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, 2003
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, 2003, the last business day of the
Registrant's most recently completed second fiscal quarter, was approximately
$344.9 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, 2004, the number of shares outstanding of the Registrant's Common
Stock, par value $0.01 per share, was 18,352,842.
Documents Incorporated by Reference:
Portions of the Registrant's Proxy Statement for its Annual Meeting of
Stockholders to be held on May 27, 2004 are incorporated by reference in Part
III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
Page
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PART I............................................................................................1
Item 1. Business............................................................................1
Item 2. Properties.........................................................................13
Item 3. Legal Proceedings..................................................................14
Item 4. Submission of Matters to a Vote of Security Holders................................14
PART II..........................................................................................15
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.....................................................15
Item 6. Selected Financial Data............................................................15
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................................18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.........................32
Item 8. Financial Statements and Supplementary Data........................................33
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure...............................................................33
Item 9A. Controls and Procedures............................................................33
PART III.........................................................................................34
Item 10. Directors and Executive Officers of the Registrant.................................34
Item 11. Executive Compensation.............................................................34
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters................................................................34
Item 13. Certain Relationships and Related Transactions.....................................34
Item 14. Principal Accountant Fees and Services.............................................34
PART IV..........................................................................................35
Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K..................35
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PART I
Item 1. Business.
General
We are a leading North American manufacturer of metal and plastic consumer
goods packaging products. We had consolidated net sales of approximately $2.312
billion in 2003. Our products are used for a wide variety of end markets and we
operate 63 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 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 of approximately 51 percent
in 2003. 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. For 2003, our metal food
container business had net sales of $1.751 billion (approximately 76 percent of
our consolidated net sales) and income from operations of $126.0 million
(approximately 72 percent of our consolidated income from operations excluding
corporate expense). Additionally, with our acquisition in March 2003 of the
remaining 65 percent equity interest in the Amcor White Cap, LLC joint venture,
or White Cap, that we did not already own, we are also a leading manufacturer of
metal, composite and plastic vacuum closures in North America for food and
beverage products. Following the acquisition, we renamed this business Silgan
Closures LLC, or Silgan Closures, and began integrating it with our metal food
container business.
We are also a leading manufacturer of plastic containers in North America
for personal care products. Our success in the plastic packaging market is
largely due to our demonstrated ability to provide 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 2003, our
plastic container business had net sales of $561.7 million (approximately 24
percent of our consolidated net sales) and income from operations of $48.0
million (approximately 28 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 2004
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 twenty
businesses. Most recently, in April 2003, we acquired PCP Can Manufacturing,
Inc., or Pacific Coast Can, the can manufacturing business of Pacific Coast
Producers, or Pacific Coast. As part of this acquisition, we entered into a
multi-year supply agreement with Pacific Coast for its requirements of metal
food containers. In March 2003, we also acquired the remaining 65 percent equity
interest in White Cap that we did not already own. This business manufactures
metal, composite and plastic closures for food and beverage products.
Additionally, in January 2003, we acquired substantially all of the assets of
Thatcher Tubes LLC and its affiliates, or Thatcher Tubes, a manufacturer of
decorated plastic tubes primarily for personal care products.
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 51 percent in 2003. Our
plastic container business has also improved its market position since 1987,
with sales increasing more than sixfold to $561.7 million in 2003. 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 2003 Metal, composite and
plastic 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:
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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 demands of our customers. With our acquisition of Thatcher
Tubes, we believe that we are one of the few plastic packaging businesses that
can custom design and manufacture both plastic containers and plastic tubes,
providing the customer with the ability to satisfy more of its plastic packaging
needs through one supplier. 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.
Utilize Leverage to Support Growth and Increase Shareholder Value
Our financial strategy is to use leverage to support our growth and
increase shareholder returns. Our stable and predictable cash flow, generated
largely as a result of our long-term customer relationships and generally
recession resistant business, supports our financial strategy. We intend to
continue using leverage, supported by our stable cash flows, to make value
enhancing acquisitions. In so using 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. As we
announced last year, we intend to focus on reducing our debt over the next three
years in the absence of compelling (i.e., strategic and immediately accretive)
acquisitions. As a result, we expect to reduce our debt by $200-$300 million
over the period from 2004 through 2006, of which at least $75 million is
expected in 2004.
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Expand Through Acquisitions and Internal Growth
We intend to continue to increase our market share in our current business
lines through acquisitions and, particularly in plastic containers, 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 a compound annual growth rate of 13.6 percent
and 14.9 percent, respectively, over the last ten years.
During the past sixteen years, the metal food container market has
experienced significant consolidation primarily due to the desire by food
processors to reduce costs and focus resources on their core operations rather
than self-manufacture their metal food containers. Our acquisitions of the metal
food container manufacturing operations of Nestle Food Company, or Nestle, The
Dial Corporation, or Dial, Del Monte Corporation, or Del Monte, Birds Eye Foods,
Inc., or Birds Eye, and Campbell Soup Company, or Campbell, as well as our
recent acquisition of Pacific Coast Can, reflect this trend. We estimate that
approximately 9 percent of the market for metal food containers is still served
by self-manufacturers.
We have improved our market position for our plastic container business
since 1987, with sales increasing more than sixfold to $561.7 million in 2003.
We achieved this improvement primarily through strategic acquisitions, including
most recently Thatcher Tubes, as well as through internal growth. The plastic
container business of the consumer goods packaging industry is highly
fragmented, and we intend to pursue further consolidation opportunities in this
market. We also believe that we can successfully apply our acquisition and
operating expertise to new markets of the consumer goods packaging industry.
With our acquisition of Thatcher Tubes in January 2003, we extended our business
into decorated plastic tubes primarily for personal care products to complement
our plastic container business. We also expect to continue to generate internal
growth in our plastic container business. For example, we will aggressively
market our decorated plastic tubes to existing customers of our plastic
container business. Additionally, we intend to continue to expand our customer
base in the markets that we serve, such as the personal care, health care,
pharmaceutical, household and industrial chemical, food, pet care, agricultural
chemical, automotive and marine chemical markets.
Enhance Profitability of Acquired Companies Through Productivity Improvements
and Cost Reductions
We intend to continue to enhance profitability through productivity and
cost reduction opportunities from acquired businesses. The additional sales and
production capacity provided through acquisitions have enabled us to rationalize
plant operations and decrease overhead costs through plant closings and
downsizings. In addition, we expect that our acquisitions will continue to
enable us to realize manufacturing efficiencies as a result of optimizing
production scheduling and minimizing product transportation costs. We expect to
continue to benefit from economies of scale and from the elimination of
redundant selling and administrative functions. In addition to the benefits
realized through the integration of acquired businesses, we have improved the
operating performance of our plant facilities by investing capital for
productivity improvements and manufacturing cost reductions.
Business Segments
We are a holding company that conducts our business through two wholly
owned operating subsidiaries, Silgan Containers Corporation, or Silgan
Containers, and Silgan Plastics Corporation, or Silgan Plastics. Silgan
Containers includes our metal food container operations and our metal, composite
and plastic food and beverage closure operations, and Silgan Plastics includes
our plastic container, tube and closure operations.
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Metal Food Containers--76 percent of our consolidated net sales in 2003
We are the largest manufacturer of metal food containers in North America,
with a unit volume market share in the United States of 51 percent in 2003, 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
metal containers for soup, vegetables, fruit, meat, tomato based products,
coffee, seafood, adult nutritional drinks, pet food and other miscellaneous food
products. For 2003, our metal food container business had net sales of $1.751
billion (approximately 76 percent of our consolidated net sales) and income from
operations of $126.0 million (approximately 72 percent of our consolidated
income from operations excluding corporate expense). Since 1993, our metal food
container business has realized compound annual unit sales growth of
approximately 12 percent. We estimate that approximately 90 percent of our
projected metal food container sales in 2004 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.
With our acquisition in March 2003 of the remaining 65 percent equity
interest in White Cap, 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 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 2003
We are one of the leading manufacturers of custom designed high density
polyethylene, or HDPE, and polyethylene terephthalate, or PET, containers for
the personal care market in North America. We produce plastic containers from a
full range of resin materials and offer a comprehensive array of molding and
decorating capabilities. Approximately 55 percent of Silgan Plastics' sales in
2003 were to the personal care and health care markets. For 2003, Silgan
Plastics had net sales of $561.7 million (approximately 24 percent of our
consolidated net sales) and income from operations of $48.0 million
(approximately 28 percent of our consolidated income from operations excluding
corporate expense). Since 1987, we have improved our market position for our
plastic container business, with sales increasing more than sixfold.
We manufacture custom designed and stock HDPE containers for personal care
and health care products, including containers for shampoos, conditioners, hand
creams, lotions, cosmetics and toiletries; household and industrial chemical
products, including containers for scouring cleaners, cleaning agents and lawn
and garden chemicals; and pharmaceutical products, including containers for
tablets, antacids and eye cleaning solutions. We manufacture custom designed and
stock PET containers for mouthwash, shampoos, conditioners, respiratory and
gastrointestinal products, liquid soap, skin care lotions, peanut butter, salad
dressings, condiments, premium bottled water and liquor. We also manufacture
plastic containers, closures, caps, sifters and fitments for food, household and
pet care products, including salad
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dressings, peanut butter, spices, liquid margarine, powdered drink mixes, arts
and crafts supplies and kitty litter, as well as thermoformed plastic tubs for
personal care and household products, including soft fabric wipes. As a result
of our acquisition of Thatcher Tubes, we manufacture plastic tubes primarily for
personal care products such as skin lotions and hair treatment products.
Additionally, we manufacture our 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. Our value-added, diverse product line is the result of our ability to
produce plastic containers from a full range of resin materials using a broad
array of manufacturing, molding and decorating capabilities. With our
acquisition of Thatcher Tubes, we now have the ability to manufacture decorated
plastic tubes for our customers. We benefit from our large scale and nationwide
presence, as significant consolidation is occurring in many of our customers'
markets. Through these capabilities, we are well-positioned to serve our
personal care market customers, who demand customized solutions as they continue
to seek innovative means to differentiate their products in the marketplace
using packaging.
Manufacturing and Production
As is the practice in the industry, most of our customers provide us with
quarterly or annual estimates of products and quantities pursuant to which
periodic commitments are given. These estimates enable us to effectively manage
production and control working capital requirements. We schedule our production
to meet customers' requirements. Because the production time for our products is
short, the backlog of customer orders in relation to our sales is not material.
As of March 1, 2004, we operated 63 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.
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.
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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.
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 otherwise.
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Metal Food Container Business
We use tin plated and chromium plated steel, aluminum, copper wire, organic
coatings, lining compound and inks in the manufacture and decoration of our
metal food container products. We use tin plated and chromium plated steel,
aluminum, organic coatings, low-metallic inks and pulpboard, plastic and organic
lining materials in the manufacture of metal closures. We use resins in pellet
form, such as homopolymer, polypropylene, copolymer polypropylene and HDPE,
thermoplastic elastomer lining materials, processing additives and colorants in
the manufacture of plastic closures. Our material requirements are supplied
through contracts and purchase orders with suppliers with whom we have long-term
relationships. If our suppliers fail to deliver under their arrangements, we
would be forced to purchase raw materials on the open market, and no assurances
can be given that we would be able to make the purchases at comparable prices or
terms. 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.
Plastic Container Business
The raw materials we use in our plastic container business are primarily
resins in pellet form such as virgin HDPE, virgin PET, recycled HDPE, recycled
PET, polypropylene and, to a lesser extent, polystyrene, low density
polyethylene, polyethylene terephthalate glycol, polyvinyl chloride and medium
density polyethylene. Our resin requirements are acquired through multi-year
arrangements for specific quantities of resins with several major suppliers of
resins. The price that we pay for resin raw materials is not fixed and is
subject to market pricing. We believe that we 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 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 2003, 2002, and 2001, approximately 11 percent, 13 percent, and 11
percent, respectively, of our net sales were to Nestle; approximately 11
percent, 10 percent, and 10 percent, respectively, of our net sales were to Del
Monte; and approximately 12 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 2003 in the United States of approximately 51
percent. Our largest customers for this segment include Campbell, Del Monte,
Nestle, ConAgra Foods Inc., Pacific Coast, Hormel Foods Corp., or Hormel,
General Mills, Inc., Seneca Foods L.L.C., Unilever, N.V., Mead Johnson
Nutritionals, a subsidiary of Bristol-Myers Squibb Company, Dial and Signature
Fruit Company.
We have entered into multi-year supply arrangements with many of our
customers, including Nestle, Del Monte, Campbell and several other major food
producers. We estimate that approximately 90 percent of our projected metal food
container sales in 2004 will be pursuant to multi-year customer supply
arrangements. Historically, we have been successful in continuing these
multi-year customer supply arrangements.
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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 2003, our total net sales of metal containers to Nestle were
$218.8 million.
We currently have supply agreements with Nestle under which we supply
Nestle with a large majority of its U.S. metal container requirements. We
recently extended the terms of the Nestle agreements with respect to
approximately half of the metal containers supplied thereunder from the end of
2004 to the end of 2009. The terms of the Nestle agreements continue through
2008 for the remaining metal containers currently supplied thereunder. Net sales
to Nestle in 2003 under the Nestle agreements represented approximately 7
percent of our consolidated net sales.
The Nestle agreements provide for certain prices and specify that those
prices will be increased or decreased based upon cost change formulas. These
agreements contain provisions that require us to maintain levels of product
quality, service and delivery in order to retain the business. In the event we
breach any one of the agreements, Nestle may terminate 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 that currently continues through 2006. Additionally, we
have a supply agreement with DLM Foods Inc., a subsidiary of Del Monte, that
continues through 2008 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 2003, our net sales of metal containers to Del Monte
amounted to $244.6 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. Campbell has agreed to purchase from us substantially
all of its steel container requirements to be used for the packaging of foods
and beverages in the United States. In 2003, our net sales of metal containers
to Campbell were $246.4 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.
With the acquisition of White Cap in March 2003, we are 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
Pepsico Inc., Campbell, The Coca-Cola Company, Heinz, Anheuser Busch Companies
Inc., Cadbury Schweppes plc, Unilever, N.V. and Dean Foods Company. We have
multi-year supply arrangements with many customers for these products.
-9-
Plastic Container Business
We are one of the leading manufacturers of custom designed and stock HDPE
and PET containers sold in North America. We market our plastic containers,
tubes and closures in most areas of North America through a direct sales force,
through a large network of distributors and, more recently, through e-commerce.
We are a leading manufacturer of plastic containers in North America for
personal care products. Approximately 55 percent of our plastic containers are
sold for personal care and health care products, such as hair care, skin care
and oral care, and pharmaceutical products. Our largest customers in these
product segments include Unilever Home and Personal Care North America (a unit
of Unilever, N.V.), Pfizer Inc., The Procter & Gamble Company, L'Oreal, Avon
Products Inc., Alberto Culver USA, Inc., Johnson & Johnson and Neutrogena
Corporation.
With our acquisition of Thatcher Tubes in January 2003, we also manufacture
decorated plastic tubes, primarily for personal care products. Customers of this
product segment include Johnson & Johnson, Neutrogena Corporation, L'Oreal and
Alticor Inc.
