Annual Reports

  • 10-K (Feb 10, 2017)
  • 10-K (May 13, 2016)
  • 10-K (Feb 16, 2016)
  • 10-K (Feb 11, 2015)
  • 10-K (Feb 13, 2014)
  • 10-K (Feb 13, 2013)

 
Quarterly Reports

 
8-K

 
Other

Owens-Illinois 10-K 2011

Use these links to rapidly review the document
TABLE OF CONTENTS
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
PART IV
INDEX TO FINANCIAL STATEMENT SCHEDULE

Table of Contents

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, 2010

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

One Michael Owens Way, Perrysburg, Ohio
(Address of principal executive offices)

 

43551
(Zip Code)

Registrant's telephone number, including area code: (567) 336-5000

          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

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

          Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý    No o

          Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o    No ý

          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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). 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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o
(do not check if a
smaller reporting company)
  Smaller reporting company o

          Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

          The aggregate market value (based on the consolidated tape closing price on June 30, 2010) of the voting and non-voting stock beneficially held by non-affiliates of Owens-Illinois, Inc. was approximately $3,274,343,000. For the sole purpose of making this calculation, the term "non-affiliate" has been interpreted to exclude directors and executive officers of the Company. Such interpretation is not intended to be, and should not be construed to be, an admission by Owens-Illinois, Inc. or such directors or executive officers of the Company that such directors and executive officers of the Company are "affiliates" of Owens-Illinois, Inc., as that term is defined under the Securities Act of 1934.

          The number of shares of common stock, $.01 par value of Owens-Illinois, Inc. outstanding as of December 31, 2010 was 163,715,483.

DOCUMENTS INCORPORATED BY REFERENCE

          Portions of Owens-Illinois, Inc. Proxy Statement for The Annual Meeting of Share Owners To Be Held Thursday, May 5, 2011 ("Proxy Statement") are incorporated by reference into Part III hereof.

TABLE OF GUARANTORS

Exact Name of Registrant
As Specified In Its Charter
  State/Country of
Incorporation or
Organization
  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 Michael Owens Way, Perrysburg, Ohio 43551; (567) 336-5000. These companies are listed as guarantors of the debt securities of the registrant. The consolidating condensed financial statements of the Company depicting separately its guarantor and non-guarantor subsidiaries are presented in the notes to the consolidated financial statements. All of the equity securities of each of the guarantors set forth in the table above are owned, either directly or indirectly, by Owens-Illinois, Inc.


Table of Contents


TABLE OF CONTENTS

 

PART I

    1  
   

ITEM 1.

 

BUSINESS

    1  
   

ITEM 1A.

 

RISK FACTORS

    9  
   

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

    15  
   

ITEM 2.

 

PROPERTIES

    15  
   

ITEM 3.

 

LEGAL PROCEEDINGS

    17  
   

ITEM 4.

 

RESERVED

    17  

 


PART II


 

 

18

 
   

ITEM 5.

 

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

    18  
   

ITEM 6.

 

SELECTED FINANCIAL DATA

    20  
   

ITEM 7.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

    24  
   

ITEM 7A.

 

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

    44  
   

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    47  
   

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

    108  
   

ITEM 9A.

 

CONTROLS AND PROCEDURES

    108  
   

ITEM 9B.

 

OTHER INFORMATION

    112  

 


PART III


 

 

112

 
   

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

    112  
   

ITEM 11.

 

EXECUTIVE COMPENSATION

    112  
   

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

    112  
   

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

    113  
   

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

    113  

 


PART IV


 

 

114

 
   

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

    114  

 


SIGNATURES


 

 

211

 

 


EXHIBITS


 

 

E-1

 

Table of Contents


PART I

ITEM 1.    BUSINESS

General Development of Business

        Owens-Illinois, Inc. (the "Company"), through its subsidiaries, is the successor to a business established in 1903. The Company is the largest manufacturer of glass containers in the world, based on revenues, with leading positions in Europe, North America, South America and Asia Pacific.

Strategic Priorities and Competitive Strengths

        The Company is pursuing the following strategic priorities aimed at optimizing shareholder return:

    Marketing Glass—drive growth with total packaging solutions and conversion to glass; partner with new and existing customers; and promote glass benefits to customers, retailers and others

    Strategic & Profitable Growth—grow through acquisitions and joint ventures in targeted markets and build plants in rapidly growing markets

    Innovation & Technology—invest in research and development focused on melting, forming and glass properties and focus on new products, new features and new processes

    Operational Excellence—focus on safety first; establish quality leadership; pursue excellence in productivity, supply chain and processes; and develop employees

        Beginning in 2007, the Company commenced a strategic review of its global profitability and manufacturing footprint. Since undertaking this review, the Company has announced the curtailment of capacity or closing of facilities involving 26 furnaces and approximately 3,250 job eliminations. The Company concluded its global review as of December 31, 2009, with the final actions being implemented in the first half of 2010. The Company believes these actions will contribute to optimizing shareholder return. On an ongoing basis, the Company will review its manufacturing operations, and it is possible that it will close selected facilities or production lines in the future.

Technology Leader

        The Company believes it is a technological leader in the worldwide glass container segment of the rigid packaging market in which it competes. During the five years ended December 31, 2010, on a continuing operations basis, the Company invested more than $1.7 billion in capital expenditures (excluding acquisitions) and more than $300 million in research, development and engineering to, among other things, improve labor and machine productivity, increase capacity in growing markets and commercialize technology into new products.

Worldwide Corporate Headquarters

        The principal executive office of the Company is located at One Michael Owens Way, Perrysburg, Ohio 43551; the telephone number is (567) 336-5000. The Company's website is www.o-i.com. The Company's annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 can be obtained from this site at no cost. The Company's Corporate Governance Guidelines, Code of Business Conduct and Ethics and the charters of the Compensation, Nominating/Corporate Governance and Audit Committees are also available on the Investor Relations section of the Company's web site. Copies of these documents are available in print to share owners upon request, addressed to the Corporate Secretary at the address above.

1


Table of Contents

Financial Information about Reportable Segments

        Information as to sales, earnings from continuing operations before interest income, interest expense, and provision for income taxes and excluding amounts related to certain items that management considers not representative of ongoing operations ("Segment Operating Profit"), and total assets by reportable segment is included in Note 19 to the Consolidated Financial Statements.

Narrative Description of Business

        Below is a description of the business and information to the extent material to understanding the Company's business taken as a whole.

        The Company is the largest manufacturer of glass containers in the world with 81 glass manufacturing plants in 21 countries. The Company is the leading glass container manufacturer in most of the countries where it competes in the glass container segment of the rigid packaging market, including the U.S.

Products and Services

        The Company produces glass containers for beer, ready-to-drink low alcohol refreshers, spirits, wine, food, tea, juice and pharmaceuticals. The Company also produces glass containers for soft drinks and other non-alcoholic beverages, including returnable/refillable glass containers, principally outside the U.S. The Company manufactures these products in a wide range of sizes, shapes and colors. The Company is active in new product development and glass container innovation.

Customers

        In most of the countries where the Company competes, it has the leading position in the glass container segment of the rigid packaging market based on sales revenue. The largest customers include many of the leading manufacturers and marketers of glass packaged products in the world. In the U.S., the majority of the Company's customers for glass containers are brewers, wine vintners, distillers and food producers. The Company also produces glass containers for soft drinks and other non-alcoholic beverages, principally outside the U.S. The largest U.S. glass container customers include (in alphabetical order) Anheuser-Busch InBev, Brown Forman, Constellation, Diageo, H.J. Heinz, MillerCoors, PepsiCo, Saxco International, and Yuengling. The largest glass container customers outside the U.S. include (in alphabetical order) Anheuser-Busch InBev, Diageo, Foster's, Heineken, Lion Nathan, Molson/Coors, Nestle, Pernod Ricard, and SABMiller. The Company is a significant supplier of glass containers to all of these customers.

        The Company sells most of its glass container products directly to customers under annual or multi-year supply agreements. Multi-year contracts typically provide for price adjustments based on cost changes. The Company also sells some of its products through distributors. Glass container production is typically scheduled to maintain reasonable levels of inventory.

Markets and Competitive Conditions

        The Company's principal markets for glass container products are in Europe, North America, South America and Asia Pacific. The Company believes it is a low-cost producer in the glass container segment of the rigid packaging market in many of the countries in which it competes. Much of this cost advantage is due to the Company's manufacturing know-how and process technology. The Company's machine development activities and systematic upgrading of production equipment support its low-cost leadership position in the glass container segment in many of the countries in which it competes, a key strength to competing successfully in the rigid packaging market.

2


Table of Contents

        Europe.    The Company has the leading share of the glass container segment of the rigid packaging market in Europe, with 36 glass container manufacturing plants located in the Czech Republic, Estonia, France, Germany, Hungary, Italy, The Netherlands, Poland, Spain and the United Kingdom. These plants primarily produce glass containers for the beer, wine, champagne, spirits and food markets in these countries. The Company is also involved in a joint-venture glass manufacturer in Italy. The Company competes directly with Verallia, a subsidiary of Compagnie de Saint-Gobain, throughout Europe, Ardagh plc in the U.K., Germany and Poland, and Vetropak in the Czech Republic. In other locations in Europe, the Company competes indirectly with a variety of glass container firms including Verallia, Vetropak and Ardagh plc.

        North America.    The Company has 19 glass container manufacturing plants in the U.S. and Canada, and is also involved in a joint venture that manufactures glass containers in the U.S. 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. The principal glass container competitors in the U.S. are Verallia North America (a brand of Saint-Gobain Containers, Inc., a wholly-owned subsidiary of Compagnie de Saint-Gobain) and Anchor Glass Container Corporation. In addition, imports from Mexico and other countries compete in U.S. glass container segments. Additionally, a few major consumer packaged goods companies self-manufacture glass containers.

        South America.    The Company has 13 glass manufacturing plants in South America, located in Argentina, Brazil, Colombia, Ecuador and Peru. In South America, the Company maintains a diversified portfolio serving several markets, including beer, non-alcoholic beverages, spirits, ready-to-drink beverages, wine, food and pharmaceuticals. The region also has a large infrastructure for returnable/refillable glass containers, which has been further developed in recent years with expansions in new filling lines by many of the Company's customers. The Company competes directly with Verallia, a subsidiary of Compagnie de Saint-Gobain, in Brazil and Argentina, and does not believe that it competes with any other large, multi-national glass container manufacturers in the rest of the region.

        Until recently, the Company's South American operations included two production facilities in Venezuela. These operations were expropriated by the Venezuelan government during the fourth quarter of 2010. For further information, see Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 23 to the Consolidated Financial Statements.

        Asia Pacific.    The Company has 13 glass container manufacturing plants in the Asia Pacific region, located in Australia, New Zealand, Indonesia and China. It is also involved in joint venture operations in China, Malaysia and Vietnam. The Company primarily produces glass containers for the beer, wine, food and non-alcoholic beverage markets in the Asia Pacific region. The Company competes directly with Amcor Limited in Australia, and does not believe that it competes with any other large, multi-national glass container manufacturers in the rest of the region. In China, the glass container segments of the packaging market are regional and highly fragmented with a large number of local competitors.

        In addition to competing with other large and well-established manufacturers in the glass container segment, the Company competes in all regions with manufacturers of other forms of rigid packaging, principally aluminum cans and plastic containers, on the basis of quality, price, service and the marketing attributes of the container. The principal competitors producing metal containers include Amcor, Ball Corporation, Crown Holdings, Inc., Rexam plc, and Silgan Holdings Inc. The principal competitors producing plastic containers include 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, aseptic cartons and bag-in-box containers.

        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

3


Table of Contents


glass container partner of choice for such multi-national consumer companies due to the Company's leadership in glass manufacturing know-how and process technology and its status as a high quality producer.

Manufacturing

        The Company believes it is a low-cost producer in the glass container segment of the rigid packaging market in many of the countries in which it competes. Much of this cost advantage is due to the Company's manufacturing know-how and process technology. The Company's machine development activities and systematic upgrading of production equipment have given it a low-cost leadership position in the glass container segment in most of the countries in which it competes, a key strength to competing successfully in the rigid packaging market. The Company uses its 81-plant footprint to benchmark its manufacturing operations and to share best practices.

        The Company operates several machine shops that assemble and repair high-productivity glass-forming machines as well as mold shops that manufacture molds and related equipment. The Company also provides engineering support for its glass manufacturing operations through facilities located in the U.S., Australia, Poland and Peru.

Methods of Distribution

        Due to the significance of transportation costs and the importance of timely delivery, glass container manufacturing facilities are generally located close to customers. In the U.S., most of the Company's glass container products are shipped by common carrier to customers within a 250-mile radius of a given production site. In addition, the Company's glass container operations outside the U.S. export some products to customers beyond their national boundaries, which may include transportation by rail and ocean delivery in combination with common carriers.

Suppliers and Raw Materials

        The primary raw materials used in the Company's glass container operations are sand, soda ash, limestone and recycled glass. Each of these materials, as well as the other raw materials used to manufacture glass containers, has historically been available in adequate supply from multiple sources. One of the sources is a soda ash mining operation in Wyoming in which the Company has a 25% interest.

Energy

        The Company's glass container operations require a continuous supply of significant amounts of energy, principally natural gas, fuel oil, and electrical power. Adequate supplies of energy are generally available to the Company at all of its manufacturing locations. Energy costs typically account for 15-25% of the Company's total manufacturing costs, depending on the cost of energy, the factory location, and its particular energy requirements. The percentage of total cost related to energy can vary significantly because of volatility in market prices, particularly for natural gas and fuel oil in volatile markets such as North America and Europe. In North America, approximately 85% of the sales volume is tied to customer contracts that contain provisions that pass the price of natural gas to the customer, effectively reducing the North America segment's exposure to changing market prices. In Europe, the Company enters into fixed price contracts for much of its energy requirements. These contracts typically have terms of 12 months or less. Also, in order to limit the effects of fluctuations in market prices for natural gas, the Company uses commodity futures contracts related to its forecasted requirements in North America. The objective of these futures contracts is to reduce the potential volatility in cash flows and expense due to changing market prices. The Company continually evaluates the energy markets with respect to its forecasted energy requirements in order to optimize its use of commodity futures contracts.

4


Table of Contents

Glass Recycling

        The Company is an important contributor to the recycling effort in the U.S. and abroad and continues to melt substantial recycled glass tonnage in its glass furnaces. The Company is among the largest users of recycled glass containers. If sufficient high-quality recycled glass were available on a consistent basis, the Company has the technology to operate using up to 90% recycled glass. Using recycled glass in the manufacturing process reduces energy costs and prolongs the operating life of the glass melting furnaces.

Technical Assistance License Agreements

        The Company has agreements to license its proprietary glass container technology and provide technical assistance to 21 companies in 20 countries. These agreements cover areas related to manufacturing and engineering assistance. The worldwide licensee network provides a stream of revenue to help 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 certain "best practices" developed by its worldwide licensee network. In the years 2010, 2009 and 2008, the Company earned $16 million, $13 million and $18 million, respectively, in royalties and net technical assistance revenue on a continuing operations basis.

