Mixed Results from Silgan - Analyst Blog

Silgan Holdings Inc. (SLGN) delivered adjusted EPS of 42 cents in its fourth quarter ended December 31, 2010, outperforming the Zacks Consensus Estimate of 40 cents and increasing 35% from 31 cents in the year-ago quarter. The adjusted EPS was in line with management's guidance of 33–43 cents for the fourth quarter.

The reported EPS in the quarter excludes a rationalization charge of 17 cents per share and a loss on early extinguishment of debt of 3 cents. Including these items, the company reported an EPS of 22 cents in the quarter compared with 31 cents in the year-ago quarter.

Total revenue increased 0.9% year over year to $711.6 million, falling short of the Zacks Consensus Estimate of $739 million. Higher volumes across all of its three segments, pass-through of higher resin costs and the inclusion of the IPEC acquisition in the quarter led to the annualized increase.

However, these positives were partially offset by lower average selling prices in the Metal Food Container and the metal portion of the Closures businesses, unfavorable foreign currency translation and a less favorable mix of products in the Plastic Container business.

Cost & Margin Performance 

Cost of sales increased a minimal 0.1% to $613.5 million in the quarter but, as a percentage of revenues, improved 70 basis points to 86.2%. Gross profit increased 6% to $98.1 million and gross margin expanded 70 basis points to 13.8%.

Selling, general and administrative expenses remained flat year over year at $41 million in the quarter and, as a percentage of revenues, stayed static at 5.8%.

Silgan's adjusted operating income upped 12% to $57.1 million and operating margin expanded 80 basis points to 8%. The growth in operating income and margins resulted from higher volumes across all the business units, manufacturing efficiencies in the Metal Food Container and Closures businesses and effective cost control.

These positives were partly countered by an unfavorable base year comparison of a benefit of delayed pass-throughs of raw material cost declines in Europe, an adverse impact of a less favorable mix of products sold in the Plastic Container business and incremental corporate expenses associated with corporate development activities.

Segment Performance

The Plastic Container segment posted a revenue growth of 5% reaching $143 million. The segment's operating income, however, dropped 38% to $4.5 million (excluding rationalization charges) and operating margin contracted 220 basis points to 3.1%.

The Closures segment's revenues inched up 0.3% to $146.2 in the quarter. The segment's operating income declined 20% to $10.7 million (excluding rationalization charges) and operating margin contracted 180 basis points to 7.3%.

The Metal Food Container segment's revenues dipped a marginal 0.1% to $422.1 million. However, the segment's operating income increased 39% to $46.9 million with operating margin soaring 300 basis points to 11%.

Fiscal 2010 Performance

Silgan's adjusted EPS for fiscal 2010 was a record $2.19, up 5% from the prior year and beating the Zacks Consensus Estimate by a penny. Adjusted EPS was in line with the company's EPS guidance range of $2.10 to $2.20.

Fiscal 2010 EPS excluded special items viz. a rationalization charge of 19 cents, loss on early extinguishment of debt of 7 cents and a 4 cent impact from the remeasurement of net assets of the Venezuelan operations. The prior-year adjusted EPS excluded a rationalization charge and loss on early extinguishment of debt of a cent each. Including the above mentioned special items, in fiscal 2010, the company reported EPS of $1.89, a 9% drop from $2.07 in the prior year.

Silgan reported revenues of $3.07 billion, a 0.2% increase from the prior year but falling short of the Zacks Consensus Estimate of $3.1 billion. Higher average selling prices in the Plastic Container business largely attributable to the pass-through of higher resin costs and volume increases were partially offset by lower average selling prices in the Metal Food Container business and the metal portion of the Closures business as a result of the pass-through of lower raw material costs and unfavorable foreign currency translation.

Financial Position

As of December 31, 2010, Silgan had cash and cash equivalents of $175.2 million, down from $393 million as of September 30, 2010 and $306 million as of December 31, 2009. During the year, the company's cash outflow from operating activities was $187.3 million, down from $322.8 million in the prior year. Silgan repurchased 7.1 million of its shares and increased its cash dividend by approximately 11% to 42 cents per share in the reported fiscal.

Free cash flow during the year was $89.1 million, down significantly from $264.1 million in the prior year. The decline was due to the company's decision to make a voluntary contribution of $92.3 million to its pension plans and a significant increase in working capital in 2010. For fiscal 2011, Silgan expects free cash flow between $180 million and $220 million, as increased capital expenditures are expected to be countered by lower working capital levels and significantly lower pension funding.

As of December 31, 2010, the debt-to-capitalization ratio deteriorated to 62% from 54% as of December 31, 2009.

2011 Outlook

Silgan expects first quarter fiscal 2011 EPS to be in the band of 35 cents to 40 cents, which excludes rationalization charges. For fiscal 2011, the company expects adjusted EPS to range between $2.55 and $2.65, excluding rationalization charges but including the anticipated closing of the Vogel & Noot transaction, net of incremental transaction costs and negative purchase accounting adjustments. This translates into a year-over-year growth of 16% to 21% driven by improved sales and profitability in each of its businesses and the net benefit from the share repurchases completed in 2010.

The company expects interest expense in 2011 to outgrow 2010 due to higher average outstanding borrowings as a result of significant capital deployments initiated in 2010 and the Vogel & Noot transaction, as well as higher average interest rates due to the full year impact from the refinancing of the senior secured credit facility in July 2010 and accounting for higher market interest rates.

Peer Comparison

Silgan competes with Ball Corporation (BLL) and Crown Holdings Inc. (CCK). Ball Corporation reported fourth-quarter 2010 adjusted EPS of 93 cents, up 1.09% year over year. Net sales for Ball Corporation were $1.995 billion, an improvement of 15% from $1.727 billion in the year-ago quarter. Crown Holdings reported fourth quarter adjusted EPS of 42 cents, up 56% from 27 cents a year ago. Net sales for Crown were $1,949 million compared with $1,917 million in the prior-year quarter.

Our Take

Silgan is the largest manufacturer of metal food containers in North America, hogging half of the total volume market share in the United States. Silgan has increased its sales and market share through acquisitions as well as internal growth and, in the process, expanded and diversified its customer base, geographic presence and product lines.

The company is currently undertaking various corporate development activities, including manufacturing efficiencies, which are likely to improve volumes across the board. The improving economy would also aid in volume expansion. We currently have a Zacks #2 Rank (short-term Buy recommendation) on the stock.

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. Silgan is also a leading worldwide supplier of metal, composite and plastic vacuum closures for food and beverage products.

 
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