We also manufacture plastic containers for food and beverage, pet care and
household and industrial chemical products. Customers for these product lines
include The Procter & Gamble Company, The Clorox Company, Nestle's Purina Pet
Care, Kraft Foods Inc. 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 Unilever Best Foods, Campbell, Hormel, Nestle's
Nesquik, Nice-Pak Products, Inc., The Kroger Company and McCormick & Company,
Incorporated.
We have arrangements to sell some of our plastic containers and closures to
distributors, who in turn resell those products primarily to regional customers.
Plastic containers sold to distributors are manufactured by using generic and
custom molds with decoration added to meet the end users' requirements. The
distributors' warehouses and their sales personnel enable us to market and
inventory a wide range of such products to a variety of customers.
We have written purchase orders or contracts for the supply of containers
with the majority of our customers. In general, these purchase orders and
contracts are for containers made from proprietary molds and are for a duration
of one to seven years.
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 disadvantaged by the
relocation of a major customer.
Metal Food Container Business
Of the commercial metal food container manufacturers, Ball Corporation and
Crown Cork and Seal Company, Inc. are our most significant national competitors.
As an alternative to purchasing
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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 closure business
competes primarily with Crown Cork and Seal Company, Inc., Alcoa Closure Systems
International, Inc., Owens-Illinois, Inc., Kerr Group, Inc. and Portola
Packaging, Inc.
Plastic Container Business
Our plastic container business competes with a number of large national
producers of plastic containers, tubes and closures for personal care, health
care, pharmaceutical, household and industrial chemical, food, pet care,
agricultural chemical, automotive and marine chemical products. These
competitors include Owens-Illinois, Inc., Alpla-Werke Alwin Lehner GmbH & Co.,
Plastipak Packaging Inc., Consolidated Container Company LLC, Constar
International, Inc., Amcor PET Packaging, Rexam plc, CCL Industries Inc., Tubed
Products, Inc. and Cebal Americas. To compete effectively in the constantly
changing market for plastic containers, tubes and closures, we must remain
current with, and to some extent anticipate, innovations in resin composition
and applications and changes in the technology for the manufacturing of plastic
containers, tubes and closures.
Employees
As of December 31, 2003, we employed approximately 1,700 salaried and 6,700
hourly employees on a full-time basis. Approximately 55 percent of our hourly
plant employees as of that date were represented by a variety of unions. In
addition, as of December 31, 2003, in connection with our 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 2004 and 2008. As of
December 31, 2003, contracts covering approximately 11 percent of our hourly
employees will expire during 2004. 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
-11-
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.
In July 2003, we agreed to a Consent Decree pursuant to which, following
entry of the Consent Decree with the court, we would pay the federal
Environmental Protection Agency a $659,500 fine and make certain plant and
operational changes in response to alleged past violations of the federal Clean
Air Act at six of our facilities in California. The Consent Decree was filed
with the U.S. District Court, Eastern District of California, and was entered by
the court in December 2003 upon expiration of the notice period without
comments. As a result of the entry of the Consent Decree, we paid this fine in
late December 2003. In August 2003, we entered into a settlement agreement and
release with Jefferson County, Alabama Department of Health pursuant to which we
paid $350,000 to settle allegations of past air pollution violations at our
Tarrant City, Alabama leased facility.
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 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 (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.
-12-
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 40 operating facilities for the metal food
container business and 23 operating facilities for the plastic container
business. We own 27 of these facilities and lease 36. 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, 2004 for our metal food container business:
Approximate Building Area
Location (square feet)
-------- -------------------------
Tarrant, AL................................. 89,100 (leased)
Antioch, CA................................. 144,500 (leased)
Kingsburg, CA............................... 35,600 (leased)
Lodi, CA.................................... 133,000 (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)
Chicago, IL................................. 467,900
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
Fort Madison, IA............................ 121,000 (56,000 leased)
Ft. Dodge, IA............................... 155,200 (leased)
Benton Harbor, MI........................... 20,200 (leased)
Savage, MN.................................. 160,000
St. Paul, MN................................ 470,000
Mt. Vernon, MO.............................. 100,000
St. Joseph, MO.............................. 173,700
Maxton, NC.................................. 231,800 (leased)
Edison, NJ.................................. 265,500
Lyons, NY................................... 149,700
Napoleon, OH................................ 339,600 (leased)
West Hazleton, PA........................... 151,500 (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, 2004 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............................ 298,900 (leased)
Langhorne, PA............................... 156,000 (leased)
Houston, TX................................. 335,200
Richmond, VA................................ 70,000 (leased)
Triadelphia, WV............................. 168,400
Mississauga, Ontario........................ 75,000 (leased)
Mississauga, Ontario........................ 62,600 (leased)
Scarborough, Ontario........................ 117,000
Lachine, Quebec............................. 113,300 (leased)
Lachine, Quebec............................. 77,800 (leased)
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 March 1, 2004, we had approximately 61 holders of record of
our common stock. We have never declared or paid cash dividends on our common
stock. We currently retain all available funds for use in the operation and
expansion of our business and do not pay cash dividends on our common stock. Any
future determination to pay cash dividends will be at the discretion of our
Board of Directors and will be dependent upon our consolidated results of
operations and financial condition, applicable contractual restrictions and
other factors deemed relevant by our Board of Directors. We are allowed to pay
cash dividends on our common stock up to specified limits under 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.
High Low
---- ---
2002
----
First Quarter................ $34.04 $21.40
Second Quarter............... 42.83 33.27
Third Quarter................ 42.14 24.35
Fourth Quarter............... 29.88 18.41
High Low
---- ---
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, 2003. Our consolidated
financial statements for the five years ended December 31, 2003 have been
audited by Ernst & Young LLP, independent auditors.
You should read this selected financial data along with the consolidated
financial statements and accompanying notes included elsewhere in this Annual
Report, as well as the section of this Annual Report titled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Selected Financial Data
Year Ended December 31,
-------------------------------------------------------------
2003(a) 2002 2001 2000(b) 1999
------- ---- ---- ------- ----
(Dollars in millions, except per share data)
Operating Data:
Net sales........................................... $2,312.2 $1,988.3 $1,941.0 $1,877.5 $1,892.1
Cost of goods sold ................................. 2,026.7 1,749.7 1,700.7 1,648.3 1,656.7
-------- -------- -------- -------- --------
Gross profit ....................................... 285.5 238.6 240.3 229.2 235.4
Selling, general and administrative expenses ....... 108.4 76.2 78.6 72.1 75.0
Rationalization charges (credits) .................. 9.0 (5.6) 9.3 -- 36.1
-------- -------- -------- -------- --------
Income from operations ............................. 168.1 168.0 152.4 157.1 124.3
Interest and other debt expense before loss
on early extinguishment of debt ................. 78.8 73.8 81.2 91.2 86.1
Loss on early extinguishment of debt (c) ........... 19.2 1.0 -- 6.9 --
-------- -------- -------- -------- --------
Interest and other debt expense .................... 98.0 74.8 81.2 98.1 86.1
-------- -------- -------- -------- --------
Gain on assets contributed to affiliate ............ -- -- 4.9 -- --
Income before income taxes and equity in
losses of affiliates ............................ 70.1 93.2 76.1 59.0 38.2
Provision for income taxes ......................... 27.8 36.8 30.2 23.1 14.3
-------- -------- -------- -------- --------
Income before equity in losses of affiliates ....... 42.3 56.4 45.9 35.9 23.9
Equity in losses of affiliates ..................... (0.3) (2.6) (4.1) (4.6) --
-------- -------- -------- -------- --------
Net income ......................................... $ 42.0 $ 53.8 $ 41.8 $ 31.3 $ 23.9
======== ======== ======== ======== ========
Per Share Data:
Basic net income per share.......................... $2.30 $2.97 $2.35 $1.77 $1.35
===== ===== ===== ===== =====
Diluted net income per share........................ $2.28 $2.93 $2.31 $1.74 $1.32
===== ===== ===== ===== =====
Selected Segment Data: (d)
Net sales:
Metal food containers............................ $1,750.5 $1,487.0 $1,447.4 $1,478.5 $1,541.6
Plastic containers............................... 561.7 501.3 493.6 399.0 350.5
Income from operations:
Metal food containers (e)........................ 126.0 120.6 111.6 123.9 88.2
Plastic containers (f)........................... 48.0 52.9 46.0 36.9 40.0
(continued)
-16-
Selected Financial Data
Year Ended December 31,
-------------------------------------------------------------
2003(a) 2002 2001 2000(b) 1999
------- ---- ---- ------- ----
(Dollars in millions, except per share data)
Other Data:
Capital expenditures................................ $ 105.9 $ 119.2 $ 93.0 $ 89.2 $ 87.4
Depreciation and amortization (g)................... 111.3 95.7 95.5 89.0 86.0
Net cash provided by operating activities........... 234.9 163.3 143.0 95.1 143.3
Net cash used in investing activities............... (310.0) (117.2) (59.8) (218.5) (84.9)
Net cash provided by (used in) financing
activities....................................... 28.8 (5.7) (85.3) 141.0 (60.7)
Balance Sheet Data (at end of period):
Goodwill, net....................................... $ 202.4 $ 141.5 $ 141.5 $ 153.0 $ 107.6
Total assets........................................ 1,621.1 1,404.0 1,311.8 1,383.8 1,185.3
Total debt.......................................... 1,002.6 956.8 944.8 1,031.5 883.3
Stockholders' equity (deficiency)................... 120.8 63.1 15.1 (20.4) (48.7)
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 White Cap that we did not already
own. In April 2003, we acquired Pacific Coast Can.
(b) In October 2000, we acquired RXI Holdings, Inc.
(c) Effective January 1, 2003, we adopted Statement of Financial Accounting
Standards, or SFAS, No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections." Among
other provisions, SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and
Losses from Extinguishment of Debt," such that gains or losses from the
extinguishment of our debt will no longer be classified as extraordinary
items. Upon adoption in 2003, the extraordinary items for losses on early
extinguishment of debt of $1.0 million and $6.9 million before income taxes
recorded for 2002 and 2000, respectively, were reclassified to loss on
early extinguishment of debt in our Consolidated Statements of Income.
(d) After contributing our metal closures business to the White Cap joint
venture in 2001, we reported the results of that business separately for
periods prior to the formation of White Cap. After our acquisition of White
Cap in 2003, we report the results of Silgan Closures as part of our metal
food container business. As a result, for 2001, 2000 and 1999 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, $90.8 million and $101.6 million and income from operations of
$3.3 million, $3.7 million and $3.7 million in 2001, 2000 and 1999,
respectively.
(e) Income from operations of the metal food container business includes
rationalization charges of $1.2 million in 2003, rationalization credits of
$5.4 million in 2002, net rationalization charges of $5.8 million in 2001
and rationalization charges of $36.1 million in 1999.
(f) Income from operations of the plastic container business includes
rationalization charges of $7.8 million in 2003, a rationalization credit
of $0.2 million in 2002 and a rationalization charge of $3.5 million in
2001.
(g) Depreciation and amortization excludes amortization of debt issuance costs.
Depreciation and amortization includes goodwill amortization of $5.0
million, $4.2 million and $3.9 million in 2001, 2000 and 1999,
respectively.
-17-
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, 2003. 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 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, 2003 of approximately 51
percent in the United States, a leading manufacturer of plastic containers in
North America for personal care products and a leading manufacturer of metal,
composite and plastic vacuum closures in North America for food and beverage
products.
Our objective is to increase shareholder value by efficiently deploying
capital and management resources to grow our business, reduce operating costs,
build sustainable competitive positions, or franchises, and complete
acquisitions that generate attractive cash returns. We have grown our net sales
at a compounded annual rate of 13.6 percent 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 sales and market share in our metal food container and
plastic container businesses through both acquisitions and, particularly in our
plastic container business, internal growth. As a result, we have expanded and
diversified our customer base, geographic presence and product lines.
During the past sixteen years, the metal food container market has
experienced significant consolidation primarily due to the desire by food
processors to reduce costs and focus resources on their core operations rather
than self-manufacture their metal food containers. Our acquisitions of the metal
food container manufacturing operations of Nestle, Dial, Del Monte, Birds Eye
and Campbell, as well as our recent acquisition of Pacific Coast Can, reflect
this trend.
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, despite increased demand for convenience products such as single-serve
sizes and easy-open ends.
We have improved the market position of our plastic container business
since 1987, with net sales increasing more than sixfold to $561.7 million in
2003. We achieved this improved market position primarily through strategic
acquisitions, including most recently Thatcher Tubes, as well as through
internal growth. The plastic container business of the consumer goods packaging
industry is 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-
-18-
added operating expertise and strategy. With our acquisition of Thatcher Tubes
in 2003, we extended our business into decorated plastic tubes primarily for
personal care products to complement our plastic container business. We also
expect to continue to generate internal growth in 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 and
minimizing product transportation costs. Additionally, our metal food container
business has entered into a long-term technical agreement with Daiwa Can
Company, or Daiwa, of Tokyo, Japan. Daiwa is a major producer of metal food and
beverage containers as well as plastic containers for cosmetics and foods in
Japan, and our relationship with Daiwa gives us access to manufacturing
processes and materials technologies that have been exclusively developed by
Daiwa. 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 $494.8 million in capital to maintain our market position, improve our
productivity, reduce our manufacturing costs and invest in new market
opportunities.
Historically, we have been successful in renewing our multi-year supply
arrangements with our customers. Recently, 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. We estimate that approximately 90 percent of our projected metal
food container sales in 2004 and a majority of our projected plastic container
sales in 2004 will be under multi-year arrangements. Many of these multi-year
supply arrangements generally provide for the pass through of changes in
material, labor and other manufacturing costs, thereby significantly reducing
the exposure of our results of operations to the volatility of these costs.
Our metal food container business' sales and 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.
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
leverage, supported by our stable cash flows, and to make value enhancing
acquisitions. In so using 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.
As we announced after completing three acquisitions in early 2003, we
intend to focus on reducing debt over the next few years. We stated that our
debt at year-end 2003 would increase by only approximately $100 million over
year-end 2002 despite spending approximately $175 million for these
acquisitions, excluding certain acquired inventory, and paying $16.9 million in
redemption premiums in connection with the redemption of our 9% Senior
Subordinated Debentures due 2009, or our 9%
-19-
Debentures. In fact, our year-end 2003 debt increased by only $45.8 million as
compared to 2002. Additionally, as we also announced, in the absence of
compelling acquisitions, we intend to continue to focus on reducing our debt and
expect to further reduce our debt by $200-300 million over the next three years,
of which at least $75 million is expected in 2004.
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, 2003
we had $349.6 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 2003, our aggregate interest and other debt expense was
58.3 percent of our income from operations as compared to 44.5 percent, 53.3
percent, 62.4 percent and 69.2 percent for 2002, 2001, 2000, and 1999,
respectively.
In 2003, we took advantage of favorable debt markets and refinanced all
$500 million principal amount of our outstanding 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. As a result of this refinancing, we expect significantly
lower interest expense in 2004 as compared to 2003.
