Item 1. Business.
General
Silgan Holdings Inc. ("Holdings"; together with its direct and indirect owned subsidiaries, the "Company") is a leading North American manufacturer of consumer goods packaging products that currently produces (i) steel and aluminum containers for human and pet food, (ii) custom designed plastic containers for personal care, health, food, pharmaceutical and household detergent and chemical products and (iii) specialty packaging items used in the food and beverage industries, including metal caps and closures, aluminum roll-on closures, plastic bowls, plastic cans and paperboard containers. The Company is the largest manufacturer of metal food containers in North America, with a unit sale market share in the United States for the year ended December 31, 1999 of 47%. The Company is also a leading manufacturer of plastic containers in North America for personal care products and a major supplier of metal closures for food and beverage products. The Company's strategy is to increase shareholder value by growing its existing businesses and expanding into other segments by applying its expertise in acquiring, financing, integrating and efficiently operating consumer goods packaging businesses.
The Company was founded in 1987 by its Co-Chief Executive Officers. Since its inception, the Company has acquired sixteen businesses. See "--Company History." As a result of its growth strategy, the Company has increased its overall share of the U.S. metal food container market from approximately 10% in 1987 to approximately 47% in 1999. The Company's plastic container business has also increased its market position from a sales base of $88.8 million in 1987 to $321.2 million in 1999, while sales of the Company's specialty packaging business have grown from $9.6 million in 1994 to $134.5 million in 1999.
The Company's strategy has enabled it to rapidly increase its net sales and income from operations. The Company's net sales have increased from $861.4 million in 1994 to $1,856.8 million in 1999, representing a compound annual growth rate of approximately 16.6%. During this period, income from operations increased from $75.1 million in 1994 (excluding the effect of a $16.7 million non-cash charge for the reduction in carrying value of assets) to $160.4 million in 1999 (excluding the effect of an aggregate of $36.1 million of rationalization charges), representing a compound annual growth rate of approximately 16.4%.
The Company's operating philosophy, which has contributed to its strong performance since inception, is based on: (i) a significant equity ownership by management and an entrepreneurial approach to business, (ii) its low cost producer position and (iii) its long-term customer relationships. The Company's senior management has a significant ownership interest in the Company, which fosters an entrepreneurial management style and places a primary focus on creating shareholder value. The Company has achieved a low cost producer status through (i) the maintenance of a flat, efficient organizational structure, resulting in low selling, general and administrative expenses as a percentage of total net sales, (ii) purchasing economies, (iii) significant capital investments that have generated manufacturing and production efficiencies, (iv) plant consolidations and rationalizations and (v) the proximity of its plants to its customers. The Company's philosophy has also been to develop long-term customer relationships by acting in partnership with customers, providing reliable quality and service and utilizing its low cost producer position. This philosophy has resulted in numerous long-term supply contracts, high retention of customers' business and recognition from customers, as demonstrated by the Company's many quality and service awards.
Growth Strategy
The Company intends to enhance its position as a leading supplier of consumer goods packaging products by continuing to aggressively pursue a strategy designed to achieve future growth and to increase profitability. The key components of this strategy are to (i) increase the Company's market share in its current business lines through acquisitions and internal growth, (ii) expand into complementary business lines by applying the Company's acquisition and operating expertise to other areas of the consumer goods packaging market and (iii) improve the profitability of acquired businesses through integration, rationalization and capital investments to enhance their manufacturing and production efficiency.
Increase Market Share Through Acquisitions and Internal Growth. The Company has increased its revenues and market share in the metal food container, plastic container and specialty packaging markets through acquisitions and internal growth. As a result of this strategy, the Company has diversified its customer base, geographic presence and product line. In its acquisitions, the Company has followed a disciplined approach of acquiring businesses at reasonable cash flow multiples. No assurance can be given that in the future the Company will be able to locate or acquire suitable businesses on acceptable terms or at reasonable cash flow multiples.
The Company's overall share of the U.S. metal food container market has more than quadrupled since 1987, increasing from approximately 10% in 1987 to approximately 47% in 1999. During the past twelve 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. The Company's acquisitions of the metal food container manufacturing operations of Nestle Food Company ("Nestle"), The Dial Corporation ("Dial"), Del Monte Corporation ("Del Monte"), Agrilink Foods, Inc. ("Agrilink") and, most recently, Campbell Soup Company ("Campbell") reflect this trend. Additionally, in 1995 the Company acquired the Food Metal and Specialty business ("AN Can") of American National Can Company ("ANC"), expanding its customer base and geographic diversity. See "--Company History."
The Company's plastic container business has increased its market position from a sales base of $88.8 million in 1987 to $321.2 million in 1999 primarily through strategic acquisitions. See "--Company History." The plastic container segment of the consumer goods packaging industry is highly fragmented, and management intends to pursue consolidation opportunities in this segment. The Company also expects to continue to generate internal growth. For example, the Company intends to aggressively market to the personal care and pharmaceutical markets its family of stock polyethylene terephthalate ("PET") containers provided by a recent acquisition, using its sales force as well as distributors and taking advantage of its existing customer relationships. Due to increasing consumer preference for plastic as a substitute for glass, the Company is also aggressively pursuing opportunities for its custom designed PET and high density polyethylene ("HDPE") containers. These opportunities include producing PET containers for food and regional bottled water companies, and PET and HDPE containers for markets such as hair care, skin care, oral care and household detergents and chemicals. Additionally, as customers develop relationships with fewer suppliers, the Company intends to capitalize on its ability to supply customers throughout North America.
The Company's acquisition strategy with respect to its specialty packaging business is to acquire businesses with a significant percentage of a niche market in the consumer goods packaging industry. Specialty packaging products currently manufactured by the Company include steel closures for glass and plastic containers; aluminum roll-on closures for glass and plastic containers; its licensed Omni plastic container, a multi-layer microwaveable plastic bowl with an easy-open metal end; its licensed Procan multi-layer plastic can with an easy-open metal end; and paperboard containers.
Expand into Complementary Business Lines Through Acquisitions. Management believes that it can successfully apply its acquisition and operating expertise to new segments of the consumer goods packaging industry. Although no assurance can be given that the Company will be able to locate or acquire attractive acquisition candidates on acceptable terms, management believes that certain trends in and characteristics of the consumer goods packaging industry will generate attractive acquisition opportunities in complementary business lines. Importantly, the industry is fragmented, with numerous segments and multiple participants in the various segments. Additionally, many of these segments are experiencing consolidation.
Enhance Profitability of Acquired Companies. The Company seeks to acquire businesses at reasonable cash flow multiples and to enhance profitability through productivity and cost reduction opportunities. The additional sales and production capacity provided through acquisitions have enabled the Company to rationalize plant operations and decrease overhead costs through plant closings and downsizings. In addition, the Company's acquisitions have enabled it to realize manufacturing efficiencies as a result of optimizing production scheduling and minimizing product transportation costs. The Company has also benefited from the economies of its increased purchasing volume and from the elimination of redundant selling and administrative functions, as well as from the investment of capital to upgrade the acquired facilities. In addition to the benefits realized through the integration of acquired businesses, the Company has improved the operating performance of its existing plant facilities by making capital investments for productivity improvements and manufacturing cost reductions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Operating Strategy."
Financial Strategy
The Company's financial strategy is to use leverage to support its growth and increase shareholder returns. The Company's stable and predictable cash flow, generated largely as a result of its long-term customer relationships and generally recession resistant business, supports its financial strategy. Management has successfully operated its businesses and achieved its growth strategy while managing the Company's indebtedness. Management intends to continue to apply this financial strategy in its business.
In 1999, the Company reduced its total debt by $43.7 million to $883.3 million from $927.0 million in 1998. The Company achieved this reduction as a result of its increased Adjusted EBITDA (as defined in "Selected Financial Data") in 1999 as compared to 1998 and because it did not complete any acquisition and did not incur additional acquisition related indebtedness in 1999. The Company achieved this debt reduction in 1999 despite higher capital expenditures and interest expense in 1999 as compared to 1998 and the incurrence of $16.6 million of indebtedness in 1999 for Common Stock repurchases. As a result of this debt reduction and the Company's increased Adjusted EBITDA, the Company's ratios of Adjusted EBITDA to interest expense and total debt to Adjusted EBITDA continued to improve in 1999. Unless the Company incurs additional indebtedness in 2000 to finance acquisitions, the Company expects to further reduce its total debt in 2000. Additionally, the Company may redeem its 13-1/4% Subordinated Debentures due 2006 (the "13-1/4% Exchange Debentures") ($56.2 million principal amount) in the third quarter of 2000, using lower cost revolving loans under its U.S. senior secured credit facility. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Financial Strategy."
Business Segments
Holdings is a holding company that conducts its business through two wholly owned operating subsidiaries, Silgan Containers Corporation (together with its subsidiaries, "Containers") and Silgan Plastics Corporation (together with its subsidiaries, "Plastics"). Containers' operations include the Company's metal food container business and specialty packaging business. See Note 16 to the Company's Consolidated Financial Statements for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
Metal Food Container Business. For 1999, the Company's metal food container business had net sales of $1,401.1 million (approximately 76% of the Company's net sales) and income from operations of $120.7 million (approximately 73% of the Company's income from operations) (without giving effect to an aggregate of $36.1 million of rationalization charges and to corporate expense). The Company's metal food container business has realized compound annual unit sales growth in excess of 15% since 1994. The Company's metal food container business is engaged in the manufacture and sale of steel and aluminum containers that are used primarily by processors and packagers for human and pet food. The Company's metal food container business manufactures metal containers for soup, vegetables, fruit, pet food, meat, tomato based products, coffee, seafood, adult nutritional drinks and other miscellaneous food products. The Company estimates that approximately 75% of its projected metal food container sales in 2000 will be pursuant to long-term supply arrangements, including agreements with Nestle, Del Monte, Campbell and several other major food processors. See "--Sales and Marketing."
Plastic Container Business. For 1999, Plastics had net sales of $321.2 million (approximately 17% of the Company's net sales) and income from operations of $38.6 million (approximately 24% of the Company's income from operations) (without giving effect to an aggregate of $36.1 million of rationalization charges and to corporate expense). Plastics emphasizes value-added design, fabrication and decoration of custom designed PET and HDPE containers in its business. Plastics manufactures custom designed HDPE containers for personal care and health products, including containers for shampoos, conditioners, hand creams, lotions, cosmetics and toiletries, household detergent and chemical products, including containers for scouring cleaners, cleaning agents and lawn and garden chemicals, and pharmaceutical products, including containers for tablets, antacids and eye cleaning solutions. In addition, Plastics manufactures custom designed PET containers for mouthwash, respiratory and gastrointestinal products, liquid soap, skin care lotions, salad dressings, condiments, instant coffee, bottled water and liquor. Because these products are characterized by short product life and a demand for creative packaging, the containers manufactured for these products generally have more sophisticated designs and decorations. Plastics also manufactures a family of stock PET containers for the personal care and pharmaceutical markets.
Specialty Packaging Business. For 1999, the Company's specialty packaging business had net sales of $134.5 million (approximately 7% of the Company's net sales) and income from operations of $5.0 million (approximately 3% of the Company's income from operations) (without giving effect to an aggregate of $36.1 million of rationalization charges and to corporate expense). The Company's specialty packaging business manufactures and sells steel caps and closures, aluminum roll-on closures, Omni and Procan plastic containers and paperboard containers used in the food and beverage industries. The Company's specialty packaging business is also engaged in the development of new proprietary technology for easy open plastic ends. The Company intends to market its easy open plastic ends with its Omni plastic containers.
Manufacturing and Production
As is the practice in the industry, most of the Company's customers provide it with quarterly or annual estimates of products and quantities pursuant to which periodic commitments are given. Such estimates enable the Company to effectively manage production and control working capital requirements. The Company schedules its production to meet customers' requirements. Because the production time for the Company's products is short, the backlog of customer orders in relation to its sales is not material.
Metal Food Container Business
The manufacturing operations of the Company's metal food container business include cutting, coating, lithographing, fabricating, assembling and packaging finished cans. Three basic processes are used to produce cans. The traditional three-piece method requires three pieces of flat metal to form a cylindrical body with a welded side seam, a bottom and a top. High integrity of the side seam is assured by the use of sophisticated electronic weld monitors and organic coatings that are thermally cured by induction and convection processes. The other two methods of producing cans start by forming a shallow cup that is then formed into the desired height using either the draw and iron process or the draw and redraw process. Using the draw and redraw process, the Company manufactures steel and aluminum two-piece cans, the height of which generally does not exceed the diameter. For cans the height of which is greater than the diameter, the Company manufactures steel two-piece cans by using a drawing and ironing process. Quality and stackability of such cans are comparable to that of the shallow two-piece cans described above. Can bodies and ends are manufactured from thin, high-strength aluminum alloys and steels by utilizing proprietary tool and die designs and selected can making equipment.
Plastic Container Business
The Company utilizes two basic processes to produce plastic containers. In the extrusion blowmolding process, pellets of plastic resin are heated and extruded into a tube of plastic. A two-piece metal mold is then closed around the plastic tube and high pressure air is blown into it causing a bottle to form in the mold's shape. In the injection and injection stretch blowmolding processes, pellets of plastic resin are heated and injected into a mold, forming a plastic preform. The plastic preform is then blown into a bottle-shaped metal mold, creating a plastic bottle.
The Company believes that its proprietary equipment for the production of HDPE containers is particularly well-suited for the use of post-consumer recycled ("PCR") resins because of the relatively low capital costs required to convert its equipment to utilize multi-layer container construction.
The Company's decorating methods for its plastic containers include (i) in-mold labeling which applies a plastic film label to the bottle during the blowing process and (ii) post-mold decoration. Post-mold decoration includes (i) silk screen decoration which enables the applications of images in multiple colors to the bottle, (ii) pressure sensitive decoration which uses a plastic film or paper label with an adhesive, (iii) heat transfer decoration which uses a plastic coated label applied by heat, and (iv) hot stamping decoration which transfers images from a die using metallic foils. The Company has state-of-the-art decorating equipment, including several of the largest sophisticated decorating facilities in the country.
Specialty Packaging Business
The Company's manufacturing operations for metal closures include cutting, coating, lithographing, fabricating and lining closures. The Company manufactures continuous thread and lug style steel caps and closures and aluminum roll-on closures for glass and plastic containers, ranging in size from 18 to 120 millimeters in diameter. The Company employs state-of-the-art multi-die presses to manufacture closures, offering it a low-cost, high quality means of production.
The Company's Omni and Procan plastic containers are manufactured using a plastic injection blowmolding process where dissimilar pellets of plastic are heated and co-injected in a proprietary process to form a five-layer preform, which is immediately transferred to a blowmold for final shaping and cooling. The Company designed its equipment for this manufacturing process, and the equipment utilizes a variety of proprietary processes to make rigid plastic containers capable of holding processed foods for extended shelf lives. The Company's Omni plastic container is a multi-layer microwaveable bowl, predominantly used for single serve food applications, with an easy open aluminum end that is manufactured by the Company's metal food container business. The Company's Procan container is a multi-layer plastic can with an easy open metal end, which can package retortable, hard-to-hold food products. The Company's Omni and Procan plastic containers are manufactured pursuant to a royalty-free, perpetual license with ANC which was entered into in connection with the Company's acquisition of AN Can.
The Company's specialty packaging business is also engaged in the manufacture of paperboard containers and in the development of new proprietary closure technology. See "--General--Business Segments--Specialty Packaging Business."
Raw Materials
The Company does not believe that it is materially dependent upon any single supplier for any of its raw materials, and, based upon the existing arrangements with suppliers, its current and anticipated requirements and market conditions, the Company believes that it has made adequate provisions for acquiring raw materials. Although increases in the prices of raw materials have generally been passed along to the Company's customers in accordance with the Company's long-term supply arrangements and otherwise, any inability to do so in the future could have a significant impact on the Company's results of operations.
Metal Food Container Business
The Company uses tin plated and chromium plated steel, aluminum, copper wire, organic coatings, lining compound and inks in the manufacture and decoration of its metal food container products. The Company's material requirements are supplied through purchase orders with suppliers with whom the Company has long-term relationships. If its suppliers fail to deliver under their arrangements, the Company would be forced to purchase raw materials on the open market, and no assurances can be given that it would be able to make such purchases at comparable prices or terms. The Company believes that it will be able to purchase sufficient quantities of steel and aluminum can sheet for the foreseeable future.
Plastic Container Business
The raw materials used by the Company for the manufacture of plastic containers are primarily resins in pellet form such as virgin HDPE, virgin PET, HDPE-PCR, recycled PET and, to a lesser extent, low density polyethylene, extrudable polyethylene terephthalate, polyethylene terephthalate glycol, polypropylene, polyvinyl chloride and medium density polyethylene. The Company's resin requirements are acquired through multi-year arrangements for specific quantities of resins with several major suppliers of resins. The price that the Company pays for resin raw materials is not fixed and is subject to market pricing. The Company believes that it will be able to purchase sufficient quantities of resins for the foreseeable future.
Specialty Packaging Business
The Company uses tin plated and chromium plated steel, aluminum, organic coatings, low-metallic inks and pulpboard, plastic and organic lining materials in its metal closure operations. The Company purchases polypropylene, HDPE, ethyl vinyl alcohol and colorant resins for its Omni and Procan plastic containers. The Company also currently purchases a proprietary compounded resin product from a supplier for its Omni plastic container, which resin is produced pursuant to a license with ANC. The Company uses paperboard and various inks for its paperboard container manufacturing operations. The Company typically purchases these materials from suppliers under annual or multi-year supply arrangements, subject to market pricing. If suppliers fail to deliver under these arrangements, the Company would be forced to purchase these materials on the open market, and no assurance can be given that it would be able to purchase materials of comparable quality or at comparable prices or terms. The Company believes that it will be able to purchase sufficient quantities of raw materials for its specialty packaging business in the foreseeable future.
Sales and Marketing
The Company's philosophy has been to develop long-term customer relationships by acting in partnership with its customers, providing reliable quality and service and utilizing its low cost producer position. The Company markets its products in most areas of North America primarily by a direct sales force and for its plastic container and specialty packaging businesses, in part, through a network of distributors. Because of the high cost of transporting empty containers, the Company's metal food and plastic container businesses generally sell to customers within a 300 mile radius of their manufacturing plants. See also "--Competition."
In 1999, 1998 and 1997, approximately 12%, 14%, and 17%, respectively, of the Company's sales were to Nestle, and approximately 11%, 12%, and 11%, respectively, of the Company's sales were to Del Monte. Additionally, in 1999 approximately 12% of the Company's sales were to Campbell. No other customer accounted for more than 10% of the Company's total sales during such years.
Metal Food Container Business
The Company is the largest manufacturer of metal food containers in North America, with a unit sale market share in 1999 in the United States of approximately 47%. The Company's largest customers for this segment include Nestle, Del Monte, Campbell, Dial, H.J. Heinz Co., Hormel Foods Corp., International Home Foods, Inc., Land O' Lakes, Inc. and The Pillsbury Company.
The Company has entered into multi-year supply arrangements with many of its customers, including Nestle, Del Monte, Campbell and several other major food producers. The Company estimates that approximately 75% of its projected metal food container sales in 2000 will be pursuant to such multi-year supply arrangements. Historically, the Company has been successful in continuing these multi-year supply arrangements with its customers. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Operating Strategy" and "--Financial Strategy."
Since its inception in 1987, the Company has supplied Nestle with substantially all of its U.S. metal container requirements. In 1999, total sales of metal containers by the Company to Nestle were $214.8 million. The Company currently has three supply agreements with Nestle (the "Nestle Supply Agreements") under which it supplies Nestle with a large majority of its U.S. metal container requirements (representing approximately 9.2% of the Company's 1999 sales). The terms of the Nestle Supply Agreements were recently extended for an additional seven years from 2001 through 2008 for approximately half of the metal container sales under the Nestle Supply Agreements, in return for certain price reductions for such metal containers beginning in 2001. The Company believes that these price reductions will not have a material adverse effect on its financial condition or results of operations. The terms of the Nestle Supply Agreements for the remaining metal containers currently supplied thereunder continue through 2004.
