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SLGN > SEC Filings for SLGN > Form 10-K on 28-Feb-2014All Recent SEC Filings

Show all filings for SILGAN HOLDINGS INC

Form 10-K for SILGAN HOLDINGS INC


28-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis is intended to assist you in understanding our consolidated financial condition and results of operations for the three-year period ended December 31, 2013. Our consolidated financial statements and the accompanying notes included elsewhere in this Annual Report contain detailed information that you should refer to in conjunction with the following discussion and analysis.
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, the largest manufacturer of metal food containers in North America with a unit volume market share for the year ended December 31, 2013 of approximately half of the market in the United States, 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 and 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, 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 largely through acquisitions but also through internal growth, and we continue to evaluate acquisition opportunities in the consumer goods packaging market.
SALES GROWTH
We have increased net sales and market share in our metal container, closures and plastic container businesses through both acquisitions and internal growth. As a result, we have expanded and diversified our customer base, geographic presence and product lines.
We are a leading manufacturer of metal containers in North America and Europe, primarily as a result of our acquisitions but also as a result of growth with existing customers. During the past twenty-seven years, the metal food container market has experienced significant consolidation primarily due to the desire by food processors to reduce costs and focus resources on their core operations rather than self-manufacture their metal food containers. Our acquisitions of the metal food container manufacturing operations of NestlÚ, Dial, Del Monte, Birds Eye, Campbell, Pacific Coast and, most recently, Purina Steel Can reflect this trend. We estimate that approximately five percent of the market for metal food containers in the United States is still served by self-manufacturers. In addition, the metal food container market in North America has been relatively flat during this period, despite losing market share as a result of more dining out, fresh produce and competing materials. However, we increased our share of the market for metal food containers in the United States primarily through acquisitions and growth with existing customers, and we have enhanced our business by focusing on providing customers with high levels of quality and service and value-added features such as our Quick Top« easy-open ends, shaped metal food containers and alternative color offerings for metal food containers. We anticipate that the market will be relatively flat in the future, but will continue to increase in areas of consumer convenience products such as single-serve sizes and easy-open ends. In 2013, approximately 65 percent of our metal food containers sold had an easy-open end. We expect to further enhance our metal container business through our Can Vision 2020SM program which is intended to further the competitive advantages of metal packaging for food. With our acquisitions of our closures operations in North America, Europe, Asia and South America, we established ourselves as a leading worldwide manufacturer of metal, composite and plastic closures for food and beverage products, with leadership positions in the North American and European markets. In 2013 and 2012, we expanded the geographic scope, product offerings and scale of our closures business with the acquisitions of Portola, Amcor Australia Metal Closures, Tecnocap U.S. Metal Closures and Ínta?. We may pursue further consolidation opportunities in the closures markets in which we operate. Additionally, we expect to continue to generate internal growth in our closures business, particularly in plastic closures.
We have improved the market position of our plastic container business since 1987, with net sales increasing sevenfold to $647.0 million in 2013. We achieved this improved market position primarily through strategic acquisitions as well as through internal growth. In 2012, we completed the strategic acquisition of PFC, broadening


