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SLGN > SEC Filings for SLGN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for SILGAN HOLDINGS INC

Form 10-Q for SILGAN HOLDINGS INC


9-Nov-2012

Quarterly Report


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, 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.

General

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 August 30, 2012, we acquired PFC from Rexam PLC for an aggregate purchase price of $248.1 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. We funded the purchase price for this acquisition from cash on hand.

On July 10, 2012, we acquired Ínta? for an aggregate purchase price of $18.2 million, which we funded from cash on hand. Ínta?, 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.

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RESULTS OF OPERATIONS

The following table sets forth certain unaudited income statement data expressed
as a percentage of net sales for the periods presented:

                                           Three Months Ended               Nine Months Ended
                                       Sept. 30,        Sept. 30,       Sept. 30,       Sept. 30,
                                         2012             2011            2012            2011
Net sales
Metal containers                             71.5 %           69.6 %          63.7 %          62.5 %
Closures                                     16.0             16.5            19.4            20.0
Plastic containers                           12.5             13.9            16.9            17.5
Consolidated                                100.0            100.0           100.0           100.0
Cost of goods sold                           84.3             84.0            85.0            85.0
Gross profit                                 15.7             16.0            15.0            15.0
Selling, general and administrative
expenses                                      3.9              4.0             5.0             4.2
Rationalization charges                       0.2              0.1             0.2             0.2
Income from operations                       11.6             11.9             9.8            10.6
Interest and other debt expense               1.4              1.5             3.2             1.8
Income before income taxes                   10.2             10.4             6.6             8.8
Provision for income taxes                    3.3              3.5             2.1             3.0
Net income                                    6.9 %            6.9 %           4.5 %           5.8 %

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

                            Three Months Ended           Nine Months Ended
                          Sept. 30,     Sept. 30,     Sept. 30,     Sept. 30,
                            2012          2011          2012          2011
                                         (Dollars in millions)

Net sales
Metal containers         $   814.1     $   798.7     $ 1,738.7     $ 1,671.4
Closures                     182.7         189.5         528.8         534.1
Plastic containers           142.7         159.8         462.0         467.8
Consolidated             $ 1,139.5     $ 1,148.0     $ 2,729.5     $ 2,673.3

Income from operations
Metal containers (1)     $   103.5     $   111.7     $   185.6     $   193.0
Closures (2)                  24.1          24.4          65.1          62.9
Plastic containers (3)         6.2           3.8          24.2          14.6
Corporate(4)                  (1.4 )        (3.8 )        (8.1 )        13.7
Consolidated             $   132.4     $   136.1     $   266.8     $   284.2


(1) Includes new plant start-up costs of $1.4 million and $4.3 million for the three and nine months ended September 30, 2012, respectively. Includes rationalization charges of $1.7 million for each of the three and nine months ended September 30, 2012 and rationalization charges of $1.4 million for the nine months ended September 30, 2011. Includes a charge for the resolution of a past product liability dispute of $3.3 million for the nine months ended September 30, 2011.

(2) Includes rationalization charges of $0.5 million and $0.3 million for the three months ended September 30, 2012 and 2011, respectively, and $2.6 million and $1.7 million for the nine months ended September 30, 2012 and 2011, respectively.

(3) Includes a rationalization credit of $0.1 million and rationalization charges of $0.3 million for the three months ended September 30, 2012 and 2011, respectively, and rationalization charges of $1.5 million and $1.7 million for the nine months ended September 30, 2012 and 2011, respectively.

(4) Includes costs attributable to announced acquisitions of $0.8 million and $1.5 million for the three and nine months ended September 30, 2012, respectively. Includes income of $25.2 million for the nine months ended September 30, 2011 for proceeds received as a result of the termination of the Graham Packaging merger agreement, net of costs associated with certain corporate development activities.

