Silgan Holdings Inc. — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010. Unaudited interim results; dollar amounts are U.S. dollars. Silgan manufactures metal food containers, closures, and plastic containers. Comparisons below are with the corresponding 2009 periods.
Key financial results
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $1,002.1 million | $1,016.5 million | $2,359.9 million | $2,361.5 million |
| Gross profit / margin | $162.4 million / 16.2% | $167.1 million / 16.4% | $374.3 million / 15.9% | $369.0 million / 15.6% |
| Operating income / margin | $121.0 million / 12.1% | $128.3 million / 12.6% | $244.7 million / 10.4% | $247.5 million / 10.4% |
| Net income | $65.2 million | $73.8 million | $128.3 million | $135.5 million |
| Diluted EPS | $0.84 | $0.96 | $1.66 | $1.76 |
- Cash flow: Nine-month operating cash flow was negative $27.6 million, versus positive $18.7 million in 2009. It included a $92.3 million voluntary pension contribution, working-capital cash use (including receivables), and seasonal inventory needs. Investing cash outflow was $75.3 million, including $76.0 million of capital expenditures. Financing provided $190.3 million; cash increased $87.4 million to $393.1 million.
- Debt and liquidity: Total debt was $1.106 billion at September 30, 2010, including $213.2 million classified as current; cash was $393.1 million. No revolving loans were outstanding, and $767.5 million of revolving capacity was available after letters of credit. Current classification included $200 million of senior subordinated notes scheduled for redemption after quarter-end.
- Dividends: Quarterly dividends paid in March, June, and September were $0.105 per share; the board declared another $0.105 dividend payable December 15, 2010.
Material changes and operating drivers
- Q3 sales fell 1.4% and operating income fell 5.7% year over year. A later, less robust produce pack reduced metal-container volumes; lower selling prices and unfavorable product mix also weighed on sales. Closures sales declined, while plastic-container sales rose 12.5% on higher prices and volume.
- For the first nine months, sales were nearly flat and operating income declined 1.1%. Metal-container operating income improved, but closures and plastic-container operating income declined. Plastic-container results were pressured by delayed pass-through of higher resin costs; closures were affected by resin costs, mix, and a Venezuela remeasurement charge.
- Interest and other debt expense before extinguishment charges rose to $16.0 million in Q3 and $40.4 million year to date, reflecting higher rates and debt balances. The company recorded a $4.5 million pretax loss on early debt extinguishment in Q3 related to its July refinancing.
- In July, Silgan refinanced its prior secured facility with a new $1.4 billion credit agreement. It includes term loans, revolving facilities, and an uncommitted incremental facility of up to $450 million. The company reported compliance with financial and operating covenants.
Outlook, risks, and unusual items
- Management said cash from operations and available borrowing capacity should be sufficient for expected operating needs, capital expenditures, debt service, taxes, pension contributions, repurchases, and dividends. The filing provides no specific earnings or revenue guidance.
- On October 1, 2010, Silgan gave notice to redeem all $200 million of its 6.75% notes on November 15 at 101.125% of principal plus accrued interest, using cash and/or revolver borrowings. It expected a further $3.1 million pretax extinguishment charge in Q4.
- On October 8, Silgan commenced a modified Dutch auction tender offer to repurchase up to $175 million of shares. If fully subscribed, an associated agreement would result in approximately $72.2 million of purchases from its two largest stockholders. Funding was expected from cash and/or revolving loans.
- The Port Clinton, Ohio plastic-container facility closure is expected to cost $4.6 million in total; $3.0 million had been recognized through September 30. Remaining expenses of $1.6 million and cash expenditures of $2.4 million were expected primarily in 2010.
- Key exposures include seasonal harvest-dependent demand and working capital, raw-material and energy cost pass-through timing, interest rates, foreign exchange, and pension obligations. Natural-gas swaps hedged about 29% of estimated 12-month exposure. The company reported a $3.2 million charge for remeasuring Venezuelan net assets at the devalued official exchange rate.
- The IRS was examining tax returns for 2004–2007; a material change in unrecognized tax benefits was reasonably possible, but the company could not estimate the impact. An EPA consent decree concerning alleged Clean Air Act violations at 17 facilities was entered in 2010; corrective changes were substantially completed and the $0.365 million fine was paid.
- Management reported effective disclosure controls, no material change in internal control over financial reporting, and no impairment of goodwill or indefinite-lived intangible assets in its 2010 annual assessment.
Important facts for investors to verify
- Whether the note redemption and share tender offer were completed as planned, and their final cash and borrowing impacts.
- Subsequent operating cash generation and working-capital requirements after the negative nine-month operating cash flow.
- Whether resin, metal, and other manufacturing-cost changes were passed through to customers on schedule and how product mix and seasonal harvests affected margins.
- Debt levels, covenant headroom, interest expense, and the impact of planned repurchases and pension funding on liquidity.
- Outcomes of the IRS examination and any developments in Venezuela-related currency exposure or the EPA matter.