our product offerings for shelf-stable food products to include plastic thermoformed barrier and non-barrier bowls and trays. As part of the acquisition of Portola in 2013, we acquired three plastic container manufacturing facilities in Canada, further expanding the geographic scope and product offerings of our plastic container business. The plastic container market of the consumer goods packaging industry continues to be highly fragmented, with growth rates in excess of population expansion due to substitution of plastic for other materials. We have focused on the segment of this market where custom design and decoration allows customers to differentiate their products such as in personal care. We intend to pursue further acquisition opportunities in markets where we believe that we can successfully apply our acquisition and value-added operating expertise and strategy.
OPERATING PERFORMANCE
We operate in a competitive industry where it is necessary to realize cost reduction opportunities to offset continued competitive pricing pressure. We have improved the operating performance of our plant facilities through the investment of capital for productivity improvements and manufacturing cost reductions. Our acquisitions have enabled us to rationalize plant operations and decrease overhead costs through plant closings and downsizings and to realize manufacturing efficiencies as a result of optimizing production scheduling. From 2009, we have closed two metal container manufacturing facilities, one closure manufacturing facility and three plastic container manufacturing facilities in connection with our continuing efforts to streamline our plant operations, reduce operating costs and better match supply with geographic demand. In addition, we have consolidated various positions in our corporate offices across all businesses to further enhance profitability.
We have also invested substantial capital in the past several years for new market opportunities and value-added products such as new Quick Top« easy-open ends for metal food containers, shaped metal food containers and alternative color offerings for metal food containers. In addition, we have begun to make investments for our Can Vision 2020SM program which are intended to enhance the competitive advantages of metal packaging for food. We have also made significant capital investments to expand VN into new developing Eastern countries. Over the past five years, we have invested $600.4 million in capital to invest in new market opportunities, maintain our market position, improve our productivity and reduce our manufacturing costs.
Historically, we have been successful in renewing our multi-year supply arrangements with our customers. We estimate that in 2014 approximately 90 percent of our projected North American metal container sales, a majority of our projected closures sales in the United States and a majority of our projected plastic container sales will be under multi-year arrangements.
Many of our multi-year customer supply arrangements generally provide for the pass through of changes in raw material, labor and other manufacturing costs, thereby significantly reducing the exposure of our results of operations to the volatility of these costs. Under our supply arrangements in the United States, we were able to increase prices to pass through higher metal costs. For our non-contract domestic customers, we have also generally increased prices to pass through higher metal costs. In Europe, our businesses have had long-term relationships with many of their customers and we have generally increased prices to pass through higher metal costs, although, as is common practice, many supply arrangements are negotiated on a year-by-year basis. Resin prices have also fluctuated significantly in the past few years, and we have been able to pass through changes in resin costs in accordance with our supply arrangements. Our metal container business' sales and income from operations are dependent, in part, upon the vegetable and fruit harvests in the midwest and western regions of the United States and, to a lesser extent, in a variety of national growing regions in Europe. Our closures business is also dependent, in part, upon vegetable and fruit harvests. The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in applicable regions. Because of the seasonality of the harvests, we have historically experienced higher unit sales volume in the third quarter of our fiscal year and generated a disproportionate amount of our annual income from operations during that quarter. Additionally, as is common in the packaging industry, we provide extended payment terms to some of our customers in our metal container business due to the seasonality of the vegetable and fruit packing process.
USE OF CAPITAL
Historically, we have used leverage to support our growth and increase shareholder returns. Our stable and predictable cash flow, generated largely as a result of our long-term customer relationships and generally recession resistant business, supports our financial strategy. We intend to continue using reasonable leverage, supported by our stable cash flows, to make value enhancing acquisitions. In determining reasonable leverage, we evaluate our


