Silgan (SLGN) - 2022 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents unaudited condensed consolidated financial statements, including balance sheets, income, comprehensive income, cash flows, and stockholders' equity, with detailed notes for periods ended September 30, 2022 and 2021 Condensed Consolidated Balance Sheets Total assets slightly decreased from $7.77 billion at December 31, 2021, to $7.52 billion at September 30, 2022, driven by lower cash and cash equivalents, while stockholders' equity increased | Metric (Dollars in thousands) | Sept. 30, 2022 | Sept. 30, 2021 | Dec. 31, 2021 | | :---------------------------- | :------------- | :------------- | :------------ | | Cash and cash equivalents | 243,609 | 270,567 | 631,439 | | Total current assets | 2,332,228 | 2,181,374 | 2,295,849 | | Total assets | 7,519,413 | 7,547,840 | 7,770,846 | | Total current liabilities | 1,681,412 | 2,041,088 | 1,508,522 | | Long-term debt | 3,246,738 | 3,191,581 | 3,772,926 | | Total stockholders' equity | 1,693,231 | 1,456,706 | 1,562,696 | Condensed Consolidated Statements of Income Net sales increased 19.3% for the three months and 16.9% for the nine months ended September 30, 2022, driving significant growth in gross profit and net income, with diluted EPS rising to $1.25 and $2.85 respectively | Metric (Dollars in thousands, except per share) | Three Months Ended Sept. 30, 2022 | Three Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :-------------------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net sales | 1,970,445 | 1,651,070 | 4,956,112 | 4,237,841 | | Cost of goods sold | 1,662,680 | 1,402,836 | 4,140,968 | 3,533,257 | | Gross profit | 307,765 | 248,234 | 815,144 | 704,584 | | Net income | 138,703 | 106,292 | 316,253 | 274,049 | | Diluted net income per share | 1.25 | 0.96 | 2.85 | 2.47 | Condensed Consolidated Statements of Comprehensive Income Comprehensive income slightly increased to $81.6 million for the three months but decreased to $210.7 million for the nine months ended September 30, 2022, primarily due to foreign currency translation losses | Metric (Dollars in thousands) | Three Months Ended Sept. 30, 2022 | Three Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net income | 138,703 | 106,292 | 316,253 | 274,049 | | Foreign currency translation | (58,254) | (30,952) | (109,957) | (38,655) | | Other comprehensive loss | (57,140) | (27,725) | (105,528) | (30,205) | | Comprehensive income | 81,563 | 78,567 | 210,725 | 243,844 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities significantly increased to $117.5 million for the nine months ended September 30, 2022, while investing activities decreased due to fewer acquisitions, leading to an overall $387.8 million decrease in cash and cash equivalents | Metric (Dollars in thousands) | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :---------------------------- | :------------------------------- | :------------------------------- | | Net cash used in operating activities | (117,522) | (5,778) | | Net cash used in investing activities | (161,611) | (889,190) | | Net cash (used in) provided by financing activities | (90,561) | 761,886 | | Net decrease in cash and cash equivalents | (387,830) | (138,914) | | Balance at end of period | 243,609 | 270,567 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity increased to $1.69 billion at September 30, 2022, driven by net income and retained earnings growth, despite increased accumulated other comprehensive loss and treasury stock repurchases | Metric (Dollars in thousands, except per share) | Sept. 30, 2022 | Sept. 30, 2021 | | :-------------------------------------------- | :------------- | :------------- | | Total stockholders' equity | 1,693,231 | 1,456,706 | | Retained earnings | 2,954,292 | 2,622,401 | | Accumulated other comprehensive loss | (365,356) | (291,158) | | Dividends declared on common stock per share | 0.16 (3 months) / 0.48 (9 months) | 0.14 (3 months) / 0.42 (9 months) | | Repurchases of common stock (9 months) | (26,367) | — | Notes to Condensed Consolidated Financial Statements This section provides detailed context for financial statements, covering accounting policies, revenue, rationalization, comprehensive loss, inventory, debt, financial instruments, commitments, retirement benefits, income taxes, treasury stock, stock-based compensation, and segment information Note 1. Significant Accounting Policies Financial statements are prepared under GAAP for interim reporting, with no impairment found in the 2022 annual assessment of goodwill and indefinite-lived intangible assets - Financial