Owens-Illinois Profit Lags, Sales Rise

Owens-Illinois, Inc. (OI - Analyst Report) reported net earnings of $71 million or 42 cents per share from continuing operations in the second quarter of 2011, deteriorating significantly from $132 million or 79 cents per share in the year-ago quarter.

Reported earnings included charges of $24 million or 15 cents per share associated with note purchase premiums and write-offs for finance fees and another $3 million or 2 cents per share for restructuring and asset impairment, while the prior-year quarter earnings included only restructuring and asset impairment charges of $8 million or 5 cents per share.

Excluding these items, the company’s adjusted earnings amounted to $98 million or 59 cents per share compared with $140 million or 84 cents per share a year ago. Adjusted earnings in the reported quarter missed the Zacks Consensus Estimate of 62 cents per share.

Revenues increased 17.4% year over year to $1.96 billion, driven by improved shipments, which in turn were favorably impacted by the company’s successful acquisitions and gradually recovering market conditions. Sales also benefited from favorable foreign currency translations.

Manufacturing and delivery costs were $1.60 billion, up 24% year over year. The increase was attributable to additional costs arising from production and supply chain issues in the North American region. As a result, gross profit plunged 7.3% year over year to $355 million.

Selling and administrative expenses surged 19% year over year to $146 million while research, development and engineering expenses climbed 20% year over year to $18 million. These resulted in a 17% year-over-year decline in segment operating profit for the company to $225 million, despite higher shipment levels and favorable foreign currency translations.

Owens-Illinois had cash and cash equivalents of $260 million as of June 30, 2011 compared with $648 million as of June 30, 2010. Long-term debt increased to $3.97 billion at the end of the second quarter of 2011 from $3.23 billion at the end of the second quarter of 2010 due to higher number of acquisitions and buyouts along with refinancing activities and dividends paid to non-controlling interests.

Cash flow from operating activities was $94 million in the first half of 2011 compared with $174 million in the year-ago period.

During the quarter, Owens-Illinois announced a new $2 billion bank credit agreement comprising $1.1 billion in term loans and a $900 million revolving credit facility. Proceeds from borrowings under the new credit agreement were used to repay and terminate the previous credit agreement scheduled to mature in June 2012 and also to redeem more than $700 million of higher cost 6.75% senior notes maturing 2014.

Management did not provide any specific earnings guidance for the upcoming quarter or the fiscal year. But it expects its results to improve compared to the current quarter. However, the company projected free cash flow in the range of $200 to $250 million for fiscal 2011.

However, manufacturing costs are expected to increase mainly due to production and supply challenges in both North America and Asia Pacific. This may affect margins going forward.

Moreover, intense competition, not only from other well-established glass container manufacturers such as Compagnie de Saint-Gobain, Anchor Glass Container Corp. and Ardagh Plc., but also from manufacturers of alternative forms of packaging such as Silgan Holdings Inc. (SLGN - Analyst Report) will hurt the company’s profitability in the future.

Keeping these in mind, the shares of Owens-Illinois, Inc. are maintaining a Zacks #5 Rank, which translates into a short-term “Strong Sell” rating.

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