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Three Months Ended September 30, 2012 Compared with Three Months Ended September 30, 2011

Overview. Consolidated net sales were $1,139.5 million in the third quarter of 2012, representing a 0.7 percent decrease as compared to the third quarter of 2011, due primarily to the impact of unfavorable foreign currency translation of approximately $23.4 million, a decrease in unit volumes in the plastic container business, weaker economic conditions in Europe and lower average selling prices as a result of the pass through of lower resin costs, mostly offset by an increase in unit volumes in the metal container and closures businesses, higher average selling prices as a result of the pass through of higher raw material costs in the metal container business and the inclusion of net sales from acquisitions. Income from operations for the third quarter of 2012 of $132.4 million decreased by $3.7 million, or 2.7 percent, as compared to the same period in 2011 primarily due to declines in the European markets, the negative impact from lower absorption of overhead costs due to inventory reductions in the metal container business, a decrease in unit volumes in the plastic container business, an increase in rationalization charges and costs associated with the start-up of new metal container production facilities in eastern Europe and the Middle East, partially offset by an increase in unit volumes in the metal container and closures businesses, the favorable comparison of the year-over-year resin pass through lag effect which benefitted the third quarter of 2012, cost reduction initiatives and continued improvements in operating performance. Rationalization charges were $2.1 million and $0.6 million for the third quarter of 2012 and 2011, respectively. Net income for the third quarter of 2012 was $78.7 million, or $1.13 per diluted share, as compared to $78.8 million, or $1.12 per diluted share, for the same period in 2011.

Net Sales. The $8.5 million decrease in consolidated net sales in the third quarter of 2012 as compared to the third quarter of 2011 was the result of lower net sales in the closures and plastic container businesses, partially offset by higher net sales in the metal container business.

Net sales for the metal container business increased $15.4 million, or 1.9 percent, in the third quarter of 2012 as compared to the same period in 2011. This increase was primarily attributable to an increase in unit volumes and higher average selling prices as a result of the pass through of higher raw material costs, partially offset by the impact of unfavorable foreign currency translation of approximately $12.0 million. Unit volumes increased in the third quarter of 2012 primarily as a result of an improved fresh vegetable pack in 2012 as compared to a weak vegetable pack in 2011 and net sales contributed from the recent acquisition of Ínta?.

Net sales for the closures business decreased $6.8 million, or 3.6 percent, in the third 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 $10.9 million, partially offset by an increase in unit volumes.

Net sales for the plastic container business in the third quarter of 2012 decreased $17.1 million, or 10.7 percent, as compared to the same period in 2011. This decrease was principally a result of lower unit volumes partially due to planned third quarter shut downs by certain customers, lower average selling prices as a result of the pass through of lower resin costs and the unfavorable impact of foreign currency translation of approximately $0.5 million, partially offset by the inclusion of net sales from PFC which was acquired on August 30, 2012.

Gross Profit. Gross profit margin decreased 0.3 percentage points to 15.7 percent in the third quarter of 2012 as compared to the same period in 2011 for the reasons discussed below in "Income from Operations."

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Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased slightly to 3.9 percent for the third quarter of 2012 as compared to 4.0 percent for the same period in 2011. Selling, general and administrative expenses decreased $1.9 million to $44.3 million for the third quarter of 2012 as compared to $46.2 million for the same period in 2011.

Income from Operations. Income from operations for the third quarter of 2012 decreased by $3.7 million as compared to the third quarter of 2011, and operating margin decreased to 11.6 percent from 11.9 percent over the same periods. The decrease in income from operations was primarily due to a decrease in income from operations in the metal container business, partially offset by an increase in income from operations in the plastic container business and lower selling, general and administrative expenses.

Income from operations of the metal container business for the third quarter of 2012 decreased $8.2 million, or 7.3 percent, as compared to the same period in 2011, and operating margin decreased to 12.7 percent from 14.0 percent over the same periods. These decreases were primarily the result of the negative impact from lower absorption of overhead costs due to inventory reductions in the third quarter of 2012 in excess of reductions in 2011. Also contributing to these decreases were lower price realization in the European markets largely in exchange for improved credit terms negotiated earlier in the year, rationalization charges of $1.7 million in the third quarter of 2012 from the recently announced closing of the Kingsburg, California manufacturing facility and costs of $1.4 million associated with the start-up of new production facilities in eastern Europe and one new facility in the Middle East. These decreases were partially offset by an increase in unit volumes.

Income from operations of the closures business for the third quarter of 2012 decreased $0.3 million, or 1.2 percent, to $24.1 million as compared to $24.4 million for the same period in 2011, while operating margin increased to 13.2 percent from 12.9 percent over the same periods. The slight decrease in income from operations was primarily attributable to declines in Europe resulting from on-going macroeconomic issues and higher rationalization charges, mostly offset by volume improvements in the U.S. largely in the single-serve beverage market, improved manufacturing efficiencies and on-going operating cost savings. Rationalization charges of $0.5 million and $0.3 million were recognized in the third quarters of 2012 and 2011, respectively.

