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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 JUNE 30, 2001
[ ] 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 1-2227
CROWN CORK & SEAL COMPANY, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1526444
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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
--- ---
There were 125,634,204 shares of Common Stock outstanding as of July 31, 2001.
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Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except share and per share data)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2001 2000
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 1,878 $ 1,935
---------- ----------
Costs, expenses & other income
Cost of products sold, excluding depreciation and amortization 1,543 1,552
Depreciation 96 95
Amortization 28 30
Selling and administrative expense 70 78
Provision for restructuring and asset impairments 3 77
Gain on sale of assets ( 1)
Interest expense 120 97
Interest income ( 5) ( 6)
Translation and exchange adjustments 3 2
---------- ----------
1,857 1,925
---------- ----------
Income before income taxes 21 10
Provision for income taxes 14 8
Minority interests, net of equity earnings ( 2) ( 6)
---------- ----------
Net income / (loss) $ 5 ($ 4)
========== ==========
Earnings / (loss) per average common share:
Basic and diluted $ .04 ($ .03)
========== ==========
Dividends per common share $ .25
==========
Average common shares outstanding:
Basic 125,635,607 127,433,082
Diluted 125,635,607 127,433,082
- ---------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Certain prior year amounts have been reclassified to improve comparability.
2
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except share and per share data)
(Unaudited)
- --------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2001 2000
- --------------------------------------------------------------------------------------------------------------
Net sales $ 3,536 $ 3,634
---------- ----------
Costs, expenses & other income
Cost of products sold, excluding depreciation and amortization 2,938 2,904
Depreciation 190 192
Amortization 58 61
Selling and administrative expense 156 163
Provision for restructuring and asset impairments 5 77
Gain on sale of assets ( 1)
Interest expense 235 189
Interest income ( 11) ( 10)
Translation and exchange adjustments 6 2
---------- ----------
3,576 3,578
---------- ----------
(Loss) / income before income taxes and cumulative effect
of accounting change ( 40) 56
Provision for income taxes 3 27
Minority interests, net of equity earnings ( 2) ( 10)
---------- ----------
Net (loss) / income before cumulative effect of accounting change ( 45) 19
Cumulative effect of change in accounting for derivatives
and hedging activities, net of tax 4
---------- ----------
Net (loss) / income ( 41) 19
Preferred stock dividends 2
---------- ----------
Net (loss) / income available to common shareholders ($ 41) $ 17
========== ==========
(Loss) / earnings per average common share:
Basic and diluted - before cumulative effect of accounting change ($ .36) $ .14
========== ==========
Cumulative effect of accounting change $ .03
==========
Basic and diluted - after cumulative effect of accounting change ($ .33) $ .14
========== ==========
Dividends per common share $ .50
==========
Average common shares outstanding:
Basic 125,629,864 125,661,602
Diluted 125,629,864 127,996,659
- --------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Certain prior year amounts have been reclassified to improve comparability.
3
Crown Cork & Seal Company, Inc.
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions)
- --------------------------------------------------------------------------------
June 30, December 31,
2001 2000
(Unaudited)
- --------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 308 $ 382
Receivables 1,251 1,153
Inventories 1,275 1,288
Prepaid expenses and other current assets 127 90
------- -------
Total current assets 2,961 2,913
------- -------
Long-term notes and receivables 20 25
Investments 150 142
Goodwill, net of amortization 3,671 3,920
Property, plant and equipment 2,745 2,969
Other non-current assets 1,295 1,190
------- -------
Total $10,842 $11,159
======= =======
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 542 $ 232
Current maturities of long-term debt 57 68
Accounts payable and accrued liabilities 1,691 1,903
Income taxes payable 29 58
------- -------
Total current liabilities 2,319 2,261
------- -------
Long-term debt, excluding current maturities 5,031 5,049
Postretirement and pension liabilities 705 731
Other non-current liabilities 742 814
Minority interests 193 195
Shareholders' equity 1,852 2,109
------- -------
$10,842 $11,159
======= =======
Total
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The accompanying notes are an integral part of these financial statements.
