Silgan Holdings Inc. — Q2 2022 Form 10-Q
Business and period: Silgan manufactures rigid packaging, including dispensing and specialty closures, metal containers, and custom containers. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,543.8m | $1,348.7m | $2,985.7m | $2,586.8m |
| Gross profit / margin | $273.9m / 17.7% | $234.9m / 17.4% | $507.4m / 17.0% | $456.4m / 17.6% |
| Income before interest and taxes | $158.0m | $153.0m | $301.4m | $279.5m |
| Net income | $92.7m | $94.5m | $177.6m | $167.8m |
| Diluted EPS | $0.83 | $0.85 | $1.59 | $1.51 |
Q2 sales rose 14.5%; six-month sales rose 15.4%, largely from higher selling prices reflecting raw-material and other inflation, and from acquisitions and mix. Q2 operating income increased modestly, but net income and diluted EPS declined. Six-month net income and EPS increased year over year.
Margins: Q2 gross margin improved 0.3 percentage points, while six-month gross margin declined 0.6 points. Income-before-interest-and-tax margin fell to 10.2% from 11.3% in Q2 and to 10.1% from 10.8% for the first half. Q2 SG&A was $123.8m, up from $94.4m, including a $25.2m European Commission settlement charge.
Segments: Q2 sales increased in all segments: Dispensing and Specialty Closures $602.4m (+10.4%), Metal Containers $754.4m (+20.8%), and Custom Containers $187.0m (+4.8%). Metal Containers’ Q2 unit volume fell about 10%; Custom Containers’ fell about 7%. For the first half, segment income rose in closures and custom containers, while Metal Containers income was nearly flat and its margin declined to 7.4% from 8.8%.
Cash flow, debt and liquidity
- Operating cash flow was negative $351.9m in the first half, versus negative $209.3m in 2021. Working capital was a major use of cash, including a $475.2m increase in inventory and a $243.3m increase in receivables.
- Investing cash outflow was $120.4m, including $118.4m of capital expenditures. Financing provided $96.9m. Cash declined $383.6m to $247.8m.
- Debt principal was $4.106bn at June 30; reported total debt, net of issuance costs and discount, was $4.086bn. Current debt was $718.7m, including $675.0m of revolver borrowings. Long-term debt was $3.367bn.
- After letters of credit, $805.3m remained available under the credit facility. The company said operating cash generation and borrowing availability should meet foreseeable needs and reported compliance with financing covenants.
- Six-month interest and debt expense before early-extinguishment losses was $58.0m, up from $52.8m. The company redeemed $300m of 4.75% notes in March, funded with revolver borrowings and cash, and recorded a $1.5m extinguishment loss.
Changes, outlook and risks
- Price increases passed through higher input costs, but manufacturing-cost inflation, foreign-currency effects and lower volumes in metal and custom containers pressured margins. Supply-chain, labor and energy challenges, customer inventory corrections and smaller-can product mix also affected results.
- Inventory management programs benefited results; LIFO inventory liquidations reduced cost of goods sold by $7.3m in the first half. This is an unusual benefit to consider when assessing earnings.
- On July 12, 2022, the company announced a settlement ending the European Commission investigation into its European metal packaging operations. It agreed to pay €23.852m (reported as $25.2m), due in Q4 2022, while stating it did not fully concur with the Commission’s facts and legal qualifications. The charge was included in Q2 and first-half results.
- Management provided no specific earnings guidance in the supplied filing text. It noted seasonal working-capital needs, historically peaking in summer or early fall, and typically higher unit sales and a disproportionate share of annual segment income in Q3 due to harvest-related demand. It said liquidity was sufficient for foreseeable operating needs, planned investment, debt service, dividends and repurchases.
- Other items to monitor include the Central States pension-plan withdrawal liability, with expected cash payments of about $3.1m annually through 2040; foreign-exchange and interest-rate exposure; and integration of 2021 acquisitions. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- How much of sales growth and segment earnings reflects pricing and acquisitions versus underlying unit demand, particularly in Metal Containers and Custom Containers.
- Whether working-capital outflows and elevated inventories reverse as seasonal sales progress, and how that affects revolver usage and liquidity.
- The effect of the $25.2m settlement charge, Q4 cash payment and LIFO liquidation benefit on comparable earnings and cash flow.
- Debt maturities, variable-rate exposure, covenant headroom and continued availability of the credit facility.
- Harvest-dependent seasonality, customer supply-chain conditions, inflation, currency movements and acquisition integration risks.