Silgan Holdings - 10-Q quarterly report FY2010 Q3

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

(Mark One)

 

For the quarterly period ended September 30, 2010

 

 

 

For the transition period from ________________ to ________________

 

 

Commission file number  000-22117

 

 

SILGAN HOLDINGS INC.

(Exact name of Registrant as specified in its charter)

 

 (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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).

Yes [ X ]   No [   ]

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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 29, 2010, the number of shares outstanding of the Registrant’s common stock, $0.01 par value, was 76,786,941.

 

 

Part I. Financial Information

Item 1. Financial Statements

 

(Dollars in thousands)

 

 

 

 

See accompanying notes.

 

For the three months ended September 30, 2010 and 2009

(Dollars and shares in thousands, except per share amounts)

(Unaudited)

 

 

 

______________

 

 

 

 

 

 

 

See accompanying notes.

 

For the nine months ended September 30, 2010 and 2009

(Dollars and shares in thousands, except per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

See accompanying notes.

 

For the nine months ended September 30, 2010 and 2009

(Dollars in thousands)

(Unaudited)

 

 

See accompanying notes.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

The Condensed Consolidated Balance Sheet at December 31, 2009 has been derived from our audited consolidated financial statements at that date, but does not include all of the information and footnotes required by GAAP 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, 2009.

 

 

 

 

 

 

 

 

 

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

Note 2.           Rationalization Charges

 

 

 

 

In February 2010, we announced a plan to exit our Port Clinton, Ohio plastic container manufacturing facility.  Our plan included the termination of approximately 150 employees and other related plant exit costs.  The total estimated costs for the rationalization of this facility of $4.6 million consist of $1.4 million for employee severance and benefits, $1.7 million for plant exit costs and $1.5 million for the non-cash write-down in carrying value of assets.  Through September 30, 2010, we have recognized a total of $3.0 million of costs, which consisted of $1.2 million of employee severance and benefits, $0.3 million of plant exit costs and $1.5 million for the non-cash write-down in carrying value of assets.  Remaining expenses and cash expenditures of $1.6 million and $2.4 million, respec tively, are expected primarily in 2010.

 

 

 

 

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) income is reported in the Condensed Consolidated Statements of Stockholders’ Equity.  Amounts included in accumulated other comprehensive (loss) income, net of tax, consisted of the following:

 

 

 

 

 

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

Inventories consisted of the following:

 

 

 

Note 5.           Long-Term Debt

 

Long-term debt consisted of the following:

 

 

At September 30, 2010, amounts expected to be repaid within one year consisted of $200.0 million of our 6¾% Senior Subordinated Notes and $13.2 million of foreign bank revolving and term loans.

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

On July 7, 2010, we completed the refinancing of our previous senior secured credit facility by entering into a new $1.4 billion senior secured credit facility, or the Credit Agreement.  The Credit Agreement provides us with term loans and revolving loans.  The term loans, or the Term Loans, consist of $400 million of U.S. term loans, €125 million of Euro term loans and Cdn $81 million of Canadian term loans.  The revolving loans, or the Revolving Loans, consist of a $790 million multicurrency revolving loan facility and a Cdn $10 million Canadian revolving loan facility.  The Credit Agreement also provides us with an uncommitted multicurrency incremental loan facility for up to an additional U.S. $450 million, which may be used to finance acquisitions and for other permitted purposes.

