SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2002
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.
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(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1269834
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4 Landmark Square
Stamford, Connecticut 06901
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, Including Area Code (203) 975-7110
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
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(Title of Class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X ] No [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates, computed by reference to the price at which the Registrant's
Common Stock was last sold as of June 28, 2002, the last business day of the
Registrant's most recently completed second fiscal quarter, was approximately
$435.6 million. Common Stock of the Registrant held by executive officers and
directors of the Registrant has been excluded from this computation in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not a conclusive determination for other purposes.
As of March 1, 2003, the number of shares outstanding of the Registrant's Common
Stock, par value $0.01 per share, was 18,239,242.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on June 5, 2003 are incorporated by reference in Part
III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Page
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Part I........................................................................................... 1
Item 1. Business........................................................................... 1
Item 2. Properties.........................................................................13
Item 3. Legal Proceedings..................................................................15
Item 4. Submission of Matters to a Vote of Security Holders................................15
PART II..........................................................................................16
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..............16
Item 6. Selected Financial Data............................................................16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.........................................................................19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................35
Item 8. Financial Statements and Supplementary Data........................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.........................................................................36
PART III.........................................................................................37
Item 10. Directors and Executive Officers of the Registrant.................................37
Item 11. Executive Compensation.............................................................37
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters............. ...............................................37
Item 13. Certain Relationships and Related Transactions.....................................37
Item 14. Controls and Procedures............................................................37
PART IV..........................................................................................38
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..................38
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PART I
Item 1. Business.
General
We are a leading North American manufacturer of metal and plastic consumer
goods packaging products. We had consolidated net sales of $1.988 billion in
2002. Our products are used for a wide variety of end markets and we have 68
manufacturing plants throughout North America. Our product lines include:
o steel and aluminum containers for human and pet food;
o custom designed plastic containers, tubes and closures for personal
care, health care, pharmaceutical, household and industrial chemical,
food, pet care, agricultural chemical, automotive and marine chemical
products; and
o metal, composite and plastic closures for food and beverage products.
We are the largest manufacturer of metal food containers in North America,
with a unit volume market share in the United States of approximately 49 percent
in 2002. Our leadership in this market is driven by our high levels of quality,
service and technological support, low cost producer position, strong long-term
customer relationships and our proximity to customers through our widespread
geographic presence. We believe that we have the most comprehensive equipment
capabilities in the industry. For 2002, our metal food container business had
net sales of $1.487 billion (approximately 75 percent of our consolidated net
sales) and income from operations of $120.6 million (approximately 70 percent of
our consolidated income from operations). Additionally, with our acquisition in
March 2003 of the remaining 65 percent equity interest in Amcor White Cap, LLC,
or White Cap, that we did not already own, we are also a leading manufacturer of
metal and plastic vacuum closures in North America for food and beverage
products. Following the acquisition, we renamed this business Silgan Closures
LLC.
We are a leading manufacturer of plastic containers in North America for
personal care products. Our success in the plastic packaging market is largely
due to our demonstrated ability to provide high levels of quality, service and
technological support, our value-added design-focused products and our extensive
geographic presence. We produce plastic containers from a full range of resin
materials and offer a comprehensive array of molding and decorating
capabilities. For 2002, our plastic container business had net sales of $501.3
million (approximately 25 percent of our consolidated net sales) and income from
operations of $52.9 million (approximately 30 percent of our consolidated income
from operations).
Our customer base includes some of the world's best-known branded consumer
products companies. Our philosophy has been to develop long-term customer
relationships by acting in partnership with our customers by providing reliable
quality, service and technological support and utilizing our low cost producer
position. The strength of our customer relationships is evidenced by our large
number of multi-year supply contracts, our high retention of customers' business
and our continued recognition from customers, as demonstrated by the many
quality and service awards we have received. We estimate that in 2003
approximately 85 percent of our projected metal food container sales and a
majority of our projected plastic container sales will be under multi-year
supply arrangements.
Our objective is to increase shareholder value through efficiently
deploying capital and management resources to grow our business and reduce costs
of existing operations and to complete acquisitions that generate attractive
cash returns. We believe that we will accomplish this goal because of our
leading market positions and management expertise in acquiring, financing,
integrating and efficiently operating consumer goods packaging businesses.
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We were founded in 1987 by our Co-Chief Executive Officers, R. Philip
Silver and D. Greg Horrigan, former members of senior management of the
packaging operations of Continental Group Inc., or Continental Can, which in the
mid-1980's was one of the largest packaging companies in the world. Our senior
executive management has on average 25 years of experience in the packaging
industry. Mr. Silver and Mr. Horrigan have approximately a 39 percent ownership
interest in Silgan Holdings. Management's large ownership interest in Silgan
Holdings fosters an entrepreneurial management style and places a primary focus
on creating shareholder value.
Our History
Since our inception in 1987, we have acquired nineteen businesses. Most
recently, in March, 2003 we acquired the remaining 65 percent equity interest in
White Cap that we did not already own. This business manufactures metal,
composite and plastic closures for food and beverage products. In January, 2003,
we also acquired substantially all of the assets of Thatcher Tubes LLC and its
affiliates, or Thatcher Tubes, a manufacturer of decorated plastic tubes
primarily for personal care products. Additionally, we have recently announced
that we will acquire PCP Can Manufacturing, Inc., or PCP Can Manufacturing, a
subsidiary of Pacific Coast Producers, or PCP, through which PCP
self-manufactures its metal food containers. This acquisition is expected to
close in April 2003. As part of this announced acquisition, we will also be
entering into a long-term supply agreement with PCP for its requirements of
metal food containers.
As a result of the benefits of acquisitions and organic growth, we have
increased our overall share of the U.S. metal food container market from
approximately 10 percent in 1987 to approximately 49 percent in 2002. Our
plastic container business has also improved its market position since 1987,
with sales increasing more than fivefold to $501.3 million in 2002. The
following chart shows our acquisitions since our inception:
Acquired Business Year Products
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Nestle Food Company's metal container 1987 Metal food containers
manufacturing division
Monsanto Company's plastic container business 1987 Plastic containers
Fort Madison Can Company of The Dial 1988 Metal food containers
Corporation
Seaboard Carton Division of Nestle Food 1988 Paperboard containers
Company
Aim Packaging, Inc. 1989 Plastic containers
Fortune Plastics Inc. 1989 Plastic containers
Express Plastic Containers Limited 1989 Plastic containers
Amoco Container Company 1989 Plastic containers
Del Monte Corporation's U.S. can 1993 Metal food containers
manufacturing operations
Food Metal and Specialty business of 1995 Metal food containers,
American National Can Company steel closures and Omni
plastic containers
Finger Lakes Packaging Company, Inc., a 1996 Metal food containers
subsidiary of Birds Eye Foods, Inc.
Alcoa Inc.'s North American aluminum roll-on 1997 Aluminum roll-on
closure business closures
Rexam plc's North American plastic container 1997 Plastic containers and
business closures
Winn Packaging Co. 1998 Plastic containers
Campbell Soup Company's steel container 1998 Metal food containers
manufacturing business
Clearplass Containers, Inc. 1998 Plastic containers
RXI Holdings, Inc. 2000 Plastic containers and
plastic closures, caps,
sifters and fitments
Thatcher Tubes LLC 2003 Plastic tubes
Amcor White Cap, LLC 2003 Metal, composite and
plastic closures
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Our Strategy
We intend to enhance our position as a leading supplier of consumer goods
packaging products by continuing to aggressively pursue a strategy designed to
achieve future growth and increase shareholder value by focusing on the
following key elements:
Expand Through Acquisitions That Generate Attractive Cash Returns and Through
Internal Growth
We intend to continue to increase our market share in our current business
lines through acquisitions and internal growth. We use a disciplined approach to
acquire businesses that generate attractive cash returns. As a result, we expect
to continue to expand and diversify our customer base, geographic presence and
product lines. This strategy has enabled us to rapidly increase our net sales
and income from operations, which have grown at a compound annual growth rate of
11.0 percent and 14.1 percent, respectively, since 1994.
During the past fifteen years, the metal food container market has
experienced significant consolidation primarily due to the desire by food
processors to reduce costs and focus resources on their core operations rather
than self-manufacture their metal food containers. Our acquisitions of the metal
food container manufacturing operations of Nestle Food Company, or Nestle, The
Dial Corporation, or Dial, Del Monte Corporation, or Del Monte, Birds Eye Foods,
Inc., or Birds Eye, and Campbell Soup Company, or Campbell, as well as our
recently announced acquisition of PCP Can Manufacturing, reflect this trend. We
estimate that approximately 10 percent of the market for metal food containers
is still served by self-manufacturers.
We have improved our market position for our plastic container business
since 1987, with sales increasing more than fivefold to $501.3 million in 2002.
We achieved this improvement primarily through strategic acquisitions, including
most recently Thatcher Tubes, as well as through internal growth. The plastic
container business of the consumer goods packaging industry is highly
fragmented, and we intend to pursue further consolidation opportunities in this
market. We also believe that we can successfully apply our acquisition and
operating expertise to new markets of the consumer goods packaging industry.
With our acquisition of Thatcher Tubes in January 2003, we extended our business
into decorated plastic tubes primarily for personal care products to complement
our plastic container business. Additionally, with our acquisition of RXI
Holdings, Inc., or RXI, in October 2000 we expanded our business into plastic
closures, caps, sifters and fitments and thermoformed plastic tubs. We expect to
continue to generate internal growth in our plastic container business. For
example, we intend to aggressively market our decorated plastic tubes and
plastic closures to existing customers of our plastic container business.
Additionally, we intend to continue to expand our customer base in the markets
that we serve, such as the personal care, health care, pharmaceutical, household
and industrial chemical, food, pet care, agricultural chemical, automotive and
marine chemical markets.
In March 2003, we acquired the remaining 65 percent equity interest in
White Cap that we did not already own for a purchase price of $37.1 million in
cash and refinanced approximately $90 million of debt of the business. The
business is a leading manufacturer of metal and plastic vacuum closures in North
America for food and beverage products with seven manufacturing facilities in
the United States and Mexico. In 2002, the business had approximately $250
million of net sales. Previously, in July 2001 we had contributed our metal
closure business to White Cap for $32.4 million in cash and a 35 percent equity
interest. In 2000, our metal closure business had net sales of approximately $90
million and, unlike White Cap, did not have a market leading position or the
capability to manufacture plastic or composite closures for food and beverage
products.
Enhance Profitability of Acquired Companies Through Productivity Improvements
and Cost Reductions
We intend to continue to enhance profitability through productivity and
cost reduction opportunities from acquired businesses. The additional sales and
production capacity provided through
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acquisitions have enabled us to rationalize plant operations and decrease
overhead costs through plant closings and downsizings. In addition, we expect
that our acquisitions will continue to enable us to realize manufacturing
efficiencies as a result of optimizing production scheduling and minimizing
product transportation costs. We expect to continue to benefit from economies of
scale and from the elimination of redundant selling and administrative
functions. We also expect that our recent acquisitions will provide us with
additional opportunities to enhance profitability through productivity and cost
reduction opportunities as well as manufacturing efficiencies. In addition to
the benefits realized through the integration of acquired businesses, we have
improved the operating performance of our plant facilities by investing capital
for productivity improvements and manufacturing cost reductions.
Supply "Best Value" Packaging Products With High Levels of Quality, Service and
Technological Support
Since our inception we have been, and intend to continue to be, devoted to
consistently supplying our products with the combination of quality, price and
service that our customers consider to be "best value." Within our metal food
container business, we focus on providing high quality and high levels of
service and utilizing our low cost producer position. We have made, and are
making, significant capital investments to offer our customers value added
features such as convenience ends for our metal food containers. Within our
plastic container business, we provide high levels of quality and service and
focus on value added, custom designed plastic containers to meet changing
product and packaging demands of brand owners. With our acquisition of Thatcher
Tubes, we believe that we are one of the few plastic packaging businesses that
can custom design and manufacture both plastic containers and plastic tubes,
providing the customer with the ability to satisfy more of its plastic packaging
needs through one supplier Furthermore, with our acquisition of RXI, we also
believe that we are one of the few businesses that can custom design and
manufacture both plastic containers and plastic closures. We will continue to
supply customized products that can be delivered quickly to our customers with
superior levels of design, development and technology support.
Maintain Low Cost Producer Position
We will continue pursuing opportunities to strengthen our low cost
position in our business by:
o maintaining a flat, efficient organizational structure, resulting in
low selling, general and administrative expenses as a percentage of
consolidated net sales;
o achieving and maintaining economies of scale;
o investing in new technologies to increase manufacturing and production
efficiency;
o rationalizing our existing plant structure; and
o serving our customers from our strategically located plants.
Through our facilities dedicated to our metal food container products, we
believe that we provide the most comprehensive equipment capabilities in the
industry. Through our facilities dedicated to our plastic container products, we
have the capacity to manufacture customized products across the entire spectrum
of resin materials, decorating techniques and molding processes required by our
customers. We also have the ability to provide our customers with plastic
containers and plastic tubes that are custom designed as well as plastic
closures. We intend to leverage our manufacturing, design, and engineering
capabilities to continue to create cost-effective manufacturing systems that
will drive our improvements in product quality, operating efficiency and
customer support.
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Utilize Leverage to Support Growth and Increase Shareholder Value
Our financial strategy is to use leverage to support our growth and
increase shareholder returns. Our stable and predictable cash flow, generated
largely as a result of our long-term customer relationships and generally
recession resistant business, supports our financial strategy. We intend to
continue using leverage, supported by our stable cash flows, to make
value-enhancing acquisitions. In the absence of attractive acquisition
opportunities, we intend to use our free cash flow to repay indebtedness or for
other permitted purposes. For example, we did not complete any acquisitions
during 2002 or 2001, and over that period we reduced our total debt by $73.9
million and increased our cash balances by $38.2 million.
Business Segments
We are a holding company that conducts our business through two wholly
owned operating subsidiaries, Silgan Containers Corporation, or Silgan
Containers, and Silgan Plastics Corporation, or Silgan Plastics. Silgan
Containers includes our metal food container operations and our metal, composite
and plastic food and beverage closure operations, and Silgan Plastics includes
our plastic container, tube and closure operations.
Metal Food Containers--75 percent of our consolidated net sales in 2002
We are the largest manufacturer of metal food containers in North America,
with a unit volume market share in the United States of 49 percent in 2002. Our
metal food container business is engaged in the manufacture and sale of steel
and aluminum containers that are used primarily by processors and packagers for
food products, such as metal containers for soup, vegetables, fruit, meat,
tomato based products, coffee, seafood, adult nutritional drinks, pet food and
other miscellaneous food products. For 2002, our metal food container business
had net sales of $1.487 billion (approximately 75 percent of our consolidated
net sales) and income from operations of $120.6 million (approximately 70
percent of our consolidated income from operations). Since 1994, our metal food
container business has realized compound annual unit sales growth of
approximately 10 percent. We estimate that approximately 85 percent of our
projected metal food container sales in 2003 will be pursuant to multi-year
supply arrangements.
Although metal containers face competition from plastic, paper, glass and
composite containers, we believe metal containers are superior to plastic and
paper containers in applications where the contents are processed at high
temperatures or packaged in larger consumer or institutional quantities or where
the long-term storage of the product is desirable while maintaining the
product's quality. We also believe that metal containers are generally more
desirable than glass containers because metal containers are more durable and
less costly to transport.
With our acquisition in March 2003 of the remaining 65 percent equity
interest in White Cap, we are also a leading manufacturer of metal and plastic
vacuum closures in North America for food and beverage products, such as juices
and juice drinks, ready-to-drink tea and coffee, sports drinks, ketchup, salsa,
pickles, tomato sauce, soup, cooking sauces, gravies, beer and liquor, fruit,
vegetables, preserves, baby food, baby juice, infant formula and dairy products.
This business also provides customers with sealing/capping equipment to
complement its closure product offering. As a result of our extensive range of
metal, composite and plastic closures and our geographic presence, we believe
that we are well-positioned to serve food and beverage product companies for
their closure needs.
Plastic Containers--25 percent of our consolidated net sales in 2002
We are one of the leading manufacturers of custom designed high density
polyethylene, or HDPE, and polyethylene terephthalate, or PET, containers for
the personal care market in North America. We produce plastic containers from a
full range of resin materials and offer a comprehensive array of molding and
decorating capabilities. Approximately 58 percent of Silgan Plastics' sales in
2002
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were to the personal care and health care markets. For 2002, Silgan Plastics had
net sales of $501.3 million (approximately 25 percent of our consolidated net
sales) and income from operations of $52.9 million (approximately 30 percent of
our consolidated income from operations). Since 1987, we have improved our
market position for our plastic container business, with sales increasing more
than fivefold.
We manufacture custom designed and stock HDPE containers for personal care
and health care products, including containers for shampoos, conditioners, hand
creams, lotions, cosmetics and toiletries; household and industrial chemical
products, including containers for scouring cleaners, cleaning agents and lawn
and garden chemicals; and pharmaceutical products, including containers for
tablets, antacids and eye cleaning solutions. We manufacture custom designed and
stock PET containers for mouthwash, shampoos, conditioners, respiratory and
gastrointestinal products, liquid soap, skin care lotions, peanut butter, salad
dressings, condiments, premium bottled water and liquor. We also manufacture
plastic containers, closures, caps, sifters and fitments for food, household and
pet care products, including salad dressings, peanut butter, spices, liquid
margarine, powdered drink mixes, arts and crafts supplies and kitty litter, as
well as thermoformed plastic tubs for personal care and household products,
including soft fabric wipes. As a result of our acquisition of Thatcher Tubes,
we manufacture plastic tubes primarily for personal care products such as skin
lotions and hair treatment products. Additionally, we manufacture our licensed
Omni plastic container (a multi-layer microwaveable and retortable plastic bowl)
for food products and our proprietary Polystar easy-open plastic end which we
market with our Omni plastic container as an all-plastic microwaveable package.
Our leading position in the plastic container market is largely driven by
our rapid response to our customers' design, development and technology support
needs. Our value-added, diverse product line is the result of our ability to
produce plastic containers from a full range of resin materials using a broad
array of manufacturing, molding and decorating capabilities. With our
acquisition of Thatcher Tubes, we now have the ability to manufacture decorated
plastic tubes for our customers. We benefit from our large scale and nationwide
presence, as significant consolidation is occurring in many of our customers'
markets. Through these capabilities, we are well-positioned to serve our
personal care market customers, who demand customized solutions as they continue
to seek innovative means to differentiate their products in the marketplace
using packaging.
Manufacturing and Production
As is the practice in the industry, most of our customers provide us with
quarterly or annual estimates of products and quantities pursuant to which
periodic commitments are given. These estimates enable us to effectively manage
production and control working capital requirements. We schedule our production
to meet customers' requirements. Because the production time for our products is
short, the backlog of customer orders in relation to our sales is not material.
As of March 1, 2003, we operated 68 manufacturing facilities, geographically
dispersed throughout the United States, Canada and Mexico, that serve the
distribution needs of our customers.
Metal Food Container Business
The manufacturing operations of our metal food container business include
cutting, coating, lithographing, fabricating, assembling and packaging finished
cans. We use three basic processes to produce cans. The traditional three-piece
method requires three pieces of flat metal to form a cylindrical body with a
welded side seam, a bottom and a top. High integrity of the side seam is assured
by the use of sophisticated electronic weld monitors and organic coatings that
are thermally cured by induction and convection processes. The other two methods
of producing cans start by forming a shallow cup that is then formed into the
desired height using either the draw and iron process or the draw and redraw
process. Using the draw and redraw process, we manufacture steel and aluminum
two-piece cans, the height of which generally does not exceed the diameter. For
cans the height of which is greater than the diameter, we manufacture steel
two-piece cans by using a drawing and ironing process. Quality and stackability
of these cans are comparable to that of the shallow two-piece cans described
above. We
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manufacture can bodies and ends from thin, high-strength aluminum alloys and
steels by utilizing proprietary tool and die designs and selected can making
equipment.
The manufacturing operations for metal closures include cutting, coating,
lithographing, fabricating and lining closures. We manufacture lug style steel
closures and aluminum roll-on closures for glass and plastic containers, ranging
in size from 18 to 110 millimeters in diameter. We employ state-of-the-art
multi-die presses to manufacture metal closures, offering a low-cost, high
quality means of production. Plastic closures are manufactured using both
injection and compression molded processes. In the injection molded process,
pellets of plastic resin are heated and injected into a mold, forming a plastic
closure shell. In the compression molded process, pellets of plastic resin are
heated and extruded, and then compressed to form a plastic closure shell. In
both processes, the shell is then lined, slit and printed depending on its end
use. For composite closures, a metal panel is manufactured using the same
manufacturing process for metal closures, and then it is inserted into a plastic
closure shell.
Plastic Container Business
We utilize two basic processes to produce plastic containers. In the
extrusion blowmolding process, pellets of plastic resin are heated and extruded
into a tube of plastic. A two-piece metal mold is then closed around the plastic
tube and high pressure air is blown into it causing a bottle to form in the
mold's shape. In the injection and injection stretch blowmolding processes,
pellets of plastic resin are heated and injected into a mold, forming a plastic
preform. The plastic preform is then blown into a bottle-shaped metal mold,
creating a plastic bottle.
In our proprietary plastic tube manufacturing process, we continually
extrude a plastic tube in various diameters from pellets of plastic resin. A
neck finish is then compression molded onto the plastic tube. The plastic tube
is then decorated, and a cap or closure is put on the decorated plastic tube
before it is shipped to the customer.
We also manufacture plastic closures, caps, sifters and fitments using
runnerless injection molding technology. In this process, pellets of plastic
resin are melted and forced under pressure into a mold, where they take the
mold's shape. Our thermoformed plastic tubs are manufactured by melting pellets
of plastic resin into a plastic sheet. The plastic sheets are then stamped by
hot molds to form plastic tubs. Our Omni plastic containers are manufactured
using a plastic injection blowmolding process where dissimilar pellets of
plastic are heated and co-injected in a proprietary process to form a five-layer
preform, which is immediately transferred to a blowmold for final shaping. We
designed the equipment for this manufacturing process, and the equipment
utilizes a variety of proprietary processes to make rigid plastic containers
capable of holding processed foods for extended shelf lives. We manufacture Omni
plastic containers pursuant to a royalty-free, perpetual license with American
National Can Company, or ANC, which was entered into at the time of our
acquisition of the Food Metal and Specialty business of ANC.
We have state-of-the-art decorating equipment, including several of the
largest sophisticated decorating facilities in the country. Our decorating
methods for plastic containers are in-mold labeling, which applies a plastic
film label to the bottle during the blowing process, and post-mold decoration.
For plastic tubes, we offer all commercially available post-mold decoration
technologies. Post-mold decoration includes:
o silk screen decoration which enables the applications of images in
multiple colors to the bottle;
o pressure sensitive decoration which uses a plastic film or paper label
with an adhesive;
o heat transfer decoration which uses a plastic coated label applied by
heat; and
o hot stamping decoration which transfers images from a die using
metallic foils.
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Raw Materials
We do not believe that we are materially dependent upon any single supplier
for any of our raw materials, and, based upon the existing arrangements with
suppliers, our current and anticipated requirements and market conditions, we
believe that we have made adequate provisions for acquiring raw materials.
Increases in the prices of raw materials have generally been passed along to our
customers in accordance with our multi-year supply arrangements and otherwise.
Metal Food Container Business
We use tin plated and chromium plated steel, aluminum, copper wire, organic
coatings, lining compound and inks in the manufacture and decoration of our
metal food container products. We use tin plated and chromium plated steel,
aluminum, organic coatings, low-metallic inks and pulpboard, plastic and organic
lining materials in the manufacture of metal closures. We use resins in pellet
form, such as homopolymer, polypropylene, copolymer polypropylene and HDPE,
thermoplastic elastomer lining materials, processing additives and colorants in
the manufacture of plastic closures. Our material requirements are supplied
through contracts and purchase orders with suppliers with whom we have long-term
relationships. If our suppliers fail to deliver under their arrangements, we
would be forced to purchase raw materials on the open market, and no assurances
can be given that we would be able to make the purchases at comparable prices or
terms. We believe that we will be able to purchase sufficient quantities of
steel and aluminum can sheet for the foreseeable future.
Plastic Container Business
The raw materials we use in our plastic container business are primarily
resins in pellet form such as virgin HDPE, virgin PET, recycled HDPE, recycled
PET, polypropylene and, to a lesser extent, polystyrene, low density
polyethylene, polyethylene terephthalate glycol, polyvinyl chloride and medium
density polyethylene. Our resin requirements are acquired through multi-year
arrangements for specific quantities of resins with several major suppliers of
resins. The price that we pay for resin raw materials is not fixed and is
subject to market pricing. We believe that we will be able to purchase
sufficient quantities of resins for the foreseeable future.
Sales and Marketing
Our philosophy has been to develop long-term customer relationships by
acting in partnership with our customers, providing reliable quality and
service. We market our products in most areas of North America primarily by a
direct sales force and for our plastic container business, in part, through a
network of distributors. Because of the high cost of transporting empty
containers, our metal food and plastic container businesses generally sell to
customers within a 300 mile radius of their manufacturing plants.
In 2002, 2001, and 2000, approximately 13 percent, 11 percent, and 12
percent, respectively, of our sales were to Nestle; approximately 10 percent, 10
percent, and 11 percent, respectively, of our sales were to Del Monte; and
approximately 12 percent, 12 percent, and 11 percent, respectively, of our sales
were to Campbell. No other customer accounted for more than 10 percent of our
total sales during those years.
