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Silgan Holdings Inc. (SLGN - Analyst Report) posted adjusted earnings of $1.17 per share in the third-quarter 2012; a 3% increase from the year-ago quarter’s EPS of $1.14. Earnings were on the lower end of its guided range of $1.15-$1.25 per share, missing the Zacks Consensus Estimate by a penny.

Including rationalization charges of 2 cents per share, new plant start-up cost of 1 cent per share and acquisition cost of 1 cent per share, earnings were $1.13 in the reported quarter. Earnings in the prior-year quarter were $1.12 per share including a rationalization charge of 1 cent per share and a loss of 1 cent per share from early extinguishment of debt.

Total revenues declined 0.7% year over year to $1.140 billion in the quarter, missing the Zacks Consensus Estimate of $1.155 million. Sales dipped in the plastic container and closures businesses, which were somewhat offset by increased sales in the metal container business.

Cost and Margins

Cost of goods sold decreased 0.4% to $960.7 million. Gross profit declined 2.3% to $178.8 million. Consequently, gross margin contracted 20 basis-points (bps) to 15.7% in the quarter.

Selling, general and administrative expenses fell 4.3% to $44.3 million. Adjusted operating income plunged 2.7% to $132.4 million, thereby contracting operating margin by 30 bps to 11.9% in the reported quarter.

Segment Performance

Total revenues in the Metal Containers segment rose 1.9% to $814.1 million. Sales improved as higher unit volumes and average selling prices, partially offset the negative impact of foreign currency translation. Unit volumes benefited from the Ontas acquisition in Turkey along with improved fresh vegetable pack in 2012 compared to 2011. Operating income dropped 7.3% to $103.5 million, contracting operating margin by 130 bps to 12.7%

Closures segment’s total revenues dipped 3.6% to $182.7 million due to unfavorable foreign currency translation, which was partially offset by favorable unit volumes. Operating income fell by 1.2% to $24.1 million. However, operating margin increased 30 bps to 13.2%.

In the Plastic Containers segment, total revenues decreased 10.7% to $142.7 million, driven by weak unit volumes due to shut down by certain customers, reduced average selling prices because of lower resin costs along with a negative impact of foreign currency translation. The negatives were partially offset by plastic food container business from Rexam Plc. Operating income jumped 63% to $6.2 million, expanding operating margins by 190 bps.

Financial Updates    

Cash and cash equivalents were $422.5 million as of September 30, 2012, compared with $140.5 million as of September 30, 2011. Inventories decreased to $561.5 million as of September 30, 2012, compared with $580.4 million as of September 30, 2011.

Current and long-term debt increased to $1,989.7 million as of September 30, 2012, compared with $1,431 million as of September 30, 2011. Debt-to-capitalization ratio was 73% as of September 30, 2012, compared to 68.2% as of September 30, 2011.

Cash used in operating activities was $6 million during the first nine months of fiscal 2012 compared with an inflow of $76.2 million in the first nine months of fiscal 2011. Capital expenditure was $84.7 million during the period versus $123.2 million during the year-ago comparable period.

Share Repurchase

During third-quarter 2012, Silgan repurchased 288,655 shares of its common stock for $11.8 million at an average price of $40.80 per share. Aggregate dividend payment amounted to $8.4 million.

Outlook for 2012

The company narrowed its guidance range of adjusted earnings to lie in between $2.80-$2.85 per share from the previous range of $2.80-$2.90 per share for 2012. Adjusted earnings are expected to be in the range of 58 cents-63 cents per share for the fourth-quarter 2012.  

Peer Comparison

Silgan faces tough competition from companies like Ball Corporation (BLL - Analyst Report) and Crown Holdings Inc. (CCK - Analyst Report). During the third-quarter 2012, Ball Corp.’s adjusted earnings were 90 cents per share, which exceeded the Zacks Consensus Estimate of 87 cents, as well as the year-ago adjusted earnings of 81 cents. While Crown Holdings third-quarter adjusted earnings declined 1% year over year to $1.00 per share and were in line with the Zacks Consensus Estimate.

Silgan retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

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