 

We may use Revolving Loans under the Credit Agreement for working capital and other general corporate purposes, including acquisitions, dividends, stock repurchases and refinancing of other debt.  Revolving Loans may be borrowed, repaid and re-borrowed until their final maturity on July 7, 2015.  The Term Loans mature on July 7, 2016 and are each payable in installments as follows (amounts in thousands):

 

 

 

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

Under the Credit Agreement, the interest rate for U.S. term loans will be either LIBOR or the base rate under the Credit Agreement plus a margin, the interest rate for Euro term loans will be the Euribor rate under the Credit Agreement plus a margin and the interest rate for Canadian term loans will be either the Bankers’ Acceptance discount rate or the Canadian prime rate under the Credit Agreement plus a margin.  Initially, for Term Loans and Revolving Loans maintained as LIBOR, Euribor or Bankers’ Acceptance loans, the margin will be 2.25 percent and for Term Loans and Revolving Loans maintained as base rate or Canadian prime rate loans the margin will be 1.25 percent.  The Credit Agreement provides for the payment of a commitment fee ranging from 0.375 percent to 0.50 percent per annum on the daily average unused portion of commitments available under the Revolving Loans.  Initially, the commitment fee will be 0.50 percent per annum. The margins for Term Loans, Revolving Loans and the commitment fee are subject to adjustment quarterly based upon our Total Leverage Ratio and our corporate credit rating from certain rating agencies as provided in the Credit Agreement.

 

We may utilize up to a maximum of $100 million of our multicurrency 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 under such multicurrency revolving loan facility do not exceed the amount of the commitment under such multicurrency 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 the greater of (x) $500 per annum and (y) 0.25 percent per annum, calculated on the aggregate stated amount of all letters of credit for their stated duration.

 

The indebtedness under the Credit Agreement is guaranteed by Silgan and certain of its U.S. and Canadian 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, subject to certain exceptions, among other things, our ability to incur additional indebtedness; create liens; consolidate, merge or sell assets; make certain advances, investments or loans; enter into certain transactions with affiliates; engage in any business other than the packaging business; pay dividends; and repurchase 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.

 

All amounts owing under our previous senior secured credit facility were repaid on July 7, 2010 with proceeds from the Credit Agreement.  As a result of the refinancing of our senior secured credit facility, we recorded a pre-tax charge of $4.5 million for the loss on early extinguishment of debt during the quarter ended September 30, 2010.

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

 

 

Note 6.           Financial Instruments

 

 

 

 

Financial Instruments Measured at Fair Value

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

 

The financial assets and liabilities that are measured on a recurring basis at September 30, 2010 consist of our cash and cash equivalents, interest rate swap agreements and natural gas swap agreements.  We measured the fair value of cash and cash equivalents using Level 1 inputs.  We measured the fair value of the swap agreements using the income approach.  The fair value of these agreements reflects the estimated amounts that we would pay based on the present value of the expected cash flows derived from market interest rates and prices.  As such, these derivative instruments are classified within Level 2.

 

Financial Instruments Not Measured at Fair Value

 

 

 

 

We utilize certain derivative financial instruments to manage a portion of our interest rate and natural gas cost exposures.  We limit our use of derivative financial instruments to interest rate and natural gas swap agreements.  We do not engage in trading or other speculative uses of these financial instruments.  For a financial instrument to qualify as a hedge, we must be exposed to interest rate or price risk, and the financial instrument must reduce the exposure and be designated as a hedge.  Financial instruments qualifying for hedge accounting must maintain a high correlation between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.

 

 

Our interest rate and natural gas swap agreements are accounted for as cash flow hedges.  During the first nine months of 2010, our hedges were fully effective. The fair value of our outstanding swap agreements in effect at September 30, 2010 was recorded in our Condensed Consolidated Balance Sheet as a liability of $15.5 million, of which $5.8 million was included in accrued liabilities and $9.7 million was included in other liabilities.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

 

 

 

 

We have entered into U.S. dollar and Euro interest rate swap agreements to manage a portion of our exposure to interest rate fluctuations.  At September 30, 2010, the aggregate notional principal amount of our outstanding interest rate swap agreements was $169.6 million (non-U.S. dollar agreements have been translated into U.S. dollars at exchange rates in effect at the balance sheet date).  The difference between amounts to be paid or received on our interest rate swap agreements is recorded in interest and other debt expense in our Condensed Consolidated Statements of Income.  For the nine months ended September 30, 2010, net payments under our interest rate swap agreements were $6.2 million.  These agreements are with a financial institution which is expected to fully perform under the terms thereof.

