SILGAN HOLDINGS INC 10-Q

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Securities Exchange Act of 1934, as amended. Such forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting us and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in our other filings with the Securities and Exchange Commission. As a result, the actual results of our operations or our financial condition could differ materially from those expressed or implied in these forward-looking statements. General We are a leading manufacturer of sustainable rigid packaging solutions for consumer goods products. We currently produce dispensing and specialty closures for food, beverage, health care, garden, home, personal care, fragrance and beauty products; steel and aluminum containers for human and pet food and general line products; and custom designed plastic containers for personal care, food, health care, pharmaceutical, household and industrial chemical, pet food and care, agricultural, automotive and marine chemical products. We are a leading worldwide manufacturer of dispensing and specialty closures, a leading manufacturer of metal containers in North America and Europe, and a leading manufacturer of custom containers in North America for a variety of markets, including the personal care, food, health care and household and industrial chemical markets. Our objective is to increase shareholder value by efficiently deploying capital and management resources to grow our business, reduce operating costs and build sustainable competitive positions, or franchises, and to complete acquisitions that generate attractive cash returns. We have grown our net sales and income from operations largely through acquisitions but also through internal growth, and we continue to evaluate acquisition opportunities in the consumer goods packaging market. If acquisition opportunities are not identified over a longer period of time, we may use our cash flow to repay debt, repurchase shares of our common stock or increase dividends to our stockholders or for other permitted purposes. -16- RESULTS OF OPERATIONS The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the three months ended March 31: 2022 2021 Net sales Dispensing and Specialty Closures 41.5 % 41.1 % Metal Containers 45.1 44.8 Custom Containers 13.4 14.1 Consolidated 100.0 100.0 Cost of goods sold 83.8 82.1 Gross profit 16.2 17.9 Selling, general and administrative expenses 7.0 7.9 Rationalization charges 0.1 0.8 Other pension and postretirement income (0.8) (1.0) Income before interest and income taxes 9.9 10.2 Interest and other debt expense 2.1 2.2 Income before income taxes 7.8 8.0 Provision for income taxes 1.9 2.1 Net income 5.9 % 5.9 % Summary unaudited results of operations for the three months ended March 31 are provided below. 2022 2021 (dollars in millions) Net sales Dispensing and Specialty Closures $ 597.9 $ 509.3 Metal Containers 650.7 554.1 Custom Containers 193.3 174.7 Consolidated $ 1,441.9 $ 1,238.1 Segment income Dispensing and Specialty Closures (1) $ 87.3 $ 65.7 Metal Containers (2) 38.0 45.6 Custom Containers (3) 24.7 24.5 Corporate (6.6) (9.2) Consolidated $ 143.4 $ 126.6 (1) Includes rationalization charges of $5.2 million for the three months ended March 31, 2021. (2) Includes rationalization charges of $1.3 million and $5.0 million for the three months ended March 31, 2022 and 2021, respectively. (3) Includes rationalization charges of $0.1 million for each of the three months ended March 31, 2022 and 2021. Three Months Ended March 31, 2022 Compared with Three Months Ended March 31, 2021 Overview . Consolidated net sales were $1.44 billion in the first quarter of 2022, a 16.5 percent increase as compared to the first quarter of 2021 primarily due to higher average selling prices due to the pass through of higher raw material and other inflationary costs across all segments, higher unit volumes in the dispensing and specialty closures segment including from acquisitions, and a more favorable mix of products sold in the custom containers segment, partially offset by lower unit volumes and a higher percentage of smaller cans sold in the metal containers segment, lower volumes in the custom containers segment and the impact from unfavorable foreign currency translation. Income before interest and income taxes for the first quarter of 2022 was $143.4 million, a $16.8 million increase as compared to the same period in 2021 primarily due to the -17- favorable impact in the current year period from the delayed pass through of lower resin costs as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs in both the dispensing and specialty closures and custom containers segments, strong manufacturing performance and operating efficiencies, higher unit volumes in the dispensing and specialty closures segment and lower rationalization charges, partially offset by inflation in manufacturing costs, lower volumes in the metal