UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________________ to ________________
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1269834
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4 Landmark Square
Stamford, Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
(203)975-7110
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
As of October 31, 2005, the number of shares outstanding of the Registrant's
common stock, $0.01 par value, was 37,205,350.
SILGAN HOLDINGS INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information 3
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at 3
September 30, 2005 and 2004 and December 31, 2004
Condensed Consolidated Statements of Income for 4
the three months ended September 30, 2005 and 2004
Condensed Consolidated Statements of Income for 5
the nine months ended September 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows for 6
the nine months ended September 30, 2005 and 2004
Condensed Consolidated Statements of Stockholders' 7
Equity for the nine months ended September 30, 2005
and 2004
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 26
Risk
Item 4. Controls and Procedures 27
Part II. Other Information 27
Item 6. Exhibits 27
Signatures 28
Exhibit Index 29
-2-
Part I. Financial Information
Item 1. Financial Statements
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited, see Note 1)
Sept. 30, Sept. 30, Dec. 31,
2005 2004 2004
---- ---- ----
Assets
Current assets
Cash and cash equivalents ............................... $ 63,848 $ 22,877 $ 35,416
Trade accounts receivable, net .......................... 352,802 317,450 148,073
Inventories ............................................. 307,836 307,966 318,665
Prepaid expenses and other current assets ............... 22,640 33,862 53,776
---------- ---------- ----------
Total current assets ................................ 747,126 682,155 555,930
Property, plant and equipment, net ........................... 763,241 792,903 792,936
Goodwill, net ................................................ 198,096 203,606 198,346
Other assets, net ............................................ 50,284 55,818 49,947
---------- ---------- ----------
$1,758,747 $1,734,482 $1,597,159
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Bank revolving loans .................................... $ 217,700 $ 78,100 $ --
Current portion of long-term debt ....................... 1,250 23,670 21,804
Trade accounts payable .................................. 175,639 156,832 244,116
Accrued payroll and related costs ....................... 64,972 71,920 57,364
Accrued liabilities ..................................... 65,167 77,334 21,152
---------- ---------- ----------
Total current liabilities ........................... 524,728 407,856 344,436
Long-term debt ............................................... 751,750 953,910 819,864
Other liabilities ............................................ 201,419 181,066 225,423
Stockholders' equity
Common stock ............................................ 426 211 211
Paid-in capital ......................................... 138,441 131,383 131,685
Retained earnings ....................................... 199,213 123,164 136,768
Accumulated other comprehensive income (loss) ........... 5,137 (1,204) 859
Unamortized stock compensation .......................... (2,135) (1,511) (1,694)
Treasury stock .......................................... (60,232) (60,393) (60,393)
---------- ---------- ----------
Total stockholders' equity .......................... 280,850 191,650 207,436
---------- ---------- ----------
$1,758,747 $1,734,482 $1,597,159
========== ========== ==========
See accompanying notes.
-3-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended September 30, 2005 and 2004
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2005 2004
---- ----
Net sales ............................................ $797,514 $784,847
Cost of goods sold ................................... 681,235 679,046
-------- --------
Gross profit .................................... 116,279 105,801
Selling, general and administrative expenses ......... 30,185 28,619
Rationalization charges .............................. -- 66
-------- --------
Income from operations .......................... 86,094 77,116
Interest and other debt expense ...................... 12,618 13,554
-------- --------
Income before income taxes ...................... 73,476 63,562
Provision for income taxes ........................... 28,245 25,107
-------- --------
Net income ...................................... $ 45,231 $ 38,455
======== ========
Earnings per share: (a)
Basic net income per share ...................... $1.22 $1.05
===== =====
Diluted net income per share .................... $1.20 $1.03
===== =====
Dividends per share: (a) ............................. $0.10 $0.08
===== =====
Weighted average number of shares: (a)
Basic ........................................... 37,172 36,799
Effect of dilutive securities ................... 474 456
------ ------
Diluted ......................................... 37,646 37,255
====== ======
(a) Per share and share amounts have been restated for the two-for-one
stock split discussed in Note 1.
See accompanying notes.
-4-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the nine months ended September 30, 2005 and 2004
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2005 2004
---- ----
Net sales .......................................... $1,908,716 $1,854,488
Cost of goods sold ................................. 1,652,484 1,614,772
---------- ----------
Gross profit .................................. 256,232 239,716
Selling, general and administrative expenses ....... 86,563 82,559
Rationalization charges ............................ 464 1,267
---------- ----------
Income from operations ........................ 169,205 155,890
Interest and other debt expense before loss on
early extinguishment of debt .................... 38,533 43,860
Loss on early extinguishment of debt ............... 11,035 --
---------- ----------
Interest and other debt expense ............... 49,568 43,860
Income before income taxes .................... 119,637 112,030
Provision for income taxes ......................... 46,060 44,252
---------- ----------
Net income .................................... $ 73,577 $ 67,778
========== ==========
Earnings per share: (a)
Basic net income per share .................... $1.99 $1.85
===== =====
Diluted net income per share .................. $1.96 $1.82
===== =====
Dividends per share: (a) ........................... $0.30 $0.15
===== =====
Weighted average number of shares: (a)
Basic ......................................... 37,059 36,713
Effect of dilutive securities ................. 514 476
------ ------
Diluted ....................................... 37,573 37,189
====== ======
(a) Per share and share amounts have been restated for the two-for-one
stock split discussed in Note 1.
See accompanying notes.
