Silgan Holdings Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparisons are with Q1 2013 unless stated otherwise. Silgan manufactures rigid packaging, reported in metal containers, closures and plastic containers. Results include Portola Packaging, acquired in October 2013.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Net sales | $855.8 million | $795.7 million |
| Gross profit / margin | $128.0 million / 15.0% | $111.3 million / 14.0% |
| Income from operations / margin | $68.0 million / 8.0% | $58.1 million / 7.3% |
| Net income | $31.5 million | $25.4 million |
| Diluted earnings per share | $0.49 | $0.38 |
| Cash used in operating activities | $103.1 million | $69.0 million |
| Capital expenditures | $27.0 million | $25.1 million |
At March 31, cash was $83.2 million, down from $160.5 million at year-end 2013 and $158.6 million a year earlier. Total debt was $1.86 billion, comprising $302.1 million current and $1.56 billion long-term, versus $1.78 billion total debt at March 31, 2013. Stockholders’ equity was $725.1 million. The quarter’s operating cash outflow reflected working-capital uses, including $68.4 million from receivables and $133.4 million from inventory.
Silgan refinanced its senior secured credit facility in January. At quarter-end it had $182.4 million of revolving loans outstanding and $794.0 million of revolver availability after letters of credit. Management stated that it was in compliance with financing covenants and expected available cash, operating cash flow and borrowing capacity to meet foreseeable needs. The company paid $9.7 million in dividends; the declared dividend was $0.15 per share.
Changes versus the prior period
- Sales increased 7.6%, primarily reflecting Portola, higher metal-container volumes, raw-material cost pass-throughs, product mix and favorable currency translation. Closures sales rose 32.7%, largely due to Portola; metal-container sales rose 1.0%; plastic-container sales rose 1.6% despite a roughly 2% volume decline.
- Operating income increased 17.0%. Segment operating income was $40.5 million for metal containers, $17.8 million for closures and $12.8 million for plastic containers. The closures improvement included Portola and lower Venezuelan losses.
- Net income and diluted EPS increased, while interest and debt expense before refinancing charges rose to $18.7 million from $15.3 million, primarily because of higher average borrowings. The effective tax rate fell to 34.2% from 37.5%.
- Reported results benefited from a January 2014 change in estimated useful lives of certain production equipment: operating income increased by $5.5 million and net income by $3.6 million, or $0.06 per diluted share. Management cited lower depreciation and amortization as a significant contributor to operating-income growth.
Outlook, commentary and risks
- Management estimated 2014 depreciation and amortization expense of approximately $155 million, compared with $167.6 million in 2013. The filing does not provide a specific full-year revenue or earnings forecast.
- Seasonal working-capital needs generally peak in summer or early fall; historical peak requirements averaged approximately $350 million. Harvest-dependent metal-container and closures sales have typically been strongest in the third quarter.
- Management expected approximately $8.7 million of additional rationalization cash spending, primarily in 2014; remaining expenses were estimated at $3.9 million. Q1 rationalization charges were $1.6 million.
- Other notable Q1 items included a $1.5 million loss on early extinguishment of debt following refinancing, a $0.5 million Venezuelan operating loss, and foreign-currency losses primarily in Russia and Ukraine. The prior-year quarter included a $3.0 million Venezuelan currency remeasurement charge and $0.8 million of metal-container plant start-up costs.
- Risks and sensitivities discussed include seasonality and harvest variability, customer-contract renewal economics, currency movements, resin-cost pass-through timing, interest rates, commodity prices and foreign operations. Silgan had no natural-gas swaps outstanding at quarter-end; interest-rate swaps had $295.2 million aggregate notional value. Management cautioned that forward-looking results may differ materially from expectations.
Important facts for investors to verify
- Assess how much operating-income growth is attributable to the useful-life estimate change, and compare results excluding its $5.5 million operating-income benefit.
- Review the sustainability of cash generation given Q1 operating cash outflow and seasonal working-capital requirements.
- Track debt, interest costs, refinancing terms and revolver availability, particularly as seasonal borrowing needs rise.
- Evaluate Portola’s contribution to closures growth and the underlying volume and margin trends in each segment.
- Monitor foreign-currency exposure, Venezuelan operations, resin-cost pass-throughs, customer-contract renewals and expected rationalization spending.