Research and Development

        The Company believes it is a technological leader in the worldwide glass container segment of the rigid packaging market. Research, development, and engineering constitute important parts of the Company's technical activities. On a continuing operations basis, research, development, and engineering expenditures were $62 million, $58 million, and $66 million for 2010, 2009, and 2008, respectively. The Company's research, development and engineering activities include new products, manufacturing process control, melting technology, automatic inspection and further automation of manufacturing activities. The Company's research and development activities are conducted at its corporate facilities in Perrysburg, Ohio.

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.

Recycling and Bottle Deposits

        In the U.S., Canada, Europe and elsewhere, a number of government authorities have adopted or are considering legal requirements that would mandate certain rates of recycling, the use of recycled materials, or limitations on or preferences for certain types of packaging. The Company believes that governments worldwide will continue to develop and enact legal requirements seeking to, or having the effect of, guiding customer and end-consumer packaging choices.

        In North America, sales of beverage containers are affected by governmental regulation of packaging, including deposit return laws. As of December 31, 2010, there were 11 U.S. states with bottle deposit laws in effect, requiring consumer deposits of between 2 and 15 cents (USD), depending on the size of the container. In Canada, there are 10 provinces and 2 territories with consumer deposits between 5 and 25 cents (Canadian), depending on the size of the container. In Europe a number of countries have some form of consumer deposit law in effect, including Austria, Belgium, Denmark,

5


Table of Contents


Finland, Germany, The Netherlands, Norway, Sweden and Switzerland. The structure and enforcement of such laws and regulations can impact the sales of beverage containers in a given jurisdiction. Such laws and regulations also impact the availability of post-consumer recycled glass for the Company to use in container production.

        A number of U.S. states and Canadian provinces have recently considered or are now considering laws and regulations to encourage curbside, deposit return, and on-premise recycling. Although there is no clear trend in the direction of these state and provincial laws and regulations, the Company believes that U.S. states and Canadian provinces, as well as municipalities within those jurisdictions, will continue to adopt recycling laws which will affect supplies of post-consumer recycled glass. As a large user of post-consumer recycled glass for bottle-to-bottle production, the Company has an interest in laws and regulations impacting supplies of such material in its markets.

Air Emissions

        The European Union Emissions Trading Scheme ("EUETS") commenced January 1, 2005. The EU has committed to Kyoto Protocol emissions reduction targets and the EUETS is intended to facilitate such reduction. The Company's manufacturing installations which operate in EU countries must restrict the volume of their CO2 emissions to the level of their individually allocated Emissions Allowances as set by country regulators. If the actual level of emissions for any installation exceeds its allocated allowance, additional allowances can be bought on the market to cover deficits; conversely, if the actual level of emissions for such installation is less than its allocation, the excess allowances can be sold on the same market. The EUETS has not had a material effect on the Company's results to date, however, should the regulators significantly restrict the number of Emissions Allowances available, it could have a material effect in the future.

        In North America, the U.S. and Canada are engaged in significant legislative and regulatory activity relating to CO2 emissions, both at the federal and the state and provincial levels of government. There are numerous proposals pending before the U.S. Congress which would create a cap-and-trade emissions trading scheme for CO2, but no legislation has been adopted into law. Other proposals would adopt a national carbon tax or would create restrictions on CO2 emissions without utilizing a cap-and-trade system. The U.S. Environmental Protection Agency has recently commenced a regulatory process for CO2, but no specific scheme affecting manufacturing facilities has been detailed.

        In Asia Pacific, Australia's ratification of the Kyoto Protocol came into effect in March 2008. In July 2008, the Australian Federal Government issued the Carbon Pollution Reduction Scheme ("CPRS") Green Paper aimed to help reduce the country's carbon emissions. The CPRS recommended an emissions trading scheme ("ETS") be established in Australia in 2010, however this has not yet occurred. Also in Australia, the National Greenhouse and Energy Reporting Act 2007 commenced on July 1, 2008. This act establishes a mandatory reporting system for corporate greenhouse gas emissions and energy production and consumption. Key features of this act include the following: (1) reporting of greenhouse gas emissions, energy consumption and production by large corporations, subject to independent audit; (2) public disclosure of corporate level greenhouse gas emissions and energy information; and (3) consistent and comparable data available for government, in particular, the development and administration of the CPRS. In New Zealand, the government made a number of amendments to the emissions trading scheme passed into law in September 2008. One of the changes introduced a transition phase to the scheme between July 1, 2010 and December 31, 2012. During this period, participants are able to buy emission units from the government. The New Zealand scheme covers emissions covered by the Kyoto Protocol to which New Zealand is a signatory.

        The Company is unable to predict what environmental legal requirements may be adopted in the future. However, the Company continually monitors its operations in relation to environmental impacts and invests in environmentally friendly and emissions-reducing projects. As such, the Company has

6


Table of Contents


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 effect on the Company's results of operations or cash flows. The Company is unable to predict the impact of future environmental legal requirements on its results of operations or cash flows.

Intellectual Property Rights

        The Company has a large number of patents which relate to a wide variety of products and processes, has a substantial number of patent applications pending, and is licensed under several patents of others. While in the aggregate the Company's patents are of material importance to its businesses, the Company does not consider that any patent or group of patents relating to a particular product or process is of material importance when judged from the standpoint of any segment or its businesses as a whole. The Company has a number of intellectual property rights, comprised of both patented and proprietary technology, that the Company believes makes its glass forming machines more efficient and productive than those used by its competitors. In addition, the efficiency of the Company's glass forming machines is enhanced by the Company's overall approach to cost efficient manufacturing technology, which extends from the raw materials batch house to the finished goods warehouse. This technology is proprietary to the Company through a combination of issued patents, pending applications, copyrights, trade secrets and proprietary know-how.

        Upstream of the glass forming machines, there is technology to deliver molten glass to the forming machine at high rates of flow and fully conditioned to be homogeneous in consistency, viscosity and temperature for efficient forming into glass containers. The Company has proprietary know-how in (a) the batch house, where raw materials are stored, measured and mixed, (b) the furnace control system and furnace combustion, and (c) the forehearth and feeding system to deliver such homogeneous glass to the forming machines.

        In the Company's glass container manufacturing processes, computer controls and electro-mechanical mechanisms are commonly used for a wide variety of applications in the forming machines and auxiliary processes. Various patents held by the Company are directed to the electro-mechanical mechanisms and related technologies used to control sections of the machines. Additional U.S. patents held by the Company and various pending applications are directed to the technology used by the Company for the systems that control the operation of the forming machines and many of the component mechanisms that are embodied in the machine systems.

        Downstream of the glass forming machines, there is patented and unpatented technology for ware handling, annealing, coating and inspection, which further enhances the overall efficiency of the manufacturing process.

        While the above patents and intellectual property rights are representative of the technology used in the Company's glass manufacturing operations, there are numerous other pending patent applications, trade secrets and other proprietary know-how and technology, as supplemented by administrative and operational best practices, which contribute to the Company's competitive advantage. As noted above, however, the Company does not consider that any patent or group of patents relating to a particular product or process is of material importance when judged from the standpoint of any segment or its businesses as a whole.

Seasonality

        Sales of particular glass container products such as beer and 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 the Asia Pacific region are typically greater in the first and fourth quarters of the year, and shipments in South America are typically greater in the third and fourth quarters of the year.

7


Table of Contents

Employees

        The Company's worldwide operations employed approximately 24,000 persons as of December 31, 2010. Approximately 76% of North American employees are hourly workers covered by collective bargaining agreements. The principal collective bargaining agreement, which at December 31, 2010, covered approximately 88% of the Company's union-affiliated employees in North America, will expire on March 31, 2011. Approximately 64% of employees in South America are unionized, although according to the labor legislation in each country, 100% of employees are covered by collective bargaining agreements. The average length of these agreements is approximately 3 years. In addition, a large number of the Company's employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. The Company considers its employee relations to be good and does not anticipate any material work stoppages in the near term.

Executive Officers of the Registrant

Name and Age
  Position
Albert P. L. Stroucken(63)   Chairman and Chief Executive Officer since December 2006. Previously Chief Executive Officer of HB Fuller Company, a manufacturer of adhesives, sealants, coatings, paints and other specialty chemical products 1998-2006, and Chairman of HB Fuller Company from 1999-2006.

Edward C. White(63)

 

Chief Financial Officer since 2005; Senior Vice President and Director of Sales and Marketing for O-I Europe 2004-2005; Senior Vice President since 2003; Senior Vice President of Finance and Administration 2003-2004; Controller 1999-2004; Vice President 2002-2003.

James W. Baehren(60)

 

Senior Vice President Strategic Planning since 2006; Chief Administrative Officer 2004-2006; Senior Vice President and General Counsel since 2003; Corporate Secretary 1998-2010; Vice President and Director of Finance 2001-2003.

L. Richard Crawford(50)

 

Chief Technology and Operations Officer since 2010; President, Global Glass Operations 2006-2010; President, Latin America Glass 2005-2006; Vice President, Director of Operations and Technology for O-I Europe 2004-2005; Vice President of Global Glass Technology 2002-2004; Vice President, Manufacturing Manager of Domestic Glass Container 2000-2002.

Financial Information about Foreign and Domestic Operations

        Information as to net sales, Segment Operating Profit, and assets of the Company's reportable segments is included in Note 19 to the Consolidated Financial Statements.

8


Table of Contents

ITEM 1A.    RISK FACTORS

Asbestos-Related Liability—The Company has made, and will continue to make, substantial payments to resolve claims of persons alleging exposure to asbestos-containing products and may need to record additional charges in the future for estimated asbestos-related costs. These substantial payments have affected and may continue to affect the Company's cost of borrowing and the ability to pursue acquisitions.

        The Company is a defendant in numerous lawsuits alleging bodily injury and death as a result of exposure to asbestos dust. From 1948 to 1958, one of the Company's former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos. The Company exited the pipe and block insulation business in April 1958. The typical asbestos personal injury lawsuit alleges various theories of liability, including negligence, gross negligence and strict liability and seek compensatory, and in some cases, punitive damages, in various amounts (herein referred to as "asbestos claims").

        The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot reasonably be estimated. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $3.82 billion through 2010, before insurance recoveries, for its asbestos-related liability. The Company's ability to reasonably estimate its liability has been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty of future disease incidence and claiming patterns, the expanding list of non-traditional defendants that have been sued in this litigation, and the use of mass litigation screenings to generate large numbers of claims by parties who allege exposure to asbestos dust but have no present physical asbestos impairment.

        The Company conducted a comprehensive review of its asbestos-related liabilities and costs in connection with finalizing and reporting its results of operations for the year ended December 31, 2010 and concluded that an increase in its accrual for future asbestos-related costs in the amount of $170 million (pretax and after tax) was required.

        The ultimate amount of distributions that may be required to fund the Company's asbestos-related payments cannot reasonably be estimated. The Company's reported results of operations for 2010 were materially affected by the $170 million (pretax and after tax) fourth quarter charge and asbestos-related payments continue to be substantial. Any future additional charge may likewise materially affect the Company's results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and may continue to affect the Company's cost of borrowing and its ability to pursue global or domestic acquisitions.

Substantial Leverage—The Company's indebtedness could adversely affect the Company's financial health.

        The Company has a significant amount of debt. As of December 31, 2010, the Company had approximately $4.3 billion of total debt outstanding, an increase from $3.6 billion at December 31, 2009.

        The Company's indebtedness could result in the following consequences:

    Increased vulnerability to general adverse economic and industry conditions;

    Increased vulnerability to interest rate increases for the portion of the debt under the secured credit agreement;

    Require the Company to dedicate a substantial portion of cash flow from operations to payments on indebtedness, thereby reducing the availability of cash flow to fund working capital, capital expenditures, acquisitions, development efforts and other general corporate purposes;

9


Table of Contents

    Limited flexibility in planning for, or reacting to, changes in the Company's business and the rigid packaging market;

    Place the Company at a competitive disadvantage relative to its competitors that have less debt; and

    Limit, along with the financial and other restrictive covenants in the documents governing indebtedness, among other things, the Company's ability to borrow additional funds.

Ability to Service Debt—To service its indebtedness, the Company will require a significant amount of cash. The Company's ability to generate cash depends on many factors beyond its control.

        The Company's ability to make payments on and to refinance its indebtedness and to fund working capital, capital expenditures, acquisitions, development efforts and other general corporate purposes depends on its ability to generate cash in the future. The Company has no assurance that it will generate sufficient cash flow from operations, or that future borrowings will be available under the secured credit agreement, in an amount sufficient to enable the Company to pay its indebtedness, or to fund other liquidity needs. If short term interest rates increase, the Company's debt service cost will increase because some of its debt is subject to short term variable interest rates. At December 31, 2010, the Company's debt subject to variable interest rates represented approximately 22% of total debt. The Company's ratios of earnings to fixed charges were 2.6x and 1.9x for the years ended December 31, 2010 and 2009, respectively.

        The Company may need to refinance all or a portion of its indebtedness on or before maturity. If the Company is unable to generate sufficient cash flow and is unable to refinance or extend outstanding borrowings on commercially reasonable terms or at all, it may have to take one or more of the following actions:

    Reduce or delay capital expenditures planned for replacements, improvements and expansions;

    Sell assets;

    Restructure debt; and/or

    Obtain additional debt or equity financing.

        The Company can provide no assurance that it could effect or implement any of these alternatives on satisfactory terms, if at all.

Debt Restrictions—The Company may not be able to finance future needs or adapt its business plans to changes because of restrictions placed on it by the secured credit agreement and the indentures and instruments governing other indebtedness.

        The secured credit agreement, the indentures governing the senior debentures and notes, and certain of the agreements governing other indebtedness contain affirmative and negative covenants that limit the ability of the Company to take certain actions. For example, these indentures restrict, among other things, the ability of the Company and its restricted subsidiaries to borrow money, pay dividends on, or redeem or repurchase its stock, make investments, create liens, enter into certain transactions with affiliates and sell certain assets or merge with or into other companies. These restrictions could adversely affect the Company's ability to operate its businesses and may limit its ability to take advantage of potential business opportunities as they arise.

        Failure to comply with these or other covenants and restrictions contained in the secured credit agreement, the indentures or agreements governing other indebtedness could result in a default under those agreements, and the debt under those agreements, together with accrued interest, could then be declared immediately due and payable. If a default occurs under the secured credit agreement, the

10


Table of Contents


Company could no longer request borrowings under the agreement, and the lenders could cause all of the outstanding debt obligations under such secured credit agreement to become due and payable, which would result in a default under a number of other outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. A default under the secured credit agreement, indentures or agreements governing other indebtedness could also lead to an acceleration of debt under other debt instruments that contain cross acceleration or cross-default provisions.

International Operations—The Company is subject to risks associated with operating in foreign countries.

        The Company operates manufacturing and other facilities throughout the world. Net sales from international operations totaled approximately $4.7 billion, representing approximately 71% of the Company's net sales for the year ended December 31, 2010. As a result of its international operations, the Company is subject to risks associated with operating in foreign countries, including:

    Political, social and economic instability;

    War, civil disturbance or acts of terrorism;

    Taking of property by nationalization or expropriation without fair compensation;

    Changes in government policies and regulations;

    Devaluations and fluctuations in currency exchange rates;

    Imposition of limitations on conversions of foreign currencies into dollars or remittance of dividends and other payments by foreign subsidiaries;

    Imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries;

    Hyperinflation in certain foreign countries;

    Impositions or increase of investment and other restrictions or requirements by foreign governments;

    Loss or non-renewal of treaties or other agreements with foreign tax authorities; and

    Changes in tax laws, or the interpretation thereof, affecting foreign tax credits or tax deductions relating to our non-U.S. earnings or operations.

