Silgan Holdings - 10-Q quarterly report FY2012 Q2

Commission file number 000-22117

SILGAN HOLDINGS INC.

(Exact name of Registrant as specified in its charter)

 

See accompanying notes.

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

See accompanying notes.

(Dollars in thousands)

See accompanying notes.

For the six months ended June 30, 2012 and 2011

(Dollars in thousands)

(Unaudited)

 

See accompanying notes.

For the six months ended June 30, 2012 and 2011

(Dollars and shares in thousands)

(Unaudited)

 

(Information at June 30, 2012 and 2011 and for the

three and six months then ended is unaudited)

In March 2012, we paid the deferred portion of the purchase price under our agreement to acquire the metal container operations of Vogel & Noot Holding AG, or VN, of €36.4 million ($47.6 million translated at the U.S. dollar exchange rate at the date of payment).

 

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, 2011 is summarized as follows:

Rationalization reserves as of June 30, 2012 and December 31, 2011 are included in the Condensed Consolidated Balance Sheets as accrued liabilities.

 

 

(Information at June 30, 2012 and 2011 and for the

three and six months then ended is unaudited)

Long-term debt consisted of the following:

At June 30, 2012, amounts expected to be repaid within one year consisted of $160.0 million of bank revolving loans and $76.6 million of foreign bank revolving and term loans.

On March 23, 2012, we issued $500 million aggregate principal amount of our 5% Senior Notes due 2020, or the 5% Notes, at 100 percent of their principal amount.  The 5% Notes are general unsecured obligations of Silgan, ranking equal in right of payment with Silgan’s unsecured unsubordinated indebtedness and ahead of Silgan’s subordinated debt, if any.  The 5% Notes are effectively subordinated to Silgan’s secured debt to the extent of the assets securing such debt and effectively subordinated to all obligations of subsidiaries of Silgan.  Interest on the 5% Notes is payable semi-annually in cash on April 1 and October 1 of each year, and the 5% Notes mature on April 1, 2020.  Proceeds from the issuance of the 5% Notes were used in April 2012 to redeem all of the outstanding 7¼% Senior Notes due 2016, or the 7¼% Notes, to pay the applicable premium for such redemption, to pay related fees and expenses and for general corporate purposes.

(Information at June 30, 2012 and 2011 and for the

three and six months then ended is unaudited)

Note 5.     Long-Term Debt (continued)

5% Senior Notes (continued)

The 5% Notes are redeemable, at the option of Silgan, in whole or in part, at any time after April 1, 2016 at the following redemption prices (expressed in percentages of principal amount) plus accrued and unpaid interest thereon to the redemption date if redeemed during the twelve month period commencing April 1, of the years set forth below:

In addition, prior to April 1, 2015, we may redeem up to 35 percent of the aggregate principal amount of the 5% Notes from the proceeds of certain equity offerings at a redemption price of 105 percent of their principal amount, plus accrued and unpaid interest to the date of redemption.  We may also redeem the 5% Notes, in whole or in part, prior to April 1, 2016 at a redemption price equal to 100 percent of their principal amount plus a make-whole premium as provided in the indenture for the 5% Notes.

Upon the occurrence of a change of control, as defined in the indenture for the 5% Notes, Silgan is required to make an offer to purchase the 5% Notes at a purchase price equal to 101 percent of their principal amount, plus accrued and unpaid interest to the date of purchase.

The indenture for the 5% Notes contains covenants which are generally less restrictive than those under our senior secured credit facility, or the Credit Agreement.

 

On April 9, 2012, we redeemed all $250 million aggregate principal amount of our outstanding 7¼% Notes at a redemption price of 112.3715 percent of their principal amount, or $280.9 million, plus accrued and unpaid interest up to the redemption date.  As a result, during the second quarter of 2012, we recorded a loss on early extinguishment of debt of $38.7 million for the premium paid in connection with this redemption and for the write-off of unamortized debt issuance costs and discount.