-5-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended September 30, 2005 and 2004
(Dollars in thousands)
(Unaudited)
2005 2004
---- ----
Cash flows provided by (used in) operating activities
Net income .................................................. $ 73,577 $ 67,778
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 92,837 90,718
Rationalization charges ................................. 464 1,267
Loss on early extinguishment of debt .................... 11,035 --
Other changes that provided (used) cash:
Trade accounts receivable, net ..................... (204,729) (158,177)
Inventories ........................................ 10,829 12,148
Trade accounts payable ............................. 11,703 22,118
Accrued liabilities ................................ 51,159 56,464
Other, net ......................................... 5,398 9,190
--------- ---------
Net cash provided by operating activities ............... 52,273 101,506
--------- ---------
Cash flows provided by (used in) investing activities
Capital expenditures ........................................ (63,721) (72,919)
Proceeds from asset sales ................................... 3,001 9,934
--------- ---------
Net cash used in investing activities ................... (60,720) (62,985)
--------- ---------
Cash flows provided by (used in) financing activities
Borrowings under revolving loans ............................ 956,275 745,700
Repayments under revolving loans ............................ (738,575) (692,600)
Proceeds from stock option exercises ........................ 3,305 2,262
Changes in outstanding checks - principally vendors ......... (80,180) (76,925)
Proceeds from issuance of long-term debt .................... 550,000 --
Repayments of long-term debt ................................ (638,668) --
Dividends paid on common stock .............................. (11,132) (5,519)
Debt issuance costs ......................................... (4,146) (662)
--------- ---------
Net cash provided by (used in) financing activities ..... 36,879 (27,744)
--------- ---------
Cash and cash equivalents
Net increase ................................................ 28,432 10,777
Balance at beginning of year ................................ 35,416 12,100
--------- ---------
Balance at end of period .................................... $ 63,848 $ 22,877
========= =========
Interest paid .................................................... $ 35,167 $ 35,205
Income taxes paid, net of refunds ................................ 11,481 674
See accompanying notes.
-6-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the nine months ended September 30, 2005 and 2004
(Dollars and shares in thousands)
(Unaudited)
Common Stock Accumulated
------------ Paid- Other Unamortized Total
Shares Par in Retained Comprehensive Stock Treasury Stockholders'
Outstanding Value Capital Earnings Income (Loss) Compensation Stock Equity
----------- ----- -------- -------- ------------- ------------ --------- -------------
Balance at December 31, 2003 ............. 18,273 $210 $125,758 $ 60,905 $(5,675) $ -- $(60,393) $120,805
Comprehensive income:
Net income ............................ -- -- -- 67,778 -- -- -- 67,778
Change in fair value of derivatives,
net of tax provision of $1,934 ....... -- -- -- -- 2,961 -- -- 2,961
Foreign currency translation .......... -- -- -- -- 1,510 -- -- 1,510
--------
Comprehensive income ..................... 72,249
--------
Dividends declared on common stock ....... -- -- -- (5,519) -- -- -- (5,519)
Issuance of restricted stock units ....... -- -- 1,631 -- -- (1,631) -- --
Amortization of stock compensation ....... -- -- -- -- -- 120 -- 120
Stock option exercises, including
tax benefit of $1,733 .................. 149 1 3,994 -- -- -- -- 3,995
------ ---- -------- -------- ------- ------- -------- --------
Balance at September 30, 2004 ............ 18,422 $211 $131,383 $123,164 $(1,204) $(1,511) $(60,393) $191,650
====== ==== ======== ======== ======= ======= ======== ========
Balance at December 31, 2004 ............. 18,423 $211 $131,685 $136,768 $ 859 $(1,694) $(60,393) $207,436
Comprehensive income:
Net income ............................ -- -- -- 73,577 -- -- -- 73,577
Change in fair value of derivatives,
net of tax provision of $1,438 ...... -- -- -- -- 2,423 -- -- 2,423
Foreign currency translation .......... -- -- -- -- 1,855 -- -- 1,855
--------
Comprehensive income ..................... 77,855
--------
Dividends declared on common stock ....... -- -- -- (11,132) -- -- -- (11,132)
Issuance of restricted stock units ....... -- -- 852 -- -- (852) -- --
Amortization of stock compensation ....... -- -- -- -- -- 411 -- 411
Stock option exercises, including
tax benefit of $2,945 .................. 173 2 6,248 -- -- -- -- 6,250
Net issuance of treasury stock for
vested restricted stock units,
including tax benefit of $39 ........... 6 -- (131) -- -- -- 161 30
Two-for-one stock split, net of
treasury shares of 2,679 ............... 18,602 213 (213) -- -- -- -- --
------ ---- -------- -------- ------- ------- -------- --------
Balance at September 30, 2005 ............ 37,204 $426 $138,441 $199,213 $ 5,137 $(2,135) $(60,232) $280,850
====== ==== ======== ======== ======= ======= ======== ========
See accompanying notes.
-7-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements of Silgan Holdings Inc., or Holdings, have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. The results of operations for any
interim period are not necessarily indicative of the results of operations for
the full year.
The Condensed Consolidated Balance Sheet at December 31, 2004 has been derived
from our audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
You should read the accompanying condensed consolidated financial statements in
conjunction with our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
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 2005 assessment.
Stock Split. On August 15, 2005, our Board of Directors declared a two-for-one
stock split of our issued common stock. The stock split was affected in the form
of a stock dividend. Stockholders of record at the close of business on
September 1, 2005 were issued one additional share of common stock for each
share of common stock owned on that date. The additional shares were distributed
on September 15, 2005. Information pertaining to the number of shares
outstanding, per share amounts and stock compensation has been restated in the
accompanying financial statements and related footnotes to reflect this stock
split for all periods presented, except for the Condensed Consolidated Balance
Sheets and Statements of Stockholders' Equity. Stockholders' equity reflects the
stock split by reclassifying from paid-in capital to common stock an amount
equal to the par value of the additional shares issued as a result of the stock
split.
Stock-Based Compensation. We currently have one stock-based compensation plan
in effect, under which we have issued options and restricted stock units to our
officers, other key employees and outside directors. 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. Accordingly, no compensation expense for employee
stock options is recognized, as all options granted 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.
