Silgan (SLGN) 10-Q2023 Q3 Quarterly report

The Condensed Consolidated Balance Sheet at December 31, 2022 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

You should read the accompanying condensed consolidated financial statements in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following tables present our revenues disaggregated by reportable segment and geography as they best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenues by segment were as follows:

Revenues by geography were as follows:

Our contract assets primarily consist of unbilled accounts receivable related to over time revenue recognition and were $104.2 million, $113.3 million, and $110.2 million as of September 30, 2023 and 2022 and December 31, 2022, respectively. Unbilled receivables are included in trade accounts receivable, net on our Condensed Consolidated Balance Sheets.

Activity in reserves for our rationalization plans were as follows:

Rationalization reserves as of September 30, 2023 were recorded in our Condensed Consolidated Balance Sheet as accrued liabilities of $4.1 million and other liabilities of $27.0 million. Excluding the impact of our withdrawal from the Central States, Southeast and Southwest Areas Pension Plan, or the Central States Pension Plan, in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $6.6 million and $9.9 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.

Accumulated other comprehensive loss is reported in our Condensed Consolidated Statements of Stockholders’ Equity.  Amounts included in accumulated other comprehensive loss, net of tax, were as follows:

The amounts reclassified to earnings from the unrecognized net defined benefit plan costs component of accumulated other comprehensive loss for the three and nine months ended September 30, 2023 were net (losses) of $(2.5) million and $(7.7) million, respectively, excluding income tax benefits of $0.5 million and $2.2 million, respectively. For the three and nine months ended September 30, 2023, these net (losses) consisted of amortization of net actuarial (losses) of $(2.7) million and $(8.3) million and amortization of net prior service credit of $0.2 million and $0.6 million, respectively. Amortization of net actuarial losses and net prior service credit was recorded in other pension and postretirement income in our Condensed Consolidated Statements of Income. See Note 10 for further information.

The amounts reclassified to earnings from the change in fair value of derivatives component of accumulated other comprehensive loss for the three and nine months ended September 30, 2023 were not significant.

Other comprehensive income before reclassifications related to foreign currency translation for the three and nine months ended September 30, 2023 consisted of (i) foreign currency (losses) related to translation of quarter end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $(45.5) million and $(3.8) million, respectively, (ii) foreign currency gains related to intra-entity foreign currency transactions that are of a long-term investment nature of $0.1 million and $2.0 million, respectively, and (iii) foreign currency gains related to our net investment hedges of $15.0 million and $4.1 million, respectively, excluding income tax (provisions) of $(3.6) million and $(1.0) million, respectively. See Note 7 for further discussion. Amounts reclassified from accumulated other comprehensive loss related to foreign currency translation for the nine months ended September 30, 2023 related to the shutdown of our metal container manufacturing facilities in Russia.

Long-term debt consisted of the following: 

At September 30, 2023, the current portion of long-term debt consisted of $818.0 million of U.S. revolving loans under our amended and restated senior secured credit facility, as amended, or the Credit Agreement, $51.9 million of other foreign bank revolving and term loans and $27.9 million of finance leases.

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, trade accounts receivable, trade accounts payable, debt obligations and swap agreements. Due to their short-term maturity, the carrying amounts of trade accounts receivable and trade accounts payable approximate their fair market values. The following table summarizes the carrying amounts and estimated fair values of our other financial instruments at September 30, 2023:

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP classifies the inputs used to measure fair value into a hierarchy consisting of three levels. Level 1 inputs represent unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs represent unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs represent unobservable inputs for the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The financial assets and liabilities that were measured on a recurring basis at September 30, 2023 consisted of our cash and cash equivalents and derivative instruments. We measured the fair value of cash and cash equivalents using Level 1 inputs. We measured the fair value of our derivative instruments using the income approach. The fair value of our derivative instruments reflects the estimated amounts that we would pay or receive based on the present value of the expected cash flows derived from market interest rates and prices. As such, these derivative instruments were classified within Level 2.

