SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005 |
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM ________ TO _________ |
COMMISSION FILE NUMBER 0-50189
Pennsylvania | 75-3099507 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
One Crown Way, Philadelphia, PA | 19154-4599 | |
(Address of principal executive offices) | (Zip Code) |
215-698-5100 | ||
(Registrant’s telephone number, including area code) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No ___
There were 166,394,997 shares of Common Stock outstanding as of July 30, 2005.
Crown Holdings, Inc.
FORM 10-Q
FOR QUARTER ENDED JUNE 30, 2005
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
Crown Holdings, Inc.
(Unaudited)
Three months ended June 30, | 2005 | 2004 | ||||||
---|---|---|---|---|---|---|---|---|
Net sales | $ | 2,017 | $ | 1,836 | ||||
Cost of products sold, excluding depreciation and amortization | 1,654 | 1,501 | ||||||
Depreciation and amortization | 75 | 76 | ||||||
Gross profit | 288 | 259 | ||||||
Selling and administrative expense | 102 | 90 | ||||||
Gain on sale of assets and provision for asset impairments, net | ( | 17 | ) | |||||
Loss from early extinguishments of debt | 2 | |||||||
Interest expense | 95 | 89 | ||||||
Interest income | ( | 2 | ) | ( | 1 | ) | ||
Translation and exchange adjustments | 65 | 23 | ||||||
Income before income taxes, minority interests and equity earnings | 43 | 58 | ||||||
Provision for income taxes | 8 | 16 | ||||||
Minority interests and equity earnings | ( | 7 | ) | ( | 6 | ) | ||
Net income | $ | 28 | $ | 36 | ||||
Earnings per average common share: | ||||||||
Basic | $ | .17 | $ | .22 | ||||
Diluted | $ | .16 | $ | .22 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 165,694,221 | 165,165,133 | ||||||
Diluted | 171,526,145 | 167,343,493 |
The accompanyingnotes are an integral part of these consolidated financial statements.
2
Crown Holdings, Inc.
(Unaudited)
Six months ended June 30, | 2005 | 2004 | ||||||
---|---|---|---|---|---|---|---|---|
Net sales | $ | 3,720 | $ | 3,459 | ||||
Cost of products sold, excluding depreciation and amortization | 3,078 | 2,862 | ||||||
Depreciation and amortization | 147 | 153 | ||||||
Gross profit | 495 | 444 | ||||||
Selling and administrative expense | 198 | 182 | ||||||
Gain on sale of assets and provision for asset impairments, net | ( | 22 | ) | |||||
Loss from early extinguishments of debt | 2 | 4 | ||||||
Interest expense | 189 | 179 | ||||||
Interest income | ( | 4 | ) | ( | 3 | ) | ||
Translation and exchange adjustments | 95 | 27 | ||||||
Income before income taxes, minority interests and equity earnings | 37 | 55 | ||||||
Provision for income taxes | 8 | 24 | ||||||
Minority interests and equity earnings | ( | 11 | ) | ( | 11 | ) | ||
Net income | $ | 18 | $ | 20 | ||||
Earnings per average common share: | ||||||||
Basic | $ | .11 | $ | .12 | ||||
Diluted | $ | .10 | $ | .12 | ||||
Weighted average common shares outstanding: | ||||||||
Basic | 165,756,374 | 165,120,811 | ||||||
Diluted | 171,694,310 | 167,247,804 |
The accompanyingnotes are an integral part of these consolidated financial statements.
3
Crown Holdings, Inc.
(Unaudited)
June 30, | December 31, | ||||||
---|---|---|---|---|---|---|---|
2005 | 2004 | ||||||
Assets | |||||||
Current assets | |||||||
Cash and cash equivalents | $ | 265 | $ | 471 | |||
Receivables, net | 987 | 900 | |||||
Inventories | 1,009 | 894 | |||||
Prepaid expenses and other current assets | 72 | 78 | |||||
Total current assets | 2,333 | 2,343 | |||||
Investments | 84 | 85 | |||||
Goodwill | 2,421 | 2,592 | |||||
Property, plant and equipment, net | 1,798 | 2,002 | |||||
Other non-current assets | 1,015 | 1,103 | |||||
Total | $ | 7,651 | $ | 8,125 | |||
Liabilities and shareholders’ equity | |||||||
Current liabilities | |||||||
Short-term debt | $ | 47 | $ | 51 | |||
Current maturities of long-term debt | 25 | 25 | |||||
Accounts payable and accrued liabilities | 1,911 | 1,943 | |||||
Income taxes payable | 60 | 61 | |||||
Total current liabilities | 2,043 | 2,080 | |||||
Long-term debt, excluding current maturities | 3,635 | 3,796 | |||||
Postretirement and pension liabilities | 981 | 1,019 | |||||
Other non-current liabilities | 646 | 752 | |||||
Minority interests | 185 | 201 | |||||
Commitments and contingent liabilities (Note J) | |||||||
Shareholders’ equity | 161 | 277 | |||||
Total | $ | 7,651 | $ | 8,125 | |||
The accompanyingnotes are an integral part of these consolidated financial statements.
4
Crown Holdings, Inc.
(Unaudited)
Six months ended June 30, | 2005 | 2004 | ||||||
---|---|---|---|---|---|---|---|---|
Net cash used for operating activities | ( | $ | 53 | ) | ( | $ | 66 | ) |
Cash flows from investing activities | ||||||||
Capital expenditures | ( | 71 | ) | ( | 66 | ) | ||
Proceeds from sale of property, plant and equipment | 22 | 5 | ||||||
Other, net | ( | 7 | ) | ( | 6 | ) | ||
Net cash used for investing activities | ( | 56 | ) | ( | 67 | ) | ||
Cash flows from financing activities | ||||||||
Proceeds from long-term debt | 10 | 1 | ||||||
Payments of long-term debt | ( | 72 | ) | ( | 135 | ) | ||
Net change in short-term debt | 17 | 135 | ||||||
Common stock repurchased | ( | 14 | ) | |||||
Common stock issued | 6 | 1 | ||||||
Minority dividends, net of contributions | ( | 28 | ) | ( | 17 | ) | ||
Net cash used for financing activities | ( | 81 | ) | ( | 15 | ) | ||
Effect of exchange rate changes on cash and cash equivalents | ( | 16 | ) | ( | 2 | ) | ||
Net change in cash and cash equivalents | ( | 206 | ) | ( | 150 | ) | ||
Cash and cash equivalents at January 1 | 471 | 401 | ||||||
Cash and cash equivalents at June 30 | $ | 265 | $ | 251 | ||||
The accompanyingnotes are an integral part of these consolidated financial statements.
5
Crown Holdings, Inc.
(Unaudited)
Comprehensive Income | Common | Paid-In | Unearned | Accumulated | Treasury | Accumulated Other Comprehensive | ||||||||||||||||
Quarter | Year–To–Date | Stock | Capital | Compensation | Deficit | Stock | Loss | Total | ||||||||||||||
Balance at January 1, 2004 | $929 | $1,699 | ($1,215 | ) | ($103 | ) | ($1,170 | ) | $140 | |||||||||||||
Net income | $ 36 | $ 20 | 20 | 20 | ||||||||||||||||||
Translation adjustments | ( 17 | ) | 19 | 19 | 19 | |||||||||||||||||
Derivatives qualifying as hedges | ( 3 | ) | 3 | 3 | 3 | |||||||||||||||||
Comprehensive income | $16 | $42 | ||||||||||||||||||||
Common stock issued —benefit plans | 1 | 1 | ||||||||||||||||||||
Balance at June 30, 2004 | $929 | $1,699 | ($1,195 | ) | ($102 | ) | ($1,148 | ) | $183 | |||||||||||||
Comprehensive Loss | Common | Paid-In | Unearned | Accumulated | Treasury | Accumulated Other Comprehensive | ||||||||||||||||
Quarter | Year–To–Date | Stock | Capital | Compensation | Deficit | Stock | Loss | Total | ||||||||||||||
Balance at January 1, 2005 | $929 | $1,699 | ($1,164 | ) | ($100 | ) | ($1,087 | ) | $277 | |||||||||||||
Net income | $28 | $ 18 | 18 | 18 | ||||||||||||||||||
Translation adjustments | ( 84 | ) | ( 116 | ) | ( 116 | ) | ( 116 | ) | ||||||||||||||
Derivatives qualifying as hedges | ( 6 | ) | ( 6 | ) | ( 6 | ) | ( 6 | ) | ||||||||||||||
Available for sale securities | ( 2 | ) | ( 5 | ) | ( 5 | ) | ( 5 | ) | ||||||||||||||
Comprehensive loss | ($64 | ) | ($109 | ) | ||||||||||||||||||
Restricted stock issued | 5 | ($8 | ) | 3 | ||||||||||||||||||
Earned compensation on restricted stock | 1 | 1 | ||||||||||||||||||||
Stock repurchased | ( 10 | ) | ( 4 | ) | ( 14 | ) | ||||||||||||||||
Common stock issued — benefit plans | 1 | 5 | 6 | |||||||||||||||||||
Balance at June 30, 2005 | $929 | $1,695 | ($7 | ) | ($1,146 | ) | ($ 96 | ) | ($1,214 | ) | $161 | |||||||||||
The accompanyingnotes are an integral part of these consolidated financial statements.
6
Crown Holdings, Inc.