 

 

We have entered into natural gas swap agreements with a major financial institution to manage a portion of our exposure to fluctuations in natural gas prices.  At September 30, 2010, the aggregate notional principal amount of our natural gas swap agreements was 877,700 MMBtu of natural gas with fixed prices ranging from $4.42 to $6.70 MMBtu, which hedges approximately 29 percent of our estimated twelve month exposure to fluctuations in natural gas prices.  The difference between amounts to be paid or received on our natural gas swap agreements is recorded in cost of goods sold in our Condensed Consolidated Statements of Income.  For the nine months ended September 30, 2010, net payments under our natural gas swap agreements were $0.7 million.  These agreements are with a financial institution w hich is expected to fully perform under the terms thereof.

 

 

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

three and nine months then ended is unaudited)

 

 

Note 7.           Retirement Benefits

 

The components of the net periodic pension benefit costs are as follows:

 

 

The components of the net periodic other postretirement benefits costs are as follows:

 

 

 

 

Note 8.           Income Taxes

 

Silgan and its subsidiaries file U.S. Federal income tax returns, as well as income tax returns in various states and foreign jurisdictions.  The Internal Revenue Service, or IRS, has commenced an examination of Silgan’s income tax return for the periods ended December 31, 2004 through December 31, 2007.  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.

(Information at September 30, 2010 and 2009 and for the

 

 

Note 9.           Dividends

 

 

On November 4, 2010, our Board of Directors declared a quarterly cash dividend on our common stock of $0.105 per share, payable on December 15, 2010 to holders of record of our common stock on December 1, 2010.

 

 

Note 10.         Treasury Stock

 

 

 

Note 11.         Stock-Based Compensation

 

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

 

 

Note 12.         Business Segment Information

 

 

 

 

SILGAN HOLDINGS INC.

(Information at September 30, 2010 and 2009 and for the

 

 

 

 

 

Sales and income from operations of our metal food container business are dependent, in part, upon the vegetable and fruit harvests in the midwest and western regions of the United States.  Our closures business is also dependent, in part, upon vegetable and fruit harvests.  The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in applicable regions.  Because of the seasonality of the harvests, we have historically experienced higher unit sales volume in the third quarter of our fiscal year and generated a disproportionate amount of our annual income from operations during that quarter.

 

 

Note 13.         Subsequent Events

 

 

 

 

 

 

 

 

 

 

 

 

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 September 30, 2010 Compared with Three Months Ended September 30, 2009

 

 

 

Net sales for the metal food container business decreased $27.6 million, or 3.9 percent, in the third quarter of 2010 as compared to the same period in 2009.  This decrease was primarily due to lower average selling prices as a result of the pass through of lower raw material and other manufacturing costs, an unfavorable mix of products sold and lower unit volumes principally attributable to a later and less robust vegetable and fruit pack in 2010 as compared to 2009.

 

Net sales for the closures business decreased $3.5 million, or 2.1 percent, in the third quarter of 2010 as compared to the same period in 2009.  This decrease was primarily the result of the impact of unfavorable foreign currency translation of approximately $8.1 million, lower average selling prices due to the pass through of lower net raw material costs and an unfavorable mix of products sold, partially offset by an increase in unit volumes primarily in the domestic single-serve beverage market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2010 Compared with Nine Months Ended September 30, 2009

 

 

 

Net sales for the metal food container business decreased $51.5 million, or 3.4 percent, in the first nine months of 2010 as compared to the same period in 2009.  This decrease was primarily attributable to lower average selling prices due to the pass through of lower raw material costs and an unfavorable mix of products sold.

 

Net sales for the closures business in the first nine months of 2010 increased $9.3 million, or 2.0 percent, as compared to the same period in 2009.  This increase was primarily the result of higher unit volumes, partially offset by the impact of unfavorable foreign currency translation of approximately $9.5 million and an unfavorable mix of products sold.

