| SILGAN HOLDINGS INC ITEM 1A RISK FACTORS The following are certain risk factors that could materially and adversely affect our business, financial condition or results of operations |
| OUR INDEBTEDNESS COULD ADVERSELY AFFECT OUR CASH FLOW At December 31, 2005, we had dlra700dtta4 million of total consolidated indebtedness |
| We incurred much of this indebtedness as a result of financing acquisitions |
| In addition, at December 31, 2005, after taking into account letters of credit of dlra24dtta8 million, we had dlra425dtta2 million of revolving loans available to be borrowed under our senior secured credit facility, or the Credit Agreement |
| Under our Credit Agreement, we also have available to us an uncommitted incremental loan facility in an amount of up to an additional dlra350 million, and we may incur additional indebtedness as permitted by our Credit Agreement and our other instruments governing our indebtedness |
| We recently announced that we entered into a purchase agreement with Amcor to purchase its White Cap closures business in Europe, Southeast Asia and South America |
| We indicated that we intend on funding the purchase price for this acquisition either through borrowings under our Credit Agreement or the issuance of new senior subordinated notes by us or one of our subsidiaries, or a combination thereof |
| We also may incur additional debt to fund the operating needs of White Cap |
| A significant portion of our cash flow must be used to service our indebtedness and is therefore not available to be used in our business |
| In 2005, we paid dlra50dtta1 million in interest on our indebtedness |
| Our ability to generate cash flow is subject to general economic, financial, competitive, legislative, regulatory and other factors that may be beyond our control |
| In addition, a substantial portion of our indebtedness bears interest at floating rates, and therefore a substantial increase in interest rates could adversely impact our results of operations |
| Based on the average outstanding amount of our variable rate indebtedness in 2005, a one percentage point change in the interest rates for our variable rate indebtedness would have impacted our 2005 interest expense by an aggregate of approximately dlra3dtta9 million, after taking into account the average outstanding notional amount of our interest rate swap agreements during 2005 |
| Our indebtedness could have important consequences |
| For example, it could: • increase our vulnerability to general adverse economic and industry conditions; • require us to dedicate a significant portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, acquisitions and capital expenditures, and for other general corporate purposes; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • restrict us from making strategic acquisitions or exploiting business opportunities; and • limit, along with the financial and other restrictive covenants in our indebtedness, among other things, our ability to borrow additional funds |
| DESPITE OUR CURRENT LEVELS OF INDEBTEDNESS, WE MAY INCUR ADDITIONAL DEBT IN THE FUTURE, WHICH COULD INCREASE THE RISKS ASSOCIATED WITH OUR LEVERAGE We are continually evaluating and pursuing acquisition opportunities in the consumer goods packaging market and may incur additional indebtedness, including indebtedness under our Credit Agreement, to finance any such acquisitions and to fund any resulting increased operating needs |
| If new debt is added to our current debt levels, the related risks we now face could increase |
| We will have to effect any new financing in compliance with the agreements governing our then existing indebtedness |
| We have indicated that we intend to finance the purchase price for our recently announced acquisition of Amcor’s White Cap closures business in Europe, Southeast Asia and South America by incurring additional indebtedness |
| We may also incur additional debt to fund the operating needs of White Cap |
| 15 ______________________________________________________________________ [42]Table of Contents THE TERMS OF OUR DEBT INSTRUMENTS RESTRICT THE MANNER IN WHICH WE CONDUCT OUR BUSINESS AND MAY LIMIT OUR ABILITY TO IMPLEMENT ELEMENTS OF OUR GROWTH STRATEGY The instruments and agreements governing our indebtedness contain numerous covenants, including financial and operating covenants, some of which are quite restrictive |
| These covenants affect, and in many respects limit, among other things, our ability to: • incur additional indebtedness; • create liens; • consolidate, merge or sell assets; • make certain capital expenditures; • make certain advances, investments and loans; • enter into certain transactions with affiliates; • engage in any business other than the packaging business and certain related businesses; • pay dividends; and • repurchase stock |
| These covenants could restrict us in the pursuit of our growth strategy |
| WE FACE COMPETITION FROM MANY COMPANIES AND WE MAY LOSE SALES OR EXPERIENCE LOWER MARGINS ON SALES AS A RESULT OF SUCH COMPETITION The manufacture and sale of metal and plastic containers and closures is highly competitive |
| We compete with other packaging manufacturers as well as packaged goods companies who manufacture containers for their own use and for sale to others |
| Approximately 90 percent of our metal food container sales in 2005 and a majority of sales for our plastic container business in 2005 were pursuant to multi-year supply arrangements |
| In general, many of these arrangements provide that during the term the customer may receive competitive proposals for all or up to a portion of the products we furnish to the customer |
| We have the right to retain the business subject to the terms and conditions of the competitive proposal |
