Silgan Holdings Inc. — 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. This is an annual report; fourth-quarter figures are identified separately below. Silgan manufactures metal food and general-line containers, food and beverage closures, and custom plastic containers. It reported 87 manufacturing plants and operated in three segments.
Financial performance
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $3,911.8 million | $3,708.5 million | +5.5% |
| Gross profit | $599.8 million | $547.2 million | +9.6% |
| Income from operations | $360.9 million | $324.2 million | +11.3% |
| Net income | $182.4 million | $185.4 million | -1.6% |
| Diluted EPS | $2.86 | $2.87 | -0.3% |
| Operating cash flow | $345.0 million | $350.7 million | -1.6% |
Gross margin rose to 15.3% from 14.7%; operating margin rose to 9.2% from 8.7%. Net margin declined to 4.7% from 5.0%. Interest and other debt expense was $76.3 million, including a $1.5 million refinancing-related extinguishment loss. The effective tax rate was 35.9%; 2013’s reported rate of 27.2% included a favorable tax adjustment, and management cites 35.0% excluding that benefit.
Fourth quarter: Net sales were $910.2 million versus $864.8 million in Q4 2013; gross profit was $122.5 million versus $120.0 million. Net income was $23.6 million versus $23.3 million, and diluted EPS was $0.37 versus $0.36. Q4 2014 included $9.5 million of rationalization charges.
Segments and material changes
| Segment | 2014 sales | 2014 operating income | Comparison with 2013 |
|---|---|---|---|
| Metal containers | $2,369.7 million | $248.7 million | Sales +1.2%; operating income +5.2% |
| Closures | $882.9 million | $75.6 million | Sales +22.6%; operating income +20.0% |
| Plastic containers | $659.2 million | $51.5 million | Sales +1.9%; operating income +33.4% |
Overall sales growth reflected acquisitions, raw-material cost pass-through and favorable plastic-container product mix, partly offset by metal-container contract renewals and unfavorable currency translation. Closures sales and earnings benefited particularly from the inclusion of Portola, acquired in October 2013. Metal-container U.S. volumes were pressured by declines in core vegetable and soup markets; poor Midwest vegetable-pack conditions also weighed on volumes. Plastic-container operating results benefited from lower costs, favorable mix and a customer reimbursement for historical project costs.
In September 2014, Silgan acquired Van Can’s metal-container assets for $17.3 million, funded with cash. A significant accounting estimate change also boosted reported results: longer estimated useful lives for certain production equipment increased 2014 operating income by $21.9 million, net income by $14.0 million and diluted EPS by $0.22.
Cash flow, debt and liquidity
- Capital expenditures were $140.4 million, up from $103.1 million. Operating cash flow less capital expenditures was approximately $204.6 million.
- Cash and cash equivalents were $222.6 million at year-end; total debt was $1,599.0 million, implying net debt of approximately $1,376.4 million. Debt declined from $1,703.8 million in 2013.
- No revolving loans were outstanding at year-end. After letters of credit, availability was $962.6 million plus Cdn $15.0 million. The company also had an uncommitted incremental facility of up to $1.25 billion, subject to its terms.
- Debt maturities include $125.1 million in 2015 and $950.9 million in 2020. Interest paid in 2014 was $69.7 million. After swaps, $632.0 million, or 40% of debt, carried floating rates; a one-percentage-point rate change would have affected 2014 interest expense by approximately $8.3 million.
- Seasonal working-capital needs have historically averaged approximately $350 million and may require short-term borrowing. Management stated operating cash flow and available borrowings should cover expected needs, planned investment, debt service, taxes, dividends and the announced tender offer.
Outlook, risks and unusual items
- Silgan gave no earnings or revenue guidance in the provided filing. It expected approximately $250 million of capital expenditures in 2015, including three new U.S. manufacturing facilities; thereafter, it anticipated annual capital expenditures of approximately $120 million to $160 million, potentially higher with Can Vision 2020 projects.
- Management expected 2015 tax payments of approximately $90 million to $110 million and rationalization-plan cash spending of approximately $11.1 million, primarily in 2015. It expected no significant domestic pension contributions based on year-end funding.
- The company commenced a tender offer on February 9, 2015 to repurchase up to $200 million of shares at $54.75 to $58.50 per share, funded with cash and revolver borrowings; the offer was scheduled to expire March 10, 2015 unless extended.
- Silgan shut down its Venezuela closures facility in Q4 2014 after difficulty importing raw materials amid political and currency restrictions. Closures rationalization charges were $12.2 million for the year, primarily related to the shutdown and European headcount reductions.
- Key exposures include raw-material supply and price pass-through, competition and customer contract pricing, harvest-related demand and seasonality, leverage and floating rates, foreign currency and geopolitical conditions, labor relations, pensions, and environmental and food-contact regulation. Nestlé represented 10.9% of consolidated sales in 2014; the three largest customers together represented 26.2%.
- Ernst & Young issued an unqualified opinion on the financial statements and internal controls; management reported effective disclosure controls and internal control over financial reporting.
Important facts for investors to verify
- Assess how much 2014 operating improvement depended on the five-year average extension of equipment useful lives, and whether the lower depreciation expense is sustainable.
- Reconcile the decline in net income despite higher sales and operating income, including tax-rate normalization, interest costs and Venezuela-related charges.
- Review the full debt maturity schedule, covenant headroom, seasonal revolver needs and the financing impact of the tender offer and 2015 capital program.
- Monitor crop conditions, customer contract renewals and cost pass-through timing, as well as the recovery or further costs associated with the Venezuela shutdown.
- Check subsequent filings for the tender-offer outcome, actual capital spending, acquisition activity and any changes to management’s liquidity expectations.