Silgan Holdings Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013. Silgan manufactures metal, plastic and composite packaging and closures. Results are seasonal, with metal-container and some closure sales typically higher during the third-quarter harvest season. Figures below are unaudited; dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,167.9 | $1,139.5 | $2,843.7 | $2,729.5 |
| Gross profit / margin | $187.8 / 16.0% | $178.8 / 15.7% | $427.3 / 15.0% | $408.1 / 15.0% |
| Operating income / margin | $135.9 / 11.6% | $132.4 / 11.6% | $268.9 / 9.5% | $266.8 / 9.8% |
| Net income | $77.2 | $78.7 | $162.1 | $122.0 |
| Diluted EPS | $1.21 | $1.13 | $2.50 | $1.74 |
| Interest and debt expense | $17.0 | $16.0 | $49.8 | $86.3 |
- Cash flow: Operating cash flow was $1.0 million for the first nine months, versus cash used of $6.0 million a year earlier. Working-capital uses included $258.1 million from receivables and $25.0 million from inventories. Capital expenditures were $80.0 million; net cash used in investing was $79.2 million.
- Cash and liquidity: Cash was $134.5 million at September 30, down from $465.6 million at year-end 2012. Available revolving capacity under the Credit Agreement was $673.2 million after letters of credit. Management said cash from operations and available borrowing capacity should cover expected operating needs, capital spending, debt service, taxes, pensions, dividends and planned share repurchases.
- Debt: Total debt was $1,799.9 million, including $225.7 million classified as current; long-term debt was $1,574.2 million. Silgan issued $300 million of 5.5% senior notes due 2022 and used proceeds to repay revolver borrowings. It prepaid approximately $300.9 million of term loans, leaving no significant Credit Agreement term-loan amortization due until 2015. The company reported compliance with its financing covenants.
Changes versus the comparable period
- Q3 sales rose 2.5%, and operating income rose 2.6%; operating margin was unchanged. Net income declined from $78.7 million to $77.2 million, while diluted EPS increased, alongside a lower weighted-average share count following repurchases.
- For the first nine months, sales increased 4.2% and operating income increased 0.8%, but operating margin declined from 9.8% to 9.5%. Net income and diluted EPS rose materially, helped by a $19.7 million favorable tax adjustment and a much smaller debt-extinguishment loss than in 2012.
- Q3 sales growth reflected acquisitions, favorable currency translation, higher metal-container volumes and higher selling prices; lower legacy plastic-container and closure volumes partly offset gains. Year-to-date metal-container sales grew 5.0%, plastic-container sales 6.0%, while closure sales slipped 0.2%.
- Year-to-date segment trends diverged: metal-container operating income increased 4.3%, plastic-container income increased 25.6%, and closure income declined 14.9%. Closure operations were affected by Venezuela and lower volumes; plastic-container results benefited from acquired operations and improved mix and performance.
Outlook, risks and unusual items
- Guidance: The filing provides no specific earnings or sales forecast. Management expressed confidence in liquidity and covenant compliance and said it continues to assess acquisition opportunities.
- Acquisition after quarter-end: On October 22, 2013, Silgan acquired Portola Packaging for $266 million on a debt-free basis, funded with revolver borrowings. Portola had approximately $200 million of 2012 sales and eight facilities in North America and Europe.
- Tax item: Final acceptance of an IRS settlement covering tax years through 2007 led to recognition of previously gross unrecognized tax benefits of $27.2 million and a $19.7 million favorable effective-tax-rate adjustment in the first nine months. Remaining gross unrecognized tax benefits were $25.0 million at September 30.
- Venezuela and currency: Year-to-date closure results included a $3.0 million charge to remeasure Venezuelan net assets after official currency devaluation and a $5.5 million adverse comparative operational impact from political instability and currency restrictions.
- Cost actions: Plans to exit the Crystal City, Texas facility and downsize Sacramento, California include approximately 40 employee terminations and estimated total costs of $1.6 million. Management expected about $3.5 million in cost-of-goods-sold savings through 2014, partly offset by costs to supply business relocated by a customer. Total future cash spending for outstanding rationalization plans was estimated at $7.0 million.
- Other risks and items: Seasonal working-capital needs have averaged approximately $350 million. Raw-material cost pass-through timing, harvest conditions, resin and natural-gas prices, foreign exchange, European economic conditions, and Venezuelan restrictions may affect results. The company reported no impairment in its 2013 annual goodwill and indefinite-lived intangible-asset assessment. It used derivatives for interest-rate and natural-gas hedging, not speculation.
Important facts for investors to verify
- Whether operating cash generation improves as seasonal receivables and inventory unwind, and how liquidity changes after the Portola acquisition.
- The acquisition’s financing impact, integration costs and contribution to sales and earnings; the filing does not provide pro forma acquisition results.
- How much of nine-month earnings growth is attributable to the one-time $19.7 million tax benefit and the reduced prior-year debt-extinguishment charge.
- Whether closure-segment weakness, Venezuela-related restrictions and raw-material pass-through timing persist, and whether planned rationalization savings are achieved.
- Debt levels, interest expense, revolving availability and compliance with financing covenants following the post-quarter acquisition.