Silgan to Lay Off 38 Jobs (BLL) (CCK) (SLGN)

Silgan Containers, a subsidiary of Silgan Holdings Inc. (SLGN), announced its intention of shifting production from its Menomonee Falls plant to another manufacturing facility, resulting in a retrenchment of 38 employees. The layoff would start in phases from December 1, 2012.

Silgan Holdings continues to enhance profitability through productivity and cost reduction opportunities. Consistent with its efforts of streamlining plant operations, reducing operating costs and better match supply with the geographic demand, Silgan has closed three metal container manufacturing facilities, one closures manufacturing facility and two plastic container manufacturing facilities since 2007. Furthermore in 2012, Silgan announced plans to close one more plastic container manufacturing facility, and lay off more employees in its closures business.

Silgan’s metal container segment’s volumes were negatively affected by a slow start to the vegetable pack in the second quarter, presumably owing to the heat wave and drought affecting the Midwest. In the quarter, peas and green beans were harvested later than anticipated because of weather issues, and resulted in some order shifting to the second half of 2012.

Although other crops are following a somewhat normal pattern, though delayed, the main concern remains regarding sweet corn. It represents approximately 5% of total food can volumes and is cultivated in the upper Midwest (Minnesota and Wisconsin) and is largely irrigated, so the primary risk to the crop is continued extreme heat. If the sweet corn crop harvest is not as per expectations, it might affect Silgan’s earnings.

Silgan’s exposure to Europe has increased following 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. As of June 30, 2012, its debt-to-capitalization ratio was at 73%. Its strategy to leverage for acquisitions will further aggravate the company’s debt position. Silgan Holdings retains a short-term Zacks #3 Rank (Hold). We have a long-term Neutral recommendation on the stock.

Silgan Holdings Inc. is one of the leading North American manufacturers of metal and plastic consumer goods packaging products. Its products are used in a wide variety of end-markets. It is the largest metal-container supplier for food products in North America. The company has 82 manufacturing plants throughout North and South America, Europe, and Asia. Silgan competes with companies like Ball Corporation (BLL) and Crown Holding Inc. (CCK).