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 had annual net
sales of approximately $29 million in 2002. Thatcher Tubes operates as part of
our plastic container business and extends our personal care business into
decorated plastic tubes.
In March 2003, we acquired the remaining 65 percent equity interest in
White Cap that we did not already own from Amcor White Cap, Inc. for
approximately $37 million in cash. Additionally, we refinanced debt of White Cap
and purchased equipment subject to a third party lease for approximately $93
million. The business now operates under the name Silgan Closures and is a
leading manufacturer of metal, composite and plastic vacuum closures in North
America for food and beverage products. White Cap had annual net sales of
approximately $250 million in 2002. The business operates as part of our metal
food container business.
In April 2003, we acquired 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. Pacific
Coast Can operates as part of our metal food container business.
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
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Financial Statements for the year ended December 31, 2003 and the accompanying
notes included elsewhere in this Annual Report.
Year Ended December 31,
---------------------------
2003 2002 2001
---- ---- ----
Operating Data:
Net sales:
Metal food containers.......................... 75.7% 74.8% 74.6%
Plastic containers............................. 24.3 25.2 25.4
----- ----- -----
Consolidated................................ 100.0 100.0 100.0
Cost of goods sold............................... 87.6 88.0 87.6
----- ----- -----
Gross profit..................................... 12.4 12.0 12.4
Selling, general and administrative expenses..... 4.7 3.8 4.0
Rationalization charges (credits)................ 0.4 (0.2) 0.5
----- ----- -----
Income from operations........................... 7.3 8.4 7.9
Gain on assets contributed to affiliate.......... -- -- 0.3
Interest and other debt expense.................. 4.3 3.8 4.2
----- ----- -----
Income before income taxes and equity in
losses of affiliates .......................... 3.0 4.6 4.0
Provision for income taxes....................... 1.2 1.8 1.6
----- ----- -----
Income before equity in losses of affiliates..... 1.8 2.8 2.4
Equity in losses of affiliates, net of
income taxes................................... -- (0.1) (0.2)
----- ----- -----
Net income....................................... 1.8% 2.7% 2.2%
===== ===== =====
Summary results for our business segments for the years ended December 31,
2003, 2002 and 2001 are provided below.
Year Ended December 31,
----------------------------------
2003 2002 2001(3)
---- ---- -------
(Dollars in millions)
Net sales:
Metal food containers ............. $1,750.5 $1,487.0 $1,447.4
Plastic containers ................ 561.7 501.3 493.6
-------- -------- --------
Consolidated ................... $2,312.2 $1,988.3 $1,941.0
======== ======== ========
Income from operations:
Metal food containers(1) .......... $ 126.0 $ 120.6 $ 111.6
Plastic containers(2) ............. 48.0 52.9 46.0
Corporate ......................... (5.9) (5.6) (5.2)
-------- -------- --------
Consolidated ................... $ 168.1 $ 167.9 $ 152.4
======== ======== ========
(1) Includes rationalization charges of $1.2 million in 2003, rationalization
credits of $5.4 million in 2002 and net rationalization charges of $5.8
million and goodwill amortization of $2.3 million in 2001. You should also
read Note 3 to our Consolidated Financial Statements for the year ended
December 31, 2003 included elsewhere in this Annual Report.
(2) Includes rationalization charges of $7.8 million in 2003, a rationalization
credit of $0.2 million in 2002 and a rationalization charge of $3.5 million
and goodwill amortization of $2.7 million in 2001. You should also read
Note 3 to our Consolidated Financial Statements for the year ended December
31, 2003 included elsewhere in this Annual Report.
(3) After contributing our metal closures business to the White Cap joint
venture in 2001, we reported the results of that business separately for
periods prior to the formation of White Cap. After our acquisition of White
Cap in 2003, we report the results of Silgan Closures as part of our metal
food container business. As a result, for 2001 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 income from
operations of $3.3 million in 2001.
-21-
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, bringing
our unit volume market share in the United States metal food can market to over
50 percent, 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. Silgan Closures had lower operating margins
than the rest of the metal food container business as it continues to execute a
major restructuring program initiated prior to our acquisition of the business.
Net income in 2003 of $42.0 million, or $2.28 per diluted share, declined by
$0.65 per diluted share as compared to 2002 as a result of rationalization
charges of $9.0 million, or $0.30 per diluted share, and a loss on early
extinguishment of debt of $19.2 million, or $0.63 per diluted share. Both the
plant rationalizations and, more importantly, the refinancing of our debt are
expected to be accretive to our results in 2004 and beyond.
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 the recently acquired businesses.
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 White Cap 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 recently acquired White Cap closures and Thatcher Tubes businesses,
inflation in employee benefits costs and the favorable impact in 2002 of net
payments 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
-22-
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.
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.
Year Ended December 31, 2002 Compared with Year Ended December 31, 2001
Overview. Consolidated net sales in 2002 increased $47.3 million, or 2.4
percent, as compared to 2001 primarily as a result of higher unit volume in the
metal food container business due to new business awarded and a stronger fruit
and vegetable pack. Income from operations increased by $15.5 million and
operating margin increased to 8.4 percent due to the increased volume,
rationalization credits in 2002 as compared to rationalization charges in 2001
and the elimination of goodwill amortization. Partially offsetting these
improvements were price adjustments related to certain contract negotiations,
higher depreciation expense, higher costs to initially absorb new business and
the impact of contributing the metal closures business to the White Cap joint
venture in July 2001. As a result, net income for 2002 was $53.8 million, or
$2.93 per diluted share, as compared to net income of $41.8 million, or $2.31
per diluted share, for 2001. Net income for 2002 included rationalization
credits of $5.6 million, or $0.18 per diluted share, equity in losses of White
Cap of $2.6 million, or $0.14 per diluted share, and a loss on early
extinguishment of debt of $1.0 million, or $0.03 per diluted share. Net income
for 2001 included net rationalization charges of $9.3 million, or $0.31 per
diluted share, a gain on assets contributed to the White Cap joint venture of
$4.9 million, or $0.16 per diluted share, equity in losses of Packtion
Corporation, a dissolved e-commerce venture, of $3.8 million, or $0.21 per
diluted share, and equity in losses of White Cap of $0.3 million, or $0.02 per
diluted share.
Net Sales. Consolidated net sales increased $47.3 million, or 2.4 percent,
for 2002 as compared to 2001. This increase was largely the result of higher net
sales of the metal food container business and, to a lesser extent, of the
plastic container business, partially offset by the impact of contributing the
metal closure business to the White Cap joint venture in July 2001. Net sales of
the metal closure business in 2001 were $46.3 million.
Net sales for the metal food container business increased $39.6 million, or
2.7 percent, for 2002 as compared to 2001. This increase was primarily
attributable to higher unit volume principally as a result of new business on
the West Coast and a stronger fruit and vegetable pack as compared to 2001,
-23-
partially offset by the impact of contributing the metal closure business to the
White Cap joint venture in July 2001.
Net sales for the plastic container business for 2002 increased $7.7
million, or 1.6 percent, from 2001. This increase was primarily a result of
higher unit volume due primarily to new business, partially offset by lower
average selling prices due principally to the pass through of lower resin costs
and a less favorable sales mix.
Gross Profit. The decrease in gross profit margin for 2002 as compared to
2001 was principally due to the effect of price adjustments related to certain
contract negotiations, higher manufacturing costs to initially absorb new
business in the metal food container business and higher depreciation expense,
partially offset by higher volume and the elimination of goodwill amortization
in both the metal food container and the plastic container businesses.
Selling, General and Administrative Expenses. The decrease in selling,
general and administrative expenses as a percentage of consolidated net sales
for 2002 as compared to 2001 was primarily due to net payments received in
settlement of certain litigation in 2002, partially offset by higher selling and
commercial development expenses in the plastic container business.
Income from Operations. Income from operations for 2002 increased by $15.5
million, or 10.2 percent, as compared to 2001, and operating margin increased to
8.4 percent from 7.9 percent. Income from operations and operating margin were
higher in both the metal food container and plastic container businesses. We
recorded rationalization credits in 2002 totaling $5.6 million and net
rationalization charges of $9.3 million in 2001.
Income from operations of the metal food container business for 2002
increased $9.0 million, or 8.1 percent, as compared to 2001, and operating
margin increased to 8.1 percent from 7.7 percent. The increases in income from
operations and operating margin were principally due to higher volume,
rationalization credits in 2002 as compared to net rationalization charges in
2001 and the elimination of goodwill amortization, partially offset by the
effect of price adjustments relating to certain contract negotiations, the
impact of contributing the metal closures business to the White Cap joint
venture in July 2001, higher depreciation expense, higher manufacturing costs to
initially absorb new business, start-up costs related to the manufacture of
convenience ends and increased employee health and welfare costs. Income from
operations of the metal closures business in 2001 was $3.3 million.
Income from operations of the plastic container business for 2002 increased
$6.9 million, or 15.0 percent, as compared to 2001, and operating margin
increased to 10.6 percent from 9.3 percent. The increases in income from
operations and operating margin were primarily a result of higher volumes, a
rationalization charge recorded in 2001, the elimination of goodwill
amortization and improved operational efficiencies, partially offset by higher
depreciation expense, higher selling and commercial development expenses and
higher employee health and welfare costs.
Interest and Other Debt Expense. Interest and other debt expense decreased
$6.4 million in 2002 as compared to 2001. This decrease resulted primarily from
a lower average interest rate and approximately $75 million in lower average
borrowings during 2002 as compared to 2001. Despite an add-on issuance of $200
million of 9% Debentures and higher interest rate spreads over LIBOR, we
experienced a lower average interest rate in 2002 as compared to 2001 as a
result of lower LIBOR rates. Interest and other debt expense for 2002 included a
loss on early extinguishment of debt of $1.0 million for the write-off of
unamortized debt issuance costs related to our previous senior secured credit
facility.
Statement of Financial Accounting Standards, or SFAS, No. 142, "Goodwill
and Other Intangible Assets," required us to eliminate the amortization of
goodwill effective January 1, 2002. For 2001, we recorded goodwill amortization
of approximately $5.0 million, or $0.17 per diluted share.
-24-
During 2002, the metal food container and plastic container businesses benefited
from the elimination of $2.3 million and $2.7 million, respectively, of goodwill
amortization.
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.
During 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% Debentures or any other
subordinated indebtedness.
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 White Cap and Thatcher Tubes. In December 2003, 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. The terms of these incremental term loans are the same as those for
B term loans under the Credit Agreement. Our uncommitted incremental term loan
facility under the Credit Agreement at December 31, 2003 was $125 million.
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 will be 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. As a result of this redemption, we expect significantly lower
interest expense in 2004 as compared to 2003. We recorded a loss on early
extinguishment of debt of approximately $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. This loss on early extinguishment of debt was recorded as interest
and other debt expense in our Consolidated Statements of Income.
In 2003, we used cash from incremental term loan borrowings of $350
million, cash from operations of $234.9 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, 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
-25-
generated from operations of $163.3 million, proceeds from stock option
exercises of $4.3 million and proceeds from asset sales of $1.9 million to fund
capital expenditures of $119.2 million, net repayments of revolving loans and
long-term debt of $193.6 million and debt issuance costs of $22.4 million and to
increase cash balances by $40.3 million.
In 2002, trade accounts receivable, net decreased $20.2 million to $124.7
million as compared to 2001, primarily due to the timing of sales. Inventories
increased $10.2 million to $272.8 million in 2002 as compared to 2001 primarily
due to the timing of sales and raw material purchases.
In 2001, we used cash generated from operations of $143.0 million, cash
proceeds from the White Cap joint venture of $32.4 million, proceeds from asset
sales of $3.9 million, cash balances of $2.0 million and proceeds from stock
option exercises of $1.0 million to fund capital expenditures of $93.0 million,
net repayments of revolving loans and long-term debt of $86.3 million and our
investment in Packtion of $3.0 million.
As of December 31, 2003, there were $25.0 million of 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 $352.1 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 ($83.3 million
outstanding at December 31, 2003) and B term loans ($691.3 million outstanding
at December 31, 2003), which are required to be repaid in annual installments
through June 28, 2008 and November 30, 2008, respectively. You should also read
Note 9 to our Consolidated Financial Statements for the year ended December 31,
2003 included elsewhere in this Annual Report.
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.
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.
For 2004, we estimate that we will utilize approximately $225-250 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 (taking into account recent acquisitions) 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 $23.7 million and the repayment in 2004 of $25.0
million of revolving loans outstanding under the Credit Agreement at
year-end 2003;
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
-26-
o payments of approximately $15 million for federal, state and foreign
tax liabilities in 2004, which will increase annually thereafter.
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 and tax obligations
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 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 2004 with all of these covenants.
You should also read Note 13 to our Consolidated Financial Statements for
the year ended December 31, 2003 included elsewhere in this Annual Report.
Contractual Obligations
Our contractual cash obligations at December 31, 2003 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) ...... $1,002.6 $48.7 $47.3 $706.6 $200.0
Operating lease obligations ......... 119.1 23.8 39.6 24.0 31.7
Purchase obligations (2) ............ 8.7 8.7 -- -- --
-------- ----- ----- ------ ------
Total (3) ........................... $1,130.4 $81.2 $86.9 $730.6 $231.7
======== ===== ===== ====== ======
(1) These amounts represent expected cash payments of our long-term debt.
(2) Purchase obligations consist of commitments for capital expenditures.
Obligations that are cancelable without penalty are excluded.
(3) Minimum pension funding requirements and other postretirement benefit plan
funding are not included as such amounts have not been determined. Based on
current tax law, the minimum required contributions to our pension plans
are expected to be approximately $6.1 million in 2004. However, this
estimate 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 2003, we made
pension and other postretirement benefit plan contributions of
approximately $46.8 million, of which approximately $12.8 million
represented minimum funding requirements.
At December 31, 2003, we also had outstanding letters of credit of $22.9
million that were issued under the Credit Agreement.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
-27-
Effect of Inflation and Interest Rate Fluctuations
Historically, inflation has not had a material effect on us, other than to
increase our cost of borrowing. In general, we have been able to increase the
sales prices of our products to reflect any increases in the prices of raw
materials.
Because we have indebtedness which bears interest at floating rates, our
financial results will be sensitive to changes in prevailing market rates of
interest. As of December 31, 2003, we had $1.003 billion of indebtedness
outstanding, of which $349.6 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 3.8 percent. At December 31,
2003, the aggregate notional principal amounts of these agreements was $550
million (including $100 million notional principal amount that became effective
on January 1, 2004), with $250 million aggregate notional principal amount of
these agreements maturing in 2004 and $100 million aggregate notional principal
amount of these agreements maturing in each of 2005, 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 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 and which will be finalized during
the first quarter of 2004. As we continue to assess, formulate and finalize our
integration plans, there may be revisions to these acquisition reserves during
the first quarter of 2004. Currently, these plans include 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 include 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 $4.4 million and plant exit costs of $1.6 million related to
the planned closing of the previously discussed acquired facilities. Through
December 31, 2003, a total of $1.2 million and $0.5 million has been expended
for employee severance and benefits and plant exit costs related to these plans,
respectively. At December 31, 2003, these reserves had an aggregate balance of
$4.3 million. Cash payments related to these reserves are expected through 2004.
