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, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934.
For the transition period from ________________ to ________________
Commission file number 000-22117
SILGAN HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware 06-1269834
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4 Landmark Square
Stamford, Connecticut 06901
(Address of Principal Executive Offices) (Zip Code)
(203)975-7110
(Registrant's Telephone Number, Including Area Code)
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of July 29, 2005, the number of shares outstanding of the Registrant's common
stock, $0.01 par value, was 18,568,416.
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, 2005 and 2004 and December 31, 2004
Condensed Consolidated Statements of Income for the 4
three months ended June 30, 2005 and 2004
Condensed Consolidated Statements of Income for the 5
six months ended June 30, 2005 and 2004
Condensed Consolidated Statements of Cash Flows for 6
the six months ended June 30, 2005 and 2004
Condensed Consolidated Statements of Stockholders' 7
Equity for the six months ended June 30, 2005 and 2004
Notes to Condensed Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 19
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market 26
Risk
Item 4. Controls and Procedures 27
Part II. Other Information 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits 28
Signatures 29
Exhibit Index 30
-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,
2005 2004 2004
---- ---- ----
Assets
Current assets
Cash and cash equivalents ............................... $ 82,333 $ 23,908 $ 35,416
Trade accounts receivable, net .......................... 249,531 258,753 148,073
Inventories ............................................. 445,127 439,270 318,665
Prepaid expenses and other current assets ............... 42,521 44,491 53,776
---------- ---------- ----------
Total current assets ................................ 819,512 766,422 555,930
Property, plant and equipment, net ........................... 776,143 802,671 792,936
Goodwill, net ................................................ 198,283 204,512 198,346
Other assets, net ............................................ 40,311 59,885 49,947
---------- ---------- ----------
$1,834,249 $1,833,490 $1,597,159
========== ========== ==========
Liabilities and Stockholders' Equity
Current liabilities
Bank revolving loans .................................... $ 351,600 $ 226,900 $ --
Current portion of long-term debt ....................... 1,250 23,670 21,804
Trade accounts payable .................................. 175,533 168,363 244,116
Accrued payroll and related costs ....................... 58,235 69,145 57,364
Accrued liabilities ..................................... 44,382 42,360 21,152
---------- ---------- ----------
Total current liabilities ........................... 631,000 530,438 344,436
Long-term debt ............................................... 751,750 953,910 819,864
Other liabilities ............................................ 218,048 194,933 225,423
Stockholders' equity
Common stock ............................................ 213 211 211
Paid-in capital ......................................... 137,608 128,455 131,685
Retained earnings ....................................... 157,702 87,473 136,768
Accumulated other comprehensive income (loss) ........... 485 (1,433) 859
Unamortized stock compensation .......................... (2,164) (104) (1,694)
Treasury stock .......................................... (60,393) (60,393) (60,393)
---------- ---------- ----------
Total stockholders' equity .......................... 233,451 154,209 207,436
---------- ---------- ----------
$1,834,249 $1,833,490 $1,597,159
========== ========== ==========
See accompanying notes.
-3-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the three months ended June 30, 2005 and 2004
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2005 2004
---- ----
Net sales ............................................ $581,158 $551,311
Cost of goods sold ................................... 503,389 479,556
-------- --------
Gross profit .................................... 77,769 71,755
Selling, general and administrative expenses ......... 28,093 26,314
Rationalization charges .............................. 181 211
-------- --------
Income from operations .......................... 49,495 45,230
Interest and other debt expense before loss on
early extinguishment of debt ...................... 13,633 15,083
Loss on early extinguishment of debt ................. 11,035 --
-------- --------
Interest and other debt expense ................. 24,668 15,083
Income before income taxes ...................... 24,827 30,147
Provision for income taxes ........................... 9,409 11,908
-------- --------
Net income ...................................... $ 15,418 $ 18,239
======== ========
Earnings per share:
Basic net income per share ...................... $0.83 $0.99
===== =====
Diluted net income per share .................... $0.82 $0.98
===== =====
Dividends per share: ................................. $0.20 $0.15
===== =====
Weighted average number of shares:
Basic ........................................... 18,540 18,362
Effect of dilutive securities ................... 246 227
------ ------
Diluted ......................................... 18,786 18,589
====== ======
See accompanying notes.
-4-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the six months ended June 30, 2005 and 2004
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
2005 2004
---- ----
Net sales .......................................... $1,111,202 $1,069,641
Cost of goods sold ................................. 971,249 935,726
---------- ----------
Gross profit .................................. 139,953 133,915
Selling, general and administrative expenses ....... 56,378 53,940
Rationalization charges ............................ 464 1,201
---------- ----------
Income from operations ........................ 83,111 78,774
Interest and other debt expense before loss on
early extinguishment of debt .................... 25,915 30,305
Loss on early extinguishment of debt ............... 11,035 --
---------- ----------
Interest and other debt expense ............... 36,950 30,305
Income before income taxes .................... 46,161 48,469
Provision for income taxes ......................... 17,815 19,145
---------- ----------
Net income .................................... $ 28,346 $ 29,324
========== ==========
Earnings per share:
Basic net income per share .................... $1.53 $1.60
===== =====
Diluted net income per share .................. $1.51 $1.58
===== =====
Dividends per share: ............................... $0.40 $0.15
===== =====
Weighted average number of shares:
Basic ........................................ 18,501 18,335
Effect of dilutive securities ................ 267 243
------ ------
Diluted ...................................... 18,768 18,578
====== ======
See accompanying notes.
-5-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended June 30, 2005 and 2004
(Dollars in thousands)
(Unaudited)
2005 2004
---- ----
Cash flows provided by (used in) operating activities
Net income .................................................. $ 28,346 $ 29,324
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization ........................... 61,660 59,866
Rationalization charges ................................. 464 1,201
Loss on early extinguishment of debt .................... 11,035 --
Other changes that provided (used) cash:
Trade accounts receivable, net ..................... (101,458) (99,480)
Inventories ........................................ (126,462) (119,156)
Trade accounts payable ............................. 11,234 33,385
Accrued liabilities ................................ 23,637 18,781
Other, net ......................................... 7,569 8,493
--------- ---------
Net cash used in operating activities ................... (83,975) (67,586)
--------- ---------
Cash flows provided by (used in) investing activities
Capital expenditures ........................................ (44,199) (46,556)
Proceeds from asset sales ................................... 188 2,101
--------- ---------
Net cash used in investing activities ................... (44,011) (44,455)
--------- ---------
Cash flows provided by (used in) financing activities
Borrowings under revolving loans ............................ 779,225 535,875
Repayments under revolving loans ............................ (427,625) (333,975)
Proceeds from stock option exercises ........................ 2,675 1,528
Changes in outstanding checks - principally vendors ......... (79,817) (76,661)
Proceeds from issuance of long-term debt .................... 550,000 --
Repayments of long-term debt ................................ (638,668) --
Dividends paid on common stock .............................. (7,412) (2,756)
Debt issuance costs ......................................... (3,475) (162)
--------- ---------
Net cash provided by financing activities ............... 174,903 123,849
--------- ---------
Cash and cash equivalents
Net increase ................................................ 46,917 11,808
Balance at beginning of year ................................ 35,416 12,100
--------- ---------
Balance at end of period .................................... $ 82,333 $ 23,908
========= =========
Interest paid .................................................... $ 25,615 $ 28,616
Income taxes (refunded) paid, net ................................ (476) 977
See accompanying notes.
