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EX-32.2 - EXHIBIT 32.2 - SILGAN HOLDINGS INCexhibit3229-30x16.htm
EX-32.1 - EXHIBIT 32.1 - SILGAN HOLDINGS INCexhibit3219-30x16.htm
EX-31.2 - EXHIBIT 31.2 - SILGAN HOLDINGS INCexhibit3129-30x16.htm
EX-31.1 - EXHIBIT 31.1 - SILGAN HOLDINGS INCexhibit3119-30x16.htm
EX-12 - EXHIBIT 12 - SILGAN HOLDINGS INCexhibit129-30x16.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
 
(Mark One)
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016
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)

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 [ X ]   No [   ]

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, 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 [ X ]   No [   ]

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  [ X ]
           Accelerated filer  [   ]
Non-accelerated filer  [   ]  (Do not check if a smaller reporting company)
           Smaller reporting company  [   ]

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

As of October 31, 2016, the number of shares outstanding of the Registrant’s common stock, $0.01 par value, was 60,339,652.

-1-


SILGAN HOLDINGS INC.
 
 
TABLE OF CONTENTS
 
 
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

-2-




Part I. Financial Information
Item 1. Financial Statements
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

 
Sept. 30, 2016
 
Sept. 30, 2015
 
Dec. 31, 2015
 
(unaudited)
 
(unaudited)
 
 
Assets
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
93,561

 
$
104,203

 
$
99,945

Trade accounts receivable, net
515,606

 
623,591

 
281,041

Inventories
638,091

 
580,276

 
628,138

Prepaid expenses and other current assets
51,100

 
29,060

 
36,134

Total current assets
1,298,358

 
1,337,130

 
1,045,258

 
 
 
 
 
 
Property, plant and equipment, net
1,171,240

 
1,099,873

 
1,125,433

Goodwill
614,698

 
617,786

 
612,792

Other intangible assets, net
185,435

 
199,475

 
195,087

Other assets, net
231,788

 
237,598

 
214,109

 
$
3,501,519

 
$
3,491,862

 
$
3,192,679

 
 
 
 
 
 
Liabilities and Stockholders’ Equity
 

 
 

 
 

 
 
 
 
 
 
Current liabilities:
 

 
 

 
 

Revolving loans and current portion of long-term debt
$
454,212

 
$
482,877

 
$
152,398

Trade accounts payable
316,802

 
342,878

 
477,171

Accrued payroll and related costs
51,512

 
55,107

 
45,094

Accrued liabilities
143,875

 
94,156

 
106,550

Total current liabilities
966,401

 
975,018

 
781,213

 
 
 
 
 
 
Long-term debt
1,364,199

 
1,436,013

 
1,361,149

Other liabilities
419,265

 
448,946

 
411,133

 
 
 
 
 
 
Stockholders’ equity:
 

 
 

 
 

Common stock
876

 
876

 
876

Paid-in capital
246,721

 
234,789

 
237,291

Retained earnings
1,544,431

 
1,429,468

 
1,446,193

Accumulated other comprehensive loss
(195,262
)
 
(196,878
)
 
(208,806
)
Treasury stock
(845,112
)
 
(836,370
)
 
(836,370
)
Total stockholders’ equity
751,654

 
631,885

 
639,184

 
$
3,501,519

 
$
3,491,862

 
$
3,192,679


See accompanying notes.

-3-

SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)

 
 
Three Months Ended
 
Nine Months Ended
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
   
 
 
 
 
 
 
 
Net sales
$
1,139,643

 
$
1,203,525

 
$
2,807,023

 
$
2,934,355

Cost of goods sold
957,704

 
1,018,419

 
2,383,500

 
2,493,355

Gross profit
181,939

 
185,106

 
423,523

 
441,000

Selling, general and administrative expenses
51,711

 
54,113

 
162,092

 
162,969

Rationalization charges
7,821

 
9,070

 
13,929

 
10,754

Income from operations
122,407

 
121,923

 
247,502

 
267,277

Interest and other debt expense
17,318

 
17,159

 
50,657

 
50,364

Income before income taxes
105,089

 
104,764

 
196,845

 
216,913

Provision for income taxes
35,319

 
34,448

 
67,190

 
71,047

Net income
$
69,770

 
$
70,316

 
$
129,655

 
$
145,866

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 

 
 

Basic net income per share
$
1.15

 
$
1.16

 
$
2.14

 
$
2.38

Diluted net income per share
$
1.15

 
$
1.16

 
$
2.13

 
$
2.37

 
 
 
 
 
 
 
 
Dividends per share
$
0.17

 
$
0.16

 
$
0.51

 
$
0.48

 
 
 
 
 
 
 
 
Weighted average number of shares:
 
 
 
 
 

 
 

Basic
60,445

 
60,417

 
60,467

 
61,222

Effect of dilutive securities
384

 
279

 
371

 
271

Diluted
60,829

 
60,696

 
60,838

 
61,493


See accompanying notes.

-4-

 SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)





 
Three Months Ended
 
Nine Months Ended
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
 
 
 
 
 
 
 
 
Net income
$
69,770

 
$
70,316

 
$
129,655

 
$
145,866

  Other comprehensive income (loss), net of tax:


 


 
 
 
 
  Changes in net prior service credit and actuarial losses
4,181

 
12

 
5,992

 
1,632

  Change in fair value of derivatives
228

 
(277
)
 
689

 
(107
)
  Foreign currency translation
2,625

 
(13,834
)
 
6,863

 
(32,779
)
Other comprehensive income (loss)
7,034

 
(14,099
)
 
13,544

 
(31,254
)
Comprehensive income
$
76,804

 
$
56,217

 
$
143,199

 
$
114,612

 
See accompanying notes.