During 2003, we approved and announced to employees plans to exit our
Norwalk, Connecticut and Anaheim, California plastic container manufacturing
facilities and our Queretaro, Mexico metal closures manufacturing facility.
These plans include the termination of approximately 120 plant employees and
other related exit costs. These decisions resulted in a charge to earnings of
$9.0 million, 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. Through December 31, 2003, a total of
$1.5 million and $0.6 million has been expended for employee severance and
benefits and plant exit costs, respectively. At December 31, 2003, these
reserves had an aggregate balance of $1.6 million. Additional rationalization
charges related to these facility closings are expected in the first quarter of
2004. The timing of certain cash payments 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
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million related to certain aspects of a rationalization plan to close a plastic
container manufacturing facility that were completed at amounts less than
originally estimated. In 2001, we recorded net rationalization charges totaling
$9.3 million. These net rationalization charges included a $5.8 million charge
in the metal food container business, comprised of a charge of $7.0 million,
including $4.2 million for the non-cash write-down in carrying value of assets,
primarily relating to the planned closing of two metal food container
manufacturing facilities (including our Kingsburg, California facility) and a
$1.2 million credit as a result of certain assets of the metal food container
business that were placed back in service, and a $3.5 million charge related to
closing our Fairfield, Ohio plastic container manufacturing facility.
Under our rationalization and acquisition plans, we made cash payments of
$6.0 million, $5.9 million and $6.1 million, respectively in 2003, 2002 and
2001. Additional cash spending is expected in 2004 under our 2003 acquisition
plans, 2003 rationalization plans and Fairfield rationalization plan.
You should also read Note 3 to our Consolidated Financial Statements for
the year ended December 31, 2003 included elsewhere in this Annual Report.
Critical Accounting Policies
Accounting principles generally accepted in the United States require
estimates and assumptions that affect the reported amounts in our consolidated
financial statements and the accompanying notes. Some of these estimates and
assumptions require difficult, subjective and/or complex judgments. Critical
accounting policies cover accounting matters that are inherently uncertain
because the future resolution of such matters is unknown. We believe that our
accounting policies for deferred income taxes, pension expense and obligations,
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, 2003 and the accompanying
notes included elsewhere in this Annual Report.
At December 31, 2003, CS Can had approximately $18.8 million of deferred
tax assets relating to $53.7 million of net operating loss carryforwards, or
NOLs, that expire between 2019 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. This process requires the use of significant
judgment and estimates.
Our pension expense and obligations are developed from actuarial
valuations. Two critical assumptions in determining pension expense and
obligations are the discount rate and expected 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 75 basis point decrease in
the discount rate would increase our pension expense by approximately $2.8
million. For 2004, we reduced our discount rate from 7.00 percent to 6.25
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
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expected long-term return on plan assets would increase our pension expense by
approximately $1.3 million. For 2003, 2002 and 2001, we assumed that the
expected return on our pension plan assets was 9.0 percent.
Historically, we have maintained a strategy of acquiring businesses and
enhancing profitability through productivity and cost reduction opportunities.
Acquisitions require us to estimate the fair value of the assets acquired and
liabilities assumed in the transactions. These estimates of fair value are based
on our business plans for the acquired entities, which includes eliminating
operating redundancies, facility closings and rationalizations and assumptions
as to the ultimate resolution of liabilities assumed. We also continually
evaluate the operating performance of our existing facilities and our business
requirements and, when deemed appropriate, we exit or rationalize existing
operating facilities. Establishing reserves for acquisition plans and facility
rationalizations requires the use of estimates. Although we believe that these
estimates accurately reflect the costs of these plans, actual costs incurred may
differ from these estimates.
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
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 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and SFAS No. 64,
"Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements," such that
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 the Credit Agreement was
reclassified to loss on early extinguishment of debt in our Consolidated
Statements of Income.
Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is applicable to exit and
disposal activities that are initiated after December 31, 2002. SFAS No. 146
addresses accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires the recognition of a liability for a cost associated with an
exit or disposal activity when the liability is incurred. Under EITF Issue No.
94-3, a liability for an exit cost was recognized at the date an entity
committed to an exit plan. The adoption of SFAS No. 146 did not have a
significant effect on our financial position or results of operations.
In December 2003, the Financial Accounting Standards Board, or 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 are not required until 2004.
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
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Act of 2003." Specific authoritative guidance on the accounting for the federal
subsidy is pending, and therefore we have elected to defer accounting for the
effects of the Act as permitted by FSP No. 106-1. As a result, in accordance
with FSP No. 106-1, our accumulated postretirement benefit obligation and net
periodic postretirement benefit costs do not reflect the effects of the Act on
the plans. Specific authoritative guidance, when issued, could require us to
change previously reported information.
In January 2003, 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 will be effective
for us on March 31, 2004. The adoption of FIN No. 46 is not expected to impact
our financial position or results of operations.
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 assimilate 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;
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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
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 objectives, we regularly evaluate the amount of
our variable rate debt as a percentage of our aggregate debt. During 2003 and
2002, our average outstanding variable rate debt, after taking into account the
average outstanding notional amount of our interest rate swap agreements, was 31
percent and 39 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, 9 and 10 to our Consolidated Financial Statements included elsewhere in
this Annual Report which outline the principal and notional amounts, interest
rates, fair values and other terms required to evaluate the expected cash flows
from these agreements.
Based on the average outstanding amount of our variable rate indebtedness
in 2003, a one percentage point change in the interest rates for our variable
rate indebtedness would have impacted 2003 interest expense by an aggregate of
approximately $3.9 million, after taking into account the average outstanding
notional amount of our interest rate swap agreements during 2003.
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.
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Commodity Pricing Risk
We purchase commodities for our products such as metal and resins. These
commodities are generally purchased pursuant to contracts or at market prices
established with the vendor. In general, we do not engage in hedging activities
for these commodities due to our ability to pass on price changes to our
customers.
We also purchase other commodities, such as natural gas and electricity,
and are subject to risks on the pricing of these commodities. In general, we
purchase these commodities pursuant to contracts or at market prices. We manage
up to a significant portion of our exposure to natural gas price fluctuations
through natural gas swap agreements. During 2003 and 2002, we entered into
natural gas swap agreements to hedge approximately 40 percent and 80 percent,
respectively, of our exposure to fluctuations in natural gas prices. At December
31, 2003, we had entered into natural gas swap agreements to hedge approximately
25 percent of our expected 2004 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 10 to our
Consolidated Financial Statements included elsewhere in this Annual Report which
outlines the terms necessary to evaluate these transactions.
Based on our natural gas usage in 2003, a ten percent change in natural gas
costs would have impacted our 2003 cost of goods sold by approximately $1.5
million, after taking into account the average outstanding notional amount of
our natural gas swap agreements.
Item 8. Financial Statements and Supplementary Data.
We refer you to Item 15, "Exhibits, Financial Statements, Schedules and
Reports on Form 8-K," below for a listing of financial statements and schedules
included in this Annual Report which are incorporated here in this Annual Report
by this reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9A. 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.
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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 27, 2004 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 27, 2004 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 27, 2004 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 27, 2004 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 27, 2004 in the section
entitled "Ratification of Appointment of Independent Auditor" and is
incorporated here in this Annual Report by this reference.
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PART IV
Item 15. Exhibits, Financial Statements Schedules, and Reports on Form 8-K.
(a)
Financial Statements:
Report of Independent Auditors..................................................................... F-1
Consolidated Balance Sheets at December 31, 2003 and 2002.......................................... F-2
Consolidated Statements of Income for the years ended December 31, 2003, 2002
and 2001...................................................................................... F-3
Consolidated Statements of Stockholders' Equity (Deficiency) for the years ended
December 31, 2003, 2002 and 2001.............................................................. F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002
and 2001...................................................................................... F-5
Notes to Consolidated Financial Statements......................................................... F-6
Schedules:
I. Condensed Financial Information of Registrant:
Condensed Balance Sheets of Silgan Holdings Inc. (Parent Company) at
December 31, 2003 and 2002................................................. F-45
Condensed Statements of Income of Silgan Holdings Inc. (Parent Company)
for the years ended December 31, 2003, 2002 and 2001......................... F-46
Condensed Statements of Cash Flows of Silgan Holdings Inc. (Parent
Company) for the years ended December 31, 2003, 2002 and 2001................ F-47
Notes to Condensed Financial Statements.............................................. F-48
II. Valuation and Qualifying Accounts for the years ended December 31,
2003, 2002 and 2001.................................................................. F-50
All other financial statements and schedules not listed have been omitted
because they are not applicable or not required, or because the required
information is included in the consolidated financial statements or notes
thereto.
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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 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).
10.5 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).
10.6 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).
10.7 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).
10.8 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).
10.9 Underwriting Agreement, dated as of February 13, 1997, among Silgan
Holdings, Silgan Corporation, Silgan Containers, Silgan Plastics, The
Morgan Stanley Leveraged Equity Fund II, L.P., Bankers Trust New York
Corporation and the underwriters listed on Schedule I thereto
(incorporated by reference to Exhibit 10.40 filed with our Annual
Report on Form 10-K for the year ended December 31, 1996, Commission
File No. 000-22117).
10.10 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 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).
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Exhibit
Number Description
- ------- -----------
+10.12 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).
+10.13 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).
+10.14 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).
+10.15 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).
+10.16 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).
+10.17 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).
10.18 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).
*+10.19 Silgan Holdings Inc. Senior Executive Performance Plan.
*12 Computation of Ratio of Earnings to Fixed Charges for the years ended
December 31, 2003, 2002, 2001, 2000 and 1999.
*14 Code of Ethics applicable to Silgan Holdings' principal executive
officers, principal financial officer, principal accounting officer or
controller or persons performing similar functions.
*21 Subsidiaries of the Registrant.
*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.
-38-
Exhibit
Number Description
- ------- -----------
*31.3 Certification by the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act.
*32.1 Certification by the Co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act.
*32.2 Certification by the Co-Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act.
*32.3 Certification by the Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K:
1. On October 23, 2003, we filed a Current Report on Form 8-K pursuant to
Item 12 thereof related to the press release we issued reporting our
earnings for the three and nine month periods ended September 30,
2003.
2. On October 30, 2003, we filed a Current Report on Form 8-K pursuant to
Item 5 thereof related to the press release we issued to announce our
planned offering of senior subordinated notes.
3. On November 14, 2003, we filed a Current Report on Form 8-K pursuant
to Items 5 and 9 thereof related to the press release we issued
announcing that we had (i) completed a private placement of $200
million of our 6 3/4% Notes, (ii) received commitments for a $200
million additional term loan borrowing under our senior secured credit
facility, and (iii) issued a notice to redeem our remaining 9%
Debentures, using proceeds from such private placement and term loan
borrowings as well as other funds.
- -----------------
*Filed herewith.
+Management contract or compensatory plan or arrangement.
-39-
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 15, 2004 By /s/ R. Philip Silver
--------------------------
R. Philip Silver
Chairman of the Board and
Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Chairman of the Board and
Co-Chief Executive Officer
/s/ R. Philip Silver (Principal Executive Officer) March 15, 2004
- -----------------------
(R. Philip Silver)
President, Co-Chief Executive
Officer and Director
/s/ D. Greg Horrigan (Principal Executive Officer) March 15, 2004
- -----------------------
(D. Greg Horrigan)
/s/ John W. Alden Director March 15, 2004
- -----------------------
(John W. Alden)
/s/ Jeffrey C. Crowe Director March 15, 2004
- -----------------------
(Jeffrey C. Crowe)
/s/ William C. Jennings Director March 15, 2004
- -----------------------
(William C. Jennings)
/s/ Edward A. Lapekas Director March 15, 2004
- -----------------------
(Edward A. Lapekas)
Executive Vice President and
Chief Financial Officer
/s/ Anthony J. Allott (Principal Financial Officer) March 15, 2004
- -----------------------
(Anthony J. Allott)
Vice President and Controller
/s/ Nancy Merola (Principal Accounting Officer) March 15, 2004
- -----------------------
(Nancy Merola)
-40-
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Silgan Holdings Inc.
We have audited the accompanying consolidated financial statements and
schedules of Silgan Holdings Inc. as listed in the accompanying index to the
financial statements (Item 15(a)). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements listed in the accompanying index
to the financial statements (Item 15(a)) present fairly, in all material
respects, the consolidated financial position of Silgan Holdings Inc. at
December 31, 2003 and 2002, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
2003, in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedules, when
considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, in 2002
the Company changed its method of accounting for goodwill and other intangible
assets.
/s/ Ernst & Young LLP
Stamford, Connecticut
January 28, 2004
F-1
SILGAN HOLDINGS INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands, except per share data)
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents .................... $ 12,100 $ 58,318
Trade accounts receivable, less allowances
of $3,086 and $2,864, respectively ........ 159,273 124,657
Inventories .................................. 320,194 272,836
Prepaid expenses and other current assets .... 53,731 43,521
---------- ----------
Total current assets ..................... 545,298 499,332
Property, plant and equipment, net ................ 817,850 705,746
Goodwill, net ..................................... 202,421 141,481
Other assets ...................................... 55,515 57,399
---------- ----------
$1,621,084 $1,403,958
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ............ $ 48,670 $ 20,170
Trade accounts payable ....................... 211,639 172,703
Accrued payroll and related costs ............ 65,940 56,238
Accrued liabilities .......................... 24,518 15,825
---------- ----------
Total current liabilities ................ 350,767 264,936
Long-term debt .................................... 953,910 936,655
Other liabilities ................................. 195,602 139,275
Commitments and contingencies
Stockholders' equity:
Common stock ($0.01 par value per share;
100,000,000 shares authorized,
20,958,517 and 20,916,317 shares issued
and 18,273,042 and 18,230,842 shares
outstanding, respectively) ................. 210 209
Paid-in capital .............................. 125,758 124,872
Retained earnings ............................ 60,905 18,871
Accumulated other comprehensive loss ......... (5,675) (20,467)
Treasury stock at cost (2,685,475 shares) .... (60,393) (60,393)
---------- ----------
Total stockholders' equity ............... 120,805 63,092
---------- ----------
$1,621,084 $1,403,958
========== ==========
See notes to consolidated financial statements.
F-2
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2003, 2002 and 2001
(Dollars in thousands, except per share data)
2003 2002 2001
---- ---- ----
Net sales .............................................. $2,312,165 $1,988,284 $1,940,994
Cost of goods sold ..................................... 2,026,687 1,749,731 1,700,708
---------- ---------- ----------
Gross profit ...................................... 285,478 238,553 240,286
Selling, general and administrative expenses ........... 108,393 76,216 78,541
Rationalization charges (credits) ...................... 8,993 (5,603) 9,334
---------- ---------- ----------
Income from operations ............................ 168,092 167,940 152,411
Interest and other debt expense before loss on
early extinguishment of debt ....................... 78,861 73,789 81,192
Loss on early extinguishment of debt ................... 19,173 983 --
---------- ---------- ----------
Interest and other debt expense ................... 98,034 74,772 81,192
Gain on assets contributed to affiliate ................ -- -- 4,908
---------- ---------- ----------
Income before income taxes and equity
in losses of affiliates ....................... 70,058 93,168 76,127
Provision for income taxes ............................. 27,743 36,806 30,222
---------- ---------- ----------
Income before equity in losses of affiliates ...... 42,315 56,362 45,905
Equity in losses of affiliates ......................... (281) (2,554) (4,140)
---------- ---------- ----------
Net income ........................................ $ 42,034 $ 53,808 $ 41,765
========== ========== ==========
Basic net income per share ............................. $2.30 $2.97 $2.35
===== ===== =====
Diluted net income per share ........................... $2.28 $2.93 $2.31
===== ===== =====
See notes to consolidated financial statements.
