Silgan Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Silgan manufactures dispensing and specialty closures, metal containers, and custom containers. Results are unaudited; the company notes interim results are not necessarily indicative of full-year performance.
Financial results
| Metric | Q3 2023 | Q3 2022 | First 9 months 2023 | First 9 months 2022 |
|---|---|---|---|---|
| Net sales | $1,803.1 million | $1,970.4 million | $4,648.1 million | $4,956.1 million |
| Gross profit | $285.9 million | $307.8 million | $774.0 million | $815.1 million |
| Gross margin | 15.9% | 15.6% | 16.7% | 16.4% |
| Income before interest and taxes | $194.1 million | $219.4 million | $469.3 million | $520.8 million |
| Net income | $110.6 million | $138.7 million | $261.5 million | $316.3 million |
| Diluted EPS | $1.02 | $1.25 | $2.38 | $2.85 |
Q3 operating margin was 10.7%, down from 11.1%; net margin was 6.1%, down from 7.0%. Year-to-date operating margin was 10.1%, versus 10.5%; net margin was 5.6%, versus 6.4%. Interest and other debt expense rose to $47.3 million in Q3 and $130.8 million year to date, primarily due to higher weighted-average interest rates.
Cash flow and liquidity: Operating cash flow was negative $596.0 million for the first nine months, compared with negative $117.5 million a year earlier. Working-capital movements included $638.3 million of cash use from receivables and $152.9 million from inventories, partly offset by a $233.7 million reduction in accounts payable. Capital expenditures were $173.5 million. Cash ended the period at $307.1 million, down from $585.6 million at year-end 2022.
Debt: Total debt was $4.21 billion, including $897.8 million classified as current; long-term debt was $3.31 billion. The current portion included $818.0 million of U.S. revolving loans. The company reported $660.5 million of remaining availability under its credit agreement after letters of credit. It stated that it was in compliance with financing covenants.
Material changes and segment performance
- Consolidated sales: Down 8.5% in Q3 and 6.2% year to date. Management attributed declines mainly to lower volumes across segments, Russia-related sales in the 2022 comparison period, and—in custom containers—lower resin-cost pass-through and weaker product mix. Foreign currency translation partly offset declines.
- Dispensing and Specialty Closures: Q3 sales fell 2.8%; adjusted EBIT rose to $93.8 million from $88.4 million, with adjusted EBIT margin improving to 16.8% from 15.4%. Year-to-date adjusted EBIT declined to $253.6 million from $285.2 million, and margin fell to 14.9% from 16.1%.
- Metal Containers: Q3 sales declined 9.7%, principally on lower volumes and customer destocking; adjusted EBIT was $113.5 million versus $117.6 million, while margin improved to 10.4% from 9.7%. Year-to-date adjusted EBIT increased to $241.7 million from $214.0 million, with margin rising to 9.8% from 8.2%, supported by price increases and lower SG&A.
- Custom Containers: Q3 sales decreased 18.3%; adjusted EBIT fell to $11.8 million from $22.8 million, and margin dropped to 7.9% from 12.5%. Year-to-date sales decreased 15.9% and adjusted EBIT fell to $50.3 million from $75.5 million. Lower volumes, destocking, and less favorable mix were key factors; the company also cited exiting lower-margin business.
Consolidated adjusted EBIT, a non-GAAP measure, was $214.4 million in Q3 versus $223.4 million, and $524.6 million year to date versus $557.5 million. These figures exclude specified items; the company cautions that adjusted EBIT is not a substitute for GAAP results and may not be comparable with similarly titled measures.
Outlook, risks, and unusual items
- The filing gives no specific numerical earnings or sales guidance. Management believes operating cash generation and available borrowing capacity will cover foreseeable operating needs, capital expenditures, debt service, taxes, pension contributions, repurchases, and dividends. It may use additional debt to finance acquisitions.
- Seasonality is significant: harvest-related packaging demand generally makes the third quarter a disproportionate contributor to annual sales and adjusted EBIT. Seasonal working-capital requirements have historically averaged about $350 million.
- Customer destocking and lower volumes affected multiple segments. Management also cited labor challenges that reduced output at a U.S. closures facility, inflation-related pricing, and changing product mix.
- Rationalization charges were $6.4 million in Q3 and $13.2 million year to date, compared with $2.7 million and $7.5 million, respectively, in 2022. Remaining rationalization expenses and cash expenditures, excluding the Central States pension withdrawal liability, were estimated at $6.6 million and $9.9 million.
- Higher pension expense reflected lower pension asset returns, higher plan interest cost, and a lower expected return assumption for U.S. pension assets (5.5% in 2023 versus 6.9% in 2022). The plans were approximately 129% funded at December 31, 2022.
- The first nine months of 2022 included a $25.2 million European Commission settlement charge; 2023 included a $3.5 million write-off of accrued interest income tied to a historical acquisition tax indemnity. The 2023 effective tax rate benefited from reversal of tax reserves associated with that indemnity.
- The company reported no pending legal proceedings it believes could materially adversely affect its business or financial condition. It identified interest-rate, foreign-exchange, and natural-gas price exposure, and said it does not use derivatives for speculative trading.
Important facts for investors to verify
- Whether working-capital cash use reverses as seasonal receivables and inventory convert to cash, and how that affects revolver borrowings.
- Whether customer destocking and lower segment volumes persist, particularly in metal and custom containers, and whether custom-container margins recover.
- Debt maturities, borrowing costs, covenant headroom, and the availability of the reported $660.5 million revolver capacity.
- How much of the year-over-year earnings change reflects underlying operations versus pension effects, rationalization charges, prior-period Russia sales, and other unusual items.
- Progress against capital allocation plans: the company repurchased $174.6 million of shares in the first nine months and had $93.3 million remaining under its repurchase authorization at September 30, 2023.