Our bank debt, 3¼% Senior Notes, 4⅛% Senior Notes, 2¼% Senior Notes and 1.4% Senior Secured Notes were recorded at historical amounts in our Condensed Consolidated Balance Sheets, as we have not elected to measure them at fair value. We measured the fair value of our variable rate bank debt using the market approach based on Level 2 inputs. Fair values of the 3¼% Senior Notes, 4⅛% Senior Notes, 2¼% Senior Notes and 1.4% Senior Secured Notes were estimated based on quoted market prices, a Level 1 input.

Our derivative financial instruments were recorded in the Condensed Consolidated Balance Sheets at their fair values. Changes in fair values of derivatives are recorded in each period in earnings or comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.

We utilize certain derivative financial instruments to manage a portion of our interest rate and natural gas cost exposures. We generally limit our use of derivative financial instruments to interest rate and natural gas swap agreements. We do not engage in trading or other speculative uses of these financial instruments. For a financial instrument to qualify as a hedge, we must be exposed to interest rate or price risk, and the financial instrument must reduce the exposure and be designated as a hedge. Financial instruments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.

We also utilize certain internal hedging strategies to minimize our foreign currency exchange rate risk. Net investment hedges that qualify for hedge accounting result in the recognition of foreign currency gains or losses, net of tax, in accumulated other comprehensive loss. 

We had two U.S. dollar interest rate swap agreements, each for $50.0 million notional principal amount, to manage a portion of our exposure to interest rate fluctuations, with a fixed rate of 2.878 percent, that matured on March 24, 2023. In March 2023, we entered into four U.S. dollar interest rate swap agreements, each for $75.0 million notional principal amount, to manage a portion of our exposure to interest rate fluctuations. These agreements have a fixed rate ranging from 3.889 percent to 3.905 percent, mature on April 3, 2026, and were entered into with financial institutions which are expected to fully perform under the terms thereof. The difference between amounts to be paid or received on our interest rate swap agreements is recorded in interest and other debt expense in our Condensed Consolidated Statements of Income and was not significant for the three and nine months ended September 30, 2023. The total fair value of our interest rate swaps agreements in effect at September 30, 2023 was not significant.

We have entered into natural gas swap agreements to manage a portion of our exposure to fluctuations in natural gas prices. The difference between amounts to be paid or received on our natural gas swap agreements is recorded in cost of goods sold in our Condensed Consolidated Statements of Income and was not significant for the three and nine months ended September 30, 2023. These agreements are with a financial institution which is expected to fully perform under the terms thereof. The total fair value of our natural gas swap agreements in effect at September 30, 2023 was not significant.

In an effort to minimize our foreign currency exchange rate risk, we have financed acquisitions of foreign operations primarily with borrowings denominated in Euros. In addition, where available, we have borrowed funds in local currency or implemented certain internal hedging strategies to minimize our foreign currency exchange rate risk related to foreign operations, including net investment hedges related to the 3¼% Senior Notes which are Euro denominated. Foreign currency gains related to our net investment hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2023 were $15.0 million and $4.1 million, respectively.

We are a party to other legal proceedings, contract disputes and claims arising in the ordinary course of our business. We are not a party to, and none of our properties are subject to, any pending legal proceedings which could have a material adverse effect on our business or financial condition.

We have a supply chain finance (“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. We agree to pay the financial institution the stated amount of invoices from our suppliers electing to participate on the original maturity dates of the invoices. We may terminate our agreement with the financial institution upon at least 30 days’ notice, and the financial institution may terminate our agreement upon at least 10 days’ notice. Additionally, suppliers who elect to participate in this SCF program may terminate their participation upon at least 30 days’ notice. The suppliers' invoices sold under this SCF program can be outstanding up to 210 days from the invoice date. Suppliers’ invoices included in this SCF program were $294.1 million, $321.9 million and $346.8 million at September 30, 2023 and 2022 and December 31, 2022, respectively, and were included in accounts payable in our Condensed Consolidated Balance Sheets.

The components of the net periodic pension benefit cost (credit) were as follows:

Silgan and its subsidiaries file U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions. The Internal Revenue Service, or IRS, has completed its review of the 2021 tax year with no change to our filed federal income tax return. We have been accepted into the Compliance Assurance Program for the 2022 and 2023 tax years which provides for the review by the IRS of tax matters relating to our tax return prior to filing.