F-3
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
For the years ended December 31, 2003, 2002 and 2001
(Dollars and shares in thousands)
Common Stock Retained Accumulated Total
------------ Earnings Other Stockholders'
Par Paid-in (Accumulated Comprehensive Treasury Equity
Shares Value Capital Deficit) Income (Loss) Stock (Deficiency)
------ ----- ------- ------------ ------------- -------- -------------
Balance at January 1, 2001 ............... 17,703 $204 $118,099 $(76,702) $ (1,588) $(60,393) $(20,380)
Comprehensive income:
Net income ............................ -- -- -- 41,765 -- -- 41,765
Minimum pension liability, net of
tax benefit of $1,885 ............... -- -- -- -- (1,966) -- (1,966)
Change in fair value of derivatives,
net of tax benefit of $2,151 ........ -- -- -- -- (3,267) -- (3,267)
Foreign currency translation .......... -- -- -- -- (1,225) -- (1,225)
--------
Comprehensive income .................. 35,307
--------
Stock option exercises, including
tax benefit of $595 .................... 151 1 1,622 -- -- -- 1,623
Dilution of investment in
equity affiliate ...................... -- -- (1,402) -- -- -- (1,402)
------ ---- -------- -------- -------- -------- --------
Balance at December 31, 2001 ............. 17,854 205 118,319 (34,937) (8,046) (60,393) 15,148
Comprehensive income:
Net income ............................ -- -- -- 53,808 -- -- 53,808
Minimum pension liability, net of
tax benefit of $8,336 ............... -- -- -- -- (12,792) -- (12,792)
Change in fair value of
derivatives, net of tax
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
====== ==== ======== ======== ======== ======== ========
See notes to consolidated financial statements.
F-4
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income .................................................... $ 42,034 $ 53,808 $ 41,765
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ............................................. 110,724 94,936 89,772
Amortization of goodwill and other intangibles ........... 590 779 5,759
Amortization of debt issuance costs ...................... 3,888 2,588 1,675
Rationalization charges (credits) ........................ 8,993 (5,603) 9,334
Loss on early extinguishment of debt ..................... 19,173 983 --
Equity in losses of affiliates ........................... 457 4,222 4,140
Gain on assets contributed to affiliate .................. -- -- (4,908)
Deferred income tax provision ............................ 25,742 25,219 13,852
Other changes that provided (used) cash, net of
effects of acquisitions:
Trade accounts receivable ........................... (12,465) 20,246 19,179
Inventories ......................................... 28,109 (10,209) 1,220
Trade accounts payable .............................. 25,328 (1,148) (34,293)
Accrued liabilities ................................. (6,443) (12,273) 4,312
Other, net .......................................... (11,224) (10,255) (8,824)
--------- ----------- ---------
Net cash provided by operating activities ................ 234,906 163,293 142,983
--------- ----------- ---------
Cash flows provided by (used in) investing activities:
Investment in equity affiliate ................................ -- -- (3,039)
Proceeds from equity affiliate ................................ -- -- 32,388
Purchases of businesses, net of cash acquired ................. (207,793) -- --
Capital expenditures .......................................... (105,912) (119,160) (93,042)
Proceeds from asset sales ..................................... 3,739 1,915 3,901
--------- ----------- ---------
Net cash used in investing activities .................... (309,966) (117,245) (59,792)
--------- ----------- ---------
Cash flows provided by (used in) financing activities:
Borrowings under revolving loans .............................. 905,800 1,163,580 710,749
Repayments under revolving loans .............................. (880,800) (1,496,605) (746,719)
Proceeds from stock option exercises .......................... 647 4,303 1,028
Proceeds from issuance of long-term debt ...................... 550,000 656,000 --
Repayments of long-term debt .................................. (540,545) (310,573) (50,313)
Debt issuance costs ........................................... (6,260) (22,444) --
--------- ----------- ---------
Net cash provided by (used in) financing activities ...... 28,842 (5,739) (85,255)
--------- ----------- ---------
Cash and cash equivalents:
Net (decrease) increase ....................................... (46,218) 40,309 (2,064)
Balance at beginning of year .................................. 58,318 18,009 20,073
--------- ----------- ---------
Balance at end of year ........................................ $ 12,100 $ 58,318 $ 18,009
========= =========== =========
Interest paid ...................................................... $ 93,514 $ 73,251 $ 85,825
Income taxes paid, net of refunds .................................. 2,803 14,374 8,308
See notes to consolidated financial statements.
F-5
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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 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 accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying notes. Actual
results may differ from those estimates.
The 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 loss.
Certain prior years' amounts have been reclassified to conform with the current
year's presentation.
Cash and Cash Equivalents. Cash equivalents represent short-term, highly liquid
investments which are readily convertible to cash and have maturities of three
months or less at the time of purchase. The carrying values of these assets
approximate their fair values. As a result of our cash management system, checks
issued and presented to the banks for payment may create negative cash balances.
Checks outstanding in excess of related cash balances totaling approximately
$99.4 million at December 31, 2003 and $88.3 million at December 31, 2002 are
included in trade accounts payable.
Inventories. Inventories are valued at the lower of cost or market (net
realizable value) and the cost is principally determined on the last-in,
first-out basis, or LIFO.
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.
F-6
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 1. Summary of Significant Accounting Policies (continued)
Property, Plant and Equipment, Net (continued). Interest incurred on amounts
borrowed in connection with the installation of major machinery and equipment
acquisitions is capitalized. Capitalized interest of $1.0 million in 2003 and
$1.4 million in 2002 was recorded as part of the cost of the assets to which it
relates and is amortized over the assets' estimated useful life.
Goodwill, Net. Effective January 1, 2002, we adopted Statement of Financial
Accounting Standards, or SFAS, No. 141, "Business Combinations," and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 revises the accounting
treatment for business combinations to require the use of purchase accounting
and prohibit the use of the pooling-of-interests method for business
combinations initiated after June 30, 2001. SFAS No. 142 revises the accounting
for goodwill to eliminate amortization of goodwill on transactions consummated
after June 30, 2001 and of all other goodwill as of January 1, 2002. As a
result, we stopped recording goodwill amortization as of January 1, 2002.
Intangible assets with definite lives will continue to be amortized over their
useful lives.
Net income and earnings per share would have been as follows had the provisions
of SFAS No. 142 been applied as of January 1, 2001:
2003 2002 2001
---- ---- ----
(Dollars in thousands, except per share data)
Net income:
Net income ............................ $42,034 $53,808 $41,765
Add back of goodwill amortization ..... -- -- 3,017
------- ------- -------
Adjusted net income ................... $42,034 $53,808 $44,782
======= ======= =======
Basic earnings per share:
Net income ............................ $2.30 $2.97 $2.35
Add back of goodwill amortization ..... -- -- 0.17
----- ----- -----
Adjusted net income ................... $2.30 $2.97 $2.52
===== ===== =====
Diluted earnings per share:
Net income ............................ $2.28 $2.93 $2.31
Add back of goodwill amortization ..... -- -- 0.17
----- ----- -----
Adjusted net income ................... $2.28 $2.93 $2.48
===== ===== =====
F-7
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 1. Summary of Significant Accounting Policies (continued)
Goodwill, Net (continued). SFAS No. 142 also requires goodwill and other
intangible assets with indefinite lives to be reviewed for impairment each year
and more frequently if circumstances indicate a possible impairment. We
completed our 2003 review and determined that goodwill was not impaired. Changes
in the carrying amount of goodwill, net are as follows:
Metal Food Plastic
Containers Containers Total
---------- ---------- -----
(Dollars in thousands)
Balance at December 31, 2001 ........ $ 47,680 $93,785 $141,465
Currency translation ................ -- 16 16
-------- ------- --------
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
======== ======= ========
Goodwill, net for our metal food container business includes accumulated
amortization of $14.7 million at both December 31, 2003 and 2002. Goodwill, net
for our plastic container business includes accumulated amortization of $11.1
million and $10.9 million at December 31, 2003 and 2002, respectively.
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.
Effective January 1, 2002, we adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and the accounting and reporting provisions of
Accounting Principles Board, or APB, Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." SFAS
No. 144 provides updated guidance concerning the recognition and measurement of
an impairment loss for certain types of long-lived assets and expands the scope
of a discontinued operation to include a component of an entity. The adoption of
SFAS No. 144 on January 1, 2002 did not impact our financial position or results
of operations.
Other Assets. Other assets consist principally of debt issuance costs which are
being amortized on a straight-line basis over the terms of the related debt
agreements (6 to 10 years) and an intangible pension asset.
F-8
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 1. Summary of Significant Accounting Policies (continued)
Hedging Instruments. We utilize certain derivative financial instruments to
manage a portion of our interest rate and natural gas cost exposures. We do not
engage in trading or other speculative uses of these financial instruments. For
a financial instrument to qualify as a hedge, we must be exposed to interest
rate or price risk, and the financial instrument must reduce the exposure and be
designated as a hedge. Financial instruments qualifying for hedge accounting
must maintain a high correlation between the hedging instrument and the item
being hedged, both at inception and throughout the hedged period.
Effective January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and interpreted. SFAS No. 133
requires all derivative instruments to be recorded in the Consolidated Balance
Sheets at their fair values. Changes in the fair values of derivatives will be
recorded each period in earnings or other comprehensive loss, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. The adoption of SFAS No. 133, as amended, did not
have a significant impact on our financial position or results of operations.
Income Taxes. We account for income taxes using the liability method in
accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period of enactment of such change.
Income taxes are calculated for Holdings, 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 since
these earnings are expected to be permanently reinvested.
Revenue Recognition. Revenues are recognized when goods are shipped and the
title and risk of loss pass to the customer. Shipping and handling fees and
costs incurred in connection with products sold are recorded in cost of goods
sold in our Consolidated Statements of Income.
Stock-Based Compensation. We have two stock-based compensation plans, one for
key employees and one for non-employee directors. See Note 14 for further
discussion. We apply the recognition and measurement principles of APB Opinion
No. 25, "Accounting for Stock Issued to Employees," and related interpretations
in accounting for these plans. Accordingly, no compensation expense for employee
stock options is recognized, as all options granted under these plans had an
exercise price that was equal to or greater than the market value of the
underlying stock on the date of the grant. If we had applied the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation," for the years ended December 31, 2003, 2002 and 2001, net income
and basic and diluted earnings per share would have been as follows:
F-9
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 1. Summary of Significant Accounting Policies (continued)
Stock-Based Compensation (continued).
2003 2002 2001
---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported .............................. $42,034 $53,808 $41,765
Deduct: Total stock-based employee
compensation expense determined under
the fair value method for all stock option
awards, net of income taxes ....................... 1,441 1,165 1,337
------- ------- -------
Pro forma net income ................................. $40,593 $52,643 $40,428
======= ======= =======
Earnings per share:
Basic net income per share - as reported ......... $2.30 $2.97 $2.35
===== ===== =====
Basic net income per share - pro forma ........... 2.22 2.90 2.27
===== ===== =====
Diluted net income per share - as reported ....... $2.28 $2.93 $2.31
===== ===== =====
Diluted net income per share - pro forma ......... 2.22 2.88 2.26
===== ===== =====
Recently Adopted Accounting Pronouncements. 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 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt," and SFAS No. 64, "Extinguishment of Debt Made to
Satisfy Sinking-Fund Requirements," such that 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.
Effective January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is applicable to exit and
disposal activities that are initiated after December 31, 2002. SFAS No. 146
addresses accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force, or EITF, Issue No. 94-3,
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
No. 146 requires the recognition of a liability for a cost associated with an
exit or disposal activity when the liability is incurred. Under EITF Issue No.
94-3, a liability for an exit cost was recognized at the date an entity
committed to an exit plan. The adoption of SFAS No. 146 did not have a
significant effect on our financial position or results of operations.
F-10
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 1. Summary of Significant Accounting Policies (continued)
Recently Adopted Accounting Pronouncements (continued). In December 2003, the
Financial Accounting Standards Board, or 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 are not required until 2004.
Recently Issued Accounting Pronouncement. In January 2003, 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 will be effective for us on March 31, 2004. The
adoption of FIN No. 46 is not expected to impact our financial position or
results of operations.
Note 2. Acquisitions
In January 2003, we acquired substantially all of the assets of Thatcher Tubes
LLC and its affiliates, or Thatcher Tubes, a privately held manufacturer and
marketer of decorated plastic tubes serving primarily the personal care
industry. Including additional production capacity installed shortly before the
acquisition, the purchase price for the assets was approximately $32 million in
cash. Thatcher Tubes had annual net sales of approximately $29 million in 2002.
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 and purchased equipment subject to a third party
lease for approximately $93 million. White Cap had annual net sales of
approximately $250 million in 2002. 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 Producers, or Pacific Coast, through which Pacific
Coast self-manufactured a majority of its metal food containers. The purchase
price was approximately $44 million in cash, including approximately $29 million
for inventory. As part of the transaction, we entered into a ten-year supply
agreement with Pacific Coast under which Pacific Coast has agreed to purchase
from us substantially all of its metal food container requirements. Pacific
Coast Can operates as part of our metal food container business.
F-11
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 2. Acquisitions (continued)
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
is based on preliminary estimates and assumptions and is subject to revision
during the first quarter of 2004 when valuations and integration plans are
finalized. Accordingly, revisions to the allocation of purchase price, which may
be significant, will be reported in a future period as increases or decreases to
amounts previously reported.
Note 3. Rationalization Charges (Credits) and Acquisition Reserves
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 and which will be finalized within
one year. As we continue to assess, formulate and finalize our integration
plans, there may be revisions to these acquisition reserves during the first
quarter of 2004. Currently, these plans include 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 include 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 $4.4 million and plant exit costs of $1.6 million related to
the planned closing of the previously discussed acquired facilities. Through
December 31, 2003, a total of $1.2 million and $0.5 million has been expended
for employee severance and benefits and plant exit costs related to these plans,
respectively. At December 31, 2003, these reserves had an aggregate balance of
$4.3 million. Cash payments related to these reserves are expected through 2004.
