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SILGAN HOLDINGS INC - Quarter Report: 2020 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

Commission file number  000-22117
SILGAN HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
Delaware06-1269834
(State or other jurisdiction(I.R.S. Employer
of incorporation or organization)Identification No.)
  
4 Landmark Square 
Stamford,Connecticut06901
(Address of principal executive offices)(Zip Code)
(203) 975-7110
(Registrant's telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareSLGNNasdaq Global Select Market

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes ☒   No ☐

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒

           Accelerated filer
☐

Non-accelerated filer
☐

           Smaller reporting company☐
           Emerging growth company☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐   No ☒

As of April 30, 2020, the number of shares outstanding of the Registrant’s common stock was 110,871,203.
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SILGAN HOLDINGS INC.
 
TABLE OF CONTENTS
  
 Page No.
  
  
  
  
 
  
  
  
  
  
 
  
 
 
  

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Part I. Financial Information
Item 1. Financial Statements

SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

March 31, 2020March 31, 2019Dec. 31, 2019
 (unaudited)(unaudited) 
Assets   
Current assets:   
Cash and cash equivalents$614,846  $141,400  $203,824  
Trade accounts receivable, net600,698  596,601  504,986  
Inventories697,808  686,213  633,005  
Prepaid expenses and other current assets68,993  70,622  64,993  
Total current assets1,982,345  1,494,836  1,406,808  
Property, plant and equipment, net1,553,867  1,511,718  1,570,331  
Goodwill1,148,991  1,141,202  1,142,223  
Other intangible assets, net356,542  374,809  354,615  
Other assets, net486,793  402,008  457,082  
 $5,528,538  $4,924,573  $4,931,059  
Liabilities and Stockholders’ Equity   
Current liabilities:   
Revolving loans and current portion of long-term debt$854,653  $578,001  $29,813  
Trade accounts payable504,481  536,909  727,053  
Accrued payroll and related costs66,772  61,874  66,866  
Accrued liabilities217,928  122,001  194,797  
Total current liabilities1,643,834  1,298,785  1,018,529  
Long-term debt2,174,571  2,113,575  2,214,608  
Deferred income taxes264,047  273,345  254,836  
Other liabilities425,511  338,661  419,764  
Stockholders’ equity:   
Common stock1,751  1,751  1,751  
Paid-in capital292,283  276,435  289,422  
Retained earnings2,184,691  2,031,487  2,141,302  
Accumulated other comprehensive loss(297,697) (272,431) (259,742) 
Treasury stock(1,160,453) (1,137,035) (1,149,411) 
Total stockholders’ equity1,020,575  900,207  1,023,322  
 $5,528,538  $4,924,573  $4,931,059  

See accompanying notes.
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SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended March 31, 2020 and 2019
(Dollars and shares in thousands, except per share amounts)
(Unaudited)


 20202019
   
Net sales$1,030,384  $1,027,131  
Cost of goods sold845,286  861,134  
Gross profit185,098  165,997  
Selling, general and administrative expenses89,863  77,662  
Rationalization charges2,799  6,083  
Other pension and postretirement income(9,705) (4,490) 
Income before interest and income taxes102,141  86,742  
Interest and other debt expense before loss on
early extinguishment of debt		23,489  27,103  
Loss on early extinguishment of debt
1,481  —  
Interest and other debt expense24,970  27,103  
Income before income taxes77,171  59,639  
Provision for income taxes19,571  12,897  
Net income$57,600  $46,742  
Earnings per share:
Basic net income per share$0.52  $0.42  
Diluted net income per share$0.52  $0.42  
Weighted average number of shares:
Basic110,862  110,709  
Effect of dilutive securities570  883  
Diluted111,432  111,592  
See accompanying notes.