containers and custom containers segments, the mix impact of more smaller cans sold in the metal containers segment and the impact of unfavorable foreign currency translation. Results for the first quarters of 2022 and 2021 included rationalization charges of $1.4 million and $10.3 million, respectively. Results for the first quarters of 2022 and 2021 also included a loss on early extinguishment of debt of $1.5 million and $0.9 million, respectively. Net income for the first quarter of 2022 was $84.9 million as compared to $73.3 million for the same period in 2021. Net income per diluted share for the first quarter of 2022 was $0.76 as compared to $0.66 for the same period in 2021. Net Sales . The $203.8 million increase in consolidated net sales in the first quarter of 2022 as compared to the first quarter of 2021 was the result of higher net sales across all the segments. Net sales for the dispensing and specialty closures segment increased $88.6 million, or 17.4 percent, in the first quarter of 2022 as compared to the same period in 2021. This increase was primarily the result of higher average selling prices due to the pass through of higher raw material and other inflationary costs and higher unit volumes of approximately eight percent, partially offset by the impact of unfavorable foreign currency translation of approximately $15 million. The increase in unit volumes was principally the result of the inclusion of the recent acquisitions and higher volumes for beauty and fragrance products, partially offset by a decrease in volumes for hygiene and home cleaning products which continued to be impacted by an inventory correction throughout the supply chain, and for metal closures as a result of customer pre-buy activity in late 2021 in advance of significant metal inflation this year. Net sales for the metal containers segment increased $96.6 million, or 17.4 percent, in the first quarter of 2022 as compared to the same period in 2021. This increase was primarily the result of higher average selling prices due to the pass through of higher raw material and other manufacturing costs, partially offset by lower unit volumes of approximately fourteen percent, a higher percentage of smaller cans sold and the impact of unfavorable foreign currency translation of approximately $7 million. The decrease in unit volumes was principally the result of higher customer purchases in late 2021 in advance of significant metal inflation this year and customers’ ongoing supply chain and labor challenges in the current year period. Net sales for the custom containers segment increased $18.6 million, or 10.6 percent, in the first quarter of 2022 as compared to the same period in 2021. This increase was principally due to higher average selling prices related to the pass through of higher resin costs and a more favorable mix of products sold, partially offset by lower volumes of approximately eight percent. The decline in volumes was primarily due to strong pandemic driven demand in the first quarter of 2021. Gross Profit . Gross profit margin decreased 1.7 percentage points to 16.2 percent in the first quarter of 2022 as compared to the same period in 2021 for the reasons discussed below in "Income before Interest and Income Taxes." Selling, General and Administrative Expenses . Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 7.0 percent in the first quarter of 2022 as compared to 7.9 percent in the same period in 2021. Selling, general and administrative expenses increased $2.6 million to $100.0 million for the first quarter of 2022 as compared to $97.4 million for the same period in 2021. Income before Interest and Income Taxes . Income before interest and income taxes for the first quarter of 2022 increased by $16.8 million as compared to the first quarter of 2021, while margins decreased to 9.9 percent from 10.2 percent over the same periods. The increase in income before interest and income taxes was primarily the result of higher income in the dispensing and specialty closures and custom containers segments, partially offset by lower income in the metal containers segment. Rationalization charges were $1.4 million and $10.3 million in the first quarters of 2022 and 2021, respectively. Segment income of the dispensing and specialty closures segment for the first quarter of 2022 increased $21.6 million as compared to the same period in 2021, and segment income margin increased to 14.6 percent from 12.9 percent over the same periods. The increase in segment income was primarily due to the favorable impact in the current year period from the delayed pass through of lower resin costs as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs, higher unit volumes including from recent acquisitions, improved operating efficiencies and lower rationalization charges, partially offset by inflation in manufacturing costs and the impact of unfavorable foreign currency