Activity in our 2003 acquisition plans 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
======= ====== =======
F-12
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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. These plans
include the termination of approximately 120 plant employees and other related
exit costs. These decisions resulted in a charge to earnings of $9.0 million,
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. Through December 31, 2003, a total of $1.5 million and
$0.6 million has been expended for employee severance and benefits and plant
exit costs, respectively. At December 31, 2003, these reserves had an aggregate
balance of $1.6 million. Additional rationalization charges related to these
facility closings are expected in the first quarter of 2004. The timing of
certain cash payments 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 plans 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
======= ====== ======= =======
F-13
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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. Through December 31, 2003, a total of $2.0 million has been expended
relating to this plan. These expenditures consisted of $0.7 million related to
employee severance and benefits and $1.3 million for plant exit costs. During
2002, all actions under this plan related to employee severance and benefits
were completed at amounts less than originally estimated, and, accordingly, we
reversed $0.2 million of rationalization reserves as a rationalization credit.
At December 31, 2003, this reserve had a balance of $1.3 million. Although we
have closed the plant, the timing of cash payments is dependent upon the
expiration of a lease obligation. Accordingly, cash payments related to closing
this facility are expected through 2009.
Activity in our Fairfield rationalization plan reserve is summarized as follows:
Employee
Severance Plant Exit
and Benefits Costs Total
------------ ----- -----
(Dollars in thousands)
Balance at December 31, 2000 ............. $ -- $ -- $ --
2001 Rationalization Charge .............. 874 2,616 3,490
2001 Utilized ............................ (637) (749) (1,386)
----- ------ ------
Balance at December 31, 2001 ............. 237 1,867 2,104
2002 Rationalization Credit .............. (237) -- (237)
2002 Utilized ............................ -- (273) (273)
----- ------ ------
Balance at December 31, 2002 ............. -- 1,594 1,594
2003 Utilized ............................ -- (321) (321)
----- ------ ------
Balance at December 31, 2003 ............. $ -- $1,273 $1,273
===== ====== ======
F-14
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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, 2000 ..... $2,364 $2,622 $ 4,000 $ 8,986
2001 Utilized .................... (873) (645) (2,000) (3,518)
------ ------ ------- -------
Balance at December 31, 2001 ..... 1,491 1,977 2,000 5,468
2002 Utilized .................... (744) (858) (2,000) (3,602)
------ ------ ------- -------
Balance at December 31, 2002 ..... 747 1,119 -- 1,866
2003 Utilized .................... (747) (1,119) -- (1,866)
------ ------ ------- -------
Balance at December 31, 2003 ..... $ -- $ -- $ -- $ --
====== ====== ======= =======
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. These decisions resulted in a
rationalization charge of $7.0 million. This charge consisted of $4.2 million
for the non-cash write-down in carrying value of assets, $1.4 million for
employee severance and benefits costs and $1.4 million for plant exit costs.
F-15
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 3. Rationalization Charges (Credits) and Acquisition Reserves (continued)
Northtown, Kingsburg and Waukegan Rationalization Plans (continued)
- -------------------------------------------------------
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.
San Leandro and City of Industry Rationalization Plans
- ------------------------------------------------------
During 2001, certain assets with carrying values that were previously written
down as part of our plans to exit our San Leandro and City of Industry,
California metal food container facilities were placed back in service. As a
result, we recorded a $1.2 million rationalization credit and recorded those
assets in our Consolidated Balance Sheets at their depreciated cost, which
approximated fair value.
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) and for the years ended December 31 are
summarized as follows:
2003 2002 2001
---- ---- ----
(Dollars in thousands)
2003 Rationalization plans ................ $8,993 $ -- $ --
Fairfield plan ............................ -- (237) 3,490
Northtown, Kingsburg and Waukegan plans ... -- (3,041) 7,033
San Leandro and City of Industry plans .... -- -- (1,189)
Other assets .............................. -- (2,325) --
------ ------- -------
$8,993 $(5,603) $ 9,334
====== ======= =======
F-16
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
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:
2003 2002
---- ----
(Dollars in thousands)
Accrued liabilities ....... $5,572 $1,813
Other liabilities ......... 1,587 1,647
------ ------
$7,159 $3,460
====== ======
Note 4. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in our Consolidated
Statements of Stockholders' Equity (Deficiency). Amounts included in accumulated
other comprehensive income (loss) at December 31 are as follows:
2003 2002
---- ----
(Dollars in thousands)
Foreign currency translation .............. $ 4,635 $ (1,998)
Change in fair value of derivatives ....... (761) (2,814)
Minimum pension liability ................. (9,549) (15,655)
------- --------
Accumulated other comprehensive loss .... $(5,675) $(20,467)
======= ========
The amount reclassified to earnings from the change in fair value of derivatives
component of accumulated other comprehensive income (loss) for the year ended
December 31, 2003, 2002 and 2001 was net losses of $2.2 million, $5.0 million
and $2.7 million, net of income taxes, respectively.
We estimate that we will reclassify $3.9 million, net of income taxes, of the
change in fair value of derivatives component of accumulated other comprehensive
income (loss) as a charge to earnings during the next twelve months. The actual
amount that will be reclassified to earnings will vary from this amount as a
result of changes in market conditions. See Note 10 which includes a discussion
of hedging activities.
For the year ended December 31, 2002, the foreign currency translation and
minimum pension liability components of accumulated other comprehensive income
(loss) included $0.4 million and $5.6 million, respectively, related to our
equity investment in White Cap. See Note 8 which includes a discussion of our
equity investment in White Cap.
F-17
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 5. Inventories
The components of inventories at December 31 are as follows:
2003 2002
---- ----
(Dollars in thousands)
Raw materials ................... $ 36,732 $ 31,925
Work-in-process ................. 52,815 50,941
Finished goods .................. 213,481 171,341
Spare parts and other ........... 20,267 13,944
-------- --------
323,295 268,151
Adjustment to value inventory
at cost on the LIFO method ... (3,101) 4,685
-------- --------
$320,194 $272,836
======== ========
Inventories include $30.3 million and $23.6 million recorded on the first-in,
first-out method at December 31, 2003 and 2002, respectively.
Note 6. Property, Plant and Equipment, Net
Property, plant and equipment, net, at December 31 is as follows:
2003 2002
---- ----
(Dollars in thousands)
Land .................................... $ 10,060 $ 7,943
Buildings and improvements .............. 168,236 135,499
Machinery and equipment ................. 1,309,756 1,120,617
Construction in progress ................ 60,068 80,626
---------- ----------
1,548,120 1,344,685
Accumulated depreciation ................ (730,270) (638,939)
---------- ----------
Property, plant and equipment, net ... $ 817,850 $ 705,746
========== ==========
F-18
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 7. Other Assets
Other assets at December 31 are as follows:
2003 2002
---- ----
(Dollars in thousands)
Debt issuance costs ............ $24,505 $31,121
Intangible pension asset ....... 16,416 10,349
Other .......................... 19,330 21,784
------- -------
60,251 63,254
Accumulated amortization ....... (4,736) (5,855)
------- -------
$55,515 $57,399
======= =======
Note 8. Investments in Equity Affiliates
Amcor White Cap, LLC
- --------------------
Effective July 1, 2001, we formed a joint venture company with Schmalbach-Lubeca
AG. The joint venture was a leading supplier of an extensive range of metal and
plastic closures to consumer goods packaging companies in the food and beverage
industries in North America. The venture operated under the name Amcor White
Cap, LLC. We contributed $48.4 million of metal closure assets, including our
manufacturing facilities in Evansville and Richmond, Indiana, and $7.1 million
of metal closure liabilities to White Cap in return for a 35 percent interest in
and $32.4 million of cash proceeds from the joint venture. Net sales of our
metal closure business, which was contributed to the White Cap joint venture,
totaled $46.3 million in 2001. Schmalbach-Lubeca AG contributed the remaining
metal and plastic closure operations to the joint venture. In July 2002, Amcor
Ltd. purchased Schmalbach-Lubeca AG's interest in the joint venture.
As discussed in Note 2, in March 2003, we acquired the remaining 65 percent
equity interest in the White Cap joint venture that we did not already own. The
business now operates under the name Silgan Closures LLC, or Silgan Closures.
Prior to our acquisition of White Cap, we accounted for our investment in the
White Cap joint venture using the equity method. For the first two months of
2003, we recorded equity in losses of White Cap of $0.3 million, net of income
taxes. The results of Silgan Closures since March 2003 have been included with
the results of our metal food container business.
During 2002, we recorded equity in losses of White Cap of $2.6 million, net of
income taxes. As part of the integration of the contributed businesses, the
White Cap joint venture instituted a program to rationalize its operations. As a
result, our equity in losses of White Cap for 2002 included $2.0 million, net of
income taxes, for our portion of White Cap's rationalization charge to close its
Chicago, Illinois metal closure manufacturing facility and $0.7 million, net of
income taxes, for our portion of White Cap's gain on the sale of certain assets
at a price in excess of book value. During 2001, we recorded equity in losses of
White Cap of $0.3 million and a gain on the assets contributed to the joint
venture of $4.9 million.
F-19
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 8. Investments in Equity Affiliates (continued)
Packtion Corporation
- --------------------
In April 2000, we, together with Morgan Stanley Private Equity and
Diamondcluster International Inc., agreed to invest in Packtion Corporation, or
Packtion, an e-commerce joint venture aimed at integrating the packaging supply
chain from design through manufacturing and procurement. The parties agreed to
make the investments through Packaging Markets LLC, a limited liability company.
The joint venture was expected to provide a comprehensive online marketplace for
packaging goods and services and to combine content, tools and collaboration
capabilities to streamline the product development process and enhance
transaction opportunities for buyers and sellers of packaging. The products that
Packtion was developing included a web-based software tool to enable product and
package design, development and collaboration; an internet-based secure
environment enabling the sharing of packaging related product information and
the transaction of business electronically; and an informational source of
packaging related knowledge, tools and expert services. Packtion had
insignificant sales for internet consulting services and incurred net losses. We
accounted for our investment in Packtion using the equity method.
In June and August 2000, we invested a total of $7.0 million in Packtion
representing approximately a 45 percent interest in Packtion. In the first
quarter of 2001, in connection with an investment by The Proctor & Gamble
Company and E. I. Du Pont de Nemours & Co. in Packtion, we invested an
additional $3.1 million bringing our total investment to $10.1 million
representing approximately a 25 percent interest in Packtion. In connection with
this transaction, we also recorded a reduction to paid-in capital of $1.4
million due to the dilution of our investment. Packtion was dissolved on May 31,
2001, after its board of directors determined that there had been slower than
anticipated market acceptance of its business. During 2001, we recorded equity
in losses of Packtion aggregating $3.8 million, which included our final losses
and eliminated our investment.
F-20
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 9. Long-Term Debt
Long-term debt at December 31 is as follows:
2003 2002
---- ----
(Dollars in thousands)
Bank debt:
Bank revolving loans ................. $ 25,000 $ --
Bank A term loans .................... 83,330 100,000
Bank B term loans .................... 691,250 348,250
---------- --------
Total bank debt .................... 799,580 448,250
Subordinated debt:
6 3/4% Senior Subordinated Notes ..... 200,000 --
9% Senior Subordinated Debentures .... -- 505,575
Other ................................ 3,000 3,000
---------- --------
Total subordinated debt ............ 203,000 508,575
---------- --------
Total debt .............................. 1,002,580 956,825
Less current portion ................. 48,670 20,170
---------- --------
$ 953,910 $936,655
========== ========
The aggregate annual maturities of our debt are as follows (dollars in
thousands):
2004 ............ $ 48,670
2005 ............ 23,670
2006 ............ 23,670
2007 ............ 23,670
2008 ............ 682,900
Thereafter ...... 200,000
----------
$1,002,580
==========
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.
F-21
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 9. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
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, 2003 was $125 million.
The A term loans and revolving loans mature on June 28, 2008 and the B term
loans mature on November 30, 2008. Principal on the A term loans and B term
loans is required to be repaid in scheduled annual installments. During 2003, we
repaid $16.7 million of A term loans and $7.0 million of B term loans under the
Credit Agreement. During 2002, we repaid $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.
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.
F-22
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 9. Long-Term Debt (continued)
Bank Credit Agreement (continued)
- ---------------------
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, 2003, there were $25.0
million of revolving loans outstanding and, after taking into account letters of
credit of $22.9 million, borrowings available under the revolving credit
facility of the Credit Agreement were $352.1 million.
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 1.25 percent, and Eurodollar rate borrowings
bear interest at the Eurodollar rate plus a margin of 2.25 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, 2003, the interest
rate for Eurodollar rate borrowings was 3.5 percent. There were no base rate
borrowings outstanding at December 31, 2003. For 2003, 2002 and 2001, the
weighted average annual interest rate paid on term loans was 3.4 percent, 4.0
percent and 6.0 percent, respectively; and the weighted average annual interest
rate paid on revolving loans was 3.5 percent, 3.3 percent and 5.3 percent,
respectively. We have entered into interest rate swap agreements with an
aggregate notional amount of $550 million to convert interest rate exposure from
variable rates to fixed rates of interest. See Note 10 which includes a
discussion of the interest rate swap agreements.
The 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, 2003). 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 (2.25 percent at December 31, 2003) 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-23
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 9. 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, 2003, we had assets of a U.S. subsidiary of $135.2
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 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 packing season. Due to our seasonal requirements, we incur short-term
indebtedness to finance our working capital requirements. For 2003, 2002 and
2001, the average amount of revolving loans outstanding, including seasonal
borrowings, was $131.0 million, $258.8 million and $497.0 million, respectively;
and, after taking into account outstanding letters of credit, the highest amount
of such borrowings was $260.0 million, $485.3 million and $584.3 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-24
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 9. 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-25
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 10. Financial Instruments
The financial instruments recorded in our Consolidated Balance Sheets include
cash and cash equivalents, accounts receivable, accounts payable, debt
obligations and swap agreements. Due to their short-term maturity, the carrying
amounts of cash and cash equivalents, accounts receivable and accounts payable
approximate their fair market values. The following table summarizes the
carrying amounts and estimated fair values of our other financial instruments at
December 31 (bracketed amounts represent assets):
2003 2002
--------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Dollars in thousands)
Bank debt ....................... $799,580 $799,580 $448,250 $448,250
Subordinated debt ............... 200,000 199,250 505,575 518,750
Interest rate swap agreements ... 3,679 3,679 6,526 6,526
Natural gas swap agreements ..... (218) (218) (569) (569)
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 and 9% Debentures is
estimated based on quoted market prices.
Interest rate and natural gas swap agreements: The fair value of the interest
rate and natural gas swap agreements reflects the estimated amounts that we
would pay or receive at December 31, 2003 and 2002 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-26
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 10. 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 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 2003, 2002 and 2001, ineffectiveness
for our hedges reduced net income by $0.5 million, $0.2 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, 2003
and 2002 was recorded in our Consolidated Balance Sheets as 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) and $6.0 million ($5.6
million in other liabilities, $0.9 million in accrued interest payable and $0.5
million in other assets), respectively. See Note 4 which includes a discussion
of the effects of hedging activities on accumulated other comprehensive 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, 2003 and 2002, the aggregate notional
principal amount of these agreements was $550 million (including $100 million
notional principal amount that became effective on January 1, 2004) and $375
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 3.8 percent and receive floating rates of interest based on three month
LIBOR. These agreements mature as follows: $250 million notional principal
amount in 2004 and $100 million notional principal amount in each of 2005, 2007
and 2008. The difference between amounts to be paid or received on interest rate
swap agreements is recorded as interest expense. Net payments of $4.8 million,
$7.2 million and $2.0 million were made under these interest rate swap
agreements for the years ended December 31, 2003, 2002 and 2001, respectively.