        The risks associated with operating in foreign countries may have a material adverse effect on operations.

Competition—The Company faces intense competition from other glass container producers, as well as from makers of alternative forms of packaging. Competitive pressures could adversely affect the Company's financial health.

        The Company is subject to significant competition from other glass container producers, as well as from makers of alternative forms of packaging, such as aluminum cans and plastic containers. The Company competes with each rigid packaging competitor on the basis of price, quality, service and the marketing attributes of the container. Advantages or disadvantages in any of these competitive factors may be sufficient to cause the customer to consider changing suppliers and/or using an alternative form of packaging. The adverse effects of consumer purchasing decisions may be more significant in periods of economic downturn and may lead to longer term reductions in consumer spending on glass packaged products. The Company also competes with manufacturers of non-rigid packaging alternatives, including flexible pouches and aseptic cartons, in serving the packaging needs of certain end-use markets, including juice customers.

11


Table of Contents

        Pressures from competitors and producers of alternative forms of packaging have resulted in excess capacity in certain countries in the past and have led to capacity adjustments and significant pricing pressures in the rigid packaging market.

High Energy Costs—Higher energy costs worldwide and interrupted power supplies may have a material adverse effect on operations.

        Electrical power, natural gas, and fuel oil are vital to the Company's operations as it relies on a continuous power supply to conduct its business. Depending on the location and mix of energy sources, energy accounts for 15% to 25% of total production costs. Substantial increases and volatility in energy costs could cause the Company to experience a significant increase in operating costs, which may have a material adverse effect on operations.

Business Integration Risks—The Company may not be able to effectively integrate additional businesses it acquires in the future.

        The Company may consider strategic transactions, including acquisitions that will complement, strengthen and enhance growth in its worldwide glass operations. The Company evaluates opportunities on a preliminary basis from time to time, but these transactions may not advance beyond the preliminary stages or be completed. Such acquisitions are subject to various risks and uncertainties, including:

    The inability to integrate effectively the operations, products, technologies and personnel of the acquired companies (some of which are located in diverse geographic regions) and achieve expected synergies;

    The potential disruption of existing business and diversion of management's attention from day-to-day operations;

    The inability to maintain uniform standards, controls, procedures and policies;

    The need or obligation to divest portions of the acquired companies;

    The potential impairment of relationships with customers;

    The potential failure to identify material problems and liabilities during due diligence review of acquisition targets;

    The potential failure to obtain sufficient indemnification rights to fully offset possible liabilities associated with acquired businesses; and

    The challenges associated with operating in new geographic regions.

        In addition, the Company cannot make assurances that the integration and consolidation of newly acquired businesses will achieve any anticipated cost savings and operating synergies.

Customer Consolidation—The continuing consolidation of the Company's customer base may intensify pricing pressures and have a material adverse effect on operations.

        Since the early 1990s, many of the Company's largest customers have acquired companies with similar or complementary product lines. This consolidation has increased the concentration of the Company's business with its largest customers. In many cases, such consolidation has been accompanied by pressure from customers for lower prices, reflecting the increase in the total volume of products purchased or the elimination of a price differential between the acquiring customer and the company acquired. Increased pricing pressures from the Company's customers may have a material adverse effect on operations.

Seasonality and Raw Materials—Profitability could be affected by varied seasonal demands and the availability of raw materials.

        Due principally to the seasonal nature of the consumption of beer and other beverages, for which demand is stronger during the summer months, sales of the Company's products have varied and are expected to vary by quarter. Shipments in the U.S. and Europe are typically greater in the second and third quarters of the year, while shipments in the Asia Pacific region are typically greater in the first and fourth quarters of the year, and shipments in South America are typically greater in the third and fourth quarters of the year. Unseasonably cool weather during peak demand periods can reduce demand for certain beverages packaged in the Company's containers.

12


Table of Contents

        The raw materials that the Company uses have historically been available in adequate supply from multiple sources. For certain raw materials, however, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays. These shortages, as well as material volatility in the cost of any of the principal raw materials that the Company uses, may have a material adverse effect on operations.

Environmental Risks—The Company is subject to various environmental legal requirements and may be subject to new legal requirements in the future. These requirements may have a material adverse effect on operations.

        The Company's operations and properties, both in the U.S. and abroad, are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean-up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety. Such legal requirements frequently change and vary among jurisdictions. The Company's operations and properties, both in the U.S. and abroad, must comply with these legal requirements. These requirements may have a material adverse effect on operations.

        The Company has incurred, and expects to incur, costs for its operations to comply with environmental legal requirements, and these costs could increase in the future. Many environmental legal requirements provide for substantial fines, orders (including orders to cease operations), and criminal sanctions for violations. These legal requirements may apply to conditions at properties that the Company presently or formerly owned or operated, as well as at other properties for which the Company may be responsible, including those at which wastes attributable to the Company were disposed. A significant order or judgment against the Company, the loss of a significant permit or license or the imposition of a significant fine may have a material adverse effect on operations.

        A number of governmental authorities both in the U.S. and abroad have enacted, or are considering, legal requirements that would mandate certain rates of recycling, the use of recycled materials and/or limitations on certain kinds of packaging materials. In addition, some companies with packaging needs have responded to such developments and/or perceived environmental concerns of consumers by using containers made in whole or in part of recycled materials. Such developments may reduce the demand for some of the Company's products and/or increase the Company's costs, which may have a material adverse effect on operations.

Labor Relations—Some of the Company's employees are unionized or represented by workers' councils.

        The Company is party to a number of collective bargaining agreements with labor unions which at December 31, 2010, covered approximately 76% of the Company's employees in North America. Approximately 64% of employees in South America are unionized, although according to the labor legislation of each country, 100% of employees are covered by collective bargaining agreements. The agreement covering substantially all of the Company's union-affiliated employees in its U.S. glass container operations expires on March 31, 2011. Agreements in South America typically have an average term of approximately 3 years. Upon the expiration of any collective bargaining agreement, if the Company is unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. In addition, a large number of the Company's employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S. Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements. For example, most of the Company's employees in Europe are represented by workers' councils that must approve any changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure the Company's workforce. Although the Company believes that it has a good working relationship with

13


Table of Contents


its employees, if the Company's employees were to engage in a strike or other work stoppage, the Company could experience a significant disruption of operations and/or higher ongoing labor costs, which may have a material adverse effect on operations.

Accounting—The Company's financial results are based upon estimates and assumptions that may differ from actual results.

        In preparing the Company's consolidated financial statements in accordance with U.S. generally accepted accounting principles, several estimates and assumptions are made that affect the accounting for and recognition of assets, liabilities, revenues and expenses. These estimates and assumptions must be made because certain information that is used in the preparation of the Company's financial statements is dependent on future events, cannot be calculated with a high degree of precision from data available or is not capable of being readily calculated based on generally accepted methodologies. In some cases, these estimates are particularly difficult to determine and the Company must exercise significant judgment. The Company believes that accounting for long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements. Actual results for all estimates could differ materially from the estimates and assumptions that the Company uses, which could have a material adverse effect on the Company's financial condition and results of operations.

Accounting Standards—The adoption of new accounting standards or interpretations could adversely impact the Company's financial results.

        The Company's implementation of and compliance with changes in accounting rules and interpretations could adversely affect its operating results or cause unanticipated fluctuations in its results in future periods. The accounting rules and regulations that the Company must comply with are complex and continually changing. Recent actions and public comments from the SEC have focused on the integrity of financial reporting generally. The Financial Accounting Standards Board has recently introduced several new or proposed accounting standards, or is developing new proposed standards, which would represent a significant change from current industry practices. In addition, many companies' accounting policies are being subjected to heightened scrutiny by regulators and the public. While the Company believes that its financial statements have been prepared in accordance with U.S. generally accepted accounting principles, the Company cannot predict the impact of future changes to accounting principles or its accounting policies on its financial statements going forward.

Goodwill—A significant write down of goodwill would have a material adverse effect on the Company's reported results of operations and net worth.

        Goodwill at December 31, 2010 totaled $2.8 billion. The Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment using the required business valuation methods. These methods include the use of a weighted average cost of capital to calculate the present value of the expected future cash flows of the Company's reporting units. Future changes in the cost of capital, expected cash flows, or other factors may cause the Company's goodwill to be impaired, resulting in a non-cash charge against results of operations to write down goodwill for the amount of the impairment. If a significant write down is required, the charge would have a material adverse effect on the Company's reported results of operations and net worth.

14


Table of Contents

Pension Funding—Declines in the fair value of the assets of the pension plans sponsored by the Company could require increased funding.

        The Company's defined benefit pension plans in the U.S. and several other countries are funded through qualified trusts that hold investments in a broad range of equity and debt securities. Deterioration in the value of such investments, or reductions driven by a decline in securities markets or otherwise, could increase the underfunded status of the Company's funded pension plans, thereby increasing its obligation to make contributions to the plans as required by the laws and regulations governing each plan. An obligation to make contributions to pension plans could reduce the cash available for working capital and other corporate uses, and may have an adverse impact on the Company's operations, financial condition and liquidity.

ITEM 1B.    UNRESOLVED STAFF COMMENTS

        None.

ITEM 2.    PROPERTIES

        The principal manufacturing facilities and other material important physical properties of the Company at December 31, 2010 are listed below. All properties are glass container plants and are owned in fee, except where otherwise noted.

North American Operations

   
 

United States

   
   

Atlanta, GA

 

Portland, OR

   

Auburn, NY

 

Streator, IL

   

Brockway, PA

 

Toano, VA

   

Crenshaw, PA

 

Tracy, CA

   

Danville, VA

 

Waco, TX

   

Lapel, IN

 

Windsor, CO

   

Los Angeles, CA

 

Winston-Salem, NC

   

Muskogee, OK

 

Zanesville, OH

   

Oakland, CA

   
 

Canada

   
   

Brampton, Ontario

 

Montreal, Quebec

Asia Pacific Operations

   
 

Australia

   
   

Adelaide

 

Melbourne

   

Brisbane

 

Sydney

 

China

   
   

Cangshun

 

Tianjin

   

Guangzhou

 

Tianjin (mold shop)

   

Rixin

 

Wuhan

   

Shanghai

 

Zhaoqing

 

Indonesia

   
   

Jakarta

   
 

New Zealand

   
   

Auckland

   

15


Table of Contents

European Operations

   
 

Czech Republic

   
   

Sokolov

 

Teplice

 

Estonia

   
   

Jarvakandi

   
 

France

   
   

Beziers

 

Reims

   

Gironcourt

 

Vayres

   

Labegude

 

Veauche

   

Puy-Guillaume

 

Wingles

 

Germany

   
   

Achern

 

Holzminden

   

Bernsdorf

 

Rinteln

 

Hungary

   
   

Oroshaza

   
 

Italy

   
   

Asti

 

Pordenone

   

Bari (2 plants)

 

Terni

   

Latina

 

Trento

   

Trapani

 

Treviso

   

Napoli

 

Varese

 

The Netherlands

   
   

Leerdam

 

Schiedam

   

Maastricht

   
 

Poland

   
   

Antoninek

 

Jaroslaw

 

Spain

   
   

Alcala

 

Barcelona

 

United Kingdom

   
   

Alloa

 

Harlow

South American Operations

   
 

Argentina

   
   

Rosario

   
 

Brazil

   
   

Ceará

 

Rio de Janeiro (glass container and tableware)

   

Manaus (mold shop)

 

Sao Paulo

   

Pernambuco (2 plants)

   

16


Table of Contents

 

Colombia

   
   

Buga (tableware)

 

Soacha

   

Envigado

 

Zipaquira (glass container and flat glass)

 

Ecuador

   
   

Guayaquil

   
 

Peru

   
   

Callao

 

Lurin(1)

Other Operations

   
   

Machine Shops and Engineering Support Center

   
     

Brockway, Pennsylvania

 

Jaroslaw, Poland

     

Cali, Colombia

 

Lurin, Peru

     

Clayton, Australia

 

Perrysburg, Ohio

Corporate Facilities

   
   

Hawthorn, Australia(1)

 

Bussigny-Lausanne, Switzerland(1)

   

Perrysburg, Ohio(1)

   

(1)
This facility is leased in whole or in part.

        The Company believes that its facilities are well maintained and currently adequate for its planned production requirements over the next three to five years.

ITEM 3.    LEGAL PROCEEDINGS

        For further information on legal proceedings, see Note 18 to the Consolidated Financial Statements and the section entitled "Environmental and Other Governmental Regulation" in Item 1.

ITEM 4.    RESERVED

17


Table of Contents


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHARE OWNER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        The price range for the Company's common stock on the New York Stock Exchange, as reported by the Financial Industry Regulatory Authority, Inc., was as follows:

 
  2010   2009  
 
  High   Low   High   Low  

First Quarter

  $ 36.10   $ 25.61   $ 27.69   $ 9.60  

Second Quarter

    37.96     26.34     31.00     14.16  

Third Quarter

    30.68     24.92     39.00     25.66  

Fourth Quarter

    31.03     25.95     39.55     29.84  

        The number of share owners of record on December 31, 2010 was 1,410. Approximately 91% 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 45,000 unidentified beneficial owners. No dividends have been declared or paid since the Company's initial public offering in December 1991 and the Company does not anticipate paying any dividends in the near future. For restrictions on payment of dividends on common stock, see Management's Discussion and Analysis of Financial Condition and Results of Operations—Capital Resources and Liquidity—Current and Long-Term Debt and Note 6 to the Consolidated Financial Statements.

        Information with respect to securities authorized for issuance under equity compensation plans is included herein under Item 12.

        During 2010, the Company purchased 6 million shares of its common stock for $199 million pursuant to authorization by its Board of Directors in September 2008 to purchase up to $350 million of the Company's common stock.

18


Table of Contents


PERFORMANCE GRAPH
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG OWENS-ILLINOIS, S&P 500, AND PACKAGING GROUP

GRAPHIC

 
  Years Ending December 31,  
 
  2005   2006   2007   2008   2009   2010  

Owens-Illinois

  $ 100.00   $ 87.69   $ 235.29   $ 129.88   $ 156.21   $ 145.90  

S&P 500

  $ 100.00   $ 115.79   $ 122.16   $ 76.97   $ 97.33   $ 112.00  

Packaging Group—New

  $ 100.00   $ 113.78   $ 132.16   $ 99.14   $ 125.57   $ 149.94  

Packaging Group—Old

  $ 100.00   $ 115.13   $ 127.29   $ 92.21   $ 116.60   $ 140.43  

        The above graph compares the performance of the Company's Common Stock with that of a broad market index (the S&P 500 Composite Index) and a packaging group consisting of companies with lines of business or product end uses comparable to those of the Company for which market quotations are available.

        The packaging group consists of: AptarGroup, Inc., Ball Corp., Bemis Company, Inc., Crown Holdings, Inc., Graham Packaging Company Inc., Owens-Illinois, Inc., Sealed Air Corp., Silgan Holdings Inc., and Sonoco Products Co. Graham Packaging Company Inc. was added to the packaging group because market quotations for its stock are now available following its initial public offering in 2010. Vitro Sociedad Anonima was removed from the packaging group due to its bankruptcy proceedings.

