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, 2007 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 a large accelerated filer,an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer[X] Accelerated filer[ ] Non-accelerated filer[ ] 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, 2007, the number of shares outstanding of the Registrant's common stock, $0.01 par value, was 37,726,515.
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, 2007 and 2006 and December 31, 2006 Condensed Consolidated Statements of Income for the 4 three months ended September 30, 2007 and 2006 Condensed Consolidated Statements of Income for the 5 nine months ended September 30, 2007 and 2006 Condensed Consolidated Statements of Cash Flows for 6 the nine months ended September 30, 2007 and 2006 Condensed Consolidated Statements of Stockholders' 7 Equity for the nine months ended September 30, 2007 and 2006 Notes to Condensed Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial 20 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures About 27 Market Risk Item 4. Controls and Procedures 27 Part II. Other Information 28 Item 6. Exhibits 28 Signatures 29 Exhibit Index 30 -2-
<TABLE> <CAPTION> Part I. Financial Information Item 1. Financial Statements SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in thousands) Sept. 30, Sept. 30, Dec. 31, 2007 2006 2006 ---- ---- ---- (unaudited) (unaudited) <S> <C> <C> <C> Assets Current assets Cash and cash equivalents $ 26,792 $ 27,767 $ 16,737 Trade accounts receivable, net 456,289 444,732 232,429 Inventories 412,706 383,561 426,591 Prepaid expenses and other current assets 27,341 20,676 41,995 ---------- ---------- ---------- Total current assets 923,128 876,736 717,752 Property, plant and equipment, net 926,462 874,003 894,647 Goodwill 304,495 235,476 304,393 Other intangible assets, net 63,709 100,143 47,833 Other assets, net 51,466 39,134 43,754 ---------- ---------- ---------- $2,269,260 $2,125,492 $2,008,379 ========== ========== ========== Liabilities and Stockholders' Equity Current liabilities Revolving loans and current portion of long-term debt $ 210,828 $ 201,992 $ 26,417 Trade accounts payable 208,988 208,845 299,938 Accrued payroll and related costs 75,073 74,565 72,205 Accrued liabilities 60,821 64,745 34,404 ---------- ---------- ---------- Total current liabilities 555,710 550,147 432,964 Long-term debt 962,846 955,427 929,221 Other liabilities 282,141 277,270 279,654 Stockholders' equity Common stock 430 428 429 Paid-in capital 151,667 141,957 146,332 Retained earnings 378,282 279,184 295,433 Accumulated other comprehensive loss (1,712) (18,812) (15,564) Treasury stock (60,104) (60,109) (60,090) ---------- ---------- ---------- Total stockholders' equity 468,563 342,648 366,540 ---------- ---------- ---------- $2,269,260 $2,125,492 $2,008,379 ========== ========== ========== See accompanying notes. -3- </TABLE>
SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the three months ended September 30, 2007 and 2006 (Dollars and shares in thousands, except per share amounts) (Unaudited) 2007 2006 ---- ---- Net sales $904,837 $856,426 Cost of goods sold 774,536 731,168 -------- -------- Gross profit 130,301 125,258 Selling, general and administrative expenses 37,026 36,587 Rationalization charges 670 1,740 -------- -------- Income from operations 92,605 86,931 Interest and other debt expense 17,282 17,920 -------- -------- Income before income taxes 75,323 69,011 Provision for income taxes 27,705 19,323 -------- -------- Net income $ 47,618 $ 49,688 ======== ======== Earnings per share: Basic net income per share $1.26 $1.33 ===== ===== Diluted net income per share $1.25 $1.31 ===== ===== Dividends per share: $0.16 $0.12 ===== ===== Weighted average number of shares: Basic 37,690 37,411 Effect of dilutive securities 490 515 ------ ------ Diluted 38,180 37,926 ====== ====== See accompanying notes. -4-
SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME For the nine months ended September 30, 2007 and 2006 (Dollars and shares in thousands, except per share amounts) (Unaudited) 2007 2006 ---- ---- Net sales $2,239,188 $2,023,489 Cost of goods sold 1,909,576 1,751,735 ---------- ---------- Gross profit 329,612 271,754 Selling, general and administrative expenses 112,403 95,266 Rationalization charges 4,048 10,090 ---------- ---------- Income from operations 213,161 166,398 Interest and other debt expense 50,290 43,369 ---------- ---------- Income before income taxes 162,871 123,029 Provision for income taxes 60,000 39,796 ---------- ---------- Net income $ 102,871 $ 83,233 ========== ========== Earnings per share: Basic net income per share $2.73 $2.23 ===== ===== Diluted net income per share $2.70 $2.20 ===== ===== Dividends per share: $0.48 $0.36 ===== ===== Weighted average number of shares: Basic 37,653 37,346 Effect of dilutive securities 496 532 ------ ------ Diluted 38,149 37,878 ====== ====== See accompanying notes. -5-
<TABLE> <CAPTION> SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS For the nine months ended September 30, 2007 and 2006 (Dollars in thousands) (Unaudited) 2007 2006 ---- ---- <S> <C> <C> Cash flows provided by (used in) operating activities Net income $ 102,871 $ 83,233 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 101,455 93,991 Rationalization charges 4,048 10,090 Other changes that provided (used) cash, net of effects from acquisitions: Trade accounts receivable, net (214,115) (237,779) Inventories 23,359 (1,335) Trade accounts payable (1,758) 32,435 Accrued liabilities 20,297 52,803 Other, net 21,065 (6,871) --------- --------- Net cash provided by operating activities 57,222 26,567 --------- --------- Cash flows provided by (used in) investing activities Purchases of businesses, net of cash acquired (7,846) (261,778) Capital expenditures (112,612) (87,206) Proceeds from asset sales 2,855 1,226 --------- --------- Net cash used in investing activities (117,603) (347,758) --------- --------- Cash flows provided by (used in) financing activities Borrowings under revolving loans 713,033 797,273 Repayments under revolving loans (531,059) (614,724) Changes in outstanding checks - principally vendors (95,874) (98,134) Proceeds from issuance of long-term debt -- 257,600 Dividends paid on common stock (18,207) (13,508) Proceeds from stock option exercises 1,530 1,629 Excess tax benefit from stock-based compensation 1,578 921 Repurchase of treasury shares (565) (217) Debt issuance costs -- (2,343) --------- --------- Net cash provided by financing activities 70,436 328,497 --------- --------- Cash and cash equivalents Net increase 10,055 7,306 Balance at beginning of year 16,737 20,461 --------- --------- Balance at end of period $ 26,792 $ 27,767 ========= ========= Interest paid, net $ 41,523 $ 39,793 Income taxes paid, net 43,681 12,221 </TABLE> See accompanying notes. -6-
