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SLGN > SEC Filings for SLGN > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for SILGAN HOLDINGS INC

Form 10-Q for SILGAN HOLDINGS INC


8-Aug-2013

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, 2012 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 shelf-stable food and other 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, food, health care, pharmaceutical, household and industrial chemical, 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, food, health care, household and industrial chemical 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.

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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           Six Months Ended
                                              June 30,       June 30,     June 30,      June 30,
                                                2013           2012         2013          2012
Net sales
Metal containers                                 60.4 %         58.4 %       59.4 %        58.1 %
Closures                                         20.6           22.3         20.4          21.8
Plastic containers                               19.0           19.3         20.2          20.1
Consolidated                                    100.0          100.0        100.0         100.0
Cost of goods sold                               85.4           86.0         85.7          85.6
Gross profit                                     14.6           14.0         14.3          14.4
Selling, general and administrative expenses      6.0            5.7          6.2           5.7
Rationalization charges                           0.1              -          0.1           0.3
Income from operations                            8.5            8.3          8.0           8.4
Interest and other debt expense                   1.7            6.6          2.0           4.4
Income before income taxes                        6.8            1.7          6.0           4.0
Provision for income taxes                          -            0.4          0.9           1.3
Net income                                        6.8 %          1.3 %        5.1 %         2.7 %

Summary unaudited results of operations for the three and six months ended June 30, 2013 and 2012 are provided below.

                          Three Months Ended           Six Months Ended
                         June 30,      June 30,     June 30,      June 30,
                           2013          2012         2013          2012
                                      (Dollars in millions)
Net sales
Metal containers       $   531.2      $  479.7     $   994.9     $   924.6
Closures                   181.4         183.1         342.6         346.1
Plastic containers         167.4         158.8         338.3         319.3
Consolidated           $   880.0      $  821.6     $ 1,675.8     $ 1,590.0

Income from operations
Metal containers (1)   $    45.7      $   40.1     $    85.3     $    82.2
Closures (2)                21.7          22.9          32.3          40.9
Plastic containers (3)      11.5           9.1          21.9          18.0
Corporate (4)               (4.0 )        (3.5 )        (6.5 )        (6.7 )
Consolidated           $    74.9      $   68.6     $   133.0     $   134.4

(1) Includes rationalization charges of $0.3 million and $1.4 million for the three and six months ended June 30, 2013, respectively, and plant start-up costs of $1.9 million for the three months ended June 30, 2012 and $0.8 million and $2.9 million for the six months ended June 30, 2013 and 2012, respectively.
(2) Includes a charge of $3.0 million for the six months ended June 30, 2013 for the remeasurement of net assets in Venezuela due to a currency devaluation and rationalization charges of $0.2 million for each of the three and six months ended June 30, 2013 and $2.1 million for the six months ended June 30, 2012.
(3) Includes rationalization charges of $0.4 million and $0.2 million for the three months ended June 30, 2013 and 2012, respectively, and $0.7 million and $1.6 million for the six months ended June 30, 2013 and 2012, respectively.
(4) Includes costs attributable to announced acquisitions of $0.2 million for the six months ended June 30, 2013 and $0.7 million for each of the three and six months ended June 30, 2012.

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Three Months Ended June 30, 2013 Compared with Three Months Ended June 30, 2012

Overview. Consolidated net sales were $880.0 million in the second quarter of 2013, representing a 7.1 percent increase as compared to the second quarter of 2012 primarily as a result of an increase in unit volumes in the metal container business, the inclusion of net sales from the plastic food container operations acquired in August 2012, higher average selling prices in the metal container business due to the pass through of higher raw material costs, a more favorable mix of products sold in the plastics container business and the favorable impact of foreign currency translation, partially offset by lower unit volumes in the closure business including in Venezuela and in the legacy operations of the plastic container business. Income from operations for the second quarter of 2013 of $74.9 million increased by $6.3 million, or 9.2 percent, as compared to the same period in 2012 primarily due to increased volumes in the metal container business, the inclusion of the plastic food container operations, improved manufacturing efficiencies and favorable operating performance and a more favorable mix of products sold in the plastic container business, partially offset by lower unit volumes in the closure business and legacy operations of the plastic container business, the operational impact from the devaluation of currency and political instability in Venezuela, unabsorbed operating costs of the new plants of the metal container business in Eastern Europe and the Middle East, the unfavorable impact from the lagged pass through of increases in resin costs and higher rationalization charges. Results for the second quarter of 2013 included rationalization charges of $0.9 million and a favorable tax adjustment of $19.8 million primarily as a result of the completion of the IRS audit for periods through 2007. Results for the second quarter of 2012 included rationalization charges of $0.2 million, plant start-up costs of $1.9 million and costs attributable to announced acquisitions of $0.7 million. Net income for the second quarter of 2013 was $59.5 million as compared to $10.6 million for the same period in 2012. Net income per diluted share for the second quarter of 2013 was $0.93 as compared to $0.15 for the same period in 2012.

