SILGAN HOLDINGS INC 10-Q

Item 1. Financial Statements SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) Sept. 30, 2020 Sept. 30, 2019 Dec. 31, 2019 (unaudited) (unaudited) Assets Current assets: Cash and cash equivalents $ 193,759 $ 117,389 $ 203,824 Trade accounts receivable, net 865,436 751,404 504,986 Inventories 678,181 703,206 633,005 Prepaid expenses and other current assets 84,715 61,310 64,993 Total current assets 1,822,091 1,633,309 1,406,808 Property, plant and equipment, net 1,785,787 1,522,541 1,570,331 Goodwill 1,702,463 1,128,151 1,142,223 Other intangible assets, net 633,256 358,046 354,615 Other assets, net 508,982 431,970 457,082 $ 6,452,579 $ 5,074,017 $ 4,931,059 Liabilities and Stockholders’ Equity Current liabilities: Revolving loans and current portion of long-term debt $ 284,465 $ 841,430 $ 29,813 Trade accounts payable 592,881 550,557 727,053 Accrued payroll and related costs 119,369 69,191 66,866 Accrued liabilities 245,626 156,599 194,797 Total current liabilities 1,242,341 1,617,777 1,018,529 Long-term debt 3,163,305 1,809,955 2,214,608 Deferred income taxes 371,966 274,107 254,836 Other liabilities 456,104 403,648 419,764 Stockholders’ equity: Common stock 1,751 1,751 1,751 Paid-in capital 301,463 285,061 289,422 Retained earnings 2,348,728 2,118,860 2,141,302 Accumulated other comprehensive loss ( 272,352 ) ( 287,923 ) ( 259,742 ) Treasury stock ( 1,160,727 ) ( 1,149,219 ) ( 1,149,411 ) Total stockholders’ equity 1,218,863 968,530 1,023,322 $ 6,452,579 $ 5,074,017 $ 4,931,059 See accompanying notes. -3- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three and nine months ended September 30, 2020 and 2019 (Dollars and shares in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 Net sales $ 1,488,499 $ 1,321,342 $ 3,695,353 $ 3,441,635 Cost of goods sold 1,230,148 1,113,727 3,027,809 2,884,510 Gross profit 258,351 207,615 667,544 557,125 Selling, general and administrative expenses 91,525 76,065 282,011 233,816 Rationalization charges 2,505 3,195 7,247 48,594 Other pension and postretirement income ( 9,712 ) ( 4,340 ) ( 29,122 ) ( 13,320 ) Income before interest and income taxes 174,033 132,695 407,408 288,035 Interest and other debt expense before loss on early extinguishment of debt 27,725 26,767 77,051 82,272 Loss on early extinguishment of debt — 1,676 1,481 1,676 Interest and other debt expense 27,725 28,443 78,532 83,948 Income before income taxes 146,308 104,252 328,876 204,087 Provision for income taxes 33,457 22,978 80,253 45,117 Net income $ 112,851 $ 81,274 $ 248,623 $ 158,970 Earnings per share: Basic net income per share $ 1.02 $ 0.73 $ 2.24 $ 1.43 Diluted net income per share $ 1.01 $ 0.73 $ 2.23 $ 1.43 Weighted average number of shares: Basic 110,921 111,058 110,895 110,985 Effect of dilutive securities 691 463 565 554 Diluted 111,612 111,521 111,460 111,539 See accompanying notes. -4- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and nine months ended September 30, 2020 and 2019 (Dollars in thousands) (Unaudited) Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 Net income $ 112,851 $ 81,274 $ 248,623 $ 158,970 Other comprehensive income (loss), net of tax: Changes in net prior service credit and actuarial losses 1,807 2,625 4,555 7,745 Change in fair value of derivatives 681 ( 159 ) ( 1,670 ) ( 2,647 ) Foreign currency translation 22,520 ( 25,016 ) ( 15,495 ) ( 24,213 ) Other comprehensive income (loss) 25,008 ( 22,550 ) ( 12,610 ) ( 19,115 ) Comprehensive income $ 137,859 $ 58,724 $ 236,013 $ 139,855 See accompanying notes. -5- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2020 and 2019 (Dollars in thousands) (Unaudited) 2020 2019 Cash flows provided by (used in) operating activities: Net income $ 248,623 $ 158,970 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 163,454 156,780 Rationalization charges 7,247 48,594 Stock compensation expense 13,880 12,669 Loss on early extinguishment of debt 1,481 1,676 Other changes that provided (used) cash, net of effects from acquisitions: Trade accounts receivable, net ( 311,008 ) ( 250,783 ) Inventories 2,435 ( 75,414 ) Trade accounts payable ( 73,814 ) ( 63,609 ) Accrued liabilities 57,187 ( 10,475 ) Other, net 8,981 19,181 Net cash provided by (used in) operating activities 118,466 ( 2,411 ) Cash flows