Silgan Holdings Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. Silgan manufactures rigid packaging through metal container, closures and plastic container segments, operating 81 plants worldwide. The filing was audited by Ernst & Young, which issued an unqualified opinion.
Financial performance and liquidity
| Metric | 2012 | 2011 |
|---|---|---|
| Net sales | $3,588.3 million | $3,509.2 million |
| Gross profit / margin | $517.6 million / 14.4% | $518.6 million / 14.8% |
| Operating income / margin | $325.5 million / 9.1% | $354.1 million / 10.1% |
| Net income / diluted EPS | $151.3 million / $2.17 | $193.2 million / $2.75 |
| Operating cash flow | $351.7 million | $359.6 million |
| Capital expenditures | $119.2 million | $173.0 million |
| Cash and cash equivalents | $465.6 million | $397.1 million |
| Total debt | $1,671.3 million | $1,376.3 million |
- Sales increased 2.3%, while operating income declined 8.1% and net income fell 21.7%. Reported margins are calculated from filing amounts.
- Cash used in investing activities was $436.8 million; cash provided by financing activities was $153.6 million. Debt less cash was approximately $1.21 billion at year-end.
- At December 31, the company had $761.9 million of revolving availability plus Cdn $10 million, after letters of credit. Current assets were $1.38 billion and current liabilities $702.6 million.
- Approximately 57% of debt bore floating rates after swaps. Management estimated a one-percentage-point rate change would affect annual interest expense by about $10 million.
- Segment sales and operating income: metal containers $2,293.7 million and $231.5 million; closures $680.1 million and $73.1 million; plastic containers $614.5 million and $30.8 million.
- Fourth-quarter 2012 sales were $858.8 million and net income $29.4 million (diluted EPS $0.42), compared with $835.9 million and $37.1 million (EPS $0.53) in fourth-quarter 2011.
Changes versus 2011
- Sales growth chiefly reflected acquired businesses, higher metal-container selling prices passed through for raw-material costs, and higher unit volumes. Foreign exchange, weak European conditions and lower selling prices in closures and plastics partly offset growth.
- Operating income and margins declined. Factors included the $25.2 million net benefit recorded in 2011 from termination of the Graham Packaging merger agreement, weak European markets, metal-container inventory reductions and manufacturing inefficiencies, and $6.4 million of start-up costs for new facilities. Increased depreciation and rationalization charges also weighed on results.
- Plastic-container operating income rose to $30.8 million from $12.6 million, reflecting improved operations, acquired PFC business and a favorable resin-cost pass-through comparison. Metal-container operating income fell to $231.5 million from $256.3 million; closures operating income fell to $73.1 million from $75.9 million.
- Interest expense before debt-extinguishment losses was essentially unchanged at $63.0 million. Total interest and debt expense rose to $101.7 million due to a $38.7 million loss on redeeming the 7.25% notes.
Outlook, risks and unusual items
- Management provided no specific earnings or revenue guidance. It expected annual capital expenditures of $120–$150 million, tax payments of approximately $100–$120 million in 2013, and to fund peak seasonal working-capital needs through revolving facilities. Management believed operating cash flow and available borrowing capacity would cover expected needs.
- Management anticipated a relatively flat North American metal food-can market, with opportunities in convenience products such as single-serve sizes and easy-open ends. It cited potential continued growth in plastic packaging and closures, while pursuing acquisitions and cost reductions.
- The company issued $500 million of 5% senior notes due 2020 and redeemed all $250 million of 7.25% notes due 2016, recording the $38.7 million extinguishment loss. The 2012 acquisitions included Turkish metal-packaging maker Öntaş and Rexam’s plastic food-container operations (PFC), acquired for $18.2 million and $250.0 million, respectively.
- In February 2013, after year-end, Silgan bought 5,524,861 shares for $250 million in a tender offer. The company said this was funded from year-end cash; the transaction is subsequent to the reporting date.
- Key risks include substantial leverage and debt covenants, seasonal working-capital borrowing, floating rates, currency exposure, and raw-material availability and pass-through timing. Fruit and vegetable harvests, competition, customer concentration, labor negotiations and international economic conditions may also affect results.
- Nestlé and Campbell represented approximately 12% and 10% of 2012 consolidated sales, respectively. The Campbell metal-container supply agreement was scheduled to end in 2013; discussions to extend it were ongoing, with no assurance of renewal or favorable terms.
- Rationalization charges were $8.7 million in 2012, including plans to close Kingsburg, California and Breinigsville, Pennsylvania facilities and reduce closures-business staffing. No pending legal proceedings were identified as likely to have a material adverse effect; management noted potential environmental and regulatory liabilities.
Most important facts for investors to verify
- Whether Campbell’s supply agreement was extended after its 2013 expiration, and on what economics.
- Post-tender-offer cash, debt and share count, and the effect of the $250 million repurchase on liquidity and leverage.
- Whether new facilities and acquisitions deliver expected utilization, integration benefits and returns, especially PFC and Eastern European capacity.
- How much margin pressure persists from European weakness, production inefficiencies, raw-material pass-through lags and customer pricing.
- Debt maturities, covenant headroom, seasonal revolver usage, pension funding needs and exposure to interest-rate and foreign-exchange changes.