cost of capital and manage our level of debt to maintain an optimal cost of capital based on current market conditions. 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. In March 2011, we funded the purchase price for VN with Euro denominated borrowings under our 2010 Credit Facility. In 2011, we also refinanced our 2010 Credit Facility with our 2011 Credit Facility, and we funded repurchases of our common stock for $15.8 million and the purchase price for Purina Steel Can with cash on hand. In March 2012, we issued $500 million of the 5% Notes and used part of the proceeds from that issuance to redeem all $250 million of the 7╝% Notes. In 2012, we also funded repurchases of our common stock for $34.1 million and the purchase price for our acquisitions of Ínta? and PFC with cash on hand. In 2013, we used cash on hand, revolving loan borrowings under our 2011 Credit Facility and other foreign bank revolving loans to fund repurchases of our common stock for $267.6 million (which included $250.0 million of our common stock purchased pursuant to a "modified Dutch auction" tender offer completed in February 2013), the purchase price for our acquisitions of Amcor Australia Metal Closures, Portola and Tecnocap U.S. Metal Closures and the repayment of $300.9 million of term loans under our 2011 Credit Facility. In addition, we issued $300 million of the 5Ż% Notes in September 2013, the net proceeds of which were used to repay revolving loans under our 2011 Credit Facility. Additionally, in 2013 we commenced the refinancing of our 2011 Credit Facility, which we completed in January 2014 with our Credit Agreement. Our Credit Agreement refinanced all outstanding amounts under our 2011 Credit Facility and provides us with a $985.6 million multicurrency revolving loan facility and a Cdn $15.0 million revolving loan facility for working capital requirements and other strategic initiatives.
To the extent we utilize debt for acquisitions or other permitted purposes in future periods, our interest expense may increase. Further, since the revolving loan and term loan borrowings under our Credit Agreement bear interest at floating rates, our interest expense is sensitive to changes in prevailing rates of interest and, accordingly, our interest expense may vary from period to period. After taking into account interest rate swap agreements that we entered into to mitigate the effect of interest rate fluctuations, at December 31, 2013 we had $633.4 million of indebtedness, or 37 percent of our total outstanding indebtedness, which bore interest at floating rates. You should read Note 9 to our Consolidated Financial Statements for the year ended December 31, 2013 included elsewhere in this Annual Report for information regarding our interest rate swap agreements.
In light of our strategy to use leverage to support our growth and optimize shareholder returns, we have incurred and will continue to incur significant interest expense. For 2013, 2012 and 2011, our aggregate interest and other debt expense before loss on early extinguishment of debt as a percentage of our income from operations was 20.8 percent, 19.4 percent and 17.8 percent, respectively.


RESULTS OF OPERATIONS
The following table sets forth certain income statement data expressed as a percentage of net sales for each of the periods presented. You should read this table in conjunction with our Consolidated Financial Statements for the year ended December 31, 2013 and the accompanying notes included elsewhere in this Annual Report.

                                                Year Ended December 31,
                                               2013        2012      2011
Operating Data:
Net sales:
Metal containers                               63.1 %      63.9 %    63.0 %
Closures                                       19.4        19.0      19.6
Plastic containers                             17.5        17.1      17.4
Consolidated                                  100.0       100.0     100.0
Cost of goods sold                             85.3        85.6      85.2
Gross profit                                   14.7        14.4      14.8
Selling, general and administrative expenses    5.7         5.1       4.5
Rationalization charges                         0.3         0.2       0.2
Income from operations                          8.7         9.1      10.1
Interest and other debt expense                 1.8         2.9       1.8
Income before income taxes                      6.9         6.2       8.3
Provision for income taxes                      1.9         2.0       2.8
Net income                                      5.0 %       4.2 %     5.5 %

Summary results for our business segments for the years ended December 31, 2013, 2012 and 2011 are provided below.

                               Year Ended December 31,
                           2013          2012          2011
                                (Dollars in millions)
Net sales:
Metal containers        $ 2,341.4     $ 2,293.7     $ 2,211.5
Closures                    720.1         680.1         687.8
Plastic containers          647.0         614.5         609.9
Consolidated            $ 3,708.5     $ 3,588.3     $ 3,509.2
Income from operations:
Metal containers(1)     $   236.3     $   231.5     $   256.3
Closures(2)                  63.0          73.1          75.9
Plastic containers(3)        38.6          30.8          12.6
Corporate(4)                (13.7 )        (9.9 )         9.3
Consolidated            $   324.2     $   325.5     $   354.1


______________________


(1) Includes rationalization charges of $2.5 million, $2.5 million and $1.4 million in 2013, 2012 and 2011, respectively, plant start-up costs of $0.8 million and $6.4 million in 2013 and 2012, respectively, and a charge for the resolution of a past product liability dispute of $3.3 million in 2011.

(2) Includes rationalization charges of $5.6 million, $2.9 million and $1.8 million in 2013, 2012 and 2011, respectively, and a charge of $3.0 million in 2013 for the remeasurement of net assets in Venezuela.

(3) Includes rationalization charges of $3.9 million, $3.3 million and $4.0 million in 2013, 2012 and 2011, respectively.

(4) Includes costs attributable to announced acquisitions of $1.5 million in each of 2013 and 2012, rationalization charges of $0.5 million in 2011 and income of $25.2 million in 2011 for proceeds received as a result of the termination of the merger agreement with Graham Packaging Company Inc., net of costs associated with certain corporate development activities.