The Nestle Supply Agreements provide for certain prices and specify that such prices will be increased or decreased based upon cost change formulas set forth therein. These agreements contain provisions that require the Company to maintain certain levels of product quality, service and delivery in order to retain the business. In the event of a breach of any such agreement, Nestle may terminate such Nestle Supply Agreement but the other Nestle Supply Agreements would remain in effect. Under certain limited circumstances, Nestle may provide to the Company a competitive bid for certain metal containers sales under these agreements. The Company has the right to retain the business subject to the terms of such bid. There can be no assurance that such bid will be made at sales prices then in effect for such metal containers, and until such bid is received the Company cannot predict the effect, if any, on its results of operations of matching or not matching such bid. In the event the Company chooses not to match such bid, the Nestle Supply Agreements will terminate only with respect to the metal containers which are the subject of such bid.
The Company also supplies metal containers to Nestle pursuant to purchase orders from Nestle (representing approximately 2.4% of the Company's 1999 sales). These sales are substantially pursuant to supply arrangements that the Company has had with Nestle since 1987. There can be no assurance, however, that the Company will continue to supply such metal containers to Nestle in any future period. However, the Company believes that the loss of any such sales would not have a material adverse effect on the Company's results of operations.
In connection with the Company's acquisition of Del Monte's U.S. metal container manufacturing operations in December 1993, the Company and Del Monte entered into a supply agreement (the "DM Supply Agreement") pursuant to which Del Monte has agreed to purchase from the Company substantially all of its annual requirements for metal containers to be used for the packaging of food and beverages in the United States, subject to certain limited exceptions. The term of the DM Supply Agreement currently continues until December 21, 2006. In 1999, sales of metal containers by the Company to Del Monte were $204.4 million.
The DM Supply Agreement provides for certain prices for metal containers supplied by the Company to Del Monte and specifies that such prices will be increased or decreased based upon specified cost change formulas. Under the DM Supply Agreement, Del Monte may, under certain circumstances, receive proposals from independent commercial can manufacturers for the supply of containers of a type and quality similar to the metal containers that the Company furnishes to Del Monte, which proposals must be for the remainder of the term of the DM Supply Agreement and for 100% of the annual volume of containers at one or more of Del Monte's processing facilities. The Company has the right to retain the business subject to the terms and conditions of such competitive proposal. There can be no assurance that any such proposal will be made at sales prices equivalent to those currently in effect or otherwise on terms similar to those currently in effect. The Company cannot predict the effect, if any, on its results of operations of matching or not matching any such proposal. During the term of the DM Supply Agreement, Del Monte is not permitted to purchase pursuant to such proposals more than 50% of its metal containers from suppliers other than the Company.
In connection with the Company's June 1998 acquisition of the steel container manufacturing business of Campbell ("CS Can"), the Company and Campbell entered into a ten-year supply agreement (the "Campbell Supply Agreement"). Under the Campbell Supply Agreement, Campbell has agreed to purchase from the Company for the term of such agreement substantially all of its steel container requirements to be used for the packaging of foods and beverages in the United States. In 1999, sales of metal containers by the Company to Campbell were $206.3 million.
The Campbell Supply Agreement provides for certain prices for containers supplied by the Company to Campbell and specifies that such prices will be increased or decreased based upon specified cost change formulas. The Campbell Supply Agreement permits Campbell, beginning in June 2003, to receive proposals from independent commercial can manufacturers for the supply of containers of a type and quality similar to the metal containers supplied by the Company to Campbell, which proposals must be for the remainder of the term of the Campbell Supply Agreement and for 100% of the annual volume of containers at any one or more of Campbell's food processing plants. The Company has the right to retain the business subject to the terms and conditions of such competitive proposal. Until a competitive bid is received, the Company cannot predict the effect, if any, on its results of operations of matching or not matching any such bids. Upon any material breach by the Company of its obligations under the Campbell Supply Agreement, Campbell has the right to terminate such agreement. In addition, Campbell has the right, at the end of the term of the Campbell Supply Agreement or upon the occurrence of certain material defaults under agreements with Campbell (including certain events of bankruptcy, certain defaults under the Company's agreements governing its material indebtedness, and certain breaches, after applicable cure periods, by the Company of its material obligations under its agreements with Campbell), to purchase from the Company the assets used to manufacture containers for Campbell that are located at the facilities that the Company leases from Campbell. The purchase price for such assets would be determined at the time of purchase in accordance with an agreed upon formula that is based upon the net book value of the assets.
The Company's metal food container business sales are dependent, in part, upon the vegetable, tomato and fruit harvests in the midwest and western regions of the United States. The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in those regions, and the Company's results of operations could be impacted accordingly. The Company's results of operations could be materially adversely affected in a year in which crop yields are substantially lower than normal in either of the prime agricultural regions of the United States in which the Company operates.
The sale of metal containers to vegetable and fruit processors is seasonal and monthly revenues increase during the months of June through October. As is common in the packaging industry, the Company must build inventory and then carry accounts receivable for some seasonal customers beyond the end of the season. Consistent with industry practice, such customers may return unused containers. Historically, such returns have been minimal.
Plastic Container Business
The Company is one of the leading manufacturers of custom designed HDPE and PET containers sold in North America. The Company markets its plastic containers in most areas of North America through a direct sales force and through a large network of distributors. Management believes that the Company is a leading manufacturer of plastic containers in North America for personal care products. More than 75% of the Company's plastic containers are sold for personal care and health products, such as hair care, skin care, oral care, pharmaceutical and other health care applications. The Company's largest customers in these product segments include the Helene Curtis and Chesebrough-Ponds divisions of Unilever Home and Personal Care North America, The Procter & Gamble Co., Warner-Lambert Co., Bristol-Myers Squibb Co. and Avon Products Inc. The Company also manufactures plastic containers for food and beverage products, such as salad dressings, condiments, bottled water and liquor. Customers in these product segments include The Procter & Gamble Co., Kraft Foods Inc., and The Torbitt & Castleman Company.
As part of its marketing strategy, the Company has arrangements to sell some of its plastic products to distributors, who in turn sell such products primarily to regional customers. Plastic containers sold to distributors are manufactured by using generic molds with decoration, color and neck finishes added to meet the distributors' individual requirements. The distributors' warehouses and their sales personnel enable the Company to market and inventory a wide range of such products to a variety of customers.
Plastics has written purchase orders or contracts for the supply of containers with the majority of its customers. In general, these purchase orders and contracts are for containers made from proprietary molds and are for a duration of 2 to 5 years.
Specialty Packaging Business
The Company believes that in the United States it is the largest manufacturer of aluminum roll-on closures, the largest manufacturer of retortable, multi-layer microwaveable plastic bowls for single serve food applications, and the third largest supplier of steel closures. The Company's metal closures are used by food processors for hot-filled foods, including pasta sauces, salsas, apple sauces and new-age beverages such as ready-to-drink teas, juices and wellness beverages; pickles; coffee creamer; mayonnaise; beers and wines; bottled water and carbonated beverages; chocolate drinks; and liquor products. The Company's Omni and Procan plastic containers are used by food processors for microwaveable soup, pasta and meat single serve meals, pie fillings and salsa.
The Company's specialty packaging business has had long-term relationships with many of its customers. A majority of the sales of the specialty packaging business are pursuant to multi-year contracts that contain provisions for the pass through of material and labor cost changes. The Company's largest customers in this segment include Campbell, Lipton (a division of Unilever N.V.), Anheuser-Busch Companies, Inc., Triarc Beverage Group, Nestle, Hormel Foods Corp., South Beach Beverages LLC, Gerber Products Co. (a unit of Novartis Consumer Health, Inc.), Cadbury Schweppes Delaware LP, PepsiCo Inc., Arizona Beverage Co. and Miller Brewing Co.
The Company's specialty packaging business sells its products primarily through a direct sales force. The Company also supplements its sales of specialty packaging products through its use of several regional distributors, thereby allowing the Company to market these products to a wider variety of customers throughout the United States.
Competition
The packaging industry is highly competitive. The Company competes in this industry with other packaging manufacturers as well as fillers, food processors and packers who manufacture containers for their own use and for sale to others. Certain of the Company's competitors may have greater financial resources than the Company. The Company attempts to compete effectively through the quality of its products, competitive pricing and its ability to meet customer requirements for delivery, performance and technical assistance.
Because of the high cost of transporting empty containers, the Company's metal food and plastic container businesses generally sell to customers within a 300 mile radius of its manufacturing plants. Strategically located existing plants give the Company an advantage over competitors from other areas, and the Company could be disadvantaged by the relocation of a major customer. As of March 1, 2000, the Company operated 58 manufacturing facilities, geographically dispersed throughout the United States and Canada, that serve the distribution needs of its customers.
Metal Food Container Business
Of the commercial metal food container manufacturers, Crown Cork and Seal Company, Inc. and Ball Corporation are the Company's most significant national competitors. As an alternative to purchasing containers from commercial can manufacturers, customers have the ability to invest in equipment to self-manufacture their containers.
Although metal containers face continued competition from plastic, paper, glass and composite containers, management believes that metal containers are superior to plastic and paper containers in applications where the contents are processed at high temperatures, where the contents are packaged in larger consumer or institutional quantities (8 to 64 oz.) or where long-term storage of the product is desirable. Management also believes that metal containers are more desirable generally than glass containers because metal containers are more durable and less costly to transport.
Plastic Container Business
Plastics competes with a number of large national producers of plastic containers for personal care, health, food, beverage, pharmaceutical and household detergent and chemical products, including Owens-Illinois, Inc., Crown Cork and Seal Company, Inc., Schmalbach-Lubeca AG and Plastipak Packaging Inc. In order to compete effectively in the constantly changing market for plastic bottles, the Company must remain current with, and to some extent anticipate, innovations in resin composition and applications and changes in the technology for the manufacturing of plastic bottles.
Specialty Packaging Business
The Company's competitors in the manufacture and sale of metal closures include White Cap Inc. (a subsidiary of Schmalbach-Lubeca AG), Anchor Closures (a unit of Crown Cork and Seal Company, Inc.), and Zapata International Corp. The Company competes in the manufacture and sale of metal closures through its established customer relationships, the quality of its products, its service, and its low cost producer position. While management believes that metal closures are superior to plastic closures because they offer stronger product integrity and greater aesthetics through metal lithography, metal closures have faced competition for several years from plastic substitutions, particularly as PET plastic containers have replaced glass containers.
The Company's Omni and Procan plastic containers compete with certain plastic thermoformed containers produced by Rexam plc and PRI, Inc. and with metal containers similar to those produced by the Company's metal food container business. The Company believes that its Omni and Procan products are able to compete effectively because of their convenience, microwaveability, processability and ability to package hard-to-hold food products.
Employees
As of December 31, 1999, the Company employed approximately 1,230 salaried and 4,910 hourly employees on a full-time basis. Approximately 56% of the Company's hourly plant employees are represented by a variety of unions. In addition, in connection with the Company's acquisition of CS Can, Campbell is currently providing to the Company approximately 750 hourly employees on a full-time basis at the facilities leased by the Company from Campbell.
The Company's labor contracts expire at various times between 2000 and 2008. As of December 31, 1999, contracts covering approximately 13% of the Company's hourly employees expire during 2000. The Company expects no significant changes in its relations with these unions. Management believes that its relationship with its employees is good.
Regulation
The Company is subject to federal, state and local environmental laws and regulations. In general, these laws and regulations limit the discharge of pollutants into the environment and establish standards for the treatment, storage, and disposal of solid and hazardous waste. The Company believes that all of its facilities are either in compliance in all material respects with all presently applicable environmental laws and regulations or are operating in accordance with appropriate variances, delayed compliance orders or similar arrangements.
In addition to costs associated with regulatory compliance, the Company may be held liable for alleged environmental damage associated with the past disposal of hazardous substances. Generators of hazardous substances disposed of at sites at which environmental problems are alleged to exist, as well as the owners of those sites and certain other classes of persons, are subject to claims under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 ("CERCLA") regardless of fault or the legality of the original disposal. Liability under CERCLA and under many similar state statutes is joint and several, and, therefore, any responsible party may be held liable for the entire cleanup cost at a particular site. Other state statutes may impose proportionate rather than joint and several liability. The federal Environmental Protection Agency or a state agency may also issue orders requiring responsible parties to undertake removal or remedial actions at certain sites.
The Company is also subject to the Occupational Safety and Health Act and other laws regulating noise exposure levels and other safety and health concerns in the production areas of its plants.
Management does not believe that any of the regulatory matters described above individually or in the aggregate will have a material effect on the Company's capital expenditures, earnings, financial position or competitive position.
Research and Product Development
The Company's research, product development and product engineering efforts relating to its metal food container and specialty packaging businesses are conducted at its new research facility in Oconomowoc, Wisconsin. The Company's research, product development and product engineering efforts with respect to its plastic container business are performed by its manufacturing and engineering personnel located at its Norcross, Georgia facility.
Company History
Holdings is a Delaware corporation formed as a holding company to acquire interests in various packaging manufacturers. See "--General." Holdings' principal assets are all of the outstanding capital stock of Containers and Plastics.
Since its origin in 1987, the Company has completed the following acquisitions:
Acquired Business Year Products ----------------- ---- -------- Nestle's metal container manufacturing 1987 Metal food containers division Monsanto Company's plastic container business 1987 Plastic containers Fort Madison Can Company of Dial 1988 Metal food containers Seaboard Carton Division of Nestle 1988 Paperboard containers Aim Packaging, Inc. 1989 Plastic containers Fortune Plastics Inc. 1989 Plastic containers Express Plastic Containers Limited 1989 Plastic containers Amoco Container Company 1989 Plastic containers Del Monte's U.S. can manufacturing operations 1993 Metal food containers Food Metal and Specialty business of ANC 1995 Metal food containers, metal caps and closures and Omni plastic containers Finger Lakes Packaging Company, Inc., a 1996 Metal food containers subsidiary of Agrilink Alcoa's North American aluminum roll-on 1997 Aluminum roll-on closures closure business ("Roll-on Closures") Rexam plc's North American plastic container 1997 Plastic containers and business closures Winn Packaging Co. ("Winn") 1998 Plastic containers Campbell's steel container manufacturing 1998 Metal food containers business Clearplass Containers, Inc. ("Clearplass") 1998 Plastic containers
Item 2.
Item 2. Properties.
Holdings' principal executive offices are located at 4 Landmark Square, Stamford, Connecticut 06901. The administrative headquarters and principal places of business for the Company's metal food container, plastic container and specialty packaging businesses are located at 21800 Oxnard Street, Woodland Hills, California 91367; 14515 N. Outer Forty, Chesterfield, Missouri 63017; and 9700 West Higgins Road, Rosemont, Illinois 60018, respectively. All of these offices are leased by the Company.
The Company owns and leases properties for use in the ordinary course of business. Such properties consist primarily of 34 metal food container, 19 plastic container and 5 specialty packaging manufacturing facilities. Twenty-four of these facilities are owned and 34 are leased by the Company. The leases expire at various times through 2020. Some of these leases provide renewal options as well as various purchase options.
Below is a list of the Company's operating facilities, including attached warehouses, as of March 1, 2000 for its metal food container business:
Approximate Building Area Location (square feet) -------- -------------
Tarrant, AL......................... 89,100 (leased) Kingsburg, CA....................... 35,600 (leased) Modesto, CA......................... 37,800 (leased) Modesto, CA......................... 128,000 (leased) Modesto, CA......................... 150,000 (leased) Riverbank, CA....................... 167,000 Sacramento, CA...................... 284,900 (leased) San Leandro, CA..................... 73,000 (leased) Stockton, CA........................ 243,500 Hoopeston, IL....................... 323,000 Rochelle, IL........................ 175,000 Waukegan, IL........................ 40,000 (leased) Hammond, IN......................... 158,000 (leased) Laporte, IN......................... 144,000 (leased) Fort Madison, IA.................... 65,000 Ft. Dodge, IA....................... 155,200 (leased) Benton Harbor, MI................... 20,200 (leased) Savage, MN.......................... 160,000 St. Paul, MN........................ 470,000 Mt. Vernon, MO...................... 100,000 Northtown, MO....................... 111,700 (leased) St. Joseph, MO...................... 173,700 Maxton, NC.......................... 231,800 (leased) Edison, NJ.......................... 260,000 Lyons, NY........................... 149,700 Napoleon, OH........................ 339,600 (leased) Crystal City, TX.................... 26,000 (leased) Paris, TX........................... 266,300 (leased) Toppenish, WA....................... 105,000 Menomonee Falls, WI................. 116,000 Menomonie, WI....................... 129,400 (leased) Oconomowoc, WI...................... 105,200 Plover, WI.......................... 91,400 (leased) Waupun, WI.......................... 212,000
Below is a list of the Company's operating facilities, including attached warehouses, as of March 1, 2000 for its plastic container business:
Approximate Building Area Location (square feet) -------- -------------
Sheffield, AL....................... 20,200 (leased) Anaheim, CA......................... 127,000 (leased) Deep River, CT...................... 140,000 Monroe, GA.......................... 139,600 Norcross, GA........................ 59,000 (leased) Flora, IL........................... 56,400 Ligonier, IN........................ 469,000 (276,000 leased) Seymour, IN......................... 431,000 Albia, IA........................... 53,000 (leased) Franklin, KY........................ 122,000 (leased) Penn Yan, NY........................ 100,000 Fairfield, OH....................... 185,000 (leased) Port Clinton, OH.................... 257,400 (leased) Langhorne, PA....................... 156,000 (leased) Mississauga, Ontario................ 75,000 (leased) Mississauga, Ontario................ 62,600 (leased) Scarborough, Ontario................ 117,000 Lachine, Quebec..................... 113,300 (leased) Lachine, Quebec..................... 77,800 (leased)
Below is a list of the Company's operating facilities, including attached warehouses, as of March 1, 2000 for its specialty packaging business:
Approximate Building Area Location (square feet) -------- -------------
Norwalk, CT......................... 14,400 (leased) Broadview, IL....................... 85,000 Woodstock, IL....................... 186,700 (leased) Evansville, IN...................... 188,000 Richmond, IN........................ 462,000
The Company owns and leases certain other warehouse facilities that are detached from its manufacturing facilities. All of the Company's U.S. facilities are subject to liens in favor of the banks under its U.S. bank credit agreement, and all of the Company's Canadian facilities are subject to liens in favor of the banks under the Company's Canadian bank credit agreement.
The Company believes that its plants, warehouses and other facilities are in good operating condition, adequately maintained, and suitable to meet its present needs and future plans. The Company believes that it has sufficient capacity to satisfy the demand for its products in the foreseeable future. To the extent that the Company needs additional capacity, management believes that the Company can convert certain facilities to continuous operation or make the appropriate capital expenditures to increase capacity.
Item 3.
Item 3. Legal Proceedings.
Other than ordinary routine legal proceedings incidental to its business, the Company is not a party to, and none of its properties are subject to, any pending legal proceedings which could have a material adverse effect on its business or financial condition.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock is quoted on the Nasdaq National Market System under the symbol SLGN. As of March 1, 2000, there were approximately 81 holders of record of the Common Stock. Holdings has never declared or paid cash dividends on its Common Stock. Holdings currently anticipates that it will retain all available funds for use in the operation and expansion of its business and does not anticipate paying any cash dividends on its Common Stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of Holdings' Board of Directors and will be dependent upon Holdings' consolidated results of operations and financial condition, applicable contractual restrictions and other factors deemed relevant by Holdings' Board of Directors. The Company's U.S. bank credit agreement and indentures for its 9% Senior Subordinated Debentures due 2009 (the "9% Debentures") and 13-1/4% Exchange Debentures allow Holdings to pay dividends on its Common Stock up to specified limits. The following table sets forth the high and low closing sales prices of Holdings' Common Stock as reported by the Nasdaq National Market System for the periods indicated below.
