UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the quarterly period ended June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________________ to ________________
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1269834
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4 Landmark Square
Stamford, Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
(203)975-7110
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of July 31, 2004, the number of shares outstanding of the Registrant's common
stock, $0.01 par value, was 18,377,642.
SILGAN HOLDINGS INC.
TABLE OF CONTENTS
Page No.
--------
Part I. Financial Information 3
Item 1. Financial Statements 3
Condensed Consolidated Balance Sheets at 3
June 30, 2004 and 2003 and December 31, 2003
Condensed Consolidated Statements of Income for 4
the three months ended June 30, 2004 and 2003
Condensed Consolidated Statements of Income for 5
the six months ended June 30, 2004 and 2003
Condensed Consolidated Statements of Cash Flows for 6
the six months ended June 30, 2004 and 2003
Condensed Consolidated Statements of Stockholders' 7
Equity for the six months ended June 30, 2004
and 2003
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 27
Risk
Item 4. Controls and Procedures 28
Part II. Other Information 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29
Signatures 30
Exhibit Index 31
-2-
Part I. Financial Information
Item 1. Financial Statements
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited, see Note 1)
June 30, June 30, Dec. 31,
2004 2003 2003
---- ---- ----
Assets
Current assets
Cash and cash equivalents ................... $ 23,908 $ 10,167 $ 12,100
Trade accounts receivable, net .............. 258,753 232,256 159,273
Inventories ................................. 439,270 439,819 320,194
Prepaid expenses and other current assets ... 44,491 39,172 53,731
---------- ---------- ----------
Total current assets .................... 766,422 721,414 545,298
Property, plant and equipment, net ............... 802,671 818,264 817,850
Goodwill, net .................................... 204,512 218,221 202,421
Other assets ..................................... 59,885 57,182 55,515
---------- ---------- ----------
$1,833,490 $1,815,081 $1,621,084
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Bank revolving loans ........................ $ 226,900 $ 170,900 $ 25,000
Current portion of long-term debt ........... 23,670 46,926 23,670
Trade accounts payable ...................... 168,363 152,082 211,639
Accrued payroll and related costs ........... 69,145 68,003 65,940
Accrued liabilities ......................... 42,360 39,457 24,518
---------- ---------- ----------
Total current liabilities ............... 530,438 477,368 350,767
Long-term debt ................................... 953,910 1,059,564 953,910
Other liabilities ................................ 194,933 190,684 195,602
Stockholders' equity
Common stock ................................ 211 209 210
Paid-in capital ............................. 128,455 125,009 125,758
Retained earnings ........................... 87,473 36,575 60,905
Accumulated other comprehensive loss ........ (1,433) (13,935) (5,675)
Unamortized stock compensation .............. (104) -- --
Treasury stock .............................. (60,393) (60,393) (60,393)
---------- ---------- ----------
Total stockholders' equity .............. 154,209 87,465 120,805
---------- ---------- ----------
$1,833,490 $1,815,081 $1,621,084
========== ========== ==========
See accompanying notes.
-3-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2004 and 2003
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2004 2003
---- ----
Net sales .......................................... $551,311 $545,240
Cost of goods sold ................................. 479,556 475,045
-------- --------
Gross profit .................................. 71,755 70,195
Selling, general and administrative expenses ....... 26,314 28,144
Rationalization charge ............................. 211 --
-------- --------
Income from operations ........................ 45,230 42,051
Interest and other debt expense .................... 15,083 20,038
-------- --------
Income before income taxes .................... 30,147 22,013
Provision for income taxes ......................... 11,908 8,475
-------- --------
Net income .................................... $ 18,239 $ 13,538
======== ========
Earnings per share:
Basic net income per share .................... $0.99 $0.74
===== =====
Diluted net income per share .................. $0.98 $0.74
===== =====
Dividends per share: ............................... $0.15 $ --
===== =====
Weighted average number of shares:
Basic ......................................... 18,362 18,239
Effect of dilutive securities ................. 227 156
------ ------
Diluted ....................................... 18,589 18,395
====== ======
See accompanying notes.
-4-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 2004 and 2003
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2004 2003
---- ----
Net sales ............................................ $1,069,641 $999,617
Cost of goods sold ................................... 935,726 879,825
---------- --------
Gross profit .................................... 133,915 119,792
Selling, general and administrative expenses ......... 53,940 51,720
Rationalization charges .............................. 1,201 --
---------- --------
Income from operations .......................... 78,774 68,072
Interest and other debt expense ...................... 30,305 38,827
---------- --------
Income before income taxes and equity in
losses of affiliate ........................... 48,469 29,245
Provision for income taxes ........................... 19,145 11,260
---------- --------
Income before equity in losses of affiliate ..... 29,324 17,985
Equity in losses of affiliate, net of income taxes ... -- 281
---------- --------
Net income ...................................... $ 29,324 $ 17,704
========== ========
Earnings per share:
Basic net income per share ...................... $1.60 $0.97
===== =====
Diluted net income per share .................... $1.58 $0.96
===== =====
Dividends per share: ................................. $0.15 $ --
===== =====
Weighted average number of shares:
Basic ........................................... 18,335 18,237
Effect of dilutive securities ................... 243 132
------ ------
Diluted ......................................... 18,578 18,369
====== ======
See accompanying notes.
-5-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2004 and 2003
(Dollars in thousands)
(Unaudited)
2004 2003
---- ----
Cash flows provided by (used in) operating activities
Net income ................................................. $ 29,324 $ 17,704
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization .......................... 59,866 56,143
Rationalization charges ................................ 1,201 --
Equity in losses of affiliate .......................... -- 457
Other changes that provided (used) cash,
net of effects from acquisitions:
Trade accounts receivable, net .................... (99,480) (85,898)
Inventories ....................................... (119,156) (88,377)
Trade accounts payable ............................ (43,276) (35,309)
Accrued liabilities ............................... 18,781 16,423
Other, net ........................................ 8,493 13,311
--------- ---------
Net cash used in operating activities .................. (144,247) (105,546)
--------- ---------
Cash flows provided by (used in) investing activities
Purchases of businesses, net of cash acquired .............. -- (206,868)
Capital expenditures ....................................... (46,556) (55,073)
Proceeds from asset sales .................................. 2,101 325
--------- ---------
Net cash used in investing activities .................. (44,455) (261,616)
--------- ---------
Cash flows provided by (used in) financing activities
Borrowings under revolving loans ........................... 535,875 383,050
Repayments under revolving loans ........................... (333,975) (212,150)
Proceeds from stock option exercises ....................... 1,528 118
Proceeds from issuance of long-term debt ................... -- 150,000
Dividends paid on common stock ............................. (2,756) --
Debt issuance costs ........................................ (162) (2,007)
--------- ---------
Net cash provided by financing activities .............. 200,510 319,011
--------- ---------
Cash and cash equivalents
Net increase (decrease) .................................... 11,808 (48,151)
Balance at beginning of year ............................... 12,100 58,318
--------- ---------
Balance at end of period ................................... $ 23,908 $ 10,167
========= =========
Interest paid ................................................... $ 28,616 $ 32,715
Income taxes paid, net of refunds ............................... 977 (69)
See accompanying notes.