Net Sales. The $58.4 million increase in consolidated net sales in the second quarter of 2013 as compared to the second quarter of 2012 was the result of higher net sales in the metal container and plastic container businesses, slightly offset by lower net sales in the closure business.

Net sales for the metal container business increased $51.5 million, or 10.7 percent, in the second quarter of 2013 as compared to the same period in 2012. This increase was primarily the result of an increase in unit volumes, higher average selling prices as a result of the pass through of higher raw material costs and the impact of favorable foreign currency translation. The increase in unit volumes was primarily the result of continued growth in the U.S., principally in the pet food and soup markets, sales from the new plants in Eastern Europe and the inclusion of sales from the operations in Turkey which were acquired in July 2012.

Net sales for the closure business decreased $1.7 million, or 0.9 percent, in the second quarter of 2013 as compared to the same period in 2012. This decrease was primarily the result of lower unit volumes in the U.S., primarily for single-serve beverages in the current year period as compared to the prior year period which benefited from unseasonably warm weather, and in Venezuela, partially offset by the impact of favorable foreign currency translation.

Net sales for the plastic container business in the second quarter of 2013 increased $8.6 million, or 5.4 percent, as compared to the same period in 2012. This increase was primarily due to the inclusion of net sales from the plastic food container operations and a more favorable mix of products sold, partially offset by lower volumes in the legacy operations due in part to accelerated sales in the prior year period in advance of certain customer shutdowns in the third quarter of 2012 as well as ongoing efforts to rebalance the portfolio of the business.

Gross Profit. Gross profit margin increased 0.6 percentage points to 14.6 percent in the second quarter of 2013 as compared to the same period in 2012 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 0.3 percentage points to 6.0 percent for the second quarter of 2013 as compared to 5.7 percent for the same period in 2012. Selling, general and administrative expenses increased $5.8 million to $52.3 million for the second quarter of 2013 as compared to $46.5 million for the same period in 2012 primarily due to the inclusion of recent acquisitions.

Income from Operations. Income from operations for the second quarter of 2013 increased by $6.3 million, or 9.2 percent, as compared to the second quarter of 2012, and operating margin increased to 8.5 percent from 8.3 percent over the same periods.

Income from operations of the metal container business for the second quarter of 2013 increased $5.6 million, or 14.0 percent, as compared to the same period in 2012, and operating margin increased to 8.6 percent from 8.4 percent over the same periods. The increase in income from operations was primarily a result of an increase in unit volumes, partially offset by unabsorbed operating costs of the new plants in Eastern Europe and the Middle East. Rationalization charges were $0.3 million in the second quarter of 2013. Plant start-up costs were $1.9 million in the second quarter of 2012.

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Income from operations of the closure business for the second quarter of 2013 decreased $1.2 million, or 5.2 percent, as compared to the same period in 2012, and operating margin decreased to 12.0 percent from 12.5 percent over the same periods. The decrease in income from operations was primarily due to a $2.3 million comparative decline in operating income in Venezuela due to delays in sourcing steel supply in the current year quarter as a result of political instability and currency restrictions as well as the decline in U.S. unit volumes, partially offset by improved manufacturing efficiencies. Rationalization charges were $0.2 million in the second quarter of 2013.

Income from operations of the plastic container business for the second quarter of 2012 increased $2.4 million, or 26.4 percent, as compared to the same period in 2012, and operating margin increased to 6.9 percent from 5.7 percent over the same periods. The increase in income from operations was primarily attributable to the inclusion of the plastic food container operations, favorable operating performance and a more favorable mix of products sold, partially offset by lower volumes in the legacy operations and the unfavorable impact from the lagged pass through of increases in resin costs in the current year quarter.
Rationalization charges were $0.4 million and $0.2 million in the second quarter of 2013 and 2012, respectively.

Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the second quarter of 2013 decreased $0.6 million to $15.4 million as compared to the same period in 2012. The second quarter of 2012 included a pre-tax charge of $38.7 million for the loss on early extinguishment of debt as a result of the redemption of all $250 million of our 7% Senior Notes due 2016.

Provision for Income Taxes. The income tax provision for the second quarter of 2013 included a favorable tax adjustment of $19.8 million primarily as a result of the completion of the IRS audit for periods through 2007. The effective tax rate excluding the tax audit adjustment in 2013 was 33.2 and 23.9 percent for the second quarter of 2013 and 2012, respectfully. The effective tax rate for the second quarter of 2012 included a cumulative adjustment of reductions in the enacted tax rates in certain foreign countries.

