O-I Glass, Inc. /DE/ (OI) FY 2021 MD&A

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

The Company’s measure of profit for its reportable segments is segment operating profit, which consists of consolidated earnings from continuing operations before interest income, interest expense, and provision for income taxes and excludes amounts related to certain items that management considers not representative of ongoing operations and other adjustments as well as certain retained corporate costs. The segment data presented below is prepared in accordance with general accounting principles for segment reporting. The lines titled “reportable segment totals” in both net sales and segment operating profit, however, are non-GAAP measures when presented outside of the financial statement footnotes. Management has included reportable segment totals below to facilitate the discussion and analysis of financial condition and results of operations and believes this information allows the Board of Directors, management, investors and analysts to better understand the Company’s financial performance. The Company’s management uses segment operating profit, in combination with net sales and selected cash flow information, to evaluate performance and to allocate resources. Segment operating profit is not, however, intended as an alternative measure of operating results as determined in accordance with U.S. GAAP and is not necessarily comparable to similarly titled measures used by other companies.

In March 2020, the World Health Organization categorized COVID-19 as a pandemic, and it continues to spread throughout the United States and other countries across the world. To limit the spread of COVID-19, governments have taken various actions, including the issuance of stay-at-home orders and social distancing guidelines. As a result, many businesses have adjusted, reduced or suspended operating activities, either due to requirements under government orders or as a result of a reduction in demand for many products from direct or ultimate customers. Fortunately, the manufacture of glass containers has been largely viewed as essential to the important food and beverage value chain in the countries in which the Company operates. However, the Company is still impacted by broader supply chain issues and, in some cases, certain end use categories that it serves are not deemed essential. While the Company’s plants continued to operate as essential businesses, some plants suspended operations or cut back on shifts for a portion of 2020 due to government actions to address COVID-19. Additional suspensions and cutbacks may occur as the impacts from COVID-19 and related responses continue to develop.

The following discussion describes the Company’s consolidated results of operations for the year ended December 31, 2021. The COVID-19 pandemic impacted the Company’s shipment and production levels in 2020 and, to a lesser extent, 2021. The Company is actively monitoring the continued impact of the pandemic, which could negatively impact its business, results of operations, cash flows and financial position beyond 2021.

On July 31, 2020, the Company completed the sale of its Australia and New Zealand (“ANZ”) businesses, which comprised the majority of the Asia Pacific region (approximately 85% of net sales for the full year 2019), to Visy.  After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment. For the 2020 results presented below, the results for the Asia Pacific reportable segment reflect only the results of the ANZ businesses. The sales and operating results of the other businesses that historically comprised the Asia Pacific segment, and that have been retained by the Company, have been reclassified to Other sales and Retained corporate costs and other, respectively.

For discussion related to changes in financial condition and the results of operations for 2020 compared to 2019, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 16, 2021.

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Financial information regarding the Company’s reportable segments is as follows (dollars in millions):

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

Executive Overview—Comparison of 2021 with 2020

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Net sales in 2021 were $266 million, or approximately 4%, higher than in 2020 primarily due to stronger shipments than the prior year period, which was more significantly impacted by COVID-19. Net sales were negatively impacted by the sale of the Company’s ANZ businesses in 2020, the sale of the Company’s plant in Argentina in January 2021 and the impact of severe weather in the southern United States in February 2021. Net sales were positively impacted by the favorable effects of changes in foreign currency exchange rates and higher prices.

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Earnings from continuing operations before income taxes were $21 million lower in 2021 compared to the

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prior year. This decrease was primarily due to the non-recurrence of the gain on the sale of the ANZ businesses in 2020, a higher Paddock-related charge in 2021 and higher retained corporate costs and other in 2021, partially offset by higher segment operating profit, higher gains on the sale of miscellaneous assets in 2021, a gain recorded on a Brazilian indirect tax credit in 2021, lower restructuring charges and lower interest expense than in 2020. Segment operating profit for reportable segments for 2021 was $149 million higher than in the prior year, primarily due to higher sales and production levels, as well as strong operating performance and the benefit of margin expansion initiatives.

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On April 26, 2021, the Company announced that its subsidiary, Paddock, had reached an agreement in principle to accept the terms of a mediator’s proposal regarding a consensual plan of reorganization in Paddock’s Chapter 11 bankruptcy case. The agreement in principle provides for total consideration of $610 million to fund a trust established under section 524(g) of the Bankruptcy Code on the effective date of a plan of reorganization, which is subject to definitive documentation and satisfaction of certain conditions. The Company recorded a charge of $154 million related to its potential liability under the Paddock support agreement during the first fiscal quarter of 2021 primarily related to an increase to Paddock’s asbestos reserve estimate in consideration for the channeling injunction to be included in the Plan protecting O-I Glass and its affiliates from Asbestos Claims.

Net interest expense in 2021 decreased $49 million compared to 2020, primarily due to lower refinancing fees and charges and lower debt levels in 2021.

In 2021, the Company recorded net earnings from continuing operations attributable to the Company of $142 million, or $0.88 per share (diluted), compared to $249 million, or $1.57 per share (diluted), in 2020. As discussed below, earnings in both periods included items that management considers not representative of ongoing operations and other adjustments. These items decreased earnings from continuing operations attributable to the Company by $152 million, or $0.95 per share, in 2021 and increased earnings from continuing operations attributable to the Company by $55 million, or $0.35 per share, in 2020.

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Results of Operations—Comparison of 2021 with 2020

Net Sales

The Company’s net sales in 2021 were $6,357 million compared with $6,091 million in 2020, an increase of $266 million, or approximately 4%. Total glass container shipments, in tons, were up less than 1% in 2021 compared to the prior year and were impacted by the sale of the Company’s ANZ businesses on July 31, 2020 and the sale of the Company’s plant in Argentina in January 2021. The non-recurrence of the shipments related to these divestitures reduced net sales by approximately $305 million in 2021. Excluding the divested businesses, glass container shipments increased approximately 5%, increasing net sales by approximately $304 million, in 2021 compared to 2020, which was more significantly impacted by COVID-19. Higher selling prices increased net sales by $179 million in 2021. Favorable foreign currency exchange rates increased net sales by $99 million in 2021 compared to the prior year, primarily driven by the strengthening of the Euro and the Mexican peso compared to the U.S. dollar. Other sales were approximately $11 million lower in 2021 than in the prior year driven by lower machine parts sales to third parties.