-6-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the six months ended June 30, 2004 and 2003
(Dollars and shares in thousands)
(Unaudited)
Common Stock Accumulated
------------ Paid- other Unamortized Total
Par in Retained comprehensive stock Treasury stockholders'
Shares value capital earnings income (loss) compensation stock equity
------ ----- ------- -------- ------------- ------------ -------- -------------
Balance at December 31, 2002 ............. 18,231 $209 $124,872 $18,871 $(20,467) $ -- $(60,393) $ 63,092
Comprehensive income:
Net income ............................ -- -- -- 17,704 -- -- -- 17,704
Change in fair value of derivatives,
net of tax provision of $688 ........ -- -- -- -- 978 -- -- 978
Foreign currency translation .......... -- -- -- -- 5,554 -- -- 5,554
--------
Comprehensive income ..................... 24,236
Stock option exercises, including
tax benefit of $19 ..................... 8 -- 137 -- -- $ -- -- 137
------ ---- -------- ------- -------- ------ -------- --------
Balance at June 30, 2003 ................. 18,239 $209 $125,009 $36,575 $(13,935) $ -- $(60,393) $ 87,465
====== ==== ======== ======= ======== ====== ======== ========
Balance at December 31, 2003 ............. 18,273 $210 $125,758 $60,905 $ (5,675) -- $(60,393) $120,805
Comprehensive income:
Net income ............................ -- -- -- 29,324 -- -- -- 29,324
Change in fair value of derivatives,
net of tax benefit of $3,629 ......... -- -- -- -- 5,555 -- -- 5,555
Foreign currency translation .......... -- -- -- -- (1,313) -- -- (1,313)
--------
Comprehensive income ..................... 33,566
Dividend declared on common stock ........ -- -- -- (2,756) -- -- -- (2,756)
Issuance of restricted stock units ....... -- -- 127 -- -- (127) -- --
Amortization of stock compensation ....... -- -- -- -- -- 23 -- 23
Stock option exercises, including
tax benefit of $1,043 .................. 98 1 2,570 -- -- -- -- 2,571
------ ---- -------- ------- -------- ------ -------- --------
Balance at June 30, 2004 ................. 18,371 $211 $128,455 $87,473 $ (1,433) $(104) $(60,393) $154,209
====== ==== ======== ======= ======== ====== ======== ========
See accompanying notes.
-7-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 1. Significant Accounting Policies
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements of Silgan Holdings Inc., or Holdings, have been prepared in
accordance with U.S. generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S. generally accepted accounting principles for complete
financial statements. In the opinion of management, the accompanying financial
statements include all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation. The results of operations for any
interim period are not necessarily indicative of the results of operations for
the full year.
The condensed consolidated balance sheet at December 31, 2003 has been derived
from our audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
You should read the accompanying condensed consolidated financial statements in
conjunction with our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2003.
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
Stock-Based Compensation. We currently have one stock-based compensation plan in
effect, which plan replaced two previous plans under which stock options are
still outstanding. We apply the recognition and measurement principles of
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for stock options issued
under these plans. Accordingly, no compensation expense for employee stock
options is recognized, as all options granted under these plans had an exercise
price that was equal to or greater than the market value of the underlying stock
on the date of the grant.
In May 2004, we adopted the Silgan Holdings Inc. 2004 Stock Incentive Plan, or
the Plan, which provides for awards of stock options, stock appreciation rights,
restricted stock, stock units and performance awards to our officers, other key
employees and outside Directors. The Plan replaces our previous stock option
plans, and all shares of our common stock reserved for issuance under those
plans will no longer be available for issuance.
Shares of our common stock offered under the Plan shall be authorized but
unissued shares or treasury shares. The maximum aggregate number of shares of
our common stock that may be issued in connection with stock options, stock
appreciation rights, stock units, restricted shares and performance awards under
the Plan shall not exceed 900,000 shares. Each award of stock options or stock
appreciation rights under the Plan will reduce the number of shares of our
common stock available for future issuance under the Plan by the number of
shares of our common stock subject to the award. Each award of restricted stock
or stock units under the Plan, in contrast, will reduce the number of shares of
our common stock available for future issuance under the Plan by two shares for
every one restricted share or stock unit awarded.
-8-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Stock-Based Compensation (continued). In May 2004, pursuant to the Plan we
granted 3,000 restricted stock units to the independent members of our Board of
Directors, which restricted stock units vest in full six months from the date of
grant. A restricted stock unit represents the right to receive one share of our
common stock at a future date. These restricted stock units may not be disposed
of or transferred during the six-month vesting period. This grant is accounted
for as a fixed grant and, accordingly, the fair value at the grant date of
$42.25 per share has been charged to stockholders' equity as unamortized stock
compensation and is being amortized over the six-month vesting period.
If we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," net income and basic and diluted net income per share would have
been as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported .................................... $18,239 $13,538 $29,324 $17,704
Add: Stock-based employee compensation
expense included in reported net income,
net of income taxes ................................... 14 -- 14 --
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all dilutive securities,
net of income taxes ................................... (401) (377) (876) (701)
------- ------- ------- -------
Pro forma net income ....................................... $17,852 $13,161 $28,462 $17,003
======= ======= ======= =======
Earnings per share:
Basic net income per share - as reported ............... $0.99 $0.74 $1.60 $0.97
===== ===== ===== ====
Basic net income per share - pro forma ................. 0.97 0.72 1.55 0.93
===== ===== ===== ====
Diluted net income per share - as reported ............. $0.98 $0.74 $1.58 $0.96
===== ===== ===== ====
Diluted net income per share - pro forma ............... 0.96 0.72 1.54 0.93
===== ===== ===== ====
-9-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Recently Adopted Accounting Pronouncements. In January 2003, the Financial
Accounting Standards Board, or the FASB, issued Interpretation, or FIN, No. 46,
"Consolidation of Variable Interest Entities," which expands upon existing
accounting guidance on consolidation. A variable interest entity either does not
have equity investors with voting rights or has equity investors that do not
provide sufficient financial resources for the entity to support its activities.
FIN No. 46 requires a variable interest entity to be consolidated by a company
if that company is subject to a majority of the risk of loss from the variable
interest entity's activities or is entitled to receive a majority of the
entity's residual returns. The provisions of FIN No. 46 were effective for us on
March 31, 2004. The adoption of FIN No. 46 did not effect our financial position
or results of operations.
