QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
Delaware
06-1269834
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
4 Landmark Square
Stamford,
Connecticut
06901
(Address of principal executive offices)
(Zip Code)
(203) 975-7110
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
SLGN
New York Stock Exchange
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes☒ No ☐
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 31, 2022, the number of shares outstanding of the Registrant’s common stock was 110,079,007.
Revolving loans and current portion of long-term debt
$
591,287
$
934,246
$
20,251
Trade accounts payable
688,383
761,018
1,133,318
Accrued payroll and related costs
110,358
110,452
109,279
Accrued liabilities
291,384
235,372
245,674
Total current liabilities
1,681,412
2,041,088
1,508,522
Long-term debt
3,246,738
3,191,581
3,772,926
Deferred income taxes
425,181
383,154
435,252
Other liabilities
472,851
475,311
491,450
Stockholders’ equity:
Common stock
1,751
1,751
1,751
Paid-in capital
335,924
320,132
325,448
Retained earnings
2,954,292
2,622,401
2,691,745
Accumulated other comprehensive loss
(365,356)
(291,158)
(259,828)
Treasury stock
(1,233,380)
(1,196,420)
(1,196,420)
Total stockholders’ equity
1,693,231
1,456,706
1,562,696
$
7,519,413
$
7,547,840
$
7,770,846
See accompanying notes.
-3-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three and nine months ended September 30, 2022 and 2021
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
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
Selling, general and administrative expenses
96,680
90,299
320,521
282,072
Rationalization charges
2,726
2,315
7,533
13,026
Other pension and postretirement income
(11,051)
(12,297)
(33,729)
(37,934)
Income before interest and income taxes
219,410
167,917
520,819
447,420
Interest and other debt expense before loss on early extinguishment of debt
33,743
27,039
91,752
79,868
Loss on early extinguishment of debt
—
—
1,481
883
Interest and other debt expense
33,743
27,039
93,233
80,751
Income before income taxes
185,667
140,878
427,586
366,669
Provision for income taxes
46,964
34,586
111,333
92,620
Net income
$
138,703
$
106,292
$
316,253
$
274,049
Earnings per share:
Basic net income per share
$
1.26
$
0.96
$
2.86
$
2.48
Diluted net income per share
$
1.25
$
0.96
$
2.85
$
2.47
Weighted average number of shares:
Basic
110,281
110,465
110,572
110,372
Effect of dilutive securities
460
732
548
739
Diluted
110,741
111,197
111,120
111,111
See accompanying notes.
-4-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three and nine months ended September 30, 2022 and 2021
(Dollars in thousands)
(Unaudited)
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
Net income
$
138,703
$
106,292
$
316,253
$
274,049
Other comprehensive income (loss), net of tax:
Changes in net prior service credit and actuarial losses
693
2,156
1,731
5,910
Change in fair value of derivatives
421
1,071
2,698
2,540
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
See accompanying notes.
-5-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2022 and 2021
(Dollars in thousands)
(Unaudited)
2022
2021
Cash flows provided by (used in) operating activities:
Net income
$
316,253
$
274,049
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
201,912
185,968
Rationalization charges
7,533
13,026
Stock compensation expense
12,917
15,605
Loss on early extinguishment of debt
1,481
883
Other changes that provided (used) cash, net of effects from acquisitions:
Trade accounts receivable, net
(459,131)
(415,331)
Inventories
(92,181)
(78,738)
Trade accounts payable
(165,717)
62,303
Accrued liabilities
64,458
(33,488)
Other, net
(5,047)
(30,055)
Net cash used in operating activities
(117,522)
(5,778)
Cash flows provided by (used in) investing activities:
Purchase of businesses, net of cash acquired
(1,333)
(718,430)
Capital expenditures
(162,271)
(172,994)
Other, net
1,993
2,234
Net cash used in investing activities
(161,611)
(889,190)
Cash flows provided by (used in) financing activities:
Borrowings under revolving loans
813,628
1,155,199
Repayments under revolving loans
(290,327)
(248,310)
Proceeds from issuance of long-term debt
6,042
499,725
Repayments of long-term debt
(300,314)
(500,000)
Changes in outstanding checks - principally vendors
(225,863)
(84,216)
Dividends paid on common stock
(54,325)
(47,030)
Debt issuance costs
—
(4,909)
Repurchase of common stock
(39,402)
(8,573)
Net cash (used in) provided by financing activities
(90,561)
761,886
Effect of exchange rate changes on cash and cash equivalents
(18,136)
(5,832)
Cash and cash equivalents:
Net decrease
(387,830)
(138,914)
Balance at beginning of year
631,439
409,481
Balance at end of period
$
243,609
$
270,567
Interest paid, net
$
91,037
$
79,107
Income taxes paid, net
66,959
79,812
See accompanying notes.
-6-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three and nine months ended September 30, 2022 and 2021
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
Common stock - shares outstanding
Balance at beginning of period
110,215
110,408
110,410
110,057
Net issuance of treasury stock for vested restricted stock units
—
2
455
353
Repurchases of common stock
—
—
(650)
—
Balance at end of period
110,215
110,410
110,215
110,410
Common stock - par value
Balance at beginning and end of period
$
1,751
$
1,751
$
1,751
$
1,751
Paid-in capital
Balance at beginning of period
331,877
314,873
325,448
306,363
Stock compensation expense
4,047
5,268
12,917
15,605
Net issuance of treasury stock for vested restricted stock units
—
(9)
(2,441)
(1,836)
Balance at end of period
335,924
320,132
335,924
320,132
Retained earnings
Balance at beginning of period
2,833,431
2,531,783
2,691,745
2,395,395
Net income
138,703
106,292
316,253
274,049
Dividends declared on common stock
(17,842)
(15,674)
(53,706)
(47,043)
Balance at end of period
2,954,292
2,622,401
2,954,292
2,622,401
Accumulated other comprehensive loss
Balance at beginning of period
(308,216)
(263,433)
(259,828)
(260,953)
Other comprehensive loss
(57,140)
(27,725)
(105,528)
(30,205)
Balance at end of period
(365,356)
(291,158)
(365,356)
(291,158)
Treasury stock
Balance at beginning of period
(1,233,380)
(1,196,394)
(1,196,420)
(1,189,683)
Net issuance of treasury stock for vested restricted stock units
—
(26)
(10,593)
(6,737)
Repurchases of common stock
—
—
(26,367)
—
Balance at end of period
(1,233,380)
(1,196,420)
(1,233,380)
(1,196,420)
Total stockholders' equity
$
1,693,231
$
1,456,706
$
1,693,231
$
1,456,706
Dividends declared on common stock per share
$
0.16
$
0.14
$
0.48
$
0.42
See accompanying notes.