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

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Americas: Net sales in the Americas in 2021 were $3,557 million compared to $3,322 million in 2020, an increase of $235 million, or approximately 7%. Higher selling prices in the region increased net sales by $160 million in 2021, driven by higher cost inflation especially in the second half of the year. Total glass container shipments in the region were up approximately 1% in 2021 compared to the prior year, which was more significantly impacted from COVID-19. Higher organic shipments (excluding the impacts from divestitures) increased net sales by approximately $77 million in 2021 and more than offset the impact of severe weather that affected the southern United States in February 2021, choppy demand patterns and mix management from lower margin categories given tight inventory conditions and ongoing supply chain challenges, which are expected to continue into 2022. The divestiture of a plant in Argentina reduced net sales by approximately $24 million in 2021. Excluding the divestiture, glass container shipments were up approximately 2% in 2021.

The favorable effects of foreign currency exchange rate changes increased net sales by $22 million in 2021 compared to 2020 as the Mexican peso strengthened in relation to the U.S. dollar.

Europe: Net sales in Europe in 2021 were $2,687 million compared to $2,364 million in 2020, an increase of $323 million, or approximately 14%. Glass container shipments in 2021 were up approximately 9%, increasing net sales by approximately $227 million, compared to 2020, driven by stronger shipments to wine and beer customers. Favorable foreign currency exchange rates increased the region’s net sales by approximately $77 million in 2021 as the Euro strengthened in relation to the U.S. dollar. Higher selling prices in Europe increased net sales by $19 million in 2021.

Asia Pacific: Net sales in Asia Pacific in 2021 were $0 compared to $281 million in 2020, a decrease of $281 million, due to the sale of the ANZ businesses in the third quarter of 2020.

Earnings from Continuing Operations before Income Taxes and Segment Operating Profit

Earnings from continuing operations before income taxes were $332 million in 2021 compared to $353 million in 2020, a decrease of $21 million, or approximately 6%. This decrease was primarily due to the non-recurrence of the gain on the sale of the ANZ businesses in 2020, a higher Paddock-related charge in 2021 and higher retained corporate costs and other in 2021, partially offset by higher segment operating profit, higher gains on the sale of miscellaneous assets in 2021, a gain recorded on a Brazilian indirect tax credit in 2021, lower restructuring charges and lower interest expense than in 2020.

Segment operating profit of the reportable segments includes an allocation of some corporate expenses based on a percentage of sales and direct billings based on the costs of specific services provided. Unallocated corporate expenses and certain other expenses not directly related to the reportable segments’ operations are included in Retained corporate costs and other. For further information, see Segment Information included in Note 2 to the Consolidated Financial Statements.

Segment operating profit of reportable segments in 2021 was $827 million, compared to $678 million in 2020, an increase of $149 million, or approximately 22%. This increase was primarily due to higher sales and production levels, strong operating performance and benefits from the Company’s margin expansion initiatives in 2021.

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The change in segment operating profit of reportable segments can be summarized as follows (dollars in millions):

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Americas: Segment operating profit in the Americas in 2021 was $456 million compared to $395 million in 2020, an increase of $61 million, or 15%. The impact of higher organic sales discussed above increased segment operating profit by $21 million. Selling prices exceeded cost inflation resulting in a net $4 million increase to segment operating profit in 2021.

Operating costs in 2021 were $32 million lower than in the prior year, which improved segment operating profit. Included within these operating costs were benefits from the region’s margin expansion initiatives and higher production volumes. The effects of foreign currency exchange rates increased segment operating profit by $1 million in the current year period. The divestiture of the region’s plant in Argentina improved segment operating profit by approximately $3 million in 2021. Also, the region’s closure of a plant in the second quarter of 2020 did not have a material impact on its profitability in 2021, and significant savings are not expected in future periods, but the closure is expected to avoid anticipated losses from this plant in the future. The outcome of this plant closure is in-line with management’s expectations.

Included in the above discussion of the factors affecting the region’s results, the Company estimates that segment operating profit in 2021 was negatively impacted by approximately $38 million from the severe weather that occurred in February of 2021, which includes surcharges for usage or excess usage of electricity and natural gas during the period of severe weather, as well as the estimated impacts of lost production downtime, lost sales and the cost of incremental repairs.

In December 2021, the Company entered into an agreement to sell its glass tableware business in Colombia. This agreement is expected to close during the first half of 2022, subject to customary regulatory approvals and other closing conditions. This divestiture is part of the Company’s portfolio optimization program to divest non-core assets and decapitalize the business through several sale-leaseback transactions and redeploy the proceeds to help fund attractive growth opportunities, which primarily include capital expenditures related to expansion projects and investments in the Company’s MAGMA innovation, as well as to reduce debt. Once completed, this divestiture is expected to reduce annual net sales in the Americas by approximately $65 million and reduce annual segment operating profit by approximately $17 million, both on a full year basis. The Company expects incremental net sales and segment operating profit to be generated by the expansion projects and MAGMA investments starting in 2023.

Europe: Segment operating profit in Europe in 2021 was $371 million compared to $264 million in 2020, an increase of $107 million, or 41%. The impact of higher shipments discussed above increased segment operating profit by $51 million. Higher production volumes and benefits from margin expansion initiatives and cost control measures reduced the region’s operating costs and increased segment operating profit by approximately $102 million in 2021 compared to the prior year. Cost inflation exceeded selling prices and decreased segment operating profit by $53 million in 2021 compared to 2020. The effects of foreign currency exchange rates increased segment operating profit by $7 million in the current year period.

Asia Pacific: Segment operating profit in Asia Pacific in 2021 was $0 compared to $19 million in 2020, a decrease of $19 million, due to the sale of the ANZ businesses in the third quarter of 2020.

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Interest Expense, Net

Net interest expense in 2021 was $216 million compared to $265 million in 2020. This decrease was primarily due to lower refinancing fees and charges and lower debt levels in 2021. Net interest expense in 2021 and 2020 included $13 million and $44 million, respectively, for note repurchase premiums, third-party fees and the write-off of deferred finance fees that related to debt that was repaid prior to its maturity.

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Provision for Income Taxes

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The Company’s effective tax rate from operations for 2021 was 50.3% compared to 25.2% for 2020.  The effective tax rate for 2021 differed from 2020 due to the charge related to the Paddock support agreement liability recorded without a tax benefit in 2021, the net increase of uncertain tax position reserves in 2021 and the non-recurrence of the gain on the sale of ANZ, which was recorded as non-taxable in 2020, as well as to a change in the mix of geographic earnings.