4
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
- -------------------------------------------------------------------------------------------------
Six months ended June 30, 2001 2000
- -------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net (loss) / income ($ 41) $ 19
Depreciation and amortization 248 253
Provision for restructuring and asset impairments 3 55
Gain on sale of assets ( 1)
Cumulative effect of accounting change ( 4)
Change in assets and liabilities, other than debt ( 450) ( 392)
----- -----
Net cash used in operating activities ( 245) ( 65)
----- -----
Cash flows from investing activities
Capital expenditures ( 90) ( 116)
Proceeds from sale of property, plant and equipment 7 20
Other, net ( 14) ( 3)
----- -----
Net cash used in investing activities ( 97) ( 99)
----- -----
Cash flows from financing activities
Proceeds from long-term debt 3
Payments of long-term debt ( 30) ( 150)
Net change in short-term debt 317 400
Stock repurchased ( 36)
Dividends paid ( 65)
Minority dividends, net of contributions ( 3) ( 2)
----- -----
Net cash provided by financing activities 284 150
----- -----
Effect of exchange rate changes on cash and cash equivalents ( 16) ( 9)
----- -----
Net change in cash and cash equivalents ( 74) ( 23)
Cash and cash equivalents at beginning of period 382 267
----- -----
Cash and cash equivalents at end of period $308 $244
==== ====
- --------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
5
Crown Cork & Seal Company, Inc.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In millions)
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Comprehensive Income/(loss) Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date Stock Stock Capital Earnings Stock Income/(loss) Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000 | $780 $1,596 $ 994 ($151) ($1,110) $2,109
Net income / (loss) $ 5 ($ 41) | ( 41) ( 41)
Translation adjustments ( 51) ( 206) | ( 206) ( 206)
Derivatives qualifying as hedges 4 ( 10) | ( 10) ( 10)
---- ---- |
Comprehensive loss ($ 42) ($257) |
==== ==== |
|
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2001 | $780 $1,596 $ 953 ($151) ($1,326) $1,852
====================================================================================================================================
| Accumulated
| Other
Comprehensive Income/(loss) | Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date | Stock Stock Capital Earnings Stock Income/(loss) Total
-----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999 | $349 $779 $1,317 $1,295 ($173) ($ 676) $2,891
Net (loss) / income ($ 4) $ 19 | 19 19
Translation adjustments ( 74) ( 168) | ( 168) ( 168)
---- ---- |
Comprehensive loss ($ 78) ($149) |
==== ==== |
Dividends declared: |
Common | ( 63) ( 63)
Preferred | ( 2) ( 2)
Stock repurchased | ( 25) ( 11) ( 36)
Preferred stock conversions | ( 349) 1 311 37
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 2000 | $780 $1,603 $1,249 ($147) ($ 844) $2,641
====================================================================================================================================
The accompanying notes are an integral part of these financial statements.
6
Crown Cork & Seal Company, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share and employee data)
(Unaudited)
A. Statement of Information Furnished
----------------------------------
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 to present fairly the financial position of Crown
Cork & Seal Company, Inc. as of June 30, 2001 and the results of its
operations and cash flows for the periods ended June 30, 2001 and
2000, respectively. These results have been determined on the basis of
generally accepted accounting principles and practices consistently
applied.
Certain information and footnote disclosures, normally included in
financial statements presented in accordance with generally accepted
accounting principles, have been condensed or omitted. The
accompanying Consolidated Financial Statements should be read in
conjunction with the financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended
December 31, 2000.
B. Accounting Change
-----------------
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended (SFAS 133). SFAS 133 requires that
the Company recognize all outstanding derivative instruments on the
balance sheet at their fair values. The impact on earnings from
recognizing these instruments at fair value depends on whether the
instruments are designated and qualify as hedges. If the derivative
does not qualify as a hedge, changes in fair value are reported in
earnings immediately. If the derivative instrument qualifies as a
hedge and based on the risk being hedged, changes in the fair value of
the derivatives will either be offset against changes in fair value of
the hedged assets, liabilities or firm commitments through earnings
(fair value hedges) or recognized in other comprehensive income (cash
flow and net investment hedges). Any ineffective portion of designated
hedges is reported in earnings immediately. For cash flow hedges,
adjustments to the fair value of the derivative instruments are
temporarily reported in other comprehensive income until the related
hedged items impact earnings. For hedges of the net investment in
foreign operations, fair value adjustments are reported in other
comprehensive income as translation adjustments and released to
earnings when the investments are disposed. Within the balance sheet,
the fair values of the derivatives are reported as current or
non-current assets or liabilities consistent with the classification
of the hedged items. Within the Consolidated Statements of Cash Flows,
cash flows from hedging transactions are classified under the same
category as the cash flows of the hedged items.
At January 1, 2001, the Company recorded transition adjustments, the
cumulative effect of an accounting change, which resulted in an
after-tax credit of $4 to net income and an after-tax charge of $18 to
"accumulated other comprehensive income" in Shareholders' Equity. The
per share credit to earnings was $.03. The ongoing impact on the
Company from adoption of this standard will depend on a variety of
factors, including interest rates and other market conditions, as well
as future interpretive guidance from the Financial Accounting
Standards Board ("FASB"), which continues to address implementation
issues.
The cumulative effects on earnings and equity were due primarily to
net fair value adjustments related to outstanding cross-currency
swaps.
