Silgan Holdings Inc. — Q1 2017 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, 2017, compared with the same period in 2016. Results are seasonal; management says sales and operating income have historically been higher in the third quarter.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $805.4 million | $792.7 million |
| Gross profit / margin | $124.6 million / 15.5% | $113.9 million / 14.4% |
| Operating income / margin | $56.8 million / 7.1% | $57.4 million / 7.2% |
| Interest and other debt expense | $23.1 million, including $2.7 million loss on early debt extinguishment | $16.5 million |
| Net income | $23.2 million | $26.6 million |
| Diluted EPS | $0.42 | $0.44 |
| Operating cash flow | $(140.9) million | $(150.8) million |
| Capital expenditures | $38.9 million | $62.0 million |
| Cash at quarter-end | $350.6 million | $66.6 million |
At March 31, 2017, total debt was $2.172 billion carrying value ($2.193 billion principal); $580.2 million was classified as current. Stockholders’ equity was $490.3 million. Cash increased $325.9 million during the quarter, primarily reflecting debt issuance and financing activity; operating and investing activities used cash. Revolving loans outstanding were $319.5 million, with disclosed availability of $851.2 million plus Cdn $15.0 million after letters of credit. The company reported compliance with its debt covenants.
Changes versus the prior-year quarter
- Sales increased 1.6%, mainly from raw-material cost pass-through, favorable metal-container mix and higher plastic-container volumes; foreign currency and product mix partly offset growth.
- Gross margin rose 1.1 percentage points, while operating income declined 1.0%. SG&A rose $11.5 million, primarily because of $13.2 million in initial costs attributed to the planned dispensing-systems acquisition.
- Metal-container operating income increased to $43.9 million from $37.6 million; closures income fell to $23.8 million from $24.5 million; plastic-container income rose to $6.8 million from $0.1 million.
- Net income and diluted EPS declined despite higher gross profit, reflecting increased debt expense and acquisition-related costs. The effective tax rate was 31.0%, versus 35.2%.
Financing, outlook and risks
- In February, Silgan issued $300 million of 4.75% notes due 2025 and €650 million of 3.125% notes due 2025, using proceeds in part to repay existing term and revolving debt. In March, it amended and restated its credit agreement, extending maturities and adding capacity, including an $800 million delayed-draw U.S. term loan.
- After quarter-end, Silgan redeemed $220 million of 5% notes on April 3; it expects to record an approximately $4.4 million pretax extinguishment charge in Q2.
- On April 6, Silgan acquired WestRock’s dispensing systems business for $1.025 billion cash. The business had approximately $570 million in 2016 sales. The purchase was funded with credit-agreement borrowings, including the $800 million delayed-draw term loan. Purchase-price allocation and pro forma information were not yet available.
- Management said operating cash flow and available borrowing capacity should meet foreseeable operating, investment and debt-service needs. No specific earnings or revenue guidance was provided. Seasonal working-capital needs have historically averaged approximately $350 million and may require short-term borrowing.
- Key exposures include harvest and weather variability, seasonal working capital, raw-material cost pass-through timing, interest rates, foreign exchange and natural-gas prices. Natural-gas swaps covered approximately 33% of estimated 12-month exposure. A German antitrust investigation involving industry participants remains at an early stage; Silgan said it could not reasonably estimate potential actions or costs.
- Management noted that adoption of the revenue-recognition standard in 2018 may accelerate revenue recognition for certain customer-specific production arrangements; the impact was still being assessed.
Important facts for investors to verify
- Post-quarter acquisition funding, resulting debt and leverage, and the final purchase-price allocation for the dispensing systems business.
- The effect of acquisition-related costs on reported operating performance and whether expected integration results emerge.
- Debt maturities, interest costs, covenant headroom and the impact of the April 2017 note redemption and new credit agreement.
- Seasonal cash use, inventory and receivables development, and the ability to maintain liquidity through peak working-capital periods.
- Developments in the German antitrust investigation and any material change in the company’s assessment of exposure.