Silgan (SLGN) 10-Q2021 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

For the quarterly period ended September 30, 2021

For the transition period from ________________ to ________________

Commission file number  000-22117

SILGAN HOLDINGS INC.

(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:

Part I. Financial Information

Item 1. Financial Statements

(Dollars in thousands)

See accompanying notes.

See accompanying notes.

 

See accompanying notes.

See accompanying notes.

See accompanying notes.

Note 1.               Significant Accounting Policies

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:

Revenues by geography were as follows:

Our contract assets primarily consist of unbilled accounts receivable related to over time revenue recognition and were $94.6 million, $80.2 million, and $83.0 million as of September 30, 2021 and 2020 and December 31, 2020, respectively. Unbilled receivables are included in trade accounts receivable, net on our Condensed Consolidated Balance Sheets.

Note 3.               Acquisitions

On September 20, 2021, we acquired Gateway Plastics LLC, or Silgan Specialty Packaging, a manufacturer and seller of dispensing closures and integrated dispensing packaging solutions, such as a combined container and closure or 100% recyclable dispensing beverage pods, to consumer goods product companies primarily for the food and beverage markets. The purchase price for this acquisition of $483.8 million, net of cash acquired, was funded with revolving loan borrowings under our amended and restated senior secured credit facility, as amended, or the Credit Agreement. The purchase price is subject to adjustments for working capital, net indebtedness and seller's transaction expenses. The initial purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition using valuation techniques including the income, cost and market approaches, primarily using Level 3 inputs (as defined in Note 9). 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 $200.7 million which is expected to be deductible for income tax purposes, a customer relationship intangible asset of $166.0 million with an estimated remaining life of 22 years and technology know-how of $3.4 million with an estimated remaining life of 5 years. The purchase price allocation is preliminary and subject to change pending a final valuation of the assets and liabilities, including property, plant and equipment and intangible assets. Silgan Specialty Packaging's results of operations were included in our Dispensing and Specialty Closures segment since the acquisition date and were not significant since such date.

On September 30, 2021, we acquired Unicep Packaging LLC, or Unicep, a Specialty Contract Manufacturer and Developer, or SCMD, solutions provider that develops, formulates, manufactures and sells precision dosing dispensing packaging solutions, such as diagnostic test components, oral care applications and skin care products, primarily for the health care, diagnostics, animal health, oral care and personal care markets. The purchase price for this acquisition of $236.9 million, net of cash acquired, was funded with revolving loan borrowings under the Credit Agreement. The purchase price is subject to adjustments for working capital, net indebtedness and seller's transaction expenses. The initial purchase price has been allocated to assets acquired and liabilities assumed based on estimated fair values at the date of acquisition using valuation techniques including the income, cost and market approaches, primarily using Level 3 inputs (as defined in Note 9). 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 $142.8 million which is expected to be deductible for income tax purposes, a customer relationship intangible asset of $72.0 million with an estimated remaining life of 18 years, technology know-how of $4.0 million with an estimated remaining life of 10 years and a trade name of $3.7 million with an estimated remaining life of 10 years. The purchase price allocation is preliminary and subject to change pending a final valuation of the assets and liabilities, including property, plant and equipment and intangible assets. Unicep's results of operations were included in our Dispensing and Specialty Closures segment since the acquisition date and were not significant since such date.

Note 4.               Rationalization Charges

Activity in reserves for our rationalization plans were as follows:

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 9 for information regarding a Level 3 fair value measurement).

Rationalization reserves as of September 30, 2021 were recorded in our Condensed Consolidated Balance Sheet as accrued liabilities of $7.1 million and other liabilities of $36.0 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 $1.2 million and $5.9 million, respectively. Remaining expenses for the accretion of interest for the withdrawal liability related to the Central States Pension Plan are expected to average approximately $1.1 million per year and be recognized annually 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.

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:

 

The amounts reclassified to earnings from the unrecognized net defined benefit plan costs component of accumulated other comprehensive loss for the three and nine months ended September 30, 2021 were net (losses) of $(2.9) million and $(8.1) million, respectively, excluding income tax benefits of $0.8 million and $2.2 million, respectively. For the three and nine months ended September 30, 2021, these net (losses) consisted of amortization of net actuarial (losses) of $(3.3) million and $(9.3) million and amortization of net prior service credit of $0.4 million and $1.2 million, respectively. Amortization of net actuarial losses and net prior service credit was recorded in other pension and postretirement income in our Condensed Consolidated Statements of Income. See Note 11 for further information.

