Silgan Beats EPS, Misses Sales - Analyst Blog

Silgan Holdings Inc. (SLGN) delivered adjusted earnings per share (EPS) of 48 cents in its second quarter ended June 30, 2010, outperforming the Zacks Consensus Estimate of 44 cents and increasing 4% from 46 cents in the year-ago quarter. The year-over-year improvement reflected higher average selling prices in the Plastic Container segment, as well as higher unit volumes in the Plastic Container and Closures segments.

The reported EPS in the quarter includes a rationalization charge of 1 cent per share. EPS in the year-ago quarter excluded a 1-cent per share loss on early extinguishment of debt related to the issuance of 7.25% senior notes in May 2009. Including these items, the company reported an EPS of 47 cents in the quarter, compared with 45 cents in the year-ago quarter.

Total revenue increased 0.6% year over year to $693.9 million, falling short of the Zacks Consensus Estimate of $700 million. The revenue increases in the company’s Plastic Container and Closure segments were offset by a decline in the Metal Food Containers segment.

Cost & Margin Performance

Cost of sales increased 0.4% to $585.3 million in the quarter, but, as a percentage of revenues, it improved 20 basis points to 84.3%. Gross profit increased 2% to $108.6 million and gross margin expanded 20 basis points to 15.7%.

Selling, general and administrative expenses rose 2% to $40.8 million in the quarter, but, as a percentage of revenues, remained flat year over year. Silgan's adjusted operating income inched 2% higher to $67.8 million and operating margin expanded 10 basis points to 9.8%.

Benefits from higher volumes in the Plastic Container and Closures businesses and effective cost control and manufacturing efficiencies were partially offset by lower unit volumes in the Metal Food Container business coupled with a lag in pass-through of increased resin costs at the Plastic Container and Closures businesses.

Segment Performance

The Plastic Container segment posted the highest revenue growth of 16% to $150 million, driven by higher average selling prices as a result of the pass-through of resin cost increases, surge in unit volumes and favorable foreign currency translation.

The segment's operating income, however, dropped 27% to $4.4 million (excluding rationalization charges) and operating margin contracted 170 basis points to 2.9%. The decline was due to the lagged pass-through of resin cost increases to customers, partially offset by the effect of an increase in unit volumes.

The Closures segment followed with revenue growth of 7% to $165.8 million. The segment witnessed volume recovery in the domestic single-serve beverage market as well as overall volume improvement in Europe. However, this was partially offset by an unfavorable foreign currency translation.

The segment's operating income increased 9% to $24 million and operating margin expanded 20 basis points to 14.5%. Increased unit volumes, the benefits of ongoing cost reduction initiatives and improved manufacturing efficiencies were somewhat offset by a similar lag in pass-through of resin costs to customers.

The Metal Food Container posted a 7% decline in revenues. The drop was blamed on lower average selling prices as a result of the pass through of lower raw material costs and lower unit volumes.

However, the segment's operating income increased 6% to $44.3 million with operating margin soaring 200 basis points to 12%, driven by cost control measures and continued improvement in manufacturing efficiencies, partially offset by the effect of lower unit volumes.

Financial Position

As of June 30, 2010, Silgan had cash and cash equivalents of $52.1 million, down from $99.2 million as of March 31, 2010. During the quarter, the company's cash outflow from operating activities was $17.8 million, an improvement from the $35.3 million outflow in the year-ago quarter.

As of June 30, 2010, the debt-to-capitalization ratio went down to 54% from 55% as of March 31, 2010.

Outlook

Silgan expects its third-quarter adjusted EPS in the range of 85—95 cents. Year-over-year improvement in the plastic container business will be offset by the return to a more normal pack season for the metal food container business in comparison to its historically large fruit and vegetable harvest in 2009. The guidance excludes a rationalization charge and loss on early extinguishment of debt of 1 cent and 4 cents, respectively.

For fiscal 2010, Silgan projects its adjusted EPS to be within $2.10 to $2.20. This excludes rationalization charges, loss on early extinguishment of debt and impact from the remeasurement of net assets in Venezuela of 4 cents per share each.

Our Take

Silgan Holdings is a leading player in all three of its core businesses. The company holds an approximately 50% share of the U.S. metal food container market, from which it generates a major portion of its revenue.

The economic slowdown affected Silgan's top-line growth as consumers pulled back spending. During the quarter, the company saw an improvement in volumes. We expect volumes to gradually recover with an improving economy.

Silgan is a leading manufacturer of consumer goods packaging products, operating 66 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. In addition, Silgan is a leading worldwide supplier of metal, composite and plastic vacuum closures for food and beverage products. It operates through three segments, namely Metal Food Containers, Closures and Plastic Containers.

 
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