Silgan Holdings Inc. — Q1 2015 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2015, Silgan manufactured rigid packaging through its metal containers, closures and plastic containers businesses. Results are compared with Q1 2014; the interim results are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net sales | $816.6 million | $855.8 million |
| Gross profit / margin | $122.2 million / 15.0% | $128.0 million / 15.0% |
| Operating income / margin | $67.1 million / 8.2% | $68.0 million / 8.0% |
| Net income | $33.3 million | $31.5 million |
| Diluted EPS | $0.53 | $0.49 |
| Cash used in operating activities | $144.5 million | $103.1 million |
| Capital expenditures | $48.8 million | $27.0 million |
Cash and cash equivalents were $129.1 million at March 31, 2015, down from $222.6 million at year-end 2014. Total debt was $1.911 billion, including $474.0 million classified as current; at March 31, 2014, total debt was $1.860 billion. The company reported $603.4 million and Cdn $15.0 million of available revolving credit capacity after letters of credit. Management said operating cash flow and available borrowing capacity should cover expected operating needs, planned capital expenditures, debt service, taxes, pension contributions, repurchases and dividends. The company reported compliance with financing covenants.
Material changes and drivers
- Sales declined 4.6%, primarily from unfavorable foreign currency translation, lower plastic-container volumes, the cessation of Venezuela closures operations, customer-contract effects in plastics, and lower raw-material-cost pass-throughs. Metal and closures unit volumes each rose approximately 2%; plastic-container volume fell approximately 3%.
- Operating income declined 1.3%, while operating margin increased to 8.2% from 8.0%. Closures operating income rose to $21.6 million from $17.8 million; plastic containers fell to $9.2 million from $12.8 million; metal containers were nearly flat at $40.7 million versus $40.5 million.
- Net income and diluted EPS increased despite lower operating income, helped by lower interest and debt expense and the absence of the $1.5 million early debt-extinguishment loss recorded in Q1 2014. Effective tax rates were 34.2% in both periods.
- Operating cash use increased year over year, with large seasonal working-capital uses: receivables consumed $84.7 million and inventories $145.0 million. Financing included a $161.8 million tender-offer share repurchase, plus fees and expenses, funded in part with revolving borrowings. The tender offer bought 2.77 million shares at $58.50 each; approximately $113.6 million remained under the repurchase authorization.
- Other comprehensive loss was $29.7 million, principally reflecting foreign-currency translation. This reduced reported stockholders’ equity, which was $542.9 million at quarter-end versus $710.0 million at year-end 2014.
Outlook, risks and unusual items
The filing provides no specific earnings or revenue guidance. Management cited seasonal working-capital needs, historically averaging about $350 million at peak, and said these typically peak in summer or early fall. The company historically generates higher unit sales and a disproportionate share of annual operating income in Q3 due to harvest-related demand. Management expected approximately $6.8 million of rationalization cash spending over the next 12 months; remaining rationalization expenses were estimated at $2.6 million.
Risks and operating pressures discussed include harvest variability and seasonality, foreign-exchange movements, interest-rate and natural-gas price exposure, weaker demand and lower volumes in plastics, unfavorable longer-term customer-contract economics, and delays in planned plastic-container cost reductions. Interest-rate and natural-gas swaps were used for hedging, not speculation; natural-gas swaps covered approximately 29% of estimated 12-month exposure. Management stated there had been no material change in market-risk exposures or related policies since the prior annual filing.
Important facts for investors to verify
- Whether plastic-container contract economics and delayed cost-saving actions improve, and whether segment operating performance stabilizes.
- How seasonal working-capital demands affect operating cash flow, revolving borrowings and liquidity through the summer and fall.
- Debt maturities and refinancing needs: $474.0 million was classified as current at quarter-end, including bank facilities and foreign bank loans.
- Whether foreign-exchange effects, harvest conditions and raw-material pass-through timing materially change sales, margins or equity.
- Actual rationalization spending, covenant compliance and the company’s use of the remaining share-repurchase authorization.