Six Months Ended June 30, 2013 Compared with Six Months Ended June 30, 2012

Overview. Consolidated net sales were $1.68 billion in the first six months of 2013, representing a 5.4 percent increase as compared to the first six months of 2012 primarily due to the inclusion of net sales from the plastic food container operations, higher unit volumes in the metal container business, higher average selling prices in the metal container and closure businesses due to the pass through of higher raw material costs, a favorable mix of products sold in the plastic container business and the favorable impact of foreign currency translation, partially offset by lower volumes in the closure business including in Venezuela and in the legacy operations of the plastic container business. Income from operations for the first six months of 2013 of $133.0 million decreased by $1.4 million, or 1.0 percent, as compared to the same period in 2012 primarily as a result of the charge for the remeasurement of net assets and the operational impact of the currency restrictions and political climate in Venezuela, lower volumes in the closure business and legacy operations in the plastic container business, the unfavorable comparison of a reduced inventory build as compared to the prior year period in the metal container business, the unfavorable impact from the lagged pass through of increases in resin costs, continued economic weakness in Europe and unabsorbed operating costs of the new plants in Eastern Europe and the Middle East. These decreases were offset by an increase in unit volumes in the metal container business, the inclusion of the plastic food container operations acquired in August 2012, improved manufacturing efficiencies, a more favorable mix of products sold in the plastic container business and lower rationalization charges and plant start-up costs. Results for the first six months of 2013 and 2012 included plant start-up costs of $0.8 million and $2.9 million, respectively. Rationalization charges were $2.3 million and $3.7 million in the first six months of 2013 and 2012, respectively. Results for the first six months of 2013 and 2012 included a loss on early extinguishment of debt of $2.1 million and $38.7 million, respectively. Results for the first six months of 2013 also included the favorable tax adjustment of $19.8 million primarily as a result of the completion of the IRS audit for periods through 2007. Net income for the first six months of 2013 was $85.0 million, or $1.30 per diluted share, as compared to $43.3 million, or $0.62 per diluted share, for the same period in 2012.

Net Sales. The $85.8 million increase in consolidated net sales in the first six months of 2013 as compared to the first six months of 2012 was due to higher net sales in the metal container and plastic container businesses, slightly offset by lower net sales in the closure business.

Net sales for the metal container business increased $70.3 million, or 7.6 percent, in the first six months of 2013 as compared to the same period in 2012. This increase was primarily the result of an increase in unit volumes, higher average selling prices as a result of the pass through of higher raw material costs and the impact of favorable foreign currency translation. The increase in unit volumes was primarily the result of continued growth in the U.S., principally in the pet food and soup markets, sales from the new plants in Eastern Europe and the inclusion of sales from the operations in Turkey which were acquired in July 2012.

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Net sales for the closure business in the first six months of 2013 decreased $3.5 million, or 1.0 percent, as compared to the same period in 2012. This decrease was primarily the result of lower unit volumes in the U.S., primarily for single-serve beverages, and in Venezuela, partially offset by the impact of favorable foreign currency translation.

Net sales for the plastic container business in the first six months of 2013 increased $19.0 million, or 6.0 percent, as compared to the same period in 2012. This increase was primarily due to the inclusion of net sales from the plastic food container operations and a more favorable mix of products sold, partially offset by lower volumes in the legacy operations due in part to accelerated sales in the prior year period in advance of certain customer shutdowns in the third quarter of 2012 as well as ongoing efforts to rebalance the portfolio of the business.

Gross Profit. Gross profit margin decreased 0.1 percentage point to 14.3 percent for the first six months of 2013 as compared to the same period in 2012 for the reasons discussed below in "Income from Operations."

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $12.9 million to $104.1 million for the six months ended June 30, 2013 as compared to $91.2 million for the same period in 2012. Selling, general and administrative expenses as a percentage of consolidated net sales increased to 6.2 percent for the first six months of 2013 as compared to 5.7 percent for the same period in 2012. These increases were primarily due to the inclusion of recent acquisitions and a charge of $3.0 million recognized for the remeasurement of the net assets in the closure operations in Venezuela to the devalued official Bolivar exchange rate.

Income from Operations. Income from operations for the first six months of 2013 decreased by $1.4 million, or 1.0 percent, as compared to the first six months of 2012, and operating margin decreased to 8.0 percent from 8.4 percent over the same periods.

