Silgan Holdings Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. Unaudited results; dollar figures below are in millions unless otherwise noted. Silgan manufactures metal food containers, food and beverage closures, and plastic containers. Comparisons are with the corresponding 2009 periods; per-share comparisons reflect the two-for-one stock split.
Financial performance
| Metric | Q2 2010 | Q2 2009 | First half 2010 | First half 2009 |
|---|---|---|---|---|
| Net sales | $693.8 | $689.5 | $1,357.9 | $1,344.9 |
| Gross profit / margin | $108.6 / 15.7% | $106.8 / 15.5% | $211.9 / 15.6% | $201.9 / 15.0% |
| Operating income / margin | $67.1 / 9.7% | $66.8 / 9.7% | $123.8 / 9.1% | $119.2 / 8.8% |
| Net income | $36.3 | $34.8 | $63.0 | $61.7 |
| Diluted EPS | $0.47 | $0.45 | $0.82 | $0.80 |
- Q2 sales rose 0.6%; operating income increased 0.4% and net income increased about 4%. First-half sales rose 1.0%, operating income 3.9%, and net income about 2%.
- Q2 sales increased in closures and plastic containers, offset by lower metal food container sales. Metal food containers: $378.1 million, down 6.7%; closures: $165.8 million, up 7.2%; plastic containers: $150.0 million, up 15.7%.
- First-half operating income improved in metal food containers to $90.4 million from $68.4 million, but declined in closures to $35.1 million from $36.5 million and in plastic containers to $6.9 million from $20.9 million. Plastic-container operating margin fell to 2.3% from 7.7%, principally due to delayed pass-through of resin cost increases and rationalization charges.
Cash flow, balance sheet and liquidity
- Cash and cash equivalents were $52.1 million at June 30, down from $305.8 million at December 31, 2009. First-half operating cash flow was negative $172.5 million, versus negative $71.6 million in 2009.
- Operating cash use included a $92.3 million voluntary pension contribution (versus $23.1 million in 2009) and seasonal working-capital needs. Receivables and inventory used $118.9 million and $185.0 million, respectively; accounts payable provided $34.3 million.
- Capital expenditures were $48.1 million. Financing cash flow was negative $33.6 million, including $16.3 million of dividends and a $92.5 million reduction in outstanding checks, partly offset by net revolving-loan borrowings of $75.8 million.
- Total debt was $848.8 million at June 30, compared with $984.6 million a year earlier and $799.4 million at December 31, 2009. Current debt was $88.4 million and long-term debt $760.5 million. Stockholders’ equity was $719.9 million.
- On July 7, Silgan refinanced its previous secured facility with a new $1.4 billion secured credit agreement. At July 7, no revolving loans were outstanding and reported revolving availability, after letters of credit, was $767.1 million. The facility includes term loans and revolving commitments, with maturities in 2015 for revolvers and 2016 for term loans. Silgan said it was covenant-compliant.
- Management expects cash from operations and available credit to meet operating needs, seasonal working capital, planned capital expenditures, debt service, pension obligations and dividends for the foreseeable future. Seasonal working-capital needs have historically peaked at approximately $300 million.
Outlook, notable items and risks
- No specific earnings or revenue guidance is provided. Management notes that harvest-related demand makes metal food container and closures sales seasonal, with historically higher unit sales and a disproportionate share of annual operating income in Q3.
- The July refinancing is expected to result in an approximately $4.5 million pretax debt-extinguishment charge in Q3 2010. Silgan also expects interest-rate margins and commitment fees under the new agreement to adjust based on leverage and credit rating.
- A February 2010 plan to close the Port Clinton, Ohio plastic-container facility includes approximately 150 employee terminations and estimated total charges of $4.7 million. $2.4 million was recognized through June 30; remaining expenses and cash expenditures of $2.3 million and $3.2 million, respectively, were expected primarily in 2010. The filing also estimates $7.0 million of future cash spending across outstanding rationalization plans.
- First-half results included a $3.2 million charge in closures for remeasuring Venezuelan net assets at the devalued official Bolivar exchange rate; the charge also affected SG&A and the effective tax rate. Resin-cost increases passed through to customers with a lag pressured plastic-container and closures results.
- The IRS was examining tax returns for 2004–2007. The audit could conclude within 12 months and materially change unrecognized tax benefits, but Silgan could not estimate the potential impact.
- Silgan uses interest-rate, natural-gas and foreign-currency risk-management measures and states it does not use derivatives for speculative purposes. Natural-gas swaps covered approximately 18% of estimated 12-month exposure. The filing estimates $2.8 million of after-tax derivative losses may be reclassified into earnings over the next 12 months; actual amounts may vary.
- The board authorized up to $300 million of share repurchases over three years; none had been made under the authorization by the filing date. A $0.105-per-share quarterly dividend was declared in July, with an expected cash payment of $8.2 million.
Important facts for investors to verify
- Whether seasonal working-capital demands and weak first-half operating cash flow normalize as expected, and the extent of ongoing reliance on revolver availability.
- Progress in passing resin-cost increases through to customers and whether plastic-container segment profitability recovers.
- Actual costs, timing, and cash outlays for the Port Clinton closure and other rationalization plans.
- Final refinancing costs, borrowing costs, covenant headroom and compliance under the July credit agreement.
- Potential outcome and financial effect of the IRS examinations and the Venezuelan currency remeasurement.