<TABLE> <CAPTION> SILGAN HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the nine months ended September 30, 2007 and 2006 (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 (Loss)Income Compensation Stock Equity ----------- ----- ------- -------- ------------- ------------ --------- ------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> Balance at December 31, 2005 37,266 $426 $139,475 $209,459 $(13,888) $(1,893) $(60,229) $273,350 Comprehensive income: Net income -- -- -- 83,233 -- -- -- 83,233 Change in fair value of derivatives, net of tax benefit of $2,926 -- -- -- -- (4,652) -- -- (4,652) Foreign currency translation, net of tax provision of $1,351 -- -- -- -- (272) -- -- (272) -------- Comprehensive income 78,309 -------- Dividends declared on common stock -- -- -- (13,508) -- -- -- (13,508) Reversal of unamortized stock compensation -- -- (1,893) -- -- 1,893 -- -- Stock compensation expense -- -- 1,589 -- -- -- -- 1,589 Stock option exercises, including tax benefit of $1,371 133 2 2,998 -- -- -- -- 3,000 Net issuance of treasury stock for vested restricted stock units, including tax benefit of $97 18 -- (212) -- -- -- 120 (92) ------ ---- -------- -------- -------- ------- -------- -------- Balance at September 30, 2006 37,417 $428 $141,957 $279,184 $(18,812) $ -- $(60,109) $342,648 ====== ==== ======== ======== ======== ======= ======== ======== Balance at December 31, 2006 37,588 $429 $146,332 $295,433 $(15,564) $ -- $(60,090) $366,540 Comprehensive income: Net income -- -- -- 102,871 -- -- -- 102,871 Amortization of net prior service cost and actuarial losses, net of tax provision of $577 -- -- -- -- 919 -- -- 919 Change in fair value of derivatives, net of tax provision of $979 -- -- -- -- 1,696 -- -- 1,696 Foreign currency translation, net of tax benefit of $8,041 -- -- -- -- 11,237 -- -- 11,237 -------- Comprehensive income 116,723 -------- Adjustment to initially apply FIN 48 -- -- -- (1,815) -- -- -- (1,815) Dividends declared on common stock -- -- -- (18,207) -- -- -- (18,207) Stock compensation expense -- -- 2,443 -- -- -- -- 2,443 Stock option exercises, including tax benefit of $1,648 109 1 3,177 -- -- -- -- 3,178 Net issuance of treasury stock for vested restricted stock units, including tax benefit of $266 30 -- (285) -- -- -- (14) (299) ------ ---- -------- -------- -------- ------- -------- -------- Balance at September 30, 2007 37,727 $430 $151,667 $378,282 $ (1,712) $ -- $(60,104) $468,563 ====== ==== ======== ======== ======== ======= ======== ======== See accompanying notes. </TABLE> -7-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 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, 2006 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. Certain prior years' amounts have been reclassified to conform with the current year's presentation. 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, 2006. Goodwill and Other Intangible Assets. We review goodwill and other indefinite-lived intangible assets for impairment as of July 1 of each year and more frequently if circumstances indicate a possible impairment. We determined that our goodwill and other indefinite-lived intangible assets were not impaired in our third quarter 2007 assessment. Recently Adopted Accounting Pronouncement. In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB Interpretation No., or FIN, 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted FIN 48 on January 1, 2007. As a result, we recognized a reduction to opening retained earnings at January 1, 2007 of $1.8 million to recognize additional long-term tax liabilities. See Note 8 for further information. Recent Accounting Pronouncement. In September 2006, the FASB issued Statement of Financial Accounting Standards, or SFAS, No. 157, "Fair Value Measurements." SFAS No. 157 establishes a single authoritative definition for fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS No. 157 is effective for us on January 1, 2008. We are currently evaluating the impact SFAS No. 157 will have on our consolidated financial statements. -8-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 2. Acquisitions White Cap - --------- During 2006, we acquired the White Cap closures operations in Europe, Turkey, China and the Philippines from Amcor Limited, or Amcor. The majority of this acquisition was completed in June 2006. In January 2007, we acquired the majority share of the White Cap closures operations in Venezuela from Amcor. The acquisition of the remaining White Cap closures operations in Brazil is subject to the satisfaction of specified conditions as provided in the purchase agreement with Amcor. White Cap is a leading supplier of an extensive range of vacuum closures to consumer goods packaging companies in the food and beverage industries in the markets it serves. White Cap has been recombined with our previously acquired White Cap closures operations in the United States to create a global leader in vacuum closures for hot filled and retortable food and beverage products. The White Cap acquisition was accounted for using the purchase method of accounting. Accordingly, the purchase price has been allocated to the assets acquired and liabilities assumed based on their estimated fair values at the respective dates of acquisition, and the results of operations have been included in our consolidated financial statements as of the respective dates of acquisition. We have completed the valuation of certain assets and liabilities including property, plant and equipment, intangible assets and pension obligations. The valuation of certain other assets and liabilities related to operations acquired in the fourth quarter of 2006 and first quarter of 2007 is still in process, and therefore the actual fair value may vary from these preliminary estimates. Adjustments to the acquired net assets resulting from final valuations are not expected to be significant. Cousins-Currie Limited - ---------------------- In December 2006, we acquired substantially all of the assets of Cousins-Currie Limited, or Cousins-Currie, a leading manufacturer in Canada of larger-size custom designed plastic containers. The acquisition of Cousins-Currie was accounted for using the purchase method of accounting. Accordingly, the purchase price has been preliminarily allocated to the assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. We completed the valuation of intangible assets in 2007 and as a result reallocated $17.7 million from goodwill to other intangible assets, which assets were primarily customer relationships with an estimated useful life of 19 years. The valuation of certain other assets and liabilities is still in process, and therefore the actual fair value may vary from these preliminary estimates. Adjustments to the acquired net assets resulting from final valuations are not expected to be