UNITED STATES
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 SEPTEMBER 30, 2008
[ ] 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
CROWN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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 a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer X Accelerated filer __ Smaller reporting company __
Non-accelerated filer __ (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ___ No X
There were 161,153,066 shares of Common Stock outstanding as of October 22, 2008.
Crown Holdings, Inc.
FORM 10-Q
FOR QUARTER ENDED SEPTEMBER 30, 2008
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
| Page Number | |
| Item 1 Financial Statments | |
| 1 | |
| 2 | |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 6 | |
| 6 | |
| 7 | |
D. Goodwill | 7 |
E. Inventories | 7 |
| 7 | |
| 8 | |
| 9 | |
| 9 | |
| 9 | |
| 11 | |
| 12 | |
| 12 | |
N. Income Taxes | 13 |
| 13 | |
| 15 | |
| Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations | |
| 39 | |
| 39 | |
| 39 | |
| 42 | |
| 48 | |
| 48 | |
| Item 4 Controls and Procedures | 49 |
| PART II - OTHER INFORMATION | |
Item 1 Legal Proceedings | 50 |
Item 1A Risk Factors | 50 |
| Item 2 Unregistered Sales of Equity Securities and use of Proceeds | 50 |
| Item 6 Exhibits | 50 |
| Signature | 51 |
Crown Holdings, Inc.
(In millions except share and per share data)
(Unaudited)
| Three months ended September 30 | 2008 | 2007 | ||||||||
| Net sales | $ | 2,369 | $ | 2,153 | ||||||
| Cost of products sold, excluding depreciation and amortization | 1,935 | 1,785 | ||||||||
| Depreciation and amortization | 56 | 56 | ||||||||
| Gross profit | 378 | 312 | ||||||||
| Selling and administrative expense | 102 | 97 | ||||||||
| Provision for restructuring | 3 | 9 | ||||||||
| Provision for asset impairments and loss/(gain) on sale of assets | 2 | (4) | ||||||||
| Interest expense | 76 | 79 | ||||||||
| Interest income | (3) | (2) | ||||||||
| Translation and exchange adjustments | 8 | (5) | ||||||||
| Income before income taxes, minority interests and equity earnings | 190 | 138 | ||||||||
| Provision for income taxes | 45 | 22 | ||||||||
| Minority interests and equity earnings | (31) | (23) | ||||||||
| Net income | $ | 114 | $ | 93 | ||||||
| Earnings per average common share: | ||||||||||
| Basic | $ | 0.71 | $ | 0.58 | ||||||
| Diluted | $ | 0.70 | $ | 0.56 | ||||||
| Weighted average common shares outstanding: | ||||||||||
| Basic | 160,006,745 | 161,238,844 | ||||||||
| Diluted | 163,441,406 | 165,217,100 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
1
Crown Holdings, Inc.
(In millions except share and per share data)
(Unaudited)
| Nine months ended September 30 | 2008 | 2007 | ||||||||
| Net sales | $ | 6,428 | $ | 5,856 | ||||||
| Cost of products sold, excluding depreciation and amortization | 5,277 | 4,875 | ||||||||
| Depreciation and amortization | 165 | 168 | ||||||||
| Gross profit | 986 | 813 | ||||||||
| Selling and administrative expense | 309 | 285 | ||||||||
| Provision for restructuring | 4 | 14 | ||||||||
| Provision for asset impairments and loss/(gain) on sale of assets | (14) | |||||||||
| Loss from early extinguishment of debt | 2 | |||||||||
| Interest expense | 232 | 232 | ||||||||
| Interest income | (8) | (9) | ||||||||
| Translation and exchange adjustments | 14 | (13) | ||||||||
Income before income taxes, minority interests and equity earnings | 433 | 318 | ||||||||
| Provision for income taxes | 113 | 62 | ||||||||
| Minority interests and equity earnings | (80) | (54) | ||||||||
| Net income | $ | 240 | $ | 202 | ||||||
| Earnings per average common share: | ||||||||||
| Basic | $ | 1.50 | $ | 1.25 | ||||||
| Diluted | $ | 1.47 | $ | 1.21 | ||||||
| Weighted average common shares outstanding: | ||||||||||
| Basic | 159,610,030 | 162,158,144 | ||||||||
| Diluted | 163,173,502 | 166,380,854 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
2
Crown Holdings, Inc.
(In millions)
(Unaudited)
September 30, 2008 | December 31, 2007 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | $ | 332 | $ | 457 | ||||
| Receivables, net | 1,067 | 673 | ||||||
| Inventories | 1,112 | 1,030 | ||||||
| Other current assets | 114 | 74 | ||||||
| Total current assets | 2,625 | 2,234 | ||||||
| Goodwill | 2,089 | 2,199 | ||||||
| Property, plant and equipment, net | 1,506 | 1,604 | ||||||
| Other non-current assets | 934 | 942 | ||||||
| Total | $ | 7,154 | $ | 6,979 | ||||
| Liabilities and shareholders’ equity | ||||||||
| Current liabilities | ||||||||
| Short-term debt | $ | 64 | $ | 45 | ||||
| Current maturities of long-term debt | 24 | 38 | ||||||
| Accounts payable and accrued liabilities | 1,900 | 2,000 | ||||||
| Total current liabilities | 1,988 | 2,083 | ||||||
| Long-term debt, excluding current maturities | 3,445 | 3,354 | ||||||
| Postretirement and pension liabilities | 584 | 625 | ||||||
| Other non-current liabilities | 566 | 579 | ||||||
| Minority interests | 352 | 323 | ||||||
Commitments and contingent liabilities (Note K) | ||||||||
| Shareholders’ equity | 219 | 15 | ||||||
| Total | $ | 7,154 | $ | 6,979 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
3
Crown Holdings, Inc.
(In millions)
(Unaudited)
| Nine months ended September 30 | 2008 | 2007 | |||||||
| Net cash used for operating activities | $ | (146) | $ | (29) | |||||
| Cash flows from investing activities | |||||||||
| Capital expenditures | (114) | (105) | |||||||
| Proceeds from sale of property, plant and equipment | 10 | 63 | |||||||
| Other | (24) | (7) | |||||||
| Net cash used for investing activities | (128) | (49) | |||||||
| Cash flows from financing activities | |||||||||
| Proceeds from long-term debt | 22 | ||||||||
| Payments of long-term debt | (67) | (25) | |||||||
| Net change in revolving credit facility and short-term debt | 212 | 125 | |||||||
| Common stock repurchased | (3) | (118) | |||||||
| Common stock issued | 10 | 12 | |||||||
| Dividends paid to minority interests | (43) | (17) | |||||||
| Other | 40 | ||||||||
Net cash provided by/(used for) financing activities | 149 | (1) | |||||||
| Effect of exchange rate changes on cash and cash equivalents | 20 | ||||||||
| Net change in cash and cash equivalents | (125) | (59) | |||||||
| Cash and cash equivalents at January 1 | 457 | 407 | |||||||
| Cash and cash equivalents at September 30 | $ | 332 | $ | 348 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
4
Crown Holdings, Inc.
(In millions)
(Unaudited)
| Accumulated | ||||||||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||||||||
| Comprehensive Income | Common | Paid-In | Accumulated | Treasury | Comprehensive | |||||||||||||||||||||||||||
| Quarter | Year-To-Date | Stock | Capital | Deficit | Stock | Loss | Total | |||||||||||||||||||||||||
| Balance at January 1, 2007 | $ | 929 | $ | 1,589 | $ | (1,166) | $ | (115) | $ | (1,731) | $ | (494) | ||||||||||||||||||||
| Net income | $ | 93 | $ | 202 | 202 | 202 | ||||||||||||||||||||||||||
| Translation adjustments | 8 | 27 | 27 | 27 | ||||||||||||||||||||||||||||
Amortization of net loss and prior service cost included in net periodic pension and postretirement cost, net of tax | 16 | 49 | 49 | 49 | ||||||||||||||||||||||||||||
| Derivatives qualifying as hedges | (2) | (1) | (1) | (1) | ||||||||||||||||||||||||||||
| Available-for-sale securities | (2) | (3) | (3) | (3) | ||||||||||||||||||||||||||||
| Comprehensive income | $ | 113 | $ | 274 | ||||||||||||||||||||||||||||
| Adoption of FIN 48 | (16) | (16) | ||||||||||||||||||||||||||||||
| Restricted stock awarded | (2) | 2 | ||||||||||||||||||||||||||||||
| Stock-based compensation | 11 | 11 | ||||||||||||||||||||||||||||||
| Common stock repurchased | (94) | (24) | (118) | |||||||||||||||||||||||||||||
| Common stock issued – benefit plans | 7 | 7 | 14 | |||||||||||||||||||||||||||||
| Balance at September 30, 2007 | $ | 929 | $ | 1,511 | $ | (980) | $ | (130) | $ | (1,659) | $ | (329) | ||||||||||||||||||||
| Balance at January 1, 2008 | $ | 929 | $ | 1,516 | $ | (654) | $ | (130) | $ | (1,646) | $ | 15 | ||||||||||||||||||||
| Net income | $ | 114 | $ | 240 | 240 | 240 | ||||||||||||||||||||||||||
| Translation adjustments | (71) | (79) | (79) | (79) | ||||||||||||||||||||||||||||
Amortization of net loss and prior service cost included in net periodic pension and postretirement cost, net of tax | 10 | 28 | 28 | 28 | ||||||||||||||||||||||||||||
| Derivatives qualifying as hedges | (46) | (5) | (5) | (5) | ||||||||||||||||||||||||||||
| Available-for-sale securities | 2 | |||||||||||||||||||||||||||||||
| Comprehensive income | $ | 9 | $ | 184 | ||||||||||||||||||||||||||||
| Restricted stock awarded | (2) | 2 | ||||||||||||||||||||||||||||||
| Stock-based compensation | 13 | 13 | ||||||||||||||||||||||||||||||
| Common stock issued – benefit plans | (2) | (1) | (3) | |||||||||||||||||||||||||||||
| Common stock repurchased | 5 | 5 | 10 | |||||||||||||||||||||||||||||
| Balance at September 30, 2008 | $ | 929 | $ | 1,530 | $ | (414) | $ | (124) | $ | (1,702) | $ | 219 | ||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
Crown Holdings, Inc.
(In millions, except per share and statistical data)
(Unaudited)
The consolidated financial statements include the accounts of Crown Holdings, Inc. and its consolidated subsidiaries (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 September 30, 2008, the results of its operations for the three and nine month periods ended September 30, 2008 and 2007, and its cash flows for the nine month periods ended September 30, 2008 and 2007. 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, 2007 balance sheet data was derived from the audited consolidated financial statements as of December 31, 2007. 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, 2007.
Effective January 1, 2008, the Company adopted SFAS No. 157 (“FAS 157”), “Fair Value Measurements” to account for its financial assets and financial liabilities. FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. Expanded disclosures include a tabular presentation of the fair value of a company’s outstanding financial instruments according to a fair value hierarchy (i.e., levels 1, 2, 3, as defined) as well as enhanced disclosures regarding instruments in the level 3 category including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. The adoption of FAS 157 did not have a material impact on the Company. The provisions of FAS 157 relating to nonfinancial assets, primarily goodwill, and nonfinancial liabilities that are recognized or disclosed at fair value on a nonrecurring basis are effective for the Company as of January 1, 2009. See Note F for additional information regarding FAS 157.
Effective January 1, 2008, the Company adopted SFAS No. 159 (“FAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value, and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. The adoption of FAS 159 had no impact on the Company’s financial statements as the Company did not elect the fair value option.
In December 2007, the FASB issued SFAS No. 160 (“FAS 160”), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” FAS 160 requires the recognition of noncontrolling (minority) interests as equity in the consolidated financial statements, but separate from the parent’s equity. The statement also requires that the amount of net income attributable to minority interests be included in consolidated net income on the face of the income statement. Assuming FAS 160 was adopted as of December 31, 2007, and using the amounts included in the Company’s financial statements as of that date, the adoption of FAS 160 would increase the Company’s shareholders’ equity from $15 to $338 due to the inclusion of minority interests of $323 in shareholders’ equity. The effect on the income statement for the year ended December 31, 2007 would be to increase the Company’s consolidated net income from $528 to $601 with the inclusion of $73 of net income attributable to minority interests, and the Company would separately disclose $73 of consolidated net income attributable to minority interests. FAS 160 also includes expanded disclosure requirements regarding interests of the parent and noncontrolling interests, and amends certain consolidation procedures of ARB No. 51 for consistency with the requirements of FAS 141(R). FAS 160 is effective for the Company as of January 1, 2009.
6
Crown Holdings, Inc.
During the first quarter of 2008, the Company awarded 482,337 shares of restricted and performance-based stock to certain senior executives, including 337,059 shares with time-vesting requirements and 145,278 shares containing a market performance feature. The time-vested awards vest ratably over three years on the anniversary date of the grant and had a grant-date fair value of $22.68 per share. The performance shares vest at the end of the three years based on the results of a market performance criterion. The number of performance shares that will ultimately vest in 2011 is based on the level of performance achieved, ranging between 0% and 200% of the shares awarded, and will be settled in stock. The estimated fair value of each performance share was calculated as $25.59 using a Monte Carlo valuation model. Also during the first quarter, 361,388 shares of service-based awards were released from restriction. The weighted average fair value of these shares on the date of release was $23.87 per share.
Unrecognized compensation cost related to unvested stock options and restricted stock was $24 and $10, respectively, at September 30, 2008. The weighted average period over which the expense is expected to be recognized is 4.4 years for stock options and 1.2 years for restricted stock.
