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, 2022 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 the world's essential 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. 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. -17- 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: 2023 2022 Net sales Dispensing and Specialty Closures 40.9 % 41.5 % Metal Containers 47.2 45.1 Custom Containers 11.9 13.4 Consolidated 100.0 100.0 Cost of goods sold 83.2 83.8 Gross profit 16.8 16.2 Selling, general and administrative expenses 7.1 7.0 Rationalization charges 0.3 0.1 Other pension and postretirement expense (income) 0.1 (0.8) Income before interest and income taxes 9.3 9.9 Interest and other debt expense 2.6 2.1 Income before income taxes 6.7 7.8 Provision for income taxes 1.6 1.9 Net income 5.1 % 5.9 % Summary unaudited results of operations for the three months ended March 31 are provided below. 2023 2022 (dollars in millions) Net sales Dispensing and Specialty Closures $ 579.9 $ 597.9 Metal Containers 670.1 650.7 Custom Containers 168.3 193.3 Consolidated $ 1,418.3 $ 1,441.9 Income before interest and income taxes Dispensing and Specialty Closures $ 70.9 $ 87.3 Metal Containers 47.8 38.0 Custom Containers 18.5 24.7 Corporate (6.0) (6.6) Consolidated $ 131.2 $ 143.4 Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022 Net Sales . Consolidated net sales were $1.42 billion in the first quarter of 2023, a decrease of $23.6 million, or 1.6 percent, as compared to the first quarter of 2022 primarily due to lower volumes in the dispensing and specialty closures and custom containers segments, the impact from unfavorable foreign currency translation, non-recurring net sales associated with Russia in 2022, lower average selling prices due primarily to the pass through of lower resin costs in the custom containers segment and a less favorable mix of products sold in the metal container segment. These decreases were partially offset by higher selling prices primarily related to inflation in other manufacturing costs in each of the segments, higher unit volumes in the metal containers segment and a more favorable mix of products sold in the dispensing and specialty closures segment. Gross Profit . Gross profit margin increased 0.6 percentage points to 16.8 percent in the first quarter of 2023 as compared to the same period in 2022 for the reasons discussed below in "Income before Interest and Income Taxes." -18- Selling, General and Administrative Expenses . Selling, general and administrative expenses as a percentage of consolidated net sales increased to 7.1 percent in the first quarter of 2023 as compared to 7.0 percent in the same period in 2022. Selling, general and administrative expenses increased $1.3 million to $101.3 million for the first quarter of 2023 as compared to $100.0 million for the same period in 2022. Other pension and postretirement expense (income) . Other pension and postretirement expense in the first quarter of 2023 was $1.3 million, while other pension and postretirement (income) in the first quarter of 2022 was $(11.3) million. This period -over-period change in other pension and postretirement expense (income) was the result of a lower pension asset balance in 2023 due to a lower rate of return on assets in 2022, higher pension plan interest cost and a decrease in the expected long-term rate of return on U.S. pension plan assets in 2023 from 2022. The expected long-term rate of return on pension plan assets was decreased from 6.9 percent in 2022 to 5.5 percent in 2023 due to planned changes in investment allocations for our U.S. pension plans, which are overfunded with plan assets of approximately 129 percent of projected benefit obligations at December 31, 2022, to a liability driven investment strategy that more closely matches plan assets with plan liabilities primarily using long duration bonds. Income before Interest and Income Taxes . Income before interest and income taxes for the first quarter of 2023 decreased by $12.2 million to $131.2 million as compared to $143.4 million in the first quarter of 2022, and margins decreased to 9.3 percent from 9.9 percent over the same periods. The decrease in income before interest and income taxes was primarily the result of other pension and postretirement expense in the current year period as compared to other pension and postretirement income in the prior year period, the unfavorable impact in the current year period from the delayed pass through of higher resin costs as compared to the favorable impact in the prior year period from the delayed pass through of lower resin costs in the dispensing and specialty closures segment, the favorable impact in the prior year period from an inventory management program in the dispensing and specialty closures segment, lower volumes in the custom containers and dispensing and specialty closures segments, a less favorable mix of products sold in the metal containers segment, higher rationalization charges and the impact of unfavorable foreign currency translation. These decreases were partially offset by the favorable impact in the current year period from the lagged contractual pass through of inflation in other manufacturing costs in the metal containers segment, a more favorable mix of products sold in the dispensing and specialty