-7-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Silgan Holdings Inc., or Silgan, have been prepared in accordance with U.S. generally accepted accounting principles, or GAAP, for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The results of operations for any interim period are not necessarily indicative of the results of operations for the full year.
The Condensed Consolidated Balance Sheet at December 31, 2021 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.
You should read the accompanying condensed consolidated financial statements in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Goodwill and Other Intangible Assets. We review goodwill and other indefinite-lived intangible assets for impairment as of July 1 of each year and more frequently if circumstances indicate a possible impairment. We determined that our goodwill and other indefinite-lived intangible assets were not impaired in our annual 2022 assessment performed during the third quarter.
Note 2. Revenue
The following tables present our revenues disaggregated by reportable segment and geography as they best depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Revenues by segment were as follows:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(Dollars in thousands)
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
$
1,970,445
$
1,651,070
$
4,956,112
$
4,237,841
Revenues by geography were as follows:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(Dollars in thousands)
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
$
1,970,445
$
1,651,070
$
4,956,112
$
4,237,841
Our contract assets primarily consist of unbilled accounts receivable related to over time revenue recognition and were $113.3 million, $94.6 million, and $78.2 million as of September 30, 2022 and 2021 and December 31, 2021, respectively. Unbilled receivables are included in trade accounts receivable, net on our Condensed Consolidated Balance Sheets.
-8-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 3. Rationalization Charges
We continually evaluate cost reduction opportunities across each of our segments, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. Rationalization charges by segment were as follows:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(Dollars in thousands)
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
$
2,726
$
2,315
$
7,533
$
13,026
Activity in reserves for our rationalization plans were as follows:
Employee Severance and Benefits
Plant Exit Costs
Non-Cash Asset Write-Down
Total
(Dollars in thousands)
Balance at December 31, 2021
$
41,090
$
157
$
—
$
41,247
Charged to expense
5,324
348
1,861
7,533
Utilized and currency translation
(5,908)
(378)
(1,861)
(8,147)
Balance at September 30, 2022
$
40,506
$
127
$
—
$
40,633
Non-cash asset write-downs were the result of comparing the carrying value of certain production related assets to their fair value using estimated future discounted cash flows, a Level 3 fair value measurement (see Note 7 for information regarding a Level 3 fair value measurement).
Rationalization reserves as of September 30, 2022 were recorded in our Condensed Consolidated Balance Sheet as accrued liabilities of $4.4 million and other liabilities of $36.2 million. Excluding the impact of our withdrawal from the Central States, Southeast and Southwest Areas Pension Plan, or the Central States Pension Plan, in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $3.1 million and $6.0 million, respectively. Remaining expenses for the accretion of interest for the withdrawal liability related to the Central States Pension Plan are expected to average approximately $0.9 million per year and be recognized annually through 2040, and remaining cash expenditures for the withdrawal liability related to the Central States Pension Plan are expected to be approximately $3.1 million annually through 2040.
-9-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 4. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is reported in our Condensed Consolidated Statements of Stockholders’ Equity. Amounts included in accumulated other comprehensive loss, net of tax, were as follows:
Unrecognized Net Defined Benefit Plan Costs
Change in Fair Value of Derivatives
Foreign Currency Translation
Total
(Dollars in thousands)
Balance at December 31, 2021
$
(119,474)
$
(2,327)
$
(138,027)
$
(259,828)
Other comprehensive loss before reclassifications
—
3,135
(109,957)
(106,822)
Amounts reclassified from accumulated other
comprehensive loss
1,731
(437)
—
1,294
Other comprehensive loss
1,731
2,698
(109,957)
(105,528)
Balance at September 30, 2022
$
(117,743)
$
371
$
(247,984)
$
(365,356)
The amounts reclassified to earnings from the unrecognized net defined benefit plan costs component of accumulated other comprehensive loss for the three and nine months ended September 30, 2022 were net (losses) of $(0.9) million and $(2.4) million, respectively, excluding income tax benefits of $0.3 million and $0.7 million, respectively. For the three and nine months ended September 30, 2022, these net (losses) consisted of amortization of net actuarial (losses) of $(1.3) million and $(3.5) million and amortization of net prior service credit of $0.4 million and $1.1 million, respectively. Amortization of net actuarial losses and net prior service credit was recorded in other pension and postretirement income in our Condensed Consolidated Statements of Income. See Note 9 for further information.
The amounts reclassified to earnings from the change in fair value of derivatives component of accumulated other comprehensive loss for the three and nine months ended September 30, 2022 were not significant.
Other comprehensive loss before reclassifications related to foreign currency translation for the three and nine months ended September 30, 2022 consisted of (i) foreign currency (losses) related to translation of quarter end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $(82.5) million and $(168.1) million, respectively, (ii) foreign currency gains related to intra-entity foreign currency transactions that are of a long-term investment nature of $1.2 million and $3.1 million, respectively, and (iii) foreign currency gains related to our net investment hedges of $30.2 million and $72.2 million, respectively, excluding income tax (provisions) of $(7.1) million and $(17.1) million, respectively. See Note 7 for further discussion.
-10-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 5. Inventories
Inventories consisted of the following:
Sept. 30, 2022
Sept. 30, 2021
Dec. 31, 2021
(Dollars in thousands)
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
Other
16,857
16,005
15,731
1,242,244
871,770
961,617
Adjustment to value inventory at cost on the LIFO method
(391,174)
(109,588)
(162,780)
$
851,070
$
762,182
$
798,837
During the nine months ended September 30, 2022, we implemented an inventory management program which resulted in permanent reductions of inventories valued under the last-in, first-out basis. This resulted in liquidations of inventory layers carried at costs prevailing in prior years and thereby decreased cost of goods sold by $26.2 million and $33.5 million for the three and nine months ended September 20, 2022, respectively.