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Net Earnings from Continuing Operations Attributable to the Company

For 2021, the Company recorded earnings from continuing operations attributable to the Company of $142 million, or $0.88 per share (diluted), compared to $249 million, or $1.57 per share (diluted), in 2020. Earnings in 2021 and 2020 included items that management considered not representative of ongoing operations and other adjustments as set forth in the following table (dollars in millions):

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Foreign Currency Exchange Rates

Given the global nature of its operations, the Company is subject to fluctuations in foreign currency exchange rates. As described above, the Company’s reported revenues and segment operating profit in 2021 were increased due to foreign currency effects compared to 2020.

This trend may not continue into 2022. During times of a strengthening U.S. dollar, the reported revenues and segment operating profit of the Company’s international operations will be reduced because the local currencies will translate into fewer U.S. dollars. The Company uses certain derivative instruments to mitigate a portion of the risk associated with changing foreign currency exchange rates.

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Forward Looking Operational and Financial Information

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Operational and Financial Impacts due to Environmental Issues

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Regulatory Impacts on the Business

As discussed in Item 1, Business, and Item 1A, Risk Factors, above, governments globally are increasingly implementing legislation, regulations and international accords regarding climate change.  These include mandatory regulatory and legal requirements and voluntary initiatives in relation to climate change or other environmental matters with the intent to provide regulatory approaches to reducing greenhouse gas emissions.  The Company’s results of operations have been impacted by various regulatory approaches as described below.

For the year ending December 31, 2021, the European segment recognized approximately $22 million of expense related to emissions allowances to comply with the European Union Emissions Trading Scheme. In the Americas, the state of California in the U.S., the Canadian federal government and the province of Quebec have adopted cap-and-trade legislation aimed at reducing GHG emissions. As a result, the Americas segment recognized approximately $2 million of expense related to emissions credits to comply with various country, state/province, or municipality laws or regulations. New laws or regulations, significant changes in the amount of emissions allowances granted to the Company or the Company’s manufacturing plants or significant fluctuations in the price or availability of these emissions credits could have a significant long-term impact on the Company’s operations that are affected by such regulations and could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

The Company has also been impacted by various fines or penalties as a result of noncompliance with various federal or local environmental statutes, including impacts to the Company’s reputation as it focuses on its sustainability initiatives and targets. For example, in June 2021, the Oregon Department of Environmental Quality alleged that the Company’s manufacturing facility in Portland, Oregon exceeded certain permitted air emission limits. To resolve this matter, in August 2021, the Company entered into an Order with Oregon DEQ and agreed to pay a civil penalty of less than $1 million. In addition, by June 30, 2022, the Company must either submit a permit application to install pollution control equipment, or cease operations, at the facility. The

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estimated cost of the required pollution control equipment could be up to $10 million. The closure of this facility would likely result in a material charge for restructuring and asset impairments.

The Company has an approved emissions reduction target from Science Based Targets Initiative (SBTi), which provides an emissions-reduction pathway that aligns with certain carbon-reduction scenarios. The assumptions and estimates used to support the target and pathway are based on existing SBTi frameworks and assumptions, which likely will evolve and change, and on assumptions about the existing and future state of marketplaces and technology, which likely will evolve and change. Also, the Company monitors its operations in relation to climate-change risks and environmental impacts and has made, and may continue to make, significant expenditures for environmental improvements at certain of its facilities in recent years and in the future. The Company also generally seeks to invest in environmentally friendly and emissions-reducing projects, none of which have materially impacted the Company’s results of operations or cash flows. However, the Company is unable to predict what private or governmental climate-change or environmental criteria or legal requirements may be adopted in the future, how public perception in relation to climate change and other ESG-related issues may change, or the impacts of those changes on its results of operations, access to and cost of capital or cash flows. Significant changes in regulations, criteria, public perception or legal requirements related to emissions reduction or fossil-fuel use could have a material impact on the Company’s results.

Physical Effects and other Consequences of Climate-Change

The Company experiences a variety of impacts due to weather-related events, including severe weather, and events related to climate change, which may include extreme storms, flooding and wildfires, across its 70 manufacturing facilities in 19 different countries.  For example, in February 2021, severe weather conditions swept across the southern United States, curtailing access to natural gas and electricity for several of the Company’s facilities.  While the situation was most acute in Texas, access to natural gas in Mexico was also significantly impacted as Texas supplies natural gas to the country.  The Company estimates that segment operating profit in 2021 in the Americas was negatively impacted by approximately $38 million from the severe weather that occurred in February of 2021, which includes surcharges for usage or excess usage of electricity and natural gas during the period of severe weather, as well as the estimated impacts of higher energy costs, lost production downtime, lost sales, and the cost of incremental repairs.  As of December 31, 2021, the Company is pursuing insurance reimbursement related to this event but cannot determine the amount, if any, that will be reimbursed.

In addition, there are indirect consequences of climate-related regulation or business trends that affect the Company’s business. For example, a contributor to the Company’s future success is likely to be its ability to improve its glass melting technology and introduce processes that emit less carbon. One of these new technologies, known as the MAGMA program, seeks to reduce the amount of capital required to install, rebuild and operate the Company’s furnaces. It also is focused on the ability of these assets to be more easily turned on and off or adjusted based on seasonality and customer demand, utilize more recycled glass, produce lighter containers and use lower-carbon fuels. The Company is implementing its MAGMA program using a multi-generation development roadmap, which will include various deployment risks and will require the discovery of additional inventions through 2025. If the Company is unable to continue to improve its glass melting technology through research and development or licensing of new technology, including but not limited to MAGMA, the Company may not be able to remain competitive with other packaging manufacturers.

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Items Excluded from Reportable Segment Totals

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Retained Corporate Costs and Other

After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment. Starting on August 1, 2020 and for the historical periods, the operating results of the other businesses that were historically included in the Asia Pacific segment and that have

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been retained by the Company have been reclassified to Retained corporate costs and other. The results of these entities were not significant for the years ending December 31, 2021 and 2020.

Retained corporate costs and other for 2021 were $171 million compared to $145 million in 2020. These costs were higher in 2021 primarily due to additional research and development expenses related to MAGMA, higher marketing expense for the Company’s glass advocacy campaign and higher management incentive expense.

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Gain on Sale of Miscellaneous Assets

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In December 2021, the Company completed the sale of its Le Parfait brand in Europe and a previously closed plant in the Americas. As a result, the Company recorded pretax gains (including costs directly attributable to the sales) of approximately $84 million in 2021.  These pretax gains were recorded to Other income (expense), net on the Consolidated Results of Operations.