The amounts reclassified to earnings from the change in fair value of derivatives component of accumulated other comprehensive loss for the three and nine months ended September 30, 2021 were not significant.

Other comprehensive loss before reclassifications related to foreign currency translation for the three and nine months ended September 30, 2021 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 $(40.5) million and $(63.1) million, respectively, (ii) foreign currency (losses) gains related to intra-entity foreign currency transactions that are of a long-term investment nature of $(0.1) million and $0.8 million, respectively, and (iii) foreign currency gains related to our net investment hedges of $12.6 million and $30.9 million, respectively, excluding an income tax (provision) of $(3.0) million and $(7.3) million, respectively. See Note 9 for further discussion.

Note 6.               Inventories

Inventories consisted of the following: 

Note 7.               Goodwill and Other Intangibles

Changes in the carrying amount of goodwill were as follows:

In connection with our acquisitions of Silgan Specialty Packaging and Unicep as discussed in Note 3, we recognized goodwill of $343.5 million.

The components of other intangible assets, net were as follows:

In connection with our acquisitions of Silgan Specialty Packaging and Unicep as discussed in Note 3, we recognized intangible assets for customer relationships of $238.0 million, technology know-how of $7.4 million and a trade name of $3.7 million.

Amortization expense was $10.5 million and $31.1 million for the three and nine months ended September 30, 2021, respectively, and $10.4 million and $25.4 million for the three and nine months ended September 30, 2020, respectively. Amortization expense is expected to be $45.1 million, $52.8 million, $52.7 million, $52.7 million and $48.7 million for the years ended December 31, 2021 through 2025, respectively.

Note 8.               Long-Term Debt

Long-term debt consisted of the following: 

At September 30, 2021, the current portion of long-term debt consisted of $910.0 million of bank revolving loans under the Credit Agreement, $21.6 million of other foreign bank revolving and term loans and $2.6 million of finance leases.

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.

The 1.4% Notes are not, and are not required to be, registered under the Securities Act of 1933, as amended.

    

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.

Note 9.               Financial Instruments

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, trade accounts receivable, trade accounts payable, debt obligations and swap agreements. Due to their short-term maturity, the carrying amounts of trade accounts receivable and trade accounts payable approximate their fair market values. The following table summarizes the carrying amounts and estimated fair values of our other financial instruments at September 30, 2021:

Fair Value Measurements

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). GAAP classifies the inputs used to measure fair value into a hierarchy consisting of three levels. Level 1 inputs represent unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs represent unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs represent unobservable inputs for the asset or liability. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Financial Instruments Measured at Fair Value

The financial assets and liabilities that were measured on a recurring basis at September 30, 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.

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.

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 September 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 nine months ended September 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 September 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 gains related to our net investment hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2021 were $12.6 million and $30.9 million, respectively.

Note 10.               Commitments and Contingencies

A competition authority in Germany commenced an antitrust investigation in 2015 involving the industry association for metal packaging in Germany and its members, including our metal 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 11.               Retirement Benefits

The components of the net periodic pension benefit credit were as follows:

 

The components of the net periodic other postretirement benefit credit were as follows:

Note 12.               Income Taxes

Silgan and its subsidiaries file U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions. The Internal Revenue Service, or IRS, has completed its review of the 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.

Note 13.               Treasury Stock

On October 17, 2016, our Board of Directors authorized the repurchase by us of up to an aggregate of $300.0 million of our common stock by various means from time to time through and including December 31, 2021. We did not repurchase any shares of our common stock pursuant to this authorization during the nine months ended September 30, 2021. At September 30, 2021, we had approximately $76.6 million remaining under this authorization for the repurchase of our common stock.

During the first nine months of 2021, we issued 576,232 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 223,030 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 September 30, 2021, 64,702,267 shares of our common stock were held in treasury.

Note 14.             Stock-Based Compensation

We currently have one stock-based compensation plan in effect under which we have issued options and restricted stock units to our officers, other key employees and outside directors. During the first nine months of 2021, 364,769 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 $14.1 million, which is being amortized ratably over the respective vesting period from the grant date.

Note 15.             Segment Information

Reportable segment information was as follows:

_____________

Total segment income is reconciled to income before income taxes as follows:

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 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.