Metal Food Container Business
We are the largest manufacturer of metal food containers in North America,
with a unit sale market share in 2002 in the United States of approximately 49
percent. Our largest customers for this segment include Nestle, Campbell, Del
Monte, General Mills, Inc., ConAgra Foods Inc., Unilever, N.V., Hormel Foods
Corp., or Hormel, Kraft Foods Inc., or Kraft, Signature Fruit Company, Mead
Johnson Nutritionals, a subsidiary of Bristol-Myers Squibb Company, and Dial.
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We have entered into multi-year supply arrangements with many of our
customers, including Nestle, Del Monte, Campbell and several other major food
producers. We estimate that approximately 85 percent of our projected metal food
container sales in 2003 will be pursuant to multi-year supply arrangements.
Historically, we have been successful in continuing these multi-year supply
arrangements with our customers.
Since our inception in 1987, we have supplied Nestle with substantially all
of its U.S. metal container requirements purchased from third party
manufacturers. In 2002, our total sales of metal containers to Nestle were
$241.0 million.
We currently have three supply agreements with Nestle under which we supply
Nestle with a large majority of its U.S. metal container requirements
(representing approximately 9.5 percent of our consolidated 2002 sales and,
together with additional sales to Nestle under purchase orders, approximately
12.1 percent of our consolidated 2002 sales). The terms of the Nestle agreements
continue through 2008 for approximately half of the metal container sales under
the Nestle agreements. The terms of the Nestle agreements for the remaining
metal containers currently supplied thereunder continue through 2004.
The Nestle agreements provide for certain prices and specify that those
prices will be increased or decreased based upon cost change formulas. These
agreements contain provisions that require us to maintain levels of product
quality, service and delivery in order to retain the business. In the event we
breach any one of the agreements, Nestle may terminate the agreement but the
other Nestle agreements would remain in effect.
Under limited circumstances, Nestle may provide to us a competitive bid for
metal container sales under these agreements. We have the right to retain the
business subject to the terms of the bid. In the event we choose not to match
the bid, the Nestle agreements will terminate only with respect to the metal
containers which are the subject of the bid.
In connection with our acquisition of Del Monte's U.S. metal container
manufacturing operations in December 1993, we entered into a supply agreement
with Del Monte. Del Monte has agreed to purchase from us substantially all of
its annual requirements for metal containers to be used for the packaging of
food and beverages in the United States. The term of the Del Monte agreement
continues until December 21, 2006. In 2002, our sales of metal containers to Del
Monte amounted to $197.3 million.
The Del Monte agreement provides certain prices for our metal containers
and specifies that those prices will be increased or decreased based upon
specified cost change formulas. Del Monte may, under certain circumstances,
receive proposals from independent commercial can manufacturers for the supply
of containers of a type and quality similar to the metal containers that we
furnish to Del Monte. The proposals must be for the remainder of the term of the
Del Monte agreement and for 100 percent of the annual volume of containers at
one or more of Del Monte's processing facilities. We have the right to retain
the business subject to the terms and conditions of the competitive proposal. In
addition, during the term of our agreement, Del Monte is not permitted to
purchase pursuant to the proposals more than 50 percent of its metal containers
from any other suppliers.
In connection with our June 1998 acquisition of the steel container
manufacturing business of Campbell, or CS Can, we entered into a ten-year supply
agreement with Campbell. Campbell has agreed to purchase from us substantially
all of its steel container requirements to be used for the packaging of foods
and beverages in the United States. In 2002, our sales of metal containers to
Campbell were $227.0 million.
The Campbell agreement provides certain prices for containers supplied by
us to Campbell and specifies that those prices will be increased or decreased
based upon specified cost change formulas. The Campbell agreement permits
Campbell, beginning in June 2003, to receive proposals from independent
-9-
commercial can manufacturers for the supply of containers of a type and quality
similar to the metal containers that we supply to Campbell. The proposals must
be for the remainder of the term of the Campbell agreement and for 100 percent
of the annual volume of containers at one or more of Campbell's food processing
plants. We have the right to retain the business subject to the terms and
conditions of the competitive proposal. Upon any material breach by us, Campbell
has the right to terminate this agreement. In addition, Campbell has the right,
at the end of the term of the Campbell agreement or upon the occurrence of
specified material defaults under other agreements with Campbell, to purchase
from us the assets used to manufacture containers for Campbell. These assets are
located at the facilities we lease from Campbell. The purchase price for the
assets would be determined at the time of purchase in accordance with an agreed
upon formula that is based upon the net book value of the assets.
With the acquisition of White Cap in March 2003, we are a leading
manufacturer of metal and plastic vacuum closures in North America for food and
beverage products. The largest customers of that business include Pepisco Inc.,
The Coca-Cola Company, Campbell, H.J. Heinz Company, Cadbury Schweppes plc,
Unilever, N.V., Dean Foods Company, Ocean Spray Cranberries, Inc. and The JM
Smucker Company. The business has entered into multi-year supply arrangements
with many of its customers.
Plastic Container Business
We are one of the leading manufacturers of custom designed and stock HDPE
and PET containers sold in North America. We market our plastic containers,
tubes and closures in most areas of North America through a direct sales force,
through a large network of distributors and, more recently, through e-commerce.
We are a leading manufacturer of plastic containers in North America for
personal care products. Approximately 58 percent of our plastic containers are
sold for personal care and health care products, such as hair care, skin care
and oral care, and pharmaceutical products. Our largest customers in these
product segments include Unilever Home and Personal Care North America (a unit
of Unilever, N.V.), Pfizer Inc., The Procter & Gamble Company, L'Oreal, Avon
Products Inc., Alberto Culver USA, Inc., Johnson & Johnson and Neutrogena
Corporation.
With our acquisition of Thatcher Tubes in January 2003, we also manufacture
decorated plastic tubes, primarily for personal care products. Customers of this
product segment include Johnson & Johnson, Neutrogena Corporation, Alberto
Culver USA, Inc. and L'Oreal.
We also manufacture plastic containers for food and beverage, pet care and
household and industrial chemical products. Customers for these product lines
include The Procter & Gamble Company, The Clorox Company, Nestle's Purina Pet
Care, Kraft and S.C. Johnson & Sons, Inc. In addition, we manufacture plastic
closures, caps, sifters and fitments for food, household and pet care products,
as well as thermoformed plastic tubs for personal care and household products
and Omni plastic bowls for microwaveable prepared foods. Customers for these
product lines include Lipton (a unit of Unilever Home and Personal Care North
America), The Kroger Company, McCormick & Company, Incorporated, Nice-Pak
Products, Inc., Nestle's Purina Pet Care, Campbell and Hormel.
We have arrangements to sell some of our plastic containers and closures to
distributors, who in turn resell those products primarily to regional customers.
Plastic containers sold to distributors are manufactured by using generic and
custom molds with decoration added to meet the end users' requirements. The
distributors' warehouses and their sales personnel enable us to market and
inventory a wide range of such products to a variety of customers.
We have written purchase orders or contracts for the supply of containers
with the majority of our customers. In general, these purchase orders and
contracts are for containers made from proprietary molds and are for a duration
of one to seven years.
-10-
Competition
The packaging industry is highly competitive. We compete in this industry
with other packaging manufacturers as well as fillers, food processors and
packers who manufacture containers for their own use and for sale to others. We
attempt to compete effectively through the quality of our products, competitive
pricing and our ability to meet customer requirements for delivery, performance
and technical assistance.
Because of the high cost of transporting empty containers, our metal food
and our plastic container businesses generally sell to customers within a 300
mile radius of our manufacturing plants. Strategically located existing plants
give us an advantage over competitors from other areas, but we could be
disadvantaged by the relocation of a major customer.
Metal Food Container Business
Of the commercial metal food container manufacturers, Crown Cork and Seal
Company, Inc. and Ball Corporation are our most significant national
competitors. As an alternative to purchasing containers from commercial can
manufacturers, customers have the ability to invest in equipment to
self-manufacture their containers.
Although metal containers face competition from plastic, paper, glass and
composite containers, we believe that metal containers are superior to plastic
and paper containers in applications, where the contents are processed at high
temperatures or packaged in larger consumer or institutional quantities or where
long-term storage of the product is desirable while maintaining the product's
quality. We also believe that metal containers are more desirable generally than
glass containers because metal containers are more durable and less costly to
transport.
Our metal, composite and plastic closure business competes with Crown Cork
and Seal Company, Inc., Alcoa Closure Systems International, Inc.,
Owens-Illinois, Inc., Kerr Group, Inc. and Portola Packaging, Inc.
Plastic Container Business
Our plastic container business competes with a number of large national
producers of plastic containers, tubes and closures for personal care, health
care, pharmaceutical, household and industrial chemical, food, pet care,
agricultural chemical, automotive and marine chemical products. These
competitors include Owens-Illinois, Inc., Crown Cork and Seal Company, Inc.,
Plastipak Packaging Inc., Consolidated Container Company LLC, Rexam plc, CCL
Industries Inc., Tubed Products, Inc. and Cebal Americas. To compete effectively
in the constantly changing market for plastic containers, tubes and closures, we
must remain current with, and to some extent anticipate, innovations in resin
composition and applications and changes in the technology for the manufacturing
of plastic containers, tubes and closures.
Employees
As of December 31, 2002, we employed approximately 1,400 salaried and 5,700
hourly employees on a full-time basis. Approximately 52 percent of our hourly
plant employees as of that date were represented by a variety of unions. In
addition, as of December 31, 2002, in connection with our acquisition of
Campbell's steel container manufacturing business, Campbell provided us with
approximately 200 hourly employees on a full-time basis at one of the facilities
that we lease from Campbell.
-11-
Our labor contracts expire at various times between 2003 and 2007. As of
December 31, 2002, contracts covering approximately 14% of our hourly employees
will expire during 2003. We expect no significant changes in our relations with
these unions.
Regulation
We are subject to federal, state and local environmental laws and
regulations. In general, these laws and regulations limit the discharge of
pollutants into the environment and establish standards for the treatment,
storage, and disposal of solid and hazardous waste. We believe that all of our
facilities are either in compliance in all material respects with all presently
applicable environmental laws and regulations or are operating in accordance
with appropriate variances, delayed compliance orders or similar arrangements.
In addition to costs associated with regulatory compliance, we may be held
liable for alleged environmental damage associated with the past disposal of
hazardous substances. Those that generate hazardous substances that are disposed
of at sites at which environmental problems are alleged to exist, as well as the
owners of those sites and other classes of persons, are subject to claims under
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, or CERCLA, regardless of fault or the legality of the original disposal.
CERCLA and many similar state statutes may hold a responsible party liable for
the entire cleanup cost at a particular site even though that party may not have
caused the entire problem. Other state statutes may impose proportionate rather
than joint and several liability. The federal Environmental Protection Agency or
a state agency may also issue orders requiring responsible parties to undertake
removal or remedial actions at sites.
We are also subject to the Occupational Safety and Health Act and other
laws regulating noise exposure levels and other safety and health concerns in
the production areas of our plants.
On June 18, 2001, we received a fine from the Jefferson County, Alabama
Department of Health for $2.3 million for alleged air violations at our Tarrant
City, Alabama leased facility. The alleged violations stem from activities
occurring during the facility's ownership by a predecessor owner, which we
discovered and voluntarily disclosed to the Jefferson County agency in 2000.
Initial review of the fine indicates that most of it is related to our alleged
"economic benefit" for operating certain equipment without upgraded control
devices that the former owner should have installed. Based on the discovery of
these alleged violations, we filed an indemnity claim against the former owner
seeking to offset any costs or penalties we incur. We are reviewing this matter
with Jefferson County, as well as all of our legal options. We do not expect to
incur any material liability in excess of the indemnification available to us.
Our management does not believe that any of the regulatory matters
described above, individually or in the aggregate, will have a material effect
on our capital expenditures, earnings, financial position or competitive
position.
Research and Product Development
Our research, product development and product engineering efforts relating
to our metal food container business are conducted at our research facility in
Oconomowoc, Wisconsin. Our research, product development and product engineering
efforts with respect to our plastic container business are performed by our
manufacturing and engineering personnel located at our Norcross, Georgia
facility. In addition to research, product development and product engineering,
these sites also provide technical support to our customers. The amounts we have
spent on research and development during the last three fiscal years are not
material.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q and
current reports on Form 8-K, proxy statements and other information with the
Securities and Exchange Commission, or the
-12-
SEC. You may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, Washington, D.C. 20549. You may
obtain information on the operation of the SEC's Public Reference Room by
calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains
annual, quarterly and current reports, proxy statements and other information
that issuers (including the Company) file electronically with the SEC. The
internet address of the SEC's website is http://www.sec.gov.
We maintain a website, the internet address of which is www.silgan.com.
Information contained on our website is not part of this Annual Report. We do
not currently make available free of charge on or through our website our annual
reports on Form 10-K, quarterly reports on Form 10-Q or current reports on Form
8-K (or any amendments to those reports) or Forms 3, 4 and 5 filed on behalf of
our directors and executive officers because such reports and forms are readily
available at the SEC, including through the SEC's website. However, we are
currently reviewing alternatives to, and intend in the near future to, make
available free of charge on or through our website such reports and forms.
Presently, we provide a link to EDGAR Online on our website through which such
reports and forms are available if you subscribe to EDGAR Online. We will
provide paper copies of such reports and forms and of our other filings with the
SEC free of charge upon request to Silgan Holdings Inc., 4 Landmark Square,
Suite 400, Stamford, CT 06901, Attention: Corporate Secretary, or through our
website.
Item 2. Properties.
Our principal executive offices are located at 4 Landmark Square, Suite
400, Stamford, Connecticut 06901. The administrative headquarters and principal
places of business for our metal food container and plastic container businesses
are located at 21800 Oxnard Street, Woodland Hills, California 91367 and 14515
N. Outer Forty, Chesterfield, Missouri 63017, respectively. We lease all of
these offices.
We own and lease properties for use in the ordinary course of business. The
properties consist primarily of 41 operating facilities for the metal food
container business and 27 operating facilities for the plastic container
business. We own 29 of these facilities and lease 39. The leases expire at
various times through 2020. Some of these leases provide renewal options as well
as various purchase options.
-13-
Below is a list of our operating facilities, including attached warehouses,
as of March 1, 2003 for our metal food container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Tarrant, AL........................ 89,100 (leased)
Antioch, CA........................ 144,500 (leased)
Kingsburg, CA...................... 35,600 (leased)
Modesto, CA........................ 37,800 (leased)
Modesto, CA........................ 128,000 (leased)
Modesto, CA........................ 150,000 (leased)
Riverbank, CA...................... 167,000
Sacramento, CA..................... 284,900 (leased)
Stockton, CA....................... 243,500
Athens, GA......................... 113,000 (leased)
Broadview, IL...................... 85,000
Champaign, IL...................... 119,000 (leased)
Chicago, IL........................ 542,000
Hoopeston, IL...................... 323,000
Rochelle, IL....................... 175,000
Waukegan, IL....................... 40,000 (leased)
Evansville, IN..................... 186,000
Hammond, IN........................ 158,000 (leased)
Laporte, IN........................ 144,000 (leased)
Richmond, IN....................... 462,000
Fort Madison, IA................... 121,000 (56,000 leased)
Ft. Dodge, IA...................... 155,200 (leased)
Benton Harbor, MI.................. 20,200 (leased)
Savage, MN......................... 160,000
St. Paul, MN....................... 470,000
Mt. Vernon, MO..................... 100,000
St. Joseph, MO..................... 173,700
Maxton, NC......................... 231,800 (leased)
Edison, NJ......................... 265,500
Lyons, NY.......................... 149,700
Napoleon, OH....................... 339,600 (leased)
West Hazleton, PA.................. 151,600 (leased)
Crystal City, TX................... 26,000 (leased)
Paris, TX.......................... 266,300 (leased)
Toppenish, WA...................... 105,000
Menomonee Falls, WI................ 116,000
Menomonie, WI...................... 129,400 (leased)
Oconomowoc, WI..................... 105,200
Plover, WI......................... 91,400 (leased)
Waupun, WI......................... 212,000
Queretaro, Mexico.................. 170,000
-14-
Below is a list of the Company's operating facilities, including attached
warehouses, as of March 1, 2003 for our plastic container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Anaheim, CA........................ 127,000 (leased)
Valencia, CA....................... 122,500 (leased)
Deep River, CT..................... 140,000
Norwalk, CT........................ 14,400 (leased)
Monroe, GA......................... 139,600
Norcross, GA....................... 59,000 (leased)
Flora, IL.......................... 56,400
Woodstock, IL...................... 186,700 (leased)
Woodstock, IL...................... 129,800 (leased)
Ligonier, IN....................... 469,000 (276,000 leased)
Plainfield, IN..................... 105,700 (leased)
Seymour, IN........................ 400,600
Franklin, KY....................... 122,000 (leased)
Cape Girardeau, MO................. 71,700 (leased)
Penn Yan, NY....................... 100,000
Ottawa, OH......................... 267,000
Port Clinton, OH................... 298,900 (leased)
Langhorne, PA...................... 156,000 (leased)
Houston, TX........................ 335,200
Richmond, VA....................... 70,000 (leased)
Triadelphia, WV.................... 168,400
Mississauga, Ontario............... 75,000 (leased)
Mississauga, Ontario............... 62,600 (leased)
Scarborough, Ontario............... 117,000
Lachine, Quebec.................... 113,300 (leased)
Lachine, Quebec.................... 77,800 (leased)
Culiacan, Mexico................... 10,800 (leased)
We own and lease other warehouse facilities that are detached from our
manufacturing facilities. We believe that our plants, warehouses and other
facilities are in good operating condition, adequately maintained, and suitable
to meet our present needs and future plans. We believe that we have sufficient
capacity to satisfy the demand for our products in the foreseeable future. To
the extent that we need additional capacity, we believe that we can convert
certain facilities to continuous operation or make the appropriate capital
expenditures to increase capacity.
All of our U.S. facilities are subject to liens in favor of the lenders
under our senior secured credit facility to which we and our U.S. subsidiaries
are parties, and all of our Canadian facilities are subject to liens in favor of
the lenders under our Canadian credit facility.
Item 3. Legal Proceedings.
We are a party to routine legal proceedings 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.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
-15-
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Our common stock is quoted on the Nasdaq National Market System under the
symbol SLGN. As of March 1, 2003, we had approximately 66 holders of record of
our common stock. We have never declared or paid cash dividends on our common
stock. We currently anticipate that we will retain all available funds for use
in the operation and expansion of our business and do not anticipate paying any
cash dividends on our common stock in the foreseeable future. Any future
determination to pay cash dividends will be at the discretion of our Board of
Directors and will be dependent upon our consolidated results of operations and
financial condition, applicable contractual restrictions and other factors
deemed relevant by our Board of Directors. We are allowed to pay cash dividends
on our common stock up to specified limits under our senior secured credit
agreements and our indenture for our 9% Senior Subordinated Debentures due 2009,
or the 9% Debentures. The table below sets forth the high and low closing sales
prices of our common stock as reported by the Nasdaq National Market System for
the periods indicated below.
High Low
---- ---
2001
----
First Quarter...................... $12.56 $ 7.88
Second Quarter..................... 22.94 10.88
Third Quarter...................... 25.29 16.50
Fourth Quarter..................... 26.16 18.65
High Low
---- ---
2002
----
First Quarter...................... $34.04 $21.40
Second Quarter..................... 42.83 33.27
Third Quarter...................... 42.14 24.35
Fourth Quarter..................... 29.88 18.41
Item 6. Selected Financial Data.
In the table that follows, we provide you with selected financial data of
Silgan Holdings Inc. We have derived this data from our consolidated financial
statements for the five years ended December 31, 2002. Our consolidated
financial statements for the five years ended December 31, 2002 have been
audited by Ernst & Young LLP, independent auditors.
You should read this selected financial data along with the consolidated
financial statements and accompanying notes included elsewhere in this Annual
Report, as well as the section of this Annual Report titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
-16-
Selected Financial Data
Year Ended December 31,
-------------------------------------------------------------
2002 2001 2000(a) 1999 1998(b)
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
Operating Data:
Net sales .......................................... $1,988.3 $1,941.0 $1,877.5 $1,892.1 $1,768.7
Cost of goods sold ................................. 1,749.7 1,700.7 1,648.3 1,656.7 1,546.3
-------- -------- -------- -------- --------
Gross profit ....................................... 238.6 240.3 229.2 235.4 222.4
Selling, general and administrative expenses ....... 76.2 78.6 72.1 75.0 68.1
Rationalization (credits) charges .................. (5.6) 9.3 -- 36.1 --
-------- -------- -------- -------- --------
Income from operations ............................. 168.0 152.4 157.1 124.3 154.3
Gain on assets contributed to affiliate ............ -- 4.9 -- -- --
Interest and other debt expense .................... 73.8 81.2 91.2 86.1 81.5
-------- -------- -------- -------- --------
Income before income taxes, equity in losses of
affiliates and extraordinary item ............... 94.2 76.1 65.9 38.2 72.8
Provision for income taxes ......................... 37.2 30.2 25.8 14.3 26.9
-------- -------- -------- -------- --------
Income before equity in losses of affiliates
and extraordinary item .......................... 57.0 45.9 40.1 23.9 45.9
Equity in losses of affiliates ..................... (2.6) (4.1) (4.6) -- --
-------- -------- -------- -------- --------
Income before extraordinary item ................... 54.4 41.8 35.5 23.9 45.9
Extraordinary item - loss on early
extinguishment of debt, net of income taxes ..... (0.6) -- (4.2) -- --
-------- -------- -------- -------- --------
Net income ......................................... $ 53.8 $ 41.8 $ 31.3 $ 23.9 $ 45.9
======== ======== ======== ======== ========
Per Share Data:
Basic earnings per share:
Income before extraordinary item................. $ 3.00 $2.35 $ 2.01 $1.35 $2.41
Extraordinary item .............................. (0.03) -- (0.24) -- --
------ ----- ------ ----- -----
Basic net income per share....................... $ 2.97 $2.35 $ 1.77 $1.35 $2.41
====== ===== ====== ===== =====
Diluted earnings per share:
Income before extraordinary item................. $ 2.96 $2.31 $ 1.97 $1.32 $2.30
Extraordinary item .............................. (0.03) -- (0.23) -- --
------ ----- ------ ----- -----
Diluted net income per share..................... $ 2.93 $2.31 $ 1.74 $1.32 $2.30
====== ===== ====== ===== =====
(continued)
-17-
Selected Financial Data (continued)
Year Ended December 31,
-------------------------------------------------------------
2002 2001 2000(a) 1999 1998(b)
---- ---- ---- ---- ----
(Dollars in millions, except per share data)
Selected Segment Data:
Net sales:
Metal food containers ........................... $1,487.0 $1,401.1 $1,387.7 $1,440.0 $1,333.0
Plastic containers .............................. 501.3 493.6 399.0 350.5 337.5
Metal closures .................................. -- 46.3 90.8 101.6 98.2
Income from operations:
Metal food containers (c) ....................... 120.6 108.3 120.2 84.5 115.7
Plastic containers (d) .......................... 52.9 46.0 36.9 40.0 37.4
Metal closures .................................. -- 3.3 3.7 3.7 4.3
Other Data:
Capital expenditures ............................... $ 119.2 $ 93.0 $ 89.2 $ 87.4 $ 86.1
Depreciation and amortization (e) .................. 95.7 95.5 89.0 86.0 77.5
Net cash provided by operating activities .......... 163.3 143.0 95.1 143.3 147.4
Net cash used in investing activities .............. (117.2) (59.8) (218.5) (84.9) (278.3)
Net cash (used in) provided by financing
activities ...................................... (5.7) (85.3) 141.0 (60.7) 82.0
Balance Sheet Data (at end of period):
Goodwill, net ...................................... $ 141.5 $ 141.5 $ 153.0 $ 107.6 $ 109.2
Total assets ....................................... 1,374.4 1,311.8 1,383.8 1,185.3 1,224.0
Total debt ......................................... 956.8 944.8 1,031.5 883.3 927.0
Stockholders' equity (deficiency) .................. 63.1 15.1 (20.4) (48.7) (57.3)
Notes to Selected Financial Data
(a) On October 1, 2000, we acquired RXI. The acquisition was accounted for as a
purchase transaction and the results of operations have been included with
our consolidated results of operations from the date of acquisition.
(b) On June 1, 1998, we acquired CS Can. The acquisition was accounted for as a
purchase transaction and the results of operations have been included with
our consolidated results of operations from the date of acquisition.
(c) Income from operations of the metal food container business includes
rationalization credits of $5.4 million in 2002, net rationalization
charges of $5.8 million in 2001 and rationalization charges of $36.1
million in 1999.
(d) Income from operations of the plastic container business includes a
rationalization credit of $0.2 million in 2002 and a rationalization charge
of $3.5 million in 2001.
(e) Depreciation and amortization excludes amortization of debt financing
costs. Depreciation and amortization includes goodwill amortization of $5.0
million, $4.2 million, $3.9 million and $3.2 million in 2001, 2000, 1999
and 1998, respectively.
-18-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion and analysis is intended to assist you in
understanding our consolidated financial condition and results of operations for
the three-year period ended December 31, 2002. Our consolidated financial
statements and the accompanying notes included elsewhere in this Annual Report
contain detailed information that you should refer to in conjunction with the
following discussion and analysis.
General
We are a leading North American manufacturer of metal and plastic consumer
goods packaging products. We currently produce steel and aluminum containers for
human and pet food and custom designed plastic containers, tubes and closures
for personal care, health care, pharmaceutical, household and industrial
chemical, food, pet care, agricultural chemical, automotive and marine chemical
products, and metal, composite and plastic closures for food and beverage
products. We are the largest manufacturer of metal food containers in North
America, with a unit sale market share for the year ended December 31, 2002 of
approximately 49 percent in the United States, a leading manufacturer of plastic
containers in North America for personal care products and a leading
manufacturer of metal and plastic vacuum closures in North America for food and
beverage products.
