10-Q 1 tenq3q05.txt FOR PERIOD ENDING SEPTEMBER 30, 2005 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the quarterly period ended September 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period from ________________ to ________________ Commission file number 000-22117 SILGAN HOLDINGS INC. (Exact Name of Registrant as Specified in Its Charter) Delaware 06-1269834 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 4 Landmark Square Stamford, Connecticut 06901 (Address of Principal Executive Offices) (Zip Code) (203)975-7110 (Registrant's Telephone Number, Including Area Code) N/A (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ] Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ] As of October 31, 2005, the number of shares outstanding of the Registrant's common stock, $0.01 par value, was 37,205,350. SILGAN HOLDINGS INC. TABLE OF CONTENTS Page No. -------- Part I. Financial Information 3 Item 1. Financial Statements 3 Condensed Consolidated Balance Sheets at 3 September 30, 2005 and 2004 and December 31, 2004 Condensed Consolidated Statements of Income for 4 the three months ended September 30, 2005 and 2004 Condensed Consolidated Statements of Income for 5 the nine months ended September 30, 2005 and 2004 Condensed Consolidated Statements of Cash Flows for 6 the nine months ended September 30, 2005 and 2004 Condensed Consolidated Statements of Stockholders' 7 Equity for the nine months ended September 30, 2005 and 2004 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial 19 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About Market 26 Risk Item 4. Controls and Procedures 27 Part II. Other Information 27 Item 6. Exhibits 27 Signatures 28 Exhibit Index 29 -2-
Part I. Financial Information Item 1. Financial Statements SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) (Unaudited, see Note 1) Sept. 30, Sept. 30, Dec. 31, 2005 2004 2004 ---- ---- ---- Assets Current assets Cash and cash equivalents ............................... $ 63,848 $ 22,877 $ 35,416 Trade accounts receivable, net .......................... 352,802 317,450 148,073 Inventories ............................................. 307,836 307,966 318,665 Prepaid expenses and other current assets ............... 22,640 33,862 53,776 ---------- ---------- ---------- Total current assets ................................ 747,126 682,155 555,930 Property, plant and equipment, net ........................... 763,241 792,903 792,936 Goodwill, net ................................................ 198,096 203,606 198,346 Other assets, net ............................................ 50,284 55,818 49,947 ---------- ---------- ---------- $1,758,747 $1,734,482 $1,597,159 ========== ========== ========== Liabilities and Stockholders' Equity Current liabilities Bank revolving loans .................................... $ 217,700 $ 78,100 $ -- Current portion of long-term debt ....................... 1,250 23,670 21,804 Trade accounts payable .................................. 175,639 156,832 244,116 Accrued payroll and related costs ....................... 64,972 71,920 57,364 Accrued liabilities ..................................... 65,167 77,334 21,152 ---------- ---------- ---------- Total current liabilities ........................... 524,728 407,856 344,436 Long-term debt ............................................... 751,750 953,910 819,864 Other liabilities ............................................ 201,419 181,066 225,423 Stockholders' equity Common stock ............................................ 426 211 211 Paid-in capital ......................................... 138,441 131,383 131,685 Retained earnings ....................................... 199,213 123,164 136,768 Accumulated other comprehensive income (loss) ........... 5,137 (1,204) 859 Unamortized stock compensation .......................... (2,135) (1,511) (1,694) Treasury stock .......................................... (60,232) (60,393) (60,393) ---------- ---------- ---------- Total stockholders' equity .......................... 280,850 191,650 207,436 ---------- ---------- ---------- $1,758,747 $1,734,482 $1,597,159 ========== ========== ==========
See accompanying notes. -3- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three months ended September 30, 2005 and 2004 (Dollars and shares in thousands, except per share amounts) (Unaudited) 2005 2004 ---- ---- Net sales ............................................ $797,514 $784,847 Cost of goods sold ................................... 681,235 679,046 -------- -------- Gross profit .................................... 116,279 105,801 Selling, general and administrative expenses ......... 30,185 28,619 Rationalization charges .............................. -- 66 -------- -------- Income from operations .......................... 86,094 77,116 Interest and other debt expense ...................... 12,618 13,554 -------- -------- Income before income taxes ...................... 73,476 63,562 Provision for income taxes ........................... 28,245 25,107 -------- -------- Net income ...................................... $ 45,231 $ 38,455 ======== ======== Earnings per share: (a) Basic net income per share ...................... $1.22 $1.05 ===== ===== Diluted net income per share .................... $1.20 $1.03 ===== ===== Dividends per share: (a) ............................. $0.10 $0.08 ===== ===== Weighted average number of shares: (a) Basic ........................................... 37,172 36,799 Effect of dilutive securities ................... 474 456 ------ ------ Diluted ......................................... 37,646 37,255 ====== ====== (a) Per share and share amounts have been restated for the two-for-one stock split discussed in Note 1. See accompanying notes. -4- SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the nine months ended September 30, 2005 and 2004 (Dollars and shares in thousands, except per share amounts) (Unaudited) 2005 2004 ---- ---- Net sales .......................................... $1,908,716 $1,854,488 Cost of goods sold ................................. 1,652,484 1,614,772 ---------- ---------- Gross profit .................................. 256,232 239,716 Selling, general and administrative expenses ....... 86,563 82,559 Rationalization charges ............................ 464 1,267 ---------- ---------- Income from operations ........................ 169,205 155,890 Interest and other debt expense before loss on early extinguishment of debt .................... 38,533 43,860 Loss on early extinguishment of debt ............... 11,035 -- ---------- ---------- Interest and other debt expense ............... 49,568 43,860 Income before income taxes .................... 119,637 112,030 Provision for income taxes ......................... 46,060 44,252 ---------- ---------- Net income .................................... $ 73,577 $ 67,778 ========== ========== Earnings per share: (a) Basic net income per share .................... $1.99 $1.85 ===== ===== Diluted net income per share .................. $1.96 $1.82 ===== ===== Dividends per share: (a) ........................... $0.30 $0.15 ===== ===== Weighted average number of shares: (a) Basic ......................................... 37,059 36,713 Effect of dilutive securities ................. 514 476 ------ ------ Diluted ....................................... 37,573 37,189 ====== ====== (a) Per share and share amounts have been restated for the two-for-one stock split discussed in Note 1. See accompanying notes. -5-
SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2005 and 2004 (Dollars in thousands) (Unaudited) 2005 2004 ---- ---- Cash flows provided by (used in) operating activities Net income .................................................. $ 73,577 $ 67,778 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ........................... 92,837 90,718 Rationalization charges ................................. 464 1,267 Loss on early extinguishment of debt .................... 11,035 -- Other changes that provided (used) cash: Trade accounts receivable, net ..................... (204,729) (158,177) Inventories ........................................ 10,829 12,148 Trade accounts payable ............................. 11,703 22,118 Accrued liabilities ................................ 51,159 56,464 Other, net ......................................... 5,398 9,190 --------- --------- Net cash provided by operating activities ............... 52,273 101,506 --------- --------- Cash flows provided by (used in) investing activities Capital expenditures ........................................ (63,721) (72,919) Proceeds from asset sales ................................... 3,001 9,934 --------- --------- Net cash used in investing activities ................... (60,720) (62,985) --------- --------- Cash flows provided by (used in) financing activities Borrowings under revolving loans ............................ 956,275 745,700 Repayments under revolving loans ............................ (738,575) (692,600) Proceeds from stock option exercises ........................ 3,305 2,262 Changes in outstanding checks - principally vendors ......... (80,180) (76,925) Proceeds from issuance of long-term debt .................... 550,000 -- Repayments of long-term debt ................................ (638,668) -- Dividends paid on common stock .............................. (11,132) (5,519) Debt issuance costs ......................................... (4,146) (662) --------- --------- Net cash provided by (used in) financing activities ..... 36,879 (27,744) --------- --------- Cash and cash equivalents Net increase ................................................ 28,432 10,777 Balance at beginning of year ................................ 35,416 12,100 --------- --------- Balance at end of period .................................... $ 63,848 $ 22,877 ========= ========= Interest paid .................................................... $ 35,167 $ 35,205 Income taxes paid, net of refunds ................................ 11,481 674 See accompanying notes.
