SILGAN HOLDINGS INC 10-Q

Item 1. Financial Statements SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) June 30, 2021 June 30, 2020 Dec. 31, 2020 (unaudited) (unaudited) Assets Current assets: Cash and cash equivalents $ 164,821 $ 191,082 $ 409,481 Trade accounts receivable, net 891,812 729,275 619,535 Inventories 907,805 821,448 677,534 Prepaid expenses and other current assets 88,818 85,918 92,643 Total current assets 2,053,256 1,827,723 1,799,193 Property, plant and equipment, net 1,832,885 1,729,481 1,840,758 Goodwill 1,719,815 1,668,614 1,741,496 Other intangible assets, net 609,882 635,156 637,208 Other assets, net 508,481 512,082 492,931 $ 6,724,319 $ 6,373,056 $ 6,511,586 Liabilities and Stockholders’ Equity Current liabilities: Revolving loans and current portion of long-term debt $ 240,859 $ 391,418 $ 28,036 Trade accounts payable 727,523 601,740 802,541 Accrued payroll and related costs 112,270 103,458 130,088 Accrued liabilities 234,503 266,512 230,955 Total current liabilities 1,315,155 1,363,128 1,191,620 Long-term debt 3,176,393 3,106,425 3,223,217 Deferred income taxes 360,027 357,131 355,995 Other liabilities 484,164 456,678 487,881 Stockholders’ equity: Common stock 1,751 1,751 1,751 Paid-in capital 314,873 296,639 306,363 Retained earnings 2,531,783 2,249,391 2,395,395 Accumulated other comprehensive loss ( 263,433 ) ( 297,360 ) ( 260,953 ) Treasury stock ( 1,196,394 ) ( 1,160,727 ) ( 1,189,683 ) Total stockholders’ equity 1,388,580 1,089,694 1,252,873 $ 6,724,319 $ 6,373,056 $ 6,511,586 See accompanying notes. -3- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three and six months ended June 30, 2021 and 2020 (Dollars and shares in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net sales $ 1,348,661 $ 1,176,470 $ 2,586,771 $ 2,206,854 Cost of goods sold 1,113,777 952,375 2,130,421 1,797,661 Gross profit 234,884 224,095 456,350 409,193 Selling, general and administrative expenses 94,394 100,624 191,773 190,487 Rationalization charges 354 1,942 10,711 4,741 Other pension and postretirement income ( 12,818 ) ( 9,705 ) ( 25,637 ) ( 19,410 ) Income before interest and income taxes 152,954 131,234 279,503 233,375 Interest and other debt expense before loss on early extinguishment of debt 26,406 25,837 52,829 49,326 Loss on early extinguishment of debt — — 883 1,481 Interest and other debt expense 26,406 25,837 53,712 50,807 Income before income taxes 126,548 105,397 225,791 182,568 Provision for income taxes 32,072 27,225 58,034 46,796 Net income $ 94,476 $ 78,172 $ 167,757 $ 135,772 Earnings per share: Basic net income per share $ 0.86 $ 0.70 $ 1.52 $ 1.22 Diluted net income per share $ 0.85 $ 0.70 $ 1.51 $ 1.22 Weighted average number of shares: Basic 110,442 110,901 110,323 110,879 Effect of dilutive securities 661 433 743 501 Diluted 111,103 111,334 111,066 111,380 See accompanying notes. -4- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the three and six months ended June 30, 2021 and 2020 (Dollars in thousands) (Unaudited) Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Net income $ 94,476 $ 78,172 $ 167,757 $ 135,772 Other comprehensive income (loss), net of tax: Changes in net prior service credit and actuarial losses 1,876 1,809 3,754 2,748 Change in fair value of derivatives 828 104 1,469 ( 2,351 ) Foreign currency translation 25,669 ( 1,576 ) ( 7,703 ) ( 38,015 ) Other comprehensive income (loss) 28,373 337 ( 2,480 ) ( 37,618 ) Comprehensive income $ 122,849 $ 78,509 $ 165,277 $ 98,154 See accompanying notes. -5- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, 2021 and 2020 (Dollars in thousands) (Unaudited) 2021 2020 Cash flows provided by (used in) operating activities: Net income $ 167,757 $ 135,772 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 122,386 104,197 Rationalization charges 10,711 4,741 Stock compensation expense 10,337 9,056 Loss on early extinguishment of debt 883 1,481 Other changes that provided (used) cash, net of effects from acquisitions: Trade accounts receivable, net ( 277,768 ) ( 179,949 ) Inventories ( 233,815 ) ( 148,141 ) Trade accounts payable 31,825 ( 68,026 ) Accrued liabilities ( 24,316 ) 67,936 Other, net ( 17,313 ) 9,129 Net cash used in operating activities ( 209,313 ) ( 63,804 ) Cash flows