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UNITED STATES
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, 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.
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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 30, 2004, the last business day of the
Registrant's most recently completed second fiscal quarter, was approximately
$449.4 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, 2005, the number of shares outstanding of the Registrant's Common
Stock, par value $0.01 per share, was 18,495,141.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 23, 2005 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.........................................................................14
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, Related Stockholder Matters and Issuer
Purchases of Equity Securities.....................................................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.........................34
Item 8. Financial Statements and Supplementary Data........................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.........................................................................35
Item 9A. Controls and Procedures............................................................35
Item 9B. Other Information..................................................................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. Principal Accountant Fees and Services.............................................37
PART IV..........................................................................................38
Item 15. Exhibits and Financial Statement Schedules.........................................38
-i-
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 $2.421 billion in
2004. Our products are used for a wide variety of end markets and we operate 61
manufacturing plants throughout the United States and Canada. Our products
include:
o steel and aluminum containers for human and pet food and metal,
composite and plastic vacuum closures for food and beverage products;
and
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.
We are the largest manufacturer of metal food containers in North America,
with a unit volume market share in the United States in 2004 of approximately
half of the market. 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 throughout North America.
Additionally, through our Silgan Closures business that we have integrated with
our metal food container business, we are a leading manufacturer of metal,
composite and plastic vacuum closures in North America for food and beverage
products. For 2004, our metal food container business had net sales of $1.842
billion (approximately 76 percent of our consolidated net sales) and income from
operations of $154.7 million (approximately 75 percent of our consolidated
income from operations excluding corporate expense).
We are also a leading manufacturer of plastic containers in North America
for a variety of markets, including the personal care, health care, household
and industrial chemical and pet care markets. Our success in the plastic
packaging market is largely due to our demonstrated ability to provide our
customers with high levels of quality, service and technological support, along
with 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 2004,
our plastic container business had net sales of $578.4 million (approximately 24
percent of our consolidated net sales) and income from operations of $52.1
million (approximately 25 percent of our consolidated income from operations
excluding corporate expense).
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 arrangements, 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 2005
approximately 90 percent of our projected metal food container sales and a
majority of our projected plastic container sales will be under multi-year
customer supply arrangements.
Our objective is to increase shareholder value by efficiently deploying
capital and management resources to grow our business, reduce operating costs
and build sustainable competitive positions, or franchises, and to complete
acquisitions that generate attractive cash returns. We believe that we will
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accomplish this goal because of our leading market positions and management
expertise in acquiring, financing, integrating and efficiently operating
consumer goods packaging businesses.
Our History
We were founded in 1987 by our Co-Chief Executive Officers, R. Philip
Silver and D. Greg Horrigan. Since our inception, we have acquired and
integrated twenty businesses. 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 half of
the market in 2004. Our plastic container business has also improved its market
position since 1987, with net sales increasing more than sixfold to $578.4
million in 2004. The following chart shows our acquisitions since our inception:
Acquired Business Year Products
----------------- ---- --------
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 Company 1988 Paperboard containers
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 manufacturing 1993 Metal food containers
operations
Food Metal and Specialty business of American 1995 Metal food containers,
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 (Silgan Closures LLC) 2003 Metal, composite and
plastic vacuum closures
Pacific Coast Producers' can manufacturing 2003 Metal food containers
operations
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:
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." In 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 significant
capital investments to offer our customers value-added features such as our
family of Quick Top(TM) easy-open ends for our metal food containers. In 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
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demands of our customers. 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. 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 prudently 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 throughout North America. 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 both 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.
Maintain an Optimal Capital Structure 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 reasonable leverage, supported by our stable cash flows, to make
value enhancing acquisitions. In determining reasonable leverage, we evaluate
our cost of capital and manage our level of debt to maintain an optimal cost of
capital based on current market conditions. In the absence of such acquisition
opportunities, we intend to use our cash flow to repay debt or for other
permitted purposes. In 2003, we established a target to reduce our debt by
$200-$300 million over the period from 2004 through 2006 in the absence of
compelling acquisitions. In 2004, we paid down $160.9 million of debt, making
significant progress toward this debt reduction goal. As a result, we believe
that over the next two years we can meet our debt reduction goal and still
complete some complementary acquisitions should they become available. Although
no assurances can be given, we expect to pay down approximately $100 million of
debt during 2005 in the absence of acquisitions.
Expand Through Acquisitions and 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
make acquisitions 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 compounded annual growth rates
of 14.1 percent and 16.9 percent, respectively, over the last ten years.
-3-
During the past seventeen 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, Campbell Soup Company, or Campbell, and most recently
Pacific Coast Producers, or Pacific Coast, reflect this trend. We estimate that
approximately 8 percent of the market for metal food containers is still served
by self-manufacturers.
While we have increased our market share of metal food containers in the
United States primarily through acquisitions, we have also made significant
capital investment over the last few years in our metal food container business
to enhance our business and offer our customers value-added features, such as
our family of Quick Top(TM) easy-open ends. In 2004, 54 percent of our metal
food containers sold had a Quick Top(TM) easy-open end, representing an increase
in unit sales of this value-added feature of 33 percent since 2002.
We have improved our market position for our plastic container business
since 1987, with net sales increasing more than sixfold to $578.4 million in
2004. We achieved this improvement primarily through strategic acquisitions 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 LLC,
or Thatcher Tubes, we extended our business into decorated plastic tubes
primarily for personal care products to complement our existing plastic
container business. Over the long term, we also expect to continue to generate
internal growth in our plastic container business. As with acquisitions, we used
a disciplined approach to pursue internal growth in order to generate attractive
cash returns. Through a combination of these efforts, 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.
Enhance Profitability Through Productivity Improvements and Cost Reductions
We intend to continue to 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. For example,
following our acquisition in March 2003 of the remaining 65 percent equity
interest that we did not own in Amcor White Cap, LLC, our former vacuum closures
joint venture which we renamed Silgan Closures LLC, or Silgan Closures, we
implemented rationalization and integration plans to consolidate certain
administrative functions of this business with our metal food container business
and to close a higher cost manufacturing facility. We substantially completed
these plans in 2004 and significantly improved the profitability of this
business. Additionally, with our acquisition in April 2003 of the can
manufacturing business of Pacific Coast, we were able to successfully
rationalize and consolidate this business into our existing metal food container
facilities and realize cost reductions and manufacturing efficiencies as a
result.
We expect that our acquisitions will continue to enable us to realize
manufacturing efficiencies as a result of optimizing production scheduling. We
also expect to continue to benefit from 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 and expect to continue to improve the operating performance of our
plant facilities by investing capital for productivity improvements and
manufacturing cost reductions. For example, we intend to make certain capital
expenditures on equipment to automate activities currently performed manually.
While we have made some of these investments in certain of our plants, more
opportunities still exist throughout our system. We will continue to use a
disciplined approach to identify these opportunities to generate attractive cash
returns.
-4-
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 vacuum closure operations, and Silgan Plastics includes our plastic
container, tube and closure operations.
Metal Food Containers--76 percent of our consolidated net sales in 2004
We are the largest manufacturer of metal food containers in North America,
with a unit volume market share in the United States in 2004 of approximately
half of the market, and one of the largest manufacturers of metal, composite and
plastic vacuum closures in North America for food and beverage products. 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 soup, vegetables, fruit, meat, tomato based products,
coffee, seafood, adult nutritional drinks, pet food and other miscellaneous food
products. For 2004, our metal food container business had net sales of $1.842
billion (approximately 76 percent of our consolidated net sales) and income from
operations of $154.7 million (approximately 75 percent of our consolidated
income from operations excluding corporate expense). We estimate that
approximately 90 percent of our projected metal food container sales in 2005
will be pursuant to multi-year customer supply arrangements.
Although metal containers face competition from plastic, paper, glass and
composite containers, we believe metal containers are superior to plastic, paper
and composite 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. Additionally, while the market for metal food
containers in the United States has experienced little or no growth over the
last ten years, we have increased our market share of metal food containers in
the United States primarily through acquisitions, and have enhanced our business
by focusing on providing customers with high quality and high levels of service
and value-added features such as our family of Quick Top(TM) easy-open ends.
Through Silgan Closures, we also manufacture metal, composite and plastic
vacuum closures for food and beverage products, such as juices and juice drinks,
ready-to-drink tea, 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. We also provide customers
with sealing/capping equipment to complement our closure product offering for
food and beverage products. As a result of our extensive range of metal,
composite and plastic vacuum closures and our geographic presence, we believe
that we are uniquely positioned to serve food and beverage product companies for
their closure needs.
Plastic Containers--24 percent of our consolidated net sales in 2004
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. For 2004, Silgan Plastics had net sales of $578.4
million (approximately 24 percent of our consolidated net sales) and income from
operations of $52.1 million (approximately 25 percent of our consolidated income
from operations excluding corporate expense). Since 1987, we have improved our
market position for our plastic container business, with net sales increasing
more than sixfold.
-5-
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 and liquor. Additionally, we manufacture plastic tubes
primarily for personal care products such as skin lotions and hair treatment
products. 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, and our innovative
Omni plastic container (a multi-layer microwaveable and retortable plastic bowl)
for food products.
Our leading position in the plastic container market is largely driven by
our rapid response to our customers' design, development and technology support
needs and our value-added, diverse product line. This 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. We also have the ability to manufacture decorated plastic tubes
for our customers, providing our customers with the ability to satisfy more of
their plastic packaging needs through one supplier. 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 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, 2005, we operated 61 manufacturing facilities,
geographically dispersed throughout the United States and Canada, 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 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. We also manufacture our Quick Top(TM) easy-open ends from both
steel and aluminum alloys in a sophisticated precision progressive die process.
We regularly review our Quick Top(TM) easy-open end designs for improvements for
optimum consumer preference.
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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 and then lined.
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 in aesthetically
pleasing contoured designs, such as for Campbell's Soup at Hand(TM) product.
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
Based upon our existing arrangements with suppliers and our current and
anticipated requirements, we believe that we have made adequate provisions for
acquiring our raw materials. As a result of significant consolidation of
suppliers, we are, however, dependent upon a limited number of suppliers for our
steel, aluminum, coatings and compound raw materials. Increases in the prices of
raw materials have generally been passed along to our customers in accordance
with our multi-year customer supply arrangements and through general price
increases.
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. Although there has been significant
consolidation of suppliers, we believe that we have made adequate provision to
purchase sufficient quantities of these raw materials for the foreseeable
future.
Over the last few years, there has been significant consolidation of
suppliers of steel. Additionally, tariffs and court cases in the United States
have negatively impacted the ability of certain foreign steel suppliers to
competitively supply steel in the United States. In 2004, the steel industry
claimed to have raw material supply difficulties and increased worldwide demand
which resulted in a tighter than normal supply situation and adversely affected
their ability to timely deliver steel. In response, the steel industry announced
significant price increases for steel during 2004. Nevertheless, as a result of
our contracts and other arrangements with steel suppliers, we were able to
obtain sufficient quantities of steel in 2004 to timely meet all of our
customers' requirements. Although no assurances can be given, we expect to be
able to purchase sufficient quantities of steel to timely meet all of our
customers' requirements in 2005 as well. Our metal food container supply
arrangements with our customers provide for the pass through of changes in our
metal costs. For non-contract customers, subject to market conditions, we also
increase their metal food container prices to pass through increases in our
metal costs.
Our material requirements are supplied through agreements 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 purchase such raw materials at comparable prices or terms.
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, which has increased significantly in the past few
years. Our plastic container business has generally passed along to our
customers changes in the prices of our resin raw materials in accordance with
customer supply arrangements. We believe that we have made adequate provision 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
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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 business generally sells to
customers within a 300 mile radius of its manufacturing plants.
In 2004, 2003, and 2002, approximately 11 percent, 11 percent, and 13
percent, respectively, of our net sales were to Nestle; approximately 11
percent, 11 percent, and 10 percent, respectively, of our net sales were to Del
Monte; and approximately 13 percent, 12 percent, and 12 percent, respectively,
of our net sales were to Campbell. No other customer accounted for more than 10
percent of our total net sales during those years.
Metal Food Container Business
We are the largest manufacturer of metal food containers in North America,
with a unit volume market share in the United States in 2004 of approximately
half of the market. Our largest customers for these products include Campbell,
ConAgra Foods Inc., Del Monte, Dial, General Mills, Inc., Hormel Foods Corp., or
Hormel, Nestle, Pacific Coast, Seneca Foods L.L.C., and Signature Fruit Company.
We have entered into multi-year supply arrangements with many of our
customers, including Nestle, Del Monte, Campbell and other food producers. We
estimate that approximately 90 percent of our projected metal food container
sales in 2005 will be pursuant to multi-year customer supply arrangements.
Historically, we have been successful in continuing these multi-year customer
supply arrangements.
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 2004, our total net sales of metal containers to Nestle were
$230.2 million.
We currently have supply agreements with Nestle under which we supply
Nestle with a large majority of its U.S. metal container requirements. With
respect to approximately half of the metal containers supplied to Nestle under
these agreements, we recently extended the terms of such supply agreements to
the end of 2009. These agreements automatically renew for successive 3 year
periods unless either party elects not to renew them. The terms of the Nestle
supply agreements for the remaining metal containers supplied to Nestle pursuant
to these agreements continue through 2008. Net sales to Nestle of metal
containers in 2004 under all supply agreements represented approximately 7
percent of our consolidated net sales.
The Nestle supply 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 that agreement.
In connection with our acquisition of Del Monte's U.S. metal food container
manufacturing operations in December 1993, we entered into a long-term supply
agreement with Del Monte. We recently extended the term of this supply agreement
to the end of 2011. Additionally, we have a supply agreement with DLM Foods
Inc., a subsidiary of Del Monte, that continues through 2011 for metal
containers for food products acquired by DLM Foods Inc. from H. J. Heinz
Company, or Heinz, in 2002. Under these supply agreements, we supply Del Monte
and its subsidiary with a large majority of their U.S. metal container
requirements for food and beverage products. These supply agreements provide for
certain prices for our metal containers and specify that those prices will be
increased or decreased based upon specified cost change formulas. In 2004, our
net sales of metal containers to Del Monte and its subsidiary amounted to $252.1
million.
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 for the purchase of substantially all of Campbell's
steel container requirements to be used for the packaging of foods and
-9-
beverages in the United States. In 2004, we extended the term of this supply
agreement to the end of 2013. In 2004, our net sales of metal containers to
Campbell were $296.0 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 to receive proposals from independent 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 related
to the net book value of the assets.
Our metal food container business' sales and income from operations 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.
We are also a leading manufacturer of metal, composite and plastic vacuum
closures in North America for food and beverage products. The largest customers
for these products include Anheuser- Busch Companies Inc., Campbell, Cadbury
Schweppes plc, Cliffstar Corporation, The Coca-Cola Company, Dean Foods Company,
Heinz, Pepsico Inc., Unilever, N.V., and Welch's Foods Inc. We have multi-year
supply arrangements with many customers for these products.
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. Our largest customers for these products include Alberto
Culver USA, Inc., Avon Products Inc., Dial, Johnson & Johnson, L'Oreal, Pfizer
Inc., The Procter & Gamble Company, and Unilever Home and Personal Care North
America (a unit of Unilever, N.V.). We also manufacture decorated plastic tubes,
primarily for personal care products. Customers for these products include
Alticor Inc., Avon Products Inc., Bristol-Myers Squibb Company, Johnson &
Johnson and L'Oreal.
We manufacture plastic containers for food and beverage, pet care and
household and industrial chemical products. Customers for these product lines
include The Clorox Company, Kraft Foods Inc., Nestle's Purina Pet Care, The
Procter & Gamble Company, 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 Campbell, Hormel, The Kroger Company,
McCormick & Company, Incorporated, Nestle's Nesquik, Nice-Pak Products, Inc.,
and Unilever Best Foods (a unit of Unilever, N.V.).
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
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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.
Competition
The packaging industry is highly competitive. We compete in this industry
with manufacturers of similar and other types of packaging, 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
container business generally sells to customers within a 300 mile radius of its
manufacturing plants. Strategically located existing plants give us an advantage
over competitors from other areas, but we could be potentially disadvantaged by
the relocation of a major customer.
Metal Food Container Business
Of the commercial metal food container manufacturers, Ball Corporation and
Crown Holdings, Inc. 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,
composite 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 vacuum closure business competes primarily
with Crown Holdings, Inc., Alcoa Closure Systems International, Inc.,
Owens-Illinois, Inc. and Kerr Group, 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 Graham Packaging Company L.P., Alpla-Werke Alwin Lehner GmbH
& Co., Plastipak Packaging Inc., Consolidated Container Company LLC, Constar
International, Inc., Amcor PET Packaging, Rexam plc, CCL Industries Inc., Kerr
Group, 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, 2004, we employed approximately 1,700 salaried and 6,200
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, 2004, in connection with our
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acquisition of Campbell's steel container manufacturing business, Campbell
provided us with approximately 160 hourly employees on a full-time basis at one
of the facilities that we lease from Campbell.
Our labor contracts expire at various times between 2005 and 2012. As of
December 31, 2004, contracts covering approximately 9 percent of our hourly
employees will expire during 2005. 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.
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, and our research, product development and product
engineering efforts relating to our metal, composite and plastic vacuum closures
business for food and beverage products are conducted at our research facility
in Downers Grove, Illinois. 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 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
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(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 make
available free of charge on or through our website our annual reports on Form
10-K, quarterly reports on Form 10-Q and current reports on Form 8-K (or any
amendments to those reports) and Forms 3, 4 and 5 filed on behalf of our
directors and executive officers as soon as reasonably practicable after such
documents are electronically filed or furnished to the SEC.
