| OWENS ILLINOIS INC /DE/ 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 dlra40 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”) |
| 15 ______________________________________________________________________ The Company believes that its ultimate asbestos-related liability (ie, its indemnity payments or other claim disposition costs plus related legal fees) cannot be estimated with certainty |
| Beginning with the initial liability of dlra975 million established in 1993, the Company has accrued a total of approximately dlra2dtta99 billion through 2005, 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, 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 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, 2005 and concluded that an increase in its reserve for future asbestos-related costs in the amount of dlra135dtta0 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 2005 were materially affected by the dlra135dtta0 million fourth quarter charge and asbestos-related payments continue to be substantial |
| Any future additional charge may likewise materially affect the Company’s results of operations for the period in which it is recorded |
| Also, the continued use of significant amounts of cash for asbestos-related costs has affected and may continue to affect the Company’s cost of borrowing and its ability to pursue global or domestic acquisitions |
| Substantial Leverage – The Company’s substantial indebtedness could adversely affect the Company’s financial health |
| The Company has a significant amount of debt |
| As of December 31, 2005, the Company had dlra5dtta3 billion of total debt outstanding |
| The Company’s substantial indebtedness could result in the following consequences: • Increase vulnerability to general adverse economic and industry conditions; • Increase 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; • Limit 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, 2005, the Company’s 16 ______________________________________________________________________ debt subject to variable interest rates, including fixed rate debt swapped to variable rate, represented approximately 45prca 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 take one or more of the following actions: • reduce or delay capital expenditures planned for replacements, improvements and expansions; • sell assets; • restructure debt; and/or • obtain additional debt or equity financing |
| The Company can provide no assurance that it could effect or implement any of these alternatives on satisfactory terms, if at all |
| Debt Restrictions—The Company may not be able to finance future needs or adapt its business plans to changes because of restrictions contained in the secured credit agreement and the indentures and instruments governing other indebtedness |
| 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 issuer 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 dlra4dtta7 billion, representing approximately 67prca of the Company’s net sales for the year ended December 31, 2005 |
| 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; 17 ______________________________________________________________________ • 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 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 and 2005, higher energy costs worldwide negatively impacted the Company’s glass container segment operating profit by dlra22dtta8 million and dlra75dtta7 million, respectively |
| 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 |
| Integration Risks – The Company may not be able to effectively integrate BSN or additional businesses it acquires in the future |
| In addition to the BSN Acquisition, the Company is considering strategic transactions, including acquisitions that will complement, strengthen and enhance growth in its worldwide glass and plastics packaging operations |
| The Company is evaluating a number of these transactions on a preliminary basis but it is not certain that any of these transactions will advance beyond the preliminary stages or be completed |
| The BSN Acquisition and strategic transactions, including any future acquisitions, are subject to various risks and uncertainties, including: 18 ______________________________________________________________________ • 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 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 US and Europe are typically greater in the second and third quarters of the year, while shipments in South America and the Asia Pacific region are typically greater in the first and fourth quarters of the year |
| 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 US 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 US and abroad, must comply with these legal requirements |
| These requirements may have a material adverse effect on operations |
| 19 ______________________________________________________________________ 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 US 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 |
| 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, 2005, covered approximately 66prca of the Company’s employees in North America |
| The agreement covering substantially all of the Company’s union-affiliated employees in its US glass container operations expires in 2008 |
| 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 US Such employment rights require us 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 US 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 20 ______________________________________________________________________ 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 December 2004, the FASB issued Statement Nodtta 123 (revised 2004), “Share-Based Payment,” which requires publicly traded companies to expense stock options, among other equity instruments, in the reporting period beginning January 1, 2006 |
| FAS Nodtta 123R requires each such company to recognize the grant-date fair-value of stock options and other equity-based compensation issued to employees in the company’s income statement over the vesting period of the award rather than as a disclosure in the footnotes to the financial statements |
| FAS Nodtta 123R will reduce the Company’s reported financial results and could decrease the Company’s stock price |
| 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 US 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 |
| Funded Status of Pension Plans – Recognition of a minimum pension liability may cause a significant reduction in net worth |
| Statement of Financial Accounting Standards Nodtta 87, “Accounting for Pensions,” requires balance sheet recognition of a minimum liability if the fair value of plan assets is less than the accumulated benefit obligation (“ABO”) at the end of the year |
| The fair values of the Company’s US pension plan assets exceeded the ABO at December 31, 2005; therefore, no recognition of a minimum liability was required with respect to these plans |
| If the ABO of any of the Company’s principal pension plans in the US, the Netherlands and Australia exceeds the fair value of its assets at the next measurement date, the Company will be required to write off the related prepaid pension asset and record a liability equal to the excess of the ABO over the fair value of the assets of such plan |
| The non-cash charge would result in a decrease in the Accumulated Other Comprehensive Income component of share owners’ equity that would significantly reduce net worth |
| Even if the fair values of the US plans’ assets are less than ABO at December 31, 2006, the Company believes it will not be required to make cash contributions to the US plans for at least several years |
| The covenants under the Company’s Third Amended and Restated Secured Credit Agreement would not be affected by a reduction in the Company’s net worth if a significant non-cash charge was taken to write off the prepaid pension assets |
| Deferred Tax Assets – Recognition of minimum pension liabilities may require a deferred tax valuation allowance |
| In the US, 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 US deferred tax assets not offset by deferred tax liabilities |
| Should the Company be required to write off the prepaid pension assets related to the US 21 ______________________________________________________________________ pension plans, the related deferred tax liability would also be written off, leaving deferred tax assets amounting to approximately dlra262 million without a valuation allowance |
| It is currently likely that an additional valuation allowance would be required in that case since it is currently more likely than not that the deferred tax asset would not be realized |
| 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 Nodtta 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 |