UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarter Ended March 31, 1999 or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) of the Securities Exchange
Act of 1934 for the Period ____________ to ____________.
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1269834
(State of Incorporation) (I.R.S. Employer Identification Number)
4 Landmark Square
Stamford, Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (203) 975-7110
Indicate by check mark whether 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 [ ]
As of May 5, 1999, the number of shares outstanding of the registrant's common
stock, $0.01 par value, was 17,437,880.
Part I. Financial Information
Item 1. Financial Statements
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, March 31, Dec. 31,
1999 1998 1998
---- ---- ----
(unaudited) (unaudited) (audited)
ASSETS
Current assets:
Cash and cash equivalents ............. $ 2,593 $ 4,042 $ 4,753
Accounts receivable, net .............. 150,318 132,109 134,004
Inventories ........................... 306,829 276,272 250,085
Prepaid expenses and other current
assets ............................. 9,582 10,566 9,880
---------- ---------- ----------
Total current assets .............. 469,322 422,989 398,722
Property, plant and equipment, net ......... 669,321 537,724 671,466
Other non-current assets, net .............. 155,814 121,146 153,857
---------- ---------- ----------
$1,294,457 $1,081,859 $1,224,045
========== ========== ==========
LIABILITIES AND DEFICIENCY IN STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable ................ $ 126,257 $ 113,354 $ 184,543
Accrued payroll and related costs ..... 45,507 43,178 45,566
Accrued interest payable .............. 15,291 15,679 10,357
Accrued expenses and other current
liabilities ........................ 21,904 21,161 23,220
Bank revolving loans .................. 126,800 44,595 --
Current portion of long-term debt ..... 33,915 1,867 36,065
---------- ---------- ----------
Total current liabilities ......... 369,674 239,834 299,751
Long-term debt ............................. 893,348 803,468 890,976
Other long-term liabilities ................ 93,713 98,839 90,626
Deficiency in stockholders' equity:
Common stock .......................... 199 189 199
Additional paid-in capital ............ 117,911 111,079 117,911
Accumulated deficit ................... (126,317) (171,195) (131,940)
Accumulated other comprehensive (loss) (628) (355) (723)
Treasury stock ........................ (53,443) -- (42,755)
---------- ---------- ----------
Total deficiency in stockholders'
equity ....................... (62,278) (60,282) (57,308)
---------- ---------- ----------
$1,294,457 $1,081,859 $1,224,045
========== ========== ==========
See accompanying notes.
-2-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in thousands, except per common share amounts)
Three Months Ended
------------------
March 31, March 31,
1999 1998
---- ----
Net sales ........................................... $ 398,747 $ 334,413
Cost of goods sold .................................. 350,888 290,089
--------- ---------
Gross profit ................................... 47,859 44,324
Selling, general and administrative expenses ........ 17,755 15,663
--------- ---------
Income from operations ......................... 30,104 28,661
Interest expense and other related financing costs .. 20,893 17,963
--------- ---------
Income before income taxes ..................... 9,211 10,698
Income tax provision ................................ 3,588 4,029
--------- ---------
Net income ..................................... $ 5,623 $ 6,669
========= =========
Per common share data:
Basic earnings per common share ................ $ 0.31 $ 0.35
========= =========
Diluted earnings per common share .............. $ 0.30 $ 0.33
========= =========
Weighted average shares used in computation:
Basic ......................................... 18,193,239 18,868,567
Effect of dilutive employee stock options ..... 533,061 1,336,741
---------- ----------
Diluted ....................................... 18,726,300 20,205,308
========== ==========
See accompanying notes.
