989.9
5,646.1
4,904.8
$
7,884.7
7,566.7
6,692.4
Operations in individual countries outside the United States that accounted for more than 10% of
consolidated net sales were in Italy (2008 - 10.7%, 2007 - 10.1%) and France (2008 - 14.7%,
2007 - 19.3%, 2006 - 19.3%).
18. Additional Interest Charges from Early Extinguishment of Debt During 2007, the Company
recorded additional interest charges of $9.5 million ($8.8 million after tax) for note repurchase premiums
and the write-off of unamortized finance fees related to debt that was repaid prior to its maturity. During
2006, the Company recorded additional interest charges of $17.5 million ($17.1 million after tax) for note
repurchase premiums and the write-off of unamortized finance fees related to debt that was repaid prior to
its maturity.
19. Goodwill The changes in the carrying amount of goodwill for the years ended December 31, 2006,
2007 and 2008 are as follows:
Balance as of January 1, 2006
Translation effects
Other changes, principally adjustments to
reverse foreign deferred tax valuation
allowances
Balance as of December 31, 2006
Translation effects
Other changes
Balance as of December 31, 2007
Translation effects
Other changes
Balance as of December 31, 2008
North
America
747.5
2.8
$
$
Europe
926.7
99.5
Asia
Pacific
$
470.8
31.3
South
America
$
-
Other
$
14.7
(28.7)
721.6
25.1
(1.1)
745.6
(28.8)
$
716.8
(9.2)
1,017.0
115.3
(13.0)
1,119.3
(58.2)
(10.1)
1,051.0
$
502.1
54.6
556.7
(123.1)
-
-
$
433.6
$
-
(0.2)
14.5
(8.0)
6.5
0.3
(0.7)
6.1
$
Total
2,159.7
133.6
-
-
(38.1)
2,255.2
195.0
(22.1)
2,428.1
(209.8)
(10.8)
2,207.5
$
$
During the fourth quarters of 2008, 2007 and 2006, the Company completed its annual impairment testing
and determined that no impairment existed.
189
20. Fair Value Measurements In September 2006, the FASB issued Statement of Financial Accounting
Standards No. 157, “Fair Value Measurements” (FAS No. 157), which defines fair value, establishes a
framework for measuring fair value and enhances disclosure about fair value measurements. On
February 2, 2008, the FASB issued FASB Staff Position No. 157-2 (FSP 157-2) which delays the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are
recognized or disclosed at fair value in the financial statements on at least an annual basis. Where the
measurement objective specifically requires the use of “fair value” the Company has adopted the
provisions of FAS No. 157 related to financial assets and financial liabilities as of January 1, 2008. The
adoption of FAS No. 157 had no impact on the Company.
FAS No. 157 clarifies that fair value is an exit price, representing the amount that would be received to
sell an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market participants. FAS No. 157 establishes a three-
tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly;
and
Level 3: Unobservable inputs for which there is little or no market data, which requires the Company to
develop assumptions.
The Company’s derivative assets and liabilities consist of interest rate swaps, natural gas forwards, and
foreign exchange option and forward contracts. The Company uses an income approach to valuing these
contracts. Interest rate yield curves, natural gas forward rates, and foreign exchange rates are the
significant inputs into the valuation models. These inputs are observable in active markets over the terms
of the instruments the Company holds, and accordingly, the Company classifies the $0.4 net derivative
liability as Level 2 in the hierarchy. The Company also evaluates counterparty risk in determining fair
values.
The Company adopted Statement of Financial Accounting Standards No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115” (“FAS
No. 159”), effective January 1, 2008. This standard permits entities to choose to measure many financial
instruments and certain other items at fair value. While FAS No. 159 became effective January 1, 2008,
the Company did not elect the fair value measurement option for any of its financial assets or liabilities.
190
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
(Registrant)
By:/s/ James W. Baehren
James W. Baehren
Attorney-in-fact
Date: February 17, 2009
191
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of Owens-Illinois, Inc. and in the capacities and on the dates indicated.
Signatures
Signatures
Title
Albert P.L. Stroucken
Chairman of the Board of Directors and Chief Executive Officer
(Principal Executive Officer); Director
Edward C. White
Gary F. Colter
Peter S. Hellman
David H. Y. Ho
Anastasia D. Kelly
Senior Vice President and Chief Financial Officer (Principal Financial
Officer)
Director
Director
Director
Director
John J. McMackin, Jr.
