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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________________ to ________________
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1269834
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4 Landmark Square
Stamford, Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
(203)975-7110
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of October 31, 2004, the number of shares outstanding of the Registrant's
common stock, $0.01 par value, was 18,422,142.
SILGAN HOLDINGS INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information 3
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at 3
September 30, 2004 and 2003 and December 31, 2003
Condensed Consolidated Statements of Income for 4
the three months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Income for 5
the nine months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for 6
the nine months ended September 30, 2004 and 2003
Condensed Consolidated Statements of Stockholders' 7
Equity for the nine months ended September 30, 2004
and 2003
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 21
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 28
Risk
Item 4. Controls and Procedures 29
Part II. Other Information 30
Item 6. Exhibits and Reports on Form 8-K 30
Signatures 31
Exhibit Index 32
-2-
Part I. Financial Information
Item 1. Financial Statements
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited, see Note 1)
Sept. 30, Sept. 30, Dec. 31,
2004 2003 2003
---- ---- ----
Assets
Current assets
Cash and cash equivalents ........................ $ 22,877 $ 33,576 $ 12,100
Trade accounts receivable, net ................... 317,450 333,718 159,273
Inventories ...................................... 307,966 321,525 320,194
Prepaid expenses and other current assets ........ 33,862 31,399 53,731
---------- ---------- ----------
Total current assets ......................... 682,155 720,218 545,298
Property, plant and equipment, net .................... 792,903 809,113 817,850
Goodwill, net ......................................... 203,606 217,634 202,421
Other assets .......................................... 55,818 54,745 55,515
---------- ---------- ----------
$1,734,482 $1,801,710 $1,621,084
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Bank revolving loans ............................. $ 78,100 $ 133,000 $ 25,000
Current portion of long-term debt ................ 23,670 21,670 23,670
Trade accounts payable ........................... 156,832 146,632 211,639
Accrued payroll and related costs ................ 71,920 71,116 65,940
Accrued liabilities .............................. 77,334 67,544 24,518
---------- ---------- ----------
Total current liabilities .................... 407,856 439,962 350,767
Long-term debt ........................................ 953,910 1,059,394 953,910
Other liabilities ..................................... 181,066 187,223 195,602
Stockholders' equity
Common stock ..................................... 211 209 210
Paid-in capital .................................. 131,383 125,551 125,758
Retained earnings ................................ 123,164 63,339 60,905
Accumulated other comprehensive loss ............. (1,204) (13,575) (5,675)
Unamortized stock compensation ................... (1,511) -- --
Treasury stock ................................... (60,393) (60,393) (60,393)
---------- ---------- ----------
Total stockholders' equity ................... 191,650 115,131 120,805
---------- ---------- ----------
$1,734,482 $1,801,710 $1,621,084
========== ========== ==========
See accompanying notes.
-3-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended September 30, 2004 and 2003
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2004 2003
---- ----
Net sales ............................................... $784,847 $760,971
Cost of goods sold ...................................... 679,046 658,775
-------- --------
Gross profit ....................................... 105,801 102,196
Selling, general and administrative expenses ............ 28,619 28,130
Rationalization charges ................................. 66 7,653
-------- --------
Income from operations ............................. 77,116 66,413
Interest and other debt expense before loss on
early extinguishment of debt ....................... 13,554 20,604
Loss on early extinguishment of debt .................... -- 967
-------- --------
Interest and other debt expense .................... 13,554 21,571
-------- --------
Income before income taxes ......................... 63,562 44,842
Provision for income taxes .............................. 25,107 18,079
-------- --------
Net income ......................................... $ 38,455 $ 26,763
======== ========
Earnings per share:
Basic net income per share ......................... $2.09 $1.47
===== =====
Diluted net income per share ....................... $2.06 $1.45
===== =====
Dividends per share: .................................... $0.15 $ --
===== =====
Weighted average number of shares:
Basic ............................................. 18,399 18,253
Effect of dilutive securities ..................... 228 194
------ ------
Diluted ........................................... 18,627 18,447
====== ======
See accompanying notes.
-4-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 2004 and 2003
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2004 2003
---- ----
Net sales .............................................. $1,854,488 $1,760,588
Cost of goods sold ..................................... 1,614,772 1,538,601
---------- ----------
Gross profit ...................................... 239,716 221,987
Selling, general and administrative expenses ........... 82,559 79,849
Rationalization charges ................................ 1,267 7,653
---------- ----------
Income from operations ............................ 155,890 134,485
Interest and other debt expense before loss on
early extinguishment of debt ...................... 43,860 59,431
Loss on early extinguishment of debt ................... -- 967
---------- ----------
Interest and other debt expense ................... 43,860 60,398
---------- ----------
Income before income taxes and equity in
losses of affiliate ............................. 112,030 74,087
Provision for income taxes ............................. 44,252 29,338
---------- ----------
Income before equity in losses of affiliate ....... 67,778 44,749
Equity in losses of affiliate, net of income taxes ..... -- 281
---------- ----------
Net income ........................................ $ 67,778 $ 44,468
========== ==========
Earnings per share:
Basic net income per share ........................ $3.69 $2.44
===== =====
Diluted net income per share ...................... $3.64 $2.42
===== =====
Dividends per share: ................................... $0.30 $ --
===== =====
Weighted average number of shares:
Basic ............................................. 18,356 18,242
Effect of dilutive securities ..................... 239 153
------ ------
Diluted ........................................... 18,595 18,395
====== ======
See accompanying notes.
-5-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2004 and 2003
(Dollars in thousands)
(Unaudited)
2004 2003
---- ----
Cash flows provided by (used in) operating activities
Net income ................................................. $ 67,778 $ 44,468
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .......................... 90,718 86,223
Rationalization charges ................................ 1,267 7,653
Equity in losses of affiliate .......................... -- 457
Other changes that provided (used) cash,
net of effects from acquisitions:
Trade accounts receivable, net .................... (158,177) (186,641)
Inventories ....................................... 12,148 30,267
Trade accounts payable ............................ 22,118 26,619
Accrued liabilities ............................... 56,464 44,783
Other, net ........................................ 9,190 16,981
--------- ---------
Net cash provided by operating activities .............. 101,506 70,810
--------- ---------
Cash flows provided by (used in) investing activities
Purchases of businesses, net of cash acquired .............. -- (207,676)
Capital expenditures ....................................... (72,919) (79,160)
Proceeds from asset sales .................................. 9,934 1,619
--------- ---------
Net cash used in investing activities .................. (62,985) (285,217)
--------- ---------
Cash flows provided by (used in) financing activities
Borrowings under revolving loans ........................... 745,700 614,100
Repayments under revolving loans ........................... (692,600) (481,100)
Proceeds from stock option exercises ....................... 2,262 485
Changes in outstanding checks - principally vendors ........ (76,925) (66,756)
Proceeds from issuance of long-term debt ................... -- 150,000
Repayments of long-term debt ............................... -- (25,000)
Dividends paid on common stock ............................. (5,519) --
Debt issuance costs ........................................ (662) (2,064)
--------- ---------
Net cash (used in) provided by financing activities .... (27,744) 189,665
--------- ---------
Cash and cash equivalents
Net increase (decrease) .................................... 10,777 (24,742)
Balance at beginning of year ............................... 12,100 58,318
--------- ---------
Balance at end of period ................................... $ 22,877 $ 33,576
========= =========
Interest paid ................................................... $ 35,205 $ 42,091
Income taxes paid, net of refunds ............................... 674 449
See accompanying notes.