-3-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
------------------
March 31, March 31,
1999 1998
---- ----
Cash flows from operating activities:
Net income ....................................... $ 5,623 $ 6,669
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation ................................. 20,080 16,222
Amortization ................................. 1,291 1,183
Changes in assets and liabilities, net of
effect of acquisitions:
(Increase) in accounts receivable ....... (16,314) (4,121)
(Increase) in inventories ............... (56,744) (64,660)
(Increase) decrease in other non-current
assets ................................. (2,406) 2,436
(Decrease) in trade accounts payable .... (58,286) (28,927)
Other, net .............................. 6,228 8,617
--------- ---------
Total adjustments ................... (106,151) (69,250)
--------- ---------
Net cash used in operating activities ........ (100,528) (62,581)
--------- ---------
Cash flows from investing activities:
Acquisition of businesses ........................ -- (14,110)
Capital expenditures, net ........................ (17,744) (17,518)
--------- ---------
Net cash used in investing activities ........ (17,744) (31,628)
--------- ---------
Cash flows from financing activities:
Borrowings under revolving loans ................. 331,400 217,755
Repayments under revolving loans ................. (204,600) (159,050)
Purchases of treasury stock ...................... (10,688) --
Proceeds from issuance of long-term debt ......... -- 4,193
Repayment of long-term debt ...................... -- (18,365)
--------- ---------
Net cash provided by financing activities .... 116,112 44,533
--------- ---------
Net (decrease) in cash and cash equivalents ........... (2,160) (49,676)
Cash and cash equivalents at beginning of year ........ 4,753 53,718
--------- ---------
Cash and cash equivalents at end of period ............ $ 2,593 $ 4,042
========= =========
Supplementary data:
Cash interest payments ........................... $ 15,634 $ 12,902
Cash income tax payments, net of refunds ......... 2,165 1,006
See accompanying notes.
-4-
SILGAN HOLDINGS INC.
CONSOLIDATED STATEMENTS OF DEFICIENCY IN STOCKHOLDERS' EQUITY
(Dollars and shares in thousands)
Common Stock
------------
Accumulated Total
Additional other deficiency in
Par paid-in Accumulated comprehensive Treasury stockholders'
Shares Value capital deficit income (loss) stock equity
------ ----- ------- ------- ------------- ----- ------
Balance at December 31, 1998 .... 18,256 $199 $117,911 $(131,940) $(723) $(42,755) $(57,308)
Comprehensive income:
Net income ................... 5,623 5,623
Foreign currency translation.. 95 95
--------
Comprehensive income ............ 5,718
Purchase of treasury stock ...... (570) (10,688) (10,688)
------ ---- -------- --------- ----- -------- --------
Balance at March 31, 1999 ....... 17,686 $199 $117,911 $(126,317) $(628) $(53,443) $(62,278)
====== ==== ======== ========= ===== ======== ========
See accompanying notes.
-5-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 1999 and 1998 and for the
three months then ended is unaudited)
1. Basis of Presentation
The accompanying condensed unaudited consolidated financial statements of Silgan
Holdings Inc. ("Holdings" or the "Company") have been prepared in accordance
with Rule 10-01 of Regulation S-X and, therefore, do not include all information
and footnotes necessary for a fair presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. All adjustments of a normal recurring nature have been made,
including appropriate estimates for reserves and provisions which are normally
determined or settled at year end. In the opinion of the Company, the
accompanying financial statements contain all adjustments (consisting solely of
a normal recurring nature) necessary to present fairly Holdings' financial
position as of March 31, 1999 and 1998 and December 31, 1998 and results of
operations and cash flows for the three months ended March 31, 1999 and 1998.
While the Company believes that the disclosures presented are adequate to make
the information not misleading, it is suggested that these financial statements
be read in conjunction with Holdings' financial statements and notes included in
its Annual Report on Form 10-K for the year ended December 31, 1998.