 

Net sales for the plastic container business in the first nine months of 2010 increased $40.6 million, or 10.0 percent, as compared to the same period in 2009.  This increase was primarily the result of higher average selling prices as a result of the pass through of resin cost increases, higher unit volumes and the impact of favorable foreign currency translation of approximately $10.4 million, partially offset by an unfavorable mix of products sold.

 

 

 

 

 

Income from operations of the metal food container business for the first nine months of 2010 increased $13.1 million, or 7.6 percent, as compared to the same period in 2009, and operating margin increased to 12.9 percent from 11.6 percent over the same periods.  These increases were primarily the result of the year-over-year benefit resulting from the timing of certain contractual pass throughs of changes in manufacturing costs and improved manufacturing efficiencies, partially offset by an unfavorable mix of products sold and higher rationalization charges.  The first nine months of 2010 included rationalization charges of $0.7 million.

 

 

 

 

 

 

 

CAPITAL RESOURCES AND LIQUIDITY

 

Our principal sources of liquidity have been net cash from operating activities and borrowings under our debt instruments, including the Credit Agreement.  Our liquidity requirements arise primarily from our obligations under the indebtedness incurred in connection with our acquisitions and the refinancing of that indebtedness, capital investment in new and existing equipment and the funding of our seasonal working capital needs.

 

On July 7, 2010, we completed the refinancing of our previous senior secured credit facility by entering into the Credit Agreement.  The Credit Agreement provides us with Term Loans and Revolving Loans.  The Term Loans consist of $400 million of U.S. term loans, €125 million of Euro term loans and Cdn $81 million of Canadian term loans.  The Revolving Loans consist of a $790 million multicurrency revolving loan facility and a Cdn $10 million Canadian revolving loan facility.  The Credit Agreement also provides us with an uncommitted multicurrency incremental loan facility for up to an additional U.S. $450 million, which may be used to finance acquisitions and for other permitted purposes.  Under the Credit Agreement, total Term Loans of $648.1 million are payable as follows: 0; $97.2 million in each of 2012 and 2013, $129.6 million in each of 2014 and 2015, and $194.5 million in 2016 (non-U.S. dollar debt has been translated into U.S. dollars at exchange rates in effect at the balance sheet date).

 

Under the Credit Agreement, the interest rate for U.S. term loans will be either LIBOR or the base rate under the Credit Agreement plus a margin, the interest rate for Euro term loans will be the Euribor rate under the Credit Agreement plus a margin and the interest rate for Canadian term loans will be either the Bankers’ Acceptance discount rate or the Canadian prime rate under the Credit Agreement plus a margin.  Initially, for Term Loans and Revolving Loans maintained as LIBOR, Euribor or Bankers’ Acceptance loans, the margin will be 2.25 percent and for Term Loans and Revolving Loans maintained as base rate or Canadian prime rate loans the margin will be 1.25 percent.  The Credit Agreement provides for the payment of a commitment fee ranging from 0.375 percent to 0.50 percent per annum on the daily average unused portion of commitments available under the Revolving Loans.  Initially, the commitment fee will be 0.50 percent per annum. The margins for Term Loans, Revolving Loans and the commitment fee are subject to adjustment quarterly based upon our Total Leverage Ratio and our corporate credit rating from certain rating agencies as provided in the Credit Agreement.

 

 

For the nine months ended September 30, 2009, we used cash and cash equivalents of $96.3 million, cash from operations of $18.7 million (which included $23.4 million of contributions to our pension benefit plans), net borrowings of revolving loans of $25.1 million, proceeds from the issuance of the 7¼% Senior Notes of $243.2 million and net proceeds from stock-based compensation issuances of $2.9 million to fund the repayment of term loans under our previous senior secured credit facility of $237.9 million, decreases in outstanding checks of $51.8 million, net capital expenditures of $69.2 million, debt issuance costs of $5.3 million and dividends paid on our common stock of $22.0 million.

