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Silgan's Earnings Miss by a Penny

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Silgan Holdings Inc. (SLGN - Free Report) posted adjusted earnings of 46 cents per share in the first-quarter of 2013; down 10% from 51 cents earned in the year-ago quarter, affected by higher resin costs and macroeconomic conditions in Europe. Earnings were within the company’s guided range of 40 to 50 cents per share but a penny short of the Zacks Consensus Estimate.

Including rationalization charges and new plant start up costs of 1 cent per share each, loss of 2 cents per share for an early extinguishment of debt and 4 cents per share impact from the remeasurement of net assets in Venezuela, earnings stood at 38 cents per share in the reported quarter. Including rationalization charge of 3 cents per share and new plant start-up cost of 1 cent per share, earnings per share in the prior-year quarter were 47 cents per share.

Total revenue increased 4% year over year to $796 million in the quarter, trailing the Zacks Consensus Estimate of $809 million. Sales increased in metal food container and plastic container businesses, which offset lower sales in the closures business.

Cost and Margins

Cost of goods sold increased 5% to $684 million. Gross profit declined 2% to $111 million. Consequently, gross margin contracted 80 basis points (bps) to 14% in the quarter. Selling, general and administrative expenses increased 16% to $51.8 million. Adjusted operating income plunged 10% to $63.3 million, leading to 120 bps contraction in operating margin to 8% in the reported quarter.

Segment Performance

Total revenue in the Metal Containers segment rose 4% to $464 million, attributed to higher unit volumes and higher selling prices. Adjusted operating income dropped 3% to $41 million, contracting operating margin by 80 bps to 8.9%. The year-over-year decline was due to an unfavorable comparison of a reduced inventory build in the first quarter of 2013 with a more significant inventory build in advance of labor negotiations in the first quarter of 2012, continued economic weakness in the European markets, partially offset by higher volume.

Closures segment’s total revenue slipped 1% to $161 million as unfavorable impact from the devaluation of currency in Venezuela, partially offset by higher average selling prices. Adjusted operating income fell 32% to $13.6 million and operating margin plunged 390 bps to 8.4%, affected by higher resin costs and weak economic conditions in Europe,

In the Plastic Containers segment, total revenue increased 6% to $171 million. Revenue increased due to the inclusion of net sales from the plastic food container operations acquired in Aug 2012, offset by lower volumes in the legacy operations. Adjusted operating income in the quarter was $10.7 million, up 3% from $10.4 million in the prior-year quarter. Benefit from the inclusion of the plastic food container operations, offset by the unfavorable impact from the lagged pass through of increases in resin prices in the reported quarter as compared to a favorable impact from resin in the prior-year quarter, and lower volumes in the legacy operations led to the overall increase.

Financial Updates

Cash and cash equivalents were $159 million as of Mar 31, 2013 compared with $466 million as of Dec 31, 2012. Current and long-term debt increased to $1.78 billion as of Mar 31, 2013 from $1.67 billion as of Dec 31, 2012. Debt-to-capitalization ratio increased to 78% as of Mar 31, 2013, rom 69% as of Dec 31, 2012. Cash used in operating activities was $69 million during the first quarter compared with $105 million in the prior-year quarter.

Silgan also completed a tender offer in Feb 2013, buying back approximately 5.5 million shares for $45.25 per share and also increased its dividend by 17% to 14 cents. 

Outlook for 2013

The company affirmed its previous expectation of adjusted earnings per share in the range of $3.05 to $3.20 in 2013.

Adjusted earnings are expected to be in the range of 60 cents-70 cents per share for the second quarter of 2013. The guidance factors in the impact of the tender offer completed in Feb 2013, expectations of normal fruit and vegetable pack and continued strength in soup and pet food sales and expected benefit from the Aug 2012 acquisition of plastic food container operations.

However, these benefits are expected to more than offset the negative comparison of the resin pass through lag effect, which was beneficial in the second quarter of 2012. Furthermore, volumes in the closures and plastic container businesses are expected to be lower compared with the second quarter of 2012. Volumes in the aforementioned segments will be pitted against a tough comparison as unseasonably warm weather led to higher volumes in second quarter of 2012. In addition, volumes in the plastic container business benefited from accelerated sales in anticipation of certain customer shutdowns in the third quarter of 2012.

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. The company’s acquisition of Rexam’s high-barrier food business in 2012 not only added to its growth platform through an adjacent product/technology but also augmented its scope for international expansion. The acquisition is expected to be accretive to 2013 earnings.

Silgan Holdings continues to enhance profitability through productivity and cost reduction opportunities. Silgan is funding two major initiatives to promote food can as a sustainable long-term packaging solution for shelf-stable products - Can Vision 2020 and an industry-wide campaign through the Can Manufacturing Institute.

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 of pursuing acquisitions will further aggravate the company’s debt position. Higher resin costs are expected to weigh on the Plastics and Closures segments results during the first half of fiscal 2013. Silgan retains a short-term Zacks Rank#3 (Hold).

Peer Performance

Among Silgan’s peers, Crown Holdings Inc. (CCK - Free Report) fared better with a 9% year-over-year increase to 50 cents per share, ahead of the Zacks Consensus Estimate of 48 cents per share. On the other hand, Ball Corporation (BLL - Free Report) reported first-quarter 2013 adjusted earnings of 58 cents per share; an 8% decline from the year-ago adjusted earnings of 63 cents per share, falling short of the Zacks Consensus Estimate of 64 cents. Mobile Mini, Inc. (MINI - Free Report) is slated to announce its first quarter results on May 6, 2013. The Zacks Consensus Estimate currently stands at 22 cents, projecting an 83% annual climb.


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