-6-
SILGAN HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
For the six months ended June 30, 2005 and 2004
(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, 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 provision of $3,629 ....... -- -- -- -- 5,555 -- -- 5,555
Foreign currency translation .......... -- -- -- -- (1,313) -- -- (1,313)
--------
Comprehensive income ..................... 33,566
--------
Dividends 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
====== ==== ======== ======== ======= ======= ======== ========
Balance at December 31, 2004 ............. 18,423 $211 $131,685 $136,768 $ 859 $(1,694) $(60,393) $207,436
Comprehensive income:
Net income ............................ -- -- -- 28,346 -- -- -- 28,346
Change in fair value of derivatives,
net of tax provision of $274 ........ -- -- -- -- 653 -- -- 653
Foreign currency translation .......... -- -- -- -- (1,027) -- -- (1,027)
--------
Comprehensive income ..................... 27,972
--------
Dividends declared on common stock ....... -- -- -- (7,412) -- -- -- (7,412)
Issuance of restricted stock units ....... -- -- 706 -- -- (706) -- --
Amortization of stock compensation ....... -- -- -- -- -- 236 -- 236
Stock option exercises, including
tax benefit of $2,544 .................. 145 2 5,217 -- -- -- -- 5,219
------ ---- -------- -------- ------- ------- -------- --------
Balance at June 30, 2005 ................. 18,568 $213 $137,608 $157,702 $ 485 $(2,164) $(60,393) $233,451
====== ==== ======== ======== ======= ======= ======== ========
See accompanying notes.
-7-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 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, 2004 has been derived
from our audited consolidated financial statements at that date, but does not
include all of the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements.
You should read the accompanying condensed consolidated financial statements in
conjunction with our consolidated financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31, 2004.
Certain prior year amounts have been reclassified to conform with the current
year's presentation.
Cash and Cash Equivalents. Cash equivalents represent short-term, highly liquid
investments which are readily convertible to cash and have maturities of three
months or less at the time of purchase. As a result of our cash management
system, checks issued for payment may create negative book balances. Checks
outstanding in excess of related book balances of approximately $25.7 million,
$22.8 million and $105.5 million at June 30, 2005 and 2004 and December 31,
2004, respectively, are included in trade accounts payable in our Condensed
Consolidated Balance Sheets. For the six months ended June 30, 2005 and 2004, we
reclassified the changes in outstanding checks from operating activities to
financing activities in our Condensed Consolidated Statements of Cash Flows to
treat them as, in substance, cash advances.
Stock-Based Compensation. We currently have one stock-based compensation plan in
effect, under which we have issued options and restricted stock units to our
officers, other key employees and outside directors. We apply the recognition
and measurement principles of Accounting Principles Board, or APB, Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for stock awards. Accordingly, no compensation expense for employee
stock options is recognized, as all options granted had an exercise price that
was equal to or greater than the market value of the underlying stock on the
date of the grant. Restricted stock units issued are accounted for as fixed
grants and, accordingly, the fair value at the grant date has been charged to
stockholders' equity as unamortized stock compensation and is being amortized
ratably over the respective vesting period.
-8-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Stock-Based Compensation (continued). In the first half of 2005, we granted
8,000 restricted stock units to certain of our officers and key employees. These
restricted stock units vest ratably over a five-year period from the date of
grant. The fair value of these units at the date of grant was $0.5 million.
Additionally, in May 2005, we granted 3,564 restricted stock units to the
independent members of our Board of Directors, which vest in full one year from
the date of grant. The fair value of these units at the date of grant was $0.2
million. Unvested restricted stock units may not be disposed of or transferred
during the vesting period.
If we had applied the fair value recognition provisions of Statement of
Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based
Compensation," net income and basic and diluted earnings per share would have
been as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands, except per share data)
Net income, as reported .................................... $15,418 $18,239 $28,346 $29,324
Add: Stock-based compensation expense
included in reported net income, net of
income taxes .......................................... 80 14 143 14
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of
income taxes .......................................... (346) (401) (705) (876)
------- ------- ------- -------
Pro forma net income ....................................... $15,152 $17,852 $27,784 $28,462
======= ======= ======= =======
Earnings per share:
Basic net income per share - as reported ............... $0.83 $0.99 $1.53 $1.60
===== ===== ===== =====
Basic net income per share - pro forma ................. 0.82 0.97 1.50 1.55
===== ===== ===== =====
Diluted net income per share - as reported ............. $0.82 $0.98 $1.51 $1.58
===== ===== ===== =====
Diluted net income per share - pro forma ............... 0.81 0.96 1.48 1.54
===== ===== ===== =====
Recently Issued Accounting Pronouncements. In November 2004, the Financial
Accounting Standards Board, or the FASB, issued SFAS No. 151, "Inventory Costs,
an amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal
amounts of idle facility expense, freight, handling costs and wasted materials
should be recognized as current period charges in all circumstances. SFAS No.
151 will be effective for us beginning January 1, 2006. We do not expect the
adoption of SFAS No. 151 to have a material effect on our financial position,
results of operations or cash flows.
-9-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 1. Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements (continued). In December 2004, the
FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires
that public companies recognize compensation expense in an amount equal to the
fair value of the share-based payment. We will adopt SFAS No. 123(R) beginning
January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements
using one of two methods:
1. A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS No.
123 for all awards granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective date.
2. A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
We are still assessing which transition method to utilize.