 

Because we sell metal containers used in fruit and vegetable pack processing, we have seasonal sales.  As is common in the industry, we must utilize working capital to build inventory and then carry accounts receivable for some customers beyond the end of the packing season.  Due to our seasonal requirements, which generally peak sometime in the summer or early fall, we may incur short-term indebtedness to finance our working capital requirements.  In recent years, our seasonal working capital requirements have peaked at approximately $300 million.  In 2010, our seasonal working capital requirements were funded through cash on hand.

 

 

 

Our Board of Directors has authorized the repurchase of up to $300 million of our common stock from time to time over a period of three years.  As of September 30, 2010, we have not repurchased any shares of our common stock pursuant to this authorization.  On October 8, 2010, we commenced a “modified Dutch Auction” tender offer with the intention to purchase up to $175.0 million of our common stock.  We have also entered into a Stock Purchase Agreement with Messrs. R. Philip Silver and D. Greg Horrigan, our two largest stockholders and the Non-Executive Co-Chairmen of our Board of Directors, pursuant to which each of Messrs. Silver and Horrigan has agreed to sell to Silgan, following the closing for the tender offer, such number of shares of our common stock as will result in Messrs. Silver and Horrigan maintaining substantially the same percentage beneficial ownership interest in our common stock that they have immediately prior to the consummation of the tender offer.  Assuming the tender offer is fully subscribed, we will purchase approximately $72.2 million of our common stock pursuant to the Stock Purchase Agreement.  We expect to fund the proposed repurchase of shares of our common stock in the tender offer and under the Stock Purchase Agreement with cash on hand and/or Revolving Loans.

 

On November 4, 2010, our Board of Directors declared a quarterly cash dividend on our common stock of $0.105 per share, payable on December 15, 2010 to holders of record of our common stock on December 1, 2010.  The cash payment related to this dividend is not expected to exceed $8.2 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, pension benefit plan contributions, share repurchases 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 2010 with all of these covenants.

 

Rationalization Charges

 

In February 2010, we announced a plan to exit our Port Clinton, Ohio plastic container manufacturing facility, which plan included the termination of approximately 150 employees.  Total estimated charges related to this plan are $4.6 million.  Through September 30, 2010, we have recognized a total of $3.0 million of costs. Remaining expenses and cash expenditures of $1.6 million and $2.4 million, respectively, are expected primarily in 2010.

 

Under our rationalization plans, we made cash payments of $4.4 million and $1.9 million for the nine months ended September 30, 2010 and 2009, respectively.  Total future cash spending of $3.0 million is expected for our outstanding rationalization plans.

 

You should also read Note 2 to our Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2010 included elsewhere in this Quarterly Report.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Part II.  Other Information

 

 

 

As previously disclosed, in August 2009 we reached an agreement in principle to enter into a Consent Decree with the U.S. Environmental Protection Agency, or EPA, pursuant to which we would pay a $0.365 million fine and agree to certain plant and operational changes in response to alleged past violations of the federal Clean Air Act at seventeen of our metal food container manufacturing facilities in Alabama, Illinois, Indiana, Michigan, Minnesota, New York, North Carolina, Washington, and Wisconsin.  Plant and operational changes to correct alleged past violations have been substantially completed.  This agreement completes a voluntary process that we initiated in 1999 for all of our metal food container manufacturing facilities pursuant to EPA’s Audit Policy, “Incentives for Self Policing: Discovery, Disclosure, Correction and Prevention of Violations.”  Most of these alleged past violations stem from activities occurring during the facilities’ ownership by prior owners.  The Consent Decree was entered into with the EPA on June 10, 2010 and was filed in the United States District Court for the Eastern District of Wisconsin on August 2, 2010.  As a result of the entry of the Consent Decree, we paid this fine on August 10, 2010.

 

 

 

 

 

 

 

 

 

 

Item 6.  Exhibits

 

 

 

 

 

 

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.