High Low ---- --- ---- First Quarter.................. $35.750 $27.375 Second Quarter................. 36.000 28.000 Third Quarter.................. 27.875 20.625 Fourth Quarter................. 28.000 20.000
High Low ---- --- ---- First Quarter.................. $27.875 16.688 Second Quarter................. 24.500 14.750 Third Quarter.................. 24.125 18.000 Fourth Quarter................. 19.875 11.250
Item 6.
Item 6. Selected Financial Data.
Set forth below are selected historical consolidated financial data of the Company at December 31, 1999, 1998, 1997, 1996, and 1995 and for the years then ended.
The selected historical consolidated financial data of the Company at December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999 were derived from the historical consolidated financial statements of the Company for such periods that were audited by Ernst & Young LLP, independent auditors, whose report appears elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data of the Company at December 31, 1997, 1996, and 1995 and for the years ended December 31, 1996 and 1995 were derived from the historical audited consolidated financial statements of the Company for such periods.
The selected historical consolidated financial data of the Company should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the historical financial statements of the Company, including the notes thereto, included elsewhere in this Annual Report on Form 10-K.
Notes to Selected Financial Data
(a) On June 1, 1998, the Company acquired CS Can. The acquisition was accounted for as a purchase transaction and the results of operations have been included with the Company's historical results from the acquisition date.
(b) On August 1, 1995, the Company acquired AN Can. The acquisition was accounted for as a purchase transaction and the results of operations have been included with the Company's historical results from the acquisition date.
(c) In connection with Holdings' initial public offering of its Common Stock in February 1997 (the "IPO"), the Company recognized a non-cash charge of $22.5 million at the time of the IPO for the excess of the fair market value over the grant price of certain stock options, less $3.7 million previously accrued. See Note 12 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
(d) In the fourth quarter of 1999, the Company decided to close two manufacturing facilities of the metal food container business, resulting in a charge of $11.9 million (including $7.3 million for the write-down in carrying value of assets determined to be impaired). Additionally, based upon a review of the depreciable assets of the metal food container business in 1999 and 1995, the Company determined that certain adjustments were necessary to properly reflect net realizable values and recorded a write-down of $24.2 million and $14.7 million in 1999 and 1995, respectively, for the excess of carrying value over estimated realizable value of machinery and equipment which had become obsolete or surplus. See Note 2 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
(e) During 1997, the Company determined that a portion of the future tax benefits arising from its net operating loss carryforwards would be realized in future years due to the Company's continued improvement in earnings and increased probability of future taxable income. Accordingly, in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, the Company recognized an income tax benefit for its recoverable net operating loss carryforwards. See Note 11 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
(f) Income from operations in the selected segment data excludes (i) charges of $36.1 million and $14.7 million for the years ended December 31, 1999 and 1995, respectively, all as referred to in footnote (d) above, (ii) the non-cash stock option charge of $22.5 million incurred as a result of the IPO, as referred to in footnote (c) above, and (iii) corporate expense.
(g) "Adjusted EBITDA" means consolidated net income before extraordinary charges and preferred stock dividends plus, to the extent reflected in the income statement for the applicable period, without duplication, consolidated interest expense, income tax expense and depreciation and amortization expense, as adjusted to add back charges incurred for the closing of facilities ($11.9 million for the year ended December 31, 1999, as referred to in footnote (d) above), charges incurred for the reduction in carrying value of assets ($24.2 million and $14.7 million for the years ended December 31, 1999 and 1995, respectively, as referred to in footnote (d) above) and certain other non-cash charges (including a charge of $22.5 million incurred in 1997 in connection with the IPO, as referred to in footnote (c) above, and charges relating to the vesting of benefits under stock appreciation rights of $0.8 million for each of the years ended December 31, 1996 and 1995). The Company has included information regarding Adjusted EBITDA because management believes that many investors consider it important in assessing a company's ability to service and incur debt. Accordingly, this information has been disclosed herein to permit a more complete analysis of the Company's financial condition. Adjusted EBITDA should not be considered in isolation or as a substitute for net income or
other consolidated statement of income or cash flows data prepared in accordance with accounting principles generally accepted in the United States ("GAAP") as a measure of the profitability or liquidity of the Company. See the consolidated statements of income and consolidated statements of cash flows of the Company, including the notes thereto, included elsewhere in this Annual Report on Form 10-K. Adjusted EBITDA does not take into account the Company's debt service requirements and other commitments and, accordingly, is not necessarily indicative of amounts that may be available for discretionary uses. Additionally, Adjusted EBITDA is not computed in accordance with GAAP and may not be comparable to other similarly titled measures of other companies.
(h) Depreciation and amortization excludes amortization of debt financing costs.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis is intended to assist in an understanding of the Company's consolidated financial condition and results of operations for the three-year period ended December 31, 1999. The Company's consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K contain detailed information that should be referred to in conjunction with the following discussion and analysis.
General
The Company is a leading North American manufacturer of consumer goods packaging products that currently produces (i) steel and aluminum containers for human and pet food, (ii) custom designed plastic containers for personal care, health, food, pharmaceutical and household detergent and chemical products and (iii) specialty packaging items used in the food and beverage industries, including steel caps and closures, aluminum roll-on closures, plastic bowls, plastic cans and paperboard containers. The Company is the largest manufacturer of metal food containers in North America, with a unit sale market share for the year ended December 31, 1999 of 47% in the United States, a leading manufacturer of plastic containers in North America for personal care products and a major supplier of metal closures for food and beverage products. See "Business--General."
Revenue Growth
The Company's strategy is to increase shareholder value by growing its existing businesses and expanding into other segments by applying its expertise in acquiring, financing, integrating and efficiently operating consumer goods packaging businesses. The Company has increased its revenues and market share in the metal food container, plastic container and specialty packaging markets through acquisitions and internal growth. As a result of this strategy, the Company has diversified its customer base, geographic presence and product line.
For example, during the past twelve 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. The Company's acquisitions of the metal food container manufacturing operations of Nestle, Dial, Del Monte, Agrilink and, most recently, Campbell reflect this trend. During this period, the Company's overall share of the U.S. metal food container market more than quadrupled, from approximately 10% in 1987 to approximately 47% in 1999. See "Business--General--Growth Strategy."
The Company's plastic container business has also increased its market position from a sales base of $88.8 million in 1987 to $321.2 million in 1999 through strategic acquisitions and, to a lesser extent, through internal growth. The plastic container segment of the consumer goods packaging industry is highly fragmented, and management intends to pursue consolidation opportunities in that segment. See "Business--General--Growth Strategy."
Management believes that it can successfully apply its acquisition and operating expertise to new segments of the consumer goods packaging industry. Although no assurance can be given that the Company will be able to locate or acquire attractive acquisition candidates on acceptable terms, management believes that certain trends in and characteristics of the consumer goods packaging industry will generate attractive acquisition opportunities in complementary business lines. Importantly, the industry is fragmented, with numerous segments and multiple participants in the various segments. Additionally, many of these segments are experiencing consolidation. See "Business--General--Growth Strategy."
Operating Strategy
The Company seeks to acquire businesses at reasonable cash flow multiples and to enhance profitability through productivity and cost reduction opportunities. The additional sales and production capacity provided through acquisitions have enabled the Company to rationalize plant operations and decrease overhead costs through plant closings and downsizings. In addition, the Company's acquisitions have enabled it to realize manufacturing efficiencies as a result of optimizing production scheduling and minimizing product transportation costs. The Company has also benefited from the economies of its increased purchasing volume and from the elimination of redundant selling and administrative functions, as well as from the investment of capital to upgrade the acquired facilities. See "Business--General--Growth Strategy--Enhance Profitability of Acquired Companies."
Historically, the Company has been able to improve its operating margins through productivity and cost reduction opportunities provided by its acquisitions. Following an acquisition, the Company initiates a systematic program, which usually is implemented over a number of years, to optimize its manufacturing facilities. As a result, this improvement to operating margins generally has been realized over a number of years. See "--Capital Resources and Liquidity."
In addition to the benefits realized through the integration of acquired businesses, the Company has improved the operating performance of its existing plant facilities through the investment of capital for productivity improvements and manufacturing cost reductions. Over the past five years, the Company has made $344.5 million in capital investments to improve its productivity, to reduce its manufacturing costs and to invest in new market opportunities.
For the period from 1995 through 1999, the Company's operating margins (without giving effect to rationalization charges) improved over 10%, from 7.7% in 1995 to 8.6% in 1999, principally as a result of the benefits realized from its rationalization and integration activities since its AN Can acquisition in 1995 and from the investment of capital for productivity improvements. This improvement was achieved despite the recent impact of lower margin sales to Campbell, price reductions under recently extended long-term supply agreements and competitive pricing pressure, all of which reduced the Company's operating margins in 1999.
The Company operates in a competitive industry where it is necessary to realize cost reduction opportunities to offset continued competitive pricing pressure. Further, the multi-year supply arrangements entered into by the Company's metal food container business with many of its customers, including Nestle, Del Monte, Campbell and several other major food producers, limit the Company's ability to increase its margins. The Company estimates that approximately 75% of its projected metal food container sales in 2000 will be pursuant to such arrangements. These multi-year supply arrangements generally provide, however, for the pass through of material and labor cost changes, thereby significantly reducing the exposure of the Company's results of operations to the volatility of these costs. See "Business--Raw Materials."
Historically, the Company has been successful in continuing its multi-year supply arrangements with its customers, without any resulting material adverse effect on its financial condition or results of operations. There can be no assurance, however, that in the future the Company will retain these multi-year supply arrangements or, if the Company continues these arrangements, that they will be continued without any material adverse effect on its financial condition or results of operations. Recently, the Company and Nestle agreed to extend the term of the Nestle Supply Agreements for approximately half of the metal containers sales thereunder by seven years from 2001 through 2008, in return for certain price reductions which will take effect in 2001. The Company believes that these price reductions will not have a material adverse effect on its financial condition or results of operations. See "Business--Sales and Marketing."
The Company's metal food container business sales and, to a lesser extent, operating income are dependent, in part, upon the vegetable, tomato and fruit harvests in the midwest and western regions of the United States. The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in those regions. Because of the seasonality of the harvests, the Company has historically experienced higher unit sales volume in the second and third quarters of its fiscal year and generated a disproportionate amount of its annual income from operations during these quarters. The Company believes that this seasonal impact will be mitigated somewhat by the acquisition of CS Can. Management believes that sales to Campbell generally will be highest in the first and fourth quarters due to the seasonal demand for soup products.
Financial Strategy
The Company's financial strategy is to use leverage to support its growth and increase shareholder returns. The Company's stable and predictable cash flow, generated largely as a result of its long-term customer relationships and generally recession resistant business, supports its financial strategy.
In 1999, the Company reduced its total debt by $43.7 million to $883.3 million from $927.0 million in 1998. The Company achieved this reduction as a result of a 6.3% increase in its Adjusted EBITDA in 1999 as compared to 1998 and because it did not complete any acquisition and did not incur additional acquisition related indebtedness in 1999. The Company achieved this debt reduction in 1999 despite higher capital expenditures and interest expense in 1999 as compared to 1998 and the incurrence of $16.6 million of indebtedness in 1999 for Common Stock repurchases. As a result of this debt reduction and the Company's increased Adjusted EBITDA, the Company's ratios of Adjusted EBITDA to interest expense and total debt to Adjusted EBITDA continued to improve in 1999 as compared to 1998. The Company's ratio of Adjusted EBITDA to interest expense has increased to 2.9 in 1999 from 1.6 in 1995, while the Company's ratio of total debt to Adjusted EBITDA has improved to 3.6 in 1999 from 6.0 in 1995. Unless the Company incurs additional indebtedness in 2000 to finance acquisitions, the Company expects to further reduce its total debt in 2000 as compared to 1999.
Pursuant to the indenture relating to the 13-1/4% Exchange Debentures, the Company is permitted to redeem all or any of the 13-1/4% Exchange Debentures beginning July 15, 2000. See Note 7 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K. The Company is considering redeeming all of its outstanding 13-1/4% Exchange Debentures ($56.2 million principal amount) in accordance with their terms in the third quarter of 2000, using lower cost revolving loans from its U.S. senior secured credit facility to fund this redemption.
During 1998 and 1999, the Company used $253.9 million of its revolving loan facilities to finance its 1998 acquisitions and to repurchase approximately $59.9 million of its Common Stock. Even though the Company incurred such additional indebtedness to finance acquisitions and Common Stock repurchases, the Company's aggregate financing costs (interest expense and preferred stock dividend requirements) in 1999 declined approximately $6.3 million from 1996, reflecting the benefits of the Company's reduction of its debt in 1999 and the Company's 1997 refinancings. See "--Capital Resources and Liquidity."
In 1997, the Company refinanced substantially all of its indebtedness with lower cost indebtedness and equity to further improve its cash flow and operating and financial flexibility. In addition to reducing the Company's borrowing costs and extending the maturities of its debt, the Company's refinancings improved its operating and financial flexibility, including its ability to engage in mergers and acquisitions, make capital expenditures, incur additional indebtedness, pay dividends, repurchase stock and refinance existing indebtedness. Furthermore, the Company's secured credit facilities provide it with revolving loan facilities of $550.0 million, which are available to the Company to provide for seasonal working capital needs and to pursue its growth strategy or for other permitted purposes. See "--Capital Resources and Liquidity."
To the extent the Company utilizes its revolving loan facilities for acquisitions, stock repurchases or other permitted purposes in future periods, its interest expense may increase. Further, since the Company's revolving loan and term loan borrowings under its secured credit facilities bear interest at floating rates, it is sensitive to changes in prevailing rates of interest and, accordingly, its interest expense may vary from period to period. After taking into account interest rate swap arrangements that the Company entered into to mitigate the effect of interest rate fluctuations, at December 31, 1999 the Company had $424.1 million of indebtedness which bore interest at floating rates. See "--Effect of Inflation and Interest Rate Fluctuations" and "Quantitative and Qualitative Disclosure About Market Risk--Interest Rate Risk."
In light of the Company's strategy to use leverage to support its growth and optimize shareholder returns, the Company has incurred and will continue to incur significant interest expense. For 1999, the Company's aggregate financing costs were 53.6% of its income from operations (without giving effect to rationalization charges) as compared to 52.8%, 57.1% and 74.9% for 1998, 1997 and 1996, respectively (without giving effect to the non-cash stock option charge in 1997). Due to the Company's significant interest expense, events such as price reductions given to customers in exchange for term extensions or other modifications to existing supply arrangements that are not material to the Company's income from operations could have a significant impact on its net income.
The Company's Board of Directors has authorized the repurchase by the Company of up to $70 million of its Common Stock. In 1998 and 1999, the Company repurchased $59.9 million of its Common Stock (2,608,975 shares) and funded such repurchases with revolving loan borrowings from its U.S. bank credit facility. Such repurchases were accretive to the Company's earnings per share in 1999 and 1998. See "--Capital Resources and Liquidity."
Results of Operations
The following table sets forth certain income statement data for the Company, expressed as a percentage of net sales, for each of the periods presented, and should be read in conjunction with the consolidated financial statements of the Company and related notes thereto included elsewhere in this Annual Report on Form 10-K.
Summary historical results for the Company's three business segments, metal food containers, plastic containers and specialty packaging, for the years ended December 31, 1999, 1998 and 1997 are provided below.
Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ---- (Dollars in millions) Net sales: Metal food container business ...... $1,401.1 $1,299.0 $1,134.5 Plastic container business ......... 321.2 310.9 263.3 Specialty packaging business ....... 134.5 128.8 113.6 -------- -------- -------- Consolidated .................... $1,856.8 $1,738.7 $1,511.4 ======== ======== ======== Income from operations: Metal food container business ...... $ 120.7 $ 116.1 $ 118.5 Plastic container business ......... 38.6 38.0 28.5 Specialty packaging business ....... 5.0 3.3 1.9 Rationalization charges(1) ......... (36.1) -- -- Non-cash stock option charge(2) .... -- -- (22.5) Corporate expense .................. (3.9) (3.1) (1.8) -------- -------- -------- Consolidated .................... $ 124.3 $ 154.3 $ 124.6 ======== ======== ======== - ------------
(1) Included in income from operations of the Company in 1999 are an aggregate of $36.1 million of rationalization charges, consisting of a charge of $11.9 million relating to the Company's decision to close two manufacturing facilities of the metal food container business (which includes $7.3 million for the non-cash write-down in carrying value of assets determined to be impaired) and a non-cash charge of $24.2 million for the excess of carrying value over estimated realizable value of machinery and equipment of the metal food container business which had become obsolete or surplus. See Note 2 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
(2) In connection with the IPO, the Company recognized a non-cash charge of $22.5 million for the excess of the fair market value over the grant price of stock options converted from stock option plans of Holdings' subsidiaries to Holdings' stock option plan at the time of the IPO. See Note 12 to the Consolidated Financial Statements of the Company for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
Year Ended December 31, 1999 Compared with Year Ended December 31, 1998
Net Sales. Consolidated net sales increased $118.1 million, or 6.8%, to $1,856.8 million for the year ended December 31, 1999, as compared to net sales of $1,738.7 million for the prior year. This increase resulted primarily from incremental sales added from acquisitions and, to a lesser extent, from increased sales from all three business segments.
Net sales for the metal food container business were $1,401.1 million for the year ended December 31, 1999, an increase of $102.1 million, or 7.9%, from net sales of $1,299.0 million for the prior year. This increase resulted from sales to Campbell under the Campbell Supply Agreement entered into in June 1998 and from increased unit sales to other customers, and was offset in part by lower price realization under recently extended long-term supply agreements.
Net sales for the plastic container business of $321.2 million for the year ended December 31, 1999 increased $10.3 million, or 3.3%, from net sales of $310.9 million for 1998. This increase in net sales was principally attributable to incremental sales added by the August 1998 acquisition of Clearplass as well as increased unit sales of the existing business.
Net sales for the specialty packaging business increased $5.7 million, or 4.4%, to $134.5 million for the year ended December 31, 1999, as compared to $128.8 million for the prior year. This increase was a result of higher unit sales.
Cost of Goods Sold. Cost of goods sold as a percentage of consolidated net sales was 87.3% ($1,621.4 million) for the year ended December 31, 1999, an increase of 0.1 percentage point as compared to 87.2% ($1,516.3 million) in 1998. The decline in gross profit margin was primarily attributable to lower margins realized by the metal food container business as discussed below, and was offset in part by the leveraging effect of increased unit sales of the specialty packaging business.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales for the year ended December 31, 1999 increased slightly to 4.0% ($75.0 million), as compared to 3.9% ($68.2 million) for the prior year.
Income from Operations. Excluding the effect of an aggregate of $36.1 million of rationalization charges recorded in 1999, income from operations increased $6.1 million, or 4.0%, to $160.4 million for the year ended December 31, 1999, as compared to income from operations of $154.3 million for the prior year. This increase was a result of increased operating income from all three business segments. Including the effect of the rationalization charges, income from operations for the year ended December 31, 1999 was $124.3 million. Income from operations as a percentage of consolidated net sales for the year ended December 31, 1999, excluding the effect of the rationalization charges recorded in 1999, was 8.6% as compared to 8.9% for 1998. The decline in operating margins was attributable to lower operating margins of the metal food container and plastic container businesses, and was offset in part by the improved operating performance of the specialty packaging business.
In order to maximize production efficiencies, the Company decided in the fourth quarter of 1999 to close two West Coast manufacturing facilities of the metal food container business, and accordingly recorded a pre-tax charge to earnings of $11.9 million, which includes $7.3 million for the non-cash write-down in carrying value of certain assets determined to be impaired. Additionally, in the third quarter of 1999, the Company recorded a non-cash pre-tax charge to earnings of $24.2 million to reduce the carrying value of certain assets of the metal food container business determined to be surplus or obsolete.
