Business context and reporting period
Silgan Holdings Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company manufactures rigid packaging, primarily through metal containers, closures and plastic containers. Results are seasonal: metal-container sales and operating income have historically been higher in the third quarter due to fruit and vegetable harvests.
In 2012, Silgan acquired Rexam’s plastic thermoformed food-container business for $248.1 million and Turkey-based Öntaş for $18.2 million, both funded with cash on hand. The acquired businesses contributed little to reported results through September 30.
Financial performance and position
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $1,139.5 | $1,148.0 | $2,729.5 | $2,673.3 |
| Gross profit | $178.8 | $183.0 | $408.1 | $401.8 |
| Gross margin | 15.7% | 16.0% | 15.0% | 15.0% |
| Operating income | $132.4 | $136.1 | $266.8 | $284.2 |
| Operating margin | 11.6% | 11.9% | 9.8% | 10.6% |
| Net income | $78.7 | $78.8 | $122.0 | $156.1 |
| Diluted earnings per share | $1.13 | $1.12 | $1.74 | $2.22 |
- Cash flow: Operating activities used $6.0 million in the first nine months of 2012, versus providing $76.2 million in 2011. The 2012 outflow included $76.0 million of voluntary domestic pension contributions and substantial seasonal growth in receivables. Investing activities used $400.8 million, including business purchases of $317.5 million and capital expenditures of $84.7 million. Financing activities provided $432.2 million. Cash increased $25.4 million to $422.5 million.
- Liquidity: At September 30, cash was $422.5 million; current assets were $1,633.3 million and current liabilities $830.6 million. Revolver borrowings were $320.0 million, with $451.5 million of revolving capacity available after letters of credit. Management said operating cash flow and available borrowing capacity should meet expected needs for the foreseeable future.
- Debt: Total debt was $1,989.7 million, including $423.3 million classified as current and $1,566.4 million long term. In March, Silgan issued $500 million of 5% notes due 2020 and used proceeds in part to redeem $250 million of 7¼% notes. The redemption generated a $38.7 million early-extinguishment loss, materially affecting nine-month earnings.
- Other: Dividends were $0.12 per share in each of the first three quarters. The board declared another $0.12 quarterly dividend in November. Silgan repurchased $33.9 million of stock during the first nine months, with $250.3 million remaining under its authorization.
Material changes versus comparable periods
- Third-quarter sales declined 0.7%, while nine-month sales increased 2.1%. Foreign-exchange translation reduced sales by approximately $23.4 million in Q3 and $46.6 million for the nine-month period.
- Q3 operating income fell 2.7%; net income was essentially flat. Lower metal-container overhead absorption amid inventory reductions, weaker European conditions, plastic-container volume declines, rationalization costs and new-plant start-up costs weighed on Q3 results. Higher metal-container and closures volumes, cost reductions and improved plastic-container performance partially offset these pressures.
- Nine-month operating income fell 6.1% and net income fell 21.8%. Comparability was affected by the $38.7 million 2012 debt-redemption loss and by $25.2 million of 2011 income related to termination of the Graham Packaging merger agreement. Excluding neither item, reported results show both effects.
- By segment, Q3 metal-container sales rose 1.9% but operating income declined 7.3%; closures sales fell 3.6% and operating income declined 1.2%; plastic-container sales fell 10.7% while operating income rose 63.2%. For nine months, metal-container operating income declined 3.8%, closures operating income rose 3.5%, and plastic-container operating income rose 65.8%.
- At September 30, 2012, debt was higher than at year-end 2011, reflecting acquisitions and financing activity. Cash was also higher, while receivables rose substantially from year-end, consistent with seasonal working-capital needs.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management expects cash from operations and borrowing availability to cover operating needs, planned capital expenditures, debt service, taxes, pension contributions, repurchases and dividends; it may borrow further to finance acquisitions.
- Management cited weak European economic conditions, harvest variability, seasonality and foreign-exchange movements as factors affecting results. Other exposures include interest rates and natural-gas prices. The company uses interest-rate and natural-gas swaps for risk management and states it does not use derivatives for trading or speculation.
- Outstanding rationalization plans include facility exits and workforce reductions. Total future cash spending of $11.8 million was expected in the current year and thereafter. The Kingsburg, California metal-container facility exit was estimated to cost $2.4 million; the Breinigsville, Pennsylvania plastic-container plant had ceased operations.
- The IRS was examining tax returns for 2004–2010. The company said audits could conclude within 12 months and could significantly change unrecognized tax benefits, but it could not estimate the potential impact.
- Silgan reported compliance with financing covenants. Disclosure controls were assessed as effective; the company was integrating VN’s internal controls and planned to include them in its 2012 annual assessment.
Important facts for investors to verify
- Whether seasonal receivables, inventory and cash requirements normalize after the harvest-driven peak, and whether operating cash flow recovers.
- The sustainability of segment operating trends, particularly metal-container margins, European demand and plastic-container volume and profitability.
- The final purchase-price allocation and integration results for the Rexam and Öntaş acquisitions, including the preliminary $108.5 million goodwill recognized for the Rexam business.
- Debt maturities, revolver availability and covenant headroom, especially given $423.3 million of current debt at September 30.
- The eventual cash costs and completion timing of rationalization plans, and the outcome and potential financial effect of the IRS examinations.