Silgan Holdings Inc. — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Although the request identifies 2016 Q4, this is an annual filing; fourth-quarter results are noted separately below. Dollar amounts are in U.S. dollars.
Business context
Silgan manufactures rigid consumer packaging through three segments: metal containers, closures, and plastic containers. It operated 87 manufacturing plants across 21 countries. Metal containers represented 62.9% of annual sales, closures 22.1%, and plastic containers 15.0%. The company reported approximately 60% U.S. metal food-can unit market share. Nestlé accounted for approximately 13% of consolidated sales.
Financial results and liquidity
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $3,612.9 million | $3,764.0 million |
| Gross profit / margin | $533.5 million / 14.8% | $554.1 million / 14.7% |
| Operating income / margin | $299.7 million / 8.3% | $319.8 million / 8.5% |
| Net income | $153.4 million | $172.4 million |
| Diluted EPS | $2.55 | $2.81 |
| Cash from operations | $394.6 million | $335.8 million |
| Capital expenditures | $191.9 million | $237.3 million |
| Cash and cash equivalents, year-end | $24.7 million | $99.9 million |
| Total debt principal, year-end | $1,571.2 million | $1,525.8 million |
Operating cash flow less reported capital expenditures was approximately $202.7 million in 2016; this simple measure is not the company’s stated free-cash-flow measure. Interest and other debt expense was $67.8 million. The company reported $868.1 million and Cdn $15.0 million of available revolving capacity at year-end, after revolving borrowings and letters of credit. Debt reported net of unamortized issuance costs on the balance sheet was $1,561.6 million.
Segment sales and operating income in 2016 were: metal containers $2,271.9 million and $214.7 million; closures $797.1 million and $99.8 million; plastic containers $543.9 million and $5.2 million. Corporate expense was $20.0 million.
Fourth quarter: Sales were $805.9 million versus $829.6 million in Q4 2015; net income was $23.7 million versus $26.5 million; diluted EPS was $0.41 versus $0.44. Q4 2016 included $5.1 million of rationalization charges and $1.4 million of costs attributed to announced acquisitions.
Changes versus prior period
- Annual sales declined 4.0%, primarily due to lower raw-material and other manufacturing costs passed through to customers, less favorable metal-container product mix, lower plastic-container volumes, and adverse foreign-currency translation. Closures volumes increased approximately 3%; plastic-container volumes declined approximately 3%.
- Operating income fell $20.1 million, or 6.3%, and operating margin declined from 8.5% to 8.3%. Higher new-plant start-up costs, metal-container indexed deflation and inventory effects, product mix, rationalization charges, resin pass-through timing, and weaker plastic-container volumes were among the pressures; improved manufacturing performance and closures growth partly offset them.
- Segment performance diverged: closures operating income rose $8.0 million to $99.8 million, while metal-container income fell $21.7 million to $214.7 million and plastic-container income fell $2.6 million to $5.2 million.
- Cash from operations increased by $58.8 million, while cash declined by $75.3 million. The company repurchased $277.3 million of stock in 2016, including a $269.4 million tender offer, and paid $40.9 million in dividends. Year-end stockholders’ equity decreased to $469.4 million from $639.2 million.
Outlook, risks, and notable items
- Management anticipated a relatively flat North American metal food-container market, with continued opportunities in convenience products, including single-serve packaging and easy-open ends. It expected approximately 90% of projected 2017 metal-container sales, and a majority of closures and plastic-container sales, to be covered by multi-year supply arrangements.
- Management estimated 2017 capital expenditures of approximately $150 million and said operating cash flow and available borrowing capacity should meet expected operating needs, capital spending, debt service, taxes, pension contributions, dividends, and stock-plan share requirements. The filing does not provide specific earnings or sales guidance.
- After year-end, Silgan agreed to acquire WestRock’s dispensing systems business for $1.025 billion in cash, subject to adjustments, customary conditions, and regulatory approval; closing was expected late in Q1 2017. The target reported $566 million of sales for its fiscal year ended September 30, 2016. Silgan obtained an $800 million incremental term-loan commitment and expected to fund the purchase with cash and borrowings. Completion and expected synergies were not assured.
- Also after year-end, Silgan issued $300 million of 4.75% notes and €650 million of 3.25% notes due 2025. Proceeds were intended to repay or refinance bank debt and redeem part of the 5% notes. These transactions were subsequent events, not year-end debt balances.
- Principal risks include substantial leverage and floating-rate exposure (a one-percentage-point rate change was estimated to affect 2016 interest expense by about $9.5 million), seasonal working-capital borrowing, raw-material supply and price pass-through timing, crop variability, customer concentration, competition, foreign-exchange and geopolitical exposures, and integration and closing risks for the pending acquisition.
- A German competition authority antitrust investigation involving the industry association and its members, including Silgan’s German subsidiaries, remained at an early stage; the company could not estimate potential costs or outcomes. Management stated that routine legal matters were not expected to have a material adverse effect. Two of four multiemployer pension plans in which Silgan participated were less than 65% funded.
- Annual rationalization charges rose to $19.1 million from $14.4 million, including costs related to plant closures and optimization. The company said its 2015-initiated manufacturing optimization plans were substantially completed by year-end 2016. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Review the complete financial statements and notes for debt maturities, covenants, seasonal working-capital needs, and the effect of the February 2017 refinancing.
- Track regulatory approval, final purchase-price adjustments, financing, integration costs, and realized synergies for the WestRock dispensing-systems acquisition.
- Assess whether lower sales and operating income, particularly the very low plastic-container segment margin, improve as new facilities ramp and optimization benefits emerge.
- Monitor raw-material cost pass-through lags, crop conditions, customer renewals and concentration, foreign-currency effects, and the German antitrust investigation.
- Confirm the sustainability of cash generation and shareholder distributions in light of the 2016 tender offer, increased debt, planned capital spending, and acquisition funding.