QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2021
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact name of Registrant as specified in its charter)
Delaware
06-1269834
(State or other jurisdiction
(I.R.S. Employer
of incorporation or organization)
Identification No.)
4 Landmark Square
Stamford,
Connecticut
06901
(Address of principal executive offices)
(Zip Code)
(203) 975-7110
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.01 per share
SLGN
Nasdaq 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 July 31, 2021, the number of shares outstanding of the Registrant’s common stock was 110,408,113.
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-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q that are not historical facts are “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Securities Exchange Act of 1934, as amended. Such forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting us and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and in our other filings with the Securities and Exchange Commission. As a result, the actual results of our operations or our financial condition could differ materially from those expressed or implied in these forward-looking statements.
General
We are a leading manufacturer of sustainable rigid packaging solutions for consumer goods products. We currently produce dispensing and specialty closures for food, beverage, health care, garden, home, personal care and beauty products; steel and aluminum containers for human and pet food and general line products; and custom designed containers for personal care, food, health care, pharmaceutical, household and industrial chemical, pet food and care, agricultural, automotive and marine chemical products. We are a leading worldwide manufacturer of dispensing and specialty closures, a leading manufacturer of metal containers in North America and Europe, and a leading manufacturer of custom plastic containers in North America for a variety of markets, including the personal care, food, health care and household and industrial chemical markets.
Our objective is to increase shareholder value by efficiently deploying capital and management resources to grow our business, reduce operating costs and build sustainable competitive positions, or franchises, and to complete acquisitions that generate attractive cash returns. We have grown our net sales and income from operations largely through acquisitions but also through internal growth, and we continue to evaluate acquisition opportunities in the consumer goods packaging market. If acquisition opportunities are not identified over a longer period of time, we may use our cash flow to repay debt, repurchase shares of our common stock or increase dividends to our stockholders or for other permitted purposes.
-19-
RESULTS OF OPERATIONS
The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented:
Three Months Ended
Six Months Ended
June 30, 2021
June 30, 2020
June 30, 2021
June 30, 2020
Net sales
Dispensing and Specialty Closures
40.5
%
34.9
%
40.8
%
34.8
%
Metal Containers
46.3
50.8
45.6
50.1
Custom Containers
13.2
14.3
13.6
15.1
Consolidated
100.0
100.0
100.0
100.0
Cost of goods sold
82.6
80.9
82.4
81.5
Gross profit
17.4
19.1
17.6
18.5
Selling, general and administrative expenses
7.0
8.5
7.4
8.6
Rationalization charges
—
0.2
0.4
0.2
Other pension and postretirement income
(0.9)
(0.8)
(1.0)
(0.9)
Income before interest and income taxes
11.3
11.2
10.8
10.6
Interest and other debt expense
1.9
2.2
2.1
2.3
Income before income taxes
9.4
9.0
8.7
8.3
Provision for income taxes
2.4
2.3
2.2
2.1
Net income
7.0
%
6.7
%
6.5
%
6.2
%
Summary unaudited results of operations for the periods presented are provided below.
Three Months Ended
Six Months Ended
June 30, 2021
June 30, 2020
June 30, 2021
June 30, 2020
(dollars in millions)
Net sales
Dispensing and Specialty Closures
$
545.8
$
410.5
$
1,055.1
$
767.6
Metal Containers
624.5
597.2
1,178.6
1,105.7
Custom Containers
178.4
168.8
353.1
333.5
Consolidated
$
1,348.7
$
1,176.5
$
2,586.8
$
2,206.8
Segment income
Dispensing and Specialty Closures (1)
$
73.8
$
58.6
$
139.5
$
103.8
Metal Containers (2)
58.6
71.8
104.2
119.3
Custom Containers (3)
27.2
23.0
51.7
45.0
Corporate (4)
(6.6)
(22.2)
(15.9)
(34.7)
Consolidated
$
153.0
$
131.2
$
279.5
$
233.4
(1) Includes rationalization charges of $0.1 million and $0.7 million for the three months ended June 30, 2021 and 2020, respectively, and $5.3 million and $1.4 million for the six months ended June 30, 2021 and 2020, respectively. Includes a charge of $3.5 million for the write-up of inventory for purchase accounting for each of the three and six months ended June 30, 2020 as a result of the acquisition of the dispensing operations of the Albéa Group in June 2020.
