UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


FORM 10-K

(Mark One)

 

 

x

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

 

For the fiscal year ended December 31, 2006

 

 

 

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

 

22-2781933

(State or other jurisdiction of

 

(IRS Employer

incorporation or organization)

 

Identification No.)

 

 

 

One Michael Owens Way, Perrysburg, Ohio

 

43551

(Address of principal executive offices)

 

(Zip Code)

 

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

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

 

Name of each exchange on

Title of each class

 

which registered

Common Stock, $.01 par value

 

New York Stock Exchange

Convertible Preferred Stock, $.01 par

 

New York Stock Exchange

value, $50 liquidation preference

 

 

 

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 x           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 x

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 x           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.     x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x                    Accelerated filer o              Non-accelerated filer 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 x

The aggregate market value (based on the consolidated tape closing price on June 30, 2006) of the voting and non-voting stock beneficially held by non-affiliates of Owens-Illinois, Inc. was approximately $1,127,291,000.  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 January 31, 2007 was 154,432,537.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of Owens-Illinois, Inc. Proxy Statement for The Annual Meeting of Share Owners To Be Held Wednesday, May 9, 2007 (“Proxy Statement”) are incorporated by reference into Part III hereof.

TABLE OF GUARANTORS

 

 

 

Primary

 

 

 

 

 

 

 

Standard

 

 

 

 

 

State/Country of

 

Industrial

 

I.R.S

 

 

 

Incorporation

 

Classification

 

Employee

 

Exact Name of Registrant

 

or

 

Code

 

Identification

 

As Specified In Its Charter

 

Organization

 

Number

 

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

PART I

 

 

ITEM 1.

 

BUSINESS

ITEM 1A.

 

RISK FACTORS

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

ITEM 2.

 

PROPERTIES

ITEM 3.

 

LEGAL PROCEEDINGS

ITEM 4.

 

SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

 

 

PART II

 

 

ITEM 5.

 

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

ITEM 6.

 

SELECTED FINANCIAL DATA

ITEM 7.

 

MANAGMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A.

 

QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A.

 

CONTROLS AND PROCEDURES

ITEM 9B.

 

OTHER INFORMATION

 

 

 

PART III

 

 

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11.

 

EXECUTIVE COMPENSATION

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

 

 

PART IV

 

 

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

 

 

SIGNATURES

 

 

 

 

 

EXHIBITS

 

 

 




PART I

ITEM 1.             BUSINESS

General Development of Business

Owens-Illinois, Inc. (the “Company”), through its subsidiaries, is the successor to a business established in 1903.  The Company is one of the world’s leading manufacturers of packaging products based on sales revenue and is the largest manufacturer of glass containers in the world, with leading positions in Europe, North America, Asia Pacific and South America.  The Company is also a leading manufacturer of healthcare packaging including plastic prescription containers and medical devices, and plastic closure systems including tamper-evident caps and child-resistant closures, with operations in the United States, Mexico, Puerto Rico, Brazil, Hungary, Malaysia and Singapore.

Strategy and Competitive Strengths

The Company is pursuing a strategy aimed at leveraging its global capabilities, broadening its market base and focusing on modern management technologies and fundamentals including incentive compensation linked to cash flows and fact-based, data-driven decision making.

The Company’s current priorities include the following:

·                  Increase prices near term to offset inflationary pressures – past and present

·                  Improve liquidity - reduce leverage

·                  Achieve successful European integration

·                  Improve system cost and capital capabilities

·                  Implement global procurement initiatives

·                  Modest growth momentum

The Company’s current core competitive strengths are:

·                  Global leadership in manufacturing glass containers

·                  Long-standing relationships with a diverse group of leading consumer products companies

·                  Technological leadership and worldwide licensee network

·                  Low-cost production of glass containers

·                  Leading healthcare packaging businesses

·                  Experienced and motivated management team and work force

The Company has acquired 17 glass container businesses in 22 countries since 1990, including businesses in Europe, North America, Asia Pacific and South America.  Through these acquisitions, the Company has enhanced its global presence in order to better serve the needs of its multinational customers. Through global leveraging, the Company also expects to achieve purchasing and cost reduction synergies.

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The Company has 83 glass manufacturing plants in 22 countries and 18 plastics packaging facilities, 13 of which are in the United States.

Technology Leader

The Company believes it is a technological leader in the worldwide glass container and plastics packaging segments of the rigid packaging market in which it competes.  During the five years ended December 31, 2006, on a continuing operations basis, the Company invested more than $1.6 billion in capital expenditures (excluding acquisitions) and more than $295 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 Exchange Act 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, Audit Committee are also available on the Investor Relations section of the Company’s website.  Copies of these documents are available in print to share owners upon request, addressed to the Corporate Secretary at the address above.

Financial Information about Product Segments

Information as to sales, earnings from continuing operations before interest income, interest expense, provision for income taxes and minority share owners’ interests in earnings of subsidiaries and excluding amounts related to certain items that management considers not representative of ongoing operations (“Segment Operating Profit”), and total assets by product segment is included in Note 21 to the Consolidated Financial Statements.

Narrative Description of Business

The Company has two product segments: (1) Glass Containers and (2) Plastics Packaging.  Below is a description of these segments and information to the extent material to understanding the Company’s business taken as a whole.

Products and Services, Customers, Markets and Competitive Conditions, and Methods of Distribution

GLASS CONTAINERS PRODUCT SEGMENT

The Company is the largest manufacturer of glass containers in the world.  The Company is the leading glass container manufacturer in 19 of the 22 countries where it competes in the glass container segment of the rigid packaging market, including the U.S., and the sole manufacturer of glass containers in eight of these countries. On a continuing operations basis, worldwide glass container sales represented 90%, 89%, and 88%, of the Company’s consolidated net sales for the years ended December 31, 2006, 2005, and 2004, respectively.

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Products and Services

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

Customers

In most of the countries where the Company competes, it has the leading position in the glass container segment of the rigid packaging market based on sales revenue.  The largest customers include many of the leading manufacturers and marketers of glass packaged products in the world.  In the U.S., the majority of customers for glass containers are brewers, wine vintners, distillers and food producers.  The Company also produces glass containers for soft drinks, principally outside the U.S.  The largest U.S. glass container customers include (in alphabetical order) Anheuser-Busch, Diageo, H.J. Heinz, Molson/Coors, Novartis, Pepsico, SABMiller, and Saxco-Demptos, Inc.  The largest glass container customers outside the U.S. include (in alphabetical order) Diageo, Foster’s, Heineken, InBev, Lion Nathan, Molson/Coors, SABMiller, and  Scottish & Newcastle.  The Company is a major glass container supplier to all of these customers.

The Company sells most of its glass container products directly to customers under annual or multi-year supply agreements.  The Company also sells some of its products through distributors. Glass containers are typically scheduled for production in order to maintain reasonable inventories in relation to customers’ forecasts of their quarterly requirements.

Markets and Competitive Conditions

The principal markets for glass container products made by the Company are in Europe, North America, Asia Pacific, and South America.  The Company believes it is a low-cost producer in the glass container segment of the rigid packaging market in many of the countries in which it competes.  Much of this cost advantage is due to proprietary equipment and process technology used by the Company.  The Company’s machine development activities and systematic upgrading of production equipment in the 1990’s and early 2000’s have given it a low-cost leadership position in the glass container segment in many of the countries in which it competes, a key strength to competing successfully in the rigid packaging market.

The Company has the leading share of the glass container segment of the U.S. rigid packaging market based on sales revenue by domestic producers in the U.S.  The principal glass container competitors in the U.S. are Saint-Gobain Containers, Inc., a wholly-owned subsidiary of Compagnie de Saint-Gobain, and Anchor Glass Container Corporation.  In addition, imports from Mexico and other countries increasingly compete in U.S. glass container segments.  Additionally, a few major consumer packaged goods companies also self-manufacture glass containers.

In supplying glass containers outside of the U.S., the Company competes directly with Compagnie de Saint-Gobain in Europe and Brazil, Ardagh plc in the U.K., Germany, and Poland, Vetropak in the Czech Republic and Amcor Limited in Australia.  In other locations in Europe, the Company competes indirectly with a variety of glass container firms including Compagnie de Saint-Gobain, Vetropak and Rexam plc.  Except as mentioned above, the Company does not compete with any large, multi-national glass container manufacturers in South America or the Asia Pacific region.

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In addition to competing with other large, well-established manufacturers in the glass container segment, the Company competes with manufacturers of other forms of rigid packaging, principally aluminum cans and plastic containers, on the basis of quality, price and service.  The principal competitors producing metal containers are Amcor, Ball Corporation, Crown Holdings, Inc., Rexam plc, and Silgan Holdings Inc.  The principal competitors producing plastic containers are Consolidated Container Holdings, LLC, Graham Packaging Company, Plastipak Packaging, Inc. and Silgan Holdings Inc.  The Company also competes with manufacturers of non-rigid packaging alternatives, including flexible pouches and aseptic cartons.

The Company’s unit shipments of glass containers in countries outside of the U.S. have grown substantially from levels of the early 1990’s.  The Company has added to its international operations by acquiring glass container companies, many of which have leading positions in growing or established markets, increasing capacity at select foreign subsidiaries, and maintaining the global network of glass container companies that license its technology.  In many developing countries, the Company’s international glass operations have benefited in the last ten years from increased consumer spending power, a trend toward the privatization of industry, a favorable climate for foreign investment, lowering of trade barriers and global expansion programs by multi-national consumer companies.

North America.  In addition to the glass container operations in the U.S., the Company’s subsidiary in Canada is the sole manufacturer of glass containers in that country.

South America.  The Company is the sole manufacturer of glass containers in Colombia, Ecuador and Peru.  In both Brazil and Venezuela, the Company is the leading manufacturer of glass containers.  In South America, there is a large infrastructure for returnable/refillable glass containers.  However, with improving economic conditions in South America after the recessions of the late 1990’s, unit sales of non-returnable glass containers have grown in Venezuela, Colombia and Brazil.

Europe.  The Company’s European glass container business, headquartered in Switzerland, has consolidated manufacturing operations in 11 countries and is the largest in Europe.  The Company is a leading producer of wine and champagne bottles in France and is the sole supplier of glass containers to Scottish & Newcastle, France’s leading brewer.  In Italy, the Company is the leading manufacturer of glass containers and operates 12 glass container plants.  In Germany, the Company’s key customers include Scottish & Newcastle and Nestle Europe.  In The Netherlands, the Company is one of the leading suppliers of glass containers to Heineken.  The Company is a leading manufacturer of glass containers for the U.K. spirits business.  In Spain, the Company serves the market for olives in the Sevilla area and the market for wine bottles in the Barcelona and southern France area.  In Poland, the Company is the leading glass container manufacturer and operates two plants.  The Company is the leading glass container manufacturer in the Czech Republic.  In Hungary, the Company is the sole glass container manufacturer and serves the Hungarian food industry.  In Finland and the Baltic country of Estonia, the Company is the only manufacturer of glass containers.  The Company coordinates production activities between Finland and Estonia in order to efficiently serve the Finnish, Baltic and Russian markets. In recent years, Western European brewers have been establishing beer production facilities in Central Europe and the Russian Republic.  Because these new beer plants use high-speed filling lines, they require high quality glass containers in order to operate properly. The Company believes it is well positioned to meet this growing demand.

Asia Pacific.  The Company has glass operations in four countries in the Asia Pacific region: Australia, New Zealand, Indonesia and China.  In the Asia Pacific region, the Company is the leading manufacturer of glass containers in most of the countries in which it competes.  In Australia, the Company’s subsidiary operates four glass container plants, including a plant focused on serving the needs of the growing Australian wine industry.  In New Zealand, the Company is the sole glass container manufacturer.  In

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Indonesia, the Company supplies the Indonesian market and exports glass containers for food and pharmaceutical products to Australian customers.  In China, the glass container segments of the packaging market are regional and highly fragmented with a number of local competitors.  The Company has four modern glass container plants in China manufacturing high-quality beer bottles to serve Foster’s as well as Anheuser-Busch, which is now producing Budweiser® in and for the Chinese market.

