O-I Glass, Inc. /DE/ (OI) FY 2022 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.

The COVID-19 pandemic, and the various governmental, industry and consumer actions related thereto, have had, and may likely continue to have, negative impacts on the Company's business. These impacts include, without limitation, significant volatility or decreases in the demand for the Company's products, changes in customer and consumer behavior and preferences, disruptions in or closures of the Company’s manufacturing operations or those of its customers and suppliers, disruptions within the Company’s supply chain, limitations on the Company's employees’ ability to work and travel, potential financial difficulties of customers and suppliers, significant changes in economic or political conditions, and related financial and commodity volatility, including volatility in raw material and other input costs.

The COVID-19 pandemic impacted the Company’s shipment and production levels in 2020 and, to a lesser extent, 2021 and 2022. 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 2022.

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. 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 2021 compared to 2020, 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, 2021, which was filed with the SEC on February 9, 2022.

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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 2022 with 2021

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Net sales in 2022 increased $499 million, or 8%, compared to the prior year, primarily due to higher prices and shipments than the prior year, which was more significantly impacted by COVID-19 and the impact of severe weather in the Americas. Net sales were negatively impacted by the unfavorable effects of changes in foreign currency exchange rates and the sale of the Company’s glass tableware business in Colombia on March 1, 2022.

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Earnings from continuing operations before income taxes were $473 million higher in 2022 compared to the prior year. This increase was due to higher segment operating profit and gains on the sale of the land and buildings of two of the Company’s plants in 2022, as well as the non-recurrence of the Paddock-related charge in 2021, partially offset by the non-recurrence of the gain recorded on a Brazilian indirect tax credit in 2021, higher retained corporate and other costs and higher net interest expense in 2022 compared to the prior year.

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Segment operating profit for reportable segments in 2022 was $133 million higher compared to 2021,

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primarily due to higher sales and production levels, strong operating performance, benefits from margin expansion initiatives, higher net prices and the non-recurrence of severe weather that impacted the Americas in the first quarter of 2021, partially offset by elevated asset project activity and unplanned production downtime, the unfavorable effects of changes in foreign currency exchange rates and the unfavorable impacts of divestitures in earlier periods.

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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 issued in connection with the Plan, protecting the Company and its affiliates from current and future asbestos-related personal injury claims. In July 2022, the Plan became effective, and the Paddock Trust was funded by the Company and Paddock with consideration totaling $610 million. For further information, see Notes 14 and 15 to the Consolidated Financial Statements.

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Net interest expense in 2022 increased $23 million compared to 2021, primarily due to higher note repurchase premiums and refinancing fees and charges and higher interest rates, partially offset by lower debt levels.

In 2022, the Company recorded net earnings from continuing operations attributable to the Company of $584 million, or $3.67 per share (diluted), compared to $142 million, or $0.88 per share (diluted), in 2021. As discussed below, net earnings in both periods included items that management considers not representative of ongoing operations and other adjustments. These items increased net earnings from continuing operations attributable to the Company by $218 million, or $1.37 per share, in 2022 and decreased net earnings attributable to the Company by $152 million, or $0.95 per share, in 2021.

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Results of Operations—Comparison of 2022 with 2021

Net Sales

The Company’s net sales in 2022 were $6,856 million compared with $6,357 million in 2021, an increase of $499 million, or 8%. Glass container shipments, in tons, were up approximately 1% in 2022, increasing net sales by approximately $19 million compared to 2021, which was more significantly impacted by COVID-19 and the impact of severe weather in the Americas. Higher selling prices increased net sales by $805 million in 2022, driven by the pass through of higher cost inflation. Unfavorable foreign currency exchange rates decreased net sales by $303 million in 2022 compared to the prior year, primarily driven by the weakening of the Euro compared to the U.S. dollar. The non-recurrence of the shipments related to the divestiture of the Company’s glass tableware business in Colombia on March 1, 2022 reduced net sales by approximately $52 million in 2022. Other sales were approximately $30 million higher in 2022 than in the prior year driven by higher 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 2022 were $3,835 million compared to $3,557 million in 2021, an increase of $278 million, or 8%. Higher selling prices in the region increased net sales by $370 million in 2022,