Director
Corbin A. McNeill, Jr.
Director
Hugh H. Roberts
Helge H. Wehmeier
Dennis K. Williams
Thomas L. Young
Director
Director
Director
Director
By:/s/ James W. Baehren
James W. Baehren
Attorney-in-fact
Date: February 17, 2009
192
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INDEX TO FINANCIAL STATEMENT SCHEDULE
Financial Statement Schedule of Owens-Illinois, Inc. and Subsidiaries:
For the years ended December 31, 2008, 2007, and 2006:
II – Valuation and Qualifying Accounts (Consolidated) . . . . . . . . . . . . . . . . . .
S-1
PAGE
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OWENS-ILLINOIS, INC.
SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS (CONSOLIDATED)
Years ended December 31, 2008, 2007, and 2006
(Millions of Dollars)
Reserves deducted from assets in the balance sheets:
Allowances for losses and discounts on receivables
Additions
Balance at
beginning
of period
Charged to
costs and
expenses
Other
Deductions
(Note 1)
Balance
at end of
period
2008
2007
2006
$
36.0
$
8.1
$
(0.7)
$
3.7
$
39.7
$
28.7
$
4.1
$
8.1
$
4.9
$
36.0
$
22.5
$
4.2
$
5.3
$
3.3
$
28.7
(1) Deductions from allowances for losses and discounts on receivables represent
uncollectible notes and accounts written off.
S-1
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EXHIBIT 21
SUBSIDIARIES OF OWENS-ILLINOIS, INC.
Owens-Illinois, Inc. had the following subsidiaries at December 31, 2008 (subsidiaries are indented
following their respective parent companies):
Owens-Illinois Group, Inc.
OI General Finance Inc.
OI General FTS Inc.
Name
OI Castalia STS Inc.
OI Levis Park STS Inc.
Owens-Illinois General Inc.
Owens Insurance, Ltd.
Universal Materials, Inc.
Sovereign Air, LLC
OI Advisors, Inc.
OI Securities Inc.
OI Transfer Inc.
Maumee Air Associates Inc.
OI Australia Inc.
Continental PET Holdings Pty. Ltd.
ACI America Holdings, Inc.
ACI Ventures, Inc.
Owens-Brockway Packaging, Inc.
Owens-Brockway Glass Container Inc.
Brockway Realty Corp.
NHW Auburn, LLC
OI Auburn Inc.
SeaGate, Inc.
Ohio Companies
OIB Produvisa Inc.
OI California Containers Inc.
OI Puerto Rico STS Inc.
O-I Caribbean Sales & Distribution Inc.
Bolivian Investments, Inc.
Fabrica Boliviana de Vidrios S.A.
OI International Holdings Inc.
OI Holding LLC
OI Global C.V.
OI Hungary LLC
OI Mfg Hungary Ltd.
E-1
State/Country
of Incorporation
or Organization
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Bermuda
Ohio
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Australia
Delaware
Delaware
Delaware
Delaware
Pennsylvania
Delaware
Delaware
Ohio
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Bolivia
Delaware
Delaware
Netherlands
Delaware
Hungary
Subsidiairies of the Registrant (continued)
Name
OI Ecuador STS LLC
Cristaleria del Ecuador, S. A.
OI European Group B.V.
Owens-Illinois (Australia) Pty. Ltd.
ACI Packaging Services Pty . Ltd.
ACI Technical Services Pty. Ltd.
ACI Operations Pty. Ltd.
ACI Plastics Packaging (Thailand) Ltd.
Australian Consolidated Industries Pty. Ltd.
ACI International Pty. Ltd.
OI Andover Group Inc.
The Andover Group Inc.
ACI Glass Packaging Penrith Pty. Ltd.
PT Kangar Consolidated Industries
Owens-Illinois (NZ) Ltd.
ACI Operations NZ Ltd.
OI China LLC
Wuhan Owens Glass Container Company Ltd.
Owens-Illinois (HK) Ltd.
ACI Guangdong Ltd.
ACI Guangdong Glass Company Ltd.
ACI Shanghai Ltd.
ACI Shanghai Glass Company Ltd.
ACI Tianjin Ltd.
ACI Tianjin Mould Company Ltd.
Owens-Illinois Services H.K. Ltd.