-6-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2004 and 2003
(Dollars and shares in thousands)
(Unaudited)
Common Stock Accumulated
------------ Paid- other Unamortized Total
Par in Retained comprehensive stock Treasury stockholders'
Shares value capital earnings income (loss) compensation stock equity
------ ----- ------- -------- ------------- ------------ -------- -------------
Balance at December 31, 2002 ............. 18,231 $209 $124,872 $ 18,871 $(20,467) $ -- $(60,393) $ 63,092
Comprehensive income:
Net income ............................ -- -- -- 44,468 -- -- -- 44,468
Change in fair value of derivatives,
net of tax provision of $1,015 ...... -- -- -- -- 1,559 -- -- 1,559
Foreign currency translation .......... -- -- -- -- 5,333 -- -- 5,333
--------
Comprehensive income ..................... 51,360
Stock option exercises, including
tax benefit of $194 .................... 34 -- 679 -- -- -- -- 679
------ ---- -------- -------- -------- ------- -------- --------
Balance at September 30, 2003 ............ 18,265 $209 $125,551 $ 63,339 $(13,575) $ -- $(60,393) $115,131
====== ==== ======== ======== ======== ======= ======== ========
Balance at December 31, 2003 ............. 18,273 $210 $125,758 $ 60,905 $ (5,675) $ -- $(60,393) $120,805
Comprehensive income:
Net income ............................ -- -- -- 67,778 -- -- -- 67,778
Change in fair value of derivatives,
net of tax provision of $1,934 ....... -- -- -- -- 2,961 -- -- 2,961
Foreign currency translation .......... -- -- -- -- 1,510 -- -- 1,510
--------
Comprehensive income ..................... 72,249
Dividends declared on common stock ....... -- -- -- (5,519) -- -- -- (5,519)
Issuance of restricted stock units ....... -- -- 1,631 -- -- (1,631) -- --
Amortization of stock compensation ....... -- -- -- -- -- 120 -- 120
Stock option exercises, including
tax benefit of $1,733 .................. 149 1 3,994 -- -- -- -- 3,995
------ ---- -------- -------- -------- ------- -------- --------
Balance at September 30, 2004 ............ 18,422 $211 $131,383 $123,164 $ (1,204) $(1,511) $(60,393) $191,650
====== ==== ======== ======== ======== ======= ======== ========
See accompanying notes.
-7-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements of Silgan Holdings Inc., or Holdings, have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. The results of operations for any
interim period are not necessarily indicative of the results of operations for
the full year.
The Condensed Consolidated Balance Sheet at December 31, 2003 has been derived
from our audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
You should read the accompanying condensed consolidated financial statements in
conjunction with our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
Certain prior year 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. As a result of our cash management
system, checks issued for payment may create negative book balances. Checks
outstanding in excess of related book balances of $22.5 million, $21.6 million
and $99.4 million at September 30, 2004 and 2003 and December 31, 2003,
respectively, are included in trade accounts payable in our Condensed
Consolidated Balance Sheets. For the nine months ended September 30, 2004 and
2003, we reclassified the changes in outstanding checks from operating
activities to financing activities in our Condensed Consolidated Statements of
Cash Flows to treat them as, in substance, cash advances.
Stock-Based Compensation. We currently have one stock-based compensation plan in
effect, which plan replaced two previous plans under which stock options are
still outstanding. We apply the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for stock options issued
under 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.
In May 2004, we adopted the Silgan Holdings Inc. 2004 Stock Incentive Plan, or
the Plan, which provides for awards of stock options, stock appreciation rights,
restricted stock, stock units and performance awards to our officers, other key
employees and outside Directors. The Plan replaces our previous stock option
plans, and all shares of our common stock reserved for issuance under those
plans will no longer be available for issuance.
-8-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Stock-Based Compensation (continued).
Shares of our common stock offered under the Plan shall be authorized but
unissued shares or treasury shares. The maximum aggregate number of shares of
our common stock that may be issued in connection with stock options, stock
appreciation rights, stock units, restricted shares and performance awards under
the Plan shall not exceed 900,000 shares. Each award of stock options or stock
appreciation rights under the Plan will reduce the number of shares of our
common stock available for future issuance under the Plan by the number of
shares of our common stock subject to the award. Each award of restricted stock
or stock units under the Plan, in contrast, will reduce the number of shares of
our common stock available for future issuance under the Plan by two shares for
every one restricted share or stock unit awarded.
In the second quarter of 2004, we granted 3,000 restricted stock units to the
independent members of our Board of Directors, which vest in full six months
from the date of grant. The fair value of these units at the date of grant was
$0.1 million. In the third quarter of 2004, we granted 32,000 restricted stock
units to certain of our officers and key employees. These restricted stock units
vest ratably over a five-year period from the date of grant. The fair value of
these units at the date of grant was $1.5 million. Unvested restricted stock
units may not be disposed of or transferred during the vesting period. Grants
issued are accounted for as fixed grants and, accordingly, the fair value at the
grant date has been charged to stockholders' equity as unamortized stock
compensation and is being amortized over the respective vesting period.
Restricted stock units were not included in the computation of diluted net
income per share for the three and nine months ended September 30, 2004 because
the market price at the date of grant was greater than the average market price
of the common shares during such periods.
-9-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Stock-Based Compensation (continued).