(Unaudited)
A. | Statement of Information Furnished |
The consolidated financial statements include the accounts of Crown Holdings, Inc. and its wholly–owned and majority–owned subsidiary companies (the “Company”). The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with Form 10-Q instructions. In the opinion of management, these consolidated financial statements contain all adjustments of a normal and recurring nature necessary for a fair statement of the financial position of Crown Holdings, Inc. as of June 30, 2005 and the results of its operations and cash flows for the three and six month periods ended June 30, 2005 and 2004. These results have been determined on the basis of U.S. generally accepted accounting principles and practices consistently applied. | |
Certain information and footnote disclosures, normally included in financial statements presented in accordance with U.S. generally accepted accounting principles, have been condensed or omitted. The December 31, 2004 balance sheet data was derived from the audited consolidated financial statements as of December 31, 2004. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. | |
B. | Recent Accounting and Reporting Pronouncements |
In December 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) (“FAS 123(R)”), “Share–Based Payment.” FAS 123(R) replaces SFAS No. 123 (“FAS 123”), “Accounting for Stock–Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS 123(R) requires that the cost of share–based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their grant–date fair values. The pro forma disclosures previously permitted under FAS 123 will no longer be an alternative to financial statement recognition. Under FAS 123(R), the Company must select an appropriate valuation model to calculate the fair value of its share–based payments for awards made subsequent to adoption of the standard and a transition method for recognizing compensation expense. Valuations of awards granted prior to adoption of the standard have been and will be calculated using the Black–Scholes Option Pricing model. Upon adoption of the standard, these prior valuations will not be reassessed. The transition methods provided in the standard include modified prospective and retrospective options. Under the modified prospective method, compensation expense for all unvested stock awards, measured by the grant–date fair value of the awards, will be charged to earnings prospectively over the remaining vesting period, based on the estimated number of awards that are expected to vest. Under the retrospective method, prior reporting periods back to the date of issuance of FAS 123 may be restated. The restatement of prior periods under the retrospective method will be based on the amounts previously recognized in the pro forma disclosures required by the original provisions of FAS 123. The Company is currently evaluating the requirements of FAS 123(R) and intends to adopt the new standard on January 1, 2006, the amended effective date set for public companies by the U.S. Securities and Exchange Commission. | |
C. | Stock–Based Compensation |
During the first quarter of 2005, the Company issued 604,196 shares of restricted stock to employees. Compensation expense of $8, equal to the fair value of the shares at the date of issuance, will be recognized ratably over the three-year vesting period. | |
In accordance with APB 25, the Company uses the intrinsic value method to account for its employee stock options. Accordingly, no compensation expense is recognized in connection with the issuance of stock options under the Company’s stock–based incentive compensation plans; however, compensation expense is recognized in connection with the issuance of restricted shares granted under such plans. Commencing January 1, 2006, as discussed in Note B above, the Company intends to adopt FAS 123(R) and commence recognition of compensation expense for its outstanding unvested stock options. | |
7
Crown Holdings, Inc.
The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of FAS 123(R) to stock options: | |
Three Months Ended | Six Months Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
June 30, | June 30, | |||||||||||||
2005 | 2004 | 2005 | 2004 | |||||||||||
Net income, as reported | $28 | $36 | $18 | $20 | ||||||||||
Add: stock–based compensation expense already included in net income as reported, net of related tax effects | 1 | |||||||||||||
Deduct: pro forma employee stock–based compensation, related to stock options and restricted stock grants, net of related tax effects | ( | 3 | ) | ( | 2 | ) | ( | 7 | ) | ( | 3 | ) | ||
Pro forma net income | $25 | $34 | $12 | $17 | ||||||||||
Earnings per share: | ||||||||||||||
Basic – as reported | $.17 | $.22 | $.11 | $.12 | ||||||||||
– pro forma | $.15 | $.21 | $.07 | $.10 | ||||||||||
Diluted – as reported | $.16 | $.22 | $.10 | $.12 | ||||||||||
– pro forma | $.15 | $.20 | $.07 | $.10 | ||||||||||
D. | Goodwill |
The changes in the carrying amount of goodwill by reportable segment for the six month period ended June 30, 2005 were as follows: |
Americas | Europe | Total | |||||||||||
Balance as of January 1, 2005 | $ | 656 | $ | 1,936 | $ | 2,592 | |||||||
Foreign currency translation | ( | 3 | ) | ( | 168 | ) | ( | 171 | ) | ||||
Balance as of June 30, 2005 | $ | 653 | $ | 1,768 | $ | 2,421 | |||||||
E. | Inventories |
June 30, | December 31, | ||||||||
---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | ||||||||
Finished goods | $434 | $307 | |||||||
Work in process | 133 | 111 | |||||||
Raw material and supplies | 442 | 476 | |||||||
$1,009 | $894 | ||||||||
F. | Debt and Liquidity |
In the first quarter of 2004, the Company purchased $21 aggregate principal of its 8.38% notes due 2005 at a premium of 4.5% to principal and €85 aggregate principal of its 6.00% notes due 2004 at a premium of 3.0% to principal, and recognized a loss of $4 from the early extinguishments of debt. | |
In the second quarter of 2005, the Company repurchased $70 aggregate principal of its 7.00% notes due 2006 at a premium of 3.0% to principal, and recognized a loss of $2 from the early extinguishments of debt. | |
8
Crown Holdings, Inc.
The Company recognized unrealized foreign exchange losses of $65 and $23 during the second quarter of 2005 and 2004, respectively, and losses of $95 and $27 during the first six months of 2005 and 2004, respectively, arising primarily from unhedged currency exposures in Europe from the sale of senior secured notes in 2003. | |
In June 2005, the Company entered into a new €120 European securitization facility. Under this facility, certain subsidiaries in the U.K. and France sell receivables to an entity formed in France for the sole purpose of buying receivables from the selling subsidiaries. The buying entity finances the purchase of receivables by the issue of senior units to a company in which Crown does not retain any interest. The selling subsidiaries continue to service the receivables for a fee, but do not retain any interest in the receivables sold and the sales are reflected as a reduction in receivables within the Consolidated Balance Sheet. At June 30, 2005, $125 of receivables were securitized under this program. | |
During the first six months of 2005, the Company paid $30 to terminate interest rate swaps with a combined notional value of $900. As of June 30, 2005, the Company had no remaining outstanding interest rate swaps. | |
G. | Asset Disposals and Impairments |
During the first six months of 2005, the Company recognized a net gain of $22 relating to asset disposals and impairments. The gain of $22 included $16 for asset disposals and $7 for the reversal of a provision in Asia, offset by $1 for asset impairments in the U.S. In Asia, the Company received a waiver of a local requirement to divest a portion of one of its subsidiaries and, accordingly, reversed its provision for the expected loss on divestiture. During the first six months of 2004, the Company sold various assets for $5 and had no total net gain or loss. | |
H. | Restructuring |
The components of the outstanding restructuring reserve and movements within these components during the six months ended June 30, 2005 and 2004, respectively, were as follows: |
Termination | Other Exit | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
Benefits | Costs | Total | ||||||||
Balance as of January 1, 2004 | $23 | $ 2 | $25 | |||||||
Payments made | ( 8 | ) | ( 1 | ) | ( 9 | ) | ||||
Balance as of June 30, 2004 | $15 | $ 1 | $16 | |||||||
Balance as of January 1, 2005 | $14 | $ 1 | $15 | |||||||
Payments made | ( 10 | ) | ( 10 | ) | ||||||
Foreign currency translation | ( 1 | ) | ( 1 | ) | ||||||
Balance as of June 30, 2005 | $ 3 | $ 1 | $ 4 | |||||||
The June 30, 2005 balance includes provisions for termination benefits established in 2004 and 2003 restructuring actions, and for other exit costs for actions prior to 2003. The balance includes employee-related agreements with unions and governmental agencies as well as lease arrangements with landlords for which payments are extended over time. The balance of the restructuring reserve was included in the Consolidated Balance Sheets within accounts payable and accrued liabilities. |
I. | Asbestos–Related Liabilities |
Crown Cork & Seal Company, Inc. (“Crown Cork”) is one of many defendants in a substantial number of lawsuits filed throughout the United States by persons alleging bodily injury as a result of exposure to asbestos. These claims arose from the insulation operations of a U.S. company, the majority of whose stock Crown Cork purchased in 1963. Approximately ninety days after the stock purchase, this U.S. company sold its insulation assets and was later merged into Crown Cork. | |
Prior to 1998, the amounts paid to asbestos claimants were covered by a fund made available to Crown Cork under a 1985 settlement with carriers insuring Crown Cork through 1976, when Crown Cork became self–insured. The fund was depleted in 1998 and the Company has no remaining coverage for asbestos–related costs. |
9
Crown Holdings, Inc.
In May 2005, January 2005 and April 2004, the States of Florida, Ohio and Mississippi, respectively, enacted legislation that limits the asbestos–related liabilities under state law of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The new legislation, which applies to future and pending claims, caps asbestos–related liabilities at the fair market value of the predecessor’s total gross assets adjusted for inflation. Crown Cork has paid significantly more for asbestos–related claims than the total adjusted value of its predecessor’s assets. Crown Cork has integrated the legislation into its claims defense strategy. The Company cautions, however, that the legislation may be challenged and there can be no assurance regarding the ultimate effect of the legislation on Crown Cork. | |
In June 2003, the State of Texas enacted legislation that limits the asbestos–related liabilities in Texas courts of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The Texas legislation, which applies to future claims and pending claims, caps asbestos–related liabilities at the total gross value of the predecessor’s assets adjusted for inflation. Crown Cork has paid significantly more for asbestos–related claims than the total adjusted value of its predecessor’s assets. On October 31, 2003, Crown Cork received a favorable ruling on its motion for summary judgment in two asbestos–related cases pending against it in the district court of Harris County, Texas (in Re Asbestos Litigation No. 90–23333, District Court, Harris County, Texas); this ruling has been appealed. In addition, a favorable ruling for summary judgment in an asbestos case pending against Crown Cork in the district court of Travis County, Texas (in Re Rosemarie Satterfield as Representative of the Estate of Jerrold Braley Deceased v. Crown Cork & Seal Company, Inc. District Court Travis County, 98th Judicial District Cause No. GN-203572) has been appealed. Although the Company believes that the rulings of the District Court are correct, there can be no assurance that the legislation will be upheld by the Texas courts on appeal or in other cases that may challenge the legislation. | |
In December 2001, the Commonwealth of Pennsylvania enacted legislation that limits the asbestos–related liabilities of Pennsylvania corporations that are successors by corporate merger to companies involved with asbestos. The legislation limits the successor’s liability for asbestos to the acquired company’s asset value adjusted for inflation. Crown Cork has already paid significantly more for asbestos–related claims than the acquired company’s adjusted asset value. On February 20, 2004, the Supreme Court of Pennsylvania reversed the June 11, 2002 order of the Philadelphia Court of Common Pleas, in which the Court of Common Pleas ruled favorably on a motion by Crown Cork for summary judgment regarding 376 pending asbestos–related cases against Crown Cork in Philadelphia and remanded the cases to the Philadelphia Court of Common Pleas (Ieropoli v. AC&S Corporation, et. al., No. 117 EM 2002). The Court ruled that the new statute, as applied, violated the Pennsylvania Constitution because it retroactively extinguished the plaintiffs’ pre–existing and accrued causes of action. The Company believed that the ruling by the court was limited only to cases which were pending at the time the legislation was enacted and, in November 2004, the Commonwealth of Pennsylvania enacted legislation amending the 2001 successor liability statute providing that the 2001 statute applies only to asbestos–related claims with respect to which the two–year statute of limitations for asbestos–related claims began to run after the statute was enacted on December 17, 2001. On December 10, 2004, the Company filed a global motion for summary judgment in the Philadelphia Court of Common Pleas to dismiss all pending asbestos–related cases filed in the court after December 17, 2003 (In re: Asbestos–Litigation October term 1986, No. 001). The Company cautions, however, that the Company’s position regarding the limitation of the Pennsylvania Supreme Court ruling may not be upheld. | |
In recent years, certain other state and federal legislators have considered legislation to reform the reatment of asbestos–related personal injury claims. In April of 2005, the Fairness in Asbestos Injury Resolution Act of 2005 (the “FAIR Bill”) was introduced in the United States Senate and is being considered by the Senate Judiciary Committee. The FAIR Bill would create a national trust fund in lieu of state and federal litigation to compensate people with asbestos–related diseases. The trust fund would require contributions from companies, such as Crown Cork, that have made past payments for asbestos–related personal injury claims and would limit the payments made by such companies relating to asbestos–related liabilities during the life of the fund. There can be no assurance that federal asbestos legislation, such as the FAIR Bill, will be passed into law or the form that any such legislation will take. Due to this uncertainty, the Company has not considered possible federal legislation in evaluating the adequacy of the Company’s reserve for asbestos–related claims. | |
During the six months ended June 30, 2005, Crown Cork received approximately 6,000 new claims, settled or dismissed approximately 2,000 claims for a total of $5 and had approximately 78,000 claims outstanding at the end of the period. Settlement amounts include amounts committed to be paid in future periods. |
10
Crown Holdings, Inc.