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Gain on Sale of the ANZ Businesses

On July 31, 2020, the Company completed the sale of its ANZ businesses, which comprised the majority of its businesses in the Asia Pacific region (approximately 85% of net sales in that region for the full year 2019), to Visy. As a result, the Company recorded a net gain (including costs directly attributable to the sale of ANZ) of approximately $275 million in 2020.  This gain was recorded to Other income (expense), net on the Consolidated Results of Operations.

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Brazil Indirect Tax Credit

In 2021, the Company recorded a $71 million gain based on a favorable court ruling in Brazil that will allow the Company to recover indirect taxes paid in previous years.  This gain was recorded to Other income (expense), net on the Consolidated Results of Operations.

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Pension Settlement Charges

In 2021, the Company settled a portion of its pension obligations and recorded approximately $74 million of pension settlement charges, in the United States, Canada and Mexico. In 2020, the Company settled a portion of its pension obligations and recorded approximately $26 million of pension settlement charges, primarily in Canada, Mexico and the United States.

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Restructuring, Asset Impairment and Other Charges

During 2021, the Company implemented several discrete restructuring initiatives and recorded restructuring and other charges of $35 million.  These charges reflect $28 million of employee costs, such as severance and benefit-related costs and other exit costs (including related consulting costs attributed to restructuring of managed services activities) at a number of the Company’s businesses in the Americas and Europe. The Company expects that the majority of the remaining cash expenditures related to the accrued employee and other exit costs will be paid out over the next several years. These charges also reflect approximately $7 million of other charges.

During 2020, the Company recorded charges totaling $142 million for restructuring, asset impairment and other charges. These charges reflect $96 million of employee costs, such as severance, benefit-related costs, asset impairment and other exit costs primarily related to a reduction-in-force program for certain salaried employees and a plant closure in the Americas. The Company expects that the majority of the remaining cash expenditures related to the accrued employee and other exit costs will be paid out over the next several years. These charges also reflect approximately $46 million of other charges, which included approximately $36 million of non-cash impairment charges related to an equity investment (Retained corporate costs and other).

See Notes 6 and 10 to the Consolidated Financial Statements for further information.

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Strategic Transaction Costs

During 2020, the Company recorded charges totaling $8 million for strategic transaction costs, which relate to activities that are aimed at exploring options to maximize investor value, focused on aligning the Company’s business with demand trends, improving the Company’s operating efficiency, cost structure and working capital management. These activities are ongoing and may result in tactical divestitures, corporate transactions or similar actions, and could cause the Company to incur restructuring, impairment, disposal or other related charges in future periods.

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Charge for Paddock Support Agreement Liability

On April 26, 2021, the Company announced that its subsidiary, Paddock, had reached an agreement in principle to accept the terms of a mediator’s proposal regarding a consensual plan of reorganization in Paddock’s Chapter 11 bankruptcy case. The agreement in principle provides for total consideration of $610 million to fund a trust under section 524(g) of the Bankruptcy Code on the effective date of a plan of reorganization, which is subject to final definitive documentation and satisfaction of certain conditions. The Plan (as defined herein) was filed on January 12, 2022, and related proceedings remain ongoing. The Company has recorded a charge of $154 million related to its potential liability under the Paddock support agreement during the first quarter of 2021, primarily related to an increase to Paddock’s asbestos reserve estimate in consideration for the channeling injunction to be included in the Plan protecting O-I Glass and its affiliates from Asbestos Claims.

See Note 15 to the Consolidated Financial Statements for further information.

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Charge for Deconsolidation of Paddock

Following its Chapter 11 filing in January 2020, the activities of Paddock are now subject to review and oversight by the Bankruptcy Court. As a result, the Company no longer has exclusive control over Paddock’s activities during the bankruptcy proceedings. Therefore, Paddock was deconsolidated as of the Petition Date, and its assets and liabilities, which primarily included $47 million of cash, the legacy asbestos-related liabilities, as well as certain other assets and liabilities, were derecognized from the Company’s consolidated financial statements. Simultaneously, the Company recognized a liability related to the support agreement of $471 million, based on the accrual required under applicable accounting standards. Taken together, these transactions resulted in a loss of approximately $14 million, which was recorded as a charge in the first quarter of 2020.

See Note 15 to the Consolidated Financial Statements for further information.

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Capital Resources and Liquidity

On June 25, 2019, certain of the Company’s subsidiaries entered into a Senior Secured Credit Facility Agreement (as amended by that certain Amendment No. 1 to the Third Amended and Restated Credit Agreement and Syndicated Facility Agreement dated as of December 13, 2019, and as further amended by that certain Amendment No. 2 to the Third Amended and Restated Credit Agreement and Syndicated Facility Agreement dated as of December 19, 2019, the “Agreement”), which amended and restated the previous credit agreement (the “Previous Agreement”). The proceeds from the Agreement were used to repay all outstanding amounts under the Previous Agreement.

The Agreement provides for up to $3.0 billion of borrowings pursuant to term loans and revolving credit facilities. The term loans mature, and the revolving credit facilities terminate, in June 2024. At December 31, 2021, the Agreement includes a $300 million revolving credit facility, a $1.2 billion multicurrency revolving credit facility, and a $1.5 billion term loan A facility ($923 million outstanding balance at December 31, 2021, net of debt issuance costs). At December 31, 2021, the Company had unused credit of $1,490 million available under the Agreement. The weighted average interest rate on borrowings outstanding under the Agreement at December 31, 2021 was 1.61%.

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The Agreement contains various covenants that restrict, among other things and subject to certain exceptions, the ability of the Company to incur certain indebtedness and liens, make certain investments, become liable under contingent obligations in certain defined instances only, make restricted payments, make certain asset sales within guidelines and limits, engage in certain affiliate transactions, participate in sale and leaseback financing arrangements, alter its fundamental business, and amend certain subordinated debt obligations.

The Agreement also contains one financial maintenance covenant, a Total Leverage Ratio (the “Leverage Ratio”), that requires the Company not to exceed a ratio of 4.5x calculated by dividing consolidated total debt, less cash and cash equivalents, by Consolidated EBITDA, as defined and described in the Agreement. The maximum Leverage Ratio is subject to an increase of 0.5x for (i) any fiscal quarter during which certain qualifying acquisitions (as specified in the Agreement) are consummated and (ii) the following three fiscal quarters, provided that the Leverage Ratio shall not exceed 5.0x. The Leverage Ratio could restrict the ability of the Company to undertake additional financing or acquisitions to the extent that such financing or acquisitions would cause the Leverage Ratio to exceed the specified maximum.