2. Comprehensive Income
Comprehensive income is reported in the Consolidated Statements of Deficiency in
Stockholders' Equity. Amounts included in accumulated other comprehensive income
(loss) at March 31, 1999, March 31, 1998 and December 31, 1998 consist of the
following:
March 31, March 31, Dec. 31,
1999 1998 1998
---- ---- ----
(Dollars in thousands)
Foreign currency translation ............... $(608) $(355) $(703)
Additional minimum pension liability ....... (20) -- (20)
----- ----- -----
Accumulated other comprehensive
income (loss) ..................... $(628) $(355) $(723)
===== ===== =====
The components of comprehensive income for the three months ended March 31, 1999
and 1998 are as follows:
March 31, March 31,
1999 1998
---- ----
(Dollars in thousands)
Net income .......................................... $5,623 $6,669
Foreign currency translation adjustments ............ 95 153
------ ------
Comprehensive income .............................. $5,718 $6,822
====== ======
-6-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 1999 and 1998 and for the
three months then ended is unaudited)
3. Inventories
Inventories consisted of the following:
March 31, March 31, Dec. 31,
1999 1998 1998
---- ---- ----
(Dollars in thousands)
Raw materials and supplies ................. $ 52,473 $ 33,191 $ 34,224
Work-in-process ............................ 41,894 54,521 52,415
Finished goods ............................. 193,809 178,754 147,339
Spare parts and other ...................... 11,990 8,731 10,927
-------- -------- --------
300,166 275,197 244,905
Adjustment to value inventory
at cost on the LIFO Method .............. 6,663 1,075 5,180
-------- -------- --------
$306,829 $276,272 $250,085
======== ======== ========
4. Long-Term Debt
Long-term debt consisted of the following:
March 31, March 31, Dec. 31,
1999 1998 1998
---- ---- ----
(Dollars in thousands)
Bank debt:
Bank Revolving Loans .................. $ 262,700 $ 58,000 $ 135,900
Bank A Term Loans ..................... 223,900 223,900 223,900
Bank B Term Loans ..................... 192,449 192,449 192,449
Canadian Bank Facility ................ 15,808 19,375 15,586
---------- ---------- ----------
Total bank debt .................... 694,857 493,724 567,835
Subordinated debt:
9% Senior Subordinated Debentures ..... 300,000 300,000 300,000
13 1/4% Subordinated Debentures ....... 56,206 56,206 56,206
Other ................................. 3,000 -- 3,000
---------- ---------- ----------
Total subordinated debt ............ 359,206 356,206 359,206
Total debt ................................. 1,054,063 849,930 927,041
Less: Amounts to be repaid within
one year ........................... 160,715 46,462 36,065
---------- ---------- ----------
$ 893,348 $ 803,468 $ 890,976
========== ========== ==========
-7-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 1999 and 1998 and for the
three months then ended is unaudited)
4. Long-Term Debt (continued)
Under the Company's U.S. senior secured bank credit facility (the "U.S. Credit
Agreement"), the Company has available to it $545.5 million of bank revolving
loans. The Company also has $4.5 million of bank revolving loans available to it
under its Canadian bank facility. Bank revolving loans may be used by the
Company for working capital needs, acquisitions, common stock repurchases and
other permitted purposes. Bank revolving loans may be borrowed, repaid and
reborrowed until December 31, 2003, their final maturity date under both
facilities.
At March 31, 1999, bank revolving loans consisted of $126.8 million related
primarily to seasonal working capital needs and $135.9 million related to
long-term financing of acquisitions. Bank revolving loans used to finance
acquisitions have been recorded as long-term debt. At March 31, 1999, amounts
expected to be repaid within one year consisted of $126.8 million of bank
revolving loans and $33.9 million of bank term loans.
5. Income Taxes
The provision for income taxes for the three months ended March 31, 1999 was
recorded at an effective tax rate of 39.0%; the comparable prior period rate in
1998 was approximately 38.0%.
6. Stockholders' Equity
The Company's Board of Directors has authorized the repurchase by the Company of
up to $70.0 million of its common stock, including $10 million authorized in
April 1999. The Company expects to fund repurchases from internally generated
funds or from revolving loan borrowings under its U.S. Credit Agreement. The
Company's repurchases of common stock are recorded as treasury stock and result
in a reduction of stockholders' equity. As of March 31, 1999, the Company
repurchased 2,277,003 shares of its common stock for $54.1 million. In April
1999, the Company repurchased 326,972 shares of its common stock for $5.8
million.
7. Business Segment Information
Presented below is a table setting forth reportable business segment profit or
loss for the three months ended March 31, 1999 and 1998 for the Company's three
business segments. Segment information for 1998 has been restated to conform
with the requirements of Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
-8-
SILGAN HOLDINGS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information at March 31, 1999 and 1998 and for the
three months then ended is unaudited)
7. Business Segment Information (continued)
Metal Food Plastic Specialty
Containers Containers Packaging Other(1) Total
---------- ---------- --------- -------- -----
(Dollars in millions)
Three Months Ended
March 31, 1999
- --------------
Net sales ....................... $288.3 $78.8 $31.6 $ -- $398.7
EBITDA(2) ....................... 32.1 15.9 4.2 (0.7) 51.5
Depreciation and amortization ... 13.3 5.8 2.3 -- 21.4
Segment profit (loss) ........... 18.8 10.1 1.9 (0.7) 30.1
Three Months Ended
March 31,1998
- -------------
Net sales ....................... $229.3 $75.2 $29.9 $ -- $334.4
EBITDA(2) ....................... 28.8 14.7 3.0 (0.4) 46.1
Depreciation and amortization ... 10.6 4.7 2.1 -- 17.4
Segment profit (loss) ........... 18.2 10.0 0.9 (0.4) 28.7
(1)The other category provides information pertaining to the corporate holding
company.