F-27
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 10. 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 40
percent and 80 percent of our exposure to fluctuations in natural gas prices in
2003 and 2002, respectively. At December 31, 2003 and 2002, the aggregate
notional principal amount of these agreements was 0.7 million and 0.9 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 $4.18 to
$5.46 per MMBtu and receive a NYMEX-based natural gas price. These agreements
mature in 2004 (0.6 million MMBtu notional principal amount) and 2005 (0.1
million MMBtu notional principal amount). Gains and losses on these natural gas
swap agreements are deferred and recognized when the related costs are recorded
to cost of goods sold. Payments received under these natural gas swap agreements
were $1.2 million during 2003. Payments made under these natural gas swap
agreements were $1.2 million and $1.3 million during 2002 and 2001,
respectively.
Concentration of Credit Risk
- ----------------------------
We derive a significant portion of our revenue from multi-year supply agreements
with many of our customers. Aggregate revenues from our three largest customers
accounted for approximately 33.0 percent, 34.9 percent and 33.6 percent of our
net sales in 2003, 2002 and 2001, respectively. The receivable balances from
these customers collectively represented 32.4 percent and 27.4 percent of our
trade accounts receivable at December 31, 2003 and 2002, respectively. As is
common in the packaging industry, we provide extended payment terms to some of
our customers due to the seasonality of the vegetable and fruit pack processing
business. Exposure to losses is dependent on each customer's financial position.
We perform ongoing credit evaluations of our customers' financial condition, and
our receivables are generally not collateralized. We maintain an allowance for
doubtful accounts which we believe is adequate to cover potential credit losses
based on customer credit evaluations, collection history and other information.
F-28
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 11. Commitments and Contingencies
We have a number of noncancelable operating leases for office and plant
facilities, equipment and automobiles that expire at various dates through 2020.
Certain operating leases have renewal options as well as various purchase
options. Minimum future rental payments under these leases are as set forth
below for each of the following years (dollars in thousands):
2004 ............ $ 23,806
2005 ............ 21,102
2006 ............ 18,504
2007 ............ 14,812
2008 ............ 9,158
Thereafter ...... 31,696
--------
$119,078
========
Rent expense was approximately $27.6 million, $23.5 million and $22.8 million
for the years ended December 31, 2003, 2002 and 2001, respectively.
We are a party to routine legal proceedings arising in the ordinary course of
our business. We are not a party to, and none of our properties are subject to,
any pending legal proceedings which could have a material adverse effect on our
business or financial condition.
Note 12. 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-29
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 12. Retirement Benefits (continued)
The changes in benefit obligations and plan assets as well as the funded status
of our retirement plans at December 31 are as follows:
Other
Pension Benefits Postretirement Benefits
------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
(Dollars in thousands)
Change in Benefit Obligation
Obligation at beginning of year ..................... $156,295 $137,488 $ 53,755 $ 50,674
Service cost ..................................... 10,047 7,787 2,264 1,385
Interest cost .................................... 17,757 10,018 5,121 3,584
Actuarial losses ................................. 32,015 5,307 13,689 1,127
Plan amendments .................................. 12,159 865 -- (71)
Benefits paid .................................... (15,252) (5,170) (4,869) (3,252)
Participants' contributions ...................... -- -- 696 308
Acquisitions ..................................... 109,775 -- 22,221 --
-------- -------- -------- --------
Obligation at end of year ........................... 322,796 156,295 92,877 53,755
Change in Plan Assets
Fair value of plan assets at
beginning of year ................................. 112,795 99,960 -- --
Actual return on plan assets ..................... 40,913 (5,986) -- --
Employer contributions ........................... 42,584 24,970 4,173 2,944
Participants' contributions ...................... -- -- 696 308
Benefits paid .................................... (15,252) (5,170) (4,869) (3,252)
Acquisitions ..................................... 74,763 -- -- --
Expenses ......................................... (1,245) (979) -- --
-------- -------- -------- --------
Fair value of plan assets at end of year ............ 254,558 112,795 -- --
Funded Status
Funded Status ....................................... (68,238) (43,500) (92,877) (53,755)
Unrecognized actuarial loss ...................... 37,559 30,474 20,629 6,781
Unrecognized prior service cost .................. 22,831 14,504 29 34
-------- -------- -------- --------
Net (liability) asset recognized .................... $ (7,848) $ 1,478 $(72,219) $(46,940)
======== ======== ======== ========
Amounts recognized in the Consolidated
Balance Sheets
Prepaid benefit cost ............................. $ 21,199 $ 16,516 $ -- $ --
Accrued benefit cost ............................. (61,273) (41,958) (72,219) (46,940)
Intangible asset ................................. 16,416 10,349 -- --
Accumulated other comprehensive loss ............. 15,810 16,571 -- --
-------- -------- -------- --------
Net (liability) asset recognized .................... $ (7,848) $ 1,478 $(72,219) $(46,940)
======== ======== ======== ========
F-30
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 12. Retirement Benefits (continued)
The accumulated benefit obligation for all defined benefit plans at December 31,
2003 and 2002 was $295.8 million and $136.3 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 $263.2 million, $242.4 million and $200.4 million,
respectively, at December 31, 2003 and $156.3 million, $136.3 million and $112.8
million, respectively, at December 31, 2002.
Our principal pension and other postretirement benefit plans used the following
weighted average actuarial assumptions to determine the benefit obligations at
December 31:
2003 2002
---- ----
Discount rate ...................... 6.25% 7.00%
Expected return on plan assets ..... 9.00% 9.00%
Rate of compensation increase ...... 3.30% 3.60%
Health care cost trend rate:
Assumed for next year ........... 10% 11%
Ultimate rate ................... 5% 5%
Year that the ultimate rate
is reached ................... 2009 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.
The components of the net periodic benefit cost for each of the years ended
December 31 are as follows:
Other
Pension Benefits Postretirement Benefits
---------------------------------- ----------------------------
2003 2002 2001 2003 2002 2001
---- ---- ---- ---- ---- ----
(Dollars in thousands)
Service cost ..................................... $ 10,047 $ 7,787 $ 7,653 $2,264 $1,385 $1,778
Interest cost .................................... 17,757 10,018 9,472 5,121 3,584 3,640
Expected return on plan assets ................... (15,337) (9,144) (8,754) -- -- --
Amortization of prior service cost ............... 2,802 2,164 2,108 5 5 15
Amortization of actuarial losses (gains) ......... 1,372 58 (93) 320 57 23
Settlement or curtailment loss ................... 149 -- 151 -- -- --
-------- ------- ------- ------ ------ ------
Net periodic benefit cost ........................ $ 16,790 $10,883 $10,537 $7,710 $5,031 $5,456
======== ======= ======= ====== ====== ======
F-31
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 12. Retirement Benefits (continued)
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:
2003 2002 2001
---- ---- ----
Discount rate ...................... 7.00% 7.25% 7.50%
Expected return on plan assets ..... 9.00% 9.00% 9.00%
Rate of compensation increase ...... 3.60% 3.60% 3.75%
Health care cost trend rate ........ 11% 9% 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 ............. $ 957 $ (762)
Effect on postretirement benefit obligation ..... 9,693 (8,102)
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.
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." Specific authoritative
guidance on the accounting for the federal subsidy is pending, and therefore we
have elected to defer accounting for the effects of the Act as permitted by FSP
No. 106-1. As a result, in accordance with FSP No. 106-1, our accumulated
postretirement benefit obligation and net periodic postretirement benefit costs
do not reflect the effects of the Act on the plans. Specific authoritative
guidance, when issued, could require us to change previously reported
information.
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 2003, 2002 and 2001 were $5.7 million, $4.7
million and $4.6 million, respectively.
F-32
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 12. Retirement Benefits (continued)
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 $7.7 million in 2003, $6.4 million in 2002 and $6.2
million in 2001.
Plan Assets
- -----------
The weighted-average asset allocation for our pension plans at December 31 was
as follows:
2003 2002
---- ----
Equity securities ............ 57% 50%
Debt securities .............. 40% 36%
Cash and cash equivalents .... 3% 14%
---- ----
100% 100%
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, 2003 and 2002, the timing of our cash
contributions resulted in a higher than targeted investment in cash and cash
equivalents.
Based on current tax law, the minimum required contributions to our pension
plans are expected to be approximately $6.1 million in 2004. However, this
estimate 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. It has been our practice to make contributions in
accordance with ERISA minimum requirements, except that under certain
circumstances we may make contributions, up to the extent they are tax
deductible, in excess of the minimum amounts required in order to reduce our
unfunded pension liability.
F-33
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 13. Income Taxes
The components of the provision for income taxes are as follows:
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Current:
Federal ................................. $(1,081) $ 5,527 $11,618
State ................................... (194) 843 1,372
Foreign ................................. 3,100 3,549 3,380
------- ------- -------
Current income tax provision ........ 1,825 9,919 16,370
Deferred:
Federal ................................. 22,885 22,825 12,378
State ................................... 2,763 2,325 2,182
Foreign ................................. 94 69 (708)
------- ------- -------
Deferred income tax provision ....... 25,742 25,219 13,852
------- ------- -------
$27,567 $35,138 $30,222
======= ======= =======
The provision for income taxes is included in our Consolidated Statements of
Income as follows:
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Income before equity in losses of affiliates ... $27,743 $36,806 $30,222
Equity in losses of affiliates ................. (176) (1,668) --
------- ------- -------
$27,567 $35,138 $30,222
======= ======= =======
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:
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Income taxes computed at the statutory
U.S. federal income tax rate ............... $24,360 $31,131 $26,644
State income taxes, net of federal
tax benefit ................................ 3,174 3,148 2,702
Tax liabilities no longer required ............. (2,420) -- --
Amortization of goodwill ....................... -- -- 1,309
Valuation allowance ............................ 1,488 -- --
Other .......................................... 965 859 (433)
------- ------- -------
$27,567 $35,138 $30,222
======= ======= =======
Effective tax rate ............................... 39.6% 39.5% 39.7%
F-34
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 13. 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:
2003 2002
---- ----
(Dollars in thousands)
Deferred tax assets:
Pension and postretirement liabilities ........... $ 35,421 $ 25,394
Rationalization and other accrued liabilities .... 22,247 16,863
AMT and other credit carryforwards ............... 30,089 30,272
Net operating loss carryforwards ................. 27,251 29,226
Other ............................................ 27,334 10,897
--------- ---------
Total deferred tax assets .................... 142,342 112,652
Deferred tax liabilities:
Property, plant and equipment .................... (134,588) (115,494)
Other ............................................ (9,838) (11,998)
--------- ---------
Total deferred tax liabilities ............... (144,426) (127,492)
--------- ---------
Valuation allowance ................................... (18,713) (6,878)
--------- ---------
Net deferred tax liability ............................ $ (20,797) $ (21,718)
========= =========
At December 31, 2003 and 2002, the net deferred tax liability in our
Consolidated Balance Sheets is comprised of current deferred tax assets of $39.7
million and $29.5 million, respectively, and long-term deferred tax liabilities
of $60.5 million and $51.3 million, respectively.
The valuation allowance in 2003 includes deferred tax assets of $10.3 million
resulting from operations acquired. Subsequent recognition of these tax
benefits, if any, will be allocated to reduce goodwill of the acquired
operations. The valuation allowance also includes current year losses of certain
foreign operations of $1.5 million, capital loss carryforwards of $4.1 million
and state and local net operating loss and credit carryforwards totaling $2.8
million.
F-35
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 13. Income Taxes (continued)
We file a consolidated U.S. federal income tax return that includes all domestic
subsidiaries except CS Can and Silgan Equipment, which file separate
consolidated U.S. federal income tax returns. At December 31, 2003, we had net
operating loss carryforwards, or NOLs, of approximately $5.2 million that are
available to offset future consolidated taxable income (excluding CS Can and
Silgan Equipment) and that expire in 2012. At December 31, 2003, CS Can had NOLs
of approximately $53.7 million that are available to offset its future taxable
income and that expire from 2019 through 2022. We believe that it is more likely
than not that these NOLs will be available to reduce future income tax
liabilities based upon estimated future taxable income and the reversal of
temporary differences in future periods.
At December 31, 2003, we had $26.0 million of alternative minimum tax credits
and CS Can has $0.3 million of alternative minimum tax credits which are
available indefinitely to reduce future income tax payments. We also had state
tax NOLs of approximately $5.2 million that are available to offset future
taxable income and that expire from 2004 to 2022.
Pre-tax income of our Canadian subsidiaries was $9.4 million in 2003, $11.1
million in 2002 and $10.7 million in 2001. At December 31, 2003, approximately
$36.3 million of accumulated earnings of our Canadian subsidiaries are expected
to be permanently reinvested. Accordingly, applicable U.S. federal income taxes
have not been provided. Determination of the amount of unrecognized deferred
U.S. income tax liability is not practicable to estimate.
Note 14. Stock Option Plans
We have established a stock option plan, or the Plan, for key employees pursuant
to which options to purchase shares of our common stock may be granted. The Plan
authorizes grants of non-qualified or incentive stock options to purchase shares
of our common stock. A maximum of 3,533,417 shares may be issued for stock
options under the Plan. As of December 31, 2003, there were options for 496,374
shares of our common stock available for future issuance under the Plan. The
exercise price of the stock options granted under the Plan is the fair market
value of our common stock on the grant date. The stock options granted under the
Plan generally vest ratably over a four to five year period beginning one year
after the grant date and have a term of seven to ten years.
We have also established a stock option plan, or the Directors' Plan, for
non-employee directors pursuant to which options to purchase shares of our
common stock may be granted. The Directors' Plan authorizes grants of
non-qualified stock options to purchase shares of our common stock. A maximum of
60,000 shares may be issued for stock options under the Directors' Plan. As of
December 31, 2003, there were options for 51,000 shares of our common stock
available for future issuance under the Directors' Plan. The exercise price of
the stock options granted under the Directors' Plan is the fair market value of
our common stock on the grant date. The stock options granted under the
Directors' Plan generally vest six months after the grant date and have a term
of ten years.
F-36
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 14. Stock Option Plans (continued)
The following is a summary of stock option activity for years ended December 31,
2003, 2002 and 2001:
Weighted Average
Options Exercise Price
------- ----------------
Options outstanding at December 31, 2000 ..... 1,188,465 $12.71
=========
Granted ................................. 100,000 $20.76
Exercised ............................... (150,773) 6.82
Canceled ................................ -- --
---------
Options outstanding at December 31, 2001 ..... 1,137,692 14.20
=========
Granted ................................. 151,440 $37.89
Exercised ............................... (377,172) 11.41
Canceled ................................ (144,600) 15.57
---------
Options outstanding at December 31, 2002 ..... 767,360 19.99
=========
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
=========
At December 31, 2003, 2002 and 2001, the remaining contractual life of options
outstanding was 6.7 years, 7.4 years and 7.0 years, respectively, and there were
346,048, 220,280 and 402,372 options exercisable with weighted average exercise
prices of $18.71, $17.88 and $12.26, respectively.