(Information at June 30, 2012 and 2011 and for the

three and six months then ended is unaudited)

The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, trade accounts receivable, trade accounts payable, debt obligations and swap agreements.  Due to their short-term maturity, the carrying amounts of trade accounts receivable and trade accounts payable approximate their fair market values.  The following table summarizes the carrying amounts and estimated fair values of our other financial instruments at June 30, 2012:

GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  GAAP classifies the inputs used to measure fair value into a hierarchy consisting of three levels.  Level 1 inputs represent unadjusted quoted prices in active markets for identical assets or liabilities.  Level 2 inputs represent unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability.  Level 3 inputs represent unobservable inputs for the asset or liability.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Financial Instruments Measured at Fair Value

The financial assets and liabilities that are measured on a recurring basis at June 30, 2012 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.

 

 

(Information at June 30, 2012 and 2011 and for the

three and six months then ended is unaudited)

Note 6.     Financial Instruments (continued)

Financial Instruments Not Measured at Fair Value

Our bank debt and 5% Notes are recorded at historical amounts in our Condensed Consolidated Balance Sheets, as we have not elected to record them at fair value.  For purposes of the table above, we measured the fair value of our variable rate bank debt using Level 2 inputs and the fair values of our 5% Notes using Level 1 inputs.

Our derivative financial instruments are recorded in the Condensed Consolidated Balance Sheets at their fair values.  Changes in fair values of derivatives are recorded in each period in earnings or comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction.

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.

We utilize certain internal hedging strategies to minimize our foreign currency exchange rate risk.  Net investment hedges that qualify for hedge accounting result in the recognition of foreign currency gains or losses, net of tax, in accumulated other comprehensive (loss) income.  We generally do not utilize external derivative financial instruments to manage our foreign currency exchange rate risk.

Our interest rate and natural gas swap agreements are accounted for as cash flow hedges.  During the first six months of 2012, our hedges were fully effective. The fair value of our outstanding swap agreements in effect at June 30, 2012 was recorded in our Condensed Consolidated Balance Sheet as a liability of $12.8 million, of which $5.0 million was included in accrued liabilities and $7.8 million was included in other liabilities.

The amount reclassified to earnings from the change in fair value of derivatives component of accumulated other comprehensive loss for the three and six months ended June 30, 2012 were losses, net of income taxes, of $0.9 million and $1.7 million, respectively.  We estimate that we will reclassify losses of $2.6 million, net of income taxes, from the change in fair value of derivatives component of accumulated other comprehensive loss to earnings during the next twelve months.  The actual amount that will be reclassified to earnings will vary from this amount as a result of changes in market conditions.

 

 

 

(Information at June 30, 2012 and 2011 and for the

three and six months then ended is unaudited)

Reportable business segment information for the three and six months ended June 30 is as follows:

(Information at June 30, 2012 and 2011 and for the

three and six 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:

Sales and income from operations of our metal container and closures businesses are dependent, in part, upon the vegetable and fruit harvests in the United States and, to a lesser extent, in a variety of national growing regions in Europe.  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.

On July 3, 2012 we announced that we had entered into a definitive purchase agreement to acquire Rexam PLC’s plastic thermoformed food business for an aggregate purchase price of $250.0 million. This business, with sales of approximately $90.0 million for the year ended December 31, 2011, provides thermoformed packaging solutions such as retortable bowls and barrier trays to many of the world’s leading packaged food and ready-meal companies.  The transaction is expected to close in the third quarter of 2012, subject to certain customary conditions and regulatory approvals, and we expect to fund the purchase price for this acquisition with cash on hand.

On July 10, 2012, we acquired Öntaş Öner Teneke Ambalaj Sanayii Ve Tikaret A.S., which operates under the name of Öntaş in Izmir, Turkey, or Öntaş, for an aggregate purchase price of $18.3 million.  Öntaş, with sales of approximately $30.0 million for the year ended December 31, 2011, is a leading supplier of food cans and vacuum closures in the Turkish market.  We funded the purchase price for this acquisition with cash on hand.

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, 2011 and in 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.

