Silgan Holdings Inc. — Q1 2011 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2011, compared with the first quarter of 2010. Silgan supplies rigid packaging through metal containers, closures and plastic containers. The quarter included Vogel & Noot (VN) metal-container operations and DGS closures, both acquired March 1, 2011; results are seasonal, with sales and operating income historically weighted toward the third quarter.
Financial performance
| Metric | Q1 2011 | Q1 2010 | Change / context |
|---|---|---|---|
| Net sales | $703.1 million | $664.0 million | Up 5.9% |
| Gross profit / margin | $102.0 million / 14.5% | $103.3 million / 15.5% | Margin down 1.0 percentage point |
| Operating income / margin | $53.6 million / 7.6% | $56.7 million / 8.5% | Down 5.5%; margin down 0.9 point |
| Interest and other debt expense | $13.9 million | $12.5 million | Higher average borrowings |
| Net income | $26.1 million | $26.8 million | Down 2.5% |
| Diluted EPS | $0.37 | $0.35 | Higher despite lower net income; weighted diluted shares fell to 70.5 million from 77.2 million |
| Operating cash flow | $(58.9) million | $(154.7) million | Outflow improved; 2010 included $92.3 million of pension contributions |
| Cash and cash equivalents | $135.8 million | $99.2 million | At March 31, 2011 and 2010, respectively |
| Total debt | $1,443.0 million | $905 million | At March 31, 2011 and December 31, 2010, respectively; includes $520.3 million classified current |
At March 31, 2011, current assets were $1,215.6 million and current liabilities were $940.2 million. Revolving loans outstanding under the Credit Agreement were $440.2 million, with $328.7 million of availability after letters of credit. Cash declined $39.4 million from year-end. Investing cash outflow was $297.7 million, including $264.4 million for acquisitions and $33.5 million of capital expenditures; financing cash inflow was $317.2 million.
Material changes and drivers
- Revenue growth reflected higher selling prices, acquired businesses and increased closures volumes. Metal-container sales rose 4.1%, closures 11.1%, and plastic-container sales 5.3%.
- Operating income declined mainly because of lower domestic metal-container volumes, delayed pass-through of higher manufacturing and resin costs, and higher corporate-development expenses. Acquisitions and closures-volume growth helped revenue; operational efficiencies and lower rationalization costs provided some offsets.
- Metal-container operating income fell to $38.4 million from $46.4 million. Closures operating income increased to $15.8 million from $11.1 million, while plastic-container operating income rose to $6.3 million from $2.9 million. Corporate expense increased to $6.9 million from $3.7 million.
- The effective tax rate fell to 34.2% from 39.4%; the 2010 rate was affected by a nondeductible Venezuela remeasurement charge. Q1 2011 included $1.7 million of rationalization charges; $19.2 million of future cash spending was expected for outstanding plans in the current year and thereafter.
Outlook, risks and unusual items
- Management provided no specific earnings or revenue guidance. It said operating cash generation and Credit Agreement availability should be sufficient for expected operating needs, capital spending, debt service, taxes, pension contributions and dividends, and expected to remain in compliance with debt covenants during 2011.
- Silgan acquired VN for a stated total purchase price of $292.4 million net of cash acquired; $48.7 million is payable in June 2012. The preliminary purchase-price allocation may change materially. VN contributed $25.1 million in quarterly sales and incurred a $2.5 million pretax inventory step-up impact. DGS was acquired for $20.7 million; its post-acquisition results were not significant.
- After quarter-end, Silgan agreed to acquire Graham Packaging for 0.402 Silgan shares plus $4.75 cash per Graham share, at an indicated enterprise value of approximately $4.1 billion. Closing was expected in Q3 2011, subject to shareholder, regulatory and other conditions. Financing commitments included up to $4 billion of new senior secured credit facilities, subject to conditions. Completion, financing availability and the substantial additional debt are key risks.
- Other exposures include seasonal working-capital needs, raw-material and energy costs, interest rates, foreign currency and harvest variability. The company hedged approximately 23% of estimated 12-month natural-gas exposure. IRS examinations could result in a significant change to unrecognized tax benefits, but the potential amount was not estimable.
- Disclosure controls were deemed effective. VN’s controls were being integrated and were to be included in Silgan’s fiscal 2012 annual internal-control assessment.
Investor verification priorities
- Track whether acquired VN and DGS operations deliver expected performance and synergies, and review final VN purchase accounting.
- Verify Graham transaction approvals, regulatory conditions, financing terms, final consideration and resulting leverage and covenant capacity.
- Monitor seasonal working capital, inventory and receivables, revolver availability, and the classification and repayment of current debt.
- Assess whether pricing catches up with raw-material and manufacturing-cost inflation and whether operating margins recover.
- Review IRS audit developments, rationalization cash spending and the impact of foreign-exchange and commodity movements.