Silgan Holdings Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Silgan manufactures rigid packaging, including metal and plastic containers, closures and dispensing systems. Results include the Silgan Dispensing Systems (SDS) business acquired in April 2017; the prior-year quarter did not.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $1,012.3 million | $805.4 million |
| Gross profit / margin | $160.0 million / 15.8% | $118.0 million / 14.7% |
| Income before interest and taxes | $92.2 million / 9.1% of sales | $56.8 million / 7.1% of sales |
| Net income | $45.7 million | $23.2 million |
| Diluted earnings per share | $0.41 | $0.21 |
| Operating cash flow | $(90.1) million | $(140.9) million |
| Capital expenditures | $49.2 million | $38.9 million |
Sales increased 25.7%; management attributed the increase mainly to SDS, higher raw-material cost pass-through, favorable currency translation and higher plastic-container volumes. Income before interest and taxes rose 62.3%. Gross margin improved 1.1 percentage points, while SG&A fell to 7.6% of sales from 8.5%. The effective tax rate was 25.9%, versus 31.0%.
Segment sales were $486.0 million for metal containers, $370.3 million for closures and $156.0 million for plastic containers. Segment income was $37.1 million, $48.2 million and $11.1 million, respectively. Metal-container segment income declined 15.5%, while closures and plastics increased 102.5% and 63.2%; the closures comparison includes SDS.
Cash, debt and liquidity
Cash and cash equivalents were $174.5 million at March 31, 2018, up from $53.5 million at year-end. Operating activities used $90.1 million, primarily reflecting working-capital needs. Net cash provided by financing was $258.3 million. Debt totaled $2.93 billion, including $758.7 million classified as current; stockholders’ equity was $824.8 million. The filing reported $755.5 million and Cdn $15.0 million of available revolving capacity after letters of credit. The company said it expected operating cash flow and available borrowing capacity to meet foreseeable needs and reported compliance with financing covenants.
On April 16, 2018, Silgan redeemed $280 million of 5% Senior Notes using revolving borrowings and cash on hand. It expected a second-quarter 2018 pre-tax debt-extinguishment charge of approximately $1.4 million.
Material changes, outlook and risks
- Acquisition and comparability: SDS materially increased closures sales and income. Q1 2017 also included $13.2 million of announced-acquisition costs and a $2.7 million debt-extinguishment loss; neither item was reported in Q1 2018.
- Operating factors: Metal-container results were pressured by lower seasonal inventory build, less favorable product mix and lower unit volumes. Legacy closures volumes also declined; plastics benefited from higher volumes and lower manufacturing costs.
- Accounting change: Silgan adopted the new revenue-recognition standard on January 1, 2018. It increased opening retained earnings by $9.1 million and changed the timing of revenue recognition for certain production contracts. Prior-year figures were not restated, limiting direct comparability. The company said adoption did not materially affect financial position, results or cash flows.
- Seasonality: Fruit and vegetable harvests affect metal containers and some closures. Sales and income have historically been concentrated in the third quarter; seasonal working-capital needs may require short-term borrowing.
- Contingencies and market risks: European Commission antitrust proceedings involving the metal-packaging industry began in late April 2018, following a German investigation. Silgan said it could not yet assess potential actions or costs. Other stated exposures include interest rates, foreign exchange and commodity prices; it reported no material change in market-risk disclosures.
- Guidance: The filing provides no specific earnings or revenue forecast. Management described liquidity as sufficient for expected needs and continued to evaluate acquisition opportunities.
Investor facts to verify
- How much of sales and earnings growth reflects SDS and other acquisition effects versus organic demand and pricing?
- Can operating cash flow improve as seasonal working-capital investment reverses, and how will seasonal borrowing affect interest expense?
- What are the eventual findings, potential penalties or other consequences of the European antitrust investigation?
- What were the final effects of the revenue-recognition adoption and the 2017 Tax Act measurement-period adjustments?
- How did the April 2018 note redemption change borrowing levels, interest costs and available revolving capacity?