provided by (used in) investing activities: Purchase of businesses, net of cash acquired ( 940,875 ) — Capital expenditures ( 165,163 ) ( 166,848 ) Other, net 999 509 Net cash used in investing activities ( 1,105,039 ) ( 166,339 ) Cash flows provided by (used in) financing activities: Borrowings under revolving loans 993,406 1,139,329 Repayments under revolving loans ( 748,539 ) ( 464,759 ) Proceeds from issuance of long-term debt 1,639,661 — Repayments of long-term debt ( 766,170 ) ( 308,161 ) Changes in outstanding checks - principally vendors ( 79,006 ) ( 83,670 ) Dividends paid on common stock ( 40,432 ) ( 38,615 ) Debt issuance costs ( 10,265 ) — Repurchase of common stock ( 13,155 ) ( 27,364 ) Net cash provided by financing activities 975,500 216,760 Effect of exchange rate changes on cash and cash equivalents 1,008 ( 3,440 ) Cash and cash equivalents: Net (decrease) increase ( 10,065 ) 44,570 Balance at beginning of year 203,824 72,819 Balance at end of period $ 193,759 $ 117,389 Interest paid, net $ 70,948 $ 97,630 Income taxes paid, net 91,378 31,067 See accompanying notes. -6- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three and nine months ended September 30, 2020 and 2019 (Dollars and shares in thousands, except per share amounts) (Unaudited) Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 Common stock - shares outstanding Balance at beginning of period 110,886 111,176 110,780 110,430 Net issuance of treasury stock for vested restricted stock units — — 365 746 Repurchases of common stock — ( 408 ) ( 259 ) ( 408 ) Balance at end of period 110,886 110,768 110,886 110,768 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 296,639 280,636 289,422 276,062 Stock compensation expense 4,824 4,425 13,880 12,669 Net issuance of treasury stock for vested restricted stock units — — ( 1,839 ) ( 3,670 ) Balance at end of period 301,463 285,061 301,463 285,061 Retained earnings Balance at beginning of period 2,249,391 2,049,995 2,141,302 1,997,785 Net income 112,851 81,274 248,623 158,970 Dividends declared on common stock ( 13,514 ) ( 12,409 ) ( 40,532 ) ( 37,302 ) Adoption of accounting standards updates related to credit losses in 2020 and leases in 2019 — — ( 665 ) ( 593 ) Balance at end of period 2,348,728 2,118,860 2,348,728 2,118,860 Accumulated other comprehensive loss Balance at beginning of period ( 297,360 ) ( 265,373 ) ( 259,742 ) ( 268,808 ) Other comprehensive income (loss) 25,008 ( 22,550 ) ( 12,610 ) ( 19,115 ) Balance at end of period ( 272,352 ) ( 287,923 ) ( 272,352 ) ( 287,923 ) Treasury stock Balance at beginning of period ( 1,160,727 ) ( 1,137,107 ) ( 1,149,411 ) ( 1,125,525 ) Net issuance of treasury stock for vested restricted stock units — — ( 4,382 ) ( 11,582 ) Repurchases of common stock — ( 12,112 ) ( 6,934 ) ( 12,112 ) Balance at end of period ( 1,160,727 ) ( 1,149,219 ) ( 1,160,727 ) ( 1,149,219 ) Total stockholders' equity $ 1,218,863 $ 968,530 $ 1,218,863 $ 968,530 Dividends declared on common stock per share $ 0.12 $ 0.11 $ 0.36 $ 0.33 See accompanying notes. -7- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 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, 2019 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, 2019. 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 2020 assessment performed during the third quarter. Recently Adopted Accounting Pronouncements. In June 2016, the Financial Accounting Standards Board, or FASB, issued an accounting standards update, or ASU, that amends the guidance on the accounting for credit losses on financial instruments . This new standard introduces an approach, based on expected losses, to estimate credit losses on certain types of financial instruments. The new approach to estimating credit losses (referred to as the current expected credit losses model) applies to most financial assets measured at amortized cost and certain other instruments, including trade and other receivables. We adopted this new standard on January 1, 2020 using the transition method, which allowed us to recognize the effects of applying this standard as a cumulative effect to retained earnings as of January 1, 2020. As a result of the adoption of this standard, we reduced retained earnings by $ 0.7 million. The adoption of this standard did not