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 SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2020 and 2019
(Dollars in thousands)
(Unaudited)


 20202019
Net income$57,600  $46,742  
  Other comprehensive income (loss), net of tax:
  Changes in net prior service credit and actuarial losses939  2,506  
  Change in fair value of derivatives(2,455) (887) 
  Foreign currency translation(36,439) (5,242) 
Other comprehensive loss (37,955) (3,623) 
Comprehensive income $19,645  $43,119  
 
See accompanying notes.
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 SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2020 and 2019
(Dollars in thousands)
(Unaudited)



 20202019
Cash flows provided by (used in) operating activities:  
Net income$57,600  $46,742  
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:		  
Depreciation and amortization51,090  51,232  
Rationalization charges2,799  6,083  
Stock compensation expense4,483  3,909  
Loss on early extinguishment of debt1,481  —  
Other changes that provided (used) cash, net of effects from acquisition:  
Trade accounts receivable, net(103,975) (88,594) 
Inventories(68,965) (53,793) 
Trade accounts payable(126,728) (81,242) 
Accrued liabilities20,443  (51,321) 
Other, net(6,364) 11,198  
Net cash used in operating activities(168,136) (155,786) 
Cash flows provided by (used in) investing activities:  
Purchase of business, net of cash acquired(39,828) —  
Capital expenditures(65,147) (61,746) 
Other, net534  20  
Net cash used in investing activities(104,441) (61,726) 
Cash flows provided by (used in) financing activities:  
Borrowings under revolving loans877,114  614,103  
Repayments under revolving loans(48,970) (205,856) 
Proceeds from issuance of long-term debt739,661  —  
Repayments of long-term debt(766,170) (8,161) 
Changes in outstanding checks - principally vendors(79,006) (83,670) 
Dividends paid on common stock(13,771) (14,161) 
Debt issuance costs(7,544) —  
Repurchase of common stock under stock plan(12,664) (15,046) 
Net cash provided by financing activities688,650  287,209  
Effect of exchange rate changes on cash and cash equivalents(5,051) (1,116) 
Cash and cash equivalents:  
Net increase 411,022  68,581  
Balance at beginning of year203,824  72,819  
Balance at end of period$614,846  $141,400  
Interest paid, net$23,518  $39,969  
Income taxes paid, net22,056  16,933  

See accompanying notes.
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SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the three months ended March 31, 2020 and 2019
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
 


20202019
Common stock - shares outstanding
Balance at beginning of period
110,780  110,430  
Net issuance of treasury stock for vested restricted stock units
313  698  
Repurchases of common stock
(259) —  
Balance at end of period
110,834  111,128  
Common stock - par value
Balance at beginning and end of period
$1,751  $1,751  
Paid-in capital
Balance at beginning of period
289,422  276,062  
Stock compensation expense
4,483  3,909  
Net issuance of treasury stock for vested restricted stock units
(1,622) (3,536) 
Balance at end of period
292,283  276,435  
Retained earnings
Balance at beginning of period
2,141,302  1,997,785  
Net income
57,600  46,742  
Dividends declared on common stock
(13,546) (12,447) 
Adoption of accounting standards updates related to credit losses in 2020 and leases in 2019
(665) (593) 
Balance at end of period
2,184,691  2,031,487  
Accumulated other comprehensive loss
Balance at beginning of period
(259,742) (268,808) 
Other comprehensive loss
(37,955) (3,623) 
Balance at end of period
(297,697) (272,431) 
Treasury stock
Balance at beginning of period
(1,149,411) (1,125,525) 
Net issuance of treasury stock for vested restricted stock units
(4,108) (11,510) 
Repurchases of common stock
(6,934) —  
Balance at end of period
(1,160,453) (1,137,035) 
Total stockholders' equity$1,020,575  $900,207  
Dividends declared on common stock per share$0.12  $0.11  

See accompanying notes.
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three 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.

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 for the three months ended March 31 were as follows:
20202019
(Dollars in thousands)
Metal containers$508,519  $507,062  
Closures357,151  356,199  
Plastic containers164,714  163,870  
$1,030,384  $1,027,131  

Revenues by geography for the three months ended March 31 were as follows:
20202019
(Dollars in thousands)
North America$822,405  $810,741  
Europe and other207,979  216,390  
$1,030,384  $1,027,131  



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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)
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 $68.9 million, $75.3 million, and $71.1 million as of March 31, 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.               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.