As permitted by SFAS No. 123, we currently account for share-based payments to
employees using APB Opinion No. 25's intrinsic value method and, as such,
recognize no compensation expense for employee stock options. Accordingly, the
adoption of SFAS No. 123(R)'s fair value method will have an impact on our
results of operations, although it will have no impact on our overall financial
position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this
time because it will depend on levels of share-based payments granted in the
future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of
that standard would have approximated the impact of SFAS No. 123 as described in
the disclosure of pro forma net income and diluted net income per share in Note
1 to our Condensed Consolidated Financial Statements. SFAS No. 123(R) also
requires the benefits of tax deductions in excess of recognized compensation
expense to be reported as a financing cash flow activity, rather than as an
operating cash flow activity as required under current literature. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. While we cannot estimate what those amounts
will be in the future (because they depend on, among other things, when
employees exercise stock options), the amounts of operating cash flows
recognized in prior periods for such excess tax deductions have not been
material to our cash flows.
On October 22, 2004, the American Jobs Creation Act, or the AJCA, was signed
into law. The AJCA includes a deduction of 85 percent on certain foreign
earnings that are repatriated during the calendar years of 2004 and 2005. We may
elect to apply this provision to qualifying earnings repatriated in 2005. The
range of possible amounts that we are evaluating for repatriation under this
provision is between zero and $48 million. The related potential range of income
tax cannot be determined at this time. We expect to complete our evaluation of
the repatriation provision under the AJCA in the fourth quarter of 2005.
-10-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 2. Rationalization Charges and Acquisition Reserves
As part of our plans to integrate the operations of our various acquired
businesses and to rationalize certain facilities, we have established reserves
for employee severance and benefits and plant exit costs. Activity in our
rationalization and acquisition reserves since December 31, 2004 is summarized
as follows:
Employee Plant Non-Cash
Severance Exit Asset
and Benefits Costs Write Down Total
------------ ----- ---------- -----
(Dollars in thousands)
Balance at December 31, 2004
----------------------------
Fairfield Rationalization .............................. $-- $ 893 $ -- $ 893
2003 Acquisition Plans ................................. 160 46 -- 206
2003 Rationalization Plans ............................. 37 690 -- 727
---- ------ ----- ------
Balance at December 31, 2004 ........................... 197 1,629 -- 1,826
Activity for the Six Months Ended June 30, 2005
-----------------------------------------------
Fairfield Rationalization .............................. -- (181) -- (181)
2003 Acquisition Plan Reserves Utilized ................ (76) -- -- (76)
2003 Rationalization Plan Reserves Utilized ............ -- (86) -- (86)
2005 Rationalization Plan Reserves Established ......... 287 48 129 464
2005 Rationalization Plan Reserves Utilized ............ (57) -- (129) (186)
---- ------ ----- ------
Total Activity ......................................... 154 (219) -- (65)
Balance at June 30, 2005
------------------------
Fairfield Rationalization .............................. -- 712 -- 712
2003 Acquisition Plans ................................. 84 46 -- 130
2003 Rationalization Plans ............................. 37 604 -- 641
2005 Rationalization Plan .............................. 230 48 -- 278
---- ------ ----- ------
Balance at June 30, 2005 ............................... $351 $1,410 $ -- $1,761
==== ====== ===== ======
-11-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 2. Rationalization Charges and Acquisition Reserves (continued)
2005 Rationalization Plan
-------------------------
During the first quarter of 2005, we approved and announced to employees a plan
to relocate the operations of one of our Mississauga, Ontario plastic container
manufacturing facilities to other operating facilities. This decision resulted
in a charge to earnings of $0.5 million, which consisted of $0.1 million for the
non-cash write-down in carrying value of assets and $0.4 million for employee
severance and benefits and plant exit costs. The relocation of operations has
been substantially completed. Through June 30, 2005, there were no significant
cash payments related to relocating this facility. Cash payments related to
these reserves are expected through 2006 for employee severance and benefits
costs.
Rationalization and acquisition reserves are included in the Condensed
Consolidated Balance Sheets as follows:
June 30, June 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Accrued liabilities.......... $ 716 $1,297 $ 877
Other liabilities............ 1,045 1,587 949
------ ------ ------
$1,761 $2,884 $1,826
====== ====== ======
Note 3. Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive income (loss) is reported in the Condensed
Consolidated Statements of Stockholders' Equity. Amounts included in accumulated
other comprehensive income (loss) consisted of the following:
June 30, June 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Foreign currency translation ........................ $ 8,610 $ 3,322 $ 9,637
Change in fair value of derivatives ................. 3,578 4,794 2,925
Minimum pension liability ........................... (11,703) (9,549) (11,703)
-------- ------- --------
Accumulated other comprehensive income (loss)..... $ 485 $(1,433) $ 859
======== ======= ========
-12-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 4. Inventories
Inventories consisted of the following:
June 30, June 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Raw materials ........................ $ 62,574 $ 45,803 $ 63,225
Work-in-process ...................... 65,273 64,798 50,366
Finished goods ....................... 311,881 314,410 198,697
Spare parts and other ................ 17,460 19,744 19,324
-------- -------- --------
457,188 444,755 331,612
Adjustment to value inventory
at cost on the LIFO method ....... (12,061) (5,485) (12,947)
-------- -------- --------
$445,127 $439,270 $318,665
======== ======== ========
Note 5. Long-Term Debt
Long-term debt consisted of the following:
June 30, June 30, Dec. 31,
2005 2004 2004
---- ---- ----
(Dollars in thousands)
Bank debt
Bank revolving loans ............... $ 351,600 $ 226,900 $ --
Bank A term loans .................. 425,000 83,330 63,669
Bank B term loans .................. 125,000 691,250 574,999
---------- ---------- --------
Total bank debt ................. 901,600 1,001,480 638,668
Subordinated debt
6 3/4% Senior Subordinated Notes ... 200,000 200,000 200,000
Other .............................. 3,000 3,000 3,000
---------- ---------- --------
Total subordinated debt ......... 203,000 203,000 203,000
---------- ---------- --------
Total debt .............................. 1,104,600 1,204,480 841,668
Less current portion ............... 352,850 250,570 21,804
---------- ---------- --------
$ 751,750 $ 953,910 $819,864
========== ========== ========
-13-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 5. Long-Term Debt (continued)
Bank Credit Agreement
---------------------
On June 30, 2005, we completed the refinancing of our previous senior secured
credit facility by entering into a new $1.0 billion senior secured credit
facility, or the Credit Agreement. Our Credit Agreement provided us with $425
million of A term loans and $125 million of B term loans, and provides us with
up to $450 million of revolving loans. Pursuant to the Credit Agreement, we also
have a $350 million incremental uncommitted loan facility, of which all of it
may be borrowed in the form of term loans and up to $150 million may be borrowed
in the form of revolving loans under the revolving loan facility.
