================================================================================
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, 1999
[ ] 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 (I.R.S. Employer Identification No.)
of 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)
Indicated 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 122,356,114 shares of Common Stock outstanding as of July 31, 1999.
================================================================================
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions except share and per share data)
(Unaudited)
- -----------------------------------------------------------------------------------------------------
Three months ended June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------
Net sales $ 1,997.4 $ 2,245.0
----------- -----------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 1,529.0 1,727.2
Depreciation and amortization 131.0 136.1
Selling and administrative expense 91.0 93.2
Gain on sale of assets (1.3)
Interest expense 91.2 104.1
Interest income (7.3) (12.4)
Translation and exchange adjustments 1.0 5.8
----------- -----------
1,834.6 2,054.0
----------- -----------
Income before income taxes 162.8 191.0
Provision for income taxes 55.0 64.4
Minority interests, net of equity earnings (8.2) (.9)
----------- -----------
Net income 99.6 125.7
Preferred stock dividends 3.9 4.1
----------- -----------
Net income available to common shareholders $ 95.7 $ 121.6
----------- -----------
Earnings per average common share:
Basic $ .78 $ .98
=========== ===========
Diluted $ .77 $ .95
=========== ===========
Dividends per common share $ .25 $ .25
=========== ===========
Weighted average common shares outstanding:
Basic 122,350,114 124,442,024
Diluted 130,040,318 132,826,655
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
2
Crown Cork & Seal Company, Inc.
PART I - FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF INCOME
(In millions except share and per share data)
(Unaudited)
- -----------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 1998
- -----------------------------------------------------------------------------------------------------
Net sales $ 3,791.0 $ 4,137.4
----------- -----------
Cost, expenses & other income
Cost of products sold, excluding depreciation and amortization 2,947.0 3,229.4
Depreciation and amortization 264.0 272.7
Selling and administrative expense 182.0 190.8
Gain on sale of assets (3.7)
Interest expense 184.3 197.9
Interest income (14.8) (19.8)
Translation and exchange adjustments 9.9 7.5
----------- -----------
3,568.7 3,878.5
----------- -----------
Income before income taxes 222.3 258.9
Provision for income taxes 83.4 92.3
Minority interests, net of equity earnings (9.8) .8
----------- -----------
Net income 129.1 167.4
Preferred stock dividends 7.8 9.2
----------- -----------
Net income available to common shareholders $ 121.3 $ 158.2
=========== ===========
Earnings per average common share:
Basic $ .99 $ 1.26
=========== ===========
Diluted $ .99 $ 1.24
=========== ===========
Dividends per common share $ .50 $ .50
=========== ===========
Weighted average common shares outstanding:
Basic 122,338,291 125,763,763
Diluted 129,984,457 135,295,628
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
3
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions except per share data)
(Unaudited)
- -----------------------------------------------------------------------------------------------------
June 30, December 31,
1999 1998
- -----------------------------------------------------------------------------------------------------
Assets
Current assets
Cash and cash equivalents $ 203.1 $ 283.9
Receivables 1,464.0 1,359.2
Inventories 1,533.9 1,421.0
Prepaid expenses and other current assets 98.8 103.6
----------- -----------
Total current assets 3,299.8 3,167.7
----------- -----------
Long-term notes and receivables 29.2 44.2
Investments 145.6 90.6
Goodwill, net of amortization 4,294.4 4,565.4
Property, plant and equipment 3,469.5 3,742.5
Other non-current assets 885.7 858.1
----------- -----------
Total $ 12,124.2 $ 12,468.5
=========== ===========
Liabilities and shareholders' equity
Current liabilities
Short-term debt $ 2,793.6 $ 2,331.0
Current portion of long-term debt 53.9 135.0
Accounts payable and accrued liabilities 1,816.0 2,180.7
United States and foreign income taxes 59.7 62.8
---------- ----------
Total current liabilities 4,723.2 4,709.5
---------- ----------
Long-term debt, excluding current maturities 3,071.8 3,188.5
Postretirement and pension liabilities 684.1 707.0
Other non-current liabilities 546.2 609.0
Minority interests 275.3 279.7
Commitments and contingent liabilities
Shareholders' equity 2,823.6 2,974.8
----------- -----------
Total $ 12,124.2 $ 12,468.5
=========== ===========
Book value per common share $ 21.72 $ 22.89