Sales Growth
Our objective is to increase shareholder value through efficiently
deploying capital and management resources to grow our business and reduce costs
of existing operations and to complete acquisitions that generate attractive
cash returns. We have increased sales and market share in our metal food
container and plastic container businesses through acquisitions and internal
growth. As a result, we have expanded and diversified our customer base,
geographic presence and product lines.
During the past fifteen years, the metal food container market has
experienced significant consolidation primarily due to the desire by food
processors to reduce costs and focus resources on their core operations rather
than self-manufacture their metal food containers. Our acquisitions of the metal
food container manufacturing operations of Nestle, Dial, Del Monte, Birds Eye
and Campbell, as well as our recently announced acquisition of PCP Can
Manufacturing, reflect this trend.
We have improved the market position of our plastic container business
since 1987, with sales increasing more than fivefold to $501.3 million in 2002.
We achieved this improved market position primarily through strategic
acquisitions, including most recently Thatcher Tubes, as well as through
internal growth. The plastic container business of the consumer goods packaging
industry is highly fragmented, and we intend to pursue further consolidation
opportunities in this market. We also believe that we can successfully apply our
acquisition and operating expertise to new markets of the consumer goods
packaging industry. With our acquisition of Thatcher Tubes in January 2003, we
extended our business into decorated plastic tubes primarily for personal care
products to complement our plastic container business. Additionally, with our
acquisition of RXI in October 2000, we expanded our business into plastic
closures, caps, sifters and fitments and thermoformed plastic tubs. We expect to
continue to generate internal growth in our plastic container business. For
example, we intend to aggressively market our decorated plastic tubes and
plastic closures to existing customers of our plastic container business.
Additionally, we intend to continue to expand our customer base in the markets
that we serve, such as the personal care, health care, pharmaceutical, household
and industrial chemical, food, pet care, agricultural chemical, automotive and
marine chemical markets.
In March 2003, we acquired the remaining 65 percent equity interest in
White Cap that we did not already own. The business is a leading manufacturer of
metal and plastic vacuum closures in North America for food and beverage
products. In 2002, the business had approximately $250 million of net sales.
-19-
Operating Performance
We use a disciplined approach to acquire businesses that generate
attractive cash returns and enhance profitability through productivity and cost
reduction opportunities. The additional sales and production capacity provided
through acquisitions have enabled us to rationalize plant operations and
decrease overhead costs through plant closings and downsizings. In addition, our
acquisitions have enabled us to realize manufacturing efficiencies as a result
of optimizing production scheduling and minimizing product transportation costs.
We have also benefited from our economies of scale and from the elimination of
redundant selling and administrative functions.
In addition to the benefits realized through the integration of acquired
businesses, we have improved the operating performance of our existing plant
facilities through the investment of capital for productivity improvements and
manufacturing cost reductions. During 2002, our metal food container business
entered into a long-term technical agreement with Daiwa Can Company, or Daiwa,
of Tokyo, Japan. Daiwa is a major producer of metal food and beverage containers
as well as plastic containers for cosmetics and foods in Japan, and our
relationship with Daiwa gives us access to new products, manufacturing processes
and materials technologies that have been exclusively developed by Daiwa. We
have also invested capital for new market opportunities, such as convenience
ends for metal food containers. Over the past five years, we have invested
$474.9 million in capital to maintain our market position, improve our
productivity, reduce our manufacturing costs and invest in new market
opportunities.
We operate in a competitive industry where it is necessary to realize cost
reduction opportunities to offset continued competitive pricing pressure.
Recently, our plastic container business began to experience increased
competitive pressures. For example, some customers have consolidated and are
placing larger portions of their business up for competitive bidding.
Historically, we have been successful in renewing our multi-year supply
arrangements with our customers. In 2002, we extended the term of our supply
agreements with various customers in return for price adjustments. Further, the
multi-year supply agreements that we enter into with many of our customers limit
our ability to increase our margins. We estimate that approximately 85 percent
of our projected metal food container sales in 2003 and a majority of our
projected plastic container sales in 2003 will be under multi-year arrangements.
Many of these multi-year supply arrangements generally provide for the pass
through of changes in material, labor and other manufacturing costs, thereby
significantly reducing the exposure of our results of operations to the
volatility of these costs.
Our metal food container business' sales and, to a lesser extent, operating
income are dependent, in part, upon the vegetable and fruit harvests in the
midwest and western regions of the United States. The size and quality of these
harvests varies from year to year, depending in large part upon the weather
conditions in those 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. This seasonal impact has been mitigated somewhat
by the acquisition of CS Can from Campbell. Sales to Campbell generally have
been highest in the fourth quarter due to the seasonal demand for soup products.
Use of Capital
We use leverage to support our growth and increase shareholder returns. Our
stable and predictable cash flow, generated largely as a result of our
multi-year customer contracts and generally recession resistant business,
supports our financial strategy. We intend to continue using leverage, supported
by our stable cash flows, to make value-enhancing acquisitions. In the absence
of attractive acquisition opportunities, we intend to use our free cash flow to
repay indebtedness or for other permitted purposes. For example, we did not
complete any acquisitions during 2002 or 2001, and over that period we reduced
our total debt by $73.9 million and increased our cash balances by $38.2
million.
-20-
To the extent we utilize debt for acquisitions or other permitted purposes
in future periods, our interest expense may increase. Further, since the
revolving loan and term loan borrowings under our senior secured credit
facilities bear interest at floating rates, our interest expense is sensitive to
changes in prevailing rates of interest and, accordingly, our interest expense
may vary from period to period. After taking into account interest rate swap
agreements that we entered into to mitigate the effect of interest rate
fluctuations, at December 31, 2002 we had $73.3 million of indebtedness which
bore interest at floating rates.
In light of our strategy to use leverage to support our growth and optimize
shareholder returns, we have incurred and will continue to incur significant
interest expense. For 2002, our aggregate interest and other debt expense was
43.9 percent of our income from operations as compared to 53.3 percent, 58.0
percent, 69.2 percent and 52.8 percent for 2001, 2000, 1999 and 1998,
respectively.
In April 2002, we issued an additional $200 million aggregate principal
amount of our 9% Debentures, the proceeds of which were used to repay revolving
loans under our previous U.S. senior secured credit facility, or the U.S. Credit
Agreement. In June 2002, we refinanced the U.S. Credit Agreement by entering
into a new $850 million senior secured credit facility, or the New Credit
Agreement. The New Credit Agreement also provides us with an incremental
uncommitted term loan facility of up to an additional $275 million ($150 million
of which has been borrowed as described below) which may be used to finance
acquisitions and for other permitted purposes. The New Credit Agreement provides
increased flexibility to, among other things, make acquisitions, pay dividends
and incur additional debt. Under the New Credit Agreement, the interest rate for
all loans will be either the Eurodollar rate plus a margin or the prime lending
rate of Deutsche Bank Trust Company Americas, or Deutsche Bank, plus a margin.
Initially, the margin for Eurodollar rate loans is 2 percent and the margin for
prime rate loans is 1 percent. Under the U.S. Credit Agreement, the interest
rate for A term loans and revolving loans was the Eurodollar rate plus a margin
of 1 percent or the prime lending rate of Deutsche Bank. For B term loans, the
interest rate was the Eurodollar rate plus a margin of 1.5 percent or the prime
lending rate of Deutsche Bank plus a margin of 0.5 percent.
In January 2003, we acquired substantially all of the assets of Thatcher
Tubes, a privately held manufacturer and marketer of decorated plastic tubes
serving primarily the personal care industry. Thatcher Tubes operates
manufacturing facilities in Woodstock, Illinois and Culiacan, Mexico and had net
sales of approximately $29 million in 2002. The purchase price, including
additional production capacity recently installed and currently being installed,
was approximately $32 million in cash. In March 2003, we acquired the remaining
65 percent equity interest in White Cap that we did not already own for $37.1
million in cash and refinanced approximately $90 million of debt of the
business. In March 2003, we also completed a $150 million incremental term loan
borrowing under the New Credit Agreement largely to finance the acquisitions of
White Cap and Thatcher Tubes.
White Cap Joint Venture
Effective July 1, 2001, we formed a joint venture company with
Schmalbach-Lubeca AG that is a leading supplier of an extensive range of metal
and plastic closures to consumer goods packaging companies in the food and
beverage industries in North America. The venture operated under the name Amcor
White Cap LLC. We contributed $48.4 million of metal closure assets, including
our manufacturing facilities in Evansville and Richmond, Indiana, and $7.1
million of metal closure liabilities to White Cap in return for a 35 percent
interest in and $32.4 million of cash proceeds from the joint venture. Net sales
of our metal closure business, which was contributed to the White Cap joint
venture, totaled $46.3 million and $90.8 million in 2001 and 2000, respectively.
Schmalbach-Lubeca AG contributed the remaining metal and plastic closure
operations to the joint venture. In July 2002, Amcor Ltd. purchased
Schmalbach-Lubeca AG's interest in the joint venture.
-21-
During 2002, we recorded equity in losses of White Cap of $2.6 million, net
of income taxes. As part of the integration of the contributed businesses, the
White Cap joint venture instituted a program to rationalize its operations. As a
result, our equity in losses of White Cap for 2002 included $2.0 million, net of
income taxes, for our portion of White Cap's rationalization charge to close its
Chicago, Illinois metal closure manufacturing facility and $0.7 million, net of
income taxes, for our portion of White Cap's gain on the sale of certain assets
at a price in excess of book value. During 2001, we recorded equity in losses of
White Cap of $0.3 million and a gain on the assets contributed to the joint
venture of $4.9 million.
In March 2003, we acquired the remaining 65 percent equity interest in
White Cap that we did not already own for $37.1 million in cash and refinanced
approximately $90 million of debt of the business. The business is headquartered
in Chicago and presently operates seven manufacturing facilities located in
Athens, Georgia; Champaign, Illinois; West Hazleton, Pennsylvania; Evansville,
Indiana; Richmond, Indiana; Chicago, Illinois; and Queretaro, Mexico. The
business operates as part of our metal food container business due to
similarities in end-use markets. Net sales for the business were approximately
$250 million in 2002.
Packtion Investment
In April 2000, we, together with Morgan Stanley Private Equity and
Diamondcluster International, Inc., agreed to invest in Packtion Corporation, or
Packtion, an e-commerce joint venture aimed at integrating the packaging supply
chain, from design through manufacture and procurement. The parties agreed to
make the investments through Packaging Markets LLC, a limited liability company.
The joint venture was expected to provide a comprehensive online marketplace for
packaging goods and services and to combine content, tools and collaboration
capabilities to streamline the product development process and enhance
transaction opportunities for buyers and sellers of packaging. The products that
Packtion was developing included a web-based software tool to enable product and
package design, development and collaboration; an internet-based secure
environment enabling the sharing of packaging related product information and
the transaction of business electronically; and an informational source of
packaging related knowledge, tools and expert services. Packtion had
insignificant sales for internet consulting services and incurred net losses.
In June and August 2000, we invested a total of $7.0 million in Packtion
representing approximately a 45 percent interest in Packtion. For the year ended
December 31, 2000, we recorded equity in losses of Packtion of $4.6 million. In
the first quarter of 2001 in connection with an investment by The Procter &
Gamble Company and E.I. Du Pont de Nemours & Co. in Packtion, we invested an
additional $3.1 million, bringing our total investment to $10.1 million
representing approximately a 25 percent interest in Packtion. Packtion was
dissolved on May 31, 2001 after its board of directors determined that there had
been slower than anticipated market acceptance of its business. During 2001, we
recorded equity in losses of Packtion aggregating $3.8 million, which included
our final losses and eliminated our investment.
Results of Operations
The following table sets forth certain income statement data expressed as a
percentage of net sales for each of the periods presented. You should read this
table in conjunction with our Consolidated Financial Statements for the year
ended December 31, 2002 and the accompanying notes included elsewhere in this
Annual Report.
-22-
Year Ended December 31,
---------------------------
2002 2001 2000
---- ---- ----
Operating Data:
Net sales:
Metal food containers.......................... 74.8% 72.2% 73.9%
Plastic containers............................. 25.2 25.4 21.3
Metal closures................................. -- 2.4 4.8
----- ----- -----
Total....................................... 100.0 100.0 100.0
Cost of goods sold............................... 88.0 87.6 87.8
----- ----- -----
Gross profit..................................... 12.0 12.4 12.2
Selling, general and administrative expenses..... 3.8 4.0 3.8
Rationalization (credits) charges ............... (0.2) 0.5 --
----- ----- -----
Income from operations........................... 8.4 7.9 8.4
Gain on assets contributed to affiliate.......... -- 0.3 --
Interest and other debt expense.................. 3.7 4.2 4.9
----- ----- -----
Income before income taxes, equity in losses of
affiliates and extraordinary item ............. 4.7 4.0 3.5
Provision for income taxes....................... 1.9 1.6 1.4
----- ----- -----
Income before equity in losses of affiliates
and extraordinary item......................... 2.8 2.4 2.1
Equity in losses of affiliates................... (0.1) (0.2) (0.2)
----- ----- -----
Income before extraordinary item................. 2.7 2.2 1.9
Extraordinary item - loss on early extinguishment
of debt, net of income taxes................... -- -- (0.2)
----- ----- -----
Net income....................................... 2.7% 2.2% 1.7%
===== ===== =====
Summary results for our business segments for the years ended December 31,
2002, 2001, and 2000 are provided below.
Year Ended December 31,
----------------------------------
2002 2001 2000
---- ---- ----
(Dollars in millions)
Net sales:
Metal food containers.............. $1,487.0 $1,401.1 $1,387.7
Plastic containers................. 501.3 493.6 399.0
Metal closures..................... -- 46.3 90.8
-------- -------- --------
Consolidated.................... $1,988.3 $1,941.0 $1,877.5
======== ======== ========
Income from operations:
Metal food containers(1)........... $ 120.6 $ 108.3 $ 120.2
Plastic containers(2).............. 52.9 46.0 36.9
Metal closures..................... -- 3.3 3.7
Corporate.......................... (5.6) (5.2) (3.7)
-------- -------- --------
Consolidated.................... $ 167.9 $ 152.4 $ 157.1
======== ======== ========
- ------------
(1) Includes rationalization credits of $5.4 million in 2002 and net
rationalization charges of $5.8 million in 2001. You should also read Note
3 to our Consolidated Financial Statements for the year ended December 31,
2002 included elsewhere in this Annual Report.
(2) Includes a rationalization credit of $0.2 million in 2002 and a
rationalization charge of $3.5 million in 2001. You should also read Note 3
to our Consolidated Financial Statements for the year ended December 31,
2002 included elsewhere in this Annual Report.
-23-
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Net Sales. Consolidated net sales increased $47.3 million, or 2.4 percent,
to $1.988 billion for the year ended December 31, 2002, as compared to net sales
of $1.941 billion for 2001. This increase was largely the result of higher net
sales of the metal food container business and, to a lesser extent, of the
plastic container business, partially offset by the impact of contributing the
metal closure business to the White Cap joint venture in July 2001.
Net sales for the metal food container business were $1.487 billion for the
year ended December 31, 2002, an increase of $85.9 million, or 6.1 percent, from
net sales of $1.401 billion for 2001. This increase was primarily attributable
to higher unit volume principally as a result of new business on the West Coast
and a stronger fruit and vegetable pack as compared to 2001.
Net sales for the plastic container business of $501.3 million for the year
ended December 31, 2002 increased $7.7 million, or 1.6 percent, from net sales
of $493.6 million for 2001. This increase was primarily a result of higher unit
volume due primarily to new business, partially offset by lower average selling
prices due principally to the pass through of lower resin costs and a less
favorable sales mix.
Cost of Goods Sold. Cost of goods sold was 88.0 percent of consolidated net
sales for the year ended December 31, 2002, an increase of 0.4 percentage points
as compared to 2001. This increase was principally due to the effect of price
adjustments related to certain contract negotiations, higher manufacturing costs
to initially absorb new business in the metal food container business and higher
depreciation expense, partially offset by higher volume and the elimination of
goodwill amortization in both the metal food container and the plastic container
businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $76.2 million, or 3.8 percent of consolidated net
sales, for the year ended December 31, 2002, as compared to $78.5 million, or
4.0 percent of consolidated net sales for 2001. This decrease was primarily due
to net payments received in settlement of certain litigation in 2002, partially
offset by higher selling and commercial development expenses in the plastic
container business.
Income from Operations. Income from operations for 2002 increased by $15.5
million, or 10.2 percent, to $167.9 million as compared to $152.4 million for
the same period in 2001, and operating margin increased to 8.4 percent from 7.9
percent. The increases in income from operations and operating margin were
primarily a result of higher volumes, rationalization credits in 2002 as
compared to net rationalization charges in 2001 and the elimination of goodwill
amortization, partially offset by the effect of price adjustments relating to
certain contract negotiations, higher depreciation expense, higher costs to
initially absorb new business in the metal food container business and the
impact of contributing the metal closures business to the White Cap joint
venture in July 2001.
We recorded rationalization credits in 2002 totaling $5.6 million. These
rationalization credits included $2.4 million related primarily to the decision
to support new business requirements by continuing to operate the Kingsburg,
California metal food container facility that was previously expected to be
closed, $3.0 million related primarily to certain previously written down assets
of the metal food container business that were placed back in service to meet
business requirements and $0.2 million related to certain aspects of a
rationalization plan to close a plastic container manufacturing facility that
were completed at amounts less than originally estimated. In 2001, we recorded
net rationalization charges totaling $9.3 million. These net rationalization
charges included a $5.8 million charge in the metal food container business,
comprised of a charge of $7.0 million, including $4.2 million for the non-cash
write-down in carrying value of assets, primarily relating to the planned
closing of two metal food container manufacturing facilities (including the
Kingsburg, California facility) and a $1.2 million credit as a result of certain
assets of the metal food container business that were placed back in service,
and a $3.5 million charge related to closing a plastic container manufacturing
facility.
-24-
Income from operations of the metal food container business for 2002
increased $12.3 million, or 11.4 percent, to $120.6 million as compared to
$108.3 million in 2001, and operating margin increased to 8.1 percent from 7.7
percent. The increases in income from operations and operating margin were
principally due to higher volume, rationalization credits in 2002 as compared to
net rationalization charges in 2001 and the elimination of goodwill
amortization, partially offset by the effect of price adjustments relating to
certain contract negotiations, higher depreciation expense, higher manufacturing
costs to initially absorb new business, start-up costs related to the
manufacture of convenience ends and increased employee health and welfare costs.
Income from operations of the plastic container business for 2002 increased
$6.9 million, or 15.0 percent, to $52.9 million as compared to $46.0 million in
2001, and operating margin increased to 10.6 percent from 9.3 percent. The
increases in income from operations and operating margin were primarily a result
of higher volumes, a rationalization charge recorded in 2001, the elimination of
goodwill amortization and improved operational efficiencies, partially offset by
higher depreciation expense, higher selling and commercial development expenses
and higher employee health and welfare costs.
Interest Expense. Interest expense decreased $7.4 million to $73.8 million
for the year ended December 31, 2002 as compared to $81.2 million in 2001. This
decrease resulted primarily from a lower average interest rate and approximately
$75 million in lower average borrowings during 2002 as compared to 2001. Despite
the add-on issuance of $200 million of 9% Debentures and higher interest rate
spreads over LIBOR as a result of the refinancing of the U.S. Credit Agreement,
we experienced a lower average interest rate as compared to 2001 as a result of
lower LIBOR rates.
Income Taxes. The provision for income taxes for the year ended December
31, 2002 and 2001 was recorded at an estimated effective annual income tax rate
of 39.5 percent and 39.7 percent, respectively.
Net Income and Earnings per Share. Net income for the year ended December
31, 2002 was $53.8 million, or $2.93 per diluted share, as compared to net
income of $41.8 million, or $2.31 per diluted share, for 2001. Net income for
2002 included our share of White Cap's rationalization charge of $2.0 million,
net of income taxes, or $0.11 per diluted share, and our share of White Cap's
gain on the sale of assets of $0.7 million, net of income taxes, or $0.04 per
diluted share. Net income for 2002 also included rationalization credits
totaling $5.6 million, or $0.18 per diluted share, and an extraordinary charge,
net of income taxes, of $0.6 million, or $0.03 per diluted share, for the
write-off of unamortized debt issuance costs as a result of the refinancing of
the U.S. Credit Agreement. Net income for 2001 included net rationalization
charges of $9.3 million, or $0.31 per diluted share, a gain on assets
contributed to the White Cap joint venture of $4.9 million, or $0.16 per diluted
share, and equity in losses of Packtion of $3.8 million, or $0.21 per diluted
share.
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill
and Other Intangible Assets," required us to eliminate the amortization of
goodwill effective January 1, 2002. For the year ended December 31, 2001, we
recorded goodwill amortization of approximately $5.0 million, or $0.17 per
diluted share. During 2002, the metal food container and plastic container
businesses benefited from the elimination of $2.3 million and $2.7 million,
respectively, of goodwill amortization.
Year Ended December 31, 2001 Compared with Year Ended December 31, 2000
Net Sales. Consolidated net sales increased $63.5 million, or 3.4 percent,
to $1.941 billion for the year ended December 31, 2001, as compared to net sales
of $1.878 billion for 2000. This increase was the result of increased net sales
of the plastic container business largely due to the acquisition of RXI in
October 2000 and slightly higher net sales of the metal food container business,
partially offset by the impact of contributing the metal closure business to the
White Cap joint venture in July 2001.
-25-
Net sales for the metal food container business were $1.401 billion for the
year ended December 31, 2001, an increase of $13.4 million, or 1.0 percent, from
net sales of $1.388 billion for 2000. This increase was primarily due to the
acquisition of new food can customers and a favorable sales mix primarily driven
by increased sales of convenience ends, largely offset by weaker fruit and
vegetable packs in 2001 as compared to 2000 and generally softer market
conditions in the first half of 2001 as compared to 2000.
Net sales for the plastic container business of $493.6 million for the year
ended December 31, 2001 increased $94.6 million, or 23.7 percent, from net sales
of $399.0 million for 2000. This increase in net sales was largely due to the
acquisition of RXI in October 2000. Additionally, customer inventory restocking
in the first half of 2001 more than offset generally softer market conditions
later in 2001.
Net sales for the metal closure business were $46.3 million for the year
ended December 31, 2001, as compared to net sales of $90.8 million for 2000. The
decrease in net sales was a result of contributing the metal closure business to
the White Cap joint venture on July 1, 2001.
Cost of Goods Sold. Cost of goods sold as a percentage of consolidated net
sales was 87.6 percent for the year ended December 31, 2001, a decrease of 0.2
percentage point as compared to 87.8 percent in 2000. The increase in gross
profit margin was attributable to higher margins from the plastic container
business and was offset in part by lower margins realized by the metal food
container business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $78.5 million, or 4.0 percent of consolidated net
sales, for the year ended December 31, 2001, as compared to $72.1 million, or
3.8 percent of consolidated net sales, for 2000. This increase in selling,
general and administrative expenses as a percent of consolidated net sales was
primarily a result of costs we incurred related to the secondary public offering
by a selling stockholder in November 2001.
Income from Operations. Income from operations for the year ended December
31, 2001 decreased $4.7 million, or 3.0 percent, to $152.4 million as compared
to income from operations of $157.1 million for 2000, and operating margin
decreased to 7.9 percent from 8.4 percent. The decreases in income from
operations and operating margin were primarily a result of net rationalization
charges, lower operating income in the metal food container business and the
impact of contributing the metal closure business to the White Cap joint
venture, partially offset by higher sales in the plastic container business.
During 2001, we recorded net rationalization charges of $9.3 million. These
net rationalization charges included a $5.8 million charge in the metal food
container business, comprised of a charge of $7.0 million, including $4.2
million for the non-cash write-down in carrying value of assets, primarily
relating to the planned closing of two metal food container manufacturing
facilities and a $1.2 million credit as a result of certain assets of the metal
food container business that were placed back in service, and a charge of $3.5
million related to closing a plastic container manufacturing facility.
Income from operations for the metal food container business for the year
ended December 31, 2001 was $108.3 million, a $11.9 million decrease from income
from operations of $120.2 million for 2000, and operating margin decreased to
7.7 percent from 8.7 percent. The lower income from operations and operating
margin of the metal food container business was principally attributable to net
rationalization charges, higher energy costs, higher depreciation expense,
start-up costs related to the manufacture of convenience ends and higher
employee medical costs, partially offset by benefits realized from a previous
plant rationalization and a favorable sales mix.
Income from operations for the plastic container business for the year
ended December 31, 2001 was $46.0 million, a $9.1 million increase over income
from operations of $36.9 million for 2000, and
-26-
operating margin increased to 9.3 percent from 9.2 percent. The increase in
income from operations and operating margin for the plastic container business
was primarily a result of higher unit volume, partially offset by a
rationalization charge.
Income from operations for the metal closure business for the year ended
December 31, 2001 was $3.3 million, as compared to income from operations of
$3.7 million for 2000. The decrease in income from operations was the result of
contributing the metal closure business to the White Cap joint venture on July
1, 2001.
Interest Expense. Interest expense decreased $10.0 million to $81.2 million
for the year ended December 31, 2001, as compared to $91.2 million in 2000. This
decrease was principally a result of the benefit of lower interest rates that
more than offset the impact of higher average borrowings outstanding,
principally due to debt incurred in the fourth quarter of 2000 for the
acquisition of RXI.
Income Taxes. The provision for income taxes for the year ended December
31, 2001 was recorded at an effective tax rate of 39.7 percent, as compared to
39.1 percent for 2000.