        The comparison of total return on investment for each period is based on the investment of $100 on December 31, 2005 and the change in market value of the stock, including additional shares assumed purchased through reinvestment of dividends, if any.

19


Table of Contents


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, 2010. The financial data for each of the five years in the period ended December 31, 2010 was derived from the audited consolidated financial statements of the Company. The results of the Company's Venezuelan operations have been reclassified to discontinued operations as a result of the expropriation of those operations in 2010. For more information, see the "Consolidated Financial Statements" included elsewhere in this document.

 
  Years ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (Dollar amounts in millions)
 

Consolidated operating results(a):

                               

Net sales

  $ 6,633   $ 6,652   $ 7,540   $ 7,302   $ 6,424  

Manufacturing, shipping and delivery(b)

    (5,283 )   (5,317 )   (5,994 )   (5,800 )   (5,328 )
                       

Gross profit

    1,350     1,335     1,546     1,502     1,096  

Selling and administrative, research development and engineering

   
(554

)
 
(551

)
 
(565

)
 
(576

)
 
(570

)

Other expense(c)

    (227 )   (442 )   (396 )   (262 )   (172 )

Other revenue(d)

    104     95     103     107     95  
                       

Earnings before interest expense and items below

    673     437     688     771     449  

Interest expense(e)

    (249 )   (222 )   (253 )   (349 )   (349 )
                       

Earnings from continuing operations before income taxes

    424     215     435     422     100  

Provision for income taxes(f)

    (129 )   (83 )   (210 )   (126 )   (107 )
                       

Earnings (loss) from continuing operations

    295     132     225     296     (7 )

Earnings of discontinued operations

    31     66     96     66     23  

Gain (loss) on disposal of discontinued operations

    (331 )         7     1,039        
                       

Net earnings (loss)

    (5 )   198     328     1,401     16  

Net earnings attributable to noncontrolling interests

    (42 )   (36 )   (70 )   (60 )   (44 )
                       

Net earnings (loss) attributable to the Company

  $ (47 ) $ 162   $ 258   $ 1,341   $ (28 )
                       

20


Table of Contents


 
  Years ended December 31,  
 
  2010   2009   2008   2007   2006  

Basic earnings (loss) per share of common stock:

                               
 

Earnings (loss) from continuing operations

  $ 1.57   $ 0.65   $ 1.03   $ 1.50   $ (0.37 )
 

Earnings of discontinued operations

    0.14     0.31     0.46     0.30     0.05  
 

Gain (loss) on disposal of discontinued operations

    (2.00 )         0.04     6.66        
                       
 

Net earnings (loss)

  $ (0.29 ) $ 0.96   $ 1.53   $ 8.46   $ (0.32 )
                       

Weighted average shares outstanding (in thousands)

    164,271     167,687     163,178     154,215     152,071  
                       

Diluted earnings (loss) per share of common stock:

                               
 

Earnings (loss) from continuing operations

  $ 1.55   $ 0.65   $ 1.03   $ 1.52   $ (0.37 )
 

Earnings of discontinued operations

    0.14     0.30     0.45     0.28     0.05  
 

Gain (loss) on disposal of discontinued operations

    (1.97 )         0.04     6.19        
                       
 

Net earnings (loss)

  $ (0.28 ) $ 0.95   $ 1.52   $ 7.99   $ (0.32 )
                       

Diluted average shares (in thousands)

    167,078     170,540     169,677     167,767     152,071  
                       

        The Company's convertible preferred stock was included in the computation of diluted earnings per share for 2008, to the extent outstanding during 2008, and 2007 on an "if converted" basis since the result was dilutive. The Company's convertible preferred stock was not included in the computation of 2006 diluted earnings per share since the result would have been antidilutive. Options to purchase 687,353, 994,834, 241,711 and 862,906 weighted average shares of common stock which were outstanding during 2010, 2009, 2008 and 2007, 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 year ended December 31, 2006, diluted earnings per share of common stock are equal to basic earnings per share of common stock due to the loss from continuing operations.

        The 2015 Exchangeable Notes have a dilutive effect only in those periods in which the Company's average stock price exceeds the exchange price of $47.47 per share. For the year ended December 31, 2010, the Company's average stock price did not exceed the exchange price. Therefore, the potentially issuable shares resulting from the settlement of the 2015 Exchangeable Notes were not included in the

21


Table of Contents


calculation of diluted earnings per share. See Note 6 to the Consolidated Financial Statements for additional information on the 2015 Exchangeable Notes.

 
  Years ended December 31,  
 
  2010   2009   2008   2007   2006  
 
  (Dollar amounts in millions)
 

Other data:

                               

The following are included in earnings from continuing operations:

                               
 

Depreciation

  $ 369   $ 364   $ 420   $ 412   $ 418  
 

Amortization of intangibles

    22     21     29     29     22  
 

Amortization of deferred finance fees (included in interest expense)

    19     10     8     9     6  

Balance sheet data (at end of period):

                               
 

Working capital (current assets less current liabilities)

  $ 659   $ 763   $ 441   $ 165   $ 67  
 

Total assets

    9,754     8,727     7,977     9,325     9,321  
 

Total debt

    4,278     3,608     3,334     3,714     5,457  
 

Share owners' equity

    2,026     1,736     1,293     2,439     563  

Free cash flow(g)

 
$

100
 
$

322
 
$

320
 
$

301
 
$

(196

)

(a)
Amounts related to the Company's plastic packaging business have been reclassified to discontinued operations for 2006 and 2007 as a result of the sale of that business in 2007.

Amounts related to the Company's Venezuelan operations have been reclassified to discontinued operations for 2006 - 2010 as a result of the expropriation of those operations in 2010.

(b)
Amount for 2010 includes charges of $12 million ($7 million after tax amount attributable to the Company) for acquisition-related fair value inventory adjustments.

Amount for 2006 includes a loss of $9 million ($8 million after tax amount attributable to the Company) from the mark to market effect of natural gas hedge contracts.

(c)
Amount for 2010 includes charges of $170 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs, $13 million ($11 million after tax amount attributable to the Company) for restructuring and asset impairments, and $20 million (pretax and after tax amount attributable to the Company) for acquisition-related restructuring, transaction and financing costs.

Amount for 2009 includes charges of $180 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs, $207 million ($180 million after tax amount attributable to the Company) for restructuring and asset impairments, and $18 million ($17 million after tax amount attributable to the Company) for the remeasurement of certain bolivar-denominated assets and liabilities held outside of Venezuela.

Amount for 2008 includes charges of $250 million ($249 million after tax) to increase the accrual for estimated future asbestos-related costs and $133 million ($110 million after tax amount attributable to the Company) for restructuring and asset impairments.

Amount for 2007 includes charges of $115 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs and $100 million ($84 million after tax amount attributable to the Company) for restructuring and asset impairments.

Amount for 2006 includes charges of $120 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs, a charge of $21 million (pretax and after tax attributable to

22


Table of Contents

    the Company) for CEO transition costs, and a charge of $30 million (pretax and after tax amount attributable to the Company) for the closing of the Godfrey, Illinois machine parts manufacturing operation.

(d)
Other revenue in 2006 includes a gain of $16 million ($11 million after tax amount attributable to the Company) for the curtailment of postretirement benefits in The Netherlands.

(e)
Amount for 2010 includes charges of $6 million (pretax and after tax amount attributable to the Company) for note repurchase premiums. In addition, the Company recorded a reduction of interest expense of $9 million (pretax and after tax amount attributable to the Company) to recognize the unamortized proceeds from terminated interest rate swaps.

Amount for 2009 includes charges of $5 million (pretax and after tax amount attributable to the Company) for note repurchase premiums, net of a gain from the termination of interest rate swap agreements on the notes.

Amount for 2007 includes charges of $8 million ($7 million after tax amount attributable to the Company) for note repurchase premiums.

Amount for 2006 includes charges of $6 million (pretax and after tax amount attributable to the Company) for note repurchase premiums.

Includes additional interest charges for the write-off of unamortized deferred financing fees related to the early extinguishment of debt as follows: $3 million (pretax and after tax amount attributable to the Company) for 2010; $2 million (pretax and after tax amount attributable to the Company) for 2007; and $11 million (pretax and after tax amount attributable to the Company) for 2006.

(f)
Amount for 2010 includes a net tax benefit of $24 million related to the reversal of deferred tax valuation allowances and a non-cash tax benefit transferred from other income categories of $8 million.

Amount for 2009 includes a non-cash tax benefit transferred from other income categories of $48 million.

Amount for 2008 includes a net tax expense of $33 million ($35 million attributable to the Company) related to tax legislation, restructuring, and other.

Amount for 2007 includes a benefit of $14 million for the recognition of tax credits related to restructuring of investments in certain European operations.

Amount for 2006 includes a benefit of $6 million from the reversal of a non-U.S. deferred tax asset valuation allowance partially offset by charges related to international tax restructuring.

(g)
The Company defines free cash flow as cash provided by continuing operating activities less additions to property, plant, and equipment from continuing operations. Free cash flow does not conform to U.S. GAAP and should not be construed as an alternative to the cash flow measures reported in accordance with U.S. GAAP. The Company uses free cash flow for internal reporting, forecasting and budgeting and believes this information allows the board of directors, management, investors and analysts to better understand the Company's financial performance. Free cash flow is calculated as follows (dollar amounts in millions):

Years ended December 31,
  2010   2009   2008   2007   2006  

Cash provided by continuing operating activities

  $ 600   $ 729   $ 660   $ 574   $ 65  

Additions to property, plant, and equipment—continuing

    (500 )   (407 )   (340 )   (273 )   (261 )
                       

Free cash flow

  $ 100   $ 322   $ 320   $ 301   $ (196 )
                       

23


Table of Contents

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

        Following are the Company's net sales by segment and segment operating profit for the years ended December 31, 2010, 2009, and 2008 (dollars in millions). The Company's measure of profit for its reportable segments is Segment Operating Profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations as well as certain retained corporate costs. The segment data presented below is prepared in accordance with general accounting principles for segment reporting. The line titled 'reportable segment totals', however, is a non-GAAP measure when presented outside of the financial statement footnotes. Management has included 'reportable segment totals' below to facilitate the discussion and analysis of financial condition and results of operations. The Company's management uses Segment Operating Profit, in combination with selected cash flow information, to evaluate performance and to allocate resources.

 
  2010   2009   2008  

Net Sales:

                   
 

Europe

  $ 2,746   $ 2,918   $ 3,498  
 

North America

    1,879     2,074     2,210  
 

South America

    975     689     791  
 

Asia Pacific

    996     925     964  
               

Reportable segment totals

    6,596     6,606     7,463  
 

Other

    37     46     77  
               

Net Sales

  $ 6,633   $ 6,652   $ 7,540  
               

24


Table of Contents


 
  2010   2009   2008  

Segment Operating Profit:

                   
 

Europe

  $ 324   $ 333   $ 478  
 

North America

    275     282     185  
 

South America

    224     145     221  
 

Asia Pacific

    141     131     163  
               

Reportable segment totals

    964     891     1,047  

Items excluded from Segment Operating Profit:

                   
 

Retained corporate costs and other

    (89 )   (67 )   (1 )
 

Restructuring and asset impairment

    (13 )   (207 )   (133 )
 

Acquisition-related fair value inventory adjustments and restructuring, transaction and financing costs

    (32 )            
 

Charge for currency remeasurement

          (18 )      
 

Charge for asbestos related costs

    (170 )   (180 )   (250 )

Interest income

    13     18     25  

Interest expense

    (249 )   (222 )   (253 )
               

Earnings from continuing operations before income taxes

    424     215     435  

Provision for income taxes

    (129 )   (83 )   (210 )
               

Earnings from continuing operations

    295     132     225  

Earnings from discontinued operations

    31     66     96  

Gain (loss) on disposal of discontinued operations

    (331 )         7  
               

Net earnings (loss)

    (5 )   198     328  

Net earnings attributable to noncontrolling interests

    (42 )   (36 )   (70 )
               

Net earnings (loss) attributable to the Company

  $ (47 ) $ 162   $ 258  
               

Net earnings from continuing operations attributable to the Company

  $ 258   $ 110   $ 175  
               

        Note: all amounts excluded from reportable segment totals are discussed in the following applicable sections.

Executive Overview—Comparison of 2010 with 2009

2010 Highlights

    Acquired glass plants in Argentina (1 plant), Brazil (3 plants) and China (3 plants)

    Invested in a joint venture with glass plants in China, Malaysia and Vietnam

    Growth in South America, acquisitions in 2010 and improved manufacturing productivity drove 8% increase in Segment Operating Profit

    Issued $690 million exchangeable senior notes due 2015 and €500 million senior notes due 2020, and redeemed $450 million senior notes due 2013

    Repurchased 6 million shares of the Company's common stock for $199 million

    Reclassified Venezuelan operations as discontinued operations

        Net sales were $19 million lower than the prior year principally resulting from decreased shipments and the impact of cost pass-through provisions on certain customer contracts, partially offset by the favorable effect of changes in foreign currency exchange rates.

25


Table of Contents

        Segment Operating Profit for reportable segments was $73 million higher than the prior year. The increase was mainly attributable to lower manufacturing and delivery costs and the favorable effect of changes in foreign currency exchange rates.

        Interest expense in 2010 was $249 million compared with interest expense of $222 million in 2009. The increase is principally due to additional debt issued in 2010 to fund acquisitions.

        Net earnings from continuing operations attributable to the Company for 2010 were $258 million, or $1.55 per share (diluted), compared to $110 million, or $0.65 per share (diluted) for 2009. Earnings in both periods included items that management considered not representative of ongoing operations. These items decreased net earnings in 2010 by $176 million, or $1.05 per share, and decreased net earnings in 2009 by $334 million, or $1.96 per share. The Company purchased 6 million shares of its common stock in 2010, which increased earnings per share by approximately $0.05 for 2010.

        The Company's Venezuelan operations were expropriated by the Venezuelan government in 2010. The Company has reclassified its Venezuelan operations to discontinued operations for all periods presented. In addition, the Company recognized a loss on the disposal of its Venezuelan operations as the net assets of the operations were written-off. The type or amount of compensation the Company may receive from the Venezuelan government is uncertain and thus, will be recorded as a gain from discontinued operations when received.

        2010 was a transition year for the Company. The Company concluded the strategic review of its global profitability and manufacturing footprint that began in 2007, and shifted its focus to profitable growth in emerging markets, which was highlighted by the acquisitions in 2010.

Results of Operations—Comparison of 2010 with 2009

Net Sales

        The Company's net sales in 2010 were $6,633 million compared with $6,652 million in 2009, a decrease of $19 million, or 0.3%. For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

        The decline in net sales in 2010 was due to lower glass container shipments and the impact of cost pass-through provisions on certain customer contracts, partially offset by the favorable effects of changes in foreign currency exchange rates. Glass container shipments, in tonnes, were down 1.0% in 2010 compared to 2009, primarily due to lower beer glass volumes in North America and Europe. The Company's beer markets remain weak in North America and Europe due to continued weakness in the economy and high unemployment levels. In addition, North American beer volumes were impacted by the loss of certain beer contracts resulting from business renegotiated at the end of 2009 in order for the Company to achieve its margin objectives. Sales volumes in 2010 also benefited from the acquisitions in Brazil and Argentina, as well as organic growth in South America where glass container shipments, excluding the acquisitions, increased approximately 20% compared to 2009. The cost pass-through provisions include monthly or quarterly contractual provisions as well as the transfer of certain third-party costs, such as shipping, to customers, primarily in North America. Foreign currency exchange rate changes increased net sales in 2010 compared to 2009, primarily due to a stronger Australian dollar, Brazilian Real and Colombian Peso in relation to the U.S. dollar, partly offset by a weaker Euro.