As of June 30, the Company’s accrual for pending and future asbestos–related claims was $223. The Company estimates that its probable and estimable liability for pending and future asbestos–related claims will range between $223 and $341. The accrual balance of $223 includes $104 for unasserted claims and $9 for committed settlements that will be paid over time. | |
Historically (1977–2004), Crown Cork estimates that approximately one–quarter of all asbestos–related claims made against it have been asserted by claimants who claim first exposure to asbestos after 1964. However, because of Crown Cork’s settlement experience to date and the increased difficulty of establishing identification of the subsidiary’s insulation products as the cause of injury by persons alleging first exposure to asbestos after 1964, the Company has not included in its accrual and range of potential liability any amounts for settlements by persons alleging first exposure to asbestos after 1964. | |
Assumptions underlying the accrual and the range of potential liability include that claims for exposure to asbestos that occurred after the sale of the U.S. company’s insulation business in 1964 would not be entitled to settlement payouts and that the Texas, Florida, Mississippi, Ohio and Pennsylvania asbestos legislation described above are expected to have a highly favorable impact on Crown Cork’s ability to settle or defend against asbestos–related claims in those states, and other states where Pennsylvania law may apply. The Company’s accrual includes estimates for probable costs for claims through the year 2014. The upper end of the Company’s estimated range of possible asbestos costs of $341 includes claims beyond that date. | |
While it is not possible to predict the ultimate outcome of the asbestos-related claims and settlements, the Company believes that resolution of these matters is not expected to have a material adverse effect on the Company’s financial position. The Company cautions, however, that estimates for asbestos cases and settlements are difficult to predict and may be influenced by many factors. In addition, there can be no assurance regarding the validity or correctness of the Company’s assumptions or beliefs underlying its accrual and the estimated range of potential liability. Unfavorable court decisions or other adverse developments may require the Company to substantially increase its accrual or change its estimate. Accordingly, these matters, if resolved in a manner different from the estimate, could have a material effect on the Company’s results of operations, financial position and cash flow. | |
J. | Commitments and Contingent Liabilities |
In 2003, Crown Cork amended the retiree medical benefits that it had been providing to approximately 10,000 retirees pursuant to a series of collective bargaining agreements between Crown Cork and certain unions. The amendments increased maximum coverage, required additional retiree contributions for medical and prescription drug costs and reduced other coverage benefits. Crown Cork is a party to litigation initiated in June 2003 in which the USWA and IAM unions and retirees claim that the retiree medical benefits were vested and that the amendments breached the applicable collective bargaining agreements in violation of ERISA and the Labor Management Relations Act. Crown Cork and the USWA parties have submitted their dispute to binding arbitration in Pittsburgh, Pennsylvania and litigation involving Crown Cork and the IAM parties is pending in federal district court in Nebraska. The Company believes that it had the right to make such amendments and intends to contest the matter vigorously. However, the ultimate outcome of these cases is uncertain and if they are decided adversely, the Company could be required to restore all or a portion of the retiree medical benefits to their pre–amendment levels which could have a material adverse impact on the Company’s financial position, results of operations and cash flows. | |
The Company is subject to various other lawsuits and claims with respect to matters such as governmental and environmental regulations, recent price increases by one of the Company’s suppliers, and other actions arising out of the normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes that the ultimate liabilities resulting from such lawsuits and claims will not materially affect the results of operations, financial position or cash flow of the Company. |
11
Crown Holdings, Inc.
The Company has various commitments to purchase materials and supplies as part of the ordinary conduct of business. The Company’s basic raw materials for its products are tinplate, aluminum and resins, all of which are purchased from multiple sources. The Company is subject to fluctuations in the cost of these raw materials and has periodically adjusted its selling prices to certain customers to reflect these movements. There can be no assurances, however, that the Company will be able to fully recover any increases or fluctuations in raw material costs from its customers. The Company also has commitments for standby letters of credit and for purchases of capital assets. | |
At June 30, 2005, the Company had certain indemnification agreements covering environmental remediation and other potential costs associated with properties sold or businesses divested. For agreements with defined liability limits, the maximum potential liability was $47. The Company accrues for costs associated with such indemnifications and potential costs when it is probable that a liability has been incurred and the amount can be reasonably estimated. | |
At June 30, 2005, the Company had guarantees of $36 related to the residual values of leased assets and recorded a liability of $8 related to these guarantees. |
K. | Earnings Per Share |
The following table summarizes the basic and diluted earnings per share computations for the periods ended June 30, 2005 and 2004, respectively: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||
Earnings: | ||||||||||
Net income | $ 28 | $ 36 | $ 18 | $ 20 | ||||||
Weighted average common shares outstanding: | ||||||||||
Basic | 165.7 | 165.2 | 165.8 | 165.1 | ||||||
Add: dilutive stock options and restricted stock | 5.8 | 2.1 | 5.9 | 2.1 | ||||||
Diluted | 171.5 | 167.3 | 171.7 | 167.2 | ||||||
Basic earnings per share | $.17 | $.22 | $.11 | $.12 | ||||||
Diluted earnings per share | $.16 | $.22 | $.10 | $.12 | ||||||
Excluded from the computation of diluted earnings per share were common shares contingently issuable upon the exercise of outstanding stock options, amounting to 3.6 million shares for the three and six months ended June 30, 2005, and 3.9 million shares for the three and six months ended June 30, 2004. These shares were excluded because the exercise prices of the outstanding options were above the average market prices for the related periods. |
12
Crown Holdings, Inc.
L. | Pension and Other Postretirement Benefits |
Components of Net Periodic Benefit Cost |
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30 | June 30 | ||||||||||||||||
Pension Benefits - U.S. Plans | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 3 | $ | 3 | $ | 5 | $ | 5 | |||||||||
Interest cost | 19 | 20 | 39 | 40 | |||||||||||||
Expected return on plan assets | ( | 21 | ) | ( | 19 | ) | ( | 42 | ) | ( | 37 | ) | |||||
Recognized prior service cost | 1 | 1 | |||||||||||||||
Recognized actuarial net gain | 16 | 16 | 32 | 31 | |||||||||||||
Net periodic benefit cost | $ | 17 | $ | 20 | $ | 35 | $ | 40 | |||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30 | June 30 | ||||||||||||||||
Pension Benefits - Non-U.S. Plans | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 10 | $ | 8 | $ | 19 | $ | 16 | |||||||||
Interest cost | 42 | 42 | 85 | 82 | |||||||||||||
Expected return on plan assets | ( | 56 | ) | ( | 55 | ) | ( | 112 | ) | ( | 108 | ) | |||||
Recognized prior service cost | ( | 2 | ) | ( | 3 | ) | ( | 4 | ) | ( | 4 | ) | |||||
Recognized actuarial net gain | 14 | 14 | 27 | 26 | |||||||||||||
Net periodic benefit cost | $ | 8 | $ | 6 | $ | 15 | $ | 12 | |||||||||
Three Months Ended | Six Months Ended | ||||||||||||||||
June 30 | June 30 | ||||||||||||||||
Other Postretirement Benefits | 2005 | 2004 | 2005 | 2004 | |||||||||||||
Service cost | $ | 1 | $ | 2 | $ | 1 | |||||||||||
Interest cost | 9 | $ | 9 | 19 | 19 | ||||||||||||
Recognized prior service cost | ( | 3 | ) | ( | 3 | ) | ( | 6 | ) | ( | 6 | ) | |||||
Recognized actuarial net gain | 4 | 3 | 8 | 6 | |||||||||||||
Net periodic benefit cost | $ | 11 | $ | 9 | $ | 23 | $ | 20 | |||||||||
13
Crown Holdings, Inc.
