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Owens-Illinois 10-K 2005

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549


FORM 10-K

(Mark One)  

ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

or

o

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 of other jurisdiction of incorporation or organization)
  22-2781933
(IRS Employer Identification No.)

One SeaGate, Toledo, Ohio
(Address of principal executive offices)

 

43666
(Zip Code)

Registrant's telephone number, including area code: (419) 247-5000

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

  Name of each exchange on
which registered

Common Stock, $.01 par value   New York Stock Exchange
Convertible Preferred Stock, $.01 par value, $50 liquidation preference   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

        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 ý        No o

        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. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

Yes ý        No o

        The aggregate market value (based on the consolidated tape closing price on January 31, 2005) of the voting stock beneficially held by non-affiliates of Owens-Illinois, Inc. was approximately $3,369,485,000. As of January 31, 2005, the number of shares outstanding of the registrant's Common Stock was 151,161,753. 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 February 28, 2005 was 151,569,256.

DOCUMENTS INCORPORATED BY REFERENCE

        Part III Owens-Illinois, Inc. Proxy Statement for The Annual Meeting of Share Owners To Be Held Wednesday, May 11, 2005 ("Proxy Statement").

TABLE OF GUARANTORS

Exact Name of Registrant As Specified In Its Charter

  State/Country of
Incorporation or
Organization

  Primary Standard
Industrial Classification
Code Number

  I.R.S Employee
Identification
Number

Owens-Illinois Group, Inc   Delaware   6719   34-1559348
Owens-Brockway Packaging, Inc   Delaware   6719   34-1559346

        The address, including zip code, and telephone number, of each additional registrant's principal executive office is One Seagate, Toledo, Ohio 43666 (419) 247-5000. 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.





TABLE OF CONTENTS

PART I   1
  ITEM 1.   BUSINESS   1
  ITEM 2.   PROPERTIES   12
  ITEM 3.   LEGAL PROCEEDINGS   15
  ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS   15
    EXECUTIVE OFFICERS OF THE REGISTRANT   16

PART II

 

18
  ITEM 5.   MARKET FOR OWENS-ILLINOIS, INC.'S COMMON STOCK AND RELATED SHARE OWNER MATTERS   18
  ITEM 6.   SELECTED FINANCIAL DATA   19
  ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS   22
  ITEM 7.(A)   QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK   46
  ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA   51
  ITEM 9.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE   109
  ITEM 9.(A)   CONTROLS AND PROCEDURES   109

PART III

 

112
  ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT   112
  ITEM 11.
AND 13.
  EXECUTIVE COMPENSATION AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS   112
  ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT   112
  ITEM 14.   PRINCIPAL ACCOUNTING FEES AND SERVICES   112

PART IV

 

113
  ITEM 15.   EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K   113
  ITEM 15.(A)   FINANCIAL STATEMENTS AND FINANCIAL STATEMENTS SCHEDULES   113
  ITEM 15.(B)   REPORTS ON FORM 8-K   113
  ITEM 15.(C)   EXHIBIT INDEX   115
  ITEM 15.(D)   SEPARATE FINANCIAL STATEMENTS OF AFFILIATES WHOSE SECURITIES ARE PLEDGED AS COLLATERAL   120

SIGNATURES

 

212
EXHIBITS    

i



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 one of the world's leading manufacturers of packaging products (based on sales revenue) and is the largest manufacturer of glass containers in the world, with leading positions in Europe, North America, Asia Pacific and South America. The Company is also a leading manufacturer of health care packaging including plastic prescription containers and medical devices, and plastic closure systems including tamper-evident caps and child-resistant closures, with operations in the United States, Mexico, Puerto Rico, Brazil, Hungary and Singapore.

Strategy and Competitive Strengths

        The Company is pursuing a strategy aimed at leveraging its global capabilities, broadening its market base and focusing on the effective management of working capital and capital spending.

        Our current priorities include the following:

    Achieve successful European integration

    Improve liquidity and reduce leverage

    Build modest growth momentum and broaden market base

    Improve system cost and capital capabilities

    Implement global procurement initiatives

Our current core competitive strengths are:

    Global leadership in manufacturing glass containers

    Long-standing relationships with industry-leading consumer products companies

    Low-cost production of glass containers

    Technological leadership and innovation

    Worldwide licensee network—glass containers and plastic closures

    Leading health care packaging businesses

    Experienced and motivated management team and work force

        Consistent with its vision to become the world's leading packaging company, the Company has acquired 16 glass container businesses in 22 countries since 1990, including businesses in Europe, North America, Asia Pacific and South America. Through these acquisitions, the Company has enhanced its global presence in order to better serve the needs of its multi-national customers and has achieved purchasing and cost reduction synergies.

Realignment of Business Portfolio

        In 2004, the Company completed two major transactions which significantly realigned its business portfolio:

    On June 21, 2004, the Company completed the acquisition of BSN Glasspack, S.A., for total consideration of approximately $1.3 billion; and

    On October 7, 2004, the Company completed the Plastics Sale for approximately $1.2 billion.

The Company has 82 glass manufacturing plants in 22 countries and 24 plastics packaging facilities primarily in the United States.

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Technology Leader

        The Company believes it is a technological leader in the worldwide glass container and plastics packaging segments of the rigid packaging market. During the four years ended December 31, 2004, on continuing operations basis, the Company invested more than $1.0 billion in capital expenditures (excluding acquisitions) and more than $219 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 SeaGate, Toledo, Ohio 43666; the telephone number is (419) 247-5000. The Company's website is www.o-i.com. The Company's annual report and SEC filings 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 and Nominating/Corporate Governance Committees will be adopted by the Board of Directors and, together with the previously adopted charter of the Audit Committee, will be available on the Investor Relations section of the Company's website on or about April 1, 2005. On and after such date, copies of these documents will also be available in print to share owners upon request, addressed to the Corporate Secretary at the address above.

Financial Information about Product Segments

        Information as to sales, earnings from continuing operations before interest income, interest expense, provision for income taxes, minority share owners' interests in earnings of subsidiaries, and cumulative effect of accounting change and excluding amounts related to certain items that management considers not representative of ongoing operations ("Segment Operating Profit"), and total assets by product segment is included in Note 20 to the Consolidated Financial Statements.

Narrative Description of Business

        The Company has two product segments: (1) Glass Containers and (2) Plastics Packaging. Below is a description of these segments 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

GLASS CONTAINERS PRODUCT SEGMENT

        The Company is the largest manufacturer of glass containers in the world. Approximately one of every two glass containers made worldwide is made by the Company, its subsidiaries or its licensees. On a continuing operations basis, worldwide glass container sales represented 88%, 84%, and 84%, of the Company's consolidated net sales for the years ended December 31, 2004, 2003, and 2002, respectively. For the year ended December 31, 2004, the Company manufactured approximately 37% of all glass containers sold by domestic producers in the U.S., making the Company the leading manufacturer of glass containers in the U.S. The Company is the leading glass container manufacturer in 19 of the 22 countries where it competes in the glass container segment of the rigid packaging market and the sole manufacturer of glass containers in 8 of these countries.

Products and Services

        The Company produces glass containers for malt beverages including beer and ready to drink low alcohol refreshers, liquor, wine, food, tea, juice and pharmaceuticals. The Company also produces glass containers for soft drinks, principally outside the U.S. The Company manufactures these products in a

2



wide range of sizes, shapes and colors. As a leader in glass container innovation, the Company is active in new product development.

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. Outside of the U.S., glass container customers also include soft drink bottlers. The largest U.S. glass container customers include (in alphabetical order) Anheuser-Busch, Campbell Soup Co., Coors, Gerber, H.J. Heinz and SABMiller. The largest international glass container customers include (in alphabetical order) Diageo, Foster's, Heineken, InBev, Kronenbourg, Lion Nathan, Molson and SABMiller. The Company is the major glass container supplier to some of these customers.

        The Company sells most of its glass container products directly to customers under annual or multi-year supply agreements. The Company also sells some of its products through distributors. Glass containers are typically scheduled for production in response to customers' orders for their quarterly requirements.

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 the low-cost producer in the glass container segment of the rigid packaging market in most 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 in the 1990's and early 2000's have given it low-cost leadership 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 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., with its sales representing approximately 37% of the glass container segment of the U.S. rigid packaging market for the year ended December 31, 2004. 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 supplying glass containers outside of the U.S., the Company competes directly with Compagnie de Saint-Gobain in Europe and Brazil, Rexam plc and Ardagh plc in the U.K., 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 Rexam 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 and service. The principal competitors producing metal containers are Crown Cork & Seal Company, Inc., Rexam plc, Ball Corporation 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, in serving the packaging needs of juice customers.

3



        The Company's unit shipments of glass containers in countries outside of the U.S. have grown substantially from levels of the early 1990's. 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 maintaining the 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. Due to the weighting of labor as a production cost, glass containers have a cost advantage over plastic and metal containers in developing countries where labor wage rates are relatively low.

        The Company's majority ownership positions in international glass subsidiaries are summarized below:

Subsidiary/Country

  Ownership %
ACI Operations Pty. Ltd., Australia   100.0
ACI Operations NZ Ltd., New Zealand   100.0
Avirunion, a.s., Czech Republic   100.0
BSN Glasspack S.A   100.0
Karhulan Lasi Oy, Finland   100.0
OI Canada Corp., Canada   100.0
United Glass Ltd., United Kingdom   100.0
United Hungarian Glass Containers, Kft., Hungary   100.0
Vidrieria Rovira, S.A., Spain   100.0
A/S Jarvakandi Klaas, Estonia   100.0
PT Kangar Consolidated Industries, Indonesia   99.9
AVIR S.p.A., Italy   99.7
Owens-Illinois Polska S.A., Poland   99.4
Owens-Illinois Peru, S.A, Peru.   96.0
Companhia Industrial Sao Paulo e Rio, Brazil   79.4
Owens-Illinois de Venezuela, C.A., Venezuela   74.0
ACI Guangdong Glass Company Ltd., China   70.0
ACI Shanghai Glass Company Ltd., China   80.0
Wuhan Owens Glass Container Company Ltd., China   70.0
Cristaleria del Ecuador, S.A., Ecuador   69.0
Cristaleria Peldar, S. A., Colombia   58.4

        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, with improving economic conditions in South America after the recessions of the late 1990's, unit sales of non-returnable glass containers have grown in Venezuela, Colombia and Brazil.

        Europe.    The Company's European glass container business has operations in 11 countries and is the largest in Europe. The Company's subsidiary in France is a leading producer of wine and champagne bottles and is the sole supplier of glass containers to Kronenbourg, France's leading brewer. In Italy, the Company's wholly-owned subsidiary, AVIR, is the leading manufacturer of glass containers and operates 13 glass container plants. The Company's sales in France and Italy accounted for approximately 67% of the Company's total European glass container sales in 2004. In Germany, the Company's key customers include Kronenbourg and Nestle Europe. In the Netherlands, the Company

4



is one of the leading suppliers of glass containers to Heineken. United Glass, the Company's subsidiary in the U.K., 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 manufacturer and currently operates two plants. The Company's subsidiary in the Czech Republic, Avirunion, is the leading glass container manufacturer in that country and also ships a portion of its beer bottle production to Germany. 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 growing demand.

        Asia Pacific.    The Company has glass operations in four countries in the Asia Pacific region: Australia, New Zealand, Indonesia and China. In the Asia Pacific 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, ACI, 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 for food and pharmaceutical products to Australian customers. In China, the glass container segments of the packaging market are regional and highly fragmented with a number of local competitors. The Company has three modern glass container plants in China manufacturing high-quality beer bottles to serve Foster's as well as Anheuser-Busch, which is now producing Budweiser® in and for the Chinese market.

        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 low-cost producer in most of the markets it serves.

Manufacturing

        The Company believes it is the low-cost producer in the glass container segment of the North American rigid packaging market, as well as the low-cost producer in most 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 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 has given it low-cost leadership 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.

        Since the early 1990's, the Company has more than doubled its overall glass container labor and machine productivity in the U.S., as measured by output produced per man-hour. By applying its technology and worldwide "best practices" during this period, the Company decreased the number of production employees required per glass-forming machine line in the U.S. by over 35%, and increased the daily output of glass-forming machines by approximately 40%. The Company also operates several machine and mold shops that manufacture high-productivity glass-forming machines, molds and related equipment.

5



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 and limestone. Each of these materials, as well as the other raw materials used to manufacture glass containers, 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.

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 15-20% of the Company's total manufacturing costs, depending on 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 in particularly volatile markets such as North America. In order to limit the effects of fluctuations in market prices for natural gas and fuel oil, the Company uses commodity futures contracts related to its forecasted requirements, principally in North America. The objective of these futures contracts is to reduce the potential volatility in cash flows 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. If sufficient high-quality recycled glass were available on a consistent basis, the Company has the technology to operate using 100% recycled glass. Using recycled glass in the manufacturing process reduces energy costs and prolongs the operating life of the glass melting furnaces.

PLASTICS PACKAGING PRODUCT SEGMENT

        The Company is a leading manufacturer in North America of plastic healthcare containers, plastic closures and plastic prescription containers. The Company also has plastics packaging operations in South America, Europe, Singapore, and Australia. On a continuing operations basis, Plastics Packaging sales represented 12%, 16% and 16% of the Company's consolidated net sales for the years ended December 31, 2004, 2003 and 2002, respectively.

Manufacturing and Products

        Injection molding is a plastics manufacturing process where plastic resin in the form of pellets or powder is melted and then injected or otherwise forced under pressure into a mold. The mold is then cooled and the product is removed from the mold.

6



        The Company's health care container unit manufactures injection-molded plastic containers for prescriptions and over-the-counter products. These products are sold primarily to drug wholesalers, major drug chains and mail order pharmacies.

        The prescription product unit manufactures injection-molded plastic prescription containers. These products are sold primarily to drug wholesalers, major drug chains and mail order pharmacies. Containers for prescriptions include ovals, vials, closures, ointment jars, dropper bottles and automation friendly prescription containers.

        Injection-molding is used in the manufacture of plastic closures, deodorant canisters, ink cartridges and vials. The Company develops and produces injection-molded plastic closures and closure systems, which typically incorporate functional features such as tamper evidence and child resistance or dispensing. Other products include injection-molded containers for deodorant and toothpaste.

        Compression-molding, an alternative to injection-molding which has advantages in high volume applications, is used in manufacturing plastic closures for carbonated soft drink and other beverage closures that require tamper evidence.

Customers

        The Company's largest customers (in alphabetical order) for plastic health care containers and prescription containers include AmeriSourceBergen, Cardinal Health, Eckerd Drug, Johnson & Johnson, McKesson, Merck-Medco, Pfizer, Rite-Aid and Walgreen. The Company's largest customers (in alphabetical order) for plastic closures include Coca-Cola Enterprises, Cott Beverages, Nestle Waters North America, Pepsico and Proctor & Gamble.

        The Company sells most plastic health care containers, prescription containers and closures directly to customers under annual or multi-year supply agreements. These supply agreements typically allow a pass-through of resin price increases and decreases, except for the prescription business. The Company also sells some of its products through distributors.

Markets and Competitive Conditions

        Major markets for the Company's plastics packaging include consumer products and health care products.

        The Company competes with other manufacturers in the plastics packaging segment on the basis of quality, price, service and product design. The principal competitors producing plastics packaging are Amcor, Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak Packaging, Inc. and Silgan Holdings Inc. The Company emphasizes proprietary technology and products, new package development and packaging innovation. The plastic closures segment is divided into various categories in which several suppliers compete for business on the basis of quality, price, service and product design.

        In addition to competing with other established manufacturers in the plastics packaging segment, the Company competes with manufacturers of other forms of rigid packaging, principally aluminum cans and glass containers, on the basis of quality, price, and service. The principal competitors producing metal containers are Crown Cork & Seal Company, Inc., Rexam plc, Ball Corporation and Silgan Holdings Inc. The principal competitors producing glass containers in the U.S. are Saint-Gobain Containers, Inc., a wholly-owned subsidiary of Compagnie de Saint-Gobain, and Anchor Glass Container Corporation. The Company also competes with manufacturers of non-rigid packaging alternatives, including blister packs, in serving the packaging needs of health care customers.

7



Manufacturing

        The exact type of blow-molding manufacturing process the Company uses is dependent on the plastic product type and package requirements. These blow-molding processes include: various types of extrusion blow-molding for medium- and large-sized HDPE, low density polyethelene (LDPE), polypropylene and polyvinyl chloride (PVC) containers; stretch blow-molding for medium-sized PET containers; injection blow-molding for small health care and personal care containers in various materials; two-stage PET blow-molding for high volume, high performance mono-layer, multi-layer and heat-set PET containers; and proprietary blow-molding for drain-back systems and other specialized applications.

        Injection-molding is used in the manufacture of plastic closures, deodorant canisters, ink cartridges and vials. Compression-molding, an alternative to injection-molding, is used for high volume carbonated soft drink and other beverage closures that require tamper evidence.

Methods of Distribution

        In the U.S., most of the Company's plastic containers, plastic closures and plastic prescription containers are shipped by common carrier. In addition, the Company's plastics packaging 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 Company manufactures containers and closures using HDPE, polypropylene, PET and various other plastic resins. The Company also purchases large quantities of batch colorants, corrugated materials and labels. In general, these raw materials are available in adequate supply from multiple sources. However, for certain raw materials, there may be temporary shortages due to market conditions and other factors.

        Worldwide suppliers of plastic resins used in the production of plastics packaging include Basell, BP Solvay, Chevron Phillips, Dow Chemical, ExxonMobil, and Voridian (formerly Eastman Chemical). Historically, prices for plastic resins have been subject to dramatic fluctuations. However, resin cost pass-through provisions are typical in the Company's supply contracts with its plastics packaging customers.

        With the exception of PolyOne, Ampacet and Clariant, each of which does business worldwide, most suppliers of batch colorants are regional in scope. Historically, prices for these raw materials have been subject to dramatic fluctuations. However, cost recovery for batch colorants is included in resin pass-through provisions which are typical of the Company's supply contracts with its plastics packaging customers.

        Domestic suppliers of corrugated materials include Georgia-Pacific, International Paper, Smurfit-Stone Container, Temple-Inland, and Weyerhauser. Historically, prices for corrugated materials have not been subject to dramatic fluctuations, except for temporary spikes or troughs from time to time.

Recycling

        Recycling content legislation, which has been enacted in several states, requires that a certain specified minimum percentage of recycled plastic be included in certain new plastics packaging. The Company has met such legislated standards in part due to its material process technology. In addition, its plastics packaging manufacturing plants also recycle virtually all of the internal scrap generated in the production process.

8


ADDITIONAL INFORMATION

Technical Assistance License Agreements

        The Company licenses its proprietary glass container technology to 20 companies in 21 countries. In plastics packaging, the Company has technical assistance agreements with 31 companies in 15 countries. These agreements cover areas ranging from manufacturing and engineering assistance, to support in functions such as marketing, sales and administration. 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 agreements enable it to apply "best practices" developed by its worldwide licensee network. In the years 2004, 2003 and 2002, the Company earned $21.1 million, $17.5 million and $17.4 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 bases, research, development, and engineering expenditures were $59.0 million, $64.6 million, and $57.6 million for 2004, 2003, and 2002, respectively. The Company's research, development and engineering activities include new products, manufacturing process control, automatic inspection and further automation.

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. Capital expenditures for property, plant and equipment for environmental control activities were not material during 2004.

        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 such as plastics. The Company believes that governmental authorities in both the U.S. and abroad will continue to enact and develop such legal requirements.

        In North America, sales of non-refillable glass beverage bottles and other convenience packages are affected by mandatory deposit laws and other types of restrictive legislation. As of January 1, 2005, there were 11 U.S. states and 8 Canadian provinces with mandatory deposit laws in effect. In Europe, the following countries have some form of mandatory deposit law in effect: Austria, Belgium, Denmark, Finland, Germany, the Netherlands, Norway, Sweden and Switzerland.

        A number of U.S. states and local governments have enacted or are considering legislation to promote curbside recycling and recycled content legislation as alternatives to mandatory deposit laws. Although such legislation is not uniformly developed, the Company believes that U.S. states and local governments may continue to enact and develop curbside recycling and recycling content legislation.

        The Company is unable to predict what environmental legal requirements may be adopted in the future. 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. The compliance costs associated with environmental legal requirements may continue to result in future additional costs to operations.

9



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 make the Company's glass forming machines more efficient and productive than those used by our 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 batch house to warehouse. This technology is proprietary to the Company through a combination of issued patents, pending applications, copyrights, trade secret and proprietary know-how.

        Upstream of the glass forming machine, 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 control 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 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 enhance 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 and plastics packaging products such as beer, food and beverage containers and closures for beverages are seasonal. Shipments in the U.S. and Europe are typically greater in the second and third quarters of the year, while shipments in South America and the Asia Pacific region are typically greater in the first and fourth quarters of the year.