-5-

 SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2016 and 2015
(Dollars in thousands)
(Unaudited)



 
2016
 
2015
Cash flows provided by (used in) operating activities:
 
 
 
Net income
$
129,655

 
$
145,866

Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
 

 
 

Depreciation and amortization
110,280

 
109,790

Rationalization charges
13,929

 
10,754

Stock compensation expense
9,724

 
9,098

Other changes that provided (used) cash:
 

 
 

Trade accounts receivable, net
(231,674
)
 
(325,281
)
Inventories
(6,546
)
 
(43,721
)
Trade accounts payable
(60,423
)
 
8,555

Accrued liabilities
34,371

 
22,272

Other, net
(10,885
)
 
15,170

Net cash used in operating activities
(11,569
)
 
(47,497
)
 
 
 
 
Cash flows provided by (used in) investing activities:
 

 
 

Purchase of business, net of cash acquired

 
(690
)
Capital expenditures
(151,522
)
 
(151,419
)
Proceeds from asset sales
8,926

 
225

Net cash used in investing activities
(142,596
)
 
(151,884
)
 
 
 
 
Cash flows provided by (used in) financing activities:
 

 
 

Borrowings under revolving loans
601,558

 
692,476

Repayments under revolving loans
(303,259
)
 
(326,026
)
Proceeds from issuance of long-term debt

 
7,327

Repayments of long-term debt
(7,775
)
 
(7,040
)
Changes in outstanding checks - principally vendors
(101,765
)
 
(82,801
)
Dividends paid on common stock
(31,344
)
 
(29,919
)
Repurchase of common stock under stock plan
(2,434
)
 
(2,892
)
Repurchase of common stock under share repurchase authorization
(7,200
)
 
(170,132
)
Net cash provided by financing activities
147,781

 
80,993

 
 
 
 
Cash and cash equivalents:
 

 
 

Net decrease
(6,384
)
 
(118,388
)
Balance at beginning of year
99,945

 
222,591

Balance at end of period
$
93,561

 
$
104,203

 
 
 
 
Interest paid, net
$
46,899

 
$
45,541

Income taxes paid, net
46,206

 
37,546


See accompanying notes.

-6-

SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2016 and 2015
(Dollars and shares in thousands)
(Unaudited)
 


 
 
 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Loss
 
 
 
 
 
Common Stock
 
 
 
 
 
 
 
 
Total Stockholders’ Equity
 
Shares Outstanding
 
Par Value
 
Paid-in Capital
 
Retained Earnings
 
 
Treasury Stock
 
Balance at December 31, 2014
63,203

 
$
876

 
$
225,449

 
$
1,313,521

 
$
(165,624
)
 
$
(664,266
)
 
$
709,956

Net income

 

 

 
145,866

 

 

 
145,866

Other comprehensive loss

 

 

 

 
(31,254
)
 

 
(31,254
)
Dividends declared on common stock

 

 

 
(29,919
)
 

 

 
(29,919
)
Stock compensation expense

 

 
9,580

 

 

 

 
9,580

Net issuance of treasury stock for vested restricted stock units, including tax benefit of $680
96

 

 
(240
)
 

 

 
(1,972
)
 
(2,212
)
Repurchases of common stock
(2,906
)
 

 

 

 

 
(170,132
)
 
(170,132
)
Balance at September 30, 2015
60,393

 
$
876

 
$
234,789

 
$
1,429,468

 
$
(196,878
)
 
$
(836,370
)
 
$
631,885

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
60,393

 
$
876

 
$
237,291

 
$
1,446,193

 
$
(208,806
)
 
$
(836,370
)
 
$
639,184

Net income

 

 

 
129,655

 

 

 
129,655

Other comprehensive income

 

 

 

 
13,544

 

 
13,544

Dividends declared on common stock

 

 

 
(31,344
)
 


 

 
(31,344
)
Stock compensation expense

 

 
9,724

 

 

 

 
9,724

Adoption of accounting standard update related to stock compensation accounting
 
 
 
 
598

 
(73
)
 
 
 
 
 
525

Net issuance of treasury stock for vested restricted stock units
94

 

 
(892
)
 

 

 
(1,542
)
 
(2,434
)
Repurchases of common stock
(147
)
 

 

 

 

 
(7,200
)
 
(7,200
)
Balance at September 30, 2016
60,340

 
$
876

 
$
246,721

 
$
1,544,431

 
$
(195,262
)
 
$
(845,112
)
 
$
751,654

 
See accompanying notes.

-7-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine 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, 2015 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.

Certain prior year's amounts have been reclassified to conform with the current year's presentation.

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, 2015.

Goodwill and Other Intangible Assets. We review goodwill and other indefinite-lived intangible assets for impairment as of July 1 of each year and more frequently if circumstances indicate a possible impairment. We determined that our goodwill and other indefinite-lived intangible assets were not impaired in our annual 2016 assessment performed during the third quarter.

Recently Adopted Accounting Pronouncements. In July 2015, the Financial Accounting Standards Board, or FASB, issued an accounting standards update, or ASU, that amends existing guidance for measuring inventories. This amendment requires us to measure inventories recorded using the first-in, first-out method and the average cost method at the lower of cost and net realizable value. This amendment did not change the methodology for measuring inventories recorded using the last-in, first-out method. As permitted, we have adopted this amendment early, effective January 1, 2016, and have applied it prospectively. The adoption of this amendment did not have a material effect on our financial position, results of operations or cash flows.

In March 2016, the FASB issued an ASU that amends the guidance for stock compensation accounting. This amendment (i) requires all income tax effects of stock-based compensation awards to be recognized in the statement of income when such awards vest or are settled, (ii) allows an employer to repurchase more of an employee's shares upon the vesting or settlement of an award than it could have previously for tax withholding purposes without triggering liability accounting, (iii) allows an employer to make a policy election to recognize forfeitures in respect of awards as they occur and (iv) specifies certain classifications on the statement of cash flows related to excess tax benefits and shares repurchased from employees for tax withholding purposes. As permitted, we have adopted this amendment early, effective January 1, 2016, and have applied it (i) prospectively as it related to recognizing income tax effects of awards in the statement of income, (ii) using the modified retrospective method as it related to classifying certain awards as equity rather than liabilities and recognizing forfeitures as they occur and (iii) using the retrospective method as it related to classifying excess tax benefits on the statement of cash flows. The adoption of this amendment did not have a material effect on our financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements. In May 2014, the FASB issued an ASU that amends the guidance for revenue recognition. This amendment contains principles that will require an entity to recognize revenue to depict the transfer of goods and services to customers at an amount that an entity expects to be entitled to in exchange for those goods or services. This amendment permits the use of one of two retrospective transition methods. This amendment will be effective for us on January 1, 2018, with early adoption permitted up to one year prior to the effective date. We have not yet selected a transition method and are currently evaluating the impact of this amendment on our financial position, results of operations and cash flows.


-8-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)

In February 2016, the FASB issued an ASU that amends existing guidance for certain leases by lessees. This amendment will require us to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. In addition, this amendment clarifies the presentation requirements of the effects of leases in the statement of income and statement of cash flows. This amendment will be effective for us on January 1, 2019. Early adoption is permitted. This amendment is required to be adopted using a modified retrospective approach. We are currently evaluating the impact of this amendment on our financial position, results of operations and cash flows.