provided by (used in) investing activities: Purchase of businesses, net of cash acquired 2,305 ( 941,102 ) Capital expenditures ( 123,604 ) ( 106,436 ) Other, net 4,914 983 Net cash used in investing activities ( 116,385 ) ( 1,046,555 ) Cash flows provided by (used in) financing activities: Borrowings under revolving loans 318,141 927,302 Repayments under revolving loans ( 105,856 ) ( 570,955 ) Proceeds from issuance of long-term debt 499,725 1,639,661 Repayments of long-term debt ( 500,000 ) ( 766,170 ) Changes in outstanding checks - principally vendors ( 84,216 ) ( 79,006 ) Dividends paid on common stock ( 31,564 ) ( 27,121 ) Debt issuance costs ( 4,905 ) ( 10,265 ) Repurchase of common stock ( 8,538 ) ( 13,155 ) Net cash provided by financing activities 82,787 1,100,291 Effect of exchange rate changes on cash and cash equivalents ( 1,749 ) ( 2,674 ) Cash and cash equivalents: Net decrease ( 244,660 ) ( 12,742 ) Balance at beginning of year 409,481 203,824 Balance at end of period $ 164,821 $ 191,082 Interest paid, net $ 48,026 $ 38,058 Income taxes paid, net 47,297 28,974 See accompanying notes. -6- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the three and six months ended June 30, 2021 and 2020 (Dollars and shares in thousands, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Common stock - shares outstanding Balance at beginning of period 110,386 110,834 110,057 110,780 Net issuance of treasury stock for vested restricted stock units 22 52 351 365 Repurchases of common stock — — — ( 259 ) Balance at end of period 110,408 110,886 110,408 110,886 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 309,635 292,283 306,363 289,422 Stock compensation expense 5,327 4,573 10,337 9,056 Net issuance of treasury stock for vested restricted stock units ( 89 ) ( 217 ) ( 1,827 ) ( 1,839 ) Balance at end of period 314,873 296,639 314,873 296,639 Retained earnings Balance at beginning of period 2,452,996 2,184,691 2,395,395 2,141,302 Net income 94,476 78,172 167,757 135,772 Dividends declared on common stock ( 15,689 ) ( 13,472 ) ( 31,369 ) ( 27,018 ) Adoption of accounting standards update related to credit losses in 2020 — — — ( 665 ) Balance at end of period 2,531,783 2,249,391 2,531,783 2,249,391 Accumulated other comprehensive loss Balance at beginning of period ( 291,806 ) ( 297,697 ) ( 260,953 ) ( 259,742 ) Other comprehensive income (loss) 28,373 337 ( 2,480 ) ( 37,618 ) Balance at end of period ( 263,433 ) ( 297,360 ) ( 263,433 ) ( 297,360 ) Treasury stock Balance at beginning of period ( 1,196,221 ) ( 1,160,453 ) ( 1,189,683 ) ( 1,149,411 ) Net issuance of treasury stock for vested restricted stock units ( 173 ) ( 274 ) ( 6,711 ) ( 4,382 ) Repurchases of common stock — — — ( 6,934 ) Balance at end of period ( 1,196,394 ) ( 1,160,727 ) ( 1,196,394 ) ( 1,160,727 ) Total stockholders' equity $ 1,388,580 $ 1,089,694 $ 1,388,580 $ 1,089,694 Dividends declared on common stock per share $ 0.14 $ 0.12 $ 0.28 $ 0.24 See accompanying notes. -7- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six 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, 2020 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, 2020. Effective with the first quarter of 2021, we renamed our Closures segment as our Dispensing and Specialty Closures segment and our Plastic Containers segment as our Custom Containers segment, in each case to better capture the evolving nature of their products and our ongoing strategic focus. Each of these segments continues to consist of the same operations as prior to it being renamed. 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 Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (Dollars in thousands) Dispensing and Specialty Closures $ 545,768 $ 410,468 $ 1,055,120 $ 767,619 Metal Containers 624,534 597,191 1,178,615 1,105,709 Custom Containers 178,359 168,811 353,036 333,526 $ 1,348,661 $ 1,176,470 $ 2,586,771 $ 2,206,854 Revenues by geography were as follows: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (Dollars in thousands) North America $ 968,497 $ 897,327 $ 1,866,899 $ 1,715,000 Europe and other 380,164 279,143 719,872 491,854 $ 1,348,661 $ 1,176,470 $ 2,586,771 $ 2,206,854 Our contract assets primarily consist of unbilled accounts receivable related