-8-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Stock-Based Compensation (continued). During the first nine months of 2005, we
granted 21,000 restricted stock units to certain of our officers and key
employees. These restricted stock units vest ratably over a five-year period
from the date of grant. The fair value of these units at the date of grant was
$0.7 million. Additionally, in May 2005, we granted 7,128 restricted stock units
to the independent members of our Board of Directors, which vest in full one
year from the date of grant. The fair value of these units at the date of grant
was $0.2 million. Unvested restricted stock units may not be disposed of or
transferred during the vesting period.
If we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," net income and basic and diluted earnings per share would have
been as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported ........................... $45,231 $38,455 $73,577 $67,778
Add: Stock-based compensation expense
included in reported net income, net of
income taxes .................................. 107 58 250 72
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of
income taxes .................................. (296) (468) (1,002) (1,357)
------- ------- ------- -------
Pro forma net income .............................. $45,042 $38,045 $72,825 $66,493
======= ======= ======= =======
Earnings per share:
Basic net income per share - as reported ...... $1.22 $1.05 $1.99 $1.85
===== ===== ===== =====
Basic net income per share - pro forma ........ 1.21 1.03 1.97 1.81
===== ===== ===== =====
Diluted net income per share - as reported .... $1.20 $1.03 $1.96 $1.82
===== ===== ===== =====
Diluted net income per share - pro forma ...... 1.20 1.02 1.94 1.79
===== ===== ===== =====
Recently Issued 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 material effect on our financial position,
results of operations or cash flows.
-9-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements (continued). 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. We will adopt SFAS No. 123(R) beginning
January 1, 2006. 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 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 Condensed 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 $3.0 million and
$1.7 million for the nine months ending September 30, 2005 and 2004,
respectively.
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. The
range of possible amounts that we are evaluating for repatriation under this
provision is between zero and $62 million. The related potential range of income
tax cannot be determined at this time. We expect to complete our evaluation of
the repatriation provision under the AJCA in the fourth quarter of 2005.
-10-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 2. Rationalization Charges and Acquisition Reserves
As part of our plans to integrate the operations of our various acquired
businesses and to rationalize certain facilities, we have established reserves
for employee severance and benefits and plant exit costs. Activity in our
rationalization and acquisition reserves since December 31, 2004 is summarized
as follows:
Employee Plant Non-Cash
Severance Exit Asset
and Benefits Costs Write Down Total
------------ ----- ---------- -----
(Dollars in thousands)
Balance at December 31, 2004
----------------------------
Fairfield Rationalization ...................................... $ -- $ 893 $ -- $ 893
2003 Acquisition Plans ......................................... 160 46 -- 206
2003 Rationalization Plans ..................................... 37 690 -- 727
---- ------ ----- ------
Balance at December 31, 2004 ................................... 197 1,629 -- 1,826
Activity for the Nine Months Ended Sept. 30, 2005
-------------------------------------------------
Fairfield Rationalization ...................................... -- (272) -- (272)
2003 Acquisition Plan Reserves Utilized ........................ (76) -- -- (76)
2003 Acquisition Plan Reserves Adjusted ........................ (84) -- -- (84)
2003 Rationalization Plan Reserves Utilized .................... -- (129) -- (129)
2005 Rationalization Plan Reserves Established ................. 287 48 129 464
2005 Rationalization Plan Reserves Utilized .................... (77) (48) (129) (254)
---- ------ ----- ------
Total Activity ................................................. 50 (401) -- (351)
Balance at September 30, 2005
-----------------------------
Fairfield Rationalization ...................................... -- 621 -- 621
2003 Acquisition Plans ......................................... -- 46 -- 46
2003 Rationalization Plans ..................................... 37 561 -- 598
2005 Rationalization Plan ...................................... 210 -- -- 210
---- ------ ----- ------
Balance at September 30, 2005 .................................. $247 $1,228 $ -- $1,475
==== ====== ===== ======
2005 Rationalization Plan
-------------------------
During the first quarter of 2005, we approved and announced to employees a plan
to relocate the operations of one of our Mississauga, Ontario plastic container
manufacturing facilities to other operating facilities. This decision resulted
in charges to earnings of $0.5 million, which consisted of $0.1 million for the
non-cash write-down in carrying value of assets and $0.4 million for employee
severance and benefits and plant exit costs. The relocation of operations has
been substantially completed. Through September 30, 2005, there were no
significant cash payments related to relocating this facility. Cash payments
related to these reserves are expected through 2006 for employee severance and
benefits costs.
-11-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 2. Rationalization Charges and Acquisition Reserves (continued)
Rationalization and acquisition reserves are included in the Condensed
Consolidated Balance Sheets as follows:
Sept. 30, Sept. 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Accrued liabilities ............... $ 425 $ 462 $ 877
Other liabilities ................. 1,050 1,587 949
------ ------ ------
$1,475 $2,049 $1,826
====== ====== ======
Note 3. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in the Condensed
Consolidated Statements of Stockholders' Equity. Amounts included in accumulated
other comprehensive income (loss) consisted of the following:
Sept. 30, Sept. 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Foreign currency translation ....................... $ 11,492 $ 6,145 $ 9,637
Change in fair value of derivatives ................ 5,348 2,200 2,925
Minimum pension liability .......................... (11,703) (9,549) (11,703)
-------- ------- --------
Accumulated other comprehensive income (loss)..... $ 5,137 $(1,204) $ 859
======== ======= ========
-12-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 4. Inventories
Inventories consisted of the following:
Sept. 30, Sept. 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Raw materials ........................... $ 55,962 $ 42,043 $ 63,225
Work-in-process ......................... 59,323 61,812 50,366
Finished goods .......................... 190,115 191,431 198,697
Spare parts and other ................... 17,141 19,231 19,324
-------- -------- --------
322,541 314,517 331,612
Adjustment to value inventory
at cost on the LIFO method .......... (14,705) (6,551) (12,947)
-------- -------- --------
$307,836 $307,966 $318,665
======== ======== ========
Note 5. Long-Term Debt
Long-term debt consisted of the following:
Sept. 30, Sept. 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Bank debt
Bank revolving loans ................. $217,700 $ 78,100 $ --
Bank A term loans .................... 425,000 83,330 63,669
Bank B term loans .................... 125,000 691,250 574,999
-------- ---------- --------
Total bank debt ................... 767,700 852,680 638,668
-------- ---------- --------
Subordinated debt
6 3/4% Senior Subordinated Notes ..... 200,000 200,000 200,000
Other ................................ 3,000 3,000 3,000
-------- ---------- --------
Total subordinated debt ........... 203,000 203,000 203,000
-------- ---------- --------
Total debt ................................ 970,700 1,055,680 841,668
Less current portion ................. 218,950 101,770 21,804
-------- ---------- --------
$751,750 $ 953,910 $819,864
======== ========== ========
At September 30, 2005, amounts expected to be repaid within one year consisted
of $217.7 million of bank revolving loans related primarily to seasonal working
capital needs and $1.3 million of bank term loans under our senior secured
credit facility.