If we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," net income and basic and diluted net income per share would have
been as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported ........................... $38,455 $26,763 $67,778 $44,468
Add: Stock-based compensation expense
included in reported net income, net
of income taxes .............................. 58 -- 72 --
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards,
net of income taxes .......................... (468) (317) (1,357) (1,010)
------- ------- ------- -------
Pro forma net income .............................. $38,045 $26,446 $66,493 $43,458
======= ======= ======= =======
Earnings per share:
Basic net income per share - as reported ..... $2.09 $1.47 $3.69 $2.44
===== ===== ===== =====
Basic net income per share - pro forma ....... $2.07 $1.45 $3.62 $2.38
===== ===== ===== =====
Diluted net income per share - as reported ... $2.06 $1.45 $3.64 $2.42
===== ===== ===== =====
Diluted net income per share - pro forma ..... $2.05 $1.44 $3.59 $2.37
===== ===== ===== =====
-10-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Recently Adopted Accounting Pronouncements. In January 2003, the Financial
Accounting Standards Board, or the FASB, issued Interpretation, or FIN, No. 46,
"Consolidation of Variable Interest Entities," which expands upon existing
accounting guidance on consolidation. A variable interest entity either does not
have equity investors with voting rights or has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN No. 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns. The provisions of FIN No. 46 were effective for us on
March 31, 2004. The adoption of FIN No. 46 did not effect our financial position
or results of operations.
Note 2. Acquisitions
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. Including additional production capacity installed shortly before the
acquisition, the purchase price for the assets was approximately $32 million in
cash. Thatcher Tubes operates as part of our plastic container business.
In March 2003, we acquired the remaining 65 percent equity interest in the Amcor
White Cap, LLC, or White Cap, joint venture that we did not already own from
Amcor White Cap, Inc. for approximately $37 million in cash. Additionally, we
refinanced debt of White Cap in the amount of approximately $88 million and
purchased equipment subject to a third party lease for approximately $5 million.
This closures business operates as part of our metal food container business.
In April 2003, we acquired PCP Can Manufacturing, Inc., or Pacific Coast Can, a
subsidiary of Pacific Coast Producers, or Pacific Coast, through which Pacific
Coast self-manufactured a majority of its metal food containers. The purchase
price was approximately $44 million in cash, including approximately $29 million
for inventory. As part of the transaction, we entered into a ten-year supply
agreement with Pacific Coast under which Pacific Coast has agreed to purchase
from us substantially all of its metal food container requirements. Pacific
Coast Can operates as part of our metal food container business.
These acquisitions were 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
the businesses' results of operations have been included in our consolidated
operating results from the date of acquisition. The allocation of purchase price
was finalized during the first quarter of 2004 when valuations and integration
plans were completed.
-11-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 3. Rationalization Charges and Acquisition Reserves
As part of our plans to integrate the operations of our various acquired
businesses and to rationalize certain facilities, we have established reserves
for employee severance and benefits and plant exit costs. Activity in our
rationalization and acquisition reserves since December 31, 2003 is summarized
as follows:
Employee Plant Non-Cash
Severance Exit Asset
and Benefits Costs Write Down Total
------------ ----- ---------- -----
(Dollars in thousands)
Balance at December 31, 2003
- ----------------------------
Fairfield Rationalization ...................................... $ -- $1,273 $ -- $ 1,273
2003 Acquisitions .............................................. 3,284 1,036 -- 4,320
2003 Rationalizations .......................................... 595 971 -- 1,566
------- ------ ----- -------
Balance at December 31, 2003 ................................... 3,879 3,280 -- 7,159
Activity for the Nine Months Ended Sept. 30, 2004
- -------------------------------------------------
Fairfield Rationalization Reserves Utilized..................... -- (275) -- (275)
Finalization of 2003 Acquisition Plan Reserves ................. (268) (239) -- (507)
2003 Acquisition Plan Reserves Utilized ........................ (2,820) (751) -- (3,571)
2003 Rationalization Plan Reserves Established ................. 423 257 -- 680
2003 Rationalization Plan Reserves Utilized .................... (958) (479) -- (1,437)
Benton Harbor Rationalization Reserve Established .............. 210 136 241 587
Benton Harbor Rationalization Reserve Utilized ................. (210) (136) (241) (587)
------- ------ ----- -------
Total Activity ................................................. (3,623) (1,487) -- (5,110)
Balance at September 30, 2004
- -----------------------------
Fairfield Rationalization ...................................... -- 998 -- 998
2003 Acquisitions .............................................. 196 46 -- 242
2003 Rationalizations .......................................... 60 749 -- 809
Benton Harbor Rationalization .................................. -- -- -- --
------- ------ ----- -------
Balance at September 30, 2004 .................................. $ 256 $1,793 $ -- $ 2,049
======= ====== ===== =======
-12-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 3. Rationalization Charges and Acquisition Reserves (continued)
Benton Harbor Rationalization Plan
- ----------------------------------
During the first quarter of 2004, we approved and announced to employees a plan
to exit our Benton Harbor, Michigan metal food container manufacturing facility.
This decision resulted in a charge to earnings during the first half of 2004 of
$0.6 million. Through September 30, 2004, we made cash payments totaling $0.4
million related to this plan. All actions under this plan have been completed.
2003 Acquisition Plans
- ----------------------
During 2003, we established acquisition reserves in connection with our
purchases of Thatcher Tubes, White Cap and Pacific Coast Can, recorded pursuant
to plans that we began to assess and formulate at the date of the acquisitions.
During the first quarter of 2004, we finalized these plans and the related
acquisition reserves. These plans included exiting the Lodi, California metal
food container manufacturing facility, the Chicago, Illinois and Queretaro,
Mexico metal closures manufacturing facilities and the Culiacan, Mexico plastic
container manufacturing facility, as well as the consolidation of certain
administrative functions of the acquired businesses. All of these facilities
have ceased manufacturing operations. During the first nine months of 2004, we
made cash payments totaling $3.6 million related to these plans. At September
30, 2004, these reserves had an aggregate balance of $0.2 million. All cash
payments related to these plans are expected in 2004.
2003 Rationalization Plans
- --------------------------
During 2003, we approved and announced to employees plans to exit our Norwalk,
Connecticut and Anaheim, California plastic container manufacturing facilities
and our Queretaro, Mexico metal closures manufacturing facility, as well as to
consolidate certain administrative functions of the closures business. These
decisions resulted in a charge to earnings of $9.0 million ($1.2 million for the
metal food container business and $7.8 million for the plastic container
business) in 2003, which included $5.3 million for the non-cash write-down in
carrying value of assets. During 2004, additional rationalization charges of
$0.7 million were recorded related to these plans. During the first nine months
of 2004, we made cash payments totaling $1.4 million related to these plans. At
September 30, 2004, these reserves had an aggregate balance of $0.8 million. The
timing of certain cash payments related to these reserves is dependent upon the
expiration of a lease obligation. Therefore, cash payments related to these
reserves are expected through 2010.