As of September 30, 2008, outstanding stock options included 8,332,665 shares that were fully vested or expected to vest of which 5,027,335 were exercisable. The weighted average exercise price of the options that were fully vested or expected to vest was $16.57 per share, the aggregate intrinsic value was $56, and the weighted average remaining contractual life was 5.5 years. The weighted average exercise price of options that were currently exercisable was $12.07 per share, the aggregate intrinsic value was $56, and the weighted average remaining contractual life was 3.6 years.
The Company received cash proceeds of $9 and $11 from the exercise of stock options in the first nine months of 2008 and 2007, respectively.
D. Goodwill
Changes in the carrying amount of goodwill by reportable segment for the nine-month period ended September 30, 2008 were as follows:
| Americas | North America | European | European | Non-reportable | ||||||||||||||||||||
| Beverage | Food | Beverage | Food | segments | Total | |||||||||||||||||||
| Balance as of January 1, 2008 | $ | 428 | $ | 164 | $ | 780 | $ | 649 | $ | 178 | $ | 2,199 | ||||||||||||
| Foreign currency translation | (4) | (6) | (52) | (34) | (14) | (110) | ||||||||||||||||||
| Balance as of September 30, 2008 | $ | 424 | $ | 158 | $ | 728 | $ | 615 | $ | 164 | $ | 2,089 | ||||||||||||
E. Inventories
| September 30, | December 31, | ||||||||
| 2008 | 2007 | ||||||||
| Finished goods | $ | 438 | $ | 380 | |||||
| Work in process | 140 | 125 | |||||||
| Raw material and supplies | 534 | 525 | |||||||
| $ | 1,112 | $ | 1,030 | ||||||
As discussed in Note B, FAS 157 provides a framework for measuring fair value under GAAP and provides a three-tier fair value hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the report date. Level 3 inputs include unobservable pricing inputs that are not corroborated by market data or other objective sources.
7
Crown Holdings, Inc.
The following table sets forth within the FAS 157 fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2008:
| September 30, 2008 | ||||||||||||||
| Fair Value Measurements Using | ||||||||||||||
| Assets/liabilities | ||||||||||||||
| at fair value | Level 1 | Level 2 | Level 3 | |||||||||||
| Assets | ||||||||||||||
| Derivative instruments | $ | 50 | $ | 6 | $ | 44 | ||||||||
| Available-for-sale securities | 4 | 4 | ||||||||||||
| Total assets | $ | 54 | $ | 10 | $ | 44 | ||||||||
| Liabilities | ||||||||||||||
| Derivative instruments | $ | 146 | $ | 42 | $ | 104 | ||||||||
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy.
The Company uses an income approach to value the assets and liabilities for outstanding derivative contracts including cross-currency swaps and foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as prevailing interest rates and foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy. The Company applies a market approach to value its exchange-traded available-for-sale securities and commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 1.
Refer to Note G below for further discussion of the Company’s use of derivative instruments and their fair values at September 30, 2008.
At September 30, 2008 and December 31, 2007, the Company had two outstanding cross-currency swaps with a combined notional value of $460. These swaps were designated as cash flow hedges and effectively convert fixed rate U.S. dollar intercompany debt into fixed rate euro intercompany debt. The aggregate fair values of these swaps at September 30, 2008 and December 31, 2007 were losses of $78 and $100, respectively, and were reported within other non-current liabilities. The Company also designated certain foreign exchange and commodity contracts as cash flow hedges of anticipated purchases or sales. At September 30, 2008 and December 31, 2007, the aggregate fair values of the foreign exchange contracts were net gains of $2 for 2008 and net losses of $6 for 2007 and were reported within other current assets and liabilities. The aggregate fair values of outstanding commodity price contracts at September 30, 2008 and December 31, 2007 were net losses of $36 and $19, respectively. The fair values of the outstanding commodity contracts were reported within other current assets and liabilities.
The Company designates certain foreign currency forward contracts as fair value hedges of recognized foreign denominated assets and liabilities and unrecognized foreign-denominated firm commitments. At September 30, 2008 and December 31, 2007, the aggregate fair values of the outstanding contracts were net gains of $17 for 2008 and net losses of $3 for 2007 and were reported in other current assets and liabilities.
At September 30, 2008 and December 31, 2007, the Company had outstanding foreign exchange contracts that had not been designated as hedges. Changes in their fair values are reported currently in earnings as translation and exchange adjustments and offset foreign exchange adjustments which result from the remeasurement of related intercompany balances. The aggregate fair values of these contracts were net losses of $1 at September 30, 2008 and $13 at December 31, 2007, and were reported in other current assets and liabilities.
8
Crown Holdings, Inc.
During the third quarter of 2008, the Company recorded an asset impairment charge of $4 to write down its investment in an available for sale security. The charge of $4 included $2 to write down the investment from its carrying value of $3 to its fair value of $1, and $2 to reclassify balances from other comprehensive income to net income. Fair value was determined based on quoted market prices. The quoted market price for the investment had been declining steadily throughout the year and the investee company received a delisting notice in the third quarter of 2008. Based on the declining fair value and the delisting notice, the Company determined during the third quarter that the impairment was other than temporary.
The components of the outstanding restructuring reserve and movements within these components during the nine months ended September 30, 2008 and 2007, respectively, were as follows:
| Termination | Other Exit | |||||||||||
| Benefits | Costs | Total | ||||||||||
| Balance as of January 1, 2007 | $ | 7 | $ | 4 | $ | 11 | ||||||
| Provision | 4 | 10 | 14 | |||||||||
| Payments | (7) | (2) | (9) | |||||||||
| Other | (1) | (6) | (7) | |||||||||
| Balance as of September 30, 2007 | $ | 3 | $ | 6 | $ | 9 | ||||||
| Balance as of January 1, 2008 | $ | 8 | $ | 7 | $ | 15 | ||||||
| Provision | 3 | 1 | 4 | |||||||||
| Payments | (4) | (7) | (11) | |||||||||
| Other | (1) | (1) | ||||||||||
| Balance as of September 30, 2008 | $ | 6 | $ | 1 | $ | 7 | ||||||
The charge of $14 in 2007 included $6 for the reclassification of cumulative translation adjustments to earnings related to the closure of a plant in Asia, $4 for severance and other exit costs in the European food segment, $2 of corporate costs for the settlement of a labor dispute related to prior restructurings, and $2 of severance costs in South America. The charge of $4 in 2008 included costs to reduce headcount at a plant in the European food segment.
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.
In April 2007, May 2006, May 2005, January 2005 and April 2004, the States of Georgia, South Carolina, 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, with the exception of Georgia and South Carolina, 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 value of its predecessor’s assets adjusted for inflation. 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.
9
Crown Holdings, Inc.
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 an asbestos-related case pending against it in the district court of Harris County, Texas (in Re Asbestos Litigation No. 90-23333, District Court, Harris County, Texas), which was appealed. On May 4, 2006, the Texas Fourteenth Court of Appeals upheld the favorable ruling in that case (Barbara Robinson v. Crown Cork & Seal Company, Inc., No. 14-04-00658-CV, Fourteenth Court of Appeals, Texas). The Appeals Court decision has been appealed by the plaintiff to the Texas Supreme Court where oral argument was held on February 7, 2008. The Texas Supreme Court has not ruled on the appeal. 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 reversed on appeal. Although the Company believes that the favorable rulings of the District Court and the Texas Fourteenth Court of Appeals are correct, there can be no assurance that the legislation will be upheld by the Texas Supreme Court on appeal or by Texas courts in other cases that may challenge the legislation. Adverse rulings in either or both of these cases could have a material impact on the Company.
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 believes that the ruling by the court was limited only to cases which were pending at the time the legislation was enacted. 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 had not yet commenced at the time the statute was enacted on December 17, 2001. On July 28, 2005, the Philadelphia Court of Common Pleas granted Crown Cork’s global motion for summary judgment to dismiss all pending asbestos-related cases filed in the court after December 17, 2003 (In re: Asbestos-Litigation October term 1986, No. 001). Additional cases have been dismissed subsequent to July 28, 2005 by the Philadelphia Court of Common Pleas. These decisions remain subject to potential appeal by the plaintiffs and, in some cases, appeals to the Superior Court of Pennsylvania have been filed by the plaintiffs in connection with these decisions and oral argument held before the Superior Court. The Superior Court has not ruled on these appeals. The Company cautions that the limitation of the statute may not be upheld.
During the nine months ended September 30, 2008, Crown Cork received approximately 2,000 new claims, settled or dismissed approximately 3,000 claims for a total of $9, and had approximately 50,000 claims outstanding at the end of the period. Settlement amounts include amounts committed to be paid in future periods. During the second quarter of 2008, the Company updated its claims database to remove approximately 10,000 duplicate claims. The removal of the duplicate claims had no effect on the Company’s accrual because these claims were not valued in calculating the accrual. The 50,000 open claims at September 30, 2008, also excludes approximately 19,000 inactive claims. Due to the passage of time, the Company considers it unlikely that the plaintiffs in these cases will pursue further action. Excluding these claims has no effect on the calculation of the Company’s accrual as they were filed in states, as described above, where the Company’s liability is limited by statute.
As of September 30, 2008, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $184, including $65 for unasserted claims and $3 for committed settlements that will be paid over time.
10
Crown Holdings, Inc.
Historically (1977-2007), 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 any amounts for settlements by persons alleging first exposure to asbestos after 1964.
Underlying the accrual are assumptions 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 Georgia, South Carolina, Florida, Ohio, Mississippi, Texas 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. Estimated additional costs of $42 beyond 2017 have not been included in the Company’s liability, as the Company believes cost projections beyond ten years are inherently unreliable due to potential changes in the litigation environment and other factors whose impact cannot be known or reasonably estimated.
At the end of each quarter, the Company considers whether there have been any material developments that would cause it to update its asbestos liability accrual calculations. Absent any significant developments in the asbestos litigation environment in general or with respect to the Company specifically, the Company updates its accrual calculations in the fourth quarter of each year. The Company’s asbestos liability accrual is calculated in the fourth quarter of each year as the sum of its outstanding and expected future claims, multiplied by the expected average settlement cost of those claims, plus estimated legal fees. The expected number of claims, and the expected average settlement cost per claim, are calculated using projections based on actual data for the most recent five years. Because claims are not submitted or settled evenly throughout the year, it is difficult to predict at any time during the year whether the number of claims or average settlement cost over the five year period ending December 31 of such year will increase compared to the prior five year period. The five year average settlement cost at the end of 2007 was higher than at the end of 2006. The effect of this increase in the expected average settlement cost per claim was partially mitigated by a decrease in the expected number of future claims. The combination of these two factors resulted in a charge of $29 in 2007 compared to charges of $10 in each of the preceding two years.
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. 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 or cash flow.
The Company and its subsidiaries are subject to various lawsuits and claims with respect to labor, environmental, securities, vendor, tax and other matters arising in 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.
The Company has various commitments to purchase materials, supplies and utilities as part of the ordinary conduct of business. The Company’s basic raw materials for its products include tinplate and aluminum, both 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 September 30, 2008, the Company had certain indemnification agreements covering environmental remediation and other potential costs associated with properties sold or businesses divested. 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 September 30, 2008, the Company also had guarantees of $29 related to the residual values of leased assets.
11
Crown Holdings, Inc.
The following table summarizes the basic and diluted earnings per share computations for the periods ended September 30, 2008 and 2007, respectively:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| Earnings: | 2008 | 2007 | 2008 | 2007 | ||||||||||||
| Net income | $ | 114 | $ | 93 | $ | 240 | $ | 202 | ||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | 160.0 | 161.2 | 159.6 | 162.2 | ||||||||||||
| Add: dilutive stock options and restricted stock | 3.4 | 4.0 | 3.6 | 4.2 | ||||||||||||
| Diluted | 163.4 | 165.2 | 163.2 | 166.4 | ||||||||||||
| Basic earnings per share | $ | 0.71 | $ | 0.58 | $ | 1.50 | $ | 1.25 | ||||||||
| Diluted earnings per share | $ | 0.70 | $ | 0.56 | $ | 1.47 | $ | 1.21 | ||||||||
Excluded from the computation of diluted earnings per share were common shares contingently issuable upon the exercise of outstanding stock options, amounting to 4.1 million shares and 4.2 million shares for the three and nine month periods ended September 30, 2008, and 4.6 million shares and 3.9 million shares for the three and nine month periods ended September 30, 2007. These shares were excluded because the assumed proceeds of the then outstanding options were above the average market prices for the related periods.