Note 6. Long-Term Debt
Long-term debt consisted of the following:
Sept. 30, 2022
Sept. 30, 2021
Dec. 31, 2021
(Dollars in thousands)
Bank debt
Bank revolving loans
$
497,000
$
910,000
$
—
U.S. term loans
1,000,000
400,000
1,000,000
Other foreign bank revolving and term loans
66,649
36,003
38,862
Total bank debt
1,563,649
1,346,003
1,038,862
4¾% Senior Notes
—
300,000
300,000
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
Finance leases
66,109
69,061
68,730
Total debt - principal
3,856,298
4,147,799
3,815,372
Less unamortized debt issuance costs and debt discount
18,273
21,972
22,195
Total debt
3,838,025
4,125,827
3,793,177
Less current portion
591,287
934,246
20,251
$
3,246,738
$
3,191,581
$
3,772,926
At September 30, 2022, the current portion of long-term debt consisted of $497.0 million of bank revolving loans and $50.0 million of U.S. term loans under our amended and restated senior secured credit facility, as amended, or the Credit Agreement, $41.6 million of other foreign bank revolving and term loans and $2.7 million of finance leases.
-11-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
On March 28, 2022, we redeemed all $300.0 million aggregate principal amount of our outstanding 4¾% Senior Notes due 2025, or the 4¾% Notes, at a redemption price of 100 percent of their principal amount plus accrued and unpaid interest to the redemption date. We funded this redemption with revolving loan borrowings under the Credit Agreement and cash on hand. As a result of this redemption, we recorded a pre-tax charge for the loss on early extinguishment of debt of $1.5 million during the first quarter of 2022 for the write-off of unamortized debt issuance costs.
Note 7. Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, trade accounts receivable, trade accounts payable, debt obligations and swap agreements. Due to their short-term maturity, the carrying amounts of trade accounts receivable and trade accounts payable approximate their fair market values. The following table summarizes the carrying amounts and estimated fair values of our other financial instruments at September 30, 2022:
Carrying Amount
Fair Value
(Dollars in thousands)
Assets:
Cash and cash equivalents
$
243,609
$
243,609
Liabilities:
Bank debt
$
1,563,649
$
1,563,649
3¼% Senior Notes
636,740
601,083
4⅛% Senior Notes
599,287
532,200
2¼% Senior Notes
489,800
394,632
1.4% Senior Secured Notes
499,811
427,000
Fair Value Measurements
GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP classifies the inputs used to measure fair value into a hierarchy consisting of three levels. Level 1 inputs represent unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs represent unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs represent unobservable inputs for the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
Financial Instruments Measured at Fair Value
The financial assets and liabilities that were measured on a recurring basis at September 30, 2022 consisted of our cash and cash equivalents and derivative instruments. We measured the fair value of cash and cash equivalents using Level 1 inputs. We measured the fair value of our derivative instruments using the income approach. The fair value of our derivative instruments reflects the estimated amounts that we would pay or receive based on the present value of the expected cash flows derived from market interest rates and prices. As such, these derivative instruments were classified within Level 2.
Financial Instruments Not Measured at Fair Value
Our bank debt, 3¼% Senior Notes, 4⅛% Senior Notes, 2¼% Senior Notes and 1.4% Senior Secured Notes were recorded at historical amounts in our Condensed Consolidated Balance Sheets, as we have not elected to measure them at fair value. We measured the fair value of our variable rate bank debt using the market approach based on Level 2 inputs. Fair values of the 3¼% Senior Notes, 4⅛% Senior Notes, 2¼% Senior Notes and 1.4% Senior Secured Notes were estimated based on quoted market prices, a Level 1 input.
-12-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Derivative Instruments and Hedging Activities
Our derivative financial instruments were recorded in the Condensed Consolidated Balance Sheets at their fair values. Changes in fair values of derivatives are recorded in each period in earnings or comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.
We utilize certain derivative financial instruments to manage a portion of our interest rate and natural gas cost exposures. We generally limit our use of derivative financial instruments to interest rate and natural gas swap agreements. We do not engage in trading or other speculative uses of these financial instruments. For a financial instrument to qualify as a hedge, we must be exposed to interest rate or price risk, and the financial instrument must reduce the exposure and be designated as a hedge. Financial instruments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.
We also utilize certain internal hedging strategies to minimize our foreign currency exchange rate risk. Net investment hedges that qualify for hedge accounting result in the recognition of foreign currency gains or losses, net of tax, in accumulated other comprehensive loss.
Interest Rate Swap Agreements
We have entered into two U.S. dollar interest rate swap agreements, each for $50.0 million notional principal amount, to manage a portion of our exposure to interest rate fluctuations. These agreements have a fixed rate of 2.878 percent and mature on March 24, 2023. The difference between amounts to be paid or received on our interest rate swap agreements is recorded in interest and other debt expense in our Condensed Consolidated Statements of Income and was not significant for the three and nine months ended September 30, 2022. These agreements are with a financial institution which is expected to fully perform under the terms thereof. The total fair value of our interest rate swap agreements in effect at September 30, 2022 was not significant.
Natural Gas Swap Agreements
We have entered into natural gas swap agreements to manage a portion of our exposure to fluctuations in natural gas prices. The difference between amounts to be paid or received on our natural gas swap agreements is recorded in cost of goods sold in our Condensed Consolidated Statements of Income and was not significant for the three and nine months ended September 30, 2022. These agreements are with a financial institution which is expected to fully perform under the terms thereof. The total fair value of our natural gas swap agreements in effect at September 30, 2022 was not significant.
Foreign Currency Exchange Rate Risk
In an effort to minimize our foreign currency exchange rate risk, we have financed acquisitions of foreign operations primarily with borrowings denominated in Euros. In addition, where available, we have borrowed funds in local currency or implemented certain internal hedging strategies to minimize our foreign currency exchange rate risk related to foreign operations, including net investment hedges related to the 3¼% Senior Notes which are Euro denominated. Foreign currency gains related to our net investment hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2022 were $30.2 million and $72.2 million, respectively.
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 8. Commitments and Contingencies
On July 12, 2022, we concluded a settlement with the European Commission to end a long-running investigation of our metal packaging operations in Europe. This investigation was started in 2015 by the German antitrust authority and was transferred in 2018 to the European Commission. With the settlement, the European Commission closed its investigation and we paid a fine of €23.9 million in October 2022, although we do not fully concur with the facts and legal qualifications put forth by the European Commission.
We are a party to other legal proceedings, contract disputes and claims arising in the ordinary course of our business. We are not a party to, and none of our properties are subject to, any pending legal proceedings which could have a material adverse effect on our business or financial condition.