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driven by the pass through of higher cost inflation. Glass container shipments in the region were down approximately 1% in 2022 compared to the prior year, which decreased net sales by approximately $36 million in 2022. Lower shipments to beer customers, primarily in North America, drove overall shipments in the Americas down in 2022, but were partially offset by higher shipments to spirits and non-alcoholic customers across the remainder of the region. The divestiture of the Cristar glass tableware business in March 2022 also reduced net sales by approximately $52 million in 2022 compared to the prior year. The unfavorable effects of foreign currency exchange rate changes decreased net sales by $4 million in 2022 compared to 2021.

Europe: Net sales in Europe in 2022 were $2,878 million compared to $2,687 million in 2021, an increase of $191 million, or 7%. Glass container shipments in 2022 were up nearly 4%, increasing net sales by approximately $55 million compared to 2021, driven by stronger shipments to customers in all end-use categories including higher shipments resulting from the dislocation of supply due to the conflict between Russia and Ukraine. Higher selling prices in Europe increased net sales by $434 million in 2022, driven by the pass through of higher cost inflation. Unfavorable foreign currency exchange rates decreased the region’s net sales by approximately $298 million in 2022 as the Euro weakened in relation to the U.S. dollar.

Earnings from Continuing Operations before Income Taxes and Segment Operating Profit

Earnings from continuing operations before income taxes were $805 million in 2022 compared to $332 million in 2021, an increase of $473 million. This increase was due to higher segment operating profit, gains on the sale of land and buildings of two of the Company’s plants in the Americas in 2022 and the non-recurrence of the Paddock-related charge in 2021, partially offset by the non-recurrence of the gain recorded on a Brazilian indirect tax credit, higher retained corporate and other costs and higher net interest expense in 2022 compared to the prior year.

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 2022 was $960 million, compared to $827 million in 2021, an increase of $133 million, or approximately 16%. This increase was primarily due to higher sales and production levels, strong operating performance, benefits from the Company’s margin expansion initiatives, higher net prices and the non-recurrence of severe weather that impacted the Americas in the first quarter of 2021, partially offset by elevated asset project activity and unplanned production downtime, the unfavorable effects of changes in foreign currency exchange rates and the unfavorable impacts from divestitures in earlier periods.

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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 2022 was $472 million, compared to $456 million in 2021, an increase of $16 million, or 4%. The impact of lower shipments discussed above resulted in a $3 million decrease to segment operating profit in 2022 compared to 2021. The benefit of higher selling prices exceeded

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cost inflation resulting in a net $53 million increase to segment operating profit in 2022. Operating costs in 2022 were $18 million higher than in the prior year and were impacted by furnace events in North America that resulted in higher repair costs and unplanned production downtime and elevated asset activity related to projects to increase capacity, partially offset by benefits from the region’s margin expansion initiatives. The region’s restructuring actions in 2022 have not had a significant impact on operating costs since they occurred late in the fourth quarter but are expected to lower operating costs starting in 2023, in line with management’s expectations. The effects of foreign currency exchange rates increased segment operating profit by $6 million in the current year.

Included in the above discussion of the factors impacting results, the region’s results in 2022 benefited from the non-recurrence of severe weather that occurred in February of 2021, which negatively impacted results by approximately $38 million, primarily due to surcharges for usage or excess usage of electricity and natural gas, lost production downtime, lost sales and the cost of incremental repairs.

In 2022, the Company completed the sale of its land and buildings for two plants in the Americas and simultaneously entered in to leaseback transactions for these properties. These sale leaseback transactions and the sale of the Company’s Cristar tableware business in Colombia in 2022 were part of the Company’s portfolio optimization program to redeploy proceeds on asset sales 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. The divestiture of the Cristar glass tableware business and the additional lease expense associated with the sale leaseback transactions reduced segment operating profit by approximately $22 million in 2022 compared to the prior year.

