SILGAN HOLDINGS INC 10-Q

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, 2020 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 and beauty products; steel and aluminum containers for human and pet food and general line products; and custom designed 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 plastic 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. -18- RESULTS OF OPERATIONS The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the three months ended March 31 2021 2020 Net sales Dispensing and Specialty Closures 41.1 % 34.7 % Metal Containers 44.8 49.3 Custom Containers 14.1 16.0 Consolidated 100.0 100.0 Cost of goods sold 82.1 82.0 Gross profit 17.9 18.0 Selling, general and administrative expenses 7.9 8.7 Rationalization charges 0.8 0.3 Other pension and postretirement income (1.0) (0.9) Income before interest and income taxes 10.2 9.9 Interest and other debt expense 2.2 2.4 Income before income taxes 8.0 7.5 Provision for income taxes 2.1 1.9 Net income 5.9 % 5.6 % Summary unaudited results of operations for the three months ended March 31 are provided below. 2021 2020 (dollars in millions) Net sales Dispensing and Specialty Closures $ 509.3 $ 357.2 Metal Containers 554.1 508.5 Custom Containers 174.7 164.7 Consolidated $ 1,238.1 $ 1,030.4 Segment income Dispensing and Specialty Closures (1) $ 65.7 $ 45.2 Metal Containers (2) 45.6 47.5 Custom Containers (3) 24.5 22.0 Corporate (4) (9.2) (12.6) Consolidated $ 126.6 $ 102.1 (1) Includes rationalization charges of $5.2 million and $0.7 million for the three months ended March 31, 2021 and 2020, respectively. (2) Includes rationalization charges of $5.0 million and $2.0 million for the three months ended March 31, 2021 and 2020, respectively. (3) Includes rationalization charges of $0.1 million and $0.1 million for the three months ended March 31, 2021 and 2020, respectively. (4) Includes costs attributed to announced acquisitions of $2.3 million in 2020. Three Months Ended March 30, 2021 Compared with Three Months Ended March 30, 2020 Overview . Consolidated net sales were $1.24 billion in the first quarter of 2021, a 20.2 percent increase as compared to the first quarter of 2020 primarily due to higher volumes in the Dispensing and Specialty Closures and Metal Container segments, the pass through of higher raw material and other costs, the impact from favorable foreign currency translation and a more favorable mix of products sold in the Dispensing and Specialty Closures and Custom Container segments, partially offset by a higher percentage of smaller cans sold in the Metal Container segment. Income before interest and income taxes for the first -19- quarter of 2021 was $126.6 million, a $24.5 million increase as compared to the same period in 2020 primarily due to higher unit volumes in the Dispensing and Specialty Closures and Metal Container segments, a more favorable mix of products sold and strong operating performance in the Dispensing and Specialty Closures and Custom Container segments and higher pension income, partially offset by the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs in the Dispensing and Specialty Closures and Custom Container segments, higher production costs in the Metal Container segment, higher rationalization charges and foreign currency transaction losses in the Dispensing and Specialty Closures segment. Results for the first quarters of 2021 and 2020 included rationalization charges of $10.3 million and $2.8 million, respectively. Results for the first quarters of 2021 and 2020 also included a loss on early extinguishment of debt of $0.9 million and $1.5 million, respectively. Net income for the first quarter of 2021 was $73.3 million as compared to $57.6 million for the same period in 2020. Net income per diluted share for the first quarter of 2021 was $0.66 as compared to $0.52 for the same period in 2020. Net Sales . The $207.7 million increase in consolidated net sales in the first quarter of 2021 as compared to the first quarter of 2020 was the result of higher net sales across all the segments. Net sales for the Dispensing and Specialty Closures segment increased $152.1 million, or 42.6 percent, in the first quarter of 2021 as compared to the same period in 2020. This increase was primarily the result of higher unit volumes of approximately nine percent, the pass through of higher raw material costs, a more favorable mix of products sold and the impact of favorable foreign currency translation of approximately $11 million. The increase in unit volumes was principally the result of volumes from the dispensing operations of the Albéa Group acquired in June 2020 and continued higher volume demand across the product offerings. Net sales for the Metal Container segment increased $45.6 million, or 9.0 percent, in the first quarter of 2021 as compared to the same period in 2020. This increase was primarily the result of higher unit volumes of approximately nine percent, the pass