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Silgan Holdings Inc. (SLGN - Analyst Report) posted adjusted earnings of 47 cents per share in the fourth-quarter of 2012; a 16% decline from 56 cents earned in the year-ago quarter. Earnings were within the company’s guided range of 43 to 53 cents per share and in line with the Zacks Consensus Estimate.
 
Including rationalization charges of 3 cents per share and new plant start-up cost of 2 cents per share, earnings stood at 42 cents per share in the reported quarter versus 53 cents per share (including a rationalization charge of 3 cents per share) in the year-ago quarter.
 
Total revenue increased 2.7% year over year to $859 million in the quarter, ahead of the Zacks Consensus Estimate of $848 million. Sales increased in metal food container and the plastic container businesses, which offset a dip in sales in the closures business. The impact of weak economic conditions in Europe and unfavorable foreign currency translation somewhat tempered the increase.
 
Cost and Margins
 
Cost of goods sold increased 4% to $749 million. Gross profit declined 6% to $109 million. Consequently, gross margin contracted 130 basis points (bps) to 12.7% in the quarter.
 
Selling, general and administrative expenses increased 9% to $47.8 million. Adjusted operating income plunged 16% to $61.6 million, leading to a 150 bps contraction in operating margin to 7.2% in the reported quarter.
 
Segment Performance
 
Total revenue in the Metal Containers segment rose 3% to $555 million attributed to higher unit volumes. Adjusted operating income dropped 23% to $48.7 million, contracting operating margin by 300 bps to 9%. 
 
Closures segment’s total revenue dipped 2% to $151.2 million. Adjusted operating income fell 36% to $8.4 million and operating margin plunged 290 bps to 5.6%.
 
In the Plastic Containers segment, total revenue increased 7% to $152 million. Adjusted operating income in the quarter was $8.5 million compared with $0.3 million in the prior-year quarter.
 
Fiscal 2012 Performance
 
Silgan reported record adjusted EPS of $2.70 in fiscal 2012, up 3% from $2.63 in fiscal 2011 and a penny ahead of the Zacks Consensus Estimate. The reported earnings were within management guidance of $2.65 to $2.75. Including one-time items, EPS in the reported fiscal stood at $2.17, a 21% decline from $2.75 in the prior fiscal.
 
Revenues stood at $3.59 billion, up 2.3% from $3.5 billion in 2011.  This increase was driven by higher sales in the metal container and plastic container businesses, partially offset by a decline in sales in the closures business.
 
Financial Updates 
 
Cash and cash equivalents were $466 million as of 2012 end compared with $397 million as of 2011 end. Current and long-term debt increased to $1,671.3 million as of 2012 end from $1,376 million as of 2011 end. Debt-to-capitalization ratio was 68.9% as of Dec 31, 2012, compared to 68% as of Dec 31, 2011. 
 
Cash flow from operating activities was $351.7 million during 2012 compared with an inflow of $359.6 million in 2011. Free cash flow almost doubled to $303.7 million in 2012 from $152.9 million in 2011. Free cash flow per share was a record $4.35 in 2012 compared with $2.17 in 2011.
 
Outlook for 2013
 
The company expects adjusted earnings per share in the range of $3.05 to $3.20 in 2013. This is expected to be achieved through improved profitability in each business, the full year benefit from the 2012 acquisitions and the estimated impact from the purchase of $250 million of common stock pursuant to the company’s tender offer expected to be completed in February 2013. Adjusted earnings are expected to be in the range of 40 cents-50 cents per share for the first-quarter of 2013. 
 
Our Take
 
Silgan has managed to increase its overall share in the U.S. metal food container market to approximately 50% on the back of accretive acquisitions and organic growth. Silgan Holdings continues to enhance profitability through productivity and cost reduction opportunities. Backed by the additional capacity resulting from the acquisitions, the company has been able to rationalize plant operations and reduce overhead costs by closing plants and work force downsizing.
 
However, Silgan’s exposure to Europe has increased after its Vogel & Noot acquisition and expansion of the Closures segment in the region, accounting for almost 50% of the segment’s revenues. In Europe, weakening demand and softer pricing has emerged as a result of the ongoing economic instability in the region. With the European conditions expected to remain challenging over the next few quarters, we expect additional pricing pressure.
 
Furthermore, Silgan Holdings high debt-to-capitalization ratio is a concern. Its strategy to leverage for acquisitions will further aggravate the company s debt position.
 
Silgan retains a short-term Zacks Rank#3 (Hold). Its peers Ball Corporation (BLL - Analyst Report) and Crown Holdings Inc. (CCK - Analyst Report) are slated to release their fourth quarter results tomorrow, Jan 31 while Mobile Mini, Inc. (MINI - Snapshot Report) will announce its results on Feb 22. 

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