to over time revenue recognition and were $ 92.6 million, $ 80.4 million, and $ 83.0 million as of June 30, 2021 and 2020 and December 31, 2020, 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 June 30, 2021 and 2020 and for the three and six 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 Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (Dollars in thousands) Dispensing and Specialty Closures $ 67 $ 700 $ 5,298 $ 1,442 Metal Containers 225 1,153 5,246 3,116 Custom Containers 62 89 167 183 $ 354 $ 1,942 $ 10,711 $ 4,741 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, 2020 $ 41,005 $ 555 $ — $ 41,560 Charged to expense 6,172 ( 5 ) 4,544 10,711 Utilized and currency translation ( 3,258 ) ( 263 ) ( 4,544 ) ( 8,065 ) Balance at June 30, 2021 $ 43,919 $ 287 $ — $ 44,206 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 June 30, 2021 were recorded in our Condensed Consolidated Balance Sheet as accrued liabilities of $ 7.9 million and other liabilities of $ 36.3 million. Exclusive of the footprint optimization plan for our Metal Container segment 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 $ 2.2 million and $ 7.0 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 $ 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. -9- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six 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, 2020 $ ( 168,604 ) $ ( 4,656 ) $ ( 87,693 ) $ ( 260,953 ) Other comprehensive loss before reclassifications — 484 ( 7,703 ) ( 7,219 ) Amounts reclassified from accumulated other comprehensive loss 3,754 985 — 4,739 Other comprehensive loss 3,754 1,469 ( 7,703 ) ( 2,480 ) Balance at June 30, 2021 $ ( 164,850 ) $ ( 3,187 ) $ ( 95,396 ) $ ( 263,433 ) The amounts reclassified to earnings from the unrecognized net defined benefit plan costs component of accumulated other comprehensive loss for the three and six months ended June 30, 2021 were net (losses) of $( 2.6 ) million and $( 5.2 ) million, respectively, excluding income tax benefits of $ 0.7 million and $ 1.4 million, respectively. For the three and six months ended June 30, 2021, these net (losses) consisted of amortization of net actuarial (losses) of $( 3.0 ) million and $( 6.0 ) million and amortization of net prior service credit of $ 0.4 million and $ 0.8 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 six months ended June 30, 2021 were not significant. Other comprehensive loss before reclassifications related to foreign currency translation for the three and six months ended June 30, 2021 consisted of (i) foreign currency gains (losses) related to translation of quarter end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $ 29.1 million and $( 22.6 ) million, respectively, (ii) foreign currency gains related to intra-entity foreign currency transactions that are of a long-term investment nature of $ 0.5 million and $ 0.9 million, respectively, and (iii) foreign currency (losses) gains related to our net investment hedges of $( 5.2 ) million and $ 18.3 million, respectively, excluding an income tax benefit (provision) of $ 1.3 million and $( 4.3 ) million, respectively. See Note 7 for further discussion. Note 5. Inventories Inventories consisted of the following: June 30, 2021 June 30, 2020 Dec. 31, 2020 (Dollars in thousands) Raw materials $ 302,719 $ 298,550 $ 270,066 Work-in-process 164,655 165,505 167,100 Finished goods 534,522 499,799 335,346 Other 15,497 14,089 14,610 1,017,393 977,943 787,122 Adjustment to value inventory at cost on the LIFO method ( 109,588 ) ( 156,495 ) ( 109,588 ) $ 907,805 $ 821,448 $ 677,534 -10- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) Note 6. Long-Term Debt Long-term debt consisted of the following: June 30, 2021 June 30, 2020 Dec. 31, 2020 (Dollars in thousands) Bank debt Bank revolving loans $ 195,859 $ 354,000 $ — U.S. term loans 400,000 900,000 900,000 Other foreign bank revolving and term loans 47,132 42,534 30,407 Total bank debt 642,991 1,296,534 930,407 4¾% Senior Notes 300,000 300,000 300,000 3¼% Senior Notes 770,835 728,520 795,307 4⅛% Senior Notes 600,000 600,000 600,000 2¼% Senior Notes 592,950 560,400 611,775 1.4% Senior Secured Notes 500,000 — — Finance leases 33,460 35,102 34,480 Total debt - principal 