Note 9. Retirement Benefits
The components of the net periodic pension benefit credit were as follows:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(Dollars in thousands)
Service cost
$
2,937
$
3,177
$
9,507
$
10,754
Interest cost
5,131
4,579
15,430
13,288
Expected return on plan assets
(17,220)
(19,892)
(51,849)
(59,590)
Amortization of prior service cost
62
67
170
183
Amortization of actuarial losses
1,370
3,464
3,682
9,518
Net periodic benefit credit
$
(7,720)
$
(8,605)
$
(23,060)
$
(25,847)
The components of the net periodic other postretirement benefit credit were as follows:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(Dollars in thousands)
Service cost
$
5
$
25
$
56
$
81
Interest cost
96
82
314
272
Amortization of prior service credit
(415)
(460)
(1,247)
(1,373)
Amortization of actuarial gains
(75)
(137)
(229)
(232)
Net periodic benefit credit
$
(389)
$
(490)
$
(1,106)
$
(1,252)
Note 10. Income Taxes
Silgan and its subsidiaries file U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions. The Internal Revenue Service, or IRS, has completed its review of the 2020 tax year with no change to our filed federal income tax return. We have been accepted into the Compliance Assurance Program for the 2021 and 2022 tax years which provides for the review by the IRS of tax matters relating to our tax return prior to filing.
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 11. Treasury Stock
On March 4, 2022, our Board of Directors authorized the repurchase by us of up to an aggregate of $300.0 million of our common stock by various means from time to time through and including December 31, 2026. During the nine months ended September 30, 2022, we repurchased an aggregate of 649,727 shares of our common stock at an average price per share of $40.56, for a total purchase price of $26.4 million. At September 30, 2022, we had approximately $273.6 million remaining under this authorization for the repurchase of our common stock.
During the first nine months of 2022, we issued 765,917 treasury shares which had an average cost of $3.19 per share for restricted stock units that vested during the period. In accordance with the Silgan Holdings Inc. Amended and Restated 2004 Stock Incentive Plan, we repurchased 310,904 shares of our common stock at an average cost of $41.92 to satisfy minimum employee withholding tax requirements resulting from the vesting of such restricted stock units.
We account for treasury shares using the first-in, first-out (FIFO) cost method. As of September 30, 2022, 64,896,981 shares of our common stock were held in treasury.
Note 12. Stock-Based Compensation
We currently have one stock-based compensation plan in effect under which we have issued options and restricted stock units to our officers, other key employees and outside directors. During the first nine months of 2022, 429,731 restricted stock units were granted to certain of our officers, other key employees and outside directors. The fair value of these restricted stock units at the grant date was $17.9 million, which is being amortized ratably over the respective vesting period from the grant date.
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Note 13. Segment Information
Reportable segment information was as follows:
Dispensing and Specialty Closures
Metal Containers
Custom Containers
Corporate
Total
(Dollars in thousands)
Three Months Ended September 30, 2022
Net sales
$
575,530
$
1,212,034
$
182,881
$
—
$
1,970,445
Depreciation and amortization(1)
36,056
17,811
9,882
39
63,788
Rationalization charges
346
2,480
(100)
—
2,726
Segment income
79,163
121,267
24,262
(5,282)
219,410
Three Months Ended September 30, 2021
Net sales
$
533,329
$
942,125
$
175,616
$
—
$
1,651,070
Depreciation and amortization(1)
30,830
21,231
10,072
38
62,171
Rationalization charges
406
1,822
87
—
2,315
Segment income
60,090
94,271
22,704
(9,148)
167,917
Nine Months Ended September 30, 2022
Net sales
$
1,775,888
$
2,617,156
$
563,068
$
—
$
4,956,112
Depreciation and amortization(1)
109,216
58,749
29,699
120
197,784
Rationalization charges
346
7,182
5
—
7,533
Segment income (2)
257,825
225,634
79,846
(42,486)
520,819
Nine Months Ended September 30, 2021
Net sales
$
1,588,449
$
2,120,740
$
528,652
$
—
$
4,237,841
Depreciation and amortization(1)
88,821
63,809
29,077
119
181,826
Rationalization charges
5,704
7,068
254
—
13,026
Segment income
199,571
198,520
74,434
(25,105)
447,420
_____________
(1)Depreciation and amortization excludes amortization of debt discount and debt issuance costs of $1.3 million and $1.4 million for the three months ended September 30, 2022 and 2021, respectively, and $4.1 million for each of the nine months ended September 30, 2022 and 2021.
(2)Corporate includes a charge of $25.2 million for the settlement with the European Commission for the nine months ended September 30, 2022.
Total segment income is reconciled to income before income taxes as follows:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(Dollars in thousands)
Total segment income
$
219,410
$
167,917
$
520,819
$
447,420
Interest and other debt expense
33,743
27,039
93,233
80,751
Income before income taxes
$
185,667
$
140,878
$
427,586
$
366,669
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2022 and 2021 and for the
three and nine months then ended is unaudited)
Sales and segment income of our metal containers segment and of part of our dispensing and specialty closures segment are dependent, in part, upon the vegetable and fruit harvests in the United States and, to a lesser extent, in a variety of national growing regions in Europe. The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in applicable regions. Because of the seasonality of the harvests, we have historically experienced higher unit sales volume in the third quarter of our fiscal year and generated a disproportionate amount of our annual segment income during that quarter.
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Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Securities Exchange Act of 1934, as amended. Such forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting us and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and in our other filings with the Securities and Exchange Commission. As a result, the actual results of our operations or our financial condition could differ materially from those expressed or implied in these forward-looking statements.
General
We are a leading manufacturer of sustainable rigid packaging solutions for consumer goods products. We currently produce dispensing and specialty closures for food, beverage, health care, garden, home, personal care, fragrance and beauty products; steel and aluminum containers for human and pet food and general line products; and custom designed plastic containers for personal care, food, health care, pharmaceutical, household and industrial chemical, pet food and care, agricultural, automotive and marine chemical products. We are a leading worldwide manufacturer of dispensing and specialty closures, a leading manufacturer of metal containers in North America and Europe, and a leading manufacturer of custom containers in North America for a variety of markets, including the personal care, food, health care and household and industrial chemical markets.
Our objective is to increase shareholder value by efficiently deploying capital and management resources to grow our business, reduce operating costs and build sustainable competitive positions, or franchises, and to complete acquisitions that generate attractive cash returns. We have grown our net sales and income from operations largely through acquisitions but also through internal growth, and we continue to evaluate acquisition opportunities in the consumer goods packaging market. If acquisition opportunities are not identified over a longer period of time, we may use our cash flow to repay debt, repurchase shares of our common stock or increase dividends to our stockholders or for other permitted purposes.