We are a leading manufacturer of rigid packaging for consumer goods products.  We currently produce steel and aluminum containers for human and pet food and general line products; metal, composite and plastic vacuum closures for food and beverage products and plastic closures for the dairy and juice markets; and custom designed plastic containers, tubes and closures for personal care, health care, pharmaceutical, household and industrial chemical, food, pet care, agricultural chemical, automotive and marine chemical products.  We are a leading manufacturer of metal containers in North America and Europe, a leading worldwide manufacturer of metal, composite and plastic vacuum closures for food and beverage products and 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 food markets.

Our objective is to increase shareholder value by efficiently deploying capital and management resources to grow our business, reduce operating costs and 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.  If acquisition opportunities are not identified over a longer period of time, we may use our cash flow to repay debt, repurchase shares of our common stock or increase dividends to our stockholders or for other permitted purposes.

On July 3, 2012 we announced that we had entered into a definitive purchase agreement to acquire Rexam PLC’s plastic thermoformed food business for an aggregate purchase price of $250.0 million. This business, with sales of approximately $90.0 million for the year ended December 31, 2011, provides thermoformed packaging solutions such as retortable bowls and barrier trays to many of the world’s leading packaged food and ready-meal companies.  The transaction is expected to close in the third quarter of 2012, subject to certain customary conditions and regulatory approvals, and we expect to fund the purchase price for this acquisition with cash on hand.

On July 10, 2012, we acquired Öntaş for an aggregate purchase price of $18.3 million, which we funded from cash on hand.  Öntaş, with sales of approximately $30.0 million for the year ended December 31, 2011, is a leading supplier of food cans and vacuum closures in the Turkish market.

 

 

Summary unaudited results of operations for the three and six months ended June 30, 2012 and 2011 are provided below.

Overview.  Consolidated net sales were $821.6 million in the second quarter of 2012, representing a 0.1 percent decrease as compared to the second quarter of 2011 due primarily to unfavorable foreign currency translation of approximately $18.4 million, softness in the European market and a less favorable mix of products sold in the metal containers business, mostly offset by higher average selling prices as a result of the pass through of higher raw material costs in the metal container business, favorable unit volumes in the U.S. single-serve beverage market, a favorable mix of products sold in the plastic container business and an increase in unit volumes sold in the plastic container and metal container businesses.  Income from operations for the second quarter of 2012 of $68.6 million decreased by $25.9 million, or 27.4 percent, as compared to the same period in 2011 primarily due to income of $27.0 million in the second quarter of 2011 for proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs attributable to certain corporate development activities, an unfavorable mix of products sold in metal food containers, increased price pressure and volume declines in the European market, and costs associated with the start-up of new metal container production facilities in eastern Europe and the Middle East, partially offset by the favorable comparison of the year-over-year resin cost pass through lag effect, favorable unit volumes in the U.S. single-serve beverage market, a favorable mix of products sold and an increase in unit volumes in the plastic container business, cost reduction initiatives and continued improvements in operating performance, a $3.3 million charge in 2011 for the resolution of a past product liability dispute and a decrease in rationalization charges of $2.2 million.  Rationalization charges were $0.2 million and $2.4 million for the second quarter of 2012 and 2011, respectively.  Income before income taxes for 2012 included a loss on early extinguishment of debt of $38.7 million. Net income for the second quarter of 2012 was $10.6 million, or $0.15 per diluted share, as compared to $51.2 million, or $0.73 per diluted share, for the same period in 2011.

Net Sales.  The $0.6 million decrease in consolidated net sales in the second quarter of 2012 as compared to the second quarter of 2011 was the result of lower net sales in the metal containers and closures businesses, partially offset by higher net sales in the plastic container business.

Net sales for the metal container business decreased $2.6 million, or 0.5 percent, in the second quarter of 2012 as compared to the same period in 2011.  This decrease was primarily attributable to the impact of unfavorable foreign currency translation of approximately $7.5 million, a less favorable mix of products sold and softness in the European markets, partially offset by higher average selling prices as a result of the pass through of higher raw material costs.