have a material impact on our financial position, results of operations or cash flows. Note 2. Revenue The following tables present our revenues disaggregated by reportable business 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 business segment were as follows: Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 (Dollars in thousands) Metal containers $ 856,660 $ 822,262 $ 1,962,370 $ 1,904,941 Closures 475,105 353,436 1,242,725 1,072,979 Plastic containers 156,734 145,644 490,258 463,715 $ 1,488,499 $ 1,321,342 $ 3,695,353 $ 3,441,635 -8- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Revenues by geography were as follows: Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 (Dollars in thousands) North America $ 1,143,562 $ 1,078,187 $ 2,858,561 $ 2,747,518 Europe and other 344,937 243,155 836,792 694,117 $ 1,488,499 $ 1,321,342 $ 3,695,353 $ 3,441,635 Our contracts generally include standard commercial payment terms generally acceptable in each region. We do not provide financing with extended payment terms beyond generally standard commercial payment terms for the applicable industry. We have no significant obligations for refunds, warranties or similar obligations. Trade accounts receivable, net are shown separately on our Condensed Consolidated Balance Sheet. Contract assets are the result of the timing of revenue recognition, billings and cash collections. Our contract assets primarily consist of unbilled accounts receivable related to over time revenue recognition and were $ 80.2 million, $ 73.4 million, and $ 71.1 million as of September 30, 2020 and 2019 and December 31, 2019, respectively. Unbilled receivables are included in trade accounts receivable, net on our Condensed Consolidated Balance Sheet. Note 3. Acquisitions Cobra Plastics Acquisition On February 4, 2020 we acquired Cobra Plastics, Inc., or Cobra Plastics, a manufacturer and seller of injection molded plastic closures for a wide variety of consumer products, with a particular focus on the aerosol overcap market. The purchase price for this acquisition of $ 39.8 million, net of cash acquired, was primarily funded with revolving loan borrowings under our amended and restated senior secured credit facility, or the Credit Agreement. For this acquisition, we applied the acquisition method of accounting and recognized assets acquired and liabilities assumed at fair value as of the acquisition date, and we recognized goodwill of $ 18.4 million and a customer relationship intangible asset of $ 11.5 million. Cobra Plastics' results of operations were included in our closures business since the acquisition date and were not significant since such date. Albéa Dispensing Business Acquisition On June 1, 2020, we acquired the dispensing operations of the Albéa Group, or the Albéa Dispensing Business, a leading global supplier of highly engineered pumps, sprayers and foam dispensing solutions to major branded consumer goods product companies in the beauty and personal care markets. It operates a global network of ten manufacturing facilities across North America, Europe, South America and Asia. This acquisition is strategically important for us, as it expands our closures franchise and, in particular, our dispensing systems operations. The Albéa Dispensing Business is included in our closures business as of the acquisition date. We acquired the Albéa Dispensing Business for a purchase price in cash of $ 901.0 million, net of cash acquired. The purchase price is subject to adjustment for working capital, other current assets and current liabilities and net indebtedness. We incurred acquisition related costs for the Albéa Dispensing Business totaling $ 0.7 million and $ 19.0 million for the three and nine months ended September 30, 2020, respectively, which are included in selling, general and administrative expenses in our Condensed Consolidated Statements of Income. We funded the purchase price for this acquisition with term and revolving loan borrowings under the Credit Agreement, including a delayed draw term loan of $ 900 million. See Note 8 for further information. The initial purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition using valuation techniques including the income, cost and market approaches, primarily using Level 3 inputs (as