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SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the nine months ended September 30, 2005 and 2004 (Dollars and shares in thousands) (Unaudited) Common Stock Accumulated ------------ Paid- Other Unamortized Total Shares Par in Retained Comprehensive Stock Treasury Stockholders' Outstanding Value Capital Earnings Income (Loss) Compensation Stock Equity ----------- ----- -------- -------- ------------- ------------ --------- ------------- Balance at December 31, 2003 ............. 18,273 $210 $125,758 $ 60,905 $(5,675) $ -- $(60,393) $120,805 Comprehensive income: Net income ............................ -- -- -- 67,778 -- -- -- 67,778 Change in fair value of derivatives, net of tax provision of $1,934 ....... -- -- -- -- 2,961 -- -- 2,961 Foreign currency translation .......... -- -- -- -- 1,510 -- -- 1,510 -------- Comprehensive income ..................... 72,249 -------- Dividends declared on common stock ....... -- -- -- (5,519) -- -- -- (5,519) Issuance of restricted stock units ....... -- -- 1,631 -- -- (1,631) -- -- Amortization of stock compensation ....... -- -- -- -- -- 120 -- 120 Stock option exercises, including tax benefit of $1,733 .................. 149 1 3,994 -- -- -- -- 3,995 ------ ---- -------- -------- ------- ------- -------- -------- Balance at September 30, 2004 ............ 18,422 $211 $131,383 $123,164 $(1,204) $(1,511) $(60,393) $191,650 ====== ==== ======== ======== ======= ======= ======== ======== Balance at December 31, 2004 ............. 18,423 $211 $131,685 $136,768 $ 859 $(1,694) $(60,393) $207,436 Comprehensive income: Net income ............................ -- -- -- 73,577 -- -- -- 73,577 Change in fair value of derivatives, net of tax provision of $1,438 ...... -- -- -- -- 2,423 -- -- 2,423 Foreign currency translation .......... -- -- -- -- 1,855 -- -- 1,855 -------- Comprehensive income ..................... 77,855 -------- Dividends declared on common stock ....... -- -- -- (11,132) -- -- -- (11,132) Issuance of restricted stock units ....... -- -- 852 -- -- (852) -- -- Amortization of stock compensation ....... -- -- -- -- -- 411 -- 411 Stock option exercises, including tax benefit of $2,945 .................. 173 2 6,248 -- -- -- -- 6,250 Net issuance of treasury stock for vested restricted stock units, including tax benefit of $39 ........... 6 -- (131) -- -- -- 161 30 Two-for-one stock split, net of treasury shares of 2,679 ............... 18,602 213 (213) -- -- -- -- -- ------ ---- -------- -------- ------- ------- -------- -------- Balance at September 30, 2005 ............ 37,204 $426 $138,441 $199,213 $ 5,137 $(2,135) $(60,232) $280,850 ====== ==== ======== ======== ======= ======= ======== ========
See accompanying notes. -7- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 1. Significant Accounting Policies Basis of Presentation. The accompanying unaudited condensed consolidated financial statements of Silgan Holdings Inc., or Holdings, have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying financial statements include all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation. The results of operations for any interim period are not necessarily indicative of the results of operations for the full year. The Condensed Consolidated Balance Sheet at December 31, 2004 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. You should read the accompanying condensed consolidated financial statements in conjunction with our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004. Goodwill, Net. We review goodwill for impairment as of July 1 of each year and more frequently if circumstances indicate a possible impairment. We determined that goodwill was not impaired in our third quarter 2005 assessment. Stock Split. On August 15, 2005, our Board of Directors declared a two-for-one stock split of our issued common stock. The stock split was affected in the form of a stock dividend. Stockholders of record at the close of business on September 1, 2005 were issued one additional share of common stock for each share of common stock owned on that date. The additional shares were distributed on September 15, 2005. Information pertaining to the number of shares outstanding, per share amounts and stock compensation has been restated in the accompanying financial statements and related footnotes to reflect this stock split for all periods presented, except for the Condensed Consolidated Balance Sheets and Statements of Stockholders' Equity. Stockholders' equity reflects the stock split by reclassifying from paid-in capital to common stock an amount equal to the par value of the additional shares issued as a result of the stock split. Stock-Based Compensation. We currently have one stock-based compensation plan in effect, under which we have issued options and restricted stock units to our officers, other key employees and outside directors. We apply the recognition and measurement principles of Accounting Principles Board, or APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock awards. Accordingly, no compensation expense for employee stock options is recognized, as all options granted had an exercise price that was equal to or greater than the market value of the underlying stock on the date of the grant. Restricted stock units issued are accounted for as fixed grants and, accordingly, the fair value at the grant date has been charged to stockholders' equity as unamortized stock compensation and is being amortized ratably over the respective vesting period. -8- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 1. Significant Accounting Policies (continued) Stock-Based Compensation (continued). During the first nine months of 2005, we granted 21,000 restricted stock units to certain of our officers and key employees. These restricted stock units vest ratably over a five-year period from the date of grant. The fair value of these units at the date of grant was $0.7 million. Additionally, in May 2005, we granted 7,128 restricted stock units to the independent members of our Board of Directors, which vest in full one year from the date of grant. The fair value of these units at the date of grant was $0.2 million. Unvested restricted stock units may not be disposed of or transferred during the vesting period. If we had applied the fair value recognition provisions of Statement of Financial Accounting Standards, or SFAS, No. 123, "Accounting for Stock-Based Compensation," net income and basic and diluted earnings per share would have been as follows:
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Dollars in thousands, except per share data) Net income, as reported ........................... $45,231 $38,455 $73,577 $67,778 Add: Stock-based compensation expense included in reported net income, net of income taxes .................................. 107 58 250 72 Deduct: Total stock-based compensation expense determined under fair value method for all awards, net of income taxes .................................. (296) (468) (1,002) (1,357) ------- ------- ------- ------- Pro forma net income .............................. $45,042 $38,045 $72,825 $66,493 ======= ======= ======= ======= Earnings per share: Basic net income per share - as reported ...... $1.22 $1.05 $1.99 $1.85 ===== ===== ===== ===== Basic net income per share - pro forma ........ 1.21 1.03 1.97 1.81 ===== ===== ===== ===== Diluted net income per share - as reported .... $1.20 $1.03 $1.96 $1.82 ===== ===== ===== ===== Diluted net income per share - pro forma ...... 1.20 1.02 1.94 1.79 ===== ===== ===== =====