Income from operations for the metal food container business for the year ended December 31, 1999, excluding the effect of the rationalization charges recorded in 1999, was $120.7 million, a $4.6 million, or 4.0%, increase over income from operations of $116.1 million for the metal food container business for the prior year. This increase was principally due to increased net sales of the metal food container business in 1999 as compared to 1998. Including the effect of the rationalization charges, income from operations for the metal food container business for the year ended December 31, 1999 was $84.6 million. Income from operations as a percentage of net sales for the metal food container business, excluding the effect of the rationalization charges recorded in 1999, was 8.6% for the year ended December 31, 1999 as compared to 8.9% in 1998. The decline in operating margins of the metal food container business was principally attributable to anticipated lower margin sales to Campbell and lower price realization under recently extended long-term supply agreements, and was partially offset by lower overall per unit manufacturing costs.
Income from operations for the plastic container business for the year ended December 31, 1999 increased 1.6% to $38.6 million, as compared to income from operations of $38.0 million for the plastic container business for the prior year, primarily due to increased net sales. Income from operations as a percentage of net sales for the plastic container business for the year ended December 31, 1999 was 12.0% as compared to 12.2% for 1998. The decrease in income from operations as a percentage of net sales for the plastic container business was principally attributable to higher depreciation expense and higher selling, general and administrative expenses primarily related to the Clearplass acquisition.
Income from operations for the specialty packaging business for the year ended December 31, 1999 was $5.0 million, a $1.7 million increase over income from operations of $3.3 million for the specialty packaging business for the prior year. This increase was principally attributable to increased net sales of the specialty packaging business in 1999 as compared to 1998. Income from operations as a percentage of net sales for the specialty packaging business improved 1.1 percentage points to 3.7% for the year ended December 31, 1999 as compared to 2.6% in 1998. The improvement in operating performance of the specialty packaging business was primarily due to higher unit sales which resulted in lower per unit production costs, and was offset in part by higher depreciation expense and higher selling, general and administrative expenses partially attributable to higher new product development costs and costs incurred in connection with Year 2000 readiness issues.
Interest Expense. Interest expense increased $4.6 million to $86.1 million for the year ended December 31, 1999, as compared to $81.5 million in 1998. This increase was principally a result of higher average revolving loan balances outstanding for the year ended December 31, 1999 as compared to the prior year, primarily to finance the acquisitions of CS Can in June 1998 and Clearplass in August 1998 and Common Stock repurchases.
Income Taxes. The provision for income taxes for the year ended December 31, 1999 was recorded at an effective tax rate of 37.4% ($14.3 million), as compared to 36.9% ($26.9 million) for 1998.
Net Income and Earnings per Share. As a result of the items discussed above, net income for the year ended December 31, 1999, excluding the effect of the rationalization charges recorded in 1999, was $46.6 million, or $2.56 per diluted share, as compared to $45.9 million, or $2.30 per diluted share, for the year ended December 31, 1998. Although net income for 1999 was only slightly higher than the prior year primarily due to higher interest expense, 1999 earnings per diluted share increased $0.26 principally due to the benefits from Common Stock repurchases. Including the net-of-tax effect of $22.6 million, or $1.24 per diluted share, of the rationalization charges, net income for the year ended December 31, 1999 was $23.9 million, or $1.32 per diluted share.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Net Sales. Consolidated net sales increased $227.3 million, or 15.0%, to $1,738.7 million for the year ended December 31, 1998, as compared to net sales of $1,511.4 million for the same period in 1997. This increase was principally a result of incremental sales from acquisitions.
Net sales for the metal food container business were $1,299.0 million for the year ended December 31, 1998, an increase of $164.5 million, or 14.5%, from net sales of $1,134.5 million for the same period in 1997. This increase resulted principally from sales to Campbell under the Campbell Supply Agreement entered into in June 1998.
Net sales for the plastic container business of $310.9 million during the year ended December 31, 1998 increased $47.6 million, or 18.1%, from net sales of $263.3 million for the same period in 1997. The increase in net sales was attributable to incremental sales added by its 1998 and 1997 acquisitions and to higher unit volume from the existing business.
Net sales for the specialty packaging business increased $15.2 million, or 13.4%, to $128.8 million during the year ended December 31, 1998, as compared to $113.6 million for the same period in 1997. This increase resulted from the inclusion of a full year of sales from Roll-on Closures which was acquired in April 1997, as well as an increase in sales to existing customers.
Cost of Goods Sold. Cost of goods sold as a percentage of consolidated net sales was 87.2% ($1,516.3 million) for the year ended December 31, 1998, an increase of 1.0 percentage point as compared to 86.2% ($1,303.5 million) for the same period in 1997. The decline in gross profit margin was principally attributable to the effect of lower margin sales to Campbell and slightly lower margins realized by the existing metal food container business, offset in part by higher margins realized by the plastic container business.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of consolidated net sales decreased 0.1 percentage point to 3.9% ($68.2 million) for the year ended December 31, 1998, as compared to 4.0% ($60.8 million) for the year ended December 31, 1997. The improvement in selling, general and administrative expenses as a percentage of net sales principally related to increased revenues generated from the recent acquisitions without a commensurate increase in selling, general and administrative costs.
Income from Operations. Income from operations as a percentage of consolidated net sales for the year ended December 31, 1998 improved to 8.9% ($154.3 million), as compared to 8.3% ($124.6 million) for 1997. However, after excluding the non-cash stock option charge of $22.5 million incurred in connection with the IPO, 1997 operating margins as a percentage of net sales would have been 9.7%. The decline in operating margins in 1998 as compared to 1997, as adjusted to exclude the non-cash stock option charge of $22.5 million described below, was principally attributable to lower margins realized by the metal food container business, offset in part by the improved operating performance of the plastic container business.
At the time of the IPO in February 1997, stock options issued under the stock option plans of Holdings' subsidiaries were converted to stock options of Holdings. In accordance with generally accepted accounting principles, the Company recorded a charge of $22.5 million for the excess of the fair market value of the stock options issued under the subsidiary stock option plans over the grant price of the options. The Company does not expect to recognize any future charges for these stock options.
Income from operations as a percentage of net sales for the metal food container business decreased 1.5 percentage points to 8.9% ($116.1 million) for the year ended December 31, 1998, as compared to 10.4% ($118.5 million) for the same period in 1997. The decrease in income from operations as a percentage of net sales for the metal food container business principally resulted from lower margin sales to Campbell, an increase in depreciation expense, and price reductions provided to certain metal food container customers in exchange for contract extensions, and was offset in part by the benefit of plant rationalizations realized from the AN Can acquisition.
Income from operations as a percentage of net sales for the plastic container business improved 1.4 percentage points to 12.2% ($38.0 million) for the year ended December 31, 1998, as compared to 10.8% ($28.5 million) for the same period in 1997. The improvement in the operating performance of the plastic container business was principally attributable to an increase in unit sales to existing customers, resulting in slightly lower per unit production costs.
Income from operations as a percentage of net sales for the specialty packaging business improved 1.0 percentage point to 2.6% ($3.3 million) for the year ended December 31, 1998, as compared to 1.6% ($1.9 million) for the same period in 1997. Income from operations as a percentage of net sales for the specialty packaging business improved in 1998 as compared to 1997 despite an increase in new product development expenditures of $1.0 million to $2.7 million during the year.
Interest Expense. Interest expense increased $0.8 million to $81.5 million for the year ended December 31, 1998, as compared to $80.7 million in 1997. The increase in interest expense during 1998 was a result of the incurrence of additional indebtedness to finance acquisitions and the repurchase of Common Stock, offset in part by lower average borrowing rates. During 1998, the Company recognized the full year benefit of its 1997 refinancings and benefited from slightly lower bank borrowing rates as compared to 1997.
Income Taxes. The provision for income taxes of $26.9 million for the year ended December 31, 1998 was recorded at an effective rate of 37%. For the year ended December 31, 1997, the Company recorded an income tax benefit of $6.7 million, which was realized through the release of the Company's valuation allowance and was partially offset by a provision for income taxes recorded at an effective tax rate of 38%. During 1997, the Company determined that it was more likely than not that future tax benefits arising from its net operating loss carryforwards would be realized in future years due to the Company's continued improvement in earnings and the probability of future taxable income, and therefore recognized an income tax benefit of $27.4 million.
Net Income and Earnings per Share. As a result of the matters discussed above, net income for the year ended December 31, 1998 was $45.9 million, or $2.30 per diluted share, compared with $31.0 million, or $1.57 per diluted share, for the year ended December 31, 1997. During 1997, the Company incurred an extraordinary charge of $16.4 million, net of taxes, or $0.83 per diluted share, for the write-off of unamortized debt financing costs and premiums associated with the early redemption of the Company's 13-1/4% Senior Discount Debentures due 2002 (the "Discount Debentures") and 11-3/4% Senior Subordinated Notes due 2002 (the "11-3/4% Notes") and the refinancing of the Company's previous U.S. bank credit agreement. Before the extraordinary charge and the preferred stock dividend requirement, earnings per diluted share were $2.56 in 1997.
The Company estimates that 1997 earnings would have been $38.6 million, or $1.96 per diluted share, if unusual items for the non-cash stock option charge and the extraordinary charges incurred in connection with the refinancing of the Company's debt obligations had been excluded from earnings and if earnings for such period had been calculated using the effective tax rate for the year ended December 31, 1998.
Capital Resources and Liquidity
The Company's liquidity requirements arise primarily from its obligations under the indebtedness incurred in connection with its acquisitions and the refinancing of such indebtedness, capital investment in new and existing equipment and the funding of the Company's seasonal working capital needs. Historically, the Company has met these liquidity requirements through cash flow generated from operating activities and revolving loan borrowings.
During 1997, the Company refinanced substantially all of its indebtedness with lower cost indebtedness and equity to further improve its cash flow and operating and financial flexibility. This refinancing culminated in the Company entering into a U.S. senior secured credit facility to replace its existing bank facility. This credit facility provided the Company with a total senior secured credit facility of $1.0 billion, which included $450.0 million of term loans and a revolving loan facility of $550.0 million. Revolving loans are available to the Company for its working capital and general corporate purposes (including acquisitions and stock repurchases). In addition, the Company may request to borrow up to an additional $200.0 million of revolving loans from one or more of the lenders under the U.S. senior secured credit facility. The U.S. senior secured credit facility (i) lowered the interest rates on the Company's senior secured borrowings, (ii) extended the maturities of the Company's A term loans and revolving loans thereunder to December 31, 2003 and B term loans thereunder to June 30, 2005, and (iii) changed certain covenants to further improve the Company's operating and financial flexibility, including changes to provide more flexibility to engage in mergers and acquisitions, make capital expenditures, incur indebtedness, pay dividends, repurchase stock, and refinance existing indebtedness.
In December 1997, the Company's Canadian subsidiaries entered into a secured credit facility to provide the Company with more financing flexibility and reduce the Company's foreign currency exposure. The Canadian credit facility provided such subsidiaries with approximately $18.5 million of term loans and up to approximately $4.5 million of revolving loans. The term loan proceeds were used to prepay $14.3 million and $4.2 million of term loans under the U.S. senior secured credit facility in December 1997 and January 1998, respectively. Additionally, as a result of the Canadian credit facility, the revolving loan facility under the U.S. senior secured credit facility was reduced by $4.5 million, the amount of the revolving loan commitment under the Canadian credit facility, from $550.0 million to $545.5 million. Interest rates for borrowings under the Canadian credit facility are generally comparable to interest rates under the U.S. senior secured credit facility.
In 1999, cash generated from operations of $143.3 million, $2.4 million of cash balances and $0.5 million of cash proceeds from the exercise of employee stock options were used to repay $44.7 million of borrowings under the Company's senior secured credit facilities, fund net capital expenditures of $84.9 million and repurchase $16.6 million of Holdings' Common Stock.
In 1999, the Company initiated and concluded a study to evaluate the long-term utilization of all assets of its metal food container business. As a result, during the third quarter of 1999, the Company recorded a non-cash pre-tax charge to earnings of $24.2 million to reduce the carrying value of those assets determined to be surplus or obsolete. During the fourth quarter of 1999, the Company announced its plan to close two West Coast manufacturing facilities of its metal food container business and as a result recorded a pre-tax charge to earnings of $11.9 million, which includes $7.3 million for the non-cash write-down of certain long-term assets deemed to be impaired. These actions were taken as part of the Company's operating strategy to rationalize its operations with the objective of maximizing production efficiencies and enhancing profitability.
In 1998, cash generated from operations of $147.4 million, net borrowings of revolving loans of $135.9 million under the Company's U.S. senior secured credit facility, $4.2 million of borrowings under the Company's Canadian credit facility, $3.0 million of other borrowings related to the acquisition of CS Can, $2.3 million of proceeds from employee stock option exercises, $1.8 million of proceeds from asset sales, and $49.0 million of cash balances were used to fund capital expenditures of $86.1 million, the acquisitions of Winn, CS Can and Clearplass for an aggregate amount of $194.0 million, the repurchase of Common Stock for $43.4 million, and the repayment of $20.1 million of bank term loans.
During 1997, in implementing its refinancing strategy, the Company used proceeds of $67.2 million from the IPO, proceeds of $300.0 million from the issuance of the 9% Debentures, along with borrowings of $75.0 million under the previous credit agreement, $450.0 million of term loans under the new U.S. senior secured credit facility and $14.3 million of term loans under the Canadian credit facility to redeem the remaining principal amount ($59.0 million) of the Discount Debentures, refinance $613.3 million of term loans under the previous credit agreement, redeem the 11-3/4% Notes for $142.9 million ($135.0 million principal amount), repay $14.3 million of term loans under the U.S. senior secured credit facility, and pay fees and expenses related to such refinancings of $13.0 million.
For the year ended December 31, 1997, the Company used excess proceeds of $64.0 million realized from the refinancings referred to above and cash provided by operations of $117.9 million to repay $1.0 million principal amount of term loans and $27.8 million of revolving loans under the previous credit agreement, make net capital expenditures of $57.6 million, fund acquisitions for $42.8 million, and increase its cash balance by $52.7 million.
Because the Company sells metal containers used in fruit and vegetable pack processing, it has seasonal sales. As is common in the industry, the Company must access working capital to build inventory and then carry accounts receivable for some customers beyond the end of the summer and fall packing season. Seasonal accounts are generally settled by year end. Due to the Company's seasonal requirements, the Company incurs short term indebtedness to finance its working capital requirements.
The Company utilizes its revolving loan facilities for seasonal working capital needs and for other general corporate purposes, including acquisitions and repurchases of its Common Stock. Revolving loan borrowings under the U.S. senior secured credit facility will be due and payable on December 31, 2003. As of December 31, 1999, there were $125.2 million of outstanding revolving loans under the U.S. senior secured credit facility, and, after taking into account outstanding letters of credit, the unused portion of the revolving loan facility under the U.S. senior secured credit facility at such date was $405.1 million. For 2000, the Company estimates that at its peak it will utilize approximately $345-$355 million of its revolving loan facilities. As a result, the Company estimates that approximately $175-$185 million of its revolving loan facilities is available to it in 2000 for acquisitions, repurchases of Common Stock and other permitted purposes.
In the third quarter of 2000, the Company may redeem all of its outstanding 13-1/4% Exchange Debentures ($56.2 million principal amount) in accordance with their terms, using lower cost revolving loans from its U.S. senior secured credit facility. See "--Financial Strategy."
The Company financed repurchases of its Common Stock in 1999 and 1998 with revolving loans from its U.S. senior secured credit facility. The Company's Board of Directors has authorized the repurchase by the Company of up to $70 million of its Common Stock. Since July 1998, the Company has repurchased 2,608,975 shares of its Common Stock for an aggregate cost of approximately $59.9 million. The Company intends to finance any future repurchases of its Common Stock with revolving loans from its U.S. senior secured credit facility. In 1998, the Company issued 23,500 shares of its Common Stock from its treasury stock for employee stock option exercises.
In addition to its operating cash needs, the Company believes its cash requirements over the next several years (without taking into account the effect of future acquisitions or the possible redemption of the 13-1/4% Exchange Debentures) will consist primarily of (i) annual capital expenditures of $80 to $85 million, (ii) annual principal amortization payments of bank term loans under its senior secured credit facilities beginning in 2000 of approximately $39.4 million, $44.7 million, $60.7 million and $196.6 million, (iii) expected total expenditures of approximately $22.1 million over the next few years associated with plant rationalizations, employee severance and workforce reductions and other plant exit costs, (iv) the Company's interest requirements, including interest on revolving loans (the principal amount of which will vary depending upon seasonal requirements and acquisitions) and bank term loans under its senior secured credit facilities, most of which bear fluctuating rates of interest, the 9% Debentures and the 13-1/4% Exchange Debentures (for which the Company intends to make future interest payments in cash), and (v) payments of approximately $14 million for federal and state tax liabilities in 2000, which will increase annually thereafter.
Since 1995, the Company completed three acquisitions in its metal food container business, including AN Can in August 1995 and CS Can in June 1998. Acquisition reserves established in connection with the purchase of AN Can aggregated $49.5 million and related to plant exit costs, employee termination and severance which included the elimination of approximately 500 plant, selling and administrative employees, the assumption of certain liabilities and the elimination of selling, general and administrative functions. Although the Company has completed its restructuring plan, the timing of cash payments relating to these costs has been dependent upon, among other things, the expiration of binding labor obligations assumed by the Company and complexities associated with qualifying different facilities with the U.S. Food and Drug Administration and customer's requirements. Accordingly, cash payments related to these reserves are expected to be made through 2001. See Note 2 to the Company's Consolidated Financial Statements for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
In connection with its 1998 acquisitions of CS Can, Clearplass and Winn, the Company developed plans to integrate these businesses into its operations, which included rationalizing certain of the acquired plant operations. Pursuant to these plans which were finalized in 1999, the Company accrued liabilities of $5.4 million, of which $4.9 million related to plant exit costs and other acquisition liabilities and $0.5 million related to employee severance and relocation costs. The timing of cash payments relating to these rationalization activities is dependent upon, among other things, the time required to obtain necessary environmental permits and approvals in connection with a consent order with the U.S. Environmental Protection Agency to which the Company is subject as a result of its acquisition of CS Can and complexities associated with the transfer of the labor force of Campbell for CS Can to the Company. The Company expects that principally all actions under these plans will be completed by the end of 2001. See Note 2 to the Company's Consolidated Financial Statements for the year ended December 31, 1999 included elsewhere in this Annual Report on Form 10-K.
Management believes that cash generated by operations and funds from the revolving loans available under the Company's secured credit facilities will be sufficient to meet the Company's expected operating needs, planned capital expenditures, debt service and tax obligations for the foreseeable future. The Company is also continually evaluating and pursuing acquisition opportunities in the consumer goods packaging market, and will likely incur additional indebtedness, including indebtedness under its U.S. revolving loan facility, to finance any such acquisition.
The Company's secured credit facilities and the indentures with respect to the 9% Debentures and the 13-1/4% Exchange Debentures contain restrictive covenants that, among other things, limit the Company's ability to incur debt, sell assets and engage in certain transactions. Management does not expect these limitations to have a material effect on the Company's business or results of operations. The Company is in compliance with all financial and operating covenants contained in such financing agreements and believes that it will continue to be in compliance during 2000 with all such covenants.
Year 2000 Issues
Since 1997, the Company incurred approximately $2.7 million in connection with its identification, assessment, remediation and testing efforts relating to Year 2000 readiness issues. To date, the Company has not experienced any material disruptions to its businesses or operations as a result of any Year 2000 issues affecting it or any of its customers, suppliers, banks or others. The Company will continue to monitor its systems for Year 2000 issues, although it does not expect to incur any additional material costs relating to Year 2000 issues. Additionally, the Company does not believe that its results of operations in 1999, and in particular the fourth quarter of 1999, were materially impacted as a result of any of its customers purchasing additional products from the Company during such period in anticipation of the year 2000.
Effect of Inflation and Interest Rate Fluctuations
Historically, inflation has not had a material effect on the Company, other than to increase its cost of borrowing. In general, the Company has been able to increase the sales prices of its products to reflect any increases in the prices of raw materials. See "Business--Raw Materials" and "--Sales and Marketing."
