Silgan Holdings Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Silgan manufactures rigid packaging for consumer goods across metal containers, closures and dispensing systems, and plastic containers. Results include Silgan Dispensing Systems (SDS) from its April 6, 2017 acquisition; comparisons with 2016 therefore include an acquisition-related change in business mix.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $1,266.9 million | $1,139.6 million | $3,094.2 million | $2,807.0 million |
| Gross profit / margin | $212.6 million / 16.8% | $181.9 million / 16.0% | $502.3 million / 16.2% | $423.5 million / 15.1% |
| Operating income / margin | $138.6 million / 10.9% | $122.4 million / 10.7% | $270.6 million / 8.7% | $247.5 million / 8.8% |
| Net income | $72.4 million | $69.8 million | $123.5 million | $129.7 million |
| Diluted EPS | $0.65 | $0.57 | $1.11 | $1.07 |
- Q3 sales rose 11.2% and operating income rose 13.2%; net income increased 3.7%. Nine-month sales rose 10.2% and operating income rose 9.3%, while net income declined 4.7%.
- Q3 results benefited from SDS, improved plastic-container performance and lower rationalization charges. Nine-month net income was affected by higher interest expense and a $7.1 million debt-extinguishment loss.
- Operating cash flow was a use of $4.5 million in the first nine months, versus a use of $11.6 million in 2016. The filing attributes significant working-capital cash use to receivables, which increased by $285.9 million in the cash-flow reconciliation.
- Investing cash outflow was $1,152.4 million, including $1,028.7 million for SDS and $124.2 million of capital expenditures. Financing cash inflow was $1,331.3 million. Cash increased $174.5 million to $199.2 million.
Balance sheet, debt and liquidity
- At September 30, 2017, total debt was $3,106.2 million, compared with $1,818.4 million at September 30, 2016; cash was $199.2 million. Debt increased substantially to fund the SDS acquisition and related refinancing.
- Current debt, including revolving loans, was $640.4 million; long-term debt was $2,465.8 million. The company reported $571.8 million of available revolving capacity, plus Cdn $15.0 million, after letters of credit.
- The amended credit agreement provides approximately $1.19 billion of multicurrency revolving capacity, matures in 2022, and includes $800 million of U.S. term loans maturing in 2023. The company reported compliance with all financial and operating covenants.
- Dividends were $0.09 per share for Q3 and $0.27 per share for the first nine months. The company had approximately $129.4 million remaining under its share-repurchase authorization.
Material changes and management commentary
- SDS was acquired for $1.029 billion, net of cash acquired. It contributed $149.8 million of Q3 sales and $21.0 million of Q3 operating income; nine-month contributions were $292.5 million and $28.7 million. The nine-month operating contribution included an $11.9 million purchase-accounting inventory charge. The purchase-price allocation remained preliminary.
- Closures sales grew 68.6% in Q3, mainly because of SDS; legacy closures volumes fell approximately 7%. Metal-container sales declined 3.1%, with volumes down about 5%, reflecting an unfavorable fruit and tomato pack and lower soup volumes. Plastic-container sales increased 5.3%, including volume growth of approximately 3%.
- Management cited higher raw-material cost pass-throughs and favorable currency translation as sales drivers. Operating results also reflected lower manufacturing costs and rationalization charges, offset in part by lower volumes, higher depreciation, indexed deflation pass-throughs in metal containers, lagged resin-cost pass-throughs in plastics, and acquisition costs.
- Interest and other debt expense rose to $30.6 million in Q3 from $17.3 million, and to $87.3 million for nine months from $50.7 million, primarily due to higher borrowing levels and weighted-average interest rates.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management said operating cash generation and available borrowing facilities should cover expected operating needs, planned capital expenditures, debt service, taxes, pension contributions, repurchases and dividends for the foreseeable future; it may take on further debt for acquisitions.
- Results are seasonal: fruit and vegetable harvests affect metal-container and some closures sales, with historically higher sales and a disproportionate share of annual operating income in Q3. Weather and customer activity can materially affect volumes.
- Other risks include raw-material and energy prices, interest and foreign-exchange exposure, integration of SDS, and leverage. A German competition authority antitrust investigation involving industry participants, including Silgan subsidiaries, remained at an early stage; the company said it could not estimate potential actions or costs.
- Rationalization charges were $4.5 million for nine months, down from $13.9 million. Additional cash spending of $4.3 million was expected through 2023. The company reported no impairment in its 2017 annual goodwill assessment.
- Management stated disclosure controls were effective. SDS controls were still being integrated and were scheduled for inclusion in the company’s 2018 internal-control assessment.
Important facts for investors to verify
- How much of sales and earnings growth is attributable to SDS versus organic volumes, pricing and currency, and how SDS performs after integration.
- Whether operating cash flow improves as seasonal receivables unwind, and the ongoing working-capital and capital-expenditure requirements.
- Debt maturities, interest costs, covenant headroom and liquidity after seasonal borrowing needs; the filing reports covenant compliance but does not provide a specific covenant cushion here.
- Whether weaker metal-container and legacy-closures volumes persist, and the effects of harvest conditions, customer demand and raw-material pass-through timing.
- Developments in the German antitrust investigation and any change to the preliminary SDS purchase-price allocation or acquisition-related costs.