Europe: Segment operating profit in Europe in 2022 was $488 million compared to $371 million in 2021, an increase of $117 million, or 32%. The impact of higher shipments discussed above increased segment operating profit by approximately $13 million. The benefit of higher selling prices exceeded cost inflation and increased segment operating profit by $178 million in 2022 compared to 2021. Operating costs in 2022 were $30 million higher than in the prior year and were impacted by higher project spending and logistics costs and an insurance recovery in the prior year that did not repeat this year, partially offset by benefits from the region’s margin expansion initiatives and the net benefit of a $19 million subsidy received by the Italian government to help mitigate the impact of elevated energy costs. The effects of foreign currency exchange rates decreased segment operating profit by $37 million in the current year. The divestiture of the Le Parfait brand in December 2021 reduced segment operating profit by approximately $7 million in 2022 compared to the prior year.

In addition, the current conflict between Russia and Ukraine has caused a significant increase in the price of natural gas and increased price volatility. The Company’s European operations typically purchase natural gas under long-term supply arrangements with terms that range from one to five years and through these agreements, typically agree on price with the relevant supplier in advance of the period in which the natural gas will be delivered, which shields the Company from the full impact of increased natural gas prices, while such agreements remain in effect. However, the current conflict between Russia and Ukraine and the resulting sanctions, potential sanctions or other adverse repercussions on Russian-sourced energy supplies could cause the Company’s energy suppliers to be unable or unwilling to deliver natural gas at agreed prices and quantities. If this occurs, it will be necessary for the Company to procure natural gas at then-current market prices and subject to market availability and could cause the Company to experience a significant increase in operating costs or result in the temporary or permanent cessation of delivery of natural gas to several of the Company’s manufacturing plants in Europe. In addition, depending on the duration and ultimate outcome of the conflict between Russia and Ukraine, future long-term supply arrangements for natural gas may not be available at reasonable prices or at all.

Interest Expense, Net

Net interest expense in 2022 was $239 million compared to $216 million in 2021. This increase was primarily due to higher note repurchase premiums and refinancing fees and charges and higher interest rates, partially offset by lower debt levels. Net interest expense in 2022 and 2021 included $26 million and $13 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 and the Company’s new bank credit agreement.

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Provision for Income Taxes

The Company’s effective tax rate from operations for 2022 was 22.1% compared to 50.3% for 2021.  The effective tax rate for 2022 differed from 2021 due to the favorable tax provisions on the sales of the tableware business and the land and buildings of two plants in 2022 and the charge related to the Paddock support agreement liability recorded without a tax benefit in 2021, as well as a change in the mix of geographic earnings.

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Net Earnings Attributable to Noncontrolling Interests

Net earnings attributable to noncontrolling interests for 2022 was $43 million compared to $23 million for 2021. This increase was primarily due to approximately $29 million of noncontrolling interest recorded in 2022 associated with the gain on the sale of the Company’s glass tableware business in Colombia.

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Net Earnings from Continuing Operations Attributable to the Company

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For 2022, the Company recorded net earnings from continuing operations attributable to the Company of $584 million, or $3.67 per share (diluted), compared to $142 million, or $0.88 per share (diluted), in 2021. Earnings in 2022 and 2021 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 2022 were lower due to foreign currency effects compared to 2021.

This trend may not continue into 2023. 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.

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 and other ESG-related matters.  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 and other environmental impacts.  The Company’s results of operations have been impacted by various regulatory approaches as described below.

For the year ending December 31, 2022, the European segment recognized approximately $24 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., Mexico, the Canadian federal government and the province of Quebec, among others, have adopted cap-and-trade or carbon pricing legislation aimed at reducing GHG emissions. As a result, the Americas segment recognized approximately $3 million of expense related to emissions credits and fees 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 (“DEQ”) 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. The Company also agreed to submit a

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permit application to install pollution control equipment at its Portland, Oregon manufacturing facility or to cease its operations at that facility by June 30, 2022. In the second quarter of 2022, the Company submitted the permit application to install pollution control equipment, allowing it to continue operations at the Portland facility. The Company expects this pollution control equipment will be implemented in 2023 at an estimated cost of approximately $12 million.