On March 4, 2022, our Board of Directors authorized the repurchase by us of up to an aggregate of $300.0 million of our common stock by various means from time to time through and including December 31, 2026. During the nine months ended September 30, 2023, we repurchased an aggregate of 3,893,098 shares of our common stock at an average price per share of $44.86, for a total purchase price of $174.6 million. At September 30, 2023, we had approximately $93.3 million remaining under this authorization for the repurchase of our common stock.

During the first nine months of 2023, we issued 487,409 treasury shares which had an average cost of $3.19 per share for restricted stock units that vested during the period that had been previously issued under a prior stock-based compensation plan. In accordance with the applicable agreements for such restricted stock units, we repurchased 174,882 shares of our common stock at an average cost of $52.71 to satisfy minimum employee withholding tax requirements resulting from the vesting of such restricted stock units.

We account for treasury shares using the first-in, first-out (FIFO) cost method. As of September 30, 2023, 68,614,060 shares of our common stock were held in treasury.

We currently have one stock-based compensation plan in effect under which we have issued restricted stock units to our officers, other key employees and outside directors. In May and June of 2023, 293,190 restricted stock units were granted to certain of our officers, other key employees and outside directors. The fair value of these restricted stock units at the grant date was $13.6 million, which is being amortized ratably over the respective vesting period from the grant date.

We evaluate performance of our business segments and allocate resources based on the adjusted EBIT of our business segments. Adjusted EBIT is not a defined term under GAAP. We define adjusted EBIT as income before interest and income taxes excluding 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. We began using adjusted EBIT in 2023. Previously, we used segment income, without any adjustments, for our business segments. We have provided adjusted EBIT for 2022 below for comparative purposes. Adjusted EBIT should not be considered in isolation or as a substitute for income before interest and income taxes or any other financial data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies.

Reportable segment information was as follows:

Net sales and adjusted EBIT of our metal containers segment and of part of our dispensing and specialty closures segment are dependent, in part, upon the vegetable and fruit harvests in the United States and, to a lesser extent, in a variety of national growing regions in Europe. The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in applicable regions. Because of the seasonality of the harvests, we have historically experienced higher unit sales volume in the third quarter of our fiscal year and generated a disproportionate amount of our annual adjusted EBIT during that quarter.

Item 2.

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.

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.

The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented:

Summary unaudited results of operations for the periods presented are provided below.

In the first nine months of 2023, consolidated net sales were $4.65 billion, a decrease of $308.0 million, or 6.2 percent, as compared to the first nine months of 2022 primarily due to lower volumes across all segments, non-recurring net sales

associated with Russia in the first nine months of 2022, the unfavorable impact from the pass through of lower resin costs in the custom containers segment and a less favorable mix of products sold in the metal containers and custom containers segments. These decreases were partially offset by price increases primarily related to inflation in other manufacturing costs in the dispensing and specialty closures and metal containers segments, a more favorable mix of products sold in the dispensing and specialty closures segment and the impact from favorable foreign currency translation.

In the first nine months of 2023, income before interest and income taxes decreased by $51.5 million to $469.3 million as compared to $520.8 million in the first nine months of 2022, and margins decreased to 10.1 percent from 10.5 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 favorable impact in the first nine months of 2022 from an inventory management program in the dispensing and specialty closures and metal containers segments, other pension and postretirement expense in the first nine months of 2023 as compared to other pension and postretirement income in the first nine months of 2022, the unfavorable impact of higher costs related to labor challenges that impacted output at a U.S. food and beverage closures facility, cost recovery in the prior year period of certain customer project expenditures in the dispensing and specialty closures segment, higher rationalization charges and a less favorable mix of products sold in the custom containers segment. These decreases were partially offset by the $25.2 million charge in the prior year period for the settlement with the European Commission, the favorable impact in the first nine months of 2023 from price increases primarily related to inflation in other manufacturing costs in all segments, a more favorable mix of products sold in the dispensing and specialty closures segment and lower selling, general and administrative costs. Rationalization charges were $13.2 million and $7.5 million in the first nine months of 2023 and 2022, respectively.

expense increased $37.6 million to $130.8 million as compared to $93.2 million in the first nine months of 2022. The increases were primarily due to higher weighted average interest rates. The first nine months of 2023 also included the write-off of $3.5 million of accrued interest income associated with a historical acquisition tax indemnity in the second quarter of 2023. The first nine months of 2022 also included a loss on early extinguishment of debt of $1.5 million.