26


Table of Contents

        The change in net sales of reportable segments can be summarized as follows (dollars in millions):

Net sales—2009

        $ 6,606  

Net effect of price and mix

  $ 5        

Customer pass-through provisions

    (30 )      

Sales volume

    (61 )      

Effects of changing foreign currency rates

    76        
             

Total effect on net sales

          (10 )
             

Net sales—2010

        $ 6,596  
             

Segment Operating Profit

        Operating Profit of the reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments' operations are included in Retained Corporate Costs and Other. For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

        Segment Operating Profit of reportable segments in 2010 was $964 million compared to $891 million in 2009, an increase of $73 million, or 8.2%. The net effect of price and product mix in 2010 was consistent with 2009. Sales volume had a minimal impact on Segment Operating Profit in 2010 as the decrease in glass container shipments during the year was more than offset by favorable regional sales mix, primarily due to growth of higher margin business in South America. Manufacturing and delivery costs declined $38 million from 2009 mostly due to benefits from the Company's strategic footprint alignment initiative, partially offset by $20 million of inflationary cost increases. Foreign currency exchange rate changes increased Segment Operating Profit in 2010 compared to 2009, primarily due to a stronger Australian dollar, Brazilian Real and Colombian Peso in relation to the U.S. dollar, partly offset by a weaker Euro.

        The change in Segment Operating Profit of reportable segments can be summarized as follows (dollars in millions):

Segment Operating Profit—2009

        $ 891  

Net effect of price and mix

  $ 5        

Sales volume

    7        

Manufacturing and delivery

    38        

Operating expenses and other

    7        

Effects of changing foreign currency rates

    16        
             

Total net effect on Segment Operating Profit

          73  
             

Segment Operating Profit—2010

        $ 964  
             

Interest Expense

        Interest expense in 2010 was $249 million compared with interest expense of $222 million in 2009. The 2009 amount includes $5 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees, net of a gain from the termination of interest rate swap agreements following the May 2009 tender for the 7.50% Senior Debentures due May 2010. Exclusive of these items, interest expense increased approximately $32 million. The increase is principally due to additional debt issued in 2010 to fund acquisitions.

27


Table of Contents

Interest Income

        Interest income for 2010 was $13 million compared to $18 million for 2009. The decrease is principally due to lower interest rates on the Company's cash and investments.

Provision for Income Taxes

        The Company's effective tax rate from continuing operations for 2010 was 30.4%, compared with 38.6% for 2009. The provision for 2010 includes a tax benefit of $24 million related to the reversal of a non-U.S. valuation allowance offset by additional liability related to uncertain tax positions. The provisions for 2010 and 2009 include a continuing operation non-cash tax benefit transferred from other income categories of $8 million and $48 million, respectively (see Note 11 to the Consolidated Financial Statements for more information). Excluding the amounts related to items that management considers not representative of ongoing operations, the Company's effective tax rate for 2010 was 26.2% compared to 24.0% for 2009. The increase in the effective tax rate in 2010 was due to higher earnings generated in jurisdictions where the Company has higher effective tax rates. The Company expects that the effective tax rate will not change significantly in 2011 compared to 2010.

Net Earnings Attributable to Noncontrolling Interests

        Net earnings attributable to noncontrolling interests for 2010 was $42 million compared to $36 million for 2009. Net earnings from continuing operations attributable to noncontrolling interests was $37 million in 2010 compared to $22 million in 2009. Net earnings from continuing operations attributable to noncontrolling interests was reduced by $8 million in 2009 related to restructuring and asset impairment charges recorded during the year. Excluding this amount, net earnings from continuing operations attributable to noncontrolling interests in 2010 increased $7 million compared with 2009. This increase is primarily a result of higher segment operating profit in the Company's South American segment in 2010. Net earnings attributable to noncontrolling interests related to discontinued operations in 2010 was $5 million compared to $14 million in 2009. The decrease is due to 2010 only including a partial year of earnings from the Company's Venezuelan operations due to the expropriation in October 2010 and the unfavorable effects of the bolivar devaluation in 2010 compared to 2009.

Earnings from Continuing Operations Attributable to the Company

        For 2010, the Company recorded earnings from continuing operations attributable to the Company of $258 million compared to $110 million for 2009. The after tax effects of the items excluded from

28


Table of Contents


Segment Operating Profit, the unusual tax items and the 2009 additional interest charges increased or decreased earnings in 2010 and 2009 as set forth in the following table (dollars in millions).

 
  Net Earnings
Increase
(Decrease)
 
Description
  2010   2009  

Restructuring and asset impairment

  $ (11 ) $ (180 )

Acquisition-related fair value inventory adjustments and restructuring, transaction and financing costs

    (27 )      

Charge for currency remeasurement

          (17 )

Note repurchase premiums and write-off of finance fees, net of interest rate swap gain

          (5 )

Tax benefit related to the reversal of deferred tax valuation allowance offset by additional liability related to uncertain tax positions

    24        

Non-cash tax benefit transferred from other income categories

    8     48  

Charge for asbestos related costs

    (170 )   (180 )
           

Total

  $ (176 ) $ (334 )
           

Executive Overview—Comparison of 2009 with 2008

2009 Highlights

    Strategic review of manufacturing footprint resulted in $122 million of fixed costs savings

    Inventory levels reduced by 11% due to strategic review of manufacturing footprint, temporary production curtailments and other management initiatives

    Free cash flow generation of $322 million

    Issued $600 million senior notes due 2016 and extinguished $222 million of the senior debentures due 2010

        Net sales were $888 million lower than the prior year principally resulting from decreased shipments and the unfavorable effect of foreign currency exchange rates, partially offset by higher selling prices and improved mix.

        Segment Operating Profit for reportable segments was $156 million lower than the prior year. The decrease was mainly attributable to lower sales volume and increased manufacturing and delivery costs resulting from temporary production curtailments and inflationary cost increases. Partially offsetting these costs were higher selling prices and savings from permanent curtailment of plant capacity and realignment of selected operations.

        Interest expense in 2009 decreased $31 million compared with 2008, principally due to lower variable interest rates under the Company's bank credit agreement as well as favorable foreign currency exchange rates.

        Net earnings from continuing operations attributable to the Company for 2009 were $110 million, or $0.65 per share (diluted), compared to $175 million, or $1.03 per share (diluted) for 2008. Earnings in both periods included items that management considered not representative of ongoing operations. These items decreased net earnings in 2009 by $334 million, or $1.96 per share, and decreased net earnings in 2008 by $394 million, or $2.32 per share.

29


Table of Contents

Results of Operations—Comparison of 2009 with 2008

Net Sales

        The Company's net sales in 2009 were $6,652 million compared with $7,540 million in 2008, a decrease of $888 million, or 11.8%. For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

        Net sales declined in 2009 compared with 2008 primarily due to a 10% reduction in shipments as a result of weaker market conditions and customer de-stocking in the first half of the year. Partially offsetting this lower volume was improved price and mix, primarily due to the Company's price over volume strategy aimed at improving margins. This strategy also contributed to the lower shipments in 2009.

        The change in net sales of reportable segments can be summarized as follows (dollars in millions):

Net sales—2008

        $ 7,463  

Net effect of price and mix

  $ 264        

Decreased sales volume

    (777 )      

Effects of changing foreign currency rates

    (344 )      
             

Total effect on net sales

          (857 )
             

Net sales—2009

        $ 6,606  
             

Segment Operating Profit

        Operating Profit of the reportable segments includes an allocation of some corporate expenses based on both a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments' operations are included in Retained Corporate Costs and Other. For further information, see Segment Information included in Note 19 to the Consolidated Financial Statements.

        Segment Operating Profit of reportable segments in 2009 was $891 million compared to $1,047 million in 2008, a decrease of $156 million, or 14.9%. The decrease was primarily due to weaker market conditions and customer de-stocking, which led to a 10% reduction in shipments and to temporary production curtailments as the Company attempted to match supply with lower demand. The temporary production curtailments resulted in approximately $302 million of higher unabsorbed fixed costs. Manufacturing costs were also higher by approximately $7 million due to inflationary cost increases.

        Partially offsetting the decreases in Segment Operating Profit noted above were improved price and mix, lower warehouse and delivery costs and savings from the Company's strategic review of its global manufacturing footprint. Improved price and mix contributed approximately $264 million in 2009, primarily due to the Company's price over volume strategy aimed at improving margins. Warehouse and delivery costs were lower by approximately $28 million due to lower shipments and an 11% reduction in inventory levels at the end of 2009 compared to 2008. The Company's strategic review of its global manufacturing footprint led to the permanent curtailment of plant capacity and the realignment of selected operations, resulting in savings of approximately $122 million.

30


Table of Contents

        The change in Segment Operating Profit of reportable segments can be summarized as follows (dollars in millions):

Segment Operating Profit—2008

        $ 1,047  

Net effect of price and mix

  $ 264        

Decreased sales volume

    (256 )      

Effects of changing foreign currency rates

    (35 )      

Manufacturing and delivery

    (132 )      

Operating expenses

    6        

Other

    (3 )      
             

Total net effect on Segment Operating Profit

          (156 )
             

Segment Operating Profit—2009

        $ 891  
             

Interest Expense

        Interest expense in 2009 was $222 million compared with interest expense of $253 million in 2008. The 2009 amount includes $5 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees, net of a gain from the termination of interest rate swap agreements following the May tender for the 7.50% Senior Debentures due May 2010. Exclusive of these items, interest expense decreased approximately $37 million. The decrease is principally due to lower variable interest rates under the Company's bank credit agreement as well as favorable foreign currency exchange rates.

Interest Income

        Interest income for 2009 was $18 million compared to $25 million for 2008. The decrease is principally due to lower interest rates on investments, which more than offset the additional interest earned on the Company's higher cash balance.

Provision for Income Taxes

        The Company's effective tax rate from continuing operations for 2009 was 38.6%, compared with 48.4% for 2008. The provision for 2009 includes a non-cash tax benefit transferred from other comprehensive income of $48 million (see Note 11 to the Consolidated Financial Statements for more information). The provision for 2008 includes a net expense of $33 million related to tax legislation, restructuring, and other. Excluding the amounts related to items that management considers not representative of ongoing operations, the Company's effective tax rate for 2009 was 24.0% compared to 24.3% for 2008.

Net Earnings Attributable to Noncontrolling Interests

        Net earnings attributable to noncontrolling interests for 2009 were $36 million compared to $70 million for 2008. Net earnings attributable to noncontrolling interests were reduced by $9 million in 2009 related to restructuring and asset impairment charges recorded during the year. Excluding this amount, net earnings attributable to noncontrolling interests in 2009 decreased $25 million compared with 2008. The decrease is primarily a result of lower segment operating profit in the Company's South American segment in 2009.

Earnings from Continuing Operations Attributable to the Company

        For 2009, the Company recorded earnings from continuing operations attributable to the Company of $110 million compared to $175 million for 2008. The after tax effects of the items excluded from

31


Table of Contents


Segment Operating Profit, the 2009 additional interest charges, and the 2009 and 2008 unusual tax items increased or decreased earnings in 2009 and 2008 as set forth in the following table (dollars in millions).

 
  Net Earnings
Increase (Decrease)
 
Description
  2009   2008  

Restructuring and asset impairment

  $ (180 ) $ (110 )

Charge for currency remeasurement

    (17 )      

Note repurchase premiums and write-off of finance fees, net of interest rate swap gain

    (5 )      

Non-cash tax benefit transferred from other income categories

    48        

Net expense related to tax legislation, restructuring and other

          (35 )

Charge for asbestos related costs

    (180 )   (249 )
           

Total

  $ (334 ) $ (394 )
           

Items Excluded from Reportable Segment Totals

Retained Corporate Costs and Other

        Retained corporate costs and other for 2010 were $89 million compared with $67 million for 2009. The increased expense in 2010 is mainly attributable to increased employee benefit costs, primarily pension expense.

        Retained corporate costs and other for 2009 were $67 million compared with $1 million for 2008. The increased expense in 2009 is mainly attributable to increased employee benefit costs, primarily pension expense, and lower royalty income.

Restructuring and Asset Impairments

        During 2010, the Company recorded charges totaling $13 million ($11 million after tax amount attributable to the Company) for restructuring and asset impairment. The charges reflect the completion of previously announced actions in North America and Europe related to the Company's strategic review of its global manufacturing footprint. See Note 16 to the Consolidated Financial Statements for additional information.

        Charges for similar actions in Europe, North America and South America during 2009 totaled $207 million ($180 million after tax amount attributable to the Company). See Note 16 to the Consolidated Financial Statements for additional information.

        Charges for similar actions during 2008 totaled $133 million ($109 million after tax amount attributable to the Company). See Note 16 to the Consolidated Financial Statements for additional information.

        During 2008, the Company also recorded an additional $1 million (pretax and after tax amount attributable to the Company), related to the impairment of the Company's equity investment in the South American Segment's 50%-owned Caribbean affiliate.

Acquisition-related fair value inventory adjustments and restructuring, transaction and financing costs

        The Company recorded charges of $12 million ($7 million after tax amount attributable to the Company) for acquisition-related fair value inventory adjustments. This charge was due to the accounting rules requiring inventory purchased in a business combination to be marked up to fair value, and then recorded as an increase to cost of goods sold as the inventory is sold. The Company

32


Table of Contents


also recorded charges of $20 million (pretax and after tax amount attributable to the Company) for acquisition-related restructuring, transaction and financing costs.

Charge for Currency Remeasurement

        Due to Venezuelan government restrictions on transfers of cash out of the country at the official rate, the Company remeasured certain bolivar-denominated assets and liabilities held outside of Venezuela to the parallel market rate and recorded a charge of $18 million ($17 million after tax amount attributable to the Company) in 2009.

Charge for Asbestos Related Costs

        The fourth quarter of 2010 charge for asbestos-related costs was $170 million (pretax and after tax), compared to the fourth quarter of 2009 charge of $180 million (pretax and after tax). These charges resulted from the Company's comprehensive annual review of asbestos-related liabilities and costs. In each year, the Company concluded that an increase in the accrued liability was required to provide for estimated indemnity payments and legal fees arising from asbestos personal injury lawsuits and claims pending and expected to be filed during the several years following the completion of the comprehensive review. See "Critical Accounting Estimates" for further information.

        Asbestos-related cash payments for 2010 were $179 million, a decrease of $11 million from 2009. Deferred amounts payable were approximately $26 million and $36 million at December 31, 2010 and 2009, respectively.

        During 2010, the Company received approximately 3,000 new filings and disposed of approximately 4,000 claims. As of December 31, 2010, the number of asbestos-related claims pending against the Company was approximately 6,000. The Company anticipates that cash flows from operations and other sources will be sufficient to meet all asbestos-related obligations on a short-term and long-term basis. See Note 18 to the Consolidated Financial Statements for further information.

