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

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Form 10-Q for SILGAN HOLDINGS INC


8-Nov-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 closures for food and beverage products; 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 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.

On October 22, 2013, we acquired Portola, a leading manufacturer of plastic closures, for an aggregate purchase price of $266 million on a debt-free basis. This business, with sales of approximately $200 million in 2012, operates eight facilities in North America and Europe. We funded the purchase price for this acquisition through revolving loan borrowings under the Credit Agreement.

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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,
                                                2013           2012         2013           2012
Net sales
Metal containers                                 71.1 %         71.5 %       64.2 %         63.7 %
Closures                                         15.9           16.0         18.6           19.4
Plastic containers                               13.0           12.5         17.2           16.9
Consolidated                                    100.0          100.0        100.0          100.0
Cost of goods sold                               84.0           84.3         85.0           85.0
Gross profit                                     16.0           15.7         15.0           15.0
Selling, general and administrative expenses      4.3            3.9          5.4            5.0
Rationalization charges                           0.1            0.2          0.1            0.2
Income from operations                           11.6           11.6          9.5            9.8
Interest and other debt expense                   1.4            1.4          1.8            3.2
Income before income taxes                       10.2           10.2          7.7            6.6
Provision for income taxes                        3.6            3.3          2.0            2.1
Net income                                        6.6 %          6.9 %        5.7 %          4.5 %

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

                          Three Months Ended           Nine Months Ended
                        Sept. 30,     Sept. 30,     Sept. 30,     Sept. 30,
                          2013          2012          2013          2012
                                      (Dollars in millions)
Net sales
Metal containers       $   831.1     $   814.1     $ 1,826.0     $ 1,738.7
Closures                   185.2         182.7         527.9         528.8
Plastic containers         151.6         142.7         489.8         462.0
Consolidated           $ 1,167.9     $ 1,139.5     $ 2,843.7     $ 2,729.5

Income from operations
Metal containers (1)   $   108.3     $   103.5     $   193.6     $   185.6
Closures (2)                23.1          24.1          55.4          65.1
Plastic containers (3)       8.6           6.2          30.4          24.2
Corporate (4)               (4.1 )        (1.4 )       (10.5 )        (8.1 )
Consolidated           $   135.9     $   132.4     $   268.9     $   266.8

(1) Includes rationalization charges of $0.3 million and $1.7 million for the three months ended September 30, 2013 and 2012, respectively, and $1.7 million for each of the nine months ended September 30, 2013 and 2012, and plant start-up costs of $1.4 million for the three months ended September 30, 2012 and $0.8 million and $4.3 million for the nine months ended September 30, 2013 and 2012, respectively.
(2) Includes a charge of $3.0 million for the nine months ended September 30, 2013 for the remeasurement of net assets in Venezuela due to a currency devaluation and rationalization charges of $1.0 million and $0.5 million for the three months ended September 30, 2013 and 2012, respectively, and $1.2 million and $2.6 million for the nine months ended September 30, 2013 and 2012, respectively.
(3) Includes a rationalization credit of $0.1 million for the three months ended September 30, 2012 and rationalization charges of $0.7 million and $1.5 million for the nine months ended September 30, 2013 and 2012, respectively.
(4) Includes costs attributable to announced acquisitions of $1.0 million and $0.8 million for the three months ended September 30, 2013 and 2012, respectively, and $1.2 million and $1.5 million for the nine months ended September 30, 2013 and 2012, respectively.

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

Overview. Consolidated net sales were $1,167.9 million in the third quarter of 2013, representing a 2.5 percent increase as compared to the third quarter of 2012 primarily as a result of the inclusion of net sales from acquired operations, the favorable impact of foreign currency translation, an increase in unit volumes in the metal container business, higher average selling prices across all businesses due to the pass through of higher raw material costs and a more favorable mix of products sold in the plastic container business, partially offset by lower unit volumes in the legacy operations of the plastic container business and in the closure business. Income from operations for the third quarter of 2013 of $135.9 million increased by $3.5 million, or 2.6 percent, as compared to the same period in 2012 primarily due to increased unit volumes in the metal container business, the inclusion of acquired operations, a more favorable mix of products sold in the plastic container business, the favorable impact from better absorption of overhead costs due to a smaller reduction in inventory in the third quarter of 2013 as compared to the same period in 2012 in the metal container business, operating cost savings, improved manufacturing efficiencies, lower rationalization charges and new plant start-up costs incurred in 2012. These increases were partially offset by lower volumes in the legacy operations of the plastic container business and in the closure business, a less favorable mix of products sold in the metal container business, the unfavorable impact from the lagged pass through of increases in resin costs, higher corporate expenses and the impact from under absorbed operating costs at the new plants of the metal container business in Eastern Europe and the Middle East. Results for the third quarter of 2013 included rationalization charges of $1.3 million and costs attributable to announced acquisitions of $1.0 million. Results for the third quarter of 2012 included rationalization charges of $2.1 million, new plant start-up costs of $1.4 million and costs attributable to announced acquisitions of $0.8 million. Net income for the third quarter of 2013 was $77.2 million as compared to $78.7 million for the same period in 2012. Net income per diluted share for the third quarter of 2013 was $1.21 as compared to $1.13 for the same period in 2012.