The Company continues to focus on serving the needs of leading multi-national consumer companies as they pursue international growth opportunities.  The Company believes that it is often the glass container partner of choice for such multi-national consumer companies due to its leadership in glass technology and its status as a high quality producer in most of the markets it serves.

Manufacturing

The Company believes it is a low-cost producer in the glass container segment of the North American rigid packaging market, as well as a low-cost producer in many of the international glass segments in which it competes.  Much of this cost advantage is due to the Company’s proprietary equipment and process technology.  The Company believes its proprietary high volume glass forming machines, developed and refined by its engineering group, are significantly more efficient and productive than those used by competitors.  The Company’s machine development activities and systematic upgrading of production equipment have given it a low-cost leadership position in the glass container segment in most of the countries in which it competes, a key strength to competing successfully in the rigid packaging market.

The Company operates several machine shops that assemble high-productivity glass-forming machines and mold shops that manufacture molds and related equipment.

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.  For certain raw materials, however, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays.

Energy

The Company’s glass container operations require a continuous supply of significant amounts of energy, principally natural gas, fuel oil, and electrical power.  Adequate supplies of energy are generally available to the Company at all of its manufacturing locations.  Energy costs typically account for 15-20% of the Company’s total manufacturing costs, depending on the factory location and its particular energy requirements.  The percentage of total cost related to energy can vary significantly because of volatility in market prices, particularly for natural gas in particularly volatile markets such as North America.  In order

5




to limit the effects of fluctuations in market prices for natural gas and fuel oil, the Company uses commodity futures contracts related to its forecasted requirements, principally in North America.  The objective of these futures contracts is to reduce the potential volatility in cash flows due to changing market prices.  The Company continually evaluates the energy markets with respect to its forecasted energy requirements in order to optimize its use of commodity futures contracts.  If energy costs increase substantially in the future, the Company could experience a corresponding increase in operating costs, which may not be fully recoverable through increased selling prices.

Glass Recycling

The Company is an important contributor to the recycling effort in the U.S. and abroad and continues to melt substantial recycled glass tonnage in its glass furnaces.  If sufficient high-quality recycled glass were available on a consistent basis, the Company has the technology to operate using 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.

PLASTICS PACKAGING PRODUCT SEGMENT

The Company is a leading manufacturer in North America of plastic packaging including healthcare containers, prescription containers, and closures. The Company also has plastics packaging operations in Puerto Rico, Brazil, Hungary, Malaysia and Singapore.  On a continuing operations basis, plastics packaging sales represented 10%, 11% and 12% of the Company’s consolidated net sales for the years ended December 31, 2006, 2005 and 2004, respectively.

Manufacturing and Products

The exact type of manufacturing process the Company uses is dependent on the plastic product type and package requirements. Injection blow-molding and injection molding are plastics manufacturing processes where plastic resin in the form of pellets or powder is melted and then injected or otherwise forced under pressure into a mold.  The mold is then cooled and the product is removed from the mold.

The Company’s healthcare container unit manufactures injection blow molded plastic containers for pharmaceutical manufacturers and over-the-counter products.

The prescription products unit manufactures injection-molded plastic prescription containers.  These products are sold primarily to drug wholesalers and major drug chains.  Containers for prescriptions include vials, ovals, closures, ointment jars, dropper bottles and prescription containers designed for automated filling processes.

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

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

6




 

Customers

The Company’s largest customers for plastic healthcare containers include (in alphabetical order) Alcon, Bausch & Lomb, Bristol Myers Squib, Hospira, McNeil, and Pfizer.   The Company’s largest customers for prescription containers include (in alphabetical order) Albertsons, Kroger, McKesson, Medco Health Solutions, Rite-Aid and Walgreen.   The Company’s largest customers for plastic closures include (in alphabetical order) Coca-Cola Enterprises, Cott Beverages, Nestle USA., Pepsico and Proctor & Gamble.

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

Markets and Competitive Conditions

Major markets for the Company’s plastics packaging include consumer products and healthcare products.

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

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

Methods of Distribution

In the U.S., most of the Company’s plastic containers, plastic closures and plastic prescription containers are shipped by common carrier.  In addition, the Company’s plastics packaging operations outside the U.S. export some products to customers beyond their national boundaries, which may include transportation by rail and ocean delivery in combination with common carriers.

Suppliers and Raw Materials

The Company manufactures plastic healthcare containers, closures and prescription containers using HDPE, polypropylene, PET and various other plastic resins.  The Company also purchases large quantities of batch colorants, corrugated materials and labels.  In general, these raw materials are available in adequate supply from multiple sources.  However, for certain raw materials, there may be temporary shortages due to market conditions and other factors.

Worldwide suppliers of plastic resins used in the production of plastics packaging include Chevron Phillips, ExxonMobil, and Total Petrochemicals.  Historically, prices for plastic resins have been subject

7




to dramatic fluctuations.  However, resin cost pass-through provisions are typical in the Company’s supply contracts with its plastics packaging customers.

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

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

Recycling

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

ADDITIONAL INFORMATION

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. In plastics packaging, the Company has such agreements with 12 companies in 9 countries.  These agreements cover areas ranging from manufacturing and engineering assistance to support in functions such as marketing, sales and administration.  The worldwide licensee network provides a stream of revenue to support the Company’s development activities and gives it the opportunity to participate in the rigid packaging market in countries where it does not already have a direct presence.  In addition, the Company’s technical agreements enable it to apply “best practices” developed by its worldwide licensee network.  In the years 2006, 2005 and 2004, the Company earned $17.8 million, $16.9 million and $21.1 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 $63.8 million, $65.4 million, and $59.0 million for 2006, 2005, and 2004, respectively.  The Company’s research, development and engineering activities include new products, manufacturing process control, automatic inspection and further automation of manufacturing activities.

Environmental And Other Governmental Regulation

The Company’s worldwide operations, in common with those of the industry generally, are subject to extensive laws, ordinances, regulations and other legal requirements relating to environmental protection, including legal requirements governing investigation and clean-up of contaminated properties as well as water discharges, air emissions, waste management and workplace health and safety.  Capital

8




expenditures for property, plant and equipment for environmental control activities were not material during 2006.

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

In North America, sales of beverage containers are affected by governmental regulation of packaging, including deposit return laws. As of January 1, 2007, there were 11 U.S. states with bottle deposit laws in effect, requiring consumer deposits of between 4 and 15 cents, USD, depending on the size of the container. In Canada, there are 8 provinces with consumer deposits between 5 and 20 cents Canadian, depending on the size of the container. In Europe a number of countries have some form of consumer deposit law in effect, including Austria, Belgium, Denmark, Finland, Germany, The Netherlands, Norway, Sweden and Switzerland. The structure and enforcement of such laws and regulations can impact the sales of beverage containers in a given jurisdiction. Such laws and regulations also impact the availability of post-consumer recycled glass for the Company to use in container production.

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

The European Union Emissions Trading Scheme (“EUETS”) commenced January 1, 2005.  The EU has committed to Kyoto Protocol emissions reduction targets and the EUETS is intended to facilitate such reduction.  The Company’s manufacturing installations which operate in EU countries will need to restrict the volume of their CO2 emissions to the level of their individually allocated Emissions Allowances as set by country regulators.   If the actual level of emissions for any installation exceeds its allocated allowance, additional allowances can be bought on the market to cover deficits; conversely, if the actual level of emissions for such installation is less than its allocation, the excess allowances can be sold on the same market.  While no material effect is anticipated as a result of the EUETS, the Company has sold a limited quantity of excess CO2 emissions allowances in the open market during 2006.

The Company is unable to predict what environmental legal requirements may be adopted in the future.  However, the Company continually monitors its operations in relation to environmental impacts and invests in environmentally friendly and emissions reducing projects.  As such, the Company has made significant expenditures for environmental improvements at certain of its factories over the last several years; however, these expenditures did not have a material adverse affect on the Company’s results of operations.  While not expected to be material, the compliance costs associated with legal environmental requirements are expected to continue.

Intellectual Property Rights

The Company has a large number of patents which relate to a wide variety of products and processes, has a substantial number of patent applications pending, and is licensed under several patents of others.  While in the aggregate the Company’s patents are of material importance to its businesses, the Company

9




does not consider that any patent or group of patents relating to a particular product or process is of material importance when judged from the standpoint of any segment or its businesses as a whole.

The Company has a number of intellectual property rights, comprised of both patented and proprietary technology, that make the Company’s glass forming machines more efficient and productive than those used by our competitors.  In addition, the efficiency of the Company’s glass forming machines is enhanced by the Company’s overall approach to cost efficient manufacturing technology, which extends from batch house to warehouse.  This technology is proprietary to the Company through a combination of issued patents, pending applications, copyrights, trade secret and proprietary know-how.

Upstream of the glass forming 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 control and electro-mechanical mechanisms are commonly used for a wide variety of applications in the forming machines and auxiliary processes. Various patents held by the Company are directed to the electro-mechanical mechanisms and related technologies used to control sections of the machines.  Additional U.S. patents 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 enhance the overall efficiency of the manufacturing process.

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

Seasonality

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

Employees

The Company’s worldwide operations employed approximately 28,000 persons as of December 31, 2006.  Approximately 66% of North American employees are hourly workers covered by collective bargaining agreements.  The principal collective bargaining agreement, which at December 31, 2006, covered approximately 74% of the Company’s union-affiliated employees in North America will expire on March

10




31, 2008. Approximately 68% of employees in South America are covered by collective bargaining agreements with an average term of approximately two 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 (59)

 

Chairman and Chief Executive Officer since December 2006. He previously served as 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 (59)

 

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 (56)

 

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

 

 

 

Joseph V. Conda (65)

 

President of Healthcare Packaging and Prescription Products since 2004; Vice President since 1998; Vice President and General Manager of Prescription Products 2000-2004.

 

 

 

L. Richard Crawford (46)

 

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

 

 

 

Michael Paparone (53)

 

President, Closure and Specialty Products since 2006; General Manager of Prescription Products 2004-2006; Chief Executive Officer of Invironmentalists, a commercial floor covering distribution and service subsidiary of Invista 2002-2004.

 

 

 

11




 

 

Financial Information about Foreign and Domestic Operations

Information as to net sales, Segment Operating Profit, and assets of the Company’s product and geographic segments is included in Note 21 to the Consolidated Financial Statements.

ITEM 1A.               RISK FACTORS

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

The Company is one of a number of defendants in a substantial number of lawsuits filed in numerous state and federal courts by persons alleging bodily injury (including death) as a result of exposure to dust from asbestos fibers.  From 1948 to 1958, one of the Company’s former business units commercially produced and sold approximately $40 million of a high-temperature, calcium-silicate based pipe and block insulation material containing asbestos.  The Company exited the pipe and block insulation business in April 1958.  The traditional asbestos personal injury lawsuits and claims relating to such production and sale of asbestos material typically allege various theories of liability, including negligence, gross negligence and strict liability and seek compensatory and in some cases, punitive damages in various amounts (herein referred to as “asbestos claims”).

The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot be estimated with certainty. Beginning with the initial liability of $975 million established in 1993, the Company has accrued a total of approximately $3.11 billion through 2006, before insurance recoveries, for its asbestos-related liability.  The Company’s ability to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the expanding list of non-traditional defendants that have been sued in this litigation, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the significant number of co-defendants that have filed for bankruptcy.

The Company 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, 2006 and concluded that an increase in its reserve for future asbestos-related costs in the amount of $120.0 million was required.

The ultimate amount of distributions which may be required to be made by the Company to fund the Company’s asbestos-related payments cannot be estimated with certainty.  The Company’s reported results of operations for 2006 were materially affected by the $120.0 million fourth quarter charge and

12




asbestos-related payments continue to be substantial.  Any future additional charge may likewise materially affect the Company’s results of operations for the period in which it is recorded. Also, the continued use of significant amounts of cash for asbestos-related costs has affected and may continue to affect the Company’s cost of borrowing and its ability to pursue global or domestic acquisitions.