defined in Note 9). The purchase price allocation is preliminary and subject to change pending a final valuation of the assets and liabilities, including property, plant and equipment and intangible assets, and the related tax impact of any adjustments to -9- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) such valuations. In connection with this acquisition, we recorded a charge of $ 3.5 million related to the write-up of acquired inventory of the Albéa Dispensing Business as a result of purchase accounting. The allocated fair value of assets acquired and liabilities assumed are summarized as follows (in thousands) Trade accounts receivable $ 42,742 Inventories 41,102 Property, plant and equipment 192,723 Other intangible assets 285,000 Other assets 33,478 Trade accounts payable and accrued liabilities ( 62,930 ) Deferred income tax liabilities ( 101,795 ) Debt and other liabilities ( 31,843 ) Total identifiable net assets 398,477 Goodwill 502,570 Cash paid at closing, net of cash acquired $ 901,047 Goodwill of $ 502.6 million consists largely of our increased capacity to serve our global customers and achieve operational synergies and has been assigned to our closures segment. A majority of the goodwill is not expected to be deductible for income tax purposes. Other intangible assets consist of customer relationships of $ 257.0 million with an estimated remaining life of 24 years and technology know-how of $ 28.0 million with an estimated remaining life of 8 years. Acquired property, plant and equipment are being depreciated on a straight-line basis with estimated remaining lives of up to 35 years. Our consolidated results of operations for the three and nine months ended September 30, 2020 included the results for the Albéa Dispensing Business since the acquisition date. Net sales from the Albéa Dispensing Business operations of $ 81.3 million and $ 111.2 million were included in our Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2020, respectively. Note 4. Rationalization Charges We continually evaluate cost reduction opportunities across each of our businesses, 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 business segment were as follows: Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 (Dollars in thousands) Metal containers $ 1,639 $ 3,035 $ 4,755 $ 42,280 Closures 787 72 2,229 5,979 Plastic containers 79 88 263 335 $ 2,505 $ 3,195 $ 7,247 $ 48,594 -10- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) 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, 2019 $ 42,815 $ 898 $ — $ 43,713 Charged to expense 4,138 2,005 1,104 7,247 Utilized and currency translation ( 5,410 ) ( 2,251 ) ( 1,104 ) ( 8,765 ) Balance at September 30, 2020 $ 41,543 $ 652 $ — $ 42,195 Rationalization reserves as of September 30, 2020 were recorded in our Condensed Consolidated Balance Sheets as accrued liabilities of $ 4.8 million and other liabilities of $ 37.4 million. Exclusive of the footprint optimization plan for our metal container business and our resulting withdrawal from the Central States, Southeast and Southwest Areas Pension Plan, or the Central States Pension Plan, announced in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $ 2.1 million and $ 3.9 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 $ 1.1 million per year and be recognized annually for the next twenty years, and remaining cash expenditures for the withdrawal liability related to the Central States Pension Plan are expected to be approximately $ 3.1 million annually for the next twenty years, beginning in 2020. Note 5. 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, 2019 $ ( 139,102 ) $ ( 3,182 ) $ ( 117,458 ) $ ( 259,742 ) Other comprehensive loss before reclassifications ( 872 ) ( 3,176 ) ( 15,495 ) ( 19,543 ) Amounts reclassified from accumulated other comprehensive loss 5,427 1,506 — 6,933 Other comprehensive loss 4,555 ( 1,670 ) ( 15,495 ) ( 12,610 ) Balance at September 30, 2020 $ ( 134,547 ) $ ( 4,852 ) $ ( 132,953 ) $ ( 272,352 ) 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, 2020, were net (losses) of $( 2.4 ) million and $( 7.3 ) million, respectively, excluding income tax benefits of $ 0.6 million and $ 1.9 million, respectively. For the three and nine months ended September 30, 2020 these net (losses) consisted of amortization of net actuarial (losses) of $( 2.9 ) million and $( 8.6 ) million and amortization of net prior service credit of $ 0.4 million and $ 1.3 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 11 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, 2020 were not significant. -11- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Other comprehensive loss before reclassifications related to foreign currency translation for the three and nine months ended September 30, 2020, consisted of (i) foreign currency gains related to translation of quarter end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $ 42.4 million and $ 19.4 million, respectively, (ii) foreign currency (losses) related to intra-entity foreign currency transactions that are of a long-term investment nature of $( 0.4 ) million and $( 3.3 ) million, respectively, and (iii) foreign currency (losses) related to our net investment hedges of $( 25.2 ) million and $( 41.4 ) million, respectively, excluding income tax benefits of $ 6.0 million and $ 9.8 million, respectively. See Note 9 for further discussion. Note 6. Inventories Inventories consisted of the following: Sept. 30, 2020 Sept. 30, 2019 Dec. 31, 2019 (Dollars in thousands) Raw materials $ 294,896 $ 275,015 $ 286,953 Work-in-process 154,157 127,590 134,417 Finished goods 370,406 413,864 355,337 Other 15,217 12,620 12,793 834,676 829,089 789,500 Adjustment to value inventory at cost on the LIFO method ( 156,495 ) ( 125,883 ) ( 156,495 ) $ 678,181 $ 703,206 $ 633,005 Note 7. Goodwill and Other Intangibles Changes in the carrying amount of goodwill were as follows: Metal Containers Closures Plastic Containers Total (Dollars in thousands) Balance at December 31, 2019 $ 113,463 $ 801,776 $ 226,984 $ 1,142,223 Acquisitions — 520,946 — 520,946 Currency translation 2,217 37,511 ( 434 ) 39,294 Balance at September 30, 2020 $ 115,680 $ 1,360,233 $ 226,550 $ 1,702,463 In connection with our acquisitions of Cobra Plastics and the Albéa Dispensing Business as discussed in Note 3, we recognized goodwill of $ 521.0 million. -12- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) The components of other intangible assets, net were as follows: Sept. 30, 2020 Dec. 31, 2019 Gross Amount Accumulated Amortization Gross Amount Accumulated Amortization (Dollars in thousands) Definite-lived intangibles: Customer relationships $ 696,003 $ ( 136,583 ) $ 422,042 $ ( 116,575 ) Other 70,766 ( 29,070 ) 39,447 ( 22,439 ) 766,769 ( 165,653 ) 461,489 ( 139,014 ) Indefinite-lived intangibles: Trade names 32,140 — 32,140 — $ 798,909 $ ( 165,653 ) $ 493,629 $ ( 139,014 ) In connection with our acquisitions of Cobra Plastics and the Albéa Dispensing Business as discussed in Note 3, we recognized intangible assets for customer relationships of $ 268.5 million and technology know-how of $ 28.0 million. Amortization expense was $ 10.4 million and $ 25.4 million for the three and nine months ended September 30, 2020, respectively, and $ 6.7 million and $ 20.4 million for the three and nine months ended September 30, 2019, respectively. Amortization expense is expected to be $ 35.9 million, $ 40.7 million, $ 39.9 million, $ 39.9 million and $ 38.3 million for the years ended December 31, 2020 through 2024, respectively. Note 8. Long-Term Debt Long-term debt consisted of the following: Sept. 30, 2020 Sept. 30, 2019 Dec. 31, 2019 (Dollars in thousands) Bank debt Bank revolving loans $ 246,000 $ 766,000 $ — U.S. term loans 900,000 800,000 760,000 Canadian term loans — 15,943 4,703 Other foreign bank revolving and term loans 39,825 37,062 31,127 Total bank debt 1,185,825 1,619,005 795,830 4¾% Senior Notes 300,000 300,000 300,000 3¼% Senior Notes 762,223 708,630 729,755 4⅛% Senior Notes 600,000 — 400,000 2¼% Senior Notes 586,325 — — Finance leases 35,035 33,440 33,288 Total debt - principal 3,469,408 2,661,075 2,258,873 Less unamortized debt issuance costs and debt discount 21,638 9,690 14,452 Total debt 3,447,770 2,651,385 2,244,421 Less current portion 284,465 841,430 29,813 $ 3,163,305 $ 1,809,955 $ 2,214,608 -13- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) At September 30, 2020, the current portion of long-term debt consisted of $ 246.0 million of bank revolving loans under the Credit Agreement, $ 36.6 