Silgan (SLGN) 10-Q2024 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended September 30, 2024

For the transition period from ________________ to ________________

Commission file number  001-41459

SILGAN HOLDINGS INC.

(Registrant's telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Part I. Financial Information

Item 1. Financial Statements

(Dollars in thousands)

See accompanying notes.

See accompanying notes.

 

See accompanying notes.

See accompanying notes.

See accompanying notes.

Note 1.               Significant Accounting Policies

The Condensed Consolidated Balance Sheet at December 31, 2023 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, 2023.

Certain prior year amounts have been reclassified to conform with the current year's presentation.

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 $110.7 million, $104.2 million, and $100.0 million as of September 30, 2024 and 2023 and December 31, 2023, respectively. Unbilled receivables are included in trade accounts receivable, net on our Condensed Consolidated Balance Sheets.

Note 3.               Rationalization Charges

Activity in reserves for our rationalization plans were as follows:

Non-cash asset write-downs were the result of comparing the carrying value of certain facilities and production related equipment to their fair value using estimated future discounted cash flows, a Level 3 fair value measurement (see Note 7 for information regarding a Level 3 fair value measurement).

Rationalization reserves as of September 30, 2024 were recorded in our Condensed Consolidated Balance Sheet as accrued liabilities of $3.6 million and other liabilities of $25.8 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 $6.9 million and $9.5 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.

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, 2024 were net (losses) of $(2.2) million and $(5.7) million, respectively, excluding income tax benefits of $0.4 million and $1.2 million, respectively. For the three and nine months ended September 30, 2024, these net (losses) consisted primarily of amortization of net actuarial (losses) of $(2.1) million and $(5.7) million, respectively. Amortization of net actuarial losses and net prior service cost 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, 2024 were not significant.

Other comprehensive loss before reclassifications related to foreign currency translation for the three and nine months ended September 30, 2024 consisted of (i) foreign currency gains (losses) related to translation of quarter end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $54.8 million and $(8.9) million, respectively, and (ii) foreign currency (losses) related to our net investment hedges of $(20.9) million and $(5.4) million, respectively, excluding income tax benefits of $5.0 million and $1.3 million, respectively. See Note 7 for further discussion.

Note 5.               Inventories

Inventories consisted of the following: 

Note 6.               Long-Term Debt

Long-term debt consisted of the following: 

At September 30, 2024, the current portion of long-term debt consisted of $725.4 million of 3¼% Senior Notes due 2025, or the 3¼% Senior Notes, $505.0 million of U.S. revolving loans under our amended and restated senior secured credit facility, as amended, or the Credit Agreement, $22.3 million of other foreign bank revolving and term loans and $1.7 million of finance leases. See Note 15 for further information.

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, 2024:

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, 2024 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. 

In March 2023, we entered into $300 million aggregate notional principal amount of U.S. dollar interest rate swap agreements to manage a portion of our exposure to interest rate fluctuations. These agreements have a weighted average fixed rate of 3.90 percent, mature in April 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, 2024. The total fair value of our interest rate swaps agreements in effect at September 30, 2024 was not significant. See Note 15 for further information.

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, 2024. 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, 2024 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 (losses) related to our net investment hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2024 were $(20.9) million and $(5.4) 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.

Note 9.               Supply Chain Finance Program

We have a supply chain finance (“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. Once a qualifying supplier elects to participate in this SCF program, all of our payments to the participating supplier are paid to such financial institution in this SCF program on the invoice due date under our agreement with such supplier, regardless of whether the individual invoice was sold by the supplier to such financial institution. 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 $284.2 million, $294.1 million and $330.2 million at September 30, 2024 and 2023 and December 31, 2023, respectively, and were included in accounts payable in our Condensed Consolidated Balance Sheets.

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

 

The components of the net periodic other postretirement 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 2022 tax year with no change to our filed federal income tax return. We have been accepted into the Compliance Assurance Program for the 2023 and 2024 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. We did not repurchase any shares of our common stock pursuant to this authorization during the nine months ended September 30, 2024. At September 30, 2024, we had approximately $93.3 million remaining under this authorization for the repurchase of our common stock.

During the first nine months of 2024, we issued 470,788 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 our stock-based compensation plans. In accordance with the applicable agreements for such restricted stock units, we repurchased 176,093 shares of our common stock at an average cost of $43.92 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, 2024, 68,317,846 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. During the first nine months of 2024, 490,672 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 $21.6 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 (income) expense for U.S. pension plans, rationalization charges and costs attributed to announced acquisitions. 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:

Total adjusted EBIT is reconciled to income before income taxes 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.

On October 15, 2024, we acquired Weener Plastics Holding B.V., or Weener, a leading producer of differentiated dispensing solutions for personal care, food and healthcare products. Weener operates a global network of 19 facilities predominantly in Europe and the Americas, with approximately 4,000 employees and proprietary manufacturing technologies including significant clean room capabilities. The purchase price for this acquisition of approximately €844.2 million, net of cash acquired, was funded with term and revolving loan borrowings under the Credit Agreement, including a new €700.0 million incremental term loan, and cash on hand.