3,440,236 3,520,556 3,271,969 Less unamortized debt issuance costs and debt discount 22,984 22,713 20,716 Total debt 3,417,252 3,497,843 3,251,253 Less current portion 240,859 391,418 28,036 $ 3,176,393 $ 3,106,425 $ 3,223,217 At June 30, 2021, the current portion of long-term debt consisted of $ 195.9 million of bank revolving loans under our amended and restated senior secured credit facility, or the Credit Agreement, $ 43.1 million of other foreign bank revolving and term loans and $ 1.9 million of finance leases. On February 1, 2021, we and certain of our subsidiaries entered into a Second Amendment to Amended and Restated Credit Agreement, or the Second Amendment, with certain lenders party thereto and Wells Fargo Bank, National Association, as administrative agent under the Credit Agreement. The Second Amendment amends the Credit Agreement to provide us with additional flexibility to issue new senior secured notes with related guarantees from our U.S. subsidiaries, which new senior secured notes and related guarantees may be secured on a pari passu basis with the U.S. Obligations by the U.S. Collateral (each as defined in the Second Amendment). The Second Amendment also makes minor technical changes and allows for certain additional internal corporate reorganizations. 1.4% SENIOR SECURED NOTES On February 10, 2021, we issued $ 500.0 million aggregate principal amount of our 1.4 % Senior Secured Notes due 2026, or the 1.4% Notes, at 99.945 percent of their principal amount, in a private placement in reliance on Rule 144A and Regulation S under the Securities Act of 1933, as amended. 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. The 1.4% Notes are guaranteed on a senior secured basis by our U.S. subsidiaries that guarantee the Credit Agreement. The 1.4% Notes are not guaranteed by any of our subsidiaries that do not guarantee the Credit Agreement, any of our foreign subsidiaries or any of our non-wholly owned subsidiaries. The 1.4% Notes and related guarantees are secured by pledges of equity interests, or the Collateral, that are owned by us and by each subsidiary guarantor, which equity interests are the same equity interests pledged to secure the obligations of U.S. borrowers under the Credit Agreement. The 1.4% Notes will share equally in the Collateral with the Credit Agreement. The guarantee of each such subsidiary guarantor will be released to the -11- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) extent such subsidiary no longer guarantees the Credit Agreement and in certain other circumstances, and the Collateral pledged by such subsidiary guarantor will also be released upon the release of such subsidiary guarantor’s guarantee. The 1.4% Notes and related guarantees are senior secured obligations of us and the subsidiary guarantors. The 1.4% Notes and related guarantees rank equally in right of payment with all of our and the subsidiary guarantors’ existing and future senior indebtedness, including under the Credit Agreement and our 4¾% Senior Notes due 2025, or the 4¾% Notes, our 3¼% Senior Notes due 2025, or the 3¼% Notes, our 4⅛% Senior Notes due 2028, or the 4⅛% Notes, and our 2¼% Senior Notes due 2028, or the 2¼% Notes; are senior in right of payment to all of our and the subsidiary guarantors’ future indebtedness that is by its terms expressly subordinated in right of payment to the 1.4% Notes; rank equally in right of payment to all of our and the subsidiary guarantors’ existing and future senior secured indebtedness (including indebtedness under the Credit Agreement) that is secured by the Collateral on a first-priority basis, to the extent of the value of the Collateral; rank effectively senior to all of our and the subsidiary guarantors’ existing and future unsecured indebtedness and indebtedness secured on a junior basis, in each case to the extent of the value of the Collateral; rank effectively junior to all existing and future indebtedness that is secured by liens on assets that do not constitute a part of the Collateral, to the extent of the value of such assets; and are structurally subordinated to all existing and future indebtedness and other liabilities of each of our existing and future subsidiaries that do not guarantee the 1.4% Notes. As