Recently Issued Accounting Pronouncements. In November 2004, the Financial Accounting Standards Board, or the FASB, issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges in all circumstances. SFAS No. 151 will be effective for us beginning January 1, 2006. We do not expect the adoption of SFAS No. 151 to have a material effect on our financial position, results of operations or cash flows. -9- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 1. Significant Accounting Policies (continued) Recently Issued Accounting Pronouncements (continued). In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires that public companies recognize compensation expense in an amount equal to the fair value of the share-based payment. We will adopt SFAS No. 123(R) beginning January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using one of two methods: 1. A "modified prospective" method in which compensation cost is recognized beginning with the effective date (a) based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and (b) based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. 2. A "modified retrospective" method which includes the requirements of the modified prospective method described above, but also permits entities to restate based on the amounts previously recognized under SFAS No. 123 for purposes of pro forma disclosures either (a) all prior periods presented or (b) prior interim periods of the year of adoption. We are still assessing which transition method to utilize. As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, recognize no compensation expense for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and diluted net income per share in Note 1 to our Condensed Consolidated Financial Statements. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow activity, rather than as an operating cash flow activity as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amounts of operating cash flows recognized in prior periods for such excess tax deductions were $3.0 million and $1.7 million for the nine months ending September 30, 2005 and 2004, respectively. On October 22, 2004, the American Jobs Creation Act, or the AJCA, was signed into law. The AJCA includes a deduction of 85 percent on certain foreign earnings that are repatriated during the calendar years of 2004 and 2005. We may elect to apply this provision to qualifying earnings repatriated in 2005. The range of possible amounts that we are evaluating for repatriation under this provision is between zero and $62 million. The related potential range of income tax cannot be determined at this time. We expect to complete our evaluation of the repatriation provision under the AJCA in the fourth quarter of 2005. -10- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 2. Rationalization Charges and Acquisition Reserves As part of our plans to integrate the operations of our various acquired businesses and to rationalize certain facilities, we have established reserves for employee severance and benefits and plant exit costs. Activity in our rationalization and acquisition reserves since December 31, 2004 is summarized as follows:
Employee Plant Non-Cash Severance Exit Asset and Benefits Costs Write Down Total ------------ ----- ---------- ----- (Dollars in thousands) Balance at December 31, 2004 ---------------------------- Fairfield Rationalization ...................................... $ -- $ 893 $ -- $ 893 2003 Acquisition Plans ......................................... 160 46 -- 206 2003 Rationalization Plans ..................................... 37 690 -- 727 ---- ------ ----- ------ Balance at December 31, 2004 ................................... 197 1,629 -- 1,826 Activity for the Nine Months Ended Sept. 30, 2005 ------------------------------------------------- Fairfield Rationalization ...................................... -- (272) -- (272) 2003 Acquisition Plan Reserves Utilized ........................ (76) -- -- (76) 2003 Acquisition Plan Reserves Adjusted ........................ (84) -- -- (84) 2003 Rationalization Plan Reserves Utilized .................... -- (129) -- (129) 2005 Rationalization Plan Reserves Established ................. 287 48 129 464 2005 Rationalization Plan Reserves Utilized .................... (77) (48) (129) (254) ---- ------ ----- ------ Total Activity ................................................. 50 (401) -- (351) Balance at September 30, 2005 ----------------------------- Fairfield Rationalization ...................................... -- 621 -- 621 2003 Acquisition Plans ......................................... -- 46 -- 46 2003 Rationalization Plans ..................................... 37 561 -- 598 2005 Rationalization Plan ...................................... 210 -- -- 210 ---- ------ ----- ------ Balance at September 30, 2005 .................................. $247 $1,228 $ -- $1,475 ==== ====== ===== ======
2005 Rationalization Plan ------------------------- During the first quarter of 2005, we approved and announced to employees a plan to relocate the operations of one of our Mississauga, Ontario plastic container manufacturing facilities to other operating facilities. This decision resulted in charges to earnings of $0.5 million, which consisted of $0.1 million for the non-cash write-down in carrying value of assets and $0.4 million for employee severance and benefits and plant exit costs. The relocation of operations has been substantially completed. Through September 30, 2005, there were no significant cash payments related to relocating this facility. Cash payments related to these reserves are expected through 2006 for employee severance and benefits costs. -11- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 2. Rationalization Charges and Acquisition Reserves (continued) Rationalization and acquisition reserves are included in the Condensed Consolidated Balance Sheets as follows: Sept. 30, Sept. 30, Dec. 31, 2005 2004 2004 ---- ---- ---- (Dollars in thousands) Accrued liabilities ............... $ 425 $ 462 $ 877 Other liabilities ................. 1,050 1,587 949 ------ ------ ------ $1,475 $2,049 $1,826 ====== ====== ====== Note 3. Accumulated Other Comprehensive Income (Loss) Accumulated other comprehensive income (loss) is reported in the Condensed Consolidated Statements of Stockholders' Equity. Amounts included in accumulated other comprehensive income (loss) consisted of the following:
Sept. 30, Sept. 30, Dec. 31, 2005 2004 2004 ---- ---- ---- (Dollars in thousands) Foreign currency translation ....................... $ 11,492 $ 6,145 $ 9,637 Change in fair value of derivatives ................ 5,348 2,200 2,925 Minimum pension liability .......................... (11,703) (9,549) (11,703) -------- ------- -------- Accumulated other comprehensive income (loss)..... $ 5,137 $(1,204) $ 859 ======== ======= ========
-12- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 4. Inventories Inventories consisted of the following:
Sept. 30, Sept. 30, Dec. 31, 2005 2004 2004 ---- ---- ---- (Dollars in thousands) Raw materials ........................... $ 55,962 $ 42,043 $ 63,225 Work-in-process ......................... 59,323 61,812 50,366 Finished goods .......................... 190,115 191,431 198,697 Spare parts and other ................... 17,141 19,231 19,324 -------- -------- -------- 322,541 314,517 331,612 Adjustment to value inventory at cost on the LIFO method .......... (14,705) (6,551) (12,947) -------- -------- -------- $307,836 $307,966 $318,665 ======== ======== ========
Note 5. Long-Term Debt Long-term debt consisted of the following:
Sept. 30, Sept. 30, Dec. 31, 2005 2004 2004 ---- ---- ---- (Dollars in thousands) Bank debt Bank revolving loans ................. $217,700 $ 78,100 $ -- Bank A term loans .................... 425,000 83,330 63,669 Bank B term loans .................... 125,000 691,250 574,999 -------- ---------- -------- Total bank debt ................... 767,700 852,680 638,668 -------- ---------- -------- Subordinated debt 6 3/4% Senior Subordinated Notes ..... 200,000 200,000 200,000 Other ................................ 3,000 3,000 3,000 -------- ---------- -------- Total subordinated debt ........... 203,000 203,000 203,000 -------- ---------- -------- Total debt ................................ 970,700 1,055,680 841,668 Less current portion ................. 218,950 101,770 21,804 -------- ---------- -------- $751,750 $ 953,910 $819,864 ======== ========== ========