Discontinued Operations

        On October 26, 2010, the Venezuelan government, through Presidential Decree No. 7.751, expropriated the assets of Owens-Illinois de Venezuela, C.A. and Fabrica de Vidrios Los Andes, C.A., two of the Company's subsidiaries in that country, which in effect constituted a taking of the going concerns of those companies. Shortly after the issuance of the decree, the Venezuelan government installed temporary administrative boards who are in control of the expropriated assets.

        Since the issuance of the decree, the Company has cooperated with the Venezuelan government, as it is compelled to do under Venezuelan law, to provide for an orderly transition while ensuring the safety and well-being of the employees and the integrity of the production facilities. The Company is also engaged in negotiations with the Venezuelan government in relation to certain aspects of the expropriation, including the compensation payable by the government as a result of its expropriation. The Company reserves and will continue to reserve the right to seek and obtain just compensation, representing the market value of its investment in Venezuela, in exchange for the expropriated assets pursuant to, as appropriate, applicable domestic and/or international law. The Company is unable at this stage to predict the amount, or timing of receipt, of compensation it will ultimately receive.

        The Company considers the disposal of these assets to be complete as of December 31, 2010. As a result, and in accordance with generally accepted accounting principles, the Company has presented the results of operations for its Venezuelan subsidiaries in the Consolidated Results of Operations for the years ended December 31, 2010, 2009 and 2008 as discontinued operations. Amounts for the prior periods have been reclassified to conform to this presentation. At December 31, 2009, the assets and

33


Table of Contents


liabilities of the Venezuelan operations are presented in the Consolidated Balance Sheets as the assets and liabilities of discontinued operations.

        The following summarizes the revenues and expenses of the Venezuelan operations reported as discontinued operations in the Consolidated Results of Operations for the periods indicated:

 
  Years ended December 31,  
 
  2010   2009   2008  

Net sales

  $ 129   $ 415   $ 345  

Manufacturing, shipping, and delivery

    (86 )   (266 )   (214 )
               

Gross profit

    43     149     131  

Selling and administrative expense

   
(5

)
 
(13

)
 
(13

)

Research, development, and engineering expense

          (1 )   (1 )

Interest income

          11     13  

Other expense

    3     (36 )   (8 )
               

Earnings from discontinued operations before income taxes

    41     110     122  

Provision for income taxes

    (10 )   (44 )   (26 )
               

Earnings from discontinued operations

    31     66     96  

Loss on disposal of discontinued operations

    (331 )            
               

Net earnings (loss) from discontinued operations

    (300 )   66     96  

Net earnings from discontinued operations attributable to noncontrolling interests

    (5 )   (14 )   (20 )
               

Net earnings (loss) from discontinued operations attributable to the Company

  $ (305 ) $ 52   $ 76  
               

        The loss on disposal of discontinued operations of $331 million includes charges totaling $77 million and $260 million to write-off the net assets and cumulative currency translation losses, respectively, of the Company's Venezuelan operations, net of a tax benefit of $6 million. The net assets were written-off as a result of the deconsolidation of the subsidiaries due to the loss of control. The type or amount of compensation the Company may receive from the Venezuelan government is uncertain and thus, will be recorded as a gain from discontinued operations when received. The cumulative currency translation losses relate to the devaluation of the Venezuelan bolivar in prior years and were written-off because the expropriation was a substantially complete disposal of the Company's operations in Venezuela.

34


Table of Contents

        The condensed consolidated balance sheet at December 31, 2009 included the following assets and liabilities related to the discontinued operations of the Company's Venezuelan subsidiaries:

 
  Balance at
December 31, 2009
 

Assets:

       
 

Cash

  $ 57  
 

Accounts receivable

    21  
 

Inventories

    11  
 

Prepaid expenses

    3  
       
   

Total current assets

    92  
 

Other long-term assets

   
3
 
 

Net property, plant, and equipment

    31  
       

Total assets

  $ 126  
       

Liabilities:

       
 

Accounts payable and other current liabilities

  $ 12  
 

Other long-term liabilities

    15  
       

Total liabilities

  $ 27  
       

        The gain on disposal of discontinued operations of $7 million reported in 2008 relates to an adjustment of the 2007 gain on the sale of the plastics packaging business mainly related to finalizing certain tax allocations and an adjustment to the selling price in accordance with procedures set forth in the final contract.

Capital Resources and Liquidity

        As of December 31, 2010, the Company had cash and total debt of $640 million and $4.3 billion, respectively, compared to $755 million and $3.6 billion, respectively, as of December 31, 2009.

Current and Long-Term Debt

        On June 14, 2006, the Company's subsidiary borrowers entered into the Secured Credit Agreement (the "Agreement"). At December 31, 2010, the Agreement included a $900 million revolving credit facility, a 90 million Australian dollar term loan, and a 111 million Canadian dollar term loan, each of which has a final maturity date of June 15, 2012. It also included a $190 million term loan and a €190 million term loan, each of which has a final maturity date of June 14, 2013. During 2010, the Company's subsidiary borrowers repaid 70 million Australian dollars of term loans under the Agreement. At December 31, 2010 the Company's subsidiary borrowers had unused credit of $732 million available under the Agreement.

        The Agreement contains various covenants that restrict, among other things and subject to certain exceptions, the ability of the Company to incur certain liens, make certain investments and acquisitions, become liable under contingent obligations in certain defined instances only, make restricted junior payments, make certain asset sales within guidelines and limits, make capital expenditures beyond a certain threshold, engage in material transactions with shareholders and affiliates, participate in sale and leaseback financing arrangements, alter its fundamental business, amend certain outstanding debt obligations, and prepay certain outstanding debt obligations.

35


Table of Contents

        The Agreement also contains one financial maintenance covenant, a Leverage Ratio, that requires the Company not to exceed a ratio calculated by dividing consolidated total debt, less cash and cash equivalents, by Consolidated Adjusted EBITDA, as defined in the Agreement. The Leverage Ratio could restrict the ability of the Company to undertake additional financing to the extent that such financing would cause the Leverage Ratio to exceed the specified maximum.

        Failure to comply with these covenants and restrictions could result in an event of default under the Agreement. In such an event, the Company could not request borrowings under the revolving facility, and all amounts outstanding under the Agreement, together with accrued interest, could then be declared immediately due and payable. If an event of default occurs under the Agreement and the lenders cause all of the outstanding debt obligations under the Agreement to become due and payable, this would result in a default under a number of other outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. A default or event of default under the Agreement, indentures or agreements governing other indebtedness could also lead to an acceleration of debt under other debt instruments that contain cross acceleration or cross-default provisions.

        The Leverage Ratio also determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company's option, the Base Rate or the Eurocurrency Rate, as defined in the Agreement. These rates include a margin linked to the Leverage Ratio and the borrowers' senior secured debt rating. The margins range from 0.875% to 1.75% for Eurocurrency Rate loans and from -0.125% to 0.75% for Base Rate loans. In addition, a facility fee is payable on the revolving credit facility commitments ranging from 0.20% to 0.50% per annum linked to the Leverage Ratio. The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2010 was 2.7%. As of December 31, 2010, the Company was in compliance with all covenants and restrictions in the Agreement. In addition, the Company believes that it will remain in compliance and that its ability to borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.

        During May 2010, a subsidiary of the Company issued exchangeable senior notes with a face value of $690 million due June 1, 2015 ("2015 Exchangeable Notes"). The 2015 Exchangeable Notes bear interest at 3.00% and are guaranteed by substantially all of the Company's domestic subsidiaries. The net proceeds, after deducting debt issuance costs, totaled approximately $672 million.

        Upon exchange of the 2015 Exchangeable Notes, under the terms outlined below, the issuer of the 2015 Exchangeable Notes is required to settle the principal amount in cash and the Company is required to settle the exchange premium in shares of the Company's common stock. The exchange premium is calculated as the value of the Company's common stock in excess of the initial exchange price of approximately $47.47 per share, which is equivalent to an exchange rate of 21.0642 per $1,000 principal amount of the 2015 Exchangeable Notes. The exchange rate may be adjusted upon the occurrence of certain events, such as certain distributions, dividends or issuances of cash, stock, options, warrants or other property or effecting a share split, or a significant change in the ownership or structure of the Company, such as a recapitalization or reclassification of the Company's common stock, a merger or consolidation involving the Company or the sale or conveyance to another person of all or substantially all of the property and assets of the Company and its subsidiaries substantially as an entirety.

        Prior to March 1, 2015, the 2015 Exchangeable Notes may be exchanged only if (1) the price of the Company's common stock exceeds $61.71 (130% of the exchange price) for a specified period of time, (2) the trading price of the 2015 Exchangeable Notes falls below 98% of the average exchange value of the 2015 Exchangeable Notes for a specified period of time (trading price was 157% of exchange value at December 31, 2010), or (3) upon the occurrence of specified corporate transactions. The 2015 Exchangeable Notes may be exchanged without restrictions on or after March 1, 2015. As of December 31, 2010, the 2015 Exchangeable Notes are not exchangeable by the holders.

36


Table of Contents

        During June 2010, a subsidiary of the Company redeemed all $450 million of the 8.25% senior notes due 2013. During the second quarter of 2010, the Company recorded $9 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees. In addition, the Company recorded a reduction of interest expense of $9 million during the second quarter of 2010 to recognize the unamortized proceeds from terminated interest rate swaps on these notes.

        During September 2010, a subsidiary of the Company issued senior notes with a face value of €500 million due September 15, 2020. The notes bear interest at 6.75% and are guaranteed by substantially all of the Company's domestic subsidiaries. The net proceeds, after deducting debt issuance costs, totaled approximately $625 million.

        The Company assesses its capital raising and refinancing needs on an ongoing basis and may seek to issue equity and/or debt securities in the domestic and international capital markets if market conditions are favorable.

        During October 2006, the Company entered into a €250 million European accounts receivable securitization program. The program extends through October 2011, subject to annual renewal of backup credit lines. In addition, the Company participated in a receivables financing program in the Asia Pacific region with a revolving funding commitment of 10 million New Zealand dollars. This program expired in October 2010.

        Information related to the Company's accounts receivable securitization program as of December 31, 2010 and 2009 is as follows:

 
  2010   2009  

Balance (included in short-term loans)

  $ 247   $ 289  

Weighted average interest rate

   
2.40

%
 
2.52

%

Cash Flows

        Free cash flow was $100 million for 2010 compared to $322 million for 2009. The Company defines free cash flow as cash provided by continuing operating activities less additions to property, plant, and equipment from continuing operations. Free cash flow does not conform to U.S. GAAP and should not be construed as an alternative to the cash flow measures reported in accordance with U.S. GAAP. The Company uses free cash flow for internal reporting, forecasting and budgeting and believes this information allows the board of directors, management, investors and analysts to better understand the Company's financial performance. Free cash flow for the years ended December 31, 2010 and 2009 is calculated as follows (dollars in millions):

 
  2010   2009  

Cash provided by continuing operating activities

  $ 600   $ 729  

Additions to property, plant, and equipment—continuing

    (500 )   (407 )
           

Free cash flow

  $ 100   $ 322  
           

        Operating activities:    Cash provided by continuing operating activities was $600 million for 2010 compared to $729 million for 2009. The decrease in cash flows from continuing operating activities was primarily due to an increase in working capital of $71 million in 2010 compared to a decrease in working capital of $156 million in 2009. The change in working capital in 2010 compared to 2009 was mainly due to the change in inventory. The Company's strategic review of its manufacturing footprint, temporary production curtailments and other management initiatives resulted in an 11% reduction in inventory levels in 2009. Inventory levels at December 31, 2010 have increased from the low levels at

37


Table of Contents


the end of 2009 as the Company expects more sales growth in 2011. The decrease in cash flows from continuing operating activities was also due to increased interest payments of $34 million as a result of higher debt balances, partially offset by an increase in dividends received from equity investments of $28 million.

        During 2010, the Company contributed $22 million to its non-U.S. defined benefit pension plans, compared with $122 million in 2009. The 2009 contributions included $50 million of accelerated 2010 contributions. The Company was not required to make cash contributions to the U.S. defined benefit pension plans during 2010. Contributions beyond 2011 are dependent on future asset returns and discount rates which the Company is unable to predict. However, the Company believes that contributions to its non-U.S. plans will be approximately $50 million to $60 million and that it will not be required to make contributions to its U.S. plans in 2011. The Company may elect to contribute amounts in excess of minimum required amounts in order to improve the funded status of certain plans.

        Investing activities:    Cash utilized in investing activities was $1,314 million for 2010 compared to $418 million for 2009. The increase was primarily due to cash paid for acquisitions of $817 million in 2010 as the Company acquired glass container manufacturing plants in Argentina, Brazil and China and invested in a joint venture with operations in Malaysia, Vietnam and China. Capital spending for property, plant, and equipment from continuing operations was $500 million for 2010 compared to $407 million for 2009. The increase in capital spending was due to restructuring activities in North America and new furnace expansions in South America and Asia Pacific.

        Financing activities:    Cash provided by financing activities was $547 million for 2010 compared to $114 million for 2009. Cash provided by financing activities during 2010 included the issuance of the $690 million exchangeable senior notes due 2015 and the €500 million senior notes due 2020. During 2010, the Company also repaid the $450 million senior notes due 2013 and repurchased shares of its common stock for $199 million.

        The Company anticipates that cash flows from its operations and from utilization of credit available under the Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short-term (twelve-months) and long-term basis. Based on the Company's expectations regarding future payments for lawsuits and claims and also based on the Company's expected operating cash flow, the Company believes that the payment of any deferred amounts of previously settled or otherwise determined lawsuits and claims, and the resolution of presently pending and anticipated future lawsuits and claims associated with asbestos, will not have a material adverse effect upon the Company's liquidity on a short-term or long-term basis.

38


Table of Contents

Contractual Obligations and Off-Balance Sheet Arrangements

        The following information summarizes the Company's significant contractual cash obligations at December 31, 2010 (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

  $ 4,028   $ 77   $ 626   $ 1,402   $ 1,923  
 

Capital lease obligations

    91     20     36     23     12  
 

Operating leases

    137     41     56     32     8  
 

Interest(1)

    1,323     240     448     337     298  
 

Purchase obligations(2)

    915     630     280     5        
 

Pension benefit plan contributions

    60     60                    
 

Postretirement benefit plan benefit payments(1)

    201     21     41     42     97  
                       
   

Total contractual cash obligations

  $ 6,755   $ 1,089   $ 1,487   $ 1,841   $ 2,338  
                       

 

 
  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

  $ 135   $ 135                                         
                       
   

Total commercial commitments

  $ 135   $ 135                                         
                       

(1)
Amounts based on rates and assumptions at December 31, 2010.

(2)
The Company's purchase obligations consist principally of contracted amounts for energy and molds. In cases where variable prices are involved, current market prices have been used. The amount above does not include ordinary course of business purchase orders because the majority of such purchase orders may be canceled. The Company does not believe such purchase orders will adversely affect its liquidity position.

        The Company is unable to make a reasonably reliable estimate as to when cash settlement with taxing authorities may occur for its unrecognized tax benefits. Therefore, the liability for unrecognized tax benefits is not included in the table above. See Note 11 to the Consolidated Financial Statements for additional information.

        The Company has no off-balance sheet arrangements.

