Shares of Silgan Holdings Inc. (SLGN) gained around 1.05% and closed at $49.21 on Oct 23, a day after the company reported record third-quarter 2014 earnings of $1.33 per share. Despite lower-than-expected volumes, solid performance in Europe and a good tomato pack led to the 8% year-over-year improvement in earnings. Earnings were in line with the Zacks Consensus Estimate and the company’s guidance range of $1.25 to $1.35.
Including rationalization charges of 3 cents per share and net income of 1 cent from its Venezuela operations, the company’s EPS came in at $1.31 in the quarter, compared with $1.21 in the prior-year quarter. EPS in the year-ago quarter included rationalization charges and costs related to acquisitions of a cent each.
Total revenue went up 5% year over year to $1.23 billion. Revenues however missed the Zacks Consensus Estimate of $1.24 billion. Increase in sales in the closures and plastic container business was partially offset by decline in sales in the metal container business.
Cost and Margins
Cost of goods sold increased 4.4% to $1,023 million from $980 million in the year-ago quarter. Gross profit improved 9.5% year over year to $205.6 million. Consequently, gross margin expanded 60 basis points (bps) to 16.7%.
Selling, general and administrative expenses increased 9.5% year over year to $55.4 million. Adjusted operating income grew 9.4% year over year to $151 million. Operating margin increased 50 bps to 12.3% from the year-ago quarter.
Total revenue in the Metal Containers segment inched down 0.4% year over year to $827.7 million due to a 1.5% decline in unit volumes and the financial impact from a large number of significantly longer-term customer contract renewals and extensions, completed recently.
Unit volumes were down mainly because of lower volumes of core vegetables and soup in the U.S. However, Silgan witnessed volume gains in Europe and strength in tomato pack in the U.S.
However, the segment’s adjusted operating income increased 3.6% year over year to $112.2 million and operating margin expanded 60 basis points to 13.6%. Despite lower revenues, lower depreciation expense and manufacturing costs, better operating performance in Europe in the third quarter of 2014 as compared with the prior-year period led to the improvement in operating profit. These increases were partially offset by decrease in unit volumes in the U.S. and the impact from customer contract renewals.
The Closures segment’s total revenue rose 30% year over year to $241 million on the back of increase in unit volumes due to the inclusion of sales from Portola Packaging (acquired in Oct 2013).
Adjusted operating income for the segment increased 20% to $27.7 million, while operating margin declined 100 bps to 11.5%, both on a year-over-year basis. The improvement is attributable to the inclusion of the Portola Packaging operations.
In the Plastic Containers segment, total revenue grew 5.3% year over year to $159.7 million due to increase in volumes (5%) and pass through of higher raw material costs, which were partially offset by the impact of unfavorable foreign currency translation.
Adjusted segment operating income in the quarter was $14.4 million, up 67.4% from $8.5 million in the prior-year quarter.
Financial Updates
As of Sep 30, 2014, cash and cash equivalents were $145.9 million, up from $134.5 million as of Sep 30, 2013. Cash used in operations was $52.6 million in the first nine month period of 2014, ended Sep 30, 2014, compared with cash flow from operations of $1 million in the prior-year period.
Total debt of the company increased to $1.97 billion as of Sep 30, 2014, from $1.78 billion as of Sep 30, 2013. Debt-to-capitalization ratio decreased to 75.5% as of Sep 30, 2014 from 77.7% as of Sep 30, 2013.
On Sep 15, Silgan acquired the assets and assumed certain specified limited liabilities of Van Can Company, a manufacturer of metal containers in the U.S. The acquisition is a strategic fit for Silgan.
Guidance
For full-year 2014, Silgan cut the upper end of its previous EPS guidance range of $3.10—$3.30, which now stands at $3.10—$3.20. The guidance reflects growth of 13% to 17% over record adjusted earnings per share of $2.74 in fiscal 2013.
For the fourth quarter of 2014, Silgan projects adjusted income per share in the range of 51 cents to 61 cents. The company expects free cash generation to be approximately $200 million, reflecting the benefits from investments.
Our Take
Silgan will continue to benefit from the Portola Packaging acquisition, which will enhance its Closure business and also enable expansion of its plastic closures offerings in Europe. Geographic expansion will also help in long-term growth. Increasing productivity and cost reduction initiatives, such as the Can Vision 2020, will also drive growth. However, high debt-to-capitalization ratio remains a concern.
Stamford, CT-based Silgan is a leading manufacturer of consumer goods packaging products, operating 81 manufacturing facilities across the Americas, Europe and Asia. In North America, Silgan is the largest supplier of metal containers for food products and a major supplier of plastic containers for personal care products.
Silgan currently carries a Zacks Rank #4 (Sell). However, other better-ranked stocks worth a look in the industrial products sector include Crown Holdings Inc. (CCK), Advanced Emissions Solutions, Inc. (ADES) and Alamo Group, Inc. (ALG). All these stocks carry a Zacks Rank #2 (Buy).
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