Substantial Leverage – The Company’s substantial indebtedness could adversely affect the Company’s financial health.

The Company has a significant amount of debt.  As of December 31, 2006, the Company had approximately $5.5 billion of total debt outstanding.  The Company’s substantial indebtedness could result in the following consequences:

·                  Increased vulnerability to general adverse economic and industry conditions;

·                  Increased vulnerability to interest rate increases for the portion of the unhedged and fixed rate borrowing swapped into variable rates;

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

·                  Limited flexibility in planning for, or reacting to the Company’s competitors that have less debt; and

·                  Limit, along with the financial and other restrictive covenants in the documents governing our indebtedness, among other things, the 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, 2006, the Company’s debt subject to variable interest rates, including fixed rate debt swapped to variable rate, represented approximately 47% of total debt.

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

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

·                  Sell assets;

·                  Restructure debt; and/or

·                  Obtain additional debt or equity financing.

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

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

13




 

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

Failure to comply with these or other covenants and restrictions contained in the secured credit agreement, the indentures or agreements governing other indebtedness could result in a default under those agreements, and the debt under those agreements, together with accrued interest, could then be declared immediately due and payable. If a default occurs under the secured credit agreement, 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 $4.9 billion, representing approximately 66% of the Company’s net sales for the year ended December 31, 2006.  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; and

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

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

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

The Company is subject to significant competition from other glass container producers, as well as from makers of alternative forms of packaging, such as aluminum cans and plastic containers.  The Company competes with each rigid packaging competitor on the basis of price, quality, service and the marketing attributes of the container and the closure.  Advantages or disadvantages in any of these competitive

14




factors may be sufficient to cause the customer to consider changing suppliers and/or using an alternative form of packaging.

In addition to competing with other large, well-established manufacturers in the glass container segment, the Company competes with manufacturers of other forms of rigid packaging, principally aluminum cans and plastic containers, on the basis of quality, price and service.  The Company also competes with manufacturers of non-rigid packaging alternatives, including flexible pouches and aseptic cartons, in serving the packaging needs of juice customers.

Pressures from competitors and producers of alternative forms of packaging have resulted in excess capacity in certain countries in the past and have led to 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 and natural gas are vital to the Company’s operations as it relies on a continuous power supply to conduct its business.  In 2004, 2005, and 2006, higher energy costs worldwide negatively impacted the Company’s glass container segment operating profit by $22.8 million, $75.7 million, and $153.5 million, respectively on a year-over-year basis.  If energy costs substantially increase in the future, the Company could 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 BSN or additional businesses it acquires in the future.

In addition to the acquisition of BSN Glass pack S.A. (“BSN”) on June 21, 2004 (“BSN Acquisition”), the Company may consider strategic transactions, including acquisitions that will complement, strengthen and enhance growth in its worldwide glass and plastics packaging 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.  The acquisition  of BSN and strategic transactions, including any future acquisitions, are subject to various risks and uncertainties, including:

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

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

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

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

·                  The potential impairment of relationships with customers.

In addition, the Company cannot make assurances that the integration and consolidation of newly acquired businesses, including BSN, 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

15




elimination of a price differential between the acquiring customer and the company acquired.  Increased pricing pressures from the Company’s customers may have a material adverse effect on operations.

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

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

The raw materials that the Company uses have historically been available in adequate supply from multiple sources.  For certain raw materials, however, there may be temporary shortages due to weather or other factors, including disruptions in supply caused by raw material transportation or production delays.  These shortages, as well as material increases 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 such as plastics.  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.

16




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, 2006, covered approximately 66% of the Company’s employees in North America and approximately 68% of the employees in South America.  The agreement covering substantially all of the Company’s union-affiliated employees in its U.S. glass container operations expires in 2008.  Agreements in South America typically have an average term of approximately two years.  Upon the expiration of any collective bargaining agreement, if the Company is unable to negotiate acceptable contracts with labor unions, it could result in strikes by the affected workers and increased operating costs as a result of higher wages or benefits paid to union members. In addition, a large number of the Company’s employees are employed in countries in which employment laws provide greater bargaining or other rights to employees than the laws of the U.S.  Such employment rights require the Company to work collaboratively with the legal representatives of the employees to effect any changes to labor arrangements.  For example, most of the Company’s employees in Europe are represented by workers’ councils that must approve any changes in conditions of employment, including salaries and benefits and staff changes, and may impede efforts to restructure the Company’s workforce.  Although the Company believes that it has a good working relationship with its employees, if the Company’s employees were to engage in a strike or other work stoppage, the Company could experience a significant disruption of operations and/or higher ongoing labor costs, which may have a material adverse effect on operations.

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 pension benefit plans, contingencies and litigation, goodwill, and deferred tax assets involves the more significant judgments and estimates used in the preparation of its consolidated financial statements.  Actual results for all estimates could differ materially from the estimates and assumptions that the Company uses, which could have a material adverse effect on the Company’s financial condition and results of operations.

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

The Company’s implementation of and compliance with changes in accounting rules and interpretations could adversely affect its operating results or cause unanticipated fluctuations in its results in future periods.  The accounting rules and regulations that the Company must comply with are complex and continually changing.  Recent actions and public comments from the SEC have focused on the integrity of financial reporting generally.  The Financial Accounting Standards Board, or FASB, has recently introduced several new or proposed accounting standards, or is developing new proposed standards, which would represent a significant change from current industry practices.  For example, in July 2006, the Financial Accounting Standards Board issued Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes”.  This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes”.  FIN 48 defines criteria that an individual tax position must meet for any

17




part of the benefit of that position to be recognized in an enterprise’s financial statements and also includes requirements for measuring the amount of the benefit to be recognized in the financial statements.  FIN 48 is effective for fiscal years beginning after December 15, 2006, therefore the Company will adopt its provisions effective as of January 1, 2007.  The Company has not yet determined the impact of adopting FIN 48.  In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public.  While the Company believes that its financial statements have been prepared in accordance with U.S. generally accepted accounting principles, the Company cannot predict the impact of future changes to accounting principles or its accounting policies on its financial statements going forward.

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

As required by FAS No. 142, “Goodwill and Other Intangibles,” the Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment using the required business valuation methods.  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.

ITEM 1B.                      Unresolved Staff Comments

None.

ITEM 2.                           PROPERTIES

The principal manufacturing facilities and other material important physical properties of the continuing operations of the Company at December 31, 2006 are listed below and grouped by product segment.  All properties shown are owned in fee except where otherwise noted.

Glass Containers

 

 

North American Operations

 

 

United States

 

 

Glass Container Plants

 

 

 

Atlanta, GA

 

Oakland, CA

 

Auburn, NY

 

Portland, OR

 

Brockway, PA

 

Streator, IL

 

Charlotte, MI

 

Toano, VA

 

Clarion, PA

 

Tracy, CA

 

Crenshaw, PA

 

Waco, TX

 

Danville, VA

 

Windsor, CO

 

Lapel, IN

 

Winston-Salem, NC

 

Los Angeles, CA

 

Zanesville, OH

 

Muskogee, OK

 

 

 

 

 

Machine Shops

 

 

 

Brockway, PA

 

 

 

18




 

Canada

 

 

Glass Container Plants

 

 

 

Brampton, Ontario

 

Scoudouc, New Brunswick

 

Lavington, British Columbia

 

Toronto, Ontario

 

Montreal, Quebec

 

 

 

 

 

 

Asia Pacific Operations

 

 

Australia

 

 

 

Glass Container Plants

 

 

 

Adelaide

 

Melbourne

 

Brisbane

 

Sydney

 

 

 

 

Mold Shop

 

 

 

Melbourne

 

 

 

 

 

 

China

 

 

 

Glass Container Plants

 

 

 

Guangzhou

 

Tianjin

 

Shanghai

 

Wuhan

 

 

 

 

Mold Shop

 

 

 

Tianjin

 

 

 

 

 

 

Indonesia

 

 

Glass Container Plant

 

 

 

Jakarta

 

 

 

 

 

 

New Zealand

 

 

Glass Container Plant

 

 

 

Auckland

 

 

European Operations

 

 

Czech Republic

 

 

Glass Container Plants

 

 

 

Sokolov

 

Teplice

 

 

 

 

Estonia

 

 

 

Glass Container Plant

 

 

 

Jarvakandi

 

 

 

 

 

 

Finland

 

 

 

Glass Container Plant

 

 

 

Karhula

 

 

 

 

 

 

France

 

 

 

Glass Container Plants

 

 

 

Beziers

 

Reims (2 plants)

 

Gironcourt

 

Vayres

 

Labegude

 

Veauche

 

19




 

Puy-Guillaume

 

Wingles

 

 

 

Germany

 

 

Glass Container Plants

 

 

 

Achern

 

Holzminden

 

Bernsdorf

 

Stoevesandt

 

 

 

 

Hungary

 

 

Glass Container Plant

 

 

 

Oroshaza

 

 

 

 

 

 

 

 

 

Italy

 

 

Glass Container Plants

 

 

 

Asti

 

Pordenone

 

Bari (2 plants)

 

Terni

 

Bologna

 

Trento

 

Latina

 

Treviso

 

Trapani

 

Varese

 

Napoli

 

 

 

 

 

Mold Shop

 

 

 

Napoli

 

 

 

 

 

The Netherlands

 

 

Glass Container Plants

 

 

 

Leerdam

 

Schiedam

 

Maastricht

 

 

 

 

 

Poland

 

 

Glass Container Plants

 

 

 

Antoninek

 

Jaroslaw

 

 

 

Spain

 

 

Glass Container Plants

 

 

 

Alcala

 

Barcelona

 

 

 

United Kingdom

 

 

Glass Container Plants

 

 

 

Alloa

 

Harlow

 

 

 

Machine Shop

 

 

 

Birmingham

 

 

 

 

 

South American Operations

 

 

Brazil

 

 

 

Glass Container Plants

 

 

 

Rio de Janeiro
(glass container and tableware)

Sao Paulo

 

20




 

Mold Shop

 

 

 

Manaus

 

 

 

 

 

Colombia

 

 

Glass Container Plants

 

 

 

Envigado

 

Zipaquira (glass container and flat glass)

 

Soacha

 

 

 

 

 

Tableware Plant

 

 

 

Buga

 

 

 

 

 

Machine Shop

 

 

 

Cali

 

 

 

 

 

Ecuador

 

 

Glass Container Plant

 

 

 

Guayaquil

 

 

 

 

 

Peru

 

 

Glass Container Plant

 

 

 

Callao

 

 

 

 

 

Venezuela

 

 

Glass Container Plants

 

 

 

Valencia

 

Valera

 

 

 

Plastics Packaging

 

 

North American Operations

 

 

United States

 

 

 

Berlin, OH (1)

 

Hamlet, NC

 

Bowling Green, OH

 

Hattiesburg, MS

 

Brookville, PA

 

Nashua, NH

 

Constantine, MI

 

Rocky Mount, NC

 

Erie, PA

 

Rossville, GA (2)

 

Franklin, IN

 

Washington, NJ (2)

 

Greenville, SC

 

 

 

 

 

Puerto Rico

 

 

 

Las Piedras

 

 

 

 

 

Asia Pacific Operations

 

 

Malaysia

 

 

 

Johor Bahru (2)

 

 

 

 

 

Singapore

 

 

 

Singapore (2)

 

 

 

21




 

European Operations

 

 

Hungary

 

 

 

Gayor (2)

 

 

 

 

 

South American Operations

 

 

Brazil

 

 

 

Sao Paulo

 

 

 

 

 

Corporate Facilities

 

 

Perrysburg, OH (2)

 

 

 

 

 

In addition, a glass container plant in Lurin, Peru is under construction.