-13-
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 37 operating facilities for the metal food
container business and 24 operating facilities for the plastic container
business. We own 27 of these facilities and lease 34. The leases expire at
various times through 2020. Some of these leases provide renewal options as well
as various purchase options.
Below is a list of our operating facilities, including attached warehouses,
as of March 1, 2005 for our metal food container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Tarrant, AL ................................ 89,100
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)
Champaign, IL .............................. 119,000 (leased)
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 ............................... 462,700
Ft. Dodge, IA .............................. 155,200 (leased)
Fort Madison, IA ........................... 121,000 (56,000 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 .......................... 151,500 (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
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Below is a list of our operating facilities, including attached warehouses,
as of March 1, 2005 for our plastic container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Valencia, CA................................ 122,500 (leased)
Deep River, CT.............................. 140,000
Monroe, GA.................................. 139,600
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............................ 401,400 (leased)
Breinigsville, PA........................... 70,000 (leased)
Langhorne, PA............................... 172,600 (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)
We lease our research facilities in Oconomowoc, Wisconsin, Downers Grove,
Illinois and Norcross, Georgia. We also own and lease other warehouse facilities
that are detached from our manufacturing facilities. Additionally, we sublease
or plan to sell other facilities that we previously operated.
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.
Substantially all of our facilities are subject to liens in favor of the
lenders under our senior secured credit facility, or the Credit Agreement, to
which we and our subsidiaries are parties.
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.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Our common stock is quoted on the Nasdaq National Market System under the
symbol SLGN. As of February 28, 2005, we had approximately 58 holders of record
of our common stock.
We began paying quarterly cash dividends on our common stock in the second
quarter of 2004. In each of the second, third and fourth quarters of 2004, our
Board of Directors declared a cash dividend on our common stock of $0.15 per
share. In February 2005, our Board of Directors increased the amount of our
quarterly cash dividend payable on our common stock to $0.20 per share and
declared a cash dividend on our common stock of $0.20 per share payable during
the first quarter of 2005. The payment of future dividends is 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 the Credit
Agreement and our indenture for our 6 3/4% Senior Subordinated Notes due 2013,
or the 6 3/4% Notes.
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 and the cash dividends paid per share of our common stock in the
periods indicated below.
Closing Sales Prices
-------------------- Cash Dividends
High Low Per Share
---- --- ---------
2004
----
First Quarter................. $47.46 $39.92 --
Second Quarter................ 47.60 39.50 $0.15
Third Quarter................. 49.31 39.50 $0.15
Fourth Quarter................ 61.35 45.67 $0.15
Closing Sales Prices
-------------------- Cash Dividends
High Low Per Share
---- --- ---------
2003
----
First Quarter................. $25.95 $19.50 --
Second Quarter................ 31.56 22.43 --
Third Quarter................. 33.91 27.60 --
Fourth Quarter................ 43.79 31.00 --
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, 2004. Our consolidated
financial statements for the five years ended December 31, 2004 have been
audited by Ernst & Young LLP, our independent registered public accounting firm.
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."
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Selected Financial Data
Year Ended December 31,
-------------------------------------------------------------
2004 2003(a) 2002 2001 2000(b)
---- ------- ---- ---- -------
(Dollars in millions, except per share data)
Operating Data:
Net sales .......................................... $2,420.5 $2,312.2 $1,988.3 $1,941.0 $1,877.5
Cost of goods sold ................................. 2,110.1 2,026.7 1,749.7 1,700.7 1,648.3
-------- -------- -------- -------- --------
Gross profit ....................................... 310.4 285.5 238.6 240.3 229.2
Selling, general and administrative expenses ....... 108.7 108.4 76.2 78.6 72.1
Rationalization charges (credits) .................. 2.1 9.0 (5.6) 9.3 --
-------- -------- -------- -------- --------
Income from operations ............................. 199.6 168.1 168.0 152.4 157.1
Interest and other debt expense before loss
on early extinguishment of debt ................. 55.6 78.8 73.8 81.2 91.2
Loss on early extinguishment of debt ............... 1.6 19.2 1.0 -- 6.9
-------- -------- -------- -------- --------
Interest and other debt expense .................... 57.2 98.0 74.8 81.2 98.1
-------- -------- -------- -------- --------
Gain on assets contributed to affiliate ............ -- -- -- 4.9 --
Income before income taxes and equity in
losses of affiliates ............................ 142.4 70.1 93.2 76.1 59.0
Provision for income taxes ......................... 58.2 27.8 36.8 30.2 23.1
-------- -------- -------- -------- --------
Income before equity in losses of affiliates ....... 84.2 42.3 56.4 45.9 35.9
Equity in losses of affiliates ..................... -- (0.3) (2.6) (4.1) (4.6)
-------- -------- -------- -------- --------
Net income ......................................... $ 84.2 $ 42.0 $ 53.8 $ 41.8 $ 31.3
======== ======== ======== ======== ========
Per Share Data:
Basic net income per share.......................... $4.58 $2.30 $2.97 $2.35 $1.77
===== ===== ===== ===== =====
Diluted net income per share........................ $4.52 $2.28 $2.93 $2.31 $1.74
===== ===== ===== ===== =====
Dividends per share................................. $0.45 $ -- $ -- $ -- $ --
===== ===== ===== ===== =====
Selected Segment Data: (c)
Net sales:
Metal food containers............................ $1,842.1 $1,750.5 $1,487.0 $1,447.4 $1,478.5
Plastic containers............................... 578.4 561.7 501.3 493.6 399.0
Income from operations:
Metal food containers (d)........................ 154.7 126.0 120.6 111.6 123.9
Plastic containers (e)........................... 52.1 48.0 52.9 46.0 36.9
(continued)
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Selected Financial Data
Year Ended December 31,
-------------------------------------------------------------
2004 2003(a) 2002 2001 2000(b)
---- ------- ---- ---- -------
(Dollars in millions, except per share data)
Other Data:
Capital expenditures................................ $ 102.9 $ 105.9 $ 119.2 $ 93.0 $ 89.2
Depreciation and amortization (f)................... 118.5 111.3 95.7 95.5 89.0
Net cash provided by operating activities (g)....... 277.7 223.8 149.7 175.0 80.8
Net cash used in investing activities............... (92.9) (310.0) (117.2) (59.8) (218.5)
Net cash (used in) provided by financing
activities (g)................................... (161.5) 39.9 7.8 (117.3) 155.3
Balance Sheet Data (at end of period):
Goodwill, net....................................... $ 198.3 $ 202.4 $ 141.5 $ 141.5 $ 153.0
Total assets........................................ 1,597.2 1,621.1 1,404.0 1,311.8 1,383.8
Total debt.......................................... 841.7 1,002.6 956.8 944.8 1,031.5
Stockholders' equity (deficiency)................... 207.4 120.8 63.1 15.1 (20.4)
Notes to Selected Financial Data
(a) In January 2003, we acquired Thatcher Tubes. In March 2003, we acquired the
remaining 65 percent equity interest in Silgan Closures that we did not
already own. In April 2003, we acquired Pacific Coast's can manufacturing
business.
(b) In October 2000, we acquired RXI Holdings, Inc.
(c) In 2001, we contributed our metal closure business to Amcor White Cap, LLC,
a joint venture of which we owned 35 percent. Prior to this, we reported
the results of our metal closure business separately. In March 2003, we
acquired this joint venture and renamed it Silgan Closures LLC. We report
the results of Silgan Closures as part of our metal food container
business. As a result, for 2001 and 2000 we have included the results of
the metal closures business with our metal food container business. The
metal closures business had net sales of $46.3 million and $90.8 million
and income from operations of $3.3 million and $3.7 million in 2001 and
2000, respectively.
(d) Income from operations of the metal food container business includes
rationalization charges of $1.8 million and $1.2 million in 2004 and 2003,
respectively, rationalization credits of $5.4 million in 2002, and net
rationalization charges of $5.8 million in 2001.
(e) Income from operations of the plastic container business includes
rationalization charges of $0.3 million and $7.8 million in 2004 and 2003,
respectively, a rationalization credit of $0.2 million in 2002 and a
rationalization charge of $3.5 million in 2001.
(f) Depreciation and amortization excludes amortization of debt issuance costs.
Depreciation and amortization includes goodwill amortization of $5.0
million and $4.2 million in 2001 and 2000, respectively.
(g) Changes in outstanding checks were reclassified from operating activities
to financing activities to treat them as, in substance, cash advances.
Amounts reclassified were $11.1 million, $13.6 million, ($32.0) million and
$14.3 million, respectively, in each of 2003, 2002, 2001 and 2000.
-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, 2004. 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; metal, composite and plastic vacuum 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, with a unit volume market share for the year ended December 31, 2004 of
approximately half of the market in the United States, a leading manufacturer of
plastic containers in North America for a variety of markets, including the
personal care, health care, household and industrial chemical and pet care
markets, 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 to complete
acquisitions that generate attractive cash returns. We have grown our net sales
and income from operations at compounded annual rates of 14.1 percent and 16.9
percent, respectively, over the past ten years, largely through acquisitions but
also through internal growth, and we continue to evaluate acquisition
opportunities in the consumer goods packaging market. However, in the absence of
such acquisition opportunities, we expect to use our cash flow to repay debt or
for other permitted purposes.
Sales Growth
We have increased net sales and market share in our metal food container
and plastic container businesses through both acquisitions and internal growth.
As a result, we have expanded and diversified our customer base, geographic
presence and product lines.
During the past seventeen 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,
Campbell and most recently Pacific Coast reflect this trend. We estimate that
approximately 8 percent of the market for metal food containers is still served
by self-manufacturers.
The metal food container market in North America was relatively flat during
this period, despite losing market share as a result of more dining out, fresh
produce and competing materials. However, we increased our share of the market
for metal food containers in the United States primarily through acquisitions,
and we have enhanced our business by focusing on providing customers with high
levels of quality and service and value-added features such as our Quick Top(TM)
easy-open ends. We anticipate that the market will decline slightly in the
future, but will continue to increase in areas of consumer convenience products
such as single-serve sizes and easy-open ends. In 2004, 54 percent of our metal
food containers sold had a Quick Top(TM) easy-open end, representing an increase
in unit sales of this value-added feature of 33 percent since 2002.
-19-
We have improved the market position of our plastic container business
since 1987, with net sales increasing more than sixfold to $578.4 million in
2004. We achieved this improved market position primarily through strategic
acquisitions as well as through internal growth. The plastic container business
of the consumer goods packaging industry is a highly fragmented business with
growth rates in excess of population expansion due to substitution of plastic
for other materials. We have focused on the part of this market where custom
design and decoration allows customers to differentiate their products such as
in personal care. We intend to pursue further acquisition opportunities in
markets where we believe that we can successfully apply our acquisition and
value-added operating expertise and strategy. We extended our business into
decorated plastic tubes primarily for personal care products to complement our
plastic container business.
Operating Performance
We operate in a competitive industry where it is necessary to realize cost
reduction opportunities to offset continued competitive pricing pressure. We
have improved the operating performance of our plant facilities through the
investment of capital for productivity improvements and manufacturing cost
reductions. Our acquisitions have enabled us to rationalize plant operations and
decrease overhead costs through plant closings and downsizings and to realize
manufacturing efficiencies as a result of optimizing production scheduling. For
example, following our acquisition in March 2003 of Silgan Closures, we
implemented rationalization and integration plans to consolidate certain
administrative functions of this business with our metal food container business
and to close a higher cost manufacturing facility. We substantially completed
these plans in 2004 and significantly improved the profitability of this
business. Additionally, with our acquisition in April 2003 of the can
manufacturing business of Pacific Coast, we were able to successfully
rationalize and consolidate this business into our existing metal food container
facilities and realize cost reductions and manufacturing efficiencies as a
result.
We have also invested substantial capital in the past few years for new
market opportunities and value-added products such as new Quick Top(TM)
easy-open ends for metal food containers. Over the past five years, we have
invested $510.2 million in capital to maintain our market position, improve our
productivity, reduce our manufacturing costs and invest in new market
opportunities.
We estimate that approximately 90 percent of our projected metal food
container sales in 2005 and a majority of our projected plastic container sales
in 2005 will be under multi-year arrangements. Many of these multi-year supply
arrangements generally provide for the pass through of changes in raw material,
labor and other manufacturing costs, thereby significantly reducing the exposure
of our results of operations to the volatility of these costs.
Historically, we have been successful in renewing our multi-year supply
arrangements with our customers. For example, our metal food container business
recently extended its supply agreements with our three largest customers, Nestle
(through 2009 for approximately half of our sales under these agreements), Del
Monte (through 2011) and Campbell (through 2013). In the fourth quarter of 2004,
our metal food container business did not retain low margin business upon a
contract renewal with a customer. This loss of low margin business is not
expected to have a material effect on our results of operations in 2005.
Over the last couple of years, our plastic container business began to
experience increased competitive pressures from new market entrants focused on
larger customers in value-added markets. As a result, our plastic container
business extended the term of several major supply agreements with various
customers, but at lower prices, and elected not to meet competitive bids for
some products.
Our metal food container business' sales and income from operations 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
-20-
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.
Use of Capital
Historically, we have used 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
reasonable leverage, supported by our stable cash flows, to make value enhancing
acquisitions. In determining reasonable leverage, we evaluate our cost of
capital and manage our level of debt to maintain an optimal cost of capital
based on current market conditions. In the absence of such acquisition
opportunities, we intend to use our cash flow to repay debt or for other
permitted purposes.
In 2003, we announced that in the absence of compelling acquisitions we
intended to focus on reducing our debt and expected to repay $200-$300 million
of debt over the period from 2004 through 2006. In 2004, we paid down $160.9
million of debt, making significant progress toward this debt reduction goal. As
a result, we believe that over the next two years we can meet our debt reduction
goal and still complete some complementary acquisitions should they become
available. Although no assurances can be given, we expect to pay down
approximately $100 million of debt during 2005 in the absence of acquisitions.
As a result of the debt reduction in the fourth quarter of 2004, we recorded a
loss on early extinguishment of debt of $1.6 million to write-off a portion of
unamortized debt issuance costs.
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 the Credit Agreement 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, 2004
we had $188.7 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 2004, our aggregate interest and other debt expense was
28.7 percent of our income from operations, significantly lower than historic
levels, primarily as a result of lower average borrowings due to our debt
reduction program and a lower average cost of borrowings. Our aggregate interest
and other debt expense was 58.3 percent and 44.5 percent of our income from
operations for 2003 and 2002, respectively.
In 2003, we took advantage of favorable debt markets and refinanced all
$500 million principal amount of our outstanding 9% Senior Subordinated
Debentures due 2009, or the 9% Debentures, with lower cost 6 3/4% Notes,
incremental term loans and revolving loans under the Credit Agreement and funds
from operations. Due to this refinancing, in 2003 we recorded a loss on early
extinguishment of debt of $19.2 million for the premium paid in connection with
the redemption of the 9% Debentures and for the write-off of unamortized debt
issuance costs and unamortized premium related to the 9% Debentures.
Acquisitions
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. 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 and extends our personal care business into
decorated plastic tubes.
-21-
In March 2003, we acquired the remaining 65 percent equity interest in
Silgan Closures that we did not already own for approximately $37 million in
cash. Additionally, we refinanced debt of Silgan Closures in the amount of
approximately $88 million and purchased equipment subject to a third party lease
for approximately $5 million. The business is a leading manufacturer of metal,
composite and plastic vacuum closures in North America for food and beverage
products. The 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, which self-manufactured a majority of its
metal food container requirements. This acquisition continued the trend of food
processors selling their metal food container manufacturing businesses. 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.
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, 2004 and the accompanying notes included elsewhere in this
Annual Report.
Year Ended December 31,
----------------------------
2004 2003 2002
---- ---- ----
Operating Data:
Net sales:
Metal food containers.......................... 76.1% 75.7% 74.8%
Plastic containers............................. 23.9 24.3 25.2
----- ----- -----
Consolidated................................ 100.0 100.0 100.0
Cost of goods sold............................... 87.2 87.6 88.0
----- ----- -----
Gross profit..................................... 12.8 12.4 12.0
Selling, general and administrative expenses..... 4.5 4.7 3.8
Rationalization charges (credits)................ 0.1 0.4 (0.2)
----- ----- -----
Income from operations........................... 8.2 7.3 8.4
Interest and other debt expense.................. 2.3 4.3 3.8
----- ----- -----
Income before income taxes and equity in
losses of affiliate ........................... 5.9 3.0 4.6
Provision for income taxes....................... 2.4 1.2 1.8
----- ----- -----
Income before equity in losses of affiliate...... 3.5 1.8 2.8
Equity in losses of affiliate, net of
income taxes................................... -- -- (0.1)
----- ----- -----
Net income....................................... 3.5% 1.8% 2.7%
===== ===== =====
-22-
Summary results for our business segments for the years ended December 31,
2004, 2003 and 2002 are provided below.