In August of 2016, the FASB issued an ASU that provides guidance for cash flow classification for certain cash receipts and cash payments to address diversity in practice in how items are classified on the statement of cash flows as either operating, investing or financing activities. This amendment will be effective for us on January 1, 2018. Early adoption is permitted. This amendment is required to be adopted using a retrospective approach. We are currently evaluating the impact of this amendment on our statement of cash flows.

Note 2.               Rationalization Charges

We continually evaluate cost reduction opportunities across each of our businesses, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. Rationalization charges by business segment were as follows:
 
Three Months Ended
 
Nine Months Ended
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
 
(Dollars in thousands)
Metal containers
$
4,280

 
$

 
$
8,333

 
$

Closures
64

 
205

 
482

 
1,351

Plastic containers
3,477

 
8,865

 
5,114

 
9,403

 
$
7,821

 
$
9,070

 
$
13,929

 
$
10,754


Activity in reserves for our rationalization plans for the nine months ended September 30 was as follows:
 
Employee
Severance
and Benefits
 
Non-Cash Retirement Benefits
 
Plant
Exit
Costs
 
Non-Cash
Asset
Write-Down
 
Total
 
(Dollars in thousands)
Balance at December 31, 2015
$
3,026

 
$

 
$
268

 
$

 
$
3,294

Charged to expense
2,754

 
3,080

 
3,906

 
4,189

 
13,929

Utilized and currency translation
(4,418
)
 
(3,080
)
 
(1,474
)
 
(4,189
)
 
(13,161
)
Balance at September 30, 2016
$
1,362

 
$

 
$
2,700

 
$

 
$
4,062



Non-cash asset write-downs were the result of comparing the carrying value of certain production related equipment to their fair value using estimated future discounted cash flows, a Level 3 fair value measurement (as defined in Note 6). Rationalization reserves were included in the Condensed Consolidated Balance Sheets as liabilities of $4.1 million, consisting of $2.4 million of accrued liabilities and $1.7 million of other liabilities.

Remaining expenses for our rationalization plans of $1.8 million are expected within the next twelve months. Remaining cash expenditures for our rationalization plans of $6.8 million are expected through 2023.


-9-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)


Note 3.               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, 2015
$
(84,280
)
 
$
(988
)
 
$
(123,538
)
 
$
(208,806
)
Other comprehensive income before reclassifications
3,377

 
(271
)
 
6,863

 
9,969

Amounts reclassified from accumulated other
    comprehensive loss
2,615

 
960

 

 
3,575

 Other comprehensive income
5,992

 
689

 
6,863

 
13,544

Balance at September 30, 2016
$
(78,288
)
 
$
(299
)
 
$
(116,675
)
 
$
(195,262
)
 
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, 2016 were net (losses) of $(1.4) million and $(4.1) million, respectively, excluding an income tax benefit of $0.6 million and $1.5 million, respectively.  For the three and nine months ended September 30, 2016, these net (losses) consisted of $(2.1) million and $(6.0) million of amortization of net actuarial (losses) and $0.7 million and $1.9 million of amortization of net prior service credit, respectively. Amortization of net actuarial losses and net prior service credit is a component of net periodic benefit cost.  See Note 8 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, 2016 were net (losses) of $(0.3) million and $(1.5) million, respectively, excluding an income tax benefit of $0.1 million and $0.5 million, respectively.  For the three and nine months ended September 30, 2016, these net (losses) consisted of $(0.2) million and $(0.7) million, respectively, related to our interest rate swap agreements which were recorded in interest and other debt expense in our Condensed Consolidated Statements of Income and $(0.1) million and $(0.8) million, respectively, related to our natural gas swap agreements which were recorded in cost of goods sold in our Condensed Consolidated Statements of Income. See Note 6 for further information.

Other comprehensive income before reclassifications related to foreign currency translation for the three and nine months ended September 30, 2016 included (i) foreign currency gains related to translation of quarter-end financial statements of foreign subsidiaries utilizing a functional currency other than the U.S. dollar of $4.8 million and $13.8 million, respectively, (ii) foreign currency (losses) related to intra-entity foreign currency transactions that are of a long-term investment nature of $(0.5) million and $(2.3) million, respectively, and (iii) foreign currency (losses) related to our net investment hedges of $(2.6) million and $(7.4) million, respectively, excluding an income tax benefit of $1.0 million and $2.8 million. See Note 6 for further discussion.




-10-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)


Note 4.               Inventories

Inventories consisted of the following:
 
 
Sept. 30,
2016
 
Sept 30,
2015
 
Dec. 31,
2015
 
(Dollars in thousands)
 
 
 
 
 
 
Raw materials
$
213,020

 
$
204,841

 
$
215,018

Work-in-process
113,393

 
104,842

 
118,947

Finished goods
389,073

 
358,783

 
371,561

Other
13,931

 
14,831

 
13,938

 
729,417

 
683,297

 
719,464

Adjustment to value inventory
 

 
 

 
 

at cost on the LIFO method
(91,326
)
 
(103,021
)
 
(91,326
)
 
$
638,091

 
$
580,276

 
$
628,138

 
 
 
 
 
 



Note 5.               Long-Term Debt

Long-term debt consisted of the following:
 
 
Sept. 30,
2016
 
Sept. 30,
2015
 
Dec. 31,
2015
 
(Dollars in thousands)
Bank debt
 
 
 
 
 
Bank revolving loans
$
306,557

 
$
357,044

 
$

U.S. term loans
346,750

 
365,000

 
346,750

Canadian term loans
45,393

 
49,582

 
47,973

Euro term loans
234,853

 
246,576

 
227,434

Other foreign bank revolving and term loans
95,121

 
113,612

 
103,661

Total bank debt
1,028,674

 
1,131,814

 
725,818

5½% Senior Notes
300,000

 
300,000

 
300,000

5% Senior Notes
500,000

 
500,000

 
500,000

Total debt - principal
1,828,674

 
1,931,814

 
1,525,818

   Less unamortized debt issuance costs
10,263

 
12,924

 
12,271

Total debt
1,818,411

 
1,918,890

 
1,513,547

Less current portion
454,212

 
482,877

 
152,398

 
$
1,364,199

 
$
1,436,013

 
$
1,361,149


At September 30, 2016, amounts expected to be repaid within one year consisted of $367.8 million of bank revolving and term loans under our senior secured credit facility, or the Credit Agreement, and $86.4 million of foreign bank revolving and term loans.