| If we match a competitive proposal, it may result in reduced sales prices for the products that are the subject of the proposal |
| If we choose not to match a competitive proposal, we may lose the sales that were the subject of the proposal |
| OUR FINANCIAL RESULTS COULD BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO OBTAIN SUFFICIENT QUANTITIES OF RAW MATERIALS OR MAINTAIN OUR ABILITY TO PASS RAW MATERIAL PRICE INCREASES THROUGH TO OUR CUSTOMERS We purchase steel, aluminum, plastic resins and other raw materials from various suppliers |
| Sufficient quantities of these raw materials may not be available in the future |
| In addition, such materials are subject to price fluctuations due to a number of factors including increases in demand for the same raw materials, the availability of other substitute materials and general economic conditions that are beyond our control |
| Over the last few years, there has been significant consolidation of suppliers of steel |
| Additionally, tariffs and court cases in the United States have negatively impacted the ability and desire of certain foreign steel suppliers to competitively supply steel in the United States |
| In each of 2005 and 2004, the steel industry in the United States announced significant price increases for steel |
| Our metal food container supply arrangements with our customers provide for the pass through of changes in our metal costs |
| For our 16 ______________________________________________________________________ [43]Table of Contents non-contract customers, we also increased prices to pass through increases in our metal costs |
| In 2004, the steel industry experienced raw material supply difficulties and increased worldwide demand which resulted in a tighter than normal supply situation and adversely affected their ability to timely deliver steel |
| Nevertheless, as a result of our contracts and other arrangements with steel suppliers, we were able to obtain sufficient quantities of steel in 2004 to timely meet all of our customers’ requirements |
| In the second half of 2005, the Gulf Coast experienced unforeseen hurricane activity which disrupted resin supply |
| Consequently, many resin suppliers, including many of our resin suppliers, declared force majeure under their supply arrangements and implemented sales volume control initiatives |
| Despite these challenges, our plastic container business was able to procure sufficient quantities of resins to meet substantially all of its customer needs, although at higher prices |
| Although no assurances can be given, we expect to be able to purchase sufficient quantities of raw materials to timely meet all of our customers’ requirements in 2006 |
| Additionally, although no assurances can be given, we generally have been able to pass raw material price increases through to our customers |
| The loss of our ability to pass those price increases through to our customers or the inability of our suppliers to meet our raw material requirements, however, could have a materially adverse impact on our business, financial condition or results of operations |
| A SUBSTANTIALLY LOWER THAN NORMAL CROP YIELD MAY REDUCE DEMAND FOR OUR METAL FOOD CONTAINERS Our metal food container business’ sales and income from operations are dependent, in part, upon the vegetable and fruit harvests in the midwest and western regions of the United States |
| The size and quality of these harvests varies from year to year, depending in large part upon the weather conditions in those regions, and our results of operations could be impacted accordingly |
| Our sales, income from operations and net income could be materially adversely affected in a year in which crop yields are substantially lower than normal in both of the prime agricultural regions of the United States in which we operate |
| THE SEASONALITY OF THE FRUIT AND VEGETABLE PACKING INDUSTRY CAUSES US TO INCUR SHORT TERM DEBT We sell metal containers used in the fruit and vegetable packing process which is a seasonal industry |
| As a result, we have historically generated a disproportionate amount of our annual income from operations in our third quarter |
| Additionally, as is common in the packaging industry, we must access working capital to build inventory and then carry accounts receivable for some customers beyond the end of the packing season |
| Due to our seasonal requirements, we incur short-term indebtedness to finance our working capital requirements |
| THE COST OF PRODUCING OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY INCREASES TO THE PRICE OF ENERGY The cost of producing our products is also sensitive to our energy costs such as natural gas and electricity |
| We have, from time to time, entered into contracts to hedge a portion of our natural gas costs |
| Energy prices, in particular oil and natural gas, have increased in recent years, with a corresponding effect on our production costs |
| WE MAY NOT BE ABLE TO PURSUE OUR GROWTH STRATEGY BY ACQUISITION Historically, we have grown predominantly through acquisitions |
| Our future growth will depend in large part on additional acquisitions of consumer goods packaging businesses |
| We may not be able to locate or acquire other suitable acquisition candidates consistent with our strategy, and we may not be able to fund future acquisitions because of limitations relating to our indebtedness or otherwise |
| 17 ______________________________________________________________________ [44]Table of Contents FUTURE ACQUISITIONS MAY CREATE RISKS AND UNCERTAINTIES THAT COULD ADVERSELY AFFECT OUR OPERATING RESULTS AND DIVERT OUR MANAGEMENT’S ATTENTION In pursuing our strategy of growth through acquisitions, we will face risks commonly encountered with an acquisition strategy |