Components of Net Periodic Benefit Cost
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| Pension Benefits – U.S. Plans | 2008 | 2007 | 2008 | 2007 | ||||||||||||
| Service cost | $ | 2 | $ | 2 | $ | 6 | $ | 6 | ||||||||
| Interest cost | 20 | 18 | 60 | 57 | ||||||||||||
| Expected return on plan assets | (29) | (28) | (88) | (84) | ||||||||||||
| Recognized prior service cost | 1 | 1 | 2 | 2 | ||||||||||||
| Recognized net loss | 7 | 11 | 22 | 35 | ||||||||||||
| Settlements | 3 | 3 | 6 | 3 | ||||||||||||
| Net periodic cost | $ | 4 | $ | 7 | $ | 8 | $ | 19 | ||||||||
The settlements in 2008 and 2007 occurred in the Company’s supplemental executive retirement plan.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| Pension Benefits – Non-U.S. Plans | 2008 | 2007 | 2008 | 2007 | ||||||||||||
| Service cost | $ | 5 | $ | 9 | $ | 25 | $ | 28 | ||||||||
| Interest cost | 45 | 43 | 137 | 126 | ||||||||||||
| Expected return on plan assets | (58) | (62) | (181) | (182) | ||||||||||||
| Recognized prior service credit | (2) | (2) | (5) | (5) | ||||||||||||
| Recognized net loss | 9 | 8 | 27 | 22 | ||||||||||||
| Net periodic cost/(credit) | $ | (1) | $ | (4) | $ | 3 | $ | (11) | ||||||||
12
Crown Holdings, Inc.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| Other Postretirement Benefits | 2008 | 2007 | 2008 | 2007 | ||||||||||||
| Service cost | $ | 2 | $ | 1 | $ | 6 | $ | 3 | ||||||||
| Interest cost | 8 | 7 | 23 | 24 | ||||||||||||
| Recognized prior service credit | (6) | (4) | (17) | (12) | ||||||||||||
| Recognized net loss | 2 | 3 | 6 | 10 | ||||||||||||
| Net periodic cost | $ | 6 | $ | 7 | $ | 18 | $ | 25 | ||||||||
N. Income Taxes
As of December 31, 2007, the Company had $77 of unrecognized tax benefits, including $36 related to a claim filed by the Company in the United States Court of Federal Claims to recover U.S. federal taxes paid in prior years. Due to an unfavorable ruling on a similar claim filed by another company, the Company withdrew its claim in this matter during 2008. During the third quarter of 2008, the Company recorded tax benefits of $4 from the reversal of potential liabilities related to transfer pricing. The benefits included the reversal of $2 of excess reserve, of a total potential liability of $5, due to a settlement with tax authorities in one jurisdiction, and an additional $2 due to the expiration of the statute of limitations in a separate jurisdiction.
Also during the third quarter of 2008, the Company adjusted its deferred taxes and recorded a tax benefit of $5 due to a change in U.K. tax law regarding depreciation.
As of December 31, 2007, the Company had a full valuation allowance of $185 against its net deferred tax assets in France. Due to improved profits in the Company’s French operations, including a reduction in interest expense due to a corporate restructuring in 2008, it is possible that some or all of the French deferred tax valuation allowance could be reversed in a future period. The Company believes there is not sufficient positive evidence as of the filing of this Form 10-Q to reverse any portion of the French valuation allowance but will review the status each quarter, including at the end of the year when the 2008 results are complete and the 2009 budget is available.
The Company’s business is organized geographically within three divisions, Americas, Europe and Asia-Pacific. Within the Americas and Europe, the Company has determined that it has the following reportable segments organized along a combination of product lines and geographic areas: Americas Beverage and North America Food within the Americas, and European Beverage, European Food and European Specialty Packaging within Europe.
The Company evaluates performance and allocates resources based on segment income. Segment income, which is not a defined term under U.S. generally accepted accounting principles, is defined by the Company as net sales less cost of products sold, depreciation and amortization, and selling and administrative expenses. Segment income should not be considered in isolation or as a substitute for net income data prepared in accordance with U.S. GAAP and may not be comparable to calculations of similarly titled measures used by other companies.
13
Crown Holdings, Inc.
The tables below present information about operating segments for the three and nine months ended September 30, 2008 and 2007:
External Sales | External Sales | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| Americas Beverage | $ | 496 | $ | 455 | $ | 1,414 | $ | 1,336 | ||||||||
| North America Food | 270 | 268 | 675 | 669 | ||||||||||||
| European Beverage | 454 | 413 | 1,278 | 1,095 | ||||||||||||
| European Food | 685 | 577 | 1,730 | 1,492 | ||||||||||||
| European Specialty Packaging | 127 | 121 | 357 | 330 | ||||||||||||
| Total reportable segments | 2,032 | 1,834 | 5,454 | 4,922 | ||||||||||||
| Non-reportable segments | 337 | 319 | 974 | 934 | ||||||||||||
| Total | $ | 2,369 | $ | 2,153 | $ | 6,428 | $ | 5,856 | ||||||||
| Segment Income | Segment Income | |||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| Americas Beverage | $ | 54 | $ | 54 | $ | 154 | $ | 148 | ||||||||
| North America Food | 35 | 31 | 66 | 61 | ||||||||||||
| European Beverage | 74 | 60 | 213 | 148 | ||||||||||||
| European Food | 89 | 55 | 191 | 138 | ||||||||||||
| European Specialty Packaging | 8 | 7 | 20 | 17 | ||||||||||||
| Total reportable segments | $ | 260 | $ | 207 | $ | 644 | $ | 512 | ||||||||
The following table reconciles the Company’s segment income of reportable segments to consolidated income from continuing operations before income taxes, minority interests and equity earnings:
Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30 | September 30 | |||||||||||||||
| 2008 | 2007 | 2008 | 2007 | |||||||||||||
| Segment income of reportable segments | $ | 260 | $ | 207 | $ | 644 | $ | 512 | ||||||||
| Segment income of non-reportable segments | 51 | 32 | 138 | 97 | ||||||||||||
| Corporate and unallocated items | (35) | (24) | (105) | (81) | ||||||||||||
| Provision for restructuring | (3) | (9) | (4) | (14) | ||||||||||||
Provision for asset impairments and loss/(gain) on sale of assets | (2) | 4 | 14 | |||||||||||||
| Loss from early extinguishment of debt | (2) | |||||||||||||||
| Interest expense | (76) | (79) | (232) | (232) | ||||||||||||
| Interest income | 3 | 2 | 8 | 9 | ||||||||||||
| Translation and exchange adjustments | (8) | 5 | (14) | 13 | ||||||||||||
Income before income taxes, minority interests and equity earnings | $ | 190 | $ | 138 | $ | 433 | $ | 318 | ||||||||
“Corporate and unallocated items” includes corporate and division administrative costs, technology costs, and unallocated items such as the U.S. and U.K. pension plan costs or income.
14
Crown Holdings, Inc.
Crown European Holdings (Issuer), a 100% owned subsidiary of the Company, has outstanding senior notes that are fully and unconditionally guaranteed by Crown Holdings, Inc. 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 receivable securitization subsidiary), substantially all subsidiaries in the United Kingdom, France, Germany, Belgium, Canada, Mexico and Switzerland, and a subsidiary in the Netherlands. The following condensed combining financial statements:
| · | statements of operations for the three and nine months ended September 30, 2008 and 2007, |
| · | balance sheets as of September 30, 2008 and December 31, 2007, and |
| · | statements of cash flows for the nine months ended September 30, 2008 and 2007 |
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 September 30, 2008
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 1,328 | $ | 1,041 | $ | 2,369 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | $ | (4) | 1,054 | 885 | 1,935 | |||||||||||||||||||
Depreciation and amortization | 30 | 26 | 56 | |||||||||||||||||||||
| Gross profit | 4 | 244 | 130 | 378 | ||||||||||||||||||||
| Selling and administrative expense | (1) | 80 | 23 | 102 | ||||||||||||||||||||
| Provision for restructuring | 1 | 2 | 3 | |||||||||||||||||||||
| Asset impairments and sales | 5 | (3) | 2 | |||||||||||||||||||||
| Net interest expense | 19 | 50 | 4 | 73 | ||||||||||||||||||||
| Technology royalty | (13) | 13 | ||||||||||||||||||||||
| Translation and exchange adjustments | (2) | 8 | 2 | 8 | ||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (12) | 113 | 89 | 190 | ||||||||||||||||||||
| Provision for income taxes | 28 | 17 | 45 | |||||||||||||||||||||
| Equity earnings | $ | 114 | 93 | 29 | $ | (236) | ||||||||||||||||||
| Income before minority interests and equity earnings | 114 | 81 | 114 | 72 | (236) | 145 | ||||||||||||||||||
| Minority interests and equity earnings | (31) | (31) | ||||||||||||||||||||||
| Net income | $ | 114 | $ | 81 | $ | 114 | $ | 41 | $ | (236) | $ | 114 | ||||||||||||
15
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended September 30, 2007
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 1,240 | $ | 913 | $ | 2,153 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | $ | (5) | 1,019 | 771 | 1,785 | |||||||||||||||||||
| Depreciation and amortization | 34 | 22 | 56 | |||||||||||||||||||||
| Gross profit | 5 | 187 | 120 | 312 | ||||||||||||||||||||
| Selling and administrative expense | 73 | 24 | 97 | |||||||||||||||||||||
| Provision for restructuring | 9 | 9 | ||||||||||||||||||||||
| Asset impairments and sales | (4) | (4) | ||||||||||||||||||||||
| Net interest expense | 25 | 50 | 2 | 77 | ||||||||||||||||||||
| Technology royalty | (14) | 14 | ||||||||||||||||||||||
| Translation and exchange adjustments | (4) | (1) | (5) | |||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (20) | 82 | 76 | 138 | ||||||||||||||||||||
| Provision for income taxes | 7 | 15 | 22 | |||||||||||||||||||||
| Equity earnings | $ | 93 | 69 | 18 | $ | (180) | ||||||||||||||||||
| Income before minority interests and equity earnings | 93 | 49 | 93 | 61 | (180) | 116 | ||||||||||||||||||
| Minority interests and equity earnings | (23) | (23) | ||||||||||||||||||||||
| Net income | $ | 93 | $ | 49 | $ | 93 | $ | 38 | $ | (180) | $ | 93 | ||||||||||||
16
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2008
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 3,694 | $ | 2,734 | $ | 6,428 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | $ | (14) | 3,016 | 2,275 | 5,277 | |||||||||||||||||||
| Depreciation and amortization | 92 | 73 | 165 | |||||||||||||||||||||
| Gross profit | 14 | 586 | 386 | 986 | ||||||||||||||||||||
| Selling and administrative expense | (2) | 233 | 78 | 309 | ||||||||||||||||||||
| Provision for restructuring | 1 | 3 | 4 | |||||||||||||||||||||
| Asset impairments and sales | (6) | 12 | (6) | |||||||||||||||||||||
| Loss from early extinguishment of debt | 2 | 2 | ||||||||||||||||||||||
| Net interest expense | 70 | 142 | 12 | 224 | ||||||||||||||||||||
| Technology royalty | (31) | 31 | ||||||||||||||||||||||
| Translation and exchange adjustments | (2) | 17 | (1) | 14 | ||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (48) | 212 | 269 | 433 | ||||||||||||||||||||
| Provision for income taxes | 57 | 56 | 113 | |||||||||||||||||||||
| Equity earnings | $ | 240 | 203 | 85 | $ | (528) | ||||||||||||||||||
| Income before minority interests and equity earnings | 240 | 155 | 240 | 213 | (528) | 320 | ||||||||||||||||||
| Minority interests and equity earnings | (80) | (80) | ||||||||||||||||||||||
| Net income | $ | 240 | $ | 155 | $ | 240 | $ | 133 | $ | (528) | $ | 240 | ||||||||||||
17
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2007
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 3,495 | $ | 2,361 | $ | 5,856 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | $ | (11) | 2,906 | 1,980 | 4,875 | |||||||||||||||||||
| Depreciation and amortization | 102 | 66 | 168 | |||||||||||||||||||||
| Gross profit | 11 | 487 | 315 | 813 | ||||||||||||||||||||
| Selling and administrative expense | (1) | 214 | 72 | 285 | ||||||||||||||||||||
| Provision for restructuring | 1 | 13 | 14 | |||||||||||||||||||||
| Asset impairments and sales | (2) | (12) | (14) | |||||||||||||||||||||
| Net interest expense | 73 | 145 | 5 | 223 | ||||||||||||||||||||
| Technology royalty | (29) | 29 | ||||||||||||||||||||||
| Translation and exchange adjustments | (10) | (3) | (13) | |||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (61) | 168 | 211 | 318 | ||||||||||||||||||||
| Provision for income taxes | 15 | 47 | 62 | |||||||||||||||||||||
| Equity earnings | $ | 202 | 182 | 49 | $ | (433) | ||||||||||||||||||
| Income before minority interests and equity earnings | 202 | 121 | 202 | 164 | (433) | 256 | ||||||||||||||||||
| Minority interests and equity earnings | (54) | (54) | ||||||||||||||||||||||
| Net income | $ | 202 | $ | 121 | $ | 202 | $ | 110 | $ | (433) | $ | 202 | ||||||||||||
18
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of September 30, 2008
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 52 | $ | 280 | $ | 332 | ||||||||||||||||||
| Receivables, net | $ | 72 | 215 | 780 | 1,067 | |||||||||||||||||||
| Intercompany receivables | 2 | 80 | 34 | $ | (116) | |||||||||||||||||||
| Inventories | 593 | 519 | 1,112 | |||||||||||||||||||||
| Other current assets | $ | 1 | 11 | 98 | 4 | 114 | ||||||||||||||||||
| Total current assets | 1 | 85 | 1,038 | 1,617 | (116) | 2,625 | ||||||||||||||||||
| Intercompany debt receivables | 2,093 | 2,051 | 269 | (4,413) | ||||||||||||||||||||