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RESULTS OF OPERATIONS
The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented:
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
Net sales
Dispensing and Specialty Closures
29.2
%
32.3
%
35.8
%
37.5
%
Metal Containers
61.5
57.1
52.8
50.0
Custom Containers
9.3
10.6
11.4
12.5
Consolidated
100.0
100.0
100.0
100.0
Cost of goods sold
84.4
85.0
83.6
83.4
Gross profit
15.6
15.0
16.4
16.6
Selling, general and administrative expenses
4.9
5.5
6.5
6.6
Rationalization charges
0.1
0.1
0.1
0.3
Other pension and postretirement income
(0.5)
(0.8)
(0.7)
(0.9)
Income before interest and income taxes
11.1
10.2
10.5
10.6
Interest and other debt expense
1.7
1.7
1.9
1.9
Income before income taxes
9.4
8.5
8.6
8.7
Provision for income taxes
2.4
2.1
2.2
2.2
Net income
7.0
%
6.4
%
6.4
%
6.5
%
Summary unaudited results of operations for the periods presented are provided below.
Three Months Ended
Nine Months Ended
Sept. 30, 2022
Sept. 30, 2021
Sept. 30, 2022
Sept. 30, 2021
(dollars in millions)
Net sales
Dispensing and Specialty Closures
$
575.5
$
533.4
$
1,775.9
$
1,588.4
Metal Containers
1,212.0
942.1
2,617.1
2,120.7
Custom Containers
182.9
175.6
563.1
528.7
Consolidated
$
1,970.4
$
1,651.1
$
4,956.1
$
4,237.8
Segment income
Dispensing and Specialty Closures (1)
$
79.2
$
60.1
$
257.8
$
199.6
Metal Containers (2)
121.3
94.3
225.6
198.5
Custom Containers (3)
24.3
22.7
79.8
74.4
Corporate (4)
(5.4)
(9.2)
(42.4)
(25.1)
Consolidated
$
219.4
$
167.9
$
520.8
$
447.4
(1) Includes rationalization charges of $0.3 million and $0.4 million for the three months ended September 30, 2022 and 2021, respectively, and $0.3 million and $5.7 million for the nine months ended September 30, 2022 and 2021, respectively. Includes a charge for the write-up of inventory for purchase accounting of $0.9 million as a result of the acquisition of Gateway Plastics LLC for the three and nine months ended September 30, 2021.
(2) Includes rationalization charges of $2.5 million and $1.8 million for the three months ended September 30, 2022 and 2021, respectively, and $7.2 million and $7.1 million for the nine months ended September 30, 2022 and 2021, respectively.
(3) Includes rationalization (credits) charges of $(0.1) million and $0.1 million for the three months ended September 30, 2022 and 2021, respectively, and $0.2 million for the nine months ended September 30, 2021.
(4) Includes a charge of $25.2 million for the settlement with the European Commission for the nine months ended September 30, 2022.
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Three Months Ended September 30, 2022 Compared with Three Months Ended September 30, 2021
Overview. Consolidated net sales were $1.97 billion in the third quarter of 2022, a 19.3 percent increase as compared to the third quarter of 2021 primarily due to higher average selling prices due to the pass through of higher raw material and other inflationary costs across all segments, higher unit volumes in the dispensing and specialty closures segment and a more favorable mix of products sold in the dispensing and specialty closures and custom containers segments, partially offset by lower unit volumes in the metal containers and custom containers segments and the impact from unfavorable foreign currency translation. Income before interest and income taxes for the third quarter of 2022 was $219.4 million, a $51.5 million increase as compared to the same period in 2021 primarily as a result of higher average selling prices across all segments due to the pass through of inflationary costs, strong operating performances in each of the segments which included the benefit from an inventory management program in the metal containers segment, the favorable impact in the current year period from the delayed pass through of lower resin costs as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs in the dispensing and specialty closures and custom containers segments, a more favorable mix of products sold and higher unit volumes in the dispensing and specialty closures segment and a $0.9 million charge for the write-up of inventory for purchase accounting in the prior year period. These increases were partially offset by inflation in manufacturing and selling, general and administrative costs, lower volumes in the metal containers and custom containers segments, and the impact of unfavorable foreign currency translation. Results for the third quarters of 2022 and 2021 included rationalization charges of $2.7 million and $2.3 million, respectively. Net income for the third quarter of 2022 was $138.7 million as compared to $106.3 million for the same period in 2021. Net income per diluted share for the third quarter of 2022 was $1.25 as compared to $0.96 for the same period in 2021.
Net Sales. The $319.3 million increase in consolidated net sales in the third quarter of 2022 as compared to the third quarter of 2021 was the result of higher net sales across all the segments.
Net sales for the dispensing and specialty closures segment increased $42.1 million, or 7.9 percent, in the third quarter of 2022 as compared to the same period in 2021. This increase was primarily the result of higher average selling prices due to the pass through of higher raw material and other inflationary costs, higher unit volumes of approximately one percent and a more favorable mix of products sold, partially offset by the impact of unfavorable foreign currency translation of approximately $37 million. The increase in unit volumes was principally the result of higher volumes for dispensing products, including from the acquisitions completed in September 2021, partially offset by expected volume decreases in closures for certain food and beverage markets compared to record pandemic driven volumes in the prior year period.
Net sales for the metal containers segment increased $269.9 million, or 28.6 percent, in the third quarter of 2022 as compared to the same period in 2021. This increase was primarily the result of higher average selling prices due to the pass through of higher raw material and other manufacturing costs, partially offset by lower unit volumes of approximately nine percent and the impact of unfavorable foreign currency translation of approximately $19 million. The decrease in unit volumes was principally the result of lower volumes of vegetable and fruit cans as compared to higher volumes from customer restocking in the record prior year period and the continued unfavorable impact from customers’ ongoing supply chain and labor challenges in the current year period.
Net sales for the custom containers segment increased $7.3 million, or 4.2 percent, in the third quarter of 2022 as compared to the same period in 2021. This increase was principally due to a more favorable mix of products sold and higher average selling prices, including the pass through of higher resin and other inflationary costs, partially offset by lower volumes of approximately seven percent and the impact of unfavorable foreign currency translation of approximately $1 million. The decline in volumes was primarily for home, personal care and lawn and garden products.
Gross Profit. Gross profit margin increased 0.6 percentage points to 15.6 percent in the third quarter of 2022 as compared to the same period in 2021 for the reasons discussed below in "Income before Interest and Income Taxes."