Failure to comply with these covenants and other customary restrictions could result in an event of default under the Agreement. In such an event, the Company could not request borrowings under the revolving facilities, and all amounts outstanding under the Agreement, together with accrued interest, could then be declared immediately due and payable. Upon the occurrence and for the duration of a payment event of default, an additional default interest rate equal to 2.0% per annum will apply to all overdue obligations under the Agreement. If an event of default occurs under the Agreement and the lenders cause all of the outstanding debt obligations under the Agreement to become due and payable, this would result in a default under the indentures governing the Company’s outstanding debt securities and could lead to an acceleration of obligations related to these debt securities. As of December 31, 2021, the Company was in compliance with all covenants and restrictions in the Agreement.  In addition, the Company believes that it will remain in compliance and that its ability to borrow funds under the Agreement will not be adversely affected by the covenants and restrictions.

The Leverage Ratio also determines pricing under the Agreement. The interest rate on borrowings under the Agreement is, at the Company’s option, the Base Rate or the Eurocurrency Rate, as defined in the Agreement, plus an applicable margin. The applicable margin is linked to the Leverage Ratio. The margins range from 1.00% to 1.50% for Eurocurrency Loans and from 0.00% to 0.50% for Base Rate Loans. In addition, a commitment fee is payable on the unused revolving credit facility commitments ranging from 0.20% to 0.30% per annum linked to the Leverage Ratio.

Obligations under the Agreement are secured by substantially all of the assets, excluding real estate and certain other excluded assets, of certain of the Company’s domestic subsidiaries and certain foreign subsidiaries. Such obligations are also secured by a pledge of intercompany debt and equity investments in certain of the Company’s domestic subsidiaries and, in the case of foreign obligations, of stock of certain foreign subsidiaries. All obligations under the Agreement are guaranteed by certain domestic subsidiaries of the Company, and certain foreign obligations under the Agreement are guaranteed by certain foreign subsidiaries of the Company.

In May 2020, the Company issued $700 million aggregate principal amount of senior notes. The senior notes bear interest at a rate of 6.625% per annum and mature on May 13, 2027. The senior notes were issued via a private placement and are guaranteed by certain of the Company’s domestic subsidiaries. The net proceeds, after deducting debt issuance costs, totaled approximately $690 million and were used to redeem the remaining $130 million aggregate principal amount of the Company’s outstanding 4.875% senior notes due 2021, approximately $419 million aggregate principal amount of the Company’s outstanding 5.00% senior notes due 2022 and approximately $105 million of other secured borrowings. The Company recorded approximately $38 million of additional interest charges for note repurchase premiums and write-off of unamortized finance fees related to these redemptions.

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In August 2020, the Company redeemed the remaining $81 million aggregate principal amount of the Company’s outstanding 5.00% senior notes due 2022. The Company recorded approximately $6 million of

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additional interest charges for note repurchase premiums and write-off of unamortized finance fees related to this redemption.

In November 2021, the Company issued $400 million aggregate principal amount of senior notes. The senior notes bear interest at a rate of 4.75% per annum and mature on February 15, 2030. The senior notes were issued via a private placement and are guaranteed by certain of the Company’s domestic subsidiaries. The net proceeds, after deducting debt issuance costs, totaled approximately $395 million and, together with cash on hand, were used to redeem the $310 million aggregate principal amount of the Company’s outstanding 4.00% senior notes due 2023 and approximately $128 million of term loan A borrowings under the Agreement. The Company recorded approximately $13 million of additional interest charges for note repurchase premiums and write-off of unamortized finance fees related to these redemptions.

In order to maintain a capital structure containing appropriate amounts of fixed and floating-rate debt, the Company has entered into a series of interest rate swap agreements. These interest rate swap agreements were accounted for as either fair value hedges or cash flow hedges (see Note 9 to the Consolidated Financial Statements for more information).

The Company assesses its capital raising and refinancing needs on an ongoing basis and may enter into additional credit facilities and seek to issue equity and/or debt securities in the domestic and international capital markets if market conditions are favorable. Also, depending on market conditions, the Company may elect to repurchase portions of its debt securities in the open market.

Material Cash Requirements

The Company’s material cash requirements include the following:

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Cash Flows

Operating activities: Cash provided by continuing operating activities was $680 million for 2021, compared to $457 million for 2020. The increase in cash provided by operating activities in 2021 was primarily due to a lower use of cash from working capital and higher non-cash charges, which more than offset lower net earnings than in 2020. For 2021, the Company paid approximately $30 million toward restructuring activities compared to $37 million in the prior year. In both 2021 and 2020, all asbestos-related payments were stayed as a result of Paddock’s Chapter 11 filing in early January 2020. See Note 15 to the Consolidated Financial Statements for additional information on Paddock.

During 2021, the Company contributed approximately $84 million to its defined benefit pension plans, compared with $103 million in 2020. As part of these contributions, the Company elected to make $43 million and $50 million in 2021 and 2020, respectively, in discretionary contributions. The Company expects to contribute between $65 million and $100 million to its pension plans from 2022 through 2024.

Working capital was a use of cash of $13 million in 2021, compared to a use of cash of $181 million in 2020. The use of cash from working capital was lower in 2021, primarily due to higher accounts payable and partially offset by higher accounts receivable. For 2021 and 2020, the Company’s use of its accounts receivable factoring programs resulted in an increase of $45 million to cash from operating activities and a $103 million decrease to cash from operating activities, respectively. Excluding the impact of accounts receivable factoring, the Company’s days sales outstanding as of December 31, 2021 were comparable to December 31, 2020.

Investing activities: Cash utilized in investing activities was $220 million for 2021, compared to $93 million of cash provided for 2020. Capital spending for property, plant and equipment increased to $398 million during 2021, compared to $311 million in 2020, which was lower due to the Company limiting capital expenditures in response to the COVID-19 pandemic. To accommodate expected future sales growth, the Company intends to increase its capital expenditures for property, plant and equipment to a total of approximately $1.95 billion during the three-year period beginning January 1, 2022 and ending December 31, 2024.  This spending includes maintenance-related capital expenditures as well as approximately $680 million in capital expenditures to increase capacity in supply-constrained geographies and categories, including using the Company’s MAGMA technology. Based on the Company’s current investment plan, capital expenditures are expected to increase in 2022 to approximately $600 million.

In 2021, the Company received approximately $122 million from the sale of miscellaneous assets, which included the sale of its Le Parfait French jar brand, a previously closed plant in the Americas and its plant in Argentina. The Company intends to complete approximately $500 million of additional divestitures of non-core assets and several sale leaseback transactions in 2022. This will complete the Company’s divestitures associated with its portfolio optimization program. The Company plans to use these proceeds to fund its increased capital expenditures and to reduce debt. On July 31, 2020, the Company completed the sale of its ANZ businesses to Visy.  Cash proceeds, net of costs directly attributable to the sale of ANZ, of approximately $441 million were received in 2020 and the remaining balance of $58 million was received by the Company in the first quarter of 2021. In addition and as discussed below, the Company received proceeds in 2020 for a sale leaseback transaction executed in conjunction with the ANZ sale.