| These risks include: • failing to assimilate the operations and personnel of the acquired businesses; • disrupting our ongoing business; • diluting our limited management resources; • operating in new geographic regions; and • impairing relationships with employees and customers of the acquired business as a result of changes in ownership and management |
| Through our experience integrating our acquisitions, we have learned that, depending upon the size of the acquisition, it can take us up to two to three years to completely integrate an acquired business into our operations and systems and realize the full benefit of the integration |
| During the early part of this integration period, the operating results of an acquired business may decrease from results attained prior to the acquisition |
| Moreover, additional indebtedness incurred to fund acquisitions could adversely affect our liquidity and financial stability |
| IF WE ARE UNABLE TO RETAIN KEY MANAGEMENT, WE MAY BE ADVERSELY AFFECTED We believe that our future success depends, in large part, on our experienced management team |
| Losing the services of key members of our current management team could make it difficult for us to manage our business and meet our objectives |
| PROLONGED WORK STOPPAGES AT OUR FACILITIES WITH UNIONIZED LABOR COULD JEOPARDIZE OUR FINANCIAL CONDITION As of December 31, 2005, we employed approximately 5cmam900 hourly employees on a full-time basis |
| Approximately 52 percent of our hourly plant employees as of that date were represented by a variety of unions |
| Our labor contracts expire at various times between 2006 and 2012, including one master agreement covering four of our plants which expires in 2007 |
| Prolonged work stoppages at our facilities could have a material adverse effect on our business, financial condition or results of operations |
| In addition, we cannot assure you that, upon expiration of existing collective bargaining agreements, new agreements will be reached without union action or that any such new agreements will be on terms no less favorable than current agreements |
| CHANGES TO THE CURRENT REGULATORY ENVIRONMENT TO WHICH WE ARE SUBJECT COULD MATERIALLY INCREASE OUR COMPLIANCE COSTS We continually review our compliance with environmental and other laws, such as the Occupational Safety and Health Act and other laws regulating noise exposure levels and other safety and health concerns in the production areas of our plants |
| We may incur liabilities for noncompliance, or substantial expenditures to achieve compliance, with changes to environmental and other laws in the future or as a result of the application of additional laws and regulations to our business |
| In addition, stricter regulations, or stricter interpretations of existing laws or regulations, may impose new liabilities on us, having a material adverse effect on our capital expenditures, results of operations, financial condition or competitive position |
| 18 ______________________________________________________________________ [45]Table of Contents IF WE COMPLETE OUR ACQUISITION OF WHITE CAP, OUR INTERNATIONAL OPERATIONS WOULD BE SUBJECT TO VARIOUS RISKS THAT MAY ADVERSELY AFFECT OUR FINANCIAL RESULTS If we complete our previously announced acquisition of White Cap, our business would become more international in scope, and our international operations would generate a significant amount of our consolidated net sales |
| Our business strategy may include continued expansion of international activities |
| Accordingly, the risks associated with operating in foreign countries may have a negative impact on our liquidity and net income |
| Risks associated with operating in foreign countries include, but are not limited to, compliance with and changes in applicable foreign laws, regulations or policies; loss or non-renewal of treaties or similar agreements with foreign tax authorities; credit risks in respect of customers; national and regional labor strikes; political, social and economic instability; and cultural, language, geographic and time zone differences |
| If we complete our previously announced acquisition of White Cap, a portion of our consolidated net sales, and some of our costs, assets and liabilities, would be denominated in currencies other than the US dollar |
| In our future consolidated financial statements, we would translate local currency financial results into US dollars based on average exchange rates prevailing during a reporting period |
| Consequently, changes in exchange rates can unpredictably and adversely affect our consolidated operating results |
| For example, during times of a strengthening US dollar, our reported international revenue and earnings will be reduced because the local currency will translate into fewer US dollars |
| Conversely, a weakening US dollar will effectively increase the dollar-equivalent of our expenses denominated in foreign currencies |
| Although we may use currency exchange rate protection agreements from time to time to reduce our exposure to currency exchange rate fluctuations in some cases, these hedges may not eliminate or reduce the effect of currency fluctuations |
| IF THE INVESTMENTS IN OUR PENSION PLANS DO NOT PERFORM AS EXPECTED, WE MAY HAVE TO CONTRIBUTE ADDITIONAL AMOUNTS TO THESE PLANS, WHICH WOULD OTHERWISE BE AVAILABLE TO COVER OPERATING AND OTHER EXPENSES We maintain noncontributory, defined benefit pension plans covering a substantial number of our employees, which we fund based on certain actuarial assumptions |
| The plans’ assets consist primarily of common stocks and fixed income securities |