YEAR ENDED DECEMBER 31, 2013 COMPARED WITH YEAR ENDED DECEMBER 31, 2012 Overview. Consolidated net sales were $3.71 billion in 2013, representing a 3.3 percent increase as compared to 2012 primarily due to the inclusion of net sales from operations acquired in 2013 and 2012, the impact of favorable foreign currency translation in the metal container and closures businesses, higher unit volumes in the metal container business, higher average selling prices due to the pass through of higher raw material costs in all of our businesses and a more favorable mix of products sold in the plastic container business. These increases were partially offset by lower volumes in our legacy closures and plastic container operations. Income from operations for 2013 decreased by $1.3 million, or 0.4 percent, as compared to 2012 primarily as a result of the charge for the remeasurement of net assets and the unfavorable impact of currency restrictions and the political climate in Venezuela, lower unit volumes in the legacy closures and plastic container operations, continued economic challenges in Europe, the impact of under absorbed operating costs at the new metal container facilities in Eastern Europe and the Middle East, a less favorable mix of products sold in the metal container business, higher rationalization charges, the unfavorable comparison of the year-over-year resin pass through lag effect in the plastic container business and higher corporate expenses. These decreases were partially offset by the inclusion of operations acquired in 2013 and 2012, higher unit volumes in the metal container business, improved manufacturing efficiencies across all of our businesses, a more favorable mix of products sold in the plastic container business and lower new plant start-up costs in the metal container business. Results for 2013 and 2012 included rationalization charges of $12.0 million and $8.7 million, respectively, and a loss on early extinguishment of debt of $2.1 million and $38.7 million, respectively. Net income in 2013 was $185.4 million as compared to $151.3 million in 2012.
Net Sales. The $120.2 million increase in consolidated net sales in 2013 as compared to 2012 was due to higher net sales across all of our businesses. Net sales for the metal container business increased $47.7 million, or 2.1 percent, in 2013 as compared to the same period in 2012. This increase was primarily attributable to an increase in unit volumes of approximately 2.5 percent, the impact of favorable foreign currency translation of approximately $10.4 million and the pass through of higher raw material costs. The increase in unit volumes was due in large part to pet food products in the U.S. and sales from the new plants in Eastern Europe, partially offset 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 closures business in 2013 increased $40.0 million, or 5.9 percent, as compared to the same period in 2012. This increase was primarily the result of an increase in unit volumes of approximately 8.5 percent due to the inclusion of net sales from Portola, the impact of favorable foreign currency translation of approximately $10.7 million and the pass through of higher raw material costs. These increases were partially offset by lower unit volumes in the legacy closures operations primarily as a result of lower sales for single-serve beverages largely attributable to cooler temperatures in 2013 and lower sales in Venezuela due to economic challenges.
Net sales for the plastic container business in 2013 increased $32.5 million, or 5.3 percent, as compared to the same period in 2012. This increase was primarily due to higher volumes of approximately 3 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 approximately $3.3 million. The increase in volumes was attributable to the inclusion for a full year of the PFC 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 increased 0.3 percentage points to 14.7 percent in 2013 as compared to 14.4 percent in 2012 for the reasons discussed below in "Income from Operations."
Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $27.7 million in 2013 as compared to 2012. Selling, general and administrative expenses as a percentage of consolidated net sales increased to 5.7 percent in 2013 as compared to 5.1 percent in 2012. These increases were primarily due to the inclusion of expenses from recent acquisitions, a charge of $3.0 million for the remeasurement of net assets in our closures operations in Venezuela due to the devalued official Bolivar exchange rate and an increase in corporate expenses.
Income from Operations. Income from operations for 2013 decreased by $1.3 million as compared to 2012, and operating margin decreased to 8.7 percent from 9.1 percent over the same periods. These decreases were principally due to lower income from operations in the closures business and an increase in corporate expenses,


