Silgan Holdings Inc. — Q2 2014 Form 10-Q
Business and period: Manufacturer of metal containers, closures and plastic containers for food and other consumer products. This unaudited report covers the quarter and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Results are seasonal, with historically higher volume and a disproportionate share of operating income in Q3.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $917.3 million | $880.0 million | $1,773.2 million | $1,675.8 million |
| Gross profit / margin | $143.7 million / 15.7% | $128.2 million / 14.6% | $271.7 million / 15.3% | $239.4 million / 14.3% |
| Operating income / margin | $86.1 million / 9.4% | $74.9 million / 8.5% | $154.1 million / 8.7% | $133.0 million / 8.0% |
| Net income | $44.0 million | $59.5 million | $75.5 million | $85.0 million |
| Diluted EPS | $0.69 | $0.93 | $1.18 | $1.30 |
Revenue grew 4.2% in Q2 and 5.8% in the first half; operating income rose 15.0% and 15.9%, respectively. Net income and EPS declined largely because 2013 included a $19.8 million favorable tax adjustment related primarily to completion of an IRS audit. Excluding that adjustment, management reported effective tax rates of 34.4% for Q2 2014 versus 33.2% in Q2 2013, and 34.4% for the first half versus 35.0%.
Cash flow and liquidity: First-half operating cash flow was a use of $162.8 million, compared with a $159.2 million use in 2013, mainly reflecting seasonal working-capital investment. Investing cash use was $59.6 million, including $60.0 million of capital expenditures. Cash declined $26.5 million from year-end to $133.9 million. At June 30, total debt was $2.017 billion, including $463.1 million classified as current; the company had $626.0 million available under its revolving facility after letters of credit. The company said cash generation and borrowing availability should cover foreseeable needs and reported compliance with debt covenants.
Other metrics: Q2 and first-half dividends were $0.15 and $0.30 per share, respectively. Q2 operating performance benefited by $5.6 million before tax ($0.06 per diluted share after tax) from extending estimated useful lives of certain equipment; the first-half benefit was $11.4 million before tax ($0.12 per diluted share). Management expected 2014 depreciation and amortization of approximately $155 million, versus $167.6 million in 2013.
Material changes and management commentary
- Closures sales rose 28.0% in Q2 and 30.2% in the first half, primarily reflecting the October 2013 Portola Packaging acquisition and favorable currency translation. Metal-container sales fell 2.4% in Q2 and 0.8% in the first half; plastic-container sales were down 0.6% in Q2 and up 0.5% for the half.
- Operating-income growth reflected Portola, lower depreciation and manufacturing costs, product mix and, in metal containers, higher inventory build. Offsets included lower volumes, the impact of longer-term customer contract renewals and extensions, and losses in Venezuela.
- Debt was refinanced in January 2014 through a new senior secured credit agreement that management said provided better pricing, additional capacity, longer maturities and greater flexibility. The refinancing produced a $1.5 million early-extinguishment charge.
Outlook, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management expects to fund operations, capital spending, debt service and shareholder distributions through operating cash flow and available borrowings, and continues to assess acquisitions.
- Seasonal working-capital needs historically average approximately $350 million and generally peak in summer or early fall. The filing notes weather-dependent fruit and vegetable harvests can affect sales and operating results.
- Venezuelan operations recorded losses of $2.9 million in Q2 and $3.4 million in the first half of 2014. Foreign-exchange movements, interest rates and commodity prices are identified exposures; the company uses hedging instruments for certain risks and states they are not used for speculation.
- Remaining rationalization expenses and cash expenditures were estimated at $3.5 million and $5.9 million, respectively, primarily in 2014. The company also estimated $2.4 million of derivative losses, net of tax, would be reclassified to earnings over the next 12 months.
- The IRS had begun reviewing tax years 2012 and 2013; management did not expect a material change in unrecognized tax benefits over the next 12 months. The impact of the new revenue-recognition standard, effective for Silgan January 1, 2017, was still under evaluation.
Investor verification priorities
- Assess whether seasonal working-capital outflows reverse as expected and track revolver usage and debt maturities.
- Separate recurring earnings from the useful-life estimate benefit, Portola contribution, Venezuela losses and prior-year tax benefit.
- Monitor volume trends, customer contract renewals, and the sustainability of margin improvement across the three segments.
- Verify progress on rationalization spending, Venezuela-related exposures, and the company’s evaluation of the revenue-recognition standard.