Revolving loans may be used for working capital needs and other general
corporate purposes, including acquisitions. Revolving loans may be borrowed,
repaid and reborrowed over the life of the Credit Agreement until their final
maturity. The A term loans and revolving loans mature on June 30, 2011, and the
B term loans mature on June 30, 2012. Principal on the A term loans and B term
loans is required to be repaid in scheduled annual installments during each of
the years set forth below and amounts repaid may not be reborrowed (in
thousands):
Year A Term Loans B Term Loans
---- ------------ ------------
2005 $ -- $ 1,250
2006 -- 1,250
2007 63,750 1,250
2008 63,750 1,250
2009 85,000 1,250
2010 85,000 1,250
2011 127,500 1,250
2012 -- 116,250
-------- --------
$425,000 $125,000
======== ========
The Credit Agreement requires us to prepay the term loans with proceeds received
from the incurrence of certain indebtedness, with proceeds received from certain
assets sales and, under certain circumstances, with 50 percent of our excess
cash flow. Generally, mandatory prepayments of term loans are allocated pro rata
to the A term loans and B term loans and applied first to the scheduled
amortization payments in the year of such prepayments and, to the extent in
excess thereof, pro rata to the remaining installments of the term loans.
Voluntary prepayments of term loans may be applied to any tranche of term loans
at our discretion and are applied first to the scheduled amortization payments
in the year of such prepayment and, to the extent in excess thereof, pro rata to
the remaining installments.
The incremental uncommitted term loan facility provides, among other things,
that any incremental term loan borrowing shall be denominated in a single
currency, either U.S. dollars or certain foreign currencies; have a maturity
date no earlier than the maturity date for the B term loans; and be used to
finance acquisitions, refinance any indebtedness assumed as part of such
acquisitions, to refinance or repurchase subordinated debt as permitted and to
repay outstanding revolving loans.
-14-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 5. Long-Term Debt (continued)
Bank Credit Agreement (continued)
---------------------
Under the Credit Agreement, the interest rate for all U.S. loans will either be
base rate or LIBOR, plus a margin. The base rate is the higher of the prime
lending rate of Deutsche Bank AG New York Branch, or Deutsche Bank, or 1/2 of
one percent in excess of the overnight federal funds rate. Initially, the
interest rate for A term and revolving loans under the Credit Agreement is the
base rate plus a margin of 0.125 percent or LIBOR plus a margin of 1.125
percent. After September 30, 2005, the interest rate margin on A term and
revolving borrowings will be reset quarterly based upon our Total Leverage
Ratio, as defined in the Credit Agreement. The interest rate for B term loans is
the base rate plus a margin of 0.25 percent or LIBOR plus a margin of 1.25
percent. The margin for B term loans is fixed through maturity.
The Credit Agreement provides for the payment of a commitment fee ranging from
0.20 percent to 0.50 percent per annum on the daily average unused portion of
commitments available under the revolving loan facility. Initially, the
commitment fee will be 0.30 percent per annum. After September 30, 2005, the
commitment fee will be reset quarterly based on our Total Leverage Ratio.
We may utilize up to a maximum of $75 million of our revolving loan facility
under the Credit Agreement for letters of credit as long as the aggregate amount
of borrowings of revolving loans and letters of credit do not exceed the amount
of the commitment under such revolving loan facility. The Credit Agreement
provides for payment to the applicable lenders of a letter of credit fee equal
to the applicable margin in effect for revolving loans and to the issuers of the
letters of credit of a facing fee of 1/8 of one percent per annum, calculated on
the aggregate stated amount of all letters of credit.
The indebtedness under the Credit Agreement is guaranteed by us and certain of
our U.S. subsidiaries. The stock of certain of our U.S. subsidiaries has also
been pledged as security to the lenders under the Credit Agreement. The Credit
Agreement contains certain financial and operating covenants which limit, among
other things, our ability and the ability of our subsidiaries to grant liens,
sell assets and use the proceeds from certain asset sales, make certain payments
(including dividends) on our capital stock, incur indebtedness or provide
guarantees, make loans or investments, enter into transactions with affiliates,
make certain capital expenditures, engage in any business other than the
packaging business, and, with respect to our subsidiaries, issue stock. In
addition, we are required to meet specified financial covenants including
Interest Coverage and Total Leverage Ratios, each as defined in the Credit
Agreement. We are currently in compliance with all covenants under the Credit
Agreement.
As a result of this refinancing, we recorded a non-cash, pre-tax charge of $11.0
million for the loss on early extinguishment of debt to write-off unamortized
debt issuance costs of the previous credit facility.
In June 2005, an interest rate swap agreement for $100 million notional
principal amount with a fixed rate of 1.3%, expired.
-15-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 5. Long-Term Debt (continued)
At June 30, 2005, amounts expected to be repaid within one year consisted of
$351.6 million of bank revolving loans related primarily to seasonal working
capital needs and $1.3 million of bank term loans under our Credit Agreement.
Note 6. 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,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Service cost ................................. $ 3,249 $ 3,099 $ 6,485 $ 6,287
Interest cost ................................ 5,201 4,926 10,366 9,885
Expected return on plan assets ............... (6,601) (5,560) (13,089) (11,131)
Amortization of prior service cost ........... 785 793 1,580 1,607
Amortization of actuarial losses ............. 354 416 750 854
------- ------- -------- --------
Net periodic benefit cost .................... $ 2,988 $ 3,674 $ 6,092 $ 7,502
======= ======= ======== ========
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,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Service cost ................................. $ 394 $ 770 $ 813 $1,557
Interest cost ................................ 1,373 1,441 2,756 2,903
Amortization of prior service cost ........... -- -- 3 3
Amortization of actuarial losses ............. 100 286 213 577
------ ------ ------ ------
Net periodic benefit cost .................... $1,867 $2,497 $3,785 $5,040
====== ====== ====== ======
As previously disclosed in our consolidated financial statements and notes
thereto included in our Annual Report on Form 10-K for the year ended December
31, 2004, based on current tax law, there are no minimum required contributions
to our pension plans in 2005. However, this estimate is subject to change based
on current proposals before Congress, as well as asset performance significantly
below the assumed long-term rate of return on plan assets. In order to reduce
our unfunded pension liability, it has been our recent practice to make
contributions in excess of the ERISA minimum requirements, to the extent they
are tax deductible. During the first six months of 2005, we made no
contributions to fund our pension plans for 2005.