ACI Beijing Ltd.
OI Tinajin Glass Co. Ltd.
ACI Finance Pty. Ltd.
OI Birmingham Machine Assembly Limited
OI Asia Pacific Holdings
OI Trading (Shanghai) Company Ltd.
OI Europe Sarl
OI Sales and Distribution Netherlands BV
OI Sales and Distribution Germany
E-2
State/Country
of Incorporation
or Organization
Delaware
Ecuador
Netherlands
Australia
Australia
Australia
Australia
Thailand
Australia
Australia
Delaware
Delaware
Australia
Indonesia
New Zealand
New Zealand
Delaware
China
Hong Kong
Hong Kong
China
Hong Kong
China
Hong Kong
China
Hong Kong
Hong Kong
China
Australia
United Kingdom
Mauritius
China
Switzerland
Netherlands
Germany
Subsidiaries of the Registrant (continued)
Name
OI Sales and Distribution Italy S.r.l.
OI Sales and Distribution UK Limited
OI Sales and Distribution Poland Z.o.o.
UGG Holdings Ltd.
OI Overseas Management Company LLC
United Glass Group Ltd.
British Glass Recycling Company Limited
OI Manufacturing Limited
OI Italia S.r.l.
Sonator Investments B.V.
OI Sales and Distribution Spain SL
OI Manufacturing Holdings Spain SL
Ascilusa SL
Vidrieria Rovira, S. L.
OI Spanish Holdings B.V.
Owens-Illinois Peru S. A.
OI Manufacturing Poland
Zanotti Vetro S.p.a.
OI Manufacturing Italy S.p.A.
OI Manufacturing Czech Republic a.s.
OI Sales and Distribution Czech Republic s.r.o.
San Domenico Vetraria S.r.l.
Trasve S.r.l.
OI Napoli Stampi S.r.l.
OI Manufacturing Netherlands B.V.
Veglarec B.V.
OI Europe SAS
OI Manufacturing France SAS
BSN Glasspack Services
OI Sales and Distribution SAS
Atlantique Emballage
Verdome Exploitation
E-3
State/Country
of Incorporation
or Organization
Italy
United Kingdom
Poland
United Kingdom
Delaware
United Kingdom
United Kingdom
United Kingdom
Italy
Netherlands
Spain
Spain
Spain
Spain
Netherlands
Peru
Poland
Italy
Italy
Czech Republic
Czech Republic
Italy
Italy
Italy
Netherlands
Netherlands
France
France
France
France
France
France
Subsidiaries of the Registrant (continued)
Name
SCI Le Mourtis
Fiaver
Prover
OI Glasspack Beteiligungs &
Verwaltungsgesellschaft mbH
OI Glasspack Verwaltungs GmbH
OI Glasspack GmbH & Co. KG
Gebruder Stoevesandt
Vertriebsgellschaft GmbH
OI Canada Holdings B.V.
O-I Canada Corp.
Manufacturera de Vidrios Planos, C.A.
Owens-Illinois de Venezuela, C. A.
Fabrica de Vidrio Los Andes, C. A.
CMC S.A.
Cristaleria Peldar, S.A.
Cristar S.A.
Vidrieria Fenicia
Industria de Materias Primas S.A.
Owens-Illinois America Latina Administracao Ltda
Companhia Industrial Sao Paulo e Rio
Owens-Illinois do Brasil S.A.
Owens-Illinois do Brasil Industria e Comercio S.A.
Cisper da Amazonia S.A.
Mineracao Silminas Ltda.
Mineracao Descalvado Ltda.
LLC Novgorod Steklo
OI Finnish Holdings Oy
OI Manufacturing Finland
UAB Karhulan Lasi Oy
OI Production Estonia AS
OI GMEC Lurin srl
E-4
State/Country
of Incorporation
or Organization
France
France
France
Germany
Germany
Germany
Germany
Netherlands
Canada
Venezuela
Venezuela
Venezuela
Colombia
Colombia
Colombia
Colombia
Colombia
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Russia
Finland
Finland
Lithuania
Estonia
Peru
Directors and Officers
Directors
Officers
Albert P.L. Stroucken
Chairman and Chief Executive Officer
Edward C. White
Senior Vice President and Chief Financial
Officer
James W. Baehren
Senior Vice President, Strategic Planning and
General Council
L. Richard Crawford
Vice President, President of Global Glass
Albert P.L. Stroucken
Chairman and Chief Executive Officer
Gary F. Colter
President of CRS Inc.
