Silgan Holdings Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Silgan manufactures rigid packaging, including metal and plastic containers and closures. Amounts below are in U.S. dollars; financial statement figures are converted from thousands to millions where appropriate.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | $792.7 million | $816.6 million |
| Gross profit / margin | $113.9 million / 14.4% | $122.2 million / 15.0% |
| Operating income / margin | $57.4 million / 7.2% | $67.1 million / 8.2% |
| Interest and other debt expense | $16.5 million | $16.4 million |
| Net income | $26.6 million | $33.3 million |
| Diluted earnings per share | $0.44 | $0.53 |
| Operating cash flow | $(150.8) million | $(143.7) million |
| Capital expenditures | $62.0 million | $48.8 million |
Cash and cash equivalents were $66.6 million at March 31, 2016, versus $129.1 million a year earlier and $99.9 million at year-end 2015. Total debt principal was $1.83 billion (carrying value $1.82 billion), compared with $1.91 billion a year earlier; current debt was $449.5 million, including seasonal borrowings. The company had $299.0 million drawn under its main revolving credit facility, with $663.6 million and Cdn $15.0 million available after letters of credit. Management said it was in compliance with financing covenants and expected to remain compliant in 2016.
Changes versus prior year
- Sales fell 2.9%, mainly from lower raw-material cost pass-through, unfavorable foreign-currency translation, and lower plastic-container volumes. Metal-container and closures volumes increased.
- Operating income declined 14.5%; net income fell about 20%, and diluted EPS decreased from $0.53 to $0.44. Operating margin contracted by 1.0 percentage point.
- Metal Containers sales declined 1.2% and operating income fell 7.6%, with higher manufacturing and Iowa facility start-up costs partly offset by higher volumes.
- Closures sales declined 1.0%, but operating income rose 13.4% on higher volumes and manufacturing efficiencies.
- Plastic Containers sales declined 10.3%; operating income dropped to $0.1 million from $9.2 million. The filing cites lower volumes, foreign exchange, start-up costs, inefficiencies related to footprint optimization, and higher rationalization charges.
- Operating cash use increased to $150.8 million from $143.7 million. Working-capital needs remained substantial, including inventory growth and lower payables; financing included $299.2 million of net revolving-loan borrowings. No shares were repurchased under the company’s repurchase authorization in Q1 2016, compared with $162.6 million of repurchases in Q1 2015.
Outlook, risks, and unusual items
- No specific earnings or sales guidance was provided. Management expected operating cash flow and available borrowing capacity to fund expected operating needs, capital spending, debt service, taxes, pension contributions, dividends, and share repurchases for the foreseeable future; acquisitions may require additional borrowing.
- Seasonality is significant: harvest-related packaging demand historically produces higher unit sales in Q3 and a disproportionate share of annual operating income. Peak seasonal working-capital needs have historically averaged approximately $350 million.
- Management attributed weaker results partly to higher manufacturing costs and start-up costs at new facilities, foreign-currency effects, plastic-container footprint optimization, and resin-cost pass-through timing. The effective tax rate rose to 35.2% from 34.2%, including an unfavorable cumulative adjustment for a foreign tax-law change.
- Rationalization charges were $1.1 million in Q1; approximately $9.5 million of remaining expenses and $9.2 million of cash expenditures were expected, primarily within the next 12 months.
- A German competition authority was investigating the metal-packaging industry association and members, including Silgan subsidiaries. Given the investigation’s early stage, the company could not estimate potential actions or costs. Other ordinary-course legal matters were not expected to have a material adverse effect.
- Silgan uses interest-rate and natural-gas swaps and foreign-currency hedging strategies; it reported no material change in market-risk exposures since its 2015 Form 10-K. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether plastic-container margins recover as footprint optimization and new-facility start-up costs subside.
- Seasonal working-capital borrowing, cash generation, and available revolving-credit capacity through the peak season.
- Progress and remaining spending on rationalization plans and manufacturing facilities.
- Developments in the German antitrust investigation and any resulting exposure.
- Effects of raw-material pass-through timing, foreign exchange, harvest conditions, and the higher effective tax rate on subsequent results.