-16-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 7. 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, 2005
--------------------------------
Net sales .................................... $422,470 $158,688 $ -- $ 581,158
Depreciation and amortization(3) ............. 19,611 10,458 10 30,079
Segment income from operations ............... 38,919 12,872 (2,296) 49,495
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
Six Months Ended June 30, 2005
------------------------------
Net sales .................................... $796,592 $314,610 $ -- $1,111,202
Depreciation and amortization(3) ............. 39,059 20,767 19 59,845
Segment income from operations ............... 66,155 22,033 (5,077) 83,111
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
-------------
(1) Segment income from operations includes rationalization charges of
$0.2 million and $0.9 million for the three and six months ended June
30, 2004, respectively.
(2) Segment income from operations includes rationalization charges of
$0.2 million for the three months ended June 30, 2005 and $0.5 million
and $0.3 million for the six months ended June 30, 2005 and 2004,
respectively.
(3) Depreciation and amortization excludes amortization of debt
issuance costs of $0.9 million and $1.0 million for the three months
ended June 30, 2005 and 2004, respectively, and $1.8 million and $2.0
million for the six months ended June 30, 2005 and 2004, respectively.
-17-
SILGAN HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information at June 30, 2005 and 2004 and for the
three and six months then ended is unaudited)
Note 7. Business Segment Information (continued)
Total segment income from operations is reconciled to income before income taxes
as follows:
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in thousands)
Total segment income from operations ....... $49,495 $45,230 $83,111 $78,774
Interest and other debt expense ............ 24,668 15,083 36,950 30,305
------- ------- ------- -------
Income before income taxes ............. $24,827 $30,147 $46,161 $48,469
======= ======= ======= =======
Note 8. Dividends
On March 15, 2005, we paid a quarterly cash dividend on our common stock of
$0.20 per share to the holders of record of our common stock on March 1, 2005.
The cash payment for this dividend was $3.7 million.
On June 15, 2005, we paid a quarterly cash dividend on our common stock of $0.20
per share to the holders of record of our common stock on June 1, 2005. The cash
payment for this dividend was $3.7 million.
On July 26, 2005, our Board of Directors declared a quarterly cash dividend on
our common stock of $0.20 per share, payable on September 15, 2005 to holders of
record of our common stock on September 1, 2005. The cash payment for this
dividend is expected to be approximately $3.7 million.
-18-
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Statements included in "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Quarterly Report on
Form 10-Q which are not historical facts are "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and Securities Exchange Act of 1934. Such forward-looking
statements are made based upon management's expectations and beliefs concerning
future events impacting us and therefore involve a number of uncertainties and
risks, including, but not limited to, those described in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2004 and our other filings with
the Securities and Exchange Commission. As a result, the actual results of our
operations or our financial condition could differ materially from those
expressed or implied in these forward-looking statements.
General
We are a leading North American manufacturer of metal and plastic consumer goods
packaging products. We produce steel and aluminum containers for human and pet
food; metal, composite and plastic vacuum closures for food and beverage
products; and custom designed plastic containers, tubes and closures for
personal care, health care, pharmaceutical, household and industrial chemical,
food, pet care, agricultural chemical, automotive and marine chemical products.
We are the largest manufacturer of metal food containers in North America, a
leading manufacturer of plastic containers in North America for a variety of
markets, including the personal care, health care, household and industrial
chemical and pet care markets, and a leading manufacturer of metal, composite
and plastic vacuum closures in North America for food and beverage products.
Our objective is to increase shareholder value by efficiently deploying capital
and management resources to grow our business, reduce operating costs, build
sustainable competitive positions, or franchises, and to complete acquisitions
that generate attractive cash returns. We have grown our net sales and income
from operations over the years, largely through acquisitions but also through
internal growth, and we continue to evaluate acquisition opportunities in the
consumer goods packaging market. However, in the absence of such acquisition
opportunities, we expect to use our cash flow to repay debt or for other
permitted purposes.
In 2003, we announced that in the absence of compelling acquisitions we intended
to focus on reducing our debt and expected to repay $200 - $300 million of debt
over the period from 2004 through 2006. In 2004, we paid down $160.9 million of
debt, making significant progress toward this debt reduction goal. In the
absence of compelling acquisitions, we anticipate further reducing debt by
approximately $125 million in 2005 as compared with our year-end 2004
outstanding debt balance.
-19-
RESULTS OF OPERATIONS
The following table sets forth certain unaudited income statement data expressed
as a percentage of net sales for the periods presented.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net sales
Metal food containers.................................. 72.7% 73.8% 71.7% 72.9%
Plastic containers..................................... 27.3 26.2 28.3 27.1
----- ----- ----- -----
Consolidated........................................ 100.0 100.0 100.0 100.0
Cost of goods sold....................................... 86.6 87.0 87.4 87.5
----- ----- ----- -----
Gross profit............................................. 13.4 13.0 12.6 12.5
Selling, general and administrative expenses............. 4.8 4.8 5.1 5.1
Rationalization charges ................................. -- -- -- 0.1
----- ----- ----- -----
Income from operations................................... 8.6 8.2 7.5 7.3
Interest and other debt expense.......................... 4.3 2.7 3.3 2.8
----- ----- ----- -----
Income before income taxes .............................. 4.3 5.5 4.2 4.5
Provision for income taxes............................... 1.6 2.2 1.6 1.8
------ ----- ----- -----
Net income............................................... 2.7% 3.3% 2.6% 2.7%
===== ===== ===== =====
Summary unaudited results of operations for the three and six months ended June
30, 2005 and 2004 are provided below.
Three Months Ended Six Months Ended
------------------ ----------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
(Dollars in millions)
Net sales
Metal food containers .............................. $422.5 $407.1 $ 796.6 $ 780.0
Plastic containers ................................. 158.7 144.2 314.6 289.6
------ ------ -------- --------
Consolidated .................................... $581.2 $551.3 $1,111.2 $1,069.6
====== ====== ======== ========
Income from operations
Metal food containers(1) ........................... $ 38.9 $ 33.2 $ 66.2 $ 54.4
Plastic containers(2) .............................. 12.9 14.1 22.0 27.9
Corporate .......................................... (2.3) (2.1) (5.1) (3.5)
------ ------ -------- --------
Consolidated .................................... $ 49.5 $ 45.2 $ 83.1 $ 78.8
====== ====== ======== ========
-------------
(1) Includes rationalization charges of $0.2 million and $0.9 million for
the three and six months ended June 30, 2004, respectively.