Note 2. Acquisitions
In January 2003, we acquired substantially all of the assets of Thatcher Tubes
LLC and its affiliates, or Thatcher Tubes, a privately held manufacturer and
marketer of decorated plastic tubes serving primarily the personal care
industry. Including additional production capacity installed shortly before the
acquisition, the purchase price for the assets was approximately $32 million in
cash. Thatcher Tubes operates as part of our plastic container business.
In March 2003, we acquired the remaining 65 percent equity interest in the Amcor
White Cap, LLC, or White Cap, joint venture that we did not already own from
Amcor White Cap, Inc. for approximately $37 million in cash. Additionally, we
refinanced debt of White Cap in the amount of approximately $88 million and
purchased equipment subject to a third party lease for approximately $5 million.
This closures business operates as part of our metal food container business.
In April 2003, we acquired PCP Can Manufacturing, Inc., or Pacific Coast Can, a
subsidiary of Pacific Coast Producers, or Pacific Coast, through which Pacific
Coast self-manufactured a majority of its metal food containers. The purchase
price was approximately $44 million in cash, including approximately $29 million
for inventory. As part of the transaction, we entered into a ten-year supply
agreement with Pacific Coast under which Pacific Coast has agreed to purchase
from us substantially all of its metal food container requirements. Pacific
Coast Can operates as part of our metal food container business.
These acquisitions were accounted for using the purchase method of accounting.
Accordingly, the purchase price has been allocated to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition, and
the businesses' results of operations have been included in our consolidated
operating results from the date of acquisition. The allocation of purchase price
was finalized during the first quarter of 2004 when valuations and integration
plans were completed.
-10-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 3. Rationalization Charges and Acquisition Reserves
As part of our plans to integrate the operations of our various acquired
businesses and to rationalize certain facilities, we have established reserves
for employee severance and benefits and plant exit costs. Activity in our
rationalization and acquisition reserves since December 31, 2003 is summarized
as follows:
Employee Plant Non-Cash
Severance Exit Asset
and Benefits Costs Write Down Total
------------ ----- ---------- -----
(Dollars in thousands)
Balance at December 31, 2003
- ----------------------------
Fairfield Rationalization ...................................... $ -- $1,273 $ -- $ 1,273
2003 Acquisitions .............................................. 3,284 1,036 -- 4,320
2003 Rationalizations .......................................... 595 971 -- 1,566
------- ------ ------- -------
Balance at December 31, 2003 ................................... 3,879 3,280 -- 7,159
Activity for the Six Months Ended June 30, 2004
- -----------------------------------------------
Fairfield Rationalization ...................................... -- (183) -- (183)
Finalization of 2003 Acquisition Plan Reserves ................. (268) 88 -- (180)
2003 Acquisition Plan Reserves Utilized ........................ (2,733) (613) -- (3,346)
2003 Rationalization Plan Reserves Established ................. 423 191 -- 614
2003 Rationalization Plan Reserves Utilized .................... (931) (249) -- (1,180)
Benton Harbor Rationalization Reserve Established .............. 210 136 241 587
Benton Harbor Rationalization Reserve Utilized ................. (210) (136) (241) (587)
------- ------ ------- -------
Total Activity ................................................. (3,509) (766) -- (4,275)
Balance at June 30, 2004
- ------------------------
Fairfield Rationalization ...................................... -- 1,090 -- 1,090
2003 Acquisitions .............................................. 283 511 -- 794
2003 Rationalizations .......................................... 87 913 -- 1,000
Benton Harbor Rationalization .................................. -- -- -- --
------- ------ ------- -------
Balance at June 30, 2004 ....................................... $ 370 $2,514 $ -- $ 2,884
======= ====== ======= =======
-11-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 3. Rationalization Charges and Acquisition Reserves (continued)
Benton Harbor Rationalization Plan
- ----------------------------------
During the first quarter of 2004, we approved and announced to employees a plan
to exit our Benton Harbor, Michigan metal food container manufacturing facility.
This decision resulted in a charge to earnings of $0.4 million, which consisted
of $0.2 million for the non-cash write-down in carrying value of assets and $0.2
million for employee severance and benefits costs. In the second quarter of
2004, additional rationalization charges of $0.2 million were recorded, bringing
the total charges related to this plan to an aggregate of $0.6 million in 2004.
Through June 30, 2004, we made cash payments totaling $0.4 million related to
this plan. All actions under this plan have been completed.
2003 Acquisition Plans
- ----------------------
During 2003, we established acquisition reserves in connection with our
purchases of Thatcher Tubes, White Cap and Pacific Coast Can, recorded pursuant
to plans that we began to assess and formulate at the date of the acquisitions.
During the first quarter of 2004, we finalized these plans and the related
acquisition reserves. These plans included exiting the Lodi, California metal
food container manufacturing facility, the Chicago, Illinois and Queretaro,
Mexico metal closures manufacturing facilities and the Culiacan, Mexico plastic
container manufacturing facility, as well as the consolidation of certain
administrative functions of the acquired businesses. All of these facilities
have ceased manufacturing operations. During the first six months of 2004, we
made cash payments totaling $3.3 million related to these plans. At June 30,
2004, these reserves had an aggregate balance of $0.8 million. All cash payments
related to these plans are expected in 2004.
2003 Rationalization Plans
- --------------------------
During 2003, we approved and announced to employees plans to exit our Norwalk,
Connecticut and Anaheim, California plastic container manufacturing facilities
and our Queretaro, Mexico metal closures manufacturing facility, as well as to
consolidate certain administrative functions of the closures business. These
decisions resulted in a charge to earnings of $9.0 million ($1.2 million for the
metal food container business and $7.8 million for the plastic container
business) in 2003, which included $5.3 million for the non-cash write-down in
carrying value of assets. During the first quarter of 2004, additional
rationalization charges of $0.6 million were recorded related to these plans.
During the first six months of 2004, we made cash payments totaling $1.2 million
related to these plans. At June 30, 2004, these reserves had an aggregate
balance of $1.0 million. The timing of certain cash payments related to these
reserves is dependent upon the expiration of a lease obligation. Therefore, cash
payments related to these reserves are expected through 2010.