The Company has a near-term emissions reduction target validated by 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, wildfires, extreme temperatures, and chronic changes in meteorological patterns, across its 69 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, 2022, the Company is pursuing insurance reimbursement related to this event but cannot determine the amount, if any, that will be reimbursed. Climate change may increase the frequency or severity of such events.

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.

The Company’s customers and suppliers may also be impacted by climate risks, whether physical or transition risks, thus potentially compounding or causing further impacts to the Company’s business and results of operations.

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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 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, 2022 and 2021.

The Company has initiated a strategic review of the remaining businesses in the former Asia Pacific region. This review is aimed at exploring options to maximize share owner value, focused on aligning the Company’s business with demand trends and improving the Company’s operating efficiency, cost structure and working capital management. The review is ongoing and may result in divestitures, corporate transactions or similar actions, and could cause the Company to incur restructuring, impairment, disposal or other related charges in future periods.

Retained corporate costs and other for 2022 were $232 million compared to $171 million in 2021. These costs were higher in 2022 primarily due to higher management incentive and insurance expense, as well as elevated cost inflation. In addition, the Company has taken some restructuring actions related to its managed services activities in 2021 and 2022, but these actions have not yet had a significant impact on operating costs, in line with management’s expectations. These actions are expected to result in the reduction of related annual costs by approximately $8 million over the next several years.

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Gain on Sale Leasebacks of Land and Building

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For the year ended December 31, 2022, the Company recorded pretax gains of approximately $334 million on the sale of land and buildings of two of its plants in the Americas. Additional details of these transactions are described below.

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In August 2022, the Company completed the sale of the land and building of the Company’s Vernon, California (Los Angeles) plant to 2900 Fruitland Investors LLC and 2901 Fruitland Avenue Investors LLC.  The Company recorded a pretax gain of approximately $153 million (approximately $153 million after tax) on the sale, which was recorded to Other income (expense), net on the Consolidated Results of Operations in 2022.

In May 2022, the Company completed the sale of the land and building of the Company’s Brampton, Ontario, Canada plant to an affiliate of Crestpoint Real Estate Investments Ltd.  The Company recorded a pretax gain of approximately $181 million (approximately $158 million after tax) on the sale, which was recorded to Other income (expense), net on the Consolidated Results of Operations in 2022.

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See Note 22 to the Consolidated Financial Statements for further information.

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Gain on Sale of Divested Businesses and Miscellaneous Assets

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In March 2022, the Company completed the sale of its Cristar glass tableware business in Colombia to Vidros Colombia S.A.S, an affiliate of Nadir Figueiredo S.A., a glass tableware producer based in Brazil. The related pretax gain was approximately $55 million (approximately $16 million after tax and noncontrolling interest). The pretax gain was recorded to Other income (expense), net on the Consolidated Results of Operations in 2022.

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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

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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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See Note 22 to the Consolidated Financial Statements for further information.

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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 2022, the Company settled a portion of its pension obligations and recorded approximately $20 million of pension settlement charges in the United States, Canada and Mexico. 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.

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Restructuring, Asset Impairment and Other Charges

During 2022, the Company implemented several discrete restructuring initiatives and recorded restructuring and other charges of $53 million.  These charges reflect $50 million of employee costs, such as severance and benefit-related costs, write-down of assets and other exit costs (including related consulting costs attributed to restructuring of managed services activities) at several of the Company’s facilities primarily 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 $3 million of 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, write-down of assets and other exit costs (including related consulting costs attributed to restructuring of managed services activities) at a number of the Company’s facilities 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.

See Note 10 to the Consolidated Financial Statements for further information.

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Charge for Paddock Support Agreement Liability

The Company 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 issued in connection with the Plan protecting O-I Glass and its affiliates from current and future asbestos-related personal injury claims.

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

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Capital Resources and Liquidity

On March 25, 2022, certain of the Company’s subsidiaries entered into a Credit Agreement and Syndicated Facility Agreement (the “Original Agreement”), which refinanced in full the previous credit agreement. The Original Agreement provided for up to $2.8 billion of borrowings pursuant to term loans, revolving credit facilities and a delayed draw term loan facility. The delayed draw term loan facility allowed for a one-time borrowing of up to $600 million, the proceeds of which were used, in addition to other consideration paid by the

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Company and/or its subsidiaries, to fund an asbestos settlement trust (the “Paddock Trust”) established in connection with the confirmed plan of reorganization of Paddock proposed by Paddock, O-I Glass and certain other parties in Paddock’s Chapter 11 case (see Note 15 to the Consolidated Financial Statements for more information). On July 18, 2022, the Company drew down the $600 million delayed draw term loan to fund, together with other consideration, the Paddock Trust.

