Silgan Holdings Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Silgan manufactures metal and plastic containers, closures, and dispensing systems for consumer products. Figures below are in U.S. dollars; financial statement amounts are unaudited.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,030.4 million | $1,027.1 million |
| Gross profit / margin | $185.1 million / 18.0% | $166.0 million / 16.2% |
| Income before interest and taxes | $102.1 million | $86.7 million |
| Net income | $57.6 million | $46.7 million |
| Diluted earnings per share | $0.52 | $0.42 |
| Operating cash flow | $(168.1) million | $(155.8) million |
| Capital expenditures | $65.1 million | $61.7 million |
Sales were nearly flat, up 0.3%. Management attributed higher volumes across all businesses partly to a March surge in consumer demand related to COVID-19, offset by lower raw-material cost pass-through, less favorable product mix, and unfavorable foreign currency translation. Segment income rose in metal containers ($47.5 million versus $38.9 million), closures ($45.2 million versus $40.3 million), and plastic containers ($22.0 million versus $12.1 million); corporate expense increased to $12.6 million from $4.5 million.
Gross margin expanded 1.8 percentage points. Selling, general and administrative expense increased to $89.9 million from $77.7 million, reflecting, among other items, one-time plant employee incentive payments during the COVID-19 crisis, acquisition-related costs, and foreign currency transaction losses. Rationalization charges decreased to $2.8 million from $6.1 million. Interest expense before a $1.5 million debt-extinguishment charge fell to $23.5 million from $27.1 million. The effective tax rate increased to 25.4% from 21.6%.
Cash, debt and liquidity
Cash and cash equivalents were $614.8 million at March 31, 2020, compared with $203.8 million at year-end 2019 and $141.4 million a year earlier. Cash used in operations was driven in part by seasonal working-capital movements, including increases in receivables and inventory and lower trade payables. Investing cash outflow was $104.4 million, including $39.8 million for the Cobra Plastics acquisition and $65.1 million of capital expenditures. Financing provided $688.7 million, including debt issuance and revolving borrowings.
Total debt principal was $3.05 billion, compared with $2.26 billion at December 31, 2019. This included $827.0 million of revolving loans; current debt was $854.7 million. The company reported $346.3 million and Cdn $15.0 million of remaining revolving capacity after letters of credit. In March, it borrowed $500 million under its revolving facility to increase cash and maintain access to liquidity amid the COVID-19 crisis. Management said cash generation and available borrowing capacity should meet foreseeable operating needs and stated the company was in compliance with its financial and operating covenants.
In February, Silgan issued an additional $200 million of 4⅝% notes and €500 million of 2⅜% notes, using proceeds and revolving borrowings to prepay its U.S. A term loans. The refinancing resulted in a $1.5 million loss on early extinguishment of debt. The filing also reported $13.8 million of dividends paid and $12.7 million of stock repurchases during the quarter.
Outlook, developments and risks
- COVID-19: March demand increased for food, beverage, consumer health and some personal-care products; some beauty product demand weakened. The filing describes related operating costs and liquidity actions but provides no quantified earnings or sales guidance. Future effects are uncertain.
- Pending acquisition: After quarter-end, Silgan signed an agreement to acquire Albéa’s dispensing business for $900 million, subject to adjustments and closing conditions, including antitrust clearances. Closing was expected in the first half of 2020. The company arranged a $900 million delayed-draw term loan to fund the purchase and related costs. The agreement provides for a $25 million break fee if required antitrust clearances are not obtained by the applicable outside date, including any permitted extension.
- Cobra Plastics: Acquired February 4 for $39.8 million net of cash acquired; its results were included in closures and were not significant from the acquisition date through quarter-end.
- Seasonality: Metal container and part of closures sales depend partly on fruit and vegetable harvests. The company historically has higher unit sales and a disproportionate share of segment income in the third quarter; seasonal working-capital needs have historically averaged about $350 million.
- Rationalization and pension obligations: Excluding the Central States Pension Plan withdrawal liability, remaining rationalization expenses were expected to be $1.9 million, primarily through 2020, with $3.6 million of cash expenditures through 2023. Central States withdrawal-liability cash payments were expected to be about $3.1 million annually for 20 years beginning in 2020; related annual interest accretion was expected to average about $1.1 million.
- Contingencies and exposures: European and German competition authorities were investigating the metal packaging industry, including Silgan subsidiaries. The company said it could not reasonably estimate potential actions or costs. Principal market risks include interest rates, foreign exchange and natural-gas prices; the filing reported no material change in risk-management policies.
Important facts for investors to verify
- Whether COVID-19-related demand and additional employee costs persisted after the quarter, and their subsequent effect on volumes, margins and cash flow.
- Completion, financing cost and integration results of the $900 million Albéa acquisition, including antitrust clearance and any break-fee exposure.
- Seasonal working-capital needs, revolving-facility availability and compliance with debt covenants as borrowing needs evolve.
- Potential outcomes and costs of the European metal-packaging antitrust investigation, which the filing does not quantify.
- The duration and cash cost of rationalization plans and the long-term Central States Pension Plan withdrawal liability.