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, 2023 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 and supplier of sustainable rigid packaging solutions for the world's essential consumer goods products. We currently produce dispensing and specialty closures for the fragrance and beauty, food, beverage, personal and health care, home care and lawn and garden markets; steel and aluminum containers for pet and human food and general line products; and custom designed plastic containers for the pet and human food, consumer health and pharmaceutical, personal care, home care, lawn and garden and automotive markets. 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. -18- 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 : 2024 2023 Net sales Dispensing and Specialty Closures 40.7 % 40.9 % Metal Containers 46.9 47.2 Custom Containers 12.4 11.9 Consolidated 100.0 100.0 Cost of goods sold 83.0 83.2 Gross profit 17.0 16.8 Selling, general and administrative expenses 7.6 7.1 Rationalization charges 0.9 0.3 Other pension and postretirement expense (income) — 0.1 Income before interest and income taxes 8.5 9.3 Interest and other debt expense 2.9 2.6 Income before income taxes 5.6 6.7 Provision for income taxes 1.4 1.6 Net income 4.2 % 5.1 % Summary unaudited results of operations for the three months ended March 31 are provided below. 2024 2023 (dollars in millions) Net sales Dispensing and Specialty Closures $ 535.9 $ 579.9 Metal Containers 617.1 670.1 Custom Containers 164.0 168.3 Consolidated $ 1,317.0 $ 1,418.3 Income before interest and income taxes Dispensing and Specialty Closures $ 59.7 $ 70.9 Metal Containers 41.7 47.8 Custom Containers 17.8 18.5 Corporate (7.5) (6.0) Consolidated $ 111.7 $ 131.2 Three Months Ended March 31, 2024 Compared with Three Months Ended March 31, 2023 Net Sales . In the first quarter of 2024, consolidated net sales were $1.32 billion, a decrease of $101.3 million, or 7.1 percent, as compared to the first quarter of 2023 primarily due to lower volumes across all segments, the unfavorable impact from the pass through of lower raw material costs in the metal containers segment and a less favorable mix of products sold in the dispensing and specialty closures segment. These decreases were partially offset by a more favorable mix of products sold in the metal containers segment and the impact from favorable foreign currency translation. Gross Profit . Gross profit margin increased 0.2 percentage points to 17.0 percent in the first quarter of 2024 as compared to the same period in 2023 primarily for the reasons discussed below in "Income before Interest and Income Taxes." -19- Selling, General and Administrative Expenses . In the first quarter of 2024, selling, general and administrative expenses as a percentage of consolidated net sales increased to 7.6 percent as compared to 7.1 percent in the first quarter of 2023. For the first quarter of 2024, selling, general and administrative expenses decreased $0.9 million to $100.5 million as compared to the first quarter of 2023. Income before Interest and Income Taxes . In the first quarter of 2024, income before interest and income taxes decreased by $19.5 million to $111.7 million as compared to $131.2 million in the first quarter of 2023, and margins decreased to 8.5 percent from 9.3 percent over the same periods. The decrease in income before interest and income taxes was primarily the result of lower volumes across all segments, the unfavorable impact of selling higher cost metal inventory from the prior year due to lower metal costs in 2024, higher rationalization charges and a more favorable mix of products sold in the custom containers segment, partially offset by improved operating and cost performance in all segments. Rationalization charges were $11.7 million and $4.1 million in the first quarters of 2024 and 2023, respectively. Interest and Other Debt Expense . In the first quarter of 2024, interest and other debt expense increased $1.8 million to $38.6 million as compared to $36.8 million in the first quarter of 2023. This increase was primarily due to higher weighted average interest rates. Provision for Income Taxes . For the first quarters of 2024 and 2023, the effective tax rates were 24.5 percent and 23.8 percent, respectively. 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. Adjusted EBIT, a non-GAAP financial measure, means income before interest and income taxes excluding, as applicable, acquired intangible asset amortization expense, other pension (income) expense for U.S. pension plans and rationalization charges. 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 (income) expense 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. -20- A reconciliation of such non-GAAP financial measures for the three months ended March 31 is provided below: 2024 2023 (Dollars in millions) Dispensing and Specialty Closures Income before interest and income taxes (EBIT) $ 59.7 $ 70.9 Acquired intangible asset amortization expense 11.9 11.8 Other pension (income) expense for U.S. pension plans (0.3) 0.1 Rationalization charges 6.5 0.1 Adjusted EBIT $ 77.8 $ 82.9 Metal Containers Income before interest and income taxes (EBIT) $ 41.7 $ 47.8 Acquired intangible asset amortization expense 0.3 0.3 Other pension (income) expense for U.S. pension plans (0.6) 0.4 Rationalization charges 3.6 3.9 Adjusted EBIT $ 45.0 $ 52.4 Custom Containers Income before interest and income taxes (EBIT) $ 17.8 $ 18.5 Acquired intangible asset amortization expense 1.1 1.1 Other pension (income) expense for U.S. pension plans (0.3) 0.4 Rationalization charges 1.6 0.1 Adjusted EBIT $ 20.2 $ 20.1 Corporate Loss before interest and income taxes (EBIT) $ (7.5) $ (6.0) Adjusted EBIT $ (7.5) $ (6.0) Total adjusted EBIT $ 135.5 $ 149.4 -21- Dispensing and Specialty Closures Segment 2024 2023 (Dollars in millions) Net sales $ 535.9 $ 579.9 Income before interest and income taxes (EBIT) 59.7 70.9 Income before interest and income taxes margin (EBIT margin) 11.1 % 12.2 % Adjusted EBIT $ 77.8 $ 82.9 Adjusted EBIT margin 14.5 % 14.3 % In the first quarter of 2024, net sales for the dispensing and specialty closures segment decreased $44.0 million, or 7.6 percent, as compared to the first quarter of 2023. This decrease was primarily the result of lower unit volumes of approximately seven percent and a less favorable mix of products sold, partially offset by the impact of favorable foreign currency translation of approximately $5 million. The decrease in unit volumes was principally the result of lower volumes for closures for food and beverage markets due to customer destocking priorities. In the first quarter of 2024, adjusted EBIT of the dispensing and