(2) Includes rationalization charges of $0.2 million for the three months
ended June 30, 2005 and $0.5 million and $0.3 million for the six
months ended June 30, 2005 and 2004, respectively.
-20-
Three Months Ended June 30, 2005 Compared with Three Months Ended June 30, 2004
Overview. Consolidated net sales were $581.2 million in the second quarter of
2005, representing a 5.4 percent increase as compared to the second quarter of
2004 primarily due to higher average selling prices resulting from the pass
through of higher raw material costs in both the metal food container and
plastic container businesses. Income from operations for the second quarter of
2005 increased by $4.3 million, or 9.5 percent, as compared to the same period
in 2004 due to higher income from operations and improved margins in our metal
food container business, partially offset by lower income from operations in the
plastic container business. On June 30, 2005, we refinanced our previous senior
secured credit facility with a new $1.0 billion senior secured credit facility.
In connection with the refinancing, we recorded a non-cash, pre-tax charge of
$11.0 million, or $0.36 per diluted share net of income tax, for the loss on
early extinguishment of debt. Net income for the second quarter of 2005 was
$15.4 million, or $0.82 per diluted share, as compared to $18.2 million, or
$0.98 per diluted share, for the same period in 2004.
Net Sales. The $29.9 million increase in consolidated net sales in the second
quarter of 2005 as compared to the second quarter of 2004 was primarily
attributable to higher average selling prices resulting from the pass through of
higher raw material costs in both the metal food container and plastic container
businesses.
Net sales for the metal food container business increased $15.4 million, or 3.8
percent, in the second quarter of 2005 as compared to the same period in 2004.
This increase was attributable to higher average selling prices due to the pass
through of higher raw material costs and an improved product mix, partially
offset by a decline in food can unit volume. The decline in food can unit volume
was primarily the result of certain low margin business with one customer that
was not retained upon contract renewal last year.
Net sales for the plastic container business in the second quarter of 2005
increased $14.5 million, or 10.1 percent, as compared to the same period in
2004. This increase was primarily the result of higher average selling prices
due to the pass through of increased resin costs.
Gross Profit. The increase in gross profit margin for the second quarter of 2005
as compared to the same period in 2004 was principally due to continued benefits
from rationalization and integration initiatives in the closures operations of
our metal food container business and an improved product mix, partially offset
by increases in other manufacturing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales for the second
quarter of 2005 remained relatively flat at 4.8 percent as compared to the same
period in 2004. The $1.8 million increase in selling, general and administrative
expenses in the second quarter of 2005 as compared to the same period in 2004
was primarily due to higher employee benefit costs.
Income from Operations. Income from operations for the second quarter of 2005
increased by $4.3 million as compared to the second quarter of 2004 and
operating margin increased to 8.6 percent from 8.2 percent over the same
periods.
-21-
Income from operations of the metal food container business for the second
quarter of 2005 increased $5.7 million, or 17.2 percent, as compared to the same
period in 2004, and operating margin increased to 9.2 percent from 8.2 percent
over the same periods. These increases were principally due to an improved
product mix, continued benefits from rationalization and integration activities
at our manufacturing facilities, particularly in the metal closures operations,
and benefits from relatively higher capital spending over the last several
years. These favorable items were partially offset by increases in certain other
manufacturing costs.
Income from operations of the plastic container business for the second quarter
of 2005 decreased $1.2 million, or 8.5 percent, as compared to the same period
in 2004, and operating margin decreased to 8.1 percent from 9.8 percent over the
same periods. These decreases were primarily a result of higher employee benefit
and other manufacturing costs.
Interest and Other Debt Expense. Interest and other debt expense for the second
quarter of 2005 increased $9.6 million to $24.7 million as compared to the same
period in 2004. This increase resulted primarily from the inclusion of a
non-cash charge of $11.0 million to write-off unamortized debt issuance costs in
connection with the refinancing of our senior secured credit facility in June
2005. This charge was partially offset by lower interest expense versus the
prior year quarter as a result of lower average borrowings due to our on-going
debt reduction program.
Income Taxes. The provision for income taxes for the second quarter of 2005 and
2004 was recorded at an effective annual income tax rate of 37.9 percent and
39.5 percent, respectively. The rate decrease in 2005 was primarily due to the
benefits of the manufacturing credit afforded under the American Jobs Creation
Act as well as the benefits of a tax initiative that was completed during the
quarter.
Six Months Ended June 30, 2005 Compared with Six Months Ended June 30, 2004
Overview. Consolidated net sales were $1.11 billion in the first six months of
2005, representing a 3.9 percent increase as compared to the first six months of
2004 primarily due to higher average selling prices in both the metal food
container and plastic container businesses largely as a result of the pass
through of higher raw material costs, partially offset by volume declines in
both businesses. Income from operations for the first six months of 2005
increased by $4.3 million, or 5.5 percent, as compared to the same period in
2004 due to higher income from operations in our metal food container business,
partially offset by lower income from operations in the plastic container
business and higher selling, general and administrative costs. The results for
2005 included a non-cash, pre-tax charge of $11.0 million, or $0.36 per diluted
share net of income tax, for the loss on early extinguishment of debt as a
result of the refinancing of our senior secured credit facility. Net income for
the first six months of 2005 was $28.3 million, or $1.51 per diluted share,
compared to $29.3 million, or $1.58 per diluted share, for the same period in
2004.
Net Sales. The $41.6 million increase in consolidated net sales in the first six
months of 2005 as compared to the first six months of 2004 was the result of
higher net sales in both the metal food and plastic container businesses,
partially offset by volume declines in both businesses.
Net sales for the metal food container business increased $16.6 million, or 2.1
percent, in the first six months of 2005 as compared to the same period in 2004.
This increase was primarily attributable to higher average selling prices due to
the pass through of higher raw material costs and an improved product mix,
partially offset by volume declines.
-22-
Net sales for the plastic container business in the first six months of 2005
increased $25.0 million, or 8.6 percent, as compared to the same period in 2004.
This increase was primarily the result of higher average selling prices due to
the pass through of higher resin costs partially offset by volume declines.