| Investments | 409 | 2,353 | (117) | (2,645) | ||||||||||||||||||||
| Goodwill | 1,492 | 597 | 2,089 | |||||||||||||||||||||
| Property, plant and equipment, net | 743 | 763 | 1,506 | |||||||||||||||||||||
| Other non-current assets | 6 | 873 | 55 | 934 | ||||||||||||||||||||
| Total | $ | 410 | $ | 4,537 | $ | 6,080 | $ | 3,301 | $ | (7,174) | $ | 7,154 | ||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
| Short-term debt | $ | 30 | $ | 34 | $ | 64 | ||||||||||||||||||
| Current maturities of long-term debt | $ | 4 | 5 | 15 | 24 | |||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 18 | 7 | 1,080 | 795 | 1,900 | ||||||||||||||||||
| Intercompany payables | 34 | 82 | $ | (116) | ||||||||||||||||||||
| Total current liabilities | 18 | 11 | 1,149 | 926 | (116) | 1,988 | ||||||||||||||||||
| Long-term debt, excluding current maturities | 1,129 | 2,247 | 69 | 3,445 | ||||||||||||||||||||
| Long-term intercompany debt | 173 | 2,524 | 1,372 | 344 | (4,413) | |||||||||||||||||||
| Postretirement and pension liabilities | 566 | 18 | 584 | |||||||||||||||||||||
| Other non-current liabilities | 78 | 337 | 151 | 566 | ||||||||||||||||||||
| Minority interests | 352 | 352 | ||||||||||||||||||||||
| Commitments and contingent liabilities | ||||||||||||||||||||||||
| Shareholders’ equity | 219 | 795 | 409 | 1,441 | (2,645) | 219 | ||||||||||||||||||
| Total | $ | 410 | $ | 4,537 | $ | 6,080 | $ | 3,301 | $ | (7,174) | $ | 7,154 | ||||||||||||
19
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2007
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||
| Cash and cash equivalents | $ | 13 | $ | 81 | $ | 363 | $ | 457 | ||||||||||||||||
| Receivables, net | 75 | 78 | 520 | 673 | ||||||||||||||||||||
| Intercompany receivables | 2 | 70 | 47 | $ | (119) | |||||||||||||||||||
| Inventories | 590 | 440 | 1,030 | |||||||||||||||||||||
| Prepaid expenses and other current assets | $ | 2 | 15 | 52 | 5 | 74 | ||||||||||||||||||
| Total current assets | 2 | 105 | 871 | 1,375 | (119) | 2,234 | ||||||||||||||||||
| Intercompany debt receivables | 1,624 | 1,924 | 381 | (3,929) | ||||||||||||||||||||
| Investments | 225 | 2,724 | (554) | (2,395) | ||||||||||||||||||||
| Goodwill | 1,582 | 617 | 2,199 | |||||||||||||||||||||
| Property, plant and equipment, net | 842 | 762 | 1,604 | |||||||||||||||||||||
| Other non-current assets | 9 | 886 | 47 | 942 | ||||||||||||||||||||
| Total | $ | 227 | $ | 4,462 | $ | 5,551 | $ | 3,182 | $ | (6,443) | $ | 6,979 | ||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
| Short-term debt | $ | 14 | $ | 2 | $ | 29 | $ | 45 | ||||||||||||||||
| Current maturities of long-term debt | 4 | 5 | 29 | 38 | ||||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 23 | 22 | 1,161 | 794 | 2,000 | ||||||||||||||||||
| Intercompany payables | 1 | 46 | 72 | $ | (119) | |||||||||||||||||||
| Total current liabilities | 23 | 41 | 1,214 | 924 | (119) | 2,083 | ||||||||||||||||||
| Long-term debt, excluding current maturities | 1,116 | 2,157 | 81 | 3,354 | ||||||||||||||||||||
| Long-term intercompany debt | 189 | 2,480 | 1,026 | 234 | (3,929) | |||||||||||||||||||
| Postretirement and pension liabilities | 606 | 19 | 625 | |||||||||||||||||||||
| Other non-current liabilities | 100 | 323 | 156 | 579 | ||||||||||||||||||||
| Minority interests | 323 | 323 | ||||||||||||||||||||||
| Commitments and contingent liabilities | ||||||||||||||||||||||||
| Shareholders’ equity | 15 | 725 | 225 | 1,445 | (2,395) | 15 | ||||||||||||||||||
| Total | $ | 227 | $ | 4,462 | $ | 5,551 | $ | 3,182 | $ | (6,443) | $ | 6,979 | ||||||||||||
20
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2008
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net cash provided by/(used for) operating activities | $ | 9 | $ | (70) | $ | 44 | $ | (129) | $ | (146) | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||||
| Capital expenditures | (33) | (81) | (114) | |||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 1 | 9 | 10 | |||||||||||||||||||||
| Intercompany investing activities | 434 | (360) | $ | (74) | ||||||||||||||||||||
| Other | (22) | (2) | (24) | |||||||||||||||||||||
Net cash provided by/(used for) investing activities | 434 | (414) | (74) | (74) | (128) | |||||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
| Payments of long-term debt | (41) | (1) | (25) | (67) | ||||||||||||||||||||
| Net change in revolving credit facility and short-term debt | 100 | 96 | 16 | 212 | ||||||||||||||||||||
| Net change in long-term intercompany balances | (16) | (459) | 229 | 246 | ||||||||||||||||||||
| Common stock repurchased | (3) | (3) | ||||||||||||||||||||||
| Common stock issued | 10 | 10 | ||||||||||||||||||||||
| Dividends paid | (74) | 74 | ||||||||||||||||||||||
| Dividends paid to minority interests | (43) | (43) | ||||||||||||||||||||||
| Other | 23 | 17 | 40 | |||||||||||||||||||||
Net cash provided by/(used for) financing activities | (9) | (377) | 341 | 120 | 74 | 149 | ||||||||||||||||||
| Effect of exchange rate on cash and cash equivalents | ||||||||||||||||||||||||
| Net change in cash and cash equivalents | (13) | (29) | (83) | (125) | ||||||||||||||||||||
| Cash and cash equivalents at January 1 | 13 | 81 | 363 | 457 | ||||||||||||||||||||
| Cash and cash equivalents at September 30 | $ | 0 | $ | 0 | $ | 52 | $ | 280 | $ | 0 | $ | 332 | ||||||||||||
21
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2007
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net cash provided by/(used for) operating activities | $ | 26 | $ | (40) | $ | 99 | $ | (114) | $ | (29) | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||||
| Capital expenditures | (51) | (54) | (105) | |||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 2 | 61 | 63 | |||||||||||||||||||||
| Intercompany investing activities | 10 | 17 | $ | (27) | ||||||||||||||||||||
| Other | (7) | (7) | ||||||||||||||||||||||
Net cash provided by/(used for) investing activities | 10 | (32) | (27) | (49) | ||||||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
| Proceeds from long-term debt | 22 | 22 | ||||||||||||||||||||||
| Payments of long-term debt | (1) | (24) | (25) | |||||||||||||||||||||
| Net change in revolving credit facility and short-term debt | 43 | 89 | (7) | 125 | ||||||||||||||||||||
| Net change in long-term intercompany balances | 80 | (13) | (206) | 139 | ||||||||||||||||||||
| Common stock repurchased | (118) | (118) | ||||||||||||||||||||||
| Common stock issued | 12 | 12 | ||||||||||||||||||||||
| Dividends paid | (27) | 27 | ||||||||||||||||||||||
| Dividends paid to minority interests | (17) | (17) | ||||||||||||||||||||||
Net cash provided by/(used for) financing activities | (26) | 30 | (118) | 86 | 27 | (1) | ||||||||||||||||||
| Effect of exchange rate on cash and cash equivalents | 3 | 17 | 20 | |||||||||||||||||||||
| Net change in cash and cash equivalents | (48) | (11) | (59) | |||||||||||||||||||||
| Cash and cash equivalents at January 1 | 97 | 310 | 407 | |||||||||||||||||||||
| Cash and cash equivalents at September 30 | $ | 0 | $ | 0 | $ | 49 | $ | 299 | $ | 0 | $ | 348 | ||||||||||||
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 nine months ended September 30, 2008 and 2007, |
| · | balance sheets as of September 30, 2008 and December 31, 2007, and |
| · | statements of cash flows for the nine months ended September 30, 2008 and 2007 |
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 September 30, 2008
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Net sales | $ | 2,369 | $ | 2,369 | ||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,935 | 1,935 | ||||||||||||||||||
| Depreciation and amortization | 56 | 56 | ||||||||||||||||||
| Gross profit | 378 | 378 | ||||||||||||||||||
| Selling and administrative expense | $ | 6 | 96 | 102 | ||||||||||||||||
| Provision for restructuring | 3 | 3 | ||||||||||||||||||
| Asset impairments and sales | 4 | (2) | 2 | |||||||||||||||||
| Net interest expense | 18 | 55 | 73 | |||||||||||||||||
| Translation and exchange adjustments | 8 | 8 | ||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (28) | 218 | 190 | |||||||||||||||||
| Provision/(benefit) for income taxes | (10) | 55 | 45 | |||||||||||||||||
| Equity earnings | $ | 114 | 132 | $ | (246) | |||||||||||||||
| Income before minority interests and equity earnings | 114 | 114 | 163 | (246) | 145 | |||||||||||||||
| Minority interests and equity earnings | (31) | (31) | ||||||||||||||||||
| Net income | $ | 114 | $ | 114 | $ | 132 | $ | (246) | $ | 114 | ||||||||||
23
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended September 30, 2007
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Net sales | $ | 2,153 | $ | 2,153 | ||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,785 | 1,785 | ||||||||||||||||||
| Depreciation and amortization | 56 | 56 | ||||||||||||||||||
| Gross profit | 312 | 312 | ||||||||||||||||||
| Selling and administrative expense | $ | 6 | 91 | 97 | ||||||||||||||||
| Provision for restucturing | 9 | 9 | ||||||||||||||||||
| Asset impairments and sales | (4) | (4) | ||||||||||||||||||
| Net interest expense | 18 | 59 | 77 | |||||||||||||||||
| Translation and exchange adjustments | (5) | (5) | ||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (24) | 162 | 138 | |||||||||||||||||
| Provision for income taxes | 2 | 20 | 22 | |||||||||||||||||
| Equity earnings | $ | 93 | 119 | $ | (212) | |||||||||||||||
| Income before minority interests and equity earnings | 93 | 93 | 142 | (212) | 116 | |||||||||||||||
| Minority interests and equity earnings | (23) | (23) | ||||||||||||||||||
| Net income | $ | 93 | $ | 93 | $ | 119 | $ | (212) | $ | 93 | ||||||||||
24
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2008
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Net sales | $ | 6,428 | $ | 6,428 | ||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 5,277 | 5,277 | ||||||||||||||||||
| Depreciation and amortization | 165 | 165 | ||||||||||||||||||
| Gross profit | 986 | 986 | ||||||||||||||||||
| Selling and administrative expense | $ | 14 | 295 | 309 | ||||||||||||||||
| Provision for restructuring | 4 | 4 | ||||||||||||||||||
| Asset impairments and sales | 4 | (4) | ||||||||||||||||||
| Loss from early entinguishment of debt | 2 | 2 | ||||||||||||||||||
| Net interest expense | 52 | 172 | 224 | |||||||||||||||||
| Translation and exchange adjustments | 14 | 14 | ||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (70) | 503 | 433 | |||||||||||||||||
| Provision/(benefit) for income taxes | (26) | 139 | 113 | |||||||||||||||||
| Equity earnings | $ | 240 | 284 | $ | (524) | |||||||||||||||
| Income before minority interests and equity earnings | 240 | 240 | 364 | (524) | 320 | |||||||||||||||
| Minority interests and equity earnings | (80) | (80) | ||||||||||||||||||
| Net income | $ | 240 | $ | 240 | $ | 284 | $ | (524) | $ | 240 | ||||||||||
25
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2007
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Net sales | $ | 5,856 | $ | 5,856 | ||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 4,875 | 4,875 | ||||||||||||||||||
| Depreciation and amortization | 168 | 168 | ||||||||||||||||||
| Gross profit | 813 | 813 | ||||||||||||||||||
| Selling and administrative expense | $ | 11 | 274 | 285 | ||||||||||||||||
| Provision for restructuring | 14 | 14 | ||||||||||||||||||
| Asset impairments and sales | (14) | (14) | ||||||||||||||||||
| Net interest expense | 51 | 172 | 223 | |||||||||||||||||
| Translation and exchange adjustments | (13) | (13) | ||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (62) | 380 | 318 | |||||||||||||||||
| Provision/(benefit) for income taxes | (5) | 67 | 62 | |||||||||||||||||
| Equity earnings | $ | 202 | 259 | $ | (461) | |||||||||||||||
| Income before minority interests and equity earnings | 202 | 202 | 313 | (461) | 256 | |||||||||||||||
| Minority interests and equity earnings | (54) | (54) | ||||||||||||||||||
| Net income | $ | 202 | $ | 202 | $ | 259 | $ | (461) | $ | 202 | ||||||||||
26
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of September 30, 2008
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 332 | $ | 332 | ||||||||||||||||
| Receivables, net | 1,067 | 1,067 | ||||||||||||||||||
| Inventories | 1,112 | 1,112 | ||||||||||||||||||
| Other current assets | $ | 1 | 113 | 114 | ||||||||||||||||
| Total current assets | 1 | 2,624 | 2,625 | |||||||||||||||||
| Intercompany debt receivables | 350 | $ | (350) | |||||||||||||||||
| Investments | 409 | $ | 1,168 | (1,577) | ||||||||||||||||
| Goodwill | 2,089 | 2,089 | ||||||||||||||||||
| Property, plant and equipment, net | 1,506 | 1,506 | ||||||||||||||||||
| Other non-current assets | 367 | 567 | 934 | |||||||||||||||||
| Total | $ | 410 | $ | 1,535 | $ | 7,136 | $ | (1,927) | $ | 7,154 | ||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||
| Short-term debt | $ | 64 | $ | 64 | ||||||||||||||||
| Current maturities of long-term debt | $ | 1 | 23 | 24 | ||||||||||||||||
| Accounts payable and accrued liabilities | $ | 18 | 61 | 1,821 | 1,900 | |||||||||||||||
| Total current liabilities | 18 | 62 | 1,908 | 1,988 | ||||||||||||||||
| Long-term debt, excluding current maturities | 697 | 2,748 | 3,445 | |||||||||||||||||
| Long-term intercompany debt | 173 | 177 | $ | (350) | ||||||||||||||||
| Postretirement and pension liabilities | 584 | 584 | ||||||||||||||||||
| Other non-current liabilities | 190 | 376 | 566 | |||||||||||||||||