-12-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 3. Rationalization Charges and Acquisition Reserves (continued)
Rationalization and acquisition reserves are included in the Condensed
Consolidated Balance Sheets as follows:
June 30, June 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Accrued liabilities ............... $1,297 $5,235 $5,572
Other liabilities ................. 1,587 1,832 1,587
------ ------ ------
$2,884 $7,067 $7,159
====== ====== ======
Note 4. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in the Condensed
Consolidated Statements of Stockholders' Equity. Amounts included in accumulated
other comprehensive income (loss) consisted of the following:
June 30, June 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Foreign currency translation ............... $ 3,322 $ 3,556 $ 4,635
Change in fair value of derivatives ........ 4,794 (1,836) (761)
Minimum pension liability .................. (9,549) (15,655) (9,549)
------- -------- -------
Accumulated other comprehensive loss .... $(1,433) $(13,935) $(5,675)
======= ======== =======
-13-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 5. Inventories
Inventories consisted of the following:
June 30, June 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Raw materials ...................... $ 45,803 $ 35,382 $ 36,732
Work-in-process .................... 64,798 64,827 52,815
Finished goods ..................... 314,410 317,243 213,481
Spare parts and other .............. 19,744 20,548 20,267
-------- -------- --------
444,755 438,000 323,295
Adjustment to value inventory
at cost on the LIFO method ..... (5,485) 1,819 (3,101)
-------- -------- --------
$439,270 $439,819 $320,194
======== ======== ========
Note 6. Investment in Affiliate
Prior to March 2003, we held a 35 percent interest in a joint venture company
with Amcor Ltd. that was a leading supplier of an extensive range of metal and
plastic closures to consumer goods packaging companies in the food and beverage
industries in North America. The venture operated under the name Amcor White
Cap, LLC. As discussed in Note 2, in March 2003, we acquired the remaining 65
percent equity interest in the White Cap joint venture that we did not already
own. The business now operates under the name Silgan Closures LLC, or Silgan
Closures.
Prior to our acquisition of White Cap, we accounted for our investment in the
White Cap joint venture using the equity method. For the first two months of
2003, we recorded equity in losses of White Cap of $0.3 million, net of income
taxes. The results of Silgan Closures since March 2003 have been included with
the results of our metal food container business.
-14-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 7. Long-Term Debt
Long-term debt consisted of the following:
June 30, June 30, Dec. 31,
2004 2003 2003
---- ---- ----
(Dollars in thousands)
Bank debt
Bank revolving loans .......................... $ 226,900 $ 170,900 $ 25,000
Bank A term loans ............................. 83,330 100,000 83,330
Bank B term loans ............................. 691,250 498,250 691,250
---------- ---------- ----------
Total bank debt ............................ 1,001,480 769,150 799,580
Subordinated debt
6 3/4% Senior Subordinated Notes .............. 200,000 -- 200,000
9% Senior Subordinated Debentures ............. -- 505,240 --
Other ......................................... 3,000 3,000 3,000
---------- ---------- ----------
Total subordinated debt .................... 203,000 508,240 203,000
---------- ---------- ----------
Total debt ......................................... 1,204,480 1,277,390 1,002,580
Less current portion .......................... 250,570 217,826 48,670
---------- ---------- ----------
$ 953,910 $1,059,564 $ 953,910
========== ========== ==========
In March 2004, we entered into interest rate swap agreements for an aggregate
notional principal amount of $150 million. Under these agreements, we will pay a
fixed rate of interest of 1.8 percent and receive a floating rate of interest
based on three month LIBOR. These agreements mature in March 2006 and are
accounted for as cash flow hedges.
At June 30, 2004, amounts expected to be repaid within one year consisted of
$226.9 million of bank revolving loans related primarily to seasonal working
capital needs and $23.7 million of bank term loans.
On July 15, 2004, we completed an amendment to our senior secured credit
facility that lowered the margin on our B term loans by twenty-five basis
points, resulting in an interest rate on our B term loans of LIBOR plus 1.75
percent.
-15-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 8. Retirement Benefits
The components of the net periodic pension benefits costs are as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Service cost ............................... $ 3,099 $ 2,579 $ 6,287 $ 4,889
Interest cost .............................. 4,926 4,739 9,885 8,277
Expected return on plan assets ............. (5,560) (4,081) (11,131) (7,177)
Amortization of prior service cost ......... 793 700 1,607 1,400
Amortization of actuarial losses ........... 416 343 854 686
Curtailment loss ........................... -- 37 -- 74
------- ------- -------- -------
Net periodic benefit cost .................. $ 3,674 $ 4,317 $ 7,502 $ 8,149
======= ======= ======== =======
The components of the net periodic other postretirement benefits costs are as
follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Service cost ............................... $ 770 $ 579 $1,557 $1,106
Interest cost .............................. 1,441 1,342 2,903 2,436
Amortization of prior service cost ......... -- 1 3 2
Amortization of actuarial losses ........... 286 80 577 160
------ ------ ------ ------
Net periodic benefit cost .................. $2,497 $2,002 $5,040 $3,704
====== ====== ====== ======
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.
-16-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 8. Retirement Benefits (continued)
In January 2004, the FASB issued FASB Staff Position, or FSP, No. 106-1,
"Accounting and Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003." Since specific authoritative
guidance on the accounting for the federal subsidy was pending, we elected to
defer accounting for the effects of the Act as permitted by FSP No. 106-1. In
May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003," that provides guidance on the accounting for the effects of the Act and
will be effective for us on July 1, 2004. FSP No. 106-2 supercedes FSP No. 106-1
and requires recognition of the change in postretirement benefit obligation as
an actuarial gain. At June 30, 2004, our accumulated other postretirement
benefit obligation and net periodic other postretirement benefit costs do not
reflect the effects of the Act on the plans because we are still in the process
of concluding whether the benefits provided by the plan are actuarially
equivalent to Medicare Part D under the Act.
As previously disclosed in our consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2003, based on current tax law, 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 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. During the first six
months of 2004, we have made no contributions to fund our pension plans for
2004.
-17-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 9. Business Segment Information
Reportable business segment information for the three and six months ended June
30 is as follows:
Metal Food Plastic
Containers(1) Containers(2) Corporate Total
---------- ---------- --------- -----
(Dollars in thousands)
Three Months Ended June 30, 2004
- --------------------------------
Net sales ................................. $407,084 $144,227 $ -- $ 551,311
Depreciation and amortization(3) .......... 19,403 9,870 11 29,284
Segment income from operations ............ 33,265 14,067 (2,102) 45,230
Three Months Ended June 30, 2003
- --------------------------------
Net sales ................................. $397,941 $147,299 $ -- $ 545,240
Depreciation and amortization(3) .......... 18,580 9,929 11 28,520
Segment income from operations ............ 26,089 17,331 (1,369) 42,051
Six Months Ended June 30, 2004
- ------------------------------
Net sales ................................. $780,019 $289,622 $ -- $1,069,641
Depreciation and amortization(3) .......... 37,440 20,450 20 57,910
Segment income from operations ............ 54,395 27,933 (3,554) 78,774
Six Months Ended June 30, 2003
- ------------------------------
Net sales ................................. $713,370 $286,247 $ -- $ 999,617
Depreciation and amortization(3) .......... 34,221 19,990 22 54,233
Segment income from operations ............ 37,878 32,805 (2,611) 68,072
- -------------
(1) Segment income from operations includes rationalization charges of $0.2
million and $0.9 million recorded for the three and six months ended June
30, 2004, respectively.
(2) Segment income from operations includes rationalization charges of $0.3
million recorded for the six months ended June 30, 2004.