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 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 for the periods presented is provided below:

In the third quarter of 2023, net sales for the dispensing and specialty closures segment decreased $16.4 million, or 2.8 percent, as compared to the second quarter of 2022. This decrease was primarily the result of lower unit volumes of approximately three percent, including from non-recurring net sales associated with Russia in the third quarter of 2022 of $3.8 million, partially offset by the impact of favorable foreign currency translation of approximately $19 million. The decrease in unit volumes was principally the result of lower volumes for closures for international food and beverage markets and non-recurring volumes associated with Russia, partially offset by volume growth in higher margin dispensing products.

In the first nine months of 2023, net sales for the dispensing and specialty closures segment decreased $76.8 million, or 4.3 percent, as compared to the first nine months of 2022. This decrease was primarily the result of lower unit volumes of approximately six percent, including from non-recurring net sales associated with Russia in the first nine months of 2022 of $13.2 million, partially offset by a more favorable mix of products sold, the impact of favorable foreign currency translation of approximately $10 million and higher average 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 and non-recurring volumes associated with Russia, partially offset by volume growth in higher margin dispensing products.

In the third quarter of 2023, adjusted EBIT of the dispensing and specialty closures segment increased $5.4 million as compared to the third quarter of 2022, and adjusted EBIT margin increased to 16.8 percent from 15.4 percent over the same periods. The increase in adjusted EBIT was primarily due to higher selling prices primarily related to inflation in other manufacturing costs, a more favorable mix of products sold and lower selling, general and administrative costs, partially offset by lower unit volumes.

In the first nine months of 2023, adjusted EBIT of the dispensing and specialty closures segment decreased $31.6 million as compared to the first nine months of 2022, and adjusted EBIT margin decreased to 14.9 percent from 16.1 percent over the same periods. The decrease in adjusted EBIT was primarily due to the favorable impact in the first nine months of 2022 from an inventory management program and cost recovery for certain customer project expenditures, lower unit volumes and the unfavorable impact of higher costs related to labor challenges that impacted output at a U.S. food and beverage closures facility, partially offset by a more favorable mix of products sold, higher selling prices primarily related to inflation in other manufacturing costs and lower selling, general and administrative costs.

In the third quarter of 2023, net sales for the metal containers segment decreased $117.4 million, or 9.7 percent, as compared to the second quarter of 2022. This decrease was primarily the result of lower unit volumes of approximately eleven percent, including from non-recurring net sales associated with Russia in the third quarter of 2022 of $16.5 million, partially offset by the impact of favorable foreign currency translation of approximately $8 million and a more favorable mix of products sold. The decrease in unit volumes was principally the result of customer destocking during the quarter and non-recurring volumes associated with Russia.

In the first nine months of 2023, net sales for the metal containers segment decreased $141.5 million, or 5.4 percent, as compared to the first nine months of 2022. This decrease was primarily the result of lower unit volumes of approximately six percent, including from non-recurring net sales associated with Russia in the first nine months of 2022 of $42.1 million, and a less favorable mix of products sold, partially offset by higher average selling prices due to the lagged contractual pass through of inflation in labor and other manufacturing costs and the impact of favorable foreign currency translation of approximately $6 million. The decrease in unit volumes was principally the result of customer destocking during the period and non-recurring volumes associated with Russia.

In the third quarter of 2023, adjusted EBIT of the metal containers segment decreased $4.1 million as compared to the third quarter of 2022, while adjusted EBIT margin increased to 10.4 from 9.7 percent for the same periods. The decrease in adjusted EBIT was primarily due to the favorable impact in the third quarter of 2022 from an inventory management program and lower unit volumes, partially offset by higher average selling prices due to the lagged contractual pass through of inflation in labor and other manufacturing costs, a more favorable mix of products sold and lower selling, general and administrative costs.

In the first nine months of 2023, adjusted EBIT of the metal containers segment increased $27.7 million as compared to the first nine months of 2022, and adjusted EBIT margin increased to 9.8 percent from 8.2 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 labor and other manufacturing costs and lower selling, general and administrative costs, partially offset by the favorable impact in the prior year period from an inventory management program and lower unit volumes.