Gross Profit. Gross profit margin increased 0.1 percentage points for the first
six months of 2005 as compared to the same period in 2004. This increase was
principally due to an improved product mix in the metal food container business,
partially offset by increases in other manufacturing costs and volume declines
in both businesses.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses as a percentage of consolidated net sales remained
relatively flat at 5.1 percent for the first six months of 2005 as compared to
the same period in 2004. The $2.5 million increase in selling, general and
administrative expenses for the first six months of 2005 as compared to the same
period in 2004 was primarily related to increases in employee benefit costs and
costs incurred as a result of the Sarbanes-Oxley Act, partially offset by
continued benefits from the rationalization and integration activities at our
manufacturing facilities.
Income from Operations. Income from operations for the first six months of 2005
increased by $4.3 million as compared to the first six months of 2004, and
operating margin increased to 7.5 percent from 7.3 percent over the same
periods. Results for the first six months of 2005 and 2004 included
rationalization charges totaling $0.5 million and $1.2 million, respectively.
Income from operations of the metal food container business for the first six
months of 2005 increased $11.8 million, or 21.7 percent, as compared to the same
period in 2004, and operating margin increased to 8.3 percent from 7.0 percent
over the same periods. These increases were principally due to an improved
product mix, continued benefits from rationalization and integration activities
at our manufacturing facilities, particularly in the metal closures operations,
and benefits from relatively higher capital spending over the last several
years. These favorable items were partially offset by the impact of lower
volumes and increases in certain other manufacturing costs.
Income from operations of the plastic container business for the first six
months of 2005 decreased $5.9 million, or 21.1 percent, as compared to the same
period in 2004, and operating margin decreased to 7.0 percent from 9.6 percent
over the same periods. Income from operations and operating margins were
negatively impacted in 2005 by lower sales volumes, resin inflation and higher
employee benefit and other manufacturing costs.
Interest and Other Debt Expense. Interest and other debt expense for the first
six months of 2005 increased $6.7 million to $37.0 million as compared to the
same period in 2004. This increase resulted primarily from the $11.0 million
non-cash charge to write-off unamortized debt issuance costs in connection with
the refinancing of our senior secured credit facility in June 2005.
CAPITAL RESOURCES AND LIQUIDITY
Our principal sources of liquidity have been cash from operations and borrowings
under our debt instruments, including our Credit Agreement. Our liquidity
requirements arise primarily from our obligations under the indebtedness
incurred in connection with our acquisitions and the refinancing of that
indebtedness, capital investment in new and existing equipment and the funding
of our seasonal working capital needs.
-23-
On June 30, 2005, we completed the refinancing of our previous senior secured
credit facility by entering into a new $1.0 billion senior secured credit
facility. The Credit Agreement provided us with $425 million of A term loans and
$125 million of B term loans, and provides us with a revolving loan facility of
up to $450 million. Under the Credit Agreement, we may use revolving loans for
working capital and other general corporate purposes, including acquisitions.
The A term loans and revolving loan facility mature on June 30, 2011, and the B
term loans mature on June 30, 2012. The Credit Agreement also provides us with
an incremental uncommitted loan facility of up to an additional $350 million,
which may be used to finance acquisitions and for other permitted purposes. You
should also read Note 5 to our Condensed Consolidated Financial Statements for
the three and six months ended June 30, 2005 included elsewhere in this
Quarterly Report.
Under the Credit Agreement, the interest rate for all U.S. loans will either be
base rate or LIBOR, plus a margin. The base rate is the higher of the prime
lending rate of Deutsche Bank or 1/2 of one percent in excess of the overnight
federal funds rate. Initially, for the A term loans and revolving loans the
margin will be 1.125 percent for LIBOR rate loans and 0.125 percent for base
rate loans. The margin for A term loans and revolving loans is subject to
adjustment quarterly based upon financial ratios. For the B term loans, the
margin for LIBOR rate loans is fixed at 1.25 percent and the margin for base
rate loans is fixed at 0.25 percent. Prior to the refinancing, the interest rate
for A term loans and revolving loans under our previous credit facility was
LIBOR plus a margin of 1.50 percent or the prime lending rate of Deutsche Bank
plus a margin of 0.50 percent, and for B term loans an additional 0.25 percent,
or LIBOR plus 1.75 percent.
For the six months ended June 30, 2005, we used proceeds of $550.0 million from
the refinancing of our senior secured credit facility, net borrowings of
revolving loans of $351.6 million, proceeds from stock option exercises of $2.7
million and proceeds from asset sales of $0.2 million to fund the repayment of
term loans of $638.7 million, cash used in operations of $84.0 million primarily
for our seasonal working capital needs, capital expenditures of $44.2 million,
decreases in outstanding checks of $79.8 million, dividends paid on our common
stock of $7.4 million and debt issuance costs of $3.5 million and to increase
cash balances by $46.9 million.
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
$67.6 million primarily for our seasonal working capital needs, capital
expenditures of $46.5 million, decreases in outstanding checks of $76.6 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.
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, 2005, we had $351.6 million of revolving loans outstanding under the
Credit Agreement. Amounts borrowed at June 30, 2005 included $207.0 million for
seasonal working capital needs, $88.7 million for the repayment of term loans
under our previous senior secured credit facility and $55.9 million held as cash
and cash equivalents at June 30, 2005 for payments of certain accounts payable
in the beginning of July 2005. After taking into account outstanding letters of
credit, the available portion of the revolving loan facility under the Credit
Agreement at June 30, 2005 was $72.4 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 2005, we estimate that we will utilize approximately $250 - $300 million
of revolving loans under the Credit Agreement for our peak seasonal working
capital requirements.
-24-
During the first six months of 2005, we paid cash dividends on our common stock
totaling $7.4 million. On July 26, 2005, our Board of Directors declared a
quarterly cash dividend on our common stock of $0.20 per share, payable on
September 15, 2005 to holders of record of our common stock on September 1,
2005. The cash payment for this dividend is expected to be approximately $3.7
million.
We believe that cash generated from operations and funds from borrowings
available under the Credit Agreement will be sufficient to meet our expected
operating needs, planned capital expenditures, debt service, tax obligations and
common stock dividends for the foreseeable future. We continue to evaluate
acquisition opportunities in the consumer goods packaging market and may incur
additional indebtedness, including indebtedness under the Credit Agreement, to
finance any such acquisition. However, in the absence of acquisition
opportunities, we expect to use our free cash flow to repay indebtedness or for
other permitted purposes.
We are in compliance with all financial and operating covenants contained in our
financing agreements and believe that we will continue to be in compliance
during 2005 with all of these covenants.