| If the investments in the plans do not perform at expected levels, then we will have to contribute additional funds to ensure that the plans will be able to pay out benefits as scheduled |
| Such an increase in funding could result in a decrease in our available cash flow |
| IF WE WERE REQUIRED TO WRITE-DOWN ALL OR PART OF OUR GOODWILL, OUR NET INCOME AND NET WORTH COULD BE MATERIALLY ADVERSELY AFFECTED As a result of our acquisitions, we have dlra201dtta2 million of goodwill, net recorded on our consolidated balance sheet as of December 31, 2005 |
| We are required to periodically determine if our goodwill has become impaired, in which case we would write-down the impaired portion of our goodwill |
| If we were required to write-down all or part of our goodwill, our net income and net worth could be materially adversely affected |
| Silver and Horrigan beneficially owned an aggregate of 13cmam512cmam916 shares of our common stock, or approximately 36 percent of our outstanding common stock |
| Accordingly, if they 19 ______________________________________________________________________ [46]Table of Contents act together, they will be able to exercise substantial influence over all matters submitted to the stockholders for a vote, including the election of directors |
| Silver and Horrigan have entered into an amended and restated principal stockholders agreement, or the Stockholders Agreement, that provides for certain director nomination rights |
| Under the Stockholders Agreement, the Group (as defined in the Stockholders Agreement) has the right to nominate for election all of our directors until the Group holds less than one-half of the number of shares of our common stock held by it in the aggregate on February 14, 1997 |
| The Group generally includes Messrs |
| Silver and Horrigan and their affiliates and related family transferees and estates |
| At least one of the Group’s nominees must be either Mr |
| Silver or Mr |
| On February 14, 1997, the Group held 14cmam306cmam180 shares of our common stock in the aggregate (as adjusted for our two-for-one stock split in 2005) |
| Additionally, the Group has the right to nominate for election either Mr |
| Horrigan as a member of our Board of Directors when the Group no longer holds at least one-half of the number of shares of our common stock held by it in the aggregate on February 14, 1997 but beneficially owns 5 percent of our common stock |
| The Stockholders Agreement continues until the death or disability of both of Messrs |
| Silver and Horrigan |
| The provisions of the Stockholders Agreement could have the effect of delaying, deferring or preventing a change of control of Silgan Holdings Inc |
| and preventing our stockholders from receiving a premium for their shares of our common stock in any proposed acquisition of Silgan Holdings Inc |
| ANTI-TAKEOVER PROVISIONS IN OUR CREDIT AGREEMENT AND OUR RESTATED CERTIFICATE OF INCORPORATION COULD HAVE THE EFFECT OF DISCOURAGING, DELAYING OR PREVENTING A MERGER OR ACQUISITION ANY OF THESE EFFECTS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK Provisions of our restated certificate of incorporation may have the effect of delaying or preventing transactions involving a change of control of Silgan Holdings Inc, including transactions in which stockholders might otherwise receive a substantial premium for their shares over then current market prices, and may limit the ability of stockholders to approve transactions that they may deem to be in their best interests |
| In particular, our restated certificate of incorporation provides that: • the board of directors is authorized to issue one or more classes of preferred stock having such designations, rights and preferences as may be determined by the board; • the board of directors is divided into three classes, and each year one third of the directors are elected for a term of three years; • action taken by the holders of common stock must be taken at a meeting and may not be taken by consent in writing; and • a special meeting of the stockholders may only be called by either of our Co-Chairmen of the Board, our President or a majority of the board of directors and may not be called by the holders of common stock |
| Under our Credit Agreement, the occurrence of a change of control (as defined in the Credit Agreement) constitutes an event of default, permitting, among other things, the acceleration of amounts owed thereunder |
| Additionally, upon the occurrence of a change of control as defined in the indenture governing our 6^ 3/4prca Senior Subordinated Notes due 2013, or 6^ 3/4prca Notes, the holders thereof have the right to require the repurchase of the 6^ 3/4prca Notes at a purchase price equal to 101prca of the principal amount thereof, plus accrued interest to the date of purchase |
| LIMITED TRADING VOLUME OF OUR COMMON STOCK MAY CONTRIBUTE TO PRICE VOLATILITY Our common stock is quoted on the Nasdaq National Market System |
| During the period from January 1, 2005 through December 31, 2005, the average daily trading volume for our common stock as reported by 20 ______________________________________________________________________ [47]Table of Contents the Nasdaq National Market System was approximately 171cmam287 shares |
| A more active trading market in our common stock may not develop |
| A limited trading volume may affect the liquidity of your investment and may make our stock price volatile |
| The price of our common stock also may vary significantly as a result of many factors, including: • our results of operations; • analyst estimates; and • general market conditions |
| In addition, the securities markets sometimes experience significant price and volume fluctuations |
| These fluctuations are often unrelated or disproportionate to the operating performance of particular companies |