(2) Includes rationalization charges of $0.2 million and $1.2 million for the three months ended June 30, 2021 and 2020, respectively and $5.2 million and $3.1 million for the six months ended June 30, 2021 and 2020, respectively.
(3) Includes rationalization charges of $0.1 million for each of the three months ended June 30, 2021 and 2020 and $0.2 million for each of the six months ended June 30, 2021 and 2020.
(4) Includes costs attributed to announced acquisitions of $16.1 million and $18.3 million for the three and six months ended June 30, 2020, respectively.
-20-
Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020
Overview. Consolidated net sales were $1.35 billion in the second quarter of 2021, a 14.6 percent increase as compared to the second quarter of 2020 primarily due to the pass through of higher raw material costs, higher unit volumes in the Dispensing and Specialty Closures segment, the impact from favorable foreign currency translation and a more favorable mix of products sold in the Metal Container and Custom Container segments, partially offset by lower volumes in the Metal Container and Custom Container segments. Income before interest and income taxes for the second quarter of 2021 was $153.0 million, a $21.8 million increase as compared to the same period in 2020, primarily due to higher unit volumes and strong operating performance in the Dispensing and Specialty Closures segment, a more favorable mix of products sold and strong operating performance in the Custom Container segment, lower corporate expenses and rationalization charges, higher pension income and the inclusion in the prior year period of a charge for the purchase accounting write-up of inventory of the dispensing operations of the Albéa Group, or the Albéa Dispensing Business, which was acquired in June 2020 and a charge in the Custom Container segment in the prior year period for a non-commercial legal dispute relating to prior periods, partially offset by lower volumes in the Metal Container and Custom Container segments, higher production costs, less efficient manufacturing processes and lower production in the Metal Container segment, the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs in the Dispensing and Specialty Closures and Custom Container segments and foreign currency transaction losses. Results for the second quarters of 2021 and 2020 included rationalization charges of $0.4 million and $2.0 million, respectively. Results for the second quarter of 2020 also included costs attributed to announced acquisitions of $16.1 million. Net income for the second quarter of 2021 was $94.5 million as compared to $78.2 million for the same period in 2020. Net income per diluted share for the second quarter of 2021 was $0.85 as compared to $0.70 for the same period in 2020.
Net Sales. The $172.2 million increase in consolidated net sales in the second quarter of 2021 as compared to the second quarter of 2020 was the result of higher net sales across all the segments.
Net sales for the Dispensing and Specialty Closures segment increased $135.3 million, or 33.0 percent, in the second quarter of 2021 as compared to the same period in 2020. This increase was primarily the result of higher unit volumes of approximately ten percent, the pass through of higher raw material costs and the impact of favorable foreign currency translation of approximately $17 million. The increase in unit volumes was principally the result of volumes from the Albéa Dispensing Business acquired in June 2020 and a strong recovery in the beverage, beauty and fragrance markets, partially offset by a decrease in volume for hygiene and home cleaning products as compared to the initial pantry filling in response to the emerging COVID-19 pandemic in the second quarter of 2020.
Net sales for the Metal Container segment increased $27.3 million, or 4.6 percent, in the second quarter of 2021 as compared to the same period in 2020. This increase was primarily the result of the pass through of higher raw material and other manufacturing costs, the impact of favorable foreign currency translation of approximately $7 million and a more favorable mix of products sold, partially offset by lower unit volumes of approximately two percent. The decrease in unit volumes was primarily due to production shortfalls caused by raw material and labor supply challenges across the supply chain.
Net sales for the Custom Container segment increased $9.6 million, or 5.7 percent, in the second quarter of 2021 as compared to the same period in 2020. This increase was principally due to the pass through of higher raw material costs, a more favorable mix of products sold and the impact of favorable foreign currency translation of approximately $3 million, partially offset by lower volumes of approximately eleven percent. The decline in volumes was due primarily to unprecedented demand in the prior year quarter for cleaning and sanitizing products as a result of the initial pantry filling in response to the emerging COVID-19 pandemic in the second quarter of 2020.