M. | Segment Information |
The Company has three reportable operating segments: Americas, Europe, and Asia-Pacific. Each reportable segment is an operating division within the Company and has a President reporting directly to the Chief Executive Officer. “Corporate” includes Corporate Technology and headquarters costs. Divisional headquarters cost are reported within the operating segments. |
The interim segment information is as follows: | |
Three Months ended June 30, | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
2005 | Americas | Europe | Asia-Pacific | Corporate | Total | |||||||
External sales | $808 | $1,097 | $112 | $2,017 | ||||||||
Segment income / (loss) | 65 | 131 | 15 | ($25 | ) | 186 | ||||||
2004 | ||||||||||||
External sales | 748 | 996 | 92 | 1,836 | ||||||||
Segment income / (loss) | 60 | 117 | 14 | ( 22 | ) | 169 | ||||||
Six Months ended June 30, | ||||||||||||
2005 | Americas | Europe | Asia-Pacific | Corporate | Total | |||||||
External sales | $1,477 | $2,026 | $217 | $3,720 | ||||||||
Segment income / (loss) | 107 | 211 | 29 | ($50 | ) | 297 | ||||||
2004 | ||||||||||||
External sales | 1,388 | 1,895 | 176 | 3,459 | ||||||||
Segment income / (loss) | 87 | 197 | 26 | ( 48 | ) | 262 |
The following table reconciles the Company’s consolidated segment income to consolidated income before income taxes, minority interests and equity earnings: |
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
2005 | 2004 | 2005 | 2004 | |||||||
Segment income | $186 | $169 | $297 | $262 | ||||||
Gain on sale of assets and provision for asset impairments, net | ( 17 | ) | ( 22 | ) | ||||||
Loss from early extinguishments of debt | 2 | 2 | 4 | |||||||
Interest expense | 95 | 89 | 189 | 179 | ||||||
Interest income | ( 2 | ) | ( 1 | ) | ( 4 | ) | ( 3 | ) | ||
Translation and exchange adjustments | 65 | 23 | 95 | 27 | ||||||
Income before income taxes,minority interests and equity earnings | $ 43 | $ 58 | $ 37 | $ 55 | ||||||
14
Crown Holdings, Inc.
N. | Condensed Combining Financial Information |
In 2003, Crown European Holdings (Issuer), a 100% owned subsidiary of the Company, issued $2,116 of senior secured notes that are fully and unconditionally guaranteed by Crown and certain subsidiaries. The guarantors are 100% owned by the Company and the guarantees are made on a joint and several basis. The guarantor column includes financial information for all subsidiaries in the United States (except for an insurance subsidiary and a receivables securitization subsidiary), and substantially all subsidiaries in the United Kingdom, France, Germany, Belgium, Canada, Mexico and Switzerland. For additional historical financial information for these subsidiaries, see Note X to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004. The following condensed combining financial statements: | |
• statements of operations for the three and six months ended June 30, 2005 and 2004, | |
• balance sheets as of June 30, 2005 and December 31, 2004, and | |
• cash flows for the six months ended June 30, 2005 and 2004 | |
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X. | |
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2005
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Net sales | $1,362 | $655 | $2,017 | ||||||||||
Cost of products sold, excluding depreciation | |||||||||||||
and amortization | ($6 | ) | 1,140 | 520 | 1,654 | ||||||||
Depreciation and amortization | 52 | 23 | 75 | ||||||||||
Gross profit | 6 | 170 | 112 | 288 | |||||||||
Selling and administrative expense | 75 | 27 | 102 | ||||||||||
Gain on sale of assets and provision for asset impairments, net | (10 | ) | (7 | ) | (17 | ) | |||||||
Loss from early extinguishments of debt | 2 | 2 | |||||||||||
Net interest expense | 30 | 62 | 1 | 93 | |||||||||
Technology royalty | (9 | ) | 9 | ||||||||||
Translation and exchange adjustments | 17 | 30 | 18 | 65 | |||||||||
Income / (loss) before income taxes, | |||||||||||||
minority interests and equity earnings | (41 | ) | 20 | 64 | 43 | ||||||||
Provision/(benefit) for income taxes | (1 | ) | (13 | ) | 22 | 8 | |||||||
Equity earnings/(loss) | $28 | 63 | (5 | ) | ($86 | ) | |||||||
Income before minority interests and equity earnings | 28 | 23 | 28 | 42 | (86 | ) | 35 | ||||||
Minority interests and equity earnings | (7 | ) | (7 | ) | |||||||||
Net income | $28 | $23 | $28 | $35 | ($86 | ) | $28 | ||||||
15
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2004
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Net sales | $1,255 | $581 | $1,836 | ||||||||||
Cost of products sold, excluding depreciation | |||||||||||||
and amortization | ($10 | ) | 1,050 | 461 | 1,501 | ||||||||
Depreciation and amortization | 51 | 25 | 76 | ||||||||||
Gross profit | 10 | 154 | 95 | 259 | |||||||||
Selling and administrative expense | (1 | ) | 67 | 24 | 90 | ||||||||
Net interest expense | 31 | 55 | 2 | 88 | |||||||||
Technology royalty | (7 | ) | 7 | ||||||||||
Translation and exchange adjustments | 11 | 9 | 3 | 23 | |||||||||
Income / (loss) before income taxes, | |||||||||||||
minority interests and equity earnings | (31 | ) | 30 | 59 | 58 | ||||||||
Provision for income taxes | 1 | 15 | 16 | ||||||||||
Equity earnings | $36 | 67 | 5 | ($108 | ) | ||||||||
Income before minority interests and equity earnings | 36 | 36 | 34 | 44 | (108 | ) | 42 | ||||||
Minority interests and equity earnings | 2 | (8 | ) | (6 | ) | ||||||||
Net income | $36 | $36 | $36 | $36 | ($108 | ) | $36 | ||||||
16
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the six months ended June 30, 2005
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Net sales | $2,536 | $1,184 | $3,720 | ||||||||||
Cost of products sold, excluding depreciation | |||||||||||||
and amortization | ($10 | ) | 2,134 | 954 | 3,078 | ||||||||
Depreciation and amortization | 102 | 45 | 147 | ||||||||||
Gross profit | 10 | 300 | 185 | 495 | |||||||||
Selling and administrative expense | 147 | 51 | 198 | ||||||||||
Gain on sale of assets and provision for asset impairments, net | (10 | ) | (12 | ) | (22 | ) | |||||||
Loss from early extinguishments of debt | 2 | 2 | |||||||||||
Net interest expense | 61 | 120 | 4 | 185 | |||||||||
Technology royalty | (15 | ) | 15 | ||||||||||
Translation and exchange adjustments | 26 | 40 | 29 | 95 | |||||||||
Income / (loss) before income taxes, | |||||||||||||
minority interests and equity earnings | (77 | ) | 16 | 98 | 37 | ||||||||
Provision / (benefit) for income taxes | (21 | ) | 29 | 8 | |||||||||
Equity earnings / (loss) | $18 | 105 | (19 | ) | ($104 | ) | |||||||
Income before minority interests and equity earnings | 18 | 28 | 18 | 69 | (104 | ) | 29 | ||||||
Minority interests and equity earnings | (11 | ) | (11 | ) | |||||||||
Net income | $18 | $28 | $18 | $58 | ($104 | ) | $18 | ||||||
17
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the six months ended June 30, 2004
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Net sales | $2,392 | $1,067 | $3,459 | ||||||||||
Cost of products sold, excluding depreciation | |||||||||||||
and amortization | ($15 | ) | 2,026 | 851 | 2,862 | ||||||||
Depreciation and amortization | 105 | 48 | 153 | ||||||||||
Gross profit | 15 | 261 | 168 | 444 | |||||||||
Selling and administrative expense | 138 | 44 | 182 | ||||||||||
Loss from early extinguishments of debt | 1 | 3 | 4 | ||||||||||
Net interest expense | 62 | 117 | (3 | ) | 176 | ||||||||
Technology royalty | (13 | ) | 13 | ||||||||||
Translation and exchange adjustments | 24 | (6 | ) | 9 | 27 | ||||||||
Income / (loss) before income taxes, | |||||||||||||
minority interests and equity earnings | (71 | ) | 24 | 102 | 55 | ||||||||
Provision / (benefit) for income taxes | (5 | ) | 29 | 24 | |||||||||
Equity earnings / (loss) | $20 | 121 | (11 | ) | ($130 | ) | |||||||
Income before minority interests and equity earnings | 20 | 50 | 18 | 73 | (130 | ) | 31 | ||||||
Minority interests and equity earnings | 2 | (13 | ) | (11 | ) | ||||||||
Net income | $20 | $50 | $20 | $60 | ($130 | ) | $20 | ||||||
18
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2005
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Assets | |||||||||||||
Current assets | |||||||||||||
Cash and cash equivalents | $14 | $80 | $171 | $265 | |||||||||
Receivables, net | 3 | 336 | 648 | 987 | |||||||||
Intercompany receivables | 1 | 53 | 36 | ($90 | ) | ||||||||
Inventories | 603 | 406 | 1,009 | ||||||||||
Prepaid expenses and other current assets | $1 | 47 | 24 | 72 | |||||||||
Total current assets | 1 | 18 | 1,119 | 1,285 | (90 | ) | 2,333 | ||||||
Intercompany debt receivables | 11 | 2,620 | 1,485 | 880 | (4,996 | ) | |||||||
Investments | 76 | 8 | 84 | ||||||||||
Investments in subsidiaries | 164 | 3,046 | (21 | ) | (3,189 | ) | |||||||
Goodwill | 1,824 | 597 | 2,421 | ||||||||||
Property, plant and equipment, net | 1,209 | 589 | 1,798 | ||||||||||
Other non-current assets | 69 | 906 | 40 | 1,015 | |||||||||
Total | $176 | $5,753 | $6,598 | $3,399 | ($8,275 | ) | $7,651 | ||||||
Liabilities and shareholders’ equity | |||||||||||||
Current liabilities | |||||||||||||
Short-term debt | $19 | $28 | $47 | ||||||||||
Current maturities of long-term debt | 1 | 24 | 25 | ||||||||||
Accounts payable and accrued liabilities | $15 | $86 | 1,182 | 628 | 1,911 | ||||||||
Intercompany payables | 36 | 54 | ($90 | ) | |||||||||
Income taxes payable | 5 | 33 | 22 | 60 | |||||||||
Total current liabilities | 15 | 91 | 1,271 | 756 | (90 | ) | 2,043 | ||||||
Long-term debt, excluding current maturities | 2,684 | 885 | 66 | 3,635 | |||||||||
