Silgan Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Silgan manufactures dispensing and specialty closures, metal containers, and custom containers. Results are unaudited.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,426.7 million | $1,543.8 million | $2,845.0 million | $2,985.7 million |
| Gross profit | $250.1 million | $273.9 million | $488.1 million | $507.4 million |
| Gross margin | 17.5% | 17.7% | 17.2% | 17.0% |
| Income before interest and taxes | $144.0 million | $158.0 million | $275.2 million | $301.4 million |
| Net income | $78.9 million | $92.7 million | $150.9 million | $177.6 million |
| Diluted EPS | $0.71 | $0.83 | $1.36 | $1.59 |
| Interest and other debt expense | $46.8 million | $28.7 million | $83.6 million | $59.5 million |
Q2 sales fell 7.6% year over year; six-month sales fell 4.7%. Q2 adjusted EBIT, a non-GAAP measure, was $160.8 million versus $187.9 million; the six-month total was $310.2 million versus $334.1 million. Adjusted EBIT margin fell to 11.3% from 12.2% in Q2 and to 10.9% from 11.2% for the first half.
Segments and material changes
- Dispensing and Specialty Closures: Q2 sales decreased 7.0% and adjusted EBIT decreased to $76.9 million from $100.3 million. Lower volumes, labor-related production disruption, and prior-year benefits from inventory management and customer-project cost recovery weighed on results.
- Metal Containers: Q2 sales decreased 5.8%, while adjusted EBIT increased to $75.7 million from $63.5 million. Inflation-related price pass-through supported earnings, partly offset by lower volume and less favorable mix.
- Custom Containers: Q2 sales decreased 16.7% and adjusted EBIT decreased to $18.5 million from $29.5 million, primarily reflecting lower volume, including exited lower-margin business, and lower resin-cost pass-through pricing.
Lower volumes across segments and non-recurring Russia-related sales in 2022 reduced comparisons. Other drivers included less favorable product mix in metal containers, unfavorable currency effects in the first half, and lower custom-container prices as resin costs declined. Prior-year results included a $25.2 million European Commission settlement charge, which benefited the year-over-year comparison for current-period SG&A and corporate results. Pension results also swung from income in 2022 to expense in 2023. Higher interest expense reflected higher weighted-average rates and a $3.5 million write-off of accrued interest income related to a historical acquisition tax indemnity.
Cash flow, debt and liquidity
- First-half operating cash flow was a use of $811.7 million, compared with a use of $351.9 million in 2022. Major working-capital uses included receivables of $397.4 million, inventory of $473.0 million, and accounts payable of $143.2 million.
- Capital expenditures were $118.2 million. Cash and cash equivalents declined to $236.6 million from $585.6 million at year-end 2022.
- Debt carrying value was $4.163 billion at June 30, 2023, including $811.4 million classified as current; total debt principal was $4.178 billion. Revolving loans included $738.0 million under the U.S. credit facility.
- Available revolving capacity under the credit facility, after letters of credit, was $741.5 million. Management said operating cash flow and available borrowing capacity should cover expected operating needs and other planned uses for the foreseeable future; the company reported compliance with financing covenants.
- Dividends paid were $40.4 million and common-stock repurchases were $31.0 million in the first half. A $300 million repurchase authorization had approximately $246.2 million remaining at June 30.
Outlook, risks and other notable items
The filing provides no quantified earnings or revenue guidance. Management emphasized the business’s seasonal working-capital needs: sales and adjusted EBIT have historically been higher in the third quarter due to food and vegetable harvest cycles, and peak seasonal working-capital requirements have averaged approximately $350 million. Management also cited continued evaluation of acquisition opportunities.
Key exposures include interest rates, foreign exchange, natural-gas prices, seasonal demand and working capital, and operating disruptions such as labor challenges. The company uses derivatives for hedging, not speculation. A credit agreement amendment in June transitioned benchmark rates from LIBOR to SOFR and SONIA and reduced Term SOFR spread adjustments. Supplier invoices in the supply-chain finance program totaled $321.9 million and remained included in accounts payable. Rationalization reserves were $29.7 million; Central States pension withdrawal payments are expected to continue through 2040. Silgan reported no pending legal proceeding expected to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether seasonal second-half sales and cash generation reverse the substantial first-half operating cash outflow and working-capital build.
- Whether segment volumes, margins, and the U.S. closures facility’s labor-related production performance improve.
- Debt, interest-rate exposure, seasonal revolver usage, covenant headroom, and available liquidity.
- The effects of supplier-finance balances and ongoing pension withdrawal payments on cash flow and reported working capital.
- How management’s non-GAAP adjusted EBIT adjustments compare with GAAP results and prior periods.