Silgan Holdings Inc. — Q1 2019 Form 10-Q
Business context and period. Silgan manufactures rigid packaging, including metal and plastic containers, closures and dispensing systems. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted.
Financial performance
- Revenue: $1.027 billion, up 1.5%. Metal containers generated $507.1 million (+4.3%), closures $356.2 million (-3.8%) and plastic containers $163.9 million (+5.1%).
- Profit and margins: Gross profit was $166.0 million, with gross margin of 16.2% versus 15.8%. Income before interest and taxes was $86.7 million, down 6.0%; its margin declined to 8.4% from 9.1%. Net income was $46.7 million versus $45.7 million, and diluted EPS was $0.42 versus $0.41. The effective tax rate fell to 21.6% from 25.9%.
- Segment income: Metal containers rose to $38.9 million from $37.1 million; closures fell to $40.3 million from $48.2 million; plastic containers rose to $12.1 million from $11.1 million. Corporate expense was $4.5 million.
- Cash flow and investment: Operating activities used $155.8 million, compared with $90.1 million used in Q1 2018. Investing activities used $61.7 million, including $61.7 million of capital expenditures. Financing activities provided $287.2 million. Cash increased by $68.6 million to $141.4 million.
- Debt and liquidity: Total debt carrying value was $2.692 billion at March 31, 2019, versus $2.933 billion a year earlier and $2.305 billion at year-end 2018. Cash was $141.4 million. The company had $506.0 million drawn under its revolving credit facility and reported $664.5 million plus C$15.0 million available after letters of credit. Management said it was in compliance with financing covenants.
- Other balance-sheet items: Current assets were $1.495 billion and current liabilities $1.299 billion. Operating lease liabilities were $168.1 million at quarter-end.
Material changes and management commentary
- Sales growth reflected higher raw-material cost pass-through, higher plastic-container volumes and improved closures product mix. These gains were partly offset by lower metal-container and closures volumes and unfavorable foreign currency translation.
- Closures segment income declined substantially, principally due to $5.7 million of rationalization charges, lower volumes, currency effects and lower pension income. Charges primarily related to the announced shutdown of the Torello, Spain metal-closures facility. Total rationalization charges were $6.1 million versus $0.7 million in Q1 2018.
- Lower average borrowings reduced interest and debt expense by $3.4 million to $27.1 million. Lower pension income and increased rationalization charges weighed on operating results.
- Management expects operating cash generation and available borrowing capacity to meet foreseeable operating needs, planned capital expenditures, debt service and other anticipated uses. No specific earnings or revenue guidance is provided in the filing.
- Working capital is seasonal: inventory is built ahead of the fruit and vegetable packing season, and peak seasonal working-capital needs have historically averaged about $350 million. Management notes that sales volume and segment income have historically been higher in Q3.
Risks, contingencies and unusual items
- A European Commission antitrust investigation involving the metal-packaging industry includes Silgan subsidiaries. Because the investigation remains at an early stage, the company cannot assess potential actions or estimate related costs.
- Results are exposed to harvest and weather variability, customer purchasing timing, raw-material and natural-gas prices, interest rates and foreign currency movements. The company uses hedging instruments for certain exposures and states it does not use derivatives for speculative purposes.
- Adoption of the lease accounting standard on January 1, 2019 added $160.8 million of long-term assets and $161.4 million of lease liabilities and reduced retained earnings by $0.6 million; management said the adoption did not materially affect results or cash flows.
- The company expects about $4.1 million of remaining rationalization expenses, primarily in 2019, and $8.3 million of remaining cash expenditures through 2023.
Important facts for investors to verify
- Whether closures volumes and segment profitability stabilize after the Spain facility shutdown and associated restructuring.
- Whether seasonal working-capital outflows lead to further revolver borrowings as the year progresses.
- Developments in the European antitrust investigation and whether any financial exposure becomes estimable.
- How raw-material pass-through, currency movements and harvest conditions affect sales, margins and cash conversion.
- The pace of rationalization spending and the company’s debt and liquidity position relative to its seasonal needs.