-11-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)

Note 6.               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, 2016:

 
Carrying
Amount
 
Fair
Value
 
(Dollars in thousands)
Assets:
 
 
 
Cash and cash equivalents
$
93,561

 
$
93,561

 
 
 
 
Liabilities:
 

 
 

Bank debt
$
1,028,674

 
$
1,028,674

5½% Senior Notes
300,000

 
311,250

5% Senior Notes
500,000

 
510,430

Interest rate swap agreements
459

 
459


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, 2016 consisted of our cash and cash equivalents, interest rate swap agreements and natural gas swap agreements.  We measured the fair value of cash and cash equivalents using Level 1 inputs.  We measured the fair value of the swap agreements using the income approach.  The fair value of the swap agreements 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, 5½% Senior Notes due 2022, or the 5½% Notes, and 5% Senior Notes due 2020, or the 5% 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 5½% Notes and the 5% 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.


-12-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)

We utilize certain derivative financial instruments to manage a portion of our interest rate and natural gas cost exposures.  We limit our use of derivative financial instruments to interest rate and natural gas swap agreements.  We do not engage in trading or other speculative uses of these financial instruments. For a financial instrument to qualify as a hedge, we must be exposed to interest rate or price risk, and the financial instrument must reduce the exposure and be designated as a hedge.  Financial instruments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.

We utilize certain internal hedging strategies to minimize our foreign currency exchange rate risk.  Net investment hedges that qualify for hedge accounting result in the recognition of foreign currency gains or losses, net of tax, in accumulated other comprehensive loss.  We generally do not utilize external derivative financial instruments to manage our foreign currency exchange rate risk.

Our interest rate and natural gas swap agreements are accounted for as cash flow hedges.  During the first nine months of 2016, our hedges were fully effective. The fair value of our outstanding swap agreements in effect at September 30, 2016 was included in accrued liabilities in our Condensed Consolidated Balance Sheet.

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, 2016 were losses, net of income taxes, of $0.2 million and $1.0 million, respectively.  We estimate that we will reclassify losses of $0.3 million, net of income taxes, from the change in fair value of derivatives component of accumulated other comprehensive loss to earnings during the next twelve months.  The actual amount that will be reclassified to earnings will vary from this amount as a result of changes in market conditions.

Interest Rate Swap Agreements

We have entered into U.S. dollar interest rate swap agreements to manage a portion of our exposure to interest rate fluctuations.  At September 30, 2016, the aggregate notional principal amount of our outstanding interest rate swap agreements was $100.0 million.  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.  For the three and nine months ended September 30, 2016, net payments under our interest rate swap agreements were $0.2 million and $0.7 million, respectively.  These agreements are with financial institutions which are expected to fully perform under the terms thereof.

Natural Gas Swap Agreements

We have entered into natural gas swap agreements with a major financial institution to manage a portion of our exposure to fluctuations in natural gas prices.  At September 30, 2016, the aggregate notional principal amount of our natural gas swap agreements was 336,000 MMBtu of natural gas with fixed prices ranging from $2.97 to $3.21 per MMBtu, which hedged approximately 11 percent of our estimated twelve month exposure to fluctuations in natural gas prices.  The difference between amounts to be paid or received on our natural gas swap agreements is recorded in cost of goods sold in our Condensed Consolidated Statements of Income.  For the three and nine months ended September 30, 2016, net payments under our natural gas swap agreements were $0.1 million and $0.8 million, respectively. These agreements are with a financial institution which is expected to fully perform under the terms thereof.

Foreign Currency Exchange Rate Risk

In an effort to minimize foreign currency exchange rate risk, we have financed acquisitions of foreign operations primarily with loans borrowed under our senior secured credit facilities denominated in Euros and Canadian dollars.  In addition, where available, we have borrowed funds in local currency or implemented certain internal hedging strategies to minimize our foreign currency exchange rate risk related to foreign operations.  We have designated substantially all of our Euro denominated borrowings under the Credit Agreement as net investment hedges.  Foreign currency (losses) related to our net investment hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2016 were $(2.6) million and $(7.4) million, respectively.



-13-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)

Note 7.               Commitments and Contingencies

A competition authority in Germany commenced an antitrust investigation involving the industry association for metal packaging in Germany and its members, including our metal container and closures subsidiaries in Germany. Given the early stage of the investigation, we cannot reasonably assess what actions may result from the investigation or estimate what costs we may incur as a result of the investigation.

We are a party to other legal proceedings, contract disputes and claims arising in the ordinary course of our business, none of which are expected to have a material adverse effect on our business or financial condition.



Note 8.               Retirement Benefits

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

 
Three Months Ended
 
Nine Months Ended
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
 
(Dollars in thousands)
Service cost
$
2,950

 
$
3,688

 
$
9,584

 
$
11,689

Interest cost
6,473

 
6,753

 
19,351

 
21,044

Expected return on plan assets
(14,653
)
 
(15,692
)
 
(43,819
)
 
(47,045
)
Amortization of prior service cost
113

 
264

 
415

 
778

Amortization of actuarial losses
2,326

 
627

 
6,493

 
4,293

Special termination benefits

 

 
2,900

 

Curtailment (gain) loss

 
(482
)
 
180

 
(482
)
Net periodic benefit credit
$
(2,791
)
 
$
(4,842
)
 
$
(4,896
)
 
$
(9,723
)
 
Special termination benefits and curtailment loss were included in rationalization charges for our metal container business segment for the nine months ended September 30, 2016.

The components of the net periodic other postretirement benefit credit were as follows:
 
Three Months Ended
 
Nine Months Ended
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
 
(Dollars in thousands)
Service cost
$
52

 
$
56

 
$
188

 
$
335

Interest cost
230

 
256

 
737

 
965

Amortization of prior service credit
(816
)
 
(817
)
 
(2,516
)
 
(2,289
)
Amortization of actuarial gains
(187
)
 
(133
)
 
(475
)
 
(260
)
Net periodic benefit credit
$
(721
)
 
$
(638
)
 
$
(2,066
)
 
$
(1,249
)






-14-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)


Note 9.               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. We have been accepted into the Compliance Assurance Program for the 2015 and 2016 tax years which provides for the review by the Internal Revenue Service of tax matters relating to our tax return prior to filing. We do not expect a material change to our unrecognized tax benefits within the next twelve months.