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 for the three months ended March 31 were as follows:
20202019
 (Dollars in thousands)
Metal containers$1,963  $222  
Closures742  5,660  
Plastic containers94  201  
 $2,799  $6,083  

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 expense1,362  1,242  195  2,799  
Utilized and currency translation(2,122) (1,331) (195) (3,648) 
Balance at March 31, 2020$42,055  $809  $—  $42,864  

Rationalization reserves as of March 31, 2020 were recorded in our Condensed Consolidated Balance Sheets as accrued liabilities of $4.7 million and other liabilities of $38.2 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 for our rationalization plans of $1.9 million are expected primarily through 2020 and remaining cash expenditures for our rationalization plans of $3.6 million are expected through 2023. 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.
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)


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) $(259,742) 
Other comprehensive loss before reclassifications
(872) (2,844) (36,439) (40,155) 
Amounts reclassified from accumulated other
    comprehensive loss
1,811  389  —  2,200  
 Other comprehensive loss939  (2,455) (36,439) (37,955) 
Balance at March 31, 2020$(138,163) $(5,637) $(153,897) $(297,697) 
 
The amounts reclassified to earnings from the unrecognized net defined benefit plan costs component of accumulated other comprehensive loss for the three months ended March 31, 2020, were net (losses) of $(2.4) million, excluding an income tax benefit of $0.6 million. These net (losses) consisted of amortization of net actuarial (losses) of $(2.8) million and amortization of net prior service credit of $0.4 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 10 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 months ended March 31, 2020 were not significant.

Other comprehensive loss before reclassifications related to foreign currency translation for the three months ended March 31, 2020, consisted of (i) foreign currency (losses) related to translation of quarter end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $(32.9) million, (ii) foreign currency (losses) related to intra-entity foreign currency transactions that are of a long-term investment nature of $(3.0) million, and (iii) foreign currency (losses) related to our net investment hedges of $(0.7) million, excluding an income tax benefit of $0.2 million. See Note 8 for further discussion.


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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)

Note 6.               Inventories

Inventories consisted of the following: 
March 31, 2020March 31, 2019Dec. 31, 2019
 (Dollars in thousands)
Raw materials$261,058  $244,859  $286,953  
Work-in-process148,034  135,685  134,417  
Finished goods432,085  418,702  355,337  
Other13,126  12,850  12,793  
 854,303  812,096  789,500  
Adjustment to value inventory
at cost on the LIFO method		(156,495) (125,883) (156,495) 
 $697,808  $686,213  $633,005  


Note 7.               Long-Term Debt

Long-term debt consisted of the following:
 
March 31, 2020March 31, 2019Dec. 31, 2019
 (Dollars in thousands)
Bank debt   
Bank revolving loans$827,000  $506,000  $—  
U.S. term loans—  800,000  760,000  
Canadian term loans—  15,825  4,703  
Other foreign bank revolving and term loans29,239  30,906  31,127  
Total bank debt856,239  1,352,731  795,830  
5½% Senior Notes—  300,000  —  
4¾% Senior Notes
300,000  300,000  300,000  
3¼% Senior Notes
713,490  729,170  729,755  
4⅛% Senior Notes600,000  —  400,000  
2¼% Senior Notes548,839  —  —  
Finance leases32,582  22,167  33,288  
Total debt - principal3,051,150  2,704,068  2,258,873  
Less unamortized debt issuance costs and debt discount21,926  12,492  14,452  
Total debt3,029,224  2,691,576  2,244,421  
Less current portion854,653  578,001  29,813  
 $2,174,571  $2,113,575  $2,214,608  

At March 31, 2020, the current portion of long-term debt consisted of $827.0 million of bank revolving loans under the Credit Agreement, $26.0 million of other foreign bank revolving and term loans and $1.7 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
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)
prepay all of our outstanding U.S. A term loans under the Credit Agreement. 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% SENIOR NOTES

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.























