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Silgan Misses Earnings Estimate

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Silgan Holdings Inc. (SLGN) posted adjusted earnings of 63 cents per share in the second-quarter of 2013, up 15% from 55 cents earned in the year-ago quarter. The improvement was driven by solid operating performance by the metal and plastic container businesses. Earnings were consistent with the company’s guided range of 60 cents to 70 cents per share but missed the Zacks Consensus Estimate of 65 cents.

Including a rationalization charge of 1 cent per share and favorable tax adjustment of 31 cents per share, earnings came in at 93 cents per share in the reported quarter. Including plant start-up costs of 2 cents per share, acquisition cost of 1 cent per share and loss of 37 cents per share for an early extinguishment of debt, earnings per share in the prior-year quarter were 15 cents per share.

Total revenue increased 7% year over year to $880 million, beating the Zacks Consensus Estimate of $862 million. Sales increased at the metal food container and plastic container businesses, partly offset by lower sales in the closures business.

Cost and Margins

Cost of goods sold increased 6% year over year to $758.1 million. Gross profit improved 11% to $128 million from $115 million in the year-ago quarter. Consequently, gross margin expanded 50 basis points (bps) to 14.6%. Selling, general and administrative expenses increased 12.6% to $52 million. Adjusted operating income increased 10% to $75.8 million, leading to 20 bps expansion in operating margin to 8.6%.

Segment Performance

Total revenue in the Metal Containers segment rose 10.7% to $532 million, attributed to higher unit volumes mainly in soup and pet food in the U.S., higher selling prices, the benefits derived from the new plants in Eastern Europe and the inclusion of the acquired Turkish operation. Foreign currency also benefited the sales.

Adjusted operating income grew 9.5% year over year to $46 million. The year-over-year increase was due to increased unit volumes partially offset by the overhead costs of the new operations and lower volumes in the Middle East as a result of political instability. Operating margin remained flat at 8.7%.

Closures segment’s total revenue slipped 0.9% to $181 million, affected by lower beverage volumes in the U.S. as a result of adverse weather condition and significantly lower sales in Venezuela due to political instability, partly compensated by favorable foreign currency. Adjusted operating income fell 4% to $21.9 million and operating margin plunged 40 bps to 12%.

In the Plastic Containers segment, total revenue increased 5.4% to $167 million. The growth was attributable to the inclusion of net sales from the plastic food container operation and a favorable mix of products sold, partly offset by a decline in unit volumes in the legacy plastic business. Adjusted operating income in the quarter was $11.9 million, up 28% from $11.9 million in the prior-year quarter. The increase was primarily attributable to solid operating performance, partly offset by lower volumes in the legacy operations and increase in the cost of resin.

Financial Updates

Cash and cash equivalents were $113 million as of Jun 30, 2013 compared with $368.9 million as of Jun 30, 2012. Current and long-term debt increased to $1.87 billion as of Jun 30, 2013 from $1.78 billion as of Jun 30, 2012. Debt-to-capitalization ratio increased to 77% as of Jun 30, 2013, from 73% as of Jun 30, 2012. Cash used in operating activities was $159 million during the second quarter compared with $195 million in the prior-year quarter.

Outlook for 2013

For 2013, Silgan lowered its full-year expectation for adjusted earnings per share to $3.00 to $3.15 from the previous band of $3.05 to $3.20. The guidance excludes the impact of tax adjustment, rationalization charges, plant start-up costs, loss on early extinguishment of debt and the impact from the remeasurement of net assets in Venezuela.

Adjusted earnings are expected at $1.25 to $1.35 per share for the third quarter of 2013. The guidance is based on the normal distribution of fruit and vegetable pack. However, political volatility in various international regions could hurt earnings.

Our Take

Silgan will benefit from its successful acquisitions, increasing productivity and cost reduction initiatives, such as the newly started Can Vision 2020. However, soft demand in Europe, a high debt-to-capitalization ratio and lower volume expectation remain concerns.

Stamford, Ct.-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 leading supplier of plastic containers for personal care products.

Silgan retains a Zacks Rank #3 (Hold). Among Silgan’s peers Ball Corporation (BLL) reported second-quarter 2013 adjusted earnings of 85 cents per share, down 4.5% from the year-ago adjusted earnings of 89 cents per share. The results however beat the Zacks Consensus Estimate by a penny. Its other peers Mobile Mini, Inc. (MINI) and Greif, Inc. (GEF) are yet to announce their quarterly results.

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