Note 10.               Treasury Stock

On February 28, 2014, our Board of Directors authorized the repurchase by us of up to an aggregate of $300.0 million of our common stock, inclusive of prior authorizations, from time to time through and including December 31, 2019. During the nine months ended September 30, 2016, we repurchased 147,465 shares of our common stock at an average price per share of $48.81, for a total purchase price of $7.2 million. As a result, at September 30, 2016, we had approximately $98.8 million remaining under this authorization for the repurchase of our common stock. See Note 13 for additional information.

During the first nine months of 2016, we issued 141,684 treasury shares which had an average cost of $6.30 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 47,472 shares of our common stock at an average cost of $51.27 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, 2016, 27,216,596 shares of our common stock were held in treasury.


Note 11.             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 2016, 199,148 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 $10.3 million, which is being amortized ratably over the respective vesting period from the grant date.



-15-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)

Note 12.             Business Segment Information

Reportable business segment information for the three and nine months ended September 30 was as follows:

 
Metal
Containers
 
Closures
 
Plastic
Containers
 
Corporate
 
Total
 
(Dollars in thousands)
Three Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Net sales
$
797,370

 
$
211,955

 
$
130,318

 
$

 
$
1,139,643

Depreciation and amortization(1)
18,432

 
9,757

 
8,006

 
27

 
36,222

Rationalization charges
4,280

 
64

 
3,477

 

 
7,821

Segment income from operations
98,007

 
28,401

 
800

 
(4,801
)
 
122,407

 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Net sales
$
845,408

 
$
215,713

 
$
142,404

 
$

 
$
1,203,525

Depreciation and amortization(1)
17,746

 
9,399

 
8,531

 
30

 
35,706

Rationalization charges

 
205

 
8,865

 

 
9,070

Segment income from operations
106,024

 
27,066

 
(7,293
)
 
(3,874
)
 
121,923

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2016
 
 
 
 
 
 
 
 
 
Net sales
$
1,780,429

 
$
614,558

 
$
412,036

 
$

 
$
2,807,023

Depreciation and amortization(1)
54,379

 
28,873

 
23,847

 
82

 
107,181

Rationalization charges
8,333

 
482

 
5,114

 

 
13,929

Segment income from operations
181,496

 
78,220

 
1,868

 
(14,082
)
 
247,502

 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
 
Net sales
$
1,858,004

 
$
620,949

 
$
455,402

 
$

 
$
2,934,355

Depreciation and amortization(1)
52,400

 
28,302

 
25,881

 
93

 
106,676

Rationalization charges

 
1,351

 
9,403

 

 
10,754

Segment income from operations
194,992

 
73,226

 
11,332

 
(12,273
)
 
267,277


_____________

(1) 
Depreciation and amortization excludes amortization of debt issuance costs of $1.0 million in each of the three months ended September 30, 2016 and 2015 and $3.1 million in each of the nine months ended September 30, 2016 and 2015.















-16-


SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2016 and 2015 and for the
three and nine months then ended is unaudited)

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

 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
 
 
 
(Dollars in thousands)
Total segment income from operations
 
 
$
122,407

 
$
121,923

 
$
247,502

 
$
267,277

Interest and other debt expense
 
 
17,318

 
17,159

 
50,657

 
50,364

Income before income taxes
 
 
$
105,089

 
$
104,764

 
$
196,845

 
$
216,913


Sales and income from operations of our metal container business and part of our closures business are dependent, in part, upon fruit and vegetable harvests.  The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in applicable regions.  Because of the seasonality of the harvests, we have historically experienced higher unit sales volume in the third quarter of our fiscal year and generated a disproportionate amount of our annual income from operations during that quarter.


Note 13.             Subsequent Events

Share Repurchase Authorization

On October 17, 2016, our Board of Directors authorized the repurchase by us of up to an additional $300 million of our issued and outstanding common stock by various means from time to time through and including December 31, 2021. This authorization is in addition to approximately $98.8 million that remains available to us for the repurchase of our common stock pursuant to a previous authorization in 2014. Accordingly, at October 17, 2016, we had approximately $398.8 million remaining pursuant to such authorizations for the repurchase of our common stock.

Tender Offer

On October 17, 2016, we commenced a "modified Dutch auction" tender offer, or the Tender Offer, to purchase up to 5,494,505 shares of our common stock at a price per share of not less than $45.50 and not greater than $52.25, for an aggregate purchase price of up to $250.0 million. The Tender Offer will expire, unless extended by us, at 5:00 pm Eastern Time on November 15, 2016. We expect to fund the purchase of shares tendered in the Tender Offer from available cash on hand and revolving loan borrowings under the Credit Agreement.









-17-


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, 2015 and in our other filings with the Securities and Exchange Commission.  As a result, the actual results of our operations or our financial condition could differ materially from those expressed or implied in these forward-looking statements.
 

General

We are a leading manufacturer of rigid packaging for shelf-stable food and other consumer goods products.  We currently produce steel and aluminum containers for human and pet food and general line products; metal, composite and plastic closures for food and beverage products; and custom designed plastic containers and closures for personal care, food, health care, pharmaceutical, household and industrial chemical, pet care, agricultural, automotive and marine chemical products.  We are a leading manufacturer of metal containers in North America and Europe, a leading worldwide manufacturer of metal, composite and plastic closures for food and beverage products and a leading manufacturer of plastic containers in North America for a variety of markets, including the personal care, food, health care, 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 over the years, largely through acquisitions but also through internal growth, and we continue to evaluate acquisition opportunities in the consumer goods packaging market.  If acquisition opportunities are not identified over a longer period of time, we may use our cash flow to repay debt, repurchase shares of our common stock or increase dividends to our stockholders or for other permitted purposes.








-18-




RESULTS OF OPERATIONS

The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented:
 
 
Three Months Ended
 
Nine Months Ended
 
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
Net sales
 
 
 
 
 
 
 
 
Metal containers
 
70.0
%
 
70.3
%
 
63.4
%
 
63.3
%
Closures
 
18.6

 
17.9

 
21.9

 
21.2

Plastic containers
 
11.4

 
11.8

 
14.7

 
15.5

Consolidated
 
100.0

 
100.0

 
100.0

 
100.0

Cost of goods sold
 
84.0

 
84.6

 
84.9

 
85.0

Gross profit
 
16.0

 
15.4

 
15.1

 
15.0

Selling, general and administrative expenses
 
4.6

 
4.5

 
5.8

 
5.6

Rationalization charges
 
0.7

 
0.8

 
0.5

 
0.3

Income from operations
 
10.7

 
10.1

 
8.8

 
9.1

Interest and other debt expense
 
1.5

 
1.4

 
1.8

 
1.7

Income before income taxes
 
9.2

 
8.7

 
7.0

 
7.4

Provision for income taxes
 
3.1

 
2.9

 
2.4

 
2.4

Net income
 
6.1
%
 
5.8
%
 
4.6
%
 
5.0
%

Summary unaudited results of operations are provided below.
 