Income from operations of the plastic container business for the third quarter of 2012 increased $2.4 million, or 63.2 percent, to $6.2 million as compared to $3.8 million for the same period in 2011, and operating margin increased to 4.3 percent from 2.4 percent over the same periods. These increases were primarily attributable to continued improvement in operating performance, the favorable comparison of the year-over-year resin pass through lag effect which benefited the third quarter of 2012 and lower rationalization charges, partially offset by a decrease in unit volumes. A rationalization credit of $0.1 million and rationalization charges of $0.3 million were recognized in the third quarters of 2012 and 2011, respectively.

Interest and Other Debt Expense. Interest and other debt expense for the third quarter of 2012 decreased $1.3 million to $16.0 million as compared to the same period in 2011. The third quarter of 2011 included a loss on early extinguishment of debt of $1.0 million as a result of the refinancing of the senior secured credit facility in July 2011.

Provision for Income Taxes. The effective tax rate for the third quarter of 2012 was 32.4 percent as compared to 33.7 percent in the same period of 2011. The effective tax rate for the third quarter of 2012 benefited from the resolution of certain issues with tax authorities and changes to statutory rates enacted in certain jurisdictions.

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Nine Months Ended September 30, 2012 Compared with Nine Months Ended September 30, 2011

Overview. Consolidated net sales were $2.73 billion in the first nine months of 2012, representing a 2.1 percent increase as compared to the first nine months of 2011, primarily due to the inclusion of net sales from 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 metal container and closures businesses principally in the U.S. 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 $46.6 million, lower unit volumes in the plastic container business and lower net sales in Europe due to weak economic conditions. Income from operations for the first nine months of 2012 decreased by $17.4 million, or 6.1 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, the unfavorable impact from inventory reductions in the metal container business, start-up costs for new metal container production facilities in eastern Europe and the Middle East and an increase in rationalization charges. These decreases were partially offset by higher unit volumes in the metal container and closures businesses, the favorable comparison of the year-over-year resin pass through lag effect, improved manufacturing efficiencies and ongoing cost controls and a $3.3 million charge in 2011 related to the resolution of a past product liability dispute. Rationalization charges were $5.8 million and $4.8 million for the first nine months of 2012 and 2011, respectively. Results for the first nine months of 2012 and 2011 included a loss on early extinguishment of debt of $38.7 million and $1.0 million, respectively. Net income for the first nine months of 2012 was $122.0 million, or $1.74 per diluted share, as compared to $156.1 million, or $2.22 per diluted share, for the same period in 2011.

Net Sales. The $56.2 million increase in consolidated net sales in the first nine months of 2012 as compared to the first nine months of 2011 was due to higher net sales in the metal container business, partially offset by lower net sales in the closures and plastic container businesses.

Net sales for the metal container business increased $67.3 million, or 4.0 percent, in the first nine months of 2012 as compared to the same period in 2011. This increase was primarily attributable to the inclusion of a full nine months of net sales from acquisitions completed in 2011, higher average selling prices as a result of the pass through of higher raw material costs and an increase in unit volumes, partially offset by the impact of unfavorable foreign currency translation of approximately $20.9 million and the impact from weak economic conditions in Europe.

Net sales for the closures business in the first nine months of 2012 decreased $5.3 million, or 1.0 percent, as compared to the same period in 2011. This decrease was primarily the result of the impact of unfavorable foreign currency translation of approximately $23.1 million and lower net sales in Europe due to weak economic conditions, partially offset by higher unit volumes principally for the single-serve beverage market in the U.S.

Net sales for the plastic container business in the first nine months of 2012 decreased $5.8 million, or 1.2 percent, as compared to the same period in 2011. This decrease was primarily the result of the impact of lower unit volumes and unfavorable foreign currency translation of approximately $2.6 million, partially offset by higher average selling prices due to the pass through of higher raw material costs, the inclusion of net sales from PFC and a favorable mix of products sold.

Gross Profit. Gross Profit margin remained unchanged at 15.0 percent for the first nine months of 2012 as compared to the same period in 2011 for the reasons discussed below in "Income from Operations."