-12-

SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)
Note 8.               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 March 31, 2020:

Carrying
Amount		Fair
Value
 (Dollars in thousands)
Assets:  
Cash and cash equivalents$614,846  $614,846  
Liabilities:  
Bank debt$856,239  $856,239  
4¾% Notes300,000  289,500  
3¼% Notes713,490  699,263  
4⅛% Notes599,009  553,500  
2¼% Notes548,839  489,015  
Derivative instruments (accrued and other liabilities)7,396  7,396  

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 March 31, 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% Notes, 3¼% Notes, 4⅛% Notes and 2¼% 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 and 2¼% 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 March 31, 2020 and 2019 and for the
three months then ended is unaudited)
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 months ended March 31, 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 March 31, 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 months ended March 31, 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 March 31, 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% Notes and the 2¼% 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 months ended March 31, 2020 were $(0.7) million.


Note 9.               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 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.

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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)

Note 10.               Retirement Benefits

The components of the net periodic pension benefit credit for the three months ended March 31 were as follows:

20202019
 (Dollars in thousands)
Service cost$3,486  $3,258  
Interest cost5,710  7,049  
Expected return on plan assets(17,993) (15,113) 
Amortization of prior service cost 55  19  
Amortization of actuarial losses2,934  4,119  
Net periodic benefit credit $(5,808) $(668) 
 

The components of the net periodic other postretirement benefit credit for the three months ended March 31 were as follows:
20202019
(Dollars in thousands)
Service cost$23  $22  
Interest cost142  185  
Amortization of prior service credit(483) (582) 
Amortization of actuarial gains(70) (167) 
Net periodic benefit credit$(388) $(542) 



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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)

Note 11.               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 12.               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 three months ended March 31, 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 March 31, 2020, we had approximately $105.6 million remaining under this authorization for the repurchase of our common stock.

During the first three months of 2020, we issued 514,053 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 200,872 shares of our common stock at an average cost of $28.53 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 March 31, 2020, 64,278,312 shares of our common stock were held in treasury.


Note 13.             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 three months of 2020, 334,800 restricted stock units were granted to certain of our officers and other key employees.  The fair value of these restricted stock units at the grant date was $9.6 million, which is being amortized ratably over the respective vesting period from the grant date.


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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)

Note 14.             Business Segment Information

Reportable business segment information for the three months ended March 31was as follows:

Metal
Containers		ClosuresPlastic
Containers		CorporateTotal
 (Dollars in thousands)
Three Months Ended March 31, 2020     
Net sales$508,519  $357,151  $164,714  $—  $1,030,384  
Depreciation and amortization(1)
20,481  20,123  9,486  40  50,130  
Rationalization charges1,963  742  94  —  2,799  
Segment income 47,479  45,229  22,047  (12,614) 102,141  
Three Months Ended March 31, 2019     
Net sales$507,062  $356,199  $163,870  $—  $1,027,131  
Depreciation and amortization(1)
21,107  20,354  8,816  41  50,318  
Rationalization charges222  5,660  201  —  6,083  
Segment income 38,897  40,256  12,066  (4,477) 86,742  

_____________

(1)Depreciation and amortization excludes amortization of debt discount and debt issuance costs of $1.0 million for the three months ended March 31, 2020 and debt issuance costs of $0.9 million for the three months ended March 31, 2019, respectively.



Total segment income is reconciled to income before income taxes as follows:
20202019
 (Dollars in thousands)
Total segment income $102,141  $86,742  
Interest and other debt expense24,970  27,103  
Income before income taxes$77,171  $59,639  

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.

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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)

Note 15. Subsequent Events

Securities and Assets Sale Agreement for the Acquisition of Albéa’s Dispensing Business

As previously disclosed, on January 27, 2020, we, on behalf of ourself and certain of our subsidiaries, made a binding offer, or the Offer, to Twist Beauty Packaging S.A.S., or Albéa, on behalf of itself and certain of its subsidiaries, or the Sellers, to purchase all the outstanding securities of certain subsidiaries of the Sellers engaged in the dispensing business and certain assets related to the Sellers’ dispensing business in China, or collectively the Albéa Dispensing Business, for an aggregate cash purchase price of $900 million, subject to certain adjustments including for working capital, other current assets and current liabilities and net indebtedness, or the Acquisition.