Year Ended December 31,
----------------------------------
2004 2003 2002
---- ---- ----
(Dollars in millions)
Net sales:
Metal food containers.............. $1,842.1 $1,750.5 $1,487.0
Plastic containers................. 578.4 561.7 501.3
-------- -------- --------
Consolidated.................... $2,420.5 $2,312.2 $1,988.3
======== ======== ========
Income from operations:
Metal food containers(1)........... $ 154.7 $ 126.0 $ 120.6
Plastic containers(2).............. 52.1 48.0 52.9
Corporate.......................... (7.2) (5.9) (5.6)
-------- -------- --------
Consolidated.................... $ 199.6 $ 168.1 $ 167.9
======== ======== ========
- ------------
(1) Includes rationalization charges of $1.8 million and $1.2 million in 2004
and 2003, respectively, and rationalization credits of $5.4 million in
2002. You should also read Note 3 to our Consolidated Financial Statements
for the year ended December 31, 2004 included elsewhere in this Annual
Report.
(2) Includes rationalization charges of $0.3 million and $7.8 million in 2004
and 2003, respectively, and a rationalization credit of $0.2 million in
2002. You should also read Note 3 to our Consolidated Financial Statements
for the year ended December 31, 2004 included elsewhere in this Annual
Report.
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Overview. Consolidated net sales were $2.421 billion in 2004, representing
a 4.7 percent increase as compared to 2003 primarily as a result of the full
year inclusion of Silgan Closures which was acquired in March 2003 and the
effect of higher average selling prices resulting from the pass through of
higher raw material costs. Income from operations in 2004 increased by $31.5
million as compared to 2003 and operating margin in 2004 increased by 0.9
percentage points as compared to 2003. These increases resulted primarily from
the post-rationalization performance of Silgan Closures, the continued
conversion to Quick Top(TM) easy-open ends and the incurrence of rationalization
charges of $9.0 million in 2003. Net income in 2004 of $84.2 million increased
by $42.2 million as compared to 2003 primarily as a result of the above
referenced improvements in income from operations, significantly reduced
interest expense attributable to the debt refinancing in late 2003 and a lower
average cost of borrowings, and a pre-tax loss on early extinguishment of debt
of $19.2 million in 2003. We used strong cash flows from operations in 2004 to
pay down $160.9 million of debt during the year, making significant progress
toward our debt reduction goal of $200 to $300 million for the years 2004
through 2006.
Net Sales. The $108.3 million increase in consolidated net sales in 2004 as
compared to 2003 was largely the result of higher net sales of the metal food
container business due to the acquisition of Silgan Closures in March 2003 and
the effect of higher average selling prices resulting from the pass through of
higher raw material costs in both the metal food container and plastic container
businesses.
Net sales for the metal food container business increased $91.6 million, or
5.2 percent, in 2004 as compared to 2003. This increase was primarily
attributable to the performance and full year inclusion of the Silgan Closures
business, as well as higher average selling prices due to the pass through of
increased metal costs and continued customer conversion to higher value-added
products.
-23-
Net sales for the plastic container business in 2004 increased $16.7
million, or 3.0 percent, as compared to 2003. This increase was primarily a
result of higher average selling prices due to the pass through of increased
resin costs, partially offset by the effect of prior year price concessions and
a less favorable mix of products sold due primarily to weak demand from certain
customers in the personal care market.
Gross Profit. The increase in gross profit margin for 2004 as compared to
2003 was principally due to the strong post-rationalization performance of the
Silgan Closures business and increased sales of Quick Top(TM) easy-open ends,
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 increased slightly as compared to 2003. As a percentage
of consolidated net sales, selling, general and administrative expenses were 0.2
percent lower as compared to 2003, primarily as a result of a benefit of $3.0
million from a litigation settlement reached with an equipment supplier and the
benefits of integrating the administrative functions of the Silgan Closures
operations into our metal food container business.
Income from Operations. Income from operations for 2004 increased by $31.5
million as compared to 2003 and operating margin increased to 8.2 percent from
7.3 percent over the same periods. We recorded rationalization charges totaling
$2.1 million in 2004 and $9.0 million in 2003.
Income from operations of the metal food container business for 2004
increased $28.7 million, or 22.8 percent, as compared to 2003, while operating
margin increased to 8.4 percent from 7.2 percent. The increases in income from
operations and operating margin were principally due to the strong
post-rationalization performance and full year inclusion of the results of the
Silgan Closures business and increased sales of Quick Top(TM) easy-open ends for
which we had made significant capital investment over the past several years.
These positive factors were partially offset by higher depreciation expense and
increases in other manufacturing costs.
Income from operations of the plastic container business for 2004 increased
$4.1 million, or 8.5 percent, as compared to 2003, and operating margin
increased to 9.0 percent from 8.5 percent. The increases in income from
operations and operating margin were primarily a result of the rationalization
charge of $7.8 million incurred in 2003 and the 2004 benefit of $3.0 million
from a litigation settlement. These benefits were partially offset by higher
manufacturing costs, the effect of prior year price concessions and a less
favorable mix of products sold.
Interest and Other Debt Expense. Interest and other debt expense in 2004
decreased $40.8 million to $57.2 million as compared to 2003. This decrease
resulted primarily from lower average borrowings resulting from debt reduction,
a lower average cost of borrowings and the inclusion in 2003 of a $19.2 million
loss on early extinguishment of debt as a result of a late-year refinancing.
These favorable comparisons were partially offset by a $1.6 million charge in
the fourth quarter of 2004 to write-off a portion of unamortized debt issuance
costs as a result of our debt reduction program.
Income Taxes. Our effective tax rate for 2004 was 40.9 percent as compared
to 39.6 percent in 2003. The increase in the effective tax rate was principally
due to valuation allowances established for certain state net operating loss
carryovers and credits.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Overview. Consolidated net sales were $2.312 billion in 2003, representing
a 16.3 percent increase as compared to 2002 primarily as a result of the
inclusion of three businesses acquired during early 2003. These acquisitions
represent a continued strengthening of our franchise market positions,
-24-
bringing our unit volume market share in the United States metal food can market
to approximately half of the market, putting us in a leadership position in the
metal, composite and plastic vacuum closure market for food and beverage
products and further extending our product line to plastic tubes for the
personal care market. Income from operations in 2003 also increased as compared
to 2002, despite the inclusion of $9.0 million of rationalization charges in
2003 and $5.6 million of rationalization credits in 2002. Operating margin in
2003 declined by 1.1 percentage points as compared to 2002 as a result of
rationalization charges in 2003 as compared to rationalization credits in 2002
and the inclusion of the acquired Silgan Closures business. In 2003, Silgan
Closures had lower operating margins than the rest of the metal food container
business as it continued to execute a major restructuring program initiated
prior to our acquisition of the business. Net income in 2003 of $42.0 million
declined by $11.8 million as compared to 2002 as a result of pre-tax
rationalization charges of $9.0 million and a pre-tax loss on early
extinguishment of debt of $19.2 million.
Net Sales. The $323.9 million increase in consolidated net sales in 2003 as
compared to 2002 was largely the result of higher net sales of the metal food
container business due to businesses acquired in 2003.
Net sales for the metal food container business increased $263.5 million,
or 17.7 percent, in 2003 as compared to 2002. This increase was primarily
attributable to the inclusion of net sales of the Silgan Closures and Pacific
Coast Can businesses.
Net sales for the plastic container business in 2003 increased $60.4
million, or 12.0 percent, as compared to 2002. This increase was primarily a
result of higher unit volume due largely to the acquisition of Thatcher Tubes
and higher average selling prices due to the pass through of increased resin
costs.
Gross Profit. The increase in gross profit margin for 2003 as compared to
2002 was principally due to increased sales of value-added products, largely
offset by heightened competitive activities in the plastic container business,
inflation in employee benefit costs and higher depreciation expense.
Selling, General and Administrative Expenses. The increase in selling,
general and administrative expenses as a percentage of consolidated net sales
for 2003 as compared to 2002 was largely due to higher levels of such expenses
in the Silgan Closures and Thatcher Tubes businesses, inflation in employee
benefits costs and the favorable impact in 2002 of net payments of $2.8 million
received in settlement for certain litigation.
Income from Operations. Income from operations for 2003 increased by $0.2
million as compared to 2002 while operating margin decreased to 7.3 percent from
8.4 percent. The increase in income from operations would have been $14.6
million higher were it not for rationalization charges in 2003 as compared to
rationalization credits in 2002. During 2003, we recorded rationalization
charges totaling $9.0 million (including the non-cash write-down in carrying
value of assets of approximately $5.3 million) related to closing two plastic
container manufacturing facilities and one metal closure manufacturing facility.
We recorded rationalization credits in 2002 totaling $5.6 million.
Income from operations of the metal food container business for 2003
increased $5.4 million, or 4.5 percent, as compared to 2002, while operating
margin decreased to 7.2 percent from 8.1 percent. The increase in income from
operations was principally due to the inclusion of the results of the recently
acquired businesses, increased sales of Quick Top(TM) easy-open ends and
improved operating efficiencies, partially offset by rationalization charges in
2003 as compared to rationalization credits in 2002, higher depreciation expense
and inflation in employee benefit costs. The decrease in operating margin was
due primarily to rationalization charges in 2003 as compared to rationalization
credits in 2002 and the inclusion of the results of Silgan Closures.
-25-
Income from operations of the plastic container business for 2003 decreased
$4.9 million, or 9.3 percent, as compared to 2002, and operating margin
decreased to 8.5 percent from 10.6 percent. The decreases in income from
operations and operating margin were primarily a result of rationalization
charges in 2003 as compared to a rationalization credit in 2002, increased
pricing pressures due to heightened competitive activities, higher depreciation
expense and inflation in employee benefits costs, partially offset by higher
unit volume and improved productivity. Operating margin was negatively impacted
as higher sales associated with higher resin costs did not result in a
corresponding increase in income from operations.
Interest and Other Debt Expense. Interest and other debt expense in 2003
increased $23.2 million to $98.0 million as compared to 2002. This increase
resulted primarily from a $19.2 million loss on early extinguishment of debt as
a result of refinancing all $500 million of the 9% Debentures and higher average
borrowings during the year due to three acquisitions completed in early 2003,
partially offset by a lower average interest rate in 2003. Interest and other
debt expense for 2002 included a $1.0 million loss on early extinguishment of
debt related to refinancing of our previous senior secured credit facility.
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.
In the fourth quarter of 2004, we utilized cash flow from operations to pay
scheduled installments of $23.7 million and voluntarily prepay an additional
$112.2 million of term loans under the Credit Agreement. Additionally, at
December 31, 2004, there were no revolving loans outstanding under the Credit
Agreement, as compared to $25.0 million outstanding at December 31, 2003. The
prepayment of our term loans generated a loss on early extinguishment of debt of
$1.6 million for the write-off of a portion of our unamortized debt issuance
costs.
In March 2003, we completed a $150 million incremental term loan borrowing
under the Credit Agreement and used the proceeds largely to finance the
acquisitions of Silgan Closures and Thatcher Tubes. Later in 2003, we amended
the Credit Agreement to increase the uncommitted incremental term loan facility
under the Credit Agreement by $200 million, and then we completed an additional
$200 million incremental term loan borrowing under the Credit Agreement and used
the proceeds and other funds to redeem outstanding 9% Debentures.
In November 2003, we issued $200 million aggregate principal amount of 6
3/4% Notes. The issue price for the 6 3/4% Notes was 100% of their principal
amount. The 6 3/4% Notes are general unsecured obligations of the Company,
subordinate in right of payment to obligations under the Credit Agreement and
effectively subordinate to all obligations of the subsidiaries of the Company.
Interest on the 6 3/4% Notes is payable semi-annually in cash on the 15th day of
each May and November. The net cash proceeds from this issuance and other funds
were used to redeem our 9% Debentures.
During 2003, we redeemed all $500 million of our outstanding 9% Debentures.
The redemption price was 103.375% of the principal amount, or $516.9 million,
plus accrued and unpaid interest to the redemption date. We funded this
redemption with the proceeds from the issuance of the 6 3/4% Notes, incremental
term loans and revolving loans under the Credit Agreement and funds from
operations. We recorded a loss on early extinguishment of debt of $19.2 million
in 2003 for the premium paid in connection with this redemption and for the
write-off of unamortized debt issuance costs and unamortized premium related to
the redeemed 9% Debentures.
-26-
In 2004, we used cash from operations of $277.7 million, proceeds from
asset sales of $10.0 million, proceeds from stock option exercises of $2.3
million and increases in outstanding checks of $6.1 million to fund capital
expenditures of $102.9 million, net repayments of long-term debt and revolving
loans of $160.9 million, dividends paid on common stock of $8.3 million and debt
issuance costs of $0.7 million and to increase cash balances by $23.3 million.
In 2004, trade accounts receivable, net decreased $11.2 million due to the
timing of cash collections from our customers. Trade accounts payable increased
$32.5 million due to the timing of payments and price increases of raw material
purchases.
In 2003, we used cash from incremental term loan borrowings of $350
million, cash from operations of $223.8 million, proceeds from the issuance of
the 6 3/4% Notes of $200 million, cash balances of $46.2 million, net borrowings
of revolving loans of $25.0 million, increases in outstanding checks of $11.1
million, proceeds from asset sales of $3.7 million and proceeds from stock
option exercises of $0.6 million to redeem the 9% Debentures for $516.9 million,
purchase businesses for $207.8 million, fund capital expenditures of $105.9
million, repay term loans under the Credit Agreement of $23.6 million and pay
debt issuance costs of $6.2 million.
In 2003, trade accounts receivable, net, inventories and trade accounts
payable increased primarily due to acquisitions completed in 2003. The increase
in inventories was partially offset by a successful finished goods inventory
reduction program in our metal food container business.
In 2002, we used proceeds of $206.0 million from an add-on issuance of 9%
Debentures, cash generated from operations of $149.7 million, increases in
outstanding checks of $13.6 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 2004, our Board of Directors initiated a quarterly dividend on our
common stock and in April, July and November of 2004 approved a $0.15 per share
quarterly cash dividend. The cash payments for dividends in 2004 totaled $8.3
million.
In February 2005, our Board of Directors declared a quarterly cash dividend
on our common stock of $0.20 per share, payable on March 15, 2005 to the holders
of record of our common stock on March 1, 2005. The cash payment for this
dividend is expected to approximate $3.7 million.
As of December 31, 2004, there were no revolving loans outstanding under
the Credit Agreement, and, after taking into account outstanding letters of
credit, the available portion of the revolving loan facility under the Credit
Agreement was $368.6 million. Revolving loans under the Credit Agreement may be
borrowed, repaid and reborrowed until their final maturity on June 28, 2008.
The Credit Agreement also provided us with A term loans ($63.7 million
outstanding at December 31, 2004) and B term loans ($575.0 million outstanding
at December 31, 2004), which are required to be repaid in annual installments
through June 28, 2008 and November 30, 2008, respectively. At December 31, 2004,
the uncommitted incremental term loan facility was $125.0 million. You should
also read Note 8 to our Consolidated Financial Statements for the year ended
December 31, 2004 included elsewhere in this Annual Report.
-27-
Under the 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 plus a margin. The margins are subject to adjustment
quarterly based upon financial ratios set forth in the Credit Agreement. During
2004, we completed an amendment to the Credit Agreement 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.
Because we sell metal containers used in the fruit and vegetable packing
process, 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.
For 2005, we estimate that we will utilize approximately $250-300 million
of revolving loans under our Credit Agreement 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.
In addition to our operating cash needs, we believe our cash requirements
over the next few years will consist primarily of:
o annual capital expenditures of $90 to $110 million;
o annual principal amortization payments of bank term loans under the
Credit Agreement of $21.8 million;
o quarterly common stock dividend payments of approximately $3.7 million
(assuming our Board of Directors continues to approve dividends at the
same level);
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 Credit Agreement, which
bear fluctuating rates of interest, and the 6 3/4% Notes; and
o payments of approximately $30 to $40 million for federal, state and
foreign tax liabilities in 2005, which represents a significant
increase from prior years as we fully utilize certain alternative
minimum tax and other credit carryforwards and which may increase
annually thereafter. These amounts do not reflect the impact of any
potential repatriation of earnings under the American Jobs Creation
Act of 2004, or the AJCA, which we are still evaluating or the impact
of the resolution of issues arising from tax audits with various tax
authorities.
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. We continue to evaluate
acquisition opportunities in the consumer goods packaging market and may incur
additional indebtedness, including indebtedness under the Credit Agreement, to
finance any such acquisition.
The Credit Agreement and the indenture with respect to the 6 3/4% Notes
contain restrictive covenants that, among other things, limit our ability to
incur debt, sell assets, pay dividends and engage in 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 2005 with all of these covenants.
-28-
Contractual Obligations
Our contractual cash obligations at December 31, 2004 are provided below:
Payment due by period
-----------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
----- --------- ----- ----- ---------
(Dollars in millions)
Long-term debt obligations (1) ........ $ 841.7 $ 21.8 $ 43.6 $576.3 $200.0
Interest on fixed rate debt (2) ....... 121.5 14.0 28.0 27.2 52.3
Interest on variable rate debt (3) .... 105.0 28.1 56.4 20.5 --
Operating lease obligations ........... 114.2 23.5 38.1 20.4 32.2
Purchase obligations (4) .............. 11.7 11.7 -- -- --
Other postretirement benefit
obligations (5) .................... 57.4 4.8 10.8 11.6 30.2
-------- ------ ------ ------ ------
Total (6) ............................. $1,251.5 $103.9 $176.9 $656.0 $314.7
======== ====== ====== ====== ======
(1) These amounts represent expected cash payments of our long-term debt.
(2) These amounts represent expected cash payments of our interest on fixed
rate long-term debt.
(3) These amounts represent expected cash payments of our interest on variable
rate long-term debt, after taking into consideration our interest rate swap
agreements, at prevailing interest rates at December 31, 2004.