The following is a summary of stock options outstanding and exercisable at
December 31, 2003 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
-------- ------ ------------ -------------- ------ --------------
$ 7.25 - $ 9.81 42,000 6.6 $ 8.84 19,600 $ 8.77
11.63 - 17.00 402,920 6.1 14.26 206,360 14.35
20.25 - 30.19 175,500 6.6 22.31 80,500 22.99
31.90 - 42.22 306,440 7.6 35.50 39,588 37.67
------- -------
926,860 346,048
======= =======
The weighted average fair value of options granted was $16.08, $25.49 and $14.01
for 2003, 2002 and 2001, respectively.
F-37
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 14. Stock Option Plans (continued)
The fair value was calculated using the Black-Scholes option-pricing model based
on the following weighted average assumptions for grants made in 2003, 2002 and
2001:
2003 2002 2001
---- ---- ----
Risk-free interest rate .......... 3.7% 5.4% 4.5%
Expected volatility .............. 56.7% 59.6% 60.3%
Dividend yield ................... -- -- --
Expected option life (years) ..... 6 8 8
Note 15. Capital Stock
Our authorized capital stock consists of 100,000,000 shares of common stock, par
value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01
per share.
Our Board of Directors previously authorized the repurchase of up to $70.0
million of our common stock from time to time in the open market, through
privately negotiated transactions or through block purchases. Our repurchases of
common stock are recorded as treasury stock and result in a charge to
stockholders' equity. As of December 31, 2003, we had repurchased 2,708,975
shares of our common stock for $61.0 million.
Note 16. Earnings Per Share
The components of the calculation of earnings per share are as follows:
2003 2002 2001
---- ---- ----
(Dollars and shares in thousands)
Net income ........................................ $42,034 $53,808 $41,765
======= ======= =======
Weighted average number of shares used in:
Basic earnings per share ...................... 18,249 18,135 17,777
Assumed exercise of employee stock options .... 165 242 304
------ ------ ------
Diluted earnings per share .................... 18,414 18,377 18,081
====== ====== ======
Options to purchase 135,940 to 233,440 shares of common stock at prices ranging
from $22.13 to $42.22 per share for 2003, 16,494 to 174,223 shares of common
stock at prices ranging from $25.15 to $42.22 per share for 2002 and 172,826 to
842,289 shares of common stock at prices ranging from $11.63 to $36.75 per share
for 2001 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.
F-38
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 17. 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 Chairman and
Co-Chief Executive Officer of Holdings, and D. Greg Horrigan, the President 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 and 2001, 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 and $5.1 million to
S&H under the Management Agreements in 2002 and 2001, respectively. These
payments to S&H were allocated, based upon EBDIT, as a charge to income from
operations of each of our business segments.
During 2001, The Morgan Stanley Leveraged Equity Fund II, L.P., an affiliate of
Morgan Stanley & Co. Incorporated, or Morgan Stanley, held a significant amount
of our common stock. Additionally, Mr. Abramson, a Managing Director of Morgan
Stanley, served as a director of Holdings until July 2003. In 2001, we paid
Morgan Stanley $0.5 million for financial advisory services. In 2003, 2002 and
2001, we entered into natural gas swap agreements with Morgan Stanley Capital
Group, Inc., or MSCG, an affiliate of Morgan Stanley, for an aggregate notional
principal amount of 0.8 million, 0.8 million and 1.0 million MMBtu of natural
gas. During 2003, 2002 and 2001, an aggregate notional principal amount of 0.9
million, 0.9 million and 0.1 million MMBtu, respectively, 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 and 2001. 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 $1.1 million, $0.4 million and $0.7 million in 2003, 2002 and
2001, respectively. Mr. Crowe, a director of Holdings, is the Chairman of the
Board, President and Chief Executive Officer of Landstar System, Inc.
F-39
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 18. 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 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.
After contributing our metal closures business to the White Cap joint venture in
2001, we reported the results of that business separately for periods prior to
the formation of White Cap. After our acquisition of White Cap in 2003, we
report the results of Silgan Closures as part of our metal food container
business. Therefore, for 2001 we have included the results of the metal closures
business with our metal food container business.
F-40
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 18. 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
------------- ------------- --------- -----
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
2001
- ----
Net sales ............................... $1,447,396 $493,598 $ -- $1,940,994
Depreciation and amortization ........... 57,572 37,864 95 95,531
Segment income from operations .......... 111,628 45,992 (5,209) 152,411
Segment assets .......................... 856,336 454,104 -- 1,310,440
Capital expenditures .................... 55,630 37,340 72 93,042
- -------------------------------
(1) Segment income from operations for the metal food container business
includes rationalization charges of $1.2 million in 2003, rationalization
credits of $5.4 million in 2002 and net rationalization charges of $5.8
million in 2001. Depreciation and amortization and segment income from
operations include goodwill amortization of $2.3 million in 2001.
(2) Segment income from operations for the plastic container business includes
rationalization charges of $7.8 million in 2003, a rationalization credit
of $0.2 million in 2002 and a rationalization charge of $3.5 million in
2001. Depreciation and amortization and segment income from operations
include goodwill amortization of $2.7 million in 2001.
F-41
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 18. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income taxes
and equity in losses of affiliates as follows:
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Total segment income from operations ...... $168,092 $167,940 $152,411
Interest and other debt expense ........... 98,034 74,772 81,192
Gain on assets contributed to affiliate ... -- -- 4,908
-------- -------- --------
Income before income taxes and
equity in losses of affiliates ... $ 70,058 $ 93,168 $ 76,127
======== ======== ========
Total segment assets at December 31 are reconciled to total assets as follows:
2003 2002
---- ----
(Dollars in thousands)
Total segment assets ......... $1,581,311 $1,374,177
Other assets ................. 39,773 29,781
---------- ----------
Total assets ............ $1,621,084 $1,403,958
========== ==========
Financial information relating to our operations by geographic area is as
follows:
2003 2002 2001
---- ---- ----
(Dollars in thousands)
Net sales:
United States .................... $2,241,204 $1,928,058 $1,882,114
Canada ........................... 65,419 60,226 58,880
Mexico ........................... 5,542 -- --
---------- ---------- ----------
Total net sales ................ $2,312,165 $1,988,284 $1,940,994
========== ========== ==========
Long-lived assets:
United States .................... $ 985,591 $ 824,571
Canada ........................... 28,058 22,656
Mexico ........................... 6,622 --
---------- ----------
Total long-lived assets ........ $1,020,271 $ 847,227
========== ==========
F-42
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 18. Business Segment Information (continued)
Net sales are attributed to the country from which the product was manufactured
and shipped.
Sales of our metal food containers segment to Nestle Food Company accounted for
9.5 percent, 12.1 percent and 10.8 percent of our consolidated net sales during
2003, 2002 and 2001, respectively. Sales of our metal food containers segment to
Campbell Soup Company accounted for 11.1 percent, 11.4 percent and 12.2 percent
of our consolidated net sales during 2003, 2002 and 2001, respectively. Sales of
our metal food containers segment to Del Monte Corporation accounted for 10.8
percent, 9.9 percent, and 10.1 percent of our consolidated net sales during
2003, 2002 and 2001, respectively.
F-43
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 19. Quarterly Results of Operations (Unaudited)
The following table presents our quarterly results of operations for the years
ended December 31, 2003 and 2002:
First Second Third Fourth
----- ------ ----- ------
(Dollars in thousands, except per share data)
2003 (1)
- --------
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)
2002 (2)
- --------
Net sales .................................. $424,256 $456,249 $640,854 $466,925
Gross profit ............................... 52,487 57,427 81,234 47,405
Net income ................................. 11,343 10,075 26,198 6,192
Basic net income per share (3) ............. $0.63 $0.56 $1.44 $0.34
Diluted net income per share (3) ........... 0.62 0.55 1.42 0.34
- -------------------------
(1) Net income for the third and fourth quarters of 2003 includes
rationalization charges of $7.6 million and $1.4 million, respectively. Net
income 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.
(2) Net income for the first, third and fourth quarters of 2002 includes
rationalization credits of $2.3 million, $2.6 million and $0.7 million,
respectively. Net income for the second quarter of 2002 includes a loss on
early extinguishment of debt of $1.0 million.
(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-44
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED BALANCE SHEETS
December 31, 2003 and 2002
(Dollars in thousands)
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents ................... $ 62 $ 62
Notes receivable - subsidiaries ............. 23,670 20,170
Interest receivable - subsidiaries .......... 2,445 3,792
Other current assets ........................ 8,517 4,297
---------- ----------
Total current assets ...................... 34,694 28,321
Notes receivable - subsidiaries ................ 950,910 933,655
Investment in and amounts due from
subsidiaries ................................ 111,321 49,838
Other assets ................................... 23,853 31,636
---------- ----------
$1,120,778 $1,043,450
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt ........... $ 23,670 $ 20,170
Accrued interest payable .................... 2,445 3,792
Accounts payable and accrued liabilities .... 4,169 736
---------- ----------
Total current liabilities ................. 30,284 24,698
Long-term debt ................................. 950,910 933,655
Other liabilities .............................. 18,779 22,005
Stockholders' equity:
Common stock ................................ 210 209
Paid-in capital ............................. 125,758 124,872
Retained earnings ........................... 60,905 18,871
Accumulated other comprehensive loss ........ (5,675) (20,467)
Treasury stock at cost (2,685,475 shares) ... (60,393) (60,393)
---------- ----------
Total stockholders' equity ................ 120,805 63,092
---------- ----------
$1,120,778 $1,043,450
========== ==========
See notes to condensed financial statements.
F-45
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED STATEMENTS OF INCOME
For the years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---- ---- ----
Net sales .............................................. $ -- $ -- $ --
Cost of goods sold ..................................... -- -- --
------- ------- -------
Gross profit ...................................... -- -- --
Selling, general and administrative expenses ........... 5,557 4,495 4,879
------- ------- -------
Loss from operations .............................. (5,557) (4,495) (4,879)
Interest and other debt expense ........................ -- -- --
------- ------- -------
Loss before income taxes, equity in losses
of affiliate and equity in earnings of
consolidated subsidiaries ................. (5,557) (4,495) (4,879)
Benefit from income taxes .............................. (2,201) (1,779) (1,937)
------- ------- -------
Loss before equity in losses of affiliate
and equity in earnings of consolidated
subsidiaries ................................... (3,356) (2,716) (2,942)
Equity in losses of affiliate .......................... -- -- (3,804)
------- ------- -------
Loss before equity in earnings
of consolidated subsidiaries .................... (3,356) (2,716) (6,746)
Equity in earnings of consolidated subsidiaries ........ 45,390 56,524 48,511
------- ------- -------
Net income $42,034 $53,808 $41,765
======= ======= =======
See notes to condensed financial statements.
F-46
SILGAN HOLDINGS INC. (Parent Company)
CONDENSED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2003, 2002 and 2001
(Dollars in thousands)
2003 2002 2001
---- ---- ----
Cash flows provided by (used in) operating activities:
Net income .................................................... $ 42,034 $ 53,808 $ 41,765
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Equity in earnings of consolidated subsidiaries ......... (45,390) (56,524) (48,511)
Equity in losses of affiliate ........................... -- -- 3,804
Deferred income tax benefit ............................. (2,201) (1,779) (1,937)
Changes in other assets and liabilities, net ............ 4,910 (360) 7,047
--------- --------- --------
Net cash (used in) provided by operating activities ..... (647) (4,855) 2,168
--------- --------- --------
Cash flows provided by (used in) investing activities:
Notes receivable - subsidiaries ............................... (26,330) (347,824) 41,758
Investment in equity affiliate ................................ -- -- (3,039)
--------- --------- --------
Net cash (used in) provided by investing activities ..... (26,330) (347,824) 38,719
--------- --------- --------
Cash flows provided by (used in) financing activities:
Proceeds from issuance of long-term debt ...................... 550,000 656,000 --
Repayments of long-term debt .................................. (523,670) (307,751) (41,758)
Proceeds from stock option exercises .......................... 647 4,303 1,028
--------- --------- --------
Net cash provided by (used in) financing activities ..... 26,977 352,552 (40,730)
--------- --------- --------
Cash and cash equivalents:
Net (decrease) increase ....................................... -- (127) 157
Balance at beginning of year .................................. 62 189 32
--------- --------- --------
Balance at end of year ........................................ $ 62 $ 62 $ 189
========= ========= ========
See notes to condensed financial statements.
F-47
SILGAN HOLDINGS INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 1. Basis of Presentation
Silgan Holdings Inc., or Holdings or the Parent Company, has two wholly owned
subsidiaries, Silgan Containers Corporation, or Containers, and Silgan Plastics
Corporation, or Plastics. Holdings' investment in its subsidiaries is stated at
cost plus its share of the undistributed earnings/losses of its subsidiaries.
The Parent Company's financial statements should be read in conjunction with our
Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K.
Note 2. Long-Term Debt
Long-term debt at December 31 is as follows:
2003 2002
---- ----
(Dollars in thousands)
Bank debt:
Bank A term loans ......................... $ 83,330 $100,000
Bank B term loans ......................... 691,250 348,250
-------- --------
Total bank debt ......................... 774,580 448,250
Subordinated debt:
6 3/4% Senior Subordinated Notes .......... 200,000 --
9% Senior Subordinated Debentures ......... -- 505,575
-------- --------
Total subordinated debt ................. 200,000 505,575
Total debt ................................... 974,580 953,825
Less current portion ...................... 23,670 20,170
-------- --------
$950,910 $933,655
======== ========
F-48
SILGAN HOLDINGS INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
December 31, 2003, 2002 and 2001
Note 2. Long-Term Debt (continued)
The aggregate annual maturities of long-term debt at December 31, 2003 are as
follows (dollars in thousands):
2004 ............ $ 23,670
2005 ............ 23,670
2006 ............ 23,670
2007 ............ 23,670
2008 ............ 679,900
Thereafter ...... 200,000
---------
$974,580
========
As of December 31, 2003 and 2002, the obligations of Holdings had been pushed
down to its subsidiaries. In 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, 2003, 2002 and 2001, Holdings did not receive
any cash dividends from its consolidated subsidiaries accounted for by the
equity method.
F-49
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SILGAN HOLDINGS INC.
For the years ended December 31, 2003, 2002 and 2001
(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, 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
====== ====== ==== ======= ======
For the year ended December 31, 2001:
Allowance for doubtful
accounts receivable ......................... $3,001 $1,697 $(10) $(1,239)(1) $3,449
====== ====== ==== ======= ======
(1) Uncollectible accounts written off, net of recoveries.
F-50
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ----------- -------
+10.19 Silgan Holdings Inc. Senior Executive Performance Plan.
12 Computation of Ratio of Earnings to Fixed Charges for the
years ended December 31, 2003, 2002, 2001, 2000 and 1999.
14 Code of Ethics applicable to Silgan Holdings' principal
executive officers, principal financial officer, principal
accounting officer or controller or persons performing
similar functions.
21 Subsidiaries of the Registrant.
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.