closures segment, higher unit volumes in the metal containers segment, and cost savings and higher prices primarily related to inflation in other manufacturing costs in the custom containers business. Rationalization charges were $4.1 million and $1.4 million in the first quarters of 2023 and 2022, respectively. Interest and Other Debt Expense . Interest and other debt expense for the first quarter of 2023 increased $6.0 million to $36.8 million as compared to $30.8 million in the same period in 2022. This increase was primarily due to higher weighted average interest rates. Provision for Income Taxes . The effective tax rates were 23.8 percent and 24.6 percent for the first quarters of 2023 and 2022, respectively. The effective tax rate for the first quarter of 2023 was favorably impacted by higher income generated in more favorable tax jurisdictions. Non-GAAP Measures Generally accepted accounting principles in the United States are commonly referred to as GAAP. A non-GAAP financial measure is generally defined as a financial measure that purports to measure financial performance, financial position or liquidity but excludes or includes amounts that could not be so adjusted in the most comparable GAAP measure. Adjusted EBIT and adjusted EBIT margin are unaudited supplemental measures of financial performance that the Company uses, which are not required by, or presented in accordance with, GAAP and therefore are non-GAAP financial measures. These non-GAAP financial measures should not be considered as alternatives to income before interest and income taxes or any other measures derived in accordance with GAAP. Such non-GAAP financial measures should not be considered in isolation or as a substitute for any financial data prepared in accordance with GAAP and may not be comparable to similarly titled measures used by other companies. The Company uses such non-GAAP financial measures because it considers them to be important and useful supplemental measures of its and its segments’ financial performance which provide a more complete understanding of the Company and its segments than could be obtained absent such non-GAAP financial measures. The Company believes that it is important and useful to present these non-GAAP financial measures because they allow for a better period-over-period comparison of results by removing the impact of items that, in management’s view, do not reflect the Company’s or its segments’ core operating performance. Management uses these non-GAAP financial measures to review and analyze the operating performance of the Company and its segments. Investors and others are urged to review and consider carefully the adjustments made by management to the most comparable GAAP financial measure to arrive at these non-GAAP financial measures. -19- Adjusted EBIT, a non-GAAP financial measure, means income before interest and income taxes excluding, as applicable, acquired intangible asset amortization expense, other pension expense (income) for U.S. pension plans, rationalization charges, the impact from charges for the write-up of acquired inventory required under purchase accounting, the charge for the European Commission settlement and costs attributed to announced acquisitions. Adjusted EBIT margin, a non-GAAP financial measure, means adjusted EBIT divided by segment net sales. Acquired intangible asset amortization expense is a non-cash expense related to acquired operations that management believes is not indicative of the on-going performance of the acquired operations. Since the Company’s U.S. pension plans are significantly over funded and have no required cash contributions for the foreseeable future based on current regulations, management views other pension expense (income) from the Company’s U.S. pension plans, which excludes service costs, as not reflective of the operational performance of the Company or its segments. While rationalization costs are incurred on a regular basis, management views these costs more as an investment to generate savings rather than period costs. The write-up of acquired inventory required under purchase accounting is viewed by management as part of the acquisition and is a non-cash charge that is not considered to be indicative of the on-going performance of the acquired operations. The charge for the European Commission settlement is nonrecurring and non-operational and relates to prior years and is not indicative of the on-going cost structure of the Company or its segments. Costs attributed to announced acquisitions consist of third party fees and expenses that are viewed by management as part of the acquisition and not indicative of the on-going cost structure of the Company. A reconciliation of such non-GAAP financial measures is provided below for the three months ended March 31: 2023 2022 (dollars in millions) Dispensing and Specialty Closures: Income before interest and income taxes (EBIT) $ 70.9 $ 87.3 Acquired intangible asset amortization expense 11.8 12.0 Other pension expense (income) for U.S. pension plans 0.1 (2.8) Rationalization charges 0.1 — Adjusted EBIT $ 82.9 $ 96.5 Metal Containers Income before interest and income taxes (EBIT) $ 47.8 $ 38.0 Acquired intangible asset amortization expense 0.3 0.3 Other pension expense (income) for U.S. pension plans 0.4 (6.7) Rationalization charges 