Silgan Holdings Inc. — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The filing was signed February 29, 2012. Silgan manufactures metal containers, closures and plastic containers for consumer goods; 2011 sales were generated across 82 facilities in North America, Europe, Asia and South America.
Financial performance and position
| Metric | 2011 | 2010 | Change |
|---|---|---|---|
| Net sales | $3,509.2 million | $3,071.5 million | +14.3% |
| Gross profit / margin | $518.6 million / 14.8% | $472.4 million / 15.4% | Margin down 0.6 percentage points |
| Income from operations / margin | $354.1 million / 10.1% | $283.3 million / 9.2% | +25.0% |
| Net income | $193.2 million | $144.6 million | +33.6% |
| Diluted EPS | $2.75 | $1.89 | +45.5% |
| Operating cash flow | $359.6 million | $187.3 million | +$172.3 million |
| Capital expenditures | $173.0 million | $105.4 million | +$67.6 million |
| Cash and cash equivalents, year-end | $397.1 million | $175.2 million | +$221.9 million |
| Total debt, year-end | $1,376.3 million | $904.7 million | +$471.6 million |
Segments: Metal containers generated $2,211.5 million in sales and $256.3 million in operating income; closures generated $687.8 million and $75.9 million; plastic containers generated $609.9 million and $12.6 million. Segment sales increased in all three businesses. Plastic containers remained the weakest segment by operating margin.
Liquidity and financing: Year-end current assets were $1,333.7 million and current liabilities $595.5 million. The company reported $761.3 million and Cdn $10 million of revolving capacity available after letters of credit, with no revolving loans outstanding under its credit facility at year-end. In July 2011 it refinanced with a $1.9 billion senior secured credit agreement. Approximately $984.9 million, or 72% of debt, bore floating rates after swaps. Management estimated a 1 percentage-point rate change would affect 2011 interest expense by about $10.2 million.
Quarterly context: Fourth-quarter 2011 sales were $835.9 million versus $711.6 million in fourth-quarter 2010; net income was $37.1 million versus $16.4 million. The third quarter was the seasonal peak, with 2011 sales of $1,148.0 million and net income of $78.8 million.
Material changes versus prior period
- Sales growth largely reflected acquisitions—especially Vogel & Noot (VN), plus DGS and IPEC—higher selling prices passed through for raw-material and manufacturing costs, and favorable currency translation. Excluding acquisitions, unit volumes were lower across the businesses; metal container volumes were affected by a weaker U.S. fruit and vegetable pack and a prior-year customer buy-ahead.
- Operating income rose despite lower gross margin. Drivers included acquired operations, manufacturing efficiencies, cost controls, lower rationalization charges, and a favorable timing comparison for contractual cost pass-throughs. The comparison also benefited from $25.2 million of net income related to termination of the Graham Packaging merger agreement.
- Interest expense before early-extinguishment losses increased to $63.0 million from $54.1 million, primarily due to higher average borrowings. Net income included $1.0 million of debt-refinancing loss in 2011 versus $7.5 million in 2010.
- Cash from operations increased substantially, while investing cash outflow rose to $459.8 million, principally reflecting $290.8 million for acquisitions and $173.0 million of capital expenditures. Working capital and outstanding checks used $85.3 million in 2011.
Outlook, commentary and risks
- No specific 2012 revenue or earnings guidance is provided. Management expected annual capital expenditures of $125–$150 million and said operating cash flow and available borrowing capacity should meet expected operating needs, capital spending, debt service and dividends for the foreseeable future.
- Management expected to fund peak seasonal working-capital needs—historically about $300 million—with cash and revolving facilities. Seasonal demand depends partly on fruit and vegetable harvests; sales and operating income have historically been disproportionately weighted to the third quarter.
- The company expects the North American metal food-container market to remain relatively flat, while emphasizing convenience formats such as single-serve containers and easy-open ends. About 65% of metal food containers sold in 2011 had Quick Top easy-open ends.
- Cost actions include announced 2012 closure of an additional plastic-container facility and further workforce reductions in closures. The company recorded $7.7 million of rationalization charges in 2011 and expected about $10.9 million of additional cash spending in 2012 and thereafter for rationalization plans.
- Key risks include leverage and floating-rate exposure; raw-material supply, price volatility and delays in passing cost increases to customers; customer concentration and competitive pricing; harvest variability and seasonality; Euro and other currency movements; acquisition integration; pension funding; labor negotiations; and environmental, product-safety and regulatory liabilities.
- At year-end, the pension plans were underfunded by $99.9 million. Two multiemployer pension plans were reported in critical (red-zone) status. The company also disclosed $48.1 million of gross unrecognized tax benefits and an ongoing IRS examination of tax years 2004–2010; the potential audit impact was not estimable.
- Material unusual items included the Graham Packaging termination proceeds, acquisition and integration effects, rationalization charges, a $3.3 million product-liability dispute charge, and the $5.5 million purchase-accounting inventory write-up expense recorded in VN results.
Important facts for investors to verify
- How much of 2011 earnings growth remains after adjusting for the $25.2 million Graham termination-related benefit and acquisition effects.
- Whether segment margins—particularly the 2.1% plastic-container operating margin—improve as cost actions and restructuring are completed.
- Debt maturities, covenant headroom, seasonal borrowing needs and sensitivity to interest-rate changes.
- Whether raw-material pass-throughs keep pace with resin, metal and energy costs, and whether volume and mix recover after the weaker 2011 comparisons.
- Integration, returns and capital requirements for VN and other acquisitions, including the expected start-up of developing Eastern European facilities.
- Potential cash and earnings effects from pension obligations, tax examinations, customer concentration and remaining rationalization commitments.