Silgan Holdings Inc. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013. Silgan manufactures metal, plastic and composite rigid packaging for food and other consumer products. Unless otherwise noted, amounts are U.S. dollars.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net sales | $880.0 million | $821.6 million | $1,675.8 million | $1,590.0 million |
| Gross profit / margin | $128.2 million / 14.6% | $115.3 million / 14.0% | $239.4 million / 14.3% | $229.4 million / 14.4% |
| Operating income / margin | $74.9 million / 8.5% | $68.6 million / 8.3% | $133.0 million / 8.0% | $134.4 million / 8.4% |
| Net income | $59.5 million | $10.6 million | $85.0 million | $43.3 million |
| Diluted EPS | $0.93 | $0.15 | $1.30 | $0.62 |
Q2 sales increased 7.1% and operating income rose 9.2%. Six-month sales increased 5.4%, while operating income declined 1.0%. The Q2 effective tax provision included a $19.8 million benefit primarily from settlement of the IRS audit through 2007; excluding that adjustment, the company reported a Q2 effective tax rate of 33.2%. The six-month effective rate excluding the adjustment was 35.0%.
Cash flow, debt and liquidity
- Operating cash flow was negative $159.2 million in the first half, compared with negative $195.2 million a year earlier. Seasonal working-capital needs were significant: receivables used $124.8 million and inventories used $207.0 million of cash.
- Capital expenditures were $53.0 million; investing cash outflow was $52.6 million. Financing cash outflow was $140.6 million, including $265.3 million of share repurchases and $18.1 million of dividends. Cash fell $352.4 million to $113.2 million.
- Total debt was $1.878 billion at June 30, versus $1.671 billion at year-end 2012. Revolving loans were $503.1 million; $619.5 million of total debt was classified current. Available revolving capacity, after letters of credit, was $268.3 million.
- The company prepaid $300.9 million of term loans due in 2013 and 2014, recording a $2.1 million early-extinguishment loss; it said no significant Credit Agreement term-loan amortization was due until 2015. Management reported compliance with financing covenants and expected continued compliance in 2013.
- Quarterly dividends were $0.14 per share. The company repurchased 5.5 million shares in a tender offer for $250 million and bought a further 305,562 shares in the first half for $14.3 million. At June 30, $85.8 million remained authorized for repurchases.
Material changes and management commentary
- Metal-container sales rose 10.7% in Q2, reflecting volume growth, price pass-through for higher raw materials, new Eastern European production and the acquired Turkish operations. Plastic-container sales rose 5.4%, including acquired plastic food-container operations. Closures sales declined 0.9%.
- Q2 operating-income growth reflected metal-container volumes, acquired plastic operations, manufacturing efficiencies and favorable plastic mix. Six-month operating income was pressured by Venezuela, weaker closure volumes, resin-cost pass-through timing, European weakness, startup costs at new plants and comparison with a larger prior-year inventory build.
- Closures operating income fell 21.0% for the first half, including a $3.0 million Venezuela net-asset remeasurement charge and an estimated $5.2 million comparative operational impact from political instability and currency restrictions. Metal and plastic container operating income increased 3.8% and 21.7%, respectively.
- Silgan expects seasonal working-capital needs to peak in summer or early fall; historical seasonal funding needs have reached approximately $325 million. Management stated cash from operations and available borrowing capacity should fund 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.
Risks, contingencies and unusual items
- Venezuela operations face currency restrictions, political instability and steel-supply delays. The company also cited foreign-exchange exposure, interest-rate and natural-gas price risks, and used swaps for portions of interest-rate and gas exposure.
- Metal-container and some closure sales depend partly on harvests and weather; the company historically generates higher unit sales and a disproportionate share of annual operating income in Q3.
- New plants in Eastern Europe and the Middle East incurred unabsorbed costs. Resin-cost pass-through lags affected plastic-container results; economic weakness in Europe was also cited.
- Plans to exit the Crystal City, Texas facility and downsize Sacramento, California include about 40 employee terminations. Estimated total costs are $1.6 million; $1.2 million had been recognized by June 30. The company estimated $6.8 million of future cash spending across outstanding rationalization plans.
- The IRS finalized its review through 2007, enabling recognition of $27.2 million of previously gross unrecognized tax benefits and a $19.8 million Q2 tax-rate benefit. Remaining gross unrecognized tax benefits were $25.0 million; the company did not expect a material change from closing the 2008–2011 IRS examination in the next 12 months.
Investor verification priorities
- Separate recurring earnings and tax performance from the $19.8 million IRS-related benefit; review the remaining $25.0 million gross unrecognized tax benefits and open IRS examination.
- Track seasonal working-capital cash use, revolver borrowings and headroom against the $268.3 million available at quarter-end.
- Assess whether Venezuela’s currency restrictions, political conditions and supply constraints persist, and whether the $3.0 million remeasurement charge captures the full operating and currency impact.
- Monitor Q3 seasonality, crop conditions, new-plant utilization and raw-material cost pass-through, especially resin.
- Compare the substantial first-half share repurchases and dividend payments with debt levels, liquidity needs and future capital allocation.