7
Crown Cork & Seal Company, Inc.
A reconciliation of current period changes, net of applicable income
taxes, in "accumulated other comprehensive income" in Shareholders'
Equity, referred to as "Derivatives qualifying as hedges," follows:
Transition adjustment as of January 1, 2001 ($18)
Current period changes in fair value - net 22
Reclassification to earnings - net ( 14)
---
Balance at June 30, 2001 ($10)
===
For hedges of future cash flows (cash flow hedges), which include
foreign exchange contracts, cross-currency swaps, and commodity
contracts, the ineffective portion was not material and no items were
excluded from the measure of effectiveness. Of the charge of $18
recorded in equity at January 1, 2001, $2, net of taxes, was
reclassified to earnings during the first six months of 2001. Of the
charge of $10 reported in equity at June 30, 2001, $6, net of income
taxes, is expected to be reclassified to earnings over the twelve
month period ending June 30, 2002. The actual amount that will be
reclassified to earnings over the next twelve months will vary from
this amount as a result of changes in market conditions. No amounts
were reclassified to earnings during the first six months in
connection with forecasted transactions that were no longer considered
probable. At June 30, 2001, the maximum term of derivative instruments
that hedge forecasted transactions, excluding those related to payment
of variable interest on existing financial instruments, was two years.
For hedges of recognized assets, liabilities and firm commitments,
including intercompany transactions, the ineffective portion was not
material. For fair value hedges, the Company excludes the time value
component of the derivative in its measurement of effectiveness.
Amounts excluded from the measure of effectiveness, reported in
earnings for the six months ended June 30, 2001, amounted to less than
$1 before income taxes. The impact on earnings from the net fair value
adjustments of cross-currency swaps designated as fair value hedges is
included in "interest expense" in the Consolidated Statements of
Operations.
In the fourth quarter of 2000, the Company adopted EITF 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF 00-10
requires that shipping and handling costs be excluded from revenues.
The Company, to comply with the standard, has reclassified from net
sales to cost of products sold $59 and $118 for the quarter and the
six months ended June 30, 2000.
C. Receivables
-----------
The Company utilizes receivable securitization agreements in its
management of cash flow activities. Agreements were outstanding during
the first six months of 2001 in North America and Europe, providing
for the accelerated receipt of up to $450 of cash on available
receivables. Securitization transactions have been accounted for as
sales in accordance with SFAS No. 140. Accordingly, accounts included
under outstanding securitization programs have been reflected as a
reduction in receivables in the accompanying Consolidated Balance
Sheets. Outstanding receivable securitizations at June 30, 2001,
December 31, 2000 and June 30, 2000, amounted to $218, $162 and $291,
respectively. During the first six months of 2001 and 2000, the
Company recorded fees related to the outstanding securitizations
amounting to approximately $7 and $5, which amounts have been included
in "interest expense" in the Consolidated Statements of Operations.
8
Crown Cork & Seal Company, Inc.
D. Inventories
-----------
-----------------------------------------------------------
June 30, December 31,
2001 2000
-----------------------------------------------------------
Finished goods $ 551 $ 530
Work in process 164 165
Raw material and supplies 560 593
------ ------
$1,275 $1,288
====== ======
E. Restructuring
-------------
During the first quarter of 2001, the Company provided $4 for the
costs associated with the closure of a U.S. food can plant. During the
second quarter of 2001, the Company provided $3 for severance costs to
close a plant in the U.K. and to reduce headcount in three plants in
Africa, resulting in the termination of 130 employees. Also during the
first two quarters of 2001, the Company recorded a restructuring
credit of $6 for the reversal of severance costs related to a
restructuring charge provided during the second quarter of 2000. The
Company decided not to pursue certain restructuring activities in its
European operations that had been previously approved.
Remaining balances in the reserves represent contracts or agreements
whereby payments are extended over time. This includes agreements with
unions and governmental agencies related to employees as well as with
landlords in lease arrangements. The balance of the restructuring
reserves (excluding write-down of assets which is reflected as a
reduction of the related asset account) is included within "accounts
payable and accrued liabilities" in the Consolidated Balance Sheets.
The components of the restructuring reserve and movements within these
components during the first six months of 2001 were as follows:
Termination Other Exit Asset
Benefits Costs Write-downs Total
-------- ---------- ----------- -----
Opening balance............................ $ 24 $ 8 $ 32
Provision, net ............................ ( 2) * 2 1 1
Payments made.............................. ( 13) ( 5) ( 18)
Other **................................... ( 1) ( 1)
Transfer against assets.................... ( 1) ( 1)
---- ---- ---- ----
Closing balance............................ $ 8 $ 5 $ 13
==== ==== ==== ====
<FN>
* Includes reversal of severance of $6, representing headcount of 65
** Includes translation adjustments
</FN>
During the first six months of 2001, payments of $13 were made for the
termination of 594 employees, 437 of whom were involved in direct
manufacturing operations. Payments of $5 were made for other exit
costs, including dismantlement costs, equipment removal and various
contractual obligations.