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 4.9 percent in the third quarter of 2022 as compared to 5.5 percent in the same period in 2021. Selling, general and administrative expenses increased $6.4 million to $96.7 million for the third quarter of 2022 as compared to $90.3 million for the same period in 2021. The increase in selling, general and administrative expenses was principally the result of inflation in such expenses in the current year period and the inclusion of selling, general and administrative expenses from the acquisitions completed late in the third quarter and in the fourth quarter of 2021.
Income before Interest and Income Taxes. Income before interest and income taxes for the third quarter of 2022 increased by $51.5 million as compared to the third quarter of 2021, and margins increased to 11.1 percent from 10.2 percent over the same periods. The increase in income before interest and income taxes was primarily the result of higher income in all of the
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segments and lower corporate expenses. The prior year period included costs attributed to announced acquisitions and a charge for the write-up of inventory for purchase accounting of $4.1 million and $0.9 million, respectively. Rationalization charges were $2.7 million and $2.3 million in the third quarters of 2022 and 2021, respectively.
Segment income of the dispensing and specialty closures segment for the third quarter of 2022 increased $19.1 million as compared to the same period in 2021, and segment income margin increased to 13.8 percent from 11.3 percent over the same periods. The increase in segment income was primarily due to higher average selling prices due to the pass through of inflationary costs, the favorable impact in the current year period from the delayed pass through of lower resin costs as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs, strong operating performance, a more favorable mix of products sold, higher unit volumes and a $0.9 million charge for the write-up of inventory for purchase accounting in the prior year period, partially offset by inflation in manufacturing and selling, general and administrative costs and the impact of unfavorable foreign currency translation.
Segment income of the metal containers segment for the third quarter of 2022 increased $27.0 million as compared to the same period in 2021, and segment income margin remained unchanged at 10.0 percent for both periods. The increase in segment income was primarily due to strong operating performance, including the benefit of an inventory management program, and higher average selling prices due to the pass through of inflationary costs, partially offset by inflation in manufacturing and selling, general and administrative costs, lower unit volumes, the impact of unfavorable foreign currency translation and higher rationalization charges. Rationalization charges were $2.5 million and $1.8 million in the third quarters of 2022 and 2021, respectively.
Segment income of the custom containers segment for the third quarter of 2022 increased $1.6 million as compared to the same period in 2021, and segment income margin increased to 13.3 percent from 12.9 percent over the same periods. The increase in segment income was primarily attributable to the pass through of inflationary costs and the favorable impact in the current year period from the delayed pass through of lower resin costs as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs, partially offset by inflation in manufacturing and selling, general and administrative costs and lower volumes.
Interest and Other Debt Expense. Interest and other debt expense for the third quarter of 2022 increased $6.7 million to $33.7 million as compared to $27.0 million in the same period in 2021. This increase was primarily due to higher weighted average outstanding borrowings during the quarter as a result of the acquisitions completed late in the third quarter and in the fourth quarter of 2021 and higher weighted average interest rates, partially offset by lower foreign currency exchange rates on outstanding Euro denominated debt.
Provision for Income Taxes. The effective tax rates were 25.3 percent and 24.6 percent for the third quarters of 2022 and 2021, respectively. The effective tax rate for the third quarter of 2022 was unfavorably impacted by higher income generated in less favorable tax jurisdictions.
Nine Months Ended September 30, 2022 Compared with Nine Months Ended September 30, 2021
Overview. Consolidated net sales were $4.96 billion in the first nine months of 2022, a 16.9 percent increase as compared to the first nine months of 2021 primarily as a result of higher average selling prices across all segments principally related to the pass through of higher raw material and other inflationary costs, higher unit volumes in the dispensing and specialty closures segment and a more favorable mix of products sold in the custom containers segment, partially offset by lower volumes in the metal containers and custom containers segments and the impact of unfavorable foreign currency translation. Income before interest and income taxes for the first nine months of 2022 increased by $73.4 million as compared to the same period in 2021 primarily due to higher average selling prices across all segments principally due to the pass through of higher raw material and other inflationary costs, strong operating performances in each of the segments including the benefit of inventory management programs in the dispensing and specialty closures and metal containers segments, the favorable impact from the delayed pass through of lower resin costs in the current year period as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin costs in the dispensing and specialty closures and custom containers segments, higher unit volumes in the dispensing and specialty closures segment, cost recovery for certain customer project expenditures in the dispensing and specialty closures segment and lower rationalization charges. These increases were partially offset by inflation in manufacturing and selling, general and administrative costs, lower volumes and a less favorable mix of products sold in the metal containers segment, higher corporate expenses due to the charge for the settlement with the European Commission in the current year period, the impact of unfavorable foreign currency translation and lower volumes in the custom containers segment. Results for the first nine months of 2022 and 2021 included rationalization charges of $7.5 million and $13.0 million,
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respectively, a loss on early extinguishment of debt of $1.5 million and $0.9 million, respectively. Results for the first nine months of 2021 also included costs attributed to announced acquisitions of $4.1 million and a $0.9 million charge for the write-up of inventory for purchase accounting. Net income for the first nine months of 2022 was $316.3 million as compared to $274.0 million for the same period in 2021. Net income per diluted share for the first nine months of 2022 was $2.85 as compared to $2.47 for the same period in 2021.
Net Sales. The $718.3 million increase in consolidated net sales in the first nine months of 2022 as compared to the first nine months of 2021 was the result of higher net sales across all the segments.
Net sales for the dispensing and specialty closures segment increased $187.5 million, or 11.8 percent, in the first nine months of 2022 as compared to the same period in 2021. This increase was primarily the result of higher average selling prices related to the pass through of higher raw material and other inflationary costs and higher unit volumes of approximately three percent, partially offset by the impact of unfavorable foreign currency translation of approximately $81 million. The increase in unit volumes was principally the result of the inclusion of volumes from acquisitions completed in 2021 and higher volumes for beauty and fragrance products, partially offset by expected volume declines for closures for certain food and beverage markets compared to record pandemic driven volumes in the prior year period and due to customer pre-buy activity in late 2021 in advance of significant metal inflation this year and a decrease in volumes for garden, hygiene and home cleaning products, which were impacted by further inventory corrections throughout the supply chain.
Net sales for the metal containers segment increased $496.4 million, or 23.4 percent, in the first nine months of 2022 as compared to the same period in 2021. This increase was primarily the result of higher average selling prices related to the pass through of higher raw material and other manufacturing costs, partially offset by lower unit volumes of approximately eleven percent and the impact of unfavorable foreign currency translation of approximately $40 million. The decrease in unit volumes was primarily due to the impact of the customer pre-buy activity in late 2021 in advance of significant price increases due to unprecedented metal inflation this year, lower volumes of vegetable and fruit cans as compared to higher volumes from customer restocking in the prior year period and the unfavorable impact from customers' ongoing supply chain and labor challenges in the current year period.