At September 30, 2005, amounts expected to be repaid within one year consisted of $217.7 million of bank revolving loans related primarily to seasonal working capital needs and $1.3 million of bank term loans under our senior secured credit facility. -13- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 5. Long-Term Debt (continued) Bank Credit Agreement --------------------- On June 30, 2005, we completed the refinancing of our previous senior secured credit facility by entering into a new $1.0 billion senior secured credit facility, or the Credit Agreement. Our Credit Agreement provided us with $425 million of A term loans and $125 million of B term loans, and provides us with up to $450 million of revolving loans. Pursuant to the Credit Agreement, we also have a $350 million incremental uncommitted loan facility, of which all of it may be borrowed in the form of term loans and up to $150 million may be borrowed in the form of revolving loans under the revolving loan facility. Revolving loans may be used for working capital needs and other general corporate purposes, including acquisitions. Revolving loans may be borrowed, repaid and reborrowed over the life of the Credit Agreement until their final maturity. The A term loans and revolving loans mature on June 30, 2011, and the B term loans mature on June 30, 2012. Principal on the A term loans and B term loans is required to be repaid in scheduled annual installments during each of the years set forth below and amounts repaid may not be reborrowed (in thousands): Year A Term Loans B Term Loans ---- ------------ ------------ 2005 $ -- $ 1,250 2006 -- 1,250 2007 63,750 1,250 2008 63,750 1,250 2009 85,000 1,250 2010 85,000 1,250 2011 127,500 1,250 2012 -- 116,250 -------- -------- $425,000 $125,000 ======== ======== The Credit Agreement requires us to prepay the term loans with proceeds received from the incurrence of certain indebtedness, with proceeds received from certain asset sales and, under certain circumstances, with 50 percent of our excess cash flow. Generally, mandatory prepayments of term loans are allocated pro rata to the A term loans and B term loans and applied first to the scheduled amortization payments in the year of such prepayments and, to the extent in excess thereof, pro rata to the remaining installments of the term loans. Voluntary prepayments of term loans may be applied to any tranche of term loans at our discretion and are applied first to the scheduled amortization payments in the year of such prepayment and, to the extent in excess thereof, pro rata to the remaining installments. The incremental uncommitted term loan facility provides, among other things, that any incremental term loan borrowing shall be denominated in a single currency, either U.S. dollars or certain foreign currencies; have a maturity date no earlier than the maturity date for the B term loans; and be used to finance acquisitions, refinance any indebtedness assumed as part of such acquisitions, to refinance or repurchase subordinated debt as permitted and to repay outstanding revolving loans. -14- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 5. Long-Term Debt (continued) Bank Credit Agreement (continued) --------------------- Under the Credit Agreement, the interest rate for all U.S. loans will either be base rate or LIBOR, plus a margin. The base rate is the higher of the prime lending rate of Deutsche Bank AG New York Branch, or Deutsche Bank, or 1/2 of one percent in excess of the overnight federal funds rate. Initially, the interest rate for A term and revolving loans under the Credit Agreement is the base rate plus a margin of 0.125 percent or LIBOR plus a margin of 1.125 percent. After September 30, 2005, the interest rate margin on A term and revolving borrowings will be reset quarterly based upon our Total Leverage Ratio, as defined in the Credit Agreement. The interest rate for B term loans is the base rate plus a margin of 0.25 percent or LIBOR plus a margin of 1.25 percent. The margin for B term loans is fixed through maturity. The Credit Agreement provides for the payment of a commitment fee ranging from 0.20 percent to 0.50 percent per annum on the daily average unused portion of commitments available under the revolving loan facility. Initially, the commitment fee will be 0.30 percent per annum. After September 30, 2005, the commitment fee will be reset quarterly based on our Total Leverage Ratio. We may utilize up to a maximum of $75 million of our revolving loan facility under the Credit Agreement for letters of credit as long as the aggregate amount of borrowings of revolving loans and letters of credit do not exceed the amount of the commitment under such revolving loan facility. The Credit Agreement provides for payment to the applicable lenders of a letter of credit fee equal to the applicable margin in effect for revolving loans and to the issuers of the letters of credit of a facing fee of 1/8 of one percent per annum, calculated on the aggregate stated amount of all letters of credit. The indebtedness under the Credit Agreement is guaranteed by us and certain of our U.S. subsidiaries. The stock of certain of our U.S. subsidiaries has also been pledged as security to the lenders under the Credit Agreement. The Credit Agreement contains certain financial and operating covenants which limit, among other things, our ability and the ability of our subsidiaries to grant liens, sell assets and use the proceeds from certain asset sales, make certain payments (including dividends) on our capital stock, incur indebtedness or provide guarantees, make loans or investments, enter into transactions with affiliates, make certain capital expenditures, engage in any business other than the packaging business, and, with respect to our subsidiaries, issue stock. In addition, we are required to meet specified financial covenants including Interest Coverage and Total Leverage Ratios, each as defined in the Credit Agreement. We are currently in compliance with all covenants under the Credit Agreement. As a result of this refinancing, we recorded a non-cash, pre-tax charge of $11.0 million for the loss on early extinguishment of debt to write-off unamortized debt issuance costs of the previous credit facility. -15- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 6. Retirement Benefits The components of the net periodic pension benefits costs are as follows:
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Dollars in thousands) Service cost .................................. $ 2,843 $ 2,405 $ 9,327 $ 8,692 Interest cost ................................. 5,123 5,056 15,489 14,941 Expected return on plan assets ................ (6,542) (5,556) (19,631) (16,687) Amortization of prior service cost ............ 790 854 2,370 2,461 Amortization of actuarial losses .............. 372 36 1,121 890 ------- ------- -------- -------- Net periodic benefit cost ..................... $ 2,586 $ 2,795 $ 8,676 $ 10,297 ======= ======= ======== ========
The components of the net periodic other postretirement benefits costs are as follows:
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Dollars in thousands) Service cost .................................. $ 252 $(536) $1,065 $1,021 Interest cost ................................. 1,074 779 3,830 3,682 Amortization of prior service cost ............ 1 1 4 4 Amortization of actuarial losses .............. 41 (455) 254 122 ------ ----- ------ ------ Net periodic benefit cost ..................... $1,368 $(211) $5,153 $4,829 ====== ===== ====== ======