statements are unaudited and prepared under GAAP for interim reporting, not full GAAP[20] - Annual impairment assessment for goodwill and indefinite-lived intangible assets was performed in Q3 2022, with no impairment found[22] Note 2. Revenue Revenue is disaggregated by segment and geography, with total revenue of $4.96 billion for the nine months ended September 30, 2022, primarily from North America and the Metal Containers segment | Segment (Dollars in thousands) | Three Months Ended Sept. 30, 2022 | Three Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Dispensing and Specialty Closures | 575,530 | 533,329 | 1,775,888 | 1,588,449 | | Metal Containers | 1,212,034 | 942,125 | 2,617,156 | 2,120,740 | | Custom Containers | 182,881 | 175,616 | 563,068 | 528,652 | | Total Revenues | 1,970,445 | 1,651,070 | 4,956,112 | 4,237,841 | | Geography (Dollars in thousands) | Three Months Ended Sept. 30, 2022 | Three Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :------------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | North America | 1,592,775 | 1,274,025 | 3,833,613 | 3,140,924 | | Europe and other | 377,670 | 377,045 | 1,122,499 | 1,096,917 | | Total Revenues | 1,970,445 | 1,651,070 | 4,956,112 | 4,237,841 | Note 3. Rationalization Charges Rationalization charges totaled $2.7 million for three months and $7.5 million for nine months ended September 30, 2022, primarily in Metal Containers, with remaining expenses and cash expenditures of $3.1 million and $6.0 million respectively | Segment (Dollars in thousands) | Three Months Ended Sept. 30, 2022 | Three Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :----------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Dispensing and Specialty Closures | 346 | 406 | 346 | 5,704 | | Metal Containers | 2,480 | 1,822 | 7,182 | 7,068 | | Custom Containers | (100) | 87 | 5 | 254 | | Total Rationalization Charges | 2,726 | 2,315 | 7,533 | 13,026 | - Remaining expenses for rationalization plans (excluding Central States Pension Plan) are expected to be $3.1 million, and cash expenditures $6.0 million[25] - Remaining cash expenditures for Central States Pension Plan withdrawal liability are approximately $3.1 million annually through 2040[25] Note 4. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss increased to $(365.4) million at September 30, 2022, primarily due to $(109.9) million in foreign currency translation losses for the nine-month period | Component (Dollars in thousands) | Balance at Dec. 31, 2021 | Other comprehensive loss (9 months ended Sept. 30, 2022) | Balance at Sept. 30, 2022 | | :------------------------------- | :----------------------- | :------------------------------------------------------- | :------------------------ | | Unrecognized Net Defined Benefit Plan Costs | (119,474) | 1,731 | (117,743) | | Change in Fair Value of Derivatives | (2,327) | 2,698 | 371 | | Foreign Currency Translation | (138,027) | (109,957) | (247,984) | | Total Accumulated Other Comprehensive Loss | (259,828) | (105,528) | (365,356) | - Foreign currency translation losses for the nine months ended September 30, 2022, were $(109.9) million, including $(168.1) million from foreign subsidiary financial statements and $72.2 million from net investment hedges[28] Note 5. Inventories Inventories increased to $851.1 million at September 30, 2022, with an inventory management program decreasing cost of goods sold by $33.5 million due to LIFO liquidations | Inventory Type (Dollars in thousands) | Sept. 30, 2022 | Sept. 30, 2021 | Dec. 31, 2021 | | :------------------------------------ | :------------- | :------------- | :------------ | | Raw materials | 452,307 | 333,202 | 394,102 | | Work-in-process | 231,036 | 152,429 | 157,406 | | Finished goods | 542,044 | 370,134 | 394,378 | | Total Inventories (LIFO adjusted) | 851,070 | 762,182 | 798,837 | - An inventory management program decreased cost of goods sold by $26.2 million for the three months and $33.5 million for the nine months ended September 30, 2022, due to LIFO inventory liquidations[30] Note 6. Long-Term Debt Total principal debt decreased to $3.86 billion at September 30, 2022, following the redemption of $300.0 million of Senior Notes in March 2022, incurring a $1.5 million pre-tax charge | Debt Type (Dollars in thousands) | Sept. 30, 2022 | Sept. 30, 2021 | Dec. 31, 2021 | | :------------------------------- | :------------- | :------------- | :------------ | | Bank revolving loans | 497,000 | 910,000 | — | | U.S. term loans | 1,000,000 | 400,000 | 1,000,000 | | 3¼% Senior Notes | 636,740 | 753,285 | 739,180 | | 4⅛% Senior Notes | 600,000 | 600,000 | 600,000 | | 2¼% Senior Notes | 489,800 | 579,450 | 568,600 | | 1.4% Senior Secured Notes | 500,000 | 500,000 | 500,000 | | Total debt - principal | 3,856,298 | 4,147,799 | 3,815,372 | - Redeemed $300.0 million of 4¾% Senior Notes in March 2022, resulting in a $1.5 million pre-tax charge for early extinguishment of debt[32] Note 7. Financial Instruments Financial instruments include cash, receivables, payables, debt, and swap agreements, with fair values measured using Level 1 or Level 2 inputs, and derivatives used to manage interest rate, natural gas, and foreign currency risks - Cash and cash equivalents fair value measured using Level 1 inputs[35] - Derivative instruments (interest rate and natural gas swaps) fair value measured using Level 2 inputs[35] - Utilizes interest rate swap agreements ($50.0 million notional principal each, fixed rate 2.878%, maturing March 24, 2023) and natural gas swap agreements to manage exposures[40][41] - Foreign currency gains related to net investment hedges (Euro-denominated 3¼% Senior Notes) were $30.2 million for the three months and $72.2 million for the nine months ended September 30, 2022[42] Note 8. Commitments and Contingencies The company settled a European Commission investigation regarding metal packaging operations, paying a €23.9 million fine in October 2022, with no other material adverse legal proceedings expected - Settled European Commission investigation for metal packaging operations, paying a fine of €23.9 million in October 2022[43] - No other legal proceedings are expected to have a material adverse effect on business or financial condition[44] Note 9. Retirement Benefits Net periodic pension benefit credit was $(7.7) million for three months and $(23.1) million for nine months ended September 30, 2022, with similar trends for other postretirement benefits | Metric (Dollars in thousands) | Three Months Ended Sept. 30, 2022 | Three Months Ended Sept. 30, 2021 | Nine Months Ended Sept. 30, 2022 | Nine Months Ended Sept. 30, 2021 | | :---------------------------- | :-------------------------------- | :-------------------------------- | :------------------------------- | :------------------------------- | | Net periodic pension benefit credit | (7,720) | (8,605) | (23,060) | (25,847) | | Net periodic other postretirement benefit credit | (389) | (490) | (1,106) | (1,252) | Note 10. Income Taxes The IRS completed its 2020 tax year review with no changes and accepted the company into the Compliance Assurance Program for 2021 and 2022 - IRS completed 2020 tax year review with no changes[46] - Accepted into Compliance Assurance Program for 2021 and 2022 tax years[46] Note 11. Treasury Stock The Board authorized a $300.0 million common stock repurchase program through 2026, with $26.4 million in repurchases during the first nine months of 2022 and $273.6 million remaining - Board authorized $300.0 million common stock repurchase program through December 31, 2026[47] - Repurchased 649,727 shares for $26.4 million during the nine months ended September 30, 2022[47] - Approximately $273.6 million remains under the repurchase authorization[47] Note 12. Stock-Based Compensation The company granted 429,731 restricted stock units with a fair value of $17.9 million during the first nine months of 2022, amortized over their vesting period - Granted 429,731 restricted stock units with a fair value of $17.9 million during the first nine months of 2022[50] Note 13. Segment Information The company operates in three segments: Dispensing and Specialty Closures, Metal Containers, and Custom Containers, with Metal Containers generating the highest net sales and Dispensing and Specialty Closures the highest segment income | Segment (Dollars in thousands) | Net Sales (9 Months Ended Sept. 30, 2022) | Segment Income (9 Months Ended Sept. 30, 2022) | | :----------------------------- | :---------------------------------------- | :--------------------------------------------- | | Dispensing and Specialty Closures | 1,775,888 | 257,825 | | Metal Containers | 2,617,156 | 225,634 | | Custom Containers | 563,068 | 79,846 | | Corporate | — | (42,486) | | Total | 4,956,112 | 520,819 | - Corporate expenses for the nine months ended September 30, 2022, include a $25.2 million charge for the European Commission settlement[52] - Sales and segment income for metal containers and part of dispensing and specialty closures are seasonal, with higher unit sales and disproportionate annual segment income historically in the third quarter due to harvests[53] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance and condition, analyzing