(2)EBITDA means earnings before interest, taxes, depreciation and amortization.
Total segment profit is reconciled to income before income taxes as follows:
March 31, March 31,
1999 1998
---- ----
(Dollars in millions)
Total segment profit ................................ $30.1 $28.7
Interest expense and other related financing costs .. 20.9 18.0
----- -----
Income before income taxes ........................ $ 9.2 $10.7
===== =====
-9-
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 the Company and therefore involve a number of
uncertainties and risks, including, but not limited to, those described in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998
and the Company's other filings with the Securities and Exchange Commission. As
a result, the actual results of operations or financial condition of the Company
could differ materially from those expressed or implied in such forward-looking
statements.
RESULTS OF OPERATIONS - THREE MONTHS
Summary unaudited results of operations for the Company's three business
segments, metal food containers, plastic containers and specialty packaging, for
the three months ended March 31, 1999 and 1998 are provided below.
Three Months Ended March 31,
----------------------------
1999 1998
---- ----
(In millions)
Net sales:
Metal food containers ..................... $288.3 $229.3
Plastic containers ........................ 78.8 75.2
Specialty packaging ....................... 31.6 29.9
------ ------
Consolidated ........................... $398.7 $334.4
====== ======
Operating profit:
Metal food containers ..................... $ 18.8 $ 18.2
Plastic containers ........................ 10.1 10.0
Specialty packaging ....................... 1.9 0.9
Other ..................................... (0.7) (0.4)
------ ------
Consolidated ............................ $ 30.1 $ 28.7
====== ======
Three Months Ended March 31, 1999 Compared with Three Months Ended
March 31, 1998
Net Sales. Consolidated net sales increased $64.3 million, or 19.2%, to $398.7
million for the three months ended March 31, 1999, as compared to net sales of
$334.4 million for the same three months in the prior year. This increase
resulted primarily from incremental sales added from acquisitions and, to a
lesser extent, from increased sales to existing customers of the metal food
container and specialty packaging businesses.
-10-
Net sales for the metal food container business were $288.3 million for the
three months ended March 31, 1999, an increase of $59.0 million, or 25.7%, from
net sales of $229.3 million for the same period in 1998. This increase resulted
from sales to Campbell Soup Company ("Campbell") under the Supply Agreement with
Campbell entered into in June 1998 and from increased unit sales to existing
customers.
Net sales for the plastic container business of $78.8 million during the three
months ended March 31, 1999 increased $3.6 million, or 4.8%, from net sales of
$75.2 million for the same period in 1998. The increase in net sales was
principally attributable to incremental sales added by its August 1998
acquisition of Clearplass Containers, Inc. and was offset in part by the pass
through of lower resin costs to customers. During the quarter, however, unit
sales to existing customers increased by approximately 5% as compared to the
same period in 1998.
Net sales for the specialty packaging business increased $1.7 million, or 5.7%,
to $31.6 million during the three months ended March 31, 1999, as compared to
$29.9 million for the same period in 1998. This increase resulted from higher
unit sales to existing customers.
Cost of Goods Sold. Cost of goods sold as a percentage of consolidated net sales
was 88.0% ($350.9 million) for the three months ended March 31, 1999, an
increase of 1.2 percentage points as compared to 86.8% ($290.1 million) for the
same period in 1998. The decline in gross profit margins was primarily
attributable to lower average per unit sales prices realized by the metal food
container business due to the impact of lower margin sales to Campbell and to a
change in the mix of products sold by the plastic container business.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales decreased 0.3
percentage points to 4.4% ($17.8 million) for the three months ended March 31,
1999, as compared to 4.7% ($15.7 million) for the three months ended March 31,
1998. The improvement in selling, general and administrative expenses as a
percentage of net sales principally related to increased revenues generated from
the recent acquisitions without a commensurate increase in selling, general and
administrative costs.
