Silgan Holdings Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Financial statements are unaudited. Silgan manufactures metal and plastic containers, closures, and dispensing systems for consumer products.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $1,488.5 million | $1,321.3 million | $3,695.4 million | $3,441.6 million |
| Gross profit | $258.4 million | $207.6 million | $667.5 million | $557.1 million |
| Income before interest and taxes | $174.0 million | $132.7 million | $407.4 million | $288.0 million |
| Net income | $112.9 million | $81.3 million | $248.6 million | $159.0 million |
| Diluted earnings per share | $1.01 | $0.73 | $2.23 | $1.43 |
- Sales rose 12.7% in Q3 and 7.4% for the nine-month period. Gross margin improved to 17.4% from 15.7% in Q3 and to 18.1% from 16.2% year to date. Operating margin was 11.7% versus 10.0% in Q3 and 11.0% versus 8.4% year to date; net margin was 7.6% versus 6.2% and 6.7% versus 4.6%, respectively.
- Q3 sales growth reflected higher volumes across businesses, acquisitions, favorable closures mix and foreign currency translation, partly offset by lower raw-material cost pass-through and less favorable mix in metal and plastic containers. Nine-month earnings also benefited from lower rationalization charges and higher pension income.
- By segment, nine-month sales were $1,962.4 million in metal containers, $1,242.7 million in closures and $490.3 million in plastic containers. Closures growth included the Albéa and Cobra acquisitions; management also cited resilient demand for certain food, health, hygiene and personal-care products.
Cash, debt and liquidity
- Nine-month operating cash flow was $118.5 million, compared with cash used of $2.4 million in 2019. Capital expenditures were $165.2 million. Investing cash use was $1,105.0 million, including $940.9 million for acquisitions.
- At September 30, cash was $193.8 million and total debt was $3,447.8 million, up from $2,244.4 million at December 31, 2019; debt less cash was approximately $3,254.0 million. Current assets were $1,822.1 million and current liabilities $1,242.3 million.
- Available revolving credit, after letters of credit, was $927.3 million plus Cdn $15.0 million. The company reported compliance with financing covenants and said operating cash flow and available borrowing capacity should cover expected needs for the foreseeable future.
- Financing cash flow included $1,639.7 million of long-term debt issuance proceeds and net revolving-loan borrowings. The company issued euro-denominated 2⅛% notes and additional 4⅝% notes, and borrowed $900 million in incremental term loans to fund Albéa.
Material changes, outlook and risks
- Silgan acquired Cobra Plastics in February for $39.8 million and Albéa’s global dispensing business in June for $901.0 million, net of cash acquired. Albéa contributed $81.3 million of Q3 sales and $111.2 million for the post-acquisition portion of the nine-month period. The Albéa purchase-price allocation remained preliminary.
- Management gave no specific numerical earnings or sales guidance. It cited seasonal working-capital needs, historically averaging about $350 million at peak, and noted that fruit and vegetable harvests affect metal-container and some closures demand. Management also said it may pursue further acquisitions and could incur additional debt.
- COVID-19 effects included increased at-home food consumption and weak demand for some beauty products. Silgan had borrowed additional revolving funds earlier in the year to preserve liquidity against potential credit-market disruption.
- Unusual items included $19.0 million of acquisition-related costs, a $3.5 million Albéa inventory purchase-accounting charge, a $2.8 million charge for a prior-period non-commercial legal dispute in plastic containers, and a $1.5 million loss on early debt extinguishment. Nine-month rationalization charges fell to $7.2 million from $48.6 million.
- An EU antitrust investigation involving the metal-packaging industry and Silgan’s subsidiaries remained unresolved; the company said it could not reasonably estimate possible actions or costs. It also expects Central States pension withdrawal-liability cash payments of about $3.1 million annually for 20 years beginning in 2020.
Important facts for investors to verify
- Whether acquisition integration, purchase accounting and the preliminary Albéa valuation affect future margins, cash flows or goodwill.
- Debt repayment capacity, leverage and covenant headroom following the Albéa acquisition; the filing does not provide a clear leverage ratio.
- Durability of pandemic-related volume gains, particularly at-home food demand, and recovery in beauty and beverage markets.
- Potential exposure from the European antitrust investigation and the timing and cost of pension withdrawal-liability payments.
- Seasonal working-capital requirements and cash conversion, including the impact of receivables growth on operating cash flow.