Long-term intercompany debt | 1,431 | 2,802 | 763 | (4,996 | ) | ||||||||
Postretirement and pension liabilities | 966 | 15 | 981 | ||||||||||
Other non-current liabilities | 11 | 510 | 125 | 646 | |||||||||
Minority interests | 185 | 185 | |||||||||||
Commitments and contingent liabilities | |||||||||||||
Shareholders’ equity | 161 | 1,536 | 164 | 1,489 | (3,189 | ) | 161 | ||||||
Total | $176 | $5,753 | $6,598 | $3,399 | ($8,275 | ) | $7,651 | ||||||
19
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2004
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Assets | |||||||||||||
Current assets | |||||||||||||
Cash and cash equivalents | $1 | $168 | $302 | $471 | |||||||||
Receivables, net | 6 | 362 | 532 | 900 | |||||||||
Intercompany receivables | 1 | 53 | 37 | ($91 | ) | ||||||||
Inventories | 556 | 338 | 894 | ||||||||||
Prepaid expenses and other current assets | 59 | 19 | 78 | ||||||||||
Total current assets | 8 | 1,198 | 1,228 | (91 | ) | 2,343 | |||||||
Intercompany debt receivables | $22 | 2,648 | 1,378 | 898 | (4,946 | ) | |||||||
Investments | 75 | 10 | 85 | ||||||||||
Investments in subsidiaries | 272 | 3,254 | 17 | (3,543 | ) | ||||||||
Goodwill | 1 | 1,931 | 660 | 2,592 | |||||||||
Property, plant and equipment, net | 1,329 | 673 | 2,002 | ||||||||||
Other non-current assets | 84 | 978 | 41 | 1,103 | |||||||||
Total | $294 | $5,995 | $6,906 | $3,510 | ($8,580 | ) | $8,125 | ||||||
Liabilities and shareholders’ equity | |||||||||||||
Current liabilities | |||||||||||||
Short-term debt | $10 | $41 | $51 | ||||||||||
Current maturities of long-term debt | 2 | 23 | 25 | ||||||||||
Accounts payable and accrued liabilities | $17 | $94 | 1,237 | 595 | 1,943 | ||||||||
Intercompany payables | 37 | 54 | ($91 | ) | |||||||||
Income taxes payable | 37 | 24 | 61 | ||||||||||
Total current liabilities | 17 | 94 | 1,323 | 737 | (91 | ) | 2,080 | ||||||
Long-term debt, excluding current maturities | 2,794 | 935 | 67 | 3,796 | |||||||||
Long-term intercompany debt | 1,419 | 2,786 | 741 | (4,946 | ) | ||||||||
Postretirement and pension liabilities | 1,003 | 16 | 1,019 | ||||||||||
Other non-current liabilities | 25 | 587 | 140 | 752 | |||||||||
Minority interests | 201 | 201 | |||||||||||
Commitments and contingent liabilities | |||||||||||||
Shareholders’ equity | 277 | 1,663 | 272 | 1,608 | (3,543 | ) | 277 | ||||||
Total | $294 | $5,995 | $6,906 | $3,510 | ($8,580 | ) | $8,125 | ||||||
20
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2005
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Net cash provided by /(used for) operating activities | ($3 | ) | ($71 | ) | ($37 | ) | $58 | ($53 | ) | ||||
Cash flows from investing activities | |||||||||||||
Capital expenditures | (53 | ) | (18 | ) | (71 | ) | |||||||
Proceeds from sale of property, plant and equipment | 14 | 8 | 22 | ||||||||||
Intercompany investing activities | 37 | 14 | ($51 | ) | |||||||||
Other, net | (7 | ) | (7 | ) | |||||||||
Net cash provided by / (used for) investing activities | 37 | (25 | ) | (17 | ) | (51 | ) | (56 | ) | ||||
Cash flows from financing activities | |||||||||||||
Proceeds from long-term debt | 10 | 10 | |||||||||||
Payments of long-term debt | (71 | ) | (1 | ) | (72 | ) | |||||||
Net change in short-term debt | 35 | (18 | ) | 17 | |||||||||
Net change in long-term intercompany balances | 11 | 47 | 29 | (87 | ) | ||||||||
Common stock repurchased | (14 | ) | (14 | ) | |||||||||
Common stock issued | 6 | 6 | |||||||||||
Dividends paid | (15 | ) | (36 | ) | 51 | ||||||||
Minority dividends, net of contributions | (28 | ) | (28 | ) | |||||||||
Net cash provided by / (used for) financing activities | 3 | 47 | (22 | ) | (160 | ) | 51 | (81 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents | (4 | ) | (12 | ) | (16 | ) | |||||||
Net change in cash and cash equivalents | 13 | (88 | ) | (131 | ) | (206 | ) | ||||||
Cash and cash equivalents at January 1 | 1 | 168 | 302 | 471 | |||||||||
Cash and cash equivalents at June 30 | $0 | $14 | $80 | $171 | $0 | $265 | |||||||
21
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2004
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | ||||||||
Net cash provided by /(used for) operating activities | $2 | ($50 | ) | ($59 | ) | $41 | ($66 | ) | |||||
Cash flows from investing activities | |||||||||||||
Capital expenditures | (51 | ) | (15 | ) | (66 | ) | |||||||
Proceeds from sale of property, plant and equipment | 2 | 3 | 5 | ||||||||||
Intercompany investing activities | 415 | 422 | 30 | ($867 | ) | ||||||||
Other, net | 4 | (10 | ) | (6 | ) | ||||||||
Net cash provided by / (used for) investing activities | 415 | 377 | 8 | (867 | ) | (67 | ) | ||||||
Cash flows from financing activities | |||||||||||||
Proceeds from long-term debt | 1 | 1 | |||||||||||
Payments of long-term debt | (21 | ) | (114 | ) | (135 | ) | |||||||
Net change in short-term debt | 7 | 114 | 14 | 135 | |||||||||
Net change in long-term intercompany balances | (3 | ) | 28 | (444 | ) | 419 | |||||||
Common stock issued | 1 | 1 | |||||||||||
Dividends paid | (400 | ) | (34 | ) | (433 | ) | 867 | ||||||
Minority dividends, net of contributions | (17 | ) | (17 | ) | |||||||||
Net cash used for financing activities | (2 | ) | (365 | ) | (385 | ) | (130 | ) | 867 | (15 | ) | ||
Effect of exchange rate changes on cash and cash equivalents | (1 | ) | (1 | ) | (2 | ) | |||||||
Net change in cash and cash equivalents | (68 | ) | (82 | ) | (150 | ) | |||||||
Cash and cash equivalents at January 1 | 5 | 118 | 278 | 401 | |||||||||
Cash and cash equivalents at June 30 | $0 | $5 | $50 | $196 | $0 | $251 | |||||||
22
Crown Holdings, Inc.
Crown Cork & Seal Company, Inc. (Issuer), a 100% owned subsidiary, has outstanding registered debt that is fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent). No other subsidiary guarantees the debt. The following condensed combining financial statements: | |
• statements of operations for the three and six months ended June 30, 2005 and 2004, | |
• balance sheets as of June 30, 2005 and December 31, 2004 and | |
• cash flows for the six months ended June 30, 2005 and 2004 | |
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X. |
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2005
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||||
Net sales | $2,017 | $2,017 | |||||||||||
Cost of products sold, excluding depreciationand amortization | 1,654 | 1,654 | |||||||||||
Depreciation and amortization | 75 | 75 | |||||||||||
Gross profit | 288 | 288 | |||||||||||
Selling and administrative expense | $1 | 101 | 102 | ||||||||||
Gain on sale of assets and provision for asset impairments, net | (17 | ) | (17 | ) | |||||||||
Loss from early extinguishments of debt | 2 | 2 | |||||||||||
Net interest expense | 81 | 12 | 93 | ||||||||||
Translation and exchange adjustments | 65 | 65 | |||||||||||
Income / (loss) before income taxes, minority interests and equity earnings | (82 | ) | 125 | 43 | |||||||||
Provision / (benefit) for income taxes | (31 | ) | 39 | 8 | |||||||||
Equity earnings | $28 | 75 | ($103 | ) | |||||||||
Income before minority interests and equity earnings | 28 | 24 | 86 | (103 | ) | 35 | |||||||
Minority interests and equity earnings | 4 | (11 | ) | (7 | ) | ||||||||
Net income | $28 | $28 | $75 | ($103 | ) | $28 | |||||||
23
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2004
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||||
Net sales | $1,836 | $1,836 | |||||||||||
Cost of products sold, excluding depreciation and amortization | 1,501 | 1,501 | |||||||||||
Depreciation and amortization | 76 | 76 | |||||||||||
Gross profit | 259 | 259 | |||||||||||
Selling and administrative expense | $2 | 88 | 90 | ||||||||||
Net interest expense | 80 | 8 | 88 | ||||||||||
(Gain) / loss on sale of assets | 1 | (1 | ) | ||||||||||
Translation and exchange adjustments | 23 | 23 | |||||||||||
Income / (loss) before income taxes, minority interests and equity earnings | (83 | ) | 141 | 58 | |||||||||
Provision / (benefit) for income taxes | (37 | ) | 53 | 16 | |||||||||
Equity earnings | $36 | 77 | ($113 | ) | |||||||||
Income before minority interests and equity earnings | 36 | 31 | 88 | (113 | ) | 42 | |||||||
Minority interests and equity earnings | 5 | (11 | ) | (6 | ) | ||||||||
Net income | $36 | $36 | $77 | ($113 | ) | $36 | |||||||
24
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the six months ended June 30, 2005
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||
Net sales | $3,720 | $3,720 | |||||||||
Cost of products sold, excluding depreciation and amortization | 3,078 | 3,078 | |||||||||
Depreciation and amortization | 147 | 147 | |||||||||
Gross profit | 495 | 495 | |||||||||
Selling and administrative expense | $3 | 195 | 198 | ||||||||
Gain on sale of assets and provision for asset impairments, net | (22 | ) | (22 | ) | |||||||
Loss from early extinguishments of debt | 2 | 2 | |||||||||
Net interest expense | 162 | 23 | 185 | ||||||||
Translation and exchange adjustments | 95 | 95 | |||||||||
Income / (loss) before income taxes, minority interests and equity earnings | (165 | ) | 202 | 37 | |||||||
Provision / (benefit) for income taxes | (58 | ) | 66 | 8 | |||||||
Equity earnings | $18 | 118 | ($136 | ) | |||||||
Income before minority interests and equity earnings | 18 | 11 | 136 | (136 | ) | 29 | |||||
Minority interests and equity earnings | 7 | (18 | ) | (11 | ) | ||||||
Net income | $18 | $18 | $118 | ($136 | ) | $18 | |||||
25