 


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

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

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

ITEM 3.                           LEGAL PROCEEDINGS

For further information on legal proceedings, see Note 20 to the Consolidated Financial Statements and the section entitled “Environmental and Other Governmental Regulation” in Item 1.

ITEM 4.                           SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the last quarter of the fiscal year ended December 31, 2006.

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 National Association of Securities Dealers, was as follows:

22




 

 

2006

 

2005

 

 

 

High

 

Low

 

High

 

Low

 

 

 

 

 

 

 

 

 

 

 

First Quarter

 

$

22.50

 

$

16.51

 

$

26.68

 

$

20.25

 

Second Quarter

 

18.66

 

15.51

 

27.19

 

22.62

 

Third Quarter

 

16.86

 

13.10

 

27.50

 

20.05

 

Fourth Quarter

 

19.69

 

14.85

 

22.35

 

17.56

 

 

The subsection entitled “Performance Graph” which is included in the Proxy Statement is incorporated herein by reference.

The number of share owners of record on January 31, 2007 was 1,252.  Approximately 94% of the outstanding shares were registered in the name of Depository Trust Company, or CEDE, which held such shares on behalf of a number of brokerage firms, banks, and other financial institutions.  The shares attributed to these financial institutions, in turn, represented the interests of more than 25,000 unidentified beneficial owners.  No dividends have been declared or paid since the Company’s initial public offering in December 1991 and the Company does not anticipate paying any dividends in the near future.  For restrictions on payment of dividends on common stock, see Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity – Current and Long Term Debt and Note 6 to the Consolidated Financial Statements.

23




 

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, 2006.  The financial data for each of the five years in the period ended December 31, 2006 was derived from the audited consolidated financial statements of the Company.  For more information, see the “Consolidated Financial Statements” included elsewhere in this document.

 

 

Years ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(Dollar amounts in millions)

 

Consolidated operating results (a):

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

7,422.0

 

$

7,079.0

 

$

6,128.4

 

$

4,975.6

 

$

4,621.2

 

Other revenue (b)

 

101.5

 

110.7

 

135.0

 

90.2

 

110.0

 

 

 

7,523.5

 

7,189.7

 

6,263.4

 

5,065.8

 

4,731.2

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Manufacturing, shipping and delivery (c)

 

6,084.0

 

5,719.5

 

4,918.4

 

3,967.9

 

3,572.9

 

Research, engineering, selling, administrative and other (d)

 

808.7

 

1,222.1

 

659.8

 

1,106.1

 

848.6

 

Earnings (loss) before interest expense and items below

 

630.8

 

248.1

 

685.2

 

(8.2

)

309.7

 

Interest expense (e)

 

488.2

 

466.7

 

474.9

 

429.8

 

372.2

 

Earnings (loss) from continuing operations before items below

 

142.6

 

(218.6

)

210.3

 

(438.0

)

(62.5

)

Provision (credit) for income taxes (f)

 

126.5

 

367.1

 

5.9

 

(133.7

)

(49.8

)

Minority share owners’ interests in earnings of subsidiaries

 

43.6

 

35.9

 

32.9

 

25.8

 

25.5

 

Earnings (loss) from continuing operations before cumulative effect of accounting change

 

(27.5

)

(621.6

)

171.5

 

(330.1

)

(38.2

)

Net earnings (loss) of discontinued operations (g)

 

 

 

63.0

 

64.0

 

(660.7

)

38.0

 

Cumulative effect of accounting change (h)

 

 

 

 

 

 

 

 

 

(460.0

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(27.5

)

$

(558.6

)

$

235.5

 

$

(990.8

)

$

(460.2

)

 

24




 

 

 

Years ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(Dollar amounts in millions, except per share data)

 

Basic earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations before cumulative effect of accounting change

 

$

(0.32

)

$

(4.26

)

$

1.01

 

$

(2.39

)

$

(0.41

)

Net earnings (loss) of discontinued operations

 

 

 

0.41

 

0.44

 

(4.50

)

0.26

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

(3.14

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(0.32

)

$

(3.85

)

$

1.45

 

$

(6.89

)

$

(3.29

)

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding (in thousands)

 

152,071

 

150,910

 

147,963

 

146,914

 

146,616

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) from continuing operations before cumulative effect of accounting change

 

$

(0.32

)

$

(4.26

)

$

1.00

 

$

(2.39

)

$

(0.41

)

Net earnings (loss) of discontinued operations

 

 

 

0.41

 

0.43

 

(4.50

)

0.26

 

Cumulative effect of accounting change

 

 

 

 

 

 

 

 

 

(3.14

)

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss)

 

$

(0.32

)

$

(3.85

)

$

1.43

 

$

(6.89

)

$

(3.29

)

 

 

 

 

 

 

 

 

 

 

 

 

Diluted average shares (in thousands)

 

152,071

 

150,910

 

149,680

 

146,914

 

146,616

 

 

The Company’s convertible preferred stock was not included in the computation of 2004 diluted earnings per share since the result would have been antidilutive.  Options to purchase 5,067,104 weighted average shares of common stock which were outstanding during 2004 were not included in the computation of diluted earnings per share because the options’ exercise price was greater than the average market price of the common shares. For the years ended December 31, 2006, 2005, 2003 and 2002, diluted earnings per share of common stock are equal to basic earnings per share of common stock due to the net losses.

25




 

 

 

Years ended December 31,

 

 

 

2006

 

2005

 

2004

 

2003

 

2002

 

 

 

(Dollar amounts in millions)

 

Other data:

 

 

 

 

 

 

 

 

 

 

 

The following are included in net earnings:

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

$

469.0

 

$

480.2

 

$

436.0

 

$

391.9

 

$

353.4

 

Amortization of intangibles

 

27.3

 

27.8

 

23.8

 

21.4

 

21.5

 

Amortization of deferred finance fees (included in interest expense)

 

12.9

 

16.0

 

15.0

 

14.4

 

16.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance sheet data (at end of period):

 

 

 

 

 

 

 

 

 

 

 

Working capital (current assets less current liabilities)

 

$

67

 

$

460

 

$

494

 

$

758

 

$

590

 

Total assets

 

9,321

 

9,522

 

10,737

 

9,531

 

9,869

 

Total debt

 

5,457

 

5,297

 

5,360

 

5,426

 

5,346

 

Share owners’ equity

 

357

 

724

 

1,544

 

1,003

 

1,671

 

 


(a)          Amounts for the year ended December 31, 2004 include the results of BSN from the date of acquisition on June 21, 2004.

(b)         Other revenue in 2006 includes a gain of $15.9 million ($11.2 million after tax) for the curtailment of postretirement benefits in The Netherlands.

Other revenue in 2005 includes $28.1 million (pretax and after tax) from the sale of the Company’s glass container facility in Corsico, Italy.

Other revenue in 2004 includes: (1) a gain of $20.6 million ($14.5 million after tax) for the sale of certain real property, and (2) a gain of $31.0 million ($13.1 million after tax) for a restructuring in the Italian Specialty Glass business.

(c)          Amount for 2006 includes a loss of $8.7 million ($8.4 million after tax) from the mark to market effect of natural gas hedge contracts.

Amount for 2005 includes a gain of $3.8 million ($2.3 million after tax) from the mark to market effect of natural gas hedge contracts.

Amount for 2004 includes a gain of $4.9 million ($3.2 million after tax) from the mark to market effect of natural gas hedge contracts.

(d)         Amount for 2006 includes charges of $120.0 million (pretax and after tax) to increase the accrual for estimated future asbestos-related costs, a charge of $20.8 million ($20.7 million after tax) for CEO transition costs, and a charge of $29.7 million ($27.7 million after tax) for the closing of the Godfrey, Illinois machine parts manufacturing operation.

26




 

Amount for 2005 includes a charge of $135.0 million ($86.0 million after tax) to increase the accrual for estimated future asbestos-related costs and a charge of $494.0 million (pretax and after tax) to write down goodwill in the Asia-Pacific Glass unit.

Amount for 2004 includes charges totaling $159.0 million ($90.3 million after tax) for the following: (1) $152.6 million ($84.9 million after tax) to increase the accrual for estimated future asbestos-related costs; and (2) $6.4 million ($5.4 million after tax) for restructuring a life insurance program in order to comply with recent statutory and tax regulation changes.

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

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

(e)          Amount for 2006 includes charges of $6.2 million (pretax and after tax) for note repurchase premiums.

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

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

Includes additional interest charges for the write off of unamortized deferred financing fees related to the early extinguishment of debt as follows:  $11.3 million ($10.9 million after tax) for 2006; $2.8 million ($1.8 million after tax) for 2004; $1.3 million ($0.9 million after tax) for 2003; and $9.1 million ($5.7 million after tax) for 2002.

(f)            Amount for 2006 includes a benefit of $5.7 million from the reversal of a non-U.S. deferred tax asset valuation allowance partially offset by charges related to international tax restructuring.

Amount for 2005 includes a charge of $306.6 million to record a valuation allowance related to accumulated deferred tax assets in the U.S. and a benefit of $5.3 million for the reversal of an accrual for potential tax liabilities related to a previous divestiture.  The accrual is no longer required based on the Company’s reassessment of potential liabilities.

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

27




 

(g)         Amount for 2005 consists principally of a third quarter benefit from the reversal of an accrual for potential tax liabilities related to a previous divestiture.  The accrual is no longer required based on the Company’s reassessment of the potential liabilities.

Amounts related to the Company’s plastic blow-molded container business have been reclassified to discontinued operations for 2002-2004 as a result of the sale of that business in 2004.

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

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

Executive Overview – Years ended December 2006 and 2005

Net sales of the Glass Containers segment were $383.5 million higher than the prior year principally resulting from increased unit shipments, improved pricing, and favorable foreign currency exchange rates.

Net sales of the Plastics Packaging segment were $40.5 million lower than the prior year. Excluding the absence of $46.3 million in sales from a portion of the plastics business in the Asia Pacific region which was divested in December of 2005, sales increased over the prior year.  Resin cost pass-throughs more than offset an unfavorable product mix.

Segment Operating Profit of the Glass Containers segment was $39.5 million lower than the prior year.  The benefits of higher selling prices, improved productivity, fixed cost savings and increased unit shipments were more than offset by inflationary cost increases.

Segment Operating Profit of the Plastics Packaging segment for 2006 was $12.7 million lower than the prior year. The decrease resulted principally from the exit from the Asia Pacific plastics business and inflationary cost increases, partially offset by improved productivity and cost savings.

Interest expense for 2006 was $488.2 million compared to $466.7 million in 2005.  Included in the 2006 interest expense was $17.5 million for note repurchase premiums and the write-off of unamortized finance fees related to the June 2006 refinancing of the Company’s previous credit agreement and the July 2006 repurchase of approximately $150 million principal amount of the 8.875% Senior Secured Notes due 2009.

Net loss in 2006 was $27.5 million, or $0.32 per share (diluted), compared to a loss from continuing operations of $621.6 million, or $4.26 per share (diluted) in 2005.  Earnings in both periods included items that management considers not representative of ongoing operations.  These items decreased net earnings in 2006 by $177.0 million, or $1.15 per share, and decreased net earnings in 2005 by $850.9 million, or $5.62 per share.

Cash payments for asbestos-related costs were $162.5 million for 2006 compared to $171.1 million for 2005.

Capital spending for property, plant and equipment was $320.3 million compared to $404.1 million in the prior year.

28




Results of Operations - Comparison of 2006 with 2005

Net Sales

The Company’s net sales by segment for 2006 and 2005 are presented in the following table.  For further information, see Segment Information included in Note 21 to the Consolidated Financial Statements.

 

 

2006

 

2005

 

 

 

(dollars in millions)

 

Glass Containers

 

$

6,650.4

 

$

6,266.9

 

Plastics Packaging

 

771.6

 

812.1

 

 

 

 

 

 

 

Segment and consolidated net sales

 

$

7,422.0

 

$

7,079.0

 

 

Consolidated net sales for 2006 increased $343.0 million, or 4.8%, to $7,422.0 million from $7,079.0 million in 2005.