10


Employees

        The Company's worldwide operations employed approximately 28,700 persons as of December 31, 2004. Approximately 65% of North American employees are hourly workers covered by collective bargaining agreements. The principal collective bargaining agreement, which at December 31, 2004, covered approximately 58% of O-I's union-affiliated employees in North America., will expire on March 31, 2005. 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 us to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. O-I considers its employee relations to be good and does not anticipate any material work stoppages in the near term.

Financial Information about Foreign and Domestic Operations and Export Sales

        Information as to net sales, Segment Operating Profit, and assets of the Company's product and geographic segments is included in Note 20 to the Consolidated Financial Statements. Export sales, in the aggregate or by geographic area, were not material for the years 2004, 2003, or 2002.

11




ITEM 2.    PROPERTIES

        The principal manufacturing facilities and other material important physical properties of the continuing operations of the Company at December 31, 2004 are listed below and grouped by product segment. All properties shown are owned in fee except where otherwise noted.

Glass Containers    
  North American Operations    
    United States    
      Glass Container Plants    
        Atlanta, GA   Muskogee, OK
        Auburn, NY   Oakland, CA
        Brockway, PA   Portland, OR
        Charlotte, MI   Streator, IL
        Clarion, PA   Toano, VA
        Crenshaw, PA   Tracy, CA
        Danville, VA   Waco, TX
        Lapel, IN   Winston-Salem, NC
        Los Angeles, CA   Zanesville, OH
     
Machine Shops

 

 
        Brockway, PA   Godfrey, IL
   
Canada

 

 
      Glass Container Plants    
        Brampton, Ontario   Scoudouc, New Brunswick
        Lavington, British Columbia   Toronto, Ontario
        Montreal, Quebec    
 
Asia Pacific Operations

 

 
    Australia    
      Glass Container Plants    
        Adelaide   Melbourne
        Brisbane   Sydney
     
Mold Shop

 

 
        Melbourne    
   
China

 

 
      Glass Container Plants    
        Guangdong   Wuhan
        Shanghai    
     
Mold Shop

 

 
        Tianjin    
   
Indonesia

 

 
      Glass Container Plant    
        Jakarta    
   
New Zealand

 

 
      Glass Container Plant    
        Auckland    
     

12


 
European Operations

 

 
    Czech Republic    
      Glass Container Plants    
        Sokolov   Teplice
   
Estonia

 

 
      Glass Container Plant    
        Jarvakandi    
   
Finland

 

 
      Glass Container Plant    
        Karhula    
   
France

 

 
      Glass Container Plants    
        Beziers   Vayres
        Gironcourt   Veauche
        Labegude   VMC Reims
        Puy-Guillaume   Wingles
        Reims BSN    
   
Germany

 

 
      Glass Container Plants    
        Achern   Holzminden
        Bernsdorf   Stoevesandt
        Dusseldorf    
   
Hungary

 

 
      Glass Container Plant    
        Oroshaza    
   
Italy

 

 
      Glass Container Plants    
        Asti   Pordenone
        Bari (2 plants)   Terni
        Bologna   Trento (2 plants)
        Latina   Treviso
        Trapani   Varese
        Napoli    
     
Mold Shop

 

 
        Napoli    
     
Glass Recycling Plant

 

 
        Alessandria    
   
Netherlands

 

 
      Glass Container Plants    
        Leerdam   Schiedam
        Maastricht    
   
Poland

 

 
      Glass Container Plants    
        Antoninek   Jaroslaw
   
Spain

 

 
      Glass Container Plants    
        Alcala   Barcelona
     

13


   
United Kingdom

 

 
      Glass Container Plants    
        Alloa   Harlow
     
Sand Plant

 

 
        Devilla    
     
Machine Shop

 

 
        Birmingham    
 
South American Operations

 

 
    Brazil    
      Glass Container Plants    
        Rio de Janeiro   Sao Paulo
     
Machine Shop

 

 
        Manaus    
     
Silica Sand Plant

 

 
        Descalvado    
   
Colombia

 

 
      Glass Container Plants    
        Envigado   Zipaquira
        Soacha    
     
Tableware Plant

 

 
        Buga    
     
Machine Shop

 

 
        Cali    
     
Silica Sand Plant

 

 
        Zipaquira    
   
Ecuador

 

 
      Glass Container Plant    
        Guayaquil    
   
Peru

 

 
      Glass Container Plant    
        Callao    
   
Venezuela

 

 
      Glass Container Plants    
        Valencia   Valera

Plastics Packaging

 

 
  North American Operations    
      United States    
        Berlin, OH(1)   Hamlet, NC
        Bowling Green, OH(2)   Hattiesburg, MS
        Brookville, PA   Nashua, NH
        Constantine, MI   Rocky Mount, NC
        Erie, PA   Rossville, GA(2)
        Franklin, IN   Sullivan, IN
        Greenville, SC   Washington, NJ(2)
     
Puerto Rico

 

 
        Las Piedras    
     

14


   
Asia Pacific Operations

 

 
      Australia    
        Adelaide   Melbourne
        Brisbane   Perth
        Berri   Sydney
     
Singapore

 

 
        Singapore    
   
European Operations

 

 
      Hungary    
        Gyor    
   
South American Operations

 

 
      Brazil    
        Sao Paulo    

Corporate Facilities

 

 
  World Headquarters Building    
  Toledo, OH(2)    
 
Levis Development Park

 

 
  Perrysburg, OH    

        In addition, a glass container plant in Windsor, Colorado is under construction.


(1)
This facility is financed in whole or in part under tax-exempt financing agreements.

(2)
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.


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, 2004.

15



EXECUTIVE OFFICERS OF THE REGISTRANT

Name and Age

  Position
Steven R. McCracken (51)   Chairman and Chief Executive Officer since April 2004. He previously served as President of Invista, the global fibers and related intermediates business subsidiary of E. I. DuPont de Nemours and Company ("DuPont") (2003–2004), DuPont Group Vice President (2000–2003) and Vice President and General Manager of DuPont Lycra® (1997–2000)

Thomas L. Young (60)

 

Chief Financial Officer since 2003; Co-Chief Executive Officer 2004; Executive Vice President, Administration and General Counsel 1993–2003; Secretary, 1990–1998. Director since 1998.

John Bachey (56)

 

Vice President since 1997; Vice President of Glass Container Sales and Marketing since 2000; General Manager, European and Latin American Plastics Operations, 1999–2000; General Manager, Europe and Latin America, Continental PET Technologies, 1998–1999.

James W. Baehren (54)

 

Chief Administrative Officer since 2004; Senior Vice President and General Counsel since 2003; Corporate Secretary since 1998; Vice President and Director of Finance 2001–2003; Associate General Counsel from 1996–2001.

Joseph V. Conda (63)

 

Vice President, President of Healthcare Packaging since 2004; Vice President since 1998; Vice President and General Manager of Prescription Products 2000–2004; Vice President of Glass Container Sales and Marketing, 1997–2000.

L. Richard Crawford (44)

 

Vice President, Director of Operations and Technology for O-I Europe since 2004; Vice President of Global Glass Technology from 2002–2004; Vice President, Manufacturing Manager of Domestic Glass Container from 2000–2002; Vice President of Domestic Glass Container and Area Manufacturing Manager, West Coast, 1997–2000.

Jeffrey A. Denker (57)

 

Vice President since 2005; Treasurer since 1998; Assistant Treasurer, 1988–1998; Director of International Finance, 1987–1998.

Gerard D. Doyle (50)

 

Vice President and Chief Information Officer since 2004; CIO, ACI Packaging, O-I subsidiary in Australia 1996–2004.

Robert E. Lachmiller (51)

 

Vice President since 2003; Vice President, Global Operations and Technology since 2004; Vice President and Manufacturing Manager of Glass Container North America from 2002–2004; Area Manufacturing Manager of Glass Container North America 1997–2002.

Gerald J. Lemieux (47)

 

Senior Vice President, General Manager, O-I Americas since 2004; Vice President since 1997; Vice President of Corporate Strategy 2002–2004; Vice President and General Manager of Domestic Glass Container from 1997–2002.
     

16



Matthew G. Longthorne (38)

 

Vice President and Corporate Controller since 2004; Glass Containers Vice President 2000–2004; Director of Finance and Administration, Glass Container North America 1999–2004

Stephen P. Malia (50)

 

Senior Vice President, Chief Human Resources Officer since 2004; Senior Vice President, Human Resources, IMC Global Inc. 2000–2004.

Michael D. McDaniel (56)

 

Vice President since 1992; Vice President, President of Closure and Specialty Products since 2001; Vice President and General Manager of Continental PET Technologies 1998–2001; Vice President and General Manager of Closure and Specialty Products, 1991–1998.

Philip McWeeny (65)

 

Vice President and General Counsel—Corporate and Assistant Secretary since 1988.

Gilberto Restrepo (64)

 

Senior Vice President, President of O-I Europe since 2004; Senior Vice President since 2003; General Manager of Latin American Glass Container Operations 2000–2004; Vice President of International Operations and General Manager, Western Region—Latin America, 1997–2000; President of Cristaleria Peldar, S.A., since 1982.

Peter J. Robinson (61)

 

Senior Vice President, President of O-I Asia Pacific since 2004; Senior Vice President since 2003; General Manager of Asia Pacific Operations since 1998; Chief Executive of ACI Packaging Group, 1988–1998.

Raymond C. Schlaff (49)

 

Vice President, Chief Procurement Officer since 2004; Vice President, Global Supply Chain, Tyco Plastics and Adhesives business of Tyco International Ltd. 2003–2004; Group Vice President, Managing Director, Nalco Europe, a division of Ondeo Nalco Company 2002–2003; Vice President, Global Supply Chain, Ondeo Nalco Company 2001–2002; Vice President, Global Procurement, Ondeo Nalco Company 2000–2001.

Edward C. White (57)

 

Senior Vice President and Director of Sales and Marketing for O-I Europe since 2004; Senior Vice President since 2003; Senior Vice President of Finance and Administration 2003–2004; Controller 1999–2004; Vice President 2002–2003; Vice President and Director of Finance, Planning, and Administration—International Operations, 1997–1999.

17



PART II


ITEM 5.    MARKET FOR OWENS-ILLINOIS, INC.'S COMMON STOCK AND RELATED SHARE OWNER MATTERS

        The price range for the Company's Common Stock on the New York Stock Exchange, as reported by National Association of Securities Dealers, was as follows:

 
  2004
  2003
 
  High
  Low
  High
  Low
First Quarter   $ 14.13   $ 10.80   $ 15.50   $ 7.51
Second Quarter     17.40     13.26     14.80     8.26
Third Quarter     17.10     13.92     15.49     10.25
Fourth Quarter     23.89     15.41     12.48     10.73

        The number of share owners of record on January 31, 2005 was 1,376. Approximately 78% 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. For restrictions on payment of dividends on Common Stock, see Note 6 to the Consolidated Financial Statements.

18


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, 2004. The financial data for each of the four years in the period ended December 31, 2004 was derived from the audited consolidated financial statements of the Company. The financial data for the year ended December 31, 2000 was derived from unaudited consolidated financial statements. For more information, see the "Consolidated Financial Statements" included elsewhere in this document.

 
  Year ended December 31,
 
 
  2004
  2003
  2002
  2001
  2000
 
 
  (Dollar amounts in millions except per share data)

 
Consolidated operating results(a):                                
Net sales   $ 6,128.4   $ 4,975.6   $ 4,621.2   $ 4,343.7   $ 4,513.2  
Other revenue(b)     135.0     90.2     110.0     599.2     253.0  
   
 
 
 
 
 
      6,263.4     5,065.8     4,731.2     4,942.9     4,766.2  
Costs and expenses:                                
Manufacturing, shipping and delivery(c)     4,918.4     3,967.9     3,572.9     3,359.3     3,533.4  
Research, engineering, selling, administrative and other(d)     659.8     1,106.1     848.6     572.4     1,259.4  
   
 
 
 
 
 
Earnings (loss) before interest expense and items below     685.2     (8.2 )   309.7     1,011.2     (26.6 )
Interest expense(e)     474.9     429.8     372.2     360.3     395.2  
   
 
 
 
 
 
Earnings (loss) from continuing operations before items below     210.3     (438.0 )   (62.5 )   650.9     (421.8 )
Provision (credit) for income taxes(f)     5.9     (133.7 )   (49.8 )   266.4     (164.0 )
Minority share owners' interests in earnings of subsidiaries     32.9     25.8     25.5     19.5     20.7  
   
 
 
 
 
 
Earnings (loss) from continuing operations before cumulative effect of accounting change     171.5     (330.1 )   (38.2 )   365.0     (278.5 )
Net earnings (loss) of discontinued operations     64.0     (660.7 )   38.0     (8.4 )   8.8  
Cumulative effect of accounting change (g)                 (460.0 )            
   
 
 
 
 
 
Net earnings (loss)   $ 235.5   $ (990.8 ) $ (460.2 ) $ 356.6   $ (269.7 )
   
 
 
 
 
 

Basic earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 
  Earnings (loss) from continuing operations before cumulative effect of accounting change   $ 1.01   $ (2.39 ) $ (0.41 ) $ 2.36   $ (2.06 )
  Net earnings (loss) of discontinued operations     0.44     (4.50 )   0.26     (0.06 )   0.06  
  Cumulative effect of accounting change                 (3.14 )            
   
 
 
 
 
 
  Net earnings (loss)   $ 1.45   $ (6.89 ) $ (3.29 ) $ 2.30   $ (2.00 )
   
 
 
 
 
 
Weighted average shares outstanding (in thousands)     147,963     146,914     146,616     145,456     145,983  
   
 
 
 
 
 
Diluted earnings (loss) per share of common stock:                                
  Earnings (loss) from continuing operations before cumulative effect of accounting change   $ 1.00   $ (2.39 ) $ (0.41 ) $ 2.36   $ (2.06 )
  Net earnings (loss) of discontinued operations     0.43     (4.50 )   0.26     (0.06 )   0.06  
  Cumulative effect of accounting change                 (3.14 )            
   
 
 
 
 
 
  Net earnings (loss)   $ 1.43   $ (6.89 ) $ (3.29 ) $ 2.30   $ (2.00 )
   
 
 
 
 
 
Diluted average shares (in thousands)     149,680     146,914     146,616     145,661     145,983  
   
 
 
 
 
 

        The Company's convertible preferred stock was not included in the computation of 2004 and 2001 diluted earnings per share since the result would have been antidilutive. Options to purchase 5,067,104 and 7,776,942 weighted average shares of common stock which were outstanding during 2004 and 2001, 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

19



December 31, 2003, 2002 and 2000, diluted earnings per share of common stock are equal to basic earnings per share of common stock due to the net loss.

 
  Years ended December 31,
 
  2004
  2003
  2002
  2001
  2000
 
  (Dollar amounts in millions)

Other data:                              
The following are included in net earnings:                              
  Depreciation   $ 436.0   $ 391.9   $ 353.4   $ 335.9   $ 404.4
  Amortization of goodwill(f)                       55.9     58.6
  Amortization of intangibles     23.8     21.4     21.5     21.8     17.9
  Amortization of deferred finance fees (included in interest expense)     15.0     14.4     16.1     15.0     8.2
   
 
 
 
 
    $ 474.8   $ 427.7   $ 391.0   $ 428.6   $ 489.1
   
 
 
 
 
Balance sheet data (at end of period):                              
  Working capital   $ 494   $ 758   $ 590   $ 756   $ 764
  Total assets     10,737     9,531     9,869     10,107     10,343
  Total debt     5,360     5,426     5,346     5,401     5,850
  Share owners' equity     1,544     1,003     1,671     2,152     1,883

(a)
Amounts related to the Company's plastic blow-molded container business have been reclassified to discontinued operations as a result of the sale. Amounts for the year ended December 31, 2004 include the results of BSN from the date of acquisition on June 21, 2004.

(b)
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.


Other revenue in 2001 includes: (1) a gain of $457.3 million ($284.4 million after tax) related to the sale of the Harbor Capital Advisors business and (2) gains totaling $13.1 million ($12.0 million after tax) related to the sale of the label business and the sale of a minerals business in Australia.

(c)
Amount for 2004 includes a gain of $4.9 million ($3.2 million after tax) from the mark to market effect of certain commodity futures contracts.

(d)
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 reserve 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.


Amount for 2003 includes charges totaling $694.2 million ($490.5 million after tax) for the following (1) $450.0 million ($292.5 million after tax) to increase the reserve for estimated future asbestos-related costs; (2) $50.0 million ($50.0 million after tax) write-down of an equity investment in a soda ash mining operation (3) $43.0 million ($30.1 million after tax) for the write-down of Plastics Packaging assets in the Asia Pacific region; (4) $37.4 million ($37.4 million after tax) for the loss on the sale of long-term notes receivable; (5) $37.4 million ($23.4 million after tax) for the estimated loss on the sale of certain closures assets; (6) $28.5 million ($17.8 million after tax) for the permanent closure of the Hayward, California glass container factory; (7) $23.9 million ($17.4 million after tax) for the shutdown of the Perth, Australia glass container factory; (8) $20.1 million ($19.5 million after tax) for the shutdown of the Milton, Ontario glass container factory; and (9) $3.9 million ($2.4 million after tax) for an additional loss on the sale of certain closures assets.

20



Amount for 2002 includes an adjustment of $475.0 million ($308.8 million after tax) to the reserve for estimated future asbestos-related costs.


Amount for 2001 includes charges totaling $133.7 million ($109.2 million after tax and minority share owners' interests) for the following: (1) charges of $66.1 million ($55.3 million after tax and minority share owners' interests) related to restructuring and impairment charges at certain of the Company's international glass operations, principally Venezuela and Puerto Rico, as well as certain other domestic and international operations; (2) a charge of $31.0 million (pretax and after tax) related to the loss on the sale of the Company's facilities in India; (3) charges of $28.7 million ($18.0 million after tax) related to special employee benefit programs; and (4) a charge of $7.9 million ($4.9 million after tax) related to restructuring manufacturing capacity in the medical devices business.


In 2000, the Company recorded pretax charges totaling $791.9 million ($509.1 million after tax and minority share owners' interests) for the following: (1) $550.0 million ($342.1 million after tax) related to adjustment of the reserve for estimated future asbestos-related costs; (2) $122.4 million ($77.3 million after tax and minority share owners' interests) related to the consolidation of manufacturing capacity; (3) a net charge of $46.0 million ($28.6 million after tax) related to early retirement incentives and special termination benefits for 350 United States salaried employees; (4) $40.0 million (pretax and after tax) related to the impairment of property, plant and equipment at the Company's facilities in India; and (5) $33.5 million ($21.1 million after tax and minority share owners' interests) related principally to the write-off of software and related development costs.

(e)
Amount for 2004 includes charges of $28.0 million ($18.3 million after tax) for note repurchase premiums.


Amount for 2003 includes a charge of $13.2 million ($8.2 million after tax) for note repurchase premiums.


Amount for 2001 includes a net interest charge of $4.0 million ($2.8 million after tax) related to interest on the resolution of the transfer of pension assets and liabilities for a previous acquisition and divestiture.


Includes additional interest charges for the write off of unamortized deferred financing fees related to the early extinguishment of debt as follows: 2004-$2.8 million ($1.8 million after tax); 2003-$1.3 million ($0.9 million after tax); 2002-$9.1 million ($5.7 million after tax); 2001-$4.7 million ($2.9 million after tax).

(f)
Amount for 2004 includes a benefit of $33.1 million for a tax consolidation in the Australian glass business.


Amount for 2001 includes a $6.0 million charge to adjust tax liabilities in Italy as a result of recent legislation.


Amount for 2000 includes a benefit of $9.3 million to adjust net income tax liabilities in Italy as a result of recent legislation.

(g)
On January 1, 2002, the Company adopted Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS No. 142"). As required by FAS No. 142, the Company changed its method of accounting for goodwill and discontinued amortization of goodwill effective January 1, 2002. Also as required by FAS No. 142, the transitional goodwill impairment loss of $460.0 million is recognized as the cumulative effect of a change in method of accounting.

21



ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview—Year ended December 2004 and 2003

        Net sales of the Glass Containers segment increased $1,183.2 million as a result of the acquisition of BSN, world wide unit shipment volume growth of approximately 2%, generally higher selling prices, a favorable product mix, and stronger foreign exchange rates in the major regions that the Company does business.

        Net sales of the continuing Plastics Packaging segment decreased $30.4 million as a result of lower sales resulting from the divestiture of certain closure assets in the 4th quarter of 2003, the divestiture of a portion of the Asia Pacific plastics business in the 2nd quarter of 2004, and lower shipments of prescription vials in 2004 as compared to 2003 due to the strong flu season in the prior year. These negative effects were partially offset by higher unit shipments of closures.

        Segment Operating Profit of the Glass Containers segment increased by $100.8 million over 2003 as a result of the same principal factors that increased sales. In addition, improved productivity also improved Segment Operating Profit over the prior year, but was partially offset by inflation in the Company's manufacturing and overhead costs.

        Segment Opertating Profit of the Plastics Packaging segment increased by $16.3 million as a result of favorable product sales mix, improved productivity, and the non-recurrence of a third quarter 2003 write-off of miscellaneous assets that were no longer being used.