Following Paddock’s Chapter 11 filing in January 2020, the activities of Paddock are now subject to review and oversight by the bankruptcy court. As a result, the Company no longer has exclusive control over Paddock’s activities during the bankruptcy proceedings. Therefore, Paddock was deconsolidated, and its assets and

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liabilities were derecognized from the Company’s financial statements, which resulted in an investing outflow of $47 million in 2020. See Note 15 to the Consolidated Financial Statements for more information.

Financing activities:  Cash utilized in financing activities was $273 million for 2021, compared to $557 million of cash utilized in financing activities for 2020.  Financing activities in 2021 included additions to long-term debt of $1,021 million, which included the issuance of $400 million of senior notes.  Financing activities in 2021 also included the repayment of long-term debt of $1,188 million, which included the redemption of $310 million aggregate principal amount of the Company’s outstanding 4.00% senior notes due 2023 and the repayment of approximately $145 million of term loan A borrowings under the Agreement.  Financing activities in 2020 included additions to long-term debt of $1,845 million, which included the issuance of $700 million of senior notes.  Financing activities in 2020 also included the repayment of long-term debt of $2,460 million, which included the paydown of approximately $410 million of the Term Loan A facility, the repurchase of the remaining €118 million aggregate principal amount of the Company’s outstanding 4.875% senior notes due 2021, approximately $500 million aggregate principal amount of the Company’s 5.00% senior notes due 2022 and approximately $230 million of other secured borrowings.

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Borrowings under short-term loans decreased $17 million in 2021.  As a result of financing activities, the Company paid finance fees and premiums of $16 million and $51 million for 2021 and 2020, respectively.  Also, the Company paid approximately $15 million and $8 million related to hedging activity in 2021 and 2020, respectively.

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In 2020, the Company received approximately $155 million in proceeds for a sale leaseback transaction that was executed in conjunction with the ANZ sale.

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In February 2021, the Company’s Board of Directors authorized a $150 million anti-dilutive share repurchase program for the Company’s common stock that the Company intends to use to offset stock-based compensation provided to the Company’s directors, officers, and employees.  This authorization supersedes and replaces any prior repurchase authorizations.  In 2021, the Company repurchased $40 million of shares of the Company’s common stock under this program.  No share repurchases were made during 2020.  The Company intends to repurchase approximately $40 million of shares of the Company’s common stock in 2022.  The Company paid $8 million in dividends in 2020 and did not pay any dividends in 2021.  In response to the COVID-19 pandemic, the Company suspended its dividend after the first quarter of 2020 and has no plans to reinstate it at this time.

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The Company anticipates that cash flows from its opera­tions and from utiliza­tion of credit available under the Agreement will be sufficient to fund its operating and seasonal working capital needs, debt service and other obligations on a short-term (12 months) and long-term basis. However, as the Company cannot predict the duration or scope of the COVID-19 pandemic and its impact on its customers and suppliers, the negative financial impact to the Company’s results cannot be reasonably estimated, but could be material. The Company is actively managing its business to maintain cash flow, and it has significant liquidity. The Company believes that these factors will allow it to meet its anticipated funding requirements. On April 26, 2021, O-I announced that its subsidiary Paddock Enterprises, LLC had reached an agreement in principle to accept the terms of a mediator’s proposal regarding a consensual plan of reorganization under the Bankruptcy Code. The agreement provides for total consideration of $610 million to fund a trust on the effective date of a plan of reorganization, which the Company expects to occur in the first half of 2022 (subject to definitive documentation and satisfaction of certain conditions). See Note 15 to the Consolidated Financial Statements for further information.

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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,

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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.

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

Impairment of Long-Lived Assets

Property, Plant and Equipment (PP&E) - 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 segment or a component of a segment. If an impairment indicator exists, the Company first evaluates the recoverability of PP&E based on undiscounted projected cash flows, excluding interest and taxes. If an asset group is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset group’s carrying amount exceeds its fair value. Historically, most of the Company’s PP&E impairments have been due to restructuring activities that result in the closure of plant sites.  In these cases, the asset group’s carrying values are reduced to their fair values, which is their expected sale values of the real property less costs to sell.

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

Goodwill – Goodwill is tested for impairment annually as of October 1 (or more frequently if impairment indicators arise).  When performing a quantitative test for goodwill impairment, the Company compares the business enterprise value (“BEV”) of each reporting unit with its carrying value. The BEV is computed based on estimated future cash flows, discounted at the weighted average cost of capital of a hypothetical third-party buyer. If the BEV is less than the carrying value for any reporting unit, then any excess of the carrying value over the BEV is recorded as an impairment loss.  The calculations of the BEV are based on internal and external inputs, such as projected future cash flows of the reporting units, discount rates, terminal business value, among other assumptions. The valuation approach utilized by management represents a Level 3 fair value measurement measured on a non-recurring basis in the fair value hierarchy due to the Company’s use of unobservable inputs. The Company’s projected future cash flows incorporate management’s best estimates of the expected future results including, but not limited to, price trends, customer demand, material costs, asset replacement costs and any other known factors.

Goodwill is tested for impairment at the reporting unit level, which is the operating segment or one level below the operating segment, also known as a component. Two or more components of an operating segment shall be aggregated into a single reporting unit based on an assessment of various factors. The aggregation of the

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components of the Company’s reporting units was based on their economic similarity as determined by the Company using a number of quantitative and qualitative factors, including gross margins, the manner in which the Company operates the business, the consistent nature of products, services, production processes, customers and methods of distribution, as well as the level of shared resources and assets between the components. The Americas reportable segment is comprised of two reporting units – North America and Latin America. The Company has determined that the Europe segment is also a reporting unit. Prior to 2020, the Company aggregated the components of the Asia Pacific segment, which had no goodwill, into a single reporting unit equal to the reportable segment. On July 31, 2020, the Company completed the sale of its ANZ businesses, which comprised the majority of its businesses in the Asia Pacific region (approximately 85% of net sales in that region for the full year 2019).  After the sale of the ANZ businesses, the remaining businesses in the Asia Pacific region do not meet the criteria of an individually reportable segment.