(3) Depreciation and amortization excludes amortization of debt issuance costs
of $1.0 million and $1.0 million for the three months ended June 30, 2004
and 2003, respectively, and $2.0 million and $1.9 million for the six
months ended June 30, 2004 and 2003, respectively.
-18-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2004 and 2003 and for the
three and six months then ended is unaudited)
Note 9. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income taxes
and equity in losses of affiliate as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in thousands)
Total segment income from operations ....... $45,230 $42,051 $78,774 $68,072
Interest and other debt expense ............ 15,083 20,038 30,305 38,827
------- ------- ------- -------
Income before income taxes and
equity in losses of affiliate ....... $30,147 $22,013 $48,469 $29,245
======= ======= ======= =======
Note 10. Dividends
In April 2004, our Board of Directors initiated a quarterly dividend on our
common stock and approved a $0.15 per share quarterly cash dividend, which was
paid on June 15, 2004 to holders of record of our common stock on June 1, 2004.
The cash payment for this dividend was $2.8 million.
On July 27, 2004, our Board of Directors declared a quarterly cash dividend on
our common stock of $0.15 per share, payable on September 15, 2004 to holders of
record of our common stock on September 1, 2004. The cash payment for this
dividend is expected to be approximately $2.8 million.
-19-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Statements included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report on
Form 10-Q which are not historical facts are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and Securities Exchange Act of 1934. Such forward-looking
statements are made based upon management's expectations and beliefs concerning
future events impacting us and therefore involve a number of uncertainties and
risks, including, but not limited to, those described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003 and our other filings with
the Securities and Exchange Commission. As a result, the actual results of our
operations or our financial condition could differ materially from those
expressed or implied in these forward-looking statements.
General
We are a leading North American manufacturer of metal and plastic consumer goods
packaging products. We produce steel and aluminum containers for human and pet
food, metal, composite and plastic closures for food and beverage products and
custom designed plastic containers, tubes and closures for personal care, health
care, pharmaceutical, household and industrial chemical, food, pet care,
agricultural chemical, automotive and marine chemical products. We are the
largest manufacturer of metal food containers in North America, a leading
manufacturer of plastic containers in North America for personal care products
and a leading manufacturer of metal, composite and plastic vacuum closures in
North America for food and beverage products.
Our objective is to increase shareholder value by efficiently deploying capital
and management resources to grow our business, reduce operating costs, build
sustainable competitive positions, or franchises, and complete acquisitions that
generate attractive cash returns. We have grown our net sales over the years,
largely through acquisitions but also through internal growth, and we continue
to evaluate acquisition opportunities in the consumer goods packaging market.
However, in the absence of such acquisition opportunities, we expect to use our
cash flow to repay debt or for other permitted purposes. As we previously
announced, in the absence of compelling acquisitions, we intend to continue to
focus on reducing our debt and expect to reduce our debt by $200 - $300 million
over the next three years, of which at least $75 million is expected in 2004.
-20-
RESULTS OF OPERATIONS
The following table sets forth certain unaudited income statement data expressed
as a percentage of net sales for the periods presented.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net sales
Metal food containers.................................. 73.8% 73.0% 72.9% 71.4%
Plastic containers..................................... 26.2 27.0 27.1 28.6
----- ----- ------ -----
Consolidated........................................ 100.0 100.0 100.0 100.0
Cost of goods sold....................................... 87.0 87.1 87.5 88.0
----- ----- ------ -----
Gross profit............................................. 13.0 12.9 12.5 12.0
Selling, general and administrative expenses............. 4.8 5.2 5.1 5.2
Rationalization charges ................................. - - 0.1 -
----- ----- ------ -----
Income from operations................................... 8.2 7.7 7.3 6.8
Interest and other debt expense.......................... 2.7 3.7 2.8 3.9
----- ----- ------ -----
Income before income taxes and equity in losses
of affiliate........................................... 5.5 4.0 4.5 2.9
Provision for income taxes............................... 2.2 1.5 1.8 1.1
----- ----- ------ -----
Income before equity in losses of affiliate ............. 3.3 2.5 2.7 1.8
Equity in losses of affiliate, net of income taxes....... - - - -
----- ----- ------ -----
Net income............................................... 3.3% 2.5% 2.7% 1.8%
===== ===== ====== =====
Summary unaudited results of operations for the three and six months ended June
30, 2004 and 2003 are provided below.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Dollars in millions)
Net sales
Metal food containers ........................... $407.1 $397.9 $ 780.0 $713.4
Plastic containers .............................. 144.2 147.3 289.6 286.2
------ ------ -------- ------
Consolidated ................................. $551.3 $545.2 $1,069.6 $999.6
====== ====== ======== ======
Income from operations
Metal food containers(1) ........................ $ 33.2 $ 26.1 $ 54.4 $ 37.9
Plastic containers(2) ........................... 14.1 17.3 27.9 32.8
Corporate ....................................... (2.1) (1.3) (3.5) (2.6)
------ ------ -------- ------
Consolidated ................................. $ 45.2 $ 42.1 $ 78.8 $ 68.1
====== ====== ======== ======
- -------------
(1) Includes rationalization charges of $0.2 million and $0.9 million
recorded for the three and six months ended June 30, 2004,
respectively.
(2) Includes rationalization charges of $0.3 million recorded for the six
months ended June 30, 2004.
-21-
Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003
Overview. Consolidated net sales were $551.3 million in the second quarter of
2004, representing a 1.1 percent increase as compared to the second quarter of
2003. This increase was attributable to higher net sales in the metal food
container business primarily due to higher average selling prices as a result of
an enhanced product mix and the pass through of increased steel costs, partially
offset by lower net sales in the plastic container business. Income from
operations for the second quarter of 2004 increased by $3.1 million, or 7.4
percent, as compared to the same period in 2003 due to higher income from
operations in the metal food container business, largely offset by lower income
from operations in the plastic container business. Operating margin for the
second quarter of 2004 increased by 0.5 percentage points as compared to the
same period in 2003 as a result of a higher operating margin in the metal food
container business, partially offset by a lower operating margin in the plastic
container business. Net income for the second quarter of 2004 of $18.2 million,
or $0.98 per diluted share, increased by $4.7 million, or $0.24 per diluted
share, as compared to the same period in 2003 as a result of the items
previously discussed, as well as lower interest and other debt expense.
In April 2004, we entered into an extension of our supply agreements with Del
Monte Corporation which extended the term to December 31, 2011. In July 2004, we
entered into a five-year extension of our supply agreement with Campbell Soup
Company which extended the term to December 31, 2013. As a result, in
combination with the extension of our supply agreements with Nestle Food Company
late in 2003, we have recently extended the supply agreements with our three
largest customers. In 2003, sales to these three customers under these supply
agreements represented approximately 30 percent of our consolidated net sales.