significant. -9-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 3. Rationalization Charges As part of our plans to rationalize certain facilities, we have established reserves for employee severance and benefits and plant exit costs. Activity in our rationalization reserves since December 31, 2006 is summarized as follows: <TABLE> <CAPTION> Employee Plant Non-Cash Severance Exit Asset and Benefits Costs Write-Down Total ------------ ----- ---------- ----- (Dollars in thousands) <S> <C> <C> <C> <C> Balance at December 31, 2006 - ---------------------------- 2001 Rationalization Plan $ -- $ 232 $ -- $ 232 2006 Rationalization Plans 4,676 -- -- 4,676 ------- ----- ------- ------- Balance at December 31, 2006 4,676 232 -- 4,908 Activity for the Nine Months Ended Sept. 30, 2007 - ------------------------------------------------- 2001 Rationalization Plan Reserve Adjustment -- 218 -- 218 2001 Rationalization Plan Reserve Utilized -- (137) -- (137) 2006 Rationalization Plan Reserves Established 2,408 235 1,187 3,830 2006 Rationalization Plan Reserves Utilized (1,874) (235) (1,187) (3,296) ------- ----- ------- ------- Total Activity 534 81 -- 615 Balance at September 30, 2007 - ----------------------------- 2001 Rationalization Plan -- 313 -- 313 2006 Rationalization Plans 5,210 -- -- 5,210 ------- ----- ------- ------- Balance at September 30, 2007 $ 5,210 $ 313 $ -- $ 5,523 ======= ===== ======= ======= </TABLE> -10-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 3. Rationalization Charges (continued) 2006 Rationalization Plans - -------------------------- In June 2006, in an effort to streamline operations and reduce costs, we approved a plan to exit our St. Paul, Minnesota metal food container manufacturing facility. We expect to cease operations at this facility in the fourth quarter of 2007. The plan includes the termination of approximately 60 employees, the consolidation of certain operations into existing facilities and the elimination of the remaining operations and the exit of the facility. We estimate that the total costs for the rationalization of the facility will be $13.7 million. These costs include $5.7 million of non-cash pension and postretirement curtailment expense, $2.6 million of employee severance and special termination benefits, $2.4 million for plant exit costs, $2.6 million for the acceleration of depreciation to write-down the building for sale and equipment for abandonment upon the exit of the facility and $0.4 million for the non-cash write-down in carrying value of assets. As of December 31, 2006, total charges recognized to date included $4.6 million of non-cash pension and postretirement curtailment expense, $1.9 million of employee severance and special termination benefits and $2.1 million for the non-cash write-down and accelerated depreciation of the building and equipment. Rationalization charges recognized during 2007 were $1.8 million for employee severance and benefits which included $1.1 million of non-cash pension curtailment expense, $0.1 million for plant exit costs and $0.9 million for the non-cash write-down and accelerated depreciation of the building and equipment. Additional charges of $2.3 million for plant exit costs are expected through 2008. Cash expenditures of $4.0 million are expected through 2008. In October 2006, we approved and announced to employees a plan to exit our Stockton, California metal food container manufacturing facility. We have ceased operations at this facility. The plan includes the termination or relocation of approximately 110 employees and other related plant exit costs. We estimate that the total costs for the rationalization of the facility will be $5.4 million. These costs include $4.0 million for employee severance and benefits, $1.0 million for plant exit costs and $0.4 million for the non-cash write-down in carrying value of assets. As of December 31, 2006, we recognized $3.4 million for employee severance and benefits and $0.1 million for the non-cash write down in carrying value of assets. Rationalization charges recognized during 2007 were $0.6 million for employee severance and benefits, $0.1 million for plant exit costs and $0.3 million for the non-cash write-down in carrying value of assets. Additional charges of $0.9 million are expected through 2008 for plant exit costs. Cash expenditures of $4.4 million are expected through 2008. In addition, we expect to sell the Stockton building in 2008 for estimated proceeds in excess of the net book value of the facility. -11-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 3. Rationalization Charges (continued) 2001 Rationalization Plan - ------------------------- In 2007, the rationalization reserve for the plan to exit our Fairfield, Ohio plastic container manufacturing facility was adjusted to recognize additional charges for the change in expected sublease income. The lease expires in 2009. Rationalization reserves are included in the Condensed Consolidated Balance Sheets as follows: <TABLE> <CAPTION> Sept. 30, Sept. 30, Dec. 31, 2007 2006 2006 ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> Accrued liabilities $1,863 $1,023 $1,537 Other liabilities 3,660 240 3,371 ------ ------ ------ $5,523 $1,263 $4,908 ====== ====== ====== Note 4. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss is reported in the Condensed Consolidated Statements of Stockholders' Equity. Amounts included in accumulated other comprehensive loss consisted of the following: Sept. 30, Sept. 30, Dec. 31, 2007 2006 2006 ---- ---- ---- (Dollars in thousands) Foreign currency translation $ 24,145 $ 11,287 $ 12,908 Change in fair value of derivatives 3,192 (539) 1,496 Unrecognized net periodic pension and other postretirement benefit costs: Net prior service credit 4,791 -- 4,532 Net actuarial loss (33,840) -- (34,500) Minimum pension liability -- (29,560) -- -------- -------- -------- Accumulated other comprehensive loss $ (1,712) $(18,812) $(15,564) ======== ======== ======== </TABLE> -12-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 5. Inventories Inventories consisted of the following: <TABLE> <CAPTION> Sept. 30, Sept. 30, Dec. 31, 2007 2006 2006 ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> Raw materials $ 79,518 $ 70,649 $ 90,969 Work-in-process 68,666 73,086 68,249 Finished goods 275,185 246,543 276,870 Spare parts and other 28,534 24,461 26,711 -------- -------- -------- 451,903 414,739 462,799 Adjustment to value domestic inventory at cost on the LIFO method (39,197) (31,178) (36,208) -------- -------- -------- $412,706 $383,561 $426,591 ======== ======== ======== Note 6. Long-Term Debt Long-term debt consisted of the following: <CAPTION> Sept. 30, Sept. 30, Dec. 31, 2007 2006 2006 ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> Bank debt Bank revolving loans $ 189,872 $ 187,900 $ -- Bank A term loans 345,000 375,000 345,000 Bank B term loans 41,904 83,750 