Note 16.               Subsequent Event

On October 1, 2021, we acquired Easytech Closures S.p.A., or Easytech, a manufacturer and seller of easy-open and sanitary metal ends used with metal containers primarily for food applications in Europe. The purchase price for this acquisition of $28.5 million, net of cash acquired, was funded with revolving loan borrowings under the Credit Agreement. Easytech's results of operations will be included in our Metal Container segment.

Item 2.

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.

 

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.

RESULTS OF OPERATIONS

The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented:

Summary unaudited results of operations for the periods presented are provided below.

 

Net sales for the Dispensing and Specialty Closures segment increased $58.3 million, or 12.3 percent, in the third 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, higher unit volumes of approximately two percent and the impact of favorable foreign currency translation of approximately $4 million, partially offset by a less favorable mix of products sold. The increase in unit volumes was principally the result of higher volumes for the beauty, fragrance, beverage and food markets as well as the inclusion of the recently acquired Silgan Specialty Packaging, partially offset by a decrease in volumes for hygiene and home cleaning products largely due to the ongoing inventory management throughout the supply chain for those products which surged in 2020 during the pandemic.

Net sales for the Metal Container segment increased $85.4 million, or 10.0 percent, in the third 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, higher unit volumes of approximately six percent, partially offset by a higher percentage of smaller cans sold. The increase in unit volumes was primarily due to higher volumes for pet food and seasonal vegetable markets.

Net sales for the Custom Container segment increased $18.9 million, or 12.1 percent, in the third quarter of 2021 as compared to the same period in 2020. This increase was principally due to the pass through of significantly higher raw material costs, a more favorable mix of products sold and the impact of favorable foreign currency translation of approximately $2 million, partially offset by lower volumes of approximately fourteen percent as compared to record pandemic driven volumes in the prior year period. The decline in volumes was due primarily to a decrease in certain consumer health and personal and home care products, partially offset by growth in pet food products.

Segment income of the Dispensing and Specialty Closures segment for the third quarter of 2021 decreased $4.1 million as compared to the same period in 2020, and segment income margin decreased to 11.3 percent from 13.5 percent over the same periods due primarily to the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs, a less favorable mix of products sold, higher costs associated with labor and supply chain challenges and the negative impact of a $0.9 million charge from the write-up of inventory for purchase accounting in 2021 related to the acquisition of Silgan Specialty Packaging, partially offset by the pass through of other cost increases, plant productivity improvements and higher unit volumes.

Segment income of the Metal Container segment for the third quarter of 2021 decreased $0.2 million as compared to the same period in 2020, and segment income margin decreased to 10.0 percent from 11.0 percent over the same periods. The decrease in segment income was primarily attributable to operational inefficiencies and higher costs as a result of labor and supply chain challenges and the mix effect of smaller cans sold, mostly offset by higher unit volumes and higher pension income. Rationalization charges were $1.8 million and $1.6 million in the third quarters of 2021 and 2020, respectively.

Segment income of the Custom Container segment for the third quarter of 2021 increased $0.8 million as compared to the same period in 2020, while segment income margin decreased to 12.9 percent from 14.0 percent over the same periods. The increase in segment income was primarily attributable to strong operating performance and cost control, partially offset by lower volumes as compared to record pandemic driven volumes in the prior year period and a less favorable mix of products sold.

Net sales for the Dispensing and Specialty Closures segment increased $345.7 million, or 27.8 percent, in the first nine months of 2021 as compared to the same period in 2020. This increase was primarily the result of higher unit volumes of approximately six percent, the pass through of higher raw material and other manufacturing costs and the impact of favorable foreign currency translation of approximately $31 million. 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 $158.3 million, or 8.1 percent, in the first nine 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 $38.4 million, or 7.8 percent, in the first nine months of 2021 as compared to the same period in 2020. This increase was primarily 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 $7 million, partially offset by lower volumes of approximately nine percent. The decrease in volumes was due primarily to a decrease in certain consumer health and personal and home care products largely due to the prior year initial pantry filling in response to the emerging pandemic, partially offset by growth in pet food products.

