Silgan (SLGN) Falls Despite Q1 Earnings Beat, Keeps View

Shares of Silgan Holdings Inc. SLGN have fallen 4% since Apr 27, when the company reported a 17% year-over-year slump in first-quarter 2016 earnings to 45 cents. Earnings, however, beat the Zacks Consensus Estimate of 40 cents and matched the high end of management's guidance range of 35 centsto 45 cents. Unfavorable foreign currency translations, pass-through of lower raw material costs, logistical inefficiencies and incremental costs related to the footprint optimization programs hurt earnings in the quarter.

Including rationalization charges of a penny in both this quarter and the last, the company's earnings per share came in at 44 cents, down from 53 cents in the prior-year quarter.

Total revenue dipped 3% year over year to $793 million, in line with the Zacks Consensus Estimate. The decline in net sales across all segments was mainly due to the pass-through of lower raw material costs.

Cost and Margins

Cost of goods sold decreased 2.2% to $679 million from $694 million in the year-ago quarter. Gross profit declined 7% to $114 million. Gross margin contracted 60 basis points (bps) to 14.4%.

Selling, general and administrative expenses inched up 2% year over year to $55 million. Adjusted operating income declined 14% to $59 million as higher income from operations in the closures business was offset by a decline in income from operations in the metal and plastic container businesses. Operating margin contracted 90 bps year over year to 7.4%.

Segment Performance

Revenues at the Metal Containers segment decreased 1% year over year to $453 million.The decline was primarily due to the pass-through of lower raw material costs and unfavorable foreign currency translation, somewhat offset by a 2% rise in volumes. The segment's adjusted operating income fell 8% to $38 million as higher manufacturing costs, including start-up costs related to the new manufacturing facility in Iowa, and foreign currency transaction gains in the prior-year period, were partially offset by higher unit volumes.

The Closures segment's revenues dipped 1% year over year to $196 million mainly due to the pass-through of lower raw material costs and unfavorable foreign currency translation, mostly offset by an approximate 5% increase in unit volumes as a result of higher demand in U.S. beverage markets. Adjusted operating income surged 12% to $25 million from $22 million a year ago, driven by higher unit volumes and manufacturing efficiencies, partially offset by the lagged pass-through of decreases in resin costs in the prior-year period.

At the Plastic Containers segment, revenues dropped 10% year over year to $143 million. The pass-through of lower raw material costs, an approximate 1% decline in volumes and unfavorable foreign currency translation led to the decrease. The segment reported an adjusted profit of $1.1 million, reflecting an 89% plunge from $9.6 million in the prior-year quarter.

Financial Updates

As of Mar 31, 2016, cash and cash equivalents were $67 million, down from $99.9 million as of Dec 31, 2015. Cash used in operations was $151 million in the first quarter, compared with $144 million in the prior-year quarter.

Total debt was $1.8 billion as of Mar 31, 2016, compared with $1.5 billion as of Dec 31, 2015. Debt-to-capitalization ratio worsened to 73% as of Mar 31, 2016 from 70% as of Dec 31, 2015.

Guidance

For 2016, the company has maintained its earnings per share guidance in the range of $2.80 to $3.00. For the second quarter, Silgan anticipates earnings per share in the range of 50–60 cents.

Stamford, CT-based Silgan is a leading manufacturer of consumer goods packaging products, operating 88 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 packaging sector include Crown Holdings Inc. CCK, Greif, Inc., GEF and Graphic Packaging Holding Co. GPK. All of these stocks carry a Zacks Rank #2 (Buy).

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