Net Income and Earnings per Share. Net income for the year ended December
31, 2001 was $41.8 million, or $2.31 per diluted share, as compared to net
income of $31.3 million, or $1.74 per diluted share, for 2000. Net income for
the year ended December 31, 2001 included net rationalization charges of $9.3
million, or $0.31 per diluted share, equity in losses of Packtion of $3.8
million, or $0.21 per diluted share, and the gain on assets contributed to the
White Cap joint venture of $4.9 million, or $0.16 per diluted share. Net income
for the year ended December 31, 2000 included equity in losses of Packtion of
$4.6 million, or $0.26 per diluted share, and the extraordinary loss, net of
income taxes, of $4.2 million, or $0.23 per diluted share, related to the early
extinguishment of our 13-1/4% Subordinated Debentures, or the 13-1/4%
Debentures.
Capital Resources and Liquidity
Our principal sources of liquidity have been net cash from operating
activities and corporate borrowings under our revolving loan facilities. Our
liquidity requirements arise primarily 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 and the
funding of our seasonal working capital needs.
On April 29, 2002, we issued an additional $200 million aggregate principal
amount of our 9% Debentures. The newly issued 9% Debentures were an add-on
issuance under the indenture for our existing 9% Debentures originally issued in
June 1997 and have identical terms to the existing 9% Debentures. The issue
price for the new 9% Debentures was 103% of their principal amount. Net cash
proceeds received from this issuance were approximately $202 million, after
deducting selling commissions and offering expenses payable by us. The net
proceeds from this issuance were used to repay a portion of our revolving loan
obligations under the U.S. Credit Agreement.
On June 28, 2002, we completed the refinancing of the U.S. Credit Agreement
by entering into a new $850 million senior secured credit facility. The New
Credit Agreement provided us with $100 million of A term loans and $350 million
of B term loans, and also provides us with up to $400 million of revolving
loans. Under the New Credit Agreement, we may use revolving loans for working
capital and other operating needs as well as for acquisitions and other
permitted purposes. The New Credit Agreement also provides us with an
incremental uncommitted term loan facility of up to an additional $275 million
($150 million of which has been borrowed as described below) which may be used
to finance acquisitions and for other permitted purposes.
-27-
On March 3, 2003, we completed a $150 million incremental term loan
borrowing under the New Credit Agreement. The proceeds were used largely to
finance the acquisitions of White Cap and Thatcher Tubes. The terms of the
incremental term loans are the same as those for B term loans under the New
Credit Agreement.
In 2002, we used proceeds of $206.0 million from the add-on issuance of 9%
Debentures, cash generated from operations of $163.3 million, proceeds from
stock option exercises of $4.3 million and proceeds from asset sales of $1.9
million to fund capital expenditures of $119.2 million, net repayments of
revolving loans and long-term debt of $193.6 million and debt issuance costs of
$22.4 million and to increase cash balances by $40.3 million.
In 2002, trade accounts receivable, net decreased $20.2 million to $124.7
million as compared to 2001, primarily due to the timing of sales. Inventories
increased $10.2 million to $272.8 million in 2002 as compared to 2001 primarily
due to the timing of sales and raw material purchases.
In 2001, we used cash generated from operations of $143.0 million, cash
proceeds from the White Cap joint venture of $32.4 million, proceeds from asset
sales of $3.9 million, cash balances of $2.0 million and proceeds from stock
option exercises of $1.0 million to fund capital expenditures of $93.0 million,
net repayments of revolving loans and long-term debt of $86.3 million and our
investment in Packtion of $3.0 million.
In 2001, trade accounts receivable, net decreased $23.4 million to $144.9
million as compared to 2000 primarily due to the impact of contributing our
metal closure business to the White Cap joint venture and the impact of a few
customers delaying payments in 2000 until the beginning of 2001. Inventories
decreased $17.1 million to $262.6 million in 2001 as compared to 2000 primarily
due to the impact of contributing our metal closure business to the White Cap
joint venture and the timing of raw material purchases and business
requirements. Trade accounts payable decreased $34.3 million to $173.9 million
principally due to the timing of payments and raw material purchases.
In 2000, we used net borrowings of revolving loans of $243.7 million
($242.1 million under the U.S. Credit Agreement and $1.6 million under our
Canadian senior secured credit facility), cash generated from operations of
$95.1 million, proceeds from asset sales of $1.8 million and proceeds from stock
option exercises of $0.5 million to fund the acquisition of RXI for $124.0
million, capital expenditures of $89.2 million, redemption of the 13-1/4%
Debentures for $61.8 million, repayment of $39.3 million of term loan borrowings
under our senior secured credit facilities, cash balances of $17.7 million, our
investment in Packtion of $7.0 million, repurchases of common stock of $1.1
million and debt issuance costs of $1.0 million.
In December 2000, we redeemed all of our outstanding 13-1/4% Debentures
($56.2 million principal amount) with lower cost revolving loans under the U.S.
Credit Agreement. The redemption price for all of the 13-1/4% Debentures,
including premiums, was $61.8 million. We benefited from this redemption because
of the lower interest rate applicable to the revolving loans, despite the slight
increase in our indebtedness as a result.
As of December 31, 2002, there were no revolving loans outstanding under
the New Credit Agreement, and, after taking into account outstanding letters of
credit, the available portion of the revolving loan facility under the New
Credit Agreement was $383.1 million. Revolving loans under the New Credit
Agreement may be borrowed, repaid and reborrowed until their final maturity on
June 28, 2008. Additionally, as of December 31, 2002, there were no outstanding
revolving loans under our Canadian senior secured credit facility, and after
taking into account outstanding letters of credit, the available portion of the
revolving loan facility under our Canadian senior secured credit facility was
$4.1 million.
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The New Credit Agreement also provided us with A term loans ($100.0 million
outstanding at December 31, 2002) and B term loans ($348.3 million outstanding
at December 31, 2002), which are required to be repaid in annual installments
through June 28, 2008 and November 30, 2008, respectively. You should also read
Note 9 to our Consolidated Financial Statements for the year ended December 31,
2002 included elsewhere in this Annual Report.
Under the New Credit Agreement, the interest rate for all loans will be
either the Eurodollar rate plus a margin or the prime lending rate of Deutsche
Bank plus a margin. Initially, the margin for Eurodollar rate loans is two
percent and the margin for prime rate loans is one percent. Starting in 2003,
the margins are subject to adjustment quarterly based upon financial ratios set
forth in the New Credit Agreement.
Because we sell metal containers used in fruit and vegetable pack
processing, we have seasonal sales. As is common in the industry, we must access
working capital to build inventory and then carry accounts receivable for some
customers beyond the end of the summer and fall packing season. Seasonal
accounts are generally settled by year end. Due to our seasonal requirements, we
incur short term indebtedness to finance our working capital requirements.
For 2003, we estimate that we will utilize approximately $200-225 million
of revolving loans under our senior secured credit facilities for our peak
seasonal working capital requirements. We may use the available portion of our
revolving loan facilities, after taking into account our seasonal needs and
outstanding letters of credit, for acquisitions and other permitted purposes.
Our board of directors has authorized the repurchase of up to $70 million
of our common stock. As of December 31, 2002, we have repurchased 2,708,975
shares of our common stock for an aggregate cost of approximately $61.0 million.
The repurchases were financed through revolving loan borrowings under the U.S.
Credit Agreement. We intend to finance future repurchases, if any, of our common
stock with revolving loans from the New Credit Agreement.
In addition to our operating cash needs, we believe our cash requirements
over the next few years (taking into account recent acquisitions) will consist
primarily of:
o annual capital expenditures of $90 to $115 million;
o annual principal amortization payments of bank term loans under the
New Credit Agreement (taking into account the recent incremental term
loan borrowings) of $21.7 million;
o our interest requirements, including interest on revolving loans (the
principal amount of which will vary depending upon seasonal
requirements) and bank term loans under the New Credit Agreement,
which bear fluctuating rates of interest, and the 9% Debentures; and
o payments of approximately $20 million for federal, state and foreign
tax liabilities in 2003, which will increase annually thereafter.
We believe that cash generated from operations and funds from borrowings
available under our senior secured credit facilities will be sufficient to meet
our expected operating needs, planned capital expenditures, debt service and tax
obligations for the foreseeable future. We are also continually evaluating and
pursuing acquisition opportunities in the consumer goods packaging market and
may incur additional indebtedness, including indebtedness under our senior
secured credit facilities, to finance any such acquisition.
Our senior secured credit facilities and the indenture with respect to the
9% Debentures contain restrictive covenants that, among other things, limit our
ability to incur debt, sell assets and engage in
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certain transactions. We do not expect these limitations to have a material
effect on our business or our results of operations. 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 2003 with all of these
covenants.
Our contractual cash obligations at December 31, 2002 are provided below
(without taking into account the recent incremental term loan borrowings):
Payments Due By Period
------------------------------------------------
2004- 2006-
Total 2003 2005 2007 Thereafter
----- ---- ---- ---- ----------
Long-term debt ......................... $ 951.2 $20.2 $40.3 $40.3 $850.4
Minimum rental commitments ............. 95.3 21.1 29.9 20.6 23.7
-------- ----- ----- ----- ------
Total contractual cash obligations ... $1,046.5 $41.3 $70.2 $60.9 $874.1
======== ===== ===== ===== ======
At December 31, 2002, we also had outstanding letters of credit of $17.3
million that were issued under our senior secured credit facilities.
Taking into account the recent $150 million incremental term loan
borrowings, our total contractual cash obligations increase by $1.5 million
annually in 2003 through 2007 and by $142.5 million in 2008.
Effect of Inflation and Interest Rate Fluctuations
Historically, inflation has not had a material effect on us, other than to
increase our cost of borrowing. In general, we have been able to increase the
sales prices of our products to reflect any increases in the prices of raw
materials.
Because we have indebtedness which bears interest at floating rates, our
financial results will be sensitive to changes in prevailing market rates of
interest. As of December 31, 2002, we had $951.2 million of indebtedness
outstanding, of which $73.3 million bore interest at floating rates, after
taking into account interest rate swap agreements that we entered into to
mitigate the effect of interest rate fluctuations. Under these agreements,
floating rate interest based on the three month LIBOR rate was exchanged for
fixed rates of interest ranging from 2.5 percent to 6.4 percent. The aggregate
notional principal amounts of these agreements totals $375 million, with $125
million aggregate notional principal amount maturing in 2003 and $250 million
aggregate notional principal amount maturing in 2004. Depending upon market
conditions, we may enter into additional interest rate swap or hedge agreements
(with counterparties that, in our judgment, have sufficient creditworthiness) to
hedge our exposure against interest rate volatility.
Rationalization (Credits) Charges and Acquisition Reserves
During 2001, we approved and announced to employees separate plans to exit
our Northtown, Missouri and Kingsburg, California metal food container
facilities and to cease operation of our composite container department at our
Waukegan, Illinois metal food container facility. These plans included the
termination of approximately 80 plant employees, the termination of an operating
lease and other plant related exit costs, including equipment dismantle costs.
These decisions resulted in a rationalization charge of $7.0 million. This
charge consisted of $4.2 million for the non-cash write-down in carrying value
of assets, $1.4 million for employee severance and benefits and $1.4 million for
plant exit costs.
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During 2002, in order to support new business we decided to continue to
operate our Kingsburg facility and to continue to utilize certain Northtown
assets with carrying values that were previously written down as part of this
rationalization charge. As a result, we recorded rationalization credits
totaling $2.8 million, which consisted of $2.2 million related to certain assets
with carrying values that were previously written down but remained in service
and $0.6 million for the reversal of rationalization reserves related to
employee severance and benefits and plant exit costs. The assets that remained
in service were recorded in our Consolidated Balance Sheets at their depreciated
cost, which approximated fair value. Through December 31, 2002, a total of $2.0
million, excluding the non-cash write-down, had been expended related to the
rationalization plans for our Northtown and Waukegan facilities, which consisted
of $0.8 million related to employee severance and benefits and $1.2 million
related to plant exit costs. During 2002, all actions related to these
rationalization plans were completed at amounts less than originally estimated,
and, accordingly, we reversed $0.2 million of rationalization reserves as a
rationalization credit.
In addition, during 2002 we placed an additional $2.3 million of metal food
container assets with carrying values that were previously written down back in
service. As a result, we recorded $2.3 million as a rationalization credit and
recorded those assets in our Consolidated Balance Sheets at their depreciated
cost, which approximated fair value.
During 2001, we approved and announced to employees a plan to exit our
Fairfield, Ohio plastic container facility. The plan included the termination of
approximately 150 plant employees and other related plant exit costs, including
equipment dismantle costs and contractual rent obligations. This decision
resulted in a rationalization charge of $3.5 million, which consisted of $0.9
million for employee severance and benefits and $2.6 million for plant exit
costs. Through December 31, 2002, a total of $1.7 million has been expended
relating to this plan. These expenditures consisted of $0.7 million related to
employee severance and benefits and $1.0 million for plant exit costs. During
2002, all actions under this plan related to employee severance and benefits
were completed at amounts less than originally estimated, and, accordingly, we
reversed $0.2 million of rationalization reserves as a rationalization credit.
At December 31, 2002, this reserve had a balance of $1.6 million. Although we
have closed the plant, the timing of cash payments is dependent upon the
expiration of a lease obligation. Accordingly, cash payments related to closing
this facility are expected through 2009.
During 1999, we approved and announced to employees separate plans to exit
our San Leandro and City of Industry, California metal food container
facilities. These plans included the termination of approximately 130 plant
employees, termination of two operating leases and other plant related exit
costs including equipment dismantle costs and contractual rent obligations.
These decisions resulted in a rationalization charge of $11.9 million. This
charge consisted of $7.3 million for the non-cash write-down in carrying value
of assets, $2.2 million for employee severance and benefits and $2.4 million for
plant exit costs. Through December 31, 2002, a total of $4.6 million, excluding
the non-cash write-down, has been expended relating to these plans. These
expenditures consisted of $2.2 million related to employee severance and
benefits and $2.4 million for plant exit costs. All actions under these plans
have been completed. During 2001, certain assets with carrying values that were
previously written down as part of this rationalization charge were placed back
in service. As a result, we recorded a $1.2 million rationalization credit and
recorded those assets in our Consolidated Balance Sheets at their depreciated
cost, which approximated fair value. The timing of cash payments under these
plans was primarily dependent upon the resolution of various matters with the
lessor of one of the facilities.
Acquisition reserves established in connection with our purchase of the
Food Metal and Specialty Business of American National Can Company, or AN Can,
in 1995 aggregating approximately $49.5 million were recorded pursuant to plans
that we began to assess and formulate at the date of the acquisition and which
were finalized in 1996. These reserves consisted of employee severance and
benefits costs ($26.1 million) for the termination of approximately 500 plant,
selling and administrative employees, plant exit costs ($6.6 million) related to
the planned closure of the St. Louis, Missouri plant,
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the downsizing of the Hoopeston, Illinois and Savage, Minnesota facilities and
the restructuring of the St. Paul, Minnesota plant and liabilities incurred in
connection with the acquisition ($16.8 million). Through December 31, 2002, a
total of $47.6 million has been expended related to these plans, which consisted
of $25.3 million for employee severance and benefits, $5.5 million for plant
exit costs and $16.8 million for payment of acquisition related liabilities. At
December 31, 2002, this reserve had a balance of $1.9 million. Although we have
completed our plan, cash payments are expected to continue for pension
obligations totaling $0.8 million which are required to be paid pursuant to a
labor agreement in place at the time of acquisition and for the resolution of
various environmental liabilities, estimated at $1.1 million, that existed at
the time of the acquisition. Accordingly, cash payments related to these
acquisition reserves are expected through 2004.
You should also read Note 3 to our Consolidated Financial Statements for
the year ended December 31, 2002 included elsewhere in this Annual Report.
Critical Accounting Policies
Accounting principles generally accepted in the United States require
estimates and assumptions that affect the reported amounts in our consolidated
financial statements and the accompanying notes. Some of these estimates and
assumptions require difficult, subjective and/or complex judgments. Critical
accounting policies cover accounting matters that are inherently uncertain
because the future resolution of such matters is unknown. We believe that our
accounting policies for deferred income taxes, pension expense and obligations
and rationalization (credits) charges and acquisition reserves reflect the more
significant judgments and estimates in our consolidated financial statements.
You should also read our Consolidated Financial Statements for the year ended
December 31, 2002 and the accompanying notes included elsewhere in this Annual
Report.
At December 31, 2002, we had approximately $29.2 million of deferred tax
assets relating to $73.3 million of net operating loss carryforwards, or NOLs,
that expire between 2012 and 2022, for which no valuation allowance has been
established. We had NOLs of approximately $10.9 million available to offset
future consolidated taxable income (excluding CS Can), and CS Can had NOLs of
approximately $62.4 million available to offset its future taxable income. We
believe that it is more likely than not that these NOLs will be available to
reduce future income tax liabilities based on estimated future taxable income,
the reversal of temporary differences in future periods and the utilization of
tax planning strategies. Current levels of consolidated pre-tax earnings
(excluding CS Can) are sufficient to generate the taxable income required to
realize our deferred tax assets. Pre-tax earnings levels for CS Can would need
to increase from current levels to generate sufficient taxable income to realize
its deferred tax assets. We would reduce our deferred tax assets by a valuation
allowance if it became more likely than not that a portion of these NOLs would
not be utilized. If a valuation allowance were established, additional expense
would be recorded within the provision for income taxes in our Consolidated
Statements of Income in the period in which that determination was made. This
process requires the use of significant judgment and estimates.
Our pension expense and obligations are developed from actuarial
valuations. Two critical assumptions in determining pension expense and
obligations are the discount rate and expected return on plan assets. We
evaluate these assumptions at least annually. Other assumptions reflect
demographic factors such as retirement, mortality and turnover and are evaluated
periodically and updated to reflect our actual experience. Actual results may
differ from actuarial assumptions. The discount rate represents the market rate
for high-quality fixed income investments and is used to calculate the present
value of the expected future cash flows for benefit obligations under our
pension plans. A decrease in the discount rate increases the present value of
benefit obligations and increases pension expense. A 50 basis point decrease in
the discount rate would increase our pension expense by approximately $1.1
million. For 2003, we reduced our discount rate from 7.25 percent to 7.0 percent
to reflect market interest rate conditions. We consider the current and expected
asset allocations of our pension plans, as
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well as historical and expected returns on those types of plan assets, in
determining the expected long-term rate of return on plan assets. A 50 basis
point decrease in the expected return on plan assets would increase our pension
expense by approximately $0.6 million. For 2002, 2001 and 2000, we assumed that
the expected return on our pension plan assets was 9.0 percent.
Historically, we have maintained a strategy of acquiring businesses and
enhancing profitability through productivity and cost reduction opportunities.
Acquisitions require us to estimate the fair value of the assets acquired and
liabilities assumed in the transactions. These estimates of fair value are based
on our business plans for the acquired entities, which includes eliminating
operating redundancies, facility closings and rationalizations and assumptions
as to the ultimate resolution of liabilities assumed. We also continually
evaluate the operating performance of our existing facilities and our business
requirements and, when deemed appropriate, we exit or rationalize existing
operating facilities. Establishing reserves for acquisition plans and facility
rationalizations requires the use of estimates. Although we believe that these
estimates accurately reflect the costs of these plans, actual costs incurred may
differ from these estimates.
New Accounting Pronouncements
Effective January 1, 2002, we adopted SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS
No. 141 revises the accounting treatment for business combinations to require
the use of purchase accounting and prohibit the use of the pooling-of-interests
method for business combinations initiated after June 30, 2001. SFAS No. 142
revises the accounting for goodwill to eliminate amortization of goodwill on
transactions consummated after June 30, 2001 and of all other goodwill as of
January 1, 2002. As a result, we stopped recording goodwill amortization as of
January 1, 2002. Intangible assets with definite lives will continue to be
amortized over their useful lives. SFAS No. 142 also requires goodwill and other
intangible assets with indefinite lives to be reviewed for impairment each year
and more frequently if circumstances indicate a possible impairment. During
2002, we completed our review and determined that goodwill was not impaired.
Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board, or APB, Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 provides updated guidance concerning the recognition and measurement of
an impairment loss for certain types of long-lived assets and expands the scope
of a discontinued operation to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not impact our financial position or results
of operations.
In April 2002, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." Among other provisions, SFAS No.
145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of
Debt," and SFAS No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements," such that most gains or losses from the extinguishment of debt
will no longer be classified as extraordinary items. The provisions of SFAS No.
145 related to the rescission of SFAS No. 4 and SFAS No. 64 are effective for us
on January 1, 2003. Upon adoption in 2003, we expect to reclassify previously
reported extraordinary items from the loss on early extinguishment of debt to
interest and other debt expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including
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Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires the
recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred. Under EITF Issue No. 94-3, a liability
for an exit cost was recognized at the date an entity committed to an exit plan.
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002.
Certifications Under Section 906 Of The Sarbanes-Oxley Act Of 2002
The written certifications of both of our Co-Chief Executive Officers and
of our Chief Financial Officer with respect to this Annual Report on Form 10-K,
as required by Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
1350), have been submitted to the Securities and Exchange Commission as
additional correspondence accompanying this Annual Report.
Forward-Looking Statements
The statements we have made in "Management's Discussion and Analysis of
Results of Operations and Financial Condition" and elsewhere in this Annual
Report which 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 the Securities Exchange Act of 1934, as amended. These
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. Therefore, the actual results of our operations or our
financial condition could differ materially from those expressed or implied in
these forward-looking statements. Important factors that could cause the actual
results of our operations or our financial condition to differ from those
expressed or implied in these forward-looking statements include, but are not
necessarily limited to:
o our ability to effect cost reduction initiatives and realize benefits
from capital investments;
o our ability to locate or acquire suitable acquisition candidates that
generate attractive cash returns and on acceptable terms;
o our ability to assimilate the operations of our acquired businesses
into our existing operations;
o our ability to generate free cash flow to invest in our business and
service our indebtedness;
o limitations and restrictions contained in our instruments and
agreements governing our indebtedness;
o our ability to retain sales with our major customers;
o the size and quality of the vegetable and fruit harvests in the
midwest and west regions of the United States;
o changes in the pricing and availability to us of raw materials or our
ability generally to pass raw material price increases through to our
customers;
o changes in consumer preferences for different packaging products;
o competitive pressures, including new product developments or changes
in competitors' pricing for products;
o changes in governmental regulations or enforcement practices;
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o changes in general economic conditions, such as fluctuations in
interest rates and changes in energy costs (such as natural gas and
electricity);
o changes in labor relations and costs; and
o other factors described elsewhere in this Annual Report or in our
other filings with the Securities and Exchange Commission.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Market risks relating to our operations result primarily from changes in
interest rates. In the normal course of business, we also have limited foreign
currency risk associated with our Canadian and Mexican operations and 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.
Interest Rate Risk
Our interest rate risk management objective is to limit the impact of
interest rate changes on our net income and cash flow and to lower our overall
borrowing cost. To achieve our objectives, we regularly evaluate the amount of
our variable rate debt as a percentage of our aggregate debt. During 2002 and
2001, our average outstanding variable rate debt, after taking into account the
average outstanding notional amount of our interest rate swap agreements, was 39
percent and 55 percent of our total debt, respectively. The decrease was
primarily due to the issuance of $200 million principal amount of the 9%
Debentures in 2002. We manage a significant portion of our exposure to interest
rate fluctuations in our variable rate debt through interest rate swap
agreements. These agreements effectively convert interest rate exposure from
variable rates to fixed rates of interest. We have entered into these agreements
with banks under the New Credit Agreement or the U.S. Credit Agreement, and our
obligations under these agreements are guaranteed and secured on a pari passu
basis with our obligations under the New Credit Agreement. You should also read
Notes 4, 9 and 10 to our Consolidated Financial Statements included elsewhere in
this Annual Report which outline the principal and notional amounts, interest
rates, fair values and other terms required to evaluate the expected cash flows
from these agreements.
Based on the average outstanding amount of our variable rate indebtedness
in 2002, a one percentage point change in the interest rates for our variable
rate indebtedness would have impacted 2002 interest expense by an aggregate of
approximately $4.3 million, after taking into account the average outstanding
notional amount of our interest rate swap agreements during 2002.
Foreign Currency Exchange Rate Risk
We do not conduct a significant portion of our manufacturing or sales
activity in foreign markets. Presently, our only foreign activities are
conducted in Canada and Mexico. Since we do not have significant foreign
operations, we do not believe it is necessary to enter into any derivative
financial instruments to reduce our exposure to foreign currency exchange rate
risk.
Because our Canadian subsidiary operates within its local economic
environment, we believe it is appropriate to finance such operation with local
currency borrowings. In determining the amount of such borrowings, we evaluate
the operation's business plans, tax implications, and the availability of
borrowings with acceptable interest rates and terms. This strategy mitigates the
risk of reported losses or gains in the event that the Canadian currency
strengthens or weakens against the U.S. dollar. Furthermore, our Canadian
operating profit is used to repay its local borrowings or is reinvested in
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Canada, and is not expected to be remitted to us or invested elsewhere. As a
result, it is not necessary for us to mitigate the economic effects of currency
rate fluctuations on our Canadian earnings.
Commodity Pricing Risk
We purchase commodities for our products such as metal and resins. These
commodities are generally purchased pursuant to contracts or at market prices
established with the vendor. In general, we do not engage in hedging activities
for these commodities due to our ability to pass on price changes to our
customers.
We also purchase other commodities, such as natural gas and electricity,
and are subject to risks on the pricing of these commodities. In general, we
purchase these commodities pursuant to contracts or at market prices. We manage
up to a significant portion of our exposure to natural gas price fluctuations
through natural gas swap agreements. During 2002, we entered into natural gas
swap agreements to hedge approximately 80 percent of our exposure to
fluctuations in natural gas prices. At December 31, 2002, we had entered into
natural gas swap agreements to hedge approximately 40 percent of our expected
2003 exposure to fluctuations in natural gas prices. These agreements
effectively convert pricing exposure for natural gas from market pricing to a
fixed price. You should also read Note 10 to our Consolidated Financial
Statements included elsewhere in this Annual Report which outlines the terms
necessary to evaluate these transactions.