-13-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 3. Rationalization Charges and Acquisition Reserves (continued)
Rationalization and acquisition reserves are included in the Condensed
Consolidated Balance Sheets as follows:
Sept. 30, Sept. 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Accrued liabilities ...................... $ 462 $5,515 $5,572
Other liabilities ........................ 1,587 2,193 1,587
------ ------ ------
$2,049 $7,708 $7,159
====== ====== ======
Note 4. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in the Condensed
Consolidated Statements of Stockholders' Equity. Amounts included in accumulated
other comprehensive income (loss) consisted of the following:
Sept. 30, Sept. 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Foreign currency translation ............. $ 6,145 $ 3,335 $ 4,635
Change in fair value of derivatives ...... 2,200 (1,255) (761)
Minimum pension liability ................ (9,549) (15,655) (9,549)
------- ------- -------
Accumulated other comprehensive loss... $(1,204) $(13,575) $(5,675)
======= ======== =======
-14-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 5. Inventories
Inventories consisted of the following:
Sept. 30, Sept. 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Raw materials ....................... $ 42,043 $ 32,820 $ 36,732
Work-in-process ..................... 61,812 61,100 52,815
Finished goods ...................... 191,431 204,268 213,481
Spare parts and other ............... 19,231 20,576 20,267
-------- -------- --------
314,517 318,764 323,295
Adjustment to value inventory
at cost on the LIFO method ...... (6,551) 2,761 (3,101)
-------- -------- --------
$307,966 $321,525 $320,194
======== ======== ========
Note 6. Investment in Affiliate
Prior to March 2003, we held a 35 percent interest in a joint venture company
with Amcor Ltd. that was 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. As discussed in Note 2, in March 2003, we acquired the remaining 65
percent equity interest in the White Cap joint venture that we did not already
own. The business now operates under the name Silgan Closures LLC, or Silgan
Closures.
Prior to our acquisition of White Cap, we accounted for our investment in the
White Cap joint venture using the equity method. For the first two months of
2003, we recorded equity in losses of White Cap of $0.3 million, net of income
taxes. The results of Silgan Closures since March 2003 have been included with
the results of our metal food container business.
-15-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 7. Long-Term Debt
Long-term debt consisted of the following:
Sept. 30, Sept. 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Bank debt
Bank revolving loans ................. $ 78,100 $ 133,000 $ 25,000
Bank A term loans .................... 83,330 100,000 83,330
Bank B term loans .................... 691,250 498,250 691,250
---------- ---------- ----------
Total bank debt ................... 852,680 731,250 799,580
Subordinated debt
6 3/4% Senior Subordinated Notes ..... 200,000 -- 200,000
9% Senior Subordinated Debentures .... -- 479,814 --
Other ................................ 3,000 3,000 3,000
---------- ---------- ----------
Total subordinated debt ........... 203,000 482,814 203,000
---------- ---------- ----------
Total debt ................................ 1,055,680 1,214,064 1,002,580
Less current portion ................. 101,770 154,670 48,670
---------- ---------- ----------
$ 953,910 $1,059,394 $ 953,910
========== ========== ==========
In March 2004, we entered into interest rate swap agreements for an aggregate
notional principal amount of $150 million. Under these agreements, we will pay a
fixed rate of interest of 1.8 percent and receive a floating rate of interest
based on three month LIBOR. These agreements mature in March 2006 and are
accounted for as cash flow hedges.
In July 2004, interest rate swaps at fixed rates ranging from 2.5 percent to 2.7
percent for an aggregate notional principal amount of $200 million expired. The
expiration of these interest rate swaps did not have a material effect on our
financial position or results of operations.
On July 15, 2004, we completed an amendment to our senior secured credit
facility that lowered the margin on our B term loans by twenty-five basis
points, resulting in an interest rate on our B term loans of LIBOR plus 1.75
percent.
At September 30, 2004, our current portion of debt consisted of $78.1 million of
bank revolving loans related primarily to seasonal working capital needs and
$23.7 million of bank term loans.
In October 2004, interest rate swaps at fixed rates of 3.8 percent for an
aggregate notional principal amount of $50 million expired. The expiration of
these interest rate swaps is not expected to have a material effect on our
financial position or results of operations.
-16-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 8. Retirement Benefits
The components of the net periodic pension benefits costs are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Service cost ........................... $ 2,405 $ 2,579 $ 8,692 $ 7,468
Interest cost .......................... 5,056 4,739 14,941 13,016
Expected return on plan assets ......... (5,556) (4,081) (16,687) (11,258)
Amortization of prior service cost ..... 854 700 2,461 2,100
Amortization of actuarial losses ....... 36 343 890 1,029
Curtailment loss ....................... -- 37 -- 111
------- ------- -------- --------
Net periodic benefit cost .............. $ 2,795 $ 4,317 $ 10,297 $ 12,466
======= ======= ======== ========
The components of the net periodic other postretirement benefits costs are as
follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Service cost ........................... $ (536) $ 579 $1,021 $1,685
Interest cost .......................... 779 1,342 3,682 3,778
Amortization of prior service cost ..... 1 1 4 3
Amortization of actuarial losses ....... (455) 80 122 240
------ ------ ------ ------
Net periodic benefit cost .............. $ (211) $2,002 $4,829 $5,706
====== ====== ====== ======
In the third quarter of 2004, in order to reflect the most current estimate of
our postretirement plans, we recorded a reduction to our postretirement benefits
expense of $1.8 million pertaining to amounts recorded earlier in the year. In
accordance with Accounting Principles Board Opinion No. 20, "Accounting
Changes," the change in accounting estimate for postretirement benefits costs
was accounted for in the current period, and resulted in an increase to net
income of $1.1 million, or $0.06 per diluted share, for the three and nine
months ended September 30, 2004.
In December 2003, the U.S. enacted into law the "Medicare Prescription Drug,
Improvement and Modernization Act of 2003," or the Act. The Act introduces a
prescription drug benefit under Medicare, or Medicare Part D, as well as a
federal subsidy to sponsors of retiree health care benefit plans that provide a
benefit that is at least actuarially equivalent to Medicare Plan D.
-17-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 8. Retirement Benefits (continued)
In January 2004, the FASB issued FASB Staff Position, or FSP, No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." Since specific authoritative
guidance on the accounting for the federal subsidy was pending, we elected to
defer accounting for the effects of the Act as permitted by FSP No. 106-1. In
May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," that provides guidance on the accounting for the effects of the Act and
was effective for us on July 1, 2004. FSP No. 106-2 supercedes FSP No. 106-1 and
requires recognition of the change in postretirement benefit obligation as an
actuarial gain.
Some of our retiree medical programs already provide prescription drug coverage
for retirees over age 65 that is at least as generous as the benefit to be
provided under Medicare. This Act will reduce our share of the obligations for
future retiree medical benefits in these instances. However, based on current
guidance, we have determined that the impact to our accumulated other
postretirement benefit obligation and net periodic other postretirement benefit
costs from this Act will be insignificant. Therefore, we will incorporate the
effects of this Act at our December 31, 2004 postretirement plan measurement
date.
