Silgan Beats Q2 Earnings on Strength in Closures Segment

Silgan Holdings Inc. (SLGN) reported record second quarter adjusted earnings of 73 cents, a 14% increase from 64 cents in the year-ago quarter. The results beat the Zacks Consensus Estimate of 67 cents per share as well as the company’s guidance range of 60 cents to 70 cents per share.

Including rationalization charges of 1 cent per share and net loss of 3 cents from its Venezuela operations, the company’s EPS came in at 69 cents in the quarter, compared with 93 cents in the prior-year quarter. EPS in the year-ago quarter included rationalization charges and loss from operations in Venezuela of 1 cent each and 31 cents benefit from tax audit adjustment.

Total revenue went up 4% year over year to $917 million. Revenues however missed the Zacks Consensus Estimate of $928 million. Increase in sales in the closures business was partially offset by decline in sales in the metal container and plastic container businesses.

Cost and Margins

Cost of goods sold increased 3% to $773.6 million from $751.8 million in the year-ago quarter. Gross profit improved 12% year over year to $143.7 million. Consequently, gross margin expanded 110 basis points (bps) to 15.7%.

Selling, general and administrative expenses increased 8% year over year to $56.7 million. Adjusted operating income grew 17% year over year to $90 million. Operating margin increased 110 bps to 9.8% from the year-ago quarter.

Segment Performance

Total revenue in the Metal Containers segment fell 2% year over year to $518.7 million. A 4% decline in unit volumes and the financial impact from a large number of significantly longer-term customer contract renewals and extensions, completed recently, mainly led to the decline.

Unit volumes were down mainly due to the comparison with a very strong prior-year quarter for the pet food and soup markets and a delayed start to the midwest vegetable pack. However, Silgan witnessed volume gains in Europe, as the pack season had an early start.

However, adjusted operating income increased 12% year over year to $51.2 million and operating margin expanded 130 basis points to 9.9%. Despite lower revenues, lower depreciation expense and manufacturing costs, the benefits from a higher inventory build in the second quarter of 2014 as compared with the prior-year period led to the improvement in operating profit. These increases were partially offset by a decrease in unit volumes in the U.S. and the impact from customer contract renewals.

The Closures segment’s total revenue rose 28% year over year to $232 million. Increase in unit volumes due to the inclusion of sales from Portola Packaging (acquired in October 2013) and the impact of favorable foreign currency translation were partially offset by lower net sales in Venezuela.

Adjusted operating income increased 34% to $29 million and operating margin expanded 50 bps to 12.5%, both on a year-over-year basis. The improvement was led by inclusion of the Portola Packaging operations and lower manufacturing costs.

In the Plastic Containers segment, total revenue declined 1% year over year to $166.4 million due to a decline in volumes (1%) and the impact of unfavorable foreign currency translation, which were partially offset by a more favorable mix of products sold and the pass through of higher raw material costs. Volumes declined mainly due to Silgan’s ongoing efforts to rebalance the business portfolio.

Adjusted operating income in the quarter was $13.4 million, up 17% from $11.5 million in the prior-year quarter.

Financial Updates

Silgan ended the quarter with cash and cash equivalents of $133.9 million, down from $160.5 million at 2013 end. Cash used in operations for the first half of fiscal 2014 was $163 million versus $159 million in the prior-year comparable period.

Total debt of the company increased to $2 billion as of Jun 30, 2013, up from $1.7 billion as of Dec 31, 2013. Debt-to-capitalization ratio decreased to 73% as of Jun 30, 2014 from 77% as of Dec 31, 2013.

Guidance

For full-year 2014, Silgan maintained its EPS guidance range of $3.10 to $3.30. The guidance reflects growth of 13.1% to 20.4% over record adjusted earnings per share of $2.74 in fiscal 2013.

For the third quarter of 2014, Silgan projects adjusted income per share range of $1.25 to $1.35. This represents growth in the range of 2% to 10% over the prior-year quarter. The guidance factors in the expected benefit from Portola Packaging, slightly higher unit volumes in the metal container business and lower depreciation and pension expense.

However, this will be partially offset by financial impact from renewals of customer contracts, earlier pack volumes realized in the second quarter in Europe, higher corporate expense and an increase in interest expense. Moreover, given the uncertainties around the timing of the fruit and vegetable pack, the results of the last half of the year could shift between the third and fourth quarters.

Our Take

Silgan will benefit from its successful acquisition of Portola Packaging in Oct 2013. The acquisition will enhance Silgan’s 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 #3 (Hold). Some better-ranked stocks in the sector include Ball Corp. (BLL), Graphic Packaging Holding Co. (GPK) and Crown Holdings Inc. (CCK). While Ball Corporation holds a Zacks Rank #1 (Strong Buy), Graphic Packaging and Crown Holdings carry a Zacks Rank #2 (Buy).