As part of its on going assessment of goodwill in 2019, the Company determined that indicators of impairment had occurred during the third quarter of 2019. The triggering events were management’s update to its long-range plan, which indicated lower projected future cash flows for its North American reporting unit (in the Americas segment) as compared to the projections used in the most recent goodwill impairment test performed as of October 1, 2018, and a significant reduction in the Company’s share price. As a result, the Company recorded a non-cash impairment charge of $595 million in the third quarter of 2019, which was equal to the excess of the North American reporting unit's carrying value over its fair value. Goodwill related to the Company’s other reporting units was determined to not be impaired as a result of the 2019 interim impairment analysis.

The COVID-19 pandemic had an adverse impact on the Company’s business during the second quarter of 2020, resulting in a significant decline in revenue and earnings, along with a decline in the Company’s stock price and associated market capitalization. The Company determined that the impact of COVID-19 was a triggering event that required the Company to perform a quantitative interim goodwill impairment test in the second quarter of 2020. This interim test indicated that the BEV of each of the Company’s reporting units exceeded its respective carrying amount in the second quarter of 2020; therefore, no goodwill impairment existed.

During the fourth quarter of 2021, the Company completed its annual impairment testing and determined that no impairment of goodwill existed. Goodwill at December 31, 2021 totaled approximately $1.84 billion, representing 21% of total assets. As of December 31, 2021, the Company has three reporting units and includes $865 million of recorded goodwill to the Company’s Europe reporting unit, $446 million of recorded goodwill to the Company’s North America reporting unit and $529 million of recorded goodwill to the Company’s Latin America reporting unit. There can be no assurance that anticipated financial results will be achieved, and the goodwill balances remain susceptible to future impairment charges. The goodwill related to the North America reporting unit remains the reporting unit that has the greatest risk of future impairment charges given the difference (28%) between the BEV and carrying value of this reporting unit as of October 1, 2021. Future changes in the Company’s cost of capital or expected cash flows may cause the Company’s goodwill to become impaired, resulting in a non-cash charge against the Company’s results of operations. For example, if the Company’s assumed perpetuity growth rate, which would impact projected future cash flows, were one percentage point lower and the Company’s assumed weighted average cost of capital were one percentage point higher, the testing performed as of October 1, 2021, would have indicated that the BEV of the Company’s North American reporting unit would have exceeded its carrying value by less than 3%. The BEVs of the Company’s Europe and Latin America reporting units more substantially exceeded their carrying values. Any impairment charges that the Company may take in the future could be material to its consolidated results of operations and financial condition.

During the time subsequent to the annual evaluation, and at December 31, 2021, the Company considered whether any events and/or changes in circumstances had resulted in the likelihood that the goodwill of any of its reporting units may have been impaired and has determined that no such events have occurred. The Company will monitor conditions throughout 2022 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

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testing confirm that a write-down of goodwill is necessary, then the Company will record a charge at that time. 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 – Equity Investments - Equity method investments are reviewed each reporting period to determine whether a significant event or change in circumstances has occurred that may have an adverse effect on the fair value of each investment.  When such events or changes occur, the Company evaluates the fair value compared to its cost basis in the investment.  Management's assessment of fair value is based on projected future discounted cash flows.  The assumptions underlying cash flow projections represent management’s best estimates at the time of the impairment review.  Factors that management must estimate for each equity investment include, among other things: industry and market conditions, sales volume and prices, production costs and inflation.  Changes in key estimates or actual conditions that differ from estimates could result in an impairment charge.  The Company uses reasonable and supportable assumptions when performing impairment reviews and cannot predict the occurrence of future events and circumstances that could result in impairment charges.

In the event the fair value of an investment declines below its cost basis, management is required to determine if the decline in fair value is other than temporary.  If management determines the decline is other than temporary, an impairment charge is recorded.  For example, in 2020 the Company evaluated the future estimated earnings and cash flow of one of its Non-U.S. equity investments (a glass container manufacturer reported in the Retained corporate costs and other category) and determined that it was other-than-temporarily impaired. As such, the Company recorded an impairment charge of approximately $36 million to the equity earnings line in its Consolidated Results of Operations to reduce its carrying value down to its estimated fair value. Management's assessment as to the nature of a decline in fair value is based on, among other things, the length of time and the extent to which the market value has been less than its cost basis; the financial condition and near-term prospects of the investment; and the Company’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in market value.

Other Long-Lived Assets - Intangibles – Other long-lived assets consist primarily of purchased customer relationships intangibles and are amortized using the accelerated amortization method over their estimated useful lives. The Company reviews these assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. In the event that a decline in fair value of an asset occurs, and the decline in value is considered to be other than temporary, an impairment loss is recognized. The test for impairment would require the Company to make estimates about fair value, which may be determined based on discounted cash flows, third-party appraisals or other methods that provide appropriate estimates of value. The Company continually monitors the carrying value of its assets.

Pension Benefit Plans

Estimates - The determination of pension obligations and the related pension expense or credits to operations involves certain estimations. The most critical estimates are the discount rate used to calculate the actuarial present value of benefit obligations and the expected long-term rate of return on plan assets. The Company uses discount rates based on yields of high quality fixed rate debt securities at the end of the year. At December 31, 2021, the weighted average discount rate was 2.86% and 2.53% for U.S. and non-U.S. plans, respectively. The Company uses an expected long-term rate of return on assets that is based on both past performance of the various plans’ assets and estimated future performance of the assets. Due to the nature of the plans’ assets and the volatility of debt and equity markets, actual returns may vary significantly from year to year. The Company refers to average historical returns over longer periods (up to 10 years) in determining its expected rates of return because short-term fluctuations in market values do not reflect the rates of return the Company expects to achieve based upon its long-term investing strategy. For purposes of determining pension charges and credits in 2021, the Company’s estimated weighted average expected long-term rate of return on plan assets is 6.85% for U.S. plans and 5.46% for non-U.S. plans compared to 7.15% for U.S. plans and 5.23% for non-U.S. plans in 2020. The Company recorded pension expense from continuing operations (exclusive of settlement charges) of $32 million,

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$32 million, and $25 million for the U.S. plans in 2021, 2020, and 2019, respectively, and less than $1 million, $6 million, and $7 million for the non-U.S. plans in 2021, 2020, and 2019, respectively. Depending on currency translation rates, the Company expects to record approximately $33 million of total pension expense for the full year of 2022. The 2022 pension expense will reflect a 5.75% and 4.21% expected long-term rate of return for the U.S. assets and non-U.S. assets, respectively.

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 discount rates used to calculate plan liabilities or in the expected rate of return on plan assets would result in a change of approximately $6 million and $10 million, respectively, in the pretax pension expense for the full year of 2022.