| Minority interests | 352 | 352 | ||||||||||||||||||
| Commitments and contingent liabilities | ||||||||||||||||||||
| Shareholders’ equity | 219 | 409 | 1,168 | (1,577) | 219 | |||||||||||||||
| Total | $ | 410 | $ | 1,535 | $ | 7,136 | $ | (1,927) | $ | 7,154 | ||||||||||
27
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2007
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Assets | ||||||||||||||||||||
| Current assets | ||||||||||||||||||||
| Cash and cash equivalents | $ | 457 | $ | 457 | ||||||||||||||||
| Receivables, net | 673 | 673 | ||||||||||||||||||
| Inventories | 1,030 | 1,030 | ||||||||||||||||||
| Prepaid expenses and other current assets | $ | 2 | 72 | 74 | ||||||||||||||||
| Total current assets | 2 | 2,232 | 2,234 | |||||||||||||||||
| Intercompany debt receivables | 375 | $ | (375) | |||||||||||||||||
| Investments | 225 | $ | 968 | (1,193) | ||||||||||||||||
| Goodwill | 2,199 | 2,199 | ||||||||||||||||||
| Property, plant and equipment, net | 1,604 | 1,604 | ||||||||||||||||||
| Other non-current assets | 416 | 526 | 942 | |||||||||||||||||
| Total | $ | 227 | $ | 1,384 | $ | 6,936 | $ | (1,568) | $ | 6,979 | ||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||
| Short-term debt | $ | 45 | $ | 45 | ||||||||||||||||
| Current maturities of long-term debt | 38 | 38 | ||||||||||||||||||
| Accounts payable and accrued liabilities | $ | 23 | $ | 69 | 1,908 | 2,000 | ||||||||||||||
| Total current liabilities | 23 | 69 | 1,991 | 2,083 | ||||||||||||||||
| Long-term debt, excluding current maturities | 698 | 2,656 | 3,354 | |||||||||||||||||
| Long-term intercompany debt | 189 | 186 | $ | (375) | ||||||||||||||||
| Postretirement and pension liabilities | 625 | 625 | ||||||||||||||||||
| Other non-current liabilities | 206 | 373 | 579 | |||||||||||||||||
| Minority interests | 323 | 323 | ||||||||||||||||||
| Commitments and contingent liabilities | ||||||||||||||||||||
| Shareholders’ equity | 15 | 225 | 968 | (1,193) | 15 | |||||||||||||||
| Total | $ | 227 | $ | 1,384 | $ | 6,936 | $ | (1,568) | $ | 6,979 | ||||||||||
28
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2008
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Net cash provided by/(used for) operating activities | $ | 9 | $ | (23) | $ | (132) | $ | (146) | ||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||
| Capital expenditures | (114) | (114) | ||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 10 | 10 | ||||||||||||||||||
| Intercompany investing activities | 32 | $ | (32) | |||||||||||||||||
| Other | (24) | (24) | ||||||||||||||||||
Net cash provided by/(used for) investing activities | 0 | 32 | (128) | (32) | (128) | |||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||
| Payments of long-term debt | (67) | (67) | ||||||||||||||||||
| Net change in revolving credit facility and short-term debt | 212 | 212 | ||||||||||||||||||
| Net change in long-term intercompany balances | (16) | (9) | 25 | |||||||||||||||||
| Common stock repurchased | (3) | (3) | ||||||||||||||||||
| Common stock issued | 10 | 10 | ||||||||||||||||||
| Dividends paid | (32) | 32 | ||||||||||||||||||
| Dividends paid to minority interests | (43) | (43) | ||||||||||||||||||
| Other | 40 | 40 | ||||||||||||||||||
Net cash provided by/(used for) financing activities | (9) | (9) | 135 | 32 | 149 | |||||||||||||||
| Effect of exchange rate on cash and cash equivalents | ||||||||||||||||||||
| Net change in cash and cash equivalents | (125) | (125) | ||||||||||||||||||
| Cash and cash equivalents at January 1 | 457 | 457 | ||||||||||||||||||
| Cash and cash equivalents at September 30 | $ | 0 | $ | 0 | $ | 332 | $ | 0 | $ | 332 | ||||||||||
29
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2007
(in millions)
Parent | Issuer | Non Guarantors | Eliminations | Total Company | ||||||||||||||||
| Net cash provided by/(used for) operating activities | $ | 26 | $ | (61) | $ | 6 | $ | (29) | ||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||
| Capital expenditures | (105) | (105) | ||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 63 | 63 | ||||||||||||||||||
| Intercompany investing activities | 8 | $ | (8) | |||||||||||||||||
| Other | (7) | (7) | ||||||||||||||||||
Net cash provided by/(used for) investing activities | 8 | (49) | (8) | (49) | ||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||
| Proceeds from long-term debt | 22 | 22 | ||||||||||||||||||
| Payments of long-term debt | (25) | (25) | ||||||||||||||||||
| Net change in revolving credit facility and short-term debt | 125 | 125 | ||||||||||||||||||
| Net change in long-term intercompany balances | 80 | 53 | (133) | |||||||||||||||||
| Common stock repurchased | (118) | (118) | ||||||||||||||||||
| Common stock issued | 12 | 12 | ||||||||||||||||||
| Dividends paid | (8) | 8 | ||||||||||||||||||
| Dividends paid to minority interests | (17) | (17) | ||||||||||||||||||
Net cash provided by/(used for) financing activities | (26) | 53 | (36) | 8 | (1) | |||||||||||||||
| Effect of exchange rate on cash and cash equivalents | 20 | 20 | ||||||||||||||||||
| Net change in cash and cash equivalents | (59) | (59) | ||||||||||||||||||
| Cash and cash equivalents at January 1 | 407 | 407 | ||||||||||||||||||
| Cash and cash equivalents at September 30 | $ | 0 | $ | 0 | $ | 348 | $ | 0 | $ | 348 | ||||||||||
30
Crown Holdings, Inc.
Crown Americas, LLC and Crown Americas Capital Corp., 100% owned subsidiaries of the Company, have outstanding senior unsecured notes that are fully and unconditionally guaranteed by Crown Holdings, Inc. and substantially all subsidiaries in the United States. The guarantors are 100% owned by the Company and the guarantees are made on a joint and several basis. The following condensed combining financial statements:
· statements of operations for the three and nine months ended September 30, 2008 and 2007,
· balance sheets as of September 30, 2008 and December 31, 2007, and
· statements of cash flows for the nine months ended September 30, 2008 and 2007
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 September 30, 2008
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 593 | $ | 1,776 | $ | 2,369 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 485 | 1,450 | 1,935 | |||||||||||||||||||||
| Depreciation and amortization | 13 | 43 | 56 | |||||||||||||||||||||
| Gross profit | 95 | 283 | 378 | |||||||||||||||||||||
| Selling and administrative expense | $ | 3 | 34 | 65 | 102 | |||||||||||||||||||
| Provision for restructuring | 3 | 3 | ||||||||||||||||||||||
| Asset impairments and sales | 4 | (2) | 2 | |||||||||||||||||||||
| Net interest expense | 9 | 31 | 33 | 73 | ||||||||||||||||||||
| Technology royalty | (15) | 15 | ||||||||||||||||||||||
| Translation and exchange adjustments | 1 | 7 | 8 | |||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (13) | 41 | 162 | 190 | ||||||||||||||||||||
| Provision/(benefit) for income taxes | (5) | 31 | 19 | 45 | ||||||||||||||||||||
| Equity earnings | $ | 114 | 8 | 104 | $ | (226) | ||||||||||||||||||
| Income before minority interests and equity earnings | 114 | 114 | 143 | (226) | 145 | |||||||||||||||||||
| Minority interests and equity earnings | (31) | (31) | ||||||||||||||||||||||
| Net income | $ | 114 | $ | 0 | $ | 114 | $ | 112 | $ | (226) | $ | 114 | ||||||||||||
31
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended September 30, 2007
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 553 | $ | 1,600 | $ | 2,153 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 450 | 1,335 | 1,785 | |||||||||||||||||||||
| Depreciation and amortization | 15 | 41 | 56 | |||||||||||||||||||||
| Gross profit | 88 | 224 | 312 | |||||||||||||||||||||
Selling and administrative expense | $ | 2 | 37 | 58 | 97 | |||||||||||||||||||
Provision for restructuring | 9 | 9 | ||||||||||||||||||||||
Asset impairments and sales | (4) | (4) | ||||||||||||||||||||||
Net interest expense | 18 | 17 | 42 | 77 | ||||||||||||||||||||
Technology royalty | (13) | 13 | ||||||||||||||||||||||
Translation and exchange adjustments | (1) | (4) | (5) | |||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (20) | 48 | 110 | 138 | ||||||||||||||||||||
| Provision/(benefit) for income taxes | (7) | 9 | 20 | 22 | ||||||||||||||||||||
| Equity earnings | $ | 93 | 67 | 54 | $ | (214) | ||||||||||||||||||
| Income before minority interests and equity earnings | 93 | 54 | 93 | 90 | (214) | 116 | ||||||||||||||||||
| Minority interests and equity earnings | (23) | (23) | ||||||||||||||||||||||
| Net income | $ | 93 | $ | 54 | $ | 93 | $ | 67 | $ | (214) | $ | 93 | ||||||||||||
32
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2008
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 1,655 | $ | 4,773 | $ | 6,428 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,367 | 3,910 | 5,277 | |||||||||||||||||||||
| Depreciation and amortization | 40 | 125 | 165 | |||||||||||||||||||||
| Gross profit | 248 | 738 | 986 | |||||||||||||||||||||
| Selling and administrative expense | $ | 7 | 101 | 201 | 309 | |||||||||||||||||||
| Provision for restructuring | 4 | 4 | ||||||||||||||||||||||
| Asset impairments and sales | 4 | (4) | ||||||||||||||||||||||
| Loss from early extinguishment of debt | 2 | 2 | ||||||||||||||||||||||
| Net interest expense | 31 | 76 | 117 | 224 | ||||||||||||||||||||
| Technology royalty | (39) | 39 | ||||||||||||||||||||||
| Translation and exchange adjustments | 2 | 12 | 14 | |||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (40) | 106 | 367 | 433 | ||||||||||||||||||||
| Provision/(benefit) for income taxes | (15) | 63 | 65 | 113 | ||||||||||||||||||||
| Equity earnings | $ | 240 | 78 | 197 | $ | (515) | ||||||||||||||||||
| Income before minority interests and equity earnings | 240 | 53 | 240 | 302 | (515) | 320 | ||||||||||||||||||
| Minority interests and equity earnings | (80) | (80) | ||||||||||||||||||||||
| Net income | $ | 240 | $ | 53 | $ | 240 | $ | 222 | $ | (515) | $ | 240 | ||||||||||||
33
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the nine months ended September 30, 2007
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net sales | $ | 1,596 | $ | 4,260 | $ | 5,856 | ||||||||||||||||||
Cost of products sold, excluding depreciation and amortization | 1,325 | 3,550 | 4,875 | |||||||||||||||||||||
| Depreciation and amortization | 45 | 123 | 168 | |||||||||||||||||||||
| Gross profit | 226 | 587 | 813 | |||||||||||||||||||||
| Selling and administrative expense | $ | 6 | 100 | 179 | 285 | |||||||||||||||||||
| Provision for restructuring | 1 | 13 | 14 | |||||||||||||||||||||
| Asset imapirments and sales | (14) | (14) | ||||||||||||||||||||||
| Net interest expense | 48 | 54 | 121 | 223 | ||||||||||||||||||||
| Technology royalty | (29) | 29 | ||||||||||||||||||||||
| Translation and exchange adjustments | (1) | (12) | (13) | |||||||||||||||||||||
Income/(loss) before income taxes, minority interests and equity earnings | (54) | 101 | 271 | 318 | ||||||||||||||||||||
| Provision/(benefit) for income taxes | (19) | 25 | 56 | 62 | ||||||||||||||||||||
| Equity earnings | $ | 202 | 132 | 126 | $ | (460) | ||||||||||||||||||
Income before minority interests and equity earnings | 202 | 97 | 202 | 215 | (460) | 256 | ||||||||||||||||||
| Minority interests and equity earnings | (54) | (54) | ||||||||||||||||||||||
| Net income | $ | 202 | $ | 97 | $ | 202 | $ | 161 | $ | (460) | $ | 202 | ||||||||||||
34
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of September 30, 2008
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 23 | $ | 3 | $ | 306 | $ | 332 | ||||||||||||||||
Receivables, net | 12 | 1,055 | 1,067 | |||||||||||||||||||||
Intercompany receivables | 65 | 10 | $ | (75) | ||||||||||||||||||||
Inventories | 243 | 869 | 1,112 | |||||||||||||||||||||
Other current assets | $ | 1 | 1 | 5 | 107 | 114 | ||||||||||||||||||
Total current assets | 1 | 24 | 328 | 2,347 | (75) | 2,625 | ||||||||||||||||||
| Intercompany debt receivables | 1,169 | 724 | 474 | (2,367) | ||||||||||||||||||||
| Investments | 409 | 851 | 651 | (1,911) | ||||||||||||||||||||
| Goodwill | 453 | 1,636 | 2,089 | |||||||||||||||||||||
| Property, plant and equipment, net | 2 | 308 | 1,196 | 1,506 | ||||||||||||||||||||
| Other non-current assets | 36 | 548 | 350 | 934 | ||||||||||||||||||||
Total | $ | 410 | $ | 2,082 | $ | 3,012 | $ | 6,003 | $ | (4,353) | $ | 7,154 | ||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
Short-term debt | $ | 64 | $ | 64 | ||||||||||||||||||||
Current maturities of long-term debt | $ | 4 | $ | 1 | 19 | 24 | ||||||||||||||||||
Accounts payable and accrued liabilities | $ | 18 | 35 | 335 | 1,512 | 1,900 | ||||||||||||||||||
Intercompany payables | 10 | 65 | $ | (75) | ||||||||||||||||||||
Total current liabilities | 18 | 39 | 346 | 1,660 | (75) | 1,988 | ||||||||||||||||||
| Long-term debt, excluding current maturities | 1,509 | 700 | 1,236 | 3,445 | ||||||||||||||||||||
| Long-term intercompany debt | 173 | 434 | 875 | 885 | (2,367) | |||||||||||||||||||
| Postretirement and pension liabilities | 412 | 172 | 584 | |||||||||||||||||||||
| Other non-current liabilities | 270 | 296 | 566 | |||||||||||||||||||||
| Minority interests | 352 | 352 | ||||||||||||||||||||||
| Commitments and contingent liabilities | ||||||||||||||||||||||||
| Shareholders’ equity | 219 | 100 | 409 | 1,402 | (1,911) | 219 | ||||||||||||||||||
Total | $ | 410 | $ | 2,082 | $ | 3,012 | $ | 6,003 | $ | (4,353) | $ | 7,154 | ||||||||||||
35
Crown Holdings, Inc.