Based on our natural gas usage in 2002, a ten percent change in natural gas
costs would have impacted our 2002 cost of goods sold by approximately $0.5
million, after taking into account the average outstanding notional amount of
our natural gas swap agreements.
Item 8. Financial Statements and Supplementary Data.
We refer you to Item 15, "Exhibits, Financial Statements, Schedules and
Reports on Form 8-K," below for a listing of financial statements and schedules
included in this Annual Report which are incorporated here in this Annual Report
by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
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PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is set forth in our Proxy Statement
for our annual meeting of stockholders to be held on June 5, 2003 in
the sections entitled "Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance," and is incorporated here in this Annual Report
by this reference.
Item 11. Executive Compensation.
The information required by this Item is set forth in our Proxy Statement
for our annual meeting of stockholders to be held on June 5, 2003 in the
sections entitled "Election of Directors--Compensation of Directors", "Executive
Compensation" and "Compensation Committee Interlocks and Insider Participation,"
and is incorporated here in this Annual Report by this reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The information required by this Item is set forth in our Proxy Statement
for our annual meeting of stockholders to be held on June 5, 2003 in the
sections entitled "Executive Compensation" and "Security Ownership of Certain
Beneficial Owners and Management and Related Stockholder Matters," and is
incorporated here in this Annual Report by this reference.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is set forth in our Proxy Statement
for our annual meeting of stockholders to be held on June 5, 2003 in the section
entitled "Certain Relationships and Related Transactions," and is incorporated
here in this Annual Report by this reference.
Item 14. Controls and Procedures.
Within 90 days prior to the filing date of this Annual Report, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Co-Chief Executive Officers and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-14 promulgated under the Securities Exchange Act of 1934, as
amended). Based upon that evaluation, our Co-Chief Executive Officers and Chief
Financial Officer concluded that our disclosure controls and procedures are
effective in ensuring that all material information required to be included in
our periodic filings with the Securities and Exchange Commission have been made
known to them in a timely fashion.
There have been no significant changes in our internal controls or in other
factors that could significantly affect these internal controls subsequent to
the date we carried out our evaluation.
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PART IV
Item 15. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
(a)
Financial Statements:
Report of Independent Auditors......................................................... F-1
Consolidated Balance Sheets at December 31, 2002 and 2001.............................. F-2
Consolidated Statements of Income for the years ended December 31, 2002, 2001
and 2000.......................................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 2002, 2001 and 2000.................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001
and 2000.......................................................................... F-5
Notes to Consolidated Financial Statements............................................. F-6
Schedules:
I. Condensed Financial Information of Registrant:
Condensed Balance Sheets of Silgan Holdings Inc. (Parent Company) at
December 31, 2002 and 2001............................................. F-45
Condensed Statements of Income of Silgan Holdings Inc. (Parent Company)
for the years ended December 31, 2002, 2001 and 2000................... F-46
Condensed Statements of Cash Flows of Silgan Holdings Inc. (Parent
Company) for the years ended December 31, 2002, 2001 and 2000.......... F-47
Notes to Condensed Financial Statements..................................... F-48
II. Valuation and Qualifying Accounts for the years ended December 31,
2002, 2001 and 2000......................................................... F-50
All other financial statements and schedules not listed have been omitted
because they are not applicable or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
-38-
Exhibits:
Exhibit
Number Description
- ------- -----------
3.1 Restated Certificate of Incorporation of Silgan Holdings (incorporated
by reference to Exhibit 3.1 filed with our Annual Report on Form 10-K
for the year ended December 31, 1996, Commission File No. 000-22117).
3.2 Amended and Restated By-laws of Silgan Holdings (incorporated by
reference to Exhibit 3.2 filed with our Annual Report on Form 10-K for
the year ended December 31, 1996, Commission File No. 000-22117).
4.1 Indenture, dated as of June 9, 1997, between Silgan Holdings (as
successor to Silgan Corporation) and The First National Bank of
Chicago, as trustee, with respect to the 9% Debentures (incorporated
by reference to Exhibit 4.1 filed with our Current Report on Form 8-K,
dated June 9, 1997, Commission File No. 000-22117).
4.2 First Supplemental Indenture, dated as of June 24, 1997 among Silgan
Holdings, Silgan Corporation and The First National Bank of Chicago,
as trustee, to the Indenture, dated as of June 9, 1997, between Silgan
Holdings (as successor to Silgan Corporation) and The First National
Bank of Chicago, as trustee, with respect to the 9% Debentures
(incorporated by reference to Exhibit 4.2 filed with our Registration
Statement on Form S-4, dated July 8, 1997, Registration Statement No.
333-30881).
4.3 Second Supplemental Indenture, dated as of April 23, 2002, between
Silgan Holdings and National City Bank, N.A. (as successor trustee),
as trustee, to the Indenture dated as of June 9, 1997 between Silgan
Holdings (as successor to Silgan Corporation), as issuer and National
City Bank, N.A. (as successor trustee), as trustee, with respect to
the 9% Debentures (incorporated by reference to Exhibit 4.3 filed with
our Registration Statement on Form S-4, dated September 18, 2002,
Registration Statement No. 333-99721).
4.4 Form of Silgan Holdings' 9% Senior Subordinated Debentures due 2009
(incorporated by reference to Exhibit 4.10 filed with our Registration
Statement on Form S-4, dated July 8, 1997, Registration Statement No.
333-30881).
4.5 Form of Silgan Holdings' 9% Senior Subordinated Debentures due 2009
(incorporated by reference to Exhibit 4.5 filed with our Registration
Statement on Form S-4, dated September 18, 2002, Registration
Statement No. 333-99721).
10.1 Amended and Restated Stockholders Agreement, dated as of November 6,
2001, among R. Philip Silver, D. Greg Horrigan and Silgan Holdings
(incorporated by reference to Exhibit 10.1 filed with our Annual
Report on Form 10-K for the year ended December 31, 2001, Commission
File No. 000-22117).
10.2 Letter agreement dated November 6, 2001 between Silgan Holdings and
The Morgan Stanley Leveraged Equity Fund II, L.P. (incorporated by
reference to Exhibit 10.2 filed with our Annual Report on Form 10-K
for the year ended December 31, 2001, Commission File No. 000-22117).
-39-
Exhibit
Number Description
- ------- -----------
+10.3 Amended and Restated Management Services Agreement, dated as of
February 14, 1997, between S&H Inc. and Silgan Holdings (incorporated
by reference to Exhibit 10.25 filed with our Annual Report on Form
10-K for the year ended December 31, 1996, Commission File No.
000-22117).
+10.4 Amended and Restated Management Services Agreement, dated as of
February 14, 1997, between S&H Inc. and Silgan Containers
(incorporated by reference to Exhibit 10.26 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
+10.5 Amended and Restated Management Services Agreement, dated as of
February 14, 1997, between S&H Inc. and Silgan Plastics (incorporated
by reference to Exhibit 10.27 filed with our Annual Report on Form
10-K for the year ended December 31, 1996, Commission File No.
000-22117).
10.6 Credit Agreement, dated as of June 28, 2002, among Silgan Holdings,
Silgan Containers, Silgan Plastics, Silgan Containers Manufacturing
Corporation, Silgan Can Company, each other Revolving Borrower party
thereto from time to time, each other Incremental Term Loan Borrower
party thereto from time to time, the lenders from time to time party
thereto, Deutsche Bank Trust Company Americas, as Administrative
Agent, Bank of America, N.A. and Citicorp USA, Inc., as Co-Syndication
Agents, Morgan Stanley Senior Funding, Inc. and Fleet National Bank,
as Co-Documentation Agents, Deutsche Bank Securities Inc. and Banc of
America Securities LLC, as Joint Lead Arrangers, and Deutsche Bank
Securities Inc., Banc of America Securities LLC and Salomon Smith
Barney Inc., as Joint Book Managers (incorporated by reference to
Exhibit 99.1 filed with our Current Report on Form 8-K, dated July 12,
2002, Commission File No. 000-22117).
10.7 US Security Agreement, dated as of June 28, 2002, among Silgan
Holdings, Silgan Containers, Silgan Plastics, Silgan Containers
Manufacturing Corporation, Silgan Can Company, Silgan Corporation,
Silgan LLC, RXI Plastics, Inc., Silgan Vacuum Closure Holding Company
and Deutsche Bank Trust Company Americas, as Collateral Agent
(incorporated by reference to Exhibit 99.2 filed with our Current
Report on Form 8-K, dated July 12, 2002, Commission File No.
000-22117).
10.8 US Pledge Agreement, dated as of June 28, 2002, among Silgan Holdings,
Silgan Containers, Silgan Plastics, Silgan Containers Manufacturing
Corporation, Silgan Can Company, Silgan Corporation, Silgan LLC, RXI
Plastics, Inc., Silgan Vacuum Closure Holding Company and Deutsche
Bank Trust Company Americas, as Collateral Agent (incorporated by
reference to Exhibit 99.3 filed with our Current Report on Form 8-K,
dated July 12, 2002, Commission File No. 000-22117).
10.9 US Borrower/Subsidiaries Guaranty, dated as of June 28, 2002, made by
each of Silgan Holdings, Silgan Containers, Silgan Plastics, Silgan
Containers Manufacturing Corporation, Silgan Corporation, Silgan LLC,
RXI Plastics, Inc. and Silgan Vacuum Closure Holding Company in favor
of the creditors thereunder (incorporated by reference to Exhibit 99.4
filed with our Current Report on Form 8-K, dated July 12, 2002,
Commission File No. 000-22117).
-40-
Exhibit
Number Description
- ------- -----------
10.10 Asset Purchase Agreement, dated as of June 2, 1995, between American
National Can Company and Silgan Containers (incorporated by reference
to Exhibit 1 filed with our Current Report on Form 8-K dated August
14, 1995, Commission File No. 33-28409).
10.11 Purchase Agreement, dated as of June 1, 1998, by and among Campbell,
Silgan Can Company and Silgan Containers (incorporated by reference to
Exhibit 2 filed with our Current Report on Form 8-K dated June 15,
1998, Commission File No. 000-22117).
10.12 Underwriting Agreement, dated as of February 13, 1997, among Silgan
Holdings, Silgan Corporation, Silgan Containers, Silgan Plastics, The
Morgan Stanley Leveraged Equity Fund II, L.P., Bankers Trust New York
Corporation and the underwriters listed on Schedule I thereto
(incorporated by reference to Exhibit 10.40 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
10.13 Placement Agreement between Silgan Corporation and Morgan Stanley &
Co. Incorporated, dated June 3, 1997 (incorporated by reference to
Exhibit 99.1 filed with our Current Report on Form 8-K dated June 9,
1997, Commission File No. 000-22117).
10.14 Equity Underwriting Agreement, dated November 6, 2001, among Silgan
Holdings, The Morgan Stanley Leveraged Equity Fund II, L.P., and
Deutsche Banc Alex. Brown Inc. and Morgan Stanley & Co. Incorporated
as representatives of the several underwriters listed on Schedule I
thereto (incorporated by reference to Exhibit 10.17 filed with our
Annual Report on Form 10-K for the year ended December 31, 2001,
Commission File No. 000-22117).
10.15 Registration Rights Agreement dated as of April 23, 2002 between
Silgan Holdings and Morgan Stanley & Co. Incorporated, Deutsche Bank
Securities Inc., Salomon Smith Barney Inc. and Fleet Securities, Inc.
(incorporated by reference to Exhibit 4.6 filed with our Registration
Statement on Form S-4, dated September 18, 2002, Registration
Statement No. 333-99721).
+10.16 Employment Agreement, dated as of September 14, 1987, between James
Beam and Canaco Corporation (Silgan Containers) (incorporated by
reference to Exhibit 10(vi) filed with Silgan Corporation's
Registration Statement on Form S-1, dated January 11, 1988,
Registration Statement No. 33-18719).
+10.17 Employment Agreement, dated as of September 1, 1989, between Silgan
Corporation, InnoPak Plastics Corporation (Silgan Plastics), Russell
F. Gervais and Aim Packaging, Inc. (incorporated by reference to
Exhibit 5 filed with Silgan Corporation's Report on Form 8-K, dated
March 15, 1989, Commission File No. 33-18719).
+10.18 Employment Agreement dated as of August 1, 1995 between Silgan
Containers (as assignee of Silgan Holdings) and Glenn A. Paulson, as
amended pursuant to an amendment dated March 1, 1997 (incorporated by
reference to Exhibit 10.19 filed with our Annual Report on Form 10-K
for the year ended December 31, 1999, Commission File No. 000-22117).
-41-
Exhibit
Number Description
- ------- -----------
+10.19 InnoPak Plastics Corporation (Plastics) Pension Plan for Salaried
Employees (incorporated by reference to Exhibit 10.32 filed with
Silgan Corporation's Annual Report on Form 10-K for the year ended
December 31, 1988, Commission File No. 33-18719).
+10.20 Containers Pension Plan for Salaried Employees (incorporated by
reference to Exhibit 10.34 filed with Silgan Corporation's Annual
Report on Form 10-K for the year ended December 31, 1988, Commission
File No. 33-18719).
+10.21 Silgan Holdings Inc. Fourth Amended and Restated 1989 Stock Option
Plan (incorporated by reference to Exhibit 10.21 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
+10.22 Form of Silgan Holdings Nonstatutory Stock Option Agreement
(incorporated by reference to Exhibit 10.22 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
*10.23 Silgan Holdings Inc. 2002 Non-Employee Directors Stock Option Plan.
*12 Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 2002, 2001, 2000, 1999 and 1998.
*21 Subsidiaries of the Registrant.
*23 Consent of Ernst & Young LLP.
(b) Reports on Form 8-K:
1. On November 14, 2002, we filed a Current Report on Form 8-K which indicated
pursuant to Item 9 that the written certifications of both of our Co-Chief
Executive Officers and our Chief Financial Officer, as required by Section
906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350), accompanied
our Quarterly Report on Form 10-Q for the quarterly period ending September
30, 2002 as additional correspondence, and with which copies of such
written certifications were furnished.
- -----------------
*Filed herewith.
+Management contract or compensatory plan or arrangement.
-42-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SILGAN HOLDINGS INC.
Date: March 31, 2003 By /s/ R. Philip Silver
-------------------------
R. Philip Silver
Chairman of the Board and
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Chairman of the Board and
Co-Chief Executive Officer
/s/ R. Philip Silver (Principal Executive Officer) March 31, 2003
- ----------------------
(R. Philip Silver)
President, Co-Chief Executive
Officer and Director
/s/ D. Greg Horrigan (Principal Executive Officer) March 31, 2003
- ----------------------
(D. Greg Horrigan)
/s/ Leigh J. Abramson Director March 31, 2003
- ----------------------
(Leigh J. Abramson)
/s/ John W. Alden Director March 31, 2003
- ----------------------
(John W. Alden)
/s/ Jeffrey C. Crowe Director March 31, 2003
- ----------------------
(Jeffrey C. Crowe)
/s/ Edward A. Lapekas Director March 31, 2003
- ----------------------
(Edward A. Lapekas)
Executive Vice President and
Chief Financial Officer
/s/ Anthony J. Allott (Principal Financial Officer) March 31, 2003
- ----------------------
(Anthony J. Allott)
Vice President and Controller
/s/ Nancy Merola (Principal Accounting Officer) March 31, 2003
- ----------------------
(Nancy Merola)
-43-
CERTIFICATIONS
I, R. Philip Silver, certify that:
1. I have reviewed this annual report on Form 10-K of Silgan Holdings
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
-44-
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ R. Philip Silver
--------------------------
Chairman of the Board and
Co-Chief Executive Officer
I, D. Greg Horrigan, certify that:
1. I have reviewed this annual report on Form 10-K of Silgan Holdings
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
-45-
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ D. Greg Horrigan
--------------------------
President and
Co-Chief Executive Officer
I, Anthony J. Allott, certify that:
1. I have reviewed this annual report on Form 10-K of Silgan Holdings
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) Presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial
-46-
data and have identified for the registrant's auditors any
material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Anthony J. Allott
----------------------------
Executive Vice President and
Chief Financial Officer
-47-
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Silgan Holdings Inc.
We have audited the accompanying consolidated financial statements and
schedules of Silgan Holdings Inc. as listed in the accompanying index to the
financial statements (Item 15(a)). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements listed in the accompanying index
to the financial statements (Item 15(a)) present fairly, in all material
respects, the consolidated financial position of Silgan Holdings Inc. at
December 31, 2002 and 2001, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 28, 2003, except for the
second and third paragraphs of Note
20, as to which the date is March 3,
2003 and for the fourth paragraph of
Note 20, as to which the date is
March 28, 2003.
F-1
SILGAN HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(Dollars in thousands, except per share data)
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents .................... $ 58,318 $ 18,009
Trade accounts receivable, less allowances
of $2,864 and $3,449, respectively ........ 124,657 144,903
Inventories .................................. 272,836 262,627
Prepaid expenses and other current assets .... 13,988 12,053
---------- ----------
Total current assets ..................... 469,799 437,592
Property, plant and equipment, net ................ 705,746 677,542
Goodwill, net ..................................... 141,481 141,465
Other assets ...................................... 57,399 55,221
---------- ----------
$1,374,425 $1,311,820
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ............ $ 20,170 $ 57,999
Trade accounts payable ....................... 172,703 173,851
Accrued payroll and related costs ............ 56,238 59,215
Accrued liabilities .......................... 15,825 26,653
---------- ----------
Total current liabilities ................ 264,936 317,718
Long-term debt .................................... 936,655 886,770
Other liabilities ................................. 109,742 92,184
Commitments and contingencies
Stockholders' equity:
Common stock ($0.01 par value per share;
100,000,000 shares authorized, 20,916,317
and 20,539,145 shares issued and
18,230,842 and 17,853,670 shares
outstanding, respectively).................. 209 205
Paid-in capital .............................. 124,872 118,319
Retained earnings (accumulated deficit) ...... 18,871 (34,937)
Accumulated other comprehensive loss ......... (20,467) (8,046)
Treasury stock at cost (2,685,475 shares) .... (60,393) (60,393)
---------- ----------
Total stockholders' equity ............... 63,092 15,148
---------- ----------
$1,374,425 $1,311,820
========== ==========
See notes to consolidated financial statements.
F-2
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000
(Dollars in thousands, except per share data)
2002 2001 2000
---- ---- ----
Net sales .............................................. $1,988,284 $1,940,994 $1,877,497
Cost of goods sold ..................................... 1,749,731 1,700,708 1,648,247
---------- ---------- ----------
Gross profit ...................................... 238,553 240,286 229,250
Selling, general and administrative expenses ........... 76,216 78,541 72,148
Rationalization (credits) charges ...................... (5,603) 9,334 --
---------- ---------- ----------
Income from operations ............................ 167,940 152,411 157,102
Gain on assets contributed to affiliate ................ -- 4,908 --
Interest and other debt expense ........................ 73,789 81,192 91,178
---------- ---------- ----------
Income before income taxes, equity in losses
of affiliates and extraordinary item ......... 94,151 76,127 65,924
Provision for income taxes ............................. 37,190 30,222 25,790
---------- ---------- ----------
Income before equity in losses of affiliates and
extraordinary item ............................ 56,961 45,905 40,134
Equity in losses of affiliates ......................... (2,554) (4,140) (4,610)
---------- ---------- ----------
Income before extraordinary item .................. 54,407 41,765 35,524
Extraordinary item - loss on early extinguishment
of debt, net of income taxes ......................... (599) -- (4,216)
---------- ---------- ----------
Net income ........................................ $ 53,808 $ 41,765 $ 31,308
========== ========== ==========
Basic earnings per share:
Income before extraordinary item .................. $ 3.00 $2.35 $ 2.01
Extraordinary item ................................ (0.03) -- (0.24)
------ ----- ------
Basic net income per share ............................. $ 2.97 $2.35 $ 1.77
====== ===== ======
Diluted earnings per share:
Income before extraordinary item .................. $ 2.96 $2.31 $ 1.97
Extraordinary item ................................ (0.03) -- (0.23)
------ ----- ------
Diluted net income per share ........................... $ 2.93 $2.31 $ 1.74
====== ===== ======
See notes to consolidated financial statements.
F-3
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the years ended December 31, 2002, 2001 and 2000
(Dollars and shares in thousands)
Common Stock Retained Accumulated Total
------------ Earnings Other Stockholders'
Par Paid-in (Accumulated Comprehensive Treasury Equity
Shares Value Capital Deficit) Loss Stock (Deficiency)
------ ----- --------- ----------- ------------- -------- -------------
Balance at January 1, 2000 ............... 17,547 $201 $118,666 $(108,010) $ (273) $(59,318) $(48,734)
Comprehensive income:
Net income ............................ -- -- -- 31,308 -- -- 31,308
Minimum pension liability ............. -- -- -- -- (797) -- (797)
Foreign currency translation .......... -- -- -- -- (518) -- (518)
--------
Comprehensive income .................. 29,993
--------
Stock option exercises, including
tax provision of $826 .................. 256 3 (317) -- -- -- (314)
Equity affiliate closing costs ........... -- -- (250) -- -- -- (250)
Repurchase of common stock ............... (100) -- -- -- -- (1,075) (1,075)
------ ---- -------- --------- -------- -------- --------
Balance at December 31, 2000 ............. 17,703 204 118,099 (76,702) (1,588) (60,393) (20,380)
Comprehensive income:
Net income ............................ -- -- -- 41,765 -- -- 41,765
Minimum pension liability, net of
tax benefit of $1,885 ............... -- -- -- -- (1,966) -- (1,966)
Change in fair value of
derivatives, net of tax
benefit of $2,151 .................. -- -- -- -- (3,267) -- (3,267)
Foreign currency translation .......... -- -- -- -- (1,225) -- (1,225)
--------
Comprehensive income .................. 35,307
--------
Stock option exercises, including
tax benefit of $595 .................... 151 1 1,622 -- -- -- 1,623
Dilution of investment in
equity affiliate ....................... -- -- (1,402) -- -- -- (1,402)
------ ---- -------- --------- -------- -------- --------
Balance at December 31, 2001 ............. 17,854 205 118,319 (34,937) (8,046) (60,393) 15,148
Comprehensive income:
Net income ............................ -- -- -- 53,808 -- -- 53,808
Minimum pension liability, net of
tax benefit of $8,336 ................ -- -- -- -- (12,792) -- (12,792)
Change in fair value of
derivatives, net of tax
benefit of $314 ..................... -- -- -- -- 453 -- 453
Foreign currency translation .......... -- -- -- -- (82) -- (82)
--------
Comprehensive income .................. 41,387
--------
Stock option exercises, including
tax benefit of $2,254 .................. 377 4 6,553 -- -- -- 6,557
------ ---- -------- --------- -------- -------- --------
Balance at December 31, 2002 ............. 18,231 $209 $124,872 $ 18,871 $(20,467) $(60,393) $ 63,092
====== ==== ======== ========= ======== ======== ========
See notes to consolidated financial statements.
F-4
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income .................................................... $ 53,808 $ 41,765 $ 31,308
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ............................................. 94,936 89,772 84,577
Amortization of goodwill and other intangibles ........... 779 5,759 4,392
Amortization of debt issuance costs ...................... 2,588 1,675 1,658
Rationalization (credits) charges ........................ (5,603) 9,334 --
Equity in losses of affiliates ........................... 4,222 4,140 4,610
Gain on assets contributed to affiliate .................. -- (4,908) --
Deferred income tax provision ............................ 25,219 13,852 11,749
Extraordinary item ....................................... 983 -- 6,926
Other changes that provided (used) cash,
net of effects of acquisitions:
Trade accounts receivable ........................... 20,246 19,179 (26,995)
Inventories ......................................... (10,209) 1,220 (18,366)
Trade accounts payable .............................. (1,148) (34,293) 21,106
Accrued liabilities ................................. (12,273) 4,312 (19,610)
Other, net .......................................... (10,255) (8,824) (6,210)
----------- --------- ----------
Net cash provided by operating activities ................ 163,293 142,983 95,145
----------- --------- ----------
Cash flows provided by (used in) investing activities:
Investment in equity affiliate ................................ -- (3,039) (7,026)
Proceeds from equity affiliate ................................ -- 32,388 --
Acquisition of businesses ..................................... -- -- (124,015)
Capital expenditures .......................................... (119,160) (93,042) (89,227)
Proceeds from asset sales ..................................... 1,915 3,901 1,789
----------- --------- ----------
Net cash used in investing activities .................... (117,245) (59,792) (218,479)
----------- --------- ----------
Cash flows provided by (used in) financing activities:
Borrowings under revolving loans .............................. 1,163,580 710,749 1,198,459
Repayments under revolving loans .............................. (1,496,605) (746,719) (954,724)
Proceeds from stock option exercises .......................... 4,303 1,028 512
Repurchase of common stock .................................... -- -- (1,075)
Proceeds from issuance of long-term debt ...................... 656,000 -- --
Repayments of long-term debt .................................. (310,573) (50,313) (101,124)
Debt issuance costs ........................................... (22,444) -- (1,052)
----------- --------- ----------
Net cash (used in) provided by financing activities ...... (5,739) (85,255) 140,996
----------- --------- ----------
Cash and cash equivalents:
Net increase (decrease) ....................................... 40,309 (2,064) 17,662
Balance at beginning of year .................................. 18,009 20,073 2,411
----------- --------- ----------
Balance at end of year ........................................ $ 58,318 $ 18,009 $ 20,073
=========== ========= ==========
Interest paid ...................................................... $ 73,251 $ 85,825 $ 91,200
Income taxes paid, net of refunds .................................. 14,374 8,308 13,352
See notes to consolidated financial statements.