- -----------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
(In millions)
(Unaudited)
- ---------------------------------------------------------------------------------------------------------
Six months ended June 30, 1999 1998
- ---------------------------------------------------------------------------------------------------------
Cash flows from operating activities
Net income $ 129.1 $ 167.4
Depreciation and amortization 264.0 272.7
Gain on sale of assets (2.7)
Change in assets and liabilities, other than debt, net of businesses acquired (523.8) (573.9)
-------- --------
Net cash used in operating activities (133.4) (133.8)
-------- --------
Cash flows from investing activities
Capital expenditures (177.6) (237.3)
Acquisition of businesses, net of cash acquired (49.8) (34.2)
Proceeds from sale of property, plant and equipment 20.7 27.6
Other, net (4.2) (5.1)
-------- --------
Net cash used in investing activities (210.9) (249.0)
-------- --------
Cash flows from financing activities
Proceeds from long-term debt 6.0 3.9
Payments of long-term debt (176.3) (108.1)
Net change in short-term debt 536.4 938.8
Stock repurchased (1.0) (369.0)
Dividends paid (69.0) (73.2)
Common stock issued - benefit plans .2 5.2
Minority contributions, net of dividends paid (5.0) (3.4)
-------- --------
Net cash provided by financing activities 291.3 394.2
-------- --------
Effect of exchange rate changes on cash and cash equivalents (27.8) (2.2)
-------- --------
Net change in cash and cash equivalents (80.8) 9.2
Cash and cash equivalents at beginning of period 283.9 205.6
-------- --------
Cash and cash equivalents at end of period $ 203.1 $ 214.8
======== ========
- ---------------------------------------------------------------------------------------------------------
1999 1998
- ---------------------------------------------------------------------------------------------------------
Schedule of non-cash investing activities:
Acquisition of businesses:
Fair value of assets acquired $ 68.1 $ 51.2
Liabilities assumed (18.3) (17.0)
-------- --------
Cash Paid $ 49.8 $ 34.2
======== ========
- ---------------------------------------------------------------------------------------------------------
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 Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date Stock Stock Capital Earnings Stock Income Total
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 | $350.9 $779.0 $1,340.3 $1,250.4 ($167.3) ($578.5) $2,974.8
Net income $ 99.6 $129.1 | 129.1 129.1
Translation adjustments (71.1) (210.5) | (210.5) (210.5)
------ ------ |
Comprehensive income (loss) $ 28.5 ($81.4) |
====== ====== |
Dividends declared: |
Common | (61.2) (61.2)
Preferred | (7.8) (7.8)
Stock repurchased | (.9) (.1) (1.0)
Stock issued - benefit plans | .2 .2
- -------------------------------------------------------|----------------------------------------------------------------------------
Balance at June 30, 1999 | $350.9 $779.0 $1,339.4 $1,310.5 ($167.2) ($789.0) $2,823.6
=======================================================|============================================================================
| Accumulated
| Other
Comprehensive Income | Preferred Common Paid-In Retained Treasury Comprehensive
Quarter Year-To-Date | Stock Stock Capital Earnings Stock Income Total
- -------------------------------------------------------|----------------------------------------------------------------------------
Balance at December 31, 1997 | $520.8 $779.0 $1,560.7 $1,327.2 ($137.0) ($521.5) $3,529.2
|
Net income $125.7 $167.4 | 167.4 167.4
Translation adjustments 22.7 (31.8) | (31.8) (31.8)
------ ------ |
Comprehensive income $148.4 $135.6 |
====== ====== |
|
Dividends declared: |
Common | (63.2) (63.2)
Preferred | (9.2) (9.2)
Stock repurchased | (153.3) (195.2) (20.5) (369.0)
Stock issued - benefit plans | 4.4 .8 5.2
|
- -------------------------------------------------------|----------------------------------------------------------------------------
Balance at June 30, 1998 | $367.5 $779.0 $1,369.9 $1,422.2 ($156.7) ($553.3) $3,228.6
====================================================================================================================================
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 data)
(Unaudited)
A. Statement of Information Furnished
----------------------------------
The accompanying unaudited interim consolidated and condensed 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 necessary to present
fairly the financial position of Crown Cork & Seal Company, Inc. as of
June 30, 1999, and the results of its operations and cash flows for the
periods ended June 30, 1999 and 1998, 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 incorporated by reference in
the Company's Annual Report on Form 10-K for the year ended December
31, 1998.