Rationalization Charges and Acquisition Reserves
During the first quarter of 2005, we approved and announced to employees a plan
to relocate the operations of one of our Mississauga, Ontario plastic container
manufacturing facilities to other operating facilities. This decision resulted
in a charge to earnings of $0.5 million, which consisted of $0.1 million for the
non-cash write-down in carrying value of assets and $0.4 million for employee
severance and benefits and plant exit costs. The relocation of operations has
been substantially completed. Through June 30, 2005, there were no significant
cash payments related to relocating this facility. Cash payments related to
these reserves are expected through 2006 for employee severance and benefits
costs.
Under our rationalization and acquisition plans, we made cash payments of $0.4
million and $5.1 million for the six months ended June 30, 2005 and 2004,
respectively. Total future cash spending of $1.8 million is expected under our
Fairfield and 2005 and 2003 rationalization plans and our 2003 acquisition
plans. Spending under these plans in 2005 is not expected to be material to our
cash flows.
You should also read Note 2 to our Condensed Consolidated Financial Statements
for the three and six months ended June 30, 2005 included elsewhere in this
Quarterly Report.
We continually evaluate cost reduction opportunities in our business, including
rationalizations of our existing facilities through plant closings and
downsizings. We use a disciplined approach to identify opportunities that
generate attractive cash returns. In line with our ongoing evaluation, we are
currently reviewing certain facilities for potential rationalization actions
which may result in cash expenditures and charges to our earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment
of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal amounts of idle
facility expense, freight, handling costs and wasted materials should be
recognized as current period charges in all circumstances. SFAS No. 151 will be
effective for us beginning January 1, 2006. We do not expect the adoption of
SFAS No. 151 to have a material effect on our financial position, results of
operations or cash flows.
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In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS
No. 123(R) requires that public companies recognize compensation expense in an
amount equal to the fair value of the share-based payment. Based on a recent
deferral of the effective date, we will adopt SFAS No. 123(R) beginning January
1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using
either the "modified prospective" method or the "modified retrospective" method.
We are still assessing which transition method to utilize. As permitted by SFAS
No. 123, we currently account for share-based payments to employees using APB
Opinion No. 25's intrinsic value method and, as such, recognize no compensation
expense for employee stock options. Accordingly, the adoption of SFAS No.
123(R)'s fair value method will have an impact on our results of operations,
although it will have no impact on our overall financial position. The impact of
adoption of SFAS No. 123(R) cannot be predicted at this time because it will
depend on levels of share-based payments granted in the future. However, had we
adopted SFAS No. 123(R) in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net income and diluted net income per share in Note 1 to our Condensed
Consolidated Financial Statements for the three and six months ended June 30,
2005. SFAS No. 123(R) also requires the benefits of tax deductions in excess of
recognized compensation expense to be reported as a financing cash flow
activity, rather than as an operating cash flow activity as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. While we cannot
estimate what those amounts will be in the future (because they depend on, among
other things, when employees exercise stock options), the amounts of operating
cash flows recognized in prior periods for such excess tax deductions have not
been material to our cash flows.
On October 22, 2004, the American Jobs Creation Act was signed into law. The
AJCA includes a deduction of 85 percent on certain foreign earnings that are
repatriated during the calendar years of 2004 and 2005. We may elect to apply
this provision to qualifying earnings repatriated in 2005. The range of possible
amounts that we are evaluating for repatriation under this provision is between
zero and $48 million. The related potential range of income tax cannot be
determined at this time. We expect to complete our evaluation of the
repatriation provision under the AJCA in the fourth quarter of 2005.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Market risks relating to our operations result primarily from changes in
interest rates. In the normal course of business, we also have limited foreign
currency exchange rate risk associated with our operations in Canada and risk
related to commodity price changes for items such as natural gas. We employ
established policies and procedures to manage our exposure to these risks.
Interest rate, foreign currency and commodity pricing transactions are used only
to the extent considered necessary to meet our objectives. We do not utilize
derivative financial instruments for trading or other speculative purposes.
Information regarding our interest rate risk, foreign currency exchange rate
risk and commodity pricing risk has been disclosed in our Annual Report on Form
10-K for the fiscal year ended December 31, 2004. Since such filing, there has
not been a material change to our interest rate risk, foreign currency exchange
rate risk or commodity pricing risk or to our policies and procedures to manage
our exposure to these risks.
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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 23, 2005 for the purposes of (1) electing two
directors to serve for a three year term until our annual meeting of
stockholders in 2008 and until their successors are duly elected and qualified;
(2) approving an amendment to the Silgan Holdings Inc. 2004 Stock Incentive Plan
with respect to awards for non-employee directors; and (3) ratifying the
appointment of Ernst & Young LLP as our independent registered public accounting
firm for the fiscal year ending December 31, 2005.
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
--------- --------
D. Greg Horrigan 11,074,738 5,462,453
John W. Alden 16,055,294 481,897
Our directors whose term of office continued after the Annual Meeting are
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, and R.
Philip Silver and William C. Jennings, each of whose term of office as a
director continues until our annual meeting of stockholders in 2007.
The amendment to the Silgan Holdings Inc. 2004 Stock Incentive Plan was approved
at the Annual Meeting. There were 15,294,288 votes cast approving such
amendment, 578,956 votes cast against such amendment and 1,880 votes abstaining.
The ratification of the appointment of Ernst & Young LLP as our independent
registered public accounting firm for the fiscal year ending December 31, 2005
was approved at the Annual Meeting. There were 16,504,271 votes cast ratifying
such appointment, 29,635 votes cast against ratification of such appointment and
3,285 votes abstaining.
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Item 6. Exhibits
Exhibit Number Description
-------------- -----------
12 Ratio of Earnings to Fixed Charges for the three and six
months ended June 30, 2005 and 2004.
31.1 Certification by the Co-Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act.
31.2 Certification by the Co-Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act.
31.3 Certification by the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act.
32.1 Certification by the Co-Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by the Co-Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act.
32.3 Certification by the Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act.
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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 9, 2005 /s/ Robert B. Lewis
-----------------------------
Robert B. Lewis
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
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EXHIBIT INDEX
EXHIBIT NO. EXHIBIT
----------- -------
12 Ratio of Earnings to Fixed Charges for the three and six
months ended June 30, 2005 and 2004.
31.1 Certification by the Co-Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act.
31.2 Certification by the Co-Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act.
31.3 Certification by the Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act.
32.1 Certification by the Co-Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act.
32.2 Certification by the Co-Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act.
32.3 Certification by the Chief Financial Officer pursuant
to Section 906 of the Sarbanes-Oxley Act.
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