41,904 Canadian term loans 89,910 40,491 77,445 Euro term loans 283,460 254,032 262,300 Other foreign bank revolving loans 20,528 13,246 25,989 ---------- ---------- -------- Total bank debt 970,674 954,419 752,638 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 1,173,674 1,157,419 955,638 Less current portion 210,828 201,992 26,417 ---------- ---------- -------- $ 962,846 $ 955,427 $929,221 ========== ========== ======== </TABLE> -13-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 6. Long-Term Debt (continued) At September 30, 2007, amounts expected to be repaid within one year consisted of $189.9 million of bank revolving loans related primarily to seasonal working capital needs and $0.4 million of bank term loans under our senior secured credit facility, or the Credit Agreement, and $20.5 million of foreign bank revolving loans. In March 2007, we entered into two interest rate swap agreements for notional principal amounts of $25 million and Cdn $25 million, respectively, to fix interest on variable rate debt at 4.90 percent and 4.20 percent, respectively. These interest rate swaps mature in March 2010. In September 2007, we entered into an interest rate swap agreement for a notional principal amount of $50 million to fix interest on variable rate debt at 4.66 percent. This interest rate swap matures in September 2010. These swaps are accounted for as cash flow hedges and are with a financial institution which is expected to fully perform under the terms thereof. At September 30, 2007, the aggregate notional principal amount of outstanding interest rate swap agreements was $555 million, of which $128 million matures in the fourth quarter of 2007 (non-U.S. dollar agreements have been translated into U.S. dollars at exchange rates in effect at September 30, 2007). -14-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 7. Retirement Benefits The components of the net periodic pension benefits costs are as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2007 2006 2007 2006 ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> Service cost $ 3,522 $ 3,688 $ 10,649 $ 10,426 Interest cost 6,401 6,008 18,650 16,876 Expected return on plan assets (7,670) (6,849) (23,080) (20,615) Amortization of prior service cost 723 636 1,877 2,205 Amortization of actuarial losses 287 769 717 2,315 Curtailment expense -- -- 1,158 3,708 Termination benefits -- 26 -- 575 ------- ------- -------- -------- Net periodic benefit cost $ 3,263 $ 4,278 $ 9,971 $ 15,490 ======= ======= ======== ======== The components of the net periodic other postretirement benefits costs are as follows: <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2007 2006 2007 2006 ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> Service cost $ 231 $ 183 $ 700 $ 793 Interest cost 808 974 2,681 2,786 Amortization of prior service credit (569) (210) (1,454) (1,323) Amortization of actuarial losses 74 79 356 498 Net curtailment gain -- (2,237) -- (1,052) ----- ------- ------- ------- Net periodic benefit cost $ 544 $(1,211) $ 2,283 $ 1,702 ===== ======= ======= ======= </TABLE> We recognized curtailment expense in 2007 and 2006 for our pension benefits and in 2006 for our postretirement benefits related to the planned exit of our St. Paul, Minnesota metal food container manufacturing facility. The curtailment expense for postretirement benefits included an adjustment to reduce the expense by $0.3 million in September 2006 to reflect the total 2006 expense of $0.9 million. In September 2006, we recognized income of $1.9 million for the curtailment of postretirement benefits in one of our closures manufacturing facilities. 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, 2006, based on current tax law, there are no significant minimum required contributions to our pension plans in 2007. However, this is subject to change based on a number of factors, including in the event that asset performance is significantly below the assumed long-term rate of return on plan assets. During the first nine months of 2007, we made no contributions to fund our pension plans. -15-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 8. Income Taxes We adopted the provisions of FIN 48 on January 1, 2007. As a result, we recognized an increase in the liability for unrecognized tax benefits of $1.8 million, which was accounted for as an adjustment to the opening balance of retained earnings at January 1, 2007. The total amount of unrecognized tax benefits as of January 1, 2007, including the cumulative effect of the adoption of FIN 48, was $30.9 million, of which $15.8 million represented liabilities that if recognized would impact the effective tax rate. Holdings and its subsidiaries file U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions. With limited exceptions and due to the impact of net operating loss and other credit carryforwards, we may be effectively subject to U.S. Federal income tax examinations for periods after 1990. We are subject to examination by state and local tax authorities generally for the period mandated by statute, with the exception of states where waivers of the statute of limitations have been executed. These states and the earliest open period include Wisconsin (1995), Texas (2001), New York (2001) and Indiana (2002). Our foreign subsidiaries are generally not subject to examination by tax authorities for periods before 2001, and we have contractual indemnities with third parties with respect to open periods that predate our ownership of certain foreign subsidiaries. Subsequent periods may be examined by the relevant tax authorities. The Internal Revenue Service, or IRS, commenced an examination in the fourth quarter of 2006 of Holdings' income tax return for the period ended December 31, 2004. It is reasonably possible that this IRS audit and IRS audits for prior periods will be concluded within the next twelve months, and that the conclusion of these audits may result in a significant change to our reported unrecognized tax benefits. Due to the ongoing nature of these audits, we are unable to estimate the amount of this potential impact. We recognize accrued interest and penalties related to unrecognized taxes as additional tax expense. At December 31, 2006, we had $1.1 million accrued for potential interest and penalties. In the third quarter of 2006, we recognized a cumulative income tax benefit of $6.9 million, primarily related to the completion of tax initiatives for research and development credits. Note 9. Dividends On November 6, 2007, our Board of Directors declared a quarterly cash dividend on our common stock of $0.16 per share, payable on December 14, 2007 to holders of record of our common stock on November 30, 2007. The cash payment for this dividend is expected to be approximately $6.1 million. -16-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 10. Treasury Stock During the nine months ended September 30, 2007, we issued 41,612 treasury shares at an average cost of $13.25 per share for restricted stock units that vested during the period. In accordance with the Silgan Holdings Inc. 2004 Stock Incentive Plan, we repurchased 11,499 shares of our common stock at an average cost of $49.11 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, 2007, 5,305,953 shares were held in treasury. Note 11. 