million of other foreign bank revolving and term loans and $ 1.9 million of finance leases. On February 26, 2020, we issued (i) an additional $ 200 million aggregate principal amount of our 4⅛% Senior Notes due 2028, or the 4⅛% Notes, at 99.5 percent of their principal amount, plus accrued and unpaid interest from November 12, 2019, and € 500 million aggregate principal amount of our 2¼% Senior Notes due 2028, or the 2¼% Notes, at 100 percent of their principal amount. We used the net proceeds from these issuances and revolving loan borrowings under the Credit Agreement to prepay all of our outstanding U.S. term loans under the Credit Agreement at that time. As a result of this prepayment, we recorded a pre-tax charge for the loss on early extinguishment of debt of $ 1.5 million during the first quarter of 2020 for the write-off of unamortized debt issuance costs. 2¼% S ENIOR N OTES The 2¼% Notes are general unsecured obligations of Silgan, ranking equal in right of payment with our existing and future unsecured unsubordinated indebtedness, including our 4¾% Senior Notes due 2025, or the 4¾% Notes, our 3¼% Senior Notes due 2025, or the 3¼% Notes, and the 4⅛% Notes, and ahead of our existing and future subordinated debt, if any. The 2¼% Notes are effectively subordinated to Silgan’s secured debt to the extent of the assets securing such debt and structurally subordinated to all obligations of subsidiaries of Silgan. The 2¼% Notes will mature on June 1, 2028. Interest on the 2¼% Notes will be payable semi-annually in cash on January 15 and July 15 of each year, beginning on July 15, 2020. The 2¼% Notes were issued pursuant to an indenture by and among Silgan, U.S. Bank National Association, as trustee, Elavon Financial Services DAC, UK Branch, as paying agent, and Elavon Financial Services DAC, as registrar and transfer agent, which indenture contains covenants that are generally less restrictive than those in the Credit Agreement and substantially similar to the covenants in the indenture for the 4¾% Notes and the 3¼% Notes and the indenture for the 4⅛% Notes. The 2¼% Notes are redeemable, at our option, in whole or in part, at any time after March 1, 2023, initially at 101.125 percent of their principal amount, plus accrued and unpaid interest to the redemption date, declining ratably to 100 percent of their principal amount, plus accrued and unpaid interest to the redemption date, on or after March 1, 2025. In addition, prior to March 1, 2023, we may redeem up to 35 percent of the aggregate principal amount of the 2¼% Notes with the proceeds of certain equity offerings at a redemption price of 102.25 percent of their principal amount, plus accrued and unpaid interest to the date of redemption. We may also redeem the 2¼% Notes, in whole or in part, prior to March 1, 2023 at a redemption price equal to 100 percent of their principal amount plus a make-whole premium as provided in the indenture for the 2¼% Notes, together with accrued and unpaid interest to the date of redemption. We will be required to make an offer to repurchase the 2¼% Notes at a repurchase price equal to 101 percent of their principal amount, plus accrued and unpaid interest to the date of repurchase, upon the occurrence of a change of control repurchase event as provided in the indenture for the 2¼% Notes. Incremental U.S. Term Loans On April 17, 2020, we and certain of our subsidiaries entered into an Incremental Term Loan Commitment Agreement, or the Incremental Term Loan Commitment Agreement, with the lenders thereunder and Wells Fargo Bank, National Association, as Administrative Agent and a lender. The Incremental Term Loan Commitment Agreement was entered into pursuant to the Credit Agreement and provided for the lenders thereunder to lend to us, on a delayed draw basis, $ 900 million of Incremental U.S. Term Loans, or the Incremental U.S. Term Loans, to fund the purchase price for the acquisition of the Albéa Dispensing Business. On June 1, 2020, we borrowed $ 900 million of Incremental U.S. Term Loans under the Incremental Term Loan Commitment Agreement to fund the purchase price for the acquisition of the Albéa Dispensing Business. The Incremental U.S. Term Loans mature on May 30, 2024 and are repayable in installments of $ 90 million on each