F. Asset Impairments
-----------------
During the second quarter of 2001, the company provided $4 to
write-down the value of certain property, plant and equipment whose
value was considered to be impaired. The write-downs were required due
to (i) the loss of a customer contract in the U.S. plastics operations
during the second quarter, (ii) the removal from service of certain
machinery in the U.S. and Europe that was operating at inefficient
levels, and (iii) the reduced market value of a property held for sale
in Europe.
9
Crown Cork & Seal Company, Inc.
G. Earnings Per Share
------------------
The following table summarizes the basic and diluted earnings per
common share computations for the periods ended June 30, 2001 and
2000, respectively:
2001 2000
------------------------------------- -------------------------------------
Average Average
Quarter Income Shares EPS Income Shares EPS
------- ------------------------------------- -------------------------------------
Basic EPS $ 5 125.6 $ .04 ($ 4) 127.4 ($ .03)
Potentially dilutive securities:
Stock options
--- ----- --- -----
Diluted EPS $ 5 125.6 $ .04 ($ 4) 127.4 ($ .03)
=== ===== === =====
2001 2000
------------------------------------- -------------------------------------
Average Average
Year-to-date Income Shares EPS Income Shares EPS
------------ ------------------------------------- -------------------------------------
Net (loss) / income ($41) $19
Less:
Preferred stock dividends ( 2)
--- ---
Basic EPS ( 41) 125.6 ($ .33) 17 125.7 $ .14
Potentially dilutive securities:
Stock options
Assumed preferred
stock conversion
---- ----- --- -----
Diluted EPS ($41) 125.6 ($ .33) $17 125.7 $ .14
=== ===== === =====
Excluded from the computation of diluted earnings per share for the
six months ended June 30, 2000 were approximately 2.3 million common
share equivalents resulting from the assumed conversion of weighted
average outstanding preferred stock. This conversion would have been
anti-dilutive.
Common shares contingently issueable upon the exercise of stock
options, amounting to 11.7 million and 7.8 million shares for the
quarters ended June 30, 2001 and 2000, and 9.2 million and 7.9 million
shares for the six months ended June 30, 2001 and 2000, respectively,
were excluded from the computation of diluted earnings per share
because the grant prices of the then outstanding options were above
the average market price for the related periods.
H. Supplemental Cash Flow Information
----------------------------------
Cash payments, including prepayments, for interest, net of amounts
capitalized, were $260 and $186 during the six months ended June 30,
2001 and 2000, respectively. Cash payments for income taxes amounted
to $28 and $27 during the six months ended June 30, 2001 and 2000,
respectively.
10
Crown Cork & Seal Company, Inc.
I. Segment Information
-------------------
The Company maintains three operating segments, defined
geographically: Americas, Europe and Asia-Pacific. Each reportable
segment is an operating division within the Company and has a
President reporting directly to the Chief Executive Officer.
"Corporate" includes Corporate Technology and headquarters' costs.
Divisional headquarter costs are maintained within the operating
segments. The interim segment information is as follows:
Quarter ended June 30,
----------------------
2001 Americas Europe Asia-Pacific Corporate Total
---- -------- ------ ------------ --------- -----
External sales $ 982 $ 814 $ 82 $1,878
Restructuring and
asset impairments 3 3
Segment income 54 94 6 ($ 16) 138
2000
----
External sales 1,007 847 81 1,935
Restructuring and
asset impairments 10 47 20 77
Segment income 76 57 6 ( 36) 103
Six months ended June 30,
-------------------------
2001 Americas Europe Asia-Pacific Corporate Total
---- -------- ------ ------------ --------- -----
External sales $1,825 $1,555 $156 $3,536
Restructuring and
asset impairments 7 ( 2) 5
Segment income 65 156 11 ($ 43) 189
2000
----
External sales 1,867 1,615 152 3,634
Restructuring and
asset impairments 10 47 20 77
Segment income 151 133 12 ( 59) 237
The following table reconciles the Company's segment income to
consolidated pre-tax income / (loss):
Second Quarter Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
-------------------- -------------------
Total segment income $138 $103 $189 $237
Interest expense 120 97 235 189
Interest income ( 5) ( 6) ( 11) ( 10)
Gain on sale of assets ( 1) ( 1)
Translation and exchange adjustments 3 2 6 2
---- ---- ---- ----
Consolidated pre-tax income / (loss) $ 21 $ 10 ($ 40) $ 56
==== ==== ==== ====
11
Crown Cork & Seal Company, Inc.