The Albéa Dispensing Business is 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 10 plants across North America, Europe, South America and Asia. For the year ended December 31, 2019, the Albéa Dispensing Business reported net sales of approximately $395 million.

In accordance with the terms of the Offer, following the conclusion of consultation and notification processes with applicable works’ councils and trade unions, on April 14, 2020, Albéa exercised the option contained in the Offer, and on April 21, 2020 we and certain of our subsidiaries and the Sellers executed the securities and assets sale agreement, or the SPA, substantially in the form attached to the Offer.

We expect to fund the purchase price for the Acquisition using borrowings under an Incremental Term Loan Commitment Agreement entered into pursuant to the Credit Agreement, as further described below, together with cash on hand and borrowings of revolving loans under the Credit Agreement.

The Acquisition is expected to close in the first half of 2020, subject to the satisfaction or waiver of certain closing conditions, including remaining antitrust clearances. The SPA provides that either we or the Sellers have the right to terminate the SPA in the event that the applicable antitrust clearances have not been obtained by October 27, 2020, or the Outside Date; provided, however, that we and the Sellers have the right to unilaterally postpone the Outside Date by up to three months after the Outside Date, or the Postponed Outside Date, in the event that applicable antitrust clearances have not yet been obtained by the Outside Date. The SPA further provides that if the applicable antitrust clearances have not been obtained by the Outside Date or the Postponed Outside Date, as the case may be, then we are required to pay a break fee of $25 million to the Sellers.

In connection with the SPA, we and certain of our subsidiaries and the Sellers have also entered into an ancillary representations and warranties agreement containing customary representations and warranties made by the Sellers in respect of the Acquisition and will enter into other agreements at closing for the Acquisition, including a transition services agreement.
Incremental Term Loan Commitment Agreement

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 Incremental Term A-1 Loan Lenders thereunder and Wells Fargo Bank, National Association, as Administrative Agent and an Incremental Term A-1 Loan Lender. The Incremental Term Loan Commitment Agreement was entered into pursuant to the Credit Agreement and provides for the Incremental Term A-1 Loan Lenders to lend to us, on a delayed draw basis and pursuant to the terms of the Incremental Term Loan Commitment Agreement and the Credit Agreement, $900 million of Incremental Term A-1 Loans to fund the purchase price for the Acquisition and related fees, costs and expenses.

The Incremental Term A-1 Loans mature on May 30, 2024, the same maturity date for term loans under the Credit Agreement. The Incremental Term Loan Commitment Agreement provides that the Incremental Term A-1 Loans 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 Term A-1 Loans will 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
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SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 2020 and 2019 and for the
three months then ended is unaudited)
quarter ending June 30, 2020. The Applicable Margin will vary between 1.25 percent to 1.75 percent per annum for Eurodollar 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 Term A-1 Loans will be 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.

Commencing on May 27, 2020, we will pay a ticking fee to the Administrative Agent, for the account of each Incremental Term A-1 Loan Lender, at a rate of 0.30 percent per annum on the unfunded Incremental Term A-1 Loans. The ticking fee will be payable in arrears and will end on the earlier to occur of the date at which (i) the Incremental Term A-1 Loans are drawn or (ii) the SPA expires or is terminated in accordance with its terms, as applicable.

-19-

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, 2019 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 rigid packaging for consumer goods products.  We currently produce steel and aluminum containers for human and pet food and general line products; metal and plastic closures and dispensing systems for food, beverage, health care, garden, personal care, home and beauty products; and custom designed plastic containers for personal care, food, health care, pharmaceutical, household and industrial chemical, pet food and care, agricultural, automotive and marine chemical products.  We are a leading manufacturer of metal containers in North America and Europe, a leading worldwide manufacturer of metal and plastic closures and dispensing systems and a leading manufacturer of 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.