CONDENSED COMBINING BALANCE SHEET
As of December 31, 2007
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Current assets | ||||||||||||||||||||||||
Cash and cash equivalents | $ | 42 | $ | 5 | $ | 410 | $ | 457 | ||||||||||||||||
Receivables, net | 10 | 663 | 673 | |||||||||||||||||||||
Intercompany receivables | 70 | 12 | $ | (82) | ||||||||||||||||||||
Inventories | 239 | 791 | 1,030 | |||||||||||||||||||||
Prepaid expenses and other current assets | $ | 2 | 1 | 4 | 67 | 74 | ||||||||||||||||||
Total current assets | 2 | 43 | 328 | 1,943 | (82) | 2,234 | ||||||||||||||||||
| Intercompany debt receivables | 1,073 | 623 | 53 | (1,749) | ||||||||||||||||||||
| Investments | 225 | 780 | 48 | (1,053) | ||||||||||||||||||||
| Goodwill | 453 | 1,746 | 2,199 | |||||||||||||||||||||
| Property, plant and equipment, net | 2 | 331 | 1,271 | 1,604 | ||||||||||||||||||||
| Other non-current assets | 43 | 580 | 319 | 942 | ||||||||||||||||||||
Total | $ | 227 | $ | 1,941 | $ | 2,363 | $ | 5,332 | $ | (2,884) | $ | 6,979 | ||||||||||||
| Liabilities and shareholders’ equity | ||||||||||||||||||||||||
| Current liabilities | ||||||||||||||||||||||||
Short-term debt | $ | 45 | $ | 45 | ||||||||||||||||||||
Current maturities of long-term debt | $ | 4 | $ | 1 | 33 | 38 | ||||||||||||||||||
Accounts payable and accrued liabilities | $ | 23 | 21 | 337 | 1,619 | 2,000 | ||||||||||||||||||
Intercompany payables | 12 | 70 | $ | (82) | ||||||||||||||||||||
Total current liabilities | 23 | 25 | 350 | 1,767 | (82) | 2,083 | ||||||||||||||||||
| Long-term debt, excluding current maturities | 1,454 | 701 | 1,199 | 3,354 | ||||||||||||||||||||
| Long-term intercompany debt | 189 | 416 | 396 | 748 | (1,749) | |||||||||||||||||||
| Postretirement and pension liabilities | 429 | 196 | 625 | |||||||||||||||||||||
| Other non-current liabilities | 262 | 317 | 579 | |||||||||||||||||||||
| Minority interests | 323 | 323 | ||||||||||||||||||||||
| Commitments and contingent liabilities | ||||||||||||||||||||||||
| Shareholders’ equity | 15 | 46 | 225 | 782 | (1,053) | 15 | ||||||||||||||||||
Total | $ | 227 | $ | 1,941 | $ | 2,363 | $ | 5,332 | $ | (2,884) | $ | 6,979 | ||||||||||||
36
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2008
(in millions)
| Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net cash provided by/(used for) operating activities | $ | 9 | $ | 5 | $ | 91 | $ | (251) | $ | (146) | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||||
| Capital expenditures | (18) | (96) | (114) | |||||||||||||||||||||
| Proceeds from sale of property, plant and equipment | 2 | 8 | 10 | |||||||||||||||||||||
| Intercompany investing activities | 5 | (502) | 528 | $ | (31) | |||||||||||||||||||
| Other | (6) | (18) | (24) | |||||||||||||||||||||
Net cash provided by/(used for) investing activities | (1) | (518) | 422 | (31) | (128) | |||||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
| Payments of long-term debt | (1) | (66) | (67) | |||||||||||||||||||||
| Net change in revolving credit facility and short-term debt | 55 | 157 | 212 | |||||||||||||||||||||
| Net change in long-term intercompany balances | (16) | (78) | 426 | (332) | ||||||||||||||||||||
| Common stock repurchased | (3) | (3) | ||||||||||||||||||||||
| Common stock issued | 10 | 10 | ||||||||||||||||||||||
| Dividends paid | (31) | 31 | ||||||||||||||||||||||
| Dividends paid to minority interests | (43) | (43) | ||||||||||||||||||||||
| Other | 40 | 40 | ||||||||||||||||||||||
Net cash provided by/(used for) financing activities | (9) | (23) | 425 | (275) | 31 | 149 | ||||||||||||||||||
| Effect of exchange rate on cash and cash equivalents | ||||||||||||||||||||||||
| Net change in cash and cash equivalents | (19) | (2) | (104) | (125) | ||||||||||||||||||||
| Cash and cash equivalents at January 1 | 42 | 5 | 410 | 457 | ||||||||||||||||||||
| Cash and cash equivalents at September 30 | $ | 0 | $ | 23 | $ | 3 | $ | 306 | $ | 0 | $ | 332 | ||||||||||||
37
Crown Holdings, Inc.
CONDENSED COMBINING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 2007
(in millions)
Parent | Issuer | Guarantors | Non Guarantors | Eliminations | Total Company | |||||||||||||||||||
| Net cash provided by/(used for) operating activities | $ | 26 | $ | (20) | $ | 101 | $ | (136) | $ | (29) | ||||||||||||||
| Cash flows from investing activities | ||||||||||||||||||||||||
Capital expenditures | (25) | (80) | (105) | |||||||||||||||||||||
Proceeds from sale of property, plant and equipment | 1 | 62 | 63 | |||||||||||||||||||||
Intercompany investing activities | 10 | 3 | $ | (13) | ||||||||||||||||||||
Other | (7) | (7) | ||||||||||||||||||||||
| Net cash provided by/(used for) investing activities | 10 | (21) | (25) | (13) | (49) | |||||||||||||||||||
| Cash flows from financing activities | ||||||||||||||||||||||||
Proceeds from long-term debt | 22 | 22 | ||||||||||||||||||||||
Payments of long-term debt | (1) | (24) | (25) | |||||||||||||||||||||
Net change in revolving credit facility and short-term debt | 84 | 41 | 125 | |||||||||||||||||||||
Net change in long-term intercompany balances | 80 | (121) | (80) | 121 | ||||||||||||||||||||
| Common stock repurchased | (118) | (118) | ||||||||||||||||||||||
Common stock issued | 12 | 12 | ||||||||||||||||||||||
Dividends paid | (13) | 13 | ||||||||||||||||||||||
Dividends paid to minority interests | (17) | (17) | ||||||||||||||||||||||
| Net cash provided by/(used for) financing activities | (26) | (37) | (81) | 130 | 13 | (1) | ||||||||||||||||||
| Effect of exchange rate on cash and cash equivalents | 20 | 20 | ||||||||||||||||||||||
| Net change in cash and cash equivalents | (47) | (1) | (11) | (59) | ||||||||||||||||||||
| Cash and cash equivalents at January 1 | 60 | 4 | 343 | 407 | ||||||||||||||||||||
| Cash and cash equivalents at September 30 | $ | 0 | $ | 13 | $ | 3 | $ | 332 | $ | 0 | $ | 348 | ||||||||||||
38
Crown Holdings, Inc.
PART I – FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
(in millions)
The following discussion presents management’s analysis of the results of operations for the three and nine months ended September 30, 2008 compared to the corresponding periods in 2007 and the changes in financial condition and liquidity from December 31, 2007. 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, 2007, along with the consolidated financial statements and related notes included in and referred to within this report.
The Company’s principal areas of focus include improving segment income and cash flow from operations and reducing debt. See Note O to the consolidated financial statements for information regarding segment income.
Improving segment income is primarily dependent on the Company’s ability to increase revenues and manage costs. Key strategies for expanding revenue include targeting geographic markets with strong growth potential, such as southern, central and eastern Europe, the Middle East, Asia and Latin America, 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 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 proceeds of which may be used to reduce debt. The Company’s total debt of $3,533 at September 30, 2008 decreased $230 from $3,763 at September 30, 2007, including $29 of decrease due to foreign currency translation.
Net Sales
Net sales in the third quarter of 2008 were $2,369, an increase of $216 or 10.0% compared to net sales of $2,153 for the same period in 2007. Net sales in the first nine months of 2008 were $6,428, an increase of $572 or 9.8% compared to net sales of $5,856 for the same period in 2007. The increase in net sales for the third quarter and first nine months included $90 and $348, respectively, of foreign currency translation. Sales from U.S. operations accounted for 25.8% of consolidated net sales in the first nine months of 2008 compared to 27.6% for the same period in 2007. Sales of beverage cans and ends accounted for 47.1% and sales of food cans and ends accounted for 34.0% of consolidated net sales in the first nine months of 2008 compared to 46.6% and 33.3%, respectively, in 2007.
Net sales in the Americas Beverage segment in the third quarter increased 9.0% from $455 in 2007 to $496 in 2008. Net sales in the first nine months of 2008 increased 5.8% from $1,336 in 2007 to $1,414 in 2008. The increases in 2008 were primarily due to the pass-through of increased aluminum costs to customers in the form of higher selling prices.
Net sales in the North America Food segment in the third quarter increased 0.7% from $268 in 2007 to $270 in 2008, and in the first nine months increased 0.9% from $669 in 2007 to $675 in 2008. The increase in net sales in the quarter was primarily due to $17 from the pass-through of increased steel and other costs to customers in the form of higher selling prices, partially offset by decreases of $15 due to lower sales unit volumes and foreign currency translation. The increase in net sales in the first nine months was primarily due to $43 from the pass-through of increased costs to customers and $5 due to foreign currency translation, partially offset by a decrease of $42 due to lower sales unit volumes.
39
Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
Net sales in the European Beverage segment increased 9.9% from $413 in the third quarter of 2007 to $454 in the same period in 2008. Net sales in the first nine months of 2008 increased 16.7% from $1,095 in 2007 to $1,278 in 2008. The increases in the quarter and first nine months of 2008 were primarily due to increased sales unit volumes and also included $11 of foreign currency translation for the quarter and $56 for the nine months.
Net sales in the European Food segment increased 18.7% from $577 in the third quarter of 2007 to $685 in the same period in 2008, and net sales in the first nine months of 2008 increased 16.0% from $1,492 in 2007 to $1,730 in 2008. The increases were primarily due to $53 of foreign currency translation for the quarter and $175 for the nine months, and increased sales unit volumes, primarily due to improved weather conditions and a resulting improved harvest compared to the prior year.
Net sales in the European Specialty Packaging segment increased 5.0% from $121 in the third quarter of 2007 to $127 in the same period in 2008, and net sales in the first nine months of 2008 increased 8.2% from $330 in 2007 to $357 in 2008. The increases were primarily due to the impact of foreign currency translation.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding deprecitation and amortization, was $1,935 and $5,277 for the third quarter and first nine months of 2008, increases of $150 and $402 compared to $1,785 and $4,875 for the same periods in 2007. The increases were primarily due to the impact of higher material costs for aluminum and steel and also included $72 and $288 due to the impact of foreign currency translation for the quarter and nine months.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 81.7% and 82.1% for the third quarter and first nine months of 2008 compared to 82.9% and 83.2% for the same periods in 2007.
As a result of steel and aluminum price increases in recent years, the Company has implemented significant price increases with many of its customers. The Company's major tinplate suppliers have indicated that they expect prices to significantly increase in 2009. The Company expects price volatility in its other commodity related costs as well, including natural gas, electricity and freight related costs. The Company intends to pass any raw material price increases on to its customers. However, there can be no assurance that the Company will be able to fully recover from its customers the impact of price increases affecting the Company, or the timing of such recovery. In addition, if the Company is unable to purchase steel, aluminum or other critical raw materials for a significant period of time, the Company's operations would be disrupted. The Company continues to monitor its core commodity and other cost inputs in relation to its pricing strategy.
Depreciation and Amortization
Depreciation and amortization was $56 and $165 in the third quarter and first nine months of 2008, compared to $56 and $168, respectively, for the prior year periods. Increases due to the impact of foreign currency translation were offset by decreases due to lower capital spending in recent years.