Our minimum required contributions to our pension plans, as previously disclosed
in our consolidated financial statements and notes thereto included in our
Annual Report on Form 10-K for the year ended December 31, 2003, based on
current tax law, were estimated at $6.1 million for 2004. In the third quarter
of 2004, we revised our estimate of minimum required contributions to $2.4
million due to our prior year funding in excess of minimum requirements and the
performance of the plan assets. Generally, it is our practice to make
contributions in accordance with ERISA minimum requirements, except that under
certain circumstances we may make contributions, up to the extent they are tax
deductible, in excess of the minimum amounts required in order to reduce our
unfunded pension liability. During the first nine months of 2004, we have made
contributions of $2.8 million to fund our pension plans.
-18-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 9. Business Segment Information
Reportable business segment information for the three and nine months ended
September 30 is as follows:
Metal Food Plastic
Containers(1) Containers(2) Corporate Total
---------- ---------- --------- -----
(Dollars in thousands)
Three Months Ended Sept. 30, 2004
- ---------------------------------
Net sales .................................... $ 642,735 $142,112 $ -- $ 784,847
Depreciation and amortization(3) ............. 19,641 10,197 7 29,845
Segment income from operations ............... 69,168 9,860 (1,912) 77,116
Three Months Ended Sept. 30, 2003
- ---------------------------------
Net sales .................................... $ 621,721 $139,250 $ -- $ 760,971
Depreciation and amortization(3) ............. 18,185 10,785 9 28,979
Segment income from operations ............... 63,491 4,326 (1,404) 66,413
Nine Months Ended Sept. 30, 2004
- --------------------------------
Net sales .................................... $1,422,754 $431,734 $ -- $1,854,488
Depreciation and amortization(3) ............. 57,081 30,647 27 87,755
Segment income from operations ............... 123,564 37,792 (5,466) 155,890
Nine Months Ended Sept. 30, 2003
- --------------------------------
Net sales .................................... $1,335,091 $425,497 $ -- $1,760,588
Depreciation and amortization(3) ............. 52,405 30,776 31 83,212
Segment income from operations ............... 101,369 37,131 (4,015) 134,485
- -------------
(1) Segment income from operations includes rationalization charges of
$1.0 million recorded for the nine months ended September 30, 2004 and
$0.6 million for the three and nine months ended September 30, 2003.
(2) Segment income from operations includes rationalization charges of
$0.3 million recorded for the nine months ended September 30, 2004 and
$7.1 million for the three and nine months ended September 30, 2003.
(3) Depreciation and amortization excludes amortization of debt issuance
costs of $1.0 million and $1.1 million for the three months ended
September 30, 2004 and 2003, respectively, and $3.0 million for each
of the nine month periods ended September 30, 2004 and 2003.
-19-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2004 and 2003 and for the
three and nine months then ended is unaudited)
Note 9. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income taxes
and equity in losses of affiliate as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Total segment income from operations ..... $77,116 $66,413 $155,890 $134,485
Interest and other debt expense .......... 13,554 21,571 43,860 60,398
------- ------- -------- --------
Income before income taxes and
equity in losses of affiliate ..... $63,562 $44,842 $112,030 $ 74,087
======= ======= ======== ========
Note 10. Dividends
In April 2004, our Board of Directors initiated a quarterly dividend on our
common stock and approved a $0.15 per share quarterly cash dividend, which was
paid on June 15, 2004 to holders of record of our common stock on June 1, 2004.
The cash payment for this dividend was $2.8 million.
In July 2004, our Board of Directors declared a quarterly cash dividend on our
common stock of $0.15 per share, which was paid on September 15, 2004 to holders
of record of our common stock on September 1, 2004. The cash payment for this
dividend was $2.8 million.
On November 4, 2004, our Board of Directors declared a quarterly cash dividend
on our common stock of $0.15 per share, payable on December 15, 2004 to holders
of record of our common stock on December 1, 2004. The cash payment for this
dividend is expected to be approximately $2.8 million.
-20-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Statements included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report on
Form 10-Q 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 Securities Exchange Act of 1934. Such forward-looking
statements are made based upon management's expectations and beliefs concerning
future events impacting us and therefore involve a number of uncertainties and
risks, including, but not limited to, those described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 and our other filings with
the Securities and Exchange Commission. As a result, the actual results of our
operations or our financial condition could differ materially from those
expressed or implied in these forward-looking statements.
General
We are a leading North American manufacturer of metal and plastic consumer goods
packaging products. We produce steel and aluminum containers for human and pet
food, metal, composite and plastic closures for food and beverage products 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. We are the
largest manufacturer of metal food containers in North America, a leading
manufacturer of plastic containers in North America for personal care products
and a leading manufacturer of metal, composite and plastic vacuum closures in
North America for food and beverage products.
Our objective is to increase shareholder value by efficiently deploying capital
and management resources to grow our business, reduce operating costs, build
sustainable competitive positions, or franchises, and complete acquisitions that
generate attractive cash returns. We have grown our net sales over the years,
largely through acquisitions but also through internal growth, and we continue
to evaluate acquisition opportunities in the consumer goods packaging market. In
the absence of compelling acquisitions, we intend to continue to focus on
reducing our debt balance from December 31, 2003 and expect to pay down between
$200 - $300 million from 2004 through 2006, of which at least $100 million is
expected in 2004.
-21-
RESULTS OF OPERATIONS
The following table sets forth certain unaudited income statement data expressed
as a percentage of net sales for the periods presented.
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
---- ---- ---- ----
Net sales
Metal food containers.................................. 81.9% 81.7% 76.7% 75.8%
Plastic containers..................................... 18.1 18.3 23.3 24.2
----- ----- ----- -----
Consolidated........................................ 100.0 100.0 100.0 100.0
Cost of goods sold....................................... 86.5 86.6 87.1 87.4
----- ----- ----- -----
Gross profit............................................. 13.5 13.4 12.9 12.6
Selling, general and administrative expenses............. 3.7 3.7 4.5 4.6
Rationalization charges ................................. -- 1.0 -- 0.4
----- ----- ----- -----
Income from operations................................... 9.8 8.7 8.4 7.6
Interest and other debt expense.......................... 1.7 2.8 2.4 3.4
----- ----- ----- -----
Income before income taxes and equity in losses
of affiliate........................................... 8.1 5.9 6.0 4.2
Provision for income taxes............................... 3.2 2.4 2.4 1.7
----- ----- ----- -----
Income before equity in losses of affiliate ............. 4.9 3.5 3.6 2.5
Equity in losses of affiliate, net of income taxes....... -- -- -- --
----- ----- ----- -----
Net income............................................... 4.9% 3.5% 3.6% 2.5%
===== ===== ===== =====
Summary unaudited results of operations for the three and nine months ended
September 30, 2004 and 2003 are provided below.