F-5
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Summary of Significant Accounting Policies
Nature of Business. Silgan Holdings Inc., or Holdings, conducts its business
through its wholly owned operating subsidiaries, Silgan Containers Corporation,
or Containers, and Silgan Plastics Corporation, or Plastics. We are engaged in
the manufacture and sale of steel and aluminum containers for human and pet food
and custom designed plastic containers and closures for personal care, health
care, pharmaceutical, household and industrial chemical, food, pet care,
agricultural chemical, automotive and marine chemical products. Principally all
of our businesses are based in the United States.
Basis of Presentation. The consolidated financial statements include the
accounts of Holdings and its subsidiaries, all of which are wholly owned. All
significant intercompany transactions have been eliminated. The preparation of
consolidated financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
The functional currency for our foreign operations is the Canadian dollar.
Balance sheet accounts of our foreign subsidiaries are translated at exchange
rates in effect at the balance sheet date, while revenue and expense accounts
are translated at average rates prevailing during the year. Translation
adjustments are reported as a component of accumulated other comprehensive loss.
Certain prior years' amounts have been reclassified to conform with the current
year's presentation.
Cash and Cash Equivalents. Cash equivalents represent short-term, highly liquid
investments which are readily convertible to cash and have maturities of three
months or less at the time of purchase. The carrying values of these assets
approximate their fair values. As a result of our cash management system, checks
issued and presented to the banks for payment may create negative cash balances.
Checks outstanding in excess of related cash balances totaling approximately
$88.3 million at December 31, 2002 and $74.8 million at December 31, 2001 are
included in trade accounts payable.
Inventories. Inventories are valued at the lower of cost or market (net
realizable value) and the cost is principally determined on the last-in,
first-out basis, or LIFO.
F-6
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment, Net. Property, plant and equipment is stated at
historical cost less accumulated depreciation. Major renewals and betterments
that extend the life of an asset are capitalized and repairs and maintenance
expenditures are charged to expense as incurred. Design and development costs
for molds, dies and other tools that we do not own and that will be used to
produce products that will be sold under long-term supply arrangements are
capitalized. Depreciation is computed using the straight-line method over the
estimated useful lives of depreciable assets. The principal estimated useful
lives are 35 years for buildings and range between 3 to 18 years for machinery
and equipment. Leasehold improvements are amortized over the shorter of the life
of the related asset or the life of the lease.
Interest incurred on amounts borrowed in connection with the installation of
major machinery and equipment acquisitions is capitalized. Capitalized interest
of $1.4 million in 2002 and $1.6 million in 2001 was recorded as part of the
cost of the assets to which it relates and is amortized over the assets'
estimated useful life.
Goodwill, Net. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards, or SFAS, No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 revises the accounting
treatment for business combinations to require the use of purchase accounting
and prohibit the use of the pooling-of-interests method for business
combinations initiated after June 30, 2001. SFAS No. 142 revises the accounting
for goodwill to eliminate amortization of goodwill on transactions consummated
after June 30, 2001 and of all other goodwill as of January 1, 2002. As a
result, we stopped recording goodwill amortization as of January 1, 2002.
Intangible assets with definite lives will continue to be amortized over their
useful lives.
F-7
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Summary of Significant Accounting Policies (continued)
Goodwill, Net (continued). Net income and earnings per share would have been as
follows had the provisions of SFAS No. 142 been applied as of January 1, 2000:
2002 2001 2000
---- ---- ----
(Dollars in thousands, except per share data)
Net income:
Income before extraordinary item .................. $54,407 $41,765 $35,524
Add back of goodwill amortization ................. -- 3,017 2,561
------- ------- -------
Adjusted income before extraordinary item ......... 54,407 44,782 38,085
Extraordinary item ................................ (599) -- (4,216)
------- ------- -------
Adjusted net income ............................... $53,808 $44,782 $33,869
======= ======= =======
Basic earnings per share:
Income before extraordinary item .................. $ 3.00 $2.35 $ 2.01
Add back of goodwill amortization ................. -- 0.17 0.14
------ ----- ------
Adjusted income before extraordinary item ......... 3.00 2.52 2.15
Extraordinary item ................................ (0.03) -- (0.24)
------ ----- ------
Adjusted net income ............................... $ 2.97 $2.52 $ 1.91
====== ===== ======
Diluted earnings per share:
Income before extraordinary item .................. $ 2.96 $2.31 $ 1.97
Add back of goodwill amortization ................. -- 0.17 0.14
------ ----- ------
Adjusted income before extraordinary item ......... 2.96 2.48 2.11
Extraordinary item ................................ (0.03) -- (0.23)
------ ----- ------
Adjusted net income ............................... $ 2.93 $2.48 $ 1.88
====== ===== ======
SFAS No. 142 also requires goodwill and other intangible assets with indefinite
lives to be reviewed for impairment each year and more frequently if
circumstances indicate a possible impairment. During 2002, we completed our
review and determined that goodwill was not impaired. Goodwill, net for our
metal food container and plastic container businesses was $47.7 million (net of
accumulated amortization of $14.7 million) and $93.8 million (net of accumulated
amortization of $10.9 million), respectively, at both December 31, 2002 and
2001.
Impairment of Long-Lived Assets. We assess long-lived assets, including
intangible assets with definite lives, for impairment whenever events or changes
in circumstances indicate the carrying amount of the assets may not be fully
recoverable. An impairment exists if the estimate of future undiscounted cash
flows generated by the assets is less than the carrying value of the assets. If
impairment is determined to exist, any related impairment loss is then measured
by comparing the fair value of the assets to their carrying amount.
F-8
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Summary of Significant Accounting Policies (continued)
Impairment of Long-Lived Assets (continued). Effective January 1, 2002, we
adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets." SFAS No. 144 supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of," and the
accounting and reporting provisions of Accounting Principles Board, or APB,
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 provides updated guidance
concerning the recognition and measurement of an impairment loss for certain
types of long-lived assets and expands the scope of a discontinued operation to
include a component of an entity. The adoption of SFAS No. 144 on January 1,
2002 did not impact our financial position or results of operations.
Other Assets. Other assets consist principally of debt issuance costs which are
being amortized on a straight-line basis over the terms of the related debt
agreements (6 to 12 years), intangible pension asset and investments in equity
affiliates.
Hedging Instruments. We utilize certain derivative financial instruments to
manage a portion of our interest rate and natural gas cost exposures. 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.
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No. 138. SFAS No. 133
requires all derivative instruments to be recorded in the Consolidated Balance
Sheets at their fair values. Changes in the fair value of derivatives will be
recorded each period in earnings or other comprehensive loss, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The adoption of SFAS No. 133, as amended, did not
have a significant impact on our financial position or results of operations.
Income Taxes. We account for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period of enactment of such change.
Income taxes are calculated for Holdings and the acquired steel container
manufacturing business of Campbell Soup Company, or CS Can, on a separate return
basis. U.S. income taxes have not been provided on the accumulated earnings of
our foreign subsidiaries since these earnings are expected to be permanently
reinvested.
F-9
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Summary of Significant Accounting Policies (continued)
Revenue Recognition. Revenues are recognized when goods are shipped and the
title and risk of loss pass to the customer. Shipping and handling fees and
costs incurred in connection with products sold are recorded in cost of goods
sold in our Consolidated Statements of Income.
Stock-Based Compensation. We have two stock-based compensation plans. See Note
14 for further discussion. We apply the recognition and measurement principles
of APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for these plans. Accordingly, no compensation
expense for employee stock options is recognized, as all options granted under
these plans had an exercise price that was equal to or greater than the market
value of the underlying stock on the date of the grant. If we had applied the
fair value recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," for the years ended December 31, 2002, 2001 and 2000, net income
and basic and diluted earnings per share would have been as follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported .......................... $53,808 $41,765 $31,308
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all stock option
awards, net of income taxes ................... 1,165 1,337 1,443
------- ------- -------
Pro forma net income ............................. $52,643 $40,428 $29,865
======= ======= =======
Earnings per share:
Basic net income per share - as reported ..... $2.97 $2.35 $1.77
===== ===== =====
Basic net income per share - pro forma ....... 2.90 2.27 1.69
===== ===== =====
Diluted net income per share - as reported ... 2.93 2.31 1.74
===== ===== =====
Diluted net income per share - pro forma ..... 2.88 2.26 1.69
===== ===== =====
F-10
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements. In April 2002, the Financial
Accounting Standards Board, or FASB, issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." Among other provisions, SFAS No. 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements," such that
most gains or losses from the extinguishment of debt will no longer be
classified as extraordinary items. The provisions of SFAS No. 145 related to the
rescission of SFAS No. 4 and SFAS No. 64 are effective for us on January 1,
2003. Upon adoption in 2003, we expect to reclassify previously reported
extraordinary items from the loss on early extinguishment of debt to interest
and other debt expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force, or EITF, Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires
the recognition of a liability for a cost associated with an exit or disposal
activity when the liability is incurred. Under EITF Issue No. 94-3, a liability
for an exit cost was recognized at the date an entity committed to an exit plan.
The provisions of SFAS No. 146 are effective for exit or disposal activities
that are initiated after December 31, 2002.
Note 2. Acquisitions
On October 1, 2000, we acquired all of the outstanding capital stock of RXI
Holdings, Inc., or RXI Plastics, a manufacturer and seller of rigid plastic
packaging, for $124.0 million in cash. We financed the purchase price through
revolving loan borrowings under our previous U.S. senior secured credit
facility. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the purchase price has been allocated to the assets
acquired and liabilities assumed based on their fair values at the date of
acquisition, and RXI Plastics' results of operations have been included in our
consolidated operating results from the date of acquisition.
See Note 20 which includes a discussion of acquisitions subsequent to December
31, 2002.
F-11
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 3. Rationalization (Credits) Charges and Acquisition Reserves
2001 Rationalization Plans
- --------------------------
During 2001, we approved and announced to employees separate plans to exit our
Northtown, Missouri and Kingsburg, California metal food container facilities
and to cease operation of our composite container department at our Waukegan,
Illinois metal food container facility. These plans included the termination of
approximately 80 plant employees, the termination of an operating lease and
other plant related exit costs, including equipment dismantle costs. These
decisions resulted in a rationalization charge of $7.0 million. This charge
consisted of $4.2 million for the non-cash write-down in carrying value of
assets, $1.4 million for employee severance and benefits and $1.4 million for
plant exit costs.
During 2002, in order to support new business we decided to continue to operate
our Kingsburg facility and to continue to utilize certain Northtown assets with
carrying values that were previously written down as part of this
rationalization charge. As a result, we recorded rationalization credits
totaling $2.8 million, which consisted of $2.2 million related to certain assets
with carrying values that were previously written down but remained in service
and $0.6 million for the reversal of rationalization reserves related to
employee severance and benefits and plant exit costs. The assets that remained
in service were recorded in our Consolidated Balance Sheets at their depreciated
cost, which approximated fair value. Through December 31, 2002, a total of $2.0
million, excluding the non-cash write-down, had been expended related to the
rationalization plans for our Northtown and Waukegan facilities, which consisted
of $0.8 million related to employee severance and benefits and $1.2 million
related to plant exit costs. During 2002, all actions related to these
rationalization plans were completed at amounts less than originally estimated,
and, accordingly, we reversed $0.2 million of rationalization reserves as a
rationalization credit.
Activity in our Northtown, Kingsburg and Waukegan plant rationalization reserve,
excluding the non-cash write-down and related credits, is summarized as follows:
Employee Plant
Severance Exit Acquisition
and Benefits Costs Liabilities Total
------------ ----- ----------- -----
(Dollars in thousands)
Balance at December 31, 2000 .......... $ -- $ -- $ -- $ --
2001 Rationalization Charge ........... 1,421 1,425 -- 2,846
2001 Utilized ......................... (88) (26) -- (114)
------ ------- ----- -------
Balance at December 31, 2001 .......... 1,333 1,399 -- 2,732
2002 Rationalization Credits .......... (605) (262) -- (867)
2002 Utilized ......................... (728) (1,137) -- (1,865)
------ ------- ----- -------
Balance at December 31, 2002 .......... $ -- $ -- $ -- $ --
====== ======= ===== =======
F-12
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 3. Rationalization (Credits) Charges and Acquisition Reserves (continued)
2001 Rationalization Plans (continued)
- --------------------------
During 2001, we approved and announced to employees a plan to exit our
Fairfield, Ohio plastic container facility. The plan included the termination of
approximately 150 plant employees and other related plant exit costs, including
equipment dismantle costs and contractual rent obligations. This decision
resulted in a rationalization charge of $3.5 million, which consisted of $0.9
million for employee severance and benefits and $2.6 million for plant exit
costs. Through December 31, 2002, a total of $1.7 million has been expended
relating to this plan. These expenditures consisted of $0.7 million related to
employee severance and benefits and $1.0 million for plant exit costs. During
2002, all actions under this plan related to employee severance and benefits
were completed at amounts less than originally estimated, and, accordingly, we
reversed $0.2 million of rationalization reserves as a rationalization credit.
At December 31, 2002, this reserve had a balance of $1.6 million. Although we
have closed the plant, the timing of cash payments is dependent upon the
expiration of a lease obligation. Accordingly, cash payments related to closing
this facility are expected through 2009.
Activity in our Fairfield plant rationalization reserve is summarized as
follows:
Employee Plant
Severance Exit Acquisition
and Benefits Costs Liabilities Total
------------ ----- ----------- -----
(Dollars in thousands)
Balance at December 31, 2000 .......... $ -- $ -- $ -- $ --
2001 Rationalization Charge ........... 874 2,616 -- 3,490
2001 Utilized ......................... (637) (749) -- (1,386)
----- ------ ----- -------
Balance at December 31, 2001 .......... 237 1,867 -- 2,104
2002 Rationalization Credit ........... (237) -- -- (237)
2002 Utilized ......................... -- (273) -- (273)
----- ------ ----- -------
Balance at December 31, 2002 .......... $ -- $1,594 $ -- $ 1,594
===== ====== ===== =======
F-13
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 3. Rationalization (Credits) Charges and Acquisition Reserves (continued)
1999 Rationalization Plans
- --------------------------
During 1999, we approved and announced to employees separate plans to exit our
San Leandro and City of Industry, California metal food container facilities.
These plans included the termination of approximately 130 plant employees,
termination of two operating leases and other plant related exit costs including
equipment dismantle costs and contractual rent obligations. These decisions
resulted in a rationalization charge of $11.9 million. This charge consisted of
$7.3 million for the non-cash write-down in carrying value of assets, $2.2
million for employee severance and benefits and $2.4 million for plant exit
costs. Through December 31, 2002, a total of $4.6 million, excluding the
non-cash write-down, has been expended relating to these plans. These
expenditures consisted of $2.2 million related to employee severance and
benefits and $2.4 million for plant exit costs. All actions under these plans
have been completed. During 2001, certain assets with carrying values that were
previously written down as part of this rationalization charge were placed back
in service. As a result, we recorded a $1.2 million rationalization credit and
recorded those assets in our Consolidated Balance Sheets at their depreciated
cost, which approximated fair value. The timing of cash payments under these
plans was primarily dependent upon the resolution of various matters with the
lessor of one of the facilities.
Activity in our San Leandro and City of Industry plant rationalization reserve,
excluding the non-cash write down and related credit, is summarized as follows:
Employee Plant
Severance Exit Acquisition
and Benefits Costs Liabilities Total
------------ ----- ----------- -----
(Dollars in thousands)
Balance at December 31, 1999 .......... $ 1,792 $ 2,332 $ -- $ 4,124
2000 Utilized ......................... (1,792) (1,726) -- (3,518)
------- ------- ----- -------
Balance at December 31, 2000 .......... -- 606 -- 606
2001 Utilized ......................... -- (409) -- (409)
------- ------- ----- -------
Balance at December 31, 2001 .......... -- 197 -- 197
2002 Utilized ......................... -- (197) -- (197)
------- ------- ----- -------
Balance at December 31, 2002 .......... $ -- $ -- $ -- $ --
======= ======= ===== =======
F-14
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 3. Rationalization (Credits) Charges and Acquisition Reserves (continued)
Acquisition Reserves
- --------------------
Acquisition reserves established in connection with our purchase of the Food
Metal and Specialty Business of American National Can Company, or AN Can, in
1995 aggregating approximately $49.5 million were recorded pursuant to plans
that we began to assess and formulate at the date of the acquisition and which
were finalized in 1996. These reserves consisted of employee severance and
benefits costs ($26.1 million) for the termination of approximately 500 plant,
selling and administrative employees, plant exit costs ($6.6 million) related to
the planned closure of the St. Louis, Missouri plant, the downsizing of the
Hoopeston, Illinois and Savage, Minnesota facilities and the restructuring of
the St. Paul, Minnesota plant and liabilities incurred in connection with the
acquisition ($16.8 million). Through December 31, 2002, a total of $47.6 million
has been expended related to these plans, which consisted of $25.3 million for
employee severance and benefits, $5.5 million for plant exit costs and $16.8
million for payment of acquisition related liabilities. At December 31, 2002,
this reserve had a balance of $1.9 million. Although we have completed our plan,
cash payments are expected to continue for pension obligations totaling $0.8
million which are required to be paid pursuant to a labor agreement in place at
the time of acquisition and for the resolution of various environmental
liabilities, estimated at $1.1 million, that existed at the time of the
acquisition. Accordingly, cash payments related to these acquisition reserves
are expected through 2004.
Activity in our AN Can acquisition reserves is summarized as follows:
Employee Plant
Severance Exit Acquisition
and Benefits Costs Liabilities Total
------------ ----- ----------- -----
(Dollars in thousands)
Balance at December 31, 1999 .......... $2,555 $ 4,451 $ 6,704 $13,710
2000 Utilized ......................... (191) (1,829) (2,704) (4,724)
------ ------- ------- -------
Balance at December 31, 2000 .......... 2,364 2,622 4,000 8,986
2001 Utilized ......................... (873) (645) (2,000) (3,518)
------ ------- ------- -------
Balance at December 31, 2001 .......... 1,491 1,977 2,000 5,468
2002 Utilized ......................... (744) (858) (2,000) (3,602)
------ ------- ------- -------
Balance at December 31, 2002 .......... $ 747 $ 1,119 $ -- $ 1,866
====== ======= ======= =======
F-15
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 3. Rationalization (Credits) Charges and Acquisition Reserves (continued)
Summary
- -------
In addition to the previously discussed rationalization credits and charges,
during 2002 we placed an additional $2.3 million of metal food container assets
with carrying values that were previously written down back in service. As a
result, we recorded $2.3 million as a rationalization credit and recorded those
assets in our Consolidated Balance Sheets at their depreciated cost, which
approximated fair value.
Rationalization (credits) and charges for the years ended December 31 are
summarized as follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Northtown, Kingsburg, Waukegan ....... $(3,041) $ 7,033 $ --
Fairfield ............................ (237) 3,490 --
San Leandro, City of Industry ........ -- (1,189) --
Other assets ......................... (2,325) -- --
------- ------- -----
$(5,603) $ 9,334 $ --
======= ======= =====
At December 31, 2002 and 2001, rationalization and acquisition reserves were
included in our Consolidated Balance Sheets as follows:
2002 2001
---- ----
(Dollars in thousands)
Accrued liabilities .................. $1,813 $ 8,492
Other liabilities .................... 1,647 2,009
------ -------
$3,460 $10,501
====== =======
F-16
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 4. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss is reported in our Consolidated Statements
of Stockholders' Equity (Deficiency). Amounts included in accumulated other
comprehensive loss at December 31 are as follows:
2002 2001
---- ----
(Dollars in thousands)
Foreign currency translation .............. $ (1,998) $(1,916)
Change in fair value of derivatives ....... (2,814) (3,267)
Minimum pension liability ................. (15,655) (2,863)
-------- -------
Accumulated other comprehensive loss .... $(20,467) $(8,046)
======== =======
The amount reclassified to earnings from the change in fair value of derivatives
component of accumulated other comprehensive loss for the year ended December
31, 2002 and December 31, 2001 was net losses of $5.0 million and $2.7 million,
net of income taxes, respectively. For the year ended December 31, 2001, the
change in fair value of derivatives component of accumulated other comprehensive
loss is comprised of a $0.1 million charge, net of income taxes, for the
cumulative effect of adopting SFAS No. 133 and an additional charge of $3.2
million, net of both income taxes and net losses reclassified to earnings, for
the change in fair value of derivatives.
We estimate that we will reclassify $2.3 million, net of income taxes, of the
change in fair value of derivatives component of accumulated other comprehensive
loss as a charge 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. See Note 10 which includes a discussion of hedging
activities.
For the year ended December 31, 2002, the foreign currency translation and
minimum pension liability components of accumulated other comprehensive loss
included $0.4 million and $5.6 million, respectively, related to our equity
investment in Amcor White Cap LLC.
F-17
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 5. Inventories
The components of inventories at December 31 are as follows:
2002 2001
---- ----
(Dollars in thousands)
Raw materials ........................ $ 31,925 $ 28,032
Work-in-process ...................... 50,941 45,510
Finished goods ....................... 171,341 168,362
Spare parts and other ................ 13,944 13,698
-------- --------
268,151 255,602
Adjustment to value inventory
at cost on the LIFO method ........ 4,685 7,025
-------- --------
$272,836 $262,627
======== ========
The amount of inventory recorded on the first-in, first-out method at December
31, 2002 and 2001 was $23.6 million and $22.3 million, respectively.
Note 6. Property, Plant and Equipment, Net
Property, plant and equipment, net, at December 31 is as follows:
2002 2001
---- ----
(Dollars in thousands)
Land ...................................... $ 7,943 $ 7,869
Buildings and improvements ................ 135,499 128,815
Machinery and equipment ................... 1,120,617 1,055,207
Construction in progress .................. 80,626 56,504
---------- ----------
1,344,685 1,248,395
Accumulated depreciation .................. (638,939) (570,853)
---------- ----------
Property, plant and equipment, net .... $ 705,746 $ 677,542
========== ==========
F-18
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 7. Other Assets
Other assets at December 31 are as follows:
2002 2001
---- ----
(Dollars in thousands)
Debt issuance costs .................. $31,121 $13,727
Intangible pension asset ............. 10,349 10,855
Investments in equity affiliates
(see Note 8) ...................... 457 14,342
Other ................................ 21,327 22,783
------- -------
63,254 61,707
Accumulated amortization ............. (5,855) (6,486)
------- -------
$57,399 $55,221
======= =======
Note 8. Investments in Equity Affiliates
Amcor White Cap LLC
- -------------------
Effective July 1, 2001, we formed a joint venture company with Schmalbach-Lubeca
AG that is a leading supplier of an extensive range of metal and plastic
closures to consumer goods packaging companies in the food and beverage
industries in North America. The venture operates under the name Amcor White Cap
LLC, or White Cap. We contributed $48.4 million of metal closure assets,
including our manufacturing facilities in Evansville and Richmond, Indiana, and
$7.1 million of metal closure liabilities to White Cap in return for a 35
percent interest in and $32.4 million of cash proceeds from the joint venture.
Net sales of our metal closure business, which was contributed to the White Cap
joint venture, totaled $46.3 million and $90.8 million in 2001 and 2000,
respectively. Schmalbach-Lubeca AG contributed the remaining metal and plastic
closure operations to the joint venture. In July 2002, Amcor Ltd. purchased
Schmalbach-Lubeca AG's interest in the joint venture.
We account for our investment in the White Cap joint venture using the equity
method. During 2002, we recorded equity in losses of White Cap of $2.6 million,
net of income taxes. As part of the integration of the contributed businesses,
the White Cap joint venture instituted a program to rationalize its operations.
As a result, our equity in losses of White Cap for 2002 included $2.0 million,
net of income taxes, for our portion of White Cap's rationalization charge to
close its Chicago, Illinois metal closure manufacturing facility and $0.7
million, net of income taxes, for our portion of White Cap's gain on the sale of
certain assets at a price in excess of book value. During 2001, we recorded
equity in losses of White Cap of $0.3 million and a gain on the assets
contributed to the joint venture of $4.9 million.
In March 2003, we acquired the remaining 65 percent equity interest in the White
Cap joint venture that we did not already own. See Note 20 which includes a
discussion of the acquisition.
F-19
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 8. Investments in Equity Affiliates (continued)
Packtion Corporation
- --------------------
In April 2000, we, together with Morgan Stanley Private Equity and
Diamondcluster International Inc., agreed to invest in Packtion Corporation, or
Packtion, an e-commerce joint venture aimed at integrating the packaging supply
chain from design through manufacturing and procurement. The parties agreed to
make the investments through Packaging Markets LLC, a limited liability company.
The joint venture was expected to provide a comprehensive online marketplace for
packaging goods and services and to combine content, tools and collaboration
capabilities to streamline the product development process and enhance
transaction opportunities for buyers and sellers of packaging. The products that
Packtion was developing included a web-based software tool to enable product and
package design, development and collaboration; an internet-based secure
environment enabling the sharing of packaging related product information and
the transaction of business electronically; and an informational source of
packaging related knowledge, tools and expert services. Packtion had
insignificant sales for internet consulting services and incurred net losses. We
accounted for our investment in Packtion using the equity method.