Gross Profit
Gross profit increased $66 from $312 in the third quarter of 2007 to $378 in the third quarter of 2008. Gross profit for the first nine months increased $173 from $813 in 2007 to $986 in 2008. Gross profit as a percentage of net sales was 16.0% and 15.3% for the third quarter and first nine months of 2008, compared to 14.5% and 13.9% for the same prior year periods. The improvements in gross profit in 2008 included foreign currency translation of $15 and $52 in the third quarter and first nine months, respectively. The remaining improvement includes sales unit volume growth, primarily in beverage cans and food cans in the Company’s European division and beverage cans in the Asia-Pacific division.
40
Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
Selling and Administrative Expense
Selling and administrative expense was $102 in the third quarter of 2008 compared to $97 for the same period in 2007. The increase was primarily due to foreign currency translation. As a percentage of net sales, selling and administrative expense was 4.3% in the third quarter of 2008 compared to 4.5% for the same period in 2007.
Selling and administrative expense was $309 in the first nine months of 2008 compared to $285 for the same period in 2007. The increase was primarily due to foreign currency translation of $15 and increased compensation costs. As a percentage of net sales, selling and administrative expense was 4.8% for the first nine months of 2008 compared to 4.9% for the same period in 2007.
The expense for the first nine months of 2008 also included a credit of $4 for litigation settlements, and a charge of $6 for pension settlement costs in the Company’s supplemental executive retirement plan. The credit for litigation settlements arose primarily from a malpractice claim the Company filed several years ago related to the sale of property.
Segment Income by Reportable Segment
As discussed in Note O to the consolidated financial statements, the Company defines segment income as net sales less cost of products sold, depreciation and amortization and selling and administrative expenses.
Segment income in the Americas Beverage segment was $54 in each of the third quarters of 2007 and 2008. Segment income in the first nine months increased $6 from $148 in 2007 to $154 in 2008. The increase in the first nine months of 2008 was primarily due to operating efficiencies. Improvements in the third quarter due to operating efficiencies were mitigated by increases in freight, utility and other costs.
Segment income in the North America Food segment increased $4 from $31 in the third quarter of 2007 to $35 in the third quarter of 2008. Segment income in the first nine months increased $5 from $61 in 2007 to $66 in 2008. The increases in 2008 were primarily due to cost reductions.
Segment income in the European Beverage segment increased $14 from $60 in the third quarter of 2007 to $74 in the third quarter of 2008. Segment income in the first nine months increased $65 from $148 in 2007 to $213 in 2008. The increases in 2008 were primarily due to increased sales unit volumes, and also included $2 and $7 of foreign currency translation for the quarter and nine months, respectively.
Segment income in the European Food segment increased $34 from $55 in the third quarter of 2007 to $89 in the third quarter of 2008. Segment income in the first nine months increased $53 from $138 in 2007 to $191 in 2008. The increases in 2008 were primarily due to increased sales unit volumes and also included $6 and $21 of foreign currency translation for the quarter and nine months, respectively.
Segment income in the European Specialty Packaging segment increased $1 from $7 in the third quarter of 2007 to $8 in the third quarter of 2008. Segment income in the first nine months increased $3 from $17 in 2007 to $20 in 2008. The increases in 2008 were primarily due to cost reductions.
Asset Impairments and Sales
The results for the nine months ended September 30, 2008 included an asset impairment charge of $4 offset by net gains of $4 from asset sales. See Note H to the consolidated financial statements for further discussion of the asset impairment charge. The results for the nine months ended September 30, 2007 included net gains of $14 from asset sales, primarily due to the sale of idle properties in the European Food segment.
Restructuring
The results for the nine month periods ended September 30, 2008 and 2007 included restructuring charges of $4 and $14, respectively. See Note I to the consolidated financial statements for additional information on these charges.
41
Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
Interest Expense
Interest expense of $232 for the nine months ended September 30, 2008 was unchanged from the prior year period. Interest expense of $76 for the quarter ended September 30, 2008 decreased $3 from the prior year period. Improvements in the third quarter due to lower average debt outstanding were offset by increases due to foreign currency translation.
Translation and Exchange Adjustments
The results for the three and nine month periods ended September 30, 2008 included net foreign exchange losses of $8 and $14, respectively, for certain subsidiaries that have unhedged currency exposures, primarily for intercompany debt obligations. These currency exposures may continue to result in future foreign exchange gains or losses. The Company may hedge or mitigate a portion of these exposures in the future through derivative instruments.
Taxes on Income
The third quarter of 2008 included net tax charges of $45 on pre-tax income of $190 for an effective rate of 23.7%. The difference of $22 between the pre-tax income at the U.S. statutory rate of 35% or $67, and the tax charges of $45, was primarily due to benefits of $15 from lower tax rates in certain non-U.S. jurisdictions, $5 from an adjustment to deferred taxes due to a change in the U.K. tax law regarding depreciation, and $3 for provision reversals as discussed in Note N to the consolidated financial statements, partially offset by other net charges of $1, including withholding taxes.
The first nine months of 2008 included net tax charges of $113 on pre-tax income of $433 for an effective rate of 26.1%. The difference of $39 between the pre-tax income at the U.S. statutory rate of 35% or $152, and the tax charges of $113, was primarily due to benefits of $44 from lower tax rates in certain non-U.S. jurisdictions, $5 from an adjustment to deferred taxes due to a change in the U.K. tax law regarding depreciation, and $3 for provision reversals as discussed in Note N to the consolidated financial statements. These benefits were partially offset by charges of $6 for withholding taxes, $5 for valuation allowance adjustments, and $2 of other items.
The third quarter of 2007 included net tax charges of $22 on pre-tax income of $138 for an effective rate of 15.9%. The difference of $26 between the pre-tax income at the U.S. statutory rate of 35% or $48, and the tax charges of $22, was primarily due to benefits of $19 from lower tax rates in certain non-U.S. jurisdictions, $4 from enacted tax rate changes, primarily in the U.K., and $3 from valuation allowance adjustments.
The first nine months of 2007 included net tax charges of $62 on pre-tax income of $318 for an effective rate of 19.5%. The difference of $49 between the pre-tax income at the U.S. statutory rate of 35% or $111, and the tax charges of $62, was primarily due to benefits of $41 from lower tax rates in certain non-U.S. jurisdictions, $6 from valuation allowance adjustments, and $4 from enacted tax rate changes, primarily in the U.K. These benefits, totaling $51, were partially offset by other net charges of $2, including withholding taxes.
Minority Interests, Net of Equity Earnings
The charge for minority interests, net of equity earnings, increased $8 and $26 in the third quarter and first nine months of 2008, respectively, compared to the same periods in 2007. These increases were primarily due to increased profits in the Middle East and China beverage can operations.
Cash from Operations
Cash of $146 was used for operating activities in the first nine months of 2008 compared to cash used of $29 during the same period in 2007. The increase of $117 in cash used for operating activities was primarily due to an increase in working capital due to increased material costs and sales in 2008, $46 of increased incentive compensation payments in 2008 due to higher accruals at the end of 2007 compared to 2006, $21 due to lower receivables securitization levels in 2008, and $20 from the translation of foreign currency cash flows at higher rates in 2008 due to the weakening of the U.S. dollar.
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Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
Investing Activities
Investing activities used cash of $128 during the first nine months of 2008 compared to cash used of $49 in the prior year period. Primary investing activities were capital expenditures of $114 in the first nine months of 2008 and $105 in the same period of 2007. The Company expects its full year capital expenditures to be approximately $185 in 2008 compared to $156 in 2007. Included in other investing activities in 2008 were payments of $13 to repurchase a portion of the outstanding shares from minority shareholders in the Company’s operations in Greece, increasing the Company’s ownership to 80.5%. In 2007, the Company received $63 of proceeds from asset sales, primarily land and buildings including $39 from the sale of a note related to property sold in 2006.
Financing Activities
Financing activities provided cash of $149 during the first nine months of 2008 compared to cash used of $1 during the same period in 2007. Borrowings under the Company’s revolving credit facility were the primary source of cash from financing activities in both 2008 and 2007. Dividends paid to minority interests increased from $17 in 2007 to $43 in 2008 due to increased payments from the Company’s joint venture beverage can operations in the Middle East. Other financing activities of $40 in 2008 represent cash received upon the settlement of foreign currency contracts used to hedge intercompany debt obligations. Common stock repurchases of $118 in 2007 included $100 purchased under an accelerated share repurchase program.
As of September 30, 2008, the Company had $504 of borrowing capacity available under its revolving credit facility, equal to the total facility of $758 less $182 of borrowings and $72 of outstanding standby letters of credit.
Contractual Obligations
During the first nine months of 2008, purchase obligations covering new agreements for raw materials and other consumables increased by $259 for 2008, $618 for 2009, $351 for 2010 and $34 for 2011 above amounts provided within Part II, 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, 2007.
Commitments and Contingent Liabilities
Information regarding the Company's commitments and contingent liabilities appears in Part I within Item 1 of this report under Note K, entitled "Commitments and Contingent Liabilities," to the consolidated financial statements.
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. Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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, 2007 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 nine months of 2008.
The discussion below repeats and expands the discussion from the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 with respect to goodwill impairment and deferred tax valuation allowances. The discussion also includes additional disclosure with respect to the calculation of the Company’s asbestos-related liability accrual and the accounting for unrecognized gains and losses for the Company’s pension and postretirement benefit plans. The discussion below should be read in conjunction with Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” 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, 2007.
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Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
Goodwill Impairment
The Company performs a goodwill impairment review in the fourth quarter of each year or when facts and circumstances indicate goodwill may be impaired. The impairment review involves a number of assumptions and judgments, including the calculation of fair value for the Company’s identified reporting units. The Company determines the estimated fair value for each reporting unit based on the average of the estimated fair values calculated using market values for comparable businesses and discounted cash flow projections. The Company’s estimates of future cash flows include assumptions concerning future operating performance, economic conditions, and technological changes and may differ from actual future cash flows. Under the first method of calculating estimated fair value, the Company obtains publicly available trading multiples based on the enterprise value of companies in the packaging industry whose shares are publicly traded. The Company also reviews available information regarding the multiples used in recent transactions, if any, involving transfers of controlling interests in the packaging industry. The appropriate multiple is applied to the forecasted EBITDA (a non-GAAP item defined by the Company as net customer sales, less cost of products sold excluding depreciation and amortization, less selling and administrative expenses) of the reporting unit to obtain an estimated fair value. Under the second method, fair value is calculated as the sum of the projected discounted cash flows of the reporting unit over the next five years and the terminal value at the end of those five years. The projected cash flows generally include no growth assumption unless there has recently been a material change in the business or a material change is forecasted. The discount rate used is based on the average weighted-average cost of capital of companies in the packaging industry, which information is available through various sources. The terminal value at the end of the five years is the product of the projected EBITDA at the end of the five year period and the trading multiple.
The North America Food segment includes the North America Food and North America Closures reporting units. As of December 31, 2007, the estimated fair value of the North America Closures reporting unit was $24 higher than its carrying value, and the reporting unit had $68 of goodwill. The fair value of the North America Closures reporting unit was estimated based on the average of the fair values calculated using market values for comparable businesses and discounted cash flow projections, as described above. The Company used an average of the two methods in estimating fair value because it believes they provide an equal probability of yielding an appropriate fair value for the reporting unit. The maximum potential effect of weighting the two methods other than equally would have been to increase or decrease the estimated fair value at December 31, 2007 by $2 as the two methods provided values that were within $4 of the other. The Company assumed an EBITDA multiple of 8.0 times for the market value method. For its discounted cash flow projections the Company assumed a five-year projection of revenue and operating margins consistent with current results, a discount rate of 8.75%, and a terminal value of 8.0 times EBITDA at the end of the five years. Assuming all other factors remain the same, a $1 change in projected annual EBITDA changes the excess of estimated fair value over carrying value by $8; a change of 0.5 in the assumed EBITDA multiple changes the excess of estimated fair value over carrying varying value by $8; and a change in the discount rate to 7.75% or 9.75% changes the excess of estimated fair value over carrying value by $3.
It is possible that an impairment charge of up to $68 could be recorded for the North America Closures reporting unit if its estimated fair value were to fall below its carrying value.
During the fourth quarter of 2007, the Company recorded a goodwill impairment charge of $103 in its European metal vacuum food closures business due to a decrease in projected operating results. The European metal vacuum food closures business is included within the Company’s European Food segment. The segment income of the business was $6, $14 and $17 for the years ended December 31, 2007, 2006 and 2005, respectively, and as of the end of 2006, the Company was projecting 2007 segment income of $16.
The decrease in 2007 segment income, compared to 2006 results and the Company’s 2007 projections, was primarily due to lower sales unit volumes, an inability to recover cost increases through increased selling prices, and, to a lesser extent, increased costs due to a temporary disruption from the relocation of certain operations during the first half of 2007. The relocation of operations is complete and the related excess costs incurred in 2007 are not expected to recur in future years.
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Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
In its projections for the European metal vacuum food closures business for 2007, the Company expected to see some pressure on selling prices based on preliminary discussions with its customers, but believed it could compensate for these losses through increased sales unit volumes that could be obtained from existing or new customers throughout the year. However, due to aggressive pricing by certain of the Company's competitors (an effort to maintain or increase their sales unit volumes), the Company was unable to increase volumes for 2007 as allocations were finalized during the first two quarters. In addition to its effect on the Company’s sales unit volumes, the competitive situation also depressed selling prices throughout the year beyond the Company’s expectations. The aggressive pricing policies evident in 2007 were unexpected in a business that had consistent segment income and relatively stable selling prices in recent years. As of October 31, 2007, it was management’s judgment that the adverse competitive situation was temporary based on its understanding of the competitive market at that time. However, at the conclusion of the 2008 budget process, which occurred at the end of 2007 only after initial discussions with existing and potential customers related to 2008 pricing and volumes, management concluded that the depressed selling prices and competition for sales volume would likely continue, and that 2008 segment income was unlikely to improve. Due to this second consecutive year of reduced segment income, and absent any evidence to the contrary, the Company determined that it was appropriate to assume similar results for its projections used to calculate the estimated fair value of the reporting unit at the end of 2007. As of December 31, 2007, the European metal vacuum food closures business had $68 of remaining carrying value including $19 of goodwill.