Income from Operations. Income from operations as a percentage of consolidated
net sales for the three months ended March 31, 1999 decreased to 7.6% ($30.1
million), as compared to 8.6% ($28.7 million) for the same period in 1998. The
decline in operating margins in the first quarter of 1999 as compared to the
same period in 1998 was principally attributable to lower margins realized by
the metal food container business and was offset in part by the improved
operating performance of the specialty packaging business.
Income from operations as a percentage of net sales for the metal food container
business decreased 1.3 percentage points to 6.6% ($18.8 million) for the three
months ended March 31, 1999, as compared to 7.9% ($18.2 million) for the same
period in 1998. The decrease in income from operations as a percentage of net
sales for the metal food container business was principally due to the impact of
lower margin sales to Campbell. In addition, higher unit sales to existing
customers offset price reductions provided to certain metal food container
customers in exchange for contract extensions.
-11-
The Company had anticipated a decline in its operating margins for this quarter
due to the impact of lower margin sales to Campbell. However, this impact was
greater than expected due to significantly lower than forecasted sales to
Campbell during the quarter. In January 1999, Campbell announced a one-time
adjustment to its production and distribution cycle which would reduce its soup
shipments in the first half of 1999. The Company believes that a majority of
Campbell's announced one-time adjustment was completed in this quarter. As a
result, the Company anticipates that its sales to Campbell for the remainder of
the year will be more consistent with historical rates. Excluding the effect of
sales to Campbell, first quarter operating margins for the existing metal food
container business for the first quarter of 1999 remained relatively the same as
compared to the same period in 1998.
Income from operations as a percentage of net sales for the plastic container
business decreased 0.5 percentage points to 12.8% ($10.1 million) for the three
months ended March 31, 1999, as compared to 13.3% ($10.0 million) for the same
period in 1998. The decrease in income from operations as a percentage of net
sales for the plastic container business was principally attributable to a
change in the mix of products sold to existing customers, resulting in slightly
higher per unit production costs.
Income from operations as a percentage of net sales for the specialty packaging
business improved 2.9 percentage points to 5.9% ($1.9 million) for the three
months ended March 31, 1999, as compared to 3.0% ($0.9 million) for the same
period in 1998. The improvement in operating performance of the specialty
packaging business was due to higher unit sales, resulting in lower per unit
production costs, and was offset in part by costs associated with the
development of new proprietary closure technology.
Interest Expense. Interest expense increased $2.9 million to $20.9 million for
the three months ended March 31, 1999, principally as a result of the incurrence
of additional indebtedness to finance acquisitions and repurchases of common
stock.
Income Taxes. The provision for income taxes for the three months ended March
31, 1999 was recorded at an effective tax rate of 39.0% ($3.6 million), as
compared to approximately 38.0% used in the comparable period in 1998.
Net Income and Earnings per Share. As a result of the items discussed above, net
income for the three months ended March 31, 1999 was $5.6 million, a decrease of
$1.1 million from net income of $6.7 million for the three months ended March
31, 1999. Earnings per diluted share for the first quarter of 1999 were $0.30 as
compared with $0.33 for the same period in 1998.
CAPITAL RESOURCES AND LIQUIDITY
The Company's liquidity requirements arise primarily from its obligations under
the indebtedness incurred in connection with its acquisitions and the
refinancing of such indebtedness, capital investment in new and existing
equipment and the funding of the Company's seasonal working capital needs.
Historically, the Company has met these liquidity requirements through cash flow
generated from operating activities and revolving loan borrowings.
-12-
For the three months ended March 31, 1999, the Company used net borrowings of
revolving loans of $126.8 million under the Company's U.S. Credit Agreement and
cash balances of $2.1 million to fund cash used by operations of $100.5 million
for the Company's seasonal working capital needs, capital expenditures of $17.7
million and repurchases of common stock for $10.7 million.