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Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $22.6 million to $135.5 million for the nine months ended September 30, 2012 as compared to $112.9 million for the same period in 2011. Selling, general and administrative expenses as a percentage of consolidated net sales increased to 5.0 percent for the first nine months of 2012 as compared to 4.2 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 nine months of 2012 decreased by $17.4 million, or 6.1 percent, as compared to the first nine months of 2011 and operating margin decreased to 9.8 percent from 10.6 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, and lower income from operations in the metal container business, partially offset by higher income from operations in the closures and plastic container businesses.

Income from operations of the metal container business for the first nine months of 2012 decreased $7.4 million, or 3.8 percent, as compared to the same period in 2011, and operating margin decreased to 10.7 percent from 11.5 percent over the same periods. These decreases were primarily the result of the unfavorable impact from inventory reductions in the third quarter of 2012 in excess of reductions in 2011, the impact from weak economic conditions in Europe, an increase in depreciation expense, start-up costs of $4.3 million for new production facilities in eastern Europe and the Middle East and an increase in rationalization charges of $0.3 million, partially offset by an increase in unit volumes and a $3.3 million charge in 2011 related to the resolution of a past product liability dispute.

Income from operations of the closures business for the first nine months of 2012 increased $2.2 million, or 3.5 percent, as compared to the same period in 2011, and operating margin increased to 12.3 percent from 11.8 percent over the same periods. These increases were primarily attributable to higher unit volumes principally for the single-serve beverage market in the U.S. and the benefits of ongoing cost reduction initiatives and improved manufacturing efficiencies, partially offset by price pressure in the European market due to macroeconomic issues and higher rationalization charges. Rationalization charges of $2.6 million and $1.7 million were recognized in the first nine months of 2012 and 2011, respectively.

Income from operations of the plastic container business for the first nine months of 2012 increased $9.6 million, or 65.8 percent, as compared to the same period in 2011, and operating margin increased to 5.2 percent from 3.1 percent over the same periods. These increases were primarily attributable to the favorable comparison of the year-over-year resin pass through lag effect, continued improvement in operating performance, a favorable mix of products sold and lower rationalization charges, partially offset by lower unit volumes. Rationalization charges of $1.5 million and $1.7 million were recognized in the first nine 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 nine months of 2012 increased $0.9 million to $47.6 million as compared to the same period in 2011. As a result of the redemption of the 7╝% 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 nine months of 2012. The first nine months of 2011 included a loss on early extinguishment of debt of $1.0 million as a result of the refinancing of the senior secured credit facility in July 2011.

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Provision for Income Taxes. The effective tax rate for the first nine months of 2012 was 32.4 percent as compared to 34.0 percent in the same period of 2011. The effective tax rate for the first nine months of 2012 was favorably impacted by the cumulative adjustment of reductions in the enacted tax rates in certain foreign countries and the resolution of certain issues with tax authorities.

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 7╝% 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 during the second quarter of 2012.

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

For the nine months ended September 30, 2012, we used proceeds from the issuance of long-term debt of $526.6 million and net borrowings of revolving loans of $325.4 million to fund repayments of long-term debt of $284.2 million (including the redemption of our 7╝% Notes for $280.9 million), the acquisitions of PFC and Ínta? for $266.5 million, cash used in operations of $6.0 million (including contributions of $76.0 million to our domestic pension benefit plans), decreases in outstanding checks of $66.2 million, net capital expenditures of $83.3 million, deferred payments of purchase price for acquisitions of $51.0 million, repurchases of our common stock of $33.9 million, dividends paid on our common stock of $25.4 million, debt issuance costs of $9.8 million related to the 5% Notes and net payments for stock-based compensation issuances of $0.3 million and to increase cash and cash equivalents by $25.4 million.

For the nine months ended September 30, 2011, we used proceeds from long-term debt of $1,088.8 million, net borrowings of revolving loans of $46.3 million, cash provided by operating activities of $76.2 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) and cash and cash equivalents of $34.8 million to fund the repayment of long-term debt of $689.6 million, the acquisitions of VN, the twist-off metal closures operations of DGS S.A. in Poland and the metal container manufacturing assets of NestlÚ Purina PetCare Company for $289.4 . . .

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