Because the Company has indebtedness which bears interest at floating rates, the Company's financial results will be sensitive to changes in prevailing market rates of interest. As of December 31, 1999, the Company had $883.3 million of indebtedness outstanding, of which $424.1 million bore interest at floating rates, taking into account interest rate swap agreements entered into by the Company to mitigate the effect of interest rate fluctuations. Under these agreements, floating rate interest was exchanged for fixed rates of interest based on the three month LIBOR rate, which rate ranges from 5.6% to 6.1%. The notional amounts of these agreements totaled $100.0 million, and the agreements mature in 2002. Depending upon market conditions, the Company may enter into additional interest rate swap or hedge agreements (with counterparties that, in the Company's judgment, have sufficient creditworthiness) to hedge its exposure against interest rate volatility. See "Quantitative and Qualitative Disclosure About Market Risk--Interest Rate Risk."
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000, and establishes accounting and reporting standards for derivative instruments, requiring recognition of all derivatives as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. As required, the Company will adopt SFAS No. 133 in 2001. The Company does not anticipate that the adoption of SFAS No. 133 will have a material impact on its consolidated financial statements.
In September 1999, the Emerging Issues Task Force ("EITF") issued EITF 99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply Agreements," which is effective for all design and development costs incurred after December 31, 1999. EITF 99-5 establishes accounting standards for costs incurred to design and develop molds, dyes and other tools that an entity will not own and that will be used to produce products that will be sold under a long-term arrangement. It has been the Company's policy to expense such costs as incurred; however, as required by EITF 99-5, the Company will begin to capitalize such costs in 2000. The Company does not anticipate that this pronouncement will have a material impact on the Company's consolidated financial statements.
Forward Looking Statements
Statements included in "Management's Discussion and Analysis of Results of Operations and Financial Condition" and elsewhere in this Annual Report on Form 10-K 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 the Securities Exchange Act of 1934, as amended. These forward-looking statements are made based upon management's expectations and beliefs concerning future events impacting the Company and therefore involve a number of uncertainties and risks. As a result, the actual results of operations or financial condition of the Company could differ materially from those expressed or implied in these forward-looking statements. Important factors that could cause the actual results of operations or financial condition of the Company to differ from those expressed or implied in these forward-looking statements include, but are not necessarily limited to, the ability of the Company to effect cost reduction initiatives and realize benefits from capital investments; the ability of the Company to locate or acquire suitable acquisition candidates at reasonable cash flow multiples and on acceptable terms; the Company's ability to assimilate the operations of its acquired businesses into its existing operations; the Company's ability to generate free cash flow to invest in its business and service its indebtedness; limitations and restrictions contained in the Company's instruments and agreements governing its indebtedness; the ability of the Company to retain sales with its major customers; the size and quality of the vegetable, tomato and fruit harvests in the midwest and west regions of the United States; changes in the pricing and availability to the Company of raw materials or the Company's ability generally to pass raw material price increases through to its customers; changes in consumer preferences for different packaging products; competitive pressures, including new product developments or changes in competitors' pricing for products; changes in governmental regulations or enforcement practices; changes in general economic conditions, such as fluctuations in interest rates; changes in labor relations and costs; and other factors described elsewhere in this Annual Report on Form 10-K or in the Company's other filings with the Securities and Exchange Commission.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Market risks relating to the Company's operations result primarily from changes in interest rates. The Company also has limited foreign currency risk associated with its Canadian operations. The Company employs established policies and procedures to manage its exposure to fluctuations in interest rates and the value of foreign currencies. Interest rate and foreign currency transactions are used only to the extent considered necessary to meet the Company's objectives. The Company does not utilize derivative financial instruments for trading or other speculative purposes.
Interest Rate Risk
The Company's interest rate risk management objective is to limit the impact of interest rate changes on its earnings and cash flow and to lower its overall borrowing cost. To achieve its objectives, the Company regularly evaluates the amount of its variable rate debt as a percentage of its aggregate debt. The Company manages its exposure to interest rate fluctuations in its variable rate debt through interest rate swap agreements. These agreements effectively convert interest rate exposure from variable rates to fixed rates of interest without the exchange of the underlying principal amounts. Notes 7 and 8 to the Company's Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K outline the principal amounts, interest rates, fair values and other terms required to evaluate the expected cash flows from these agreements. See also "Management's Discussion and Analysis of Financial Condition and Results of Operations--Effect of Inflation and Interest Rate Fluctuations."
Based on the average outstanding amount of variable rate indebtedness of the Company in 1999, a one percentage point change in the interest rates for the Company's variable rate indebtedness would have impacted the Company's 1999 interest expense by an aggregate of approximately $5.8 million, after taking into account the average outstanding notional amount of the Company's interest rate swap agreements during 1999.
Foreign Currency Exchange Rate Risk
The Company does not conduct a significant portion of its manufacturing or sales activity in foreign markets. Presently, the Company's only foreign activities are conducted in Canada. The Company's reported financial results could be affected, however, by factors such as changes in foreign currency exchange rates in the markets where it operates. When the U.S. dollar strengthens against such foreign currencies, the reported U.S. dollar value of local currency operating profits generally decreases; when the U.S. dollar weakens against such foreign currencies, the reported U.S. dollar value of local currency operating profits generally increases. Since the Company does not have significant foreign operations, the Company does not believe it is necessary to enter into any derivative financial instruments to reduce its exposure to foreign currency exchange rate risk.
Because the Company's Canadian subsidiary operates within its local economic environment, the Company believes it is appropriate to finance such operation with local currency borrowings. In determining the amount of such borrowings, the Company evaluates the operation's short and long-term business plans, tax implications, and the availability of borrowings with acceptable interest rates and terms. This strategy mitigates the risk of reported losses or gains in the event that the Canadian currency strengthens or weakens against the U.S. dollar. Furthermore, the Company's Canadian operating profit is used to repay its local borrowings or is reinvested in Canada, and is not expected to be remitted to the Company or invested elsewhere. As a result, it is not necessary for the Company to mitigate the economic effects of currency rate fluctuations on its Canadian earnings.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See Item 14 below for a listing of financial statements and schedules included therein.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Not applicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2000 in the sections entitled "Election of Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance", and is incorporated herein by reference.
Executive Officers of Holdings
The following table sets forth certain information (ages as of December 31, 1999) concerning the executive officers of Holdings.
Name Age Position - ---- --- --------
R. Philip Silver............. 57 Chairman of the Board and Co-Chief Executive Officer D. Greg Horrigan............. 56 President and Co-Chief Executive Officer Harley Rankin, Jr............ 60 Executive Vice President, Chief Financial Officer and Treasurer Frank W. Hogan, III.......... 39 Vice President, General Counsel and Secretary Glenn A. Paulson............. 56 Vice President--Corporate Development Stephen J. Sweeney........... 43 Vice President and Controller
Executive Officers of Containers
The following table sets forth certain information (ages as of December 31, 1999) concerning the executive officers of Containers.
Name Age Position - ---- --- --------
James D. Beam................ 56 President Gary M. Hughes............... 57 Executive Vice President Gerald T. Wojdon............. 63 Executive Vice President William R. McLennan.......... 41 Senior Vice President Joseph A. Heaney............. 46 Vice President--Finance H. Schuyler Todd............. 59 Vice President--Human Resources John Wilbert................. 41 Vice President--Operations
Executive Officers of Plastics
The following table sets forth certain information (ages as of December 31, 1999) concerning the executive officers of Plastics.
Name Age Position - ---- --- -------- Russell F. Gervais........... 56 President Alan H. Koblin............... 47 Senior Vice President--Operations Charles Minarik.............. 62 Senior Vice President--Sales, Marketing and Commercial Development Donald E. Bliss.............. 48 Vice President--Sales Howard H. Cole............... 54 Vice President--Human Resources/ Administration Colleen J. Jones............. 39 Vice President--Finance
Mr. Silver has been Chairman of the Board and Co-Chief Executive Officer of Holdings since March 1994. Mr. Silver is one of the founders of the Company and was formerly President of Holdings. Mr. Silver has been a Director of Holdings since its inception. Mr. Silver has been a Director of Containers since its inception in August 1987 and Vice President of Containers since May 1995. Mr. Silver has been a Director of Plastics since its inception in August 1987 and Chairman of the Board of Plastics since March 1994. Prior to founding the Company in 1987, Mr. Silver was a consultant to the packaging industry. Mr. Silver was President of Continental Can Company from June 1983 to August 1986.
Mr. Horrigan has been President and Co-Chief Executive Officer of Holdings since March 1994. Mr. Horrigan is one of the founders of the Company and was formerly Chairman of the Board of Holdings. Mr. Horrigan has been a Director of Holdings since its inception. Mr. Horrigan has been Chairman of the Board of Containers and a Director of Plastics since their inception in August 1987. Mr. Horrigan was Executive Vice President and Operating Officer of Continental Can Company from 1984 to 1987.
Mr. Rankin has been Executive Vice President and Chief Financial Officer of Holdings since its inception and Treasurer of Holdings since January 1992. Mr. Rankin has been Vice President of Containers and Plastics since January 1991 and May 1991, respectively, and was Treasurer of Plastics from January 1994 to December 1994. Prior to joining the Company, Mr. Rankin was Senior Vice President and Chief Financial Officer of Armtek Corporation. Mr. Rankin was Vice President and Chief Financial Officer of Continental Can Company from November 1984 to August 1986.
Mr. Hogan has been Vice President, General Counsel and Secretary of Holdings since June 1997. Mr. Hogan has also been Vice President, General Counsel and Secretary of Containers and Plastics since June 1997. From September 1995 until June 1997, Mr. Hogan was a partner at the law firm of Winthrop, Stimson, Putnam & Roberts. From April 1988 to September 1995, Mr. Hogan was an associate at such firm.
Mr. Paulson has been Vice President--Corporate Development of Holdings since January 1996. Mr. Paulson has also been Vice President of Containers since January 1999. Mr. Paulson was employed by Containers to manage the transition of AN Can from August 1995 to December 1995. From January 1989 to July 1995, Mr. Paulson was employed by ANC, last serving as Senior Vice President and General Manager, Food Metal and Specialty, North America. Prior to his employment with ANC, Mr. Paulson was President of the beverage packaging operations of Continental Can Company.
Mr. Sweeney has been Vice President and Controller of Holdings since April 1999. Mr. Sweeney has also been Vice President of Containers and Plastics since April 1999. From August 1990 to April 1999, Mr. Sweeney was Controller and Chief Accounting Officer of Parsons & Whittemore, Inc., a pulp and paper company. Prior to August 1990, Mr. Sweeney was employed by Ernst & Young LLP, last serving as Audit Senior Manager.
Mr. Beam has been President of Containers since July 1990. From September 1987 to July 1990, Mr. Beam was Vice President--Marketing & Sales of Containers. Mr. Beam was Vice President and General Manager of Continental Can Company, Western Food Can Division, from March 1986 to September 1987.
Mr. Hughes has been Executive Vice President of Containers since January 1998. Previously, Mr. Hughes was Vice President--Sales & Marketing of Containers since July 1990. From February 1988 to July 1990, Mr. Hughes was Vice President, Sales and Marketing of the Beverage Division of Continental Can Company. Prior to February 1988, Mr. Hughes was employed by Continental Can Company in various sales positions.
Mr. Wojdon has been Executive Vice President of Containers since January 1998. Previously, Mr. Wojdon was Vice President--Operations of Containers since September 1987. From August 1982 to August 1987, Mr. Wojdon was General Manager of Manufacturing of the Can Division of the Carnation Company.
Mr. McLennan has been Senior Vice President of Containers since June 1999. Prior to that, Mr. McLennan was Vice President - Finance at R.R. Donnelley & Sons Co. since January 1997. From June 1996 through December 1996, Mr. McLennan was Assistant Corporate Controller at R.R. Donnelley & Sons Co. From March 1995 to May 1996, Mr. McLennan was employed by Tenneco Packaging Inc. as Manager, Business Development.
Mr. Heaney has been Vice President--Finance of Containers since October 1995. From September 1990 to October 1995, Mr. Heaney was Controller, Food Metal and Specialty Division of ANC. From August 1977 to August 1990, Mr. Heaney was employed by ANC and American Can Company in various divisional, regional and plant finance/accounting positions.
Mr. Todd has been Vice President--Human Resources of Containers since April 1999. From September 1987 to April 1999, Mr. Todd was Director of Human Resources of Containers. Previously, Mr. Todd was employed for approximately eleven years by the Can Division of the Carnation Company as Industrial Relations Manager.
Mr. Wilbert has been Vice President--Operations of Containers since January 1998. From October 1992 to January 1998, Mr. Wilbert was Area Manager of Operations of Containers. Prior to 1992, Mr. Wilbert was employed by Containers in various positions.
Mr. Gervais has been President of Plastics since December 1992. From September 1989 to December 1992, Mr. Gervais was Vice President--Sales & Marketing of Plastics. From March 1984 to September 1989, Mr. Gervais was President and Chief Executive Officer of Aim Packaging, Inc.
Mr. Koblin has been Senior Vice President--Operations of Plastics since January 2000. Previously, Mr. Koblin was Vice President--Sales & Marketing of Plastics since December 1994. From 1992 to 1994, Mr. Koblin was Director of Sales & Marketing of Plastics. From 1990 to 1992, Mr. Koblin was Vice President of Churchill Industries.
Mr. Minarik has been Senior Vice President--Sales, Marketing and Commercial Development since January 2000. Previously, he was Vice President--Operations and Commercial Development of Plastics since May 1993. From February 1991 to August 1992, Mr. Minarik was President of Wheaton Industries Plastics Group. Mr. Minarik was Vice President--Marketing of Constar International, Inc. from March 1983 to February 1991.
Mr. Bliss has been Vice President--Sales of Plastics since January 2000. From November 1993 to December 1999, Mr. Bliss was National Sales Director at Plastics. Prior to that, Mr. Bliss was employed by Graham Packaging Company, last serving as Regional Sales Director.
Mr. Cole has been Vice President--Human Resources/Administration and Assistant Secretary of Plastics since September 1987. From April 1986 to September 1987, Mr. Cole was Manager of Personnel of the Monsanto Engineered Products Division of Monsanto Company.
Ms. Jones has been Vice President--Finance of Plastics since December 1994 and Assistant Secretary of Plastics since November 1993. From November 1993 to December 1994, Ms. Jones was Corporate Controller of Plastics and from July 1989 to November 1993, she was Manager--Finance of Plastics. From July 1982 to July 1989, Ms. Jones was an Audit Manager for Ernst & Young LLP.
Item 11.
Item 11. Executive Compensation.
The information required by this Item is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2000 in the sections entitled "Election of Directors--Compensation of Directors", "Executive Compensation" and "Compensation Committee Interlocks and Insider Participation", and is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2000 in the section entitled "Security Ownership of Certain Beneficial Owners and Management", and is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions.
The information required by this Item is set forth in the Company's Proxy Statement for its Annual Meeting of Stockholders to be held on May 23, 2000 in the section entitled "Certain Relationships and Related Transactions", and is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a)
All other financial statements and schedules not listed have been omitted because they are not applicable or not required, or because the required information is included in the consolidated financial statements or notes thereto.
Exhibits:
Exhibit Number Description ------ -----------
3.1 Restated Certificate of Incorporation of Holdings(incorporated by reference to Exhibit 3.1 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 000-22117).
3.2 Amended and Restated By-laws of Holdings (incorporated by reference to Exhibit 3.2 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No.000-22117).
4.1 Indenture, dated as of July 22, 1996, between Holdings and State Street Bank & Trust Company (as successor to Fleet National Bank) as Trustee, with respect to the 13-1/4% Exchange Debentures (incorporated by reference to Exhibit 4.10 filed with Holdings' Amendment No. 2 to Registration Statement on Form S-4, dated October 31, 1996, Registration Statement No. 33-9979).
4.2 Form of Holdings' Subordinated Debentures due 2006 (incorporated by reference to Exhibit 4.11 filed with Holdings' Amendment No. 2 to Registration Statement on Form S-4, dated October 31, 1996, Registration Statement No. 33-9979).
4.3 Indenture, dated as of June 9, 1997, between Holdings (as successor to Silgan Corporation) and The First National Bank of Chicago, as trustee, with respect to the 9% Debentures (incorporated by reference to Exhibit 4.1 filed with Holdings' Current Report on Form 8-K, dated June 9, 1997, Commission File No. 000-22117).
4.4 First Supplemental Indenture, dated as of June 24, 1997 among Holdings, Silgan Corporation and The First National Bank of Chicago, as trustee, to the Indenture, dated as of June 9, 1997, between Holdings (as successor to Silgan Corporation) and The First National Bank of Chicago, as trustee, with respect to the 9% Debentures (incorporated by reference to Exhibit 4.2 filed with Holdings' Registration Statement on Form S-4, dated July 8, 1997, Registration Statement No. 333-30881).
4.5 Form of Holdings' 9% Senior Subordinated Debentures due 2009 (incorporated by reference to Exhibit 4.10 filed with Holdings' Registration Statement on Form S-4, dated July 8, 1997, Registration Statement No. 333-30881).
10.1 Stockholders Agreement, dated as of December 21, 1993, among R. Philip Silver, D. Greg Horrigan, The Morgan Stanley Leveraged Equity Fund II, L.P., Bankers Trust New York Corporation, First Plaza Group Trust and Holdings (incorporated by reference to Exhibit 3 filed with Holdings' Current Report on Form 8-K, dated March 25, 1994, Commission File No. 33-28409).
10.2 Amendment to Stockholders Agreement, dated as of February 14, 1997, among R. Philip Silver, D. Greg Horrigan, The Morgan Stanley Leveraged Equity Fund II, L.P., Bankers Trust New York Corporation, and Holdings (incorporated by reference to Exhibit 10.42 filed with Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 000-22117).
Exhibit Number Description ------ -----------
+10.3 Amended and Restated Management Services Agreement, dated as of February 14, 1997, between S&H Inc. and Holdings (incorporated by reference to Exhibit 10.25 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 000-22117).
+10.4 Amended and Restated Management Services Agreement, dated as of February 14, 1997, between S&H Inc. and Containers (incorporated by reference to Exhibit 10.26 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 000-22117).
+10.5 Amended and Restated Management Services Agreement, dated as of February 14, 1997, between S&H Inc. and Plastics (incorporated by reference to Exhibit 10.27 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 000-22117).
10.6 Credit Agreement, dated as of July 29, 1997, among Holdings, Containers, Plastics, certain other subsidiaries, various banks, Bankers Trust Company, as Administrative Agent and as a Co-Arranger, Bank of America National Trust & Savings Association, as Syndication Agent and as a Co-Arranger, Goldman Sachs Credit Partners L.P., as Co-Documentation Agent and as a Co-Arranger, and Morgan Stanley Senior Funding, Inc., as Co-Documentation Agent and as a Co-Arranger (incorporated by reference to Exhibit 99.1 filed with Holdings' Current Report on Form 8-K, dated August 8, 1997, Commission File No. 000-22117).
10.7 Security Agreement, dated as of July 29, 1997, among Holdings, Containers, Plastics, certain other subsidiaries of any of them and Bankers Trust Company, as Collateral Agent (incorporated by reference to Exhibit 99.2 filed with Holdings' Current Report on Form 8-K, dated August 8, 1997, Commission File No. 000-22117).
10.8 Pledge Agreement dated as of July 29, 1997, made by Holdings, Containers, Plastics and Silgan Containers Manufacturing Corporation (as successor to California-Washington Can Corporation and SCCW Can Corporation), as Pledgors, in favor of Bankers Trust Company, as Collateral Agent and as Pledgee (incorporated by reference to Exhibit 99.3 filed with Holdings' Current Report on Form 8-K, dated August 8, 1997, Commission File No. 000-22117).
10.9 Borrowers/Subsidiaries Guaranty, dated as of July 29, 1997, made by Holdings, Containers, Plastics and Silgan Containers Manufacturing Corporation (as successor to California-Washington Can Corporation and SCCW Can Corporation) (incorporated by reference to Exhibit 99.4 filed with Holdings' Current Report on Form 8-K, dated August 8, 1997, Commission File No. 000-22117).
