Silgan Holdings Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Silgan supplies rigid packaging through metal containers, closures and plastic containers. Results are unaudited; the third quarter is typically seasonally strong because of food-packaging harvest cycles.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $1,148.0m | $1,002.1m | $2,673.3m | $2,359.9m |
| Gross profit / margin | $183.0m / 16.0% | $162.4m / 16.2% | $401.8m / 15.0% | $374.3m / 15.9% |
| Operating income / margin | $136.1m / 11.9% | $121.0m / 12.1% | $284.2m / 10.6% | $244.7m / 10.4% |
| Net income | $78.8m | $65.2m | $156.1m | $128.3m |
| Diluted EPS | $1.12 | $0.84 | $2.22 | $1.66 |
| Operating cash flow | Not separately provided for the quarter | $76.2m | $(27.6)m |
Q3 sales increased 14.6% year over year and net income increased 20.7%. Nine-month sales rose 13.3% and net income rose 21.7%. Reported diluted EPS also benefited from fewer weighted-average shares. Nine-month operating cash flow improved from an outflow, but exceeded capital expenditures of $123.3m by an outflow of approximately $47.1m before asset-sale proceeds.
At September 30, cash was $140.5m, current assets $1,345.6m and current liabilities $633.9m. Total debt was $1,431.0m, including $118.2m classified as current; approximate net debt was $1,290.5m. Working capital was $711.7m.
Changes, segments and transactions
- Sales growth reflected acquisitions, higher selling prices passed through for increased raw-material and manufacturing costs, and favorable currency translation. Unit volumes were lower across businesses excluding acquisitions.
- Metal-container sales rose 15.9% in both Q3 and the nine-month period, including $103.2m and $203.7m, respectively, from Vogel & Noot (VN). U.S. volumes were affected by a weaker pack and customer inventory reductions.
- Closures sales rose 16.4% in Q3 and 13.0% year to date, while plastic-container sales rose 6.3% and 5.1%. Plastic-container operating income fell 53.7% in Q3 amid lower volume and less favorable product mix.
- Q3 operating margin declined to 11.9% from 12.1%; nine-month margin increased to 10.6% from 10.4%. The year-to-date comparison includes $25.2m of net income from the Graham Packaging termination fee and related corporate-development costs. Without that item, reported operating-income growth would be materially lower.
- Acquisitions included VN in March for approximately $292.7m net of cash acquired, DGS in March for $20.7m net, and NPPC metal-container assets in September for $25.0m. The VN acquisition contributed $5.5m of purchase-accounting inventory write-up expense during the period.
Debt, liquidity, outlook and risks
- Silgan refinanced its prior facility on July 28 with a new $1.9bn senior secured credit agreement. The facility includes term loans and revolving commitments; $15.0m of revolver borrowings was outstanding at quarter-end, with $753.2m available after letters of credit. Term and revolving facilities generally mature in 2017 and 2016, respectively, subject to an earlier maturity provision if the 7.25% Senior Notes are not refinanced by July 7, 2016.
- Management said operating cash flow and available borrowing capacity should meet expected operating needs, capital spending, debt service, taxes, pension contributions, repurchases and dividends for the foreseeable future. No specific earnings or revenue guidance was provided.
- The board authorized up to $300m of share repurchases through December 31, 2014; $15.8m was repurchased in Q3. A quarterly dividend of $0.11 per share was declared in November.
- Key exposures include seasonal working-capital needs, harvest-dependent demand, customer inventory changes, raw-material cost pass-through timing, foreign exchange, interest rates and natural gas prices. Natural-gas swaps covered about 20% of estimated next-12-month exposure. Silgan reported compliance with debt covenants.
- The IRS was examining 2004–2007 tax returns; the company said the review could change unrecognized tax benefits, but it could not estimate the impact. Outstanding rationalization plans were expected to require $12.4m of future cash spending. VN controls were still being integrated; management planned to include them in its 2012 internal-control assessment. Disclosure controls were deemed effective, with no material control changes reported.
Investor verification priorities
- Assess underlying growth and margins apart from acquisitions, price pass-throughs, favorable currency effects and the Graham Packaging termination-related income.
- Review segment volume and margin trends, especially U.S. metal-container demand and continued weakness in plastic containers.
- Verify cash conversion and seasonal working-capital requirements against capital expenditures, acquisition spending and debt obligations.
- Check debt maturities, leverage and covenant headroom after the VN acquisition and refinancing; assess sensitivity to interest rates and foreign exchange.
- Monitor the IRS audit, rationalization cash costs, acquisition integration and VN internal-control assessment.