B. Earnings Per Share
------------------
The following table summarizes the basic and diluted earnings per
common share computations for the periods ended June 30, 1999 and 1998,
respectively:
1999 1998
------------------------- -------------------------
Average Average
Quarter Income Shares EPS Income Shares EPS
------- ------------------------- -------------------------
Net income $99.6 $125.7
Less:
Preferred stock dividends (3.9) (4.1)
----- ------
Basic EPS 95.7 122.3 $.78 121.6 124.4 $.98
Potentially dilutive securities:
Stock options .1 .4
Assumed preferred
stock conversion 3.9 7.6 4.1 8.0
----- ----- ------ -----
Diluted EPS $99.6 130.0 $.77 $125.7 132.8 $.95
===== ===== ====== =====
1999 1998
------------------------- -------------------------
Average Average
Year-to-date Income Shares EPS Income Shares EPS
------------ ------------------------- -------------------------
Net income $129.1 $167.4
Less:
Preferred stock dividends (7.8) (9.2)
------ ------
Basic EPS 121.3 122.3 $.99 158.2 125.8 $1.26
Potentially dilutive securities:
Stock options .1 .4
Assumed preferred
stock conversion 7.8 7.6 9.2 9.1
------ ----- ------ -----
Diluted EPS $129.1 130.0 $.99 $167.4 135.3 $1.24
====== ===== ====== =====
7
Crown Cork & Seal Company, Inc.
C. Inventories
-----------
--------------------------------------------------------
June 30, December 31,
1999 1998
--------------------------------------------------------
Finished goods $ 654.8 $ 576.8
Work in process 211.4 204.2
Raw materials and supplies 667.7 640.0
-------- --------
$1,533.9 $1,421.0
======== ========
D. Restructuring
-------------
During 1998, the Company provided $179 ($127 after-tax or $.95 per
share) for the costs associated with closing thirteen plants and
reorganizing three additional plants. These actions reflect the
Company's continued commitment to realign its manufacturing facilities
with the objective of enhancing operating efficiencies. Included in the
restructuring charge were costs to provide severance and related
benefits, write-down of assets and other exit costs. The Company
anticipates that this restructuring program will generate after-tax
savings of approximately $64 ($.48 per share) on an annualized basis
when fully implemented.
The cost of providing severance and related benefits is estimated at
$99 and covers a reduction of approximately 2,900 employees, 1,900 of
whom are involved in direct manufacturing operations. Employee
reductions are expected to be completed by the end of the third quarter
of 1999.
Included in this restructuring provision is a charge of $60, reflecting
the impairment of property, plant and equipment principally located in
the Americas Division. This charge has been reflected as a reduction in
the carrying values of the related assets. Write-downs of property,
plant and equipment were made where the carrying values exceed the
Company's estimate of proceeds from abandonment or disposal. These
estimates were based principally on past experience of comparable asset
disposals. Disposition of assets identified for disposal in the 1998
action is expected to be substantially completed by the end of 1999.
Other non-recurring exit costs are estimated at $20 and are primarily a
cash expense, comprising the costs to effectively close and dispose of
the facilities identified in the 1998 plan. Exit costs include, but are
not limited to, fees related to lease termination and other contract
cancellations, dismantlement costs and brokers' fees for assets to be
sold. These costs are expected to be substantially incurred by the end
of 1999.
The balance of the restructuring reserves (excluding the write-down of
assets which is reflected as a reduction of the related asset account)
is included within accounts payable and accrued liabilities. The
components of the restructuring reserve and movements within these
components during the first six months of 1999 were as follows:
Employee Other Exit
(in millions) Severance Costs Total
--------- ---------- -----
Opening balance............................ $ 96.9 $ 30.8 $127.7
Payments made.............................. (27.8) (7.1) (34.9)
Other movements............................ 3.3 * 3.3
------ ------ ------
Closing balance............................ $ 69.1 $ 27.0 $ 96.1
====== ====== ======
<FN>
* includes provisions under purchase accounting for two 1999
acquisitions in Europe as well as translation adjustments.
</FN>
8
Crown Cork & Seal Company, Inc.
During the first six months of 1999, payments of $27.8 were made
related to the termination of approximately 1,250 employees,
approximately 840 of whom were involved in direct manufacturing
operations. Payments of $7.1 were made for other exit costs, including
dismantlement costs, equipment removal and various contractual
obligations.
The foregoing restructuring charges and related cost savings represent
the Company's best estimates, but necessarily make numerous assumptions
with respect to industry performance, general business and economic
conditions, raw materials and product pricing levels, the timing of
implementation of the restructuring and related employee reductions and
facility closings and other matters many of which are outside the
Company's control. The Company's estimates of cost savings, which are
unaudited, are not necessarily indicative of future performance, which
may be significantly more or less favorable than as set forth above and
are subject to the considerations described under "Forward-Looking
Statements" within "Management's Discussion and Analysis of Financial
Condition and Results of Operations." Shareholders are cautioned not to
place undue reliance on the estimates or the underlying assumptions and
should appreciate that such information may not necessarily be updated
to reflect circumstances existing after the date hereof or to reflect
the occurrence of unanticipated events.