These extensions are not expected to have a material effect on our financial
performance, except to extend the term of supply.
Net Sales. The $6.1 million increase in consolidated net sales in the second
quarter of 2004 as compared to the second quarter of 2003 was the result of
higher net sales in the metal food container business, partially offset by lower
sales in the plastic container business.
Net sales for the metal food container business increased $9.2 million, or 2.3
percent, in the second quarter of 2004 as compared to the same period in 2003.
This increase was attributable to higher average selling prices due to an
enhanced product mix and the pass through of increased steel costs, partially
offset by 3.8 percent lower food can unit volume.
Net sales for the plastic container business in the second quarter of 2004
decreased $3.1 million, or 2.1 percent, as compared to the same period in 2003.
This decrease was primarily a result of lower average selling prices due to a
less favorable mix of products sold during the quarter and the lagged impact of
certain price concessions made last year, partially offset by the pass through
of increased resin costs. Since the price concessions became effective during
2003, their comparative impact will lessen in the last half of 2004.
Gross Profit. The increase in gross profit margin for the second quarter of 2004
as compared to the same period in 2003 was principally due to the benefits of
rationalization initiatives in the closures operations of our metal food
container business as well as an enhanced mix of products sold in our metal food
can operations.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales for the second
quarter of 2004 were 0.4 percentage points lower than in the same period in
2003. The reduction was primarily a result of the benefits from the integration
of the administrative functions of the closures operations into the metal food
container business, offset in part by higher regulatory compliance costs.
-22-
Income from Operations. Income from operations for the second quarter of 2004
increased by $3.1 million as compared to the second quarter of 2003 and
operating margin increased to 8.2 percent from 7.7 percent over the same
periods. Results for the second quarter of 2004 included rationalization charges
totaling $0.2 million related to closing a manufacturing facility.
Income from operations of the metal food container business for the second
quarter of 2004 increased $7.1 million, or 27.2 percent, as compared to the same
period in 2003, and operating margin increased to 8.2 percent from 6.6 percent
over the same periods. These increases were principally due to benefits from
rationalization and integration activities at the closures operations and from
relatively higher capital spending over the last several years, including
spending on our Quick Top(TM) convenience end capacity. These favorable items
were partially offset by inflation in employee benefit costs and increases in
certain other manufacturing costs, including depreciation expense.
Income from operations of the plastic container business for the second quarter
of 2004 decreased $3.2 million, or 18.5 percent, as compared to the same period
in 2003, and operating margin decreased to 9.8 percent from 11.7 percent over
the same periods. These decreases were primarily a result of a less favorable
product mix and the lagged impact of certain price concessions made last year.
Interest and Other Debt Expense. Interest and other debt expense for the second
quarter of 2004 decreased $5.0 million to $15.1 million as compared to the same
period in 2003. This decrease resulted primarily from a lower average interest
rate as a result of the refinancing of all $500 million of the 9% Senior
Subordinated Debentures due 2009, or the 9% Debentures, in late 2003 with $200
million of lower cost 6 3/4% Senior Subordinated Notes due 2013, or the 6 3/4%
Notes, and borrowings under the senior secured credit facility, or the Credit
Agreement, and lower average borrowings as a result of debt reductions late in
2003.
We have entered into interest rate swap agreements to manage a portion of our
exposure to interest rate fluctuations. These interest rate swap agreements
effectively convert interest rate exposure from variable rates to fixed rates of
interest. At June 30, 2004, the aggregate notional principal amount of these
agreements was $700 million, including $200 million notional principal amount
that will expire early in the third quarter of 2004 and $50 million notional
principal amount that will expire in the fourth quarter of 2004.
Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003
Overview. Consolidated net sales were $1.070 billion in the first six months of
2004, representing a 7.0 percent increase as compared to the first six months of
2003 as a result of the inclusion of net sales of Silgan Closures, as well as
higher net sales in both the metal food and plastic container businesses. Income
from operations for the first six months of 2004 increased by $10.7 million, or
15.7 percent, as compared to the same period in 2003 due to higher income from
operations in the metal food container business, partially offset by lower
income from operations in the plastic container business. Operating margin for
the first six months of 2004 increased by 0.6 percentage points as compared to
the same period in 2003 as a result of a higher operating margin in the metal
food container business, partially offset by a lower operating margin in the
plastic container business. Net income for the first six months of 2004 of $29.3
million, or $1.58 per diluted share, increased by $11.6 million, or $0.62 per
diluted share, as compared to the same period in 2003 as a result of the items
previously discussed, as well as lower interest expense.
-23-
Net Sales. The $70.0 million increase in consolidated net sales in the first six
months of 2004 as compared to the first six months of 2003 was the result of
higher net sales in both the metal food and plastic container businesses.
Net sales for the metal food container business increased $66.6 million, or 9.3
percent, in the first six months of 2004 as compared to the same period in 2003.
This increase was primarily attributable to the inclusion of net sales of Silgan
Closures for the entire period, as well as higher average selling prices due to
an enhanced product mix and the pass through of increased steel costs.
Net sales for the plastic container business in the first six months of 2004
increased $3.4 million, or 1.2 percent, as compared to the same period in 2003.
Gross Profit. The increase in gross profit margin for the first six months of
2004 as compared to the same period in 2003 was principally due to increased
sales of value-added products and the inclusion and benefits of rationalizing
the closures operations of our metal food container business. These factors were
partially offset by certain price concessions in the plastic container business,
inflation in employee benefit costs and higher depreciation expense.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the first six months of 2004 increased $2.2 million
as compared with the same period of 2003 due to the inclusion of Silgan Closures
for the entire 2004 period. As a percentage of consolidated net sales, selling,
general and administrative expenses were 0.1 percent lower over the same periods
as a result of the benefits from integrating the administrative functions of the
closures operations into our metal food container business.
Income from Operations. Income from operations for the first six months of 2004
increased by $10.7 million as compared to the first six months of 2003, and
operating margin increased to 7.4 percent from 6.8 percent over the same
periods. Results for the first six months of 2004 included rationalization
charges totaling $1.2 million related to closing several manufacturing
facilities.
Income from operations of the metal food container business for the first six
months of 2004 increased $16.4 million, or 43.3 percent, as compared to the same
period in 2003, and operating margin increased to 7.0 percent from 5.3 percent
over the same periods. These increases were principally due to the inclusion of
the results of Silgan Closures, the benefits of rationalization programs
implemented in Silgan Closures and benefits from relatively higher capital
spending over the last several years, including spending on our Quick Top(TM)
convenience end capacity. These favorable items were partially offset by higher
depreciation expense, inflation in employee benefit costs and plant
rationalization costs of $0.9 million related to closing one manufacturing
facility and the continued rationalization and integration of Silgan Closures'
operations.
