Silgan Holdings Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless noted. Amounts are in U.S. dollars. Silgan manufactures metal and plastic containers and closures for food and other consumer products. Results are seasonal, with historically higher volume and a disproportionate share of operating income in the third quarter.
Financial performance
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Net sales | $795.7 million | $768.4 million |
| Gross profit | $111.3 million | $114.0 million |
| Gross margin | 14.0% | 14.8% |
| Operating income | $58.1 million | $65.8 million |
| Operating margin | 7.3% | 8.6% |
| Net income | $25.4 million | $32.8 million |
| Diluted EPS | $0.38 | $0.47 |
| Cash used in operating activities | $69.0 million | $105.5 million |
Sales increased 3.6%, while operating income fell 11.7% and net income fell 22.3%. Cost of goods sold rose to 86.0% of sales from 85.2%; SG&A rose to 6.5% from 5.8%. The effective tax rate was 37.5%, versus 34.7%. Dividends per share were $0.14, compared with $0.12.
By segment, metal container sales were $463.8 million and operating income was $39.6 million; closures sales were $161.1 million and operating income was $10.6 million; plastic container sales were $170.8 million and operating income was $10.4 million. Closures operating income declined sharply, from $18.0 million, while plastic container operating income increased from $8.9 million.
Cash, debt and liquidity
Cash and cash equivalents were $158.6 million at March 31, 2013, down from $465.6 million at December 31, 2012. Total debt was $1.784 billion, including $526.1 million classified as current; total debt at December 31, 2012 was $1.671 billion. Working-capital investment, including a $134.0 million cash use from inventory, contributed to operating cash outflow.
Silgan prepaid approximately $300.9 million of term loans, using cash and revolving borrowings, and recorded a $2.1 million early-extinguishment loss. Management said no significant term-loan principal amortization is due under the Credit Agreement until 2015. Revolving loans outstanding were $424.8 million; $346.9 million remained available after letters of credit. The company reported compliance with its debt covenants and said operating cash and available borrowing capacity should meet foreseeable needs.
Material changes, outlook and risks
- Sales growth reflected acquired plastic food-container operations, higher metal-container volumes and selling prices, partly offset by lower legacy plastic-container volumes and the Venezuelan currency devaluation.
- Operating income was pressured by a lower metal-container inventory build, weak European markets, higher resin costs, lower legacy plastic volumes, and the Venezuelan devaluation and its operating effects. A $3.0 million Venezuelan net-asset remeasurement charge and the $2.1 million debt-extinguishment loss were notable Q1 items.
- Silgan completed a $250.0 million modified Dutch auction tender offer, repurchasing 5,524,861 shares at $45.25 each. Remaining repurchase authorization was $100.1 million at quarter-end; cash flow and revolving credit also funded the buyback.
- Plans to exit the Crystal City, Texas facility and downsize the Sacramento, California facility include about 40 employee terminations. Estimated costs are $1.6 million; $0.9 million was recognized through March 31. Management expected $0.7 million of remaining expenses and $1.1 million of cash expenditures in 2013. Total future cash spending for outstanding rationalization plans was estimated at $8.4 million.
- No numerical earnings or revenue guidance was provided in the supplied filing text. Management cited acquisition opportunities and possible use of cash for debt repayment, repurchases or dividends if acquisitions are not identified.
- Key exposures include seasonal working-capital needs, harvest variability, interest rates, foreign exchange, natural-gas and resin prices, European economic weakness, and Venezuela’s currency and political conditions. Natural-gas swaps covered about 11% of estimated twelve-month exposure; interest-rate swaps had $284.6 million aggregate notional value.
- An IRS examination of tax years 2008–2011 was ongoing; a resolution could reduce unrecognized tax benefits, but the amount could not be estimated. Management reported effective disclosure controls and no material change in internal controls over financial reporting.
Important facts for investors to verify
- Whether lower operating margins persist, particularly in closures and metal containers, and how resin costs, European demand and Venezuelan conditions develop.
- Seasonal working-capital requirements, cash conversion and available revolving-credit capacity as inventory builds toward peak season.
- Debt levels and the effect of the substantial share repurchase on liquidity, leverage and future capital allocation.
- Actual costs and cash outlays from facility rationalizations, and any further restructuring plans.
- Developments in the IRS audit and potential tax-benefit adjustments; the filing does not quantify a possible change.