Business context and reporting period
Silgan Holdings Inc. manufactures rigid packaging, including metal containers, closures and plastic containers. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,203.5 million | $1,228.4 million | $2,934.4 million | $3,001.6 million |
| Gross profit / margin | $185.1 million / 15.4% | $205.6 million / 16.7% | $441.0 million / 15.0% | $477.3 million / 15.9% |
| Operating income / margin | $121.9 million / 10.1% | $147.6 million / 12.0% | $267.3 million / 9.1% | $301.7 million / 10.1% |
| Net income | $70.3 million | $83.3 million | $145.9 million | $158.8 million |
| Diluted EPS | $1.16 | $1.31 | $2.37 | $2.49 |
- Sales declined 2.0% in Q3 and 2.2% over nine months. Operating income fell 17.5% and 11.4%, respectively; net income fell 15.6% and 8.1%.
- For the first nine months, operating cash flow was negative $48.2 million, versus negative $52.5 million in 2014. Working-capital outflows included receivables of $325.3 million and inventories of $43.7 million. Investing cash use was $151.9 million, including $151.4 million of capital expenditures. Financing provided $81.7 million.
- Cash was $104.2 million at September 30, 2015, down from $222.6 million at year-end 2014. Total debt was $1.932 billion, including $482.9 million classified as current; long-term debt was $1.449 billion. Revolving loans outstanding under the Credit Agreement were $357.0 million. Availability, after letters of credit, was $605.9 million and Cdn $15.0 million.
- Q3 dividends were $0.16 per share; nine-month dividends were $0.48 per share. The company spent $170.1 million on share repurchases in the first nine months.
Material changes and management commentary
- Metal-container sales increased 2.1% in Q3 and 2.4% year to date, supported by higher unit volumes, including Van Can-related smaller-can volume and pet food products. Operating income declined, primarily due to manufacturing and logistics costs, product mix and foreign currency effects.
- Closures sales fell 10.5% in Q3 and 9.6% year to date, mainly from unfavorable currency translation, lower resin-cost pass-throughs and the cessation of Venezuelan operations. Year-to-date operating income increased 3.7%, helped by volume, resin-cost timing and prior-year Venezuelan losses.
- Plastic-container sales declined 10.8% in Q3 and 8.9% year to date. Q3 operating results swung to a $7.3 million loss from $13.1 million income; year-to-date operating income fell 71.0% to $11.3 million. Management cited footprint-optimization costs and inefficiencies, customer contract renewals, lower volumes and the absence of a prior-year customer reimbursement.
- Unfavorable foreign currency translation reduced sales by approximately $41 million in Q3 and $115 million year to date. Lower raw-material-cost pass-throughs also reduced reported sales.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects operating cash generation and available borrowing capacity to cover operating needs, planned capital expenditures, debt service, taxes, pension contributions, repurchases and dividends for the foreseeable future. The company reported compliance with financing covenants and expected continued compliance during 2015.
- Management reported $10.8 million of rationalization charges for the first nine months, including $8.9 million in Q3 related to planned shutdowns of two Midwest plastic-container facilities. Remaining estimated rationalization expense and cash spending were $3.7 million and $7.2 million, respectively, expected within 12 months.
- A German competition authority opened an antitrust investigation involving the metal-packaging industry association and members, including Silgan subsidiaries. At this early stage, the company could not estimate possible actions or costs. Other ordinary-course legal matters were not expected to have a material adverse effect.
- Seasonality is significant: harvest-related demand generally makes third-quarter volume and operating income disproportionate to the full-year result. Management also cited manufacturing/logistics challenges and plastic-container optimization as pressures.
- The company uses interest-rate, natural-gas and foreign-currency risk-management measures and stated there had been no material change in its market-risk exposure or policies. Natural-gas swaps covered approximately 41% of estimated 12-month exposure; the company does not use derivatives for speculative purposes.
Important facts for investors to verify
- Whether plastic-container optimization and customer-contract economics improve, and whether the planned facility shutdowns deliver expected savings after near-term costs.
- How seasonal working-capital needs, receivables and inventory affect cash generation and revolving borrowings.
- Debt maturities and repayment needs: $482.9 million was classified as current at quarter-end; verify refinancing and liquidity capacity against seasonal requirements.
- Progress and potential financial consequences of the German antitrust investigation, which the filing says cannot yet be estimated.
- Whether management’s liquidity and covenant-compliance expectations remain valid as capital spending, dividends and repurchases continue.