3.9 1.3 Adjusted EBIT $ 52.4 $ 32.9 Custom Containers Income before interest and income taxes (EBIT) $ 18.5 $ 24.7 Acquired intangible asset amortization expense 1.1 1.1 Other pension expense (income) for U.S. pension plans 0.4 (2.5) Rationalization charges 0.1 0.1 Adjusted EBIT $ 20.1 $ 23.4 Corporate Loss before interest and income taxes (EBIT) $ (6.0) $ (6.6) Adjusted EBIT $ (6.0) $ (6.6) Total adjusted EBIT $ 149.4 $ 146.2 -20- Dispensing and Specialty Closures Segment 2023 2022 (dollars in millions) Net sales $ 579.9 $ 597.9 Income before interest and income taxes (EBIT) 70.9 87.3 Income before interest and income taxes margin (EBIT margin) 12.2 % 14.6 % Adjusted EBIT $ 82.9 $ 96.5 Adjusted EBIT margin 14.3 % 16.1 % Net sales for the dispensing and specialty closures segment decreased $18.0 million, or 3.0 percent, in the first quarter of 2023 as compared to the same period in 2022. This decrease was primarily the result of lower unit volumes of approximately six percent, the impact of unfavorable foreign currency translation of approximately $12 million and non-recurring net sales associated with Russia in 2022 of $4.0 million, partially offset by a more favorable mix of products sold and higher selling prices primarily related to inflation in other manufacturing costs. The decrease in unit volumes was principally the result of lower volumes for closures for food and beverage markets due to the timing of customer purchases, partially offset by volume growth in higher margin dispensing products. Adjusted EBIT of the dispensing and specialty closures segment for the first quarter of 2023 decreased $13.6 million as compared to the same period in 2022, and adjusted EBIT margin decreased to 14.3 percent from 16.1 percent over the same periods. The decrease in adjusted EBIT was primarily due to the unfavorable impact in the current year period from the delayed pass through of higher resin costs as compared to the favorable impact in the prior year period from the delayed pass through of lower resin costs, the favorable impact in the prior year period from an inventory management program, lower unit volumes and the impact of unfavorable foreign currency translation, partially offset by a more favorable mix of products sold. Metal Containers Segment 2023 2022 (dollars in millions) Net sales $ 670.1 $ 650.7 Income before interest and income taxes (EBIT) 47.8 38.0 Income before interest and income taxes margin (EBIT margin) 7.1 % 5.8 % Adjusted EBIT $ 52.4 $ 32.9 Adjusted EBIT margin 7.8 % 5.1 % Net sales for the metal containers segment increased $19.4 million, or 3.0 percent, in the first quarter of 2023 as compared to the same period in 2022. This increase was primarily the result of higher unit volumes of approximately three percent and higher average selling prices due to the lagged contractual pass through of inflation in other manufacturing costs, partially offset by a less favorable mix of products sold, non-recurring net sales associated with Russia in 2022 of $5.5 million and the impact of unfavorable foreign currency translation of approximately $4 million. The increase in unit volumes was principally the result of higher volumes primarily for pet food. Adjusted EBIT of the metal containers segment for the first quarter of 2023 increased $19.5 million as compared to the same period in 2022, and adjusted EBIT margin increased to 7.8 percent from 5.1 percent for the same periods. The increase in adjusted EBIT was primarily due to higher average selling prices due to the lagged contractual pass through of inflation in other manufacturing costs and higher unit volumes, partially offset by a less favorable mix of products sold and the impact of unfavorable foreign currency translation. -21- Custom Containers Segment 2023 2022 (dollars in millions) Net sales $ 168.3 $ 193.3 Income before interest and income taxes (EBIT) 18.5 24.7 Income before interest and income taxes margin (EBIT margin) 11.0 % 12.8 % Adjusted EBIT $ 20.1 $ 23.4 Adjusted EBIT margin 11.9 % 12.1 % Net sales for the custom containers segment decreased $25.0 million, or 12.9 percent, in the first quarter of 2023 as compared to the same period in 2022. This decrease was principally due to lower volumes of approximately ten percent, the unfavorable impact in the current year period from the pass through of lower resin costs and the impact of unfavorable foreign currency translation of approximately $2 million, partially offset by price increases primarily related to inflation in other manufacturing costs. The decline in volumes was primarily due to the exiting of lower margin business that did not meet reinvestment criteria. Adjusted EBIT of the custom containers segment for the first quarter of 2023 decreased $3.3 million as compared to the same period in 2022, and adjusted EBIT margin decreased to 11.9 percent from 12.1 percent over the same periods. The decrease in adjusted EBIT was primarily attributable to lower volumes, partially offset by cost savings and higher prices primarily related to inflation in other manufacturing costs. 