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the six months ended June 30, 2004
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||
Net sales | $3,459 | $3,459 | |||||||||
Cost of products sold, excluding depreciation and amortization | 2,862 | 2,862 | |||||||||
Depreciation and amortization | 153 | 153 | |||||||||
Gross profit | 444 | 444 | |||||||||
Selling and administrative expense | $2 | 180 | 182 | ||||||||
(Gain) / loss on sale of assets, net | 1 | (1 | ) | ||||||||
Loss from early extinguishments of debt | 1 | 3 | 4 | ||||||||
Net interest expense | 157 | 19 | 176 | ||||||||
Translation and exchange adjustments | 27 | 27 | |||||||||
Income / (loss) before income taxes, minority interests and equity earnings | (161 | ) | 216 | 55 | |||||||
Provision / (benefit) for income taxes | (49 | ) | 73 | 24 | |||||||
Equity earnings | $20 | 125 | ($145 | ) | |||||||
Income before minority interests and equity earnings | 20 | 13 | 143 | (145 | ) | 31 | |||||
Minority interests and equity earnings | 7 | (18 | ) | (11 | ) | ||||||
Net income | $20 | $20 | $125 | ($145 | ) | $20 | |||||
26
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2005
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $265 | $265 | |||||||||
Receivables, net | 987 | 987 | |||||||||
Inventories | 1,009 | 1,009 | |||||||||
Prepaid expenses and other current assets | $1 | 71 | 72 | ||||||||
Total current assets | 1 | 2,332 | 2,333 | ||||||||
Intercompany debt receivables | 11 | 3,330 | ($3,341 | ) | |||||||
Investments | 164 | $4,439 | 28 | (4,547 | ) | 84 | |||||
Goodwill | 2,421 | 2,421 | |||||||||
Property, plant and equipment, net | 1,798 | 1,798 | |||||||||
Other non-current assets | 9 | 1,006 | 1,015 | ||||||||
Total | $176 | $4,448 | $10,915 | ($7,888 | ) | $7,651 | |||||
Liabilities and shareholders’ equity | |||||||||||
Current liabilities | |||||||||||
Short-term debt | $1 | $46 | $47 | ||||||||
Current maturities of long-term debt | 25 | 25 | |||||||||
Accounts payable and accrued liabilities | $15 | 46 | 1,850 | 1,911 | |||||||
Income taxes payable | 60 | 60 | |||||||||
Total current liabilities | 15 | 47 | 1,981 | 2,043 | |||||||
Long-term debt, excluding current maturities | 698 | 2,937 | 3,635 | ||||||||
Long-term intercompany debt | 3,341 | ($3,341 | ) | ||||||||
Postretirement and pension liabilities | 981 | 981 | |||||||||
Other non-current liabilities | 198 | 448 | 646 | ||||||||
Minority interests | 185 | 185 | |||||||||
Commitments and contingent liabilities | |||||||||||
Shareholders’ equity | 161 | 164 | 4,383 | (4,547 | ) | 161 | |||||
Total | $176 | $4,448 | $10,915 | ($7,888 | ) | $7,651 | |||||
27
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2004
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||
Assets | |||||||||||
Current assets | |||||||||||
Cash and cash equivalents | $471 | $471 | |||||||||
Receivables, net | 900 | 900 | |||||||||
Inventories | 894 | 894 | |||||||||
Prepaid expenses and other current assets | 78 | 78 | |||||||||
Total current assets | 2,343 | 2,343 | |||||||||
Intercompany debt receivables | $22 | 3,204 | ($3,226 | ) | |||||||
Investments | 272 | $4,444 | 30 | (4,661 | ) | 85 | |||||
Goodwill | 2,592 | 2,592 | |||||||||
Property, plant and equipment, net | 2,002 | 2,002 | |||||||||
Other non-current assets | 9 | 1,094 | 1,103 | ||||||||
Total | $294 | $4,453 | $11,265 | ($7,887 | ) | $8,125 | |||||
Liabilities and shareholders’ equity | |||||||||||
Current liabilities | |||||||||||
Short-term debt | $51 | $51 | |||||||||
Current maturities of long-term debt | $1 | 24 | 25 | ||||||||
Accounts payable and accrued liabilities | $17 | 49 | 1,877 | 1,943 | |||||||
Income taxes payable | 61 | 61 | |||||||||
Total current liabilities | 17 | 50 | 2,013 | 2,080 | |||||||
Long-term debt, excluding current maturities | 698 | 3,098 | 3,796 | ||||||||
Long-term intercompany debt | 3,226 | ($3,226 | ) | ||||||||
Postretirement and pension liabilities | 1,019 | 1,019 | |||||||||
Other non-current liabilities | 207 | 545 | 752 | ||||||||
Minority interests | 201 | 201 | |||||||||
Commitments and contingent liabilities | |||||||||||
Shareholders’ equity | 277 | 272 | 4,389 | (4,661 | ) | 277 | |||||
Total | $294 | ) | $4,453 | $11,265 | ($7,887 | ) | $8,125 | ||||
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Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2005
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||||
Net cash provided by / (used for) operating activities | ($3 | ) | ($117 | ) | $67 | ($53 | ) | ||||||
Cash flows from investing activities | |||||||||||||
Capital expenditures | (71 | ) | (71 | ) | |||||||||
Proceeds from sale of property, plant and equipment | 22 | 22 | |||||||||||
Intercompany investing activities | 3 | ($3 | ) | ||||||||||
Other, net | (7 | ) | (7 | ) | |||||||||
Net cash provided by / (used for) investing activities | 3 | (56 | ) | (3 | ) | (56 | ) | ||||||
Cash flows from financing activities | |||||||||||||
Proceeds from long-term debt | 10 | 10 | |||||||||||
Payments of long-term debt | (72 | ) | (72 | ) | |||||||||
Net change in short-term debt | 17 | 17 | |||||||||||
Net change in long-term intercompany balances | 11 | 114 | (125 | ) | |||||||||
Common stock repurchased | (14 | ) | (14 | ) | |||||||||
Common stock issued | 6 | 6 | |||||||||||
Dividends paid | (3 | ) | 3 | ||||||||||
Minority dividends, net of contributions | (28 | ) | (28 | ) | |||||||||
Net cash provided by / (used for)financing activities | 3 | 114 | (201 | ) | 3 | (81 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents | (16 | ) | (16 | ) | |||||||||
Net change in cash and cash equivalents | (206 | ) | (206 | ) | |||||||||
Cash and cash equivalents at January 1 | 471 | 471 | |||||||||||
Cash and cash equivalents at June 30 | $0 | $0 | $265 | $0 | $265 | ||||||||
29
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the six months ended June 30, 2004
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | |||||||||
Net cash provided by / (used for) operating activities | $2 | ($119 | ) | $51 | ($66 | ) | |||||||
Cash flows from investing activities | |||||||||||||
Capital expenditures | (66 | ) | (66 | ) | |||||||||
Proceeds from sale of property, plant and equipment | 5 | 5 | |||||||||||
Intercompany investing activities | 403 | (398 | ) | ($5 | ) | ||||||||
Other, net | 4 | (10 | ) | (6 | ) | ||||||||
Net cash provided by / (used for) investing activities | 407 | (469 | ) | (5 | ) | (67 | ) | ||||||
Cash flows from financing activities | |||||||||||||
Proceeds from long-term debt | 1 | 1 | |||||||||||
Payments of long-term debt | (22 | ) | (113 | ) | (135 | ) | |||||||
Net change in short-term debt | 135 | 135 | |||||||||||
Net change in long-term intercompany balances | (3 | ) | (264 | ) | 267 | ||||||||
Common stock issued | 1 | 1 | |||||||||||
Dividends paid | (5 | ) | 5 | ||||||||||
Minority dividends, net of contributions | (17 | ) | (17 | ) | |||||||||
Net cash provided by / (used for) financing activities | (2 | ) | (286 | ) | 268 | 5 | (15 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | (2 | ) | (2 | ) | |||||||||
Net change in cash and cash equivalents | 2 | (152 | ) | (150 | ) | ||||||||
Cash and cash equivalents at January 1 | 401 | 401 | |||||||||||
Cash and cash equivalents at June 30 | $0 | $2 | $249 | $0 | $251 | ||||||||
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Crown Holdings, Inc.
PART I - FINANCIAL INFORMATION
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (in millions) |
Introduction
The following discussion presents management’s analysis of the results of operations for the three and six months ended June 30, 2005 compared to the corresponding periods in 2004 and the changes in financial condition and liquidity from December 31, 2004. This discussion should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10–K for the year ended December 31, 2004 along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
The Company’s principal areas of focus include improving segment income, reducing debt and reducing asbestos–related costs. Segment income is defined by the Company as net sales less cost of products sold, depreciation and amortization, selling and administrative expenses and provision for restructuring.
Improving segment income is primarily dependent on the Company’s ability to increase revenues and manage costs. Key strategies for building and expanding the business include targeting geographic markets with strong growth potential, such as, Asia, Latin America, the Middle East and southern and central Europe, improving selling prices in certain product lines and developing innovative packaging products using proprietary technology. The Company’s cost control efforts focus on improving operating efficiencies and managing material and labor costs, including pension and benefit costs. The Company operates globally and has significant revenues, income, cash flow and debt denominated in currencies other than the U.S. dollar.
The reduction of debt remains a principal strategic goal of the Company and is primarily dependent upon the Company’s ability to generate cash flow from operations. In addition, the Company may consider divestitures from time to time. The Company’s total debt of $3,707 at June 30, 2005 decreased $197 from $3,904 at June 30, 2004.
The Company seeks to reduce its asbestos–related costs through prudent case management. Asbestos–related payments were $41 in 2004 and $10 for the first six months of 2005, and the Company expects to pay approximately $30 for the full year of 2005.