Net Sales. The $28.4 million increase in consolidated net sales in the third quarter of 2013 as compared to the third quarter of 2012 was the result of higher net sales across all businesses.

Net sales for the metal container business increased $17.0 million, or 2.1 percent, in the third quarter of 2013 as compared to the same period in 2012. This increase was primarily the result of an increase in unit volumes, the impact of favorable foreign currency translation of $5.4 million and the pass through of higher raw material costs. While overall unit volumes did increase approximately 2 percent, net sales were negatively impacted by poor fruit and vegetable pack conditions, particularly in the west coast of the U.S. and in central and southern Europe.

Net sales for the closure business increased $2.5 million, or 1.4 percent, in the third quarter of 2013 as compared to the same period in 2012. This increase was primarily the result of the impact of favorable foreign currency translation of $4.9 million and the pass through of higher raw material costs, partially offset by lower worldwide unit volumes of approximately 4 percent largely due to softness in single-serve beverages as compared to very strong domestic volumes for these products in the third quarter of 2012.

Net sales for the plastic container business in the third quarter of 2013 increased $8.9 million, or 6.2 percent, as compared to the same period in 2012. This increase was primarily due to higher volumes of approximately 4 percent, an increase in average selling prices due primarily to the pass through of higher raw material costs and a more favorable mix of products sold, partially offset by the unfavorable impact of foreign currency translation of approximately $1.1 million. The increase in volumes was attributable to the plastic food container operations acquired in August 2012 which more than offset significantly lower volumes in the legacy operations due in part to weaker consumer demand as well as ongoing efforts to rebalance the portfolio of the business.

Gross Profit. Gross profit margin increased 0.3 percentage points to 16.0 percent in the third 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 0.4 percentage points to 4.3 percent for the third quarter of 2013 as compared to 3.9 percent for the same period in 2012. Selling, general and administrative expenses increased $6.3 million to $50.6 million for the third quarter of 2013 as compared to $44.3 million for the same period in 2012 primarily due to the inclusion of expenses from recent acquisitions and the timing of certain legal matters and acquisition related costs.

Income from Operations. Income from operations for the third quarter of 2013 increased by $3.5 million, or 2.6 percent, as compared to the third quarter of 2012, while operating margin remained unchanged at 11.6 percent for both periods.

Income from operations of the metal container business for the third quarter of 2013 increased $4.8 million, or 4.6 percent, as compared to the same period in 2012, and operating margin increased to 13.0 percent from 12.7 percent over the same periods. The increase in income from operations was primarily a result of an increase in unit volumes, the favorable impact from better absorption of overhead costs due to a smaller reduction in inventory in the third quarter of 2013 as compared to the same period in 2012, lower

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rationalization charges and new plant start-up costs incurred in 2012, partially offset by a less favorable mix of products sold and the impact from under absorbed operating costs at the new plants in Eastern Europe and the Middle East. Rationalization charges were $0.3 million and $1.7 million in the third quarters of 2013 and 2012, respectively. Plant start-up costs were $1.4 million in the third quarter of 2012.

Income from operations of the closure business for the third quarter of 2013 decreased $1.0 million, or 4.1 percent, as compared to the same period in 2012, and operating margin decreased to 12.5 percent from 13.2 percent over the same periods. The decrease in income from operations was primarily due to a decline in unit volumes, the unfavorable impact from the lagged pass through of increases in resin costs and higher rationalization charges, partially offset by operating cost savings and improved manufacturing efficiencies. Rationalization charges were $1.0 million and $0.5 million in the third quarters of 2013 and 2012, respectively.

