Silgan Holdings Inc. — Q1 2012 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. Silgan manufactures metal and plastic containers and closures for consumer products. Results are seasonal: metal-container and closures sales depend partly on fruit and vegetable harvests, with historically higher volume and a disproportionate share of annual operating income in Q3.
Financial performance
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net sales | $768.4 million | $703.1 million |
| Gross profit / margin | $114.0 million / 14.8% | $102.0 million / 14.5% |
| Operating income / margin | $65.8 million / 8.6% | $53.6 million / 7.6% |
| Income before taxes | $50.2 million | $39.7 million |
| Net income | $32.8 million | $26.1 million |
| Diluted EPS | $0.47 | $0.37 |
| Operating cash flow | $(105.5) million | $(58.9) million |
Sales rose 9.3% and operating income rose 22.8%. Net income increased about 25%. The effective tax rate was 34.7%, versus 34.2%. Dividends were $0.12 per share, up from $0.11.
At March 31, cash was $648.5 million; current assets were $1,748.1 million and current liabilities $723.5 million. Total debt was $1,911.8 million, including $331.0 million classified as current. The company had no revolving loans outstanding and reported $770.7 million available under its credit agreement after letters of credit.
Operating cash use reflected seasonal working-capital investment, including a $129.5 million inventory increase, and a $30.0 million domestic pension contribution. Investing cash use was $77.1 million, including $51.0 million of acquisition payments and $26.3 million of capital expenditures. Financing provided $434.0 million, including $526.6 million of long-term debt proceeds. Cash increased $251.4 million during the quarter.
Material changes and management commentary
- Metal-container sales increased 13.9%, primarily from a full quarter of acquired operations and higher selling prices reflecting raw-material cost pass-throughs. Closures sales rose 1.9%, and plastic-container sales rose 5.2%.
- Operating income improved across all three businesses. Management cited acquired operations, manufacturing efficiencies, cost savings, higher closures volume, and a favorable resin pass-through lag in plastics. Higher rationalization charges and depreciation partly offset these gains.
- On March 23, Silgan issued $500 million of 5% Senior Notes due 2020. On April 9, after quarter-end, it redeemed all $250 million of 7¼% Notes. The company expects a $38.7 million second-quarter loss on early extinguishment, including the redemption premium and write-off of debt costs and discount.
- Q1 included $3.6 million of rationalization charges. Plans include exiting the Breinigsville, Pennsylvania plastic-container facility and reducing staffing in the U.S. corporate office and European closures operations. Total future cash spending for outstanding rationalization plans was estimated at $14.8 million.
Outlook, risks, and contingencies
Management believes operating cash generation and borrowing availability will cover expected operating needs, capital expenditures, debt service, taxes, pension contributions, repurchases, and dividends for the foreseeable future. It reported compliance with financing covenants and expected continued compliance during 2012. No numerical earnings or sales guidance was provided.
Key risks include seasonal working-capital needs (which have peaked at approximately $300 million in recent years), harvest variability, interest-rate, currency, and natural-gas price exposures, and integration of acquired operations. Natural-gas swaps covered approximately 16% of estimated twelve-month exposure. The IRS was examining tax returns for 2004–2010; the company said a significant change in unrecognized tax benefits was reasonably possible but could not estimate the amount. Management reported effective disclosure controls and no material changes to internal control over financial reporting; VN controls were still being integrated.
Important facts for investors to verify
- Whether operating cash flow and working capital improve as the seasonal cycle progresses, and how much seasonal borrowing is required.
- The realized cost and funding effects of the April 2012 note redemption, including the expected $38.7 million extinguishment loss.
- Acquisition-related contribution to sales and earnings, and progress integrating VN and other acquired operations.
- Actual rationalization costs, cash expenditures, and savings from the facility exit and workforce reductions.
- Developments in the IRS audit and any change in tax exposures; also monitor pension contributions, including the additional $46 million contribution made in April.