OI OI Glass Inc

Owens-Illinois Inc. (OI) delivered adjusted EPS of 47 cents in its first quarter ended March 31, 2011, beating the Zacks Consensus Estimate of 45 cents.

However, the result dropped a penny from 48 cents in the year-ago quarter.

Adjusted EPS excluded a 3-cent restructuring charge. Including the said charge, the company reported EPS of 44 cents, compared with 48 cents in the year-ago quarter.

Total revenue rose 11% year over year to $1,719 million and outperformed the Zacks Consensus Estimate of $1,662 million. While the combined effect of price and product mix was essentially flat compared to the prior year, global shipments increased 7%. Acquisitions completed in 2010 represented more than 5% of this volume growth. The remaining increase was driven by organic growth. Revenues increased across all operating regions, led by South America in particular, which posted a year-over-year growth of 54%.

Costs & Margin Performance

Manufacturing and delivery costs increased 11% year over year to $1,386 million. Gross profit increased 11% to $333 million and gross margin expanded 10 basis points to 19.4% in the quarter. Selling and administrative expenses went up 18% year over year to $142 million and, as a percentage of sales, improved 50 basis points to 8.3%.

Segment operating profit increased to $199 million from $193 million in the year-ago quarter driven by higher capacity utilization and footprint realignment efforts conducted in the prior year.

Financial Position

Owens-Illinois had cash and cash equivalents of $430 million as of March 31, 2011, down from $640 million as of December 31, 2010. The company used operating cash flows of $85 million in the quarter compared with $16 million of cash generated from operating activities in the year-ago quarter.

Net debt was $3.933 billion, an increase of $295 million from fiscal 2010. The increase in net debt was primarily due to the use of free cash flow of $158 million to support seasonally higher working capital levels as well as $110 million on account of foreign currency translation. Available liquidity on March 31, 2011 was $728 million under the company’s global revolving credit facility.

Asbestos-related cash payments during the quarter were $33 million compared with $34 million in the year-ago quarter. New lawsuits and claims filed during the first three months of 2011 were consistent with the same period last year. The number of pending asbestos-related lawsuits and claims approximated 5,900 as of March 31, 2011, flat with year-end 2010 levels.

Outlook

Management did not provide specific guidance for the upcoming quarter or the fiscal year. However it expects higher shipment and production levels compared to the prior year due to the recent acquisitions and improving demand for glass packaging.

Even though the company anticipates elevated cost inflation given high energy prices in Europe, it believes an improving demand profile should create a more receptive environment to pass along incremental costs in 2011. The company expects investments in marketing and innovation to benefit future earnings. Free cash flow is expected to improve to approximately $300 million in 2011.

Our Take

The company’s substantial debt remains a matter of concern. Furthermore, the company has asbestos liabilities and may record additional charges, in the future, for estimated asbestos-related costs. In addition, raw material cost inflation and increased interest expense on additional borrowings to fund recent and future acquisitions may affect its earnings. It is currently a Zacks #4 Rank (short-term 'Sell' recommendation).

Perrysburg, Ohio-based Owens-Illinois is the world's largest glass container manufacturer for food and beverage products, including beer, wine, spirits and non-alcoholic drinks. The company commands market leadership in each of its four operating regions - Asia Pacific, Europe, Latin America and North America. Owens-Illinois competes with Silgan Holdings Inc. (SLGN) and privately-held Anchor Glass Container Corporation and Compagnie de Saint-Gobain.

 
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