(4) Purchase obligations consist of commitments for capital expenditures.
Obligations that are cancelable without penalty are excluded.
(5) Other postretirement benefit obligations have been actuarially determined
through the year 2014.
(6) Based on current tax law, there are no minimum required contributions to
our pension plans in 2005. However, this is subject to change based on
current tax proposals before Congress, as well as asset performance
significantly above or below the assumed long-term rate of return on plan
assets. During 2004, we made pension contributions of approximately $36.8
million, of which approximately $2.4 million represented minimum funding
requirements.
At December 31, 2004, we also had outstanding letters of credit of $31.4
million that were issued under the Credit Agreement.
You should also read Notes 9 and 11 to our Consolidated Financial
Statements for the year ended December 31, 2004 included elsewhere in this
Annual Report.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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 and to significantly reduce the exposure of our results of operations
to increases in other costs, such as labor and other manufacturing costs.
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, 2004, we had $841.7 million of indebtedness
outstanding, of which $188.7 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 1.3 percent to 3.3 percent. At December 31,
2004, the
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aggregate notional principal amounts of these agreements was $450 million, with
$100 million aggregate notional principal amount maturing in 2005, $150 million
aggregate notional principal amount maturing in 2006 and $100 million aggregate
notional principal amount maturing in each of 2007 and 2008. 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 Charges (Credits) and Acquisition Reserves
During 2004, we approved and announced to employees a plan to exit our
Benton Harbor, Michigan metal food container manufacturing facility and another
operation. This decision resulted in a charge to earnings during 2004 of $0.7
million, of which $0.2 million was for the non-cash write-down in carrying value
of assets. Through December 31, 2004, we made cash payments totaling $0.5
million related to these plans. All actions under these plans have been
completed.
During 2003, we established acquisition reserves in connection with our
purchases of Thatcher Tubes, Silgan Closures and Pacific Coast Can aggregating
approximately $6.0 million, recorded pursuant to plans that we began to assess
and formulate at the date of the acquisitions. During 2004, we finalized these
plans and reduced the related acquisition reserves by approximately $0.5
million. 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. Through December 31, 2004, we made cash payments
totaling $5.3 million related to these plans. At December 31, 2004, these
reserves had an aggregate balance of $0.2 million. Cash payments related to
these plans are expected to continue through the second quarter of 2005.
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 Silgan Closures
business. These plans included the termination of approximately 120 plant
employees and other related exit costs. 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 consisted of
$5.3 million for the non-cash write-down in carrying value of assets, $2.1
million for employee severance and benefits costs and $1.6 million for plant
exit costs. During 2004, additional rationalization charges of $1.3 million were
recorded related to these plans ($1.0 million for the metal food container
business and $0.3 million for the plastic container business). Since inception,
a total of $2.3 million and $1.3 million has been expended for employee
severance and benefits and plant exit costs, respectively, and $6.0 million has
been recorded for the non-cash write-down in carrying value of assets. At
December 31, 2004, these reserves had an aggregate balance of $0.7 million. The
timing of certain cash payments related to these reserves is dependent upon the
expiration of a lease obligation. Accordingly, cash payments related to these
reserves are expected through 2010.
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 our 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.
Under our rationalization and acquisition plans, we made cash payments of
$6.0 million, $6.0 million and $5.9 million, respectively, in 2004, 2003 and
2002. Additional cash spending is expected in
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2005 under our 2003 acquisition plans, 2003 rationalization plans and a prior
rationalization plan.
You should also read Note 3 to our Consolidated Financial Statements for
the year ended December 31, 2004 included elsewhere in this Annual Report.
Critical Accounting Policies
U.S. generally accepted accounting principles 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,
rationalization charges (credits) and acquisition reserves and testing goodwill
for impairment 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, 2004 and the accompanying
notes included elsewhere in this Annual Report.
At December 31, 2004, CS Can had approximately $11.3 million of deferred
tax assets relating to $32.2 million of federal net operating loss
carryforwards, or NOLs, that expire between 2020 and 2022, for which no
valuation allowance has been established. These NOLs are available to offset
future taxable income of CS Can. 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 and the reversal of temporary differences in
future periods. Current levels of CS Can pre-tax earnings are sufficient to
generate the taxable income required to realize our 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. Silgan Equipment Company, or
Silgan Equipment, had approximately $6.8 million of deferred tax assets relating
to $19.5 million of federal NOLs that expire in 2023, which have been fully
reserved for through purchase accounting.
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 long-term 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 25 basis point decrease in
the discount rate would increase our pension expense by approximately $1.2
million. For 2005, we reduced our discount rate from 6.25 percent to 6.0 percent
to reflect market interest rate conditions. We consider the current and expected
asset allocations of our pension plans, as well as historical and expected
long-term rates of return 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 long-term return on plan assets would increase our pension expense
by approximately $1.5 million. For 2004, 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.
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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.
Statement of Financial Accounting Standards, or SFAS, No. 142 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. Our tests for impairment require us to make assumptions regarding
the expected earnings and cash flows of our reporting units. These assumptions
are based on our internal forecasts. Developing these assumptions requires the
use of significant judgment and estimates. Actual results may differ from these
forecasts. If an impairment were to be identified, it could result in additional
expense recorded in our Consolidated Statements of Income.
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board, or the FASB,
issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4."
SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight,
handling costs and wasted materials should be recognized as current period
charges in all circumstances. SFAS No. 151 will be effective for us beginning
January 1, 2006. We do not expect the adoption of SFAS No. 151 to have a
significant effect on our financial position, results of operations or cash
flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment."
SFAS No. 123(R) requires that public companies recognize compensation expense in
an amount equal to the fair value of the share-based payment. SFAS No. 123(R) is
effective for us beginning with the third quarter of 2005. SFAS No. 123(R)
permits companies to adopt its requirements using either the "modified
prospective" method or the "modified retrospective" method. We are still
assessing which transition method to utilize. As permitted by SFAS No. 123, we
currently account for share-based payments to employees using Accounting
Principles Board, or APB, Opinion No. 25's intrinsic value method and, as such,
recognize no compensation expense for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)'s fair value method will have an impact on our
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of
that standard would have approximated the impact of SFAS No. 123 as described in
the disclosure of pro forma net income and diluted net income per share in Note
1 to our Consolidated Financial Statements for the year ended December 31, 2004
included elsewhere in this Annual Report. SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation expense to be
reported as a financing cash flow activity, rather than as an operating cash
flow activity as required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows in periods after
adoption. While we cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock
options), the amounts of operating cash flows recognized in prior periods for
such excess tax deductions were $1.7 million, $0.2 million and $2.3 million in
2004, 2003 and 2002, respectively.
On October 22, 2004, the AJCA was signed into law. The AJCA includes a
deduction of 85 percent on certain foreign earnings that are repatriated during
the calendar years of 2004 and 2005. We may elect to apply this provision to
qualifying earnings repatriated in 2005. We have started an evaluation of the
effects of the repatriation provision; however, we do not expect to be able to
complete this evaluation until after Congress or the Treasury Department
provides additional clarifying language on key elements of the provision. We
expect to complete our evaluation of the repatriation provision within a
reasonable period of time following the publication of the additional clarifying
language. The range of possible amounts that we are evaluating for repatriation
under this provision is between zero and $42.6 million. The related potential
range of income tax cannot be evaluated at this time.
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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 on
acceptable terms;
o our ability to integrate the operations of our acquired businesses
into our existing operations;
o our ability to generate sufficient 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 or to satisfy our
obligations under our contracts;
o the size and quality of the vegetable and fruit harvests in the
midwest and west regions of the United States or our ability to
collect our seasonal receivables;
o our ability to obtain sufficient quantities of raw materials or to
maintain the ability to pass raw material price increases through to
our customers;
o compliance by our suppliers with the terms of our arrangements with
them;
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;
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;
o the performance of the investments in our pension plans against the
level expected;
o changes in our evaluation of goodwill recorded on our consolidated
balance sheets;
o our ability to refinance the Credit Agreement prior to its maturity in
2008, which will depend on, among other things, our financial
condition at the time, the restrictions in the instruments governing
our then outstanding indebtedness and other factors including market
conditions; and
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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 primarily with our Canadian 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 objective, we regularly evaluate the amount of
our variable rate debt as a percentage of our aggregate debt. During 2004 and
2003, our average outstanding variable rate debt, after taking into account the
average outstanding notional amount of our interest rate swap agreements, was 33
percent and 31 percent of our total debt, respectively. 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 Credit Agreement, and our
obligations under these agreements are guaranteed and secured on a pari passu
basis with our obligations under the Credit Agreement. You should also read
Notes 4, 8 and 9 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 2004, a one percentage point change in the interest rates for our variable
rate indebtedness would have impacted 2004 interest expense by an aggregate of
approximately $3.7 million, after taking into account the average outstanding
notional amount of our interest rate swap agreements during 2004.
Foreign Currency Exchange Rate Risk
We do not conduct a significant portion of our manufacturing or sales
activity in foreign markets. Presently, our foreign activities are conducted
primarily in Canada. 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.
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
a portion of our exposure to natural gas price fluctuations through natural gas
swap agreements. During 2004 and 2003, we entered into natural gas swap
agreements to hedge approximately 25 percent and 40 percent, respectively, of
our exposure to fluctuations in natural gas prices. At December 31, 2004, we had
entered into natural gas swap agreements to hedge approximately
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20 percent of our expected 2005 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 Notes 4 and 9 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 2004, a ten percent change in natural gas
costs would have impacted our 2004 cost of goods sold by approximately $1.9
million, after taking into account our natural gas swap agreements.
Item 8. Financial Statements and Supplementary Data.
We refer you to Item 15, "Exhibits and Financial Statement Schedules,"
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.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures.
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-15(e) promulgated under the Securities
Exchange Act of 1934, as amended). Based upon that evaluation, as of the end of
the period covered by this Annual Report 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 disclosed
in this Annual 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 Annual Report that have materially affected,
or are reasonably likely to materially affect, these internal controls.
Management's Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements in accordance
with generally accepted accounting principles. Because of inherent limitations,
internal control over financial reporting may not prevent or detect
misstatements.
Management assessed the effectiveness of our internal control over
financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control - Integrated
Framework. Based on this assessment and those criteria, management believes that
we maintained effective internal control over financial reporting as of December
31, 2004.
Our management's assessment of the effectiveness of our internal control
over financial reporting as of December 31, 2004 has been audited by Ernst &
Young LLP, our independent registered public accounting firm, as stated in their
report which appears on page F-1.
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Item 9B. Other Information.
None.
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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 May 23, 2005 in the
sections entitled "Election of Directors", "Executive Officers" 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 May 23, 2005 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 May 23, 2005 in the
sections entitled "Executive Compensation" and "Security Ownership of Certain
Beneficial Owners and Management," 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 May 23, 2005 in the section
entitled "Certain Relationships and Related Transactions," and is incorporated
here in this Annual Report by this reference.
Item 14. Principal Accountant Fees and Services.
The information required by this item is set forth in our Proxy Statement
for our annual meeting of stockholders to be held on May 23, 2005 in the section
entitled "Ratification of Appointment of Independent Registered Public
Accounting Firm" and is incorporated here in this Annual Report by this
reference.
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PART IV
Item 15. Exhibits and Financial Statement Schedules.
Financial Statements:
Report of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting........................................................................... F-1
Report of Independent Registered Public Accounting Firm............................................ F-3
Consolidated Balance Sheets at December 31, 2004 and 2003.......................................... F-4
Consolidated Statements of Income for the years ended December 31, 2004, 2003
and 2002...................................................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2004, 2003 and 2002........................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003
and 2002...................................................................................... F-7
Notes to Consolidated Financial Statements......................................................... F-8
Schedules:
I. Condensed Financial Information of Registrant:
Condensed Balance Sheets of Silgan Holdings Inc. (Parent Company) at
December 31, 2004 and 2003............................................................ F-49
Condensed Statements of Income of Silgan Holdings Inc. (Parent Company)
for the years ended December 31, 2004, 2003 and 2002.................................. F-50
Condensed Statements of Cash Flows of Silgan Holdings Inc. (Parent
Company) for the years ended December 31, 2004, 2003 and 2002......................... F-51
Notes to Condensed Financial Statements................................................... F-52
II. Valuation and Qualifying Accounts for the years ended December 31,
2004, 2003 and 2002....................................................................... F-54
All other financial statement 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.
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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 November 14, 2003, between Silgan Holdings and
National City Bank, N.A., as trustee, with respect to the 6 3/4%
Senior Subordinated Notes due 2013 (incorporated by reference to
Exhibit 4.1 filed with our Registration Statement on Form S-4, dated
January 13, 2004, Registration Statement No. 333-11893).
4.2 Form of Silgan Holdings 6 3/4% Senior Subordinated Notes due 2013
(incorporated by reference to Exhibit 4.2 filed with our Registration
Statement on Form S-4, dated January 13, 2004, Registration Statement
No. 333-11893).
4.3 Registration Rights Agreement dated as of October 30, 2003 between
Silgan Holdings and Morgan Stanley & Co. Incorporated, Deutsche Bank
Securities Inc. and Banc of America Securities LLC (incorporated by
reference to Exhibit 4.3 filed with our Registration Statement on Form
S-4, dated January 13, 2004, Registration Statement No. 333-11893).
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 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).
10.3 First Amendment to the Credit Agreement dated as of November 4, 2003
among Silgan Holdings, Silgan Containers, Silgan Plastics, Silgan
Containers Manufacturing Corporation, Silgan Can Company, the Lenders,
and Deutsche Bank Trust Company Americas, as Administrative Agent
(incorporated by reference to Exhibit 10.4 filed with our Registration
Statement on Form S-4, dated January 13, 2004, Registration Statement
No. 333-11893).
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Exhibit
Number Description
- ------- -----------
10.4 Second Amendment to the Credit Agreement dated as of July 15, 2004
among Silgan Holdings, Silgan Containers, Silgan Plastics, Silgan
Containers Manufacturing Corporation, Silgan Can Company, the Lenders,
and Deutsche Bank Trust Company Americas, as Administrative Agent
(incorporated by reference to Exhibit 10 filed with our Quarterly
Report Form 10-Q for the quarterly period ended June 30, 2004,
Commission File No. 000-22117).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 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).
10.10 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).
+10.11 Employment Agreement, dated April 12, 2004, between Silgan Holdings
Inc. and Anthony J. Allott (incorporated by reference to Exhibit 10
filed with our Quarterly Report on Form 10-Q for the quarterly period
ended March 31, 2004, Commission File No. 000-22117).
-40-
Exhibit
Number Description
- ------- -----------
*+10.12 Employment Agreement dated June 30, 2004 between Silgan Holdings Inc.
and Robert B. Lewis.
+10.13 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).
+10.14 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).
+10.15 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).
+10.16 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).
+10.17 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).
+10.18 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).
+10.19 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).
10.20 Silgan Holdings Inc. 2002 Non-Employee Directors Stock Option Plan
(incorporated by reference to Exhibit 10.23 filed with our Annual
Report on Form 10-K for the year ended December 31, 2002, Commission
File No. 000-22117).
+10.21 Silgan Holdings Inc. Senior Executive Performance Plan (incorporated
by reference to Exhibit 10.19 filed with our Annual Report on Form
10-K for the year ended December 31, 2003, Commission File No.
000-22117).
*+10.22 Silgan Holdings Inc. 2004 Stock Incentive Plan.
-41-
Exhibit
Number Description
- ------- -----------
*+10.23 Form of Option Agreement (Employee) under the Silgan Holdings Inc.
2004 Stock Incentive Plan.
*+10.24 Form of Restricted Stock Unit Agreement (Employee) under the Silgan
Holdings 2004 Stock Incentive Plan.
*+10.25 Form of Restricted Stock Unit Agreement (Outside Director) under the
Silgan Holdings Inc. 2004 Stock Incentive Plan.
*12 Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 2004, 2003, 2002, 2001 and 2000.
14 Code of Ethics applicable to Silgan Holdings' principal executive
officers, principal financial officer, principal accounting officer or
controller or persons performing similar functions (incorporated by
reference to Exhibit 14 filed with our Annual Report on Form 10-K for
the year ended December 31, 2003, Commission File No. 000-22117).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 filed with our Annual Report on Form 10-K for the year ended
December 31, 2003, Commission File No. 000-22117).
*23 Consent of Ernst & Young LLP.
*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.
- -----------------
*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 7, 2005 By /s/ R. Philip Silver
--------------------------
R. Philip Silver
Co-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
- --------- ----- ----
Co-Chairman of the Board and
Co-Chief Executive Officer
/s/ R. Philip Silver (Principal Executive Officer) March 7, 2005
- -----------------------
(R. Philip Silver)
Co-Chairman of the Board and
Co-Chief Executive Officer
/s/ D. Greg Horrigan (Principal Executive Officer) March 7, 2005
- -----------------------
(D. Greg Horrigan)
/s/ John W. Alden Director March 7, 2005
- -----------------------
(John W. Alden)
/s/ Jeffrey C. Crowe Director March 7, 2005
- -----------------------
(Jeffrey C. Crowe)
/s/ William C. Jennings Director March 7, 2005
- -----------------------
(William C. Jennings)
/s/ Edward A. Lapekas Director March 7, 2005
- -----------------------
(Edward A. Lapekas)
Executive Vice President and
Chief Financial Officer
(Principal Financial and
/s/ Robert B. Lewis (Accounting Officer) March 7, 2005
- -----------------------
(Robert B. Lewis)
-43-
Report of Independent Registered Public Accounting Firm on
Internal Control Over Financial Reporting
The Board of Directors and Stockholders of Silgan Holdings Inc.