 
Three Months Ended
 
Nine Months Ended
 
 
Sept. 30, 2016
 
Sept. 30, 2015
 
Sept. 30, 2016
 
Sept. 30, 2015
 
 
(Dollars in millions)
Net sales
 
 
 
 
 
 
 
 
Metal containers
 
$
797.4

 
$
845.4

 
$
1,780.4

 
$
1,858.0

Closures
 
211.9

 
215.7

 
614.6

 
620.9

Plastic containers
 
130.3

 
142.4

 
412.0

 
455.4

Consolidated
 
$
1,139.6

 
$
1,203.5

 
$
2,807.0

 
$
2,934.3

 
 
 
 
 
 
 
 
 
Income from operations
 
 
 
 
 
 
 
 
Metal containers (1)
 
$
98.0

 
$
106.0

 
$
181.5

 
$
195.0

Closures (2)
 
28.4

 
27.1

 
78.2

 
73.2

Plastic containers (3)
 
0.8

 
(7.3
)
 
1.9

 
11.3

Corporate
 
(4.8
)
 
(3.9
)
 
(14.1
)
 
(12.2
)
Consolidated
 
$
122.4

 
$
121.9

 
$
247.5

 
$
267.3

 
(1) Includes rationalization charges of $4.3 million and $8.3 million for the three and nine months ended September 30, 2016, respectively.  
(2) Includes rationalization charges of $0.2 million for the three months ended September 30, 2015 and $0.5 million and $1.4 million for the nine months ended September 30, 2016 and 2015, respectively.
(3) Includes rationalization charges of $3.5 million and $8.9 million for the three months ended September 30, 2016 and 2015, respectively, and $5.1 million and $9.4 million for the nine months ended September 30, 2016 and 2015, respectively.


-19-




Three Months Ended September 30, 2016 Compared with Three Months Ended September 30, 2015

Overview.  Consolidated net sales were $1.14 billion in the third quarter of 2016, representing a 5.3 percent decrease as compared to the third quarter of 2015 due primarily to the pass through of lower raw material and other manufacturing costs in the metal container and closures businesses, lower unit volumes and the pass through of lower raw material costs in the plastic container business and a less favorable mix of products sold in the metal container business, partially offset by an increase in unit volumes in the closures business. Income from operations for the third quarter of 2016 increased by $0.5 million, or 0.4 percent, as compared to the same period in 2015 primarily due to improved manufacturing performance in each of the businesses, lower rationalization charges and higher unit volumes in the closures business, partially offset by the unfavorable impact from the contractual pass through to customers of indexed deflation and a less favorable mix of products sold in the metal container business and lower unit volumes in the plastic container business. Rationalization charges were $7.8 million in the third quarter of 2016 as compared to $9.1 million for the same period in 2015. Net income for the third quarter of 2016 was $69.8 million as compared to $70.3 million for the same period in 2015.  Net income per diluted share for the third quarter of 2016 was $1.15 as compared to $1.16 for the same period in 2015.

Net Sales.  The $63.9 million decrease in consolidated net sales in the third quarter of 2016 as compared to the third quarter of 2015 was the result of lower net sales across all businesses.

Net sales for the metal container business decreased $48.0 million, or 5.7 percent, in the third quarter of 2016 as compared to the same period in 2015.  This decrease was primarily the result of the pass through of lower raw material and other manufacturing costs and a less favorable mix of products sold. Unit volumes in the third quarter of 2016 were flat as compared to the same period in the prior year, as higher volumes for pet food were offset by a decrease in unit volumes across Europe due to wet weather which resulted in poor growing conditions for the fruit and vegetable pack.

Net sales for the closures business decreased $3.8 million, or 1.8 percent, in the third quarter of 2016 as compared to the same period in 2015.  This decrease was primarily the result of the pass through of lower raw material costs, partially offset by an increase in unit volumes of approximately 2 percent. The increase in unit volumes was primarily due to continued strong demand from U.S. beverage markets, partially offset by volume declines in Europe due to wet weather and poor growing conditions for the fruit and vegetable pack.

Net sales for the plastic container business decreased $12.1 million, or 8.5 percent, in the third quarter of 2016 as compared to the same period in 2015.  This decrease was principally due to lower unit volumes of approximately 6 percent as a result of the continued rebalancing of the customer portfolio in conjunction with the footprint optimization program and the pass through of lower raw material costs.

Gross Profit.  Gross profit margin increased 0.6 percentage points to 16.0 percent in the third quarter of 2016 as compared to the same period in 2015 for the reasons discussed below in "Income from Operations."

Selling, General and Administrative Expenses.  Selling, general and administrative expenses as a percentage of consolidated net sales increased 0.1 percentage points to 4.6 percent for the third quarter of 2016 as compared to 4.5 percent for the same period in 2015.  Selling, general and administrative expenses decreased $2.4 million to $51.7 million for the third quarter of 2016 as compared to $54.1 million for the same period in 2015.

Income from Operations.  Income from operations for the third quarter of 2016 increased by $0.5 million, or 0.4 percent, as compared to the third quarter of 2015, and operating margin increased to 10.7 percent from 10.1 percent over the same periods.

Income from operations of the metal container business for the third quarter of 2016 decreased $8.0 million, or 7.5 percent, as compared to the same period in 2015, and operating margin decreased to 12.3 percent from 12.5 percent over the same periods.  The decrease in income from operations was primarily attributable to the unfavorable impact from the contractual pass through to customers of indexed deflation, higher rationalization charges and a less favorable mix of products sold, partially offset by better operating performance than in the prior year quarter. Rationalization charges were $4.3 million for the third quarter of 2016 primarily related to the shutdown of the LaPorte, Indiana manufacturing facility.

Income from operations of the closures business for the third quarter of 2016 increased $1.3 million, or 4.8 percent, as compared to the same period in 2015, and operating margin increased to 13.4 percent from 12.6 percent over the same periods.  The increase in income from operations was primarily due to higher unit volumes and improved manufacturing efficiencies.

Income from operations of the plastic container business for the third quarter of 2016 increased $8.1 million as compared to the same period in 2015. The increase in income from operations was primarily attributable to lower rationalization charges and

-20-




improved manufacturing performance, partially offset by lower unit volumes. Rationalization charges were $3.5 million and $8.9 million in the third quarters of 2016 and 2015, respectively.

