Silgan Holdings Inc. — Q3 2019 Form 10-Q
Business context and period: Silgan manufactures rigid packaging, including metal and plastic containers, closures and dispensing systems. This unaudited filing covers the quarter and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Results are seasonal, with metal-container and some closures sales tied to fruit and vegetable harvests, typically making the third quarter a larger contributor to annual sales and segment income.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $1,321.3 million | $1,307.0 million | $3,441.6 million | $3,378.4 million |
| Gross profit / margin | $207.6 million / 15.7% | $204.1 million / 15.6% | $557.1 million / 16.2% | $537.4 million / 15.9% |
| Income before interest and taxes | $132.7 million | $138.5 million | $288.0 million | $334.8 million |
| Net income | $81.3 million | $84.7 million | $159.0 million | $185.8 million |
| Diluted earnings per share | $0.73 | $0.76 | $1.43 | $1.66 |
| Interest and debt expense | $28.4 million | $28.2 million | $83.9 million | $91.1 million |
Cash flow and liquidity: For the first nine months, operating cash flow was a use of $2.4 million, versus $13.1 million provided in 2018. Capital expenditures were $166.8 million, compared with $134.6 million; cash and cash equivalents ended September at $117.4 million. At September 30, total debt was $2,651.4 million, including $841.4 million classified as current and $1,810.0 million as long-term. The company had $766.0 million outstanding under its revolving credit facility and reported remaining availability of $407.3 million and Cdn $15.0 million, after letters of credit. Management said available cash and borrowing sources should meet foreseeable needs and reported compliance with financing covenants.
Changes and operating drivers
- Q3 sales rose 1.1%; nine-month sales rose 1.9%. Higher metal-container sales, principally reflecting pass-through of higher material and manufacturing costs, drove the increase. Nine-month metal-container volumes also grew; closures sales declined, while plastic-container sales were slightly higher.
- Profitability weakened despite higher sales. Q3 income before interest and taxes fell $5.8 million and its margin declined to 10.0% from 10.6%. Nine-month income before interest and taxes fell $46.8 million and margin declined to 8.4% from 9.9%.
- The main nine-month earnings drag was $48.6 million in rationalization charges, versus $1.5 million a year earlier. Other pension and postretirement income also declined, to $13.3 million from $27.5 million. Strong operating performance and higher container volumes partly offset these items.
- Q3 segment income declined in metal containers and closures, partly offset by improved plastic-container results. For the first nine months, metal-container and closures income fell, while plastic-container income increased.
Outlook, unusual items and risks
- Restructuring and pension withdrawal: The company plans to close metal-container plants in Mt. Vernon, Missouri, and Waupun, Wisconsin, anticipated in Q4 2019, and to withdraw completely from the Central States Pension Plan. Estimated net charges are $3.7 million for plant closings and $56.4 million for the pension withdrawal; $40.7 million had been recorded through September. Remaining pension-withdrawal cash payments are estimated at about $2.8 million annually for 20 years beginning in 2020, with about $1.0 million of annual interest accretion expense. Management does not expect plan savings to be material.
- Debt refinancing: Silgan redeemed its $300 million 5.5% notes in August, funding the redemption with revolving borrowings and cash; it recorded a $1.7 million early-extinguishment charge. After quarter-end, it announced an agreement to issue $400 million of 4⅛% senior notes due 2028. Expected net proceeds of approximately $394.6 million were intended to repay revolving loans used for the redemption and for other corporate purposes. The sale was expected to close November 12, 2019.
- Contingency and exposure: European antitrust investigations involving the metal-packaging industry remained at an early stage; the company said it could not reasonably assess possible actions or costs. Market exposures include interest rates, foreign exchange and natural-gas prices; the company uses hedges for risk management, not speculation. Unfavorable currency translation affected reported sales and comprehensive income.
- Other items: The annual 2019 goodwill and indefinite-lived intangible-asset impairment assessment found no impairment. Adoption of lease accounting added $160.8 million of assets and $161.4 million of liabilities at January 1, 2019, with no material effect on operating results or cash flows. Management provided no specific sales or earnings forecast in this filing.
Important facts for investors to verify
- Progress and final costs of the plant closures and Central States Pension Plan withdrawal, including the long-term payment schedule.
- Revolving-credit availability, seasonal working-capital needs and the classification and repayment timing of current debt.
- Whether sales and margins improve absent rationalization charges, lower pension income and foreign-currency effects.
- Closing and use of proceeds from the announced $400 million notes offering, and the resulting borrowing costs and debt mix.
- Developments in the European antitrust investigations and any change in the company’s ability to estimate potential exposure.