Exhibit Number Description ------ -----------
10.10 Purchase Agreement, dated as of September 3, 1993, between Containers and Del Monte (incorporated by reference to Exhibit 1 filed with Holdings' Current Report on Form 8-K, dated January 5, 1994, Commission File No. 33-28409).
10.11 Amendment to Purchase Agreement, dated as of December 10, 1993, between Containers and Del Monte (incorporated by reference to Exhibit 2 filed with Holdings' Current Report on Form 8-K, dated January 5, 1994, Commission File No. 33-28409).
10.12 Asset Purchase Agreement, dated as of June 2, 1995, between ANC and Containers (incorporated by reference to Exhibit 1 filed with Holdings' Current Report on Form 8-K dated August 14, 1995, Commission File No. 33-28409).
10.13 Purchase Agreement, dated as of June 1, 1998, by and among Campbell, Silgan Can Company and Containers (incorporated by reference to Exhibit 2 filed with Holdings' Current Report on Form 8-K dated June 15, 1998, Commission File No. 000-22117).
10.14 Underwriting Agreement, dated as of February 13, 1997, among Holdings, Silgan Corporation, Containers, Plastics, The Morgan Stanley Leveraged Equity Fund II, L.P., Bankers Trust New York Corporation and the underwriters listed on Schedule I thereto (incorporated by reference to Exhibit 10.40 filed with Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 1996, Commission File No. 000-22117).
10.15 Placement Agreement between Silgan Corporation and Morgan Stanley & Co. Incorporated, dated June 3, 1997 (incorporated by reference to Exhibit 99.1 filed with Holdings' Current Report on Form 8-K dated June 9, 1997, Commission File No. 000-22117).
+10.16 Employment Agreement, dated as of September 14, 1987, between James Beam and Canaco Corporation (Containers) (incorporated by reference to Exhibit 10(vi) filed with Silgan Corporation's Registration Statement on Form S-1, dated January 11, 1988, Registration Statement No. 33-18719).
+10.17 Amended and Restated Employment Agreement, dated as of June 18, 1987, between Gerald Wojdon and Canaco Corporation (Containers) (incorporated by reference to Exhibit 10(vii) filed with Silgan Corporation's Registration Statement on Form S-1, dated January 11, 1998, Registration Statement No. 33-18719).
+10.18 Employment Agreement, dated as of September 1, 1989, between Silgan Corporation, InnoPak Plastics Corporation (Plastics), Russell F. Gervais and Aim Packaging, Inc. (incorporated by reference to Exhibit 5 filed with Silgan Corporation's Report on Form 8-K, dated March 15, 1989, Commission File No. 33-18719).
Exhibit Number Description ------ -----------
*+10.19 Employment Agreement dated as of August 1, 1995 between Containers (as assignee of Holdings) and Glenn A. Paulson, as amended pursuant to an amendment dated March 1, 1997.
+10.20 InnoPak Plastics Corporation (Plastics) Pension Plan for Salaried Employees (incorporated by reference to Exhibit 10.32 filed with Silgan Corporation's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 33-18719).
+10.21 Containers Pension Plan for Salaried Employees (incorporated by reference to Exhibit 10.34 filed with Silgan Corporation's Annual Report on Form 10-K for the year ended December 31, 1988, Commission File No. 33-18719).
+10.22 Silgan Holdings Inc. Fourth Amended and Restated 1989 Stock Option Plan (incorporated by reference to Exhibit 10.21 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 000-22117).
+10.23 Form of Holdings Nonstatutory Stock Option Agreement (incorporated by reference to Exhibit 10.22 filed with Holdings' Annual Report on Form 10-K for the year ended December 31, 1996, Commission File No. 000-22117).
*12 Computations of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 1999, 1998, and 1997.
*21 Subsidiaries of the Registrant.
*23 Consent of Ernst & Young LLP.
*27 Financial Data Schedule for the fiscal year ended December 31, 1999.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1999.
- ----------------- *Filed herewith. +Management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SILGAN HOLDINGS INC.
Date: March 14, 2000 By /s/ R. Philip Silver -------------------- R. Philip Silver Chairman of the Board and Co-Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature Title Date - --------- ----- ----
Chairman of the Board and /s/ R. Philip Silver Co-Chief Executive Officer - -------------------- (Principal Executive Officer) March 14, 2000 (R. Philip Silver)
/s/ D. Greg Horrigan President, Co-Chief Executive - -------------------- Officer and Director March 14, 2000 (D. Greg Horrigan)
/s/ Leigh J. Abramson March 14, 2000 - -------------------- Director (Leigh J. Abramson)
/s/ Thomas M. Begel March 14, 2000 - -------------------- Director (Thomas M. Begel)
/s/ Jeffrey C. Crowe March 14, 2000 - -------------------- Director (Jeffrey C. Crowe)
/s/ Michael M. Janson March 14, 2000 - --------------------- Director (Michael M. Janson)
Executive Vice President, Chief /s/ Harley Rankin, Jr. Financial Officer and Treasurer - --------------------- (Principal Financial Officer) March 14, 2000 (Harley Rankin, Jr.)
/s/ Stephen J. Sweeney Vice President and Controller - ---------------------- (Principal Accounting Officer) March 14, 2000 (Stephen J. Sweeney)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders Silgan Holdings Inc.
We have audited the accompanying consolidated financial statements and schedules of Silgan Holdings Inc. as listed in the accompanying index to the financial statements (Item 14(a)). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements listed in the accompanying index to the financial statements (Item 14(a)) present fairly, in all material respects, the consolidated financial position of Silgan Holdings Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Stamford, Connecticut January 28, 2000
See accompanying notes.
Continued on following page.
See accompanying notes.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies
Nature of Business. Silgan Holdings Inc. ("Holdings"; together with its wholly owned subsidiaries, the "Company") is a company owned by Holdings' management, The Morgan Stanley Leveraged Equity Fund II, L. P. ("MSLEF II"), an affiliate of Morgan Stanley Dean Witter & Co. ("MS & Co.") and public shareholders. Holdings, through its wholly owned operating subsidiaries, Silgan Containers Corporation ("Containers") and Silgan Plastics Corporation ("Plastics"), is predominantly engaged in the manufacture and sale of steel and aluminum containers for human and pet food products. The Company also manufactures custom designed plastic containers used for personal care and health products, and specialty packaging items used in the food and beverage industries, including metal caps and closures, plastic bowls and paperboard containers. Principally all of the Company's businesses are based in the United States.
Principles of Consolidation. The consolidated financial statements include the accounts of Holdings and its subsidiaries, all of which are wholly owned. All significant intercompany transactions have been eliminated.
Revenue Recognition. Revenues are recognized when goods are shipped.
Foreign Currency Translation. The functional currency for the Company's foreign operations is the Canadian dollar. Balance sheet accounts of the Company's foreign affiliates are translated at exchange rates in effect at the balance sheet date, while revenue and expense accounts are translated at average rates prevailing during the year. Translation adjustments are reported as a component of deficiency in stockholders' equity and other comprehensive income.
Use of Estimates. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates.
Cash and cash equivalents. Cash equivalents represent short-term, highly liquid investments which are readily convertible to cash and have maturities of three months or less at the time of purchase. The carrying values of these assets approximate their fair values. As a result of the Company's cash management system, checks issued and presented to the banks for payment may create negative cash balances. Checks outstanding in excess of related cash balances totaling approximately $92.5 million at December 31, 1999 and $90.6 million at December 31, 1998 are included in trade accounts payable.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies (continued)
Inventories. Inventories are valued at the lower of cost or market (net realizable value) and the cost is principally determined on the last-in, first-out basis (LIFO).
Property, Plant and Equipment, Net. Property, plant and equipment are stated at historical cost less accumulated depreciation. Major renewals and betterments that extend the life of an asset are capitalized and repairs and maintenance expenditures are charged to expense as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of depreciable assets. The principal estimated useful lives are 35 years for buildings and range between 3 to 18 years for machinery and equipment. Leasehold improvements are amortized over the shorter of the life of the related asset or the life of the lease.
Interest incurred on amounts borrowed in connection with the installation of major machinery and equipment acquisitions is capitalized. Capitalized interest of $0.7 million in 1999 was recorded as part of the cost of the assets to which it relates and is amortized over the assets' estimated useful life.
The carrying value of property, plant and equipment is assessed annually and/or when factors indicating an impairment are present. Impairment losses are recognized when events or changes in circumstances indicate that the undiscounted cash flows generated by the assets are less than the carrying value of such assets. Impairment losses are then measured by comparing the fair value of such assets to their carrying amount.
Goodwill. Excess of cost over the fair value of net assets acquired (or goodwill) is amortized on a straight-line basis principally over 40 years. The carrying amount of goodwill is reviewed when facts and circumstances suggest that it may be impaired. If this review indicates that goodwill will not be recoverable, as determined based on the estimated undiscounted cash flows of the business acquired over the remaining amortization period, the carrying amount of the goodwill is reduced by the estimated shortfall of cash flows. In addition, the Company assesses long-lived assets for impairment under Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Under these rules, goodwill associated with assets acquired in a purchase business combination is included in impairment evaluations when events or circumstances exist that indicate the carrying amount of those assets may not be recoverable. Accumulated amortization of goodwill at December 31, 1999 and 1998 was $16.5 million and $12.6 million, respectively.
Other Assets. Other assets consist principally of debt issuance costs which are being amortized on a straight-line basis over the terms of the related debt agreements (6 to 12 years). Other intangible assets are amortized over their expected useful lives using the straight-line method.
Income Taxes. The Company accounts for income taxes using the liability method in accordance with SFAS No. 109, "Accounting for Income Taxes." The provision for income taxes includes federal, state, and foreign income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. No U.S. income taxes have been provided on the unremitted earnings of foreign subsidiaries since the Company's policy is to permanently reinvest such earnings.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
1. Summary of Significant Accounting Policies (continued)
Stock Based Compensation. The Company has elected to follow Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations, in accounting for its employee stock options. Under APB No. 25, no compensation expense is recognized when the exercise price of employee stock options equals the market price of the underlying stock on the date of grant.
Earnings Per Share. Earnings per share amounts for all periods presented conform to the requirements of SFAS No. 128, "Earnings Per Share." SFAS No. 128 requires the disclosure of basic and diluted earnings per share. Basic earnings per share is computed by dividing income available to common stockholders (the numerator) by the weighted average number of common shares outstanding (the denominator) for the period. The computation of diluted earnings per share is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares had been issued. See Note 14.
New Accounting Standards. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments, requiring recognition of all derivatives as either assets or liabilities in the statement of financial position and measurement of those instruments at fair value. As required, the Company will adopt SFAS No. 133 in 2001 and does not anticipate that this pronouncement will have a material impact on the Company's consolidated financial statements.
In September 1999, the Emerging Issues Task Force ("EITF") issued EITF 99-5, "Accounting for Pre-Production Costs Related to Long-Term Supply Agreements," which is effective for all design and development costs incurred after December 31, 1999. EITF 99-5 establishes accounting standards for costs incurred to design and develop molds, dyes and other tools that an entity will not own and that will be used to produce products that will be sold under a long-term arrangement. It has been the Company's policy to expense such costs as incurred; however, as required by EITF 99-5, the Company will begin to capitalize such costs in 2000. The Company does not anticipate that this pronouncement will have a material impact on the Company's consolidated financial statements.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
2. Rationalization Charges and Acquisition Reserves
Since 1995, the Company completed three acquisitions in its metal food container business, including the Food Metal and Specialty business ("AN Can") of American National Can Company in 1995 and the steel container manufacturing business ("CS Can") of Campbell Soup Company ("Campbell") in June 1998. Acquisition reserves established in connection with the purchase of AN Can aggregated $49.5 million and related to plant exit costs ($6.6 million), employee termination and severance ($26.1 million) which included the elimination of an estimated 500 plant, selling and administrative employees, as well as the assumption of certain liabilities and the elimination of selling, general and administrative functions ($16.8 million). Since the acquisition, the Company incurred expenditures of $5.9 million related to plant exit costs, $14.3 million related to employee termination and severance and $10.4 million related to the payment of certain assumed liabilities. Although the Company has completed its restructuring plan, the timing of cash payments relating to these costs has been dependent upon, among other things, the expiration of binding labor obligations assumed by the Company and complexities associated with qualifying different facilities with the Food and Drug Administration and other customer's requirements. Accordingly, cash payments related to this reserve are expected through 2001. Acquisition reserves established in connection with the purchase of CS Can aggregated $3.8 million and relate primarily to certain risks and liabilities assumed with the business.
In connection with its 1998 acquisitions of CS Can, Clearplass Containers, Inc. and Winn Packaging Co., the Company developed plans to integrate these businesses into its operations by rationalizing certain of the acquired plant operations. Pursuant to these plans, which were finalized in 1999, the Company accrued liabilities of $5.4 million, of which $4.9 million related to plant exit costs and other acquisition liabilities and $0.5 million related to employee severance and relocation costs. The timing of cash payments relating to these rationalization activities is dependant upon, among other things, the time required to obtain necessary environmental permits and approvals in connection with a consent order with the U.S. Environmental Protection Agency to which the Company is subject as a result of its acquisition of CS Can and complexities associated with the transfer of the labor force of Campbell for CS Can to the Company. The Company expects that principally all actions under these plans will be completed by the end of 2001.
During 1999, the Company initiated and concluded a study to evaluate the long-term utilization of all assets of its metal food container business. As a result, during the third quarter of 1999, the Company recorded a non-cash pre-tax charge to earnings of $24.2 million to reduce the carrying value of those assets determined to be surplus or obsolete. During the fourth quarter of 1999, the Company completed its plan to close two West Coast metal food container facilities. The plan includes the elimination of approximately 130 plant employees, termination of two operating leases and other plant related exit costs. This decision resulted in a fourth quarter pre-tax charge to earnings of $11.9 million, which includes $7.3 million for the non-cash write down in carrying value of certain assets determined to be impaired. The Company expects that principally all actions under the plan will be completed by the end of 2000.
Management's continuing efforts to integrate and rationalize its operations are part of the Company's strategy to maximize production efficiencies. Activity in the Company's rationalization and acquisition reserves since December 31, 1998 is summarized as follows (dollars in thousands):
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
2. Rationalization Charges and Acquisition Reserves (continued)
At December 31, 1999 and 1998, rationalization and acquisition reserves were included in the Consolidated Balance Sheets as follows:
1999 1998 ---- ---- (Dollars in thousands) Accrued expenses and other current liabilities .................. $14,523 $15,063 Other long-term liabilities .............. 7,530 9,781 ------- ------- $22,053 $24,844 ======= =======
3. Comprehensive Income
Comprehensive income is reported in the Consolidated Statements of Deficiency in Stockholders' Equity. Amounts included in accumulated other comprehensive income (loss) at December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- (Dollars in thousands)
Foreign currency translation ............. $(173) $(703) Additional minimum pension liability ..... (100) (20) ----- ----- Accumulated other comprehensive income (loss) .................... $(273) $(723) ===== =====
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
4. Inventories
The components of inventories at December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- (Dollars in thousands)
Raw materials ....................... $ 33,453 $ 34,224 Work-in-process ..................... 49,799 52,415 Finished goods ...................... 148,135 147,339 Spare parts and other ............... 10,493 10,927 -------- -------- 241,880 244,905
Adjustment to value inventory at cost on the LIFO method ....... 7,691 5,180 -------- -------- $249,571 $250,085 ======== ========
The amount of inventory recorded on the first-in, first-out method at December 31, 1999 and 1998 was $19.5 million and $16.2 million, respectively.
5. Property, Plant and Equipment, Net
Property, plant and equipment, net, at December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- (Dollars in thousands)
Land ................................ $ 7,173 $ 7,140 Buildings and improvements .......... 104,831 98,009 Machinery and equipment ............. 934,393 890,131 Construction in progress ............ 61,586 56,021 ---------- ---------- 1,107,983 1,051,301 Accumulated depreciation ............ (462,468) (379,835) ---------- ---------- Property, plant and equipment, net .......................... $ 645,515 $ 671,466 ========== ==========
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
6. Other Non-Current Assets
Other non-current assets at December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- (Dollars in thousands)
Debt issuance costs ................. $14,853 $14,905 Intangible pension asset ............ 7,364 10,707 Other ............................... 10,450 5,547 ------- ------- 32,667 31,159 Accumulated amortization ............ (3,982) (2,386) ------- ------- $28,685 $28,773 ======= =======
7. Long-Term Debt
Long-term debt obligations at December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- (Dollars in thousands)
Bank Debt: Bank Revolving Loans .................. $125,200 $135,900 Bank A Term Loans ..................... 194,047 223,900 Bank B Term Loans ..................... 190,495 192,449 Canadian Bank Facility ................ 14,312 15,586 -------- -------- Total bank debt ..................... 524,054 567,835
Subordinated Debt: 9% Senior Subordinated Debentures ..... 300,000 300,000 13 1/4% Subordinated Debentures ....... 56,206 56,206 Other ................................. 3,000 3,000 -------- -------- Total subordinated debt ............. 359,206 359,206 -------- --------
Total Debt ............................... 883,260 927,041 Less amounts due within one year ...... 39,351 36,065 -------- -------- $843,909 $890,976 ======== ========
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
7. Long-Term Debt (continued)
The aggregate annual maturities of long-term debt obligations at December 31, 1999 are as follows (dollars in thousands):
2000.................... $ 39,351 2001.................... 44,694 2002.................... 60,722 2003.................... 196,607 2004.................... 1,954 2005 and thereafter..... 539,932 -------- $883,260 ========
Bank Credit Agreement - --------------------- The Company's $1.0 billion U.S. senior secured credit facility (the "Credit Agreement") initially provided the Company with (i) $250.0 million of A Term Loans, (ii) $200.0 million of B Term Loans and (iii) up to $550.0 million of Revolving Loans.
The A Term Loans and Revolving Loans mature on December 31, 2003 and the B Term Loans mature on June 30, 2005. Principal of the A Term Loans and B Term Loans is required to be repaid in scheduled annual installments and amounts repaid may not be reborrowed. Principal repayments of $29.9 million and $11.8 million of A Term Loans and $2.0 million and $6.6 million of B Term Loans were made during 1999 and 1998, respectively.
The Credit Agreement requires the Company to prepay the term loans with proceeds received from the incurrence of indebtedness, except proceeds used to refinance other existing indebtedness; with proceeds received from certain assets sales; and, under certain circumstances, with 50% of the Company's excess cash flow, as defined. Generally, prepayments are allocated pro rata to the A Term Loans and B Term Loans and applied first to the scheduled amortization payments in the year of such prepayments and, to the extent in excess thereof, pro rata to the remaining installments of the term loans.
The Credit Agreement provides the Company with a commitment for a revolving credit facility of up to $545.5 million (after giving effect to the reduction of such facility by $4.5 million for the revolving loan facility under the Company's Canadian bank facility) for working capital needs and other general corporate purposes, including acquisitions. Revolving Loans may be borrowed, repaid, and reborrowed over the life of the Credit Agreement until final maturity. At December 31, 1999, there were $125.2 million of Revolving Loans outstanding and, after taking into account outstanding letters of credit of $15.2 million, borrowings available under the revolving credit facility of the Credit Agreement were $405.1 million. The Company does not anticipate repaying the outstanding Revolving Loan borrowings prior to December 31, 2000 and, therefore, has recorded such borrowings as long-term debt. Seasonal Revolving Loan borrowings during the year will be classified as current obligations.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
7. Long-Term Debt (continued)
Bank Credit Agreement (continued) - ---------------------
The Company may utilize up to a maximum of $30.0 million of its revolving credit facility under the Credit Agreement for letters of credit as long as the aggregate amount of borrowings of Revolving Loans and letters of credit do not exceed the amount of the commitment under such revolving credit facility. The Credit Agreement provides for the payment of a commitment fee ranging from 0.15% to 0.375% (.25% at December 31, 1999) per annum on the daily average unused portion of commitments available under the revolving credit facility of the Credit Agreement and at December 31, 1999 a 1.375% per annum fee on outstanding letters of credit.