Recognition of Funded Status - The Company recognizes the funded status of each pension benefit plan on the balance sheet. The funded status of each plan is measured as the difference between the fair value of plan assets and actuarially calculated benefit obligations as of the balance sheet date. Actuarial gains and losses are accumulated in Other Comprehensive Income, and the portion of each plan that exceeds 10% of the greater of that plan’s assets or projected benefit obligation is amortized to income on a straight-line basis over the average remaining service period of employees still accruing benefits or the expected life of participants not accruing benefits if all, or almost all, of the plan’s participants are no longer accruing benefits.

Contingencies and Litigation Related to Asbestos Liability

For many years, the Company has conducted an annual comprehensive legal review of its asbestos-related liabilities and costs in connection with finalizing and reporting its annual results of operations, unless significant changes in trends or new developments warrant an earlier review. As part of its annual comprehensive legal review for the year ended December 31, 2019, the Company provided historical claims filing data to a third-party consultant with expertise in predicting future claims filings based on actuarial inputs such as disease incidence and mortality. The Company used those estimates of total future claims, along with its legal judgment regarding an estimation of future disposition costs and related legal costs, as inputs to develop a reasonable estimate of probable liability.

Following the Corporate Modernization transactions, asbestos-related liabilities that were previously paid by O-I now reside at Paddock. On January 6, 2020, Paddock voluntarily filed for relief under Chapter 11 of the Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware, to equitably and finally resolve all of its current and future Asbestos Claims (as defined herein). O-I Glass and O-I Group were not included in the Chapter 11 filing. Paddock’s ultimate goal in its Chapter 11 case is to confirm a plan of reorganization under Section 524(g) of the Bankruptcy Code and utilize this specialized provision to establish a trust that will address all current and future Asbestos Claims. Although the Chapter 11 proceedings are progressing and Paddock, together with the other Plan Proponents (as defined herein) has now proposed the Plan, it is not possible to predict with certainty the final form of any ultimate resolution or when an ultimate resolution might occur at this time. The Company undertook the Corporate Modernization transactions to improve the Company’s operating efficiency and cost structure, which resulted in the legacy liabilities of O-I residing within Paddock, separate from the active operations of the Company’s subsidiaries, while fully maintaining Paddock’s ability to access the value of those operations to support its legacy liabilities through the support agreement. The Corporate Modernization transactions also helped ensure that Paddock has the same ability to fund the costs of defending and resolving present and future Asbestos Claims as O-I previously did, through Paddock’s retention of its own assets to satisfy these claims and through its access to additional funds from the Company through the support agreement. Although the Company has reached an agreement in principle as to the amount it will be required to fund on account of Asbestos Claims, and has now filed a consensual Plan reflecting that amount, due to the conditions that remain to be satisfied to consummate the Plan, the ultimate amount that the Company may be required to fund on account of such asbestos-related liabilities paid out in connection with a confirmed Chapter 11 plan of reorganization cannot be estimated with certainty at this time.

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Income Taxes

The Company accounts for income taxes as required by general accounting principles under which management judgment is required in determining income tax expense/(benefit) and the related balance sheet amounts. This judgment includes estimating and analyzing historical and projected future operating results, the reversal of taxable and tax deductible temporary differences, tax planning strategies, and the ultimate outcome of uncertain income tax positions. Actual income taxes paid may vary from estimates, depending upon changes in income tax laws, actual results of operations, and the effective settlement of uncertain tax positions. The Company has received tax assessments in excess of established reserves for uncertain tax positions. The Company is contesting these tax assessments, and will continue to do so, including pursuing all available remedies such as appeals and litigation, if necessary.

The Company believes that adequate provisions for all income tax uncertainties have been made. However, if tax assessments are settled against the Company at amounts in excess of established reserves, it could have a material impact to the Company’s results of operations, financial position or cash flows. Changes in the estimates and assumptions used for calculating income tax expense and potential differences in actual results from estimates could have a material impact on the Company’s results of operations and financial condition.

Deferred tax assets and liabilities are recognized for the tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities measured using enacted tax rates and for tax attributes such as operating losses and tax credit carryforwards. Deferred tax assets and liabilities are determined separately for each tax jurisdiction on a separate or on a consolidated tax filing basis, as applicable, in which the Company conducts its operations or otherwise incurs taxable income or losses. A valuation allowance is recorded when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The realization of deferred tax assets depends on the ability to generate sufficient taxable income of the appropriate character within the carryback or carryforward periods provided for in the tax law for each applicable tax jurisdiction. The Company considers the following possible sources of taxable income when assessing the realization of deferred tax assets:

The assessment regarding whether a valuation allowance is required or whether a change in judgment regarding the valuation allowance has occurred also considers all available positive and negative evidence, including, but not limited to:

The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. Accordingly, it is generally difficult to conclude a valuation allowance is not required when there is significant objective and verifiable negative evidence, such as cumulative losses in recent years. The Company uses the actual results for the last two years and current year results as the primary measure of cumulative losses in recent years.

The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events recognized in the financial statements or tax returns and future profitability. The recognition of deferred

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tax assets represents the Company’s best estimate of those future events. Changes in the current estimates, due to unanticipated events or otherwise, could have a material effect on the Company’s results of operations and financial condition.

In certain tax jurisdictions, the Company’s analysis indicates that it has cumulative losses in recent years. This is considered significant negative evidence which is objective and verifiable and, therefore, difficult to overcome. However, the cumulative loss position is not solely determinative, and, accordingly, the Company considers all other available positive and negative evidence in its analysis. Based on its analysis, the Company has recorded a valuation allowance for the portion of deferred tax assets where based on the weight of available evidence it is unlikely to realize those deferred tax assets.

Based on the evidence available, including a lack of sustainable earnings, the Company in its judgment previously recorded a valuation allowance against substantially all of its net deferred tax assets in the United States. If a change in judgment regarding this valuation allowance were to occur in the future, the Company will record a potentially material deferred tax benefit, which could result in a favorable impact on the effective tax rate in that period. The utilization of tax attributes to offset taxable income reduces the amount of deferred tax assets subject to a valuation allowance.

The Company treats Global Intangible Low Taxed Income (“GILTI”) as a period cost.

Corporate tax reform, anti-base-erosion rules and tax transparency continue to be high priorities in many jurisdictions. The potential for additional global tax legislation changes, such as restrictions on interest deductibility, deductibility of cross-jurisdictional payments, and limitations on the utilization of tax attributes could have a material adverse impact on net income and cash flow by impacting significant deductions or income inclusions.

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