On August 30, 2022, certain of the Company’s subsidiaries entered into an Amendment No. 1 to its Credit Agreement and Syndicated Facility Agreement (the “Credit Agreement Amendment”), which amends the Original Agreement (as amended by the Credit Agreement Amendment, the “Credit Agreement”). The Credit Agreement Amendment provides for up to $500 million of additional borrowings in the form of term loans. The proceeds of such term loans were used, together with cash, to retire the $600 million delayed draw term loan. The term loans mature, and the revolving credit facilities terminate, in March 2027. The term loans borrowed under the Credit Agreement Amendment are secured by certain collateral of the Company and certain of its subsidiaries. In addition, the Credit Agreement Amendment makes modifications to certain loan documents, in order to give the Company increased flexibility to incur secured debt in the future.

The Company recorded approximately $1 million of additional interest charges for third-party fees and the write-off of unamortized fees related to the Credit Agreement Amendment in the third quarter of 2022. The Company recorded approximately $2 million of additional interest charges for third-party fees incurred in connection with the execution of the Original Agreement and the write-off of unamortized fees related to the previous credit agreement in the first quarter of 2022.

At December 31, 2022, the Credit Agreement includes a $300 million revolving credit facility, a $950 million multicurrency revolving credit facility and $1,450 million in term loan A facilities ($1,426 million outstanding balance at December 31, 2022, net of debt issuance costs). At December 31, 2022, the Company had unused credit of $1.24 billion available under the Credit Agreement. The weighted average interest rate on borrowings outstanding under the Credit Agreement at December 31, 2022 was 5.93%.

The Credit 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 Credit Agreement also contains one financial maintenance covenant, a Secured Leverage Ratio (as defined in the Credit Agreement), that requires the Company not to exceed a ratio of 2.50x calculated by dividing consolidated Net Indebtedness that is then secured by Liens on property or assets of the Company and certain of its subsidiaries by Consolidated EBITDA, as each term is defined and as described in the Credit Agreement. The Secured 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 Secured Leverage Ratio to exceed the specified maximum.

Failure to comply with these covenants and restrictions could result in an event of default under the Credit Agreement. In such an event, the Company could not request additional borrowings under the revolving facilities, and all amounts outstanding under the Credit 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 Credit Agreement. If an event of default occurs under the Credit Agreement and the lenders cause all of the outstanding debt obligations under the Credit 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, 2022, the Company was in compliance with all covenants and restrictions in the Credit Agreement.  In addition, the Company believes that it will remain in compliance and that

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its ability to borrow additional funds under the Credit Agreement will not be adversely affected by the covenants and restrictions.

The Total Leverage Ratio (as defined in the Credit Agreement) determines pricing under the Credit Agreement. The interest rate on borrowings under the Credit Agreement is, at the Company’s option, the Base Rate, Term SOFR or, for non-U.S. dollar borrowings only, the Eurocurrency Rate (each as defined in the Credit Agreement), plus an applicable margin. The applicable margin is linked to the Total Leverage Ratio. The margins range from 1.00% to 2.25% for Term SOFR loans and Eurocurrency Rate loans and from 0.00% to 1.25% for Base Rate loans. In addition, a commitment fee is payable on the unused revolving credit facility commitments ranging from 0.20% to 0.35% per annum linked to the Total Leverage Ratio.

Obligations under the Credit 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 Credit Agreement are guaranteed by certain domestic subsidiaries of the Company, and certain foreign obligations under the Credit Agreement are guaranteed by certain foreign subsidiaries of the Company.

