Silgan Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Silgan manufactures metal and plastic containers, closures and dispensing systems. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $1,093.2m | $1,059.1m | $2,120.3m | $2,071.4m |
| Gross profit / margin | $183.5m / 16.8% | $173.3m / 16.4% | $349.5m / 16.5% | $333.3m / 16.1% |
| Income before interest and taxes / margin | $68.6m / 6.3% | $104.1m / 9.8% | $155.3m / 7.3% | $196.3m / 9.5% |
| Net income | $31.0m | $55.3m | $77.7m | $101.1m |
| Diluted EPS | $0.28 | $0.50 | $0.70 | $0.91 |
- Q2 sales rose 3.2%; first-half sales rose 2.4%. Higher metal-container sales, including raw-material cost pass-through and volume, were partly offset by weaker closures sales and foreign currency impacts.
- Q2 net sales by segment: metal containers $575.6m, closures $363.3m, plastics $154.2m. First-half amounts were $1,082.7m, $719.5m and $318.1m, respectively.
- Interest and debt expense was $28.4m in Q2 and $55.5m in the first half, down from $32.4m and $62.9m in the comparable periods. The 2018 figures included a $2.5m debt-extinguishment loss.
- Operating cash flow was negative $129.1m for the first half, versus negative $92.9m in 2018. Investing cash outflow was $115.6m, including $116.2m of capital expenditures. Financing provided $282.5m; cash increased $38.5m to $111.3m.
Liquidity, debt and balance sheet
- At June 30, 2019, total debt was $2,711.0m before unamortized issuance costs, compared with $2,304.6m at December 31, 2018. Current debt was $886.5m and long-term debt was $1,824.5m. The current portion included $300m of 5.5% Senior Notes subsequently redeemed.
- Cash was $111.3m. Revolving loans outstanding under the Credit Agreement were $506.0m; after letters of credit, available revolver capacity was $667.3m plus Cdn $15.0m. The company said cash generation and borrowing availability should cover foreseeable operating needs and other planned uses, and reported compliance with financing covenants.
- Working capital is seasonal; historical peak seasonal requirements averaged approximately $350m. First-half operating cash use reflected substantial receivables and inventory growth.
- Adoption of lease accounting added $160.8m of long-term assets and $161.4m of lease liabilities at January 1, 2019, with a $0.6m retained-earnings reduction. At June 30, operating lease liabilities were $180.4m.
Material changes and unusual items
- Rationalization charges rose to $39.3m in Q2 and $45.4m in the first half, versus $0.5m and $1.2m a year earlier. This was the principal reason operating income and net income declined despite higher sales and gross margins.
- The Q2 charges included $38.7m for a metal-container footprint plan and withdrawal from the Central States Pension Plan. The plan includes closing plants in Mt. Vernon, Missouri, and Waupun, Wisconsin, expected in Q4 2019. Estimated net charges are $3.7m for closures and $56.4m for the pension-plan withdrawal; the filing reports $38.7m recognized in Q2. Remaining pension-withdrawal cash payments are expected to be about $2.8m annually for 20 years. Management does not expect cost savings from the footprint plan to be material.
- First-half closures rationalization charges included costs related to the announced shutdown of the Torello, Spain facility. Pension and postretirement income also declined year over year: $4.5m versus $9.6m in Q2 and $9.0m versus $19.2m in the first half.
- On August 1, 2019, Silgan redeemed all $300m of its 5.5% Senior Notes at par plus accrued interest, funded with revolver borrowings and cash on hand.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management expects seasonal working-capital needs to peak in summer or early fall and historically higher unit sales and a disproportionate share of annual segment income in Q3, reflecting fruit and vegetable harvest cycles.
- Management cited foreign exchange, interest rates and natural-gas prices as market risks; it uses hedges for certain exposures and states that it does not use derivatives for speculative purposes. Weather and harvest variability, product mix, volume and raw-material costs also affect results.
- European and German competition authorities are investigating the metal-packaging industry, including Silgan subsidiaries. The investigations remain at an early stage; Silgan said it cannot reasonably assess potential actions or costs. It reported no other pending legal matters expected to materially adversely affect its business or financial condition.
- Disclosure controls were assessed as effective, with no material change in internal controls over financial reporting during the period.
Important facts for investors to verify
- Whether the August 2019 note redemption and its funding mix reduced interest expense as expected while preserving adequate seasonal liquidity and covenant headroom.
- The final costs, timing and cash obligations for the plant closures and Central States Pension Plan withdrawal, including any differences from current estimates.
- Whether sales and margins recover after the seasonal period, particularly in metal containers and closures, and how foreign exchange, product mix and harvest conditions affect performance.
- Developments in the European and German antitrust investigations and whether they create a measurable financial contingency.