J. Commitments and Contingent Liabilities
--------------------------------------
The Company has various commitments to purchase materials and supplies
as part of the ordinary conduct of business. Such commitments are not
at prices in excess of current market.
The Company's basic raw materials for its products are tinplate,
aluminum and resins, all of which are purchased from multiple sources.
The Company is subject to material fluctuations in the cost of these
raw materials and has periodically adjusted its selling prices to
reflect these movements. There can be no assurance, however, that the
Company will be able to fully recover any increases or fluctuations in
raw material costs from its customers.
The Company is one of over 100 defendants in a substantial number of
lawsuits filed by persons alleging bodily injury as a result of
exposure to asbestos. This litigation arose from the insulation
operations of a U.S. company, the majority of whose stock the Company
purchased in 1963. Within approximately three months of this stock
purchase, this U.S. company sold its insulation operations.
The accrual recorded for asbestos claims constitutes management's best
estimate of such costs for pending and future claims that are probable
and estimable. The Company cautions, however, that this estimate may
be influenced by changes in the litigation environment and other
factors which may vary as claims are filed and settled or otherwise
disposed of. Accordingly, these matters, if resolved in a manner
different from the estimate, could have a material effect on the
operating results or cash flows in future periods. While it is not
possible to predict with certainty the ultimate outcome of these
lawsuits and contingencies, the Company believes, after consultation
with counsel, that resolution of these matters is not expected to have
a material adverse effect on the Company's financial position.
The Company is also subject to various lawsuits and claims with
respect to matters such as governmental and environmental regulations
and other actions arising out of the normal course of business. While
the impact on future financial results is not subject to reasonable
estimation because considerable uncertainty exists, management
believes, after consulting with counsel, that the ultimate liabilities
resulting from such lawsuits and claims will not materially affect the
consolidated results, liquidity or financial position of the Company.
K. Recent Accounting Pronouncements
--------------------------------
During July 2001, the FASB issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141
supercedes APB Opinion No. 16, Business Combinations. This standard
modifies the method of accounting for business combinations entered
into after June 30, 2001 and addresses the accounting for intangible
assets. All business combinations entered into after June 30, 2001,
are accounted for using the purchase method.
SFAS No. 142, which supercedes APB Opinion No. 17, Intangible Assets,
eliminates the current requirement to amortize goodwill and
indefinite-lived intangible assets, addresses the amortization of
intangible assets with a defined life, and addresses the impairment
testing and recognition for goodwill and intangible assets. The
Company will adopt this standard on January 1, 2002. This standard
applies to goodwill and intangible assets arising from transactions
completed before and after the date of adoption. Effective January 1,
2002, the Company will cease amortization of goodwill and
indefinite-lived intangibles and test for impairment, at least,
annually. Management is currently assessing the provisions of both
standards and their potential impact on the Company's consolidated
results of operations and financial position.
12
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (in millions, except share and employee data)
Introduction
------------
The following discussion presents management's analysis of the results
of operations for the three months ended June 30, 2001, compared to
the corresponding period in 2000 and the changes in financial
condition and liquidity from December 31, 2000. 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, 2000, along with the consolidated
financial statements and related notes included in and referred to
within this report.
Results of Operations
---------------------
Net Income and Earnings Per Share
---------------------------------
Net income for the quarter ended June 30, 2001 was $5 or $.04 per
share versus a loss of $4 or $.03 per share for the second quarter of
2000. The results for 2001 included an after-tax charge of $2 ($.01
per share) for restructuring and asset impairment costs, as described
later in this discussion, and a net after-tax gain below $1 on asset
disposals. The results for 2000 included after-tax charges of $36
($.28 per share) for restructuring costs and $19 ($.15 per share) for
asset impairments, as described later in this discussion, and $13
($.10 per share) for a bad debt provision for a U.S. food can
customer. Excluding the charges noted above, earnings per share in the
second quarter of 2001 were $.05 versus $.50 in the prior year period.
The decrease is due primarily to lower beverage can pricing in North
America, reduced U.S. food can volumes, reduced profits in the
Company's U.K. operations, lower pension income and increased net
interest expense.
For the six months ended June 30, 2001, net income declined by $58 or
$.47 per share to a loss of $41 or $.33 per share from net income of
$17 or $.04 per share for the same period in 2000. Included in the
results for 2001 was a gain of $4 or $.03 per share for the cumulative
effect of a change in accounting for derivatives and hedging
activities. Excluding the non-recurring items referred to for the
second quarters of 2001 and 2000, as well as the cumulative effect of
the change in accounting in 2001, the net loss for 2001 was $40 or
$.32 per share as compared to net income of $85 or $.68 per share for
the same period in 2000. The decrease in earnings from 2000 for the
six months is due primarily to the same factors outlined above for the
second quarter of 2001.
