Owens-Illinois Disappoints - Analyst Blog

Owens-Illinois Inc. (OI) delivered adjusted EPS of 45 cents in its fourth quarter ended December 31, 2010, missing the Zacks Consensus Estimate of 47 cents. Results however were up 5% year over year from 43 cents in the year-ago quarter.

Both the quarter's adjusted EPS excluded some charges. Including these items, the company reported a loss per share of 51 cents compared with a loss per share of $1.01 in the year-ago quarter.

Total revenue inched down 1% year over year to $1,728 million and missed the Zacks Consensus Estimate of $1,765 million. Price and shipment levels were both flat with the prior-year quarter. Even a massive 54% increase in SA was not good enough to counter consistent declines seen in the company's other operating regions. North America, Europe and Asia-Pacific each suffered declines of 9%.

Costs & Margin Performance

Manufacturing and delivery costs dropped 2% to $1,420 million from the year-ago quarter mainly due to higher operating rates. Gross profit increased 5% to $308 million and gross margin expanded 110 basis points to 17.8% in the quarter. Selling and administrative expenses went down 7% year over year to $125 million and, as a percentage of sales, improved 50 basis points to 7.2%.

Segment operating profit increased to $221 million from $174 million in the year-ago quarter driven by higher capacity utilization.

Fiscal 2010 Performance

Owens-Illinois' adjusted EPS for fiscal 2010 was $2.60 compared with $2.61 in fiscal 2009, falling short of the Zacks Consensus Estimate of $2.71. Including special items, fiscal 2010 EPS was $1.55 compared with 65 cents in fiscal 2009.

Sales during the year decreased marginally by 0.3% to $6.63 billion from $6.65 billion and missed the Zacks Consensus Estimate of $6.7 billion.

Segment operating profit in fiscal 2010 went up to $964 million from $891 million in fiscal 2009. Favorable currency translation resulted in a $16 million benefit and price and product mix were consistent with the prior year. However, total shipments declined 1%. Excluding the net effect of additional volume from acquisitions and volume loss tied to contract renegotiations effective in 2010, shipments were up approximately 2% year over year.

Financial Position

Owens-Illinois had cash and cash equivalents of $640 million as of December 31, 2010, down from $700.2 million as of September 30, 2010. The company generated cash flows of $592 million from operating activities in the year, lower than $800 million in the earlier year.

Net debt was $3.638 billion, up $785 million from the end of fiscal 2009 owing to several acquisitions in 2010 and approximately $200 million paid to repurchase six million shares of the company's stock. These factors were partially mitigated by $88 million of foreign currency translation and $100 million of free cash flow from continuing operations. Further, in the fourth quarter, the company paid approximately $70 million of its debt due in 2011.

Asbestos-related cash payments during the year amounted to $179 million, down from $190 million in the prior year. New lawsuits and claims filed during 2010 declined 45%. The number of pending asbestos related lawsuits and claims was approximately 5,900 as of December 31, 2010, down from approximately 6,900 as of December 31, 2009.

Owens-Illinois acquired three plants in China during the fourth quarter, including two near Beijing and one near Guangzhou. The company also began production at its new furnace in New Zealand. For the full year, the company acquired 10 new plants across South America and Asia Pacific, including a joint venture in Southeast Asia. Owens-Illinois also added three new furnaces, one each in Argentina, Peru and New Zealand.

Due to the expropriation of the assets of its Venezuelan operations, the company has reflected this business as discontinued operations in the fourth quarter.

Outlook

Management did not provide any specific guidance for the upcoming quarter or the fiscal year. However, it expects shipments to increase due to organic growth and benefits from recent acquisitions. Further, higher selling prices are expected to partially offset additional cost inflation. As capital investments and restructuring payments will decline significantly from 2010 levels, Owens-Illinois expects free cash flow to approximate $300 million in 2011.

Our Take

The company's substantial debt is a matter of concern. Further, the company has asbestos liabilities and may record additional charges, in the future, for estimated asbestos-related costs. Overall, we believe Owens-Illinois' low near-term revenue visibility, competitive environment and continued weakness in some end-markets would continue to undermine its growth prospects and profitability. We currently have a Zacks #4 Rank (short-term Sell recommendation) on the stock.

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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