Silgan Holdings Inc. — Q2 2012 Form 10-Q
Business and period: Silgan manufactures rigid packaging, including metal and plastic containers and closures. This unaudited filing covers the quarter and six months ended June 30, 2012; amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $821.6 | $822.2 | $1,590.0 | $1,525.3 |
| Gross profit / margin | $115.3 / 14.0% | $116.9 / 14.2% | $229.4 / 14.4% | $218.9 / 14.4% |
| Income from operations / margin | $68.6 / 8.3% | $94.5 / 11.5% | $134.4 / 8.4% | $148.1 / 9.7% |
| Net income | $10.6 | $51.2 | $43.3 | $77.3 |
| Diluted EPS | $0.15 | $0.73 | $0.62 | $1.10 |
- Q2 sales were essentially flat year over year; first-half sales rose 4.2%, helped by acquired operations, higher selling prices and selected volume/mix gains. Foreign exchange, European weakness and metal-container product mix were offsets.
- First-half operating cash flow was negative $195.2, versus negative $52.5 in 2011. Cash uses included a $76.0 voluntary domestic pension contribution and seasonal working-capital investment, including a $193.7 inventory cash use. Investing cash outflow was $110.1, including $59.4 of capital expenditures and $51.0 of acquisition-related payments.
- Cash was $368.9 at June 30. Total debt was $1,781.5, including $236.6 classified as current; net current assets were $949.3. Revolver availability was $610.4 after letters of credit. Management said cash from operations and borrowing availability should cover expected operating needs, capital expenditures, debt service, taxes, pension contributions, dividends and repurchases; it reported compliance with debt covenants.
- Gross margin was unchanged year over year for the first half. Segment trends were mixed: first-half operating income rose in closures and plastic containers, while metal containers were broadly flat; European softness and new metal-plant start-up costs weighed on results.
Material changes and unusual items
- The 2011 comparison included $27.0 of Q2 and $25.2 of first-half income related to termination of the Graham Packaging merger agreement. This makes reported year-over-year operating income comparisons less representative of recurring operations.
- Silgan issued $500.0 of 5% senior notes due 2020 and redeemed its $250.0 of 7¼% notes in April. The redemption generated a $38.7 pretax extinguishment loss in Q2 and the first half. Interest expense before that loss was $16.0 for Q2 and $31.6 for the first half.
- Q2 net income also reflected a lower effective tax rate of 23.9%, versus 34.4% a year earlier, favorably affected by reductions in enacted tax rates in certain foreign countries. The first-half rates were 32.4% and 34.3%, respectively.
- First-half share repurchases totaled $22.1; dividends paid totaled $16.9. The board declared a further $0.12-per-share dividend in August, expected to require $8.4.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided in the filing. Management notes that harvest-related seasonality typically drives higher unit sales and a disproportionate share of annual operating income in Q3; seasonal working-capital needs have historically peaked at approximately $300 million.
- After quarter-end, Silgan acquired Turkish packaging supplier Öntaş for $18.3 in cash. It also agreed to acquire Rexam’s plastic thermoformed food business for $250.0, expected to close in Q3 subject to customary conditions and regulatory approvals; management expected to fund it with cash on hand.
- Risks include variable harvests and seasonality, weak European markets and foreign-exchange movements, raw-material and natural-gas costs, interest-rate exposure, and execution of acquisitions and cost-reduction plans. The company uses interest-rate and natural-gas swaps and internal currency hedges, not derivatives for speculation.
- The IRS was examining tax returns for 2004–2010. The audit could change unrecognized tax benefits, potentially significantly, but the filing says the impact cannot be estimated. Rationalization plans had $12.1 of expected future cash spending; additional expenses and payments for 2012 plans were expected primarily in 2012.
- Silgan exited its Breinigsville, Pennsylvania plastic-container plant and announced reductions affecting approximately 49 corporate and European closures employees. Management reported effective disclosure controls; VN’s controls were still being integrated.
Important facts for investors to verify
- How much of the reported earnings decline reflects the prior-year Graham Packaging termination proceeds and the 2012 debt-extinguishment charge, versus underlying operating trends.
- Whether seasonal working-capital needs, pension contributions and acquisition spending affect cash generation or borrowing needs in the second half.
- Completion, funding and integration of the Rexam transaction, and performance of the recently acquired Öntaş business.
- Developments in European demand, harvest-driven Q3 volumes, input-cost pass-throughs and the IRS examination.