partially offset by higher income from operations in the metal and plastic container businesses. Income from operations included rationalization charges of $12.0 million and $8.7 million in 2013 and 2012, respectively.
Income from operations of the metal container business for 2013 increased $4.8 million, or 2.1 percent, as compared to 2012, and operating margin remained unchanged at 10.1 percent over the same periods. The increase in income from operations was primarily due to an increase in unit volumes, comparatively lower new plant start-up costs of $5.6 million, improved manufacturing efficiencies and lower depreciation expense, 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 and a less favorable mix of products sold. Rationalization charges were $2.5 million in each of 2013 and 2012.
Income from operations of the closures business for 2013 decreased $10.1 million, or 13.8 percent, as compared to the same period in 2012, and operating margin decreased to 8.7 percent from 10.7 percent over the same periods. These decreases were primarily attributable to the $3.0 million charge for the remeasurement of net assets of the Venezuela operations, a $5.0 million unfavorable comparative operational impact in Venezuela due to political instability and currency restrictions, lower unit volumes in the legacy closures operations and higher rationalization charges, partially offset by improved manufacturing efficiencies. In addition, operating margin was unfavorably impacted by the write-up of inventory of Portola for purchase accounting. Rationalization charges were $5.6 million and $2.9 million in 2013 and 2012, respectively.
Income from operations of the plastic container business for 2013 increased $7.8 million, or 25.3 percent, as compared to 2012, and operating margin increased to 6.0 percent from 5.0 percent over the same periods. These increases were primarily attributable to the inclusion of the PFC operations for a full year, continued improvement in operating performance and a more favorable mix of products sold, partially offset by lower volumes in the legacy operations, 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 and higher rationalization charges. Rationalization charges were $3.9 million and $3.3 million in 2013 and 2012, respectively.
Interest and Other Debt Expense. Interest and other debt expense before loss on early extinguishment of debt for 2013 increased $4.4 million as compared to 2012 primarily due to higher average outstanding borrowings. The loss on early extinguishment of debt of $2.1 million in 2013 was a result of the prepayment of $300.9 million of bank term debt under our 2011 Credit Facility, while the loss on early extinguishment of debt of $38.7 million in 2012 was a result of the redemption of the 7╝% Notes.
Provision for Income Taxes. The effective tax rate for 2013 was 35.0 percent, excluding the $19.7 million favorable tax adjustment primarily related to the completion of tax audits in the second quarter of 2013, as compared to 32.4 percent for 2012. The effective tax rate for 2013 was unfavorably impacted by the cumulative adjustment of increases in enacted tax rates in certain foreign countries, the nondeductible portion of the charge for the remeasurement of net assets in the Venezuela closures operations and the geographic distribution of international income. The effective tax rate for 2012 was favorably impacted by changes to statutory tax rates enacted in certain jurisdictions and the resolution of certain issues with tax authorities.
YEAR ENDED DECEMBER 31, 2012 COMPARED WITH YEAR ENDED DECEMBER 31, 2011 Overview. Consolidated net sales were $3.59 billion in 2012, representing a 2.3 percent increase as compared to 2011 primarily due to an increase in unit volumes in all of our businesses largely as a result of the inclusion of net sales from operations acquired in 2012 and 2011 and higher average selling prices in the metal container business due to the pass through of higher raw material costs, partially offset by the impact of unfavorable foreign currency translation, lower net sales in Europe largely due to weak economic conditions and lower average selling prices in the closures and plastic container businesses as a result of the pass through of lower resin costs. Income from operations for 2012 decreased by $28.6 million, or 8.1 percent, as compared to 2011 primarily as a result of the inclusion in 2011 of $25.2 million of income from proceeds received as a result of the termination of the merger agreement with Graham Packaging Company Inc., or 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 and manufacturing inefficiencies in the metal container business, start-up costs for new metal container production facilities in Eastern Europe and the Middle East, an increase in depreciation expense, the impact of unfavorable foreign currency translation in the closures business and an increase in rationalization charges. These decreases were partially offset by higher unit volumes in all of our businesses due in large part to the inclusion of the operations acquired in 2012 and 2011, the favorable comparison of the . . .

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