Silgan Holdings Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Silgan manufactures metal containers, closures, and plastic containers for food and other consumer products. All amounts below are in U.S. dollars; financial statement amounts are unaudited.
Financial results
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net sales | $874.6 million | $914.2 million | $1,667.4 million | $1,730.8 million |
| Gross profit | $127.7 million | $133.7 million | $241.6 million | $255.9 million |
| Gross margin | 14.6% | 14.6% | 14.5% | 14.8% |
| Operating income / margin | $67.7 million / 7.7% | $78.3 million / 8.6% | $125.1 million / 7.5% | $145.4 million / 8.4% |
| Net income | $33.3 million | $42.2 million | $59.9 million | $75.5 million |
| Diluted EPS | $0.55 | $0.70 | $0.98 | $1.22 |
- Q2 sales declined 4.3%; operating income fell 13.5%. Six-month sales declined 3.7%; operating income fell 14.0%.
- Q2 selling, general and administrative expense was $55.0 million, versus $54.4 million; interest and other debt expense was $16.9 million, versus $16.8 million. The six-month figures were $110.4 million and $33.3 million, respectively.
- Six-month operating cash flow was negative $162.7 million, compared with negative $136.0 million in 2015. Investing cash use was $102.9 million, including $111.7 million in capital expenditures; financing provided $286.1 million. Cash increased $20.5 million to $120.5 million.
- At June 30, total debt was $1.935 billion ($1.946 billion principal before unamortized issuance costs); current debt was $569.9 million and long-term debt $1.365 billion. Cash was $120.5 million. Revolving loans outstanding under the Credit Agreement were $416.5 million.
- Available Credit Agreement revolving capacity, after letters of credit, was $551.1 million plus C$15.0 million. Management reported compliance with financing covenants and expects operating cash flow and borrowing availability to cover foreseeable needs.
- Current assets were $1.367 billion and current liabilities $1.078 billion. Inventories were $806.5 million, up from $628.1 million at year-end 2015.
Drivers and changes versus prior period
- Lower raw-material-cost pass-through reduced reported sales across businesses. Metal container volumes were down about 2% in Q2, reflecting prior-year timing of the U.S. vegetable pack and a slower European seasonal pack; plastic container volumes declined about 5%. Closures volumes rose about 3% in Q2 and 4% for the six-month period, supported by U.S. beverage demand.
- Plastic containers were the principal earnings weakness: segment operating income was $1.0 million in Q2 versus $9.4 million and $1.1 million for six months versus $18.6 million. Management cited customer-portfolio rebalancing and footprint optimization, customer-service inefficiencies, new-facility start-up costs, lower volumes, and resin-cost pass-through timing.
- Closures operating income improved to $25.3 million in Q2 from $24.6 million and to $49.8 million for six months from $46.2 million, reflecting higher volumes and operating performance, partly offset by resin-cost timing. Metal container income declined to $45.9 million in Q2 from $48.3 million and to $83.5 million for six months from $89.0 million.
- Rationalization charges rose to $5.0 million in Q2 and $6.1 million for six months, from $1.0 million and $1.7 million, respectively. The metal-container charges included the LaPorte, Indiana facility shutdown. Management expected $4.9 million of remaining expenses and $8.2 million of further cash expenditures, primarily within 12 months.
- The six-month effective tax rate was 34.7%, versus 32.6%; management attributed the increase partly to a cumulative adjustment from a foreign tax-law change. Q2 rates were 34.4% versus 31.3%.
Outlook, risks, and unusual items
- The filing provides no specific quantified full-year earnings or revenue guidance. Management notes that fruit and vegetable harvest seasonality historically produces higher unit sales and a disproportionate share of annual operating income in the third quarter.
- Seasonal working-capital needs typically peak in summer or early fall and have historically averaged about $350 million. Six-month operating cash use reflected substantial working-capital investment, including increases in receivables and inventories.
- A German competition authority opened an antitrust investigation involving the German metal-packaging industry association and its members, including Silgan subsidiaries. Because the investigation is at an early stage, Silgan said it cannot assess potential actions or estimate related costs.
- Silgan uses interest-rate and natural-gas swaps and foreign-currency hedging strategies; it states that derivatives are not used for speculation. Natural-gas swaps covered approximately 21% of estimated 12-month exposure. Management reported no material change in market-risk exposures or related policies since its 2015 Form 10-K.
- Management is evaluating the impact of forthcoming revenue-recognition and lease-accounting standards; the filing does not quantify their expected effects. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Whether plastic-container footprint optimization and new-facility start-ups improve segment margins and customer-service costs.
- How seasonal working-capital requirements, especially inventory and receivables, affect operating cash flow and revolving borrowings through the third quarter.
- Debt maturities and refinancing or repayment needs: $569.9 million was classified as current at June 30, including amounts expected to be repaid within one year.
- Actual rationalization charges and cash spending compared with management’s estimates, and any developments in the German antitrust investigation.
- Whether lower raw-material costs, resin pass-through timing, harvest conditions, foreign exchange, and tax-jurisdiction mix continue to affect sales and margins.