Income from operations of the plastic container business for the third quarter of 2013 increased $2.4 million, or 38.7 percent, as compared to the same period in 2012, and operating margin increased to 5.7 percent from 4.3 percent over the same periods. The increase in income from operations was primarily attributable to the inclusion of the plastic food container operations 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 as compared to the favorable impact from resin in the prior year quarter. A rationalization credit of $0.1 million was recognized in the third quarter of 2012.

Interest and Other Debt Expense. Interest and other debt expense for the third quarter of 2013 increased $1.0 million to $17.0 million as compared to the same period in 2012, primarily due to higher average interest rates as a result of the recent issuance of the 5% Notes.

Provision for Income Taxes. The effective tax rate for the third quarter of 2013 was 35.1 percent as compared to 32.4 percent in the same period in 2012. The effective tax rate for the third quarter of 2012 benefited from the resolution of certain issues with tax authorities and changes to statutory tax rates enacted in certain jurisdictions.

Nine Months Ended September 30, 2013 Compared with Nine Months Ended September 30, 2012

Overview. Consolidated net sales were $2.84 billion in the first nine months of 2013, representing a 4.2 percent increase as compared to the first nine months of 2012 primarily due to the inclusion of net sales from acquired operations, higher unit volumes in the metal container business, higher average selling prices in all businesses due to the pass through of higher raw material costs, the favorable impact from foreign currency translation and a favorable mix of products sold in the plastic container business, partially offset by lower volumes in the legacy operations of the plastic container business and in the closure business. Income from operations for the first nine months of 2013 of $268.9 million increased by $2.1 million, or 0.8 percent, as compared to the same period in 2012 primarily as a result of an increase in unit volumes in the metal container business, the inclusion of acquired operations, a more favorable mix of products sold in the plastic container business, improved manufacturing efficiencies and lower rationalization charges and new plant start-up costs. These increases were partially offset by the charge for the remeasurement of net assets and the unfavorable operational impact of currency restrictions and the political climate in Venezuela, lower volumes in the legacy operations of the plastic container business and in the closure business, weaker performance in international operations, a less favorable mix of products sold in the metal container business, the unfavorable impact from the lagged pass through of increases in resin costs and the unfavorable comparison of a reduced inventory build as compared to the prior year period in the metal container business. Results for the first nine months of 2013 and 2012 included new plant start-up costs of $0.8 million and $4.3 million, respectively, and costs attributable to announced acquisitions of $1.2 million and $1.5 million, respectively. Rationalization charges were $3.6 million and $5.8 million in the first nine months of 2013 and 2012, respectively. Results for the first nine 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 nine months of 2013 also included the favorable tax adjustment of $19.7 million primarily as a result of the completion of the IRS audit for periods through 2007. Net income for the first nine months of 2013 was $162.1 million, or $2.50 per diluted share, as compared to $122.0 million, or $1.74 per diluted share, for the same period in 2012.

Net Sales. The $114.2 million increase in consolidated net sales in the first nine months of 2013 as compared to the first nine months of 2012 was due to an increase in net sales in the metal and plastic container businesses, partially offset by a slight decrease in net sales in the closure business.

Net sales for the metal container business increased $87.3 million, or 5.0 percent, in the first nine 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 of $7.1 million. The increase in unit volumes of approximately 6 percent was primarily due to increased unit volumes for pet food and soup products, sales from the new plants in Eastern Europe and the inclusion of sales from the operations in Turkey which were acquired in July

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2012.

Net sales for the closure business in the first nine months of 2013 decreased $0.9 million, or 0.2 percent, as compared to the same period in 2012. This decrease was primarily the result of lower unit volumes of approximately 3 percent primarily in Venezuela and for single-serve beverages in the U.S., partially offset by the impact of favorable foreign currency translation of $6.7 million and higher average selling prices due to the pass through of higher raw material costs.

Net sales for the plastic container business in the first nine months of 2013 increased $27.8 million, or 6.0 percent, as compared to the same period in 2012. This increase was primarily due to higher volumes of approximately 6 percent, a more favorable mix of products sold and higher average selling prices due to the pass through of higher raw material costs, partially offset by the impact of unfavorable foreign currency translation of $1.7 million. The increase in volumes was attributable to the plastic food container operations which more than offset lower volumes in the legacy operations due in part to weaker customer demand as well as ongoing efforts to rebalance the portfolio of the business.