Net Sales
---------
Net sales in the second quarter of $1,878 were $57 or 2.9% below the
prior year period. Excluding the effect of foreign currency
translation of $65, net sales would have increased $8 compared to the
second quarter of 2000. Net sales for the six months ended June 30,
2001 decreased $98 or 2.7% compared to the same period in 2000. The
impact of foreign currency translation on net sales for the six months
of 2001, when compared to 2000, was $132. Excluding the effect of
translation, net sales for 2001 increased $34 or .9% above the 2000
level of $3,634. Sales from U.S. operations accounted for
approximately 41% and 42% of consolidated net sales in the second
quarter of 2001 and 2000, respectively. Sales of beverage cans and
ends accounted for approximately 35% and sales of food cans and ends
accounted for approximately 27% of consolidated sales in the second
quarter of 2001, as compared to 33% and 28%, respectively, for the
same period in 2000.
13
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
An analysis of comparative net sales by operating division follows:
Net Sales Percentage Change
---------------------------------------------- ----------------------
Second Quarter Six Months Ended Second Six
2001 2000 2001 2000 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $ 982 $1,007 $1,825 $1,867 (2.5%) (2.2%)
Europe 814 847 1,555 1,615 (3.9%) (3.7%)
Asia-Pacific 82 81 156 152 1.2% 2.6%
------ ------ ------ ------
$1,878 $1,935 $3,536 $3,634 (2.9%) (2.7%)
====== ====== ====== ======
The decrease in 2001 Americas Division net sales in the second quarter
was primarily due to (i) lower selling prices for beverage cans and
(ii) a 9.6% decrease in food can volumes in North America due to a
soft market and the bankruptcy filing by a large customer in the
second quarter of 2000. These decreases were partially offset by (i) a
5.6% sales unit volume increase of beverage cans and (ii) increased
sales unit volumes of plastic beverage and specialty closures, PET
preforms and bottles and across several health and beauty product
lines.
Net sales in the European Division, excluding $55 of unfavorable
currency translation, increased $22 or 2.6% in the second quarter
versus the prior year period, primarily due to sales unit volume
increases of (i) beverage cans across Southern Europe, (ii) food cans
in Greece, West Africa and the U.K., (iii) aerosol cans, PET preforms
and bottles on a division-wide basis and (iv) the entire line of
health and beauty products. These volume increases were partially
offset by lower beverage can unit volumes in the U.K. and the Middle
East and food can unit volumes in France.
Net sales in the Asia-Pacific Division increased to $82 as compared to
$81 in the second quarter of 2000. Excluding losses of $5 due to
currency translation, sales increased $6, primarily due to increased
beverage can unit volumes in Malaysia and Singapore. Overcapacity in
the Chinese beverage can market continues to put pressure on selling
prices.
Selling and Administrative
--------------------------
Selling and administrative expenses were $70 for the second quarter of
2001 as compared to $78 for the same period of the prior year. The
decrease in 2001 was due to lower headcounts and foreign currency
translation.
Restructuring and Asset Impairments
-----------------------------------
During the second quarter of 2001, the Company provided $3 for
severance costs to close a plant in the U.K. and to reduce headcount
in three plants in Africa, resulting in the termination of 130
employees. The Company anticipates that these actions will generate
after-tax savings of approximately $2 ($.02 per share) on an
annualized basis when fully implemented. Also during the second
quarter of 2001, the Company recorded a restructuring credit of $4 for
the reversal of severance costs related to a restructuring charge
provided during the second quarter of 2000. The Company decided not to
pursue certain restructuring activities in its European operations
that had been previously approved. During the second quarter of 2001,
the company provided $4 to write-down certain property, plant and
equipment in the U.S. and Europe whose value was considered to be
impaired. These restructuring and asset impairment items resulted in a
combined charge of $3 ($2 net of tax or $.01 per share) during the
second quarter of 2001.
14
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
During the second quarter of 2000, the Company provided $51 ($36
after-tax or $.28 per share) for the costs associated with structure
modifications in Europe and the closure of three Americas Division
plants and $26 ($19 after-tax or $.15 per share) for asset
impairments.
Additional details about the restructuring and asset impairment
activity are provided in Notes E and F to the Consolidated Financial
Statements included in Item 1 of this Quarterly Report on Form 10-Q.