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 SFAS No. 123(R), "Share-Based Payment," which requires recognition of compensation expense in an amount equal to the fair value of the share-based payment. During the first nine months of 2007, we granted 65,800 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 $3.2 million. In June 2007, we granted 5,142 restricted stock units to non-employee 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 $0.3 million. -17-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 12. Business Segment Information Reportable business segment information for the three and nine months ended September 30 is as follows: <TABLE> <CAPTION> Metal Food Plastic Containers(1) Containers(2) Closures Corporate Total ---------- ---------- -------- --------- ----- (Dollars in thousands) <S> <C> <C> <C> <C> <C> Three Months Ended September 30, 2007 - ------------------------------------- Net sales $ 585,071 $153,122 $166,644 $ -- $ 904,837 Depreciation and amortization(3) 15,847 11,134 6,932 421 34,334 Segment income from operations 62,729 10,275 21,828 (2,227) 92,605 Three Months Ended September 30, 2006 - ------------------------------------- Net sales $ 557,898 $144,051 $154,477 $ -- $ 856,426 Depreciation and amortization(3) 14,845 10,023 6,309 375 31,552 Segment income from operations 63,488 7,156 19,917 (3,630) 86,931 Nine Months Ended September 30, 2007 - ------------------------------------ Net sales $1,295,671 $472,715 $470,802 $ -- $2,239,188 Depreciation and amortization(3) 46,058 32,643 20,486 1,262 100,449 Segment income from operations 119,199 42,508 58,432 (6,978) 213,161 Nine Months Ended September 30, 2006 - ------------------------------------ Net sales $1,242,657 $452,268 $328,564 $ -- $2,023,489 Depreciation and amortization(3) 48,247 31,709 12,619 530 93,105 Segment income from operations 100,592 32,752 41,148 (8,094) 166,398 - ------------- (1) Segment income from operations includes rationalization charges of $0.7 million and $1.4 million for the three months ended September 30, 2007 and 2006, respectively, and $3.8 million and $7.2 million for the nine months ended September 30, 2007 and 2006, respectively. (2) Segment income from operations includes rationalization charges of $0.3 million for the three months ended September 30, 2006 and $0.2 million and $2.9 million for the nine months ended September 30, 2007 and 2006, respectively. (3) Depreciation and amortization excludes amortization of debt issuance costs of $0.3 million and $0.4 million for the three months ended September 30, 2007 and 2006, respectively, and $1.0 million and $0.9 million for the nine months ended September 30, 2007 and 2006, respectively. </TABLE> -18-
SILGAN HOLDINGS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information at September 30, 2007 and 2006 and for the three and nine months then ended is unaudited) Note 12. Business Segment Information (continued) Total segment income from operations is reconciled to income before income taxes as follows: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2007 2006 2007 2006 ---- ---- ---- ---- (Dollars in thousands) <S> <C> <C> <C> <C> Total segment income from operations $92,605 $86,931 $213,161 $166,398 Interest and other debt expense 17,282 17,920 50,290 43,369 ------- ------- -------- -------- Income before income taxes $75,323 $69,011 $162,871 $123,029 ======= ======= ======== ======== </TABLE> -19-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Statements included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q which are not historical facts are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and Securities Exchange Act of 1934. Such forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting us and therefore involve a number of uncertainties and risks, including, but not limited to, those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006 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 manufacturer of metal and plastic consumer goods packaging products. We produce steel and aluminum containers for human and pet food; 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; and metal, composite and plastic vacuum closures for food and beverage 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 worldwide manufacturer of metal, composite and plastic vacuum closures 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 may use our cash flow to repay debt. If acquisition opportunities are not identified over a longer period of time, we would consider other permitted uses of our cash flow, such as repurchases of shares of our common stock or increased dividends to our stockholders. During the first half of 2006, we acquired the White Cap closures operations in Europe and Turkey from Amcor. In the fourth quarter of 2006, we acquired the White Cap closures operations in China and the Philippines from Amcor. In January 2007, we acquired the majority share of the White Cap closures operations in Venezuela from Amcor. The acquisition of the remaining White Cap closures operations in Brazil is subject to the satisfaction of specified conditions as provided in the purchase agreement with Amcor. White Cap is a leading supplier of an extensive range of vacuum closures to consumer goods packaging companies in the food and beverage industries in the markets it serves. White Cap has been recombined with our previously acquired White Cap closures operations in the United States to create a global leader in vacuum closures for hot filled and retortable food and beverage products. In December 2006, we acquired substantially all of the assets of Cousins-Currie, a leading manufacturer in Canada of larger-size custom designed plastic containers. -20-
