Silgan Holdings Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods unless stated otherwise. Silgan manufactures metal containers, closures and plastic containers for consumer products. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net sales | $914.2 million | $917.3 million | $1,730.8 million | $1,773.2 million |
| Gross profit / margin | $133.7 million / 14.6% | $143.7 million / 15.7% | $255.9 million / 14.8% | $271.7 million / 15.3% |
| Operating income / margin | $78.3 million / 8.6% | $86.1 million / 9.4% | $145.4 million / 8.4% | $154.1 million / 8.7% |
| Net income | $42.2 million | $44.0 million | $75.5 million | $75.5 million |
| Diluted EPS | $0.70 | $0.69 | $1.22 | $1.18 |
| Interest and other debt expense | $16.8 million | $19.0 million | $33.2 million | $39.1 million |
For the six-month period, 2014 interest expense includes a $1.5 million loss on early debt extinguishment; 2015 had no such loss. The 2015 effective tax rate was 31.3% in Q2 and 32.6% for six months, versus 34.4% in both 2014 periods.
Cash flow, debt and liquidity
- Six-month operating cash flow was a use of $136.8 million, compared with a use of $162.8 million in 2014. Working-capital changes included a $140.4 million use from receivables and a $212.8 million use from inventories.
- Capital expenditures were $98.2 million, versus $60.0 million in the prior-year period; net investing cash use was $98.7 million. Cash declined $95.9 million to $126.7 million.
- At June 30, 2015, total debt was $1.984 billion, including $532.6 million classified as current and $1.451 billion as long-term. Total debt was $2.017 billion at June 30, 2014 and $1.599 billion at December 31, 2014. Cash was $126.7 million.
- Revolving loans outstanding under the Credit Agreement were $407.0 million. After letters of credit, reported availability was $555.9 million plus Cdn $15.0 million. Management reported compliance with financing covenants and expected continued compliance during 2015.
- Financing activities included $170.1 million of common-stock repurchases and $20.1 million of dividends paid. The February–March modified Dutch auction repurchased 2.77 million shares for $161.8 million, excluding fees; $106.0 million remained under the repurchase authorization at June 30.
Material changes and management commentary
- Q2 sales declined 0.3%; six-month sales declined 2.4%. Management attributed the six-month decrease principally to $74.5 million of unfavorable foreign-currency translation, lower resin-cost pass-through in closures and plastic containers, contract-renewal effects, weaker plastic-container volumes and the cessation of Venezuelan operations at the end of 2014.
- Q2 operating income fell 9.1%; six-month operating income fell 5.6%. Reported pressures included higher manufacturing costs, less efficient Van Can operations, plastic-container manufacturing inefficiencies and customer contract renewals, unfavorable currency translation, and weaker plastic-container volume. Lower SG&A and interest expense partly offset the pressures.
- Metal-container sales rose 6.7% in Q2, supported by about 11% higher unit volume, including Van Can, while closures and plastic-container sales declined. For the six months, closures operating income improved 7.4%, partly reflecting the prior-year Venezuelan operating losses; plastic-container operating income declined 27.9%.
- Silgan’s business is seasonal: metal-container and some closures sales depend partly on fruit and vegetable harvests, and management historically sees higher volume and a disproportionate share of annual operating income in Q3. Seasonal working-capital needs have historically averaged about $350 million and may be funded with borrowings.
- Management said operating cash flow and available borrowing capacity should be sufficient for expected operating needs, planned capital expenditures, debt service, taxes, pension contributions, repurchases and dividends. It continues to evaluate acquisitions; no specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- A German competition authority opened an antitrust investigation involving the German metal-packaging industry association and its members, including Silgan subsidiaries. Because it is at an early stage, Silgan said it could not assess possible actions or estimate related costs.
- Rationalization charges were $1.7 million for the first six months. The filing estimated $2.5 million of remaining expenses and $6.5 million of cash expenditures for the plans within the next 12 months.
- Silgan uses interest-rate and natural-gas swaps and internal foreign-currency hedging strategies; it stated that it does not use derivatives for trading or speculation. Natural-gas swaps covered about 21% of estimated 12-month exposure. Currency movements materially affected reported results and other comprehensive income.
- The filing states that other ordinary-course legal proceedings and claims are not expected to have a material adverse effect. Interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether plastic-container contract renewals, volume weakness, delayed cost programs and manufacturing inefficiencies improve in subsequent quarters.
- How seasonal inventory and receivables affect cash flow and revolving borrowings during the peak packing season.
- The outcome and potential financial exposure, if any, from the German antitrust investigation.
- Progress integrating and improving the efficiency of Van Can operations, and execution of planned rationalization spending.
- Repurchase pace, remaining authorization and debt levels, alongside currency effects and the company’s seasonal liquidity needs.