        Interest expense for continuing operations increased by $45.1 million as a result of the BSN acquisition and from tender offer premiums and the write-off of deferred finance fees related to the refinancing of the BSN Senior Subordinated notes and the early retirement of certain outstanding public obligations of the Company.

        Net earnings from continuing operations increased by $501.6 million over 2003 as a result of the items listed above in Segment Operating Profit as well as a smaller charge in 2004 to increase the Company's asbestos reserve ($84.9 million after tax in 2004 versus $292.5 million after tax in 2003). During 2004 and 2003, the Company recorded several items that management considers not representative of on going operations. The net after tax effect of these items was an increase in earnings of $38.4 million for 2004 and a decrease in earnings of $207.1 million for 2003.

        The Company completed its acquisition of BSN Glasspack S.A. ("BSN") on June 21, 2004 for a total purchase price of approximately $1.3 billion.

        The Company completed the sale of its blow-molded plastic container operations on October 7, 2004 with total sales proceeds of approximately $1.2 billion.

        Asbestos related cash payments of $190.1 million were lower than the prior year by 4.5%.

        The Company's total debt at December 31, 2004 was $5.36 billion or $65.1 million lower than the prior year balance.

        Cash provided by continuing operating activities improved by $239.7 million over the prior year, principally as a result of higher earnings and the Company's focus on working capital reductions and capital efficiency.

Results of Operations—Comparison of 2004 with 2003

Net Sales

        The Company's net sales by segment (dollars in millions) for 2004 and 2003 are presented in the following table. The Plastics Packaging amounts reflect the continuing operations and therefore, the

22



results of the discontinued operations have been reclassified from the 2004 and 2003 amounts. For further information, see Segment Information included in Note 20 to the Consolidated Financial Statements.

 
  2004
  2003
Glass Containers   $ 5,366.1   $ 4,182.9
Plastics Packaging     762.3     792.7
   
 
Segment and consolidated net sales   $ 6,128.4   $ 4,975.6
   
 

        Consolidated net sales for 2004 increased $1,152.8 million, or 23.2%, to $6,128.4 million from $4,975.6 million for 2003.

        Net sales of the Glass Containers segment increased $1,183.2 million, or 28.3%, over 2003.

        In Europe, the Company's largest region, sales increased $939.5 million from 2003. Net sales from the newly acquired BSN business made up $768.6 million of the region's increase. Stronger currency rates against the U.S. dollar for the European currencies also contributed to the sales growth. Unit volumes for the previously owned European businesses were up 2.8% overall with strong growth in the food, beverage and spirit markets.

        In North America, sales for 2004 were $47.2 million higher than sales in 2003. The higher sales resulted principally from increased selling prices and improved product sales mix as unit shipments declined by about 2% overall. The decrease in unit shipments was more than accounted for by the previously disclosed loss of a beverage container customer. Shipments of beer and malt beverage containers increased by approximately 4.8% over 2003, primarily due to the increase in business from a significant malt beverage customer. Shipments of containers for wine and spirits were also higher for 2004; however shipments of containers for tea, juice and other beverages were lower.

        In the Asia Pacific region, sales increased $117.7 million from 2003 principally due to unit volumes that were up 2.9% overall resulting from strong growth in beer, wine and low alcohol refreshers partially offset by lower shipments of food containers.

        In South America, sales increased $78.8 million principally as a result of glass container shipments increasing by more than 5% led by strong growth in the beer and beverage markets. Unit growth was significantly affected by lower exports to North America as a result of the loss of a previously disclosed beverage customer. Excluding the loss of those shipments, overall volume growth in South America was approximately 15%.

        The change in net sales for the Glass Containers segment can be summarized as follows (dollars in millions):

2003 Net sales—Glass Containers segment         $ 4,182.9
Additional sales from BSN businesses   $ 768.6      
The effects of sales volume, price and mix     257.5      
The effects of changing foreign currency rates on net sales     172.1      
Other     (15.0 )    
   
     
Total net effect on sales           1,183.2
         
2004 Net sales—Glass Containers segment         $ 5,366.1
         

        Net sales of the Plastics Packaging segment decreased $30.4 million, or 3.8%, from 2003. The lower sales primarily reflect the absence of sales from the closure assets divested in the fourth quarter of 2003 and the Asia Pacific plastic operations that were divested in the second quarter of 2004. In addition, sales of containers for prescription packaging were adversely affected due to a milder flu

23



season in December 2004 compared to December 2003. Increased resin prices passed through to customers and stronger currencies in Europe, Brazil and the Asia Pacific region partially offset these reductions.

        The change in net sales for the Plastics Packaging segment can be summarized as follows (dollars in millions):

2003 Net sales—Plastics Packaging segment         $ 792.7  
Divested businesses   $ (95.7 )      
Effects of higher resin cost pass-throughs     24.1        
The effects of changing foreign currency rates on net sales     21.0        
The effects of sales volume, price and mix     9.7        
Other     10.5        
   
       
Total net effect on sales           (30.4 )
         
 
2004 Net sales—Plastics Packaging segment         $ 762.3  
         
 

Segment Operating Profit

        The Company's Segment Operating Profit results (dollars in millions) for 2004 and 2003 are presented in the following table. The Plastics Packaging Segment Operating Profit amounts reflect the continuing operations, and therefore the results of the discontinued operations have been reclassified from the 2004 and 2003 amounts. In addition, certain Glass Container amounts from prior years have been reclassified to conform to current year presentation. For further information, see Segment Information included in Note 20 to the Consolidated Financial Statements.

 
  2004
  2003
 
Glass Containers   $ 759.6   $ 658.8  
Plastics Packaging     115.0     98.7  
Eliminations and other retained items     (102.2 )   (91.9 )

        Segment Operating Profit of the Glass Containers segment for 2004 increased $100.8 million, or 15.3%, to $759.6 million, compared with Segment Operating Profit of $658.8 million for 2003.

        In Europe, Segment Operating Profit for 2004 increased $60.4 million over 2003. The newly acquired BSN business contributed $27.6 million of the increase. Stronger currency rates against the U.S. dollar for the European currencies also contributed to the growth in Segment Operating Profit. In addition, higher unit shipments over 2003 in combination with improved pricing and improved productivity also contributed to the growth. These increases were partially offset by higher energy costs. The Segment Operating Profit contribution from BSN for 2004 includes a reduction in gross profit of $31.1 million related to the impact of the acquisition step-up of BSN finished goods inventory as required by FAS No. 141.

        In North America, Segment Operating Profit for 2004 increased $5.7 million over 2003. The benefits of higher selling prices and a more favorable product sales mix were the principal reasons for the increase. These increases were partially offset by a number of unfavorable effects, including: (1) lower production to control inventories consistent with the Company's working capital goals; (2) increased freight expense reflecting higher diesel fuel costs; and (3) a reduction in pension income. Also contributing to this decline was a 2% decline in unit shipments that was the result of the previously disclosed loss of a beverage customer. This decline in shipments of beverage containers was partially offset by increased shipments of containers for beer, wine, and liquor.

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        In the Asia Pacific region, Segment Operating Profit for 2004 increased $11.8 million over 2003. The effects of overall improved pricing as well as increased unit shipments were partially offset by higher energy costs. The increased unit shipments primarily relate to higher shipments in Australia for containers for wine and beer and increased shipments in New Zealand.

        In South America, Segment Operating Profit for 2004 increased $22.9 million over 2003. The increase is primarily attributed to increased unit shipments during the year. Unit shipments were higher in Venezuela where shipments increased 30% over prior year and in Ecuador where shipments increased 34% over prior year. In addition to higher unit shipments, the increase is also attributed to a better product sales mix in Brazil as the sales mix moved away from lower margin exports.

        The change in Segment Operating Profit for the Glass Containers segment can be summarized as follows (dollars in millions):

2003 Segment Operating Profit—Glass Containers         $ 658.8
The effects of sales volume, price and mix   $ 107.3      
Additional Segment Operating Profit from BSN businesses     27.6      
The effect of changing foreign currency rates on Segment Operating Profit     27.0      
Improved productivity and other manufacturing costs     3.7      
Lower pension income     (25.2 )    
Higher energy costs     (22.8 )    
Increased warehouse and other manufacturing costs     (18.8 )    
Other     2.0      
   
     
Total net effect on Segment Operating Profit           100.8
         
2004 Segment Operating Profit—Glass Containers         $ 759.6
         

        Segment Operating Profit of the Plastics Packaging segment for 2004 increased $16.3 million, or 16.5%, to $115.0 million compared to Segment Operating Profit of $98.7 million for 2003. The increase is primarily attributable to improved productivity and higher unit shipments. Also contributing to this increase was the non-recurrence of the third quarter of 2003 write-off of miscellaneous assets that were no longer being utilized. These increases were partially offset by higher delivery, warehouse, shipping and other manufacturing costs, as well as lower pension income.

        The change in Segment Operating Profit for the Plastics Packaging segment can be summarized as follows (dollars in millions):

2003 Segment Operating Profit—Plastics Packaging         $ 98.7
The effects of price,mix, sales volume and production volume   $ 7.4      
The effect of improved productivity     7.0      
The non-recurrence of a write-off of miscellaneous assets     4.0      
Increased delivery, warehouse, shipping and other manufacturing costs     (3.6 )    
Lower pension income     (0.7 )    
Other     2.2      
   
     
Total net effect on Segment Operating Profit           16.3
         
2004 Segment Operating Profit—Plastics Packaging         $ 115.0
         

        Eliminations and other retained items for 2004 were $10.3 million higher than for 2003. A reduction in pension income, higher legal and professional services costs in 2004 resulting in part from compliance with the Sarbanes-Oxley Act of 2002 and higher retention of property and casualty losses were the primary reasons for the increase. These increases were partially offset by lower spending on information systems costs as compared to prior year.

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Interest Expense

        Interest expense increased to $474.9 million in 2004 from $429.8 million in 2003. Interest expense for 2004 included charges of $28.0 million for note repurchase premiums and $2.8 million for the write-off of unamortized finance fees related to debt that was repaid prior to its maturity. Interest expense for 2003 included charges of $13.2 million for note repurchase premiums and related write-off of unamortized finance fees and $1.3 million for the write-off of unamortized finance fees related to the reduction of available credit under the Company's previous bank credit agreement. Exclusive of these items in both years, interest expense for 2004 was $28.8 million higher than in 2003. The higher interest in 2004 reflects additional interest as a result of higher debt related to the BSN acquisition. Partially offsetting this increase were lower interest expense that was principally the result of savings from the December 2003 repricing of the Secured Credit Agreement and approximately $21 million in interest savings as a result of the Company's fixed-to-floating interest rate swap on a portion of its fixed-rate debt.

Provision for Income Taxes

        The Company's effective tax rate from continuing operations for 2004 was 2.8%. Excluding the effects of items excluded from Segment Operating Profit discussed above, the additional interest charges for early retirement of debt and a tax benefit on an Australian tax consolidation, the Company's effective tax rate from continuing operations for 2004 was 26.9%. The Company's effective tax rate from continuing operations for 2003 was 30.5%. Excluding the effects of items excluded from Segment Operating Profit discussed above and the additional interest charges for early retirement of debt, the Company's effective tax rate from continuing operations for 2003 was 27.9%. The lower effective tax rate in 2004 is principally due to a favorable change in the global mix of earnings.

Minority Share Owners' Interest in Earnings of Subsidiaries

        Minority share owners' interest in earnings of subsidiaries for 2004 was $32.9 million compared to $25.8 million for 2003. The increase in 2004 is primarily due to higher earnings for the Company's subsidiaries in Venezuela, Colombia, and Italy.

Earnings from Continuing Operations

        For 2004, the Company recorded earnings from continuing operations of $171.5 million compared to a loss from continuing operations of $330.1 million for the year ended December 31, 2003. The aftertax effects of the items excluded from Segment Operating Profit, the additional interest charges discussed above and the tax benefit on the Australian tax consolidation, increased or decreased earnings in 2004 and 2003 as set forth in the following table (dollars in millions).

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  Net Earnings
Increase (Decrease)

 
Description

 
  2004
  2003
 
Gain on the sale of certain real property   $ 14.5   $  
Gain on a restructuring in the Italian Specialty Glass business     13.1        
Gain from the mark to market effect of certain commodity futures contracts     3.2        
A benefit for a tax consolidation in the Australian glass business     33.1        
Increase in the reserve for future asbestos related costs     (84.9 )   (292.5 )
Note repurchase premiums and write-off of finance fees     (20.1 )   (9.1 )
Life insurance restructuring charge     (5.4 )      
Write-down of equity investment           (50.0 )
Write-down of Plastics Packaging assets in the Asia Pacific region           (30.1 )
Loss on the sale of long-term notes receivable           (37.4 )
Loss on the sale of certain closures assets           (25.8 )
Shutdown of the Milton, Ontario glass container factory           (19.5 )
Shutdown of the Hayward, California glass container factory           (17.8 )
Shutdown of the Perth, Australia glass container factory           (17.4 )
   
 
 
Total   $ (46.5 ) $ (499.6 )
   
 
 

Executive Overview—Years ended December 2003 and 2002

        For the year ended December 31, 2003, the Company reported a loss from continuing operations of $330.1 million, or $291.9 million higher than the year ended December 31, 2002 loss from continuing operations before cumulative effect of accounting change of $38.2 million.

        The following items reduced 2003 results as compared to 2002 results:

    The write-down of plastics packaging assets in the Asia Pacific region that reduced earnings by $30.1 million ($43.0 million pretax)

    The loss on the sale of long-term notes receivable that reduced earnings by $37.4 million ($37.4 million pretax)

    The loss on the sale of certain closure assets that reduced earnings by $25.8 million ($41.3 million pretax)

    The shutdown of three glass container factories in Hayward, California, Milton, Ontario and Perth, Australia that reduced earnings by $54.7 million ($72.5 million pretax).

    The write-down of an equity investment that reduced earnings by $50.0 million ($50.0 million pretax)

    Also affecting the 2003 results were the effects of higher natural gas costs, reduced pension income, continued price pressure in certain of the Company's Plastics Packaging business, a national strike in Venezuela that lasted from December of 2002 until early 2003 and higher interest expense as further discussed below.

        The 2003 results were increased as compared to the 2002 results by higher unit prices in most of the Company's Glass Container segment, higher unit shipments of closures and the effects of changing foreign currency rates. Also affecting the comparison, in 2003 the Company recorded a charge to increase the reserve for asbestos related costs that reduced earnings by $292.5 million ($450.0 million pretax) compared to a 2002 charge that reduced earnings by $308.8 million ($475.0 million pretax).

        A net loss of $990.8 million for 2003 includes a loss from discontinued operations of $660.7 million reflecting an impairment charge of $670.0 million to reduce the reported value of goodwill in the

27



consumer products reporting unit. A net loss of $460.2 million for 2002 reflects earnings from discontinued operations of $38.0 million and a cumulative effect of accounting change of $460.0 million.

Results of Operations—Comparison of 2003 with 2002

Net Sales

        The Company's net sales by segment (dollars in millions) for 2003 and 2002 are presented in the following table. The Plastics Packaging amounts reflect the continuing operations and therefore, the results of the discontinued operations have been reclassified from the 2003 and 2002 amounts. For further information, see Segment Information included in Note 20 to the Consolidated Financial Statements.

 
  2003
  2002
Glass Containers   $ 4,182.9   $ 3,875.2
Plastics Packaging     792.7     746.0
   
 
Segment and consolidated net sales   $ 4,975.6   $ 4,621.2
   
 

        Consolidated net sales for 2003 increased $354.4 million, or 7.7%, to $4,975.6 million from $4,621.2 million for 2002.

        Net sales of the Glass Containers segment increased $307.7 million, or 7.9%, over 2002. In North America, a $22.1 million decrease in sales was primarily attributed to a 4.9% reduction in unit shipments. Overall cool and damp weather conditions in the United States and Canada during the spring and summer caused lower demand, principally for beer containers. The North American glass container business also had lower unit shipments of containers for food and beverages, principally juice and teas, as certain of these products continued to convert to plastic packaging. The effects of changing foreign currency exchange rates increased reported U.S. dollar sales of the segment's operations in Canada by approximately $19 million. The combined U.S. dollar sales of the segment's operations outside of North America increased $329.8 million over 2002. The effects of changing foreign currency exchange rates increased reported U.S. dollar sales of the segment's operations in Europe and the Asia Pacific region by approximately $253 million and decreased reported U.S. dollar sales of the segment's operations in South America by approximately $29 million. The increase was also partially attributed to a 7% increase in unit shipments and higher prices in the European businesses (principally in Italy and the United Kingdom), higher prices in South America and the Asia Pacific region, and increased unit shipments in Brazil. Overall unit shipments in the Asia Pacific region were about equal to unit shipments for 2002. These increases were partially offset by a less favorable sales mix in the Asia Pacific region and lower unit shipments throughout most of South America, excluding Brazil, and from the effects of a national strike in Venezuela that began in early December 2002 and ended in early 2003. The strike caused energy supply curtailments that forced the Company to temporarily idle its two plants in the country, adversely affecting net sales by approximately $20 million. The effects of the strike primarily impacted the first quarter of 2003.

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        The change in net sales for the Glass Containers segment can be summarized as follows (dollars in millions):

2002 Net sales—Glass Containers segment         $ 3,875.2
The effects of sales volume, price and mix   $ 101.6      
The effects of the national strike in Venezuela     (20.9 )    
The effects of changing foreign currency rates on net sales in Europe, Asia Pacific and Canada     271.7      
The effects of changing foreign currency rates on net sales in South America     (29.3 )    
Other     (15.4 )    
   
     
Total net effect on sales           307.7
         
2003 Net sales—Glass Containers segment         $ 4,182.9
         

        Net sales of the Plastics Packaging segment increased $46.7 million, or 6.3%, over 2002. Unit shipments increased by approximately 10.9% overall, led by increased shipments of closures for beverages, food, juices and healthcare. These increases were offset by lower selling prices in most of the segment's businesses and the absence of sales from the closure assets divested in November of 2003. The effects of higher resin cost pass-throughs increased sales for 2003 by approximately $19.7 million compared with 2002.

        The change in net sales for the Plastics Packaging segment can be summarized as follows (dollars in millions):

2002 Net sales—Plastics Packaging segment         $ 746.0
The effect of sales volume, price and mix   $ 17.8      
Divested businesses     (15.3 )    
Effects of higher resin cost pass-throughs     19.7      
The effects of changing foreign currency rates on net sales the Asia Pacific region     26.4      
Other     (1.9 )    
   
     
Total net effect on sales           46.7
         
2003 Net sales—Plastics Packaging segment         $ 792.7
         

Segment Operating Profit

        The Company's Segment Operating Profit results (dollars in millions) for 2003 and 2002 are presented in the following table. The Plastics Packaging Segment Operating Profit amounts reflect the continuing operations, and therefore the results of the discontinued operations have been reclassified from the 2003 and 2002 amounts. In addition, certain Glass Container amounts from prior years have been reclassified to conform to current year presentation. For further information, see Segment Information included in Note 20 to the Consolidated Financial Statements.

 
  2003
  2002
 
Glass Containers   $ 658.8   $ 709.0  
Plastics Packaging     98.7     136.0  
Eliminations and other retained items     (91.9 )   (83.1 )

        Segment Operating Profit of the Glass Containers segment for 2003 decreased $50.2 million, or 7.1%, to $658.8 million, compared with Segment Operating Profit of $709.0 million for 2002. In North

29



America, Segment Operating Profit for 2003 decreased $107.7 million from 2002. The decrease resulted from higher energy costs of $45.5 million, lower pension income of approximately $32 million and lower unit shipments, particularly beer containers, resulting primarily from overall cool and damp weather conditions in the United States and Canada during the spring and summer, partially offset by higher unit pricing compared to 2002. The Company also took extended Thanksgiving and Christmas shutdowns at its U.S. factories to reduce inventory. The combined U.S. dollar Segment Operating Profit of the segment's operations outside North America increased $57.5 million over 2002. The increase was attributed to increased unit shipments, improved productivity, and higher prices in the European businesses (principally in Italy and the United Kingdom), higher pricing in South America and the Asia Pacific region and increased shipments in Brazil. These increases were partially offset by increased energy costs totaling $34.9 million in Europe, South America and the Asia Pacific region, a less favorable sales mix in the Asia Pacific region, lower unit shipments throughout most of South America, except Brazil, and the effects of a national strike in Venezuela that began in early December 2002. The strike caused energy supply curtailments that forced the Company to temporarily idle its two plants in the country, adversely affecting Segment Operating Profit by approximately $10 million. The effects of the strike primarily impacted the first quarter of 2003. In addition, the effects of changing foreign currency exchange rates increased reported U.S. dollar Segment Operating Profit of the segment's operations in Europe and the Asia Pacific region by approximately $43 million and decreased reported U.S. dollar Segment Operating Profit of the segment's operations in South America by approximately $6 million.