RESULTS OF OPERATIONS The following table sets forth certain unaudited income statement data expressed as a percentage of net sales for the periods presented: <TABLE> <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2007 2006 2007 2006 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net sales Metal food containers 64.7% 65.1% 57.9% 61.4% Plastic containers 16.9 16.8 21.1 22.4 Closures 18.4 18.1 21.0 16.2 ----- ----- ----- ----- Consolidated 100.0 100.0 100.0 100.0 Cost of goods sold 85.6 85.4 85.3 86.6 ----- ----- ----- ----- Gross profit 14.4 14.6 14.7 13.4 Selling, general and administrative expenses 4.1 4.2 5.0 4.7 Rationalization charges 0.1 0.2 0.2 0.5 ----- ----- ----- ----- Income from operations 10.2 10.2 9.5 8.2 Interest and other debt expense 1.9 2.1 2.2 2.1 ----- ----- ----- ----- Income before income taxes 8.3 8.1 7.3 6.1 Provision for income taxes 3.0 2.3 2.7 2.0 ----- ----- ----- ----- Net income 5.3% 5.8% 4.6% 4.1% ===== ===== ===== ===== Summary unaudited results of operations for the three and nine months ended September 30, 2007 and 2006 are provided below. <CAPTION> Three Months Ended Nine Months Ended ------------------ ----------------- Sept. 30, Sept. 30, Sept. 30, Sept. 30, 2007 2006 2007 2006 ---- ---- ---- ---- (Dollars in millions) <S> <C> <C> <C> <C> Net sales Metal food containers $585.1 $557.9 $1,295.7 $1,242.7 Plastic containers 153.1 144.0 472.7 452.3 Closures 166.6 154.5 470.8 328.5 ------ ------ -------- -------- Consolidated $904.8 $856.4 $2,239.2 $2,023.5 ====== ====== ======== ======== Income from operations Metal food containers (1) $ 62.7 $ 63.5 $ 119.2 $ 100.6 Plastic containers (2) 10.3 7.2 42.5 32.8 Closures 21.8 19.9 58.5 41.1 Corporate (2.2) (3.7) (7.0) (8.1) ------ ------ -------- -------- Consolidated $ 92.6 $ 86.9 $ 213.2 $ 166.4 ====== ====== ======== ======== - ------------- (1) Includes rationalization charges of $0.7 million and $1.4 million for the three months ended September 30, 2007 and 2006, respectively, and $3.8 million and $7.2 million for the nine months ended September 30, 2007 and 2006, respectively. (2) Includes rationalization charges of $0.3 million for the three months ended September 30, 2006 and $0.2 million and $2.9 million for the nine months ended September 30, 2007 and 2006, respectively. </TABLE> -21-
Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006 Overview. Consolidated net sales were $904.8 million in the third quarter of 2007, representing a 5.7 percent increase as compared to the third quarter of 2006 due primarily to higher average selling prices resulting from the pass through of inflation in raw material and other manufacturing costs, an improved mix of products sold in the metal food container business, the inclusion of sales from our fourth quarter 2006 and first quarter 2007 acquisitions, the favorable impact of foreign exchange translation on international revenues and improved volumes across all businesses. Income from operations for the third quarter of 2007 of $92.6 million increased by $5.7 million, or 6.6 percent, as compared to the same period in 2006 due to improved volumes, benefits from cost reductions and productivity improvements and a decrease in rationalization charges, partially offset by the impact from the inventory reduction in the metal food container business. The results for 2007 included rationalization charges of $0.7 million, or $0.01 per diluted share, net of tax. The results for 2006 included a benefit of $0.15 per diluted share attributable to tax initiatives implemented in the third quarter, net of fees, reduced by rationalization charges of $1.7 million, or $0.03 per diluted share net of tax. Net income for the third quarter of 2007 was $47.6 million, or $1.25 per diluted share, as compared to $49.7 million, or $1.31 per diluted share, for the same period in 2006. Net Sales. The $48.4 million increase in consolidated net sales in the third quarter of 2007 as compared to the third quarter of 2006 was the result of higher net sales across all businesses and the favorable impact of foreign exchange translation on international revenues. Net sales for the metal food container business in the third quarter of 2007 increased $27.2 million, or 4.9 percent, as compared to net sales for the same period in 2006. This increase was the result of higher average selling prices due to an improved mix of products sold and the pass through of inflation in raw material and other manufacturing costs as well as slightly higher unit volumes. Net sales for the plastic container business in the third quarter of 2007 increased $9.1 million, or 6.3 percent, as compared to the same period in 2006. This increase was primarily a result of higher unit volumes attributable to the acquisition of Cousins-Currie. Net sales for the closures business increased $12.1 million, or 7.8 percent, in the third quarter of 2007 as compared to the same period in 2006. This increase was primarily a result of the inclusion of sales from the White Cap operations acquired in the fourth quarter of 2006 and the first quarter of 2007, the favorable foreign exchange translation on international revenues of approximately $5.6 million, increased unit volumes and the pass through of higher raw material costs. Gross Profit. Gross profit margin decreased 0.2 percentage points to 14.4 percent in the third quarter of 2007 as compared to the same period in 2006 for the reasons discussed below in "Income from Operations." Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased to 4.1 percent for the third quarter of 2007 as compared to 4.2 percent for the same period in 2006, due primarily to additional professional fees incurred in 2006 for the implementation of certain tax initiatives. Income from Operations. Income from operations for the third quarter of 2007 increased by $5.7 million as compared to the third quarter of 2006 as a result of higher income from operations from our plastic container and closures operations and a decrease in rationalization charges of $1.0 million from the prior period. Operating margin remained constant at 10.2 percent for each of the same periods. -22-
Income from operations of the metal food container business for the third quarter of 2007 decreased $0.8 million, or 1.3 percent, as compared to the same period in 2006, and operating margin decreased to 10.7 percent from 11.4 percent over the same periods. These decreases were due principally to the impact of approximately $4.7 million of costs primarily associated with the reduction in the provisional inventory built during the fourth quarter of 2006 and first quarter of 2007 in connection with certain union negotiations that were successfully concluded in the second quarter of 2007. These decreases were offset by an improved mix of products sold, increased sales volumes and benefits derived from ongoing cost reduction initiatives. The third quarter of 2007 included rationalization charges of $0.7 million for the ongoing costs associated with the plans to close the St. Paul, Minnesota and Stockton, California metal food container facilities. The third quarter of 2006 included rationalization charges of $1.4 million for the costs associated with the plans to close the St. Paul facility. Income from operations of the plastic container business for the third quarter of 2007 increased $3.1 million, or 43.1 percent, as compared to the same period in 2006, and operating margin increased to 6.7 percent from 5.0 percent over the same periods. These increases were primarily a result of the impact from the Cousins-Currie acquisition, productivity