E. Supplemental Cash Flow Information
----------------------------------
Cash payments for interest, net of amounts capitalized ($.9 for 1999
and $2.7 for 1998), were $204.4 and $189.3 during the six months ended
June 30, 1999 and 1998, respectively. Cash payments for income taxes
amounted to $40.2 and $22.5 during the six months ended June 30, 1999
and 1998, respectively.
F. 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 and the
Chief Operating Officer. "Other" represents "Corporate" which includes
research, development and engineering and administrative costs for the
U. S. corporate headquarters. Divisional headquarter costs are
maintained within the operating segments. The interim segment
information is as follows:
Quarter ended June 30,
----------------------
1999 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ----- -----
External sales $ 981.4 $ 929.6 $ 86.4 $1,997.4
Segment income 103.6 153.7 10.7 ($21.6) 246.4
1998
----
External sales 1,099.1 1,054.1 91.7 .1 2,245.0
Segment income 107.7 201.0 .6 (20.8) 288.5
Six months ended June 30,
-------------------------
1999 Americas Europe Asia-Pacific Other Total
---- -------- ------ ------------ ----- -----
External sales $1,852.0 $1,764.8 $174.2 $3,791.0
Segment income 179.0 240.0 19.3 ($40.3) 398.0
1998
----
External sales 2,025.9 1,944.5 166.8 .2 4,137.4
Segment income 177.6 309.7 1.7 (44.5) 444.5
9
Crown Cork & Seal Company, Inc
The following table reconciles the Company's segment income to
consolidated pre-tax income:
Second Quarter Ended Six Months Ended
June 30, June 30,
-------------------- ------------------
1999 1998 1999 1998
---- ---- ---- ----
Total segment income $246.4 $288.5 $398.0 $444.5
Interest expense 91.2 104.1 184.3 197.9
Interest income (7.3) (12.4) (14.8) (19.8)
Gain on sale of assets (1.3) (3.7)
Translation and exchange adjustments 1.0 5.8 9.9 7.5
------ ------ ------ ------
Consolidated pre-tax income $162.8 $191.0 $222.3 $258.9
====== ====== ====== ======
G. 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 at
prices not 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 previously adjusted its selling prices to reflect
these movements. There can be no assurance, however, that the Company
will be able to recover fully any increases or fluctuations in raw
material costs from its customers.
The Company is subject to various lawsuits and claims with respect to
matters such as those pertaining to environmental, product liability,
asbestos and safety and health matters. The ultimate liability cannot
presently be determined as considerable uncertainties exist. It is
possible that results of operations in a particular period could be
materially affected by certain contingencies. Management believes that
based on current available information and after consultation with
counsel that the ultimate disposition of matters that are pending or
asserted will not have a material adverse effect on the consolidated
results, liquidity or financial position of the Company.
10
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, per share, employee,
shareholder and statistical data)
Introduction
------------
The following discussion presents management's analysis of the results
of operations for the three and six months ended June 30, 1999,
compared to the corresponding periods in 1998 and the changes in
financial condition and liquidity from December 31, 1998. 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, 1998, along with
the consolidated financial statements and related notes included in and
referred to within this report.
All per share information is computed using average common shares
outstanding, assuming dilution.
Results of Operations
---------------------
Net Income and Earnings Per Share
---------------------------------
Net income available to common shareholders for the quarter ended June
30, 1999 was $95.7, a decrease of $25.9 or 21.3% when compared to the
prior year amount of $121.6. Earnings per common share decreased $.18
or 18.9% to $.77 from $.95 a year earlier and also reflects a 2.1%
decline in average common shares outstanding, resulting primarily from
the March 1998 repurchase of shares from Compagnie Generale d'Industrie
et de Participations (CGIP).