Credit Agreement borrowings may be designated as Base Rate or Eurodollar Rate borrowings. The Base Rate is the higher of (i) 1/2 of 1.0% in excess of the Adjusted Certificate of Deposit Rate, as defined in the Credit Agreement, (ii) 1/2 of 1.0% in excess of the Federal Funds Rate, or (iii) Bankers Trust Company's prime lending rate. Currently, Base Rate borrowings bear interest at the Base Rate plus a margin of 0.125% in the case of A Term Loans and Revolving Loans and at the Base Rate plus a margin of 0.625% in the case of B Term Loans. Eurodollar Rate borrowings currently bear interest at the Eurodollar Rate plus a margin of 1.125% in the case of A Term Loans and Revolving Loans and a margin of 1.625% in the case of B Term Loans. In accordance with the Credit Agreement, the interest rate margin on Base Rate and Eurodollar Rate borrowings will be reset quarterly based upon the Company's Leverage Ratio, as defined in the Credit Agreement. As of December 31, 1999, the interest rate for Base Rate borrowings was 8.625% and the interest rate for Eurodollar Rate borrowings ranged between 6.79% and 7.82%. For 1999, 1998 and 1997, the weighted average annual interest rate paid on all term loans was 6.7%, 7.0%, and 7.9%, respectively. The Company has entered into interest rate swap agreements to convert interest rate exposure from variable to fixed rates of interest on A Term Loans and B Term Loans in an aggregate notional amount of $100.0 million (for a discussion of the interest rate swap agreements, see Note 8).
Because the Company sells metal containers used in fruit and vegetable pack processing, it has seasonal sales. As is common in the industry, the Company must access working capital to build inventory and then carry accounts receivable for some customers beyond the end of the summer and fall packing season. Seasonal accounts are generally settled by year end. Due to the Company's seasonal requirements, the Company incurs short-term indebtedness to finance its working capital requirements. For 1999, 1998 and 1997, the average amount of borrowings under the Company's U. S. revolving credit facility was $308.1 million, $197.5 million and $89.2 million, respectively; the weighted average annual interest rate paid on such borrowings was 6.4%, 6.7%, and 7.8%, respectively; and the highest amount of such borrowings was $404.4 million, $372.0 million, and $182.2 million, respectively.
The indebtedness under the Credit Agreement is guaranteed by Holdings and certain of its U.S. subsidiaries and is secured by a security interest in substantially all of their real and personal property. The stock of certain of the Company's U.S. subsidiaries has been pledged to the lenders under the Credit Agreement. At December 31, 1999, the Company had assets of a U.S. subsidiary of $126.2 million which were restricted and could not be transferred to Holdings or any other subsidiary of Holdings.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
7. Long-Term Debt (continued)
Bank Credit Agreement (continued) - ---------------------
The Credit Agreement contains various covenants which limit, among other things, the ability of the Company and its subsidiaries to grant liens, sell assets and use the proceeds from certain asset sales, make certain payments (including dividends) on its capital stock, incur indebtedness or provide guarantees, make loans or investments, enter into transactions with affiliates, make capital expenditures, engage in any business other than the packaging business, and, with respect to the Company's subsidiaries, issue stock. In addition, the Company is required to meet specified financial covenants including Interest Coverage and Leverage Ratios, each as defined in the Credit Agreement. The Company is currently in compliance with all covenants under the Credit Agreement.
Canadian Bank Facility - ---------------------- The Company, through a wholly owned Canadian subsidiary, has a Canadian bank facility (the "Canadian Bank Facility") with various Canadian banks. The Canadian Bank Facility initially provided the Company's Canadian subsidiaries with Cdn. $26.5 million (U.S. $18.5 million) of term loans, and provides such subsidiaries with up to Cdn. $6.5 million (U.S. $4.5 million) of revolving loans. Principal of the term loans is required to be repaid in annual installments until maturity on December 31, 2003. During 1999, the Company repaid Cdn. $3.2 million (U.S. $2.1 million) of term loans in accordance with terms of the Canadian Bank Facility.
The revolving loans may be borrowed, repaid, and reborrowed until maturity on December 31, 2003.
Revolving loan and term loan borrowings may be designated as Canadian Prime Rate or Bankers Acceptance borrowings. Currently, Canadian Prime Rate borrowings bear interest at the Canadian Prime Rate, as defined in the Canadian Bank Facility, plus a margin of 0.125%. Bankers Acceptance borrowings bear interest at the rate for bankers acceptances plus a margin of 1.125%. Similar to the Credit Agreement, the interest rate margin on both Canadian Prime Rate and Bankers Acceptance borrowings will be reset quarterly based upon the Company's consolidated Leverage Ratio. As of December 31, 1999, the interest rate for Bankers Acceptance borrowings ranged from 6.31% to 6.38% and the interest rate for Canadian Prime Rate borrowings was 6.63%.
The indebtedness under the Canadian Bank Facility is guaranteed by Holdings and certain of its subsidiaries and is secured by a security interest in substantially all of the real and personal property of the Company's Canadian subsidiaries and all of the stock of the Company's Canadian subsidiaries. The Canadian Bank Facility contains covenants which are generally no more restrictive than and are generally similar to the covenants in the Credit Agreement.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
7. Long-Term Debt (continued)
9.0% Senior Subordinated Debentures - ----------------------------------- In June 1997, Holdings issued $300.0 million aggregate principal amount of 9.0% Senior Subordinated Debentures (the "9% Debentures") due June 1, 2009. The 9% Debentures represent general unsecured obligations of Holdings, subordinate in right of payment to obligations under the Credit Agreement and the Canadian Bank Facility and effectively subordinate to all obligations of the subsidiaries of Holdings. Interest on the 9% Debentures is payable semi-annually in cash on the first day of each June and December.
The 9% Debentures are redeemable, at the option of Holdings, in whole or in part, at any time after June 1, 2002 at the following redemption prices (expressed in percentages of principal amount) plus accrued and unpaid interest thereon to the redemption date if redeemed during the twelve month period beginning June 1 of the years set forth below:
Year Redemption Price ---- ---------------- 2002.................... 104.500% 2003.................... 103.375% 2004.................... 102.250% 2005.................... 101.125% 2006 and thereafter..... 100.000%
In addition, at any time on or prior to June 1, 2000, up to 35% of the aggregate principal amount of the 9% Debentures may be redeemed, at the option of Holdings, with the proceeds of one or more equity offerings by Holdings of its common stock at 109% of their principal amount, plus accrued and unpaid interest to the redemption date.
Upon the occurrence of a Change of Control (as defined in the Indenture relating to the 9% Debentures), Holdings is required to make an offer to purchase the 9% Debentures at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of purchase.
The Indenture relating to the 9% Debentures contains covenants which are generally less restrictive than those under the Credit Agreement and Canadian Bank Facility.
13 1/4% Subordinated Debentures - ------------------------------- In June 1997, Holdings exchanged its outstanding 13 1/4% Cumulative Exchangeable Redeemable Preferred Stock (the "Preferred Stock") with a par value of $1,000 per share and a total liquidation value of $56.2 million for a like principal amount of 13 1/4% Subordinated Debentures due 2006 (the "13 1/4% Debentures"). The 13 1/4% Debentures are general obligations of Holdings, subordinate in right of payment to all Senior Indebtedness (as defined in the Indenture relating to the 13 1/4% Debentures), including indebtedness under the Credit Agreement, the Canadian Bank Facility and the 9% Debentures, and effectively subordinate to all obligations of the subsidiaries of Holdings.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
7. Long-Term Debt (continued)
13 1/4% Subordinated Debentures (continued) - -------------------------------
Interest on the 13 1/4% Debentures is payable semi-annually on each January 15 and July 15 in cash or, on or prior to July 15, 2000, at the option of Holdings, in additional 13 1/4% Debentures in an aggregate principal amount equal to such interest. From and after July 15, 2000, interest is payable only in cash. Since their issuance, interest due on the 13 1/4% Debentures has been paid in cash.
The holders of the Preferred Stock were entitled to receive cumulative dividends of 13 1/4% per annum, which were payable quarterly in cash or, on or prior to July 15, 2000 at the sole option of Holdings, in additional shares of Preferred Stock. Dividend payments of $3.2 million in 1997 were paid in additional shares of Preferred Stock.
The 13 1/4% Debentures may be redeemed at any time on or after July 15, 2000, in whole or in part, at the option of Holdings at the following redemption prices (expressed in percentages of principal amount) plus accrued and unpaid interest thereon to the redemption date if redeemed during the twelve month period beginning July 15 in each of the years set forth below:
Year Redemption Price ---- ---------------- 2000.................... 109.938% 2001.................... 106.625% 2002.................... 103.313% 2003 and thereafter..... 100.000%
In addition, on or prior to July 15, 2000, Holdings may redeem all (but not less than all) outstanding 13 1/4% Debentures at a redemption price equal to 110% of their principal amount, plus accrued and unpaid interest to the redemption date, from proceeds of any sale of its common stock.
Upon the occurrence of a Change of Control (as defined in the Indenture relating to the 13 1/4% Debentures), Holdings is required to make an offer to purchase all of the 13 1/4% Debentures at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest to the date of purchase.
The Indenture relating to the 13 1/4% Debentures contains covenants which are generally comparable to or less restrictive than those under the Indenture relating to the 9% Debentures.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
7. Long-Term Debt (continued)
Refinancings - ------------ During 1997, the Company refinanced principally all of its outstanding indebtedness with lower cost indebtedness and equity.
In February 1997, the Company used net proceeds of $67.2 million from its initial public offering of its common stock (the "Offering") to prepay $8.9 million of bank term loans under its previous credit agreement and to redeem the remaining outstanding 13 1/4% Senior Discount Debentures due 2002.
In June 1997, the Company used net proceeds of $291.5 million from the issuance of the 9% Debentures to repay $148.6 million of bank term loans under its previous credit agreement and, for a total redemption amount of $142.9 million, to redeem the entire principal amount ($135.0 million) of the 11 3/4% Senior Subordinated Notes (the "11 3/4% Notes") due 2002.
In July 1997, the Company used proceeds of $452.6 million from the Credit Agreement to refinance all term loans outstanding under the previous credit agreement, including term loan borrowings of $75.0 million made in April 1997.
In connection with these refinancings, the Company incurred extraordinary charges of $16.4 million, net of tax, for the write-off of unamortized debt financing costs of $18.2 million and premiums of $7.9 million paid upon the redemption of the 11 3/4% Notes.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
8. Financial Instruments
The Company's financial instruments recorded on the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, and debt obligations. Due to their short-term maturity, the carrying amounts of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair market value. The following table summarizes the carrying amounts and estimated fair values of the Company's remaining financial instruments at December 31, 1999 and 1998 (bracketed amount represents an unrecognized asset):
1999 1998 -------------------- ------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- (Dollars in thousands)
Bank debt ......................... $524,054 $524,054 $567,835 $567,835 Subordinated debt ................. 356,206 345,702 356,206 369,889 Interest rate swap agreements ..... -- (1,984) -- 973
Methods and assumptions used in estimating fair values are as follows:
Bank debt: The carrying amounts of the Company's variable rate bank borrowings for revolving loans and term loans approximate their fair values.
Subordinated debt: The fair value of the Company's fixed rate borrowings, which are comprised of the 9% Debentures and the 13 1/4% Debentures, are estimated based on quoted market prices.
Interest Rate Swap Agreements: The fair value of the interest rate swap agreements reflect the estimated amounts that the Company would pay or receive at December 31, 1999 and 1998 in order to terminate the contracts based on quoted market prices.
Derivative Financial Instruments - -------------------------------- The Company has interest rate swap agreements with a major bank to manage its exposure to interest rate fluctuations. The interest rate swap agreements effectively convert interest rate exposure from variable rates to fixed rates of interest without the exchange of the underlying principal amounts. During the year, the Company entered into interest rate swap agreements for an aggregate notional amount of $100 million. These agreements are with a financial institution who is expected to fully perform under the terms thereof. These agreements provide for fixed rates of interest based on three month LIBOR ranging from 5.61% to 6.06% and mature in the second quarter of 2002. The notional amounts are used to measure the interest to be paid or received and do not represent the amount of exposure to credit loss. The difference between amounts to be paid or received on interest rate swap agreements are recorded as adjustments to interest expense. During 1999, interest rate swap agreements for an aggregate notional amount of $200 million expired. Net payments of $1.0 million for the year ended December 31, 1999 and $0.3 million for the years ended December 31, 1998 and 1997 were made under the Company's interest rate swap agreements.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
8. Financial Instruments (continued)
Derivative Financial Instruments (continued) - -------------------------------- The Company does not utilize derivative financial instruments for speculative purposes. Its use of derivative financial instruments is limited to interest rate swap agreements which assist in managing exposure to adverse movement in interest rates on a portion of its indebtedness.
Concentration of Credit Risk - ---------------------------- The Company derives a significant portion of its revenue from multi-year supply agreements with many of its customers. Aggregate revenues from its three largest customers accounted for approximately 34.2% of net sales in 1999, 34.1% of its net sales in 1998, and 28.2% of its net sales in 1997. The receivable balances from these customers collectively represented 27.8% and 30.6% of the Company's trade accounts receivable at December 31, 1999 and 1998, respectively. As is common in the packaging industry, the Company provides extended payment terms for some of its customers due to the seasonality of the vegetable and fruit pack processing business. Exposure to losses is dependent on each customers' financial position. The Company performs ongoing credit evaluations of its customers' financial condition and its receivables are not collateralized. The Company maintains an allowance for doubtful accounts which management believes is adequate to cover potential credit losses based on customer credit evaluations, collection history and other information.
9. Commitments and Contingencies
The Company has a number of noncancelable operating leases for office and plant facilities, equipment and automobiles that expire at various dates through 2020. Certain operating leases have renewal options. Minimum future rental payments under these leases are as set forth below for each of the following years (dollars in thousands):
2000.................... $17,505 2001.................... 14,061 2002.................... 9,375 2003.................... 7,334 2004.................... 4,390 2005 and thereafter..... 19,137 ------- $71,802 =======
Rent expense was approximately $18.9 million in 1999, $18.2 million in 1998 and $15.1 million in 1997.
Other than ordinary routine legal proceedings incidental to its business, the Company is not a party to, and none of its properties are subject to, any pending legal proceedings which could have a material adverse effect on its business or financial condition.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
10. Employee Benefit Plans
The Company sponsors defined benefit pension and defined contribution plans which cover substantially all employees, other than union employees covered by multi-employer defined benefit pension plans under collective bargaining agreements. Pension benefits are provided based on either a career average, final pay or years of service formula. With respect to certain hourly employees, pension benefits are provided based on stated amounts for each year of service. It is the Company's policy to fund accrued pension and defined contribution costs in compliance with ERISA requirements. Assets of the plans consist primarily of equity and bond funds.
The Company has unfunded defined benefit health care and life insurance plans that provide postretirement benefits to certain employees. The plans are contributory, with retiree contributions adjusted annually, and contain cost sharing features including deductibles and coinsurance. Retiree health benefits are paid as covered expenses are incurred.
The following table sets forth the funded status of the Company's retirement plans as of December 31, 1999 and 1998:
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
10. Employee Benefit Plans (continued)
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
10. Employee Benefit Plans (continued)
Amounts applicable to the Company's pension plan with projected and accumulated benefit obligations in excess of plan assets at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- (Dollars in thousands)
Projected benefit obligation.............. $63,167 $78,552 Accumulated benefit obligation............ 57,689 70,849 Fair value of plan assets................. 42,848 50,570
During 1999, a pension plan with projected benefit obligations of $17.3 million, accumulated benefit obligations of $16.1 million and plan assets with a fair value of $15.2 million at December 31, 1998 became fully funded as a result of pension plan contributions and recognized actual return on plan assets in excess of benefits and other expenses paid.
The components of the net periodic benefit cost and the weighted average assumptions as of December 31, 1999, 1998 and 1997 are as follows:
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
10. Employee Benefit Plans (continued)
The assumed health care cost trend rates used to determine the accumulated postretirement benefit obligation in 1999 ranged from 7.0% to 8.0% for pre-age 65 retirees and 6.50% to 7.0% for post-age 65 retirees, declining gradually to an ultimate rate of 5.0% in 2007.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in the assumed health care cost trend rates would have the following effects:
1-Percentage 1-Percentage Point Increase Point Decrease -------------- -------------- (Dollars in thousands)
Effect on service and interest cost components in 1999 ......................... $ 370 $ (314) Effect on postretirement benefit obligation as of December 31, 1999 .................... $3,236 $(2,815)
The Company participates in several multi-employer pension plans which provide defined benefits to certain of its union employees. The composition of total pension cost for 1999, 1998, and 1997 in the Company's Consolidated Statements of Income is as follows:
1999 1998 1997 ---- ---- ---- (Dollars in thousands)
Net periodic pension cost ..................... $ 9,106 $ 9,343 $ 6,677 Contributions to multi-employer pension plans .................................... 4,770 4,472 4,223 ------- ------- ------- Total pension costs ........................ $13,876 $13,815 $10,900 ======= ======= =======
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
10. Employee Benefit Plans (continued)
The Company also sponsors defined contribution pension and profit sharing plans covering substantially all employees. Company contributions to these plans are based upon employee contributions and operating profitability. Contributions charged to income for these plans were $5.9 million in 1999, $5.6 million in 1998, and $2.9 million in 1997.
11. Income Taxes
Components of the income tax provision (benefit) are as follows:
1999 1998 1997 ---- ---- ---- (Dollars in thousands)
Current Federal ............... $ 5,879 $ 8,653 $ 100 State ................. 1,143 -- 200 Foreign ............... 2,654 2,100 1,100 ------- ------- -------- 9,676 10,753 1,400 Deferred Federal ............... 5,952 15,967 (16,300) State ................. (1,490) -- (1,600) Foreign ............... 167 164 100 ------- ------- -------- 4,629 16,131 (17,800) ------- ------- -------- $14,305 $26,884 $(16,400) ======= ======= ========
Income tax provision (benefit) is included in the Consolidated Statements of Income as follows:
1999 1998 1997 ---- ---- ---- (Dollars in thousands) Income before extraordinary charges ........ $14,305 $26,884 $ (6,700) Extraordinary charges .......... -- -- (9,700) ------- ------- --------
$14,305 $26,884 $(16,400) ======= ======= ========
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
11. Income Taxes (continued)
The income tax provision (benefit) varied from that computed by using the U.S. statutory rate as a result of the following:
1999 1998 1997 ---- ---- ---- (Dollars in thousands)
Income tax expense at the U.S. federal income tax rate ....... $13,382 $25,483 $ 6,200 State and foreign tax expense, net of federal income benefit ...... (357) 70 260 Amortization of goodwill ............. 906 682 500 Change in valuation allowance ........ -- -- (27,400) Other ................................ 374 649 4,040 ------- ------- -------- $14,305 $26,884 $(16,400) ======= ======= ========
Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets at December 31, 1999 and 1998 are as follows:
1999 1998 ---- ---- (Dollars in thousands) Deferred tax liabilities: Tax over book depreciation ................. $ 97,174 $ 81,567 Book over tax basis of assets acquired ..... 18,349 17,495 Other ...................................... 2,636 6,645 -------- -------- Total deferred tax liabilities .......... 118,159 105,707
Deferred tax assets: Book reserves not yet deductible for tax purposes ......................... 66,675 60,879 Net operating loss carryforwards ........... 53,534 56,334 AMT and other credit carryforwards ......... 9,016 3,854 Other ...................................... 3,527 542 -------- -------- Total deferred tax assets ............... 132,752 121,609 -------- --------
Net deferred tax assets ...................... $ 14,593 $ 15,902 ======== ========
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
11. Income Taxes (continued)
During 1997, the Company determined that it was more likely than not that the future tax benefits arising from its net operating loss carryforwards would be realized in future years due to the Company's continued improvement in earnings and the probability of future taxable income. As a result, in accordance with SFAS No. 109, the Company recognized an income tax benefit of $27.4 million and reduced goodwill by $14.9 million by releasing the entire valuation allowance.