-13-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 5. Long-Term Debt (continued)
Bank Credit Agreement
---------------------
On June 30, 2005, we completed the refinancing of our previous senior secured
credit facility by entering into a new $1.0 billion senior secured credit
facility, or the Credit Agreement. Our Credit Agreement provided us with $425
million of A term loans and $125 million of B term loans, and provides us with
up to $450 million of revolving loans. Pursuant to the Credit Agreement, we also
have a $350 million incremental uncommitted loan facility, of which all of it
may be borrowed in the form of term loans and up to $150 million may be borrowed
in the form of revolving loans under the revolving loan facility.
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. The A term loans and revolving loans mature on June 30, 2011, and the
B term loans mature on June 30, 2012. Principal on the A term loans and B term
loans is required to be repaid in scheduled annual installments during each of
the years set forth below and amounts repaid may not be reborrowed (in
thousands):
Year A Term Loans B Term Loans
---- ------------ ------------
2005 $ -- $ 1,250
2006 -- 1,250
2007 63,750 1,250
2008 63,750 1,250
2009 85,000 1,250
2010 85,000 1,250
2011 127,500 1,250
2012 -- 116,250
-------- --------
$425,000 $125,000
======== ========
The Credit Agreement requires us to prepay the term loans with proceeds received
from the incurrence of certain indebtedness, with proceeds received from certain
asset sales and, under certain circumstances, with 50 percent of our excess cash
flow. Generally, mandatory prepayments of term loans 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 the term loans.
Voluntary prepayments of term loans may be applied to any tranche of term loans
at our discretion and are applied first to the scheduled amortization payments
in the year of such prepayment and, to the extent in excess thereof, pro rata to
the remaining installments.
The incremental uncommitted term loan facility provides, among other things,
that any incremental term loan borrowing shall be denominated in a single
currency, either U.S. dollars or certain foreign currencies; have a maturity
date no earlier than the maturity date for the B term loans; and be used to
finance acquisitions, refinance any indebtedness assumed as part of such
acquisitions, to refinance or repurchase subordinated debt as permitted and to
repay outstanding revolving loans.
-14-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 5. Long-Term Debt (continued)
Bank Credit Agreement (continued)
---------------------
Under the Credit Agreement, the interest rate for all U.S. loans will either be
base rate or LIBOR, plus a margin. The base rate is the higher of the prime
lending rate of Deutsche Bank AG New York Branch, or Deutsche Bank, or 1/2 of
one percent in excess of the overnight federal funds rate. Initially, the
interest rate for A term and revolving loans under the Credit Agreement is the
base rate plus a margin of 0.125 percent or LIBOR plus a margin of 1.125
percent. After September 30, 2005, the interest rate margin on A term and
revolving borrowings will be reset quarterly based upon our Total Leverage
Ratio, as defined in the Credit Agreement. The interest rate for B term loans is
the base rate plus a margin of 0.25 percent or LIBOR plus a margin of 1.25
percent. The margin for B term loans is fixed through maturity.
The Credit Agreement provides for the payment of a commitment fee ranging from
0.20 percent to 0.50 percent per annum on the daily average unused portion of
commitments available under the revolving loan facility. Initially, the
commitment fee will be 0.30 percent per annum. After September 30, 2005, the
commitment fee will be reset quarterly based on our Total Leverage Ratio.
We may utilize up to a maximum of $75 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 and to the issuers of the
letters of credit of a facing fee of 1/8 of one percent per annum, calculated on
the aggregate stated amount of all letters of credit.
The indebtedness under the Credit Agreement is guaranteed by us and certain of
our U.S. subsidiaries. The stock of certain of our U.S. subsidiaries has also
been pledged as security to the lenders under the Credit Agreement. 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.
As a result of this refinancing, we recorded a non-cash, pre-tax charge of $11.0
million for the loss on early extinguishment of debt to write-off unamortized
debt issuance costs of the previous credit facility.
-15-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 6. Retirement Benefits
The components of the net periodic pension benefits costs are as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Service cost .................................. $ 2,843 $ 2,405 $ 9,327 $ 8,692
Interest cost ................................. 5,123 5,056 15,489 14,941
Expected return on plan assets ................ (6,542) (5,556) (19,631) (16,687)
Amortization of prior service cost ............ 790 854 2,370 2,461
Amortization of actuarial losses .............. 372 36 1,121 890
------- ------- -------- --------
Net periodic benefit cost ..................... $ 2,586 $ 2,795 $ 8,676 $ 10,297
======= ======= ======== ========
The components of the net periodic other postretirement benefits costs are as
follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Service cost .................................. $ 252 $(536) $1,065 $1,021
Interest cost ................................. 1,074 779 3,830 3,682
Amortization of prior service cost ............ 1 1 4 4
Amortization of actuarial losses .............. 41 (455) 254 122
------ ----- ------ ------
Net periodic benefit cost ..................... $1,368 $(211) $5,153 $4,829
====== ===== ====== ======
In the third quarter of 2004, in order to reflect the most current estimate of
our postretirement plans, we recorded a reduction to our postretirement benefits
expense of $1.8 million pertaining to amounts recorded in the first and second
quarters of 2004. This change in accounting estimate for postretirement costs
resulted in an increase of $0.03 in earnings per diluted share for each of the
three and nine months ended September 30, 2004.