Interest and Other Debt Expense.  Interest and other debt expense for the third quarter of 2016 increased slightly to $17.3 million as compared to $17.1 million in the same period in 2015.

Provision for Income Taxes. The effective tax rate for the third quarter of 2016 was 33.6 percent as compared to 32.9 percent for the same period in 2015. The effective tax rate in the third quarter of 2015 benefitted from higher income in lower tax jurisdictions.

Nine Months Ended September 30, 2016 Compared with Nine Months Ended September 30, 2015

Overview.  Consolidated net sales were $2.81 billion in the first nine months of 2016, representing a 4.3 percent decrease as compared to the first nine months of 2015 primarily as a result of the pass through of lower raw material and other manufacturing costs in the metal container and closures businesses and lower unit volumes, the pass through of lower raw material costs and the impact of unfavorable foreign currency translation in the plastic container business, partially offset by an increase in unit volumes in the closures business. Income from operations for the first nine months of 2016 decreased by $19.8 million, or 7.4 percent, as compared to the same period in 2015 primarily as a result of higher manufacturing costs in the metal and plastic container businesses including start-up costs related to the new manufacturing facilities, lower unit volumes in the plastic container business, the contractual pass through to customers of indexed deflation in the metal container business, the unfavorable impact from the lagged pass through of changes in resin costs in the closures and plastic container businesses as compared to the prior year period and higher rationalization charges. These decreases were partially offset by an increase in unit volumes and improved manufacturing efficiencies in the closures business. Rationalization charges were $13.9 million for the first nine months of 2016 as compared to $10.8 million for the same period in 2015. Net income was $129.7 million for the first nine months of 2016 as compared to $145.9 million for the same period in 2015. Net income per diluted share for the first nine months of 2016 was $2.13 as compared to $2.37 for the same period in 2015.

Net Sales.  The $127.3 million decrease in consolidated net sales in the first nine months of 2016 as compared to the first nine months of 2015 was the result of lower net sales across all businesses.

Net sales for the metal container business decreased $77.6 million, or 4.2 percent, in the first nine months of 2016 as compared to the same period in 2015.  This decrease was primarily the result of the pass through of lower raw material and other manufacturing costs.

Net sales for the closures business decreased $6.3 million, or 1.0 percent, in the first nine months of 2016 as compared to the same period in 2015.  This decrease was primarily the result of the pass through of lower raw material costs, partially offset by an increase in unit volumes of approximately 3 percent. The increase in unit volumes was primarily due to strong demand from U.S. beverage markets, partially offset by volume declines in Europe due to wet weather and poor growing conditions for the fruit and vegetable pack.

Net sales for the plastic container business decreased $43.4 million, or 9.5 percent, in the first nine months of 2016 as compared to the same period in 2015.  This decrease was principally due to lower unit volumes of approximately 4 percent primarily as a result of the continued rebalancing of the customer portfolio in conjunction with the footprint optimization program, the pass through of lower raw material costs and the impact of unfavorable foreign currency translation of approximately $4.4 million.

Gross Profit.  Gross profit margin increased 0.1 percentage points to 15.1 percent in the first nine months of 2016 as compared to the same period in 2015 for the reasons discussed below in "Income from Operations."

Selling, General and Administrative Expenses.  Selling, general and administrative expenses as a percentage of consolidated net sales increased 0.2 percentage points to 5.8 percent for the first nine months of 2016 as compared to 5.6 percent for the same period in 2015.  Selling, general and administrative expenses decreased $0.8 million to $162.1 million for the first nine months of 2016 as compared to $162.9 million for the same period in 2015.

Income from Operations.  Income from operations for the first nine months of 2016 decreased by $19.8 million, or 7.4 percent, as compared to the first nine months of 2015, and operating margin decreased to 8.8 percent from 9.1 percent over the same periods.

Income from operations of the metal container business for the first nine months of 2016 decreased $13.5 million, or 6.9 percent, as compared to the same period in 2015, and operating margin decreased to 10.2 percent from 10.5 percent over the same periods.  The decrease in income from operations was primarily due to higher rationalization charges, the contractual pass through

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to customers of indexed deflation and higher manufacturing costs including start-up costs related to the new can manufacturing facility. Rationalization charges were $8.3 million for the first nine months of 2016 primarily related to the shutdown of the LaPorte, Indiana manufacturing facility.

Income from operations of the closures business for the first nine months of 2016 increased $5.0 million, or 6.8 percent, as compared to the same period in 2015, and operating margin increased to 12.7 percent from 11.8 percent over the same periods.  The increase in income from operations was primarily due to higher unit volumes and improved manufacturing efficiencies, partially offset by the unfavorable impact from the lagged pass through of changes in resin costs as compared to the prior year period.

Income from operations of the plastic container business for the first nine months of 2016 decreased $9.4 million to $1.9 million as compared to $11.3 million in the same period in 2015, and operating margin decreased to 0.5 percent from 2.5 percent over the same periods.  The decrease in income from operations was primarily attributable to higher incremental costs and inefficiencies incurred to service customers during the footprint optimization program, start-up costs related to the new manufacturing facilities, lower unit volumes, the favorable impact in the prior year period from the lagged pass through of decreases in resin costs and foreign currency transaction gains in the prior year period, partially offset by lower rationalization charges. Rationalization charges were $5.1 million and $9.4 million for the nine months ended September 30, 2016 and 2015, respectively.

Interest and Other Debt Expense.  Interest and other debt expense for the first nine months of 2016 increased $0.3 million to $50.7 million as compared to $50.4 million in the same period in 2015.

Provision for Income Taxes. The effective tax rate for the first nine months of 2016 was 34.1 percent as compared to 32.8 percent for the same period in 2015. The effective tax rate in 2015 benefitted from higher income in more favorable tax jurisdictions.


CAPITAL RESOURCES AND LIQUIDITY

Our principal sources of liquidity have been net cash from operating activities and borrowings under our debt instruments, including our senior secured credit facility.  Our liquidity requirements arise from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment, the funding of our seasonal working capital needs and other general corporate uses.
  
For the nine months ended September 30, 2016, we used net borrowings of revolving loans of $298.3 million and cash and cash equivalents of $6.3 million to fund net capital expenditures of $142.6 million, decreases in outstanding checks of $101.8 million, dividends paid on our common stock of $31.3 million, the repayment of $7.8 million of long-term debt, cash used in operations of $11.5 million and repurchases of our common stock of $9.6 million.