In the third quarter of 2004, in order to reflect the most current estimate of our postretirement plans, we recorded a reduction to our postretirement benefits expense of $1.8 million pertaining to amounts recorded in the first and second quarters of 2004. This change in accounting estimate for postretirement costs resulted in an increase of $0.03 in earnings per diluted share for each of the three and nine months ended September 30, 2004. As previously disclosed in our consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2004, based on current tax law, there are no minimum required contributions to our pension plans in 2005. However, this estimate is subject to change based on current proposals before Congress, as well as asset performance significantly below the assumed long-term rate of return on plan assets. In order to reduce our unfunded pension liability, it has been our recent practice to make contributions in excess of the ERISA minimum requirements, to the extent they are tax deductible. During the first nine months of 2005, we made no contributions to fund our pension plans. -16- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 7. Business Segment Information Reportable business segment information for the three and nine months ended September 30 is as follows:
Metal Food Plastic Containers(1) Containers(2) Corporate Total ---------- ---------- --------- ----- (Dollars in thousands) Three Months Ended Sept. 30, 2005 --------------------------------- Net sales .................................... $ 651,129 $146,385 $ -- $ 797,514 Depreciation and amortization(3) ............. 19,629 11,313 16 30,958 Segment income from operations ............... 81,160 7,433 (2,499) 86,094 Three Months Ended Sept. 30, 2004 --------------------------------- Net sales .................................... $ 642,735 $142,112 $ -- $ 784,847 Depreciation and amortization(3) ............. 19,641 10,197 7 29,845 Segment income from operations ............... 69,168 9,860 (1,912) 77,116 Nine Months Ended Sept. 30, 2005 -------------------------------- Net sales .................................... $1,447,721 $460,995 $ -- $1,908,716 Depreciation and amortization(3) ............. 58,689 32,081 35 90,805 Segment income from operations ............... 147,315 29,465 (7,575) 169,205 Nine Months Ended Sept. 30, 2004 -------------------------------- Net sales .................................... $1,422,754 $431,734 $ -- $1,854,488 Depreciation and amortization(3) ............. 57,081 30,647 27 87,755 Segment income from operations ............... 123,564 37,792 (5,466) 155,890 -------------
(1) Segment income from operations includes rationalization charges of $1.0 million for the nine months ended September 30, 2004. (2) Segment income from operations includes rationalization charges of $0.5 million and $0.3 million for the nine months ended September 30, 2005 and 2004, respectively. (3) Depreciation and amortization excludes amortization of debt issuance costs of $0.2 million and $1.0 million for the three months ended September 30, 2005 and 2004, respectively, and $2.0 million and $3.0 million for the nine months ended September 30, 2005 and 2004, respectively. -17- SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2005 and 2004 and for the three and nine months then ended is unaudited) Note 7. Business Segment Information (continued) Total segment income from operations is reconciled to income before income taxes as follows:
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Dollars in thousands) Total segment income from operations ..... $86,094 $77,116 $169,205 $155,890 Interest and other debt expense .......... 12,618 13,554 49,568 43,860 ------- ------- -------- -------- Income before income taxes ............. $73,476 $63,562 $119,637 $112,030 ======= ======= ======== ========
Note 8. Dividends In March, June and September of 2005, we paid a quarterly cash dividend on our common stock of $0.10 per share, as approved by our Board of Directors. The cash payments for these dividends totaled $11.1 million. On November 2, 2005, our Board of Directors declared a quarterly cash dividend on our common stock of $0.10 per share, payable on December 15, 2005 to holders of record of our common stock on December 1, 2005. The cash payment for this dividend is expected to be approximately $3.7 million. Note 9. Treasury Stock In the third quarter 2005, we issued 12,800 treasury shares at an average cost of $13.25, for restricted stock units that vested during the period. In accordance with the Silgan Holdings Inc. 2004 Stock Incentive Plan, we repurchased 282 shares of our common stock at an average cost of $30.68 to satisfy employee withholding tax requirements resulting from certain restricted stock units becoming vested. We account for the treasury shares using the first-in, first-out (FIFO) cost method. As of September 30, 2005, 5,358,434 shares were held in treasury. -18- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Statements included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q which are not historical facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Securities Exchange Act of 1934. Such forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting us and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004 and our other filings with the Securities and Exchange Commission. As a result, the actual results of our operations or our financial condition could differ materially from those expressed or implied in these forward-looking statements. General We are a leading North American manufacturer of metal and plastic consumer goods packaging products. We produce steel and aluminum containers for human and pet food; metal, composite and plastic vacuum closures for food and beverage products; and custom designed plastic containers, tubes and closures for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products. We are the largest manufacturer of metal food containers in North America, a leading manufacturer of plastic containers in North America for a variety of markets, including the personal care, health care, household and industrial chemical and pet care markets, and a leading manufacturer of metal, composite and plastic vacuum closures in North America for food and beverage products. Our objective is to increase shareholder value by efficiently deploying capital and management resources to grow our business, reduce operating costs, build sustainable competitive positions, or franchises, and to complete acquisitions that generate attractive cash returns. We have grown our net sales and income from operations over the years, largely through acquisitions but also through internal growth, and we continue to evaluate acquisition opportunities in the consumer goods packaging market. However, in the absence of such acquisition opportunities, we expect to use our cash flow to repay debt or for other permitted purposes. In 2003, we announced that in the absence of compelling acquisitions we intended to focus on reducing our debt and expected to repay $200 - $300 million of debt over the period from 2004 through 2006. In 2004, we paid down $160.9 million of debt, making significant progress toward this debt reduction goal. In the absence of compelling acquisitions, we anticipate further reducing debt by approximately $125 million in the fourth quarter of 2005 as compared with our year-end 2004 outstanding debt balance. On August 15, 2005, our Board of Directors declared a two-for-one stock split of our issued common stock in the form of a stock dividend. The additional shares of our common stock were distributed on September 15, 2005. Information pertaining to the number of shares outstanding and per share amounts have been restated to reflect this stock split for all periods presented. -19- RESULTS OF OPERATIONS The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented.