Income from operations of the plastic container business for the first six
months of 2004 decreased $4.8 million, or 14.6 percent, as compared to the same
period in 2003, and operating margin decreased to 9.7 percent from 11.5 percent
over the same periods. These decreases were primarily a result of the lagged
impact of certain price concessions made last year in response to heightened
competitive activity, higher depreciation expense, inflation in employee benefit
costs and plant rationalization costs, partially offset by higher unit volume.
Operating margin was also negatively impacted by the mathematical result of
higher net sales associated with the pass through of higher resin costs without
a corresponding increase in income from operations.
-24-
Interest and Other Debt Expense. Interest and other debt expense for the first
six months of 2004 decreased $8.5 million to $30.3 million as compared to the
same period in 2003. This decrease resulted primarily from a lower average
interest rate as a result of the refinancing of all $500 million of the 9%
Debentures in late 2003 with lower cost 6 3/4% Notes and borrowings under the
Credit Agreement.
CAPITAL RESOURCES AND LIQUIDITY
Our principal sources of liquidity have been net cash from operating activities
and borrowings under the Credit Agreement. Our liquidity requirements arise
primarily from our obligations under the indebtedness incurred in connection
with our acquisitions and the refinancing of that indebtedness, capital
investment in new and existing equipment and the funding of our seasonal working
capital needs.
For the six months ended June 30, 2004, we used net borrowings of revolving
loans of $201.9 million, proceeds from stock option exercises of $1.5 million
and proceeds from asset sales of $2.1 million to fund cash used in operations of
$144.2 million primarily for our seasonal working capital needs, capital
expenditures of $46.5 million, dividends paid on common stock of $2.8 million
and debt issuance costs of $0.2 million and to increase cash balances by $11.8
million.
For the six months ended June 30, 2003, we used net borrowings of revolving
loans of $170.9 million, incremental term loan borrowings of $150 million under
the Credit Agreement, cash balances of $48.2 million, proceeds from asset sales
of $0.3 million and proceeds from stock option exercises of $0.1 million to fund
the acquisitions of White Cap, Thatcher Tubes and Pacific Coast Can for $206.9
million, cash used in operations of $105.5 million primarily for our seasonal
working capital needs, capital expenditures of $55.1 million and debt issuance
costs of $2.0 million.
Because we sell metal containers used in fruit and vegetable pack processing, we
have seasonal sales. As is common in the industry, we must utilize working
capital to build inventory and then carry accounts receivable for some customers
beyond the end of the packing season. Due to our seasonal requirements, we incur
short-term indebtedness to finance our working capital requirements.
At June 30, 2004, we had $226.9 million of revolving loans outstanding under the
Credit Agreement related primarily to seasonal working capital needs. After
taking into account outstanding letters of credit, the available portion of the
revolving loan facility under the Credit Agreement at June 30, 2004 was $146.8
million. We may use the available portion of our revolving loan facility, after
taking into account our seasonal needs and outstanding letters of credit, for
acquisitions or other permitted purposes. During 2004, we estimate that we will
utilize approximately $230 - $260 million of revolving loans under the Credit
Agreement for our peak seasonal working capital requirements.
On July 15, 2004, we completed an amendment to the Credit Agreement that lowered
the margin on our B term loans by twenty-five basis points, from an interest
rate on our B term loans of LIBOR plus 200 basis points to an interest rate of
LIBOR plus 175 basis points. At June 30, 2004, we had $691.3 million of
outstanding B term loans.
In April 2004, our Board of Directors initiated a quarterly dividend on our
common stock and approved a $0.15 per share quarterly cash dividend, which was
paid on June 15, 2004 to holders of record of our common stock on June 1, 2004.
The cash payment for this dividend was $2.8 million.
-25-
On July 27, 2004, our Board of Directors declared a quarterly cash dividend on
our common stock of $0.15 per share, payable on September 15, 2004 to holders of
record of our common stock on September 1, 2004. The cash payment for this
dividend is expected to be approximately $2.8 million.
We believe that cash generated from operations and funds from borrowings
available under the Credit Agreement will be sufficient to meet our expected
operating needs, planned capital expenditures, debt service, tax obligations and
common stock dividends for the foreseeable future, assuming we are able to
refinance our Credit Agreement when it matures in 2008. We continue to evaluate
acquisition opportunities in the consumer goods packaging market and may incur
additional indebtedness, including indebtedness under the Credit Agreement, to
finance any such acquisitions. However, in the absence of acquisition
opportunities that generate attractive cash returns, we expect to use our free
cash flow to repay indebtedness or for other permitted purposes.
We are in compliance with all financial and operating covenants contained in our
financing agreements and believe that we will continue to be in compliance
during 2004 with all of these covenants.
Rationalization Charges and Acquisition Reserves
During the first quarter of 2004, we approved and announced to employees a plan
to exit our Benton Harbor, Michigan metal food container manufacturing facility.
This decision resulted in a charge to earnings of $0.4 million, which consisted
of $0.2 million for the non-cash write-down in carrying value of assets and $0.2
million for employee severance and benefits costs. In the second quarter of
2004, additional rationalization charges of $0.2 million were recorded, bringing
the total charges related to this plan to an aggregate of $0.6 million in 2004.
Through June 30, 2004, we made cash payments totaling $0.4 million related to
this plan. All actions under this plan have been completed.
During 2003, we established acquisition reserves in connection with our
purchases of Thatcher Tubes, White Cap and Pacific Coast Can, recorded pursuant
to plans that we began to assess and formulate at the date of the acquisitions.
During the first quarter of 2004, we finalized these plans and the related
acquisition reserves. These plans included exiting the Lodi, California metal
food container manufacturing facility, the Chicago, Illinois and Queretaro,
Mexico metal closures manufacturing facilities and the Culiacan, Mexico plastic
container manufacturing facility, as well as the consolidation of certain
administrative functions of the acquired businesses. All of these facilities
have ceased manufacturing operations. During the first six months of 2004, we
made cash payments totaling $3.3 million related to these plans. At June 30,
2004, these reserves had an aggregate balance of $0.8 million. All cash payments
related to these plans are expected in 2004.
During 2003, we approved and announced to employees plans to exit our Norwalk,
Connecticut and Anaheim, California plastic container manufacturing facilities
and our Queretaro, Mexico metal closures manufacturing facility, as well as to
consolidate certain administrative functions of the closures business. These
decisions resulted in a charge to earnings of $9.0 million ($1.2 million for the
metal food container business and $7.8 million for the plastic container
business) in 2003, which included $5.3 million for the non-cash write-down in
carrying value of assets. During the first quarter of 2004, additional
rationalization charges of $0.6 million were recorded related to these plans.
During the first six months of 2004, we made cash payments totaling $1.2 million
related to these plans. At June 30, 2004, these reserves had an aggregate
balance of $1.0 million. The timing of certain cash payments related to these
reserves is dependent upon the expiration of a lease obligation. Therefore, cash
payments related to these reserves are expected through 2010.