Because the Company sells metal containers used in fruit and vegetable pack
processing, its sales are seasonal. As is common in the industry, the Company
must access working capital to build inventory and then carry accounts
receivable for some customers beyond the end of the summer and fall packing
season. Seasonal accounts are generally settled by year end. Due to the
Company's seasonal requirements, the Company expects to incur short-term
indebtedness to finance its working capital requirements.
The Company utilizes its revolving loan facilities for seasonal working capital
needs and for other general corporate purposes, including acquisitions and
repurchases of its common stock. For 1999, the Company estimates that at its
peak it will utilize approximately $175-$185 million of its revolving loan
facilities for seasonal working capital needs. As a result, the Company
estimates that approximately $200 million of its revolving loan facilities is
available to it in 1999 for acquisitions, repurchase of common stock and other
permitted purposes.
As of March 31, 1999, the Company had $262.7 million of revolving loans
outstanding, of which $126.8 million related primarily to seasonal working
capital needs and $135.9 million related to long-term financing of acquisitions.
The amount used for acquisition financing has been recorded as long-term debt.
The unused portion of revolving loan commitments under the Company's credit
agreements at March 31, 1999, after taking into account outstanding letters of
credit, was $276.1 million.
The Company's Board of Directors has authorized the repurchase of up to $70
million of its common stock, including $10 million authorized in April 1999. At
current price levels, the Company believes a repurchase of its shares is an
attractive investment. As of March 31, 1999, the Company repurchased 2,277,003
shares of its common stock at an average cost of $23.74 per share. In April
1999, the Company repurchased 326,972 shares of its common stock at an average
price of $17.79 per share. The share repurchases were funded through revolving
loan borrowings under the Company's U.S. Credit Agreement. The Company intends
to finance future share repurchases through revolving loan borrowings under its
U.S. Credit Agreement or through internally generated funds.
Management believes that cash generated by operations and funds from revolving
loan borrowings under the Company's credit agreements will be sufficient to meet
the Company's expected operating needs, planned capital expenditures, debt
service, share repurchase plan, and tax obligations for the foreseeable future.
-13-
Since 1995, the Company has completed three acquisitions in its metal food
container business, including its acquisitions of the Food Metal and Specialty
business of American National Can Company in August 1995 and of the steel
container manufacturing business of Campbell ("CS Can") in June 1998. Following
the CS Can acquisition, the Company initiated a study in 1999 to evaluate the
long-term utilization of all assets of its metal food container business,
including assets acquired through such acquisitions. As a result, the Company
may establish, in addition to its existing facility rationalization reserves, a
one-time noncash impairment charge to earnings to write down the value of
certain assets that are determined to be surplus or obsolete to its future
requirements. Because this study is still in process and not expected to be
completed until late in the second quarter or early in the third quarter, the
Company cannot yet accurately determine the amount of such charge and its
resulting effect on the Company's earnings.
The Company is continually evaluating and pursuing acquisition opportunities in
the consumer goods packaging market. The Company intends to borrow additional
revolving loans under its U.S. Credit Agreement to finance such acquisitions and
to fund any resulting increased operating needs. However, the Company may need
to incur additional new indebtedness to finance such acquisitions and to fund
any resulting increased operating needs. Any such new financing will have to be
effected in compliance with the agreements governing the Company's indebtedness.
There can be no assurance that the Company will be able to complete any such
acquisition or obtain any such new financing.
The Company is in compliance with all financial and operating covenants
contained in the instruments and agreements governing its indebtedness and
believes that it will continue to be in compliance with all such covenants
during 1999.
YEAR 2000 ISSUES
Since 1997, the Company has been in the process of reviewing its computer and
operational systems to identify and determine the extent to which its systems
will be vulnerable to potential errors and failures as a result of the "Year
2000" issue. The Year 2000 issue arises because many computer systems and other
equipment with embedded chips or processors use only two digits to represent the
year and, as a result, may be unable to process accurately certain data before,
during or after the year 2000. The Year 2000 issue presents several risks to the
Company, such as (i) the Company's internal systems may not function properly,
(ii) suppliers' computer and operational systems may not function properly and,
consequently, deliveries of materials and supplies may be delayed, (iii)
customers' computers and operational systems may not function properly and,
consequently, orders or payments for the Company's products may be delayed, and
(iv) the Company's banks' computer systems could malfunction, disrupting the
Company's orderly posting of deposits, funds, transfers and payments. Such a
disruption at any point in the Company's supply, manufacturing, processing,
distribution or financial chains could have a material adverse effect on the
Company's financial condition and results of operations.