Results of Operations
Net Sales
Net sales in the second quarter of 2005 were $2,017, an increase of $181 or 9.9% compared to net sales of $1,836 for the same period in 2004. Net sales in the first six months of 2005 were $3,720, an increase of $261 or 7.5% compared to net sales of $3,459 for the same period in 2004. Sales from U.S. operations accounted for 29.3% of consolidated net sales in the first six months of 2005 compared to 30.1% for the same period in 2004. Sales of beverage cans and ends accounted for 38.1% and sales of food cans and ends accounted for 29.8% of consolidated net sales in the first six months of 2005 compared to 37.4% and 30.6%, respectively, in 2004.
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Crown Holdings, Inc.
Item 2. | Management’s Discussion and Analysis (Continued) |
An analysis of comparative segment net sales follows:
Net Sales | Percentage Change | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Second Quarter | Six Months Ended | Second | Six | |||||||||||
2005 | 2004 | 2005 | 2004 | Quarter | Months | |||||||||
Segment: | ||||||||||||||
Americas | $ 808 | $ 748 | $1,477 | $1,388 | 8.0% | 6.4% | ||||||||
Europe | 1,097 | 996 | 2,026 | 1,895 | 10.1% | 6.9% | ||||||||
Asia-Pacific | 112 | 92 | 217 | 176 | 21.7% | 23.3% | ||||||||
$2,017 | $1,836 | $3,720 | $3,459 | 9.9% | 7.5% | |||||||||
Net sales in the Americas segment for the second quarter of 2005 were $808, an increase of $60 or 8.0% compared to net sales of $748 in the second quarter of 2004. Net sales for the first six months of 2005 were $1,477, an increase of $89 or 6.4% compared to net sales of $1,388 in the first six months of 2004. The increase in net sales for the second quarter and first six months of 2005 was primarily due to the pass–through of higher steel and aluminum costs to customers.
Net sales in the European segment for the second quarter of 2005 were $1,097, an increase of $101 or 10.1% compared to net sales of $996 in the second quarter of 2004. Net sales for the first six months of 2005 were $2,026, an increase of $131 or 6.9% compared to net sales of $1,895 in the first six months of 2004. The increase in net sales for the second quarter and the first six months of 2005 was primarily due to the favorable impact of currency translation from the strengthening of the euro and sterling against the U.S. dollar, including $41 for the quarter and $77 for the first six months, and the pass–through of higher steel and aluminum costs to customers.
Net sales in the Asia–Pacific segment for the second quarter of 2004 were $112, an increase of $20 or 21.7% compared to net sales of $92 in the second quarter of 2004. Net sales for the first six months of 2005 were $217, an increase of $41 or 23.3% compared to $176 in the first six months of 2004. The increase in net sales for the second quarter and first six months of 2005 was primarily due to increased beverage can volumes in China and Southeast Asia.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,654 and $3,078 for the three and six months ended June 30, 2005, increases of $153 and $216 compared to $1,501 and $2,862 for the same periods in 2004. The increases were primarily due to the impact of currency translation of approximately $47 for the quarter and $86 for the six months, and higher material costs for steel and aluminum.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 82.0% and 82.7% for the three and six months ended June 30, 2005 compared to 81.8% and 82.7% for the same periods in 2004.
As a result of steel price increases, the Company in 2005 has implemented significant price increases in all of its steel product categories. To date, the impact on the Company’s earnings has not been material as a result of the pass–through of increased costs to customers. However, there can be no assurance that the Company will be able to fully recover from its customers the impact of steel surcharges or price increases. In addition, if the Company is unable to purchase steel for a significant period of time, the Company’s steel–consuming operations would be disrupted. The Company is continuing to monitor this situation and the effect on its operations.
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Crown Holdings, Inc.
Item 2. | Management’s Discussion and Analysis (Continued) |
Depreciation and Amortization
Depreciation and amortization was $75 and $147 in the second quarter and six months of 2005, decreases of $1 or 1.3% and $6 or 3.9% from the prior year periods. The decreases were primarily due to lower capital spending in recent years, offset by increases of $2 and $4 due to currency translation for the second quarter and six months, respectively. The effect of currency translation was primarily due to the strengthening of the euro and sterling against the U.S. dollar.
Selling and Administrative Expense
Selling and administrative expense was $102 in the second quarter of 2005 compared to $90 for the same period in 2004. The increase was primarily due to $2 of currency translation in Europe due to the stronger euro and sterling against the U.S. dollar, and increased compensation costs. As a percentage of net sales, selling and administrative expense was 5.1% for the three months ended June 30, 2005 compared to 4.9% for the same period in 2004.
Selling and administrative expense was $198 in the first six months of 2005 compared to $182 for the same period in 2004. The increase was primarily due to $4 of currency translation in Europe due to the stronger euro and sterling against the U.S. dollar, and increased compensation costs. As a percentage of net sales, selling and administrative expense was 5.3% for the six month periods ended June 30, 2005 and 2004.
Segment Income
Note M to the consolidated financial statements provides a reconciliation of consolidated segment income (a non-GAAP measure consisting of net sales less cost of products sold, depreciation and amortization, selling and administrative expense, and provision for restructuring) to income before income taxes, minority interests and equity earnings.
Consolidated segment income was $186 and $297 in the second quarter and six months of 2005 compared to $169 and $262 in the quarter and six months ended June 30, 2004. As a percentage of consolidated net sales, segment income was 9.2% and 8.0% in the second quarter and six months of 2005 compared to 9.2% and 7.6% for the same periods in 2004.
An analysis of segment income follows:
Segment Income | Percentage Change | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Second Quarter | Six Months Ended | Second | Six | |||||||||||
2005 | 2004 | 2005 | 2004 | Quarter | Months | |||||||||
Segment: | ||||||||||||||
Americas | $ 65 | $ 60 | $ 107 | $ 87 | 8.3% | 23.0% | ||||||||
Europe | 131 | 117 | 211 | 197 | 12.0% | 7.1% | ||||||||
Asia-Pacific | 15 | 14 | 29 | 26 | 7.1% | 11.5% | ||||||||
Corporate | ( 25 | ) | ( 22 | ) | ( 50 | ) | ( 48 | ) | (13.6% | ) | ( 4.2% | ) | ||
$186 | $169 | $297 | $262 | 10.1% | 13.4% | |||||||||
Americas segment income, as a percentage of net sales, was 8.0% and 7.2% in the second quarter and first six months of 2005 compared to 8.0% and 6.3% for the same periods in 2004. The increases in segment income and percentage margin in 2005 were primarily due to increased selling prices.
European segment income, as a percentage of net sales, was 11.9% and 10.4% in the second quarter and first six months of 2005 compared to 11.7% and 10.4% for the same periods in 2004. The increases in segment income and percentage margin in 2005 were primarily due to increased selling prices. In addition to the selling price increases, segment income in 2005 also improved $4 in the quarter and $7 in the first six months due to the effect of currency translation.
33
Crown Holdings, Inc.
Item 2. | Management’s Discussion and Analysis (Continued) |
The improvement in Asia–Pacific segment income for the quarter and first six months was primarily due to increased beverage can volumes in China and Southeast Asia.
Gain on Sale of Assets and Provision for Asset Impairments
During the first six months of 2005, the Company recognized a net gain of $22 relating to asset disposals and impairments. The gain of $22 included $16 for asset disposals and $7 for the reversal of a provision in Asia, offset by $1 for asset impairments in the U.S. In Asia, the Company received a waiver of a local requirement to divest a portion of one of its subsidiaries and, accordingly, reversed its provision for the expected loss upon divestiture. During the first six months of 2004, the Company sold various assets for $5 and had no total net gain or loss.
Gain / Loss from Early Extinguishments of Debt
During the second quarter of 2005, the Company recognized a loss of $2 before tax in Europe in connection with the repurchase of certain unsecured notes. During the first quarter of 2004, the Company recognized a loss of $4 before tax, primarily in Europe, in connection with the repurchase of certain unsecured notes.
Interest Expense
Interest expense increased $6 and $10, respectively, for the three and six months ended June 30, 2005 versus the same periods in 2004. The increases were due to increased borrowing rates, partially offset by lower average debt outstanding.
Translation and Exchange Adjustments
The results for the six months ended June 30, 2005 included net foreign exchange losses of $95 compared to net losses of $27 for the same period in 2004. The majority of the U.S. dollar debt from the Company’s 2003 refinancing was issued by its European subsidiaries, and the losses result from exchange rate movements on that debt. The European subsidiaries continue to have significant unhedged currency exposure which may result in future foreign exchange gains or losses. The Company may hedge a portion of these exposures in the future through derivative instruments or intercompany loans. Further discussion of the potential impact on earnings from the 2003 refinancing is provided in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
Taxes on Income
The second quarter of 2005 included a tax charge of $8 on pre–tax income of $43 for an effective rate of 18.6%. The difference of $7 between the pre-tax income at the U.S. statutory rate of 35% or $15, and the total tax charge of $8 was primarily due to (i) benefits of $6 from lower non–U.S. tax rates in certain jurisdictions, and (ii) a benefit of $6 from the carryback of a prior U.S. tax loss that had a valuation allowance, partially offset by (iii) charges of $3 for withholding taxes.
The first six months of 2005 included a tax charge of $8 on pre–tax income of $37 for an effective rate of 21.6%. The difference of $5 between the pre–tax income at the U.S. statutory rate of 35%, or $13, and the total tax charge of $8 was primarily due to (i) benefits of $13 from lower non–U.S. tax rates in certain jurisdictions, and (ii) a benefit of $6 from the carryback of a prior U.S. tax loss that had a valuation allowance, partially offset by (iii) charges of $5 for withholding taxes and $7 for net valuation allowance adjustments.
Minority Interests and Equity Earnings
The charge for minority interests, net of equity earnings, increased $1 in the second quarter of 2005 compared to the same period of 2004. The increase for the second quarter of 2005 was primarily due to increased minority earnings in the beverage can operations in South America.
34
Crown Holdings, Inc.
Item 2. | Management’s Discussion and Analysis (Continued) |
Liquidity and Capital Resources
Cash from Operations
Cash of $53 was used for operating activities in the first six months of 2005 compared to $66 during the same period in 2004. Cash from operating activities included the positive effect of the sale of receivables of $127 in 2005 and $23 in 2004. The improvement of $104 due to the increased sale of receivables was partially offset by $91 of decreases, including increased pension contributions of $19, payments of $30 to exit interest rate swaps, and higher working capital.