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ---- ---- ---- ---- Net sales Metal food containers................................. 81.6% 81.9% 75.8% 76.7% Plastic containers.................................... 18.4 18.1 24.2 23.3 ----- ----- ----- ----- Consolidated....................................... 100.0 100.0 100.0 100.0 Cost of goods sold...................................... 85.4 86.5 86.6 87.1 ----- ----- ----- ----- Gross profit............................................ 14.6 13.5 13.4 12.9 Selling, general and administrative expenses............ 3.8 3.7 4.5 4.5 Rationalization charges ................................ -- -- -- -- ----- ----- ----- ----- Income from operations.................................. 10.8 9.8 8.9 8.4 Interest and other debt expense......................... 1.6 1.7 2.6 2.4 ----- ----- ----- ----- Income before income taxes ............................. 9.2 8.1 6.3 6.0 Provision for income taxes.............................. 3.5 3.2 2.4 2.4 ----- ----- ----- ----- Net income.............................................. 5.7% 4.9% 3.9% 3.6% ===== ===== ===== =====
Summary unaudited results of operations for the three and nine months ended September 30, 2005 and 2004 are provided below.
Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2005 2004 2005 2004 ---- ---- ---- ---- (Dollars in millions) Net sales Metal food containers ........ $651.1 $642.7 $1,447.7 $1,422.8 Plastic containers ........... 146.4 142.1 461.0 431.7 ------ ------ -------- -------- Consolidated .............. $797.5 $784.8 $1,908.7 $1,854.5 ====== ====== ======== ======== Income from operations Metal food containers(1) ..... $ 81.2 $ 69.2 $ 147.3 $ 123.6 Plastic containers(2) ........ 7.4 9.8 29.5 37.8 Corporate .................... (2.5) (1.9) (7.6) (5.5) ------ ------ -------- -------- Consolidated .............. $ 86.1 $ 77.1 $ 169.2 $ 155.9 ====== ====== ======== ========
------------- (1) Includes rationalization charges of $1.0 million for the nine months ended September 30, 2004. (2) Includes rationalization charges of $0.5 million and $0.3 million for the nine months ended September 30, 2005 and 2004, respectively. -20- Three Months Ended September 30, 2005 Compared with Three Months Ended September 30, 2004 Overview. Consolidated net sales were $797.5 million in the third quarter of 2005, representing a 1.6 percent increase as compared to the third quarter of 2004 due primarily to higher average selling prices in both the metal food and plastic container businesses principally resulting from the pass through of higher raw material costs and growth in unit volumes in our closures product line, partially offset by volume declines in the plastic container business and food can product line. Income from operations for the third quarter of 2005 increased by $9.0 million, or 11.7 percent, as compared to the same period in 2004 due to higher income from operations and an improved operating margin in our metal food container business, partially offset by lower income from operations and a decline in operating margin in the plastic container business. Net income for the third quarter of 2005 was $45.2 million, or $1.20 per diluted share, as compared to $38.4 million, or $1.03 per diluted share, for the same period in 2004. Net Sales. The $12.7 million increase in consolidated net sales in the third quarter of 2005 as compared to the third quarter of 2004 was the result of higher net sales in both the metal food and plastic container businesses. Net sales for the metal food container business increased $8.4 million, or 1.3 percent, in the third quarter of 2005 as compared to the same period in 2004. This increase was attributable to higher average selling prices due to price increases in response to increased raw material and other inflationary costs and higher unit volumes in our closures product line, partially offset by slightly lower food can volume. The decline in food can unit volume was primarily the result of certain low margin business with one customer that was not retained upon contract renewal last year. Net sales for the plastic container business in the third quarter of 2005 increased $4.3 million, or 3.0 percent, as compared to the same period in 2004. This increase was primarily the result of higher average selling prices due to the pass through of higher resin costs and an improved product mix, partially offset by lower unit volumes. Gross Profit. Gross profit margin increased 1.1 percentage points to 14.6 percent in the third quarter of 2005 as compared to the same period in 2004 for the reasons discussed in Income from Operations below. Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales for the third quarter of 2005 increased 0.1 percentage points to 3.8 percent as compared to the same period in 2004. The $1.6 million increase in selling, general and administrative expenses in the third quarter of 2005 as compared to the same period in 2004 was primarily due to higher employee benefit costs. Income from Operations. Income from operations for the third quarter of 2005 increased by $9.0 million as compared to the third quarter of 2004 and operating margin increased to 10.8 percent from 9.8 percent over the same periods. Income from operations of the metal food container business for the third quarter of 2005 increased $12.0 million, or 17.3 percent, as compared to the same period in 2004, and operating margin increased to 12.5 percent from 10.8 percent over the same periods. These increases were principally due to strong unit volumes in our closures product line, continued benefits from rationalization and integration activities and the combination of productivity benefits from relatively higher capital spending over the last several years and price increases in response to inflationary pressures. -21- Income from operations of the plastic container business for the third quarter of 2005 decreased $2.4 million, or 24.5 percent, as compared to the same period in 2004, and operating margin decreased to 5.1 percent from 6.9 percent over the same periods. These decreases were primarily a result of lower volumes and higher employee benefit costs. Late in the third quarter of 2005, a significant disruption in resin supplies occurred primarily as a direct result of the recent hurricane activity along the Gulf Coast, which required a number of our petrochemical suppliers to temporarily shut down capacity. The effects of these hurricanes and an early-October explosion in a supplier's ethylene cracking facility led many resin suppliers to declare force majeure and in some cases implement sales volume control initiatives. As a result, resin supply is tight, and we have also implemented certain sales volume control initiatives with our customers. While the petrochemical industry appears to be returning to capacity more quickly than originally anticipated, the potential impact of a continued tight supply could have a significant impact on our results of operations for 2005. Interest and Other Debt Expense. Interest and other debt expense for the third quarter of 2005 decreased $1.0 million to $12.6 million as compared to the same period in 2004. This decrease resulted primarily from lower average borrowings due to our on-going debt reduction program and lower interest rate spreads as a result of the June 2005 refinancing of our senior secured credit facility, slightly offset by a higher average cost of borrowings resulting from rising interest rates. Nine Months Ended September 30, 2005 Compared with Nine Months Ended September 30, 2004 Overview. Consolidated net sales were $1.91 billion in the first nine months of 2005, representing a 2.9 percent increase as compared to the first nine months of 2004 primarily due to higher average selling prices in both the metal food and plastic container businesses largely as a result of the pass through of higher raw material and other inflationary costs. Income from operations for the first nine months of 2005 increased by $13.3 million, or 8.5 percent, as compared to the same period in 2004 due to higher income from operations and an improved operating margin in our metal food container business, partially offset by lower income from operations and a decline in operating margin in our plastic container business. The results for 2005 included a non-cash, pre-tax charge of $11.0 million, or $0.18 per diluted share net of income tax, for the loss on early extinguishment of debt as a result of the refinancing of our senior secured credit facility. Net income for the first nine months of 2005 was $73.6 million, or $1.96 per diluted share, compared to $67.7 million, or $1.82 per diluted share, for the same period in 2004. Net Sales. The $54.2 million increase in consolidated net sales in the first nine months of 2005 as compared to the first nine months of 2004 was the result of higher average selling prices in both the metal food and plastic container businesses primarily as a result of the pass through of higher raw material and other costs. Net sales for the metal food container business increased $24.9 million, or 1.8 percent, in the first nine months of 2005 as compared to the same period in 2004. This increase was primarily attributable to higher average selling prices due to the pass through of higher raw material and other costs and higher unit volumes in our closures product line, partially offset by lower food can volumes. Net sales for the plastic container business in the first nine months of 2005 increased $29.3 million, or 6.8 percent, as compared to the same period in 2004. This increase was primarily the result of higher average selling prices due to the pass through of higher resin costs, partially offset by volume declines. -22- Gross Profit. Gross profit margin increased 0.5 percentage points for the first nine months of 2005 as compared to the same period in 2004 for the reasons discussed in Income from Operations below. Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales remained flat at 4.5 percent for the first nine months of 2005 as compared to the same period in 2004. The $4.0 million increase in selling, general and administrative expenses for the first nine months of 2005 as compared to the same period in 2004 was primarily related to increases in employee benefit costs and costs incurred as a result of the Sarbanes-Oxley Act, partially offset by continued benefits from the rationalization and integration activities at our manufacturing facilities. Income from Operations. Income from operations for the first nine months of 2005 increased by $13.3 million as compared to the first nine months of 2004, and operating margin increased to 8.9 percent from 8.4 percent over the same periods. Results for the first nine months of 2005 and 2004 included rationalization charges totaling $0.5 million and $1.3 million, respectively. Income from operations of the metal food container business for the first nine months of 2005 increased $23.7 million, or 19.2 percent, as compared to the same period in 2004, and operating margin increased to 10.2 percent from 8.7 percent over the same periods. These increases were principally due to strong unit volumes and performance in our closures product line, continued benefits from rationalization and integration activities at our manufacturing facilities and the combination of productivity benefits from relatively higher capital spending over the last several years and price increases in response to inflationary pressures. These favorable items were partially offset by the impact of lower unit volumes in the food can business. Income from operations of the plastic container business for the first nine months of 2005 decreased $8.3 million, or 22.0 percent, as compared to the same period in 2004, and operating margin decreased to 6.4 percent from 8.8 percent over the same periods. Income from operations and operating margins were negatively impacted in 2005 by lower unit volumes, resin inflation and higher employee benefit and other manufacturing costs. Interest and Other Debt Expense. Interest and other debt expense for the first nine months of 2005 increased $5.7 million to $49.6 million as compared to the same period in 2004. This increase resulted primarily from the $11.0 million non-cash charge to write-off unamortized debt issuance costs in connection with the refinancing of our senior secured credit facility in June 2005, offset by lower average borrowings due to our debt reduction program. CAPITAL RESOURCES AND LIQUIDITY Our principal sources of liquidity have been cash from operations and borrowings under our debt instruments, including our Credit Agreement. Our liquidity requirements arise primarily from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment and the funding of our seasonal working capital needs. -23- On June 30, 2005, we completed the refinancing of our previous senior secured credit facility by entering into a new $1.0 billion senior secured credit facility. The Credit Agreement provided us with $425 million of A term loans and $125 million of B term loans, and provides us with a revolving loan facility of up to $450 million. Under the Credit Agreement, we may use revolving loans for working capital and other general corporate purposes, including acquisitions. The A term loans and revolving loan facility mature on June 30, 2011, and the B term loans mature on June 30, 2012. The Credit Agreement also provides us with an incremental uncommitted loan facility of up to an additional $350 million, which may be used to finance acquisitions and for other permitted purposes. You should also read Note 5 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2005 included elsewhere in this Quarterly Report. Under the Credit Agreement, the interest rate for all U.S. loans will either be base rate or LIBOR, plus a margin. The base rate is the higher of the prime lending rate of Deutsche Bank or 1/2 of one percent in excess of the overnight federal funds rate. Initially, for the A term loans and revolving loans the margin will be 1.125 percent for LIBOR rate loans and 0.125 percent for base rate loans. The margin for A term loans and revolving loans is subject to adjustment quarterly based upon financial ratios. For the B term loans, the margin for LIBOR rate loans is fixed at 1.25 percent and the margin for base rate loans is fixed at 0.25 percent. Prior to the refinancing, the interest rate for A term loans and revolving loans under our previous credit facility was LIBOR plus a margin of 1.50 percent or the prime lending rate of Deutsche Bank plus a margin of 0.50 percent, and for B term loans an additional 0.25 percent, or LIBOR plus 1.75 percent. For the nine months ended September 30, 2005, we used cash from operations of $52.3 million, proceeds of $550.0 million from the refinancing of our senior secured credit facility, net borrowings of revolving loans of $217.7 million, proceeds from stock option exercises of $3.3 million and proceeds from asset sales of $3.0 million to fund the repayment of term loans of $638.7 million, capital expenditures of $63.7 million, decreases in outstanding checks of $80.2 million, dividends paid on our common stock of $11.1 million and debt issuance costs of $4.2 million and to increase cash balances by $28.4 million. For the nine months ended September 30, 2004, we used cash from operations of $101.5 million, proceeds from stock option exercises of $2.3 million, proceeds from asset sales of $9.9 million and net borrowings of revolving loans of $53.1 million offset by the reduction in outstanding checks of $76.9 million to fund capital expenditures of $72.9 million, dividends paid on our common stock of $5.5 million, debt issuance costs of $0.7 million and to increase cash balances by $10.8 million. Because we sell metal containers used in fruit and vegetable pack processing, we have seasonal sales. As is common in the industry, we must utilize working capital to build inventory and then carry accounts receivable for some customers beyond the end of the packing season. Due to our seasonal requirements, we incur short-term indebtedness to finance our working capital requirements. During the third quarter of 2005, we utilized approximately $265.1 million of revolving loans under the Credit Agreement for our peak seasonal working capital requirements. This amount does not include $88.7 million of revolving loans borrowed under the Credit Agreement to repay term loans in connection with the June 2005 refinancing of our previous senior secured credit facility. At September 30, 2005, we had $217.7 million of revolving loans outstanding under the Credit Agreement. After taking into account outstanding letters of credit, the available portion of the revolving loan facility under the Credit Agreement at September 30, 2005 was $207.6 million. We may use the available portion of our revolving loan facility, after taking into account our seasonal needs and outstanding letters of credit, for acquisitions or other permitted purposes. -24- During the first nine months of 2005, we paid cash dividends on our common stock totaling $11.1 million. On November 2, 2005, our Board of Directors declared a quarterly cash dividend on our common stock of $0.10 per share, payable on December 15, 2005 to holders of record of our common stock on December 1, 2005. The cash payment for this dividend is expected to be approximately $3.7 million. We believe that cash generated from operations and funds from borrowings available