Gross Profit. Gross profit margin was 15.0 percent for the first nine months of 2013 and 2012 for the reasons discussed below in "Income from Operations."

Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $19.3 million to $154.8 million for the nine months ended September 30, 2013 as compared to $135.5 million for the same period in 2012. Selling, general and administrative expenses as a percentage of consolidated net sales increased to 5.4 percent for the first nine months of 2013 as compared to 5.0 percent for the same period in 2012. These increases were primarily due to the inclusion of expenses from recent acquisitions, 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 and the timing of certain legal matters and acquisition related costs.

Income from Operations. Income from operations for the first nine months of 2013 increased by $2.1 million, or 0.8 percent, as compared to the first nine months of 2012, while operating margin decreased to 9.5 percent from 9.8 percent over the same periods.

Income from operations of the metal container business for the first nine months of 2013 increased $8.0 million, or 4.3 percent, as compared to the same period in 2012, while operating margin decreased slightly to 10.6 percent from 10.7 percent over the same periods. The increase in income from operations was primarily a result of an increase in unit volumes and lower new plant start-up costs, partially offset by continued economic challenges in Europe, the impact of under absorbed operating costs at the new plants in Eastern Europe and the Middle East, a less favorable mix of products sold and the unfavorable comparison of a reduced inventory build as compared to the prior year period. Plant start-up costs of $0.8 million and $4.3 million were recognized in the first nine months of 2013 and 2012, respectively. Rationalization charges of $1.7 million were recognized in the each of the first nine months of 2013 and 2012.

Income from operations of the closure business for the first nine months of 2013 decreased $9.7 million, or 14.9 percent, as compared to the same period in 2012, and operating margin decreased to 10.5 percent from 12.3 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 $5.5 million unfavorable comparative operational impact in Venezuela due to political instability and currency restrictions, lower unit volumes in the U.S. primarily for single-serve beverages and the unfavorable impact from the lagged pass through of increases in resin costs, partially offset by improved manufacturing efficiencies and lower rationalization charges. Rationalization charges of $1.2 million and $2.6 million were recognized in the first nine months of 2013 and 2012, respectively.

Income from operations of the plastic container business for the first nine months of 2013 increased $6.2 million, or 25.6 percent, as compared to the same period in 2012, and operating margin increased to 6.2 percent from 5.2 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 volumes in the legacy operations and the unfavorable impact from the lagged pass through of increases in resin costs in 2013 as compared to the favorable impact from resin in 2012. Rationalization charges of $0.7 million and $1.5 million were recognized in the first nine 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 nine months of 2013 increased $0.2 million to $47.8 million as compared to the same period in 2012. This increase was primarily due to higher average debt balances, mostly offset by lower average interest rates. As a result of the prepayment of $300.9 million of term loans under the Credit Agreement in 2013, we recorded a pre-tax charge of $2.1 million for the loss on early extinguishment of debt in the first nine months of 2013. The first nine 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 in 2012 of all $250 million of our 7% Senior Notes due 2016.

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Provision for Income Taxes. The effective tax rate for the first nine months of 2013 was 35.0 percent, excluding the $19.7 million favorable tax adjustment primarily related to the completion of tax audits, as compared to 32.4 percent for the first nine months of 2012. The effective tax rate for the first nine 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 Venezuela. The effective tax rate for the first nine months of 2012 was favorably impacted by the cumulative adjustment of reductions in 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 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 nine 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.

On September 9, 2013, we issued $300 million aggregate principal amount of the 5% Notes. Interest on the 5% Notes is payable semi-annually in cash on February 1 and August 1 of each year beginning February 1, 2014, and the 5% Notes mature on February 1, 2022. Net proceeds from the issuance of the 5% Notes were used to repay outstanding bank revolving loans under the Credit Agreement.

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

For the nine months ended September 30, 2013, we used proceeds from the issuance of the 5% Notes of $300.0 million and other foreign term loans of $5.0 million, net borrowings of revolving loans of $124.6 million, cash and cash equivalents of $331.1 million and cash provided by operating activities of $1.0 million to fund the repayment of $306.4 million of long-term debt (including the repayment of $5.5 million of foreign bank term loans), repurchases of our common stock of . . .

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