In August 2022, the Company redeemed $300 million aggregate principal amount of its 5.875% Senior Notes due 2023. Following the redemption, $250.0 million aggregate principal amount of the 5.875% Senior Notes due 2023 remained outstanding. The redemption was funded with cash on hand. The Company recorded approximately $7 million of additional interest charges for note repurchase premiums and the write-off of unamortized finance fees related to this redemption.

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On February 10, 2022, the Company announced the commencement, by an indirect wholly owned subsidiary of the Company, of a tender offer to purchase for cash up to $250.0 million aggregate purchase price of its outstanding (i) 5.875% Senior Notes due 2023, (ii) 5.375% Senior Notes due 2025, (iii) 6.375% Senior Notes due 2025 and (iv) 6.625% Senior Notes due 2027. On February 28, 2022, the Company repurchased $150.0 million aggregate principal amount of the outstanding 5.875% Senior Notes due 2023 and $88.2 million aggregate principal amount of the outstanding 6.625% Senior Notes due 2027. Following the repurchase, $550.0 million and $611.8 million aggregate principal amounts of the 5.875% Senior Notes due 2023 and 6.625% Senior Notes due 2027, respectively, remained outstanding. The repurchases were funded with cash on hand. The Company recorded approximately $16 million of additional interest charges for note repurchase premiums and the write-off of unamortized finance fees related to the senior note repurchases conducted in the first quarter of 2022.

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 Previous 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 fair value 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.

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Material Cash Requirements

The Company’s material cash requirements include the following:

Cash Flows

Operating activities: Cash provided by continuing operating activities was $154 million for 2022, compared to $680 million for 2021. The decrease in cash provided by continuing operating activities in 2022 was primarily due to the $621 million that the Company paid to fund the Paddock Trust and related expenses, as well as a higher use of cash for other operating items and lower non-cash charges, partially offset by higher net earnings than in 2021. See Note 15 to the Consolidated Financial Statements for additional information on Paddock. In addition, for 2022, the Company paid approximately $20 million toward restructuring activities compared to $30 million in the prior year.

During 2022, the Company contributed approximately $26 million to its defined benefit pension plans, compared with $84 million in 2021. The 2021 pension contributions included approximately $43 million in discretionary contributions. The Company expects to contribute between $40 million and $75 million to its pension plans in 2023 through 2024.

Working capital was a source of cash of $95 million in 2022, compared to a use of cash of $13 million in 2021. The source of cash from working capital was higher in 2022 due, in part, to a smaller change in accounts receivable balances from the prior year end. For 2022 and 2021, the Company’s use of its accounts receivable factoring programs resulted in increases of $54 million and $45 million, respectively, to cash provided by operating activities. See Note 20 to the Consolidated Financial Statements for additional information. Excluding the impact of accounts receivable factoring, the Company’s days sales outstanding as of December 31, 2022 were comparable to December 31, 2021. For 2022, other cash flows from operating activities were a higher use of

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cash of approximately $144 million compared to 2021, primarily due to the Company paying a $38 million tax audit settlement in Mexico, higher equity earnings and lower dividends received from equity affiliates.

Investing activities: Cash utilized in investing activities was $97 million for 2022, compared to $220 million of cash utilized for 2021. Capital spending for property, plant and equipment increased to $539 million during 2022, compared to $398 million in 2021, as the Company increased spending to enable future planned sales growth. The Company’s 2022-2024 capital expenditure plan to enable profitable growth has evolved amid ongoing supply chain challenges. The Company now anticipates that it will undertake a broader range of smaller scope capital projects to de-risk project execution.  The Company also plans to accelerate the development of its Generation 3 MAGMA solution.  Additionally, the Company announced that it will spend up to $240 million to build its first U.S. MAGMA greenfield facility in Bowling Green, KY, which is expected to commence production in mid-2024. The Company estimates that its full year 2023 capital expenditures should be approximately $700 to $725 million.

The Company received cash proceeds of approximately $368 million in 2022 related to the sale of the land and buildings of the Company’s plants in Brampton, Ontario, Canada and Vernon, California. The Company also received approximately $98 million of cash proceeds for the sale of miscellaneous businesses and other assets, primarily related to its Cristar glass tableware business in Colombia. 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. Also in 2021, the Company received approximately $58 million related to the sale of its ANZ businesses. Contributions to joint ventures were $12 million and $0 in 2022 and 2021, respectively. The Company also paid approximately $24 million related to hedge activity in 2022.