The Company believes segment income in the European metal vacuum food closures business will improve only when, and if, selling prices in the market increase or the Company is able to significantly increase its current sales unit volumes. The Company is attempting to reduce costs in the business through manufacturing efficiencies and manpower reductions, while also seeking to improve sales price and volume by supplying a quality product and technical support in a competitive market environment. The Company is unable to predict at this time whether these initiatives will be successful or whether and to what extent such initiatives will reduce costs and improve sales volumes and pricing.
Estimated fair value for the European metal vacuum food closures business was calculated in the fourth quarters of 2007 and 2006 using the methodology outlined above. The results achieved using the market value and discounted cash flow projections were weighted evenly as the Company believes they have an equal probability of providing an appropriate fair value. Weighting the two methods in any other proportion would not have had any effect on the 2006 impairment review as any combination would have resulted in an estimated fair value in excess of carrying value. For the 2007 impairment review, the maximum potential effect of weighting the two methods other than equally would have been to increase or decrease the impairment charge by $5. The primary assumptions used included EBITDA multiples of 8.0 times and 7.5 times, and discount rates of 8.75% and 7.0%, as of December 31, 2007 and 2006, respectively. The increases in the EBITDA multiple and discount rate used in 2007 compared to 2006 were due to increases in the market values and weighted average cost of capital of companies in the packaging industry from 2006 to 2007. The primary cause of the impairment charge in 2007 was a decrease in projected operating results as described above, as the net effect of the assumed multiple and discount rate changes was not significant.
Tax Valuation Allowances
The Company records a valuation allowance to reduce its deferred tax assets when it is more likely than not that a portion of the tax assets will not be realized. The estimate of the amount that will not be realized requires the use of assumptions concerning the Company's future taxable income. The Company considers all sources of taxable income in estimating its valuation allowances, including taxable income in any available carry back period; the reversal of taxable temporary differences; tax-planning strategies; and taxable income expected to be generated in the future other than reversing temporary differences. Should the Company change its estimate of the amount of its deferred tax assets that it would be able to realize, an adjustment to the valuation allowance will result in an increase or decrease in tax expense in the period such a change in estimate is made.
At December 31, 2007, the Company reversed a portion of its U.S. valuation allowances and had approximately $360 of U.S. net deferred tax assets. The reversal of the valuation allowance was made based on management’s determination that it was more likely than not that a portion of its deferred tax benefits would be realized through future income. In forming this conclusion, the Company considered the fact that it no longer had cumulative losses in the U.S. over the past three years. The Company’s U.S. pre-tax book income/(loss) from continuing operations, as reported in Note X of the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, was $4, $39 and ($60) for the years ended December 31, 2007, 2006 and 2005, respectively. However, these amounts represent the U.S. book income only and exclude additional U.S. taxable income from dividends and other foreign source income. Foreign source income in 2007 was $40 and the Company has included similar amounts in its projections of future taxable income. In addition, the loss of $60 in 2005 included charges of $53 related to early extinguishments of debt, and the Company has not included similar charges in its projections of future income.
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Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
The Company’s methodology for determining the realizability of its deferred tax assets involves estimates of future taxable income. These estimates are projected through the life of the related deferred tax assets based on assumptions which management believes to be reasonable and consistent with current operating results. Future realization of the Company’s U.S. net deferred tax assets as of December 31, 2007 will require approximately $900 of aggregate future U.S. taxable income.
Asbestos-Related Liabilities
At the end of each quarter, the Company considers whether there have been any material developments that would cause it to update its asbestos liability accrual calculations. Absent any significant developments in the asbestos litigation environment in general or with respect to the Company specifically, the Company updates its accrual calculations in the fourth quarter of each year. The Company’s asbestos liability accrual is calculated in the fourth quarter of each year as the sum of its outstanding and expected future claims, multiplied by the expected average settlement cost of those claims, plus estimated legal fees. The expected number of claims, and the expected average settlement cost per claim are calculated using projections based on the actual data for the most recent five years. Because claims are not submitted or settled evenly throughout the year, it is difficult to predict at any time during the year whether the number of claims or average settlement cost over the five year period ending December 31 of such year will increase compared to the prior five year period. The five year average settlement cost at the end of 2007 was higher than at the end of 2006. The effect of this increase in the expected average settlement cost per claim was partially mitigated by a decrease in the expected number of future claims. The combination of these two factors in 2007 resulted in a charge of $29 in 2007 compared to charges of $10 in each of the preceding two years. A 10% change in either the number of projected claims or the average cost per claim would increase or decrease the estimated liability at December 31, 2007 by $20. A 10% increase or decrease in these two factors at the same time would increase or decrease the estimated liability at December 31, 2007 by $42 and $38, respectively.
Pension and Postretirement Benefit Plans – Unrecognized Losses
As of December 31, 2007, the Company had unrecognized net losses in other comprehensive income of $1,480 related to its pension plans and $131 related to its other postretirement benefit plans. Unrecognized gains and losses arise each year primarily due to changes in discount rates, differences in actual plan asset returns compared to assumed returns, and changes in actuarial assumptions such as mortality. Unrecognized gains and losses are accumulated in other comprehensive income and the portion in each plan that exceeds 10% of the greater of that plan’s assets or projected benefit obligation is amortized to income over future periods. The Company’s pension expense for the year ended December 31, 2007 included charges of $78 for the amortization of unrecognized net losses, and the Company estimates charges of $74 in 2008. Unrecognized net losses of $1,480 in the pension plans as of December 31, 2007 include $861 in the U.K. defined benefit plan, $446 in the U.S defined benefit plan, $157 in the Canadian defined benefit plans, and $16 in other plans. The amortizable losses in the U.K. plan are being recognized over 21 years, representing the average expected life of inactive employees as over 90% of the plan participants are inactive and the fund is closed to new participants. The amortizable losses in the U.S. plan are being recognized over the average remaining service life of active participants of 11 years. The amortizable losses in the Canadian plans are being recognized over the average remaining service life of active participants of 11 years. An increase of 10% in the number of years used to amortize the unrecognized losses in each plan would decrease the estimated charges for 2008 by 9.1% or $7. A decrease of 10% in the number of years would increase the estimated charge for 2008 by 11.1% or $8.
Unrecognized net losses in the Company’s other postretirement benefit plans as of December 31, 2007, primarily included $117 in the U.S. plans, with the amortizable portion being recognized over the average remaining service life of active participants of 9 years. The Company’s other postretirement benefits expense for the year ended December 31, 2007 included charges of $10 for the amortization of unrecognized net losses, and the Company estimates charges of $9 in 2008. An increase of 10% in the number of years used to amortize the unrecognized losses in each plan would decrease the estimated charge for 2008 by 9.1% or $1. A decrease of 10% in the number of years would increase the estimated charge for 2008 by 11.1% or $1.
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Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
Recent Events
Recent events in the financial markets could affect certain of the Company's accounting estimates and assumptions.
In performing its goodwill impairment review during the fourth quarter of each year the Company utilizes, among other things, publicly available information on EBITDA multiples of companies in the packaging industry. Declines in the market value and EBITDA multiples of these companies could reduce the estimated fair values of the Company’s businesses and increase the possibility that the estimated fair value of a business will fall below its carrying value and require an impairment charge.
The estimated realization of the Company’s deferred tax assets requires the use of assumptions concerning future income. Decreases in the Company’s pension plan assets at the end of the a year due to declining market prices could increase the Company’s pension expense in subsequent years and reduce its estimates of future income. Such reductions could affect the Company’s conclusions concerning the amount of its deferred tax assets that will be realized.
Recent Accounting Pronouncements
In April 2008, the FASB issued FASB Staff Position FAS 142-3 (“FSP FAS 142-3”), “Determination of the Useful Life of Intangible Assets.” FSP FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142 (“FAS 142”), “Goodwill and Other Intangible Assets.” The FSP attempts to improve the consistency between the useful life of a recognized intangible asset under FAS 142 and the period of expected cash flows used to measure the fair value of the asset under FASB Statement No. 141 (revised 2007) (“FAS 141(R)”),”Business Combinations” and other generally accepted accounting principles. The FSP requires disclosure of information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the company’s intent and/or ability to renew or extend the arrangement. The FSP is effective for the Company as of January 1, 2009. The guidance for determining the useful life of the recognized intangible asset in the FSP is to be applied prospectively to intangible assets acquired after the effective date. The Company is currently evaluating the FSP and does not expect its adoption to have a material impact on the Company’s consolidated financial statements.
In June 2008, the FASB issued FSP EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” FSP EITF 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share (“EPS”) under the two-class method described in FAS 128, “Earnings per Share.” The guidance in the FSP applies to the calculation of EPS for share-based payment awards with rights to dividends or dividend equivalents. Further, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of EPS pursuant to the two-class method. The FSP is effective for the Company as of January 1, 2009. All prior-period EPS data presented will be adjusted retrospectively to conform to the provisions of the FSP. The Company is currently evaluating the FSP and does not expect its adoption to have a material impact on the Company’s calculation of earnings per share.
In March 2008, the FASB issued SFAS No. 161 (“FAS 161”), “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” FAS 161 amends and expands the disclosure requirements of SFAS No. 133 (“FAS 133”), “Accounting for Derivative Instruments and Hedging Activities” with the intent to provide users of financial statements with an enhanced understanding of how and why an entity uses derivative instruments; how derivative instruments and related hedged items are accounted for under FAS 133 and its related interpretations; and how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. The statement requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. FAS 161 is effective for the Company as of January 1, 2009 and the Company is currently evaluating the disclosure implications of this statement.
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Crown Holdings, Inc.
Item 2. Management’s Discussion and Analysis (Continued)
In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“FAS 141(R)”), “Business Combinations,” which replaces FAS 141. FAS 141(R) retains the requirement of FAS 141 that business combinations be accounted for at fair value using the acquisition method, but changes the accounting for acquisitions in certain areas. Under FAS 141(R) acquisition costs will be expensed as incurred; noncontrolling (minority) interests will be valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. FAS 141(R) is effective for the Company for all business combinations for which the acquisition date is on or after January 1, 2009, and the Company does not expect its adoption to have a material impact on the Company’s financial statements at the date of adoption.
In December 2007, the FASB issued SFAS No. 160 (“FAS 160”), “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” FAS 160 requires the recognition of noncontrolling (minority) interests as equity in the consolidated financial statements, but separate from the parent’s equity. The statement also requires that the amount of net income attributable to minority interests be included in consolidated net income on the face of the income statement. Assuming FAS 160 was adopted as of December 31, 2007, and using the amounts included in the Company’s financial statements as of that date, the adoption of FAS 160 would increase the Company’s shareholders’ equity from $15 to $338 due to the inclusion of minority interests of $323 in shareholders’ equity. The effect on the income statement for the year ended December 31, 2007 would be to increase the Company’s consolidated net income from $528 to $601 with the inclusion of $73 of net income attributable to minority interests, and the Company would separately disclose $73 of consolidated net income attributable to minority interests. FAS 160 also includes expanded disclosure requirements regarding interests of the parent and noncontrolling interests, and amends certain consolidation procedures of ARB No. 51 for consistency with the requirements of FAS 141(R). FAS 160 is effective for the Company as of January 1, 2009.
Statements included herein in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, in the discussions of asbestos in Note J and commitments and contingencies in Note K 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, 2007, 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.
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Crown Holdings, Inc.
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, 2007 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
The Company has foreign currency exposure related to certain intercompany debt obligations, primarily between the U.S. and Canada, which may result in future foreign exchange adjustments to earnings. The Company may hedge or mitigate a portion of these exposures in the future through derivative instruments.
As of September 30, 2008, the Company had approximately $1.1 billion principal floating interest rate debt. A change of 0.25% in these floating interest rates would change annual interest expense by approximately $3 before tax.
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 Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective. Disclosure controls and procedures ensure that information to be disclosed in reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and terms of the Securities and Exchange Commission, and ensures that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. There has been no change in the Company's internal control over financial reporting that occurred during the period covered by this report 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 |
| Legal Proceedings | ||
For information regarding the Company’s potential asbestos-related liabilities and certain other matters, see Note J entitled “Asbestos-Related Liabilities” and Note K entitled “Commitments and Contingent Liabilities,” respectively, to the consolidated financial statements within Part I, Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference. | ||
| Risk Factors | ||
| In addition to the other information set forth in this report, carefully consider the factors discussed in Item 1A to Part I in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results. | ||
| Unregistered Sales of Equity Securities and Use of Proceeds | ||
The Company made no purchases of its equity securities during the quarter ended September 30, 2008. | ||
On February 28, 2008, the Company’s Board of Directors authorized the repurchase of up to $500 million, of which the full amount remained as of September 30, 2008, of the Company’s outstanding common stock from time to time through December 31, 2010, in the open market or through privately negotiated transactions, subject to the terms of the Company’s debt agreements, market conditions, the Company’s ability to generate operating cash flow, alternative uses of operating cash flow (including the reduction of indebtedness) and other factors. This authorization replaces and supersedes all previous outstanding authorizations to repurchase shares. The Company is not obligated to acquire any shares of common stock and the share repurchase plan may be suspended or terminated at any time at the Company’s discretion. | ||
| Exhibits | ||
| a) | 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.
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: October 24, 2008 |
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