Segment income of the Dispensing and Specialty Closures segment for the first nine months of 2021 increased $31.6 million, as compared to the same period in 2020, while segment income margin decreased to 12.6 percent from 13.5 percent over the same periods. The increase in segment income was primarily due to higher unit volumes, strong operating performance, the pass through of other cost increases 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. These increases were partially offset by the unfavorable impact in the current year period from the delayed pass through of significantly higher resin costs, higher costs associated with labor and supply chain challenges, higher rationalization charges, foreign currency transaction losses and a $0.9 million charge in the current year period related to the acquisition of Silgan Specialty Packaging. Rationalization charges were $5.7 million and $2.2 million in the first nine months of 2021 and 2020, respectively.

Segment income of the Metal Container segment for the first nine months of 2021 decreased $15.3 million as compared to the same period in 2020, and segment income margin decreased to 9.4 percent from 10.9 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 largely as a result of labor and supply chain challenges, a higher percentage of smaller cans sold and higher rationalization charges, partially offset by higher unit volumes and higher pension income. Rationalization charges were $7.1 million and $4.7 million in the first nine months of 2021 and 2020, respectively.

Segment income of the Custom Container segment for the first nine months of 2021 increased $7.5 million as compared to the same period in 2020, and segment income margin increased to 14.1 percent from 13.6 percent over the same periods. The increase in segment income was primarily attributable to strong operating performance and cost control, a more favorable mix of products sold 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.

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.

For the nine months ended September 30, 2021, we used proceeds from the net borrowings of revolving loans of $906.9 million, the issuance of the 1.4% Notes of $499.7 million and cash and cash equivalents of $138.9 million to fund acquisitions for $718.4 million, repayments of long-term debt of $500.0 million, net capital expenditures and other investing activities of $170.8 million, decreases in outstanding checks of $84.2 million, dividends paid on our common stock of $47.0 million, repurchases of our common stock of $8.6 million under our stock-based compensation plan, cash used in operations of $5.8 million, debt issuance costs of $4.9 million and the negative effect of exchange rate changes on cash and cash equivalents of $5.8 million.

For the nine months ended September 30, 2020, we used net proceeds from the issuance of the 2¼% Notes and the additional 4⅛% Notes and from incremental term loans borrowed under the Credit Agreement of $1,639.7 million, net borrowings of revolving loans of $244.9 million, cash provided by operations of $118.5 million and cash and cash equivalents of $10.0 million (excluding the positive effect of exchange rate changes of $1.0 million) to fund the purchases of the Albéa Dispensing Business and Cobra Plastics for $940.9 million, repayments of long-term debt of $766.2 million, net capital expenditures and other investing activities of $164.2 million, decreases in outstanding checks of $79.0 million, dividends paid on our common stock of $40.4 million, repurchases of our common stock of $13.1 million and debt issuance costs of $10.3 million.

At September 30, 2021, we had $910.0 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 September 30, 2021 was $258.9 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.

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 September 30, 2021 and December 31, 2020 and for the nine months ended September 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 $2.18 billion and $1.46 billion as of September 30, 2021 and December 31, 2020, respectively, are not included in noncurrent assets in the table below.

At September 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 $815.5 million and $818.9 million, respectively; and current payables due to other subsidiary companies of $6.8 million and $13.4 million, respectively.

For the nine months ended September 30, 2021, net income in the table above excludes income from equity method investments of other subsidiary companies of $65.9 million. For the nine months ended September 30, 2021, the Obligor Group recorded the following transactions with other subsidiary companies: sales to such other subsidiary companies of $30.0 million; net credits from such other subsidiary companies of $21.4 million; and net interest income from such other subsidiary companies of $15.0 million. For the nine months ended September 30, 2021, the Obligor Group received dividends from other subsidiary companies of $16.0 million.

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 $6.9 million and $7.7 million for the nine months ended September 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 $1.2 million and $5.9 million, respectively. Remaining expenses for the accretion of interest for the withdrawal liability related to the Central States Pension Plan are expected to average approximately $1.1 million per year and be recognized annually 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.

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 8 and 9 to our Condensed Consolidated Financial Statements for the three and nine months ended September 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.

 

 

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. 

We acquired Silgan Specialty Packaging and Unicep in September 2021. You should read Note 3 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2021 included elsewhere in this Quarterly Report for further information. We are currently in the process of integrating the internal controls and procedures of both acquired entities 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 Silgan Specialty Packaging and Unicep in our annual assessment of the effectiveness of our internal control over financial reporting for our 2022 fiscal year.

Part II.  Other Information

Item 6.  Exhibits

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*Filed herewith.