Operating Income
----------------
Consolidated operating income was $138 as compared to $103 in the
second quarter of 2000. Excluding restructuring and asset impairment
charges, operating income in 2001 decreased to $141 from $180 in the
second quarter of 2000. Excluding restructuring and asset impairment
charges, operating income as a percentage to net sales was 7.5% in
2001 versus 9.3% in 2000.
An analysis of operating income by division follows:
Operating Income
----------------
(excluding restructuring and asset impairments) Percentage Change
--------------------------------------------- -----------------
Second Quarter Six Months Ended Second Six
2001 2000 2001 2000 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $ 57 $ 86 $ 72 $161 (33.7%) (55.3%)
Europe 94 104 154 180 ( 9.6%) (14.4%)
Asia-Pacific 6 6 11 12 ( 8.3%)
Corporate ( 16) ( 16) ( 43) ( 39) (10.3%)
---- ---- ---- ----
$141 $180 $194 $314 (21.7%) (38.2%)
==== ==== ==== ====
Americas Division operating income, excluding restructuring and asset
impairment charges, was 5.8% of net sales in the second quarter of
2001 as compared to 8.5% for the same period of 2000. Excluding the
bad debt provision of $20, second quarter 2000 operating income was
10.5% of net sales. The decrease in operating income in 2001 was
primarily due to (i) lower selling prices in the North American
beverage can market, (ii) reduced U.S. food can volumes, (iii) lower
pension income in the U.S. and (iv) higher energy costs.
European Division operating income, excluding restructuring and asset
impairments, as a percentage of net sales was 11.5% in the second
quarter of 2001 as compared to 12.3% in 2000. The decrease in 2001
operating margins was due to (i) cost/price pressure across many
operations and (ii) pressure on U.K. selling prices due to the
relative weakness of the euro; partially offset by sales unit volume
increases across most product lines.
Asia-Pacific Division operating income of $6 in the second quarter was
unchanged from the same period in 2000 as improvements in the
Southeast Asian beverage can operations were offset by reduced profits
in the Chinese beverage can operations. As a percentage of net sales,
Asia-Pacific operating income in the second quarter of 2001 was 7.3%
as compared to 7.4% for the same period in 2000.
15
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Net Interest Expense
--------------------
Net interest expense increased $24 in the second quarter of 2001 as
compared to 2000, primarily due to increased borrowing rates and
higher average debt outstanding. During the third and fourth quarters
of 2000, the Company's ability to access the commercial paper market
was eliminated due to downgrades in its credit ratings. Since that
time the Company has funded its operations through its multicurrency
credit facility and a new term loan which have higher borrowing rates
as compared to commercial paper. The multicurrency credit facility,
which was renegotiated in March of 2001, and the new term loan are
discussed more fully under Liquidity and Capital Resources.
Translation and Exchange Adjustments
------------------------------------
The results for the second quarter of 2001 included losses of $2 and
$1 in Turkey and Brazil, respectively, in connection with currency
devaluations as compared to a loss of $2 in Brazil for the second
quarter of 2000.
Taxes on Income
---------------
The effective tax rate for the second quarter of 2001, excluding
non-deductible goodwill amortization of $28, was approximately 29%.
The effective tax rate for the same period of 2000, excluding goodwill
amortization of $30, was 20%. The lower rate in 2000 was primarily due
to (i) the tax impact of the 2000 restructuring program and (ii) the
reduction of a previously established valuation allowance of $4 for
net operating loss carryforwards in Mexico.
Minority Interests, Net of Equity Earnings
------------------------------------------
The charge for minority interests, net of equity earnings, was $4 less
in the second quarter of 2001 versus the same period in 2000. The
reduction in the charge was primarily due to the third quarter 2000
purchase of the minority interests in the Company's Asia Limited
subsidiaries.
Liquidity and Capital Resources
-------------------------------
Cash from Operations
--------------------
Cash of $245 was used by operations in the first six months of 2001
versus $65 over the same period in 2000. The increase was due to
reduced operating income and increased interest payments, including
prepayments made in connection with the Company's amended and restated
multicurrency credit facility and new term loan. These items were
partially offset by an improvement in working capital.
Investing Activities
--------------------
Investing activities used cash of $97 in the first six months of 2001
compared to $99 in the prior year period. The slight improvement in
investing activities is a result of reduced capital spending, offset
by lower proceeds from asset sales and an increase in other investing
activities.
The company is reviewing various strategic alternatives, which could
include the sale of assets. The timing of any such sales, the proceeds
to be received, and any gain or loss on disposal cannot be determined
at this time. Net proceeds received from such dispositions will be
used to reduce outstanding debt pursuant to the terms of the Company's
multicurrency revolving credit facility, which is referenced below.
