Silgan Holdings Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Silgan manufactures metal containers, closures and plastic containers for food and other consumer products. Results are unaudited.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $1,139.6 million | $1,203.5 million | $2,807.0 million | $2,934.4 million |
| Gross profit / margin | $181.9 million / 16.0% | $185.1 million / 15.4% | $423.5 million / 15.1% | $441.0 million / 15.0% |
| Operating income / margin | $122.4 million / 10.7% | $121.9 million / 10.1% | $247.5 million / 8.8% | $267.3 million / 9.1% |
| Net income | $69.8 million | $70.3 million | $129.7 million | $145.9 million |
| Diluted EPS | $1.15 | $1.16 | $2.13 | $2.37 |
Q3 operating income increased 0.4% year over year despite lower sales; net income and diluted EPS were slightly lower. For the first nine months, sales fell 4.3%, operating income fell 7.4%, and net income fell 11.1%. Nine-month dividends were $0.51 per share, versus $0.48 in 2015.
Cash flow and investment: Operating cash flow was negative $11.6 million for the first nine months, compared with negative $47.5 million a year earlier. Capital expenditures were $151.5 million; investing cash outflow was $142.6 million. Financing activities provided $147.8 million, including $298.3 million of net revolving-loan borrowings. Cash declined $6.4 million to $93.6 million.
Debt and liquidity at September 30: Total debt principal was $1.829 billion, versus $1.932 billion a year earlier; cash was $93.6 million. Current debt was $454.2 million. Available revolving capacity under the Credit Agreement, after letters of credit, was $661.0 million plus Cdn $15.0 million. The company reported compliance with financial and operating covenants and expects to remain compliant during 2016.
Material changes and operating drivers
- Q3 sales declined 5.3%, primarily from lower raw-material and manufacturing-cost pass-throughs, lower plastic-container volumes, and less favorable metal-container product mix. Closures volumes increased about 2%; metal-container volumes were flat.
- Q3 operating margin improved to 10.7% from 10.1%, supported by improved manufacturing performance, lower rationalization charges, and higher closures volumes. Metal-container operating income declined; closures and plastic-container operating income improved.
- Nine-month operating income was pressured by higher manufacturing and startup costs at new facilities, lower plastic-container volumes, indexed cost deflation passed through to metal-container customers, lagged resin-cost pass-throughs, and higher rationalization charges. Closures benefited from stronger volumes and improved efficiencies.
- Plastic-container operating income fell to $1.9 million for the first nine months from $11.3 million, reflecting footprint-optimization costs and inefficiencies, startup costs, lower volumes, and other unfavorable comparisons.
- Rationalization charges were $7.8 million in Q3 and $13.9 million year to date, including costs related to the LaPorte, Indiana facility shutdown. Remaining expenses of $1.8 million were expected within 12 months; remaining cash expenditures of approximately $6.8 million were expected through 2023.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management stated that operating cash flow and available borrowing capacity should meet expected operating needs, planned capital expenditures, debt service, taxes, pension contributions, dividends and share repurchases for the foreseeable future.
- Demand and profitability are seasonal and depend partly on fruit and vegetable harvests; wet weather and poor growing conditions reduced European volumes in 2016. Seasonal working-capital needs have historically averaged approximately $350 million.
- On October 17, 2016, the board authorized an additional $300 million share-repurchase program. The company also commenced a tender offer for up to 5,494,505 shares, at $45.50–$52.25 per share, for up to $250 million, expected to be funded with cash and revolving borrowings.
- A German competition authority opened an antitrust investigation involving the metal-packaging industry association and members, including Silgan subsidiaries. Because it was at an early stage, the company could not assess possible actions or estimate costs. Other ordinary-course proceedings were not expected to materially affect the business or financial condition.
- Interest-rate and natural-gas swaps hedge portions of exposure; the company reported no speculative derivative use. Natural-gas swaps covered approximately 11% of estimated 12-month exposure. Management reported no material change in market risks from its prior annual filing.
- The 2016 annual goodwill and indefinite-lived intangible-asset impairment review found no impairment. Newly adopted inventory and stock-compensation accounting standards had no material effect. The company was evaluating upcoming revenue-recognition and lease standards.
Important facts for investors to verify
- Whether the tender offer was completed, its final price and share count, and the resulting debt and liquidity levels.
- Whether startup and footprint-optimization costs abate and whether plastic-container profitability recovers.
- Subsequent operating cash flow, seasonal working-capital requirements, capital spending and revolving-credit availability.
- Developments in the German antitrust investigation and any resulting financial exposure.
- Harvest conditions, raw-material pass-through timing, and their effects on segment volumes and margins.