Zacks_Analysts' Blog : Mixed Results from Silgan - Analyst Blog

Silgan Holdings Inc. (SLGN) reported first quarter results delivering an EPS of 37 cents compared with 35 cents in the prior-year quarter.

The quarter noted some special items including $1.7 million or 2 cents  per share towards rationalization charges; $1.8 million or 2 cents  per share pertaining to acquiistion cost of IPEC, DGS and Vogel & Noot and the recently announced agreement to acquire Graham Packaging Company Inc. Excluding these items adjusted EPS amounted to 41 cents compared with 40 cents in the year-earlier quarter, surpassing the Zacks Consensus Estimate of 39 cents.

Total revenue as reported by Sligan amounted to $703.1 million versus $664 million in the year-ago quarter, failing the Zacks Consensus Estimate of $705 million. The improvement in sales was mainly driven by the higher average selling prices in each of the company’s businesses due to transfer of raw-material cost to customers, inclusion of sales from the recently acquired business and higher volumes in closure business, partially offset by the lower units in domestic metal container business.

Cost and Margins

Cost of sales, as reported by the company, increased to $601.1 million from $560.7 million in the year-earlier quarter. However, gross profit decreased to $102 million from $103.3 million in the prior-year quarter. Consequently, gross margins also came down by 110 basis points year over year to 14.5%.

Selling, general and administrative expenses inched up to $46.7 million from $44.5 million in the prior-year quarter. However, operating income declined marginally to $53.6 million from $56.7 million in the year-earlier quarter, leading to an operating margin contraction of 90 basis points year over year to 7.6%.

Segmental Performance

Metal Containers: Segment sale increased moderately to $390.5 million from $375.1 million in the prior-year quarter. However, operating profit of the segment plunged to $38.4 million from $46.4 million in the year-ago quarter. Segment sales were negatively impacted by lower domestic volumes. Also, the Vogel & Noot operations acquired in March  2011 were negatively impacted by certain purchase accounting adjustments, largely offsetting the favorable operating performance.

Closures: Sales as reported by the segment totaled $160 million, up from $144 million in the year-ago quarter. Operating income in the segment also increased to $15.8 million from $11.1 million in the year-earlier quarter. The segment benefited from the successful integration of IPEC operations acquired in the fourth quarter of 2010 and strong unit volumes, which were partially offset by the impact of significant resin inflation.

Plastic Closure: Sales of the segment increased to $152.6 million from $144.9 million in the year-earlier quarter. Operating income of the segment  more than doubled to $6.3 million from $2.9 million in the prior-year quarter. Though resin costs in the quarter continued to increase, the quarter produced favorable results.

Financial Performance

Cash and cash equivalents increased to $135.8 million as of March 31, 2011 from $99.2 million as of March 31, 2010. Long-term debt of the company increased substantially to $1443 million as of March 31, 2011 from $863 million as of March 31, 2010. As of March 31, 2011, the debt-to-capitalization ratio further deteriorated to 71.1% from 62% as of December 31, 2010 and 54% as of December 31, 2009. Sligan reported a cash outflow of $58.9 million in the quarter, down from $154.7 million in the year-ago quarter. Also in the quarter, the company returned value to shareholders in the form of quarterly dividend on the common stock, amounting to 11 cents per share to holders of record on March 3, 2011. The payment totaled $7.8 million.

Outlook

The company has a positive outlook for the remaining year as it raised its full year earnings range to $2.60 to $2.70 from the previous range of $2.55 and $2.65. The second quarter is expected to benefit from the recently acquired Vogel & Noot and IPEC operations, improved operating performance across each business and a lower number of shares outstanding. The likely offsets are the negative impact of the delayed passage of rising resin costs in the plastic container business and the plastic portion of the closures business as well as higher interests costs.

Peer Comparison

Silgan competes with Ball Corporation (BLL) and Crown Holdings Inc. (CCK). Ball Corporation reported first-quarter 2011 adjusted EPS of 58 cents, up from the prior-year adjusted EPS of 43 cents. Net sales for Ball Corporation were $2,011.2 million, an improvement from $1,592.3 million in the year-ago quarter. Crown Holdings reported first quarter adjusted EPS of 48 cents, up 60% from 30 cents a year ago. Net sales for Crown were $1882 million compared with $1777 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 #3 Rank (short-term Hold 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.