In October 2024, we entered into €685.0 million aggregate notional principal amount of Euro interest rate swap agreements to manage a portion of our exposure to interest rate fluctuations for our Euro term loans under the Credit Agreement, which mature as follows: €35.0 million in October 2026, €70.0 million in October 2027 and €580.0 million in October 2030. These agreements have a weighted average fixed rate of 2.43 percent and were entered into with financial institutions which are expected to fully perform under the terms thereof.

On November 4, 2024, we and certain of our wholly owned subsidiaries amended the Credit Agreement by entering into a Fifth Amendment to Amended and Restated Credit Agreement (the “Fifth Amendment”) with the Lenders therein and Wells Fargo Bank, National Association, as Administrative Agent. The Fifth Amendment:

Pursuant to the Fifth Amendment, U.S. term loans are repayable in installments as follows: $8.5 million on December 31, 2025, $42.5 million on December 31, 2026, $85.0 million on each of December 31, 2027, 2028 and 2029 and $544.0 million on November 4, 2030, and Euro term loans are repayable in installments as follows: €9.0 million on December 31, 2025, €45.0 million on December 31, 2026, €90.0 million on each of December 31, 2027, 2028 and 2029 and €576.0 million on November 4, 2030.

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, 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.

 

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.

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 2024, consolidated net sales were $4.4 billion, a decrease of $204.6 million, or 4.4 percent, as compared to the first nine months of 2023 primarily due to the unfavorable impact from the pass through of lower raw material

costs in the dispensing and specialty closures and metal containers segments, lower volumes in the dispensing and specialty closures segment and a less favorable mix of products sold in the metal containers and custom containers segments. These decreases were partially offset by a more favorable mix of products sold in the dispensing and specialty closures segment, higher volumes and the pass through of higher raw material costs in the custom containers segment and the impact from favorable foreign currency translation.

In the first nine months of 2024, income before interest and income taxes decreased by $48.4 million to $420.9 million as compared to $469.3 million in the first nine months of 2023, and margins decreased to 9.5 percent from 10.1 percent over the same periods. The decrease in income before interest and income taxes was primarily the result of the unfavorable impact of lower fixed cost absorption in the metal containers segment as a result of a significantly lower inventory build in the current year period due to a reduction in pack plans of a large fruit and vegetable customer to reduce its working capital, higher rationalization charges, higher selling, general and administrative costs, the unfavorable impact in the metal containers segment of the sale of higher cost metal inventory from the prior year due to lower metal costs in 2024 in the European operations, a less favorable mix of products sold in the metal containers segment and lower volumes in the dispensing and specialty closures segment, partially offset by improved manufacturing productivity and cost performance in the dispensing and specialty closures segment, a more favorable mix of products sold in the dispensing and specialty closures and custom containers segments and higher volumes in the custom containers segment. Rationalization charges were $38.0 million and $13.2 million in the first nine months of 2024 and 2023, respectively.

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, rationalization charges 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 (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. 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 2024, net sales for the dispensing and specialty closures segment increased $4.6 million, or 0.8 percent, as compared to the third quarter of 2023. This increase was primarily the result of a more favorable mix of products sold, partially offset by lower unit volumes of approximately one percent, the pass through of lower raw material costs and the impact of unfavorable foreign currency translation of approximately $2.0 million. Higher volumes for dispensing products were offset by lower volumes for beverage products.

In the first nine months of 2024, net sales for the dispensing and specialty closures segment decreased $34.1 million, or 2.0 percent, as compared to the first nine months of 2023. This decrease was primarily the result of lower unit volumes of approximately two percent, the pass through of lower raw material costs and the impact of unfavorable foreign currency translation of approximately $1.0 million, partially offset by a more favorable mix of products sold. The decrease in unit volumes was principally the result of lower volumes for closures for food and beverage markets primarily due to customer destocking priorities.

In the third quarter of 2024, adjusted EBIT of the dispensing and specialty closures segment increased $1.4 million as compared to the third quarter of 2023, and adjusted EBIT margin increased to 16.9 percent from 16.8 percent over the same periods. The increase in adjusted EBIT was primarily due to improved manufacturing productivity and cost performance and a more favorable mix of products sold, partially offset by the unfavorable impact of foreign currency and lower unit volumes.

In the first nine months of 2024, adjusted EBIT of the dispensing and specialty closures segment increased $12.2 million as compared to the first nine months of 2023, and adjusted EBIT margin increased to 16.0 percent from 14.9 percent over the same periods. The increase in adjusted EBIT was primarily due to improved manufacturing productivity and cost performance and a more favorable mix of products sold, partially offset by lower unit volumes.