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in millions)
Net sales
Metal food containers ........ $642.7 $621.7 $1,422.8 $1,335.1
Plastic containers ........... 142.1 139.3 431.7 425.5
------ ------ -------- --------
Consolidated .............. $784.8 $761.0 $1,854.5 $1,760.6
====== ====== ======== ========
Income from operations
Metal food containers(1) ..... $ 69.2 $ 63.5 $ 123.6 $ 101.4
Plastic containers(2) ........ 9.8 4.3 37.8 37.1
Corporate .................... (1.9) (1.4) (5.5) (4.0)
------ ------ -------- --------
Consolidated .............. $ 77.1 $ 66.4 $ 155.9 $ 134.5
====== ====== ======== ========
- -------------
(1) Includes rationalization charges of $1.0 million recorded for the nine
months ended September 30, 2004 and $0.6 million for the three and nine
months ended September 30, 2003.
(2) Includes rationalization charges of $0.3 million recorded for the nine
months ended September 30, 2004 and $7.1 million for the three and nine
months ended September 30, 2003.
-22-
Three Months Ended September 30, 2004 Compared with Three Months Ended September
30, 2003
Overview. Consolidated net sales were $784.8 million in the third quarter of
2004, representing a 3.1 percent increase as compared to the third quarter of
2003. This increase was primarily attributable to higher average selling prices
as a result of the pass through of increased raw material costs in both the
metal food and plastic container businesses. Income from operations for the
third quarter of 2004 increased by $10.7 million, or 16.1 percent, as compared
to the same period in 2003, primarily due to the inclusion of rationalization
charges of $7.7 million in 2003 and better margins in 2004 in the metal food
container business resulting from an improved product mix and strong operating
results at Silgan Closures. Net income for the third quarter of 2004 of $38.4
million, or $2.06 per diluted share, increased by $11.6 million, or $0.61 per
diluted share, as compared to the same period in 2003 as a result of the items
previously discussed, as well as lower interest and other debt expense.
Net Sales. The $23.8 million increase in consolidated net sales in the third
quarter of 2004 as compared to the third quarter of 2003 was primarily the
result of higher average selling prices resulting from the pass through of
higher raw material costs in both the metal food and plastic container
businesses.
Net sales for the metal food container business increased $21.0 million, or 3.4
percent, in the third quarter of 2004 as compared to the same period in 2003.
This increase was primarily attributable to higher average selling prices due to
the pass through of higher steel costs.
Net sales for the plastic container business in the third quarter of 2004
increased $2.8 million, or 2.0 percent, as compared to the same period in 2003.
This increase was principally a result of higher average selling prices due to
the pass through of increased resin costs, partially offset by the effect of
price concessions made last year and a less favorable mix of products sold due
to weak demand from certain customers in the personal care market.
Gross Profit. The slight increase in gross profit margin for the third quarter
of 2004 as compared to the same period in 2003 was principally due to better
margins in the metal food container business resulting from an improved product
mix and the benefits of rationalization initiatives in the closures operations,
partially offset by the impact of prior year price concessions and a less
favorable product mix in our plastic container business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales for the third
quarter of 2004 remained constant at 3.7 percent as compared to the same period
in 2003.
Income from Operations. Income from operations for the third quarter of 2004
increased by $10.7 million as compared to the third quarter of 2003 and
operating margin increased to 9.8 percent from 8.7 percent over the same
periods. Results for the third quarter of 2003 included rationalization charges
totaling $7.7 million related to closing several manufacturing facilities.
Income from operations of the metal food container business for the third
quarter of 2004 increased $5.7 million, or 9.0 percent, as compared to the same
period in 2003, and operating margin increased to 10.8 percent from 10.2 percent
over the same periods. These increases were principally due to the effect of an
improved mix of products sold as well as the benefits from rationalization and
integration activities at the closures operations, partially offset by increases
in manufacturing costs.
-23-
In the third quarter of 2004, in order to reflect the most current estimate of
our postretirement plans, we recorded a reduction to our postretirement benefits
expense of $1.8 million pertaining to amounts recorded earlier in the year. This
adjustment resulted in a benefit to our third quarter 2004 income from
operations of $2.1 million as compared to the third quarter of 2003, which was
largely offset by increases in other employee health and welfare related costs
in the quarter. Our postretirement benefits costs in the fourth quarter of 2004
are expected to be consistent with the same period in the prior year.
Income from operations of the plastic container business for the third quarter
of 2004 increased $5.5 million as compared to the same period in 2003, and
operating margin increased to 6.9 percent from 3.1 percent over the same
periods. Income from operations and operating margin in the third quarter of
2003 included rationalization charges totaling $7.1 million related to closing
two manufacturing facilities. Income from operations and operating margin in the
third quarter of 2004 were negatively impacted by a less favorable mix of
products sold, prior year price concessions and higher manufacturing costs.
Interest and Other Debt Expense. Interest and other debt expense for the third
quarter of 2004 decreased $8.0 million to $13.6 million as compared to the same
period in 2003. This decrease resulted primarily from a lower average interest
rate as a result of the refinancing of all $500 million of the 9% Senior
Subordinated Debentures due 2009, or the 9% Debentures, in late 2003 with $200
million of lower cost 6 3/4% Senior Subordinated Notes due 2013, or the 6 3/4%
Notes, and borrowings under the senior secured credit facility, or the Credit
Agreement, and lower average borrowings as a result of debt reductions late in
2003.
We have entered into interest rate swap agreements to manage a portion of our
exposure to interest rate fluctuations. These interest rate swap agreements
effectively convert interest rate exposure from variable rates to fixed rates of
interest. In July 2004, interest rate swaps at fixed rates ranging from 2.5
percent to 2.7 percent for an aggregate notional principal amount of $200
million expired. The expiration of these interest rate swaps did not have a
material effect on our financial position or results of operations. At September
30, 2004, the aggregate notional principal amount of our interest rate swap
agreements was $500 million, including $50 million notional principal amount
that expired in October 2004. The expiration of these interest rate swaps in
October 2004 is not expected to have a material effect on our financial position
or results of operations.
Nine Months Ended September 30, 2004 Compared with Nine Months Ended September
30, 2003
Overview. Consolidated net sales were $1.855 billion in the first nine months of
2004, representing a 5.3 percent increase as compared to the first nine months
of 2003 as a result of the inclusion of net sales of Silgan Closures, as well as
higher net sales in both the metal food and plastic container businesses due to
the effect of the pass through of higher raw material costs. Income from
operations for the first nine months of 2004 increased by $21.4 million, or 15.9
percent, as compared to the same period in 2003. The increase in income from
operations was primarily a result of the integration and rationalization
benefits from businesses acquired in early 2003, increased sales of value-added
products and the incurrence of rationalization charges of $7.7 million in 2003,
partially offset by higher depreciation and manufacturing expenses. Net income
for the first nine months of 2004 of $67.7 million, or $3.64 per diluted share,
increased by $23.2 million, or $1.22 per diluted share, as compared to the same
period in 2003 as a result of the items previously discussed, as well as lower
interest expense.