translation. Rationalization charges were $5.2 million in the first quarter of 2021. -18- Segment income of the metal containers segment for the first quarter of 2022 decreased $7.6 million as compared to the same period in 2021, and segment income margin decreased to 5.8 percent from 8.2 percent over the same periods. The decrease in segment income was due primarily to lower unit volumes, the mix impact of more smaller cans sold and inflation in manufacturing costs, partially offset by strong manufacturing performance. The decrease in segment income margin was primarily due to to the mathematical consequence of the pass through of inflation in raw material and other manufacturing costs in the first quarter of 2022. Rationalization charges were $1.3 million and $5.0 million in the first quarters of 2022 and 2021, respectively. Segment income of the custom containers segment for the first quarter of 2022 increased $0.2 million as compared to the same period in 2021, while segment income margin decreased to 12.8 percent from 14.0 percent over the same periods. The increase in segment income was primarily attributable to the favorable impact in the current year period from the delayed pass through of lower resin costs as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs and strong operational performance, partially offset by lower volumes. The decrease in segment income margin was primarily due to the mathematical consequence of the pass through of higher raw material costs in the first quarter of 2022. Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the first quarter of 2022 increased $2.9 million to $29.3 million as compared to $26.4 million in the same period in 2021. This increase was primarily due to higher weighted average outstanding borrowings during the quarter as a result of the acquisitions in the third and fourth quarters of 2021. In March 2022, we redeemed all $300.0 million aggregate principal amount of the outstanding 4¾% Notes. In conjunction with this prepayment, we recognized a loss on early extinguishment of debt of $1.5 million in the first quarter of 2022. Provision for Income Taxes. The effective tax rates were 24.6 percent and 26.2 percent for the first quarters of 2022 and 2021, respectively. The effective tax rate for the first quarter of 2021 was unfavorably impacted by higher income in less favorable tax jurisdictions. CAPITAL RESOURCES AND LIQUIDITY Our principal sources of liquidity have been net cash from operating activities and borrowings under our debt instruments, including our senior secured credit facility. Our liquidity requirements arise from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment, the funding of our seasonal working capital needs and other general corporate uses. On March 28, 2022, we redeemed all $300.0 million aggregate principal amount of the outstanding 4¾% Notes at a redemption price of 100 percent of their principal amount plus accrued and unpaid interest to the redemption date. We funded this redemption with revolving loan borrowings under the Credit Agreement and cash on hand. As a result of this redemption, we recorded a pre-tax charge for the loss on early extinguishment of debt of $1.5 million during the first quarter of 2022 for the write-off of unamortized debt issuance costs. You should also read Note 6 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2022 included elsewhere in this Quarterly Report. For the three months ended March 31, 2022, we used net borrowings of revolving loans of $520.2 million and cash and cash equivalents of $371.9 million (including the positive effect of exchange rate changes of $1.4 million) to fund the redemption of the 4¾% Notes for $300.0 million, cash used in operations of $267.4 million, decreases in outstanding checks of $225.9 million, net capital expenditures and other investing activities of $70.0 million, dividends paid on our common stock of $18.7 million, and repurchases of our common stock of $11.5 million under our stock-based compensation plan. For the three months ended March 31, 2021, we used proceeds from the issuance of the 1.4% Senior Secured Notes of $499.7 million, net borrowings of revolving loans of $139.2 million and cash and cash equivalents of $219.4 million to fund repayments of long-term debt of $500.0 million, cash used in operations of $172.2 million, decreases in outstanding checks of $84.2 million, net capital expenditures and other investing activities of $68.4 million, dividends paid on our common stock of $16.1 million, repurchases of our common stock of $8.3 million under our stock-based compensation plan, debt issuance costs of $4.6 million and the negative effect of exchange rate changes of $4.5 million. -19- At March 31, 2022, we had $508.0 million of revolving loans outstanding under the Credit Agreement. After taking into account outstanding letters of credit, the available portion of revolving loans under the Credit Agreement