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RESULTS OF OPERATIONS

The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the three months ended March 31
20202019
Net sales
Metal containers49.3 %49.4 %
Closures34.7  34.7  
Plastic containers16.0  15.9  
Consolidated100.0  100.0  
Cost of goods sold82.0  83.8  
Gross profit18.0  16.2  
Selling, general and administrative expenses8.7  7.6  
Rationalization charges0.3  0.6  
Other pension and postretirement income(0.9) (0.4) 
Income before interest and income taxes9.9  8.4  
Interest and other debt expense2.4  2.6  
Income before income taxes7.5  5.8  
Provision for income taxes1.9  1.2  
Net income5.6 %4.6 %

Summary unaudited results of operations for the three months ended March 31 are provided below.
 20202019
(dollars in millions)
Net sales
Metal containers$508.5  $507.0  
Closures357.2  356.2  
Plastic containers164.7  163.9  
Consolidated$1,030.4  $1,027.1  
Segment income
Metal containers (1)
$47.5  $38.9  
Closures (2)
45.2  40.2  
Plastic containers (3)
22.0  12.1  
Corporate (4)
(12.6) (4.5) 
Consolidated$102.1  $86.7  
 
(1) Includes rationalization charges of $2.0 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
(2) Includes rationalization charges of $0.7 million and $5.7 million for the three months ended March 31, 2020 and 2019, respectively.
(3) Includes rationalization charges of $0.1 million and $0.2 million for the three months ended March 31, 2020 and 2019, respectively.
(4) Includes costs attributed to announced acquisitions of $2.3 million in 2020.





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Three Months Ended March 31, 2020 Compared with Three Months Ended March 31, 2019

Overview.  Consolidated net sales were $1.03 billion in the first quarter of 2020, a 0.3 percent increase as compared to the first quarter of 2019 primarily due to higher volumes across all businesses, partially offset by the pass through of lower raw material costs, a less favorable mix of products sold and the impact of unfavorable foreign currency translation. Income before interest and income taxes for the first quarter of 2020 was $102.1 million, a $15.4 million increase as compared to the same period in 2019 primarily due to higher unit volumes, strong operating performance in both the metal and plastic container businesses, higher pension income and lower rationalization charges, partially offset by a less favorable mix of products sold in the metal container and closures businesses, the benefit in the prior year period from the delayed pass through of lower resin costs in the closures business, higher selling, general and administrative expenses and foreign currency transaction losses. Results for the first quarters of 2020 and 2019 included rationalization charges of $2.8 million and $6.1 million, respectively. Results for the first quarter of 2020 also included a loss on early extinguishment of debt of $1.5 million. Net income for the first quarter of 2020 was $57.6 million as compared to $46.7 million for the same period in 2019.  Net income per diluted share for the first quarter of 2020 was $0.52 as compared to $0.42 for the same period in 2019.

Net Sales.  The $3.3 million increase in consolidated net sales in the first quarter of 2020 as compared to the first quarter of 2019 was the result of higher net sales across all the businesses.

Net sales for the metal container business increased $1.5 million, or 0.3 percent, in the first quarter of 2020 as compared to the same period in 2019.  This increase was primarily the result of the higher unit volumes of approximately eight percent, partially offset by the pass through of lower raw material costs, a less favorable mix of products sold and the impact of unfavorable foreign currency translation of approximately $2.0 million. The increase in unit volumes was primarily due to lower volumes in the first quarter of 2019 as a result of the 2018 pre-buy of products by customers in anticipation of significant metal inflation in 2019 and the benefit in the first quarter of 2020 from higher volumes starting in March as a result of a spike in consumer demand in response to the coronavirus (COVID-19) crisis.

Net sales for the closures business increased $1.0 million, or 0.3 percent, in the first quarter of 2020 as compared to the same period in 2019.  This increase was primarily the result of higher unit volumes of approximately five percent, partially offset by the pass through of lower raw material costs, a less favorable mix of products sold and the impact of unfavorable foreign currency translation of approximately $5.0 million. The increase in unit volumes was principally the result of strong volumes for food and beverage products as well as certain consumer health and personal care products starting in March due to a spike in consumer demand in response to the coronavirus (COVID-19) crisis, lower volumes in the first quarter of 2019 as a result of the 2018 pre-buy of products by customers in anticipation of significant metal inflation in 2019 and volumes from the recent acquisition of Cobra Plastics. These volume gains were partially offset by some weakness in certain beauty products as consumers shifted buying patterns as a result of the coronavirus (COVID-19) crisis.