        The change in Segment Operating Profit for the Glass Containers segment can be summarized as follows (dollars in millions):

2002 Segment Operating Profit — Glass Containers         $ 709.0  
The effects of sales volume, price and mix   $ 64.4        
Increased warehouse and other manufacturing costs     (24.4 )      
Higher energy costs     (80.4 )      
Lower pension income in North America     (31.9 )      
Lower pension income in Europe and the Asia Pacific region     (7.2 )      
The effects of the national strike in Venezuela     (10.1 )      
The effects of changing foreign currency rates on Segment Operating Profit in Europe and Asia Pacific     42.6        
The effects of changing foreign currency rates on Segment Operating Profit in South America     (5.9 )      
Other     2.7        
   
       
Total net effect on Segment Operating Profit           (50.2 )
         
 
2003 Segment Operating Profit—Glass Containers         $ 658.8  
         
 

        Segment Operating Profit of the Plastics Packaging segment for 2003 decreased $37.3 million, or 27.4%, to $98.7 million compared to Segment Operating Profit of $136.0 million for 2002. Unit shipments increased by approximately 10.9% overall, led by increased shipments of closures for beverages, food, juices and healthcare. However, the change in product mix and lower selling prices for most of the segment's businesses more than offset the effects of increased shipments. Other factors that unfavorably affected Segment Operating Profit in 2003 compared to 2002 were: (1) reduced Segment Operating Profit of $14.5 million for the segment's advanced technology systems business, as a major customer discontinued production in the U.S. and relocated that production to Singapore; (2) the write-off of $4.0 million of miscellaneous assets that were no longer being utilized and (3) lower pension income of approximately $4.4 million.

30



        The change in Segment Operating Profit for the Plastics Packaging segment can be summarized as follows (dollars in millions):

2002 Segment Operating Profit—Plastics Packaging         $ 136.0  
The effects of price and volume   $ (7.5 )      
Increased delivery, warehouse, shipping and other manufacturing costs     (5.5 )      
Lower pension income     (4.4 )      
Effects of a customer relocating to Singapore     (14.5 )      
The write-off of miscellaneous assets     (4.0 )      
Other     (1.4 )      
   
       
Total net effect on Segment Operating Profit           (37.3 )
         
 
2003 Segment Operating Profit—Plastics Packaging         $ 98.7  
         
 

        Eliminations and other retained items for 2003 were $8.8 million higher than for 2002. The principal reasons for the higher costs were: (1) $4.6 million reduction in pension income; (2) the write-off of software initiatives that the Company decided not to pursue; and (3) accelerated amortization of certain information system assets scheduled for replacement in 2004.

        Consolidated Segment Operating Profit for 2003 was $665.6 million and excluded the following: (1) a charge of $450.0 million to increase the reserve for estimated future asbestos-related costs; (2) charges of $50.0 million for the write-down of an equity investment in a soda ash mining operation; (3) a charge of $43.0 million for the write-down of Plastics Packaging assets in the Asia Pacific region; (4) a loss of $41.3 million on the sale of certain closures assets; (5) a loss of $37.4 million from the sale of long-term notes receivable; and (6) capacity curtailment charges totaling $72.5 million which includes $28.5 million for the permanent closure of the Hayward, California glass container factory, $23.9 million for the shutdown of the Perth, Australia glass container factory and $20.1 million for the shutdown of the Milton, Ontario glass container factory. These items, which are all discussed further below, were excluded from Segment Operating Profit because management considered them not representative of ongoing operations. Consolidated Segment Operating Profit for 2002 was $761.9 million and excluded a charge of $475.0 million to increase the reserve for estimated future asbestos-related costs.

Interest Expense

        Interest expense increased to $429.8 million in 2003 from $372.2 million in 2002. Interest expense for 2003 included charges of $13.2 million for note repurchase premiums and related write-off of unamortized finance fees and $1.3 million for the write-off of unamortized finance fees related to the reduction of available credit under the Company's previous bank credit agreement. Interest expense for 2002 included a charge of $9.1 million for early extinguishment of debt which was reclassified from extraordinary items as required by FAS No. 145. For more information, see Note 18 to the Consolidated Financial Statements. Exclusive of these items in both years, interest expense for 2003 was $52.2 million higher than in 2002. The higher interest expense in 2003 was mainly due to the issuance of fixed rate notes totaling $1.625 billion in 2002 and $900 million in May 2003. The proceeds from the notes were used to repay lower cost, variable rate debt borrowed under the Company's secured credit agreement. Higher debt levels in 2003 also contributed to the increase. Lower interest rates in 2003 on the Company's remaining variable rate debt partially offset the increase.

Provision for Income Taxes

        The Company's effective tax rate from continuing operations for 2003 was 30.5%. Excluding the effects of items excluded from Segment Operating Profit discussed above and the additional interest charges for early retirement of debt, the Company's effective tax rate from continuing operations for 2003 was 27.9%. The Company's effective tax rate from continuing operations for 2002 was 79.7%.

31



Excluding the effects of items excluded from Segment Operating Profit discussed above and the additional interest charges for early retirement of debt, the Company's effective tax rate from continuing operations for 2002 was 28.4%. The lower effective tax rate in 2003 is principally due to a change in Italian tax laws, including a rate decrease that was enacted late in the fourth quarter of 2003.

Minority Share Owners' Interest in Earnings of Subsidiaries

        Minority share owners' interest in earnings of subsidiaries for 2003 was $25.8 million compared to $25.5 million for 2002.

Earnings from Continuing Operations

        For 2003, the Company recorded a net loss from continuing operations of $330.1 million compared to a net loss from continuing operations before cumulative effect of accounting change of $38.2 million for the year ended December 31, 2002. The aftertax effects of the items excluded from Segment Operating Profit and the additional interest charges discussed above, increased or decreased earnings in 2003 and 2002 as set forth in the following table (dollars in millions).

 
  Net Earnings
Increase (Decrease)

 
Description

 
  2003
  2002
 
Increase in the reserve for future asbestos related costs   $ (292.5 ) $ (308.8 )
Write-down of equity investment     (50.0 )      
Write-down of Plastics Packaging assets in the Asia Pacific region     (30.1 )      
Loss on the sale of long-term notes receivable     (37.4 )      
Loss on the sale of certain closures assets     (25.8 )      
Shutdown of the Milton, Ontario glass container factory     (19.5 )      
Shutdown of the Hayward, California glass container factory     (17.8 )      
Shutdown of the Perth, Australia glass container factory     (17.4 )      
Note repurchase premiums and write-off of finance fees     (9.1 )   (5.7 )
   
 
 
Total   $ (499.6 )   (314.5 )
   
 
 

Acquisition of BSN Glasspack, S.A.

        On June 21, 2004, the Company completed the acquisition of BSN Glasspack, S.A. ("BSN") from Glasspack Participations (the "Acquisition"). Total consideration for the Acquisition was approximately $1.3 billion, including the assumption of approximately $650 million of debt, a portion of which was refinanced in connection with the Acquisition. BSN was the second largest glass container manufacturer in Europe with manufacturing facilities in France, Spain, Germany and the Netherlands. The Acquisition was financed with borrowings under the Company's Second Amended and Restated Secured Credit Agreement (see Note 6). In order to secure the European Commission's approval, the Company committed to divest the Barcelona, Spain, and Corsico, Italy glass plants. The Company completed the sale of these plants in January 2005 and received cash proceeds of approximately €138.2 million.

        The Acquisition was part of the Company's overall strategy to improve its presence in the European market in order to better serve the needs of its customers throughout the European region and to take advantage of synergies in purchasing and cost reductions. This integration strategy should lead to significant improvement in earnings from the European operations by the end of 2006. Certain actions contemplated by the integration strategy may require additional accruals that will increase goodwill or result in additional charges to operations. As of December 31, 2004, the Company has determined to reduce capacity in one of the acquired plants. During the first half of 2005, the Company expects to conclude the evaluation of its acquired capacity.

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        The total purchase cost of approximately $1.3 billion will be allocated to the tangible and identifiable intangible assets and liabilities based upon their respective fair values. Such allocations will be based upon valuations which have not been finalized. Accordingly, the allocation of the purchase consideration included in the accompanying Condensed Consolidated Balance Sheet at December 31, 2004, is preliminary and includes €577.6 million ($786.6 million at December 31, 2004 exchange rate) of goodwill representing the unallocated portion of the purchase price. The Company expects that the valuation process will be completed no later than the second quarter of 2005. The accompanying Condensed Consolidated Results of Operations for the year ended December 31, 2004, included six months and ten days of BSN operations.

        The following table summarizes the estimated fair values of the assets acquired and liabilities assumed on June 21, 2004, translated from Euros into dollars at the exchange rate on that date. The initial purchase price allocations may be adjusted within one year of the purchase date for changes in estimates of the fair value of assets acquired and liabilities assumed (dollars in millions):

 
  June 21,
2004

 
Inventories   $ 294.7  
Accounts receivable     197.8  
Other current assets (excluding cash acquired)     31.8  
   
 
  Total current assets     524.3  
Goodwill     696.0  
Other long-term assets     121.5  
Net property, plant and equipment     670.9  
   
 
Assets acquired   $ 2,012.7  
Accounts payable and other current liabilities     (410.6 )
Other long-term liabilities     (334.6 )
   
 
Aggregate purchase costs   $ 1,267.5  
   
 

        The assets above include $71.1 million of estimated intangible assets related to customer relationships, which will be amortized over the next 8 to 12 years. The liabilities above include $72.7 million for the initial estimated costs of certain actions discussed above, substantially all of which relates to employee termination costs and related fringe benefits.

Discontinued Operations

        On October 7, 2004, the Company announced that it had completed the sale of its blow-molded plastic container operations in North America, South America and Europe, to Graham Packaging Company.

        Cash proceeds of approximately $1.2 billion were used to repay term loans under the Company's bank credit facility, which was amended to permit the sale. The sale agreement included a post-closing purchase price adjustment based on changes in certain working capital components and certain other assets and liabilities of the business. Because the level of working capital declined during the several months prior to closing, primarily due to seasonal factors, the Company expects that an amount will be payable to Graham Packaging under this price adjustment provision. The process for determining the amount payable to Graham Packaging has not been completed, however, the Company expects that it will not have a material effect upon results of operations or cash flows.

        Included in the sale were 24 plastics manufacturing plants in the U.S., two in Mexico, three in Europe and two in South America, serving consumer products companies in the food, beverage,

33



household, chemical and personal care industries. The blow-molded plastic container operations were part of the consumer products business unit of the plastics packaging segment.

        As required by FAS No. 144, the Company has presented the results of operations for the blow-molded plastic container business in the Consolidated Results of Operations for the years ended December 31, 2004, 2003 and 2002 as a discontinued operation. Interest expense was allocated to discontinued operations based on debt that was required to be repaid from the 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 condensed consolidated results of operations for the periods indicated (dollars in millions):

 
  Year ended December 31,
Revenues:

  2004
  2003
  2002
Net sales   $ 875.3   $ 1,083.4   $ 1,019.2
Other revenue     7.7     9.0     9.7
   
 
 
      883.0     1,092.4     1,028.9
Costs and expenses:                  
Manufacturing, shipping and delivery     754.6     949.3     840.5
Research, development and engineering     16.0     20.2     22.4
Selling and administrative     23.7     33.8     30.7
Interest     45.1     60.8     64.9
Other     22.9     681.0     6.7
   
 
 
      862.3     1,745.1     965.2
   
 
 
Earnings (loss) before items below     20.7     (652.7 )   63.7
Provision for income taxes     27.1     8.0     25.7
Gain on sale of discontinued operations     70.4            
   
 
 
Net earnings (loss) from discontinued operations   $ 64.0   $ (660.7 ) $ 38.0
   
 
 

        Other costs and expenses for the year ended December 31, 2003 includes an impairment charge of $670.0 million to reduce the reported value of goodwill in the consumer products reporting unit, all of which was attributable to the discontinued operations.

        The sale of the blow-molded plastic business resulted in a substantial capital loss, primarily related to previous goodwill write downs that were not deductible when recorded. The gain on the sale of discontinued operations of $70.4 million includes a credit for income taxes of $39.7 million, representing the tax benefit from offsetting a portion of the loss against otherwise taxable capital gains.

34



        The condensed consolidated balance sheet at December 31, 2003 included the following assets and liabilities related to the discontinued operations (dollars in millions):

Assets:

  Balance at
December 31,
2003

Inventories   $ 155.0
Accounts receivable     112.1
Other current assets     14.8
   
  Total current assets     281.9
Goodwill     151.1
Other long-term assets     79.2
Net property, plant and equipment     729.2
   
Total assets   $ 1,241.4
   
Liabilities:      
Accounts payable and other current liabilities   $ 103.0
Other long-term liabilities     64.0
   
Total liabilities   $ 167.0
   

Asbestos-Related Costs

        The fourth quarter 2004 charge for asbestos-related costs was $152.6 million ($84.9 million after tax), compared to the fourth quarter 2003 charge of $450.0 million ($292.5 million after tax). These charges resulted from the Company's comprehensive annual review of asbestos-related liabilities and costs. In each case, 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 2004 were $190.1 million, a reduction of $8.9 million, or 4.5%, from 2003. During 2004, the Company disposed of approximately 9,000 claims. Certain dispositions in 2004 and prior years have included deferred amounts payable over periods ranging up to seven years. Deferred amounts payable at December 31, 2004 were approximately $91 million compared with approximately $87 million at December 31, 2003. 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.

        As of December 31, 2004, the number of asbestos-related claims pending against the Company was approximately 35,000, up from approximately 29,000 pending claims at December 31, 2003. In the second quarter of 2003, the Company received approximately 7,000 new filings in advance of the effective date of the recently-enacted Mississippi tort reform law. Approximately 60% of those filings are cases with exposure dates after the Company's 1958 exit from the business for which the Company takes the position that it has no liability. The Company anticipates a significant number of the Mississippi cases will be dismissed without prejudice subject to the possibility of such cases being re-filed in other jurisdictions.

        A former business unit of the Company produced a minor amount of specialized high-temperature insulation material containing asbestos from 1948 until 1958, when the business was sold. In line with its limited involvement with an asbestos-containing product and its exit from that business over 45 years ago, the Company will continue to work aggressively to minimize the number of incoming cases and will continue to limit payments to only those impaired claimants who were exposed to the Company's

35



products and whose claims have merit under applicable state law. See Note 19 to the Consolidated Financial Statements for further information.

2004 Non-operational Items

Mark to Market of Hedge Contracts

        The Company uses commodity futures contracts related to forecasted natural gas requirements. The objective of these futures contracts is to limit the fluctuations in prices paid for natural gas and the potential volatility in cash flows from future market price movements. The Company continually evaluates the natural gas market with respect to its future usage requirements. The Company generally evaluates the natural gas market for the next twelve to eighteen months and continually enters into commodity futures contracts in order to hedge a portion of its usage requirements through the next twelve to eighteen months.

        As discussed further below, prior to December 31, 2004, the Company accounted 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 was designated as, and met the required criteria for, a cash flow hedge was recorded in accumulated other comprehensive income ("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 was deemed to be ineffective was recognized in current earnings.

        During the fourth quarter of 2004, the Company determined that the commodity futures contracts described above 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 total unrealized pretax gain recorded in 2004 was $4.9 million ($3.2 million after tax). This change had no effect upon the Company's cash flows.

Plastics Packaging Assets

        In August of 2003, the Company initiated a review of its Plastics Packaging assets in the Asia Pacific region. The review was completed during the fourth quarter of 2003. The Company used a combination of estimated divestment cash flows, which included bid prices from potential purchasers, and partial liquidation values for certain assets to determine the net realizable values of the assets. The Company compared the estimated net realizable values to the book values of the asset and determined that an asset impairment existed. As a result, the Company recorded a charge of $43.0 million ($30.1 million after tax) to write-down the assets to realizable values. Certain of the plastics businesses in the Asia Pacific region operate in highly competitive markets leading to reduced profit margins. In addition, the Company's PET container business has lost a significant amount of business in the past few years. The reduced business and overall excess capacity in the industry has caused a reduction in the overall value of the business.

        During 2004, the Company completed the sale of a portion of this business and is continuing to evaluate prospective buyers for the remaining businesses. The Company does not expect to record any further material losses related to this business.

2003 Non-operational Items

Sale of Long-term Notes Receivable

        On July 11, 2003, the Company received payments totaling 100 million British pounds sterling (US$163.0 million) in connection with the sale to Ardagh Glass Limited of certain long-term notes receivable. The notes were received from Ardagh in 1999 by the Company's wholly-owned subsidiary, United Glass Limited, in connection with its sale of Rockware, a United Kingdom glass container

36



manufacturer obtained in the 1998 acquisition of the worldwide glass and plastics packaging businesses of BTR plc. The notes were due in 2006 and interest had previously been paid in kind through periodic increases in outstanding principal balances. The proceeds from the sale of the notes were used to reduce outstanding borrowings under the Company's Secured Credit Agreement. The notes were sold at a discount of approximately 22.6 million British pounds sterling. The resulting loss of US$37.4 million (US$37.4 million after tax) was included in the results of operations of the second quarter of 2003.

Capacity Curtailments

        Over the last several years, the Company has significantly improved its overall worldwide glass container labor and machine productivity, as measured by output produced per man-hour. By applying its technology and worldwide best practices, the Company has been able to significantly increase the daily output of glass-forming machines. As a result of these increases in productivity, the Company has had to close glass plants in order to keep its capacity in balance with required production volumes.

        In August 2003, the Company announced the permanent closing of its Hayward, California glass container factory. Production at the factory was suspended in June following a major leak in its only glass furnace. As a result, the Company recorded a capacity curtailment charge of $28.5 million ($17.8 million after tax) in the third quarter of 2003.

        The closing of this factory resulted in the elimination of approximately 170 jobs and a corresponding reduction in the Company's workforce. The Company expects that a substantial portion of the closing costs will be paid out by the end of 2005.

        In November 2003, the Company announced the permanent closing of its Milton, Ontario glass container factory. This closing was part of an effort to bring capacity and inventory levels in line with anticipated demand. As a result, the Company recorded a capacity curtailment charge of $20.1 million ($19.5 million after tax) in the fourth quarter of 2003.

        The closing of this factory in November 2003 resulted in the elimination of approximately 150 jobs and a corresponding reduction in the Company's workforce. The Company expects that the majority of the closing costs will be paid out by the end of 2005.

        In December 2003, the Company announced the permanent closing of its Perth, Australia glass container factory. This closing was part of an effort to reduce overall capacity in Australia and bring inventory levels in line with anticipated demand. The Perth plant's western location and small size contributed to the plant being a higher cost facility that was no longer economically feasible to operate. As a result, the Company recorded a capacity curtailment charge of $23.9 million ($17.4 million after tax) in other costs and expenses in the results of operations for 2003.

        The closing of this factory in December 2003 resulted in the elimination of approximately 107 jobs and a corresponding reduction in the Company's workforce. The majority of the closing costs were paid out by the end of 2004.

Sale of Certain Closures Assets

        During the fourth quarter of 2003, the Company completed the sale of its assets related to the production of plastic trigger sprayers and finger pumps. Included in the sale were manufacturing facilities in Bridgeport, Connecticut and El Paso, Texas, in addition to related production assets at the Erie, Pennsylvania plant. As a result of the sale, the Company recorded a loss of $41.3 million ($25.8 million after tax) in the third and fourth quarters of 2003. The net cash proceeds from the sale of approximately $44 million, including liquidation of related working capital, were used to reduce debt.

37



        The Company's decision to sell its assets related to the production of plastic trigger sprayers and finger pumps was consistent with its objectives to improve liquidity and to focus on its core businesses.

Write-down of Equity Investment

        During the fourth quarter of 2003, the Company determined that the value of its 25% investment in a North American soda ash mining operation was impaired and not likely to recover. Increasing global competition and recent development of foreign sources of soda ash have created significant excess capacity in that industry. The resulting competitive environment caused management of the soda ash mining operation to significantly lower its projections of earnings and cash flows. Following an evaluation of future estimated earnings and cash flows, the Company determined that its carrying value should be written down to estimated fair value and recorded a $50 million charge in the fourth quarter which substantially reduced the carrying value of this equity method investment.

Capital Resources and Liquidity

Current and Long-Term Debt

        The Company's total debt at December 31, 2004 was $5.36 billion, compared to $5.43 billion at December 31, 2003. The decrease in the total debt from 2003 to 2004 was primarily the result of increased cash provided by operating activities, as discussed further below, partially offset by higher capital spending as a result of the Company's announced investment in a new glass container manufacturing plant in the U.S. The 2004 debt was also affected by several large transactions during the year. The June 21, 2004 acquisition of BSN Glasspack discussed above increased debt by $1.360 billion and the October 7, 2004 divestiture of the blow-molded plastic container business discussed above reduced debt by $1.191 billion. In addition, on October 13, the Company received $81.8 million in cash proceeds from the sale of its 20% equity interest in Consol Limited of South Africa, which was used to further reduce outstanding term debt. In 2004, the Company also incurred debt of $105.4 million for finance fees and repurchase premiums related to the financing of the BSN acquisition, the refinancing of the BSN Senior Subordinated Notes and the refinancing of the Company's Senior Notes due 2005.