Net sales for the closures business decreased $1.4 million, or 0.8 percent, in the second quarter of 2012 as compared to the same period in 2011.  This decrease was primarily the result of the impact of unfavorable foreign currency translation of approximately $9.3 million and lower net sales in Europe due to weak market conditions, partially offset by favorable unit volumes in the U.S. single-serve beverage market.

Net sales for the plastic container business in the second quarter of 2012 increased $3.4 million, or 2.2 percent, as compared to the same period in 2011.  This increase was primarily due to a favorable mix of products sold and an increase in unit volumes, both due to strong seasonal sales in the agricultural and chemical markets and customers building inventory in advance of planned shut downs, partially offset by the unfavorable impact of foreign currency translation of approximately $1.6 million.

Gross Profit.  Gross profit margin decreased 0.2 percentage points to 14.0 percent in the second quarter of 2012 as compared to the same period in 2011 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 3.3 percentage points to 5.7 percent for the second quarter of 2012 as compared to 2.4 percent for the same period in 2011.  Selling, general and administrative expenses increased $26.4 million to $46.5 million for the second quarter of 2012 as compared to $20.1 million for the same period in 2011.  These increases were primarily due to the inclusion in 2011 of $27.0 million of income from proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs associated with certain corporate development activities.

Income from Operations.  Income from operations for the second quarter of 2012 decreased by $25.9 million as compared to the second quarter of 2011, and operating margin decreased to 8.3 percent from 11.5 percent over the same periods, principally due to the inclusion in 2011 of income of $27.0 million from proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs associated with certain corporate development activities.

Income from operations of the metal container business for the second quarter of 2012 decreased $2.8 million, or 6.5 percent, as compared to the same period in 2011, and operating margin decreased to 8.4 percent from 8.9 percent over the same periods.  These decreases were primarily the result of a less favorable mix of products sold, volume declines and increased price pressure due to overall economic weakness in the European markets and costs of $1.9 million associated with the start-up of three new production facilities in eastern Europe and one facility in the Middle East, partially offset by the inclusion in the second quarter of 2011 of a charge of $3.3 million for the resolution of a past product liability dispute and rationalization charges of $1.4 million.

Income from operations of the closures business for the second quarter of 2012 increased $0.2 million to $22.9 million as compared to $22.7 million for the same period in 2011, and operating margin increased to 12.5 percent from 12.3 percent over the same periods.  These increases were primarily attributable to higher unit volumes in the U.S. single-serve beverage market, continued improvement in manufacturing efficiencies and operating cost savings and a decrease in rationalization charges, largely offset by weaker volumes and increased price pressure in the European market due to macroeconomic issues.  Rationalization charges of $0.3 million were recognized in the second quarter of 2011.

Income from operations of the plastic container business for the second quarter of 2012 increased $4.6 million to $9.1 million as compared to $4.5 million for the same period in 2011, and operating margin increased to 5.7 percent from 2.9 percent over the same periods.  These increases were primarily attributable to the  favorable comparison of the year-over-year resin cost pass through lag effect which benefitted the second quarter of 2012, a favorable mix of products sold, cost reduction initiatives and continued improvement in operating performance, an increase in unit volumes and lower rationalization charges.  Rationalization charges of $0.2 million and $0.7 million were recognized in the second quarter of 2012 and 2011, respectively.

Interest and Other Debt Expense.  Interest and other debt expense before loss on early extinguishment of debt for the second quarter of 2012 decreased $0.4 million to $16.0 million as compared to the same period in 2011.  This decrease was primarily due to lower average interest rates, partially offset by higher average outstanding borrowings as a result of the issuance of the 5% Notes in March 2012 and the refinancing of the senior secured credit facility in July 2011.  As a result of the redemption of the 7¼% Notes on April 9, 2012, we recorded a pre-tax charge of $38.7 million for the loss on early extinguishment of debt in the second quarter of 2012.

Provision for Income Taxes. The effective tax rate for the second quarter of 2012 was 23.9 percent as compared to 34.4 percent in the same period of 2011.  The effective tax rate for the second quarter of 2012 was favorably impacted by the cumulative adjustment of reductions in the enacted tax rates in certain foreign countries.