Gross Profit. Gross profit margin decreased 1.7 percentage points to 17.4 percent in the second quarter of 2021 as compared to the same period in 2020 for the reasons discussed below in "Income before Interest and Income Taxes."
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 7.0 percent in the second quarter of 2021 as compared to 8.5 percent in the same period in 2020. Selling, general and administrative expenses decreased $6.2 million to $94.4 million for the second quarter of 2021 as compared to $100.6 million for the same period in 2020. The decrease in selling, general and administrative expenses was principally due to lower corporate expenses, primarily as a result of costs attributed to announced acquisitions of $16.1 million incurred in the prior year period, and the inclusion in the prior year period of a charge of $2.8 million in the Custom Container segment for a non-commercial legal dispute relating to prior periods, partially offset by the inclusion of selling, general and administrative expenses from the Albéa Dispensing Business which was acquired in June 2020.
-21-
Income before Interest and Income Taxes. Income before interest and income taxes for the second quarter of 2021 increased by $21.8 million as compared to the second quarter of 2020, and margins increased to 11.3 percent from 11.2 percent over the same periods. The increase in income before interest and income taxes was primarily the result of higher income in the Dispensing and Specialty Closures and Custom Container segments, lower corporate expenses primarily as a result of prior year costs for announced acquisitions and lower rationalization charges, partially offset by lower income in the Metal Container segment. Rationalization charges were $0.4 million and $2.0 million in the second quarters of 2021 and 2020, respectively. The second quarter of 2020 also included the negative impact of a $3.5 million charge related to the purchase accounting write-up of inventory for the Albéa Dispensing Business acquired in June 2020.
Segment income of the Dispensing and Specialty Closures segment for the second quarter of 2021 increased $15.2 million as compared to the same period in 2020, while segment income margin decreased to 13.5 percent from 14.3 percent over the same periods due primarily to the pass through of significantly higher raw material costs. The increase in segment income was primarily due to higher unit volumes, strong operating performance and the inclusion in the prior year period of a $3.5 million charge for the purchase accounting write-up of inventory of the Albéa Dispensing Business, partially offset by the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs and foreign currency transaction losses.
Segment income of the Metal Container segment for the second quarter of 2021 decreased $13.2 million as compared to the same period in 2020, and segment income margin decreased to 9.4 percent from 12.0 percent over the same periods. The decrease in segment income was due primarily to higher production costs, less efficient manufacturing processes and lower production and volume levels, all due in large part to significant raw material supply issues and labor challenges, partially offset by higher pension income and lower rationalization charges. Rationalization charges were $0.2 million and $1.2 million in the second quarters of 2021 and 2020, respectively.
Segment income of the Custom Container segment for the second quarter of 2021 increased $4.2 million as compared to the same period in 2020, and segment income margin increased to 15.2 percent from 13.6 percent over the same periods. The increase in segment income was primarily attributable to a more favorable mix of products sold, strong operating performance and the inclusion in the prior year period of a $2.8 million charge for a non-commercial legal dispute relating to prior periods, partially offset by lower volumes and the unfavorable impact in the current year period from the delayed pass through of higher resin costs.
Interest and Other Debt Expense. Interest and other debt expense for the second quarter of 2021 increased $0.6 million to $26.4 million as compared to $25.8 million in the same period in 2020. This increase was primarily due to higher weighted average outstanding borrowings during the quarter as a result of the acquisition of the Albéa Dispensing Business in June 2020, partially offset by lower weighted average interest rates during the quarter due to lower variable market rates.
Provision for Income Taxes. The effective tax rates were 25.3 percent and 25.8 percent for the second quarters of 2021 and 2020, respectively.