As a result of the funding of the Paddock Trust and the cancellation of the pledge of equity interests in reorganized Paddock, on July 20, 2022, the Company regained exclusive control over reorganized Paddock’s activities.  Therefore, at that date in the third quarter of 2022, reorganized Paddock was reconsolidated, and its remaining assets, including $12 million of cash and cash equivalents, were recognized in the Company’s consolidated statement of cash flows.

Financing activities:  Cash provided by financing activities was $6 million for 2022, compared to $273 million of cash utilized in financing activities for 2021.  Financing activities in 2022 included additions to long-term debt of $2,852 million, which included the refinancing of the Company’s bank credit agreement.  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 2022 included the repayment of long-term debt of $2,897 million, which included the refinancing of the Company’s bank credit agreement, the redemption of $450 million aggregate principal amount of the Company’s outstanding 5.875% senior notes due 2023 and the repayment of $88.2 million aggregate principal amount of the Company’s outstanding 6.625% Senior Notes due 2027.   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 Company’s bank credit agreement.

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Borrowings under short-term loans increased $16 million in 2022.  As a result of financing activities, the Company paid finance fees and premiums of $29 million and $16 million for 2022 and 2021, respectively.  Also, the Company received approximately $133 million and paid approximately $15 million related to hedging activity in 2022 and 2021, respectively.

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Distributions to noncontrolling interests increased from $16 million in 2021 to $27 million in 2022 due to a higher distribution on the gain on the sale of the Cristar glass tableware business in Colombia.

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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 each of 2022 and 2021, the Company repurchased $40 million of shares of the

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Company’s common stock under this program. The Company intends to repurchase approximately $40 million of shares of the Company’s common stock in 2023.

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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 or the conflict between Russia and Ukraine and their impact on the Company’s 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. In July 2022, the Plan became effective and Paddock and the Company provided total consideration of $610 million plus related expenses to fund the Paddock Trust. 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, 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, 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

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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 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.

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.

During the fourth quarter of 2022, the Company completed its annual impairment testing and determined that no impairment of goodwill existed. Goodwill at December 31, 2022 totaled approximately $1.81 billion, representing approximately 20% of total assets. As of December 31, 2022, the Company has three reporting units and includes $818 million of recorded goodwill to the Company’s Europe reporting unit, $442 million of recorded goodwill to the Company’s North America reporting unit and $553 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 (13%) between the BEV and carrying value of this reporting unit as of October 1, 2022. 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-half percentage point lower and the Company’s assumed weighted average cost of capital were one-half percentage point higher, the testing performed as of October 1, 2022, would have indicated that the BEV of the Company’s

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North American reporting unit would have exceeded its carrying value by approximately 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, 2022, 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 2023 that might significantly affect the projections and variables used in the impairment test to determine if a review prior to October 1 may be appropriate. If the results of impairment testing confirm that a write-down of goodwill is necessary, then the Company will record a charge 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,

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2022, the weighted average discount rate was 5.48% and 5.52% 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. In developing this assumption, the Company also considers the Plans’ asset mix and evaluates input from its third-party pension plan asset consultants, including their review of asset class return expectations. 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. For purposes of determining pension charges and credits in 2022, the Company’s estimated weighted average expected long-term rate of return on plan assets is 5.75% for U.S. plans and 4.21% for non-U.S. plans compared to 6.85% for U.S. plans and 5.46% for non-U.S. plans in 2021. The Company recorded pension expense from continuing operations (exclusive of settlement charges) of $34 million, $32 million, and $38 million in 2022, 2021, and 2020, respectively. Depending on currency translation rates, the Company expects to record approximately $28 million of total pension expense for the full year of 2023. The 2023 pension expense will reflect a 5.75% and 4.67% 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 $3 million and $8 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.

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

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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 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. In addition, based on available evidence and the weighting of factors discussed above, the Company has valuation allowances on certain deferred tax assets in certain international tax jurisdictions.

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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