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Silgan
Holdings Inc. maintained effective internal control over financial reporting as
of December 31, 2004 based on criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). Silgan Holdings
Inc.'s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Silgan Holdings Inc. maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the COSO criteria. Also, in
our opinion, Silgan Holdings Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the COSO criteria.
F-1
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
Silgan Holdings Inc. as of December 31, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2004 and our report dated
March 2, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 2, 2005
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Silgan Holdings Inc.
We have audited the accompanying consolidated balance sheets of Silgan Holdings
Inc. as of December 31, 2004 and 2003, and the related consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2004. Our audits also included the financial
statement schedules listed in the Index at Item 15. 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 the standards of the Public Company
Accounting Oversight Board (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 referred to above present fairly, in
all material respects, the consolidated financial position of Silgan Holdings
Inc. at December 31, 2004 and 2003, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2004, in conformity with U.S. generally accepted accounting
principles. 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.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of Silgan Holdings
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 2, 2005 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Stamford, Connecticut
March 2, 2005
F-3
SILGAN HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands, except per share data)
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents ...................... $ 35,416 $ 12,100
Trade accounts receivable, less allowances
of $2,827 and $3,086 respectively ........... 148,073 159,273
Inventories .................................... 318,665 320,194
Prepaid expenses and other current assets ...... 53,776 53,731
---------- ----------
Total current assets ....................... 555,930 545,298
Property, plant and equipment, net .................. 792,936 817,850
Goodwill, net ....................................... 198,346 202,421
Other assets, net ................................... 49,947 55,515
---------- ----------
$1,597,159 $1,621,084
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt .............. $ 21,804 $ 48,670
Trade accounts payable ......................... 244,116 211,639
Accrued payroll and related costs .............. 57,364 65,940
Accrued liabilities ............................ 21,152 24,518
---------- ----------
Total current liabilities .................. 344,436 350,767
Long-term debt ...................................... 819,864 953,910
Other liabilities ................................... 225,423 195,602
Commitments and contingencies
Stockholders' equity:
Common stock ($0.01 par value per share;
100,000,000 shares authorized,
21,108,367 and 20,958,517 shares issued
and 18,422,891 and 18,273,041 shares
outstanding, respectively) ................... 211 210
Paid-in capital ................................ 131,685 125,758
Retained earnings .............................. 136,768 60,905
Accumulated other comprehensive income (loss)... 859 (5,675)
Unamortized stock compensation ................. (1,694) --
Treasury stock at cost (2,685,476 shares) ...... (60,393) (60,393)
---------- ----------
Total stockholders' equity ................. 207,436 120,805
---------- ----------
$1,597,159 $1,621,084
========== ==========
See notes to consolidated financial statements.
F-4
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands, except per share data)
2004 2003 2002
---- ---- ----
Net sales .............................................. $2,420,445 $2,312,165 $1,988,284
Cost of goods sold ..................................... 2,110,059 2,026,687 1,749,731
---------- ---------- ----------
Gross profit ...................................... 310,386 285,478 238,553
Selling, general and administrative expenses ........... 108,716 108,393 76,216
Rationalization charges (credits) ...................... 2,089 8,993 (5,603)
---------- ---------- ----------
Income from operations ............................ 199,581 168,092 167,940
Interest and other debt expense before loss on
early extinguishment of debt ....................... 55,632 78,861 73,789
Loss on early extinguishment of debt ................... 1,590 19,173 983
---------- ---------- ----------
Interest and other debt expense ................... 57,222 98,034 74,772
Income before income taxes and equity
in losses of affiliate ........................ 142,359 70,058 93,168
Provision for income taxes ............................. 58,214 27,743 36,806
---------- ---------- ----------
Income before equity in losses of affiliate ....... 84,145 42,315 56,362
Equity in losses of affiliate, net of income taxes ..... -- (281) (2,554)
---------- ---------- ----------
Net income ........................................ $ 84,145 $ 42,034 $ 53,808
========== ========== ==========
Basic net income per share ............................. $4.58 $2.30 $2.97
===== ===== =====
Diluted net income per share ........................... $4.52 $2.28 $2.93
===== ===== =====
Dividends per share .................................... $0.45 $ -- $ --
===== ===== =====
See notes to consolidated financial statements.
F-5
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the years ended December 31, 2004, 2003 and 2002
(Dollars and shares in thousands)
Common Stock Retained Accumulated
------------- Paid- Earnings Other Unamortized Total
Par in (Accumulated Comprehensive Stock Treasury Stockholders'
Shares Value Capital Deficit) Income (Loss) Compensation Stock Equity
------ ----- -------- ----------- ------------- ------------ -------- -------------
Balance at January 1, 2002 ............... 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 provision 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
Comprehensive income:
Net income ............................ -- -- -- 42,034 -- -- -- 42,034
Minimum pension liability, net of
tax provision of $3,961 ............. -- -- -- -- 6,106 -- -- 6,106
Change in fair value of derivatives,
net of tax provision of $1,338 ...... -- -- -- -- 2,053 -- -- 2,053
Foreign currency translation .......... -- -- -- -- 6,633 -- -- 6,633
--------
Comprehensive income .................. 56,826
--------
Stock option exercises, including
tax benefit of $240 .................... 42 1 886 -- -- -- -- 887
------ ---- -------- -------- -------- ------- -------- --------
Balance at December 31, 2003 ............. 18,273 210 125,758 60,905 (5,675) -- (60,393) 120,805
Comprehensive income:
Net income ............................ -- -- -- 84,145 -- -- -- 84,145
Minimum pension liability, net of
tax benefit of $1,406 ............... -- -- -- -- (2,154) -- -- (2,154)
Change in fair value of derivatives,
net of tax provision of $2,409 ....... -- -- -- -- 3,686 -- -- 3,686
Foreign currency translation .......... -- -- -- -- 5,002 -- -- 5,002
--------
Comprehensive income .................. 90,679
--------
Dividends declared on common stock ....... -- -- -- (8,282) -- -- -- (8,282)
Issuance of restricted stock units ....... -- -- 1,929 -- -- (1,929) -- --
Amortization of stock compensation ....... -- -- -- -- -- 235 -- 235
Stock option exercises and other awards,
including tax benefit of $1,736 ........ 150 1 3,998 -- -- -- -- 3,999
------ ---- -------- -------- -------- ------- -------- --------
Balance at December 31, 2004 ............. 18,423 $211 $131,685 $136,768 $ 859 $(1,694) $(60,393) $207,436
====== ==== ======== ======== ======== ======= ======== ========
See notes to consolidated financial statements.
F-6
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income ........................................................ $ 84,145 $ 42,034 $ 53,808
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ................................................. 118,450 110,724 94,936
Amortization of other intangibles ............................ 23 590 779
Amortization of debt issuance costs .......................... 3,937 3,888 2,588
Rationalization charges (credits) ............................ 2,089 8,993 (5,603)
Loss on early extinguishment of debt ......................... 1,590 19,173 983
Equity in losses of affiliate ................................ -- 457 4,222
Deferred income tax provision ................................ 42,535 25,742 25,219
Other changes that provided (used) cash, net of
effects from acquisitions:
Trade accounts receivable, net .......................... 11,200 (12,465) 20,246
Inventories ............................................. 1,449 28,109 (10,209)
Trade accounts payable .................................. 26,420 14,244 (14,725)
Accrued liabilities ..................................... (15,095) (6,443) (12,273)
Other, net .............................................. 995 (11,224) (10,255)
--------- --------- -----------
Net cash provided by operating activities .................... 277,738 223,822 149,716
--------- --------- -----------
Cash flows provided by (used in) investing activities:
Purchases of businesses, net of cash acquired ..................... -- (207,793) --
Capital expenditures .............................................. (102,868) (105,912) (119,160)
Proceeds from asset sales ......................................... 9,983 3,739 1,915
--------- --------- -----------
Net cash used in investing activities ........................ (92,885) (309,966) (117,245)
--------- --------- -----------
Cash flows provided by (used in) financing activities:
Borrowings under revolving loans .................................. 954,325 905,800 1,163,580
Repayments under revolving loans .................................. (979,325) (880,800) (1,496,605)
Proceeds from stock option exercises .............................. 2,262 647 4,303
Changes in outstanding checks - principally vendors ............... 6,057 11,084 13,577
Proceeds from issuance of long-term debt .......................... -- 550,000 656,000
Repayments of long-term debt ...................................... (135,912) (540,545) (310,573)
Dividends paid on common stock .................................... (8,282) -- --
Debt issuance costs ............................................... (662) (6,260) (22,444)
--------- --------- -----------
Net cash (used in) provided by financing
activities ............................................... (161,537) 39,926 7,838
--------- --------- -----------
Cash and cash equivalents:
Net increase (decrease) ........................................... 23,316 (46,218) 40,309
Balance at beginning of year ...................................... 12,100 58,318 18,009
--------- --------- -----------
Balance at end of year ............................................ $ 35,416 $ 12,100 $ 58,318
========= ========= ===========
Interest paid .......................................................... $ 55,494 $ 93,514 $ 73,251
Income taxes paid, net of refunds ...................................... 5,008 2,803 14,374
See notes to consolidated financial statements.
F-7
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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; metal, composite and plastic vacuum 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.
Our businesses are principally based in the United States.
Basis of Presentation. The consolidated financial statements include the
accounts of Holdings and its subsidiaries. All significant intercompany
transactions have been eliminated. The preparation of consolidated financial
statements in conformity with U.S. generally accepted accounting principles
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 principal 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
income (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. 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 totaling approximately $105.5
million at December 31, 2004 and $99.4 million at December 31, 2003 are included
in trade accounts payable in our Consolidated Balance Sheets. Changes in
outstanding checks are included in financing activities in our Consolidated
Statements of Cash Flows to treat them as, in substance, cash advances.
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-8
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 1. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment, Net. Property, plant and equipment, net 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 $0.7 million, $1.0 million and $1.4 million in 2004, 2003 and 2002,
respectively, 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. We review goodwill for impairment as of July 1 of each year and
more frequently if circumstances indicate a possible impairment. We determined
that goodwill was not impaired in our third quarter 2004 review. Changes in the
carrying amount of goodwill, net are as follows:
Metal Food Plastic
Containers Containers Total
---------- ---------- -----
(Dollars in thousands)
Balance at December 31, 2002 ... $ 47,680 $ 93,801 $141,481
Acquisitions ................... 55,350 5,050 60,400
Currency translation ........... -- 540 540
-------- -------- --------
Balance at December 31, 2003 ... 103,030 99,391 202,421
Adjustments .................... (5,722) 1,413 (4,309)
Currency translation ........... -- 234 234
-------- -------- --------
Balance at December 31, 2004 ... $ 97,308 $101,038 $198,346
======== ======== ========
Goodwill, net was adjusted in 2004 primarily for deferred tax items and the
finalization of the valuation of assets for 2003 acquisitions.
Goodwill, net for our metal food container business includes accumulated
amortization of $14.7 million at both December 31, 2004 and 2003. Goodwill, net
for our plastic container business includes accumulated amortization of $11.1
million at both December 31, 2004 and 2003.
F-9
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 1. Summary of Significant Accounting Policies (continued)
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.
Other Assets, Net. Other assets, net consist principally of debt issuance costs
which are being amortized on a straight-line basis over the terms of the related
debt agreements (4 to 9 years) and an intangible pension asset.
Hedging Instruments. We account for derivative financial instruments under
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as amended and interpreted,
which requires all derivatives to be recorded in the Consolidated Balance Sheets
at their fair values. Changes in fair values of derivatives are recorded in each
period in earnings or comprehensive income (loss), depending on whether a
derivative is designated as part of a hedge transaction and, if it is, the type
of hedge transaction.
We utilize certain derivative financial instruments to manage a portion of our
interest rate 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.
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, Silgan Equipment Company, or Silgan
Equipment, 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 as these
earnings are expected to be indefinitely reinvested. See Note 12 for further
discussion.
Revenue Recognition. Revenues are recognized when goods are shipped and the
title and risk of loss pass to the customer. For those sites where we operate
within the customer's facilities, title and risk of loss pass to the customer
upon delivery of product to clearly delineated areas within the common facility,
at which time we recognize revenues. 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.
F-10
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 1. Summary of Significant Accounting Policies (continued)
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. Under our current stock-based compensation plan, we have
issued options and restricted stock units to our officers, other key employees
and outside directors. A restricted stock unit represents the right to receive
one share of our common stock at a future date. Unvested restricted stock units
do not have dividend or voting rights and may not be disposed of or transferred
during the vesting period. See Note 13 for further discussion. We apply the
recognition and measurement principles of Accounting Principles Board, or APB,
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for stock awards 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. Restricted stock units 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 ratably over the
respective vesting period. Compensation expense of $0.2 million was amortized in
2004.
If we had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," for the years ended December 31,
2004, 2003 and 2002, net income and basic and diluted net income per share would
have been as follows:
2004 2003 2002
---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported .......................... $84,145 $42,034 $53,808
Add: Stock based compensation expense
included in reported net income, net of
income taxes ................................... 135 -- --
Deduct: Total stock-based employee
compensation expense determined under
the fair value method for all awards, net
of income taxes ................................ 1,747 1,441 1,165
------- ------- -------
Pro forma net income ............................. $82,533 $40,593 $52,643
======= ======= =======
Earnings per share:
Basic net income per share - as reported ...... $4.58 $2.30 $2.97
===== ===== =====
Basic net income per share - pro forma ........ 4.49 2.22 2.90
===== ===== =====
Diluted net income per share - as reported .... $4.52 $2.28 $2.93
===== ===== =====
Diluted net income per share - pro forma ...... 4.45 2.22 2.88
===== ===== =====
F-11
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 1. Summary of 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, as revised, 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.
Effective January 1, 2003, we adopted 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 requires that gains or losses
from the extinguishment of our debt will no longer be classified as
extraordinary items. Upon adoption in 2003, the extraordinary item for loss on
early extinguishment of debt of $1.0 million before income taxes that was
recorded in the second quarter of 2002, as a result of the refinancing of our
previous senior secured credit facility with our new senior secured credit
facility, was reclassified to loss on early extinguishment of debt in our
Consolidated Statements of Income.
In December 2003, the FASB issued a revised SFAS No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revised SFAS
No. 132 requires additional disclosures about plan assets, benefit obligations,
expected cash flows and net periodic benefit costs for defined benefit plans. In
2003, we adopted the additional disclosure requirements, except for certain
disclosures about estimated future benefit payments which were adopted in 2004.
F-12
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 1. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements. In November 2004, the FASB issued
SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No.
151 clarifies that abnormal amounts of idle facility expense, freight, handling
costs and wasted materials should be recognized as current period charges in all
circumstances. SFAS No. 151 will be effective for us beginning January 1, 2006.
We do not expect the adoption of SFAS No. 151 to have a significant effect on
our financial position, results of operations or cash flows.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) requires that public companies recognize compensation expense in an
amount equal to the fair value of the share-based payment. SFAS No. 123(R) is
effective for us beginning with the third quarter of 2005. SFAS No. 123(R)
permits companies to adopt its requirements using one of two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
We are still assessing which transition method to utilize.
As permitted by SFAS No. 123, we currently account for share-based payments to
employees using APB No. 25's intrinsic value method and, as such, recognize no
compensation expense for employee stock options. Accordingly, the adoption of
SFAS No. 123(R)'s fair value method will have an impact on our results of
operations, although it will have no impact on our overall financial position.
The impact of adoption of SFAS No. 123(R) cannot be predicted at this time
because it will depend on levels of share-based payments granted in the future.
However, had we adopted SFAS No. 123(R) in prior periods, the impact of that
standard would have approximated the impact of SFAS No. 123 as described in the
disclosure of pro forma net income and diluted net income per share in Note 1 to
our Consolidated Financial Statements. SFAS No. 123(R) also requires the
benefits of tax deductions in excess of recognized compensation expense to be
reported as a financing cash flow activity, rather than as an operating cash
flow activity as required under current literature. This requirement will reduce
net operating cash flows and increase net financing cash flows in periods after
adoption. While we cannot estimate what those amounts will be in the future
(because they depend on, among other things, when employees exercise stock
options), the amounts of operating cash flows recognized in prior periods for
such excess tax deductions were $1.7 million, $0.2 million and $2.3 million in
2004, 2003 and 2002, respectively.
F-13
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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 business operates under the name Silgan Closures LLC, or Silgan Closures,
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.
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 2004 when valuations and integration plans were completed.
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
2004 Rationalization Plans
- --------------------------
During 2004, we approved and announced to employees a plan to exit our Benton
Harbor, Michigan metal food container manufacturing facility and another
operation. This decision resulted in a charge to earnings during 2004 of $0.7
million, of which $0.2 million was for the non-cash write-down in carrying value
of assets. Through December 31, 2004, we made cash payments totaling $0.5
million related to these plans. All actions under these plans have been
completed.
