Silgan Holdings Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Silgan manufactures rigid packaging, closures and dispensing systems, and plastic containers for consumer products. This unaudited filing covers the quarter and six months ended June 30, 2020, compared with the same periods in 2019. Reportable segments are metal containers, closures, and plastic containers.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $1,176.5 million | $1,093.2 million | $2,206.9 million | $2,120.3 million |
| Gross profit / margin | $224.1 million / 19.1% | $183.5 million / 16.8% | $409.2 million / 18.5% | $349.5 million / 16.5% |
| Income before interest and taxes / margin | $131.2 million / 11.2% | $68.6 million / 6.3% | $233.4 million / 10.6% | $155.3 million / 7.3% |
| Net income | $78.2 million | $31.0 million | $135.8 million | $77.7 million |
| Diluted EPS | $0.70 | $0.28 | $1.22 | $0.70 |
First-half sales rose 4.1%; management attributed growth mainly to higher volumes across all businesses, acquisitions, and a favorable closures mix, partly offset by lower raw-material cost pass-throughs, less favorable metal and plastic product mix, and unfavorable currency translation. In Q2, sales increased 7.6%. Closures sales benefited from acquired businesses and demand for consumer health, hygiene, personal care, and food products; some beauty and beverage demand was weak.
First-half operating cash flow was negative $63.8 million, versus negative $129.1 million in 2019. Working-capital uses included $179.9 million from receivables, $148.1 million from inventory, and $68.0 million from accounts payable. Investing cash outflow was $1,046.6 million, including $941.1 million for acquisitions and $106.4 million of capital expenditures. Financing provided $1,100.3 million. Cash was $191.1 million at June 30, 2020.
Total debt principal was $3,520.6 million ($3,497.8 million carrying value), compared with $2,258.9 million principal at December 31, 2019. Debt included $354.0 million of revolving loans and $900 million of incremental term loans drawn to finance the Albéa acquisition. Revolver availability, after letters of credit, was $819.3 million and Cdn $15.0 million. Management said it expected operating cash and available borrowing capacity to cover foreseeable needs and expected to remain in covenant compliance.
Material changes and notable items
- On June 1, Silgan acquired Albéa’s global dispensing business for $901.3 million net of cash acquired; it contributed $29.9 million of sales after acquisition. The preliminary allocation included $508.9 million goodwill and $287.0 million intangible assets. The company also acquired Cobra Plastics in February for $39.8 million net of cash.
- First-half segment income increased to $119.3 million in metal containers, $103.8 million in closures, and $45.0 million in plastic containers. The comparison benefited substantially from rationalization charges declining to $4.7 million from $45.4 million, including much lower metal-container charges.
- SG&A increased by $32.7 million in the first half, reflecting $18.3 million of acquisition-related costs, acquired-business expenses, one-time plant employee incentive payments, and a $2.8 million charge for a non-commercial legal dispute relating to prior periods. Q2 also included a $3.5 million Albéa inventory purchase-accounting charge.
- Silgan issued additional $200 million 4⅝% notes and €500 million 2⅜% notes in February, using proceeds and revolver borrowings to prepay U.S. term loans. It recorded a $1.5 million early-debt-extinguishment loss. The $900 million incremental term loan matures in 2024.
- First-half dividends paid were $27.1 million; share repurchases totaled $13.2 million. The company reported a $38.0 million first-half foreign-currency translation loss in other comprehensive income.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management cited continued higher demand for products consumed in the home and other essential consumer categories, while noting weak demand in certain beauty and beverage products. It also stated that the business is seasonal: working-capital needs typically peak in summer or early fall, and historically average about $350 million; the third quarter has generally generated a disproportionate share of annual segment income.
Silgan temporarily borrowed additional revolver funds in connection with potential COVID-19-related credit-market disruption and repaid those additional borrowings in June. The filing does not quantify COVID-19’s overall financial impact. Risks include seasonal working-capital demands, interest-rate, currency and natural-gas price exposure, and acquisition integration. A European Commission antitrust investigation involving the metal-packaging industry remained unresolved; Silgan said it could not reasonably assess potential actions or costs. The company is integrating Albéa’s controls and procedures, which are to be included in its fiscal 2021 internal-control assessment. Disclosure controls were reported effective.
Important facts for investors to verify
- Whether acquired Albéa and Cobra operations deliver expected growth, synergies, and returns, and whether the preliminary Albéa purchase-price allocation changes.
- How seasonal working capital, negative first-half operating cash flow, and elevated debt affect liquidity and leverage in the second half.
- Whether the stronger margins persist after accounting for lower prior-year rationalization charges, acquisition costs, inventory step-up, and the prior-period legal-dispute charge.
- Developments in the European antitrust investigation, long-term pension withdrawal payments, and integration of Albéa’s financial controls.