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Six Months Ended June 30, 2021 Compared with Six Months Ended June, 2020
Overview. Consolidated net sales were $2.59 billion in the first six months of 2021, a 17.2 percent increase as compared to the first six months of 2020 primarily as a result of higher unit volumes in the Dispensing and Specialty Closures and Metal Container segments, the pass through of higher raw material costs, the impact of favorable foreign currency translation and a more favorable mix of products sold in the Dispensing and Specialty Closures and Custom Container segments, partially offset by lower volumes in the Custom Container segment and a higher percentage of smaller cans sold in the Metal Container segment. Income before interest and income taxes for the first six months of 2021 increased by $46.1 million as compared to the same period in 2020 primarily due to higher unit volumes in the Dispensing and Specialty Closures and Metal Container segments, a more favorable mix of products sold and strong operating performance in the Dispensing and Specialty Closures and Custom Container segments, lower corporate expenses, higher pension income, the negative impact in the prior year period of a charge for the purchase accounting write-up of acquired inventory of the Albéa Dispensing Business and the inclusion in the prior year period of a charge in the Custom Container segment for a non-commercial legal dispute relating to prior periods. These increases were partially offset by the unfavorable impact in the current year period from the delayed pass through of higher resin costs in the Dispensing and Specialty Closures and Custom Container segments, higher production costs, less efficient manufacturing processes and lower production levels in the Metal Container segment, lower volumes in the Custom Container segment, higher rationalization charges, a higher percentage of smaller cans sold in the Metal Container segment and foreign currency transaction losses. Results for the first six months of 2021 and 2020 included rationalization charges of $10.7 million and $4.7 million and a loss on early extinguishment of debt of $0.9 million and $1.5 million, respectively. Results for the first six months of 2020 also included costs attributed to acquisitions of $18.3 million. Net income for the first six months of 2021 was $167.8 million as compared to $135.8 million for the same period in 2020. Net income per diluted share for the first six months of 2021 was $1.51 as compared to $1.22 for the same period in 2020.
Net Sales. The $380.0 million increase in consolidated net sales in the first six months of 2021 as compared to the first six months of 2020 was the result of higher net sales across all the segments.
Net sales for the Dispensing and Specialty Closures segment increased $287.5 million, or 37.5 percent, in the first six months of 2021 as compared to the same period in 2020. This increase was primarily the result of higher unit volumes of approximately nine percent, the pass through of higher raw material costs, the impact of favorable foreign currency translation of approximately $27 million and a more favorable mix of products sold. The increase in unit volumes was principally the result of the inclusion of volumes from the Albéa Dispensing Business which was acquired in June 2020 and strong volumes for beverage, beauty and fragrance products.
Net sales for the Metal Container segment increased $72.9 million, or 6.6 percent, in the first six months of 2021 as compared to the same period in 2020. This increase was primarily the result of the pass through of higher raw material and other manufacturing costs, higher unit volumes of approximately four percent and the impact of favorable foreign currency translation of approximately $12 million, partially offset by a higher percentage of smaller cans sold. The increase in unit volumes was primarily due to the continued high consumer demand levels for food cans, partially offset by the negative impact on volume of production shortfalls caused by raw material and labor supply challenges across the supply chain.
Net sales for the Custom Container segment increased $19.6 million, or 5.9 percent, in the first six months of 2021 as compared to the same period in 2020. This increase was primarily due to a more favorable mix of products sold, the pass through of higher raw material costs and the impact of favorable foreign currency translation of approximately $5 million, partially offset by lower volumes of approximately six percent. The decrease in volumes was due primarily to unprecedented demand in the prior year period for cleaning and sanitizing products as a result of the initial pantry filling in response to the emerging COVID-19 pandemic.
Gross Profit. Gross profit margin decreased 0.9 percentage points to 17.6 percent in the first six months of 2021 as compared to the same period in 2020 for the reasons discussed below in "Income before Interest and Income Taxes".
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 7.4 percent for the first six months of 2021 as compared to 8.6 percent in the same period in 2020. Selling, general and administrative expenses increased $1.3 million to $191.8 million for the first six months of 2021 as compared to $190.5 million for the same period in 2020. The increase in selling, general and administrative expenses was principally the result of the inclusion of selling, general and administrative expenses from the Albéa Dispensing Business which was acquired in June 2020, partially offset by the inclusion in the prior year period of costs attributed to announced acquisitions of $18.3 million, one-time plant employee incentive payments and a charge of $2.8 million in the Custom Container segment for a non-commercial legal dispute relating to prior periods.