Overview.  Consolidated net sales were $1.59 billion in the first six months of 2012, representing a 4.2 percent increase as compared to the first six months of 2011 primarily due to the inclusion of net sales from the Vogel & Noot and Nestlé Purina PetCare steel can operations acquisitions, higher average selling prices in the metal container and plastic container businesses due to the pass through of higher raw material costs, higher unit volumes in the U.S. single-serve beverage market and a favorable mix of products sold in the plastic container business.  These increases were partially offset by the impact of unfavorable foreign currency translation of $23.2 million, lower net sales in Europe due to weak economic conditions and a less favorable mix of products sold in the metal container business.  Income from operations for the first six months of 2012 decreased by $13.7 million, or 9.3 percent, as compared to the same period in 2011 as a result of income of $25.2 million in 2011 for proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs attributable to certain corporate development activities, the impact from weak economic conditions in Europe, a less favorable mix of products sold in the metal container business and start-up costs for new metal container production facilities in eastern Europe and the Middle East.  These decreases were partially offset by the favorable comparison of the year-over-year resin cost pass through lag effect, higher unit volumes in the closures business, a favorable mix of products sold in the plastic container business, improved manufacturing efficiencies and ongoing cost controls, a $3.3 million charge in 2011 for the resolution of a past product liability dispute and a decrease in rationalization charges of $0.4 million.  Rationalization charges were $3.7 million and $4.1 million in 2012 and 2011, respectively.  Results for 2012 included a loss on early extinguishment of debt of $38.7 million.  Net income for the first six months of 2012 was $43.3 million, or $0.62 per diluted share, as compared to $77.3 million, or $1.10 per diluted share, for the same period in 2011.

Net Sales.  The $64.7 million increase in consolidated net sales in the first six months of 2012 as compared to the first six months of 2011 was due to higher net sales across all businesses.

Net sales for the metal container business increased $51.9 million, or 5.9 percent, in the first six months of 2012 as compared to the same period in 2011.  This increase was primarily attributable to the inclusion of a full six months of net sales from VN and the Nestlé Purina PetCare steel can operations acquired in 2011 and higher average selling prices as a result of the pass through of higher raw material costs, partially offset by a less favorable mix of products sold, unfavorable foreign currency translation of approximately $8.9 million and the impact from weak economic conditions in Europe.

Net sales for the closures business in the first six months of 2012 increased $1.5 million, or 0.4 percent, as compared to the same period in 2011.  This increase was primarily the result of higher unit volumes principally for the single-serve beverage market in the U.S., partially offset by the impact of unfavorable foreign currency translation of approximately $12.2 million and lower net sales in Europe due to weak economic conditions.

Net sales for the plastic container business in the first six months of 2012 increased $11.3 million, or 3.7 percent, as compared to the same period in 2011.  This increase was primarily the result of the impact of higher average selling prices as a result of the pass through of higher raw material costs and a favorable mix of products sold, partially offset by unfavorable foreign currency translation of approximately $2.1 million.

Gross Profit.  Gross Profit margin remained unchanged at 14.4 percent for the first six months of 2012 as compared to the same period in 2011 for the reasons discussed below in “Income from Operations.”

Selling, General and Administrative Expenses.  Selling, general and administrative expenses increased $24.5 million to $91.2 million for the six months ended June 30, 2012 as compared to $66.7 million for the same period in 2011.  Selling, general and administrative expenses as a percentage of consolidated net sales increased to 5.7 percent for the first six months of 2012 as compared to 4.4 percent for the same period in 2011.  These increases were primarily due to the inclusion in 2011 of $25.2 million of income from proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs attributable to certain corporate development activities.

Income from Operations.  Income from operations for the first six months of 2012 decreased by $13.7 million, or 9.3 percent, as compared to the first six months of 2011 and operating margin decreased to 8.4 percent from 9.7 percent over the same periods, principally due to the inclusion in 2011 of income of $25.2 million from proceeds received as a result of the Graham Packaging merger agreement, net of costs attributable to certain corporate development activities.