results for the three and nine months ended September 30, 2022, covering revenue, income drivers, segment performance, capital resources, and liquidity General Silgan Holdings Inc. is a leading manufacturer of sustainable rigid packaging solutions, aiming to increase shareholder value through growth, cost reduction, competitive positioning, and strategic acquisitions - Leading manufacturer of sustainable rigid packaging solutions for consumer goods[58] - Products include dispensing and specialty closures, steel and aluminum containers, and custom plastic containers[58] - Objective: increase shareholder value by growing business, reducing costs, building competitive positions, and completing attractive acquisitions[59] RESULTS OF OPERATIONS Consolidated net sales increased 19.3% and 16.9% for the three and nine months ended September 30, 2022, respectively, driven by higher selling prices and unit volumes, leading to increased income despite inflationary costs and unfavorable foreign currency translation Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021 Consolidated net sales increased 19.3% to $1.97 billion, with diluted EPS rising to $1.25, driven by higher selling prices and unit volumes in dispensing and specialty closures, partially offset by lower volumes in other segments and unfavorable foreign currency translation - Consolidated net sales increased 19.3% to $1.97 billion[63] - Net income per diluted share increased to $1.25 from $0.96[63] - Dispensing and Specialty Closures: Net sales increased 7.9% ($42.1 million) due to higher selling prices, 1% higher unit volumes, and favorable mix, partially offset by $37 million unfavorable foreign currency translation; segment income increased $19.1 million, with margin rising to 13.8%[65][71] - Metal Containers: Net sales increased 28.6% ($269.9 million) due to higher selling prices, partially offset by 9% lower unit volumes and $19 million unfavorable foreign currency translation; segment income increased $27.0 million, with margin remaining at 10.0%[66][72] - Custom Containers: Net sales increased 4.2% ($7.3 million) due to favorable product mix and higher selling prices, partially offset by 7% lower volumes and $1 million unfavorable foreign currency translation; segment income increased $1.6 million, with margin rising to 13.3%[67][73] - Interest and other debt expense increased $6.7 million to $33.7 million due to higher outstanding borrowings from acquisitions and higher interest rates[74] Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021 Consolidated net sales increased 16.9% to $4.96 billion, with diluted EPS rising to $2.85, driven by higher selling prices and unit volumes, partially offset by lower volumes in some segments, unfavorable foreign currency, and a European Commission settlement - Consolidated net sales increased 16.9% to $4.96 billion[76] - Net income per diluted share increased to $2.85 from $2.47[77] - Dispensing and Specialty Closures: Net sales increased 11.8% ($187.5 million) due to higher selling prices and 3% higher unit volumes, partially offset by $81 million unfavorable foreign currency translation; segment income increased $58.2 million, with margin rising to 14.5%[79][85] - Metal Containers: Net sales increased 23.4% ($496.4 million) due to higher selling prices, partially offset by 11% lower unit volumes and $40 million unfavorable foreign currency translation; segment income increased $27.1 million, but margin decreased to 8.6%[80][87] - Custom Containers: Net sales increased 6.5% ($34.4 million) due to higher selling prices and favorable product mix, partially offset by 7% lower volumes and $3 million unfavorable foreign currency translation; segment income increased $5.4 million, with margin rising to 14.2%[81][88] - Interest and other debt expense (before early extinguishment loss) increased $11.8 million to $91.7 million due to higher outstanding borrowings from 2021 acquisitions[89] - Corporate expenses increased due to a $25.2 million settlement with the European Commission[84] - Rationalization charges decreased to $7.5 million from $13.0 million[76] CAPITAL RESOURCES AND LIQUIDITY Liquidity is primarily from operating activities and debt, with cash used for debt redemption, capital expenditures, and dividends, while maintaining compliance with financial covenants and sufficient resources for future needs - Principal liquidity sources: net cash from operating activities and borrowings under debt instruments[91] - Redeemed $300.0 million of 4¾% Notes in March 2022 using revolving loan borrowings and cash on hand[92] - For the nine months ended