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Income before Interest and Income Taxes. Income before interest and income taxes for the first six months of 2021 increased by $46.1 million as compared to the first six months of 2020, and margins increased to 10.8 percent from 10.6 percent over the same periods. The increase in income before interest and income taxes was primarily due to higher income in the Dispensing and Specialty Closures and Custom Container segments and lower corporate expenses primarily as a result of prior year costs for announced acquisitions, partially offset by lower income in the Metal Container segment and higher rationalization charges. Rationalization charges were $10.7 million and $4.7 million for the first six months of 2021 and 2020, respectively.
Segment income of the Dispensing and Specialty Closures segment for the first six months of 2021 increased $35.7 million, as compared to the same period in 2020, while segment income margin decreased to 13.2 percent from 13.5 percent over the same periods due primarily to the pass through of higher raw material costs. The increase in segment income was primarily due to higher unit volumes, strong operating performance, a more favorable mix of products sold and the inclusion in the prior year period of a $3.5 million charge for the purchase accounting write-up of inventory of the Albéa Dispensing Business, partially offset by the unfavorable impact in the current year period from the delayed pass through of higher resin costs, higher rationalization charges and foreign currency transaction losses. Rationalization charges were $5.3 million and $1.4 million in the first six months of 2021 and 2020, respectively.
Segment income of the Metal Container segment for the first six months of 2021 decreased $15.1 million as compared to the same period in 2020, and segment income margin decreased to 8.8 percent from 10.8 percent over the same periods. The decrease in segment income was primarily attributable to higher production costs, less efficient manufacturing processes and lower production levels, a higher percentage of smaller cans sold and higher rationalization charges, partially offset by higher unit volumes. Rationalization charges were $5.2 million and $3.1 million in the first six months of 2021 and 2020, respectively.
Segment income of the Custom Container segment for the first six months of 2021 increased $6.7 million as compared to the same period in 2020, and segment income margin increased to 14.6 percent from 13.5 percent over the same periods. The increase in segment income was primarily attributable to a more favorable mix of products sold, strong operating performance and the inclusion in the prior year period of a $2.8 million charge for a non-commercial legal dispute relating to prior periods, partially offset by lower volumes and the delayed pass through of higher resin costs.
Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the first six months of 2021 increased $3.5 million to $52.8 million as compared to $49.3 million in the same period in 2020 principally due to higher weighted average outstanding borrowings primarily related to the acquisition of the Albéa Dispensing Business in June 2020, partially offset by lower weighted average interest rates due to lower variable market rates. In February 2021, we issued the 1.4% Notes and utilized the proceeds therefrom to prepay outstanding term loans under the Credit Agreement. In conjunction with this prepayment, we recognized a loss on early extinguishment of debt of $0.9 million in the first quarter of 2021. In the first six months of 2020, we recognized a loss on early extinguishment of debt of $1.5 million in conjunction with the prepayment of term loans under the Credit Agreement.
Provision for Income Taxes. The effective tax rates were 25.7 percent and 25.6 percent for the first six months of 2021 and 2020, respectively.
CAPITAL RESOURCES AND LIQUIDITY
Our principal sources of liquidity have been net cash from operating activities and borrowings under our debt instruments, including our senior secured credit facility. Our liquidity requirements arise from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment, the funding of our seasonal working capital needs and other general corporate uses.
On February 10, 2021, we issued $500.0 million aggregate principal amount of the 1.4% Notes at 99.945 percent of their principal amount. The proceeds from the sale of the 1.4% Notes were $499.7 million. We used the proceeds from the sale of the 1.4% Notes to prepay $500.0 million of our outstanding term loans under the Credit Agreement. We paid the initial purchasers' discount and offering expenses related to the sale of the 1.4% Notes with cash on hand. As a result of this prepayment, we recorded a pre-tax charge for the loss on early extinguishment of debt of $0.9 million during the first quarter of 2021 for the write-off of unamortized debt issuance costs.
You should also read Note 6 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2021 included elsewhere in this Quarterly Report.
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For the six months ended June 30, 2021, we used proceeds from the issuance of the 1.4% Notes of $499.7 million, net borrowings of revolving loans of $212.2 million and cash and cash equivalents of $244.7 million to fund repayments of long-term debt of $500.0 million, cash used in operations of $209.3 million, net capital expenditures and other investing activities of $116.4 million, decreases in outstanding checks of $84.2 million, dividends paid on our common stock of $31.6 million, repurchases of our common stock of $8.5 million under our stock-based compensation plan, debt issuance costs of $4.9 million and the negative effect of exchange rate changes on cash and cash equivalents of $1.7 million.