As previously disclosed in our consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2004, based on current tax law, there are no minimum required contributions
to our pension plans in 2005. However, this estimate is subject to change based
on current proposals before Congress, as well as asset performance significantly
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. During the first nine months of 2005, we made no
contributions to fund our pension plans.
-16-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 7. Business Segment Information
Reportable business segment information for the three and nine months ended
September 30 is as follows:
Metal Food Plastic
Containers(1) Containers(2) Corporate Total
---------- ---------- --------- -----
(Dollars in thousands)
Three Months Ended Sept. 30, 2005
---------------------------------
Net sales .................................... $ 651,129 $146,385 $ -- $ 797,514
Depreciation and amortization(3) ............. 19,629 11,313 16 30,958
Segment income from operations ............... 81,160 7,433 (2,499) 86,094
Three Months Ended Sept. 30, 2004
---------------------------------
Net sales .................................... $ 642,735 $142,112 $ -- $ 784,847
Depreciation and amortization(3) ............. 19,641 10,197 7 29,845
Segment income from operations ............... 69,168 9,860 (1,912) 77,116
Nine Months Ended Sept. 30, 2005
--------------------------------
Net sales .................................... $1,447,721 $460,995 $ -- $1,908,716
Depreciation and amortization(3) ............. 58,689 32,081 35 90,805
Segment income from operations ............... 147,315 29,465 (7,575) 169,205
Nine Months Ended Sept. 30, 2004
--------------------------------
Net sales .................................... $1,422,754 $431,734 $ -- $1,854,488
Depreciation and amortization(3) ............. 57,081 30,647 27 87,755
Segment income from operations ............... 123,564 37,792 (5,466) 155,890
-------------
(1) Segment income from operations includes rationalization charges of
$1.0 million for the nine months ended September 30, 2004.
(2) Segment income from operations includes rationalization charges of
$0.5 million and $0.3 million for the nine months ended September 30,
2005 and 2004, respectively.
(3) Depreciation and amortization excludes amortization of debt issuance
costs of $0.2 million and $1.0 million for the three months ended
September 30, 2005 and 2004, respectively, and $2.0 million and $3.0
million for the nine months ended September 30, 2005 and 2004,
respectively.
-17-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at September 30, 2005 and 2004 and for the
three and nine months then ended is unaudited)
Note 7. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income taxes
as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Total segment income from operations ..... $86,094 $77,116 $169,205 $155,890
Interest and other debt expense .......... 12,618 13,554 49,568 43,860
------- ------- -------- --------
Income before income taxes ............. $73,476 $63,562 $119,637 $112,030
======= ======= ======== ========
Note 8. Dividends
In March, June and September of 2005, we paid a quarterly cash dividend on our
common stock of $0.10 per share, as approved by our Board of Directors. The cash
payments for these dividends totaled $11.1 million.
On November 2, 2005, our Board of Directors declared a quarterly cash dividend
on our common stock of $0.10 per share, payable on December 15, 2005 to holders
of record of our common stock on December 1, 2005. The cash payment for this
dividend is expected to be approximately $3.7 million.
Note 9. Treasury Stock
In the third quarter 2005, we issued 12,800 treasury shares at an average cost
of $13.25, for restricted stock units that vested during the period. In
accordance with the Silgan Holdings Inc. 2004 Stock Incentive Plan, we
repurchased 282 shares of our common stock at an average cost of $30.68 to
satisfy employee withholding tax requirements resulting from certain restricted
stock units becoming vested. We account for the treasury shares using the
first-in, first-out (FIFO) cost method. As of September 30, 2005, 5,358,434
shares were held in treasury.
-18-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Statements included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report on
Form 10-Q which are not historical facts are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and Securities Exchange Act of 1934. Such forward-looking
statements are made based upon management's expectations and beliefs concerning
future events impacting us and therefore involve a number of uncertainties and
risks, including, but not limited to, those described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 and our other filings with
the Securities and Exchange Commission. As a result, the actual results of our
operations or our financial condition could differ materially from those
expressed or implied in these forward-looking statements.
General
We are a leading North American manufacturer of metal and plastic consumer goods
packaging products. We produce steel and aluminum containers for human and pet
food; metal, composite and plastic 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, 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 over the 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.
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. In the
absence of compelling acquisitions, we anticipate further reducing debt by
approximately $125 million in the fourth quarter of 2005 as compared with our
year-end 2004 outstanding debt balance.
On August 15, 2005, our Board of Directors declared a two-for-one stock split of
our issued common stock in the form of a stock dividend. The additional shares
of our common stock were distributed on September 15, 2005. Information
pertaining to the number of shares outstanding and per share amounts have been
restated to reflect this stock split for all periods presented.
-19-
RESULTS OF OPERATIONS
The following table sets forth certain unaudited income statement data expressed
as a percentage of net sales for the periods presented.
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
---- ---- ---- ----
Net sales
Metal food containers................................. 81.6% 81.9% 75.8% 76.7%
Plastic containers.................................... 18.4 18.1 24.2 23.3
----- ----- ----- -----
Consolidated....................................... 100.0 100.0 100.0 100.0
Cost of goods sold...................................... 85.4 86.5 86.6 87.1
----- ----- ----- -----
Gross profit............................................ 14.6 13.5 13.4 12.9
Selling, general and administrative expenses............ 3.8 3.7 4.5 4.5
Rationalization charges ................................ -- -- -- --
----- ----- ----- -----
Income from operations.................................. 10.8 9.8 8.9 8.4
Interest and other debt expense......................... 1.6 1.7 2.6 2.4
----- ----- ----- -----
Income before income taxes ............................. 9.2 8.1 6.3 6.0
Provision for income taxes.............................. 3.5 3.2 2.4 2.4
----- ----- ----- -----
Net income.............................................. 5.7% 4.9% 3.9% 3.6%
===== ===== ===== =====
Summary unaudited results of operations for the three and nine months ended
September 30, 2005 and 2004 are provided below.