16
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Financing Activities
--------------------
Financing activities provided cash of $284 in the first half of 2001,
an increase of $134 over the prior year period. Increased borrowings
were required due to lower operating cash flow, partially offset by
the suspension of dividend payments and stock repurchases.
On March 2, 2001 the company amended and restated its $2,500
multicurrency revolving credit facility and obtained a new $400 term
loan. The amended and restated credit facility bears interest at LIBOR
plus 2.5% and the maturity date has been extended to December 8, 2003.
The term loan bears interest at LIBOR plus 3.5% and matures February
4, 2002.
Total debt, net of cash and cash equivalents, was $5,322 at June 30,
2001, an increase above the December 31, 2000 level of $4,967. Total
debt, net of cash equivalents, as a percentage to total capitalization
was 72.2% at June 30, 2001 as compared to 68.3% at December 31, 2000.
Total capitalization is defined as total debt, minority interests and
shareholders' equity.
The increase in total debt, net of cash and cash equivalents, from
December 31, 2000 is primarily due to the funding of the seasonal
working capital buildup. The increase in total debt as a percentage of
total capitalization was also affected by a reduction in shareholder's
equity, due to negative currency translation adjustments in the first
half of 2001.
See the section entitled "Liquidity and Capital Resources" 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, 2000 for additional
information regarding the Company's indebtedness and financial
position.
On March 13, 2001, Standard and Poor's lowered the Company's senior
implied rating to BB- from BB and senior unsecured debt rating to B
from BB. On April 17, 2001 Moody's lowered the Company's senior
implied ratings to B3 from B2 and unsecured ratings to Caa3 from B2.
Both agencies assigned a negative outlook.
Forward Looking Statements
--------------------------
Statements included herein in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", including, but not
limited to, in the "Restructuring and Asset Impairments" and
"Investing Activities" sections, and in the discussion of the asbestos
matters in Note J 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, 2000, 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 other 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.
17
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
While the Company periodically reassesses material trends and
uncertainties affecting the Company's results of operations and
financial condition in connection with the preparation of
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" and certain other sections contained in the
Company's quarterly, annual or other reports filed with the Securities
and Exchange Commission ("SEC"), the Company does not intend to review
or revise any particular forward-looking statement in light of future
events.
A discussion of important factors that could cause the actual results
of operations or financial condition of the Company to differ from
expectations has been set forth in the Company's Annual Report on Form
10-K for the year ended December 31, 2000 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
As of June 30, 2001 there have been no material changes in the
Company's market risk exposure as described in Management's Discussion
and Analysis contained in the Company's Annual Report on Form 10-K for
the year ended December 31, 2000.
18
Crown Cork & Seal Company, Inc.
PART II - OTHER INFORMATION
Item 4. Submission of Matters to Vote of Security Holders
The Company's Annual Meeting of Shareholders was held on April 26,
2001. The matters voted upon and the results thereof are set forth in
Part II, Item 4 of the Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 2001 and such Item 4 is incorporated herein by
reference.
Item 5. Other Information
On July 26, 2001, the Company announced that Hans J. Loliger, Vice
Chairman of Winter Group, Basel, Switzerland was elected to its Board
of Directors. This addition has increased the number of directors to
ten.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
10.a. Receivables Purchase Agreement dated as of January 26,
2001, as amended and restated as of May 7, 2001, among
Crown Cork & Seal Receivables (DE) Corporation, as
Seller, Crown Cork & Seal Company (USA), Inc., as
Servicer, the banks and other financial institutions
party thereto, as Purchasers, and Citibank, N. A., as
the Agent.
10.b. Receivables Contribution and Sale Agreement dated as
of January 26, 2001, as amended and restated as of
May 7, 2001, among Crown Cork & Seal Company (USA),
Inc., Constar, Inc., Risdon-AMS(USA), Inc., Zeller
Plastiks, Inc., and Crown Cork & Seal Canada, Inc.,
as Sellers, Crown Cork & Seal Receivables (DE)
Corporation, as Buyer, and Crown Cork & Seal Company
(USA), Inc., as the Buyer's Servicer.
10.c. Undertaking Agreement dated as of January 26, 2001, as
amended and restated as of May 7, 2001, made by Crown
Cork & Seal Company. Inc., as the Parent, in favor of
the Purchasers referred to therein and Citibank,
N. A., as Agent.
b) Reports on Form 8-K
There were no reports on Form 8-K filed by Crown Cork & Seal
Company, Inc., during the quarter for which this report is
filed.
19
Crown Cork & Seal Company, Inc.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
Crown Cork & Seal Company, Inc.
Registrant
By: /s/ Thomas A. Kelly
---------------------------------------
Thomas A. Kelly
Vice President and Corporate Controller
Date: August 9, 2001
--------------
20