-24-
Net Sales. The $93.9 million increase in consolidated net sales in the first
nine months of 2004 as compared to the first nine months of 2003 was the result
of higher net sales in the metal food container business primarily due to the
acquisition of Silgan Closures in early 2003 and the effect of the pass through
of higher raw material costs in both the metal food and plastic container
businesses.
Net sales for the metal food container business increased $87.7 million, or 6.6
percent, in the first nine months of 2004 as compared to the same period in
2003. This increase was primarily attributable to the inclusion of net sales of
Silgan Closures for the entire period in 2004, as well as higher average selling
prices due to the pass through of increased steel costs and an enhanced product
mix.
Net sales for the plastic container business in the first nine months of 2004
increased $6.2 million, or 1.5 percent, as compared to the same period in 2003.
This increase was principally a result of higher average selling prices due to
the pass through of increased resin costs, partially offset by a less favorable
mix of products sold.
Gross Profit. The increase in gross profit margin for the first nine months of
2004 as compared to the same period in 2003 was principally due to increased
sales of value-added products and the inclusion of and benefits from
rationalizing the closures operations of our metal food container business.
These factors were partially offset by the impact of prior year price
concessions in the plastic container business and higher depreciation and
manufacturing expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first nine months of 2004 increased $2.7 million
as compared with the same period in 2003 due to the inclusion of Silgan Closures
for the entire 2004 period. As a percentage of consolidated net sales, selling,
general and administrative expenses were 0.1 percent lower over the same periods
as a result of the benefits from integrating the administrative functions of the
closures operations into our metal food container business.
Income from Operations. Income from operations for the first nine months of 2004
increased by $21.4 million as compared to the first nine months of 2003, and
operating margin increased to 8.4 percent from 7.6 percent over the same
periods. Results for the first nine months of 2003 included rationalization
charges totaling $7.7 million related to closing several manufacturing
facilities.
Income from operations of the metal food container business for the first nine
months of 2004 increased $22.2 million, or 21.9 percent, as compared to the same
period in 2003, and operating margin increased to 8.7 percent from 7.6 percent
over the same periods. These increases were principally due to the inclusion of
the results of Silgan Closures and benefits from relatively higher capital
spending over the last several years. These favorable items were partially
offset by higher depreciation expense and an increase in manufacturing costs.
Income from operations of the plastic container business for the first nine
months of 2004 increased $0.7 million, or 1.9 percent, as compared to the same
period in 2003, and operating margin increased to 8.8 percent from 8.7 percent
over the same periods. These increases were primarily a result of the inclusion
of $7.1 million of rationalization charges in 2003, offset by a less favorable
mix of products sold, the impact of prior year price concessions and higher
manufacturing costs.
Interest and Other Debt Expense. Interest and other debt expense for the first
nine months of 2004 decreased $16.5 million to $43.9 million as compared to the
same period in 2003. This decrease resulted primarily from a lower average
interest rate as a result of the refinancing of all $500 million of the 9%
Debentures in late 2003 with lower cost 6 3/4% Notes and borrowings under the
Credit Agreement and lower average outstanding borrowings as a result of debt
reductions in late 2003.
-25-
CAPITAL RESOURCES AND LIQUIDITY
Our principal sources of liquidity have been net cash from operating activities
and borrowings under the Credit Agreement. 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.
For the nine months ended September 30, 2004, we used cash from operations of
$101.5 million, proceeds from stock option exercises of $2.3 million, proceeds
from asset sales of $9.9 million and net borrowings of revolving loans of $53.1
million offset by the reduction in outstanding checks of $76.9 million to fund
capital expenditures of $72.9 million, dividends paid on common stock of $5.5
million, debt issuance costs of $0.7 million and to increase cash balances by
$10.8 million.
For the nine months ended September 30, 2003, we used incremental term loan
borrowings of $150 million under the Credit Agreement, cash balances of $24.7
million, cash provided by operations of $70.8 million, proceeds from asset sales
of $1.6 million, proceeds from stock option exercises of $0.5 million and net
borrowings of revolving loans of $133.0 million offset by the reduction in
outstanding checks of $66.7 million to fund the acquisitions of White Cap,
Thatcher Tubes and Pacific Coast Can for $207.7 million, capital expenditures of
$79.2 million, the partial redemption of $25 million of 9% Debentures and debt
issuance costs of $2.0 million.
Because we sell metal containers used in fruit and vegetable pack processing, we
have seasonal sales. As is common in the industry, we must utilize working
capital to build inventory and then carry accounts receivable for some customers
beyond the end of the packing season. Due to our seasonal requirements, we incur
short-term indebtedness to finance our working capital requirements.
During the third quarter of 2004, we utilized approximately $267.5 million of
revolving loans under the Credit Agreement for our peak seasonal working capital
requirements. We may use the available portion of our revolving loan facility
under the Credit Agreement, after taking into account our seasonal needs and
outstanding letters of credit, for acquisitions and other permitted purposes.
At September 30, 2004, we had $78.1 million of revolving loans outstanding under
the Credit Agreement related primarily to seasonal working capital needs. After
taking into account outstanding letters of credit, the available portion of the
revolving loan facility under the Credit Agreement at September 30, 2004 was
$297.0 million, leaving approximately 74 percent of our revolving loan facility
under the Credit Agreement unused.
On July 15, 2004, we completed an amendment to the Credit Agreement that lowered
the margin on our B term loans by twenty-five basis points, from an interest
rate on our B term loans of LIBOR plus 200 basis points to an interest rate of
LIBOR plus 175 basis points. At September 30, 2004, we had $691.3 million of
outstanding B term loans.
In April 2004, our Board of Directors initiated a quarterly dividend on our
common stock and approved a $0.15 per share quarterly cash dividend, which was
paid on June 15, 2004 to holders of record of our common stock on June 1, 2004.
The cash payment for this dividend was $2.8 million.
In July 2004, our Board of Directors declared a quarterly cash dividend on our
common stock of $0.15 per share, which was paid on September 15, 2004 to holders
of record of our common stock on September 1, 2004. The cash payment for this
dividend was $2.8 million.
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On November 4, 2004, our Board of Directors declared a quarterly cash dividend
on our common stock of $0.15 per share, payable on December 15, 2004 to holders
of record of our common stock on December 1, 2004. The cash payment for this
dividend is expected to be approximately $2.8 million.