Income from operations of the metal container business for the first six months of 2012 increased $1.0 million, or 1.2 percent, as compared to the same period in 2011, while operating margin decreased to 8.9 percent from 9.3 percent over the same periods.  The increase in income from operations was primarily the result of a $3.3 million charge in 2011 related to the resolution of a past product liability dispute and $1.4 million of rationalization charges in 2011, mostly offset by a less favorable mix of products sold, $2.9 million of start-up costs for new production facilities in eastern Europe and the Middle East and an increase in depreciation expense.

Income from operations of the closures business for the first six months of 2012 increased $2.4 million, or 6.2 percent, as compared to the same period in 2011, and operating margin increased to 11.8 percent from 11.2 percent over the same periods.  The increase in income from operations was primarily attributable to higher unit volumes and the benefits of ongoing cost reduction initiatives and improved manufacturing efficiencies, partially offset by increased price pressure in the European market due to macroeconomic issues and higher rationalization charges.  Rationalization charges of $2.1 million and $1.4 million were recognized in the first six months of 2012 and 2011, respectively.

Income from operations of the plastic container business for the first six months of 2012 increased $7.2 million, or 66.7 percent, as compared to the same period in 2011, and operating margin increased to 5.6 percent from 3.5 percent over the same periods.  These increases were primarily attributable to the favorable comparison of the year-over-year resin cost pass through lag effect, a favorable mix of products sold and continued improvement in operating performance, partially offset by higher rationalization charges.  Rationalization charges of $1.6 million and $1.3 million were recognized in the first six months of 2012 and 2011, respectively.

Interest and Other Debt Expense.  Interest and other debt expense before loss on early extinguishment of debt for the first six months of 2012 increased $1.2 million to $31.6 million as compared to the same period in 2011.  This increase was primarily due to higher average outstanding borrowings largely attributable to the refinancing of our senior secured credit facility in July 2011 and the issuance in March 2012 of the 5% Notes, partially offset by lower average interest rates.  As a result of the redemption of the 7¼% Notes on April 9, 2012, we recorded a pre-tax charge of $38.7 million for the loss on early extinguishment of debt in the first six months of 2012.

Provision for Income Taxes.  The effective tax rate for the first six months of 2012 was 32.4 percent as compared to 34.3 percent in the same period of 2011.  The effective tax rate for the first six months of 2012 was favorably impacted by the cumulative adjustment of reductions in the enacted tax rates in certain foreign countries.

CAPITAL RESOURCES AND LIQUIDITY

Our principal sources of liquidity have been net cash from operating activities and borrowings under our debt instruments, including our senior secured credit facility.  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 March 23, 2012, we issued $500 million aggregate principal amount of our 5% Notes at 100 percent of their principal amount.  Interest on the 5% Notes is payable semi-annually in cash on April 1 and October 1 of each year, and the 5% Notes mature on April 1, 2020.  Proceeds from the issuance of the 5% Notes were used to redeem all of the outstanding $250 million aggregate principal amount of our 7¼% Notes in April 2012, to pay the applicable premium for such redemption, to pay related fees and expenses and for general corporate purposes.  As a result of this redemption, we incurred a $38.7 million loss on early extinguishment of debt for the premium paid in connection with this redemption and the write-off of unamortized debt issuance costs and discount in the second quarter of 2012.

You should also read Note 5 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 included elsewhere in this Quarterly Report.

For the six months ended June 30, 2012, we used proceeds from the issuance of long-term debt of $526.6 million,  net borrowings of revolving loans of $148.7 million and cash and cash equivalents of $28.2 million to fund repayments of long-term debt of $282.6 million (including the redemption of our 7¼% Notes for $280.9 million), cash used in operations of $195.2 million (including contributions of $76.0 million to our  domestic pension benefit plans), decreases in outstanding checks of $66.6 million, net capital expenditures of $59.1 million, deferred payments of purchase price for acquisitions of $51.0 million, repurchases of our common stock of $22.1 million, dividends paid on our common stock of $16.9 million, debt issuance costs of $9.8 million related to the 5% Notes and net payments for stock-based compensation issuances of $0.2 million.

