OI

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2007, for Owens-Illinois, Inc. (O-I Glass, Inc.). The company operates in the rigid packaging industry with two primary reportable segments: Glass Containers (global operations) and Plastics Packaging (primarily North America). The financial statements are unaudited but reflect all normal recurring adjustments.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 10.9% year-over-year. The Glass Containers segment drove this growth with a 13.1% increase, attributed to improved pricing ($61.2M), increased unit shipments ($55.6M), and favorable foreign currency exchange rates ($78.5M). Conversely, the Plastics Packaging segment saw a 5.7% decline due to lower resin cost pass-throughs and the absence of Australian sales.
• Profitability: Net earnings more than doubled to $53.2 million. The Glass Containers segment operating profit rose 30.5% to $216.9 million, benefiting from price/mix and productivity gains, partially offset by inflationary cost increases. The Plastics segment profit declined slightly by $1.2 million.
• Cash Flow: Cash utilized in operating activities improved significantly to $44.1 million from $274.4 million in the prior year. This improvement is partly due to a reclassification of $122.8 million in receivables collections from operating to investing activities in 2006, and improved working capital management in 2007.
• Debt Structure: Total debt increased to $5.65 billion. In March 2007, the company issued €300 million in Senior Notes (6.875% due 2017) to refinance maturing debt and reduce revolver borrowings. Unused credit availability under the Secured Credit Agreement stood at $811.0 million.

Outlook, Risks, and Contingencies

• Asbestos Litigation: The company faces substantial asbestos-related liabilities. Cash payments for these costs were $41.0 million in Q1 2007. Management believes the ultimate liability cannot be estimated with certainty due to litigation volatility and co-defendant bankruptcies. A $120 million charge was recorded in Q4 2006; future annual reviews may result in additional charges.
• Goodwill Impairment Risk: Goodwill totaled $2,491.5 million. The Asia Pacific Glass reporting unit had a business enterprise value exceeding its book value by only approximately 7% in the 2006 annual test. Management notes that modest changes in assumptions (e.g., a 5% decrease in projected cash flows) could trigger an impairment charge in the future.
• Tax Outlook: The effective tax rate for Q1 2007 was 37.2%. Management anticipates a full-year 2007 effective tax rate of approximately 35%, driven by the geographic mix of earnings.
• Restructuring: Remaining accruals for plant closings (Godfrey, IL and European facilities) totaled $40.7 million ($10.0M US + $30.7M Europe) as of March 31, 2007.

Investor Verification Checklist

• Verify the sustainability of the 13.1% sales growth in the Glass Containers segment, specifically the portion attributed to foreign currency exchange rates ($78.5M).
• Monitor the Asia Pacific Glass reporting unit for potential goodwill impairment triggers given the narrow margin in the 2006 valuation.
• Review the quarterly cash outflows for asbestos-related claims ($41.0M in Q1) and assess the adequacy of the accrued liability against future litigation trends.
• Confirm the impact of inflationary cost increases on the Glass segment's operating profit margins in subsequent quarters.
• Track the company's ability to maintain the projected 35% effective tax rate for the full year 2007.