of December 31, 2021, 2022 and 2023, with the remaining outstanding principal balance to be repaid on May 30, 2024. The Incremental U.S. Term Loans initially have an Applicable Margin (as defined in the Credit Agreement) of 1.75 percent per annum in the case of Eurodollar Rate Loans (as defined in the Credit Agreement) and 0.75 percent per annum in the case of Base Rate Loans (as defined in the Credit Agreement), in both cases until the delivery of our financial statements for the fiscal quarter ending June 30, 2020. The Applicable Margin will vary between 1.25 percent to 1.75 percent per annum for Eurodollar -14- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Rate Loans and between 0.25 percent to 0.75 percent per annum for Base Rate Loans, in both cases based on our Total Net Leverage Ratio (as defined in the Credit Agreement). The Incremental U.S. Term Loans are guaranteed by the US Guarantors (as defined in the Credit Agreement) and secured on a pari passu basis by the same collateral that secures our outstanding loans under the Credit Agreement. Note 9. 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, 2020: Carrying Amount Fair Value (Dollars in thousands) Assets: Cash and cash equivalents $ 193,759 $ 193,759 Liabilities: Bank debt $ 1,185,825 $ 1,185,825 4¾% Senior Notes 300,000 305,250 3¼% Senior Notes 762,223 772,589 4⅛% Senior Notes 599,062 613,500 2¼% Senior Notes 586,325 573,133 Derivative instruments (accrued and other liabilities) 6,588 6,588 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, 2020 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, 4¾% Senior Notes, 3¼% Senior Notes, 4⅛% Senior Notes and 2¼% Senior 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 4¾% Senior -15- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Notes, 3¼% Senior Notes, 4⅛% Senior Notes and 2¼% Senior Notes were estimated based on quoted market prices, a Level 1 input. 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 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. We generally do not utilize external derivative financial instruments to manage our foreign currency exchange rate risk. 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 month periods ended September 30, 2020. 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, 2020 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 month periods ended September 30, 2020. 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, 2020 was not significant. Foreign Currency Exchange Rate Risk In an effort to minimize foreign currency exchange rate risk, we have financed acquisitions of foreign operations primarily with borrowings denominated in Euros and Canadian dollars. 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. We have designated the 3¼% Senior Notes and the 2¼% Senior Notes, which are Euro denominated, as net investment hedges. Foreign currency losses related to our net investment hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2020 were $( 25.2 ) million and $( 41.4 ) million, respectively. Note 10. Commitments and Contingencies A competition authority in Germany commenced an antitrust investigation in 2015 involving the industry association for metal packaging in Germany and its members, including our metal container and closures subsidiaries in Germany. At the end of April 2018, the European Commission commenced an antitrust investigation involving the metal packaging industry in Europe including our metal container and closures subsidiaries, which should effectively close out the investigation in Germany. Given -16- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) the current stage of the investigation, we cannot reasonably assess what actions may result from these investigations or estimate what costs we may incur as a result thereof. 