Three Months Ended Nine Months Ended
------------------ -----------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in millions)
Net sales
Metal food containers ........ $651.1 $642.7 $1,447.7 $1,422.8
Plastic containers ........... 146.4 142.1 461.0 431.7
------ ------ -------- --------
Consolidated .............. $797.5 $784.8 $1,908.7 $1,854.5
====== ====== ======== ========
Income from operations
Metal food containers(1) ..... $ 81.2 $ 69.2 $ 147.3 $ 123.6
Plastic containers(2) ........ 7.4 9.8 29.5 37.8
Corporate .................... (2.5) (1.9) (7.6) (5.5)
------ ------ -------- --------
Consolidated .............. $ 86.1 $ 77.1 $ 169.2 $ 155.9
====== ====== ======== ========
-------------
(1) Includes rationalization charges of $1.0 million for the nine months
ended September 30, 2004.
(2) Includes rationalization charges of $0.5 million and $0.3 million for
the nine months ended September 30, 2005 and 2004, respectively.
-20-
Three Months Ended September 30, 2005 Compared with Three Months Ended September
30, 2004
Overview. Consolidated net sales were $797.5 million in the third quarter of
2005, representing a 1.6 percent increase as compared to the third quarter of
2004 due primarily to higher average selling prices in both the metal food and
plastic container businesses principally resulting from the pass through of
higher raw material costs and growth in unit volumes in our closures product
line, partially offset by volume declines in the plastic container business and
food can product line. Income from operations for the third quarter of 2005
increased by $9.0 million, or 11.7 percent, as compared to the same period in
2004 due to higher income from operations and an improved operating margin in
our metal food container business, partially offset by lower income from
operations and a decline in operating margin in the plastic container business.
Net income for the third quarter of 2005 was $45.2 million, or $1.20 per diluted
share, as compared to $38.4 million, or $1.03 per diluted share, for the same
period in 2004.
Net Sales. The $12.7 million increase in consolidated net sales in the third
quarter of 2005 as compared to the third quarter of 2004 was the result of
higher net sales in both the metal food and plastic container businesses.
Net sales for the metal food container business increased $8.4 million, or 1.3
percent, in the third quarter of 2005 as compared to the same period in 2004.
This increase was attributable to higher average selling prices due to price
increases in response to increased raw material and other inflationary costs and
higher unit volumes in our closures product line, partially offset by slightly
lower food can volume. The decline in food can unit volume was primarily the
result of certain low margin business with one customer that was not retained
upon contract renewal last year.
Net sales for the plastic container business in the third quarter of 2005
increased $4.3 million, or 3.0 percent, as compared to the same period in 2004.
This increase was primarily the result of higher average selling prices due to
the pass through of higher resin costs and an improved product mix, partially
offset by lower unit volumes.
Gross Profit. Gross profit margin increased 1.1 percentage points to 14.6
percent in the third quarter of 2005 as compared to the same period in 2004 for
the reasons discussed in Income from Operations below.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales for the third
quarter of 2005 increased 0.1 percentage points to 3.8 percent as compared to
the same period in 2004. The $1.6 million increase in selling, general and
administrative expenses in the third quarter of 2005 as compared to the same
period in 2004 was primarily due to higher employee benefit costs.
Income from Operations. Income from operations for the third quarter of 2005
increased by $9.0 million as compared to the third quarter of 2004 and operating
margin increased to 10.8 percent from 9.8 percent over the same periods.
Income from operations of the metal food container business for the third
quarter of 2005 increased $12.0 million, or 17.3 percent, as compared to the
same period in 2004, and operating margin increased to 12.5 percent from 10.8
percent over the same periods. These increases were principally due to strong
unit volumes in our closures product line, continued benefits from
rationalization and integration activities and the combination of productivity
benefits from relatively higher capital spending over the last several years and
price increases in response to inflationary pressures.
-21-
Income from operations of the plastic container business for the third quarter
of 2005 decreased $2.4 million, or 24.5 percent, as compared to the same period
in 2004, and operating margin decreased to 5.1 percent from 6.9 percent over the
same periods. These decreases were primarily a result of lower volumes and
higher employee benefit costs.
Late in the third quarter of 2005, a significant disruption in resin supplies
occurred primarily as a direct result of the recent hurricane activity along the
Gulf Coast, which required a number of our petrochemical suppliers to
temporarily shut down capacity. The effects of these hurricanes and an
early-October explosion in a supplier's ethylene cracking facility led many
resin suppliers to declare force majeure and in some cases implement sales
volume control initiatives. As a result, resin supply is tight, and we have also
implemented certain sales volume control initiatives with our customers. While
the petrochemical industry appears to be returning to capacity more quickly than
originally anticipated, the potential impact of a continued tight supply could
have a significant impact on our results of operations for 2005.
Interest and Other Debt Expense. Interest and other debt expense for the third
quarter of 2005 decreased $1.0 million to $12.6 million as compared to the same
period in 2004. This decrease resulted primarily from lower average borrowings
due to our on-going debt reduction program and lower interest rate spreads as a
result of the June 2005 refinancing of our senior secured credit facility,
slightly offset by a higher average cost of borrowings resulting from rising
interest rates.