Critical Accounting Estimates

        The Company's analysis and discussion of its financial condition and results of operations are based upon its consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. The Company evaluates these estimates and assumptions on an ongoing basis. Estimates and assumptions are based on historical and other factors believed to be reasonable under the circumstances at the time the financial statements are issued. The results of these estimates may form the basis of the carrying value of certain assets and liabilities and may not be

39


Table of Contents


readily apparent from other sources. Actual results, under conditions and circumstances different from those assumed, may differ from estimates.

        The impact of, and any associated risks related to, estimates and assumptions are discussed within Management's Discussion and Analysis of Financial Condition and Results of Operations, as well as in the Notes to the Consolidated Financial Statements, if applicable, where estimates and assumptions affect the Company's reported and expected financial results.

        The Company believes that accounting for property, plant and equipment, impairment of long-lived assets, pension benefit plans, contingencies and litigation, and income taxes involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.

Property, Plant and Equipment

        The net carrying amount of property, plant, and equipment ("PP&E") at December 31, 2010 totaled $3,107 million, representing 32% of total assets. Depreciation expense during 2010 totaled $369 million, representing approximately 6% of total costs and expenses. Given the significance of PP&E and associated depreciation to the Company's consolidated financial statements, the determinations of an asset's cost basis and its economic useful life are considered to be critical accounting estimates.

        Cost Basis—PP&E is recorded at cost, which is generally objectively quantifiable when assets are purchased individually. However, when assets are purchased in groups, or as part of a business, costs assigned to PP&E are based on an estimate of fair value of each asset at the date of acquisition. These estimates are based on assumptions about asset condition, remaining useful life and market conditions, among others. The Company frequently employs expert appraisers to aid in allocating cost among assets purchased as a group.

        Included in the cost basis of PP&E are those costs which substantially increase the useful lives or capacity of existing PP&E. Significant judgment is needed to determine which costs should be capitalized under these criteria and which costs should be expensed as a repair or maintenance expenditure. For example, the Company frequently incurs various costs related to its existing glass melting furnaces and forming machines and must make a determination of which costs, if any, to capitalize. The Company relies on the experience and expertise of its operations and engineering staff to make reasonable and consistent judgments regarding increases in useful lives or capacity of PP&E.

        Estimated Useful Life—PP&E is generally depreciated using the straight-line method, which deducts equal amounts of the cost of each asset from earnings each period over its estimated economic useful life. Economic useful life is the duration of time an asset is expected to be productively employed by the Company, which may be less than its physical life. Management's assumptions regarding the following factors, among others, affect the determination of estimated economic useful life: wear and tear, product and process obsolescence, technical standards, and changes in market demand.

        The estimated economic useful life of an asset is monitored to determine its appropriateness, especially in light of changed business circumstances. For example, technological advances, excessive wear and tear, or changes in customers' requirements may result in a shorter estimated useful life than originally anticipated. In these cases, the Company depreciates the remaining net book value over the new estimated remaining life, thereby increasing depreciation expense per year on a prospective basis. Likewise, if the estimated useful life is increased, the adjustment to the useful life decreases depreciation expense per year on a prospective basis. Changes in economic useful life assumptions did not have a material impact on the Company's reported results in 2010, 2009 or 2008.

40


Table of Contents

Impairment of Long-Lived Assets

        Property, Plant, and Equipment—The Company tests for impairment of PP&E whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. PP&E held for use in the Company's business is grouped for impairment testing at the lowest level for which cash flows can reasonably be identified, typically a geographic region. The Company evaluates the recoverability of property, plant, and equipment based on undiscounted projected cash flows, excluding interest and taxes. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group's carrying amount exceeds its fair value. PP&E held for sale is reported at the lower of carrying amount or fair value less cost to sell.

        Impairment testing requires estimation of the fair value of PP&E based on the discounted value of projected future cash flows generated by the asset group. The assumptions underlying cash flow projections represent management's best estimates at the time of the impairment review. Factors that management must estimate include, among other things: industry and market conditions, sales volume and prices, production costs and inflation. Changes in key assumptions or actual conditions which differ from estimates could result in an impairment charge. The Company uses reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

        In mid-2007, the Company began a strategic review of its global manufacturing footprint. As a result of this review, during 2007, 2008, 2009 and 2010, the Company recorded charges that included impairments of property, plant, and equipment across all segments including certain Retained Corporate Costs and Other activities. While the Company has concluded this strategic review of its manufacturing footprint, it is possible that the Company may conclude in the future that it will close or temporarily idle additional selected facilities or production lines and reduce headcount to increase operating performance and cash flows. As of December 31, 2010, no other decisions had been made and no events had occurred that would require an additional evaluation of possible impairment. For additional information on charges recorded in 2010, 2009 and 2008, see Note 16 to the Consolidated Financial Statements.

        Goodwill—Goodwill at December 31, 2010 totaled $2,821 million, representing 29% of total assets. The Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment. The Company conducts its evaluation as of October 1 of each year. Goodwill impairment testing is performed using the business enterprise value ("BEV") of each reporting unit which is calculated as of a measurement date by determining the present value of debt-free, after-tax projected future cash flows, discounted at the weighted average cost of capital of a hypothetical third party buyer. This BEV is then compared to the book value of each reporting unit as of the measurement date to assess whether an impairment of goodwill may exist.

        During the fourth quarter of 2010, the Company completed its annual testing and determined that no impairment of goodwill existed.

        The testing performed as of October 1, 2010, indicated a significant excess of BEV over book value for each unit. If the Company's projected future cash flows were substantially lower, or if the assumed weighted average cost of capital was substantially higher, the testing performed as of October 1, 2010, may have indicated an impairment of one or more of the Company's reporting units and, as a result, the related goodwill may also have been impaired. However, less significant changes in projected future cash flows or the assumed weighted average cost of capital would not have indicated an impairment. For example, if projected future cash flows had been decreased by 5%, or if the weighted average cost of capital had been increased by 5%, or both, the resulting lower BEV's would still have exceeded the book value of each reporting unit.

41


Table of Contents

        The Company will monitor conditions throughout 2011 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 2011, or earlier if appropriate. In the event the Company would be required to record a significant write down of goodwill, the charge would have a material adverse effect on reported results of operations and net worth.

        Other Long-Lived Assets—Other long-lived assets include, among others, equity investments and repair parts inventories. The Company's equity investments are non-publicly traded ventures with other companies in businesses related to those of the Company. Equity investments are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment may not be recoverable. In the event that a decline in fair value of an investment occurs, and the decline in value is considered to be other than temporary, an impairment loss is recognized. Summarized financial information of equity affiliates is included in Note 5 to the Consolidated Financial Statements. During 2008, the Company recorded charges that included impairments of an equity investment. For additional information on these charges, see Note 15 to the Consolidated Financial Statements.

        The Company carries a significant amount of repair parts inventories in order to provide a dependable supply of quality parts for servicing the Company's PP&E, particularly its glass melting furnaces and forming machines. The Company evaluates the recoverability of repair parts inventories based on undiscounted projected cash flows, excluding interest and taxes, when factors indicate that impairment may exist. If impairment exists, the repair parts are written down to fair value. The Company continually monitors the carrying value of repair parts for recoverability, especially in light of changing business circumstances. For example, technological advances related to, and changes in, the estimated future demand for products produced on the equipment to which the repair parts relate may make the repair parts obsolete. In these circumstances, the Company writes down the repair parts to fair value.

Pension Benefit Plans

        Significant Estimates—The determination of pension obligations and the related pension expense or credits to operations involves significant estimates. The most significant estimates are the discount rate used to calculate the actuarial present value of benefit obligations and the expected long-term rate of return on plan assets. The Company uses discount rates based on yields of high quality fixed rate debt securities at the end of the year. At December 31, 2010, the weighted average discount rate was 5.24% and 5.28% for U.S. and non-U.S. plans, respectively. The Company uses an expected long-term rate of return on assets that is based on both past performance of the various plans' assets and estimated future performance of the assets. Due to the nature of the plans' assets and the volatility of debt and equity markets, actual returns may vary significantly from year to year. The Company refers to average historical returns over longer periods (up to 10 years) in determining its expected rates of return because short-term fluctuations in market values do not reflect the rates of return the Company expects to achieve based upon its long-term investing strategy. For purposes of determining pension charges and credits in 2011, the Company's estimated weighted average expected long-term rate of return on plan assets is 8.0% for U.S. plans and 6.4% for non-U.S. plans compared to 8.0% for U.S. plans and 6.8% for non-U.S. plans in 2010. The Company recorded pension expense (income) from continuing operations of $36 million, $10 million, and $(41) million for the U.S. plans in 2010, 2009, and 2008, respectively, and $37 million, $35 million, and $16 million for the non-U.S. plans from its principal defined benefit pension plans. The increase in pension expense in 2010 is principally a result of the amortization of prior period actuarial losses. Depending on currency translation rates, the Company expects to record approximately $90 million of total pension expense for the full year of 2011.

        Future effects on reported results of operations depend on economic conditions and investment performance. For example, a one-half percentage point change in the actuarial assumption regarding the expected return on assets would result in a change of approximately $18 million in the pretax

42


Table of Contents


pension expense for the full year 2011. In addition, changes in external factors, including the fair values of plan assets and the discount rates used to calculate plan liabilities, could have a significant effect on the recognition of funded status as described below. For example, a one-half percentage point change in the discount rate used to calculate plan liabilities would result in a change of approximately $20 million in the pretax pension expense for the full year 2011.

        Recognition of Funded Status—Generally accepted accounting principles for pension benefit plans require employers to adjust the assets and liabilities related to defined benefit plans so that the amounts reflected on the balance sheet represent the overfunded or underfunded status of the plans. These funded status amounts are measured as the difference between the fair value of plan assets and actuarially calculated benefit obligations as of the balance sheet date. At December 31, 2010, the Accumulated Other Comprehensive Loss component of share owners' equity was decreased by $60 million ($56 million after tax attributable to non-U.S. pension plans) to reflect a net increase in the funded status of the Company's plans at that date.

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 reasonably be estimated. The Company's ability to reasonably estimate its liability has been significantly affected by, among other factors, the volatility of asbestos-related litigation in the United States, the significant number of co-defendants that have filed for bankruptcy, the magnitude and timing of co-defendant bankruptcy trust payments, the inherent uncertainty of future disease incidence and claiming patterns, the expanding list of non-traditional defendants that have been sued in this litigation, and the use of mass litigation screenings to generate large numbers of claims by parties who allege exposure to asbestos dust but have no present physical asbestos impairment. The Company continues to monitor trends that may affect its ultimate liability and continues to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company.

        The Company conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in 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 a reasonable estimation of the probable amount of the 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 2010, the Company recorded a charge of $170 million (pretax and after tax) to increase its accrued liability for asbestos-related costs. This amount was lower than the 2009 charge of $180 million. The factors and developments that particularly affected the determination of the amount of the 2010 accrual included the following: (i) the rates and average disposition costs of new filings against the Company; (ii) the Company's successful litigation record; (iii) legislative developments and court rulings in several states; and (iv) the impact these and other factors had on the Company's valuation of existing and future claims.

        The Company's estimates are based on a number of factors as described further in Note 18 to the Consolidated Financial Statements.

        Other litigation is pending against the Company, in many cases involving ordinary and routine claims incidental to the business of the Company and in others presenting allegations that are non-routine and involve compensatory, punitive or treble damage claims as well as other types of relief. The Company records a liability for such matters when it is both probable that the liability has been incurred and the amount of the liability can be reasonably estimated. Recorded amounts are reviewed

43


Table of Contents


and adjusted to reflect changes in the factors upon which the estimates are based, including additional information, negotiations, settlements and other events.

Income Taxes

        The Company accounts for income taxes as required by general accounting principles under which management judgment is required in determining income tax expense and the related balance sheet amounts. This judgment includes estimating and analyzing historical and projected future operating results, the reversal of taxable temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on the Company's results of operations and financial condition.

        Deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using enacted tax rates and for operating losses and tax credit carryforwards. 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. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. This assessment is dependent upon historical profitability and future sources of taxable income including the effects of tax planning. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, evidence related to objective historical losses is typically given more weight than projected profitability. The Company has recorded a valuation allowance for the portion of deferred tax assets, where based on the weight of available evidence it is unlikely to realize those deferred tax assets.

ITEM 7A.    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 energy and soda ash. The Company uses certain derivative instruments to mitigate a portion of the risk associated with changing foreign currency exchange rates and fluctuating energy prices. These instruments carry varying degrees of counterparty credit risk. To mitigate this risk, the Company has established limits on the exposure with individual counterparties and the Company regularly monitors these exposures. Substantially all of these exposures are with counterparties that are rated single-A or above.

Foreign Currency Exchange Rate Risk

Earnings of operations outside the United States

        A substantial portion of the Company's operations are conducted by subsidiaries outside the U.S. The primary international markets served by the Company's subsidiaries are in Canada, Australia, China, South America (principally Colombia and Brazil), and Europe (principally Italy, France, The Netherlands, Germany, the United Kingdom, Spain, 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 U.S. 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. For the years ended December 31, 2010, 2009 and 2008, the Company did not have any significant foreign subsidiaries whose functional currency was the U.S.

44


Table of Contents


dollar. The Company does not hedge the foreign currency exchange rate risk related to earnings of operations outside the United States.

Borrowings not denominated in the functional currency

        Because the Company's subsidiaries operate within their local economic environment, the Company believes it is appropriate to finance those operations with borrowings denominated in the local currency to the extent practicable where debt financing is desirable or necessary. 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.

        Available excess funds of a subsidiary may be redeployed through intercompany loans to other subsidiaries for debt repayment, capital investment, or other cash requirements. Generally, each intercompany loan is denominated in the lender's local currency giving rise to foreign currency exchange rate risk for the borrower. To mitigate this risk, the borrower generally enters into a forward exchange contract which effectively swaps the intercompany loan and related interest to its local currency.

        The Company believes the near term exposure to foreign currency exchange rate risk of its foreign currency risk sensitive instruments was not material at December 31, 2010 and 2009.

Interest Rate Risk

        The Company's interest expense is most sensitive to changes in the general level of interest rates applicable to the term loans under its Secured Credit Agreement (see Note 6 to the Consolidated Financial Statements for further information). The Company's interest rate risk management objective is to limit the impact of interest rate changes on net income and cash flow, while minimizing interest payments and expense. To achieve this objective, the Company regularly evaluates its mix of fixed and floating-rate debt, and, from time to time, may enter into interest rate swap agreements.

        The following table provides information about the Company's interest rate sensitivity related to its significant debt obligations at December 31, 2010. The table presents principal cash flows and related weighted-average interest rates by expected maturity date.

(dollars in millions)
  2011   2012   2013   2014   2015   Thereafter   Total   Fair
Value at
12/31/2010
 

Long-term debt at variable rate:

                                                 
 

Principal by expected maturity

  $ 97   $ 203   $ 459   $ 20   $ 15   $ 17   $ 811   $ 811  
 

Avg. principal outstanding

  $ 763   $ 613   $ 282   $ 42   $ 25   $ 17              
 

Avg. interest rate

    2.67 %   2.67 %   2.67 %   2.67 %   2.67 %   2.67 %            

Long-term debt at fixed rate:

                                                 
 

Principal by expected maturity

                    $ 700   $ 690   $ 1,919   $ 3,309   $ 3,424  
 

Avg. principal outstanding

  $ 3,309   $ 3,309   $ 3,309   $ 3,251   $ 2,206   $ 1,919              
 

Avg. interest rate

    6.47 %   6.47 %   6.47 %   7.20 %   7.20 %   7.14 %            

        The Company believes the near term exposure to interest rate risk of its debt obligations has not changed materially since December 31, 2009.