The increase in the sale of receivables in 2005 was primarily due to the Company’s new €120 securitization facility in the U.K. and France, as discussed underNote F to the consolidated financial statements, which information is incorporated herein by reference.
Investing Activities
Investing activities used cash of $56 during the first six months of 2005 compared to cash used of $67 in the prior year period. The reduction in cash used for investing activities was primarily due to $22 of asset sale proceeds in 2005 compared to $5 in 2004.
Financing Activities
Financing activities used cash of $81 during the first six months of 2005 compared to cash used of $15 during the same period in 2004. The increase in cash used by financing activities compared to 2004 was primarily due to the repurchase of $70 of notes due in 2006.
During the first six months of 2005, the Company repurchased approximately 850,000 shares of its common stock for $14.
Refinancing Activities
On February 26, 2003, the Company completed a refinancing consisting of the sale of $1,085 of 9.5% second priority senior secured notes due 2011, €285 of 10.25% second priority senior secured notes due in 2011, $725 of 10.875% third priority senior secured notes due in 2013, $504 of first priority term loans due in 2008 and a $550 first priority revolving credit facility due in 2006. Proceeds were used to repay the Company’s previous credit facility, repurchase and repay a portion of the Company’s outstanding unsecured notes and pay fees and expenses associated with the refinancing.
In September 2004, the Company completed an additional refinancing consisting of the sale of €350 of 6.25% first priority senior secured notes due 2011 and a new $625 senior secured credit facility. The new facility included a $400 revolving credit facility, a $100 standby letter of credit facility due in 2010 and a $125 term loan facility due in 2011. In October 2004, the Company completed an add–on issuance of €110 of 6.25% first priority senior secured notes due 2011, bringing the total of the two issuances to €460. The €350 of proceeds from the first issuance combined with the new $625 senior secured credit facility was used to refinance the existing credit and term loan facilities entered into in February, 2003, and to pay fees and expenses associated with the refinancing. The €110 of proceeds from the second issuance was used to repay the $125 term loan from September 2004 and to pay expenses associated with the issuance.
As of June 30, 2005, the Company had $380 of borrowing capacity available under its revolving credit facility, equal to the total facility of $400 less $20 of borrowings. The Company also had $20 of standby letters of credit capacity equal to $100 less $80 of standby letters of credit outstanding.
Further information relating to the Company’s liquidity and capital resources is set forth underNote F to the consolidated financial statements, which information is incorporated herein by reference.
35
Crown Holdings, Inc.
Item 2. | Management’s Discussion and Analysis (Continued) |
Contractual Obligations
Purchase obligations, covering new agreements for raw materials and energy, increased by $96 in 2005 and $48 in 2006 above the amounts provided within Part I, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, in the “Liquidity and Capital Resources” section of the Company’s Annual Report on Form 10–K for the year ended December 31, 2004.
Commitments and Contingent Liabilities
Information regarding the Company’s commitments and contingent liabilities appears in Part I within Item 1 of this report under NotesI andJ to the consolidated financial statements, which information is incorporated herein by reference.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require that management make numerous estimates and assumptions. Actual results could differ from these estimates and assumptions, impacting the reported results of operations and financial condition of the Company. Management’s Discussion and Analysis and Note A to the consolidated financial statements contained in the Company’s Annual Report on Form 10–K for the year ended December 31, 2004 describe the significant accounting estimates and policies used in the preparation of the consolidated financial statements. There have been no significant changes in the Company’s critical accounting policies during the first six months of 2005.
Recent Accounting Pronouncements
In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004) (“FAS 123(R)”), “Share–Based Payment.” FAS 123(R) replaces SFAS No. 123 (“FAS 123”), “Accounting for Stock–Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” FAS 123(R) requires that the cost of share–based payments to employees, including grants of employee stock options, be recognized in the financial statements based on their grant–date fair values. The pro forma disclosures previously permitted under FAS 123 will no longer be an alternative to financial statement recognition. Under FAS 123(R), the Company must select an appropriate valuation model to calculate the fair value of its share–based payments for awards made subsequent to adoption of the standard, and a transition method for recognizing compensation expense. Valuations of awards granted prior to adoption of the standard have been and will be calculated using the Black–Scholes Option Pricing model. Upon adoption of the standard, these prior valuations will not be reassessed. The transition methods provided in the standard include modified prospective and retrospective options. Under the modified prospective method, compensation expense for all unvested stock awards, measured by the grant–date fair value of the awards, will be charged to earnings prospectively over the remaining vesting period, based on the estimated number of awards that are expected to vest. Under the retrospective method, prior reporting periods back to the date of issuance of FAS 123 may be restated. The restatement of prior periods under the retrospective method will be based on the amounts previously recognized in the pro forma disclosures required by the original provisions of FAS 123. The Company is currently evaluating the requirements of FAS 123(R) and intends to adopt the new standard on January 1, 2006, the amended effective date set for public companies by the U.S. Securities and Exchange Commission.
In May 2005, the FASB issued SFAS No. 154 (“FAS 154”), “Accounting Changes and Error Corrections, a Replacement of APB No. 20 and FASB Statement No. 3.” FAS 154 requires retrospective application, with minor exceptions, to prior periods’ financial statements of changes in accounting principle. The Statement applies primarily to voluntary changes in accounting principle. The Statement also requires that a change in depreciation, amortization or depletion method for long–lived non–financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. FAS 154 is effective for accounting changes and correction of errors made in fiscal years beginning after December 15, 2005.
36
Crown Holdings, Inc.
Item 2. | Management’s Discussion and Analysis (Continued) |
Forward Looking Statements
Statements included herein in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, in the Cost of Products Sold section and in the discussions of asbestos inNote I, commitments and contingencies inNote J and pension and other postretirement benefits inNote L to the consolidated financial statements included in this Quarterly Report on Form 10–Q and also in Part I, Item 1: “Business” and Item 3: “Legal Proceedings” and in Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” within the Company’s Annual Report on Form 10–K for the fiscal year ended December 31, 2004, which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward–looking statements” within the meaning of the federal securities laws. In addition, the Company and its representatives may from time to time, make oral or written statements which are also “forward–looking statements.”
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 risks and uncertainties. Management cautions that forward–looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward–looking statements.
While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with the preparation of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and certain other sections contained in the Company’s quarterly, annual or other reports filed with the Securities and Exchange Commission (“SEC”), the Company does not intend to review or revise any particular forward–looking statement in light of future events.
A discussion of important factors that could cause the actual results of operations or financial condition of the Company to differ from expectations has been set forth in the Company’s Annual Report on Form 10–K for the year ended December 31, 2004 within Part II, Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the caption “Forward Looking Statements” and is incorporated herein by reference. Some of the factors are also discussed elsewhere in this Form 10–Q and in prior Company filings with the SEC. In addition, other factors have been or may be discussed from time to time in the Company’s SEC filings.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Following its refinancing in 2003, the Company has significant U.S. dollar exposure in Europe which may result in future material foreign exchange adjustments to earnings. As of June 30, 2005, the Company had approximately $1.3 billion of net U.S. dollar–denominated liability exposure in its European subsidiaries, including approximately $0.9 billion in subsidiaries with the euro as their functional currency and approximately $0.4 billion in subsidiaries with the pound sterling as their functional currency. In addition, a euro functional currency subsidiary had a Canadian dollar asset exposure of approximately $0.5 billion from an intercompany loan. Based on the exposures at June 30, 2005, a one percentage change in the functional currencies against the exposure would result in an exchange gain or loss of approximately $8 million before tax.
As of June 30, 2005, the Company had approximately $0.2 billion principal floating interest rate debt. A change of .25% in these floating interest rates would change annual interest expense by approximately $0.5 million before tax. The amount of floating debt has decreased from approximately $1.0 billion at December 31, 2004 primarily because the Company terminated $900 notional value of interest rate swaps during 2005.
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Crown Holdings, Inc.
Item 4. | Controls and Procedures |
As of the end of the period covered by this Quarterly Report on Form 10–Q, management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation, and as of the end of the quarter for which this report is made, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information to be disclosed in the reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
There has been no change in internal control over financial reporting that occurred during the quarter ended June 30, 2005, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Crown Holdings, Inc.
PART II — OTHER INFORMATION
Item 1. | Legal Proceedings |
For information regarding the Company’s potential asbestos–related liabilities and certain other matters, seeNote I entitled “Asbestos–Related Liabilities” andNote J entitled “Commitments and Contingent Liabilities,” respectively, to the consolidated financial statements within Item 1 of this Quarterly Report on Form 10–Q, which information is incorporated herein by reference.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 5. | Other Information |
None.
Item 6. | Exhibits |
10.a. | Master Definitions Agreement, dated June 21, 2005, between France Titrisation, as Management Company, BNP Paribas, as Custodian Calculation Agent, FCC Account Bank, Liquidity Facility Provider and Swap Counterparty, Eliopée Limited, as Eliopée, GE Factofrance, as Back-up Servicer, Crown European Holdings, as Parent Company, the Entities listed in Schedule, as Sellers or Servicers, CROWN Emballage France SAS, as French Administrative Agent and CROWN Packaging UK PLC, as English Administrative Agent. | ||
10.b. | Master Receivables Transfer and Servicing Agreement, dated June 21, 2005, between France Titrisation, as Management Company, BNP Paribas, as Custodian, the Entities listed in Schedule 1 of Appendix 1, as Sellers or Servicers, CROWN Emballage France SAS, as French Administrative Agent and CROWN Packaging UK PLC, as English Administrative Agent. | ||
31.1. | Certification of Chief Executive Officer pursuant to Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002. | ||
31.2. | Certification of Chief Financial Officer pursuant to Rule 13a–14(a) or 15d–14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes–Oxley Act of 2002. | ||
32. | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes–Oxley Act of 2002, executed by John W. Conway, Chairman of the Board, President and Chief Executive Officer of Crown Holdings, Inc. and Alan W. Rutherford, Vice Chairman of the Board, Executive Vice President and Chief Financial Officer of Crown Holdings, Inc. |
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Crown Holdings, Inc.
SIGNATURE
Pursuant to the requirements 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.
Crown Holdings, Inc. | |||
Registrant | |||
By: | /s/ Thomas A. Kelly | ||
Thomas A. Kelly | |||
Vice President and Corporate Controller |
Date: August 4, 2005
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