Nine Months Ended September 30, 2005 Compared with Nine Months Ended September
30, 2004
Overview. Consolidated net sales were $1.91 billion in the first nine months of
2005, representing a 2.9 percent increase as compared to the first nine months
of 2004 primarily due to higher average selling prices in both the metal food
and plastic container businesses largely as a result of the pass through of
higher raw material and other inflationary costs. Income from operations for the
first nine months of 2005 increased by $13.3 million, or 8.5 percent, as
compared to the same period in 2004 due to higher income from operations and an
improved operating margin in our metal food container business, partially offset
by lower income from operations and a decline in operating margin in our plastic
container business. The results for 2005 included a non-cash, pre-tax charge of
$11.0 million, or $0.18 per diluted share net of income tax, for the loss on
early extinguishment of debt as a result of the refinancing of our senior
secured credit facility. Net income for the first nine months of 2005 was $73.6
million, or $1.96 per diluted share, compared to $67.7 million, or $1.82 per
diluted share, for the same period in 2004.
Net Sales. The $54.2 million increase in consolidated net sales in the first
nine months of 2005 as compared to the first nine months of 2004 was the result
of higher average selling prices in both the metal food and plastic container
businesses primarily as a result of the pass through of higher raw material and
other costs.
Net sales for the metal food container business increased $24.9 million, or 1.8
percent, in the first nine months of 2005 as compared to the same period in
2004. This increase was primarily attributable to higher average selling prices
due to the pass through of higher raw material and other costs and higher unit
volumes in our closures product line, partially offset by lower food can
volumes.
Net sales for the plastic container business in the first nine months of 2005
increased $29.3 million, or 6.8 percent, as compared to the same period in 2004.
This increase was primarily the result of higher average selling prices due to
the pass through of higher resin costs, partially offset by volume declines.
-22-
Gross Profit. Gross profit margin increased 0.5 percentage points for the first
nine months of 2005 as compared to the same period in 2004 for the reasons
discussed in Income from Operations below.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales remained flat
at 4.5 percent for the first nine months of 2005 as compared to the same period
in 2004. The $4.0 million increase in selling, general and administrative
expenses for the first nine months of 2005 as compared to the same period in
2004 was primarily related to increases in employee benefit costs and costs
incurred as a result of the Sarbanes-Oxley Act, partially offset by continued
benefits from the rationalization and integration activities at our
manufacturing facilities.
Income from Operations. Income from operations for the first nine months of 2005
increased by $13.3 million as compared to the first nine months of 2004, and
operating margin increased to 8.9 percent from 8.4 percent over the same
periods. Results for the first nine months of 2005 and 2004 included
rationalization charges totaling $0.5 million and $1.3 million, respectively.
Income from operations of the metal food container business for the first nine
months of 2005 increased $23.7 million, or 19.2 percent, as compared to the same
period in 2004, and operating margin increased to 10.2 percent from 8.7 percent
over the same periods. These increases were principally due to strong unit
volumes and performance in our closures product line, continued benefits from
rationalization and integration activities at our manufacturing facilities and
the combination of productivity benefits from relatively higher capital spending
over the last several years and price increases in response to inflationary
pressures. These favorable items were partially offset by the impact of lower
unit volumes in the food can business.
Income from operations of the plastic container business for the first nine
months of 2005 decreased $8.3 million, or 22.0 percent, as compared to the same
period in 2004, and operating margin decreased to 6.4 percent from 8.8 percent
over the same periods. Income from operations and operating margins were
negatively impacted in 2005 by lower unit volumes, resin inflation and higher
employee benefit and other manufacturing costs.
Interest and Other Debt Expense. Interest and other debt expense for the first
nine months of 2005 increased $5.7 million to $49.6 million as compared to the
same period in 2004. This increase resulted primarily from the $11.0 million
non-cash charge to write-off unamortized debt issuance costs in connection with
the refinancing of our senior secured credit facility in June 2005, offset by
lower average borrowings due to our debt reduction program.
CAPITAL RESOURCES AND LIQUIDITY
Our principal sources of liquidity have been cash from operations and borrowings
under our debt instruments, including our 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.
-23-
On June 30, 2005, we completed the refinancing of our previous senior secured
credit facility by entering into a new $1.0 billion senior secured credit
facility. The Credit Agreement provided us with $425 million of A term loans and
$125 million of B term loans, and provides us with a revolving loan facility of
up to $450 million. Under the Credit Agreement, we may use revolving loans for
working capital and other general corporate purposes, including acquisitions.
The A term loans and revolving loan facility mature on June 30, 2011, and the B
term loans mature on June 30, 2012. The Credit Agreement also provides us with
an incremental uncommitted loan facility of up to an additional $350 million,
which may be used to finance acquisitions and for other permitted purposes. You
should also read Note 5 to our Condensed Consolidated Financial Statements for
the three and nine months ended September 30, 2005 included elsewhere in this
Quarterly Report.
Under the Credit Agreement, the interest rate for all U.S. loans will either be
base rate or LIBOR, plus a margin. The base rate is the higher of the prime
lending rate of Deutsche Bank or 1/2 of one percent in excess of the overnight
federal funds rate. Initially, for the A term loans and revolving loans the
margin will be 1.125 percent for LIBOR rate loans and 0.125 percent for base
rate loans. The margin for A term loans and revolving loans is subject to
adjustment quarterly based upon financial ratios. For the B term loans, the
margin for LIBOR rate loans is fixed at 1.25 percent and the margin for base
rate loans is fixed at 0.25 percent. Prior to the refinancing, the interest rate
for A term loans and revolving loans under our previous credit facility was
LIBOR plus a margin of 1.50 percent or the prime lending rate of Deutsche Bank
plus a margin of 0.50 percent, and for B term loans an additional 0.25 percent,
or LIBOR plus 1.75 percent.
For the nine months ended September 30, 2005, we used cash from operations of
$52.3 million, proceeds of $550.0 million from the refinancing of our senior
secured credit facility, net borrowings of revolving loans of $217.7 million,
proceeds from stock option exercises of $3.3 million and proceeds from asset
sales of $3.0 million to fund the repayment of term loans of $638.7 million,
capital expenditures of $63.7 million, decreases in outstanding checks of $80.2
million, dividends paid on our common stock of $11.1 million and debt issuance
costs of $4.2 million and to increase cash balances by $28.4 million.