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 11. Retirement Benefits The components of the net periodic pension benefit credit were as follows: Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 (Dollars in thousands) Service cost $ 2,983 $ 2,871 $ 9,958 $ 9,383 Interest cost 5,816 7,149 17,236 21,241 Expected return on plan assets ( 18,104 ) ( 15,200 ) ( 54,091 ) ( 45,425 ) Amortization of prior service cost 43 46 154 86 Amortization of actuarial losses 2,993 4,084 8,862 12,324 Net periodic benefit credit $ ( 6,269 ) $ ( 1,050 ) $ ( 17,881 ) $ ( 2,391 ) The components of the net periodic other postretirement benefit credit were as follows: Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 (Dollars in thousands) Service cost $ 18 $ 16 $ 66 $ 60 Interest cost 142 200 425 569 Amortization of prior service credit ( 487 ) ( 586 ) ( 1,454 ) ( 1,749 ) Amortization of actuarial gains ( 115 ) ( 33 ) ( 254 ) ( 366 ) Net periodic benefit credit $ ( 442 ) $ ( 403 ) $ ( 1,217 ) $ ( 1,486 ) -17- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Note 12. 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 2018 tax year with no change to our filed federal income tax return. We have been accepted into the Compliance Assurance Program for the 2019 and 2020 tax years which provides for the review by the IRS of tax matters relating to our tax return prior to filing. Note 13. Treasury Stock On October 17, 2016, 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, 2021. During the nine months ended September 30, 2020, we repurchased an aggregate of 259,461 shares of our common stock at an average price per share of $ 26.71 , for a total purchase price of $ 6.9 million. At September 30, 2020, we had approximately $ 105.6 million remaining under this authorization for the repurchase of our common stock. During the first nine months of 2020, we issued 582,151 treasury shares which had an average cost of $ 3.16 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 217,325 shares of our common stock at an average cost of $ 28.63 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, 2020, 64,226,667 shares of our common stock were held in treasury. Note 14. 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 2020, 453,622 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 $ 13.6 million, which is being amortized ratably over the respective vesting period from the grant date. -18- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Note 15. Business Segment Information Reportable business segment information was as follows: Metal Containers Closures Plastic Containers Corporate Total (Dollars in thousands) Three Months Ended September 30, 2020 Net sales $ 856,660 $ 475,105 $ 156,734 $ — $ 1,488,499 Depreciation and amortization (1) 21,008 27,777 9,207 39 58,031 Rationalization charges 1,639 787 79 — 2,505 Segment income 94,497 64,161 21,887 ( 6,512 ) 174,033 Three Months Ended September 30, 2019 Net sales $ 822,262 $ 353,436 $ 145,644 $ — $ 1,321,342 Depreciation and amortization (1) 21,477 20,847 9,512 39 51,875 Rationalization charges 3,035 72 88 — 3,195 Segment income 81,128 44,784 11,425 ( 4,642 ) 132,695 Nine Months Ended September 30, 2020 Net sales $ 1,962,370 $ 1,242,725 $ 490,258 $ — $ 3,695,353 Depreciation and amortization (1) 62,034 69,927 28,046 120 160,127 Rationalization charges 4,755 2,229 263 — 7,247 Segment income 213,757 167,971 66,918 ( 41,238 ) 407,408 Nine Months Ended September 30, 2019 Net sales $ 1,904,941 $ 1,072,979 $ 463,715 $ — $ 3,441,635 Depreciation and amortization (1) 64,021 62,345 27,665 120 154,151 Rationalization charges 42,280 5,979 335 — 48,594 Segment income 134,053 131,896 36,902 ( 14,816 ) 288,035 _____________ (1) Depreciation and amortization excludes amortization of debt discount and debt issuance costs of $ 1.2 million and $ 3.3 million for the three and nine months ended September 30, 2020, respectively, and amortization of debt issuance costs of $ 0.8 million and $ 2.6 million for the three and nine months ended September 30, 2019, respectively. Total segment income is reconciled to income before income taxes as follows: Three Months Ended Nine Months Ended Sept. 30, 2020 Sept. 30, 2019 Sept. 30, 2020 Sept. 30, 2019 (Dollars in thousands) Total segment income $ 174,033 $ 132,695 $ 407,408 $ 288,035 Interest and other debt expense 27,725 28,443 78,532 83,948 Income before income taxes $ 146,308 $ 104,252 $ 328,876 $ 204,087 -19- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2020 and 2019 and for the three and nine months then ended is unaudited) Sales and segment income of our metal container business and part of our closures business are dependent, in part, upon fruit and vegetable harvests. 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. -20-