Silgan Holdings Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed March 1, 2018. This is an annual report, not a standalone fourth-quarter filing. All amounts are U.S. dollars unless noted.
Business context
Silgan manufactures rigid consumer packaging through metal containers, closures and dispensing systems, and plastic containers. In April 2017, it acquired WestRock’s specialty closures and dispensing systems business, now Silgan Dispensing Systems (SDS), for $1.024 billion net of cash acquired. SDS contributed $445.6 million in sales and $47.3 million in operating income from the acquisition date through year-end. Silgan operated 100 manufacturing facilities and reported approximately 60% U.S. metal food-can unit market share.
Key financial metrics
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $4,089.9 million | $3,612.9 million |
| Gross profit / margin | $661.1 million / 16.2% | $533.5 million / 14.8% |
| Income from operations / margin | $357.0 million / 8.7% | $299.7 million / 8.3% |
| Net income | $269.7 million | $153.4 million |
| Diluted earnings per share | $2.42 | $1.27 |
| Cash from operating activities | $389.8 million | $394.6 million |
| Capital expenditures | $174.4 million | $191.9 million |
| Cash and cash equivalents at year-end | $53.5 million | $24.7 million |
| Total debt principal at year-end | $2,564.3 million | $1,571.2 million |
FY2017 gross margin improved 1.4 percentage points and operating margin 0.4 points. Interest and other debt expense was $117.3 million, including a $7.1 million early debt-extinguishment loss, versus $67.8 million in FY2016. The company reported $896.4 million of floating-rate debt at year-end; management estimated that a 1 percentage-point rate change would affect 2017 interest expense by approximately $11.6 million, after considering swaps used during the year. The stated carrying value of debt was $2,547.3 million, net of unamortized issuance costs.
Segment sales and operating income were: metal containers $2,278.1 million and $230.2 million; closures $1,246.7 million and $142.0 million; plastic containers $565.1 million and $27.8 million. Corporate costs were $43.0 million. Foreign operations generated $979.3 million, about 24% of consolidated sales.
Changes versus the prior year
- Sales rose 13.2%, primarily due to SDS, higher raw-material cost pass-through, favorable currency translation, and higher plastic-container volumes. Metal-container unit volumes fell about 2%; legacy closures volumes fell about 3%.
- Operating income increased 19.1%. Benefits from SDS, lower manufacturing costs and lower rationalization charges were partly offset by acquisition costs, increased depreciation, lower legacy volumes and other segment-specific pressures.
- Net income included a $110.9 million income-tax benefit, primarily from remeasuring deferred tax liabilities after the U.S. federal corporate tax rate reduction. Excluding this benefit, the reported effective tax rate would have been 33.8%; reported FY2017 effective tax rate was negative 12.5%.
- Operating cash flow was slightly lower despite higher net income, which included the noncash tax benefit. Investing cash outflow was $1,197.7 million, mainly reflecting the SDS acquisition. Financing cash inflow was $836.8 million, largely reflecting debt issuance and borrowings.
- Closures sales grew 56.4% with SDS, while its reported operating margin declined to 11.4% from 12.5%, partly due to an $11.9 million acquisition-accounting inventory write-up.
For the fourth quarter, sales were $995.7 million versus $805.9 million, and net income was $146.1 million versus $23.7 million. Fourth-quarter 2017 net income included the $110.9 million tax benefit; reported diluted EPS was $1.31 versus $0.20. The company’s business is seasonal, with historically higher sales and a disproportionate share of annual operating income in the third quarter.
Outlook, risks and unusual items
- Management expected 2018 capital expenditures of approximately $200 million and annual spending of approximately $175 million to $200 million thereafter, potentially higher for specific growth or savings projects. It expected to meet operating needs, debt service, planned investment, taxes, pension contributions, dividends and share-plan obligations using operating cash and available credit, and anticipated $50 million to $70 million of tax payments in 2018.
- Management anticipated a relatively flat North American metal food-can market, with demand opportunities in convenience formats such as single-serve packaging and easy-open ends. It identified continued internal growth, cost reduction and acquisitions as strategic priorities; no specific earnings or sales guidance was provided.
- Liquidity included $53.5 million cash, no revolving loans outstanding, and approximately $1.17 billion plus Cdn $15.0 million of revolving capacity available at year-end, after letters of credit. Seasonal working-capital needs have historically averaged about $350 million. Debt covenants were reported in compliance.
- Key risks include substantial leverage and refinancing needs, floating interest rates, customer concentration (Nestlé accounted for about 11% of sales), competitive pricing, raw-material availability and delayed cost pass-through, crop and seasonal volatility, foreign exchange and international exposure, and integration and execution risks from acquisitions.
- A German competition authority antitrust investigation involving the metal-packaging industry and Silgan subsidiaries remained ongoing; the company said it could not estimate potential outcomes or costs. Routine legal claims were also disclosed.
- Two multiemployer pension plans had funded status below 65%; additional contributions or withdrawal liabilities could arise. The company also cited potential environmental, product-compliance, labor, cybersecurity and goodwill-impairment risks.
- The $110.9 million tax benefit and related tax accounting were provisional under SEC Staff Accounting Bulletin No. 118; further analysis could result in adjustments in 2018. SDS’s internal controls were excluded from management’s and the auditor’s 2017 internal-control assessment while integration was underway; the auditor gave an unqualified opinion on the financial statements and on controls within the assessed scope.
Important facts for investors to verify
- Review whether SDS’s post-acquisition performance, integration costs and expected synergies support the acquisition price and the added debt burden.
- Reconcile the one-time tax benefit with normalized earnings, cash taxes and any subsequent 2018 revisions to provisional tax estimates.
- Track debt maturities, leverage, interest-rate exposure, available revolving capacity and seasonal working-capital needs.
- Assess segment volume and margin trends, especially legacy closures and metal containers, resin-cost pass-through timing, and plastic-container profitability.
- Monitor the German antitrust investigation, multiemployer pension exposure, customer concentration and the planned capital-investment program.