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. For the three months ended March 31, 2023, we used net borrowings of revolving loans and proceeds from other foreign long-term debt of an aggregate of $756.5 million and cash and cash equivalents of $84.6 million (including the positive effect of exchange rate changes of $3.8 million) to fund cash used in operations of $631.8 million, net capital expenditures and other investing activities of $67.0 million, decreases in outstanding checks of $61.4 million, the repayment of long-term debt of $50.7 million, dividends paid on our common stock of $20.6 million and repurchases of our common stock of $13.4 million. 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 our 4¾% Senior 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. At March 31, 2023, we had $755.0 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, 2023 was $724.6 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 -22- 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 2023 with all of these covenants. Supply Chain Finance Program We believe that we negotiate the best terms possible with our suppliers, including payment terms. In connection therewith, we initiated a SCF program with a major global financial institution. Under this SCF program, qualifying suppliers may elect, but are not obligated, to sell their receivables from us to such financial institution. A participating supplier negotiates its receivables sale arrangements directly with the financial institution under this SCF program. While we are not party to, and do not participate in the negotiation of, such receivables sale arrangements, such financial institution allows a participating supplier to utilize our creditworthiness in establishing a credit spread in respect of the sale of its receivables from us as well as in establishing other applicable terms. This may provide a supplier with more favorable terms than it would be able to secure on its own. We have no economic interest in a supplier’s decision to sell a receivable. Once a qualifying supplier elects to participate in this SCF program and reaches an agreement with the financial institution, the supplier independently elects which individual invoices to us that they sell to the financial institution. All of our payments to a participating supplier are paid to the financial institution on the invoice due date under our agreement with such supplier, regardless of whether the individual invoice was sold by the supplier to the financial institution. The financial institution then pays the supplier on the invoice due date under our agreement with such supplier for any invoices not previously sold by the supplier to the financial institution. Amounts due to a supplier that elects to participate in this SCF program are included in accounts payable in our Condensed Consolidated Balance Sheet, and the associated payments are reflected in net cash provided by operating activities in our Condensed Consolidated Statements of Cash Flows. Separate from this SCF program, we and suppliers who participate in this SCF program generally maintain the contractual right to require the other party to negotiate in good faith the existing payment terms as a result of changes in market conditions, including changes in interest rates and general market liquidity, or in some cases for any reason. Outstanding trade accounts payables subject to this SCF program were approximately $318.4 million, $372.2 million and $346.8 million at March 31, 2023 and 2022 and December 31, 2022, respectively. 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, 2023 and December 31, 2022 and for the three months ended March 31, 2023. 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, 2023 and December 31, 2022 are not included in noncurrent assets in the table below. March 31, 2023 Dec. 31, 2022 (Dollars in millions) Current assets $1,718.6 $1,247.4 Noncurrent assets 4,043.2 4,028.4 Current liabilities 1,493.8 1,077.7 Noncurrent liabilities 3,946.5 3,911.4 At March 31, 2023 and December 31, 2022, the Obligor Group held current receivables due from other subsidiary companies of $39.2 million and $72.4 million, respectively; long-term notes receivable due from other subsidiary companies of $754.5 million and $730.0 million, respectively; and current payables due to other subsidiary companies of $5.4 million and $7.9 million, respectively. -23- Three months ended March 31, 2023 (Dollars in millions) Net sales $1,020.7 Gross profit 146.6 Net income 45.0 For the three months ended March 31, 2023, net income in the table above excludes income from equity method investments of other subsidiary companies of $27.1 million. For the three months ended March 31, 2023, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $13.3 million; net credits from such other subsidiary companies of $7.9 million; and net interest income from such other subsidiary companies of $8.5 million. For the three months ended March 31, 2023, the Obligor Group received dividends from other subsidiary companies of $2.4 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 $5.1 million and $2.5 million for the three months ended March 31, 2023 and 2022, 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 $1.7 million and $5.4 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 $0.9 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 $0.8 million in 2023 and $2.6 million annually thereafter through 2040. You should also read Note 3 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2023 included elsewhere in this Quarterly Report. -24-