a result of the guarantees by the subsidiary guarantors of the 1.4% Notes, such subsidiaries were also required to guarantee, and have now guaranteed, on a senior unsecured basis the 4¾% Notes, the 3¼% Notes, the 4⅛% Notes and the 2¼% Notes pursuant to supplemental indentures to the indenture for the 4¾% Notes and the 3¼% Notes, the indenture for the 4⅛% Notes and the indenture for the 2¼% Notes. The 1.4% Notes are not, and are not required to be, registered under the Securities Act of 1933, as amended. The 1.4% Notes mature on April 1, 2026. Interest on the 1.4% Notes will be payable semi-annually in cash on April 1 and October 1 of each year, beginning on October 1, 2021. The 1.4% Notes were issued pursuant to an indenture by and among Silgan, certain of our U.S. subsidiaries and Wells Fargo Bank, National Association, as trustee and collateral 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, the indenture for the 4⅛% Notes and the indenture for the 2¼% Notes. Prior to March 1, 2026 (one month prior to the maturity date of the 1.4% Notes, or the Par Call Date) the 1.4% Notes will be redeemable at a redemption price equal to the greater of (i) 100 percent of the principal amount of the 1.4% Notes to be redeemed and (ii) the principal amount of the 1.4% Notes plus a “make-whole” amount, plus, in each case, accrued and unpaid interest thereon to the redemption date. On or after the Par Call Date, the 1.4% Notes will be redeemable at a redemption price equal to 100 percent of the aggregate principal amount of any 1.4% Notes being redeemed, plus accrued and unpaid interest thereon to the redemption date. We will be required to make an offer to repurchase the 1.4% 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 1.4% Notes. -12- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) 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 June 30, 2021: Carrying Amount Fair Value (Dollars in thousands) Assets: Cash and cash equivalents $ 164,821 $ 164,821 Liabilities: Bank debt $ 642,991 $ 642,991 4¾% Notes 300,000 304,890 3¼% Notes 770,835 777,850 4⅛% Notes 600,000 622,500 2¼% Notes 592,950 597,397 1.4% Notes 500,000 495,000 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 June 30, 2021 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% Notes, 3¼% Notes, 4⅛% Notes, 2¼% Notes and 1.4% 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% Notes, 3¼% Notes, 4⅛% Notes, 2¼% Notes and 1.4% 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. -13- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) We utilize certain derivative financial instruments to manage a portion of our interest rate, foreign currency exchange rate and natural gas cost exposures. We generally limit our use of derivative financial instruments to interest rate, foreign currency exchange 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, foreign currency exchange 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. The notional principal amounts outstanding under foreign currency exchange rate agreements and natural gas swap agreements were not significant as of June 30, 2021. In addition, 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 six months ended June 30, 2021. 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 June 30, 2021 was not significant. Foreign Currency Exchange Rate Risk In an effort to minimize our foreign currency exchange rate risk, in addition to limited foreign currency exchange rate derivative financial instruments, 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, including net investment hedges related to the 3¼% Notes which are Euro denominated. Foreign currency (losses) gains related to our net investment hedges included in accumulated other comprehensive loss for the three and six months ended June 30, 2021 were $( 5.2 ) million and $ 18.3 million, respectively. -14- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) Note 8. 