Net sales for the custom containers segment increased $34.4 million, or 6.5 percent, in the first nine months of 2022 as compared to the same period in 2021. This increase was primarily due to higher average selling prices, which include the pass through of higher resin and other inflationary costs, and a more favorable mix of products sold, partially offset by lower volumes of approximately seven percent and the impact of unfavorable foreign currency translation of approximately $3 million. The decrease in volumes was primarily due to higher volumes in the prior year period as a result of strong pandemic driven demand and subsequent inventory corrections throughout the supply chain in the current year period.
Gross Profit. Gross profit margin decreased 0.2 percentage points to 16.4 percent in the first nine months of 2022 as compared to the same period in 2021 for the reasons discussed below in "Income before Interest and Income Taxes".
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 6.5 percent for the first nine months of 2022 as compared to 6.6 percent in the same period in 2021. Selling, general and administrative expenses increased $38.4 million to $320.5 million for the first nine months of 2022 as compared to $282.1 million for the same period in 2021. The increase in selling, general and administrative expenses was principally the result of a charge of $25.2 million for the settlement with the European Commission, the inclusion of selling, general and administrative expenses from the acquisitions completed late in the third quarter and in the fourth quarter of 2021, and inflation in such expenses in the current year period.
Income before Interest and Income Taxes. Income before interest and income taxes for the first nine months of 2022 increased by $73.4 million as compared to the first nine months of 2021, while margins decreased slightly to 10.5 percent from 10.6 percent over the same periods. The increase in income before interest and income taxes was primarily due to higher income across all the segments and lower rationalization charges, partially offset by higher corporate expenses due to the $25.2 million settlement with the European Commission. Rationalization charges were $7.5 million and $13.0 million for the first nine months of 2022 and 2021, respectively.
Segment income of the dispensing and specialty closures segment for the first nine months of 2022 increased $58.2 million as compared to the same period in 2021, and segment income margin increased to 14.5 percent from 12.6 percent over the same period. The increase in segment income was due primarily to higher average selling prices principally as a result of the pass through of higher raw material and other inflationary costs, strong operating performance including the benefit of an inventory management program, higher unit volumes, the favorable impact from the delayed pass through of lower resin costs in the current year period as compared to the unfavorable impact in the prior year period from the delayed pass through of higher resin
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costs, cost recovery for certain customer project expenditures and lower rationalization charges, partially offset by inflation in manufacturing and selling, general and administrative costs and the impact of unfavorable foreign currency translation. Rationalization charges were $0.3 million and $5.7 million in the first nine months of 2022 and 2021, respectively.
Segment income of the metal containers segment for the first nine months of 2022 increased $27.1 million as compared to the same period in 2021, while segment income margin decreased to 8.6 percent from 9.4 percent over the same periods. The increase in segment income was primarily attributable to higher average selling prices due to the pass through of higher raw material and other inflationary costs and strong operating performance including the benefit of an inventory management program, partially offset by inflation in manufacturing and selling, general and administrative costs, lower unit volumes, a less favorable mix of products sold and the impact of unfavorable foreign currency translation. The decrease in segment income margin was primarily due to the mathematical consequence of the pass through of inflation in raw material and other manufacturing costs. Rationalization charges were $7.2 million and $7.1 million in the first nine months of 2022 and 2021, respectively.
Segment income of the custom containers segment for the first nine months of 2022 increased $5.4 million as compared to the same period in 2021, and segment income margin increased to 14.2 percent from 14.1 percent over the same periods. The increase in segment income was primarily attributable to higher average selling prices principally due to the pass through of inflationary costs, the favorable impact from the delayed pass through of lower resin costs in the current year period as compared to the unfavorable impact of the delayed pass through of higher resin costs in the prior year period and strong operating performance, partially offset by inflation in manufacturing and selling, general and administrative costs and lower volumes.
Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the first nine months of 2022 increased $11.8 million to $91.7 million as compared to $79.9 million in the same period in 2021 principally due to higher weighted average outstanding borrowings as a result of the acquisitions completed in 2021, partially offset by lower foreign currency exchange rates on outstanding Euro denominated debt and lower weighted average interest rates primarily as a result of the redemption of the 4¾% Notes with proceeds from revolving loan borrowings under the Credit Agreement and cash on hand. In March 2022, we redeemed all $300.0 million aggregate principal amount of the outstanding 4¾% Notes. In conjunction with this redemption, we recognized a loss on early extinguishment of debt of $1.5 million in the first quarter of 2022. In February 2021, we issued the 1.4% Senior Secured Notes due 2026, or the 1.4% Notes, and utilized the proceeds therefrom to prepay outstanding term loans under the Credit Agreement. In conjunction with this prepayment, we recognized a loss on early extinguishment of debt of $0.9 million in the first quarter of 2021.
Provision for Income Taxes. The effective tax rates were 26.0 percent and 25.3 percent for the first nine months of 2022 and 2021, respectively. The effective tax rate in 2022 was unfavorably impacted by the non-deductible settlement with the European Commission and higher income generated in less favorable tax jurisdictions.
CAPITAL RESOURCES AND LIQUIDITY
Our principal sources of liquidity have been net cash from operating activities and borrowings under our debt instruments, including our senior secured credit facility. Our liquidity requirements arise from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment, the funding of our seasonal working capital needs and other general corporate uses.
On March 28, 2022, we redeemed all $300.0 million aggregate principal amount of the outstanding 4¾% Notes at a redemption price of 100 percent of their principal amount plus accrued and unpaid interest to the redemption date. We funded this redemption with revolving loan borrowings under the Credit Agreement and cash on hand. As a result of this redemption, we recorded a pre-tax charge for the loss on early extinguishment of debt of $1.5 million during the first quarter of 2022 for the write-off of unamortized debt issuance costs.
You should also read Note 6 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2022 included elsewhere in this Quarterly Report.
For the nine months ended September 30, 2022, we used net borrowings of revolving loans and proceeds from other foreign long-term debt of an aggregate of $529.3 million and cash and cash equivalents of $387.8 million to fund the redemption of the 4¾% Notes and other foreign long-term debt for an aggregate of $300.3 million, decreases in outstanding checks of $225.9 million, net capital expenditures and other investing activities of $161.6 million, cash used in operations of $117.5 million,
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dividends paid on our common stock of $54.3 million, repurchases of our common stock of $39.4 million and the negative effect of exchange rate changes on cash and cash equivalents of $18.1 million.