F-14
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
(continued)
2003 Acquisition Plans
- ----------------------
During 2003, we established acquisition reserves in connection with our
purchases of Thatcher Tubes, White Cap and Pacific Coast Can aggregating
approximately $6.0 million, recorded pursuant to plans that we began to assess
and formulate at the date of the acquisitions. During 2004, we finalized these
plans and reduced the related acquisition reserves by approximately $0.5
million. 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. These plans included the termination of approximately
380 plant and administrative employees and other related plant exit costs. These
reserves consisted of employee severance and benefits costs of $4.2 million and
plant exit costs of $1.3 million related to the closing of the previously
discussed acquired facilities. All of these facilities have ceased manufacturing
operations. Through December 31, 2004, a total of $4.0 million and $1.3 million
has been expended for employee severance and benefits and plant exit costs
related to these plans, respectively. At December 31, 2004, these reserves had
an aggregate balance of $0.2 million. Cash payments related to these reserves
are expected to continue through the second quarter of 2005.
Activity in our 2003 acquisition plan reserves is summarized as follows:
Employee
Severance Plant Exit
and Benefits Costs Total
------------ ----- -----
(Dollars in thousands)
Balance at December 31, 2002 ............. $ -- $ -- $ --
2003 Reserves Established ................ 4,451 1,559 6,010
2003 Utilized ............................ (1,167) (523) (1,690)
------- ------ -------
Balance at December 31, 2003 ............. 3,284 1,036 4,320
Finalization of 2003 Acquisition
Plan Reserves ......................... (268) (239) (507)
2004 Utilized ............................ (2,856) (751) (3,607)
------- ------ -------
Balance at December 31, 2004 ............. $ 160 $ 46 $ 206
======= ====== =======
F-15
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
(continued)
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 Silgan Closures business.
These plans included the termination of approximately 120 plant employees and
other related exit costs. 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 consisted of $5.3
million for the non-cash write-down in carrying value of assets, $2.1 million
for employee severance and benefits costs and $1.6 million for plant exit costs.
During 2004, additional rationalization charges of $1.3 million were recorded
related to these plans ($1.0 million for the metal food container business and
$0.3 million for the plastic container business). Since inception, a total of
$2.3 million and $1.3 million has been expended for employee severance and
benefits and plant exit costs, respectively, and $6.0 million has been recorded
for the non-cash write-down in carrying value of assets. At December 31, 2004,
these reserves had an aggregate balance of $0.7 million. The timing of certain
cash payments related to these reserves is dependent upon the expiration of a
lease obligation. Accordingly, cash payments related to these reserves are
expected through 2010.
Activity in our 2003 rationalization plan reserves is summarized as follows:
Employee Non-Cash
Severance Plant Exit Asset
and Benefits Costs Write-Down Total
------------ ----- ---------- -----
(Dollars in thousands)
Balance at December 31, 2002 .......... $ -- $ -- $ -- $ --
2003 Rationalization Charge ........... 2,097 1,588 5,308 8,993
2003 Utilized ......................... (1,502) (617) (5,308) (7,427)
------- ------ ------- -------
Balance at December 31, 2003 .......... 595 971 -- 1,566
2004 Rationalization Charge ........... 272 408 662 1,342
2004 Utilized ......................... (830) (689) (662) (2,181)
------- ------ ------- -------
Balance at December 31, 2004 .......... $ 37 $ 690 $ -- $ 727
======= ====== ======= =======
F-16
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
(continued)
Fairfield Rationalization Plan
- ------------------------------
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. 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. Through December 31, 2004, a total of $2.4 million has
been expended relating to this plan. At December 31, 2004, this reserve had a
remaining balance of $0.9 million related to plant exit costs. 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 rationalization plan reserve is summarized as follows:
Employee
Severance Plant Exit
and Benefits Costs Total
------------ ----- -----
(Dollars in thousands)
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
2003 Utilized ............................ -- (321) (321)
----- ------ ------
Balance at December 31, 2003 ............. -- 1,273 1,273
2004 Utilized ............................ -- (380) (380)
----- ------ ------
Balance at December 31, 2004 ............. $ -- $ 893 $ 893
===== ====== ======
F-17
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
(continued)
AN Can Acquisition Plan
- -----------------------
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, 2003, a total of $49.5 million
has been expended related to these plans, which consisted of $26.1 million for
employee severance and benefits costs, $6.6 million for plant exit costs and
$16.8 million for payment of acquisition related liabilities. During 2003, all
actions under this plan were completed.
Activity in our AN Can acquisition plan reserve is summarized as follows:
Employee
Severance Plant Exit Acquisition
and Benefits Costs Liabilities Total
------------ ----- ----------- -----
(Dollars in thousands)
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
2003 Utilized .................... (747) (1,119) -- (1,866)
------ ------- ------- -------
Balance at December 31, 2003 ..... $ -- $ -- $ -- $ --
====== ======= ======= =======
F-18
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
(continued)
Northtown, Kingsburg and Waukegan 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 the composite container department at our Waukegan,
Illinois metal food container facility.
During 2002, in order to support new business, we decided to continue to operate
our Kingsburg facility and to utilize certain Northtown assets with carrying
values that were previously written down as part of this restructuring charge.
As a result, we recorded a $2.8 million rationalization credit, which consisted
of $2.2 million related to certain assets with carrying values that were
previously written down but were placed back 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. Also, during 2002, all actions related to our rationalization plans for
our Northtown, Missouri and Waukegan, Illinois metal food container
manufacturing facilities were completed at amounts less than originally
estimated. Accordingly, we reversed $0.2 million of rationalization reserves as
a rationalization credit.
Other Assets
- ------------
During 2002, we placed certain assets of our metal food container business with
carrying values that were previously written down back in service. As a result,
we recorded a $2.3 million rationalization credit and recorded those assets in
our Consolidated Balance Sheets at their depreciated cost, which approximated
fair value.
Summary
- -------
Rationalization charges (credits) for the years ended December 31 are summarized
as follows:
2004 2003 2002
---- ---- ----
(Dollars in thousands)
2004 Rationalization plans ................ $ 747 $ -- $ --
2003 Rationalization plans ................ 1,342 8,993 --
Fairfield plan ............................ -- -- (237)
Northtown, Kingsburg and Waukegan plans ... -- -- (3,041)
Other assets .............................. -- -- (2,325)
------ ------ -------
$2,089 $8,993 $(5,603)
====== ====== =======
F-19
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
(continued)
Summary (continued)
- -------
At December 31, rationalization and acquisition reserves were included in our
Consolidated Balance Sheets as follows:
2004 2003
---- ----
(Dollars in thousands)
Accrued liabilities ............. $ 877 $5,572
Other liabilities ............... 949 1,587
------ ------
$1,826 $7,159
====== ======
Note 4. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in our Consolidated
Statements of Stockholders' Equity. Amounts included in accumulated other
comprehensive income (loss) at December 31 are as follows:
2004 2003
---- ----
(Dollars in thousands)
Foreign currency translation ........... $ 9,637 $ 4,635
Change in fair value of derivatives .... 2,925 (761)
Minimum pension liability .............. (11,703) (9,549)
-------- -------
Accumulated other comprehensive
income (loss) ..................... $ 859 $(5,675)
======== =======
The amount reclassified to earnings from the change in fair value of derivatives
component of accumulated other comprehensive income (loss) for the years ended
December 31, 2004, 2003 and 2002 was net losses of $3.4 million, $2.2 million
and $5.0 million, net of income taxes, respectively.
We estimate that we will reclassify $0.9 million of income, net of income taxes,
of the change in fair value of derivatives component of accumulated other
comprehensive income (loss) to earnings during the next twelve months. The
actual amount that will be reclassified to earnings will vary from this amount
as a result of changes in market conditions. See Note 9 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 income
(loss) included $0.4 million and $5.6 million, respectively, related to our
equity investment in White Cap. See Note 7 which includes a discussion of our
equity investment in White Cap.
F-20
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 5. Inventories
The components of inventories at December 31 are as follows:
2004 2003
---- ----
(Dollars in thousands)
Raw materials ...................... $ 63,225 $ 36,732
Work-in-process .................... 50,366 52,815
Finished goods ..................... 198,697 213,481
Spare parts and other .............. 19,324 20,267
-------- --------
331,612 323,295
Adjustment to value inventory
at cost on the LIFO method ...... (12,947) (3,101)
-------- --------
$318,665 $320,194
======== ========
Inventories include $33.2 million and $30.3 million recorded on the first-in,
first-out method at December 31, 2004 and 2003, respectively.
Note 6. Property, Plant and Equipment, Net
Property, plant and equipment, net, at December 31 is as follows:
2004 2003
---- ----
(Dollars in thousands)
Land ..................................... $ 8,984 $ 10,060
Buildings and improvements ............... 166,443 168,236
Machinery and equipment .................. 1,395,481 1,309,756
Construction in progress ................. 55,428 60,068
---------- ----------
1,626,336 1,548,120
Accumulated depreciation ................. (833,400) (730,270)
---------- ----------
Property, plant and equipment, net ... $ 792,936 $ 817,850
========== ==========
F-21
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 7. Investment in Equity 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 vacuum 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.
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. Prior to our acquisition of White Cap, we
accounted 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, which included our portion of White Cap's rationalization
charge to close its Chicago, Illinois metal closure manufacturing facility of
$2.0 million, net of income taxes, 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. 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.
Note 8. Long-Term Debt
Long-term debt at December 31 is as follows:
2004 2003
---- ----
(Dollars in thousands)
Bank debt:
Bank revolving loans ................ $ -- $ 25,000
Bank A term loans ................... 63,669 83,330
Bank B term loans ................... 574,999 691,250
-------- ----------
Total bank debt ................... 638,668 799,580
-------- ----------
Subordinated debt:
6 3/4% Senior Subordinated Notes .... 200,000 200,000
Other ............................... 3,000 3,000
-------- ----------
Total subordinated debt ........... 203,000 203,000
-------- ----------
Total debt ............................. 841,668 1,002,580
Less current portion ................ 21,804 48,670
-------- ----------
$819,864 $ 953,910
======== ==========
F-22
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 8. Long-Term Debt (continued)
The aggregate annual maturities of our debt are as follows (dollars in
thousands):
2005 ............ $ 21,804
2006 ............ 21,804
2007 ............ 21,804
2008 ............ 576,256
2009 ............ --
Thereafter ...... 200,000
--------
$841,668
========
Bank Credit Agreement
- ---------------------
On June 28, 2002, we completed the refinancing of our previous U.S. senior
secured credit facility, or the Previous U.S. Credit Agreement, by entering into
a new $850 million senior secured credit facility, or the Credit Agreement. As a
result of refinancing our Previous U.S. Credit Agreement, we recorded a loss on
early extinguishment of debt of $1.0 million in 2002 for the write-off of
unamortized debt issuance costs related to the Previous U.S. Credit Agreement.
The Credit Agreement initially 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 Credit Agreement, we also had a $275 million uncommitted
incremental term loan facility. The uncommitted incremental 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.
On March 3, 2003, we completed a $150 million incremental term loan borrowing
under the Credit Agreement, reducing the uncommitted incremental term loan
facility to $125 million. The proceeds were used largely to finance the
acquisitions of White Cap and Thatcher Tubes. The terms of this incremental term
loan borrowing are the same as those for B term loans under the Credit
Agreement.
On November 13, 2003, we amended the Credit Agreement to, among other things,
increase the uncommitted incremental term loan facility by $200 million and
provide us with greater ability to redeem our 9% Senior Subordinated Debentures
due 2009, or the 9% Debentures, or any other subordinated indebtedness. This
increased our uncommitted incremental term loan facility under the Credit
Agreement to $325 million. On December 15, 2003, we completed a $200 million
incremental term loan borrowing under the Credit Agreement. The terms of this
incremental term loan borrowing are the same as those for B term loans under the
Credit Agreement. We used the proceeds from this incremental term loan to redeem
a portion of our outstanding 9% Debentures. Our uncommitted incremental term
loan facility under the Credit Agreement at December 31, 2004 was $125 million.
F-23
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 8. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
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.
The 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, as defined
in the Credit Agreement. 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.
During 2004, we repaid scheduled installments of $16.7 million of A term loans
and $7.0 million of B term loans under the Credit Agreement. In addition, in the
fourth quarter of 2004, we utilized excess cash flows to voluntarily prepay $3.0
million of A term loans and $109.2 million of B term loans under the Credit
Agreement. As a result of our 2004 prepayments under the Credit Agreement, we
recorded a loss on early extinguishment of debt of $1.6 million for the
write-off of a portion of our debt issuance costs. During 2003, we repaid
scheduled installments of $16.7 million of A term loans and $7.0 million of B
term loans under the Credit Agreement. During 2002, we repaid scheduled
installments of $1.8 million of B term loans under the Credit Agreement. During
2002, we repaid $119.4 million of A term loans and $186.6 million of B term
loans under the Previous U.S. Credit Agreement.
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 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, 2004, there were no
revolving loans outstanding, as compared to $25.0 million outstanding at
December 31, 2003. After taking into account letters of credit of $31.4 million,
borrowings available under the revolving credit facility of the Credit Agreement
were $368.6 million on December 31, 2004.
On July 15, 2004, we completed an amendment to our Credit Agreement that lowered
the margin on our B term loans by twenty-five basis points to 1.75 percent.
F-24
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 8. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
Borrowings under the 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. Currently, base rate borrowings bear interest
at the base rate plus a margin of 0.75 percent, and Eurodollar rate borrowings
bear interest at the Eurodollar rate plus a margin of 1.75 percent. In
accordance with the Credit Agreement, the interest rate margin on base rate and
Eurodollar rate borrowings is reset quarterly based upon our total leverage
ratio, as defined in the Credit Agreement. As of December 31, 2004, the interest
rate for Eurodollar rate borrowings was 4.33 percent. There were no base rate
borrowings outstanding at December 31, 2004. For 2004, 2003 and 2002, the
weighted average annual interest rate paid on term loans was 3.5 percent, 3.4
percent and 4.0 percent, respectively; and the weighted average annual interest
rate paid on revolving loans was 3.4 percent, 3.5 percent and 3.3 percent,
respectively. We have entered into interest rate swap agreements with an
aggregate notional amount of $450 million to convert interest rate exposure from
variable rates to fixed rates of interest. See Note 9 which includes a
discussion of the interest rate swap agreements.
The 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 (0.50 percent at
December 31, 2004). The commitment fee is 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 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 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 (1.75 percent at December 31, 2004) 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.
F-25
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 8. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
The indebtedness under the 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
subsidiaries has also been pledged as security to the lenders under the Credit
Agreement. At December 31, 2004, we had assets of a U.S. subsidiary of $130.6
million which were restricted and could not be transferred to Holdings or any
other subsidiary of Holdings. The 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 Credit Agreement. We are currently in
compliance with all covenants under the Credit Agreement.
Because we sell metal containers used in the fruit and vegetable packing
process, 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 packing season. Due to our seasonal requirements, we incur
short-term indebtedness to finance our working capital requirements. For 2004,
2003 and 2002, the average amount of revolving loans outstanding, including
seasonal borrowings, was $170.3 million, $131.0 million and $258.8 million,
respectively; and, after taking into account outstanding letters of credit, the
highest amount of such borrowings was $305.3 million, $260.0 million and $485.3
million, respectively.
6 3/4% Senior Subordinated Notes
- --------------------------------
On November 14, 2003, we issued $200 million aggregate principal amount of
6 3/4% Senior Subordinated Notes due 2013, or the 6 3/4% Notes. The issue price
for the 6 3/4% Notes was 100% of their principal amount. Net cash proceeds from
this issuance were used to redeem a portion of our 9% Debentures.
The 6 3/4% Notes are general unsecured obligations of Holdings, subordinate in
right of payment to obligations under the Credit Agreement and effectively
subordinate to all obligations of the subsidiaries of Holdings. Interest on the
6 3/4% Notes is payable semi-annually in cash on the 15th day of each May and
November.
F-26
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 8. Long-Term Debt (continued)
6 3/4% Senior Subordinated Notes (continued)
- --------------------------------
The 6 3/4% Notes are redeemable, at the option of Holdings, in whole or in part,
at any time after November 15, 2008 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 November 15, of the years set forth below:
Year Redemption Price
---- ----------------
2008 ............ 103.375%
2009 ............ 102.250%
2010 ............ 101.125%
Thereafter ...... 100.000%
Upon the occurrence of a change of control, as defined in the indenture relating
to the 6 3/4% Notes, Holdings is required to make an offer to purchase the
6 3/4% Notes at a purchase price equal to 101% of their principal amount, plus
accrued interest to the date of purchase.
The indenture relating to the 6 3/4% Notes contains covenants which are
generally less restrictive than those under the Credit Agreement.
9% Senior Subordinated Debentures
- ---------------------------------
In 2003, we redeemed all $500 million principal amount of our outstanding 9%
Debentures. The redemption price was 103.375% of the principal amount, or $516.9
million, plus accrued and unpaid interest to the redemption date. As permitted
under the Credit Agreement and the other documents governing our indebtedness,
we funded the redemption with the 6 3/4% Notes, incremental term loans and
revolving loans under the Credit Agreement and funds from operations. As a
result, in 2003, we recorded a loss on early extinguishment of debt of $19.2
million for the premium paid in connection with this redemption and for the
write-off of unamortized debt issuance costs and unamortized premium related to
the 9% Debentures.
F-27
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 9. Financial Instruments
The financial instruments recorded in our Consolidated Balance Sheets include
cash and cash equivalents, trade accounts receivable, trade accounts payable,
debt obligations and swap agreements. Due to their short-term maturity, the
carrying amounts of cash and cash equivalents, trade accounts receivable and
trade accounts payable approximate their fair market values. The following table
summarizes the carrying amounts and estimated fair values of our other financial
instruments at December 31 (bracketed amounts represent assets):
2004 2003
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in thousands)
Bank debt ....................... $638,668 $638,668 $799,580 $799,580
Subordinated debt ............... 200,000 208,000 200,000 199,250
Interest rate swap agreements ... (4,776) (4,776) 3,679 3,679
Natural gas swap agreements ..... 188 188 (218) (218)
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 6 3/4% Notes 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, 2004 and 2003 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.
