Silgan Holdings Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Silgan manufactures rigid packaging, including metal and plastic containers, closures and dispensing systems. Figures below are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,307.0M | $1,266.9M | $3,378.4M | $3,094.2M |
| Gross profit | $204.1M | $205.6M | $537.4M | $482.3M |
| Gross margin | 15.6% | 16.2% | 15.9% | 15.6% |
| Income before interest and taxes | $138.5M | $138.6M | $334.8M | $270.6M |
| Net income | $84.7M | $72.4M | $185.8M | $123.5M |
| Diluted EPS | $0.76 | $0.65 | $1.66 | $1.11 |
Q3 sales rose 3.2%, while income before interest and taxes was essentially flat. Nine-month sales rose 9.2% and income before interest and taxes rose 23.7%. The effective tax rate fell to 23.1% from 33.0% in Q3 and to 23.8% from 32.6% year to date, primarily reflecting the 2017 Tax Act; Q3 also benefited from a state tax audit settlement.
Q3 segment sales were $797.8M for metal containers, $360.8M for closures and $148.4M for plastic containers. Segment income was $86.9M, $47.3M and $8.4M, respectively. Year-to-date closures and plastics segment income increased, while metal containers declined.
Cash flow, debt and liquidity
- Operating cash flow was $13.1M for the first nine months, versus cash used of $4.5M in 2017. Capital expenditures were $134.6M; cash and equivalents ended the period at $171.4M.
- Total debt principal was $2.934B ($2.920B after unamortized issuance costs), including $733.4M classified as current. The current portion included $698.0M of revolving loans. Long-term debt was $2.186B.
- Available revolving capacity at September 30 was $472.5M plus C$15.0M, after letters of credit. Management said operating cash flow and available borrowing capacity should cover expected operating needs, capital spending, debt service, taxes, pensions, dividends and repurchases for the foreseeable future. The company reported compliance with financing covenants.
- In April, Silgan redeemed $280M of remaining 5% Notes, funded with revolver borrowings and cash. A May credit agreement amendment extended revolver maturity to 2023 and term-loan maturity to 2024, reduced maximum borrowing margins and added flexibility. The transactions resulted in a $2.5M early-extinguishment charge.
Material changes, outlook and risks
- Q3 sales growth reflected raw-material cost pass-through, higher plastics volume and favorable metal-container mix, partly offset by lower metal-container volumes and unfavorable currency translation. Higher sales from raw-material pass-through reduced reported gross margin percentage.
- Metal-container unit volumes fell approximately 6% in both Q3 and the first nine months, due to customer inventory adjustments, a customer plant shutdown, loss of a smaller customer and weaker soup volume. Closures’ year-to-date growth included the full-period contribution of the 2017 SDS acquisition.
- Higher freight, delayed pass-through of resin costs and start-up costs at new facilities pressured results. Management cited lower manufacturing costs, SDS synergies and stronger plastics volumes as offsets. No numerical earnings or sales guidance is provided in the filing.
- Metal-container and some closures sales are seasonal and depend partly on fruit and vegetable harvests and weather. Seasonal working-capital needs have historically averaged about $350M and can require short-term borrowing.
- A European Commission antitrust investigation into the metal packaging industry includes Silgan subsidiaries; given its early stage, the company could not estimate potential actions or costs. Management stated other pending proceedings were not expected to have a material adverse effect.
- Silgan adopted revised revenue-recognition guidance in 2018, accelerating recognition for certain made-to-order goods. At September 30, the change had increased receivables and reduced inventory relative to the prior guidance; management said adoption did not materially affect results or cash flows. Foreign-currency translation reduced year-to-date comprehensive income by $26.4M.
Important facts for investors to verify
- Whether metal-container volumes stabilize and how seasonal harvests and customer inventory movements affect demand.
- Whether resin and other raw-material cost increases are passed through promptly, and the effect of freight and new-facility start-up costs on margins.
- Revolver utilization, seasonal working-capital needs, debt maturities and ongoing covenant compliance.
- Developments and potential financial exposure from the European antitrust investigation.
- Completion and balance-sheet impact of the upcoming lease-accounting adoption and remaining Tax Act measurement-period adjustments.