For the nine months ended September 30, 2004, we used cash from operations of
$101.5 million, proceeds from stock option exercises of $2.3 million, proceeds
from asset sales of $9.9 million and net borrowings of revolving loans of $53.1
million offset by the reduction in outstanding checks of $76.9 million to fund
capital expenditures of $72.9 million, dividends paid on our common stock of
$5.5 million, debt issuance costs of $0.7 million and to increase cash balances
by $10.8 million.
Because we sell metal containers used in fruit and vegetable pack processing, we
have seasonal sales. As is common in the industry, we must utilize working
capital to build inventory and then carry accounts receivable for some customers
beyond the end of the packing season. Due to our seasonal requirements, we incur
short-term indebtedness to finance our working capital requirements. During the
third quarter of 2005, we utilized approximately $265.1 million of revolving
loans under the Credit Agreement for our peak seasonal working capital
requirements. This amount does not include $88.7 million of revolving loans
borrowed under the Credit Agreement to repay term loans in connection with the
June 2005 refinancing of our previous senior secured credit facility.
At September 30, 2005, we had $217.7 million of revolving loans outstanding
under the Credit Agreement. After taking into account outstanding letters of
credit, the available portion of the revolving loan facility under the Credit
Agreement at September 30, 2005 was $207.6 million. We may use the available
portion of our revolving loan facility, after taking into account our seasonal
needs and outstanding letters of credit, for acquisitions or other permitted
purposes.
-24-
During the first nine months of 2005, we paid cash dividends on our common stock
totaling $11.1 million. On November 2, 2005, our Board of Directors declared a
quarterly cash dividend on our common stock of $0.10 per share, payable on
December 15, 2005 to holders of record of our common stock on December 1, 2005.
The cash payment for this dividend is expected to be approximately $3.7 million.
We believe that cash generated from operations and funds from borrowings
available under the Credit Agreement will be sufficient to meet our expected
operating needs, planned capital expenditures, debt service, tax obligations,
share repurchases required under our 2004 Stock Incentive Plan 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. However, in the absence of acquisition opportunities, we
expect to use our free cash flow to repay indebtedness or for other permitted
purposes.
We are in compliance with all financial and operating covenants contained in our
financing agreements and believe that we will continue to be in compliance
during 2005 with all of these covenants.
Rationalization Charges and Acquisition Reserves
During the first quarter of 2005, we approved and announced to employees a plan
to relocate the operations of one of our Mississauga, Ontario plastic container
manufacturing facilities to other operating facilities. This decision resulted
in charges to earnings of $0.5 million, which consisted of $0.1 million for the
non-cash write-down in carrying value of assets and $0.4 million for employee
severance and benefits and plant exit costs. The relocation of operations has
been substantially completed. Through September 30, 2005, there were no
significant cash payments related to relocating this facility. Cash payments
related to these reserves are expected through 2006 for employee severance and
benefits costs.
Under our rationalization and acquisition plans, we made cash payments of $0.6
million and $5.6 million for the nine months ended September 30, 2005 and 2004,
respectively. Total future cash spending of $1.5 million is expected under our
Fairfield and 2005 and 2003 rationalization plans and our 2003 acquisition
plans. Spending under these plans in 2005 is not expected to be material to our
cash flows.
You should also read Note 2 to our Condensed Consolidated Financial Statements
for the three and nine months ended September 30, 2005 included elsewhere in
this Quarterly Report.
We continually evaluate cost reduction opportunities in our business, including
rationalizations of our existing facilities through plant closings and
downsizings. We use a disciplined approach to identify opportunities that
generate attractive cash returns. In line with our ongoing evaluation, we are
currently reviewing certain facilities for potential rationalization actions
which may result in cash expenditures and charges to our earnings.
-25-
NEW 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 material 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. Based on a recent
deferral of the effective date, we will adopt SFAS No. 123(R) beginning January
1, 2006. 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 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 Condensed
Consolidated Financial Statements for the three and nine months ended September
30, 2005. 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 $3.0
million and $1.7 million for the nine months ending September 30, 2005 and 2004,
respectively.
On October 22, 2004, the American Jobs Creation Act 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. The range of possible
amounts that we are evaluating for repatriation under this provision is between
zero and $62 million. The related potential range of income tax cannot be
determined at this time. We expect to complete our evaluation of the
repatriation provision under the AJCA in the fourth quarter of 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market risks relating to our operations result primarily from changes in
interest rates. In the normal course of business, we also have limited foreign
currency exchange rate risk associated with our operations in Canada 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.
-26-
Information regarding our interest rate risk, foreign currency exchange rate
risk and commodity pricing risk has been disclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2004. Since such filing, there has
not been a material change to our interest rate risk, foreign currency exchange
rate risk or commodity pricing risk or to our policies and procedures to manage
our exposure to these risks.
Item 4. CONTROLS AND PROCEDURES
-----------------------
We carried out an evaluation, under the supervision and with the participation
of management, including our Co-Chief Executive Officers and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon
that evaluation, as of the end of the period covered by this Quarterly Report
our Co-Chief Executive Officers and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be disclosed in this Quarterly Report has been made
known to them in a timely fashion.
There were no changes in our internal controls over financial reporting during
the period covered by this Quarterly Report that have materially affected, or
are reasonably likely to materially affect, these internal controls.
Part II. Other Information
Item 6. Exhibits
Exhibit Number Description
-------------- -----------
12 Ratio of Earnings to Fixed Charges for the three and nine
months ended September 30, 2005 and 2004.
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.
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
SILGAN HOLDINGS INC.
Dated: November 9, 2005 /s/Robert B. Lewis
-----------------------------
Robert B. Lewis
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
-28-
EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
12 Ratio of Earnings to Fixed Charges for the three and nine
months ended September 30, 2005 and 2004.
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.
-29-