F-28
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 9. Financial Instruments (continued)
Derivative Instruments and Hedging Activities (continued)
- ---------------------------------------------
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 income (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 2004, 2003 and 2002,
ineffectiveness for our hedges increased (reduced) net income by $1.0 million,
($0.5) million and ($0.2) million, respectively, 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, 2004
and 2003 was recorded in our Consolidated Balance Sheets as a net asset of $4.6
million ($5.1 million in other assets, $0.3 million in accrued interest payable
and $0.2 million in other liabilities) and a net liability of $3.5 million ($2.4
million in other liabilities, $1.3 million in accrued interest payable and $0.2
million in other assets), respectively. See Note 4 which includes a discussion
of the effects of hedging activities on accumulated other comprehensive income
(loss).
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, 2004 and 2003, the aggregate notional
principal amount of these agreements was $450 million and $550 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 1.3 percent
to 3.3 percent and receive floating rates of interest based on three month
LIBOR. These agreements mature as follows: $100 million aggregate notional
principal amount in 2005, $150 million aggregate notional principal amount in
2006 and $100 million aggregate notional principal amount in each of 2007 and
2008. The difference between amounts to be paid or received on interest rate
swap agreements is recorded in interest expense. Net payments of $7.2 million,
$4.8 million and $7.2 million were made under these interest rate swap
agreements for the years ended December 31, 2004, 2003 and 2002, respectively.
F-29
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 9. Financial Instruments (continued)
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 25
percent and 40 percent of our exposure to fluctuations in natural gas prices in
2004 and 2003, respectively. At December 31, 2004 and 2003, the aggregate
notional principal amount of these agreements was 0.5 million (including 0.2
million that became effective on January 1, 2005) and 0.7 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 $5.46 to
$6.90 per MMBtu and receive a NYMEX-based natural gas price. These gas swap
agreements mature in 2005. 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 received under natural gas swap agreements were $0.5 million and
$1.2 million during 2004 and 2003, respectively. Payments made under natural gas
swap agreements were $1.2 million during 2002.
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
(Campbell Soup Company, Del Monte Corporation and Nestle Food Company) accounted
for approximately 34.6 percent, 33.0 percent and 34.9 percent of our net sales
in 2004, 2003 and 2002, respectively. The receivable balances from these
customers collectively represented 27.4 percent and 32.4 percent of our trade
accounts receivable at December 31, 2004 and 2003, 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 packing process.
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.
F-30
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 10. 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):
2005 ........... $ 23,535
2006 ........... 21,041
2007 ........... 17,090
2008 ........... 11,467
2009 ........... 8,897
Thereafter ..... 32,191
--------
$114,221
========
Rent expense was approximately $27.4 million, $27.6 million and $23.5 million
for the years ended December 31, 2004, 2003 and 2002, respectively.
At December 31, 2004, we had noncancelable commitments for 2005 capital
expenditures of $11.7 million.
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.
Note 11. Retirement Benefits
We sponsor a number of defined benefit and defined contribution pension 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.
We also sponsor other postretirement benefits plans, including 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 care benefits are paid as covered
expenses are incurred.
The measurement date for our retirement plans is December 31 of each year.
F-31
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 11. 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:
Other
Pension Benefits Postretirement Benefits
------------------------- -------------------------
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Change in Benefit Obligation
Obligation at beginning of year ..................... $322,796 $156,295 $ 92,877 $ 53,755
Service cost ..................................... 11,590 10,047 1,419 2,264
Interest cost .................................... 19,923 17,757 5,041 5,121
Actuarial losses (gains) ......................... 10,544 32,015 (7,401) 13,689
Plan amendments .................................. 1,226 12,159 -- --
Benefits paid .................................... (16,798) (15,252) (5,596) (4,869)
Participants' contributions ...................... -- -- 1,005 696
Acquisitions ..................................... -- 109,775 -- 22,221
-------- -------- -------- --------
Obligation at end of year ........................... 349,281 322,796 87,345 92,877
-------- -------- -------- --------
Change in Plan Assets
Fair value of plan assets at beginning of year ...... 254,558 112,795 -- --
Actual return on plan assets ..................... 27,483 40,913 -- --
Employer contributions ........................... 37,029 42,584 4,591 4,173
Participants' contributions ...................... -- -- 1,005 696
Benefits paid .................................... (16,798) (15,252) (5,596) (4,869)
Acquisitions ..................................... -- 74,763 -- --
Expenses ......................................... (2,585) (1,245) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ............ 299,687 254,558 -- --
-------- -------- -------- --------
Funded Status
Funded Status ....................................... (49,594) (68,238) (87,345) (92,877)
Unrecognized actuarial loss ...................... 44,316 37,559 12,976 20,629
Unrecognized prior service cost .................. 20,728 22,831 24 29
-------- -------- -------- --------
Net asset (liability) recognized .................... $ 15,450 $ (7,848) $(74,345) $(72,219)
======== ======== ======== ========
Amounts recognized in the Consolidated
Balance Sheets
Prepaid benefit cost ............................. $ 28,735 $ 21,199 $ -- $ --
Accrued benefit cost ............................. (46,961) (61,273) (74,345) (72,219)
Intangible asset ................................. 14,306 16,416 -- --
Accumulated other comprehensive loss ............. 19,370 15,810 -- --
-------- -------- -------- --------
Net asset (liability) recognized .................... $ 15,450 $ (7,848) $(74,345) $(72,219)
======== ======== ======== ========
F-32
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 11. Retirement Benefits (continued)
The accumulated benefit obligation for all defined benefit plans at December 31,
2004 and 2003 was $322.1 million and $295.8 million, respectively. For pension
plans with accumulated benefit obligations in excess of plan assets, the
projected benefit obligation, accumulated benefit obligation and fair value of
plan assets were $259.8 million, $243.1 million and $218.6 million,
respectively, at December 31, 2004 and $263.2 million, $242.4 million and $200.4
million, respectively, at December 31, 2003.
The benefits expected to be paid from our pension and other postretirement
benefit plans, which reflect future years of services, and the Medicare subsidy
expected to be received are as follows (dollars in thousands):
Other
Pension Postretirement
------- --------------
2005 ............ $ 17,215 $ 4,839
2006 ............ 18,112 5,216
2007 ............ 19,039 5,586
2008 ............ 20,014 5,733
2009 ............ 21,108 5,817
2010 - 2014 ..... 125,222 30,206
-------- -------
$220,710 $57,397
======== =======
Our principal pension and other postretirement benefit plans used the following
weighted average actuarial assumptions to determine the benefit obligations at
December 31:
2004 2003
---- ----
Discount rate ...................... 6.00% 6.25%
Expected return on plan assets ..... 9.00% 9.00%
Rate of compensation increase ...... 3.30% 3.30%
Health care cost trend rate:
Assumed for next year ........... 10% 10%
Ultimate rate ................... 5% 5%
Year that the ultimate rate
is reached ................... 2010 2009
Our expected return on plan assets is determined by the plan assets' historical
long-term investment performance, current and expected asset allocation and
estimates of future long-term returns on those types of plan assets.
F-33
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 11. Retirement Benefits (continued)
The components of the net periodic benefit cost for each of the years ended
December 31 are as follows:
Other
Pension Benefits Postretirement Benefits
---------------------------------- ----------------------------
2004 2003 2002 2004 2003 2002
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Service cost .................................... $ 11,590 $ 10,047 $ 7,787 $1,419 $2,264 $1,385
Interest cost ................................... 19,923 17,757 10,018 5,041 5,121 3,584
Expected return on plan assets .................. (22,249) (15,337) (9,144) -- -- --
Amortization of prior service cost .............. 3,329 2,802 2,164 5 5 5
Amortization of actuarial losses ................ 1,138 1,372 58 252 320 57
Settlement or curtailment loss .................. -- 149 -- -- -- --
-------- -------- ------- ------ ------ ------
Net periodic benefit cost ....................... $ 13,731 $ 16,790 $10,883 $6,717 $7,710 $5,031
======== ======== ======= ====== ====== ======
Our principal pension and other postretirement benefit plans used the following
weighted average actuarial assumptions to determine net periodic benefit cost
for the years ended December 31:
2004 2003 2002
---- ---- ----
Discount rate ...................... 6.25% 7.00% 7.25%
Expected return on plan assets ..... 9.00% 9.00% 9.00%
Rate of compensation increase ...... 3.30% 3.60% 3.60%
Health care cost trend rate ........ 10% 11% 9%
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 service and interest cost ............. $ 720 $ (601)
Effect on postretirement benefit obligation ..... 7,990 (6,764)
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.
F-34
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 11. 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
resulting from the federal subsidy 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. We have incorporated the
effects of this Act at our December 31, 2004 postretirement plan measurement
date and, accordingly, reduced our accumulated postretirement benefit obligation
by $2.5 million at December 31, 2004.
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 2004, 2003 and 2002 were $6.1 million, $5.7
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 $7.2 million in 2004, $7.7 million in 2003 and $6.4
million in 2002.
Plan Assets
- -----------
The weighted-average asset allocation for our pension plans at December 31 was
as follows:
2004 2003
---- ----
Equity securities ............. 57% 57%
Debt securities ............... 41% 40%
Cash and cash equivalents ..... 2% 3%
---- ----
100% 100%
F-35
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 11. Retirement Benefits (continued)
Plan Assets (continued)
- -----------
Our investment strategy is based on an expectation that equity securities will
outperform debt securities over the long term. Accordingly, the composition of
our plan assets is broadly characterized as a 58%/42% allocation between equity
and debt securities. This strategy utilizes indexed U.S. equity securities
(which constitutes approximately 85 percent of equity securities) with a lesser
allocation to indexed international equity securities and indexed investment
grade U.S. debt securities. We attempt to mitigate investment risk by regularly
rebalancing between equity and debt securities as contributions and benefit
payments are made. At December 31, 2004 and 2003, the timing of our cash
contributions resulted in a higher than targeted investment in cash and cash
equivalents.
Based on current tax law, there are no minimum required contributions to our
pension plans in 2005. However, this is subject to change based on current tax
proposals before Congress, as well as asset performance significantly above or
below the assumed long-term rate of return on plan assets. In order to reduce
our unfunded pension liability, it has been our recent practice to make
contributions in excess of the ERISA minimum requirements, to the extent they
are tax deductible. Therefore, at our discretion, we may fund amounts in excess
of the minimum in 2005.
Note 12. Income Taxes
The components of the provision for income taxes are as follows:
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Current:
Federal ................................. $ 7,727 $(1,081) $ 5,527
State ................................... 4,620 (194) 843
Foreign ................................. 3,332 3,100 3,549
------- ------- -------
Current income tax provision ........ 15,679 1,825 9,919
------- ------- -------
Deferred:
Federal ................................. 39,724 22,885 22,825
State ................................... 2,776 2,763 2,325
Foreign ................................. 35 94 69
------- ------- -------
Deferred income tax provision ....... 42,535 25,742 25,219
------- ------- -------
$58,214 $27,567 $35,138
======= ======= =======
F-36
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 12. Income Taxes (continued)
The provision for income taxes is included in our Consolidated Statements of
Income as follows:
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Income before equity in losses of affiliate .... $58,214 $27,743 $36,806
Equity in losses of affiliate .................. -- (176) (1,668)
------- ------- -------
$58,214 $27,567 $35,138
======= ======= =======
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:
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Income taxes computed at the statutory
U.S. federal income tax rate ............... $49,825 $24,360 $31,131
State income taxes, net of federal
tax benefit ................................ 6,028 3,174 3,148
Tax liabilities no longer required ............. (464) (2,420) --
Valuation allowance ............................ 1,874 1,488 --
Other .......................................... 951 965 859
------- ------- -------
$58,214 $27,567 $35,138
======= ======= =======
Effective tax rate ............................. 40.9% 39.6% 39.5%
F-37
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 12. Income Taxes (continued)
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:
2004 2003
---- ----
(Dollars in thousands)
Deferred tax assets:
Pension and postretirement liabilities ........... $ 32,721 $ 35,421
Rationalization and other accrued liabilities .... 16,133 22,247
AMT and other credit carryforwards ............... 18,397 30,089
Net operating loss carryforwards ................. 26,353 27,251
Other ............................................ 12,631 27,334
--------- ---------
Total deferred tax assets .................... 106,235 142,342
--------- ---------
Deferred tax liabilities:
Property, plant and equipment .................... (148,107) (134,588)
Other ............................................ (7,015) (9,838)
--------- ---------
Total deferred tax liabilities ............... (155,122) (144,426)
--------- ---------
Valuation allowance ................................... (17,963) (18,713)
--------- ---------
Net deferred tax liability ............................ $ (66,850) $ (20,797)
========= =========
At December 31, 2004 and 2003, the net deferred tax liability in our
Consolidated Balance Sheets was comprised of current deferred tax assets of
$36.4 million and $39.7 million, respectively, and long-term deferred tax
liabilities of $103.3 million and $60.5 million, respectively.
The valuation allowance in 2004 includes deferred tax assets of $7.7 million
resulting from prior year acquired operations. Subsequent recognition of these
tax benefits, if any, will be allocated to reduce goodwill of the acquired
operations. The valuation allowance also includes losses of certain foreign
operations of $2.0 million, capital loss carryforwards of $4.1 million and state
and local net operating loss and credit carryforwards totaling $4.1 million.
The valuation allowance for deferred tax assets decreased in 2004 by $0.8
million. This net change was principally comprised of a decrease related to
prior year acquired operations totaling $2.7 million, which was partially offset
by an increase related to state and local and foreign net operating loss
carryforwards, or NOLs, totaling $1.9 million.
F-38
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 12. Income Taxes (continued)
We file a consolidated U.S. federal income tax return that includes all domestic
subsidiaries except CS Can and Silgan Equipment. CS Can and Silgan Equipment
file separate U.S. federal income tax returns. At December 31, 2004, CS Can has
federal NOLs of approximately $32.2 million that are available to offset its
future taxable income and that expire from 2020 through 2022. Silgan Equipment
has federal NOLs of approximately $19.5 million that expire in 2023 and which
have a full valuation allowance recorded against them in purchase accounting.
At December 31, 2004, we had $13.4 million of alternative minimum tax credits
and CS Can had $0.7 million of alternative minimum tax credits which are
available indefinitely to reduce future income tax payments. We also had state
tax NOLs of approximately $5.1 million, net of any valuation allowances, that
are available to offset future taxable income and that expire from 2005 to 2023.
Pre-tax income of our Canadian subsidiaries was $9.8 million in 2004, $9.4
million in 2003 and $11.1 million in 2002. At December 31, 2004, approximately
$42.6 million of accumulated earnings of our Canadian subsidiaries are expected
to be indefinitely reinvested. Accordingly, applicable U.S. federal income taxes
have not been provided. Determination of the amount of unrecognized deferred
U.S. income tax liability and foreign tax credit carryforwards associated with
the unremitted foreign earnings is not practicable due to the complexity
associated with the hypothetical tax calculation.
On October 22, 2004, the American Jobs Creation Act, or the AJCA, was signed
into law. The AJCA includes a deduction of 85 percent on certain foreign
earnings that are repatriated during the calendar years of 2004 and 2005. We may
elect to apply this provision to qualifying earnings repatriated in 2005. We
have started an evaluation of the effects of the repatriation provision;
however, we do not expect to be able to complete this evaluation until after
Congress or the Treasury Department provides additional clarifying language on
key elements of the provision. We expect to complete our evaluation of the
repatriation provision within a reasonable period of time following the
publication of the additional clarifying language. The range of possible amounts
that we are evaluating for repatriation under this provision is between zero and
$42.6 million. The related potential range of income tax cannot be evaluated at
this time.
Note 13. Stock-Based Compensation
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 except with respect to stock
options granted thereunder prior to adoption of the Plan.
F-39
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 13. Stock-Based Compensation (continued)
Shares of our common stock issued 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. As of December 31, 2004,
800,000 shares were available for issuance under the Plan.
The following is a summary of stock option activity for years ended December 31,
2004, 2003 and 2002:
Weighted Average
Options Exercise Price
------- ----------------
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
=========
Granted ................................. 231,500 $29.18
Exercised ............................... (42,200) 15.33
Canceled ................................ (29,800) 17.97
---------
Options outstanding at December 31, 2003 ..... 926,860 22.56
=========
Granted ................................. 35,000 $45.14
Exercised ............................... (149,100) 15.18
Canceled ................................ (10,000) 8.13
---------
Options outstanding at December 31, 2004 ..... 802,760 25.10
=========
At December 31, 2004, 2003 and 2002, the remaining contractual life of options
outstanding was 5.8 years, 6.7 years and 7.4 years, respectively, and there were
396,041, 346,048 and 220,280 options exercisable with weighted average exercise
prices of $21.69, $18.71 and $17.88, respectively.