For the six months ended June 30, 2011, we used net borrowings of long-term debt and revolving loans of $468.1 million and cash and cash equivalents of $47.7 million to fund the acquisitions of VN and the twist-off metal closures operations of DGS S.A. in Poland for $264.4 million, cash used in operations of $52.5 million (which includes the benefit of $25.2 million of proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs attributable to certain corporate development activities), decreases in outstanding checks of $99.6 million, net capital expenditures of $81.0 million, dividends paid on our common stock of $15.6 million and net payments for stock-based compensation issuances of $2.7 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, which were funded through a combination of revolving loans under our senior secured credit facility and cash on hand.  We may use the available portion of revolving loans, after taking into account our seasonal needs and outstanding letters of credit, for other general corporate purposes including acquisitions, dividends, stock repurchases and to refinance or repurchase other debt.

At June 30, 2012, we had $160.0 million of revolving loans outstanding under the Credit Agreement.  After taking into account outstanding letters of credit, the available portion of revolving loans under the Credit Agreement at June 30, 2012 was $610.4 million.

On August 9, 2012, our Board of Directors declared a quarterly cash dividend on our common stock of $0.12 per share, payable on September 18, 2012 to holders of record of our common stock on September 4, 2012. The cash payment related to this dividend is expected to be $8.4 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 2012 with all of these covenants.

 

Rationalization Charges

In the first quarter of 2012, we announced a plan to exit our Breinigsville (Allentown), Pennsylvania plastic container manufacturing facility.  Our plan included the termination of approximately 32 employees and other related plant exit costs.  The total costs for the rationalization of this facility of $2.5 million consist of $0.2 million for employee severance and benefits, $1.7 million for plant exit costs and $0.6 million for the non-cash write-down in carrying value of assets.  Through June 30, 2012, we recognized a total of $1.4 million of costs, which consisted of $0.2 million of employee severance and benefits, $0.7 million for plant exit costs and $0.5 million for the non-cash write-down in carrying value of assets.  The plant has ceased operations.   Remaining expenses and cash expenditures of $1.1 million and $1.0 million, respectively, are expected primarily in 2012.

In the first quarter of 2012, we announced plans to reduce costs in the U.S. corporate office and European manufacturing facilities of our closures business through the termination of approximately 49 employees, with total estimated costs of $3.5 million for employee severance and benefits.  Through June 30, 2012, we recognized a total of $2.1 million of costs and made cash payments of $0.5 million.  Remaining expenses and cash expenditures of $1.4 million and $3.0 million, respectively, are expected primarily in 2012.

Under our rationalization plans, we made cash payments of $3.5 million and $4.7 million for the six months ended June 30, 2012 and 2011, respectively.  Total future cash spending of $12.1 million is expected for our outstanding rationalization plans in the current year and thereafter.

You should also read Note 3 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 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.

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 metal container and closures operations and our Canadian plastic container operations, from foreign currency exchange rates.  In the normal course of business, we also have 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, 2011.  Since such filing, other than the changes discussed in Notes 5 and 6 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 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.

You should also read Notes 5 and 6 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2012 included elsewhere in this Quarterly Report.

 

Item 4.      CONTROLS AND PROCEDURES

 

As required by Rule 13a-15(e) of the Securities Exchange Act of 1934, or the Exchange Act, 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.  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 were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that our disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including the Principal Executive Officer and the Principal Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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 VN 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 VN in our annual assessment of the effectiveness of our internal control over financial reporting for our 2012 fiscal year.

 

 

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities By the Issuer and Affiliated Purchasers

The following table provides information about shares of our common stock that we repurchased during the second quarter of 2012 pursuant to the authorization of our Board of Directors to repurchase up to $300 million of our common stock, inclusive of prior authorizations, from time to time through and including December 31, 2014:

 

(i) On August 5, 2011, our Board of Directors authorized the repurchase of up to $300 million of our common stock, inclusive of prior authorizations, from time to time through and including December 31, 2014.