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Under our rationalization and acquisition plans, we made cash payments of $5.1
million and $1.3 million, respectively, for the six months ended June 30, 2004
and 2003. Additional cash spending is expected during 2004 under our Fairfield
and 2003 Rationalization plans and our 2003 Acquisition plans.
You should also read Note 3 to our Condensed Consolidated Financial Statements
for the three and six months ended June 30, 2004 included elsewhere in this
Quarterly Report.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities," which expands upon existing accounting guidance on consolidation. A
variable interest entity either does not have equity investors with voting
rights or has equity investors that do not provide sufficient financial
resources for the entity to support its activities. FIN No. 46 requires a
variable interest entity to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or is entitled to receive a majority of the entity's residual
returns. The provisions of FIN No. 46 were effective for us on March 31, 2004.
The adoption of FIN No. 46 did not effect our financial position or results of
operations.
In January 2004, the FASB issued FSP No. 106-1, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." Since specific authoritative guidance on the
accounting for the federal subsidy was pending, we elected to defer accounting
for the effects of the Act as permitted by FSP No. 106-1. In May 2004, the FASB
issued FSP No. 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003," that
provides guidance on the accounting for the effects of the Act and will be
effective for us on July 1, 2004. FSP No. 106-2 supercedes FSP No. 106-1 and
requires recognition of the change in postretirement benefit obligation as an
actuarial gain. At June 30, 2004, our accumulated other postretirement benefit
obligation and net periodic other postretirement benefit costs do not reflect
the effect of the Act on the plans because we are still in the process of
concluding whether the benefits provided by the plan are actuarially equivalent
to Medicare Part D under the Act.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market risks relating to our operations result primarily from changes in
interest rates. In the normal course of business, we also have limited foreign
currency risk associated with our operations in Canada and Mexico and risk
related to commodity price changes for items such as natural gas. We employ
established policies and procedures to manage our exposure to these risks.
Interest rate, foreign currency and commodity pricing transactions are used only
to the extent considered necessary to meet our objectives. We do not utilize
derivative financial instruments for trading or other speculative purposes.
Information regarding our interest rate risk, foreign currency exchange rate
risk and commodity pricing risk has been disclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2003. Since such filing, there has
not been a material change to our interest rate risk, foreign currency rate risk
or commodity pricing risk or to our policies and procedures to manage our
exposure to these risks. You should also read Note 7 to our Condensed
Consolidated Financial Statements for the three and six months ended June 30,
2004 included elsewhere in this Quarterly Report.
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Item 4. CONTROLS AND PROCEDURES
-----------------------
We carried out an evaluation, under the supervision and with the participation
of management, including our Co-Chief Executive Officers and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon
that evaluation, as of the end of the period covered by this Quarterly Report
our Co-Chief Executive Officers and Chief Financial Officer concluded that the
disclosure controls and procedures are effective in ensuring that all material
information required to be disclosed in this Quarterly Report has been made
known to them in a timely fashion.
There were no changes in our internal controls over financial reporting during
the period covered by this Quarterly Report that have materially affected, or
are reasonably likely to materially affect, these internal controls.
Part II. Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of stockholders, or the Annual Meeting, for which proxies
were solicited pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, was held on May 27, 2004 for the purposes of (1) electing two
directors to serve for a three year term until our annual meeting of
stockholders in 2007 and until their successors are duly elected and qualified;
(2) approving the adoption of the Silgan Holdings Inc. 2004 Stock Incentive
Plan; and (3) ratifying the appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ending December 31, 2004.
The nominees for director listed in our proxy statement, each of whom was
elected at the Annual Meeting, are named below, and each received the number of
votes for election as indicated below (with each share of our common stock being
entitled to one vote):
Number of Shares Number of Shares
Voted For Withheld
--------- --------
R. Philip Silver 13,237,581 4,488,880
William C. Jennings 16,974,314 752,147
Our directors whose term of office continued after the Annual Meeting are D.
Greg Horrigan and John W. Alden, each of whose term of office as a director
continues until our annual meeting of stockholders in 2005, and Jeffrey C. Crowe
and Edward A. Lapekas, each of whose term of office as a director continues
until our annual meeting of stockholders in 2006.
The adoption of the Silgan Holdings Inc. 2004 Stock Incentive Plan was approved
at the Annual Meeting. There were 14,253,718 votes cast approving such adoption,
2,149,838 votes cast against such adoption and 8,811 votes abstaining.
The ratification of the appointment of Ernst & Young LLP as our independent
auditors for the fiscal year ending December 31, 2004 was approved at the Annual
Meeting. There were 17,581,830 votes cast ratifying such appointment, 143,275
votes cast against ratification of such appointment and 1,356 votes abstaining.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
- -------------- -----------
10 Second Amendment to the Credit Agreement dated as of July
15, 2004 among Silgan Holdings Inc., Silgan Containers
Corporation, Silgan Plastics Corporation, Silgan Containers
Manufacturing Corporation, Silgan Can Company, the lenders
from time to time party to the Credit Agreement and Deutsche
Bank Trust Company Americas, as Administrative Agent.
12 Ratio of Earnings to Fixed Charges for the three and six
months ended June 30, 2004 and 2003.
31.1 Certification by the Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification by the Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.3 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32.1 Certification by the Co-Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by the Co-Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.3 Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
1. On April 23, 2004, we filed a Current Report on Form 8-K related to
our announcement of our results of operations for the quarterly period
ended March 31, 2004.
2. On May 3, 2004, we filed a Current Report on Form 8-K related to our
announcement of the initiation of a quarterly cash dividend on our
common stock.
3. On May 11, 2004, we filed a Current Report on Form 8-K related to our
announcement that Anthony J. Allott, our current Executive Vice
President and Chief Financial Officer, will be promoted to President
upon conclusion of our search for a new Chief Financial Officer, and
that D. Greg Horrigan, our current President, will become Co-Chairman
of the Board and continue in the Co-Chief Executive Officer role with
R. Philip Silver, our current Chairman of the Board and Co-Chief
Executive Officer.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned thereunto duly authorized.
SILGAN HOLDINGS INC.
Dated: August 6, 2004 /s/Anthony J. Allott
-----------------------------
Anthony J. Allott
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
- ----------- -------
10 Second Amendment to the Credit Agreement dated as of July
15, 2004 among Silgan Holdings Inc., Silgan Containers
Corporation, Silgan Plastics Corporation, Silgan Containers
Manufacturing Corporation, Silgan Can Company, the lenders
from time to time party to the Credit Agreement and Deutsche
Bank Trust Company Americas, as Administrative Agent.
12 Ratio of Earnings to Fixed Charges for the three and six
months ended June 30, 2004 and 2003.
31.1 Certification by the Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification by the Co-Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.3 Certification by the Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32.1 Certification by the Co-Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by the Co-Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.3 Certification by the Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
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