        On October 7, 2004, in connection with the sale of the Company's blow-molded plastic container operations, the Company's subsidiary borrowers entered into the Third Amended and Restated Secured Credit Agreement (the "Agreement"). The proceeds from the sale were used to repay C and D term loans and a portion of the B1 term loan outstanding under the previous agreement. At December 31, 2004, the Third Amended and Restated Secured Credit Agreement includes a $600.0 million revolving credit facility and a $315.0 million A1 term loan, each of which has a final maturity date of April 1, 2007. It also includes a $226.8 million B1 term loan, and $190.6 million C1 term loan, and a €47.5 million C2 term loan, each of which has a final maturity date of April 1, 2008. The Third Amended and Restated Secured Credit Agreement eliminated the provisions related to the C3 term loan that was canceled on August 19, 2004. The Third Amended and Restated Secured Credit Agreement also permits the Company, at its option, to refinance certain of its outstanding notes and debentures prior to their scheduled maturity.

        At December 31, 2004, the Company's subsidiary borrowers had unused credit of $404.8 million available under the Agreement.

        The weighted average interest rate on borrowings outstanding under the Third Amended and Restated Secured Credit Agreement at December 31, 2004 was 5.09%. Including the effects of cross-currency swap agreements related to borrowings under the Third Amended and Restated Secured Credit Agreement by the Company's Australian, European and Canadian subsidiaries, as discussed in Note 9, the weighted average interest rate was 5.40%.

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        The Third Amended and Restated Secured Credit Agreement contains covenants and provisions that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness or amend certain debt instruments, pay dividends, create liens on assets, enter into contingent obligations, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted, or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, the Third Amended and Restated Secured Credit Agreement contains financial covenants that require the Company to maintain specified financial ratios and meet specified tests based upon financial statements of the Company and its subsidiaries on a consolidated basis, including minimum fixed charge coverage ratios, maximum leverage ratios and specified capital expenditure tests.

        As part of the BSN Acquisition, the Company assumed the senior subordinated notes of BSN. The 10.25% senior subordinated notes were due August 1, 2009 and had a face amount of €140.0 million at the acquisition date and were recorded at the acquisition date at a fair value of €147.7 million. The 9.25% senior subordinated notes were due August 1, 2009 and had a face amount of €160.0 million at the acquisition date and were recorded at the acquisition date at a fair value of €168.0 million. The majority of these notes were repurchased in the fourth quarter of 2004 as discussed below.

        During December 2004, a subsidiary of the Company issued Senior Notes totaling $400.0 million and Senior Notes totaling €225.0 million. The notes bear interest at 6.75%, and are due December 1, 2014. Both series of notes are guaranteed by substantially all of the Company's domestic subsidiaries. The indentures for both series of notes have substantially the same restrictions as the previously issued 7.75%, 8.875% and 8.75% Senior Secured Notes and 8.25% Senior Notes. The issuing subsidiary used the net proceeds from the notes of approximately $680.0 million in addition to borrowings under the Agreement to purchase in a tender offer $237.6 million of the $350.0 million 7.15% Senior Notes due 2005, €159.6 million of the €160.0 million 9.25% BSN notes due 2009 and €127.3 million of the €140.0 million 10.25% BSN notes due 2009. As part of the issuance of these notes and the related tender offer, the Company recorded in the fourth quarter of 2004 additional interest charges of $28.3 million for note repurchase premiums and the related write-off of unamortized finance fees.

        During May 2003, a subsidiary of the Company issued Senior Secured Notes totaling $450.0 million and Senior Notes totaling $450.0 million. The notes bear interest at 7.75% and 8.25%, respectively, and are due May 15, 2011 and May 15, 2013, respectively. Both series of notes are guaranteed by substantially all of the Company's domestic subsidiaries. In addition, the assets of substantially all of the Company's domestic subsidiaries are pledged as security for the Senior Secured Notes. The indentures for the 7.75% Senior Secured Notes and the 8.25% Senior Notes have substantially the same restrictions as the previously issued 8.875% and 8.75% Senior Secured Notes. The issuing subsidiary used the net proceeds from the notes of approximately $880.0 million to purchase in a tender offer $263.5 million of the $300.0 million 7.85% Senior Notes due 2004 and repay borrowings under the previous credit agreement. As part of the issuance of these notes and the related tender offer, the Company recorded in the second quarter of 2003 additional interest charges of $13.2 million for note repurchase premiums and the related write-off of unamortized finance fees and $3.6 million, of which $2.3 million was allocated to discontinued operations, for the write-off of unamortized finance fees related to the reduction of available credit under the previous credit agreement.

        The Senior Secured and Senior Notes that were issued during the past three years were part of the Company's plan to improve financial flexibility by issuing long-term fixed rate debt, as well as refinance existing fixed rate debt that was nearing maturity. While this strategy extended the maturity of the Company's debt, long-term fixed rate debt increases the cost of borrowing compared to shorter term, variable rate debt. The Company does not intend to continue to refinance variable rate debt with new fixed rate issuances, but will continue to issue long-term fixed rate debt in order to repay existing fixed rate debt that is nearing maturity.

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Cash Flows

        For 2004, cash provided by continuing operating activities was $544.7 million compared with $305.0 million for 2003, an improvement of $239.7. Cash provided by the change in components of working capital for 2004 was $180.9 million compared to a use of cash of $40.5 million for 2003. Inventories in North American glass container operations were lower than prior year as a result of tighter management of inventory levels as part of the Company's overall focus on working capital improvement. Inventory levels in the Australian and European glass container operations, excluding the BSN Acquisition, were also lower, as compared to the prior year. These lower inventories along with lower accounts receivable, excluding the BSN acquisition and changes in foreign currency rates, are part of the Company's focus on working capital management to improve cash flow.

        For the year ended December 31, 2004, the Company paid $548.8 million in cash interest, including note repurchase premiums, compared with $458.8 million, including note repurchase premiums, for 2003. The increase in cash interest paid is primarily due to the additional interest related to the BSN acquisition. The interest expense related to the divested blow-molded plastic container business has been reclassified to discontinued operations. This increase was partially offset by lower overall interest rates from the December 2003 repricing of the Agreement and from interest savings resulting from the Company's fixed-to-floating interest rate swap program, as discussed further below, which reduced interest expense by approximately $21 million.

        Asbestos-related payments for 2004 decreased $8.9 million, or 4.5%, to $190.1 million, compared with $199.0 million for 2003. The Company expects that its total asbestos-related payments in 2005 will be moderately lower than 2004. 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.

        For 2004, the Company's capital spending for additions to property, plant and equipment (continuing operations) was $436.7 million compared with $344.4 million for 2003. The increase is principally related to capital spending at the acquired BSN facilities and the new glass container plant being built in Windsor, Colorado. The Company continues to focus on reducing capital spending and improving its return on invested capital by improving capital efficiency. The Company expects to reduce its capital spending on existing facilities during 2005 by limiting the number of expansion projects and only undertaking projects with relatively short payback periods.

        For 2004, the Company received proceeds of $1,430.9 million from divestitures and other asset sales compared with $66.7 million in 2003. Included in 2004 were the following items (dollars in millions):

Sale of the blow-molded plastics business   $ 1,191.0
Sale of the 20% investment in Consol Glass     81.8
Restructuring in the Italian Specialty Glass business     42.4
Sale of a portion of the Australian plastics business     53.4
Sale of certain real property     25.2
Other asset sales     37.1
   
  Total proceeds from divestitures and other asset sales   $ 1,430.9
   

        Included in 2003 was approximately $44 million from the divestiture of certain closures assets as discussed above.

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        The Company paid $34.4 million in finance fees in 2004 for the issuance of Senior Notes as well as the refinancing of the Agreement. During 2004, the Company also paid and expensed $28.0 million of tender offer premiums. For 2003, the Company paid $44.5 million in finance fees related to the issuance of the Senior Secured and Senior Notes discussed above as well as the refinancing of the Agreement. During 2003, the Company also paid and expensed $13.2 million of tender offer premiums.

        For 2004, the Company paid $25.9 million related to debt hedging activity compared to $123.1 million in 2003. As discussed further below, the Company's strategy is to use currency and interest rate swaps to convert U.S. dollar borrowings by the Company's international subsidiaries, principally in Australia, into local currency borrowings. The decrease from prior year is largely due to a significantly smaller decline in the U.S. dollar against the foreign currencies during 2004 as well as lower amounts that were hedged during the year.

        The Company anticipates that cash flow from its operations and from utilization of credit available under the Third Amended and Restated Secured Credit Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short-term and long-term basis.

Contractual Obligations and Off-Balance Sheet Arrangements

        The following information summarizes the Company's significant contractual cash obligations at December 31, 2004 (dollars in millions).

 
  Payments due by period
 
  Total
  Less than
one year

  1–3 years
  3–5 years
  More than 5
years

Contractual cash obligations:                              
  Long-term debt   $ 5,338.6   $ 173.3   $ 700.8   $ 1,729.2   $ 2,735.3
  Capital lease obligations     3.6     1.0     1.0     0.8     0.8
  Operating leases     270.6     88.5     105.9     51.5     24.7
  Contractual purchase obligation     50.5     39.7     10.8            
  Interest     2,697.4     411.7     799.1     660.9     825.7
  Pension benefit plan contributions     37.3     37.3                  
  Postretirement benefit plan benefit payments     243.5     32.3     47.6     46.1     117.5
   
 
 
 
 
    Total contractual cash obligations   $ 8,641.5   $ 783.8   $ 1,665.2   $ 2,488.5   $ 3,704.0
   
 
 
 
 
 
  Amount of commitment expiration per period
 
  Total
  Less than
one year

  1–3 years
  3–5 years
  More than 5
years

Other commercial commitments:                              
  Standby letters of credit   $ 165.1   $ 165.1                  
  Guarantees     9.0                     $ 9.0
   
 
 
 
 
    Total commercial commitments   $ 174.1   $ 165.1   $   $   $ 9.0
   
 
 
 
 

Accounts Receivable Securitization Program

        As part of the acquisition of BSN, the Company acquired a trade accounts receivable securitization program through a BSN subsidiary, BSN Glasspack Services. The program was entered into by BSN in order to provide lower interest costs on a portion of its financing. In November 2000, BSN created a securitization program for its trade receivables through a sub-fund (the "fund") created in accordance with French Law. This securitization program, co-arranged by Credit Commercial de France

41



(HSBC-CCF), and Gestion et Titrisation Internationales ("GTI") and managed by GTI, provides for an aggregate securitization volume of up to €210 million.

        Under the program, BSN Glasspack Services is permitted to sell receivables to the fund until November 5, 2006. According to the program, subject to eligibility criteria, certain, but not all, receivables held by the BSN Glasspack Services are sold to the fund on a weekly basis. The purchase price for the receivables is determined as a function of the book value and the term of each receivable and a Euribor three-month rate increased by a 1.51% margin. A portion of the purchase price for the receivables is deferred and paid by the fund to BSN Glasspack Services only when receivables are collected or at the end of the program. This deferred portion varies based on the status and updated collection history of BSN Glasspack Services' receivable portfolio.

        The transfer of the receivables to the fund is deemed to be a sale for U.S. GAAP purposes. The fund assumes all collection risk on the receivables and the transferred receivables have been isolated from BSN Glasspack Services and are no longer controlled by BSN Glasspack Services. The total securitization program cannot exceed €210 million ($286.0 million at December 31, 2004). At December 31, 2004, the Company had $207.0 million of receivables that were sold in this program. For the period from June 21, 2004 through December 31, 2004, the Company received $795.9 million from the sale of receivables to the fund and paid interest of approximately $3.6 million.

        BSN Glasspack Services continues to service, administer and collect the receivables on behalf of the fund. This service rendered to the fund is invoiced to the fund at a normal market rate.

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, including but not limited to those related to pension benefit plans, contingencies and litigation, goodwill, and deferred tax assets. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances. 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 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 pension benefit plans, contingencies and litigation, goodwill, and deferred tax assets involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Pension Benefit Plans

        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 assets used in calculating the pension charges or credits for the year. The Company uses discount rates based on yields of highly rated fixed income debt securities at the end of the year. At December 31, 2004, the weighted average discount rate for all plans was 5.5%. 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

42



future performance of the assets. Due to the nature of the plans' assets and the volatility of debt and equity markets, results may vary significantly from year to year. For example, actual returns were negative for each of the years 2000-2002 while the return was over 20% for 2003 and exceeded 18% in 2004. 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 2004, the Company used a weighted average expected long-term rate of return on pension assets of approximately 8.4% compared to 8.7% for the year ended December 31, 2003. The Company recorded pension expense totaling approximately $8.7 million for 2004 and pretax pension credits of $29.9 million for 2003 from its principal defined benefit pension plans. The lower pretax credits to earnings in 2004 are principally attributable to a lower asset base, higher amortization of previous actuarial losses and generally lower discount rates (6.10% for 2004 compared with 6.52% for 2003). Depending on international exchange rates and including BSN for the full year, the Company expects to record approximately $3.2 million of pension expense for the full year of 2005, compared with expense of $6.3 million for continuing operations ($8.7 million total) in 2004.

        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 pretax pension expense for the full year 2005. In addition, changes in external factors, including the fair values of plan assets and the discount rates used to calculate plan liabilities, could result in possible future balance sheet recognition of additional minimum pension liabilities.

        If the Accumulated Benefit Obligation ("ABO") of any of the Company's principal pension plans in the U.S. and Australia exceeds the fair value of its assets at the next measurement date of December 31, 2005, the Company will be required to write off the related prepaid pension asset and record a liability equal to the excess of the ABO over the fair value of the asset of such plan at the next measurement date of December 31, 2005. The non-cash charge would result in a decrease in the Accumulated Other Comprehensive Income component of share owners' equity that would significantly reduce net worth. Amounts related to the Company's U.S. and Australian plans as of December 31, 2004 were as follows (millions of dollars):

 
  U.S.
Salary

  U.S.
Hourly

  Australian
Plans

  Total
Fair value of assets   $ 839.5   $ 1,662.1   $ 101.7   $ 2,603.3
Accumulated benefit obligations     776.1     1,407.8     88.3     2,272.2
   
 
 
 
Excess   $ 63.4   $ 254.3   $ 13.4   $ 331.1
   
 
 
 
Prepaid pension asset   $ 327.6   $ 616.4   $ 21.9   $ 965.9
   
 
 
 

        Even if the fair values of the U.S. plans' assets are less than ABO at December 31, 2005, however, the Company believes it will not be required to make cash contributions to the U.S. plans for at least several years. The covenants under the Company's Third Amended and Restated Secured Credit Agreement would not be affected by a reduction in the Company's net worth if a significant charge was taken to write off the prepaid pension assets.

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 to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the expanding list of non-traditional defendants that have been sued in this litigation and found liable for substantial damage awards, the continued use of litigation

43



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 growing number of co-defendants that have filed for bankruptcy. The Company believes that the bankruptcies of additional co-defendants have resulted in an acceleration of the presentation and disposition of a number of claims, which would otherwise have been presented and disposed of over the next several years. The Company continues to monitor trends which 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 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 2003, the Company recorded a charge of $450.0 million ($292.5 million after tax) to increase its accrued liability for asbestos-related costs. The factors and developments that particularly affected the determination of this increase included the following: (i) the significant increase in new claim filings in 2003, which the Company believes was caused by anticipation of tort reform legislation in Mississippi and Texas; (ii) the elimination of certain co-defendants from the litigation through consensually structured ("prepackaged") bankruptcy filings; (iii) the number of pending serious disease cases and the relatively flat trend line in new filings of serious disease cases; and (iv) the limited success achieved by the Company and its co-defendants in eliminating forum shopping, unimpaired claim filings, and other litigation abuses.

        In the fourth quarter of 2004, the Company recorded a charge of $152.6 million ($84.9 million after tax) to increase its accrued liability for asbestos-related costs. This amount was significantly reduced from the 2003 charge due in part to the Company's decision to conduct a comprehensive review annually. The factors and developments that particularly affected the determination of this increase included the following: (i) the modest 4.5% decline in yearly cash outlays; (ii) the significant decline in new claim filings against the Company including a decline in filings of serious disease cases; (iii) the Company's successful litigation record during the year, including a California appellate decision upholding its position regarding its nonliability for post-1958 claims; (iv) significant judicial reform in Mississippi (where approximately 40% of the lawsuits against the Company are pending) and advantageous legislative changes in Ohio affecting unimpaired claimants; and (v) a significant Federal circuit court decision overturning a co-defendant's prepackaged bankruptcy reorganization.

        The Company's estimates are based on a number of factors as described further in Note 19 to the Consolidated Financial Statements.

Goodwill

        As required by FAS No. 142, "Goodwill and Other Intangibles," 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

44



book value of each reporting unit as of the measurement date to assess whether an impairment of goodwill may exist.

        During the fourth quarter of 2004, the Company completed its annual testing and determined that no impairment of goodwill existed.

        If the Company's projected future cash flows were substantially lower, or if the assumed weighted average cost of capital were substantially higher, the testing performed as of October 1, 2004, may have indicated an impairment of one or more of the Company's reporting units and, as a result, the related goodwill would also have been written down. However, based on the Company's testing as of that date, modest changes in the projected future cash flows or cost of capital would not have created impairment in any reporting unit. For example, if projected future cash flows had been decreased by 5%, or alternatively, if the weighted average cost of capital had been increased by 5%, the resulting lower BEV's would still have exceeded the book value of each reporting unit by a significant margin in all cases except for the Asia Pacific Glass reporting unit. Because the BEV for the Asia Pacific Glass reporting unit exceeded its book value by approximately 6%, the results of the impairment testing could be negatively affected by relatively modest changes in the assumptions and projections. At December 31, 2004, the goodwill of the Asia Pacific Glass reporting unit accounted for approximately $1.0 billion of the Company's consolidated goodwill.

        The Company will monitor conditions throughout 2005 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 2005, 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.

Deferred Tax Assets

        FAS No. 109, "Accounting for Income Taxes," 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. 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 United States, the Company has recorded significant deferred tax assets, the largest of which relate to the accrued liability for asbestos-related costs that are not deductible until paid and to its net operating loss carryforwards. The deferred tax assets are partially offset by deferred tax liabilities, the most significant of which relates to the prepaid pension asset. The Company has recorded a valuation allowance for its U.S. tax credit carryforwards and U.S. capital loss carryforward, however, it has not recorded a valuation allowance for the balance of its net U.S. deferred tax assets. The Company believes that its projected taxable income in the U.S., along with a number of prudent and feasible tax planning strategies, will be sufficient to utilize the net operating losses prior to their expiration. If the Company is unable to generate sufficient income from its U.S. operations or implement the required tax planning strategies, or if the Company is required to eliminate deferred tax liabilities in connection with a write off of its prepaid pension asset, then a valuation allowance will have to be provided. It is not possible to estimate the amount of the adjustment that may be required, however, based on recorded deferred taxes at December 31, 2004, the related non-cash tax charge could range as high as $580 million. The Company will assess the need to provide a valuation allowance annually or more frequently, if necessary.

45



ITEM 7.(A).    QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

        Market risks relating to the Company's operations result primarily from fluctuations in foreign currency exchange rates, changes in interest rates, and changes in commodity prices, principally natural gas. The Company uses certain derivative instruments to mitigate a portion of the risk associated with changing foreign currency exchange rates and fluctuating natural gas prices. In addition, the Company uses interest rate swap agreements to manage a portion of fixed and floating rate debt and to reduce interest expense.

Foreign Currency Exchange Rate Risk

        A substantial portion of the Company's operations consists of manufacturing and sales activities conducted by subsidiaries in foreign jurisdictions. The primary international markets served by the Company's subsidiaries are in Canada, Australia, South America (principally Colombia, Brazil and Venezuela), and Europe (principally Italy, France, the Netherlands, Germany, the United Kingdom, and Poland). In general, revenues earned and costs incurred by the Company's major international operations are denominated in their respective local currencies. Consequently, the Company's reported financial results could be affected by factors such as changes in foreign currency exchange rates or highly inflationary economic conditions in the international markets in which the Company's subsidiaries operate. When the U.S. dollar strengthens against foreign currencies, the reported dollar value of local currency earnings generally decreases; when the U.S. dollar weakens against foreign currencies, the reported U.S. dollar value of local currency earnings generally increases. The Company does not have any significant foreign subsidiaries that are denominated in the U.S. dollar, however, if economic conditions in Venezuela continue to decline, the Company may have to adopt the U.S. dollar as its functional currency for its subsidiaries in that country.

        Subject to other business and tax considerations, the Company's strategy is to generally redeploy any subsidiary's available excess funds 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 and the borrower enters into a forward exchange contract which effectively swaps the intercompany loan and related interest to its local currency.

        Because the Company's subsidiaries operate within their local economic environment, the Company believes it is appropriate to finance those operations with local currency borrowings to the extent practicable where debt financing is required. Considerations which influence the amount of such borrowings include long- and short-term business plans, tax implications, and the availability of borrowings with acceptable interest rates and terms. In those countries where the local currency is the designated functional currency, this strategy mitigates the risk of reported losses or gains in the event the foreign currency strengthens or weakens against the U.S. dollar. In those countries where 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.