improvements and cost reductions. Income from operations of the closures business for the third quarter of 2007 increased $1.9 million, or 9.5 percent, as compared to the same quarter a year ago, and operating margin increased to 13.1 percent from 12.9 percent over the same periods. These increases were primarily the result of the inclusion of international operations acquired in the fourth quarter of 2006 and the first quarter of 2007, increased unit volumes, the benefits of cost reduction initiatives and improved manufacturing efficiencies. Interest and Other Debt Expense. Interest and other debt expense for the third quarter of 2007 decreased $0.6 million to $17.3 million as compared to the same period in 2006. This decrease resulted primarily from lower market interest rates. Provision for Income Taxes. The effective tax rate for the third quarter of 2007 was 36.8 percent as compared to 28.0 percent for the same period last year. The 2006 effective tax rate was impacted by the cumulative income tax benefit of $6.9 million, primarily related to the completion in the third quarter of 2006 of tax initiatives for research and development credits. Nine Months Ended September 30, 2007 Compared with Nine Months Ended September 30, 2006 Overview. Consolidated net sales were $2.24 billion in the first nine months of 2007, representing a 10.7 percent increase as compared to the first nine months of 2006 primarily due to the inclusion of sales from the acquisitions completed in 2006, higher average selling prices resulting from the pass through of inflation in raw material and other manufacturing costs in the metal food container and closures businesses, an improved mix of products sold in the metal food container business and improved volumes across all businesses. Income from operations for the first nine months of 2007 increased by $46.8 million, or 28.1 percent, as compared to the same period in 2006. The increase in income from operations was a result of higher income from operations across all businesses, largely due to the acquisitions completed in 2006, increased unit volumes, higher rationalization charges incurred in 2006, continued benefits from cost reductions and the lagged contractual pass through of inflation in other manufacturing costs experienced in 2006. The results for the first nine months of 2007 and 2006 included rationalization charges of $4.0 million and $10.1 million, respectively. Net income for the first nine months of 2007 was $102.9 million, or $2.70 per diluted share, as compared to $83.2 million, or $2.20 per diluted share, for the same period in 2006. -23-
Net Sales. The $215.7 million increase in consolidated net sales in the first nine months of 2007 as compared to the first nine months of 2006 was primarily due to higher net sales across all of our businesses. Net sales for the metal food container business increased $53.0 million, or 4.3 percent, in the first nine months of 2007 as compared to the same period in 2006. This increase was primarily attributable to higher average selling prices due to the pass through of inflation in raw material and other manufacturing costs, an increase in unit volumes and an improved mix of products sold. Net sales for the plastic container business in the first nine months of 2007 increased $20.4 million, or 4.5 percent, as compared to the same period in 2006. This increase was primarily the result of the inclusion of sales from Cousins-Currie and improved unit volumes, partially offset by the impact from the rationalization of the Valencia, California manufacturing facility in the second quarter of 2006. Net sales for the closures business in the first nine months of 2007 increased $142.3 million, or 43.3 percent, as compared to the same period in 2006. This increase was attributable to the White Cap acquisition, higher average selling prices resulting from the pass through of inflation in raw material and other manufacturing costs and an increase in unit volumes. Gross Profit. Gross Profit margin increased 1.3 percentage points to 14.7 percent for the first nine months of 2007 as compared to the same period in 2006 for the reasons discussed below in "Income from Operations." Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales increased to 5.0 percent for the first nine months of 2007 as compared to 4.7 percent for the same period in 2006, due primarily to the inclusion of the operations from the White Cap acquisition which incur such expenses at a higher percentage of its sales as compared to our other operations. Income from Operations. Income from operations for the first nine months of 2007 increased by $46.8 million as compared to the first nine months of 2006 as a result of higher income from operations across all businesses. Operating margin increased to 9.5 percent from 8.2 percent over the same periods as a result of increased margins in our metal food and plastic container businesses. Income from operations of the metal food container business for the first nine months of 2007 increased $18.6 million, or 18.5 percent, as compared to the same period in 2006, and operating margin increased to 9.2 percent from 8.1 percent over the same periods. These increases were principally due to higher rationalization charges recorded in the first nine months of 2006 for the shut down of the St. Paul, Minnesota manufacturing facility, the lagged contractual pass through of inflation in other manufacturing costs experienced in 2006, benefits derived from ongoing cost reduction initiatives and increased sales volumes, slightly offset by the impact from the reduction in the provisional inventory built primarily in the fourth quarter of 2006. Income from operations of the plastic container business for the first nine months of 2007 increased $9.7 million, or 29.6 percent, as compared to the same period in 2006, and operating margin increased to 9.0 percent from 7.3 percent over the same periods. The increases in income from operations and operating margin were primarily due to the impact from the Cousins-Currie acquisition, rationalization charges of $2.9 million incurred in 2006 for the shut down of the Valencia, California manufacturing facility, volume growth and continued benefits from cost reductions, slightly offset by a less favorable mix of products sold. -24-