specialty closures segment decreased $5.1 million as compared to the first quarter of 2023, while adjusted EBIT margin increased to 14.5 percent from 14.3 percent over the same periods. The decrease in adjusted EBIT was primarily due to lower unit volumes and the unfavorable impact of selling higher cost inventory from the prior year in our European metal closures operations due to lower metal costs in 2024, partially offset by improved manufacturing productivity. Metal Containers Segment 2024 2023 (Dollars in millions) Net sales $ 617.1 $ 670.1 Income before interest and income taxes (EBIT) 41.7 47.8 Income before interest and income taxes margin (EBIT margin) 6.8 % 7.1 % Adjusted EBIT $ 45.0 $ 52.4 Adjusted EBIT margin 7.3 % 7.8 % In the first quarter of 2024, net sales for the metal containers segment decreased $53.0 million, or 7.9 percent, as compared to the first quarter of 2023. This decrease was primarily the result of lower unit volumes of approximately five percent and the pass through of lower raw material costs, partially offset by a more favorable mix of products sold and the impact of favorable foreign currency translation of approximately $2 million. The decrease in unit volumes was principally the result of customer destocking across several categories in the first quarter of 2024 as compared to very strong customer demand in the first quarter of 2023. In the first quarter of 2024, adjusted EBIT of the metal containers segment decreased $7.4 million as compared to the first quarter of 2023, and adjusted EBIT margin decreased to 7.3 percent from 7.8 percent for the same periods. The decrease in adjusted EBIT was primarily due to the unfavorable impact of selling higher cost inventory from the prior year in our European operations due to lower metal costs in 2024 and lower unit volumes, partially offset by lower selling, general and administrative costs. -22- Custom Containers Segment 2024 2023 (Dollars in millions) Net sales $ 164.0 $ 168.3 Income before interest and income taxes (EBIT) 17.8 18.5 Income before interest and income taxes margin (EBIT margin) 10.9 % 11.0 % Adjusted EBIT $ 20.2 $ 20.1 Adjusted EBIT margin 12.3 % 11.9 % In the first quarter of 2024, net sales for the custom containers segment decreased $4.3 million, or 2.6 percent, as compared to the first quarter of 2023. This decrease was principally due to lower volumes of approximately three percent primarily due to customer destocking during the quarter. In the first quarter of 2024, adjusted EBIT of the custom containers segment increased $0.1 million as compared to the first quarter of 2023, and adjusted EBIT margin increased to 12.3 percent from 11.9 percent over the same periods. The increase in adjusted EBIT was primarily attributable to a more favorable mix of products sold, partially offset by lower volumes. 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, 2024, we used net borrowings of revolving loans of an aggregate of $582.4 million and cash and cash equivalents of $334.3 million to fund cash used in operations of $547.8 million, decreases in outstanding checks of $160.6 million, the repayment of long-term debt of $100.0 million, net capital expenditures and other investing activities of $72.5 million, dividends paid on our common stock of $21.1 million, repurchases of our common stock of $7.7 million, the repayment of principal amounts under finance leases of $0.3 million and the negative effect of exchange rate changes on cash and cash equivalents of $6.7 million. 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 $757.2 million and cash and cash equivalents of $84.6 million (after 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, repurchases of our common stock of $13.4 million and the repayment of principal amounts under finance leases of $0.7 million. At March 31, 2024, we had $580.0 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, 2024 was $899.4 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 $375 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. -23- 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 2024 with all of these covenants. Supply Chain Finance Program For our suppliers, we believe that we negotiate the best terms possible, including payment terms. In connection therewith, we initiated a SCF program with a major global financial institution. Under this SCF program, a qualifying supplier may elect, but is not obligated, to sell its 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 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 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 $252.6 million, $318.4 million and $330.2 million at March 31, 2024 and 2023 and December 31, 2023, 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, 2024 and December 31, 2023 and for the three months ended March 31, 2024. 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 $1.6 billion as of March 31, 2024 and December 31, 2023 are not included in noncurrent assets in the table below. March 31, 2024 Dec. 31, 2023 (Dollars in millions) Current assets $1,435.4 $1,403.5 Noncurrent assets 5,532.9 3,988.8 Current liabilities 1,965.5 1,967.8 Noncurrent liabilities 3,103.0 3,123.8 At March 31, 2024 and December 31, 2023, the Obligor Group held current receivables due from other subsidiary companies of $23.8 million and $35.6 million, respectively; long-term notes receivable due from other subsidiary companies of -24- $731.0 million and $748.8 million, respectively; and current payables due to other subsidiary companies of $10.9 million and $10.9 million, respectively. Three months ended March 31, 2024 (Dollars in millions) Net sales $948.7 Gross profit 136.1 Net income 33.9 For the three months ended March 31, 2024, net income in the table above excludes income from equity method investments of other subsidiary companies of $21.3 million. For the three months ended March 31, 2024, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $14.2 million; net credits from such other subsidiary companies of $6.7 million; and net interest income from such other subsidiary companies of $9.5 million. For the three months ended March 31, 2024, the Obligor Group did not receive dividends from other subsidiary companies. 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 $11.8 million and $5.1 million for the three months ended March 31, 2024 and 2023, 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 $8.1 million and $14.3 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 $0.8 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 $2.6 million annually through 2040. You should also read Note 3 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2024 included elsewhere in this Quarterly Report. -25-