F-40
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 13. Stock-Based Compensation (continued)
The following is a summary of stock options outstanding and exercisable at
December 31, 2004 by range of exercise price:
Outstanding Exercisable
----------------------------------------------- ---------------------------
Range of Remaining Weighted Weighted
Exercise Contractual Average Average
Prices Number Life (Years) Exercise Price Number Exercise Price
-------- ------ ------------ -------------- ------ --------------
$ 9.81 - $13.88 19,500 5.4 $10.52 10,300 $10.40
14.09 265,320 5.1 14.09 175,040 14.09
17.00 - 26.44 164,500 5.6 20.60 100,500 20.55
28.88 - 33.08 182,500 6.1 32.74 49,525 32.57
36.75 - 46.95 170,940 7.0 40.03 60,676 38.53
------- -------
802,760 396,041
======= =======
The weighted average fair value of options granted was $20.25, $16.08 and $25.49
for 2004, 2003 and 2002, respectively.
The fair value was calculated using the Black-Scholes option-pricing model based
on the following weighted average assumptions for grants made in 2004, 2003 and
2002:
2004 2003 2002
---- ---- ----
Risk-free interest rate ............. 3.4% 3.7% 5.4%
Expected volatility ................. 54.4% 56.7% 59.6%
Dividend yield ...................... 1.0% -- --
Expected option life (years) ........ 5 6 8
In 2004, we granted 37,000 restricted stock units to certain of our officers and
key employees. The fair value of these units at the date of grant was $1.8
million. These restricted stock units vest ratably over a five-year period from
the date of grant.
In May 2004, we granted 3,000 restricted stock units to the independent members
of our Board of Directors, which vested in full six months from the date of
grant. The fair value of these units at the date of grant was $0.1 million.
F-41
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 14. Capital Stock and Dividends
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. As of December 31, 2004, we had repurchased 2,708,976
shares of our common stock for $61.0 million.
In 2004, our Board of Directors initiated a quarterly dividend on our common
stock and in April, July and November approved a $0.15 per share quarterly cash
dividend. The cash payments for dividends in 2004 totaled $8.3 million.
In February 2005, our Board of Directors approved a 33 percent increase to the
quarterly cash dividend and simultaneously declared a quarterly cash dividend on
our common stock of $0.20 per share, payable on March 15, 2005 to holders of
record of our common stock on March 1, 2005. The cash payment for this dividend
is expected to be approximately $3.7 million.
Note 15. Earnings Per Share
The components of the calculation of earnings per share are as follows:
2004 2003 2002
---- ---- ----
(Dollars and shares in thousands)
Net income .......................................... $84,145 $42,034 $53,808
======= ======= =======
Weighted average number of shares used in:
Basic earnings per share ........................ 18,373 18,249 18,135
Dilutive common stock equivalents:
Stock options and restricted stock units ..... 239 165 242
------ ------ ------
Diluted earnings per share ...................... 18,612 18,414 18,377
====== ====== ======
F-42
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 15. Earnings Per Share (continued)
Options to purchase 10,000 to 15,000 shares of common stock at prices ranging
from $42.72 to $46.95 per share for 2004, 135,940 to 233,440 shares of common
stock at prices ranging from $22.13 to $42.22 per share for 2003 and 16,494 to
174,223 shares of common stock at prices ranging from $25.15 to $44.22 per share
for 2002 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. In addition, 14,424 restricted stock units issued at
values ranging from $46.95 to $47.25 were also excluded from the 2004
computation of diluted earnings per share because they were antidilutive.
Note 16. Related Party Transactions
Prior to 2003, pursuant to 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 R. Philip Silver, the Co-Chairman
and Co-Chief Executive Officer of Holdings, and D. Greg Horrigan, the
Co-Chairman and Co-Chief Executive Officer of Holdings, S&H provided Holdings
and its subsidiaries with general management, supervision and administrative
services. The parties to the Management Agreements agreed to terminate the
Management Agreements effective January 1, 2003. As a result, Messrs. Silver and
Horrigan became employees of Holdings effective January 1, 2003, and neither
Holdings nor its subsidiaries made any payment in 2003 under the Management
Agreements.
In 2002, 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 to S&H under the
Management Agreements in 2002. These payments to S&H were allocated, based upon
EBDIT, as a charge to income from operations of each of our business segments.
Prior to July 2003, Leigh Abramson, a former Managing Director of Morgan
Stanley, served as a director of Holdings. In each of 2003 and 2002, 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 MMBtu of natural gas. During each of 2003 and 2002, an aggregate
notional principal amount of 0.9 million MMBtu of these natural gas swap
agreements were settled under which we received $1.2 million in 2003 from MSCG
and paid insignificant amounts to MSCG in 2002. In 2003, we paid Morgan Stanley
and Morgan Stanley Senior Funding, Inc., an affiliate of Morgan Stanley, a
combined $2.2 million in underwriting fees related to the issuance of the 6 3/4%
Notes and the Credit Agreement. In 2002, we paid Morgan Stanley and Morgan
Stanley Senior Funding, Inc. a combined $4.9 million in underwriting fees
related to the Credit Agreement and the add-on issuance of the 9% Debentures.
Landstar System, Inc. provided transportation services to our subsidiaries in
the amount of $1.4 million, $1.1 million and $0.4 million in 2004, 2003 and
2002, respectively. Mr. Crowe, a director of Holdings, is the Chairman of the
Board of Landstar System, Inc.
F-43
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 17. Business Segment Information
We are engaged in the packaging industry and report our results 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 metal, composite and plastic vacuum closures for food and beverage
products. The plastic containers segment manufactures 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. 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.
Our metal food container business' sales and income from operations 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 (see Note 18).
F-44
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 17. Business Segment Information (continued)
Information for each of the past three years for our business segments is as
follows:
Metal Food Plastic
Containers(1) Containers(2) Corporate Total
------------- ------------- --------- -----
(Dollars in thousands)
2004
- ----
Net sales ............................... $1,842,095 $578,350 $ -- $2,420,445
Depreciation and amortization ........... 76,957 41,481 35 118,473
Segment income from operations .......... 154,718 52,074 (7,211) 199,581
Segment assets .......................... 1,030,604 529,236 -- 1,559,840
Capital expenditures .................... 59,039 43,778 51 102,868
2003
- ----
Net sales ............................... $1,750,510 $561,655 $ -- $2,312,165
Depreciation and amortization ........... 70,349 40,925 40 111,314
Segment income from operations .......... 125,938 48,010 (5,856) 168,092
Segment assets .......................... 1,081,463 499,848 -- 1,581,311
Capital expenditures .................... 67,610 38,294 8 105,912
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
- -------------------------------
(1) Segment income from operations for the metal food container business
includes rationalization charges of $1.8 million in 2004, rationalization
charges of $1.2 million in 2003 and rationalization credits of $5.4 million
in 2002.
(2) Segment income from operations for the plastic container business includes
rationalization charges of $0.3 million in 2004, rationalization charges of
$7.8 million in 2003 and a rationalization credit of $0.2 million in 2002.
F-45
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 17. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income taxes
and equity in losses of affiliate as follows:
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Total segment income from operations ....... $199,581 $168,092 $167,940
Interest and other debt expense ............ 57,222 98,034 74,772
-------- -------- --------
Income before income taxes and
equity in losses of affiliate ...... $142,359 $ 70,058 $ 93,168
======== ======== ========
Total segment assets at December 31 are reconciled to total assets as follows:
2004 2003
---- ----
(Dollars in thousands)
Total segment assets ............. $1,559,840 $1,581,311
Other assets ..................... 37,319 39,773
---------- ----------
Total assets ................ $1,597,159 $1,621,084
========== ==========
Financial information relating to our operations by geographic area is as
follows:
2004 2003 2002
---- ---- ----
(Dollars in thousands)
Net sales:
United States ................... $2,348,710 $2,241,204 $1,928,058
Canada .......................... 71,735 65,419 60,226
Mexico .......................... -- 5,542 --
---------- ---------- ----------
Total net sales ............... $2,420,445 $2,312,165 $1,988,284
========== ========== ==========
Long-lived assets:
United States ................... $960,929 $ 985,591
Canada .......................... 30,353 28,058
Mexico .......................... -- 6,622
------- ----------
Total long-lived assets ....... $991,282 $1,020,271
======== ==========
F-46
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 17. 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
9.5 percent, 9.5 percent and 12.1 percent of our consolidated net sales during
2004, 2003 and 2002, respectively. Sales of our metal food containers segment to
Campbell Soup Company accounted for 12.8 percent, 11.1 percent and 11.4 percent
of our consolidated net sales during 2004, 2003 and 2002, respectively. Sales of
our metal food containers segment to Del Monte Corporation accounted for 10.6
percent, 10.8 percent, and 9.9 percent of our consolidated net sales during
2004, 2003 and 2002, respectively.
F-47
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 18. Quarterly Results of Operations (Unaudited)
The following table presents our quarterly results of operations for the years
ended December 31, 2004 and 2003:
First Second Third Fourth
----- ------ ----- ------
(Dollars in thousands, except per share data)
2004 (1)
- ----
Net sales .................................. $518,331 $551,311 $784,847 $565,956
Gross profit ............................... 62,160 71,755 105,801 70,670
Net income ................................. 11,085 18,239 38,455 16,366
Basic net income per share (3) ............. $0.61 $0.99 $2.09 $0.89
Diluted net income per share (3) ........... 0.60 0.98 2.06 0.88
Dividends per share ........................ $ -- $0.15 $0.15 $0.15
2003 (2)
- ----
Net sales .................................. $454,377 $545,240 $760,971 $551,577
Gross profit ............................... 49,597 70,195 102,196 63,490
Net income (loss) .......................... 4,166 13,538 26,763 (2,433)
Basic net income (loss) per share (3) ...... $0.23 $0.74 $1.47 $(0.13)
Diluted net income (loss) per share (3) .... 0.23 0.74 1.45 (0.13)
- ---------------------------------
(1) Net income for the first, second, third and fourth quarters of 2004
includes rationalization charges of $1.0 million, $0.2 million, $0.1
million and $0.8 million, respectively. Net income for the fourth quarter
of 2004 includes a benefit of $3.0 million for a litigation settlement and
a loss on early extinguishment of debt of $1.6 million. In addition, in the
fourth quarter of 2004, we recognized additional tax expense of $2.0
million resulting from a change in our annual effective income tax rate and
a benefit to health and welfare expense of $1.9 million, net of income
taxes, to adjust estimated amounts to our most current claim information.
(2) Net income (loss) for the third and fourth quarters of 2003 includes
rationalization charges of $7.6 million and $1.4 million, respectively. Net
income (loss) for the third and fourth quarters of 2003 includes a loss on
early extinguishment of debt of $1.0 million and $18.2 million,
respectively.
(3) 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.
F-48
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED BALANCE SHEETS
December 31, 2004 and 2003
(Dollars in thousands)
2004 2003
---- ----
Assets
Current assets:
Cash and cash equivalents ....................... $ 130 $ 62
Notes receivable - subsidiaries ................. 21,804 23,670
Interest receivable - subsidiaries .............. 1,841 2,445
Other current assets ............................ 5,315 423
---------- ----------
Total current assets .......................... 29,090 26,600
Notes receivable - subsidiaries .................... 816,864 950,910
Investment in and amounts due from subsidiaries .... 192,173 111,321
Other assets ....................................... 15,585 27,484
---------- ----------
$1,053,712 $1,116,315
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ............... $ 21,804 $ 23,670
Accrued interest payable ........................ 1,841 2,445
Accounts payable and accrued liabilities ........ 4,445 4,169
---------- ----------
Total current liabilities ..................... 28,090 30,284
Long-term debt ..................................... 816,864 950,910
Other liabilities .................................. 1,322 14,316
Stockholders' equity:
Common stock .................................... 211 210
Paid-in capital ................................. 131,685 125,758
Retained earnings ............................... 136,768 60,905
Accumulated other comprehensive income (loss) ... 859 (5,675)
Unamortized stock compensation .................. (1,694) --
Treasury stock at cost (2,685,476 shares) ....... (60,393) (60,393)
---------- ----------
Total stockholders' equity .................... 207,436 120,805
---------- ----------
$1,053,712 $1,116,315
========== ==========
See notes to condensed financial statements.
F-49
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---- ---- ----
Net sales .............................................. $ -- $ -- $ --
Cost of goods sold ..................................... -- -- --
------- ------- -------
Gross profit ...................................... -- -- --
Selling, general and administrative expenses ........... 5,322 5,557 4,495
------- ------- -------
Loss from operations .............................. (5,322) (5,557) (4,495)
Interest and other debt expense ........................ -- -- --
------- ------- -------
Loss before income taxes and equity in
earnings of consolidated subsidiaries .......... (5,322) (5,557) (4,495)
Benefit from income taxes .............................. (2,177) (2,201) (1,779)
------- ------- -------
Loss before equity in earnings
of consolidated subsidiaries .................... (3,145) (3,356) (2,716)
Equity in earnings of consolidated subsidiaries ........ 87,290 45,390 56,524
------- ------- -------
Net income ........................................ $84,145 $42,034 $53,808
======= ======= =======
See notes to condensed financial statements.
F-50
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2004, 2003 and 2002
(Dollars in thousands)
2004 2003 2002
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income .................................................... $ 84,145 $ 42,034 $ 53,808
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Equity in earnings of consolidated subsidiaries ......... (87,290) (45,390) (56,524)
Deferred income tax benefit ............................. (2,177) (2,201) (1,779)
Changes in other assets and liabilities, net ............ 11,410 4,910 (360)
--------- --------- ---------
Net cash provided by (used in) operating activities ..... 6,088 (647) (4,855)
--------- --------- ---------
Cash flows provided by (used in) investing activities:
Notes receivable - subsidiaries ............................... 135,912 (26,330) (347,824)
--------- --------- ---------
Net cash provided by (used in) investing activities ..... 135,912 (26,330) (347,824)
--------- --------- ---------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of long-term debt ...................... -- 550,000 656,000
Repayments of long-term debt .................................. (135,912) (523,670) (307,751)
Dividends paid on common stock ................................ (8,282) -- --
Proceeds from stock option exercises .......................... 2,262 647 4,303
--------- --------- ---------
Net cash (used in) provided by financing activities ..... (141,932) 26,977 352,552
--------- --------- ---------
Cash and cash equivalents:
Net increase (decrease) ....................................... 68 -- (127)
Balance at beginning of year .................................. 62 62 189
--------- --------- ---------
Balance at end of year ........................................ $ 130 $ 62 $ 62
========= ========= =========
See notes to condensed financial statements.
F-51
SILGAN HOLDINGS INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
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.
Certain prior years' amounts have been reclassified to conform with the current
year's presentation.
Note 2. Long-Term Debt
Long-term debt at December 31 is as follows:
2004 2003
---- ----
(Dollars in thousands)
Bank debt:
Bank A term loans ....................... $ 63,669 $ 83,330
Bank B term loans ....................... 574,999 691,250
-------- --------
Total bank debt ....................... 638,668 774,580
Subordinated debt:
6 3/4% Senior Subordinated Notes ........ 200,000 200,000
-------- --------
Total subordinated debt ............... 200,000 200,000
Total debt ................................. 838,668 974,580
Less current portion .................... 21,804 23,670
-------- --------
$816,864 $950,910
======== ========
F-52
SILGAN HOLDINGS INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
Note 2. Long-Term Debt (continued)
The aggregate annual maturities of long-term debt at December 31, 2004 are as
follows (dollars in thousands):
2005 ............ $ 21,804
2006 ............ 21,804
2007 ............ 21,804
2008 ............ 573,256
2009 ............ --
Thereafter ...... 200,000
--------
$838,668
========
As of December 31, 2004 and 2003, the obligations of Holdings had been pushed
down to its subsidiaries. In 2004, 2003 and 2002, 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 Credit Agreement, Holdings guarantees all of the indebtedness of
its subsidiaries incurred under the Credit Agreement. Holdings' subsidiaries may
borrow up to $400 million of revolving loans under the Credit Agreement.
Holdings' guarantee under the Credit Agreement is secured by a pledge by
Holdings of all of the stock of its subsidiaries.
Note 4. Dividends from Subsidiaries
For the years ended December 31, 2004, 2003 and 2002, Holdings did not receive
any cash dividends from its consolidated subsidiaries accounted for by the
equity method.
F-53
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SILGAN HOLDINGS INC.
For the years ended December 31, 2004, 2003 and 2002
(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, 2004:
Allowance for doubtful
accounts receivable ......................... $3,086 $315 $33 $(607)(1) $2,827
====== ==== === ===== ======
For the year ended
December 31, 2003:
Allowance for doubtful
accounts receivable ......................... $2,864 $494 $27 $(299)(1) $3,086
====== ==== === ===== ======
For the year ended
December 31, 2002:
Allowance for doubtful
accounts receivable ......................... $3,449 $119 $-- $(704)(1) $2,864
====== ==== === ===== ======
(1) Uncollectible accounts written off, net of recoveries.
F-54
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
+10.12 Employment Agreement dated June 30, 2004 between Silgan
Holdings Inc. and Robert B. Lewis.
+10.22 Silgan Holdings Inc. 2004 Stock Incentive Plan.
+10.23 Form of Option Agreement (Employee) under the Silgan
Holdings Inc. 2004 Stock Incentive Plan.
+10.24 Form of Restricted Stock Unit Agreement (Employee) under the
Silgan Holdings 2004 Stock Incentive Plan.
+10.25 Form of Restricted Stock Unit Agreement (Outside Director)
under the Silgan Holdings Inc. 2004 Stock Incentive Plan.
12 Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 2004, 2003, 2002, 2001 and 2000.
23 Consent of Ernst & Young LLP.
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.
- --------------
+Management contract or compensatory plan or arrangement.