Net sales of the Glass Containers segment increased $383.5 million, or 6.1%, over 2005.  Shipments of beer containers and beverage containers increased in 2006 compared to 2005, more than offsetting reductions in most other product lines. Also contributing to the increase were generally higher selling prices.

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

Net sales - 2005

 

 

 

$

6,266.9

 

Net effect of price and mix

 

$

233.8

 

 

 

Net effect of volume

 

79.5

 

 

 

Effects of changing foreign currency rates

 

86.5

 

 

 

Other

 

(16.3

)

 

 

Total net effect on sales

 

 

 

383.5

 

Net sales - 2006

 

 

 

$

6,650.4

 

 

Net sales of the Plastics Packaging segment decreased $40.5 million from 2005.  Excluding the absence of $46.3 million in sales from a portion of the plastics business in the Asia Pacific region which was divested in December of 2005, sales increased over the prior year.  Resin cost pass-throughs more than offset an unfavorable product mix.

29




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

Net sales - 2005

 

 

 

$

812.1

 

Effect of increased resin cost pass-throughs

 

$

17.9

 

 

 

Divestiture

 

(46.3

)

 

 

Net effect of price and mix

 

(11.2

)

 

 

Net effect of volume

 

(0.2

)

 

 

Effects of changing foreign currency rates

 

(0.7

)

 

 

Total net effect on sales

 

 

 

(40.5

)

Net sales - 2006

 

 

 

$

771.6

 

 

Segment Operating Profit

Operating Profit for product 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.  For the Company’s U.S. pension plans, net periodic pension cost has been allocated to product segments.  For further information, see Segment Information included in Note 21 to the Consolidated Financial Statements.

 

2006

 

2005

 

 

 

(dollars in millions)

 

Glass Containers

 

$

751.3

 

$

790.8

 

Plastics Packaging

 

114.5

 

127.2

 

Eliminations and other retained items

 

(91.2

)

(89.4

)

 

Segment Operating Profit of the Glass Containers segment for 2006 decreased $39.5 million, or 5.0%, to $751.3 million, compared with Segment Operating Profit of $790.8 million in 2005.

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

Segment Operating Profit - 2005

 

 

 

$

790.8

 

Net effect of price, mix and unit sales volumes

 

$

270.1

 

 

 

Productivity, European capacity reduction and cost savings

 

116.4

 

 

 

Inflation, operating expenses, warehouse and delivery, and European integration

 

(369.4

)

 

 

Other business impacts including pension expense, and currency translation

 

(38.5

)

 

 

Other

 

(18.1

)

 

 

Total net effect on Segment Operating Profit

 

 

 

(39.5

)

Segment Operating Profit -2006

 

 

 

$

751.3

 

 

Segment Operating Profit of the Plastics Packaging segment for 2006 was $114.5 million compared with Segment Operating Profit of $127.2 million in 2005.

30




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

Segment Operating Profit - 2005

 

 

 

$

127.2

 

Productivity and cost savings

 

$

14.3

 

 

 

Inflation, operating expenses, and warehouse and delivery

 

(9.0

)

 

 

Divestiture

 

(8.2

)

 

 

Other business impacts including pension expense, and currency translation

 

(3.2

)

 

 

Net effect of price, mix and unit sales volumes

 

(0.1

)

 

 

Other

 

(6.5

)

 

 

Total net effect on Segment Operating Profit

 

 

 

(12.7

)

Segment Operating Profit -2006

 

 

 

$

114.5

 

 

Eliminations and other retained items for 2006 were $91.2 million compared to $89.4 million for 2005.

Interest Expense

Interest expense for 2006 was $488.2 million compared to $466.7 million in 2005.  Included in the 2006 interest expense was $17.5 million for both note repurchase premiums and the write-off of unamortized finance fees related to the June 2006 refinancing of the Company’s previous credit agreement and the July 2006 repurchase of approximately $150 million principal amount of the 8.875% Senior Secured Notes due 2009.  Also contributing to the increase were higher average debt balances, partially offset by lower average interest rates.

Provision for Income Taxes

The Company’s reported effective tax rate was 88.7% in 2006 and (167.9)% in 2005. Excluding the effects of separately taxed items in both periods, listed in the table below, the Company’s effective tax rate for the full year 2006 was 40.3% compared with 29.9% for the full year 2005.  The 2006 effective tax rate increased principally because the Company is no longer recording tax benefits on its losses in the United States.  A shift in mix of earnings towards higher tax cost countries in other regions of the world also increased the effective tax rate for the year.

Minority Share Owners’ Interest in Earnings of Subsidiaries

Minority share owners’ interest in earnings of subsidiaries for 2006 was $43.6 million compared to $35.9 million for 2005. The increase is primarily attributed to higher earnings from the Company’s operations in South America.

Earnings from Continuing Operations

For 2006, the Company recorded a net loss of $27.5 million compared to a loss from continuing operations of $621.6 million for the year ended December 31, 2005.  The after tax effects of the items excluded from Segment Operating Profit, the 2006 international net tax benefit, the tax charge to increase the U.S. valuation allowance, the tax benefit of reversing an accrual for potential tax liabilities, and the additional interest charges, increased or decreased earnings in 2006 and 2005 as set forth in the following table (dollars in millions).

31




 

 

 

Net Earnings
Increase (Decrease)

 

Description

 

2006

 

2005

 

Curtailment of postretirement benefits in The Netherlands

 

$

11.2

 

 

 

 

 

 

 

 

 

Gain on the sale of the Corsico, Italy glass container facility

 

 

 

28.1

 

 

 

 

 

 

 

A tax benefit from the reversal of an accrual for potential tax liabilities

 

 

 

5.3

 

Reversal of non-U.S. deferred tax asset valuation allowance partially offset by charges related to international tax restructuring

 

5.7

 

 

 

Impairment of goodwill in the Asia-Pacific Glass unit

 

 

 

(494.0

)

Increase in the U.S. deferred tax valuation allowance

 

 

 

(306.6

)

Increase in the accrual for future asbestos related costs

 

(120.0

)

(86.0

)

Charge for closing the Godfrey, Illinois plant

 

(27.7

)

 

 

CEO transition charge and other

 

(20.7

)

 

 

Note repurchase premiums and write-off of finance fees

 

(17.1

)

 

 

Gain (loss) from the mark to market effect of natural gas hedge contracts

 

(8.4

)

2.3

 

 

 

 

 

 

 

Total

 

$

(177.0

)

$

(850.9

)

 

Executive Overview – Years ended December 2005 and 2004

Net sales of the Glass Containers segment were $900.8 million higher than the prior year principally resulting from the BSN Acquisition and favorable foreign currency exchange rates.

Net sales of the Plastics Packaging segment were $49.8 million higher than the prior year.  Higher sales from improved pricing, increased sales volume and pass-through of higher resin costs were partially offset by the absence of sales from plastic container assets in the Asia Pacific region that were divested in the second quarter of 2004.

Segment Operating Profit of the Glass Containers segment was $31.2 million higher than the prior year.  The BSN Acquisition accounted for most of the increase.  The benefits of stronger foreign currencies and higher selling prices were partially offset by inflationary cost increases.

Segment Operating Profit of the Plastics Products segment was $12.2 million higher than the prior year.  Increases from improved pricing, sales volume, product mix and a gain from the sale of a plant related to the partial exit from the Australian plastics business more than offset increased costs.

Interest expense was $8.2 million lower than the prior year.  The decrease resulted from lower debt levels in the third and fourth quarters of 2005 and the non-recurrence of repurchase premiums partially offset by higher variable interest rates and higher debt from the BSN Acquisition.

Loss from continuing operations in 2005 was $621.6 million, or $4.26 per share (diluted), down from earnings of $171.5 million, or $1.00 per share (diluted), from continuing operations in 2004.  Earnings in both periods included items that management considers not representative of continuing operations.  These items decreased net earnings in 2005 by $850.9 million, or $5.62 per share, and decreased net earnings in 2004 by $46.5 million, or $0.31 per share.

Cash payments for asbestos-related costs were $171.1 million, down 10.0% from the prior year.

32




The Company’s total debt at December 31, 2005 was $5.30 billion or $63.4 million lower than the prior year balance.  Exclusive of the $191.8 million increase in both debt and accounts receivable required by a change in the Company’s European accounts receivable securitization program, total debt decreased by $255.2 million to its lowest level since 1998.

Results of Operations - Comparison of 2005 with 2004

Net Sales

The Company’s net sales by segment for 2005 and 2004 are presented in the following table.  The Plastics Packaging amounts for 2004 reflect only the continuing operations.  For further information, see Segment Information included in Note 21 to the Condensed Consolidated Financial Statements.

 

 

2005

 

2004

 

 

 

(dollars in millions)

 

Glass Containers

 

$

6,266.9

 

$

5,366.1

 

Plastics Packaging

 

812.1

 

762.3

 

 

 

 

 

 

 

Segment and consolidated net sales

 

$

7,079.0

 

$

6,128.4

 

 

Consolidated net sales for 2005 increased $950.6 million, or 15.5%, to $7,079.0 million from $6,128.4 million in 2004.

Net sales of the Glass Containers segment increased $900.8 million, or 16.8%, over 2004.  Contributing to the increase were the additional sales from the BSN Acquisition.  Increased shipments of beverage containers throughout the Americas more than offset reduced shipments of food containers in North America.  Improved pricing also had a favorable effect on net sales.  Favorable currency exchange rates accounted for about 5% of the increase.  Partially offsetting these increases was the absence of sales from the Castellar factory sold in January 2005.

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

Net sales - 2004

 

 

 

$

5,366.1

 

Net effect of the BSN Acquisition, volume, price, and mix

 

$

883.3

 

 

 

Effects of changing foreign currency rates

 

46.2

 

 

 

Divestiture of Castellar factory

 

(28.7

)

 

 

Total net effect on sales

 

 

 

900.8

 

Net sales - 2005

 

 

 

$

6,266.9

 

 

Net sales of the Plastics Packaging segment increased $49.8 million, or 6.5%, from 2004.  The higher sales reflected improved pricing and sales volume in several product lines, the pass-through effect of higher resin costs, and favorable currency translation rates. Partially offsetting these increases was the absence of sales from plastic container assets in the Asia Pacific region that were divested in the second quarter of 2004.

33




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

Net sales - 2004

 

 

 

$

762.3

 

Effect of increased resin cost pass-throughs

 

$

44.8

 

 

 

Net effect of volume, price and mix

 

34.4

 

 

 

Effects of changing foreign currency rates

 

3.5

 

 

 

Divestiture

 

(32.9

)

 

 

Total net effect on sales

 

 

 

49.8

 

Net sales - 2005

 

 

 

$

812.1

 

 

Segment Operating Profit

Operating Profit for product 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.  For the Company’s U.S. pension plans, net periodic pension cost (credit) has been allocated to product segments.  The Plastics Packaging amounts for 2004 reflect only the continuing operations.  For further information, see Segment Information included in Note 21 to the Consolidated Financial Statements.

 

 

2005

 

2004

 

 

 

(dollars in millions)

 

Glass Containers

 

$

790.8

 

$

759.6

 

Plastics Packaging

 

127.2

 

115.0

 

Eliminations and other retained items

 

(89.4

)

(102.2

)

 

Segment Operating Profit of the Glass Containers segment for 2005 increased $31.2 million, or 4.1%, to $790.8 million, compared with Segment Operating Profit of $759.6 million in 2004.  Factors contributing to the increase were: (1) the additional operating profit from the BSN Acquisition; (2) increased unit shipments of beverage containers principally in the Americas; (3) favorable exchange rates; (4) generally improved selling prices; and (5) the non-recurrence of the acquisition step-up of BSN finished goods inventory.  Factors that partially offset the increase were: (1) inflationary cost increases including energy, raw material costs, and transportation; (2) temporarily idled production capacity to reduce inventory; (3) costs of the European integration and new European headquarters; (4) the absence of equity earnings from Consol Limited (divested in the fourth quarter of 2004); (5) the absence of operating profit from the Corsico and Castellar factories; and (6) reduced food container shipments in North America.