For the nine months ended September 30, 2021, we used proceeds from the net borrowings of revolving loans of $906.9 million, the issuance of the 1.4% Notes of $499.7 million and cash and cash equivalents of $138.9 million to fund acquisitions for $718.4 million, repayments of long-term debt of $500.0 million, net capital expenditures and other investing activities of $170.8 million, decreases in outstanding checks of $84.2 million, dividends paid on our common stock of $47.0 million, repurchases of our common stock of $8.6 million under our stock-based compensation plan, cash used in operations of $5.8 million, debt issuance costs of $4.9 million and the negative effect of exchange rate changes on cash and cash equivalents of $5.8 million.
At September 30, 2022, we had $497.0 million of revolving loans outstanding under the Credit Agreement. After taking into account outstanding letters of credit, the available portion of revolving loans under the Credit Agreement at September 30, 2022 was $983.3 million.
Because we sell metal containers and closures used in fruit and vegetable pack processing, we have seasonal sales. As is common in the industry, we must utilize working capital to build inventory and then carry accounts receivable for some customers beyond the end of the packing season. Due to our seasonal requirements, which generally peak sometime in the summer or early fall, we may incur short-term indebtedness to finance our working capital requirements. Our peak seasonal working capital requirements have historically averaged approximately $350 million. We fund seasonal working capital requirements through revolving loans under the Credit Agreement, other foreign bank loans and cash on hand. We may use the available portion of revolving loans under the Credit Agreement, after taking into account our seasonal needs and outstanding letters of credit, for other general corporate purposes including acquisitions, capital expenditures, dividends, stock repurchases and to refinance or repurchase other debt.
We believe that cash generated from operations and funds from borrowings available under the Credit Agreement and other foreign bank loans will be sufficient to meet our expected operating needs, planned capital expenditures, debt service, tax obligations, pension benefit plan contributions, share repurchases and common stock dividends for the foreseeable future. We continue to evaluate acquisition opportunities in the consumer goods packaging market and may incur additional indebtedness, including indebtedness under the Credit Agreement, to finance any such acquisition.
We are in compliance with all financial and operating covenants contained in our financing agreements and believe that we will continue to be in compliance during 2022 with all of these covenants.
Guaranteed Securities
Each of the 3¼% Senior Notes, the 4⅛% Senior Notes, the 2¼% Senior Notes and the 1.4% Notes were issued by Silgan and are guaranteed by our U.S. subsidiaries that also guarantee our obligations under the Credit Agreement, collectively the Obligor Group.
The following summarized financial information relates to the Obligor Group as of September 30, 2022 and December 31, 2021 and for the nine months ended September 30, 2022. Intercompany transactions, equity investments and other intercompany activity within the Obligor Group have been eliminated from the summarized financial information. Investments in subsidiaries of Silgan that are not part of the Obligor Group of $1.4 billion as of each of September 30, 2022 and December 31, 2021 are not included in noncurrent assets in the table below.
Sept. 30, 2022
Dec. 31, 2021
(Dollars in millions)
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
At September 30, 2022 and December 31, 2021, the Obligor Group held current receivables due from other subsidiary companies of $44.9 million and $70.5 million, respectively; long-term notes receivable due from other subsidiary companies of
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$685.9 million and $782.4 million, respectively; and current payables due to other subsidiary companies of $5.9 million and $7.3 million, respectively.
Nine Months Ended Sept. 30, 2022
(Dollars in millions)
Net sales
$3,714.0
Gross profit
516.5
Net income
227.4
For the nine months ended September 30, 2022, net income in the table above excludes income from equity method investments of other subsidiary companies of $88.9 million. For the nine months ended September 30, 2022, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $30.4 million; net credits from such other subsidiary companies of $43.4 million; and net interest income from such other subsidiary companies of $16.0 million. For the nine months ended September 30, 2022, the Obligor Group received dividends from other subsidiary companies of $2.3 million.
Rationalization Charges
We continually evaluate cost reduction opportunities across each of our segments, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. Under our rationalization plans, we made cash payments of $6.3 million and $6.9 million for the nine months ended September 30, 2022 and 2021, respectively. Excluding the impact of our withdrawal from the Central States Pension Plan in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $3.1 million and $6.0 million, respectively. Remaining expenses for the accretion of interest for the withdrawal liability related to the Central States Pension Plan are expected to average approximately $0.9 million per year and be recognized annually through 2040, and remaining cash expenditures for the withdrawal liability related to the Central States Pension Plan are expected to be approximately $3.1 million annually through 2040.
You should also read Note 3 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2022 included elsewhere in this Quarterly Report.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and, with respect to our international operations, in foreign currency exchange rates. In the normal course of business, we also have risk related to commodity price changes for items such as natural gas. We employ established policies and procedures to manage our exposure to these risks. Interest rate, foreign currency and commodity pricing transactions are used only to the extent considered necessary to meet our objectives. We do not utilize derivative financial instruments for trading or other speculative purposes.
Information regarding our interest rate risk, foreign currency exchange rate risk and commodity pricing risk has been disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. Since such filing, other than the changes discussed in Notes 6 and 7 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2022 included elsewhere in this Quarterly Report, there has not been a material change to our interest rate risk, foreign currency exchange rate risk or commodity pricing risk or to our policies and procedures to manage our exposure to these risks.
Item 4. CONTROLS AND PROCEDURES
As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based upon that evaluation, as of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, these internal controls.
In 2021, we acquired Gateway Plastics LLC, Unicep Packaging LLC and Easytech Closures S.p.A. We are currently in the process of integrating the internal controls and procedures of these acquired entities into our internal controls over financial reporting. As provided under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations of the Securities and Exchange Commission, we will include the internal controls and procedures of these acquired entities in our annual assessment of the effectiveness of our internal control over financial reporting for our 2022 fiscal year.
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Part II. Other Information
Item 1. Legal Proceedings
On July 12, 2022, we concluded a settlement with the European Commission to end a long-running investigation of our metal packaging operations in Europe. This investigation was started in 2015 by the German antitrust authority and was transferred in 2018 to the European Commission. With the settlement, the European Commission closed its investigation and we paid a fine of €23.9 million in October 2022, although we do not fully concur with the facts and legal qualifications put forth by the European Commission.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
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*Filed herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