As a manufacturer of consumer goods packaging products, the products
manufactured and sold by the Company are unaffected by Year 2000 issues since
they contain no microprocessors or similar electronic components.
-14-
The Company has undertaken various initiatives intended to ensure that its
internal computing infrastructure, business applications and shop floor systems
are Year 2000 compliant. These systems assist in the control of the Company's
operations by performing such functions as processing financial data,
maintaining manufacturing processes and assisting with facilities management and
security. Many of these systems contain one or more microprocessors or other
embedded electronic components that could be affected by Year 2000 issues.
Failure of some of these systems could result in significant business
disruptions for the Company.
Based upon its identification and assessment efforts to date, the Company has
initiated modifications to its internal computing infrastructure, business
applications and shop floor systems. These systems are being renovated or
replaced as necessary to assure Year 2000 compliance. Utilizing both internal
and external resources to identify and assess needed Year 2000 remediation, the
Company currently anticipates that its Year 2000 identification, assessment,
remediation and testing efforts will be substantially completed by June 30,
1999, prior to any currently anticipated impact on its computer equipment and
software and shop floor systems. The Company estimates that as of March 31, 1999
it had completed approximately 90-95% of the initiatives that it believes will
be necessary to fully address potential Year 2000 issues relating to its
computer equipment and software and shop floor systems. The remaining
initiatives are in process and expected to be substantially completed before or
about June 30, 1999.
The Company believes that the cost of its Year 2000 identification, assessment,
remediation and testing efforts will approximate $2.0-$3.0 million, which
expenditures will be funded from operating cash flows. As of March 31, 1999, the
Company had incurred costs of approximately $1.6 million related to the Year
2000 issue. Principally all of these costs relate to analysis, repair, upgrade
or replacement of existing software.
The Company relies on numerous third party vendors and suppliers for a wide
variety of goods and services, including raw materials, telecommunications and
utilities such as water and electricity. Many of the Company's operating
locations would be adversely affected if these supplies and services were
curtailed as a result of a supplier's Year 2000 noncompliance. The Company's
vendor and supplier base has been surveyed through questionnaires in an attempt
to identify potential disruptions in the event of vendor Year 2000
noncompliance. Widespread disruption of certain utilities such as electricity
would result in a temporary closure of affected facilities and potential damage
to production equipment.
The Company is in the process of developing contingency plans related to the
Year 2000 issue that include securing alternate sources of supply, stockpiling
raw materials, increasing inventory levels, adjusting facility shutdown and
start-up schedules, moving critical equipment to other facilities not affected
by the Year 2000 issue and other appropriate measures. The contingency plans and
related cost estimates will be refined as additional information becomes
available.
-15-
The Company presently believes that the Year 2000 issue will not pose
significant operational problems for the Company. However, if all Year 2000
issues are not identified, or assessment, remediation and testing are not
effected timely, there can be no assurance that the Year 2000 issue will not
materially and adversely impact the Company's results of operations or adversely
affect the Company's relationships with customers, vendors, or others.
Additionally, there can be no assurance that the Year 2000 issues of third
parties (including suppliers, customers, banks and governmental entities) will
not have a material adverse impact on the Company's systems or results of
operations.
The costs of the Company's Year 2000 identification, assessment, remediation and
testing efforts and the dates on which the Company believes it will complete
such efforts are based upon management's best estimates, which were derived
using numerous assumptions regarding future events, including the continued
availability of certain resources, third party remediation plans, and other
factors. There can be no assurance that these estimates will prove to be
accurate, and actual results could differ materially from those currently
anticipated. Specific factors that could cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in Year 2000 issues, the ability to identify, assess, remediate and test all
relevant computer codes and embedded technology, unanticipated Year 2000
noncompliance by suppliers and/or customers, and similar uncertainties.
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates. The Company also has limited foreign currency risk associated
with its Canadian operations. The Company employs established policies and
procedures to manage its exposure to fluctuations in interest rates and the
value of foreign currencies. Interest rate and foreign currency transactions are
used only to the extent considered necessary to meet the Company's objectives.