34




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

Segment Operating Profit - 2004

 

 

 

$

759.6

 

Net effect of BSN acquisition and volume, price, and mix

 

$

184.0

 

 

 

Non-recurrence of BSN inventory step-up

 

31.1

 

 

 

Effects of changing foreign currency rates

 

14.5

 

 

 

Higher energy costs

 

(75.7

)

 

 

Other inflationary cost increases

 

(57.7

)

 

 

Temporarily idled production capacity to reduce inventory

 

(20.5

)

 

 

Effects of European integration and new European headquarter costs

 

(18.0

)

 

 

Divestiture of Corsico and Castellar factories and Consol investment

 

(13.6

)

 

 

Increased delivery and warehousing costs

 

(4.7

)

 

 

Other

 

(8.2

)

 

 

Total net effect on Segment Operating Profit

 

 

 

31.2

 

Segment Operating Profit -2005

 

 

 

$

790.8

 

 

Segment Operating Profit of the Plastics Packaging segment for 2005 increased $12.2 million, or 10.6%, to $127.2 million compared with Segment Operating Profit of $115.0 million in 2004.  The 2005 amount includes a $6 million fourth quarter gain from the sale of one plant related to the partial exit from the Australian plastics business and a reduction of the accrued exit costs.  Also contributing to the increase were the effects of improved pricing, product mix, and sales volume which more than offset the effect of increases in manufacturing, shipping and delivery costs, and the absence of profits from the plastic container assets in the Asia Pacific region that were divested in the second quarter of 2004.

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

Segment Operating Profit - 2004

 

 

 

$

115.0

 

Net effect of volume, price and mix

 

$

14.8

 

 

 

Partial exit of Australian plastics business

 

6.0

 

 

 

Non-recurrence plant shut down costs

 

3.7

 

 

 

Divestiture

 

(4.1

)

 

 

Increased delivery, warehousing and other inflationary cost increases

 

(4.2

)

 

 

Higher energy costs

 

(1.9

)

 

 

Other

 

(2.1

)

 

 

Total net effect on Segment Operating Profit

 

 

 

12.2

 

Segment Operating Profit - 2005

 

 

 

$

127.2

 

 

Eliminations and other retained items for 2005 were favorable by $12.8 million compared to 2004.   The 2005 year reflects a favorable adjustment of approximately $10.0 million to the Company’s accruals for self-insured risks, partially offset by higher retained costs for the divested blow molded plastic container business and adjustments made to certain accruals.  The 2004 year included self-insured property and casualty losses that did not recur in 2005.

35




Interest Expense

Interest expense decreased to $466.7 million in 2005 from $474.9 million in 2004.  The 2004 amount included $30.8 million for repurchase premiums and write-offs of unamortized finance fees.  Exclusive of that amount, interest expense increased $22.6 million in 2005 due to higher interest rates on the Company’s variable rate debt and additional interest as a result of higher debt related to the BSN Acquisition.  Partially offsetting this increase was lower interest as a result of lower average debt balances in the third and fourth quarters of 2005 and lower interest rates on fixed rate debt in the fourth quarter of 2005 compared to the fourth quarter of 2004.

Provision for Income Taxes

The Company’s reported effective tax rate was (167.9)%  in 2005 and 2.8% in 2004. Excluding the effects of separately taxed items in both periods, listed in the table below, the Company’s effective tax rate for 2005 was 29.9% compared with 26.9% in 2004.  The higher 2005 effective rate is principally due to a change in the mix of earnings toward higher tax international jurisdictions, tax legislation enacted in Ohio and recognition of other discrete changes in deferred taxes during 2005.

Minority Share Owners’ Interest in Earnings of Subsidiaries

Minority share owners’ interest in earnings of subsidiaries for 2005 was $35.9 million compared to $32.9 million for 2004.

Earnings from Continuing Operations

For 2005, the Company recorded a loss from continuing operations of $621.6 million compared to earnings from continuing operations of $171.5 million for the year ended December 31, 2004.  The after tax effects of the items excluded from Segment Operating Profit, the tax charge to increase the valuation allowance, the tax benefit of reversing an accrual for potential tax liabilities, the additional interest charges and the tax benefit on the Australian tax consolidation, increased or decreased earnings in 2005 and 2004 as set forth in the following table (dollars in millions).

 

 

Net Earnings
Increase (Decrease)

 

Description

 

2005

 

2004

 

 

 

 

 

 

 

Gain on the sale of the Corsico, Italy glass container facility

 

$

28.1

 

$

 

 

 

 

 

 

 

A tax benefit from the reversal of an accrual for potential tax liabilities

 

5.3

 

 

 

 

 

 

 

 

 

Gain on the sale of certain real property

 

 

 

14.5

 

Gain on a restructuring in the Italian Specialty Glass business

 

 

 

13.1

 

Gain from the mark to market effect of natural gas hedge contracts

 

2.3

 

3.2

 

A benefit for a tax consolidation in the Australian glass business

 

 

 

33.1

 

Impairment of goodwill in the Asia-Pacific Glass unit

 

(494.0

)

 

 

Increase in the deferred tax valuation allowance

 

(306.6

)

 

 

Increase in the reserve for future asbestos related costs

 

(86.0

)

(84.9

)

Note repurchase premiums and write-off of finance fees

 

 

 

(20.1

)

Life insurance restructuring charge

 

 

 

(5.4

)

 

 

 

 

 

 

Total

 

$

(850.9

)

$

(46.5

)

 

36




 

Discontinued Operations

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

Cash proceeds of approximately $1.2 billion were used to repay term loans under the Company’s bank credit facility, which was amended to permit the sale.  The sale agreement included a post-closing purchase price adjustment based on changes in certain working capital components and certain other assets and liabilities of the business.  This adjustment was finalized in April 2005, and Graham was paid approximately $39 million.  The adjustment did not impact results of operations.

Included in the sale were 24 plastics manufacturing plants in the U.S., two in Mexico, three in Europe and two in South America, serving consumer products companies in the food, beverage, household, chemical and personal care industries.  The blow-molded plastic container operations were part of the consumer products business unit of the plastics packaging segment.

As required by FAS No. 144, the Company has presented the results of operations for the blow-molded plastic container business in the Consolidated Results of Operations for 2004 as a discontinued operation.  Interest expense was allocated to discontinued operations based on debt that was required to be repaid from the proceeds.

The following summarizes the revenues and expenses of the discontinued operations as reported in the condensed consolidated results of operations for the period indicated:

 

Year ended

 

 

 

December 31,

 

 

 

2004

 

Revenues:

 

 

 

 

 

 

 

Net sales

 

$

875.3

 

Other revenue

 

7.7

 

 

 

883.0

 

Costs and expenses:

 

 

 

 

 

 

 

Manufacturing, shipping and delivery

 

754.6

 

Research, development and engineering

 

16.0

 

Selling and administrative

 

23.7

 

Interest

 

45.1

 

Other

 

22.9

 

 

 

862.3

 

Earnings before items below

 

20.7

 

Provision for income taxes

 

27.1

 

Gain on sale of discontinued operations

 

70.4

 

Net earnings from

 

 

 

discontinued operations

 

$

64.0

 

 

The sale of the blow-molded plastic business resulted in a substantial capital loss, primarily related to previous goodwill write downs that were not deductible when recorded.  The 2004 gain on the sale of discontinued operations of $70.4 million includes a credit for income taxes of $39.7 million, representing the tax benefit from offsetting a portion of the loss against otherwise taxable capital gains.

37




 

Discontinued operations of $63.0 million for 2005 includes $61.8 million for a benefit from the reversal of an accrual for potential tax liabilities related to a previous divestiture.  The accrual is no longer required based on the Company’s reassessment of the potential liabilities due to several factors, including statute expiration in September 2005.  The balance of $1.2 million relates to an adjustment of the 2004 gain on the sale of the blow-molded plastic container operations principally from finalizing certain tax allocations.

Asbestos-Related Costs

The fourth quarter 2006 charge for asbestos-related costs was $120.0 million (pretax and after tax), compared to the fourth quarter 2005 charge of $135.0 million ($86.0 million after tax).  These charges resulted from the Company’s comprehensive annual review of asbestos-related liabilities and costs.  In each case, the Company concluded that an increase in the accrued liability was required to provide for estimated indemnity payments and legal fees arising from asbestos personal injury lawsuits and claims pending and expected to be filed during the several years following the completion of the comprehensive review.  See “Critical Accounting Estimates” for further information.

Asbestos-related cash payments for 2006 were $162.5 million, a reduction of $8.6 million, or 5.0%, from 2005.  During 2006, the Company disposed of approximately 21,000 claims.  Certain dispositions in 2006 and prior years have included deferred amounts payable over periods ranging up to seven years.  Deferred amounts payable at December 31, 2006 were approximately $82.6 million compared to approximately $91 million at December 31, 2005.  The Company anticipates that cash flows from operations and other sources will be sufficient to meet all asbestos-related obligations on a short-term and long-term basis.

As of December 31, 2006, the number of asbestos-related claims pending against the Company was approximately 18,000, down from approximately 32,000 pending claims at December 31, 2005.  A former business unit of the Company produced specialized high-temperature insulation material containing asbestos from 1948 until 1958, when the business was sold. In line with its limited involvement with an asbestos-containing product and its exit from that business over 45 years ago, the Company will continue to work aggressively to minimize the number of incoming cases and will continue to limit payments to only those impaired claimants who were exposed to the Company’s products and whose claims have merit under applicable state law.  See Note 20 to the Consolidated Financial Statements for further information.

2006 Non-operational Items

Capacity Curtailment

In September 2006, the Company announced the permanent closing of its Godfrey, Illinois machine parts manufacturing operation. The facility was closed by the end of the year. This closing is part of a broad initiative to reduce working capital and improve system costs.  The Company also closed a small recycling facility in Ohio. As a result, the Company recorded a charge of $29.7 million ($27.7 million after tax) in the third quarter of 2006.

The closing of these facilities resulted in the elimination of approximately 260 jobs and a corresponding reduction in the Company’s workforce.  The Company anticipates that it will pay out approximately $11.5 million in cash related to insurance, benefits, plant clean up, and other plant closing costs. The Company expects that the majority of these costs will be paid out by the end of 2008.

38




 

CEO Transition and Other Separation Charges

The Company recorded a fourth quarter charge of $20.8 million ($20.7 million after tax) associated with the separation agreement with its former CEO and with several members of the European management team. The charge also included costs related to the employment agreement with the Company’s new CEO.

Other Postretirement Benefits

The Company recorded a fourth quarter gain of $15.9 million ($11.2 million after tax) related to curtailment of certain postretirement benefits in The Netherlands as a result of certain improvements in retiree medical benefits offered by the government.

Tax Benefit

In the fourth quarter, the Company recorded a net tax benefit of $5.7 million from the reversal of a valuation allowance against certain non-U.S. deferred tax assets due to improving operations, partially offset by charges related to international tax restructuring.

2005 Non-operational Items

Impairment of Goodwill

During the fourth quarter of 2005, the Company completed its annual impairment testing using business enterprise values and determined that impairment existed in the goodwill of its Asia Pacific Glass business unit. Lower projected cash flows as a result of competitive pricing pressures in the Company’s Australian glass operations caused the decline in the business enterprise value.  Following a review of the valuation of the unit’s identifiable assets, the Company recorded an impairment charge of $494.0 million to reduce the reported value of its goodwill.

