Silgan Holdings Inc. — Q2 2018 Form 10-Q
Business and period: Silgan manufactures rigid packaging, including metal containers, closures and dispensing systems, and plastic containers. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First six months 2018 | First six months 2017 |
|---|---|---|---|---|
| Net sales | $1,059.1 million | $1,021.8 million | $2,071.4 million | $1,827.2 million |
| Gross profit margin | 16.4% | 15.5% | 16.1% | 15.1% |
| Income before interest and taxes | $104.1 million | $75.2 million | $196.3 million | $132.0 million |
| Net income | $55.3 million | $27.9 million | $101.1 million | $51.2 million |
| Diluted earnings per share | $0.50 | $0.25 | $0.91 | $0.46 |
Q2 sales rose 3.7%; first-half sales increased 13.4%. First-half growth included the full-period contribution from the 2017 acquisition of Silgan Dispensing Systems (SDS). Closures were the largest contributor to first-half sales growth. Management reported improved gross and operating margins in both comparison periods.
At June 30, 2018, cash was $181.2 million and total debt, net of issuance costs, was $2.963 billion, including $788.7 million classified as current. The company had $410.5 million and Cdn $15.0 million of available revolving capacity after letters of credit. Stockholders’ equity was $838.0 million.
For the first six months, operating cash flow was negative $92.9 million, versus negative $138.8 million in 2017. Investing cash outflow was $90.8 million, mainly capital expenditures of $91.3 million; 2017 investing outflow included the $1.022 billion SDS acquisition. Financing provided $315.5 million, and cash increased $127.7 million to $181.2 million. Seasonal working-capital needs were significant: receivables and inventory used $135.0 million and $176.2 million of cash, respectively.
Changes, drivers and unusual items
- Q2 closures sales increased 8.5%, while metal-container sales fell 0.9% and plastic-container sales grew 8.7%. Metal-container unit volumes declined about 9% in the quarter; legacy closures volumes declined about 2%. Plastic-container volumes increased about 4%.
- First-half closures sales rose 37.0%, primarily reflecting SDS, while metal-container segment income declined 8.6%. Plastic-container segment income increased 79.3%, supported by higher volumes and lower manufacturing costs.
- Comparisons were affected by 2017 SDS purchase-accounting inventory charges of $11.9 million and acquisition-related costs of $9.8 million in Q2 and $23.0 million in the first half. The prior-year periods also included a $3.0 million charge related to a past non-commercial legal dispute.
- Silgan redeemed its remaining $280 million of 5% Senior Notes in April, funded with revolver borrowings and cash. A May credit-facility amendment extended revolving-loan maturity to 2023 and term-loan maturity to 2024, reduced maximum applicable borrowing margins and provided additional strategic flexibility. Debt-extinguishment charges were $2.5 million in Q2 2018.
- The effective tax rate declined to 22.8% in Q2 and 24.2% for the first half, from 33.0% and 32.1%, respectively; management cited the 2017 Tax Act as a benefit.
- Revenue recognition guidance adopted January 1, 2018 accelerated recognition for certain made-to-order production. Adoption increased opening retained earnings by $9.1 million; prior-period results were not restated. Management said the adoption had no material impact on results or cash flows.
Outlook, risks and contingencies
Management gave no specific earnings or revenue guidance in the provided filing text. It expects operating cash generation and available borrowing capacity to meet foreseeable operating needs, capital spending, debt service and shareholder distributions, and stated that the company was in compliance with its debt covenants. Management noted it may incur additional debt for acquisitions.
Key exposures include seasonal demand and working-capital needs tied to fruit and vegetable harvests, weather-related pack delays, customer inventory adjustments, raw-material and freight costs, interest rates, foreign exchange and natural-gas prices. A European Commission antitrust investigation into the metal-packaging industry includes Silgan subsidiaries; because it is at an early stage, the company could not estimate potential outcomes or costs. Remaining rationalization cash expenditures were estimated at $3.3 million through 2023. The company reported no other pending legal matter expected to have a material adverse effect.
Important facts for investors to verify
- How much sales and profit growth reflects SDS and favorable currency or raw-material pass-throughs, versus underlying volume and mix trends.
- Whether metal-container and legacy-closures volumes recover, given seasonality, weather impacts and customer inventory actions.
- Working-capital conversion and seasonal borrowing needs, alongside total debt, interest costs and available revolver capacity.
- Developments and potential financial exposure from the European antitrust investigation and any remaining tax-accounting adjustments.
- The effects of the 2019 lease-accounting adoption and the continuing integration of SDS controls.