For the six months ended June 30, 2020, we used net proceeds of $1,639.7 million from the issuance of the 2¼% Notes and the additional 4⅛% Notes and from the incremental term loans borrowed under our Credit Agreement, net borrowings of revolving loans of $356.4 million and cash and cash equivalents of $10.0 million to fund the purchases of the Albéa Dispensing Business and Cobra Plastics for $941.1 million, repayments of long-term debt of $766.2 million, net capital expenditures and other investing activities of $105.5 million, decreases in outstanding checks of $79.0 million, cash used in operations of $63.8 million, dividends paid on our common stock of $27.1 million, repurchases of our common stock of $13.1 million, debt issuance costs of $10.3 million and the negative effect of exchange rate changes on cash and cash equivalents of $2.7 million.
At June 30, 2021, we had $195.9 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 June 30, 2021 was $976.0 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 2021 with all of these covenants.
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Guaranteed Securities
Each of the 4¾% Notes, the 3¼% Notes, the 4⅛% Notes, the 2¼% Notes and the 1.4% Notes were issued by Silgan and are guaranteed by certain wholly owned subsidiaries of Silgan, collectively the Obligor Group.
The following summarized financial information relates to the Obligor Group as of June 30, 2021 and December 31, 2020 and for the six months ended June 30, 2021. Intercompany transactions, equity investments and other intercompany activity within the Obligor Group have been eliminated from the summarized financial information. Investments in subsidiaries of Silgan that are not part of the Obligor Group of $1.47 billion and $1.46 billion as of June 30, 2021 and December 31, 2020, respectively, are not included in noncurrent assets in the table below.
June 30, 2021
Dec. 31, 2020
(Dollars in millions)
Current assets
$1,270.2
$1,104.1
Noncurrent assets
3,312.4
3,324.0
Current liabilities
952.0
891.1
Noncurrent liabilities
3,709.1
3,744.6
At June 30, 2021 and December 31, 2020, the Obligor Group held current receivables due from other subsidiary companies of $38.0 million and $54.8 million, respectively; long-term notes receivable due from other subsidiary companies of $795.1 million and $818.9 million, respectively; and current payables due to other subsidiary companies of $6.1 million and $13.4 million, respectively.
Six months ended June 30, 2021
(Dollars in millions)
Net sales
$1,859.4
Gross profit
285.4
Net income
127.6
For the six months ended June 30, 2021, net income in the table above excludes income from equity method investments of other subsidiary companies of $40.2 million. For the six months ended June 30, 2021, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $21.3 million; net credits from such other subsidiary companies of $15.7 million; and net interest income from such other subsidiary companies of $9.4 million. For the six months ended June 30, 2021, the Obligor Group received dividends from other subsidiary companies of $16.1 million.
Rationalization Charges
We continually evaluate cost reduction opportunities across each of our segments, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. Under our rationalization plans, we made cash payments of $3.5 million and $3.6 million for the six months ended June 30, 2021 and 2020, respectively. Exclusive of the footprint optimization plan for our Metal Container segment and our resulting withdrawal from the Central States Pension Plan announced in 2019, remaining expenses and cash expenditures for our rationalization plans are expected to be $2.2 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.
You should also read Note 3 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2021 included elsewhere in this Quarterly Report.
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to our operations result primarily from changes in interest rates and, with respect to our international operations, 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, 2020. Since such filing, other than the changes discussed in Notes 6 and 7 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2021 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.
On June 1, 2020, we acquired the Albéa Dispensing Business. We are currently in the process of integrating the internal controls and procedures of the Albéa Dispensing Business into our internal controls over financial reporting. As provided under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations of the Securities and Exchange Commission, we will include the internal controls and procedures of the Albéa Dispensing Business in our annual assessment of the effectiveness of our internal control over financial reporting for our 2021 fiscal year.
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
___________________
*Filed herewith.
+ Management contract or compensatory plan or arrangement.
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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.