Deferred Tax Valuation Allowance

The Company recorded a non-cash charge of $306.6 million in the fourth quarter of 2005 to increase the valuation allowance against its accumulated net deferred tax assets in the United States.  The Company had recorded net deferred tax assets related principally to asbestos charges and net operating losses in recent years.  The amount of valuation allowance required under the provisions of FAS No. 109 is dependent upon projected near-term U.S. profitability including the effects of tax planning.  During the fourth quarter of 2005, the Company determined that an additional valuation allowance was necessary because of the near-term effects on U.S. profitability of continued asbestos-related payments, significant interest expense, rising energy costs and other cost increases.  As a result of the lower projected U.S. taxable income, the Company determined that certain tax planning strategies were no longer prudent and feasible and, therefore, were not likely to be implemented.

39




Capital Resources and Liquidity

Current and Long-Term Debt

The Company’s total debt at December 31, 2006 was $5.46 billion, compared to $5.30 billion at December 31, 2005.

On June 14, 2006, the Company’s subsidiary borrowers entered into the Secured Credit Agreement (the “Agreement”).  Proceeds from the Agreement were used to repay all outstanding amounts under the previous credit agreement. At December 31, 2006, the Agreement included a $900.0 million revolving credit facility, a 292.5 million Australian dollar term loan, and a 134.6 million Canadian dollar term loan, each of which has a final maturity date of June 15, 2012. It also included a $195.5 million term loan and a €195.5 million term loan each of which have a final maturity date of June 14, 2013. The Agreement also permits the Company, at its option, to refinance certain of its outstanding notes and debentures prior to their scheduled maturity. The Company recorded $10.2 million of additional interest charges for the write-off of unamortized finance fees related to the early repayment of the previous credit agreement.

At December 31, 2006, the Company’s subsidiary borrowers had unused credit of $765.6 million available under the Agreement.

The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2006 was 6.52%.

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

During July of 2006, a subsidiary of the Company used borrowings under the Agreement to repurchase $150.0 million principal amount of the 8.875% Senior Secured Notes due 2009.  During the third quarter, the Company recorded $7.3 million of additional interest charges for note repurchase premiums and the related write-off of unamortized finance fees.

40




During the fourth quarter of 2005, the Company expanded the capacity of its European accounts receivable securitization program from €200 million to €320 million to include operations in Italy and the United Kingdom. The accounts receivable securitization program provides lower costs of financing than traditional bank debt. The terms of this expansion resulted in changing from off-balance sheet to on-balance sheet accounting for the program by consolidating both the accounts receivable in the program and the secured indebtedness of the same amount.

During October of 2006, the Company entered into a new €300 million European accounts receivable securitization program.  The new program replaces the previous European program, described in the preceding paragraph, which was set to terminate in October 2006.

At December 31, 2006, the European program had a balance of $195.0 million, and the Asia Pacific program had a balance of $84.4 million recorded in short term loans.  The interest rate on the accounts receivable securitization program is a local short term variable rate plus a margin over the variable rate of 0.70% for the European program and 0.85% for the Asia Pacific program.  The weighted average interest rate on borrowings under the European program was 4.81% at December 31, 2006.  The weighted average interest rate on borrowings under the Asia Pacific program was 7.43% at December 31, 2006.  These programs have maturity dates ranging from January of 2008 through October of 2011.

Cash Flows

For 2006, cash provided by operating activities was $150.3 million compared with $453.1 million for 2005.  The 2006 and 2005 amounts exclude $127.3 million and $50.7 million, respectively, of collections on receivables arising from the consolidation of the receivables securitization program as described in Note 6 to the Consolidated Financial Statements.  Software acquisition and development costs and payments of approximately $33.7 million for European restructuring activities required more cash in 2006 than in 2005.  Working capital also required more cash in 2006 than in 2005 due to increased production and sales activities, principally in the fourth quarter, and because the change in 2006 lacked the benefit of the reductions achieved in 2005 as part of Company’s focus on working capital improvement.

For the year ended December 31, 2006, the Company paid $461.0 million in cash interest compared with $450.9 million for 2005.  The 2006 amount included $6.2 million for repurchase premiums.

Asbestos-related payments for 2006 decreased $8.6 million, or 5.0%, to $162.5 million, compared with $171.1 million for 2005.  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.

Capital spending for property, plant and equipment was $320.3 million compared to $404.1 million in the prior year.  The lower capital spending was principally due to the completion of the new glass container manufacturing facility in Windsor, CO. in the fourth quarter of 2005. In addition, the Company capitalized $25.3 million under capital lease obligations with the related financing recorded as long term debt.  The Company continues to focus on reducing capital spending and improving its return on invested capital by improving capital efficiency.

41




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

Contractual Obligations and Off-Balance Sheet Arrangements

The following information summarizes the Company’s significant contractual cash obligations at December 31, 2006 (dollars in millions).

 

 

Payments due by period

 

 

 

Total

 

Less than 
one year

 

1-2 years

 

3-5 years

 

More than 5 
years

 

Contractual cash obligations:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

$

5,012.2

 

$

323.0

 

$

1,141.2

 

$

923.3

 

$

2,624.7

 

Capital lease obligations

 

31.6

 

1.4

 

2.9

 

2.6

 

24.7

 

Operating leases

 

146.0

 

49.2

 

61.6

 

26.9

 

8.3

 

Interest

 

2,128.9

 

406.7

 

710.3

 

512.6

 

499.3

 

Pension benefit plan contributions

 

55.3

 

55.3

 

 

 

 

 

 

 

Postretirement benefit plan benefit payments

 

230.3

 

24.5

 

47.6

 

46.4

 

111.8

 

Total contractual cash obligations

 

$

7,604.3

 

$

860.1

 

$

1,963.6

 

$

1,511.8

 

$

3,268.8

 

 

 

 

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

 

$

89.2

 

$

89.2

 

 

 

 

 

 

 

Guarantees

 

9.0

 

 

 

 

 

 

 

$

9.0

 

Total commercial commitments

 

$

98.2

 

$

89.2

 

$

 

$

 

$

9.0

 

 

Critical Accounting Estimates

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

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

42




 

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, 2006 totaled $3,193.7 million, representing 34% of total assets.  Depreciation expense during 2006 totaled $469.0 million, representing over 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 singly.   However, when assets are purchased in groups, or as part of a business, costs assigned to PP&E are based on an estimate of fair value of each asset at the date of acquisition.  These estimates are based on assumptions about asset condition, remaining useful life and market conditions, among others.  The Company frequently employs expert appraisers to aid in allocating cost to 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 molding 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 on 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.  Over the past three years, changes in economic useful life assumptions have not had a material impact on the Company’s reported results.

Impairment of Long-Lived Assets

Property, Plant and Equipment –As required by FAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” 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 factory.  The Company assesses recoverability by comparing the carrying amount of the asset group to the estimated undiscounted future cash flows expected to be

43




generated by the assets.  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: industry and market conditions, sales volume and prices, costs to produce, inflation, etc.  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.  There were no material charges for impairment of asset groups held for use in 2006, 2005, or 2004.  As part of the actions taken to close its Godfrey, Illinois machine parts manufacturing operation, the Company recognized a charge for impairment of assets to be sold or abandoned of $3.8 million in 2006.  See Note 18 to the Consolidated Financial Statements.

Goodwill – Goodwill at December 31, 2006 totaled $2,464.7 million, representing 26% of total assets.  As required by FAS No. 142, “Goodwill and Other Intangibles,” the Company evaluates goodwill annually (or more frequently if impairment indicators arise) for impairment.  The Company conducts its evaluation as of October 1 of each year.  Goodwill impairment testing is performed using the business enterprise value (“BEV”) of each reporting unit which is calculated as of a measurement date by determining the present value of debt-free, after-tax projected future cash flows, discounted at the weighted average cost of capital of a hypothetical third party buyer.  This BEV is then compared to the 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 2006, the Company completed its annual testing and determined that no impairment of goodwill existed.

If the Company’s projected future cash flows were substantially lower, or if the assumed weighted average cost of capital was substantially higher, the testing performed as of October 1, 2006, may have indicated an impairment of one or more of the Company’s reporting units and, as a result, the related goodwill would also have been impaired.  For example, if projected future cash flows had been decreased by 5%, or alternatively, if the weighted average cost of capital had been increased by 5%, the resulting lower BEV’s would still have exceeded the book value of each reporting unit by a significant margin in all cases except for the Asia Pacific Glass reporting unit. Because the BEV for the Asia Pacific Glass reporting unit exceeded its book value by approximately 7%, the results of the impairment testing could be negatively affected by relatively modest changes in the assumptions and projections. At December 31, 2006, the goodwill of the Asia Pacific Glass reporting unit accounted for approximately $500 million of the Company’s consolidated goodwill.

The Company will monitor conditions throughout 2007 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 2007, 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

44




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.  There were no material charges for impairment of equity investments in 2006, 2005 or 2004.

Repair parts inventories are carried in order to provide a dependable supply of quality parts for servicing the Company’s PP&E, particularly its glass melting furnaces and molding 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.  As part of the actions taken to close its Godfrey, Illinois machine parts manufacturing operation, the Company recognized a write-down of excess repair parts inventories of $7.9 million in 2006.  See Note 18 to the Consolidated Financial Statements.

Pension Benefit Plans

Significant Estimates - The determination of pension obligations and the related pension expense or credits to operations involves significant estimates.  The most significant estimates are the discount rate used to calculate the actuarial present value of benefit obligations and the expected long-term rate of return on assets used in calculating the pension charges or credits for the year.  The Company uses discount rates based on yields of highly rated fixed income debt securities at the end of the year.  At December 31, 2006, the weighted average discount rate for all plans was 5.49%.  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, results may vary significantly from year to year.  For example, actual returns in the Company’s two largest plans were negative in each of the years 2000-2002.  The returns exceeded 20% in 2003, 18% in 2004, 10% in 2005 and 16% in 2006.  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 2007, the Company’s estimated weighted average expected long-term rate of return on pension assets is 8.1% compared to 8.1% for the year ended December 31, 2006.  The Company recorded pension expense of $8.7million, $4.0 million, and $36.8 million in 2004, 2005, and 2006, respectively, from its principal defined benefit pension plans.  The increase in net pension expense in 2006 resulted from lower return rates, the use of an updated mortality table reflecting longer lifetimes, and higher amortization.  Depending on currency translation rates, the Company expects to record approximately $1.7 million of pension income for the full year of 2007.  The expected improvement in 2007 is principally the result of higher asset values in the U.S. plans.

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 $19 million in pretax pension expense for the full year 2007.  In addition, changes in external factors, including the fair values of plan assets and the discount rates used to calculate plan liabilities, could have a significant effect on the recognition of funded status as described below.

Recognition of Funded Status – In September 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 158 (“FAS No. 158”), “Employers’ Accounting for

45




Defined Benefit Pension and Other Postretirement Plans”.  The Company adopted the provisions of FAS No. 158 as of December 31, 2006.  FAS No. 158 requires employers to adjust the assets and liabilities related to defined benefit plans so that the amounts reflected on the balance sheet represent the overfunded or underfunded status of the plans.  These funded status amounts are measured as the difference between the fair value of plan assets and benefit obligations as of the balance sheet date.  For pension plans, the fair value of plan assets is compared to the Projected Benefit Obligation (“PBO”).  For other postretirement benefit plans, the fair value of plan assets is compared to the Accumulated Postretirement Benefit Obligation (“APBO”). In the Company’s case, the required adjustments resulted in a non-cash charge of $639.9 million ($617.1 million after tax) to the Accumulated Other Comprehensive Income component of share owners’ equity.  The most significant of the required adjustments was a $502.5 million reduction of the prepaid pension asset at December 31, 2006.

Funding and Credit Compliance - The Company believes it will not be required to make cash contributions to the U.S. plans for at least several years.  The Company expects to contribute approximately $55 million to its non-U.S. defined benefit pension plans in 2007, down from $69.5 million in 2006.  The covenants under the Company’s Secured Credit Agreement were not affected by the $617.1 million reduction in the Company’s net worth under FAS No. 158.