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 closures and metal container 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 closures and metal container subsidiaries, which should effectively close out the investigation in Germany. Given 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 9. Retirement Benefits The components of the net periodic pension benefit credit were as follows: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (Dollars in thousands) Service cost $ 3,789 $ 3,489 $ 7,577 $ 6,975 Interest cost 4,355 5,710 8,709 11,420 Expected return on plan assets ( 19,850 ) ( 17,993 ) ( 39,698 ) ( 35,987 ) Amortization of prior service cost 58 56 116 111 Amortization of actuarial losses 3,028 2,934 6,054 5,869 Net periodic benefit credit $ ( 8,620 ) $ ( 5,804 ) $ ( 17,242 ) $ ( 11,612 ) The components of the net periodic other postretirement benefit credit were as follows: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (Dollars in thousands) Service cost $ 28 $ 25 $ 56 $ 48 Interest cost 95 141 190 283 Amortization of prior service credit ( 457 ) ( 484 ) ( 913 ) ( 967 ) Amortization of actuarial gains ( 47 ) ( 69 ) ( 95 ) ( 139 ) Net periodic benefit credit $ ( 381 ) $ ( 387 ) $ ( 762 ) $ ( 775 ) 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 2019 tax year with no change to our filed federal income tax return. We have been accepted into the Compliance Assurance Program for the 2020 and 2021 tax years which provides for the review by the IRS of tax matters relating to our tax return prior to filing. -15- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) Note 11. 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. We did not repurchase any shares of our common stock pursuant to this authorization during the six months ended June 30, 2021. At June 30, 2021, we had approximately $ 76.6 million remaining under this authorization for the repurchase of our common stock. During the first six months of 2021, we issued 573,232 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 222,146 shares of our common stock at an average cost of $ 38.44 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 June 30, 2021, 64,704,383 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 six months of 2021, 359,469 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 $ 13.9 million, which is being amortized ratably over the respective vesting period from the grant date. -16- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six 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 June 30, 2021 Net sales $ 545,768 $ 624,534 $ 178,359 $ — $ 1,348,661 Depreciation and amortization (1) 29,101 21,329 9,632 42 60,104 Rationalization charges 67 225 62 — 354 Segment income 73,836 58,635 27,244 ( 6,761 ) 152,954 Three Months Ended June 30, 2020 Net sales $ 410,468 $ 597,191 $ 168,811 $ — $ 1,176,470 Depreciation and amortization (1) 22,026 20,545 9,352 42 51,965 Rationalization charges 700 1,153 89 — 1,942 Segment income 58,581 71,782 22,987 ( 22,116 ) 131,234 Six Months Ended June 30, 2021 Net sales $ 1,055,120 $ 1,178,615 $ 353,036 $ — $ 2,586,771 Depreciation and amortization (1) 57,991 42,578 19,005 81 119,655 Rationalization charges 5,298 5,246 167 — 10,711 Segment income 139,481 104,249 51,730 ( 15,957 ) 279,503 Six Months Ended June 30, 2020 Net sales $ 767,619 $ 1,105,709 $ 333,526 $ — $ 2,206,854 Depreciation and amortization (1) 42,150 41,026 18,840 79 102,095 Rationalization charges 1,442 3,116 183 — 4,741 Segment income 103,810 119,261 45,032 ( 34,728 ) 233,375 _____________ (1) Depreciation and amortization excludes amortization of debt discount and debt issuance costs of $ 1.4 million and $ 1.1 million for the three months ended June 30, 2021 and 2020, respectively and $ 2.7 million and $ 2.1 million for the six months ended June 30, 2021 and 2020, respectively. Total segment income is reconciled to income before income taxes as follows: Three Months Ended Six Months Ended June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 (Dollars in thousands) Total segment income $ 152,954 $ 131,234 $ 279,503 $ 233,375 Interest and other debt expense 26,406 25,837 53,712 50,807 Income before income taxes $ 126,548 $ 105,397 $ 225,791 $ 182,568 Sales and segment income of part of our Dispensing and Specialty Closures segment and our Metal Container segment 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 -17- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at June 30, 2021 and 2020 and for the three and six months then ended is unaudited) 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. -18-