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Silgan Earnings Lag Estimates, Shares Fall

Zacks Equity Research

Silgan Holdings Inc. (SLGN) posted adjusted earnings of $1.23 per share in the third-quarter of 2013, up 5.1% from $1.17 a share in the year-ago quarter. Shares fell 9% on Oct 23, as earnings came below the company’s guided range of $1.25 to $1.35 per share. Despite volume growth in metal container business, weather-related headwinds and higher-than-anticipated interest expense affected the earnings. The results also fell short of the Zacks Consensus Estimate of $1.31.

Including rationalization charges and acquisition cost of 2 cents per share, the company’s earnings came in at $1.21 per share in the reported quarter compared with $1.13 per share in the prior-year quarter. Earnings in the year-ago quarter included plant start-up costs of 1 cent per share, acquisition cost of 1 cent per share and rationalization charges of 2 cents per share.

Total revenue increased 2.5% year over year to $1,168 million. Revenues however missed the Zacks Consensus Estimate of $1,185 million. The year-over-year sales growth was driven by an increase in net sales across all businesses.

Cost and Margins

Cost of goods sold increased 2% year over year to $980.1 million. Gross profit improved 5% to $187.8 million from $178.8 million in the year-ago quarter. Consequently, gross margin expanded 30 basis points (bps) to 16%.

Selling, general and administrative expenses increased 14% year over year to $50.6 million. Adjusted operating income grew 2% year over year to $137.2 million. Operating margin remained flat year over year at 11.8% in the third quarter.

Segment Performance

Total revenue in the Metal Containers segment rose 2.1% year over year to $831.1 million, attributed to higher unit volumes, pass through of higher raw material costs, favorable foreign currency translation partly offset by poor fruit and vegetable packs conditions, predominantly in the U.S. and Europe.

Adjusted operating income grew 1.9% year over year to $108.6 million. The year-over-year increase was due to higher unit volumes and favorable impact from better absorption of overhead costs. This was partially offset by an unfavorable mix of products sold and the effect of under absorbed operating costs at the new plants in Eastern Europe and the Middle East. Operating margin remained flat at 13%.

The Closures segment’s total revenue rose 1.4% year over year to $185.2 million, driven by favorable foreign currency translation and the pass through of higher raw material costs, partially offset by lower global unit volumes due to softness in single-serve beverages. Adjusted operating income fell 2% year over year to $24.1 million and operating margin plunged 50 bps to 13%. Lower unit volumes and unfavorable impact from the lagged pass through of increases in resin costs led to the decline.

In the Plastic Containers segment, total revenue grew 6.2% year over year to $151.6 million. The growth was attributable to higher volumes, an increase in average selling prices and favorable mix of products sold; but was partially offset by the negative impact of foreign currency translation. Adjusted operating income in the quarter was $8.6 million, up 38.7% from $6.2 million in the prior-year quarter. The increase was primarily attributable to the inclusion of the plastic food container operations and favorable mix of products sold; partially offset by lower volumes in the legacy operations and the unfavorable impact from lagged pass through of increases in resin costs.

Financial Updates

Cash and cash equivalents were $134.5 million as of Sep 30, 2013 down from $422.5 million as of Sep 30, 2012. Total debt declined to $1.79 billion as of Sep 30, 2013 from $1.98 billion as of Sep 30, 2012. Debt-to-capitalization ratio increased to 74% as of Sep 30, 2013, from 73% as of Sep 30, 2012. Cash flow from operating activities for the nine-month period was $0.8 million, while cash used in operating activities was $6 million in the year-ago comparable period.


For 2013, Silgan lowered its expectation for adjusted earnings per share to the band of $2.75 to $2.85 from $3.00 to $3.15. The guidance excludes the impact of tax adjustment, rationalization charges, plant start-up costs, loss on early extinguishment of debt, and the impact of remeasurement of net assets in Venezuela.

Adjusted earnings range, excluding rationalization charges for the fourth quarter of 2013 are expected to be 44-54 cents per share.

Our Take

Silgan will benefit from its successful acquisition of Portola Packaging in Oct 2013. The acquisition will enhance Silgan’s Closure business and also enable expansion of its plastic closures offerings in Europe. However, the acquisition is expected to be slightly dilutive to earnings in 2013 due to the write-up of inventory for purchase accounting. Thereafter, it will be more accretive as synergies are phased in over the next eighteen months following the closing.

Increasing productivity and cost reduction initiatives, such as the newly started Can Vision 2020 will also drive growth. However, soft demand in Europe, a high debt-to-capitalization ratio and lower volume expectation remain concerns.

Stamford, Conn.-based Silgan is a leading manufacturer of consumer goods packaging products, operating 81 manufacturing facilities in North and South America, Europe and Asia. In North America, Silgan is the largest supplier of metal containers for food products and a major supplier of plastic containers for personal care products.

Silgan retains a Zacks Rank #3 (Hold). Mobile Mini, Inc. (MINI) also belongs to the containers-metal/glass industry and holds a Zacks Rank #1 (Strong Buy).

Among Silgan’s peers Ball Corp. (BLL) reported third-quarter 2013 adjusted earnings of $1.00 per share, up 11% from 90 cents a share in the year-ago period, also beating the Zacks Consensus Estimate of 93 cents. However, EveryWare Global, Inc. (EVRY) is yet to announce its third-quarter results. The Zacks Consensus Estimate for EveryWare currently stands at 14 cents for the third quarter.

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