Silgan Holdings Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Silgan manufactures rigid packaging through Dispensing and Specialty Closures, Metal Containers, and Custom Containers. Financial amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,651.1 | $1,488.5 | $4,237.8 | $3,695.4 |
| Gross profit | $248.2 | $258.4 | $704.6 | $667.5 |
| Income before interest and taxes | $167.9 | $174.0 | $447.4 | $407.4 |
| Net income | $106.3 | $112.9 | $274.0 | $248.6 |
| Diluted EPS | $0.96 | $1.01 | $2.47 | $2.23 |
| Operating cash flow | Not separately reported quarterly | Not separately reported quarterly | $(5.8) | $118.5 |
- Sales increased 10.9% in Q3 and 14.7% year to date. Growth reflected higher raw-material and manufacturing-cost pass-through, stronger volumes in closures and metal containers, favorable currency translation, and acquired operations.
- Gross margin fell to 15.0% in Q3 from 17.4%; for nine months it was 16.6% versus 18.1%. Income before interest and taxes was 10.2% of sales in Q3 versus 11.7%, and 10.6% year to date versus 11.0%.
- Nine-month interest and debt expense was $80.8 million, including a $0.9 million early-extinguishment loss. The effective tax rate was 25.3% for the nine-month period.
- Q3 segment income was $60.1 million for Dispensing and Specialty Closures, $94.3 million for Metal Containers, and $22.7 million for Custom Containers. Year-to-date segment income was $199.6 million, $198.5 million, and $74.4 million, respectively.
Cash, debt, and liquidity
- At September 30, 2021, cash was $270.6 million. Total debt was $4.13 billion after debt discounts and issuance costs ($4.15 billion principal); $934.2 million was classified as current, including $910.0 million of revolving loans.
- After letters of credit, available revolving credit was $258.9 million plus C$15.0 million. Management said operating cash flow and borrowing capacity should meet expected operating needs, capital spending, debt service, taxes, pension contributions, dividends, and share repurchases; the company reported compliance with financing covenants.
- Nine-month operating cash flow was negative $5.8 million, driven principally by increases in receivables and inventory. Investing used $889.2 million, including $718.4 million for acquisitions and $173.0 million of capital expenditures. Financing provided $761.9 million.
- In February, Silgan issued $500 million of 1.4% senior secured notes due 2026 and used the proceeds to repay term loans. Acquisitions were funded with revolving borrowings.
Material changes and management commentary
- Q3 sales rose, but net income and operating income declined year over year. Management attributed pressure to resin costs passing through with a delay, less favorable product mix, labor and supply-chain challenges, operational inefficiencies, and lower Custom Containers volumes. Higher volumes, productivity, cost control, and cost pass-through partly offset these effects.
- For the first nine months, net income and EPS increased despite lower margins. Higher volumes and acquired business, strong operating performance, lower corporate expenses, and higher pension income were important offsets to increased operating costs and lower Metal Container segment income.
- Silgan acquired Gateway Plastics for $483.8 million and Unicep for $236.9 million in September; their post-acquisition results were not significant in the reported period. Purchase-price allocations remained preliminary. Easytech was acquired October 1 for $28.5 million, after quarter-end.
- The company reported no numerical forward guidance. It noted that packaging demand is seasonal, with working-capital needs generally peaking in summer or early fall; historical peak seasonal working-capital requirements averaged about $350 million.
Risks, contingencies, and unusual items
- Labor and supply-chain constraints, resin and other input-cost inflation, delayed cost pass-through, product mix, and currency movements affected results. Harvest-dependent packaging demand also varies with weather and crop conditions.
- European and German competition authorities have investigated the metal-packaging industry, including Silgan subsidiaries. At this stage, the company said it could not reasonably assess outcomes or estimate potential costs.
- Withdrawal-liability cash payments related to the Central States Pension Plan are expected to be approximately $3.1 million annually through 2040; related interest accretion expense is expected to average about $1.1 million annually through 2040.
- Q3 included $2.3 million of rationalization charges and $4.1 million of acquisition-related costs. Year-to-date rationalization charges were $13.0 million.
Important facts for investors to verify
- Whether cost inflation and supply-chain pressures ease, and whether pricing catches up with resin and other input costs.
- Post-acquisition performance, integration progress, and final purchase-price allocations for Gateway Plastics and Unicep; also the impact of the subsequent Easytech acquisition.
- Working-capital trends, cash conversion, revolving-credit availability, and debt levels following the acquisitions.
- Developments in the European antitrust investigations and the long-term Central States Pension Plan withdrawal liability.