In June and August 2000, we invested a total of $7.0 million in Packtion
representing approximately a 45 percent interest in Packtion. For the year ended
December 31, 2000, we recorded equity in losses of Packtion aggregating $4.6
million. In addition, we recorded our share of Packtion's closing costs, $0.2
million, as a reduction to our investment. In the first quarter of 2001, in
connection with an investment by The Proctor & Gamble Company and E. I. Du Pont
de Nemours & Co. in Packtion, we invested an additional $3.1 million bringing
our total investment to $10.1 million representing approximately a 25 percent
interest in Packtion. In connection with this transaction, we also recorded a
reduction to paid-in capital of $1.4 million due to the dilution of our
investment. Packtion was dissolved on May 31, 2001, after its board of directors
determined that there had been slower than anticipated market acceptance of its
business. During 2001, we recorded equity in losses of Packtion aggregating $3.8
million, which included our final losses and eliminated our investment.
F-20
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9. Long-Term Debt
Long-term debt at December 31 is as follows:
2002 2001
---- ----
(Dollars in thousands)
Bank debt:
Bank revolving loans ................... $ -- $333,025
Bank A term loans ...................... 100,000 119,413
Bank B term loans ...................... 348,250 186,588
Canadian Bank Facility ................. -- 2,639
-------- --------
Total bank debt ...................... 448,250 641,665
Subordinated debt:
9% Senior Subordinated Debentures ...... 505,575 300,000
Other .................................. 3,000 3,104
-------- --------
Total subordinated debt .............. 508,575 303,104
-------- --------
Total debt ................................ 956,825 944,769
Less current portion ................... 20,170 57,999
-------- --------
$936,655 $886,770
======== ========
The aggregate annual maturities of long-term debt at December 31, 2002 are as
follows (dollars in thousands):
2003 ............ $ 20,170
2004 ............ 20,170
2005 ............ 20,170
2006 ............ 20,170
2007 ............ 20,170
Thereafter ...... 850,400
--------
$951,250
========
F-21
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9. Long-Term Debt (continued)
Bank Credit Agreement
- ---------------------
On June 28, 2002, we completed the refinancing of our previous U.S. senior
secured credit facility, or the U.S. Credit Agreement, by entering into a new
$850 million senior secured credit facility, or the New Credit Agreement. The
New Credit Agreement provided us with $100 million of A term loans and $350
million of B term loans and also provides us with up to $400 million of
revolving loans. Pursuant to the New Credit Agreement, we also have a $275
million incremental uncommitted term loan facility. See Note 20 which includes a
discussion of borrowings under the incremental term loan facility subsequent to
December 31, 2002.
The A term loans and revolving loans mature on June 28, 2008 and the B term
loans mature on November 30, 2008. Principal on the A term loans and B term
loans is required to be repaid in scheduled annual installments. During 2002, we
repaid $1.8 million of B term loans under the New Credit Agreement. During 2002
and 2001, we repaid $119.4 million and $39.8 million, respectively, of A term
loans and $186.6 million and $2.0 million, respectively, of B term loans under
the U.S. Credit Agreement. The New Credit Agreement requires us to prepay term
loans with proceeds received from the incurrence of indebtedness, except
proceeds used to refinance other existing indebtedness; with proceeds received
from certain assets sales; and, under certain circumstances, with 50 percent of
our excess cash flow. Generally, prepayments are allocated pro rata to the A
term loans and B term loans and applied first to the scheduled amortization
payments in the year of such prepayments and, to the extent in excess thereof,
pro rata to the remaining installments of term loans.
The incremental uncommitted term loan facility provides, among other things,
that any incremental term loan borrowing shall be denominated in a single
currency, either U.S. dollars or certain foreign currencies; have a maturity
date no earlier than the maturity date for the B term loans; and be used to
finance permitted acquisitions, refinance any indebtedness assumed as part of a
permitted acquisition, refinance or repurchase subordinated debt and repay
outstanding revolving loans.
Revolving loans may be used for working capital needs and other general
corporate purposes, including acquisitions. Revolving loans may be borrowed,
repaid and reborrowed over the life of the New Credit Agreement until their
final maturity. We are required to maintain, for at least one period of 30
consecutive days during each calendar year, total average unutilized revolving
loan commitments of at least $90 million. At December 31, 2002, there were no
revolving loans outstanding and, after taking into account letters of credit of
$16.9 million, borrowings available under the revolving credit facility of the
New Credit Agreement were $383.1 million.
F-22
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
Borrowings under the New Credit Agreement may be designated as base rate or
Eurodollar rate borrowings. The base rate is the higher of the prime lending
rate of Deutsche Bank Trust Company Americas or 1/2 of one percent in excess of
the overnight federal funds rate. Initially, the interest rate for all loans
under the New Credit Agreement is the base rate plus a margin of one percent or
the Eurodollar rate plus a margin of two percent. After December 31, 2002, the
interest rate margin on base rate and Eurodollar rate borrowings will be reset
quarterly based upon our total leverage ratio, as defined in the New Credit
Agreement. As of December 31, 2002, the interest rate for Eurodollar rate
borrowings was 3.4 percent. There were no base rate borrowings outstanding at
December 31, 2002. For 2002, 2001 and 2000, the weighted average annual interest
rate paid on term loans was 4.0 percent, 6.0 percent and 7.8 percent,
respectively; and the weighted average annual interest rate paid on revolving
loans was 3.3 percent, 5.3 percent and 7.5 percent, respectively. We have
entered into interest rate swap agreements with an aggregate notional amount of
$375 million to convert interest rate exposure from variable rates to fixed
rates of interest. See Note 10 which includes a discussion of the interest rate
swap agreements.
The New Credit Agreement provides for the payment of a commitment fee ranging
from 0.25 percent to 0.50 percent per annum on the daily average unused portion
of commitments available under the revolving loan facility. Initially, the
commitment fee is 0.50 percent per annum. After December 31, 2002, the
commitment fee will be reset quarterly based on our total leverage ratio.
We may utilize up to a maximum of $50 million of our revolving loan facility
under the New Credit Agreement for letters of credit as long as the aggregate
amount of borrowings of revolving loans and letters of credit do not exceed the
amount of the commitment under such revolving loan facility. The New Credit
Agreement provides for payment to the applicable lenders of a letter of credit
fee equal to the applicable margin in effect for revolving loans maintained as
Eurodollar rate loans (two percent at December 31, 2002) and to the issuers of
letters of credit of a facing fee of 1/4 of one percent per annum, calculated on
the aggregate stated amount of all letters of credit.
The indebtedness under the New Credit Agreement is guaranteed by Holdings and
certain of its U.S. subsidiaries and is secured by a security interest in
substantially all of our real and personal property. The stock of certain of our
U.S. subsidiaries has also been pledged as security to the lenders under the New
Credit Agreement. At December 31, 2002, we had assets of a U.S. subsidiary of
$139.0 million which were restricted and could not be transferred to Holdings or
any other subsidiary of Holdings. The New Credit Agreement contains certain
financial and operating covenants which limit, among other things, our ability
and the ability of our subsidiaries to grant liens, sell assets and use the
proceeds from certain asset sales, make certain payments (including dividends)
on our capital stock, incur indebtedness or provide guarantees, make loans or
investments, enter into transactions with affiliates, make certain capital
expenditures, engage in any business other than the packaging business, and,
with respect to our subsidiaries, issue stock. In addition, we are required to
meet specified financial covenants including interest coverage and total
leverage ratios, each as defined in the New Credit Agreement. We are currently
in compliance with all covenants under the New Credit Agreement.
F-23
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
Because we sell metal containers used in fruit and vegetable pack processing, we
have seasonal sales. As is common in the industry, we must access working
capital to build inventory and then carry accounts receivable for some customers
beyond the end of the summer and fall packing season. Seasonal accounts are
generally settled by year end. Due to our seasonal requirements, we incur
short-term indebtedness to finance our working capital requirements. For 2002,
2001 and 2000, the average amount of revolving loans outstanding, including
seasonal borrowings, was $258.8 million, $497.0 million and $339.5 million,
respectively; and, after taking into account outstanding letters of credit, the
highest amount of such borrowings was $485.3 million, $584.3 million and $529.9
million, respectively.
As a result of refinancing our U.S. Credit Agreement, we recorded an
extraordinary charge of $0.6 million, net of income taxes, or $0.03 per diluted
share, in 2002 for the write-off of unamortized debt issuance costs related to
the U.S. Credit Agreement.
Canadian Bank Facility
- ----------------------
Through a wholly owned Canadian subsidiary, we have a Canadian bank facility, or
the Canadian Bank Facility, with various Canadian banks. The Canadian Bank
Facility initially provided our Canadian subsidiaries with Cdn. $26.5 million
(U.S. $18.5 million) of term loans, and provides such subsidiaries with up to
Cdn. $6.5 million (U.S. $4.5 million) of revolving loans. At December 31, 2002,
there were no term loans outstanding under the Canadian Bank Facility. During
2002 and 2001, we repaid Cdn. $4.2 million (U.S. $2.6 million) and Cdn. $12.8
million (U.S. $8.2 million), respectively, of term loans under the Canadian Bank
Facility.
Revolving loans may be borrowed, repaid and reborrowed until maturity on
December 31, 2003. There were no revolving loans outstanding under the Canadian
Bank Facility at December 31, 2002 and December 31, 2001.
Revolving loan and term loan borrowings may be designated as Canadian Prime Rate
or Bankers Acceptance borrowings. Currently, Canadian Prime Rate borrowings bear
interest at the Canadian Prime Rate, as defined in the Canadian Bank Facility,
plus no margin. Bankers Acceptance borrowings bear interest at the rate for
bankers acceptances plus a margin of one percent. Similar to the New Credit
Agreement, the interest rate margin on both Canadian Prime Rate and Bankers
Acceptance borrowings will be reset quarterly based upon our consolidated total
leverage ratio.
F-24
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9. Long-Term Debt (continued)
Canadian Bank Facility (continued)
- ----------------------
The indebtedness under the Canadian Bank Facility is guaranteed by Holdings and
certain of its subsidiaries and is secured by a security interest in
substantially all of the real and personal property of our Canadian subsidiaries
and all of the stock of our Canadian subsidiaries. The Canadian Bank Facility
contains covenants which are generally no more restrictive than and are
generally similar to the covenants in the New Credit Agreement.
9% Senior Subordinated Debentures
- ---------------------------------
On April 29, 2002, we issued an additional $200 million aggregate principal
amount of our 9% Senior Subordinated Debentures due 2009, or the 9% Debentures.
The newly issued 9% Debentures were an add-on issuance under the indenture for
our existing 9% Debentures originally issued in June 1997 and have identical
terms to the existing 9% Debentures. The issue price for the new 9% Debentures
was 103% of their principal amount (effective interest rate of 8.4 percent). Net
cash proceeds received from this issuance were approximately $202 million, after
deducting selling commissions and offering expenses payable by us. The net
proceeds from this issuance were used to repay a portion of our revolving loan
obligations under the U.S. Credit Agreement.
The $500 million aggregate principal amount of the 9% Debentures are general
unsecured obligations of Holdings, subordinate in right of payment to
obligations under the New Credit Agreement and the Canadian Bank Facility and
effectively subordinate to all obligations of the subsidiaries of Holdings.
Interest on the 9% Debentures is payable semi-annually in cash on the first day
of each June and December.
The 9% Debentures are redeemable, at the option of Holdings, in whole or in
part, at any time after June 1, 2002 at the following redemption prices
(expressed in percentages of principal amount) plus accrued and unpaid interest
thereon to the redemption date if redeemed during the twelve month period
beginning June 1 of the years set forth below:
Year Redemption Price
---- ----------------
2002 ............ 104.500%
2003 ............ 103.375%
2004 ............ 102.250%
2005 ............ 101.125%
Thereafter ...... 100.000%
F-25
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 9. Long-Term Debt (continued)
9% Senior Subordinated Debentures (continued)
- ---------------------------------
Upon the occurrence of a change of control, as defined in the indenture relating
to the 9% Debentures, Holdings is required to make an offer to purchase the 9%
Debentures at a purchase price equal to 101% of their principal amount, plus
accrued and unpaid interest to the date of purchase.
The indenture relating to the 9% Debentures contains covenants which are
generally less restrictive than those under the New Credit Agreement and
Canadian Bank Facility.
13 1/4% Subordinated Debentures
- -------------------------------
In December 2000, we redeemed all $56.2 million principal amount of our
outstanding 13 1/4% Subordinated Debentures due 2006, or the 13 1/4% Debentures.
The redemption price was 109.938% of the principal amount, or approximately
$61.8 million, plus accrued and unpaid interest to the redemption date. As
permitted under the U.S. Credit Agreement and the other documents governing our
indebtedness, we funded the redemption with lower cost revolving loans under the
U.S. Credit Agreement. As a result, in 2000, we recorded an extraordinary loss
of $4.2 million, net of income taxes, or $0.23 per diluted share, for the
premium paid in connection with this redemption and for the write-off of
unamortized debt issuance costs related to the 13 1/4% Debentures.
Note 10. Financial Instruments
The financial instruments recorded in our Consolidated Balance Sheets include
cash and cash equivalents, accounts receivable, accounts payable, debt
obligations and swap agreements. Due to their short-term maturity, the carrying
amounts of cash and cash equivalents, accounts receivable and accounts payable
approximate their fair market value. The following table summarizes the carrying
amounts and estimated fair values of our other financial instruments at December
31 (bracketed amounts represent assets):
2002 2001
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in thousands)
Bank debt ....................... $448,250 $448,250 $641,665 $641,665
Subordinated debt ............... 505,575 518,750 300,000 305,250
Interest rate swap agreements ... 6,526 6,526 5,037 5,037
Natural gas swap agreements ..... (569) (569) 1,768 1,768
F-26
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 10. Financial Instruments (continued)
Methods and assumptions used in estimating fair values are as follows:
Bank debt: The carrying amounts of our variable rate bank revolving loans and
term loans approximate their fair values.
Subordinated debt: The fair value of our 9% Debentures is estimated based on
quoted market prices.
Interest Rate and Natural Gas Swap Agreements: The fair value of the interest
rate and natural gas swap agreements reflects the estimated amounts that we
would pay or receive at December 31, 2002 and 2001 in order to terminate the
contracts based on the present value of expected cash flows derived from market
rates and prices.
Derivative Instruments and Hedging Activities
- ---------------------------------------------
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 utilize derivative financial instruments for speculative purposes.
Our interest rate and natural gas swap agreements are accounted for as cash flow
hedges. To the extent these swap agreements are effective pursuant to SFAS No.
133 in offsetting the variability of the hedged cash flows, changes in their
fair values are recorded in accumulated other comprehensive loss, a component of
stockholders' equity, and reclassified into earnings in future periods when
earnings are also affected by the variability of the hedged cash flows. To the
extent these swap agreements are not effective as hedges, changes in their fair
values are recorded in net income. During each of 2002 and 2001, ineffectiveness
for our hedges reduced net income by $0.2 million and was recorded primarily in
interest and other debt expense in our Consolidated Statements of Income.
The fair value of the outstanding swap agreements in effect at December 31, 2002
and 2001 was recorded in our Consolidated Balance Sheets as a net liability of
$6.0 million ($5.6 million in other liabilities, $0.9 million in accrued
interest payable and $0.5 million in other assets) and $6.8 million ($6.7
million in other liabilities, $1.1 million in accrued interest payable and $1.0
million in other assets), respectively. See Note 4 which includes a discussion
of the effects of hedging activities on accumulated other comprehensive loss.
F-27
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 10. Financial Instruments (continued)
Interest Rate Swap Agreements
- -----------------------------
We have entered into interest rate swap agreements with major banks to manage a
portion of our exposure to interest rate fluctuations. The interest rate swap
agreements effectively convert interest rate exposure from variable rates to
fixed rates of interest. At December 31, 2002 and 2001, the aggregate notional
principal amount of these agreements was $375 million and $275 million,
respectively. These agreements are with financial institutions which are
expected to fully perform under the terms thereof.
Under these agreements, we pay fixed rates of interest ranging from 2.5 percent
to 6.4 percent and receive floating rates of interest based on three month
LIBOR. These agreements mature in 2003 ($125 million notional principal amount)
and 2004 ($250 million notional principal amount). The difference between
amounts to be paid or received on interest rate swap agreements is recorded as
interest expense. Net payments of $7.2 million, net payments of $2.0 million and
net receipts of $0.6 million were made under these interest rate swap agreements
for the years ended December 31, 2002, 2001 and 2000, respectively. During 2002,
interest rate swap agreements for an aggregate notional principal amount of $100
million expired. No interest rate swap agreements expired during 2001.
Natural Gas Swap Agreements
- ---------------------------
We have entered into natural gas swap agreements with major financial
institutions to manage a portion of our exposure to fluctuations in natural gas
prices. We entered into natural gas swap agreements to hedge approximately 80
percent and 35 percent of our exposure to fluctuations in natural gas prices in
2002 and 2001, respectively. At December 31, 2002 and December 31, 2001, the
aggregate notional principal amount of these agreements was 0.9 million MMBtu
and 1.6 million MMBtu of natural gas, respectively. These agreements are with
institutions that are expected to fully perform under the terms thereof.
Under these agreements, we pay fixed natural gas prices ranging from $3.22 to
$4.23 per MMBtu and receive a NYMEX-based natural gas price. These agreements
mature in 2003 (0.8 million MMBtu notional principal amount) and 2004 (0.1
million MMBtu notional principal amount). Gains and losses on these natural gas
swap agreements are deferred and recognized when the related costs are recorded
to cost of goods sold. Payments under these natural gas swap agreements were
$1.2 million and $1.3 million during 2002 and 2001, respectively, and payments
and receipts under these agreements were essentially equal in 2000. During 2002
and 2001, natural gas swap agreements for aggregate notional amounts of 1.5
million MMBtu and 0.8 million MMBtu of natural gas expired, respectively.
F-28
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 10. Financial Instruments (continued)
Concentration of Credit Risk
- ----------------------------
We derive a significant portion of our revenue from multi-year supply agreements
with many of our customers. Aggregate revenues from our three largest customers
accounted for approximately 34.9 percent, 33.6 percent and 33.7 percent of our
net sales in 2002, 2001 and 2000, respectively. The receivable balances from
these customers collectively represented 27.4 percent and 31.1 percent of our
trade accounts receivable at December 31, 2002 and 2001, respectively. As is
common in the packaging industry, we provide extended payment terms to some of
our customers due to the seasonality of the vegetable and fruit pack processing
business. Exposure to losses is dependent on each customer's financial position.
We perform ongoing credit evaluations of our customers' financial condition, and
our receivables are generally not collateralized. We maintain an allowance for
doubtful accounts which we believe is adequate to cover potential credit losses
based on customer credit evaluations, collection history and other information.
Note 11. Commitments and Contingencies
We have a number of noncancelable operating leases for office and plant
facilities, equipment and automobiles that expire at various dates through 2020.
Certain operating leases have renewal options as well as various purchase
options. Minimum future rental payments under these leases are as set forth
below for each of the following years (dollars in thousands):
2003 ............ $21,085
2004 ............ 16,242
2005 ............ 13,665
2006 ............ 11,408
2007 ............ 9,181
Thereafter ...... 23,706
-------
$95,287
=======
Rent expense was approximately $23.5 million, $22.8 million and $19.0 million
for the years ended December 31, 2002, 2001 and 2000, respectively.
We are a party to routine legal proceedings 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.
F-29
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 12. Retirement Benefits
We sponsor a number of defined benefit pension and defined contribution plans
which cover substantially all employees, other than union employees covered by
multi-employer defined benefit pension plans under collective bargaining
agreements. Pension benefits are provided based on either a career average,
final pay or years of service formula. With respect to certain hourly employees,
pension benefits are provided based on stated amounts for each year of service.
It is our policy to fund accrued pension and defined contribution costs in
compliance with ERISA requirements. Assets of the plans consist primarily of
equity and bond funds.
We have unfunded defined benefit health care and life insurance plans that
provide postretirement benefits to certain employees. The plans are
contributory, with retiree contributions adjusted annually, and contain cost
sharing features including deductibles and coinsurance. Retiree health benefits
are paid as covered expenses are incurred.
F-30
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 12. Retirement Benefits (continued)
The changes in benefit obligations and plan assets as well as the funded status
of our retirement plans at December 31 are as follows:
Pension Benefits Postretirement Benefits
------------------------ -------------------------
2002 2001 2002 2001
---- ---- ---- ----
(Dollars in thousands)
Change in Benefit Obligation
Obligation at beginning of year ..................... $137,488 $128,840 $ 50,674 $ 49,682
Service cost ..................................... 7,787 7,653 1,385 1,778
Interest cost .................................... 10,018 9,472 3,584 3,640
Actuarial losses ................................. 5,307 2,438 1,127 2,494
Plan amendments .................................. 865 785 (71) --
Benefits paid .................................... (5,170) (5,004) (3,252) (2,475)
Participants' contributions ...................... -- -- 308 218
Acquisition ...................................... -- 1,519 -- 1,211
Curtailments or settlements ...................... -- (8,215) -- (5,874)
-------- -------- -------- --------
Obligation at end of year ........................... 156,295 137,488 53,755 50,674
Change in Plan Assets
Fair value of plan assets at beginning of year ...... 99,960 97,770 -- --
Actual return on plan assets ..................... (5,986) 508 -- --
Employer contributions ........................... 24,970 15,585 2,944 2,257
Participants' contributions ...................... -- -- 308 218
Benefits paid .................................... (5,170) (5,004) (3,252) (2,475)
Curtailments or settlements ...................... -- (7,927) -- --
Expenses ......................................... (979) (972) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ............ 112,795 99,960 -- --
Funded Status
Funded Status ....................................... (43,500) (37,528) (53,755) (50,674)
Unrecognized actuarial loss ...................... 30,474 9,116 6,781 5,710
Unrecognized prior service cost .................. 14,504 15,803 34 109
-------- -------- -------- --------
Net amount recognized ............................... $ 1,478 $(12,609) $(46,940) $(44,855)
======== ======== ======== ========
Amounts recognized in the Consolidated Balance Sheets
Prepaid benefit cost ............................. $ 16,516 $ 4,005 $ -- $ --
Accrued benefit liability ........................ (41,958) (32,217) (46,940) (44,855)
Intangible asset ................................. 10,349 10,855 -- --
Accumulated other comprehensive loss ............. 16,571 4,748 -- --
-------- -------- -------- --------
Net amount recognized ............................... $ 1,478 $(12,609) $(46,940) $(44,855)
======== ======== ======== ========
F-31
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 12. Retirement Benefits (continued)
The components of the net periodic benefit cost for each of the years ended
December 31 are as follows:
Pension Benefits Postretirement Benefits
--------------------------------- ------------------------------
2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Service cost ..................................... $ 7,787 $ 7,653 $ 6,986 $1,385 $1,778 $1,228
Interest cost .................................... 10,018 9,472 8,671 3,584 3,640 3,220
Expected return on plan assets ................... (9,144) (8,754) (7,925) -- -- --
Amortization of prior service cost ............... 2,164 2,108 1,745 5 15 15
Amortization of actuarial losses (gains) ......... 58 (93) (143) 57 23 20
Losses due to settlement or curtailment .......... -- 151 311 -- -- --
------- ------- ------- ------ ------ ------
Net periodic benefit cost ........................ $10,883 $10,537 $ 9,645 $5,031 $5,456 $4,483
======= ======= ======= ====== ====== ======
Our principal pension and postretirement benefit plans used the following
weighted average actuarial assumptions at December 31:
2002 2001
---- ----
Discount rate ..................... 7.00% 7.25%
Expected return on plan assets .... 9.00% 9.00%
Rate of compensation increase ..... 3.60% 3.60%
The assumed health care cost trend rates used to determine the accumulated
postretirement benefit obligation in 2002 were 12.0 percent for pre-age 65
retirees and 10.0 percent for post-age 65 retirees, declining gradually to an
ultimate rate of 5.0 percent in 2009. The assumed health care cost trend rates
have a significant effect on the amounts reported for the health care plan. A
one percentage point change in the assumed health care cost trend rates would
have the following effects:
1-Percentage 1-Percentage
Point Increase Point Decrease
-------------- --------------
(Dollars in thousands)
Effect on postretirement benefit cost......... $ 523 $ (436)
Effect on postretirement benefit obligation... 4,309 (3,701)
F-32
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 12. Retirement Benefits (continued)
We participate in several multi-employer pension plans which provide defined
benefits to certain of our union employees. Amounts contributed to these plans
and charged to pension cost in 2002, 2001 and 2000 were $4.7 million, $4.6
million and $4.7 million, respectively.
We also sponsor defined contribution pension and profit sharing plans covering
substantially all employees. Our contributions to these plans are based upon
employee contributions and operating profitability. Contributions charged to
expense for these plans were $6.6 million in 2002, $6.4 million in 2001 and $5.1
million in 2000.