Income from operations of the metal container business for the first six months of 2013 increased $3.1 million, or 3.8 percent, as compared to the same period in 2012, while operating margin decreased to 8.6 percent from 8.9 percent over the same periods. The increase in income from operations was primarily a result of an increase in unit volumes, partially offset by the unfavorable comparison of a reduced inventory build in the beginning of 2013 to a more significant inventory build in advance of labor negotiations in the beginning of 2012, continued economic weakness in Europe, unabsorbed operating costs of the new plants in Eastern Europe and the Middle East and higher rationalization charges. Plant start-up costs of $0.8 million and $2.9 million were recognized in the first six months of 2013 and 2012, respectively. Rationalization charges of $1.4 million were recognized in the first six months of 2013.

Income from operations of the closure business for the first six months of 2013 decreased $8.6 million, or 21.0 percent, as compared to the same period in 2012, and operating margin decreased to 9.4 percent from 11.8 percent over the same periods. The decrease in income from operations was primarily due to the $3.0 million charge for the remeasurement of net assets of the Venezuela operations due to the devaluation of the currency, a $5.2 million comparative operational impact due to the political instability and currency restrictions in Venezuela and lower unit volumes in the U.S. primarily for single-serve beverages, partially offset by improved manufacturing efficiencies and lower rationalization charges. Rationalization charges of $0.2 million and $2.1 million were recognized in the first six months of 2013 and 2012, respectively.

Income from operations of the plastic container business for the first six months of 2013 increased $3.9 million, or 21.7 percent, as compared to the same period in 2012, and operating margin increased to 6.5 percent from 5.6 percent over the same periods. These increases were primarily attributable to the inclusion of the plastic food container operations, continued improvement in operating performance, a more favorable mix of products sold and lower rationalization charges, partially offset by lower unit volumes in the legacy operations and the unfavorable impact from the lagged pass through of increases in resin costs. Rationalization charges of $0.7 million and $1.6 million were recognized in the first six months of 2013 and 2012, respectively.

Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for the first six months of 2013 decreased $0.8 million to $30.8 million as compared to the same period in 2012. This decrease was primarily due to lower average interest rates, partially offset by higher average debt balances. As a result of the prepayment of $300.9 million of term debt under the Credit Agreement, we recorded a pre-tax charge of $2.1 million for the loss on early extinguishment of debt in the first six months of 2013. The first six months of 2012 included a pre-tax charge of $38.7 million for the loss on early extinguishment of debt as a result of the redemption of all $250 million of our 7% Senior Notes due 2016.

Provision for Income Taxes. The effective tax rate for the first six months of 2013 was 35.0 percent, excluding the $19.8 million adjustment primarily related to the completion of tax audits, as compared to 32.4 percent for the first six months of 2012. The effective tax rate for the first six months of 2013 was unfavorably impacted by the cumulative adjustment of increases in enacted tax rates in certain foreign countries and the nondeductible portion of the charge for the remeasurement of net assets in the Venezuela

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operations. The effective tax rate for the first six months of 2012 was favorably impacted by the cumulative adjustment of reductions in 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 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.

In the first six months of 2013, we used cash on hand and revolving loan borrowings under the Credit Agreement to prepay essentially all term loan amortization payments due in 2013 and 2014 under the Credit Agreement, consisting of $156.0 million of U.S. term loans, 100.5 million of Euro term loans and Cdn $12.2 million of Canadian term loans, aggregating U.S. denominated $300.9 million. In connection with these prepayments, we recorded a loss on early extinguishment of debt of $2.1 million. As a result of these prepayments, we have no significant term loan principal amortization payments due under the Credit Agreement until 2015.

You should also read Note 5 to our Condensed Consolidated Financial Statements for the three and six months ended June 30, 2013 included elsewhere in this Quarterly Report.

For the six months ended June 30, 2013, we used net borrowings of revolving loans of $522.7 million and cash and cash equivalents of $352.4 million to fund the repayment of $304.8 million of long-term debt (including the repayment of $3.9 million of foreign bank term loans), repurchases of our common stock of $265.3 million, cash used in operations of $159.2 million, decreases in outstanding checks of $73.5 million, net capital expenditures of $46.6 million, dividends paid on our common stock of $18.1 million, net payments for stock-based compensation issuances of $1.6 million and the acquisition of closures operations in Australia for $6.0 million.

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 7% Senior Notes due 2016 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 our 5% Senior Notes due 2020 and net payments for stock-based compensation issuances of $0.2 million.

At June 30, 2013, we had $503.1 million of revolving loans outstanding under the Credit Agreement, including borrowings for seasonal purposes and to prepay a portion of the $300.9 million of term loans under the Credit Agreement prepaid during the first six months of 2013. After taking into account outstanding letters of credit, the available portion of revolving loans under the Credit Agreement at June 30, 2013 was $268.3 million.

Because we sell metal containers and closures 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 . . .

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