Net sales for the plastic container business increased $0.8 million, or 0.5 percent, in the first quarter of 2020 as compared to the same period in 2019. This increase was principally due to higher volumes of approximately six percent, partially offset by the pass through of lower raw material costs and a less favorable mix of products sold. The increase in volumes was due primarily to higher demand for certain food and consumer health products starting in March as a result of a spike in consumer demand in response to the coronavirus (COVID-19) crisis.

Gross Profit.  Gross profit margin increased 1.8 percentage points to 18.0 percent in the first quarter of 2020 as compared to the same period in 2019 for the reasons discussed below in "Income before Interest and Income Taxes."

Selling, General and Administrative Expenses.  Selling, general and administrative expenses as a percentage of consolidated net sales increased to 8.7 percent in the first quarter of 2020 as compared to 7.6 percent in the same period in 2019. Selling, general and administrative expenses increased $12.2 million to $89.9 million for the first quarter of 2020 as compared to $77.7 million for the same period in 2019. The increase in selling, general and administrative expenses was principally the result of higher employee incentive expense due primarily to one-time plant employee incentive payments during the coronavirus (COVID-19) crisis, costs attributed to announced acquisitions and foreign currency transaction losses in the current year period.

Income before Interest and Income Taxes.  Income before interest and income taxes for the first quarter of 2020 increased by $15.4 million as compared to the first quarter of 2019, and margins increased to 9.9 percent from 8.4 percent over the same periods. The increase in income before interest and income taxes was primarily the result of higher income in each of the businesses, partially offset by higher corporate expense. Rationalization charges were $2.8 million and $6.1 million in the first quarters of 2020 and 2019, respectively.

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Segment income of the metal container business for the first quarter of 2020 increased $8.6 million as compared to the same period in 2019, and segment income margin increased to 9.3 percent from 7.7 percent over the same periods.  The increase in segment income was primarily attributable to higher unit volumes, strong operating performance and higher pension income, partially offset by a less favorable mix of products sold, higher rationalization charges and foreign currency transaction losses in the current year period. Rationalization charges were $2.0 million and $0.2 million in the first quarters of 2020 and 2019, respectively.

Segment income of the closures business for the first quarter of 2020 increased $5.0 million as compared to the same period in 2019, and segment income margin increased to 12.7 percent from 11.3 percent over the same periods.  The increase in segment income was primarily due to higher unit volumes, lower rationalization charges and higher pension income, partially offset by a less favorable mix of products sold and the benefit in the prior year period from the delayed pass through of lower resin costs. Rationalization charges were $0.7 million and $5.7 million in the first quarters of 2020 and 2019, respectively.

Segment income of the plastic container business for the first quarter of 2020 increased $9.9 million as compared to the same period in 2019, and segment income margin increased to 13.4 percent from 7.4 percent over the same periods.  The increase in segment income was primarily attributable to higher volumes, lower manufacturing costs including for raw materials, and higher pension income.

Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the first quarter of 2020 decreased $3.6 million to $23.5 million as compared to $27.1 million in the same period in 2019. This decrease was primarily due to lower weighted average interest rates and lower weighted average outstanding borrowings during the quarter as a result of the utilization of prior year free cash flow to repay debt. Weighted average interest rates were lower during the current quarter due to the redemption of all outstanding 5½% Senior Notes due 2022 in the third quarter of 2019 and lower variable market rates. In February 2020, we issued the 2¼% Notes and the additional 4⅛% Notes. The net proceeds from these issuances were utilized to prepay outstanding U.S. A term loans under the Credit Agreement. In conjunction with this prepayment, we recognized a loss on early extinguishment of debt of $1.5 million in the first quarter of 2020.

Provision for Income Taxes. The effective tax rates were 25.4 percent and 21.6 percent for the first quarters of 2020 and 2019, respectively. The effective tax rate in the first quarter of 2019 was favorably impacted by the timing of certain tax deductions recognized in the quarter and changes in certain state tax rates.