under the Credit Agreement will be sufficient to meet our expected operating needs, planned capital expenditures, debt service, tax obligations, share repurchases required under our 2004 Stock Incentive Plan and common stock dividends for the foreseeable future. We continue to evaluate acquisition opportunities in the consumer goods packaging market and may incur additional indebtedness, including indebtedness under the Credit Agreement, to finance any such acquisition. However, in the absence of acquisition opportunities, we expect to use our free cash flow to repay indebtedness or for other permitted purposes. We are in compliance with all financial and operating covenants contained in our financing agreements and believe that we will continue to be in compliance during 2005 with all of these covenants. Rationalization Charges and Acquisition Reserves During the first quarter of 2005, we approved and announced to employees a plan to relocate the operations of one of our Mississauga, Ontario plastic container manufacturing facilities to other operating facilities. This decision resulted in charges to earnings of $0.5 million, which consisted of $0.1 million for the non-cash write-down in carrying value of assets and $0.4 million for employee severance and benefits and plant exit costs. The relocation of operations has been substantially completed. Through September 30, 2005, there were no significant cash payments related to relocating this facility. Cash payments related to these reserves are expected through 2006 for employee severance and benefits costs. Under our rationalization and acquisition plans, we made cash payments of $0.6 million and $5.6 million for the nine months ended September 30, 2005 and 2004, respectively. Total future cash spending of $1.5 million is expected under our Fairfield and 2005 and 2003 rationalization plans and our 2003 acquisition plans. Spending under these plans in 2005 is not expected to be material to our cash flows. You should also read Note 2 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2005 included elsewhere in this Quarterly Report. We continually evaluate cost reduction opportunities in our business, including rationalizations of our existing facilities through plant closings and downsizings. We use a disciplined approach to identify opportunities that generate attractive cash returns. In line with our ongoing evaluation, we are currently reviewing certain facilities for potential rationalization actions which may result in cash expenditures and charges to our earnings. -25- NEW ACCOUNTING PRONOUNCEMENTS In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4." SFAS No. 151 clarifies that abnormal amounts of idle facility expense, freight, handling costs and wasted materials should be recognized as current period charges in all circumstances. SFAS No. 151 will be effective for us beginning January 1, 2006. We do not expect the adoption of SFAS No. 151 to have a material effect on our financial position, results of operations or cash flows. In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment." SFAS No. 123(R) requires that public companies recognize compensation expense in an amount equal to the fair value of the share-based payment. Based on a recent deferral of the effective date, we will adopt SFAS No. 123(R) beginning January 1, 2006. SFAS No. 123(R) permits companies to adopt its requirements using either the "modified prospective" method or the "modified retrospective" method. We are still assessing which transition method to utilize. As permitted by SFAS No. 123, we currently account for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, recognize no compensation expense for employee stock options. Accordingly, the adoption of SFAS No. 123(R)'s fair value method will have an impact on our results of operations, although it will have no impact on our overall financial position. The impact of adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No. 123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No. 123 as described in the disclosure of pro forma net income and diluted net income per share in Note 1 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2005. SFAS No. 123(R) also requires the benefits of tax deductions in excess of recognized compensation expense to be reported as a financing cash flow activity, rather than as an operating cash flow activity as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. While we cannot estimate what those amounts will be in the future (because they depend on, among other things, when employees exercise stock options), the amounts of operating cash flows recognized in prior periods for such excess tax deductions were $3.0 million and $1.7 million for the nine months ending September 30, 2005 and 2004, respectively. On October 22, 2004, the American Jobs Creation Act was signed into law. The AJCA includes a deduction of 85 percent on certain foreign earnings that are repatriated during the calendar years of 2004 and 2005. We may elect to apply this provision to qualifying earnings repatriated in 2005. The range of possible amounts that we are evaluating for repatriation under this provision is between zero and $62 million. The related potential range of income tax cannot be determined at this time. We expect to complete our evaluation of the repatriation provision under the AJCA in the fourth quarter of 2005. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Market risks relating to our operations result primarily from changes in interest rates. In the normal course of business, we also have limited foreign currency exchange rate risk associated with our operations in Canada and risk related to commodity price changes for items such as natural gas. We employ established policies and procedures to manage our exposure to these risks. Interest rate, foreign currency and commodity pricing transactions are used only to the extent considered necessary to meet our objectives. We do not utilize derivative financial instruments for trading or other speculative purposes. -26- Information regarding our interest rate risk, foreign currency exchange rate risk and commodity pricing risk has been disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2004. Since such filing, there has not been a material change to our interest rate risk, foreign currency exchange rate risk or commodity pricing risk or to our policies and procedures to manage our exposure to these risks. Item 4. CONTROLS AND PROCEDURES ----------------------- We carried out an evaluation, under the supervision and with the participation of management, including our Co-Chief Executive Officers and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934). Based upon that evaluation, as of the end of the period covered by this Quarterly Report our Co-Chief Executive Officers and Chief Financial Officer concluded that the disclosure controls and procedures are effective in ensuring that all material information required to be disclosed in this Quarterly Report has been made known to them in a timely fashion. There were no changes in our internal controls over financial reporting during the period covered by this Quarterly Report that have materially affected, or are reasonably likely to materially affect, these internal controls. Part II. Other Information Item 6. Exhibits Exhibit Number Description -------------- ----------- 12 Ratio of Earnings to Fixed Charges for the three and nine months ended September 30, 2005 and 2004. 31.1 Certification by the Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification by the Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.3 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification by the Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2 Certification by the Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.3 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. -27- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned thereunto duly authorized. SILGAN HOLDINGS INC. Dated: November 9, 2005 /s/Robert B. Lewis ----------------------------- Robert B. Lewis Executive Vice President and Chief Financial Officer (Principal Financial Officer) -28- EXHIBIT INDEX EXHIBIT NO. EXHIBIT ----------- ------- 12 Ratio of Earnings to Fixed Charges for the three and nine months ended September 30, 2005 and 2004. 31.1 Certification by the Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification by the Co-Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.3 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification by the Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2 Certification by the Co-Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.3 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. -29-