        The terms of the Third Amended and Restated Secured Credit Agreement require that borrowings under the Agreement be denominated in U.S. dollars except for the C2 term loan which allows for €47.5 million borrowings. In order to manage the exposure to fluctuating foreign exchange rates created by U.S. dollar borrowings by the Company's international subsidiaries, certain subsidiaries have entered into currency swaps for the principal amount of their borrowings under the Agreement and for their interest payments due under the Agreement.

        At the end of 2004, the Company's subsidiary in Australia had agreements that swap a total of U.S. $455.0 million of borrowings into 702.0 million Australian dollars. These derivative instruments swap both the interest and principal from U.S. dollars to Australian dollars and also swap the interest

46



rate from a U.S.-based rate to an Australian-based rate. These agreements have various maturity dates ranging from April 2005 through March 2006.

        The Company's subsidiaries in Australia, Canada, the United Kingdom and several European countries have also entered into short term forward exchange contracts which effectively swap additional intercompany and external borrowings by each subsidiary into its local currency. These contracts swap both the interest and principal amount of borrowings.

        The Company recognizes the above derivatives on the balance sheet at fair value, and the Company accounts for them as fair value hedges. Accordingly, the changes in the value of the swaps are recognized in current earnings and are expected to substantially offset any exchange rate gains or losses on the related U.S. dollar borrowings. For the year ended December 31, 2004, the amount not offset was immaterial. The fair values are included with other long term liabilities on the balance sheet.

        In connection with debt refinancing late in December 2004, the Company's subsidiary in France borrowed approximately €91.0 million from Owens-Brockway Glass Container ("OBGC"), a U.S. subsidiary of the Company. In order to hedge the changes in the cash flows of the foreign currency interest and principal repayments, OBGC entered into a swap that converts the Euro coupon interest payments into a predetermined U.S. dollar coupon interest payment and also converts the final principal payment in December 2009 from €91 million to approximately $120.7 million U.S. dollars.

        The Company accounts for the above foreign currency exchange contract 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 accumulated other comprehensive income ("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 foreign currency exchange contract is accounted for as a cash flow hedge at December 31, 2004. Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting anticipated cash flows of the hedged transactions. For hedged forecasted transactions, hedge accounting will be discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses will be recorded to earnings immediately.

        The remaining portion of the Company's consolidated debt which was denominated in foreign currencies was not significant.

        The Company believes it does not have material foreign currency exchange rate risk related to local currency denominated financial instruments (i.e. cash, short-term investments, and long-term debt) of its subsidiaries outside the U.S.

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.

47



        The following table provides information about the Company's significant interest rate risk at December 31, 2004.

 
  Amount
  Fair value
  Hedge value
 
  (Dollars in millions)

Variable rate debt:                  
  Secured Credit Agreement, matures April 2007 and 2008:                  
    Revolving Credit Facility, interest at various rates Revolving Loans   $ 30.1   $ 30.1      
    Term Loans, interest at a Eurodollar based rate plus 2.75%                  
      A1 Term Loan     315.0     315.0      
      B1 Term Loan     226.8     226.8      
      C1 Term Loan     190.6     190.6      
      C2 Term Loan (€47.5 million)     64.7     64.7      
Fixed rate debt:                  
  Senior Secured Notes:                  
    8.875%, due 2009     1,000.0     1,087.5      
    7.75%, due 2011     450.0     489.4      
    8.75%, due 2012     625.0     703.1      
  Senior Notes:                  
    7.15%, due 2005     112.4     113.8      
    8.10%, due 2007     300.0     317.3   $ 298.2
    7.35%, due 2008     250.0     262.5     248.4
    8.25%, due 2013     450.0     496.1     440.0
    6.75%, due 2014     400.0     407.0      
    6.75%, due 2014 (€225 million)     306.4     323.3      
  Senior Debentures:                  
    7.50%, due 2010     250.0     262.5     249.6
    7.80%, due 2018     250.0     258.8      
  Senior Subordinated Notes:                  
    10.25%, due 2009 (€12.7 million)     17.4     18.3      
    9.25%, due 2009 (€0.4 million)     0.6     0.6      

Interest Rate Swap Agreements

        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 total notional amount of $1.25 billion that mature from 2007 through 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, as required by FAS No. 133 the Company recorded the net of the fair market values of the swaps as a long-term liability along with a corresponding net 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.

48



        The following selected information relates to fair value swaps at December 31, 2004 (based on a projected U.S. LIBOR rate of 3.3688%):

 
  Amount
Hedged

  Receive
Rate

  Average
Spread

  Asset
(Liability)
Recorded

 
  Senior Notes due 2007   $ 300.0   8.10 % 4.5 % $ (1.8 )
  Senior Notes due 2008     250.0   7.35 % 3.5 %   (1.6 )
  Senior Debentures due 2010     250.0   7.50 % 3.2 %   (0.4 )
  Senior Notes due 2013     450.0   8.25 % 3.7 %   (10.0 )
   
         
 
Total   $ 1,250.0           $ (13.8 )
   
         
 

Commodity Risk

        The Company uses commodity futures contracts related to forecasted natural gas requirements. The objective of these futures contracts is to limit the fluctuations in prices paid for natural gas and the potential volatility in cash flows from future market price movements. The Company continually evaluates the natural gas market with respect to its future usage requirements. The Company generally evaluates the natural gas market for the next twelve to eighteen months and continually enters into commodity futures contracts in order to hedge a portion of its usage requirements through the next twelve to eighteen months. At December 31, 2004, the Company had entered into commodity futures contracts for approximately 78% (approximately 17,930,000 MM BTUs) of its expected North American natural gas usage for full year of 2005 and approximately 23% (approximately 5,280,000 MM BTUs) for the full year of 2006.

        As discussed further below, prior to December 31, 2004, the Company accounted 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 was designated as, and met the required criteria for, a cash flow hedge was recorded in accumulated other comprehensive income ("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 was deemed to be ineffective was recognized in current earnings.

        During the fourth quarter of 2004, the Company determined that the commodity futures contracts described above 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 total unrealized pretax gain recorded in 2004 was $4.9 million ($3.2 million after tax). This change had no effect upon the Company's cash flows.

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 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 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) consolidation among competitors and customers, (10) the ability of the Company to integrate

49



operations of acquired businesses and achieve expected synergies, (11) unanticipated expenditures with respect to environmental, safety and health laws, (12) the performance by customers of their obligations under purchase agreements, and (13) 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 intend to update any particular forward looking statements contained in this document.

50



ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
  Page
Report of Independent Registered Public Accounting Firm   52

Consolidated Balance Sheets at December 31, 2004 and 2003

 

54–55

For the years ended December 31, 2004, 2003, and 2002:

 

 
 
Consolidated Results of Operations

 

53
 
Consolidated Share Owners' Equity

 

56
 
Consolidated Cash Flows

 

57

Notes to Consolidated Financial Statements

 

58-105

Selected Quarterly Financial Data

 

106

51



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. as of December 31, 2004 and 2003, 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, 2004. 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. at December 31, 2004 and 2003, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2004, 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.

        As discussed in Note 21 to the Consolidated Financial Statements, in 2002 the Company changed its accounting for goodwill.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Owens-Illinois, Inc.'s internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission and our report dated March 15, 2005 expressed an unqualified opinion thereon.

                        Ernst & Young LLP

Toledo, Ohio
March 15, 2005

52


OWENS-ILLINOIS, INC.

CONSOLIDATED RESULTS OF OPERATIONS

Dollars in millions, except per share amounts

 
  Years ended December 31,
 
 
  2004
  2003
  2002
 
Revenues:                    
  Net sales   $ 6,128.4   $ 4,975.6   $ 4,621.2  
  Royalties and net technical assistance     21.1     17.5     17.4  
  Equity earnings     27.8     27.1     27.0  
  Interest     15.3     20.4     22.8  
  Other     70.8     25.2     42.8  
   
 
 
 
      6,263.4     5,065.8     4,731.2  

Costs and expenses:

 

 

 

 

 

 

 

 

 

 
  Manufacturing, shipping, and delivery     4,918.4     3,967.9     3,572.9  
  Research and development     25.4     29.9     21.1  
  Engineering     33.6     34.7     36.5  
  Selling and administrative     402.3     320.9     287.9  
  Interest     474.9     429.8     372.2  
  Other     198.5     720.6     503.1  
   
 
 
 
      6,053.1     5,503.8     4,793.7  
   
 
 
 
Earnings (loss) from continuing operations before items below     210.3     (438.0 )   (62.5 )
Provision (benefit) for income taxes     5.9     (133.7 )   (49.8 )
   
 
 
 
      204.4     (304.3 )   (12.7 )
Minority share owners' interests in earnings of subsidiaries     32.9     25.8     25.5  
   
 
 
 
Earnings (loss) from continuing operations before cumulative effect of accounting change     171.5     (330.1 )   (38.2 )
Net earnings (loss) of discontinued operations     64.0     (660.7 )   38.0  
Cumulative effect of accounting change                 (460.0 )
   
 
 
 
Net earnings (loss)   $ 235.5   $ (990.8 ) $ (460.2 )
   
 
 
 
Basic earnings (loss) per share of common stock:                    
  Earnings (loss) from continuing operations before cumulative effect of accounting change   $ 1.01   $ (2.39 ) $ (0.41 )
  Net earnings (loss) of discontinued operations     0.44     (4.50 )   0.26  
  Cumulative effect of accounting change                 (3.14 )
   
 
 
 
Net earnings (loss)   $ 1.45   $ (6.89 ) $ (3.29 )
   
 
 
 
Diluted earnings (loss) per share of common stock:                    
  Earnings (loss) from continuing operations before cumulative effect of accounting change   $ 1.00   $ (2.39 ) $ (0.41 )
  Net earnings (loss) of discontinued operations     0.43     (4.50 )   0.26  
  Cumulative effect of accounting change                 (3.14 )
   
 
 
 
Net earnings (loss)   $ 1.43   $ (6.89 ) $ (3.29 )
   
 
 
 

See accompanying Notes to the Consolidated Financial Statements.

53



OWENS-ILLINOIS, INC.

CONSOLIDATED BALANCE SHEETS

Dollars in millions

 
  December 31,
 
  2004
  2003
Assets            
Current assets:            
  Cash, including time deposits of $175.9 ($85.2 in 2003)   $ 277.9   $ 163.4
  Short-term investments     27.6     26.8
  Receivables, less allowances of $50.3 ($44.5 in 2003) for losses and discounts     821.3     657.6
  Inventories     1,117.7     855.1
  Prepaid expenses     156.3     137.0
  Assets of discontinued operations           281.9
   
 
    Total current assets     2,400.8     2,121.8

Other assets:

 

 

 

 

 

 
  Equity investments     117.1     145.3
  Repair parts inventories     192.2     176.8
  Prepaid pension     962.5     967.1
  Deposits, receivables, and other assets     557.3     373.9
  Goodwill     3,009.1     2,129.1
  Assets of discontinued operations           959.5
   
 
    Total other assets     4,838.2     4,751.7
Property, plant, and equipment:            
  Land, at cost     165.2     149.5
  Buildings and equipment, at cost:            
    Buildings and building equipment     945.0     770.8
    Factory machinery and equipment     4,821.2     3,916.6
    Transportation, office, and miscellaneous equipment     139.2     141.7
    Construction in progress     185.7     127.6
   
 
      6,256.3     5,106.2
  Less accumulated depreciation     2,758.6     2,448.4
   
 
    Net property, plant, and equipment     3,497.7     2,657.8
   
 
Total assets   $ 10,736.7   $ 9,531.3
   
 

54



OWENS-ILLINOIS, INC.

CONSOLIDATED BALANCE SHEETS (Continued)

Dollars in millions, except per share amounts

 
  December 31,
 
 
  2004
  2003
 
Liabilities and Share Owners' Equity              
Current liabilities:              
  Short-term loans   $ 18.2   $ 28.6  
  Accounts payable     857.8     466.5  
  Salaries and wages     178.4     110.8  
  U.S. and foreign income taxes     53.8     22.3  
  Current portion of asbestos-related liabilities     170.0     175.0  
  Other accrued liabilities     454.0     393.4  
  Long-term debt due within one year     174.3     63.8  
  Liabilities of discontinued operations           103.0  
   
 
 
  Total current liabilities     1,906.5     1,363.4  
Liabilities of discontinued operations           64.0  
Long-term debt     5,167.9     5,333.1  
Deferred taxes     183.3     57.4  
Nonpension postretirement benefits     285.6     284.8  
Other liabilities     883.3     635.4  
Asbestos-related liabilities     596.2     628.7  
Commitments and contingencies              
Minority share owners' interests     169.6     161.1  
Share owners' equity:              
  Convertible preferred stock, par value $.01 per share, liquidation preference $50 per share, 9,050,000 shares authorized, issued and outstanding     452.5     452.5  
  Common stock, par value $.01 per share, 250,000,000 shares authorized, 163,502,417 shares issued and outstanding, less 12,586,053 treasury shares at December 31, 2004 (160,768,191 issued and outstanding less 12,914,262 treasury shares at December 31, 2003)     1.6     1.6  
  Capital in excess of par value     2,261.1     2,229.3  
  Treasury stock, at cost     (241.3 )   (247.6 )
  Retained deficit     (975.3 )   (1,189.3 )
  Accumulated other comprehensive income (loss)     45.7     (243.1 )
   
 
 
    Total share owners' equity     1,544.3     1,003.4  
   
 
 
Total liabilities and share owners' equity   $ 10,736.7   $ 9,531.3  
   
 
 

See accompanying Notes to the Consolidated Financial Statements.

55



OWENS-ILLINOIS, INC.

CONSOLIDATED SHARE OWNERS' EQUITY

Dollars in millions, except per share amounts

 
  Years ended December 31,
 
 
  2004
  2003
  2002
 
Convertible preferred stock                    
  Balance at beginning of year   $ 452.5   $ 452.5   $ 452.5  
   
 
 
 
    Balance at end of year     452.5     452.5     452.5  
   
 
 
 
Common stock                    
  Balance at beginning of year     1.6     1.6     1.6  
   
 
 
 
    Balance at end of year     1.6     1.6     1.6  
   
 
 
 
Capital in excess of par value                    
  Balance at beginning of year     2,229.3     2,224.9     2,217.3  
  Issuance of common stock     31.8     4.4     7.6  
   
 
 
 
    Balance at end of year     2,261.1     2,229.3     2,224.9  
   
 
 
 
Treasury stock                    
  Balance at beginning of year     (247.6 )   (247.6 )   (248.0 )
  Reissuance of common stock     6.3           0.4  
   
 
 
 
    Balance at end of year     (241.3 )   (247.6 )   (247.6 )
   
 
 
 
Retained deficit                    
  Balance at beginning of year     (1,189.3 )   (177.0 )   304.7  
  Cash dividends on convertible preferred stock—$2.375 per share     (21.5 )   (21.5 )   (21.5 )
  Net earnings (loss)     235.5     (990.8 )   (460.2 )
   
 
 
 
    Balance at end of year     (975.3 )   (1,189.3 )   (177.0 )
   
 
 
 
Accumulated other comprehensive income (loss)                    
  Balance at beginning of year     (243.1 )   (583.6 )   (576.3 )
  Foreign currency translation adjustments     317.4     361.0     79.5  
  Change in minimum pension liability, net of tax     (27.5 )   (19.3 )   (91.5 )
  Change in fair value of certain derivative instruments, net of tax     (1.1 )   (1.2 )   4.7  
   
 
 
 
    Balance at end of year     45.7     (243.1 )   (583.6 )
   
 
 
 
Total share owners' equity   $ 1,544.3   $ 1,003.4   $ 1,670.8  
   
 
 
 

Total comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 
  Net earnings (loss)   $ 235.5   $ (990.8 ) $ (460.2 )
  Foreign currency translation adjustments     317.4     361.0     79.5  
  Change in minimum pension liability, net of tax     (27.5 )   (19.3 )   (91.5 )
  Change in fair value of certain derivative instruments, net of tax     (1.1 )   (1.2 )   4.7  
   
 
 
 
    Total comprehensive income (loss)   $ 524.3   $ (650.3 ) $ (467.5 )
   
 
 
 

See accompanying Notes to the Consolidated Financial Statements.

56



OWENS-ILLINOIS, INC.

CONSOLIDATED CASH FLOWS

Dollars in millions

 
  Years ended December 31,
 
 
  2004
  2003
  2002
 
Operating activities:                    
  Earnings (loss) from continuing operations before cumulative effect of accounting change   $ 171.5   $ (330.1 ) $ (38.2 )
  Non-cash charges (credits):                    
    Depreciation     436.0     391.9     353.4  
    Amortization of deferred costs     23.8     21.4     21.5  
    Amortization of deferred finance fees     15.0     14.4     16.1  
    Deferred tax credit     (93.3 )   (182.7 )   (114.1 )
    Write-down of equity investment           50.0        
    Restructuring costs and writeoffs of certain assets           115.5        
    Loss on sale of long-term notes receivable           37.4        
    Loss on sale of certain closures assets           41.3        
    Gains on asset sales     (51.6 )            
    Future asbestos-related costs     152.6     450.0     475.0  
    Other     (66.9 )   (50.3 )   (120.5 )
  Change in non-current operating assets     (9.8 )   (7.5 )   25.3  
  Asbestos-related payments     (190.1 )   (199.0 )   (221.1 )
  Asbestos-related insurance proceeds     2.2     6.6     24.8  
  Reduction of non-current liabilities     (25.6 )   (13.4 )   (8.4 )
  Change in components of working capital     180.9     (40.5 )   18.1  
   
 
 
 
  Cash provided by continuing operating activities     544.7     305.0     431.9  
  Cash provided by discontinued operating activities     65.2     48.1     171.2  
   
 
 
 
    Total cash provided by operating activities     609.9     353.1     603.1  

Investing activities:

 

 

 

 

 

 

 

 

 

 
  Additions to property, plant and equipment — continuing     (436.7 )   (344.4 )   (395.8 )
  Additions to property, plant and equipment — discontinued     (25.1 )   (87.1 )   (100.2 )
  Acquisitions, net of cash acquired     (630.3 )         (17.6 )
  Proceeds from sale of long-term notes receivable           163.0        
  Net cash proceeds from divestitures and other     1,430.9     66.7     39.0  
   
 
 
 
    Cash provided by (utilized in) investing activities     338.8     (201.8 )   (474.6 )

Financing activities:

 

 

 

 

 

 

 

 

 

 
  Additions to long-term debt     2,125.1     2,154.5     2,129.3  
  Repayments of long-term debt     (2,885.4 )   (2,063.4 )   (2,190.8 )
  Increase (decrease) in short-term loans     (23.2 )   (28.0 )   17.5  
  Net payments for debt-related hedging activity     (25.9 )   (123.1 )   (70.9 )
  Payment of finance fees and debt retirement costs     (34.4 )   (44.5 )   (27.7 )
  Convertible preferred stock dividends     (21.5 )   (21.5 )   (21.5 )
  Issuance of common stock     27.4     3.6     6.8  
   
 
 
 
    Cash utilized in financing activities     (837.9 )   (122.4 )   (157.3 )
    Effect of exchange rate fluctuations on cash     3.7     8.1     (0.4 )
   
 
 
 
  Increase (decrease) in cash     114.5     37.0     (29.2 )
  Cash at beginning of year     163.4     126.4     155.6  
   
 
 
 
  Cash at end of year   $ 277.9   $ 163.4   $ 126.4  
   
 
 
 

See accompanying Notes to the Consolidated Financial Statements.

57



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 divested blow-molded plastic container business have been presented as a discontinued operation.

        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.

Nature of Operations

        The Company is a leading manufacturer of glass container and plastics packaging products operating in two product segments. The Company's principal product lines in the Glass Containers product segment are glass containers for the food and beverage industries. Sales of the Glass Containers product segment were 88% of the Company's 2004 consolidated sales. The Company has glass container operations located in 22 countries, while the plastics packaging products operations are located in 5 countries. The principal markets and operations for the Company's glass products are in North America, Europe, South America, and Australia. The Company's principal product lines in the Plastics Packaging product segment include plastic healthcare containers and closures and prescription products. Major markets for the Company's plastics packaging products include the United States health care market.

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.

58



Derivative Instruments

        The Company uses interest rate swaps, currency swaps, 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 and 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. 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. 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. Factory machinery and equipment is depreciated over periods ranging from 5 to 25 years and buildings and building equipment over periods ranging from 10 to 50 years. 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.

59



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 most 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.

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 2004, the FASB issued FAS No. 123R, Share-Based Payment, 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 (with limited exceptions). That cost will be recognized over the period (usually the vesting period). No compensation cost is recognized for equity instruments for which employees do not render the requisite service. The provisions of FAS No. 123R are effective as of the beginning of the first interim or annual reporting

60



period that begins after June 15, 2005. The Company has not yet determined the impact of adopting FAS No. 123R.