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 26, 2020, we issued (i) an additional $200 million aggregate principal amount of 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 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. A term loans under the Credit Agreement. 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. You should also read Note 7 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2020 included elsewhere in this Quarterly Report.

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 to increase cash and cash equivalents (including the negative effect of exchange rate changes of $5.1 million) by $411.0 million.

For the three months ended March 31, 2019, we used net borrowings of revolving loans of $408.3 million to fund cash used in operations of $155.8 million, decreases in outstanding checks of $83.7 million, net capital expenditures and other investing activities of $61.7 million, dividends paid on our common stock of $14.2 million, repayments of long-term debt of $8.2 million
-23-


and repurchases of our common stock of $15.0 million and to increase cash and cash equivalents (including the negative effect of exchange rate changes of $1.1 million) by $68.6 million.

To ensure access to liquidity in light of the coronavirus (COVID-19) crisis, we borrowed $500 million of revolving loans under the Credit Agreement in March 2020 to increase our cash and cash equivalents. Accordingly, we held cash and cash equivalents of $614.8 million at March 31, 2020. At March 31, 2020, we had $827.0 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, 2020 was $346.3 million 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 2020 with all of these covenants.

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. Under our rationalization plans, we made cash payments of $3.6 million and $0.8 million for the three months ended March 31, 2020 and 2019, respectively. Exclusive of the footprint optimization plan for our metal container business and our resulting withdrawal from the Central States Pension Plan announced in 2019, remaining expenses for our rationalization plans of $1.9 million are expected primarily through 2020 and remaining cash expenditures for our rationalization plans of $3.6 million are expected through 2023. 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.
You should also read Note 4 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2020 included elsewhere in this Quarterly Report.
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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to our operations result primarily from changes in interest rates and, with respect to our international metal container and closures operations and our Canadian plastic container operations, from foreign currency exchange rates.  In the normal course of business, we also have risk related to commodity price changes for items such as natural gas.  We employ established policies and procedures to manage our exposure to these risks.  Interest rate, foreign currency and commodity pricing transactions are used only to the extent considered necessary to meet our objectives.  We do not utilize derivative financial instruments for trading or other speculative purposes.

Information regarding our interest rate risk, foreign currency exchange rate risk and commodity pricing risk has been disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.  Since such filing, other than the changes discussed in Notes 7 and 15 to our Condensed Consolidated Financial Statements for the three months ended March 31, 2020 included elsewhere in this Quarterly Report, there has not been a material change to our interest rate risk, foreign currency exchange rate risk or commodity pricing risk or to our policies and procedures to manage our exposure to these risks.


 

Item 4.  CONTROLS AND PROCEDURES
 
As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.  Based upon that evaluation, as of the end of the period covered by this Quarterly Report, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
 
There were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, these internal controls.
 

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Part II.  Other Information

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities By the Issuer and Affiliated Purchasers

The following table provides information about shares of our common stock that we repurchased during the first quarter of 2020:

ISSUER PURCHASES OF EQUITY SECURITIES
    
   
  (c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
(d)
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(in millions) (1)
 (a)
Total Number of Shares Purchased
 (b)
Average Price Paid per Share
 
 
January 1-31, 2020———$112.5
February 1-29, 2020———$112.5
March 1-31, 2020259,461$26.71259,461$105.6
Total259,461$26.71259,461$105.6



(1) 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. Prior to the first quarter of 2020, we had repurchased approximately $112.5 million of our common stock pursuant to such authorization.
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Item 6.  Exhibits


Exhibit NumberDescription
  
31.1
  
31.2
  
32.1
 
32.2
  
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
  
101.SCHInline XBRL Taxonomy Extension Schema Document.
  
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
  
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
  
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
 
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 SILGAN HOLDINGS INC.
   
   
   
Dated: May 8, 2020 /s/ Robert B. Lewis                  
 Robert B. Lewis
 Executive Vice President and
 Chief Financial Officer
 (Principal Financial and
 Accounting Officer)

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