Silgan Holdings Inc. — FY 2013 Form 10-K
Business context and period. This annual report covers the fiscal year ended December 31, 2013; fourth-quarter figures are also summarized below. Silgan manufactures rigid packaging through three segments: metal containers, closures, and plastic containers. It operated 88 plants across 23 countries and reported approximately $3.7 billion in annual sales.
Financial performance and key metrics
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net sales | $3,708.5 million | $3,588.3 million |
| Gross profit / margin | $547.2 million / 14.7% | $517.6 million / 14.4% |
| Income from operations / margin | $324.2 million / 8.7% | $325.5 million / 9.1% |
| Net income | $185.4 million | $151.3 million |
| Diluted EPS | $2.87 | $2.17 |
| Cash from operations | $350.7 million | $351.7 million |
| Capital expenditures | $103.1 million | $119.2 million |
| Cash and cash equivalents, year-end | $160.5 million | $465.6 million |
| Total debt, year-end | $1,703.8 million | $1,671.3 million |
FY 2013 segment sales and operating income were: metal containers, $2,341.4 million and $236.3 million; closures, $720.1 million and $63.0 million; plastic containers, $647.0 million and $38.6 million. Segment operating income excludes corporate expense.
Fourth quarter: Sales were $864.8 million versus $858.8 million in Q4 2012; net income was $23.3 million versus $29.4 million. Basic and diluted EPS were $0.37 and $0.36, respectively, compared with $0.42 for each measure in Q4 2012.
Material changes versus prior periods
- Annual sales rose 3.3%, driven by acquired operations, favorable foreign currency translation, higher metal-container volumes, raw-material pass-through pricing, and a better plastic-container product mix.
- Operating income declined slightly and operating margin fell from 9.1% to 8.7%. Lower legacy closures and plastic-container volumes, Venezuela-related effects, European weakness, new-plant under-absorption, higher rationalization costs, and higher corporate expenses offset gains elsewhere.
- Net income increased despite lower operating income, principally because FY 2012 included a $38.7 million loss on early debt extinguishment, compared with $2.1 million in 2013. FY 2013 also included a favorable tax adjustment; the reported effective tax rate was 27.2%, or approximately 35.0% excluding the disclosed favorable adjustment.
- Cash from operations was broadly unchanged. Cash declined by $305.1 million, reflecting acquisitions, $267.6 million of share repurchases, debt repayment, capital spending, and dividends. Acquisitions cost $281.7 million, including Portola, Amcor Australia Metal Closures, and Tecnocap U.S. Metal Closures.
- Debt increased by $32.5 million year over year. The company issued $300 million of 5.5% notes due 2022 and repaid $300.9 million of term loans during 2013.
Outlook, commentary, and risks
- Management expected the North American metal food-container market to remain relatively flat, with continued opportunity in convenience formats such as single-serve and easy-open packaging. It cited Can Vision 2020 investments and continued acquisition and productivity initiatives as strategic priorities.
- Management expected annual capital expenditures of approximately $120–$160 million, potentially higher with Can Vision 2020 projects, and 2014 depreciation and amortization of approximately $155 million following longer estimated useful lives for certain production equipment.
- Management said operating cash generation and borrowing availability were expected to meet foreseeable operating needs, planned capital expenditures, debt service, taxes, pensions, and dividends. Seasonal working-capital needs had averaged approximately $350 million in recent years.
- In January 2014, the company refinanced its credit facility. The new agreement provides a $985.6 million multicurrency revolver, a Cdn $15.0 million revolver, term loans, and an uncommitted incremental facility of up to $1.25 billion. Silgan reported covenant compliance.
- Key risks include substantial leverage and floating-rate exposure; customer concentration and competitive pricing; dependence on steel, aluminum, and resin suppliers and the ability to pass through cost increases; harvest-related seasonality and crop variability; weak European conditions; currency, political, and economic risks in foreign markets, including Venezuela; acquisition integration; labor relations; pension exposure; and environmental, product-regulatory, and cybersecurity risks.
- Unusual items included a $3.0 million charge to remeasure Venezuelan net assets, an estimated $5.0 million adverse operational impact from Venezuela’s political instability and currency restrictions, and $12.0 million of rationalization charges. Management expected approximately $11.0 million of additional rationalization cash spending, primarily in 2014. The filing reported no pending legal proceeding expected to have a material adverse effect and no off-balance-sheet arrangements.
Important facts for investors to verify
- Review the audited statements and notes for debt maturities, floating-rate exposure, covenant terms, and the post-year-end credit refinancing.
- Assess how much of sales and earnings growth came from acquisitions, pricing, foreign exchange, and underlying volume; note the operating-margin decline and segment-level divergence.
- Verify the durability of raw-material pass-throughs, seasonal working-capital funding, and customer supply agreements. Campbell’s replacement supply agreement runs through December 2023; major customers Nestlé, Campbell, and Del Monte together represented approximately 28.2% of 2013 sales.
- Review the tax reconciliation: reported tax rate was 27.2%, while management cited approximately 35.0% excluding a favorable tax adjustment. Also assess the Q4 earnings decline against the annual increase.
- Reconcile remaining share-repurchase authorization: different sections of the filing state approximately $83.5 million and $85.3 million at year-end. The report also records $267.6 million of 2013 repurchases, including the $250 million tender offer.