We believe that cash generated from operations and funds from borrowings
available under the Credit Agreement will be sufficient to meet our expected
operating needs, planned capital expenditures, debt service, tax obligations and
common stock dividends for the foreseeable future, assuming we are able to
refinance our Credit Agreement when it matures in 2008. We continue to evaluate
acquisition opportunities in the consumer goods packaging market and may incur
additional indebtedness, including indebtedness under the Credit Agreement, to
finance any such acquisitions. However, in the absence of acquisition
opportunities that generate attractive cash returns, we expect to use our free
cash flow to repay indebtedness or for other permitted purposes.
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 with
all of these covenants during the next year.
Rationalization Charges and Acquisition Reserves
During the first quarter of 2004, we approved and announced to employees a plan
to exit our Benton Harbor, Michigan metal food container manufacturing facility.
This decision resulted in a charge to earnings during the first half of 2004 of
$0.6 million. Through September 30, 2004, we made cash payments totaling $0.4
million related to this plan. All actions under this plan have been completed.
During 2003, we established acquisition reserves in connection with our
purchases of Thatcher Tubes, White Cap and Pacific Coast Can, recorded pursuant
to plans that we began to assess and formulate at the date of the acquisitions.
During the first quarter of 2004, we finalized these plans and the related
acquisition reserves. These plans included exiting the Lodi, California metal
food container manufacturing facility, the Chicago, Illinois and Queretaro,
Mexico metal closures manufacturing facilities and the Culiacan, Mexico plastic
container manufacturing facility, as well as the consolidation of certain
administrative functions of the acquired businesses. All of these facilities
have ceased manufacturing operations. During the first nine months of 2004, we
made cash payments totaling $3.6 million related to these plans. At September
30, 2004, these reserves had an aggregate balance of $0.2 million. All cash
payments related to these plans are expected in 2004.
During 2003, we approved and announced to employees plans to exit our Norwalk,
Connecticut and Anaheim, California plastic container manufacturing facilities
and our Queretaro, Mexico metal closures manufacturing facility, as well as to
consolidate certain administrative functions of the closures business. These
decisions resulted in a charge to earnings of $9.0 million ($1.2 million for the
metal food container business and $7.8 million for the plastic container
business) in 2003, which included $5.3 million for the non-cash write-down in
carrying value of assets. During 2004, additional rationalization charges of
$0.7 million were recorded related to these plans. During the first nine months
of 2004, we made cash payments totaling $1.4 million related to these plans. At
September 30, 2004, these reserves had an aggregate balance of $0.8 million. The
timing of certain cash payments related to these reserves is dependent upon the
expiration of a lease obligation. Therefore, cash payments related to these
reserves are expected through 2010.
You should also read Note 3 to our condensed consolidated financial statements
for the three and nine months ended September 30, 2004 included elsewhere in
this Quarterly Report.
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NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," which expands upon existing accounting guidance on consolidation. A
variable interest entity either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns. The provisions of FIN No. 46 were effective for us on March 31, 2004.
The adoption of FIN No. 46 did not effect our financial position or results of
operations.
In January 2004, the FASB issued FSP No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." Since specific authoritative guidance on the
accounting for the federal subsidy was pending, we elected to defer accounting
for the effects of the Act as permitted by FSP No. 106-1. In May 2004, the FASB
issued FSP No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," that
provides guidance on the accounting for the effects of the Act and was effective
for us on July 1, 2004. FSP No. 106-2 supercedes FSP No. 106-1 and requires
recognition of the change in postretirement benefit obligation as an actuarial
gain.
Some of our retiree medical programs already provide prescription drug coverage
for retirees over age 65 that is at least as generous as the benefit to be
provided under Medicare. This Act will reduce our share of obligations for
future retiree medical benefits in these instances. However, based on current
guidance, we have determined that the impact to our accumulated other
postretirement benefit obligation and net periodic other postretirement benefit
costs from this Act will be insignificant. Therefore, we will incorporate the
effects of this Act at our December 31, 2004 postretirement plan measurement
date.
Item 3. 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 operations in Canada and Mexico 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.
Information regarding our interest rate risk, foreign currency exchange rate
risk and commodity pricing risk has been disclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003. Since such filing, there has
not been a material change to our interest rate risk, foreign currency rate risk
or commodity pricing risk or to our policies and procedures to manage our
exposure to these risks. You should also read Note 7 to our condensed
consolidated financial statements for the three and nine months ended September
30, 2004 included elsewhere in this Quarterly Report.
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Item 4. CONTROLS AND PROCEDURES
-----------------------
We carried out an evaluation, under the supervision and with the participation
of 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-15(e) of the Securities Exchange Act of 1934). Based upon
that evaluation, as of the end of the period covered by this Quarterly Report
our Co-Chief Executive Officers and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be disclosed in this Quarterly Report has been made
known to them in a timely fashion.
There were no changes in our internal controls over financial reporting during
the period covered by this Quarterly Report that have materially affected, or
are reasonably likely to materially affect, these internal controls.
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Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
-------------- -----------
12 Ratio of Earnings to Fixed Charges for the three and
nine months ended September 30, 2004 and 2003.
31.1 Certification by the Co-Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2 Certification by the Co-Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
31.3 Certification by the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1 Certification by the Co-Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by the Co-Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act.
32.3 Certification by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
1. On July 22, 2004, we filed a Current Report on Form 8-K related to our
announcement of our results of operations for the three and six month
periods ended June 30, 2004.
2. On July 30, 2004, we filed a Current Report on Form 8-K related to our
announcement of the declaration of a quarterly cash dividend on our
common stock.
3. On August 18, 2004, we filed a Current Report on Form 8-K related to
our announcement that Robert B. Lewis was appointed Executive Vice
President and Chief Financial Officer, that Anthony J. Allott was
promoted to President and that D. Greg Horrigan was appointed
Co-Chairman of the Board along with R. Philip Silver, with both
Messrs. Silver and Horrigan continuing in their Co-Chief Executive
Officer roles.
4. On September 16, 2004, we filed a Current Report on Form 8-K related
to our announcement of the acquisition of the plastic tube
manufacturing assets of Amcor Plastube Inc. located in Breinigsville,
Pennsylvania.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
SILGAN HOLDINGS INC.
Dated: November 9, 2004 /s/Robert B. Lewis
----------------------------
Robert B. Lewis
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
12 Ratio of Earnings to Fixed Charges for the three and
nine months ended September 30, 2004 and 2003.
31.1 Certification by the Co-Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
31.2 Certification by the Co-Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
31.3 Certification by the Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act.
32.1 Certification by the Co-Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by the Co-Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act.
32.3 Certification by the Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act.
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