at March 31, 2022 was $972.2 million. Because we sell metal containers and closures used in fruit and vegetable pack processing, we have seasonal sales. As is common in the industry, we must utilize working capital to build inventory and then carry accounts receivable for some customers beyond the end of the packing season. Due to our seasonal requirements, which generally peak sometime in the summer or early fall, we may incur short-term indebtedness to finance our working capital requirements. Our peak seasonal working capital requirements have historically averaged approximately $350 million. We fund seasonal working capital requirements through revolving loans under the Credit Agreement, other foreign bank loans and cash on hand. We may use the available portion of revolving loans under the Credit Agreement, after taking into account our seasonal needs and outstanding letters of credit, for other general corporate purposes including acquisitions, capital expenditures, dividends, stock repurchases and to refinance or repurchase other debt. We believe that cash generated from operations and funds from borrowings available under the Credit Agreement and other foreign bank loans will be sufficient to meet our expected operating needs, planned capital expenditures, debt service, tax obligations, pension benefit plan contributions, share repurchases and common stock dividends for the foreseeable future. We continue to evaluate acquisition opportunities in the consumer goods packaging market and may incur additional indebtedness, including indebtedness under the Credit Agreement, to finance any such acquisition. We are in compliance with all financial and operating covenants contained in our financing agreements and believe that we will continue to be in compliance during 2022 with all of these covenants. Guaranteed Securities Each of the 3¼% Senior Notes, the 4⅛% Senior Notes, the 2¼% Senior Notes and the 1.4% Senior Secured Notes were issued by Silgan and are guaranteed by our U.S. subsidiaries that also guarantee our obligations under the Credit Agreement, collectively the Obligor Group. The following summarized financial information relates to the Obligor Group as of March 31, 2022 and December 31, 2021 and for the three months ended March 31, 2022. Intercompany transactions, equity investments and other intercompany activity within the Obligor Group have been eliminated from the summarized financial information. Investments in subsidiaries of Silgan that are not part of the Obligor Group of $1.5 billion and $1.4 billion as of March 31, 2022 and December 31, 2021, respectively, are not included in noncurrent assets in the table below. March 31, 2022 Dec. 31, 2021 (Dollars in millions) Current assets $1,412.5 $1,506.9 Noncurrent assets 4,144.9 4,159.9 Current liabilities 1,348.1 1,159.2 Noncurrent liabilities 4,050.6 4,392.4 At March 31, 2022 and December 31, 2021, the Obligor Group held current receivables due from other subsidiary companies of $36.9 million and $70.5 million, respectively; long-term notes receivable due from other subsidiary companies of $778.5 million and $782.4 million, respectively; and current payables due to other subsidiary companies of $6.6 million and $7.3 million, respectively. Three months ended March 31, 2022 (Dollars in millions) Net sales $1,046.0 Gross profit 143.7 Net income 57.3 -20- For the three months ended March 31, 2022, net income in the table above excludes income from equity method investments of other subsidiary companies of $27.6 million. For the three months ended March 31, 2022, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $9.6 million; net credits from such other subsidiary companies of $7.3 million; and net interest income from such other subsidiary companies of $4.9 million. For the three months ended March 31, 2022, the Obligor Group received dividends from other subsidiary companies of $0.2 million. Rationalization Charges We continually evaluate cost reduction opportunities across each of our segments, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. Under our rationalization plans, we made cash payments of $2.5 million and $2.0 million for the three months ended March 31, 2022 and 2021, respectively. Excluding the impact of our withdrawal from the Central States Pension Plan in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $0.6 million and $2.2 million, respectively. Remaining expenses for the accretion of interest for the withdrawal liability related to the Central States Pension Plan are expected to average approximately $1.0 million per year and be recognized annually through 2040, and remaining cash expenditures for the withdrawal liability related to the Central States Pension Plan are expected to be approximately $3.1 million annually through 2040. You should also read Note 3 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2022 included elsewhere in this Quarterly Report. -21-