Silgan Holdings Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Silgan manufactures rigid packaging, including metal and plastic containers, closures and dispensing systems. Results are unaudited. Per-share and share figures for 2016 have been adjusted for the May 2017 two-for-one stock split.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net sales | $1,021.8 million | $874.6 million | $1,827.2 million | $1,667.4 million |
| Gross profit | $165.2 million | $127.7 million | $289.8 million | $241.6 million |
| Gross margin | 16.2% | 14.6% | 15.8% | 14.5% |
| Operating income | $75.2 million | $67.7 million | $132.0 million | $125.1 million |
| Operating margin | 7.4% | 7.7% | 7.2% | 7.5% |
| Net income | $27.9 million | $33.3 million | $51.2 million | $59.9 million |
| Diluted EPS | $0.25 | $0.27 | $0.46 | $0.49 |
Q2 sales rose 16.8%; six-month sales rose 9.6%. Growth primarily reflected the April acquisition of Silgan Dispensing Systems (SDS) and pass-through of higher raw-material costs. Q2 operating income increased 11.1%, while six-month operating income increased 5.5%; net income and diluted EPS declined in both comparisons. Higher selling, general and administrative expenses and interest costs weighed on margins and earnings.
For the six months, operating cash flow was negative $138.8 million (versus negative $162.7 million in 2016), including substantial working-capital outflows. Investing cash flow was negative $1,102.9 million, primarily the $1,022.1 million net cash acquisition cost for SDS; capital expenditures were $81.3 million. Financing cash flow was positive $1,359.1 million. Cash increased $117.4 million to $142.1 million.
At June 30, 2017, total debt was $3,093.8 million, compared with $1,561.6 million at year-end 2016; cash was $142.1 million. Revolving loans were $609.6 million, with $561.1 million of U.S.-dollar revolving capacity and Cdn $15.0 million available after letters of credit. Management reported compliance with financing covenants.
Material changes and unusual items
- Silgan acquired SDS from WestRock on April 6 for approximately $1.022 billion net of cash acquired, funded with term and revolving borrowings. SDS contributed $142.7 million of reported sales and $7.7 million of operating income after acquisition; its 2016 sales were approximately $570 million. The purchase-price allocation remains preliminary.
- Q2 results included an $11.9 million pre-tax purchase-accounting inventory write-up for SDS, $9.8 million of acquisition-related costs and a $4.4 million loss on early debt extinguishment. Six-month acquisition-related costs were $23.0 million and the debt-extinguishment loss was $7.1 million. A $3.0 million charge related to resolution of a past non-commercial legal dispute was also recorded.
- In February, Silgan issued $300 million of 4.75% notes and €650 million of 3.125% notes, both due 2025. It amended and restated its secured credit agreement in March and partially redeemed $220 million of 5% notes in April.
- Closures sales increased sharply, largely because of SDS. Legacy closures unit volumes declined, including lower single-serve beverage sales versus a record prior-year quarter. Metal and plastic container sales were comparatively stable, with raw-material cost pass-through affecting reported revenue.
Outlook, risks and contingencies
Management provided no specific earnings or revenue guidance. It expects operating cash generation and available borrowing capacity to cover operating needs, planned capital expenditures, debt service, taxes, pension contributions, dividends and share repurchases for the foreseeable future, while noting that future acquisitions could require additional debt. Seasonal working-capital needs generally peak in summer or early fall; historical peak needs averaged approximately $350 million, and the third quarter has typically generated a disproportionate share of annual operating income.
Risks include acquisition integration and financing, variable interest rates, foreign-exchange and commodity-price exposure, and harvest-driven seasonality. A German competition authority antitrust investigation involving the metal-packaging industry and Silgan subsidiaries remains at an early stage; the company cannot estimate potential actions or costs. Management said disclosure controls were effective; SDS controls are being integrated and are scheduled for inclusion in the company’s 2018 internal-control assessment.
Silgan is scheduled to adopt new revenue-recognition guidance on January 1, 2018; management said it may accelerate recognition for certain customer-specific production arrangements and had not selected a transition method. The filing does not provide a clear quantified impact.
Key facts for investors to verify
- How SDS performs after acquisition, including integration, realized synergies, and the final purchase-price allocation.
- Whether seasonal working-capital outflows reverse and operating cash flow improves in the second half.
- Debt levels, interest expense, covenant headroom, and available revolver capacity following the acquisition and refinancing.
- Whether legacy closures volumes recover and whether higher raw-material costs continue to be passed through without margin pressure.
- Developments in the German antitrust investigation and the financial or operational effects, if any.