Peter S. Hellman
Chief Financial and Administrative
Officer, Nordson Corporation
David H. Y. Ho
Chairman, Greater China Region for
Nokia Siemens Network
Anastasia D. Kelly
Executive Vice President, General
Counsel, and Senior Regulatory and
Compliance Officer, American
International Group, Inc. (AIG)
John J. McMackin, Jr.
Member, Williams & Jensen, P.C.
Corbin A. McNeill, Jr.
Chairman & co-CEO (retired), Exelon
Corporation
Hugh H. Roberts
President (retired), Kraft Foods
International Commercial
Helge H. Wehmeier
President and Chief Executive Officer
(retired), Bayer Corporation
Dennis K. Williams
Chairman of the Board (retired), IDEX
Corporation
Thomas L. Young
President, Titus Holding Ltd.
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C O M P A N Y I N F O R M A T I O N
Exchange Listings
Annual Meeting
Share Owners
Owens-Illinois common stock (symbol OI)
is listed on the New York Stock Exchange.
Options on the Company’s common stock
are traded on the Chicago Board Options
Exchange.
The annual meeting of share owners will be
held at 9:00 a.m. on Thursday, April 23, 2009
in Conference Room A, Plaza 2, at the O-I
World Headquarters Campus, Perrysburg, OH.
Transfer Agent for Common Stock
Computershare Trust Company, N.A.
P.O. Box 43078
Providence, RI 02940-3078
Forms 10-K and 10-Q
The Company’s Annual Report on Form 10-K
and Quarterly Reports on Form 10-Q, filed with
the Securities and Exchange Commission, may
be obtained without charge by contacting:
Private couriers and registered mail:
250 Royall Street
Canton, MA 02021
Computershare Web site:
http://www.computershare.com
Phone: (781) 575-2724
Hearing-impaired: TDD 1-800-952-9245
Owens-Illinois, Inc.
Investor Relations
One Michael Owens Way
Perrysburg, OH 43551
Phone: (567) 336-2400
These reports are also available without charge
on the Company’s Web site at www.o-i.com.
Any inquiries regarding your account
or certificates should be referred to
Computershare Trust Company, N.A.
Web Site
For further information about O-I, visit the
Company’s Web site at www.o-i.com.
Trustees
8-1/4% Senior Notes, due 2013
U.S. Bank, N.A.
Corporate Trust Services
U.S. Bank Trust Center
180 East Fifth Street, 2nd Floor
St. Paul, MN 55101
6-3/4% Senior Notes, due 2014
Law Debenture Trust Company of New York
400 Madison Avenue, 4th Floor
New York, NY 10017
7.50% Senior Debentures, due 2010
7.80% Senior Debentures, due 2018
Bank of New York
101 Barclay Street
New York, NY 10286
Market for Common Stock
As shown below, the price range for the
Company’s common stock on the New York
Stock Exchange, as reported by The Financial
Industry Regulatory Authority, Inc. was as
follows:
2008 2007
Low
High
High
Low
1st Q $58.68 $38.60 $26.17 $18.48
25.82
41.49
2nd Q
32.66
23.66
3rd Q
39.33
15.20
4th Q
60.60
48.60
29.53
35.11
42.64
50.46
No dividends have been declared or paid on
the common stock since the Company’s initial
public offering in December 1991.
The number of share owners of record
on January 31, 2009 was 1,090.
Approximately 94% of the outstanding
shares were registered in the name of
Depository Trust Company, or CEDE, which
held such shares on behalf of a number of
brokerage firms, banks and other financial
institutions. The shares attributed to these
financial institutions, in turn, represented
the interests of more than 25,000
beneficial owners.
Annual Certifications
The most recent certifications by the Chief
Executive Officer and the Chief Financial
Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 are filed as
exhibits to the Company’s Form 10-K. The
Company has also filed with the New York
Stock Exchange the most recent Annual
CEO Certification as required by Section
303A.12(a) of the New York Stock
Exchange Listed Company Manual.
Corporate Headquarters
Owens-Illinois, Inc.
One Michael Owens Way
Perrysburg, OH 43551
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Positioned to create the future of glasswww.o-i.com