September 30, 2022, cash was used for[94][95] - Debt redemption and other foreign long-term debt: $300.3 million - Decreases in outstanding checks: $225.9 million - Net capital expenditures and other investing activities: $161.6 million - Cash used in operations: $117.5 million - Dividends paid: $54.3 million - Stock repurchases: $39.4 million - Available revolving loans under the Credit Agreement at September 30, 2022, were $983.3 million[97] - Seasonal working capital requirements (averaging $350 million) are funded through revolving loans, other foreign bank loans, and cash on hand[98] - Believes cash from operations and available borrowings will meet expected operating needs, capital expenditures, debt service, tax obligations, pension contributions, share repurchases, and dividends[99] - In compliance with all financial and operating covenants[100] Guaranteed Securities Various Senior Notes are guaranteed by the Obligor Group, comprising U.S. subsidiaries that also guarantee the Credit Agreement, with summarized financial information provided - 3¼%, 4⅛%, 2¼% Senior Notes, and 1.4% Senior Secured Notes are guaranteed by the Obligor Group (U.S. subsidiaries)[101] | Obligor Group (Dollars in millions) | Sept. 30, 2022 | Dec. 31, 2021 | | :---------------------------------- | :------------- | :------------ | | Current assets | 1,460.8 | 1,506.9 | | Noncurrent assets | 4,066.2 | 4,159.9 | | Current liabilities | 1,323.3 | 1,159.2 | | Noncurrent liabilities | 3,877.6 | 4,392.4 | - For the nine months ended September 30, 2022, the Obligor Group reported net sales of $3,714.0 million and net income of $227.4 million[105] Rationalization Charges The company continues to pursue cost reduction opportunities, with $6.3 million in cash payments for rationalization plans during the nine months ended September 30, 2022, and remaining expenses of $3.1 million - Cash payments for rationalization plans were $6.3 million for the nine months ended September 30, 2022[106] - Remaining expenses and cash expenditures for rationalization plans (excluding Central States Pension Plan) are expected to be $3.1 million and $6.0 million, respectively[106] - Remaining cash expenditures for Central States Pension Plan withdrawal liability are approximately $3.1 million annually through 2040[106] Item 3. Quantitative and Qualitative Disclosures About Market Risk Primary market risks include interest rates, foreign currency, and commodity prices, managed through derivative financial instruments and internal hedging strategies, with no material changes since the last annual report - Primary market risks: interest rates, foreign currency exchange rates, and commodity prices (natural gas)[109] - Uses derivative financial instruments (interest rate and natural gas swap agreements) and internal hedging strategies for foreign currency to manage risks, not for speculation[109] - No material changes to market risks or management policies since the December 31, 2021, Form 10-K, except as noted in Financial Statements Notes 6 and 7[110] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of September 30, 2022, with no material changes in internal controls over financial reporting, and acquired entities' controls are being integrated for the 2022 annual assessment - Disclosure controls and procedures were effective as of September 30, 2022[111] - No material changes in internal controls over financial reporting during the period[112] - Integrating internal controls of 2021 acquisitions (Gateway Plastics LLC, Unicep Packaging LLC, Easytech Closures S.p.A.) for the 2022 annual assessment[113] Part II. Other Information Item 1. Legal Proceedings The company settled a European Commission investigation regarding metal packaging operations on July 12, 2022, paying a €23.9 million fine in October 2022, closing the investigation - Settled European Commission investigation regarding metal packaging operations in Europe on July 12, 2022[114] - Paid a fine of €23.9 million in October 2022[114] Item 6. Exhibits This section lists exhibits filed with the Quarterly Report, including CEO and CFO certifications under Sarbanes-Oxley Act Sections 302 and 906, and XBRL documents - Includes certifications by CEO and CFO pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act[116] - XBRL Instance Document and Taxonomy Extension documents are filed[116] Signatures The Quarterly Report on Form 10-Q was signed on November 3, 2022, by Robert B. Lewis, Executive Vice President and Chief Financial Officer - Report signed by Robert B. Lewis, Executive Vice President and Chief Financial Officer, on November 3, 2022[121]