Contingencies and Litigation

The Company believes that its ultimate asbestos-related liability (i.e., its indemnity payments or other claim disposition costs plus related legal fees) cannot be estimated with certainty. The Company’s ability to reasonably estimate its liability has been significantly affected by the volatility of asbestos-related litigation in the United States, the expanding list of non-traditional defendants that have been sued in this litigation, the continued use of litigation screenings to generate new lawsuits, the large number of claims asserted or filed by parties who claim prior exposure to asbestos materials but have no present physical impairment as a result of such exposure, and the growing number of co-defendants that have filed for bankruptcy. The Company believes that the bankruptcies of additional co-defendants have resulted in an acceleration of the presentation and disposition of a number of claims, which would otherwise have been presented and disposed of over the next several years.  The Company continues to monitor trends which may affect its ultimate liability and continues to analyze the developments and variables affecting or likely to affect the resolution of pending and future asbestos claims against the Company.

The Company conducts a comprehensive review of its asbestos-related liabilities and costs annually in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review.  If the results of an annual comprehensive review indicate that the existing amount of the accrued liability is insufficient to cover its estimated future asbestos-related costs, then the Company will record an appropriate charge to increase the accrued liability.  The Company believes that an estimation of the reasonably probable amount of the contingent liability for claims not yet asserted against the Company is not possible beyond a period of several years.  Therefore, while the results of future annual comprehensive reviews cannot be determined, the Company expects the addition of one year to the estimation period will result in an annual charge.

In the fourth quarter of 2006, the Company recorded a charge of $120.0 million (pretax and after tax) to increase its accrued liability for asbestos-related costs. This amount was reduced from the 2005 charge of $135.0 million.  The factors and developments that particularly affected the determination of the amount of this increase in the accrual included the following: i) the decline in serious disease filings against the Company and the significant decline in the non-malignancy filings; (ii) the Company’s successful

46




litigation record during the year; (iii) the 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 20 to the Consolidated Financial Statements.

Income Taxes

The Company accounts for income taxes under the provisions of FAS No. 109, “Accounting for Income Taxes,” under which deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using the enacted tax rate.  Income tax expense was $126.5 million for the year ended December 31, 2006.

Management judgment is required in determining income tax expense and the related balance sheet amounts.  Judgments are required concerning the ultimate outcome of tax contingencies and the realization of deferred tax assets.  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. The Company believes that its recorded tax liabilities adequately provide for the probable outcome of these assessments.

Deferred tax assets are also recorded for operating losses and tax credit carryforwards. However, FAS No. 109 requires that a valuation allowance be recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized.  This assessment is largely dependent upon projected near-term profitability including the effects of tax planning.  Deferred tax assets and liabilities are determined separately for each tax jurisdiction in which the Company conducts its operations or otherwise incurs taxable income or losses.  In the United States, the Company has recorded significant deferred tax assets, the largest of which relate to net operating losses, capital losses, tax credits and the accrued liability for asbestos-related costs that are not deductible until paid.  The deferred tax assets are partially offset by deferred tax liabilities, the most significant of which relate to the prepaid pension asset and accelerated depreciation.  The Company has recorded a valuation allowance for the portion of U.S. deferred tax assets not offset by deferred tax liabilities.  Under the new accounting standard for recognition of the funded status of postretirement benefit plans (as described above under Pension Benefit Plans), in 2006 the Company was required to write off a significant portion of its prepaid pension asset, principally related to the U.S. pension plans, and increase recorded liabilities for other U.S. plans.  The related deferred tax liabilities and assets were also adjusted.  As a result, in 2006 the Company was required to record an additional valuation allowance of $197.5 million.

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.  The Company uses certain derivative instruments to mitigate a portion of the risk associated with changing foreign currency exchange rates and fluctuating energy prices.  In addition, the Company uses interest rate swap agreements to manage a portion of fixed and floating rate debt and to reduce interest expense.  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.

47




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, South America (principally Colombia, Brazil and Venezuela), and Europe (principally Italy, France, the Netherlands, Germany, the United Kingdom, and Poland).  In general, revenues earned and costs incurred by the Company’s major international operations are denominated in their respective local currencies.  Consequently, the Company’s reported financial results could be affected by factors such as changes in foreign currency exchange rates or highly inflationary economic conditions in the international markets in which the Company’s subsidiaries operate.  When the U.S. dollar strength­ens against foreign curren­cies, the reported dollar value of local currency earnings generally decreases; when the U.S. dollar weakens against foreign currencies, the reported U.S. dollar value of local currency earnings generally increases.  The Company does not have any significant foreign subsidiaries that are denominated in the U.S. dollar, however, if economic conditions in Venezuela were to decline, the Company may be required to adopt the U.S. dollar as the functional currency for its subsidiaries in that country.  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 lender generally enters into a forward exchange contract which effectively swaps the intercompany loan and related interest to its local currency.

Certain of the Company’s subsidiaries in the United States and Europe have entered into short term forward exchange contracts which effectively swap intercompany loans to other subsidiaries that are denominated in the functional currency of the borrowers.  These contracts swap the principal amount of loans and in some cases they swap the related interest.

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, 2006 and 2005.

Interest Rate Risk

The Company’s interest expense is most sensitive to changes in the general level of U.S. interest rates applicable to its U.S. dollar indebtedness.

48




The Company has entered into a series of interest rate swap agreements with a total notional amount of $1.25 billion that mature from 2007 through 2013.  The swaps were executed in order to: (i) convert a portion of the senior notes and senior debentures fixed-rate debt into floating-rate debt; (ii) maintain a capital structure containing appropriate amounts of fixed and floating-rate debt; and (iii) reduce net interest payments and expense in the near-term.

Under the swaps, the Company receives fixed rate interest amounts (equal to interest on the corresponding hedged note) and pays interest at a six-month U.S. LIBOR rate (set in arrears) plus a margin spread (see table below).  The interest rate differential on each swap is recognized as an adjustment of interest expense during each six-month period over the term of the agreement.

The following table provides information about the Company’s interest rate sensitivity related to its significant debt obligations and interest rate swaps at December 31, 2006.  For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity date.  For interest rate swaps, the table presents notional amounts and weighted-average interest rates by contract maturity date.  Notional amounts are used to calculate the contractual cash flows to be exchanged under the swap contracts.

(dollars in millions)

 

2007

 

2008

 

2009

 

2010

 

2011

 

There-
after

 

Total

 

Fair
Value at
12/31/2006

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt at variable rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal by expected maturity

 

$

26.2

 

$

14.4

 

$

34.0

 

$

60.6

 

$

171.1

 

$

644.7

 

$

951.0

 

$

951.0

 

Avg. principal outstanding

 

$

898.3

 

$

845.5

 

$

828.5

 

$

797.0

 

$

688.4

 

$

605.9

 

 

 

 

 

Avg. interest rate

 

6.60

%

6.60

%

6.52

%

6.52

%

6.52

%

6.52

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt at fixed rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal by expected maturity

 

$

300.0

 

$

250.0

 

$

850.0

 

$

250.0

 

$

450.0

 

$

2,021.2

 

$

4,121.2

 

$

4,209.9

 

Avg. principal outstanding

 

$

3,933.7

 

$

3,665.0

 

$

2,827.5

 

$

2,565.0

 

$

2,190.0

 

$

2,021.2

 

 

 

 

 

Avg. interest rate

 

8.00

%

8.03

%

7.83

%

7.81

%

7.83

%

7.83

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps (pay

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

variable/receive fixed):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notional by expected maturity

 

$

300.0

 

$

250.0

 

 

 

$

250.0

 

 

 

$

450.0

 

$

1,250.0

 

$

28.4

 

Avg. notional outstanding

 

$

1,062.5

 

$

793.8

 

$

700.0

 

$

543.8

 

$

450.0

 

$

450.0

 

 

 

 

 

Avg. pay rate margin over U.S. LIBOR

 

3.62

%

3.52

%

3.52

%

3.61

%

3.70

%

3.70

%

 

 

 

 

Avg. fixed receive rate

 

7.85

%

7.91

%

7.98

%

8.12

%

8.25

%

8.25

%

 

 

 

 

 

The Company believes the near term exposure to interest rate risk of its debt obligations and interest rate swaps has not changed materially since December 31, 2005.

Commodity Price Risk

The Company has exposure to commodity price risk, principally related to energy.  The Company believes it can mitigate a portion of this risk by passing commodity cost changes through to customers.  In addition, the Company enters into commodity futures contracts related to forecasted natural gas requirements, the objectives of which are to limit the effects of fluctuations in the future market price paid

49




for natural gas and the related volatility in cash flows.  The Company continually evaluates the natural gas market with respect to its forecasted usage requirements over the next twelve to twenty-four months and periodically enters into commodity futures contracts in order to hedge a portion of its usage requirements over that period.  Significant transactions related to commodity price risk are as follows:

·                  At December 31, 2006, the Company had entered into commodity futures contracts for approximately 57% (approximately 13,450,000 MM BTUs) of its expected North American natural gas usage for full year of 2007 and approximately 9% (approximately 2,160,000 MM BTUs) for the full year of 2008.

The Company believes the near term exposure to commodity price risk of its commodity futures contracts was not material at December 31, 2006 and 2005.

Forward Looking Statements

This document contains “forward looking” statements within the meaning of Section 21E of the Securities Exchange Act of 1934 and Section 27A of the Securities Act of 1933. Forward-looking statements reflect the Company’s current expectations and projections about future events at the time, and thus involve uncertainty and risk. It is possible the Company’s future financial performance may differ from expectations due to a variety of factors including, but not limited to the following: (1) foreign currency fluctuations relative to the U.S. dollar, (2) changes in capital availability or cost, including interest rate fluctuations, (3) the general political, economic and competitive conditions in markets and countries where the Company has its operations, including disruptions in the supply chain, competitive pricing pressures, inflation or deflation, and changes in tax rates and laws, (4) consumer preferences for alternative forms of packaging, (5) fluctuations in raw material and labor costs, (6) availability of raw materials, (7) costs and availability of energy, (8) transportation costs, (9) the ability of the Company to raise selling prices commensurate with energy and other cost increases, (10) consolidation among competitors and customers, (11) the ability of the Company to integrate operations of acquired businesses and achieve expected synergies, (12) unanticipated expenditures with respect to environmental, safety and health laws, (13) the performance by customers of their obligations under purchase agreements, and (14) the timing and occurrence of events which are beyond the control of the Company, including events related to asbestos-related claims. It is not possible to foresee or identify all such factors. Any forward looking statements in this document are based on certain assumptions and analyses made by the Company in light of its experience and perception of historical trends, current conditions, expected future developments, and other factors it believes are appropriate in the circumstances. Forward-looking statements are not a guarantee of future performance and actual results or developments may differ materially from expectations. While the Company continually reviews trends and uncertainties affecting the Company’s results of operations and financial condition, the Company does not assume any obligation to update or supplement any particular forward looking statements contained in this document.

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ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

 

 

 

 

Consolidated Balance Sheets at December 31, 2006 and 2005

 

 

 

 

 

For the years ended December 31, 2006, 2005, and 2004:

 

 

 

 

 

Consolidated Results of Operations

 

 

Consolidated Share Owners’ Equity

 

 

Consolidated Cash Flows

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

Selected Quarterly Financial Data

 

 

 

51




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Share Owners of

Owens-Illinois, Inc.

We have audited the accompanying consolidated balance sheets of Owens-Illinois, Inc. and subsidiaries as of December 31, 2006 and 2005, 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, 2006.  Our audits also included the financial statement schedule listed in the Index at Item 15.  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, 2006 and 2005, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2006, 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), the effectiveness of Owens-Illinois, Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 1, 2007 expressed an unqualified opinion thereon.

As discussed in Notes 1, 14 and 15 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation, defined benefit pension plans and other postretirement plans, respectively, in 2006.

Ernst & Young LLP

Toledo, Ohio

March 1, 2007

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CONSOLIDATED RESULTS OF OPERATIONS  Owens-Illinois, Inc.

Dollars in millions, except per share amounts

 

 

 

 

 

 

 

Years ended December 31,

 

2006