45


Table of Contents

Commodity Price Risk

        The Company has exposure to commodity price risk, principally related to energy. The Company mitigates a portion of this risk by passing commodity cost changes through to customers. In addition, the Company enters into commodity futures contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid for natural gas and the related volatility in cash flows. The Company continually evaluates the natural gas market with respect to its forecasted usage requirements over the next twelve to twenty-four months and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements over that period. At December 31, 2010, the Company had entered into commodity futures contracts covering approximately 8,900,000 MM BTUs over that period.

        The Company believes the near term exposure to commodity price risk of its commodity futures contracts was not material at December 31, 2010.

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 operations, including uncertainties related to the expropriation of the Company's operations in Venezuela, disruptions in capital markets, disruptions in the supply chain, competitive pricing pressures, inflation or deflation, and changes in tax rates and laws, (4) consumer preferences for alternative forms of packaging, (5) fluctuations in raw material and labor costs, (6) availability of raw materials, (7) costs and availability of energy, (8) transportation costs, (9) the ability of the Company to raise selling prices commensurate with energy and other cost increases, (10) consolidation among competitors and customers, (11) the ability of the Company to acquire businesses and expand plants, integrate operations of acquired businesses and achieve expected synergies, (12) unanticipated expenditures with respect to environmental, safety and health laws, (13) the performance by customers of their obligations under purchase agreements, (14) the Company's ability to further develop its sales, marketing and product development capabilities, and (15) the timing and occurrence of events which are beyond the control of the Company, including any expropriation of the Company's operations and events related to asbestos-related claims. It is not possible to foresee or identify all such factors. Any forward looking statements in this document are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Forward looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. While the Company continually reviews trends and uncertainties affecting the Company's results of operations and financial condition, the Company does not assume any obligation to update or supplement any particular forward looking statements contained in this document.

46


Table of Contents

ITEM 8.    FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

47


Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Share Owners of
Owens-Illinois, Inc.

        We have audited the accompanying consolidated balance sheets of Owens-Illinois, Inc. and subsidiaries as of December 31, 2010 and 2009, 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, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

        We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Owens-Illinois, Inc. and subsidiaries at December 31, 2010 and 2009, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

        We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Owens-Illinois, Inc.'s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 10, 2011 expressed an unqualified opinion thereon.

    /s/ Ernst & Young LLP

Toledo, Ohio
February 10, 2011

48


Table of Contents


Owens-Illinois, Inc.

CONSOLIDATED RESULTS OF OPERATIONS

Dollars in millions, except per share amounts

Years ended December 31,
  2010   2009   2008  

Net sales

  $ 6,633   $ 6,652   $ 7,540  

Manufacturing, shipping, and delivery expense

    (5,283 )   (5,317 )   (5,994 )
               

Gross profit

    1,350     1,335     1,546  

Selling and administrative expense

   
(492

)
 
(493

)
 
(499

)

Research, development, and engineering expense

    (62 )   (58 )   (66 )

Interest expense

    (249 )   (222 )   (253 )

Interest income

    13     18     25  

Equity earnings

    59     53     51  

Royalties and net technical assistance

    16     13     18  

Other income

    16     11     9  

Other expense

    (227 )   (442 )   (396 )
               

Earnings from continuing operations before income taxes

    424     215     435  

Provision for income taxes

    (129 )   (83 )   (210 )
               

Earnings from continuing operations

    295     132     225  

Earnings from discontinued operations

    31     66     96  

Gain (loss) on disposal of discontinued operations

    (331 )         7  
               

Net earnings(loss)

    (5 )   198     328  

Net earnings attributable to noncontrolling interests

    (42 )   (36 )   (70 )
               

Net earnings (loss) attributable to the Company

  $ (47 ) $ 162   $ 258  
               

Amounts attributable to the Company:

                   
 

Earnings from continuing operations

  $ 258   $ 110   $ 175  
 

Earnings from discontinued operations

    24     52     76  
 

Gain (loss) on disposal of discontinued operations

    (329 )         7  
               
 

Net earnings (loss)

  $ (47 ) $ 162   $ 258  
               

Amounts attributable to noncontrolling interests:

                   
 

Earnings from continuing operations

  $ 37   $ 22   $ 50  
 

Earnings from discontinued operations

    7     14     20  
 

Loss on disposal of discontinued operations

    (2 )            
               
 

Net earnings

  $ 42   $ 36   $ 70  
               

Basic earnings per share:

                   
 

Earnings from continuing operations

  $ 1.57   $ 0.65   $ 1.03  
 

Earnings from discontinued operations

    0.14     0.31     0.46  
 

Gain (loss) on disposal of discontinued operations

    (2.00 )         0.04  
               
 

Net earnings (loss)

  $ (0.29 ) $ 0.96   $ 1.53  
               

Diluted earnings per share:

                   
 

Earnings from continuing operations

  $ 1.55   $ 0.65   $ 1.03  
 

Earnings from discontinued operations

    0.14     0.30     0.45  
 

Gain (loss) on disposal of discontinued operations

    (1.97 )         0.04  
               
 

Net earnings (loss)

  $ (0.28 ) $ 0.95   $ 1.52  
               

Comprehensive income (loss), net of tax:

                   
 

Net earnings (loss)

  $ (5 ) $ 198   $ 328  
 

Foreign currency translation adjustments

    128     200     (451 )
 

Pension and other postretirement benefit adjustments

    41     50     (979 )
 

Change in fair value of derivative instruments

    (2 )   24     (33 )
               
 

Total comprehensive income (loss)

    162     472     (1,135 )
 

Comprehensive income attributable to noncontrolling interests

    48     7     51  
               
 

Comprehensive income (loss) attributable to the Company

  $ 114   $ 465   $ (1,186 )
               

See accompanying Notes to the Consolidated Financial Statements.

49


Table of Contents


Owens-Illinois, Inc.

CONSOLIDATED BALANCE SHEETS

Dollars in millions

December 31,
  2010   2009  

Assets

             

Current assets:

             
 

Cash, including time deposits of $441 ($561 in 2009)

  $ 640   $ 755  
 

Short-term investments

          1  
 

Receivables, less allowances of $40 ($37 in 2009) for losses and discounts

    1,075     983  
 

Inventories

    946     889  
 

Prepaid expenses

    77     77  
 

Assets of discontinued operations

          92  
           
   

Total current assets

    2,738     2,797  

Other assets:

             
 

Equity investments

    299     114  
 

Repair parts inventories

    147     122  
 

Prepaid pension

    54     46  
 

Other assets

    588     522  
 

Goodwill

    2,821     2,381  
 

Assets of discontinued operations

          34  
           
   

Total other assets

    3,909     3,219  

Property, plant, and equipment:

             
 

Land, at cost

    288     248  
 

Buildings and equipment, at cost:

             
   

Buildings and building equipment

    1,233     1,167  
   

Factory machinery and equipment

    5,111     4,720  
   

Transportation, office, and miscellaneous equipment

    136     129  
   

Construction in progress

    248     289  
           

    7,016     6,553  
 

Less accumulated depreciation

    3,909     3,842  
           
   

Net property, plant, and equipment

    3,107     2,711  
           

Total assets

  $ 9,754   $ 8,727  
           

See accompanying Notes to the Consolidated Financial Statements.

50


Table of Contents


Owens-Illinois, Inc.

CONSOLIDATED BALANCE SHEETS (Continued)

Dollars in millions, except per share amounts

December 31,
  2010   2009  

Liabilities and Share Owners' Equity

             

Current liabilities:

             
 

Short-term loans

  $ 257   $ 300  
 

Accounts payable

    878     850  
 

Salaries and wages

    160     168  
 

U.S. and foreign income taxes

    32     38  
 

Current portion of asbestos-related liabilities

    170     175  
 

Other accrued liabilities

    485     441  
 

Long-term debt due within one year

    97     50  
 

Liabilities of discontinued operations

          12  
           
   

Total current liabilities

    2,079     2,034  

Long-term debt

    3,924     3,258  

Deferred taxes

    203     186  

Pension benefits

    576     578  

Nonpension postretirement benefits

    259     267  

Other liabilities

    381     343  

Asbestos-related liabilities

    306     310  

Liabilities of discontinued operations

          15  

Commitments and contingencies

             

Share owners' equity:

             

Share owners' equity of the Company:

             
 

Common stock, par value $.01 per share, 250,000,000 shares authorized, 180,808,992 and 179,923,309 shares issued (including treasury shares), respectively

    2     2  
 

Capital in excess of par value

    3,040     2,942  
 

Treasury stock, at cost, 17,093,509 and 11,322,544 shares, respectively

    (412 )   (217 )
 

Retained earnings

    82     129  
 

Accumulated other comprehensive loss

    (897 )   (1,318 )
           
   

Total share owners' equity of the Company

    1,815     1,538  
 

Noncontrolling interests

    211     198  
           
   

Total share owners' equity

    2,026     1,736  
           

Total liabilities and share owners' equity

  $ 9,754   $ 8,727  
           

See accompanying Notes to the Consolidated Financial Statements.

51


Table of Contents


Owens-Illinois, Inc

CONSOLIDATED SHARE OWNERS' EQUITY

Dollars in millions

 
  Share Owners' Equity of the Company    
   
 
 
  Convertible
Preferred Stock
  Common
Stock
  Capital in
Excess of
Par Value
  Treasury
Stock
  Retained
Earnings
(Loss)
  Accumulated
Other
Comprehensive
Loss
  Non-
controlling
Interests
  Total Share
Owners' Equity
 

Balance on January 1, 2008

  $ 452   $ 2   $ 2,420   $ (225 ) $ (286 ) $ (177 ) $ 252   $ 2,438  

Issuance of common stock (1.1 million shares)

                15                             15  

Reissuance of common stock (0.2 million shares)

                3     3                       6  

Convertible preferred stock redemption

    (452 )         452                              

Stock compensation

                24                             24  

Comprehensive income:

                                                 
 

Net earnings

                            258           70     328  
 

Foreign currency translation adjustments

                                  (432 )   (19 )   (451 )
 

Pension and other postretirement

                                                 
   

benefit adjustments, net of tax

                                  (979 )         (979 )
 

Change in fair value of derivative

                                                 
   

instruments, net of tax

                                  (33 )         (33 )

Dividends paid to noncontrolling interests

                                                 
 

on subsidiary common stock

                                        (50 )   (50 )

Dividends paid on convertible preferred stock

                            (5 )               (5 )
                                   

Balance on December 31, 2008

  $   $ 2   $ 2,914   $ (222 ) $ (33 ) $ (1,621 ) $ 253   $ 1,293  

Issuance of common stock (1.2 million shares)

                7                             7  

Reissuance of common stock (0.2 million shares)

                1     5                       6  

Stock compensation

                20                             20  

Comprehensive income:

                                                 
 

Net earnings

                            162           36     198  
 

Foreign currency translation adjustments

                                  229     (29 )   200  
 

Pension and other postretirement

                                                 
   

benefit adjustments, net of tax

                                  50           50  
 

Change in fair value of derivative

                                                 
   

instruments, net of tax

                                  24           24  

Dividends paid to noncontrolling interests

                                                 
 

on subsidiary common stock

                                        (62 )   (62 )
                                   

Balance on December 31, 2009

  $   $ 2   $ 2,942   $ (217 ) $ 129   $ (1,318 ) $ 198   $ 1,736  

Issuance of common stock (0.9 million shares)

                5                             5  

Reissuance of common stock (0.2 million shares)

                1     4                       5  

Treasury shares purchased (6 million shares)

                      (199 )                     (199 )

Issuance of exchangeable notes

                91                             91  

Stock compensation

                11                             11  

Comprehensive income:

                                                 
 

Net earnings (loss)

                            (47 )         42     (5 )
 

Foreign currency translation adjustments

                                  122     6     128  
 

Pension and other postretirement

                                                 
   

benefit adjustments, net of tax

                                  41           41  
 

Change in fair value of derivative

                                                 
   

instruments, net of tax

                                  (2 )         (2 )

Noncontrolling interests' share of

                                                 
 

acquisition

                                        12     12  

Acquisition of noncontrolling interest

                (10 )                     (8 )   (18 )

Dividends paid to noncontrolling interests

                                                 
 

on subsidiary common stock

                                        (25 )   (25 )

Disposal of Venezuelan operations

                                  260     (14 )   246  
                                   

Balance on December 31, 2010

  $   $ 2   $ 3,040   $ (412 ) $ 82   $ (897 ) $ 211   $ 2,026  
                                   

See accompanying Notes to the Consolidated Financial Statements.

52


Table of Contents


Owens-Illinois, Inc.

CONSOLIDATED CASH FLOWS

Dollars in millions

Years ended December 31,
  2010   2009   2008  

Operating activities:

                   
 

Net earnings

  $ (5 ) $ 198   $ 328  
 

Earnings from discontinued operations

    (31 )   (66 )   (96 )
 

(Gain) loss on disposal of discontinued operations

    331           (7 )
 

Non-cash charges (credits):

                   
   

Depreciation

    369     364     420  
   

Amortization of intangibles and other deferred items

    22     21     29  
   

Amortization of finance fees and debt discount

    19     10     8  
   

Deferred tax benefit

    (56 )   52     21  
   

Non-cash tax benefit

    (8 )   (48 )      
   

Restructuring and asset impairment

    13     207     133  
   

Charges for acquisition-related costs

    26              
   

Future asbestos-related costs

    170     180     250  
   

Other

    142     61     63  
 

Asbestos-related payments

    (179 )   (190 )   (210 )
 

Cash paid for restructuring activities

    (61 )   (65 )   (49 )
 

Change in non-current operating assets

    (19 )   28     8  
 

Reduction of non-current liabilities

    (62 )   (179 )   (90 )
 

Change in components of working capital

    (71 )   156     (148 )
               
   

Cash provided by continuing operating activities

    600     729     660  
   

Cash provided by (utilized in) discontinued operating activities

    (8 )   71     97  
               
   

Total cash provided by operating activities

    592     800     757  

Investing activities:

                   
 

Additions to property, plant, and equipment—continuing

    (500 )   (407 )   (340 )
 

Additions to property, plant, and equipment—discontinued

    (3 )   (21 )   (22 )
 

Acquisitions, net of cash acquired

    (817 )   (5 )      
 

Net cash proceeds related to sale of assets and other

    6     15     (15 )
               
   

Cash utilized in investing activities

    (1,314 )   (418 )   (377 )

Financing activities:

                   
 

Additions to long-term debt

    1,392     1,080     686  
 

Repayments of long-term debt

    (573 )   (832 )   (945 )
 

Decrease in short-term loans—continuing

    (39 )   (85 )   (21 )
 

Increase in short-term loans—discontinued

    (2 )   6        
 

Net receipts (payments) for hedging activity

    21     14     (45 )
 

Payment of finance fees

    (33 )   (14 )      
 

Dividends paid to noncontrolling interests—continuing

    (25 )   (35 )   (40 )
 

Dividends paid to noncontrolling interests—discontinued

          (27 )   (10 )
 

Convertible preferred stock dividends

                (5 )
 

Treasury shares purchased

    (199 )            
 

Issuance of common stock and other

    5     7