The Company files a consolidated U.S. federal income tax return which includes all domestic subsidiaries except CS Can. At December 31, 1999, the Company had net operating loss carryforwards of approximately $116.6 million (excluding $28.7 million from CS Can) which are available to offset future consolidated taxable income of the group and expire from 2007 through 2012. The Company also has $9.0 million of alternative minimum tax credits which are available indefinitely to reduce future tax payments for regular federal income tax purposes.
Pre-tax income of foreign subsidiaries was $8.1 million in 1999, $6.3 million in 1998 and $3.1 million in 1997. At December 31, 1999, the cumulative amount of unremitted foreign earnings for which no deferred taxes have been provided aggregated $10.1 million. Determination of the amount of unrecognized deferred U.S. income tax liability is not practicable because of the complexities associated with its hypothetical calculation. However, unrecognized foreign tax credit carryforwards would be available to reduce some portion of the U.S. income tax liability.
12. Stock Option Plan
The Company has established a stock option plan (the "Plan") for key employees pursuant to which options to purchase shares of Common Stock of the Company may be granted. Similar stock option plans were established at Containers and Plastics for their key employees. Concurrent with the Offering in February of 1997, all outstanding stock options issued under the Containers and Plastics plans were converted to stock options under the Plan in accordance with the terms of such plans, and the Containers and Plastics stock option plans terminated.
In connection with the Offering, the Company recognized a non-cash, pre-tax charge of $22.5 million for the excess of fair market value over the grant price of stock options converted from Holdings' subsidiaries' stock option plans to the Plan. Under APB No. 25, options granted under the subsidiary plans were considered variable options with a final measurement date at the time of conversion. Paid in capital was credited for $25.3 million which represented the current year charge and amounts accrued in prior years.
The Plan authorizes the granting of options for up to 3,533,417 shares of the Company's Common Stock, which options can be non-qualified or incentive stock options. As of December 31, 1999, there were options for 1,383,314 shares of the Company's Common Stock available for future issuance under the Plan. The exercise price of the stock options granted under the Plan is the fair market value of the Common Stock on the date of such grant. Options that have been granted generally vest ratably over a five year period beginning one year after the grant date and have a term of ten years.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
12. Stock Option Plan (continued)
The following is a summary of stock option activity for each of the three years in the period ended December 31, 1999:
Number of Weighted Average Shares Exercise Price --------- ----------------
Options outstanding December 31, 1996 ........... 1,820,103 $ 2.18
Granted .................................... 120,000 26.91 Exercised .................................. -- -- Canceled ................................... -- -- ---------
Options outstanding December 31, 1997 ........... 1,940,103 3.71
Granted .................................... 95,000 33.92 Exercised .................................. (1,100,580) 2.13 Canceled ................................... -- -- ---------
Options outstanding December 31, 1998 ........... 934,523 8.64
Granted .................................... 115,000 17.61 Exercised .................................. (192,255) 2.67 Canceled ................................... -- -- ---------
Options outstanding December 31, 1999 ........... 857,268 $11.17 =========
The number of options exercisable was 581,488, 645,455, and 1,578,952; the weighted average exercise price was $5.16, $3.12, and $2.08; and the remaining contractual life of options outstanding was 4.8 years, 4.8 years, and 3.7 years at December 31, 1999, 1998 and 1997, respectively. At December 31, 1999, there were 527,268 options outstanding with exercise prices ranging from $0.56 to $4.43 and 330,000 options outstanding with exercise prices ranging from $17.00 to $36.75. Since December 31, 1999, the Company has granted 747,900 additional stock options at a weighted average exercise price of $14.08 per share.
The Company applies APB No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for its stock option plan. Had compensation expense been determined based on the fair value of such awards at the grant date, in accordance with the methods of SFAS No. 123 "Accounting for Stock-Based Compensation," the Company's total and per share net income would have been as follows (dollars in thousands, except per share amounts):
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
12. Stock Option Plan (continued)
1999 1998 1997 ---- ---- ---- Net income: As reported net income ............. $23,930 $45,924 $30,960 Pro forma net income ............... 23,291 45,361 30,752 Basic earnings per share: As reported earnings per share ..... $1.35 $2.41 $1.68 Pro forma earnings per share ....... 1.32 2.39 1.67 Diluted earnings per share: As reported earnings per share ..... $1.32 $2.30 $1.57 Pro forma earnings per share ....... 1.28 2.27 1.56
The weighted average fair value of options granted was $10.10, $14.22 and $10.51 during 1999, 1998, and 1997, respectively. The fair value was estimated using a Black-Scholes option-pricing model based on the following weighted average assumptions for grants made in 1999, 1998, and 1997: risk-free interest rates of 5.2%, 5.6% and 6.1%, respectively; volatility of 50.4%, 38.6% and 31.2%, respectively; dividend yield of 0%; and expected lives of eight, five and five years, respectively. For purposes of the pro forma disclosures, the estimated fair values of the options is amortized to expense over five years.
13. Deficiency in Stockholders' Equity
In February 1997, the Company completed the Offering and amended its Restated Certificate of Incorporation to change its authorized capital stock to 100,000,000 shares of Common Stock, par value $.01 per share, and 10,000,000 shares of preferred stock, par value $.01 per share. In addition, the existing Class A, Class B and Class C Common Stock of Holdings were converted to Common Stock on a one for one basis, and immediately thereafter Holdings effected a 17.133145 to 1 stock split of its outstanding Common Stock.
In the Offering, the Company sold to the underwriters 3,700,000 previously unissued shares of Common Stock at an initial public offering price of $20.00 per share, and received net proceeds of $67.2 million. MSLEF II and Bankers Trust New York Corporation ("BTNY"), existing stockholders of the Company prior to the Offering, sold to the underwriters 1,317,246 and 157,754 previously issued and outstanding shares of Common Stock owned by them, respectively. The Company did not receive any of the proceeds from the sale of the shares of Common Stock by MSLEF II or BTNY.
The Company's Board of Directors previously authorized the repurchase by the Company of up to $70.0 million of its Common Stock from time to time in the open market, through privately negotiated transactions or through block purchases. The Company's repurchases of Common Stock are recorded as treasury stock and result in an increase in deficiency in stockholders' equity. Through December 31, 1999, the Company had repurchased 2,608,975 shares of its Common Stock for $59.9 million, which were initially funded from Revolving Loan borrowings under its Credit Agreement that were repaid with operating cash flows. In 1998, the Company issued 23,500 shares ($0.6 million) of its Common Stock from its treasury stock for stock option exercises.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
14. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (dollars and shares in thousands, except per share amounts):
1999 1998 1997 ---- ---- ---- Numerator: Income before extraordinary charges ....... $23,930 $45,924 $ 50,566 Extraordinary charges ..................... -- -- (16,382) Preferred stock dividend requirement ...... -- -- (3,224) ------- ------- --------
Numerator for basic and dilutive earnings per share - income available to common stockholders ........ $23,930 $45,924 $ 30,960 ======= ======= ========
Denominator: Denominator for basic earnings per share - weighted average shares ......... 17,706 19,003 18,397 Effect of dilutive securities: Employee stock options .................. 492 948 1,326 ------- -------- -------- Denominator for diluted earnings per share - adjusted weighted average shares .......................... 18,198 19,951 19,723 ======= ======= ========
Basic earnings per common share: Income before extraordinary charges ........ $1.35 $2.41 $ 2.75 Extraordinary charges ...................... -- -- (0.89) Preferred stock dividend requirement ....... -- -- (0.18) ----- ----- ------
Net income per basic common share .......... $1.35 $2.41 $ 1.68 ===== ===== ======
Diluted earnings per common share: Income before extraordinary charges ........ $1.32 $2.30 $ 2.56 Extraordinary charges ...................... -- -- (0.83) Preferred stock dividend requirement ....... -- -- (0.16) ----- ----- ------ Net income per diluted common share ........ $1.32 $2.30 $ 1.57 ===== ===== ======
Options to purchase 215,000 to 330,000 shares of Common Stock at prices ranging from $17.00 to $36.75 per share for 1999 and 140,000 shares of Common Stock at prices ranging from $28.875 to $36.75 per share for 1998, respectively, were outstanding but were not included in the computation of diluted earnings per share because the exercise prices for such options were greater than the average market price of the Common Stock and, therefore, the effect would be anti-dilutive.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
15. Related Party Transactions
Pursuant to various management services agreements (the "Management Agreements") entered into between each of Holdings, Containers and Plastics and S&H Inc. ("S&H"), a company wholly owned by Mr. Silver, the Chairman and Co-Chief Executive Officer of Holdings, and Mr. Horrigan, the President and Co-Chief Executive Officer of Holdings, S&H provides Holdings and its subsidiaries with general management, supervision and administrative services.
In consideration for its services, S&H receives a fee of 4.95% of Holdings' consolidated EBDIT (as defined in the Management Agreements) until EBDIT has reached the Scheduled Amount set forth in the Management Agreements, and 3.3% after EBDIT has exceeded the Scheduled Amount up to the Maximum Amount as set forth in the Management Agreements, plus reimbursement for all related out-of-pocket expenses. The total amount paid under the Management Agreements was $5.5 million in 1999, $5.3 million in 1998 and $5.4 million in 1997, and was allocated, based upon EBDIT, as a charge to operating income of each business segment. Under the terms of the Management Agreements, the Company has agreed, subject to certain exceptions, to indemnify S&H and any of its affiliates, officers, directors, employees, subcontractors, consultants or controlling persons against any loss or damage they may sustain arising in connection with the Management Agreements.
In connection with the bank financings entered into during 1997, the banks thereunder (including Bankers Trust Company and an affiliate of MS & Co.) received fees totaling $2.3 million.
For financial advisory services provided by MS & Co. to Holdings and its subsidiaries, MS & Co. was paid $0.5 million in 1999 and 1998 and $0.4 million in 1997 by S&H pursuant to the Management Agreements. As underwriters for the 9% Debentures offering in 1997 and a previous refinancing, MS & Co. received as compensation for its services an aggregate of $9.7 million. In connection with the Offering, the underwriters (including MS & Co.) received fees totaling $5.2 million.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
16. Business Segment Information
The Company is engaged in the packaging industry and has three business units: metal food containers, plastic containers and specialty packaging. The metal food containers segment manufactures steel and aluminum food containers. The plastic container segment manufactures custom designed PET and HDPE containers mainly for personal care and health products. The specialty packaging business includes the manufacture of specialty packaging items used in the food and beverage industries, including steel caps and closures, aluminum roll-on closures, plastic bowls and paperboard containers, as well as the costs associated with the development of new proprietary closure technology. These segments are strategic business operations that offer different products. Each are managed separately because each business produces a packaging product requiring different technology, production, and marketing strategies. Each segment operates primarily in the United States. There are no intersegment sales.
The accounting policies of the reportable segments are the same as those described in Note 1 of Notes to Consolidated Financial Statements. The Company evaluates the performance of the respective business units based upon earnings before interest, taxes, depreciation and amortization, as adjusted for unusual items ("Adjusted EBITDA"). The Company believes Adjusted EBITDA provides important information in enabling it to assess its ability to service and incur debt. Adjusted EBITDA is not intended to be a measure of profitability in isolation or as a substitute for net income or other operating income data prepared in accordance with accounting principles generally accepted in the United States ("GAAP").
Presented below is a table setting forth reportable business segment profit or loss and assets for each of the past three years for the Company's three business segments:
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
16. Business Segment Information (continued)
(1) Excludes rationalization charges of $36.1 million recorded in 1999.
(2) The other category provides information pertaining to the corporate holding company.
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
16. Business Segment Information (continued)
Total segment profit is reconciled to income before income taxes as follows:
1999 1998 1997 ---- ---- ---- (Dollars in millions)
Total segment profit ................. $160.4 $154.3 $147.1 Interest expense and other related financing costs ........... 86.1 81.5 80.7 Rationalization charges .............. 36.1 -- -- Non-cash stock option charge ......... -- -- 22.5 ------ ------ ------ Income before income taxes ........ $ 38.2 $ 72.8 $ 43.9 ====== ====== ======
Total segment assets are reconciled to total assets as follows:
1999 1998 1997 ---- ---- ---- (Dollars in millions)
Total segment assets ................. $1,170.3 $1,207.7 $1,018.0 Deferred tax asset ................... 14.6 15.9 32.0 Other assets ......................... 0.4 0.4 0.6 -------- -------- -------- Total assets ...................... $1,185.3 $1,224.0 $1,050.6 ======== ======== ========
Financial information relating to the Company's operations by geographic area is as follows:
Net Sales -------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in millions)
United States ........................ $1,810.5 $1,696.4 $1,476.5 Canada ............................... 46.3 42.3 34.9 -------- -------- -------- Consolidated ...................... $1,856.8 $1,738.7 $1,511.4 ======== ======== ========
Long-Lived Assets ------------------------- 1999 1998 1997 ---- ---- ---- (Dollars in millions)
United States ........................ $729.7 $762.5 $579.2 Canada ............................... 23.4 18.1 19.4 ------ ------ ------ Consolidated ...................... $753.1 $780.6 $598.6 ====== ====== ======
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
16. Business Segment Information (continued)
Net sales are attributed to the country from which the product was manufactured and shipped.
Metal food container and specialty packaging sales to Nestle Food Company accounted for 12.2%, 13.6% and 16.7% of consolidated net sales of the Company during 1999, 1998, and 1997, respectively. Metal food container sales to Del Monte Corporation accounted for 11.0%, 11.9%, and 11.0% of consolidated net sales of the Company during 1999, 1998, and 1997, respectively. Metal food container and specialty packaging sales to Campbell Soup Company accounted for 11.5% and 8.6% of consolidated net sales of the Company during 1999 and 1998, respectively.
17. Quarterly Results of Operations (Unaudited)
The following table presents the unaudited quarterly results of operations of the Company for the years ended December 31, 1999 and 1998 (dollars in thousands, except per share data):
SILGAN HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999, 1998 and 1997
17. Quarterly Results of Operations (continued)
Earnings per common share amounts are computed independently for each quarter and therefore may not sum to the total for the applicable year.
The results of operations for the third quarter of 1999 include a pre-tax non-cash charge of $24.2 million for the reduction in the carrying value of certain assets of the metal food container business deemed to be surplus or obsolete.
The results of operations for the fourth quarter of 1999 include a pre-tax charge of $11.9 incurred in connection with the Company's planned closing of two West Coast metal food container facilities.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
SILGAN HOLDINGS INC. (Parent Company) CONDENSED BALANCE SHEETS (Dollars in thousands)
December 31, 1999 1998 ---- ---- ASSETS - ------ Current assets: Cash and cash equivalents ....................... $ 49 $ 22 Notes receivable - subsidiaries ................. 36,783 33,987 Interest receivable - subsidiaries .............. 10,088 9,816 Other current assets ............................ 27 25 --------- --------- Total current assets .......................... 46,947 43,850
Notes receivable-subsidiaries ...................... 703,965 738,568 Deferred tax asset ................................. 80,201 77,966 Other non-current assets ........................... 312 403 --------- --------- $ 831,425 $ 860,787 ========= =========
Current liabilities: Current portion of term debt .................... $ 36,783 $ 33,987 Accrued interest payable ........................ 10,088 9,816 Accounts payable and accrued expenses ........... 1,267 858 --------- --------- Total current liabilities ..................... 48,138 44,661
Excess of distributions over investment in subsidiaries ................................... 114,703 121,810 Long-term debt ..................................... 703,965 738,568 Other long-term liabilities ........................ 13,353 13,056
Deficiency in stockholders' equity: Common stock .................................... 201 199 Additional paid-in capital ...................... 118,666 117,911 Accumulated deficit ............................. (108,010) (131,940) Accumulated other comprehensive loss ............ (273) (723) Treasury stock at cost, 2,585,475 and 1,683,503 shares in 1999 and 1998, respectively .................................. (59,318) (42,755) --------- --------- Total deficiency in stockholders' equity ...... (48,734) (57,308) --------- --------- $ 831,425 $ 860,787 ========= =========
See notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - Continued
See notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - Continued
See notes to condensed financial statements.
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - Continued
SILGAN HOLDINGS INC. (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS For the years ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
1. Basis of Presentation
Silgan Holdings Inc. ("Holdings" or the "Parent Company") has two wholly owned subsidiaries, Silgan Containers Corporation ("Containers") and Silgan Plastics Corporation ("Plastics") (collectively with Holdings, the "Company"). Holdings' investment in its subsidiaries is stated at cost plus its share of the undistributed earnings/losses of its subsidiaries. The Parent Company's financial statements should be read in conjunction with the Company's Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.
2. Long-Term Debt
Debt obligations of the Parent Company at December 31, 1999 and 1998 consist of the following:
1999 1998 ---- ---- (Dollars in thousands) Bank Debt: Bank A Term Loans .................... $194,047 $223,900 Bank B Term Loans .................... 190,495 192,449 -------- -------- Total bank debt .................... 384,542 416,349 -------- -------- Subordinated Debt: 9% Senior Subordinated Debentures .... 300,000 300,000 13 1/4% Subordinated Debentures ...... 56,206 56,206 -------- -------- Total subordinated debt ............ 356,206 356,206 -------- --------
Total Debt .............................. 740,748 772,555 Less amounts due within one year ..... 36,783 33,987 -------- -------- $703,965 $738,568 ======== ========
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT - Continued
SILGAN HOLDINGS INC. (Parent Company) NOTES TO CONDENSED FINANCIAL STATEMENTS For the years ended December 31, 1999, 1998 and 1997 (Dollars in thousands)
2. Long-Term Debt (continued)
The aggregate annual maturities of outstanding debt obligations of the Parent Company at December 31, 1999 are as follows (dollars in thousands):
2000.................... $ 36,783 2001.................... 41,758 2002.................... 56,685 2003.................... 66,636 2004.................... 1,954 2005 and thereafter..... 536,932 --------- $740,748 ========
As of December 31, 1999 and 1998, the obligations of Holdings had been pushed down to its subsidiaries.
In 1999 and 1998, Holdings received interest income from its subsidiaries in the same amount as the interest expense it incurred on its obligations.
3. Guarantees
Pursuant to the Credit Agreement, Holdings guarantees all of the indebtedness of its subsidiaries incurred under the Credit Agreement. Holdings' subsidiaries may borrow up to $545.5 million of revolving loans under the Credit Agreement. Holdings' guarantee under the Credit Agreement is secured by a pledge by Holdings of all of the stock of certain of its U.S. subsidiaries. Holdings also guarantees all of the indebtedness of its Canadian subsidiaries under the Canadian Bank Facility. At December 31, 1999, term loans of Cdn. $20.7 million (U.S. $14.3 million) were outstanding under the Canadian Bank Facility. In addition, Holdings' Canadian subsidiaries may borrow up to Cdn. $6.5 million (U.S. $4.5 million) of revolving loans under the Canadian Bank Facility. Holdings' guarantee under the Canadian Bank Facility is secured by a pledge by Holdings of all of the stock of its Canadian subsidiaries.
4. Dividends from Subsidiaries
Cash dividends received by Holdings from its consolidated subsidiaries accounted for by the equity method were $16.6 million, $43.4 million, and $59.2 million for the years ended December 31, 1999, 1998, and 1997, respectively.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(1) Uncollectible accounts written off, net of recoveries.
INDEX TO EXHIBITS
Exhibit No. Exhibit - ----------- -------
10.19 Employment Agreement dated as of August 1, 1995 between Containers (as assignee of Holdings) and Glenn A. Paulson, as amended pursuant to an amendment dated March 1, 1997
12 Computations of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends for the years ended December 31, 1999, 1998 and 1997.
21 Subsidiaries of the Registrant.
23 Consent of Ernst & Young LLP.
27 Financial Data Schedule for the fiscal year ended December 31, 1999.