Stock Options

        The Company has three nonqualified stock option plans, which are described more fully in Note 13. The Company has adopted the disclosure-only provisions (intrinsic value method) of FAS No. 123, "Accounting for Stock-Based Compensation." All options have been granted at prices equal to the market price of the Company's common stock on the date granted. Accordingly, the Company recognizes no compensation expense related to the stock option plans.

        If the Company had elected to recognize compensation cost based on the fair value of the options granted at grant date as allowed by FAS No. 123, pro forma net income (loss) and earnings (loss) per share would have been as follows:

 
  2004
  2003
  2002
 
Net income (loss):                    
  As reported   $ 235.5   $ (990.8 ) $ (460.2 )
  Total stock-based employee compensation expense determined under fair value based method, net of related tax effects     (4.1 )   (6.4 )   (9.1 )
   
 
 
 
  Pro forma   $ 231.4   $ (997.2 ) $ (469.3 )
   
 
 
 

Basic earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 
  As reported   $ 1.45   $ (6.89 ) $ (3.29 )
  Pro forma     1.42     (6.93 )   (3.35 )

Diluted earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 
  As reported     1.43     (6.89 )   (3.29 )
  Pro forma     1.40     (6.93 )   (3.35 )

        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:

 
  2004
  2003
  2002
 
Expected life of options   5 years   5 years   5 years  
Expected stock price volatility   73.9 % 72.7 % 71.5 %
Risk-free interest rate   2.7 % 3.1 % 4.5 %
Expected dividend yield   0.0 % 0.0 % 0.0 %

61


2.    Earnings Per Share

        The following table sets forth the computation of basic and diluted earnings per share:

 
  Years ended December 31,
 
 
  2004
  2003
  2002
 
Numerator:                    
  Earnings (loss) from continuing operations before cumulative effect of accounting change   $ 171.5   $ (330.1 ) $ (38.2 )
  Convertible preferred stock dividends     (21.5 )   (21.5 )   (21.5 )
   
 
 
 
  Numerator for basic earnings (loss) per share—income (loss) available to common share owners   $ 150.0   $ (351.6 ) $ (59.7 )
   
 
 
 
Denominator:                    
Denominator for basic earnings (loss) per share—weighted average shares outstanding     147,963,416     146,913,819     146,615,931  
 
Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 
    Stock options and other     1,716,175              
   
 
 
 
    Denominator for diluted earnings (loss) per share—adjusted weighted average shares and assumed exchanges of preferred stock for common stock     149,679,591     146,913,819     146,615,931  
   
 
 
 
Basic earnings (loss) per share from continuing operations before cumulative effect of accounting change   $ 1.01   $ (2.39 ) $ (0.41 )
   
 
 
 
Diluted earnings (loss) per share from continuing operations before cumulative effect of accounting change   $ 1.00   $ (2.39 ) $ (0.41 )
   
 
 
 

        See Note 12 for additional information on Convertible Preferred Stock.

        The convertible preferred stock was not included in the computation of 2004 diluted earnings per share since the result would have been antidilutive. Options to purchase 5,067,104 weighted average shares of common stock which were outstanding during 2004 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 years ended December 31, 2003 and 2002, diluted earnings per share of common stock is equal to basic earnings per share of common stock due to the net loss.

62



3.    Changes in Components of Working Capital Related to Operations

        Changes in the components of working capital related to operations (net of the effects related to acquisitions and divestitures) were as follows:

 
  2004
  2003
  2002
 
Decrease (increase) in current assets:                    
  Short-term investments   $ (0.6 ) $ (9.1 ) $ (1.1 )
  Receivables     61.5     13.7     34.8  
  Inventories     106.7     (23.7 )   (70.4 )
  Prepaid expenses     36.4     2.0     (13.9 )
Increase (decrease) in current liabilities:                    
  Accounts payable     75.3     (13.3 )   56.0  
  Accrued liabilities     (107.7 )   (77.1 )   20.6  
  Salaries and wages     9.9     (15.1 )   2.8  
  U.S. and foreign income taxes     (36.5 )   27.6     13.5  
   
 
 
 
    $ 145.0   $ (95.0 ) $ 42.3  
   
 
 
 
Continuing operations     180.9     (40.5 )   18.1  
Discontinued operations     (35.9 )   (54.5 )   24.2  
   
 
 
 
    $ 145.0   $ (95.0 ) $ 42.3  
   
 
 
 

4.    Inventories

        Major classes of inventory are as follows:

 
  2004
  2003
Finished goods   $ 929.9   $ 692.4
Work in process     6.4     9.0
Raw materials     100.1     87.4
Operating supplies     81.3     66.3
   
 
    $ 1,117.7   $ 855.1
   
 

        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 $28.7 million and $19.4 million at December 31, 2004 and 2003, respectively.

        Inventories which are valued at the lower of standard costs (which approximate average costs) or market at December 31, 2004 and 2003 were approximately $922.4 million and $622.2 million, respectively.

63



5.    Equity Investments

        Summarized information pertaining to the Company's equity associates follows:

 
  2004
  2003
   
At end of year:                
  Equity in undistributed earnings:                
    Foreign   $ 18.9   $ 95.4    
    Domestic     17.6     13.9    
   
 
   
      Total   $ 36.5   $ 109.3    
   
 
   
 
Equity in cumulative translation adjustment

 

$


 

$

(38.2

)

 
   
 
   
 
  2004
  2003
  2002
For the year:                  
  Equity in earnings:                  
    Foreign   $ 17.8   $ 17.2   $ 17.5
    Domestic     10.0     9.9     9.5
   
 
 
      Total   $ 27.8   $ 27.1   $ 27.0
   
 
 
 
Dividends received

 

$

12.8

 

$

31.1

 

$

29.2
   
 
 

64


6.    Long-Term Debt

        The following table summarizes the long-term debt of the Company at December 31, 2004 and 2003:

 
  2004
  2003
Secured Credit Agreement:            
  Revolving Credit Facility:            
    Revolving Loans   $ 30.1   $
  Term Loans:            
    A1 Term Loan     315.0     460.0
    B1 Term Loan     226.8     840.0
    C1 Term Loan     190.6      
    C2 Term Loan (€47.5 million)     64.7      
Senior Secured Notes:            
  8.875%, due 2009     1,000.0     1,000.0
  7.75%, due 2011     450.0     450.0
  8.75%, due 2012     625.0     625.0
Senior Notes:            
  7.85%, due 2004           36.5
  7.15%, due 2005     112.4     350.0
  8.10%, due 2007     298.2     301.3
  7.35%, due 2008     248.4     248.8
  8.25%, due 2013     440.0     450.0
  6.75%, due 2014     400.0      
  6.75%, due 2014 (€225 million)     306.4      
Senior Debentures:            
  7.50%, due 2010     249.6     248.3
  7.80%, due 2018     250.0     250.0
Senior Subordinated Notes:            
  10.25%, due 2009 (€12.7 million)     17.4      
  9.25%, due 2009 (€0.4 million)     0.6      
Other     117.0     137.0
   
 
      5,342.2     5,396.9
  Less amounts due within one year     174.3     63.8
   
 
    Long-term debt   $ 5,167.9   $ 5,333.1
   
 

        On October 7, 2004, in connection with the sale of the Company's blow-molded plastic container operations, the Company's subsidiary borrowers entered into the Third Amended and Restated Secured Credit Agreement (the "Agreement"). The proceeds from the sale were used to repay C and D term loans and a portion of the B1 term loan outstanding under the previous agreement. At December 31, 2004, the Third Amended and Restated Secured Credit Agreement includes a $600.0 million revolving credit facility and a $315.0 million A1 term loan, each of which has a final maturity date of April 1, 2007. It also includes a $226.8 million B1 term loan, and $190.6 million C1 term loan, and a €47.5 million C2 term loan, each of which has a final maturity date of April 1, 2008. The Third Amended and Restated Secured Credit Agreement eliminated the provisions related to the C3 term loan that was canceled on August 19, 2004. The Third Amended and Restated Secured Credit

65



Agreement also permits the Company, at its option, to refinance certain of its outstanding notes and debentures prior to their scheduled maturity.

        At December 31, 2004, the Company's subsidiary borrowers had unused credit of $404.8 million available under the Agreement.

        The interest rate on borrowings under the Revolving Credit Facility is, at the borrower's option, the Base Rate or a reserve adjusted Eurodollar rate. The interest rate on borrowings under the Revolving Credit Facility also includes a margin linked to the Company's Consolidated Leverage Ratio, as defined in the Agreement. The margin is limited to ranges of 2.25% to 2.75% for Eurodollar loans and 1.25% to 1.75% for Base Rate loans. The interest rate on Overdraft Account loans is the Base Rate. The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2004 was 5.09%. Including the effects of cross-currency swap agreements related to borrowings under the Agreement by the Company's Australian and European subsidiaries, as discussed in Note 9, the weighted average interest rate at December 31, 2004 was 5.40%. While no compensating balances are required by the Agreement, the Borrowers must pay a facility fee on the Revolving Credit Facility commitments of .50%.

        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 $4.0 billion. Borrowings are also secured by a pledge of intercompany debt and equity in most of the Company's domestic subsidiaries and certain 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.

        The Third Amended and Restated Secured Credit Agreement contains covenants and provisions that, among other things, restrict the ability of the Company and its subsidiaries to dispose of assets, incur additional indebtedness, prepay other indebtedness or amend certain debt instruments, pay dividends, create liens on assets, enter into contingent obligations, enter into sale and leaseback transactions, make investments, loans or advances, make acquisitions, engage in mergers or consolidations, change the business conducted, or engage in certain transactions with affiliates and otherwise restrict certain corporate activities. In addition, the Third Amended and Restated Secured Credit Agreement contains financial covenants that require the Company to maintain specified financial ratios and meet specified tests based upon financial statements of the Company and its subsidiaries on a consolidated basis, including minimum fixed charge coverage ratios, maximum leverage ratios and specified capital expenditure tests.

        As part of the BSN Acquisition, the Company assumed the senior subordinated notes of BSN. The 10.25% senior subordinated notes were due August 1, 2009 and had a face amount of €140.0 million at the acquisition date and were recorded at the acquisition date at a fair value of €147.7 million. The 9.25% senior subordinated notes were due August 1, 2009 and had a face amount of €160.0 million at the acquisition date and were recorded at the acquisition date at a fair value of €168.0 million. The majority of these notes were repurchased in the fourth quarter of 2004 as discussed below.

        During December 2004, a subsidiary of the Company issued Senior Notes totaling $400.0 million and Senior Notes totaling €225.0 million. The notes bear interest at 6.75%, and are due December 1, 2014. Both series of notes are guaranteed by substantially all of the Company's domestic subsidiaries. The indentures for both series of notes have substantially the same restrictions as the previously issued 7.75%, 8.875% and 8.75% Senior Secured Notes and 8.25% Senior Notes. The issuing subsidiary used the net proceeds from the notes of approximately $680.0 million in addition to borrowings under the

66



Agreement to purchase in a tender offer $237.6 million of the $350.0 million 7.15% Senior Notes due 2005, €159.6 million of the €160.0 million 9.25% BSN notes due 2009 and €127.3 million of the €140.0 million 10.25% BSN notes due 2009. As part of the issuance of these notes and the related tender offer, the Company recorded in the fourth quarter of 2004 additional interest charges of $28.3 million for note repurchase premiums and the related write-off of unamortized finance fees.

        During May 2003, a subsidiary of the Company issued Senior Secured Notes totaling $450.0 million and Senior Notes totaling $450.0 million. The notes bear interest at 7.75% and 8.25%, respectively, and are due May 15, 2011 and May 15, 2013, respectively. Both series of notes are guaranteed by substantially all of the Company's domestic subsidiaries. In addition, the assets of substantially all of the Company's domestic subsidiaries are pledged as security for the Senior Secured Notes. The indentures for the 7.75% Senior Secured Notes and the 8.25% Senior Notes have substantially the same restrictions as the previously issued 8.875% and 8.75% Senior Secured Notes. The issuing subsidiary used the net proceeds from the notes of approximately $880.0 million to purchase in a tender offer $263.5 million of the $300.0 million 7.85% Senior Notes due 2004 and repay borrowings under the previous credit agreement. As part of the issuance of these notes and the related tender offer, the Company recorded in the second quarter of 2003 additional interest charges of $13.2 million for note repurchase premiums and the related write-off of unamortized finance fees and $3.6 million, of which $2.3 million was allocated to discontinued operations, for the write-off of unamortized finance fees related to the reduction of available credit under the previous credit agreement.

        Annual maturities for all of the Company's long-term debt through 2009 are as follows: 2005, $174.3 million; 2006, $30.8 million; 2007, $670.9 million; 2008, $724.1 million; and 2009, $1,005.9 million.

        Interest paid in cash, including note repurchase premiums, aggregated $548.8 million for 2004, $458.8 million for 2003, and $372.1 million for 2002.

        Fair values at December 31, 2004, of the Company's significant fixed rate debt obligations were as follows:

 
  Principal Amount
(millions of
dollars)

  Indicated
Market
Price

  Fair Value
(millions of
dollars)

  Hedge Value
(millions of
dollars)

Senior Secured Notes:                      
  8.875%, due 2009   $ 1,000.0   108.75   $ 1,087.5      
  7.75%, due 2011     450.0   108.75     489.4      
  8.75%, due 2012     625.0   112.50     703.1      
Senior Notes:                      
  7.15%, due 2005     112.4   101.25     113.8      
  8.10%, due 2007     300.0   105.75     317.3   $ 298.2
  7.35%, due 2008     250.0   105.00     262.5     248.4
  8.25%, due 2013     450.0   110.25     496.1     440.0
  6.75%, due 2014     400.0   101.75     407.0      
  6.75%, due 2014 (€225 million)     306.4   105.50     323.3      
Senior Debentures:                      
  7.50%, due 2010     250.0   105.00     262.5     249.6
  7.80%, due 2018     250.0   103.50     258.8      
Senior Subordinated Notes:                      
  10.25%, due 2009 (€12.7 million)     17.4   105.13     18.3      
  9.25%, due 2009 (€0.4 million)     0.6   100.00     0.6      

67


7.    Operating Leases

        Rent expense attributable to all warehouse, office buildings and equipment operating leases was $89.8 million in 2004, $85.0 million in 2003, and $72.1 million in 2002. Minimum future rentals under operating leases are as follows: 2005, $88.5 million; 2006, $62.7 million; 2007, $43.2 million; 2008, $30.7 million; and 2009, $20.9 million; and 2010 and thereafter, $24.6 million.

8.    Foreign Currency Translation

        Aggregate foreign currency exchange gains (losses) included in other costs and expenses were $(9.5) million in 2004, $2.2 million in 2003, and $2.0 million in 2002.

9.    Derivative Instruments

        At December 31, 2004, the Company has the following derivative instruments related to its various hedging programs:

Fair Value Hedges of Debt

        The terms of the Third Amended and Restated Secured Credit Agreement require that borrowings under the Agreement be denominated in U.S. dollars except for the C2 term loan which allows for €47.5 million borrowings. In order to manage the exposure to fluctuating foreign exchange rates created by U.S. dollar borrowings by the Company's international subsidiaries, certain subsidiaries have entered into currency swaps for the principal amount of their borrowings under the Agreement and for their interest payments due under the Agreement.

        At the end of 2004, the Company's subsidiary in Australia had agreements that swap a total of U.S. $455.0 million of borrowings into 702.0 million Australian dollars. These derivative instruments swap both the interest and principal from U.S. dollars to Australian dollars and also swap the interest rate from a U.S.-based rate to an Australian-based rate. These agreements have various maturity dates ranging from April 2005 through March 2006.

        The Company's subsidiaries in Australia, Canada, the United Kingdom and several European countries have also entered into short term forward exchange contracts which effectively swap additional intercompany and external borrowings by each subsidiary into its local currency. These contracts swap both the interest and principal amount of borrowings.

        The Company recognizes the above derivatives on the balance sheet at fair value, and the Company accounts for them as fair value hedges. Accordingly, the changes in the value of the swaps are recognized in current earnings and are expected to substantially offset any exchange rate gains or losses on the related U.S. dollar borrowings. For the year ended December 31, 2004, the amount not offset was immaterial. The fair values are included with other long term liabilities on the balance sheet.

Foreign Currency Exchange Contracts Designated as Cash Flow Hedges

        In connection with debt refinancing in late December 2004, the Company's subsidiary in France borrowed approximately €91 million from Owens-Brockway Glass Container ("OBGC"), a U.S. subsidiary of the Company. In order to hedge the changes in the cash flows of the foreign currency interest and principal repayments, OBGC entered into a swap that converts the Euro coupon interest payments into a predetermined U.S. dollar coupon interest payment and also converts the final principal payment in December 2009 from €91.0 million to approximately $120.7 million U.S. dollars.

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        The Company accounts for the above foreign currency exchange contract 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 accumulated other comprehensive income ("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 fair values are included with other long term liabilities on the balance sheet.

        The above foreign currency exchange contract is accounted for as a cash flow hedge at December 31, 2004. Hedge accounting is only applied when the derivative is deemed to be highly effective at offsetting anticipated cash flows of the hedged transactions. For hedged forecasted transactions, hedge accounting will be discontinued if the forecasted transaction is no longer probable to occur, and any previously deferred gains or losses will be recorded to earnings immediately.

        At December 31, 2004, the amount included in OCI related to this foreign currency exchange contract was not material. The ineffectiveness related to this hedge for the year ended December 31, 2004 was also not material.

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 total notional amount of $1.25 billion that mature from 2007 through 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, as required by FAS No. 133, the Company recorded the net of the fair market values of the swaps as a long-term liability along with a corresponding net decrease in the carrying value of the hedged debt. The fair values are included with other long term liabilities on the balance sheet.

        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.

69



        The following selected information relates to fair value swaps at December 31, 2004 (based on a projected U.S. LIBOR rate of 3.3688%):

 
  Amount
Hedged

  Receive
Rate

  Average
Spread

  Asset
(Liability)
Recorded

 
Senior Notes due 2007   $ 300.0   8.10 % 4.5 % $ (1.8 )
Senior Notes due 2008     250.0   7.35 % 3.5 %   (1.6 )
Senior Debentures due 2010     250.0   7.50 % 3.2 %   (0.4 )
Senior Notes due 2013     450.0   8.25 % 3.7 %   (10.0 )
   
         
 
Total   $ 1,250.0           $ (13.8 )
   
         
 

Natural Gas Hedges

        The Company uses commodity futures contracts related to forecasted natural gas requirements. The objective of these futures contracts is to limit the fluctuations in prices paid for natural gas and the potential volatility in cash flows from future market price movements. The Company continually evaluates the natural gas market with respect to its future usage requirements. The Company generally evaluates the natural gas market for the next twelve to eighteen months and continually enters into commodity futures contracts in order to hedge a portion of its usage requirements through the next twelve to eighteen months. At December 31, 2004, the Company had entered into commodity futures contracts for approximately 78% (approximately 17,930,000 MM BTUs) of its expected North American natural gas usage for full year of 2005 and approximately 23% (approximately 5,280,000 MM BTUs) for the full year of 2006.

        As discussed further below, prior to December 31, 2004, the Company accounted 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 was designated as, and met the required criteria for, a cash flow hedge was recorded in accumulated other comprehensive income ("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 was deemed to be ineffective was recognized in current earnings.

        During the fourth quarter of 2004, the Company determined that the commodity futures contracts described above 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 total unrealized pretax gain recorded in 2004 was $4.9 million ($3.2 million after tax). This change had no effect upon the Company's cash flows.

Other Hedges

        The Company's subsidiaries may enter into short-term forward exchange agreements to purchase foreign currencies at set rates in the future. These foreign currency forward exchange agreements are used to limit exposure to fluctuations in foreign currency exchange rates for all 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

70



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.

10.    Accumulated Other Comprehensive Income (Loss)

        The components of comprehensive income (loss) are: (a) net earnings (loss); (b) change in fair value of certain derivative instruments; (c) adjustment of minimum pension liabilities; 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.

        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
(net of
tax)

  Change in
Certain
Derivative
Instruments
(net of tax)

  Total
Accumulated
Comprehensive
Income (Loss)

 
Balance on January 1, 2002   $ (600.8 ) $ 27.0   $   $ (2.5 ) $ (576.3 )
2002 Change     80.5     (1.0 )   (91.5 )   4.7     (7.3 )
   
 
 
 
 
 
Balance on December 31, 2002     (520.3 )   26.0     (91.5 )   2.2     (583.6 )
2003 Change     365.6     (4.6 )   (19.3 )   (1.2 )   340.5  
   
 
 
 
 
 
Balance on December 31, 2003     (154.7 )   21.4     (110.8 )   1.0     (243.1 )
2004 Change     326.1     (8.7 )   (27.5 )   (1.1 )   288.8  
   
 
 
 
 
 
Balance on December 31, 2004   $ 171.4   $ 12.7   $ (138.3 ) $ (0.1 ) $ 45.7  
   
 
 
 
 
 

        The 2004 change includes $52.4 million related to the sales of the blow-molded plastics business and the 20% investment in Consol Glass.