through of higher raw material and other costs and the impact of favorable foreign currency translation of approximately $5 million, partially offset by a higher percentage of smaller cans sold. The increase in unit volumes was primarily due to the continued high consumer demand levels for food cans. Net sales for the Custom Container segment increased $10.0 million, or 6.1 percent, in the first quarter of 2021 as compared to the same period in 2020. This increase was principally due to a more favorable mix of products sold, the pass through of higher raw material costs and the impact of favorable foreign currency translation of approximately $2 million. Aggregate volumes in 2021 were comparable to prior year record volumes as consumer goods and pet food products continued to experience strong demand, offset by lower volumes in hygiene products which had a significant surge in the prior year period. Gross Profit . Gross profit margin decreased 0.1 percentage points to 17.9 percent in the first quarter of 2021 as compared to the same period in 2020. Selling, General and Administrative Expenses . Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 7.9 percent in the first quarter of 2021 as compared to 8.7 percent in the same period in 2020. Selling, general and administrative expenses increased $7.5 million to $97.4 million for the first quarter of 2021 as compared to $89.9 million for the same period in 2020. The increase in selling, general and administrative expenses was principally the result of the inclusion of selling, general and administrative expenses from the dispensing operations of the Albéa Group acquired in June 2020, partially offset by lower corporate expenses primarily related to prior year costs for one-time plant employee incentive payments and announced acquisitions. Income before Interest and Income Taxes . Income before interest and income taxes for the first quarter of 2021 increased by $24.5 million as compared to the first quarter of 2020, and margins increased to 10.2 percent from 9.9 percent over the same periods. The increase in income before interest and income taxes was primarily the result of higher income in the Dispensing and Specialty Closures and Custom Containers segments and lower corporate expenses, partially offset by higher rationalization charges. Rationalization charges were $10.3 million and $2.8 million in the first quarters of 2021 and 2020, respectively. Segment income of the Dispensing and Specialty Closures segment for the first quarter of 2021 increased $20.5 million as compared to the same period in 2020, and segment income margin increased to 12.9 percent from 12.7 percent over the same periods. The increase in segment income was primarily due to higher unit volumes, a more favorable mix of products sold and strong operating performance, partially offset by the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs, higher rationalization charges and foreign currency transaction losses in the current year period. Rationalization charges were $5.2 million and $0.7 million in the first quarters of 2021 and 2020, respectively. -20- Segment income of the Metal Container segment for the first quarter of 2021 decreased $1.9 million as compared to the same period in 2020, and segment income margin decreased to 8.2 percent from 9.3 percent over the same periods. The decrease in segment income was due primarily to higher production costs principally due to challenges associated with severe winter weather conditions and one-time investments in hiring and training new employees to support increased demand levels, a higher percentage of smaller cans sold and higher rationalization charges, partially offset by higher unit volumes and higher pension income. Rationalization charges were $5.0 million and $2.0 million in the first quarters of 2021 and 2020, respectively. Segment income of the Custom Container segment for the first quarter of 2021 increased $2.5 million as compared to the same period in 2020, and segment income margin increased to 14.0 percent from 13.4 percent over the same periods. The increase in segment income was primarily attributable to a more favorable mix of products sold and strong operating performance, partially offset by the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs. Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the first quarter of 2021 increased $3.0 million to $26.4 million as compared to $23.4 million in the same period in 2020. This increase was primarily due to higher weighted average outstanding borrowings during the quarter as a result of the acquisition of the dispensing operations of the Albéa Group in June 2020, partially offset by lower weighted average interest rates during the current quarter due to lower variable market rates. In February 2021, we issued 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 26.2 percent and 25.4 percent for the first quarters of 2021 and 2020, respectively. The effective tax rate for the first quarter of 2021 was unfavorably impacted by higher income 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 February 10, 2021, we issued $500.0 million aggregate principal amount of the 1.4% Notes at 99.945 percent of their principal amount. The proceeds from the sale of the 1.4% Notes were $499.7 million. We used the proceeds from the sale of the 1.4% Notes to prepay $500.0 million of our outstanding term loans under the Credit Agreement. We paid the initial purchasers' discount and offering expenses related to the sale of the 1.4% Notes with cash on hand. As a result of this prepayment, we recorded a pre-tax charge for the loss on early extinguishment of debt of $0.9 million during the first quarter of 2021 for the write-off of unamortized debt issuance costs. You should also read Note 6 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2021 included elsewhere in this Quarterly Report. For the three months ended March 31, 2021, we used proceeds from the issuance of the 1.4% Notes of $499.7 million, net borrowings of revolving loans of $139.2 million and cash and cash equivalents of $219.4 million to fund repayments of long-term debt of $500.0 million, cash used in operations of $172.2 million, decreases in outstanding checks of $84.2 million, net capital expenditures and other investing activities of $68.4 million, dividends paid on our common stock of $16.1 million, repurchases of our common stock of $8.3 million under our stock-based compensation plan, debt issuance costs of $4.6 million and the negative effect of exchange rate changes of $4.5 million. For the three months ended March 31, 2020, we used net borrowings of revolving loans of $828.1 million and net proceeds from the issuance of the 2¼% Notes and the additional 4⅛% Notes of $739.7 million to fund repayments of long-term debt of $766.2 million, cash used in operations of $168.1 million, decreases in outstanding checks of $79.0 million, net capital expenditures and other investing activities of $64.6 million, the purchase of Cobra Plastics for $39.8 million, dividends paid on our common stock of $13.8 million, repurchases of our common stock of $12.7 million, debt issuance costs of $7.5 million and the negative effect of exchange rate changes of $5.1 million and to increase cash and cash equivalents by $411.0 million. -21- At March 31, 2021, we had $137.0 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 March 31, 2021 was $1.04 billion and Cdn $15.0 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 2021 with all of these covenants. Guaranteed Securities Each of the 4¾% Notes, the 3¼% Notes, the 4⅛% Notes, the 2¼% Notes and the 1.4% Notes were issued by Silgan and are guaranteed by certain wholly owned subsidiaries of Silgan, collectively the Obligor Group. The following summarized financial information relates to the Obligor Group as of March 31, 2021 and December 31, 2020 and for the three months ended March 31, 2021. 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 $1.41 billion and $1.46 billion as of March 31, 2021 and December 31, 2020, respectively, are not included in noncurrent assets in the table below. March 31, 2021 December 31, 2020 (Dollars in millions) Current assets $1,094.2 $1,104.1 Noncurrent assets 3,293.9 3,324.0 Current liabilities 818.1 891.1 Noncurrent liabilities 3,699.0 3,744.6 At March 31, 2021 and December 31, 2020, the Obligor Group held current receivables due from other subsidiary companies of $35.1 million and $54.8 million, respectively; long-term notes receivable due from other subsidiary companies of $788.1 million and $818.9 million, respectively; and current payables due to other subsidiary companies of $5.9 million and $13.4 million, respectively. Three months ended March 31, 2021 (Dollars in millions) Net sales $894.8 Gross profit 140.1 Net income 58.8 -22- For the three months ended March 31, 2021, net income in the table above excludes income from equity method investments of other subsidiary companies of $14.5 million. For the three months ended March 31, 2021, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $9.8 million; net credits from such other subsidiary companies of $8.2 million; and net interest income from such other subsidiary companies of $4.7 million. For the three months ended March 31, 2021, the Obligor Group received dividends from other subsidiary companies of $16.0 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 $2.0 million and $3.6 million for the three months ended March 31, 2021 and 2020, respectively. Exclusive of the footprint optimization plan for our Metal Container segment and our resulting withdrawal from the Central States Pension Plan announced in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $2.5 million and $8.3 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 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 months ended March 31, 2021 included elsewhere in this Quarterly Report. -23-