Silgan Holdings Inc. — Q3 2014 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2014. Silgan manufactures metal containers, closures and plastic containers. Results are seasonal, with fruit and vegetable packaging demand generally peaking in the third quarter. The company acquired Portola Packaging in October 2013 and substantially all assets of Van Can Company on September 12, 2014, for $17.3 million; Van Can had approximately $40 million in sales.
Key financial results
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $1,228.4m | $1,167.9m | $3,001.6m | $2,843.7m |
| Gross profit / margin | $205.6m / 16.7% | $187.8m / 16.0% | $477.3m / 15.9% | $427.3m / 15.0% |
| Income from operations / margin | $147.6m / 12.0% | $135.9m / 11.6% | $301.7m / 10.1% | $268.9m / 9.5% |
| Net income | $83.3m | $77.2m | $158.8m | $162.1m |
| Diluted EPS | $1.31 | $1.21 | $2.49 | $2.50 |
| Interest and other debt expense | $19.3m | $17.0m | $58.4m | $49.8m |
Cash flow and liquidity: Nine-month operating cash flow was a use of $52.5 million, versus $1.0 million provided in 2013, primarily reflecting higher receivables and inventory. Investing cash use was $110.8 million, including $94.3 million of capital expenditures and $17.7 million for business purchases. Financing provided $148.8 million. At September 30, cash was $145.9 million; total debt was $1.967 billion, including $444.0 million classified as current. Revolving loans outstanding were $335.1 million, with $641.2 million available under the Credit Agreement after letters of credit. The current ratio was approximately 1.58, based on reported current assets and liabilities.
Material changes and management commentary
- Q3 sales rose 5.2% and operating income rose 8.7%; net income rose to $83.3 million. For the first nine months, sales rose 5.6% and operating income rose 12.2%, while net income fell 2.1% and diluted EPS was nearly flat.
- Closures sales increased 30.1% in both comparative periods, largely from Portola. Metal-container sales declined 0.4% in Q3 and 0.6% year to date, with lower volumes and customer contract renewals/extensions partly offset by raw-material cost pass-throughs. Plastic-container sales rose 5.3% in Q3 and 2.0% year to date.
- Management attributed improved operating performance to Portola, lower manufacturing costs, better European metal-container performance, plastic-container volume/mix, and lower depreciation. Higher interest costs, metal-container volume weakness and customer contract economics were offsets.
- Prior-year nine-month net income benefited from a $19.7 million favorable tax adjustment related primarily to completion of an IRS audit. Excluding that adjustment, the filing reports effective tax rates of 34.8% for 2014 and 35.0% for 2013.
- Management estimates that the January 2014 extension of useful lives for certain equipment increased operating income by $5.4 million in Q3 and $16.8 million year to date, and net income by $3.5 million and $11.0 million, respectively. The company expects 2014 depreciation and amortization of approximately $155 million, versus $167.6 million in 2013.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects available operating cash flow and borrowing capacity to cover foreseeable operating needs, planned capital spending, debt service, taxes, pension contributions, dividends and share repurchases; it also may borrow for acquisitions. Management reported compliance with financing covenants and expected continued compliance during 2014.
- Management expects $4.2 million of remaining rationalization expenses and approximately $6.7 million of related cash spending within the next twelve months. Nine-month rationalization charges were $5.0 million, versus $3.6 million in 2013.
- Seasonal working-capital needs can drive short-term borrowing; historical peak seasonal requirements averaged approximately $350 million. Other exposures include interest rates, foreign exchange, natural gas prices, harvest variability, customer contract renewals and operations in Venezuela. The company uses hedges for portions of interest-rate and natural-gas exposures and does not use derivatives for speculative purposes.
- Venezuela operations generated a $2.6 million loss for the first nine months of 2014, compared with a $5.3 million loss in 2013. Foreign currency translation contributed to a $39.9 million nine-month other comprehensive loss in 2014.
- The January refinancing resulted in a $1.5 million early-extinguishment charge. The company also reported that its annual 2014 goodwill and indefinite-lived intangible asset impairment assessment found no impairment. A new revenue-recognition standard is expected to take effect for Silgan on January 1, 2017; the impact was still under evaluation.
Important facts for investors to verify
- How much of sales and operating-income growth is attributable to Portola and Van Can versus underlying volumes, pricing and cost performance.
- Whether seasonal working-capital investment reverses and operating cash flow improves after the peak season.
- The sustainability of operating-margin improvement, including the earnings benefit from longer depreciable lives and customer reimbursements.
- Debt, interest expense and covenant headroom as revolving borrowings fund seasonal needs and acquisitions.
- Exposure to metal-container customer contract renewals, harvest conditions, foreign currency and Venezuela losses; and the timing and cash cost of rationalization plans.