The Company does not utilize derivative financial instruments for trading or
other speculative purposes.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of
interest rate changes on its earnings and cash flow and to lower its overall
borrowing cost. To achieve its objectives, the Company regularly evaluates the
amount of its variable rate debt as a percentage of its aggregate debt. The
Company manages its exposure to interest rate fluctuations in its variable rate
debt through interest rate swap agreements. These agreements effectively convert
interest rate exposure from variable rates to fixed rates of interest without
the exchange of the underlying principal amounts.
-16-
Notional principal amounts of the Company's interest rate swap agreements
totaled $100.0 million at March 31, 1999. These agreements provide for fixed
rates of interest ranging from 5.9% to 6.0% and mature in the fourth quarter of
1999. In the first quarter of 1999, interest rate swap agreements for additional
notional principal amounts of $100.0 million matured. These interest rate swap
agreements provided for fixed rates of interest ranging from 5.6% to 6.2%. The
notional principal amounts are used to measure the interest to be paid or
received and do not represent the amount of exposure to credit loss. The
difference between amounts to be paid or received on interest swap agreements
are recorded as adjustments to interest expense. Net payments of $0.3 million
for the three months ended March 31, 1999 were recorded under the Company's
interest swap agreements. The fair value of the Company's interest rate swap
agreements at March 31, 1999 was a liability of $0.6 million.
Based on the average outstanding amount of variable rate indebtedness of the
Company in 1998, a one percentage point change in the interest rates for the
Company's variable rate debt would have impacted the Company's 1998 interest
expense by an aggregate of approximately $4.4 million, after giving effect to
the Company's interest rate swap agreements.
Foreign Currency Exchange Rate Risk
The Company does not conduct a significant portion of its manufacturing or sales
activity in foreign markets. Presently, the Company's only foreign activities
are conducted in Canada. The Company's reported financial results could be
affected, however, by factors such as changes in foreign currency exchange rates
in the markets where it operates. When the U.S. dollar strengthens against such
foreign currencies, the reported U.S. dollar value of local currency operating
profits generally decreases; when the U.S. dollar weakens against such foreign
currencies, the reported U.S. dollar value of local currency operating profits
generally increases. Since the Company does not have significant foreign
operations, the Company does not believe it is necessary to enter into any
derivative financial instruments to reduce its exposure to foreign currency
exchange rate risk.
Because the Company's Canadian subsidiary operates within its local economic
environment, the Company believes it is appropriate to finance such operation
with local currency borrowings. In determining the amount of such borrowings,
the Company evaluates the operation's short and long-term business plans, tax
implications, and the availability of borrowings with acceptable interest rates
and terms. This strategy mitigates the risk of reported losses or gains in the
event that the Canadian currency strengthens or weakens against the U.S. dollar.
Furthermore, the Company's Canadian operating profit is used to repay its local
borrowings or is reinvested in Canada, and is not expected to be remitted to the
Company or invested elsewhere. As a result, it is not necessary for the Company
to mitigate the economic effects of currency rate fluctuations on its Canadian
earnings.
-17-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Number Description
12 Ratio of Earnings to Fixed Charges
27 Financial Data Schedule.
(b) Reports on Form 8-K
None.
-18-
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: May 5, 1999 /s/Harley Rankin, Jr.
- ------------------- ----------------------------------
Harley Rankin, Jr.
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Dated: May 5, 1999 /s/Stephen J. Sweeney
- ------------------- ----------------------------------
Stephen J. Sweeney
Vice President and Controller
(Chief Accounting Officer)
-19-
Exhibit 12
SILGAN HOLDINGS INC.
RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
Three Months Ended
March 31, March 31,
1999 1998
---- ----
(Unaudited)
Income before income taxes ............................... $ 9,211 $10,698
Add:
Interest expense and debt amortization ............ 20,893 17,963
Rental expense representative of interest factor... 255 294
------- -------
Net income, as adjusted ........................... $30,359 $28,955
======= =======
Fixed charges:
Interest expense and debt amortization ............ $20,893 $17,963
Rental expense representative of interest factor... 255 294
------- -------
Total fixed charges ............................... $21,148 $18,257
======= =======
Ratio of earnings to fixed charges........................ 1.44 1.59
==== ====