Income from operations of the closures business for the first nine months of 2007 increased $17.4 million, or 42.3 percent, as compared to the same periods in 2006 due primarily to the White Cap acquisition and improved unit volumes. Operating margin for the first nine months of 2007 decreased slightly to 12.4 percent from 12.5 percent over the same period in 2006 primarily as a result of the incurrence of higher selling, general and administrative costs in the acquired White Cap operations. Interest and Other Debt Expense. Interest and other debt expense for the first nine months of 2007 increased $6.9 million to $50.3 million as compared to the same period in 2006. This increase resulted primarily from higher average borrowings as a result of the 2006 acquisitions. Provision for Income Taxes. The effective tax rate for the first nine months of 2007 was 36.8 percent as compared to 32.4 percent in the same period in 2006. The 2006 effective tax rate was impacted by the cumulative income tax benefit of $6.9 million, primarily related to the completion in the third quarter of 2006 of tax initiatives for research and development credits. 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. For the nine months ended September 30, 2007, we used cash from operations of $57.2 million, net borrowings of revolving loans of $182.0 million and net proceeds from stock-based compensation of $2.6 million to fund net capital expenditures of $109.8 million, our acquisition of the White Cap operations in Venezuela for $7.8 million, net of cash acquired, decreases in outstanding checks of $95.9 million and dividends paid on our common stock of $18.2 million and to increase cash balances by $10.1 million. For the nine months ended September 30, 2006, we used cash from operations of $26.6 million, net borrowings of revolving loans of $182.5 million, borrowings of long-term debt of $257.6 million and net proceeds from stock-based compensation of $2.3 million to fund our acquisition of White Cap for $261.8 million, net of cash acquired, net capital expenditures of $86.0 million, decreases in outstanding checks of $98.1 million, debt issuance costs of $2.3 million incurred in connection with an amendment to the Credit Agreement and dividends paid on our common stock of $13.5 million and to increase cash balances by $7.3 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 2007, we utilized approximately $281.9 million of revolving loans under the Credit Agreement for our peak seasonal working capital requirements. -25-
At September 30, 2007, we had $189.9 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, 2007 was $221.3 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 the first nine months of 2007, we paid cash dividends on our common stock totaling $18.2 million. On November 6, 2007, our Board of Directors declared a quarterly cash dividend on our common stock of $0.16 per share, payable on December 14, 2007 to holders of record of our common stock on November 30, 2007. The cash payment for this dividend is expected to be approximately $6.1 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 (approximately $150 million in 2007 and between $110 million and $140 million annually thereafter), 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. 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 2007 with all of these covenants. Rationalization Charges In 2006, we announced our plans to exit our St. Paul, Minnesota and Stockton, California metal food container manufacturing facilities. We expect to cease operations at our St. Paul facility in the fourth quarter of 2007. We incurred charges of $2.8 million during the first nine months of 2007 related to this facility rationalization and expect to incur an additional $2.3 million of charges related to plant exit costs. We have ceased operations at our Stockton facility. We incurred charges of $1.0 million in the first nine months of 2007 related to this facility rationalization and expect to incur an additional $0.9 million of charges related to plant exit costs. Under our rationalization plans, we made cash payments of $1.1 million and $1.5 million for the nine months ended September 30, 2007 and 2006, respectively. Total future cash spending of $8.7 million is expected for our outstanding rationalization plans. You should also read Note 3 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2007 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. -26-
RECENT ACCOUNTING PRONOUNCEMENTS In June 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109." FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods and disclosure. We adopted FIN 48 on January 1, 2007. Our adoption of FIN 48 did not have a material impact on our consolidated financial statements. You should also read Note 8 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2007 included elsewhere in this Quarterly Report. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 establishes a single authoritative definition for fair value, sets out a framework for measuring fair value and requires additional disclosures about fair value measurements. SFAS No. 157 is effective for us on January 1, 2008. We are currently evaluating the impact SFAS No. 157 will have on our consolidated financial statements. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- Market risks relating to our operations result primarily from changes in interest rates and, with respect to our international closures operations and our Canadian plastic container operations, from foreign currency exchange rates. In the normal course of business, we also have limited 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, 2006. Since such filing, other than as disclosed in Note 6 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2007 included elsewhere in this Quarterly Report, 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 Chief Executive Officer 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 Chief Executive Officer 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. -27-
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. We are currently in the process of integrating the internal controls and procedures of certain White Cap operations and Cousins-Currie into our internal controls over financial reporting. As provided under the Sarbanes-Oxley Act of 2002 and the applicable rules and regulations of the Securities and Exchange Commission, we will include the internal controls and procedures of White Cap and Cousins-Currie in our annual assessment of the effectiveness of our internal control over financial reporting for our 2007 fiscal year. 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, 2007 and 2006. 31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. -28-
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, 2007 /s/Robert B. Lewis ----------------------------- Robert B. Lewis Executive Vice President and Chief Financial Officer (Principal Financial Officer) -29-
EXHIBIT INDEX EXHIBIT NO. EXHIBIT - ----------- ------- 12 Ratio of Earnings to Fixed Charges for the three and nine months ended September 30, 2007 and 2006. 31.1 Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 31.2 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act. 32.1 Certification by the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act. 32.2 Certification by the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act. -30-