Note 13. Income Taxes
The components of the provision for income taxes are as follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Current:
Federal .... $ 5,527 $11,618 $ 7,859
State ...... 843 1,372 816
Foreign .... 3,549 3,380 2,656
------- ------- -------
9,919 16,370 11,331
Deferred:
Federal .... 22,825 12,378 10,372
State ...... 2,325 2,182 953
Foreign .... 69 (708) 424
------- ------- -------
25,219 13,852 11,749
------- ------- -------
$35,138 $30,222 $23,080
======= ======= =======
The provision for income taxes is included in our Consolidated Statements of
Income as follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Income before equity in losses of
affiliates and extraordinary item ... $37,190 $30,222 $25,790
Equity in losses of affiliates ........ (1,668) - -
Extraordinary item .................... (384) - (2,710)
------- ------- -------
$35,138 $30,222 $23,080
======= ======= =======
F-33
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 13. Income Taxes (continued)
The provision for income taxes varied from income taxes computed at the
statutory U.S. federal income tax rate as a result of the following:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Income taxes computed at the statutory
U.S. federal income tax rate ........... $31,131 $26,644 $20,649
State and foreign taxes, net of federal
tax benefit ............................ 2,873 1,955 1,109
Amortization of goodwill ................... -- 1,309 1,009
Other ...................................... 1,134 314 313
------- ------- -------
$35,138 $30,222 $23,080
======= ======= =======
Effective tax rate ......................... 39.5% 39.7% 39.1%
Deferred income taxes reflect the net tax effect of temporary differences
between the financial statement carrying amounts of assets and liabilities and
their respective tax bases. Significant components of our deferred tax assets
and liabilities at December 31 are as follows:
2002 2001
---- ----
(Dollars in thousands)
Deferred tax assets:
Pension and postretirement liabilities ............ $ 25,394 $ 24,694
Rationalization and other accrued liabilities ..... 16,863 24,971
Net operating loss carryforwards .................. 29,226 39,128
AMT and other credit carryforwards ................ 30,272 25,405
Other ............................................. 6,780 5,729
--------- ---------
Total deferred tax assets ..................... 108,535 119,927
Deferred tax liabilities:
Property, plant and equipment ..................... (115,494) (115,060)
Other ............................................. (11,998) (10,843)
--------- ---------
Total deferred tax liabilities ................ (127,492) (125,903)
--------- ---------
Net deferred tax liability ............................. $ (18,957) $ (5,976)
========= =========
F-34
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 13. Income Taxes (continued)
We file a consolidated U.S. federal income tax return that includes all domestic
subsidiaries except CS Can, which files a separate consolidated U.S. federal
income tax return. At December 31, 2002, we had net operating loss carryforwards
of approximately $10.9 million that are available to offset future consolidated
taxable income (excluding CS Can) and that expire in 2012. At December 31, 2002,
CS Can had net operating loss carryforwards of approximately $62.4 million that
are available to offset its future taxable income and that expire from 2018
through 2022. We believe that it is more likely than not that these net
operating loss carryforwards will be available to reduce future income tax
liabilities based upon estimated future taxable income, the reversal of
temporary differences in future periods and the utilization of tax planning
strategies. We also have $26.8 million of alternative minimum tax credits and CS
Can has $0.8 million of alternative minimum tax credits which are available
indefinitely to reduce future income tax payments.
Pre-tax income of foreign subsidiaries was $11.1 million in 2002, $10.7 million
in 2001 and $8.9 million in 2000. At December 31, 2002, approximately $30.3
million of accumulated earnings of foreign subsidiaries are expected to be
permanently reinvested. Accordingly, applicable U.S. federal income taxes have
not been provided. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable to estimate.
Note 14. Stock Option Plans
We have established a stock option plan, or the Plan, for key employees pursuant
to which options to purchase shares of our common stock may be granted. The Plan
authorizes grants of non-qualified or incentive stock options to purchase shares
of our common stock. A maximum of 3,533,417 shares may be issued for stock
options under the Plan. As of December 31, 2002, there were options for 695,074
shares of our common stock available for future issuance under the Plan. The
exercise price of the stock options granted under the Plan is the fair market
value of our common stock on the grant date. The stock options granted under the
Plan generally vest ratably over a five year period beginning one year after the
grant date and have a term of ten years.
We have also established a stock option plan, or the Directors' Plan, for
non-employee directors pursuant to which options to purchase shares of our
common stock may be granted. The Directors' Plan authorizes grants of
non-qualified stock options to purchase shares of our common stock. A maximum of
60,000 shares may be issued for stock options under the Directors' Plan. As of
December 31, 2002, there were options for 54,000 shares of our common stock
available for future issuance under the Directors' Plan. The exercise price of
the stock options granted under the Directors' Plan is the fair market value of
our common stock on the grant date. The stock options granted under the
Directors' Plan generally vest six months after the grant date and have a term
of ten years.
F-35
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 14. Stock Option Plans (continued)
The following is a summary of stock option activity for years ended December 31,
2002, 2001 and 2000:
Weighted Average
Options Exercise Price
------- ----------------
Options outstanding at December 31, 1999 ..... 857,268 $11.17
=========
Granted ................................... 823,900 $13.62
Exercised ................................. (256,203) 2.00
Canceled .................................. (236,500) 21.88
---------
Options outstanding at December 31, 2000 ..... 1,188,465 12.71
=========
Granted ................................... 100,000 $20.76
Exercised ................................. (150,773) 6.82
Canceled .................................. -- --
---------
Options outstanding at December 31, 2001 ..... 1,137,692 14.20
=========
Granted ................................... 151,440 $37.89
Exercised ................................. (377,172) 11.41
Canceled .................................. (144,600) 15.57
---------
Options outstanding at December 31, 2002 ..... 767,360 19.99
=========
At December 31, 2002, 2001 and 2000, the remaining contractual life of options
outstanding was 7.4 years, 7.0 years and 7.5 years, respectively, and there were
220,280, 402,372 and 360,065 options exercisable with weighted average exercise
prices of $17.88, $12.26 and $8.12, respectively.
The following is a summary of stock options outstanding and exercisable at
December 31, 2002 by range of exercise price:
Range of Remaining Weighted Weighted
Exercise Number Contractual Average Average
Prices Outstanding Life (Years) Exercise Price Exercisable Exercise Price
------ ----------- ------------ -------------- ----------- --------------
$ 7.25 - $14.09 463,920 7.2 $13.53 124,280 $13.52
17.00 - 22.13 130,000 6.1 20.53 80,000 21.22
25.15 - 37.26 48,000 8.0 31.67 16,000 34.97
38.00 - 42.22 125,440 9.4 38.85 -- --
------- -------
767,360 220,280
======= =======
F-36
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 14. Stock Option Plans (continued)
The weighted average fair value of options granted was $25.49, $14.01 and $9.28
for 2002, 2001 and 2000, respectively.
The fair value was calculated using the Black-Scholes option-pricing model based
on the following weighted average assumptions for grants made in 2002, 2001 and
2000:
2002 2001 2000
---- ---- ----
Risk-free interest rate ........ 5.4% 4.5% 6.6%
Expected volatility ............ 59.6% 60.3% 60.6%
Dividend yield ................. - - -
Expected option life (years).... 8 8 8
Note 15. Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01
per share.
Our Board of Directors previously authorized the repurchase of up to $70.0
million of our common stock from time to time in the open market, through
privately negotiated transactions or through block purchases. Our repurchases of
common stock are recorded as treasury stock and result in a charge to
stockholders' equity. Through December 31, 2002, we repurchased 2,708,975 shares
of our common stock for $61.0 million.
F-37
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 16. Earnings Per Share
The components of the calculation of earnings per share are as follows:
2002 2001 2000
---- ---- ----
(Dollars and shares in thousands)
Income before extraordinary item .................. $54,407 $41,765 $35,524
Extraordinary item ................................ (599) -- (4,216)
------- ------- -------
Net income .................................... $53,808 $41,765 $31,308
======= ======= =======
Weighted average number of shares used in:
Basic earnings per share ...................... 18,135 17,777 17,652
Assumed exercise of employee stock options .... 242 304 351
------ ------ ------
Diluted earnings per share .................... 18,377 18,081 18,003
====== ====== ======
Options to purchase 16,494 to 174,223 shares of common stock at prices ranging
from $25.15 to $42.22 per share for 2002, 172,826 to 842,289 shares of common
stock at prices ranging from $11.63 to $36.75 per share for 2001 and 743,575 to
997,900 shares of common stock at prices ranging from $9.31 to $36.75 per share
for 2000 were outstanding but were excluded from the computation of diluted
earnings per share because the exercise prices for such options were greater
than the average market price of the common stock and, therefore, the effect
would be antidilutive.
Note 17. Related Party Transactions
Pursuant to various management services agreements, or the Management
Agreements, entered into between each of Holdings, Containers and Plastics and
S&H Inc., or S&H, a company wholly owned by Mr. Silver, the Chairman and
Co-Chief Executive Officer of Holdings, and Mr. Horrigan, the President and
Co-Chief Executive Officer of Holdings, S&H provides Holdings and its
subsidiaries with general management, supervision and administrative services.
In 2002, 2001 and 2000, in consideration for its services, S&H received a fee in
an amount equal to 90.909 percent of 4.95 percent of our consolidated EBDIT (as
defined in the Management Agreements) until our consolidated EBDIT had reached
the scheduled amount set forth in the Management Agreements, plus reimbursement
for all related out-of-pocket expenses. We paid $5.2 million, $5.1 million and
$4.9 million to S&H under the Management Agreements in 2002, 2001 and 2000,
respectively. These payments to S&H were allocated, based upon EBDIT, as a
charge to operating income of each of our business segments. Under the terms of
the Management Agreements, we have agreed, subject to certain exceptions, to
indemnify S&H and any of its affiliates, officers, directors, employees,
subcontractors, consultants or controlling persons against any loss or damage
they may sustain arising in connection with the Management Agreements.
F-38
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 17. Related Party Transactions (continued)
During 2001 and 2000, The Morgan Stanley Leveraged Equity Fund II, L.P., an
affiliate of Morgan Stanley, held a significant amount of our common stock. In
each of 2001 and 2000, we paid Morgan Stanley $0.5 million for financial
advisory services. In 2002 and 2001, we entered into natural gas swap agreements
with Morgan Stanley Capital Group, Inc., or MSCG, an affiliate of Morgan
Stanley, for an aggregate notional principal amount of 0.8 million and 1.0
million MMBtu of natural gas. During 2002 and 2001, an aggregate notional
principal amount of 0.9 million MMBtu and 0.1 million MMBtu, respectively, of
these natural gas swap agreements were settled under which we received and paid
insignificant amounts to MSCG. In 2002, we paid Morgan Stanley and Morgan
Stanley Senior Funding, Inc., an affiliate of Morgan Stanley, a combined $4.9
million in underwriting fees related to the New Credit Agreement and the add-on
issuance of the 9% Debentures. Mr. Abramson, a director of Holdings, is a
Managing Director of Morgan Stanley & Co. Incorporated, an affiliate of Morgan
Stanley.
Landstar System, Inc. provided transportation services to our subsidiaries in
the amount of $0.4 million, $0.7 million and $0.9 million in 2002, 2001 and
2000, respectively. Mr. Crowe, a director of Holdings, is the Chairman of the
Board, President and Chief Executive Officer of Landstar System, Inc.
Note 18. Business Segment Information
We are engaged in the packaging industry and report our results primarily in two
business segments: metal food containers and plastic containers. The metal food
containers segment manufactures steel and aluminum containers for human and pet
food and paperboard containers. The plastic containers segment manufactures
custom designed plastic containers for personal care, health care,
pharmaceutical, household and industrial chemical, food, pet care, agricultural
chemical, automotive and marine chemical products, as well as plastic bowls and
cans, plastic closures, caps, sifters and fitments and thermoformed plastic tubs
for personal care, food, pet care and household products. These segments are
strategic business operations that offer different products. Each are managed
separately because each business produces a packaging product requiring
different technology, production and marketing strategies. Each segment operates
primarily in the United States. There are no inter-segment sales. The accounting
policies of the business segments are the same as those described in Note 1.
F-39
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 18. Business Segment Information (continued)
Information for each of the past three years for our business segments is as
follows:
Metal Food Plastic Metal
Containers(1) Containers(2) Closures Corporate Total
------------- ------------- -------- --------- -----
(Dollars in thousands)
2002
- ----
Net sales ........................ $1,486,950 $501,334 $ -- $ -- $1,988,284
Depreciation and amortization .... 59,435 36,225 -- 55 95,715
Segment income from operations ... 120,587 52,916 -- (5,563) 167,940
Segment assets ................... 901,628 472,549 -- -- 1,374,177
Capital expenditures ............. 82,836 36,287 -- 37 119,160
2001
- ----
Net sales ........................ $1,401,146 $493,598 $46,250 $ -- $1,940,994
Depreciation and amortization .... 55,097 37,864 2,475 95 95,531
Segment income from operations ... 108,360 45,992 3,268 (5,209) 152,411
Segment assets ................... 856,336 454,104 -- -- 1,310,440
Capital expenditures ............. 54,869 37,340 761 72 93,042
2000
- ----
Net sales ........................ $1,387,705 $398,953 $90,839 $ -- $1,877,497
Depreciation and amortization .... 53,063 30,887 4,917 102 88,969
Segment income from operations ... 120,238 36,890 3,675 (3,701) 157,102
Segment assets ................... 860,546 466,663 54,166 -- 1,381,375
Capital expenditures ............. 58,617 28,292 2,298 20 89,227
- -------------------------------
(1) Includes rationalization credits of $5.4 million in 2002 and net
rationalization charges of $5.8 million in 2001. Includes goodwill
amortization of $2.3 million and $2.4 million in 2001 and 2000,
respectively.
(2) Includes a rationalization credit of $0.2 million in 2002 and a
rationalization charge of $3.5 million in 2001. Includes goodwill
amortization of $2.7 million and $1.8 million in 2001 and 2000,
respectively.
F-40
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 18. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income
taxes, equity in losses of affiliates and extraordinary item as follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Total segment income from operations ......... $167,940 $152,411 $157,102
Gain on assets contributed to affiliate ...... -- (4,908) --
Interest and other debt expense .............. 73,789 81,192 91,178
-------- -------- --------
Income before income taxes,
equity in losses of affiliates
and extraordinary item ............ $ 94,151 $ 76,127 $ 65,924
======== ======== ========
Total segment assets are reconciled to total assets as follows:
2002 2001
---- ----
(Dollars in thousands)
Total segment assets ....... $1,374,177 $1,310,440
Other assets ............... 248 1,380
---------- ----------
Total assets .......... $1,374,425 $1,311,820
========== ==========
Financial information relating to our operations by geographic area is as
follows:
2002 2001 2000
---- ---- ----
(Dollars in thousands)
Net sales:
United States ............... $1,928,058 $1,882,114 $1,823,349
Canada ...................... 60,226 58,880 54,148
---------- ---------- ----------
Total net sales ........... $1,988,284 $1,940,994 $1,877,497
========== ========== ==========
Long-lived assets:
United States ............... $ 824,571 $ 796,632
Canada ...................... 22,656 22,375
---------- ----------
Total long-lived assets ... $ 847,227 $ 819,007
========== ==========
F-41
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 18. Business Segment Information (continued)
Net sales are attributed to the country from which the product was manufactured
and shipped.
Sales of our metal food containers segment to Nestle Food Company accounted for
12.1 percent, 10.8 percent and 11.8 percent of our consolidated net sales during
2002, 2001 and 2000, respectively. Sales of our metal food containers segment to
Campbell Soup Company accounted for 11.4 percent, 12.2 percent and 10.7 percent
of our consolidated net sales during 2002, 2001 and 2000, respectively. Sales of
our metal food containers segment to Del Monte Corporation accounted for 9.9
percent, 10.1 percent, and 10.7 percent of our consolidated net sales during
2002, 2001 and 2000, respectively.
F-42
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 19. Quarterly Results of Operations (Unaudited)
The following table presents our quarterly results of operations for the years
ended December 31, 2002 and 2001:
First Second Third Fourth
----- ------ ----- ------
(Dollars in thousands, except per share data)
2002 (1)
- ----
Net sales .............................. $424,256 $456,249 $640,854 $466,925
Gross profit ........................... 52,487 57,427 81,234 47,405
Income before extraordinary item ....... 11,343 10,674 26,198 6,192
Net income ............................. 11,343 10,075 26,198 6,192
Basic earnings per share: (2)
Income before extraordinary item ..... $0.63 $0.59 $1.44 $0.34
Net income ........................... 0.63 0.56 1.44 0.34
Diluted earnings per share: (2)
Income before extraordinary item ..... $0.62 $0.58 $1.42 $0.34
Net income ........................... 0.62 0.55 1.42 0.34
2001 (3)
- ----
Net sales .............................. $443,514 $445,417 $590,791 $461,272
Gross profit ........................... 50,930 57,192 78,978 53,186
Net income ............................. 2,225 7,447 27,279 4,814
Basic net income per share (2) ......... $0.13 $0.42 $1.53 $0.27
Diluted net income per share (2) ....... 0.12 0.41 1.50 0.26
- -------------------------
(1) Net income for the first, third and fourth quarters of 2002 includes
rationalization credits of $2.3 million, $2.6 million and $0.7 million,
respectively. Net income for the second quarter of 2002 includes an
extraordinary loss of $0.6 million, net of income taxes.
(2) Earnings per share data is computed independently for each of the periods
presented. Accordingly, the sum of the quarterly earnings per share amounts
may not equal the total for the year.
(3) Net income for the first quarter of 2001 includes a rationalization charge
of $3.5 million. Net income for the third quarter of 2001 includes a gain
on assets contributed to affiliate of $5.3 million. Net income for the
fourth quarter of 2001 includes net rationalization charges of $5.8 million
and a reduction of $0.4 million to the gain on assets contributed to
affiliate.
F-43
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 20. Subsequent Events
In January 2003, we acquired substantially all of the assets of Thatcher Tubes
LLC and its affiliates, or Thatcher Tubes, a privately held manufacturer and
marketer of decorated plastic tubes serving primarily the personal care
industry. The purchase price, including additional production capacity recently
installed and currently being installed, was approximately $32 million in cash.
In March 2003, we acquired the remaining 65 percent equity interest in the White
Cap joint venture that we did not already own from Amcor White Cap Inc. for
$37.1 million in cash and refinanced approximately $90 million of debt of the
business.
On March 3, 2003, we completed a $150 million incremental term loan borrowing
under the New Credit Agreement. The proceeds were used largely to finance the
acquisitions of White Cap and Thatcher Tubes. The terms of the incremental term
loans are the same as those for B term loans under the New Credit Agreement.
This borrowing reduces our incremental uncommitted term loan facility under the
New Credit Agreement to $125 million.
On March 28, 2003, we announced that we will acquire PCP Can Manufacturing,
Inc., a subsidiary of Pacific Coast Producers, or PCP, through which PCP
self-manufactures its metal food containers. The transaction is expected to
close in April 2003.
F-44
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED BALANCE SHEETS
December 31, 2002 and 2001
(Dollars in thousands)
2002 2001
---- ----
Assets
Current assets:
Cash and cash equivalents ................... $ 62 $ 189
Notes receivable - subsidiaries ............. 20,170 56,685
Interest receivable - subsidiaries .......... 3,792 3,054
Other current assets ........................ 4,297 5,239
---------- --------
Total current assets ...................... 28,321 65,167
Notes receivable - subsidiaries ................ 933,655 549,316
Investment in and amounts due from
subsidiaries ................................. 49,838 --
Other assets ................................... 31,636 38,780
---------- --------
$1,043,450 $653,263
========== ========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ........... $ 20,170 $ 56,685
Accrued interest payable .................... 3,792 3,054
Accounts payable and accrued liabilities .... 736 1,495
---------- --------
Total current liabilities ................. 24,698 61,234
Excess of distributions over investment
in subsidiaries .............................. -- 9,373
Long-term debt ................................. 933,655 549,316
Other liabilities .............................. 22,005 18,192
Stockholders' equity:
Common stock ................................ 209 205
Paid-in capital ............................. 124,872 118,319
Retained earnings (accumulated deficit) ..... 18,871 (34,937)
Accumulated other comprehensive loss ........ (20,467) (8,046)
Treasury stock at cost (2,685,475 shares) ... (60,393) (60,393)
---------- --------
Total stockholders' equity ................ 63,092 15,148
---------- --------
$1,043,450 $653,263
========== ========
See notes to condensed financial statements.
F-45
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
---- ---- ----
Net sales .............................................. $ -- $ -- $ --
Cost of goods sold ..................................... -- -- --
------- ------- -------
Gross profit ...................................... -- -- --
Selling, general and administrative expenses ........... 4,495 4,879 3,137
------- ------- -------
Loss from operations .............................. (4,495) (4,879) (3,137)
Interest and other debt expense ........................ -- -- --
------- ------- -------
Loss before income taxes, equity in losses
of affiliate and equity in earnings of
consolidated subsidiaries ................. (4,495) (4,879) (3,137)
Benefit from income taxes .............................. (1,779) (1,937) (1,227)
------- ------- -------
Loss before equity in losses of affiliate
and equity in earnings of consolidated
subsidiaries .............................. (2,716) (2,942) (1,910)
Equity in losses of affiliate .......................... -- (3,804) (4,610)
------- ------- -------
Loss before equity in earnings
of consolidated subsidiaries .................... (2,716) (6,746) (6,520)
Equity in earnings of consolidated subsidiaries ........ 56,524 48,511 37,828
-------- ------- -------
Net income ........................................ $53,808 $41,765 $31,308
======= ======= =======
See notes to condensed financial statements.
F-46
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
2002 2001 2000
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income .................................................... $ 53,808 $ 41,765 $ 31,308
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of consolidated subsidiaries ......... (56,524) (48,511) (37,828)
Equity in losses of affiliate ........................... -- 3,804 4,610
Deferred income tax benefit ............................. (1,779) (1,937) (1,227)
Changes in other assets and liabilities, net ............ (360) 7,047 9,634
--------- -------- --------
Net cash (used in) provided by operating activities ..... (4,855) 2,168 6,497
--------- -------- --------
Cash flows provided by (used in) investing activities:
Notes receivable - subsidiaries ............................... (347,824) 41,758 92,988
Investment in equity affiliate ................................ -- (3,039) (7,026)
Cash distribution received from subsidiaries .................. -- -- 1,075
--------- -------- --------
Net cash (used in) provided by investing activities ..... (347,824) 38,719 87,037
--------- -------- --------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of long-term debt ...................... 656,000 -- --
Repayments of long-term debt .................................. (307,751) (41,758) (92,988)
Proceeds from stock option exercises .......................... 4,303 1,028 512
Repurchase of common stock .................................... -- -- (1,075)
--------- -------- --------
Net cash provided by (used in) financing activities ..... 352,552 (40,730) (93,551)
--------- -------- --------
Cash and cash equivalents:
Net (decrease) increase ....................................... (127) 157 (17)
Balance at beginning of year .................................. 189 32 (49)
--------- -------- --------
Balance at end of year ........................................ $ 62 $ 189 $ 32
========= ======== ========
See notes to condensed financial statements.
F-47
SILGAN HOLDINGS INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 1. Basis of Presentation
Silgan Holdings Inc., or Holdings or the Parent Company, has two wholly owned
subsidiaries, Silgan Containers Corporation, or Containers, and Silgan Plastics
Corporation, or Plastics. Holdings' investment in its subsidiaries is stated at
cost plus its share of the undistributed earnings/losses of its subsidiaries.The
Parent Company's financial statements should be read in conjunction with our
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Note 2. Long-Term Debt
Long-term debt at December 31 is as follows:
2002 2001
---- ----
(Dollars in thousands)
Bank debt:
Bank A term loans ....................... $100,000 $119,413
Bank B term loans ....................... 348,250 186,588
-------- --------
Total bank debt ....................... 448,250 306,001
-------- --------
Subordinated debt:
9% Senior Subordinated Debentures ....... 505,575 300,000
-------- --------
Total Debt ................................. 953,825 606,001
Less current portion .................... 20,170 56,685
-------- --------
$933,655 $549,316
======== ========
F-48
SILGAN HOLDINGS INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
Note 2. Long-Term Debt (continued)
The aggregate annual maturities of long-term debt at December 31, 2002 are as
follows (dollars in thousands):
2003 ............ $ 20,170
2004 ............ 20,170
2005 ............ 20,170
2006 ............ 20,170
2007 ............ 20,170
Thereafter ...... 847,400
--------
$948,250
========
As of December 31, 2002 and 2001, the obligations of Holdings had been pushed
down to its subsidiaries. In 2002 and 2001, Holdings received interest income
from its subsidiaries in the same amount as the interest expense it incurred on
its obligations.
Note 3. Guarantees
Pursuant to the New Credit Agreement, Holdings guarantees all of the
indebtedness of its subsidiaries incurred under the New Credit Agreement.
Holdings' subsidiaries may borrow up to $400 million of revolving loans under
the New Credit Agreement. Holdings' guarantee under the New Credit Agreement is
secured by a pledge by Holdings of all of the stock of its U.S. subsidiaries.
Holdings also guarantees all of the indebtedness of its Canadian subsidiaries
under the Canadian Bank Facility. At December 31, 2002, there were no term loans
or revolving loans outstanding under the Canadian Bank Facility. Holdings'
guarantee under the Canadian Bank Facility is secured by a pledge by Holdings of
all of the stock of its Canadian subsidiaries.
Note 4. Dividends from Subsidiaries
For the years ended December 31, 2002 and 2001, Holdings did not receive any
cash dividends from its consolidated subsidiaries accounted for by the equity
method. For the year ended December 31, 2000, Holdings received cash dividends
of $1.1 million from its consolidated subsidiaries accounted for by the equity
method.
F-49
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SILGAN HOLDINGS INC.
For the years ended December 31, 2002, 2001 and 2000
(Dollars in thousands)
Additions
----------------------
Balance at Charged to Charged Balance
beginning costs and to other at end of
Description of period expenses accounts Deductions period
- ----------- ---------- ---------- -------- ---------- ---------
For the year ended December 31, 2002:
Allowance for doubtful
accounts receivable ......................... $3,449 $ 119 $ -- $ (704)(1) $2,864
====== ====== ==== ======= ======
For the year ended December 31, 2001:
Allowance for doubtful
accounts receivable ......................... $3,001 $1,697 $(10) $(1,239)(1) $3,449
====== ====== ==== ====== ======
For the year ended December 31, 2000:
Allowance for doubtful
accounts receivable ......................... $2,991 $ 165 $305 $ (460)(1) $3,001
====== ====== ==== ======= ======
(1) Uncollectible accounts written off, net of recoveries.
F-50
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
10.23 Silgan Holdings Inc. 2002 Non-Employee Directors Stock Option Plan.
12 Computation of Ratio of Earnings to Fixed Charges for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998.
21 Subsidiaries of Registrant.
23 Consent of Ernst & Young LLP.