For the nine months ended September 30, 2015, we used net borrowings of revolving loans of $366.4 million, cash and cash equivalents of $118.4 million and proceeds from the issuance of long-term debt of $7.3 million to fund repurchases of our common stock of $173.0 million, net capital expenditures of $151.2 million, decreases in outstanding checks of $82.8 million, cash used in operations of $47.5 million, dividends paid on our common stock of $29.9 million, the repayment of $7.0 million of long-term debt and the purchase of a business for $0.7 million.

At September 30, 2016, we had $306.6 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, 2016 was $661.0 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.

On October 17, 2016, we commenced the Tender Offer to purchase up to 5,494,505 shares of our common stock at a price per share of not less than $45.50 and not greater than $52.25, for an aggregate purchase price of up to $250.0 million. The Tender Offer will expire, unless extended by us, at 5:00 pm Eastern Time on November 15, 2016. We expect to fund the purchase of shares tendered in the Tender Offer from available cash on hand and revolving loan borrowings under the Credit Agreement.

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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 (including in the Tender Offer) 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 2016 with all of these covenants.

Rationalization Charges
We continually evaluate cost reduction opportunities across each of our businesses, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. Under our rationalization plans, we made cash payments of $5.9 million and $5.8 million for the nine months ended September 30, 2016 and 2015, respectively. Additional cash spending under our rationalization plans of approximately $6.8 million is expected through 2023.
You should also read Note 2 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2016 included elsewhere in this Quarterly Report.

Recently Adopted Accounting Pronouncements

In July 2015, the FASB issued an ASU that amends existing guidance for measuring inventories. This amendment requires us to measure inventories recorded using the first-in, first-out method and the average cost method at the lower of cost and net realizable value. This amendment did not change the methodology for measuring inventories recorded using the last-in, first-out method. As permitted, we have adopted this amendment early, effective January 1, 2016, and have applied it prospectively. The adoption of this amendment did not have a material effect on our financial position, results of operations or cash flows.

In March 2016, the FASB issued an ASU that amends the guidance for stock compensation accounting. This amendment (i) requires all income tax effects of stock-based compensation awards to be recognized in the statement of income when such awards vest or are settled, (ii) allows an employer to repurchase more of an employee's shares upon the vesting or settlement of an award than it could have previously for tax withholding purposes without triggering liability accounting, (iii) allows an employer to make a policy election to recognize forfeitures in respect of awards as they occur and (iv) specifies certain classifications on the statement of cash flows related to excess tax benefits and shares repurchased from employees for tax withholding purposes. As permitted, we have adopted this amendment early, effective January 1, 2016, and have applied it (i) prospectively as it related to recognizing income tax effects of awards in the statement of income, (ii) using the modified retrospective method as it related to classifying certain awards as equity rather than liabilities and recognizing forfeitures as they occur and (iii) using the retrospective method as it related to classifying excess tax benefits on the statement of cash flows. The adoption of this amendment did not have a material effect on our financial position, results of operations or cash flows.

Recently Issued Accounting Pronouncements

In May 2014, the FASB issued an ASU that amends the guidance for revenue recognition. This amendment contains principles that will require an entity to recognize revenue to depict the transfer of goods and services to customers at an amount that an entity expects to be entitled to in exchange for those goods or services. This amendment permits the use of one of two retrospective transition methods. This amendment will be effective for us on January 1, 2018, with early adoption permitted up to one year prior to the effective date. We have not yet selected a transition method and are currently evaluating the impact of this amendment on our financial position, results of operations and cash flows.

In February 2016, the FASB issued an ASU that amends existing guidance for certain leases by lessees. This amendment will require us to recognize assets and liabilities on the balance sheet for the rights and obligations created by long-term leases and to disclose additional quantitative and qualitative information about leasing arrangements. In addition, this amendment clarifies the presentation requirements of the effects of leases in the statement of income and statement of cash flows. This amendment will be effective for us on January 1, 2019. Early adoption is permitted. This amendment is required to be adopted using a modified retrospective approach. We are currently evaluating the impact of this amendment on our financial position, results of operations and cash flows.




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Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Information regarding our interest rate risk, foreign currency exchange rate risk and commodity pricing risk has been disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015.  Since such filing, 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.

You should also read Notes 5 and 6 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2016 included elsewhere in this Quarterly Report.
 

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

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Part II.  Other Information

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

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

The following table provides information about shares of our common stock that we repurchased during the third quarter of 2016:
 
ISSUER PURCHASES OF EQUITY SECURITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(c)
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
 
(d)
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(in millions) (1)
 
(a)
Total Number of Shares Purchased
 
 
 
 
 
 
(b)
Average Price Paid per Share
 
 
 
 
 
 
 
 
 
 
July 1-31, 2016
 
 
 
$106.0
August 1-31, 2016
83,155
 
$49.31
 
83,155
 
$101.9
September 1-30, 2016
64,110
 
$48.16
 
64,110
 
$98.8
 
 
 
 
 
 
 
 
Total
147,265
 
$48.81
 
147,265
 
$98.8
 



(1) On February 28, 2014, our Board of Directors authorized the repurchase by us of up to an aggregate of $300.0 million of our common stock, inclusive of prior authorizations, by various means from time to time through and including December 31, 2019. Prior to the third quarter of 2016, we had repurchased approximately $194.0 million of our common stock pursuant to such authorization.

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Item 6.  Exhibits


Exhibit Number
 
Description
 
 
 
12
 
Ratio of Earnings to Fixed Charges for the three and nine months ended September 30, 2016 and 2015.
 
 
 
31.1
 
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
31.2
 
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
 
32.1
 
Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
32.2
 
Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
 
101.INS 
 
XBRL Instance Document.
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document.
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document.
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document.

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
SILGAN HOLDINGS INC.
 
 
 
 
 
 
 
 
 
Dated: November 8, 2016 
/s/ Robert B. Lewis                 
 
 
Robert B. Lewis
 
Executive Vice President and
 
Chief Financial Officer
 
(Principal Financial and
 
Accounting Officer)

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EXHIBIT INDEX
 
 
EXHIBIT NO.
EXHIBIT
 
 
12
Ratio of Earnings to Fixed Charges for the three and nine months ended September 30, 2016 and 2015.
 
 
31.1
Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
31.2
Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act.
 
 
32.1
Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
32.2
Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act.
 
 
101.INS 
XBRL Instance Document.
 
 
101.SCH
XBRL Taxonomy Extension Schema Document.
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.

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