        The change in minimum pension liability for 2002, 2003, and 2004 was net of tax of $39.2 million, $1.4 million and $8.1 million, respectively. The change in minimum pension liability for 2004 included $9.0 million ($12.6 million pretax) of translation effect on the minimum pension liability recorded in prior years. The change in minimum pension liability for 2003 included $10.1 million ($14.7 million pretax) of translation effect on the minimum pension liability recorded in 2002.

        The change in certain derivative instruments for 2002, 2003 and 2004 was net of tax of $2.5 million, $0.7 million, and $0.5 million, respectively.

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. Significant components of

71



the Company's deferred tax assets and liabilities at December 31, 2004 and 2003 are as follows (certain amounts from prior years have been reclassified to conform to current year presentation):

 
  2004
  2003
 
Deferred tax assets:              
  Accrued postretirement benefits   $ 93.4   $ 99.6  
  Asbestos-related liabilities     268.2     281.3  
  Tax loss and credit carryovers     471.0     433.8  
  Capital loss carryovers     405.2     29.5  
  Alternative minimum tax credits     21.7     22.7  
  Accrued liabilities     189.8     182.5  
  Other     31.2     28.5  
   
 
 
    Total deferred tax assets     1,480.5     1,077.9  

Deferred tax liabilities:

 

 

 

 

 

 

 
  Property, plant and equipment     273.9     342.9  
  Prepaid pension costs     277.3     291.4  
  Insurance for asbestos-related costs     1.2     2.0  
  Inventory     33.4     30.5  
  Other     51.8     118.3  
   
 
 
    Total deferred tax liabilities     637.6     785.1  
  Valuation allowance     (731.2 )   (258.8 )
   
 
 
Net deferred tax assets   $ 111.7   $ 34.0  
   
 
 

Total for continuing operations

 

 

 

 

$

85.5

 
Total for discontinued operations           (51.5 )
         
 
          $ 34.0  
         
 

        Deferred taxes are included in the Consolidated Balance Sheets at December 31, 2004 and 2003 as follows:

 
  2004
  2003
 
Prepaid expenses   $ 125.2   $ 112.3  
Deposits, receivables, and other assets     169.8     41.3  
Deferred tax liability     (183.3 )   (119.6 )
   
 
 
Net deferred tax assets   $ 111.7   $ 34.0  
   
 
 
Total for continuing operations         $ 85.5  
Total for discontinued operations           (51.5 )
         
 
          $ 34.0  
         
 

72


        The provision (benefit) for income taxes consists of the following:

 
  2004
  2003
  2002
 
Current:                    
  U.S. Federal   $   $   $  
  State     3.0     1.6     1.4  
  Foreign     101.6     55.3     74.9  
   
 
 
 
      104.6     56.9     76.3  
   
 
 
 
Deferred:                    
  U.S. Federal     (82.6 )   (174.7 )   (98.2 )
  State     (8.2 )   (6.1 )   8.7  
  Foreign     (20.5 )   (1.8 )   (10.9 )
   
 
 
 
      (111.3 )   (182.6 )   (100.4 )
   
 
 
 
Total:                    
  U.S. Federal     (82.6 )   (174.7 )   (98.2 )
  State     (5.2 )   (4.5 )   10.1  
  Foreign     81.1     53.5     64.0  
   
 
 
 
    $ (6.7 ) $ (125.7 ) $ (24.1 )
   
 
 
 
Total for continuing operations   $ 5.9   $ (133.7 ) $ (49.8 )
Total for discontinued operations     (12.6 )   8.0     25.7  
   
 
 
 
    $ (6.7 ) $ (125.7 ) $ (24.1 )
   
 
 
 

        The provision (benefit) for income taxes was calculated based on the following components of earnings (loss) before income taxes:

Continuing operations

  2004
  2003
  2002
 
Domestic   $ (203.8 ) $ (617.4 ) $ (338.2 )
Foreign     414.1     179.4     275.7  
   
 
 
 
    $ 210.3   $ (438.0 ) $ (62.5 )
   
 
 
 
Discontinued operations

  2004
  2003
  2002
Domestic   $ 45.2   $ (670.4 ) $ 49.4
Foreign     6.2     17.7     14.3
   
 
 
    $ 51.4   $ (652.7 ) $ 63.7
   
 
 

        Income taxes paid (received) in cash were as follows:

 
  2004
  2003
  2002
 
Domestic   $ 1.9   $ 1.4   $ (9.0 )
Foreign     98.8     51.1     51.2  
   
 
 
 
    $ 100.7   $ 52.5   $ 42.2  
   
 
 
 

73


        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 (certain amounts from prior years have been reclassified to conform to current year presentation):

 
  2004
  2003
  2002
 
Pretax earnings (loss) from continuing operations at statutory U.S. Federal tax rate   $ 73.6   $ (153.3 ) $ (21.8 )
Increase (decrease) in provision for income taxes due to:                    
  Write-down of equity investment           17.5        
  State taxes, net of federal benefit     (11.2 )   (3.1 )   2.8  
  Rate differences on international earnings     (25.0 )   (16.0 )   (26.6 )
  Ardagh note           11.1        
  Australian tax consolidation     (33.1 )            
  Adjustment for non-U.S. tax law changes           (7.6 )   (4.8 )
  Other items     1.6     17.7     0.6  
   
 
 
 
Provision (benefit) for income taxes   $ 5.9   $ (133.7 ) $ (49.8 )
   
 
 
 
Effective tax rate     2.8 %   30.5 %   79.7 %
   
 
 
 

        At December 31, 2004, the Company has unused net operating losses, capital losses, and research tax credits expiring from 2007 to 2025.

        The Company also has unused alternative minimum tax credits which do not expire and which will be available to offset future U.S. Federal income tax.

        At December 31, 2004, the Company's equity in the undistributed earnings of foreign subsidiaries for which income taxes had not been provided approximated $1,191.4 million. It is not practicable to estimate the U.S. and foreign tax which would be payable should these earnings be distributed.

        The October 2004 sale of the blow-molded plastic business resulted in a substantial capital loss, only a small portion of which was utilized to offset otherwise taxable capital gains. Because of the significant amount and limited life of the remaining unused capital loss, a full valuation allowance of approximately $375 million was established to offset the tax benefit. The remaining increase in the valuation allowance was primarily due to an allowance of approximately $85 million established in the allocation of the purchase price for the acquisition of BSN Glasspack, S.A. Including the amount related to BSN, the components of the valuation allowance that were established in allocations of the costs of acquisitions totaled approximately $150 million. Any future reductions of these components will result in reductions of goodwill.

        In 2003, the Company entered into an agreement with the trustee of an insolvent Canadian entity. At the conclusion of its insolvency proceedings, the entity was merged with the Company's Canadian operating subsidiary, thereby establishing a loss that can be carried forward and applied against future taxable earnings of the Company's Canadian manufacturing operations. Based on its historical and projected taxable earnings in Canada, the Company provided a valuation allowance for the net deferred tax assets in Canada, including the tax loss carryforwards. The Company presently intends to reverse a portion of the valuation allowance each year related to loss carryforwards that are utilized during the year.

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12.    Convertible Preferred Stock

        Annual cumulative dividends of $2.375 per share are payable in cash quarterly. The convertible preferred stock is convertible at the option of the holder at any time, unless previously redeemed, into shares of common stock of the Company at an initial conversion rate of 0.9491 shares of common stock for each share of convertible preferred stock, subject to adjustment based on certain events. The convertible preferred stock may be redeemed only in shares of common stock of the Company at the option of the Company at predetermined redemption prices plus accrued and unpaid dividends, if any, to the redemption date.

        Holders of the convertible preferred stock have no voting rights, except as required by applicable law and except that among other things, whenever accrued and unpaid dividends on the convertible preferred stock are equal to or exceed the equivalent of six quarterly dividends payable on the convertible preferred stock such holders will be entitled to elect two directors to the Company's board of directors until the dividend arrearage has been paid or amounts have been set apart for such payment. In addition, certain changes that would be materially adverse to the rights of holders of the convertible preferred stock cannot be made without the vote of holders of two-thirds of the outstanding convertible preferred stock. The convertible preferred stock is senior to the common stock with respect to dividends and liquidation events.

13.    Stock Options and Other Stock Based Compensation

        The Company has three nonqualified stock option plans: (1) the Stock Option Plan for Key Employees of Owens-Illinois, Inc.; (2) the Stock Option Plan for Directors of Owens-Illinois, Inc. and (3) 1997 Equity Participation Plan of Owens-Illinois, Inc. 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. All options have been granted at prices equal to the market price of the Company's common stock on the date granted. Accordingly, the Company recognizes no compensation expense related to the stock option plans.

        The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the assumptions described in the accounting policies note on stock options.

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        Stock option activity is as follows:

 
  Number of
Shares

  Weighted
Average
Exercise
Price

  Weighted
Average
Fair
Value

Options outstanding at January 1, 2002   9,420,289   $ 20.51      
  Granted   1,116,311     10.44   $ 6.49
  Exercised   (605,480 )   7.54      
  Canceled   (83,265 )   22.04      
   
 
     
Options outstanding at December 31, 2002   9,847,855     20.15      
  Granted   930,800     9.98   $ 6.15
  Exercised   (182,955 )   6.85      
  Canceled   (198,284 )   20.66      
   
 
     
Options outstanding at December 31, 2003   10,397,416     19.46      
  Granted   1,162,000     13.41   $ 8.30
  Exercised   (2,239,874 )   10.26      
  Canceled   (858,042 )   20.77      
   
 
     
Options outstanding at December 31, 2004   8,461,500   $ 20.94      
   
 
     
Options exercisable at:                
  December 31, 2004   6,141,175   $ 22.74      
  December 31, 2003   5,030,410   $ 19.51      
  December 31, 2002   3,691,381   $ 13.39      
   
 
     
Shares available for option grant at:                
  December 31, 2004   4,632,810            
  December 31, 2003   5,083,627            
  December 31, 2002   6,164,635            
   
           

        The following table summarizes significant option groups outstanding at December 31, 2004, and related weighted average price and life information:

 
  Options Outstanding
   
   
 
  Options Exercisable
 
   
  Weighted
Average
Remaining
Contractual Life
(in years)

   
Range of
Exercise
Prices

  Options
Outstanding

  Weighted
Average
Exercise
Price

  Options
Exercisable

  Weighted
Average
Exercise
Price

$  5.69 to $16.98   4,542,190   6.6   $ 11.59   2,858,845   $ 10.57
$18.53 to $31.63   2,426,260   3.7   $ 26.90   1,789,280   $ 28.02
$34.88 to $41.50   1,493,050   3.4   $ 39.69   1,493,050   $ 39.69
   
           
     
    8,461,500             6,141,175      
   
           
     

        During 2004, 2003 and 2002 the Company awarded shares of restricted stock to certain key employees under the 1997 Equity Participation Plan of Owens-Illinois, Inc. and, in 2004, to non-management directors under the 2004 Equity Incentive Plan for Directors of Owens-Illinois, Inc. Shares granted to employees vest upon retirement. Granted but unvested shares are forfeited upon

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termination of employment, unless certain retirement criteria are met. Shares granted to directors vest on the later of the three-year anniversary of the grant date or the end of the director's then current term on the board.

        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 the restricted shares is amortized ratably over the vesting period. The following table summarizes total restricted shares issued and the total expense recognized for each of the years ended December 31:

Year ended
December 31,

  Total
Shares
Granted

  Weighted
Average
Fair
Value

  Total
Expense

2004   487,622   $ 13.73   $ 3.9
2003   303,000     9.93     2.6
2002   275,000     10.22     2.1

14.    Pension Benefit Plans

        Net (expense) credits to results of operations for all of the Company's pension plans and certain deferred compensation arrangements amounted to ($27.0) million in 2004, $17.8 million in 2003, and $68.0 million in 2002.

        The Company has defined benefit pension plans covering substantially all employees located in the United States, the United Kingdom, the Netherlands, Canada, Australia, 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.

        The changes in the pension benefit obligations for the year were as follows:

 
  2004
  2003
 
Obligations at beginning of year   $ 3,090.0   $ 2,752.4  

Change in benefit obligations:

 

 

 

 

 

 

 
  Service cost     56.9     48.8  
  Interest cost     197.0     179.1  
  Actuarial loss, including effect of changing discount rates     190.4     211.4  
  Acquisitions     448.8        
  Divestitures     (35.2 )      
  Participant contributions     7.7     5.1  
  Benefit payments     (281.2 )   (219.4 )
  Plan amendments     (44.6 )   0.7  
  Foreign currency translation     119.3     110.6  
  Other     5.4     1.3  
   
 
 
    Net increase in benefit obligations     664.5     337.6  
   
 
 
Obligations at end of year   $ 3,754.5   $ 3,090.0  
   
 
 

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        The changes in the fair value of the pension plans' assets for the year were as follows:

 
  2004
  2003
 
Fair value at beginning of year   $ 2,869.9   $ 2,483.9  

Change in fair value:

 

 

 

 

 

 

 
  Actual gain on plan assets     482.4     483.2  
  Acquisitions     285.1        
  Benefit payments     (281.2 )   (219.4 )
  Employer contributions     63.8     35.1  
  Participant contributions     7.7     5.1  
  Foreign currency translation     82.4     82.0  
   
 
 
    Net increase in fair value of assets     640.2     386.0  
   
 
 
Fair value at end of year   $ 3,510.1   $ 2,869.9  
   
 
 

        The funded status of the pension plans at year end was as follows:

 
  2004
  2003
 
Plan assets at fair value   $ 3,510.1   $ 2,869.9  
Projected benefit obligations     3,754.5     3,090.0  
   
 
 
  Plan assets less than projected benefit obligations     (244.4 )   (220.1 )

Net unrecognized items:

 

 

 

 

 

 

 
  Actuarial loss     1,080.0     1,157.7  
  Prior service cost     (5.5 )   45.2  
   
 
 
      1,074.5     1,202.9  
   
 
 
Net amount recognized   $ 830.1   $ 982.8  
   
 
 

        The net amount recognized is included in the Consolidated Balance Sheets at December 31, 2004 and 2003 as follows:

 
  2004
  2003
 
Prepaid pension   $ 962.5   $ 967.1  
Accrued pension, included with other liabilities     (205.5 )   (45.4 )
Minimum pension liability, included with other liabilities     (134.7 )   (107.3 )
Intangible asset, included with deposits and other assets     12.2     12.4  
Accumulated other comprehensive income     195.6     156.0  
   
 
 
Net amount recognized   $ 830.1   $ 982.8  
   
 
 

        The accumulated benefit obligation for all defined benefit pension plans was $3,470.2 million and $2,823.8 million at December 31, 2004 and 2003, respectively.

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        The components of the net pension credit for the year were as follows:

 
  2004
  2003
  2002
 
Service cost   $ 56.9   $ 48.8   $ 38.8  
Interest cost     197.0     179.1     172.4  
Expected asset return     (289.5 )   (275.1 )   (303.4 )
Amortization:                    
  Prior service cost     6.0     6.8     7.6  
  Loss     38.3     10.5     1.1  
   
 
 
 
    Net amortization     44.3     17.3     8.7  
   
 
 
 
Net expense (credit)   $ 8.7   $ (29.9 ) $ (83.5 )
   
 
 
 
Total for continuing operations   $ 6.3   $ (29.9 ) $ (79.0 )
Total for discontinued operations     2.4           (4.5 )
   
 
 
 
    $ 8.7   $ (29.9 ) $ (83.5 )
   
 
 
 

        The following selected information is for plans with projected benefit obligations in excess of the fair value of plan assets at year end:

 
  2004
  2003
Projected benefit obligations   $ 1,317.3   $ 3,090.0
Fair value of plan assets     906.8     2,869.9

        The following information is for plans with accumulated benefit obligations in excess of the fair value of plan assets at year end:

 
  2004
  2003
Accumulated benefit obligations   $ 1,197.9   $ 632.3
Fair value of plan assets     906.8     479.9

        The weighted average assumptions used to determine benefit obligations were as follows:

 
  2004
  2003
 
Discount rate   5.52 % 6.10 %
Rate of compensation increase   4.40 % 4.71 %

        The weighted average assumptions used to determine net periodic pension costs were as follows:

 
  2004
  2003
  2002
 
Discount rate   6.10 % 6.52 % 6.95 %
Rate of compensation increase   4.71 % 4.72 % 4.78 %
Expected long-term rate of return on assets   8.35 % 8.71 % 9.64 %

        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

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presented above. Amortization included in net pension expense (credits) is based on the average remaining service of employees.

        As of December 31, 2004, the Company recorded an additional minimum pension liability for the pension plan in the United Kingdom in addition to the minimum liabilities recorded in 2002 and 2003. Pursuant to this requirement, the Company increased the minimum pension liability by $25.3 million, reduced the intangible asset by $1.7 million, and increased accumulated other comprehensive income by $27.0 million.

        As of December 31, 2004, the Company adjusted the minimum pension liability for the pension plan in Canada from the minimum liabilities recorded in 2002 and 2003. Pursuant to this requirement, the Company increased the intangible asset by $0.4 million and decreased accumulated other comprehensive income by $0.4 million. The minimum pension liability was not materially decreased.

        For 2004, the Company's weighted average expected long-term rate of return on assets was 8.35%. 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, 2003), which was in line with the expected long-term rate of return assumption for 2004.

        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:

 
  Actual Allocation
   
 
Asset Category

  Target Allocation Ranges
 
  2004
  2003
 
Equity securites   61 % 68 % 56–66 %
Debt securities   29 % 24 % 26–36 %
Real estate   7 % 7 % 2–12 %
Other   3 % 1 % 0–2 %
   
 
     
Total   100 % 100 %    
   
 
     

        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.

        Plan assets at December 31, 2004 and 2003 included 487,236 and 14,423,621 shares, respectively, of the Company's common stock, which amounted to $11.0 million or 0.4% of total plan assets as of December 31, 2004 and $171.5 million or 6.0% of total plan assets as of December 31, 2003.

        The Company expects to contribute $37.3 million to its defined benefit pension plans in 2005.

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        The following estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid in the years indicated:

Year(s)
   
  Amount
2005       $ 227.1
2006         236.6
2007         234.6
2008         234.6
2009         241.1
2010–2014         1,285.7

        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 2004, $6.8 million in 2003, and $7.5 million in 2002.

15.    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 changes in the postretirement benefit obligations for the year were as follows:

 
  2004
  2003
 
Obligations at beginning of year   $ 380.8   $ 352.3  
Change in benefit obligations:              
  Service cost     4.3     3.6  
  Interest cost     21.0     23.3  
  Actuarial loss, including the effect of changing discount rates     5.3     25.1  
  Acquisitions     21.0        
  Plan amendments     (63.7 )      
  Benefit payments     (33.8 )   (32.7 )
  Foreign currency translation     6.0     9.4  
  Other         (0.2 )
   
 
 
    Net change in benefit obligations     (39.9 )   28.5  
   
 
 
Obligations at end of year   $ 340.9   $ 380.8  
   
 
 

81


        The funded status of the postretirement benefit plans at year end was as follows:

 
  2004
  2003
 
Projected postretirement benefit obligations   $ 340.9   $ 380.8  
Net unrecognized items:              
  Prior service credit     45.2     4.7  
  Actuarial loss     (100.5 )   (100.7 )
   
 
 
      (55.3 )   (96.0 )
   
 
 
Nonpension accumulated postretirement benefit obligations   $ 285.6   $ 284.8  
   
 
 

        The components of the net postretirement benefit cost for the year were as follows:

 
  2004
  2003
  2002
 
Service cost   $ 4.3   $ 3.6   $ 2.7  
Interest cost     21.0     23.3     22.6  
Amortization:                    
  Prior service credit     (6.8 )   (13.0 )   (13.0 )
  Loss     4.7     3.7     2.3  
   
 
 
 
    Net amortization     (2.1 )   (9.3 )   (10.7 )
   
 
 
 
Net postretirement benefit cost   $ 23.2   $ 17.6   $ 14.6  
   
 
 
 
Total for continuing operations     21.3     17.3     13.5  
Total for discontinued operations     1.9     0.3     1.1  
   
 
 
 
    $ 23.2   $ 17.6   $ 14.6  
   
 
 
 

        The weighted average discount rate used to determine the accumulated postretirement benefit obligation was 5.67% and 6.21% at December 31, 2004 and 2003, respectively.

        The weighted average discount rate used to determine net postretirement benefit cost was 6.21%, 6.72%, and 7.18% at December 31, 2004, 2003, and 2002, respectively.

        The weighted average assumed health care cost trend rates at December 31 were as follows:

 
  2004
  2003
 
Health care cost trend rate assumed for next year   9.19 % 10.56 %
Rate to which the cost trend rate is assumed to decline (ultimate trend rate)   5.66 % 5.93 %
Year that the rate reaches the ultimate trend rate   2009   2009  

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        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   $ 2.2   $ (1.7 )
Effect on accumulated postretirement benefit obligations     22.3     (17.4 )

        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)

  Amount
2005   $ 32.3
2006     24.1
2007     23.6
2008     23.1
2009   &nb