Net Sales
---------
Net sales in the quarter decreased $247.6 or 11.0% to $1,997.4 from
$2,245.0 in 1998 due primarily to the pass-through of lower raw
material costs, business divestitures, foreign currency translation,
and lower overall volumes for metal packaging. Excluding the effects of
lower raw material costs, business divestitures and foreign currency
translation, net sales would have been 6.0% lower than in the second
quarter of 1998. Sales from U.S. operations decreased by 10.9% and
those in non-U.S. markets decreased 11.1%. U.S. sales accounted for
approximately 41% of consolidated net sales in the second quarter of
both 1999 and 1998. Sales of beverage cans and ends as a percentage of
consolidated net sales represented 32.4% in the second quarter of 1999
compared to 32.7% in the second quarter of 1998 while sales of food
cans and ends increased in the second quarter to 29.5% from 28.4% in
the second quarter of 1998. Sales of plastic closures and plastic
containers represented 15.7% of consolidated net sales in the second
quarter of 1999 versus 16.0% for the same period of 1998.
An analysis of comparative net sales by operating division follows:
Net Sales Percentage Change
--------------------------------------------- ------------------
Second Quarter Six Months Ended Second Six
1999 1998 1999 1998 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $ 981.4 $1,099.1 $1,852.0 $2,025.9 (10.7%) (8.6%)
Europe 929.6 1,054.1 1,764.8 1,944.5 (11.8%) (9.2%)
Asia-Pacific 86.4 91.7 174.2 166.8 (5.8%) 4.4%
Other .1 .2
-------- -------- -------- --------
$1,997.4 $2,245.0 $3,791.0 $4,137.4 (11.0%) (8.4%)
======== ======== ======== ========
11
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Net sales in the Americas Division decreased by $117.7 and $173.9 for
the three and six months ended June 30, 1999 as compared to the same
periods in 1998. The decrease in the second quarter was primarily due
to (i) the pass-through of certain lower raw material costs which
amounted to $38, (ii) unfavorable foreign currency translation and
(iii) sales unit volume decreases in beverage cans, food cans and
aerosol cans partially offset by sales unit volume increases in
plastic beverage closures and plastic beverage containers. Beverage
can volumes were down 8.4% throughout the division as a result of the
Company's decision to selectively prune its account base following
restructuring activities and weak economic conditions in South America
following Brazil's January currency devaluation.
Net sales in the European Division decreased $124.5 and $179.7 for the
three and six months ended June 30, 1998. The decrease in the second
quarter was due to (i) the general weakening of most European
currencies against the U.S. dollar with the impact of translation
reducing net sales by $23 in the quarter, (ii) the divestiture of the
non-personal care HDPE plastic container business which accounted for
$19 of second quarter 1998 net sales, (iii) the sale of the majority of
our South African operations which accounted for $15 of second quarter
1998 net sales, (iv) the pass-through of certain lower raw material
costs amounting to $20 and (v) decreased sales unit volumes in aerosol
cans and plastic closures. Food can volumes were down approximately 1%
in the quarter as volume weakness in the UK and Eastern Europe offset
volume growth in Western Europe. Strong beverage can demand in Spain
and Greece coupled with increased sales unit volumes of beer cans in
the UK offset beverage can market disruptions in Northwest Europe.
Net sales in the Asia-Pacific Division decreased $5.3 in the second
quarter but are still $7.4 ahead in the six months ended June 30, 1999
compared to the prior year. The decrease in second quarter sales is
primarily a result of selling price reductions throughout the region
which eroded the benefits of increased volumes in many product lines.
Food can volumes were up over 30% in the quarter as sales of seafood,
fruit and vegetable cans were very strong in Thailand. Thailand has
remained very price competitive in the region despite the strengthening
of the Thai Baht. Beverage can volumes were down in the quarter due to
lower customer requirements in Singapore and Malaysia offset by volume
gains in China and Vietnam.
Cost of Products Sold
---------------------
Cost of products sold, excluding depreciation and amortization, was
$1,529.0 for the quarter ended June 30, 1999, a decrease of $198.2 or
11.5% compared to $1,727.2 for the same period in 1998. The decrease
reflects (i)lower raw material costs, (ii) the effect of foreign
currency translation, (iii) cost savings from restructuring programs
and (iv) lower sales unit volumes across several product lines.
As a percentage of net sales, cost of products sold was 76.5% compared
to 76.9% for the second quarter of 1998. The improvement in gross
margin as a percentage to net sales is due primarily to the benefits
derived from the Company's continuing cost containment and
restructuring programs, offset to some extent by competitive influences
on selling prices across many product lines.
Selling and Administrative
--------------------------
Selling and administrative expenses for the quarter ended June 30, 1999
were $91.0, a decrease of $2.2 or 2.4% from the second quarter of 1998.
As a percentage of net sales, selling and administrative expenses,
excluding depreciation, were 4.6% in the second quarter as compared to
4.2% for the same period of 1998. The decrease in 1999 costs is
directly related to the continuing rationalization of these costs
throughout the Company. The increase in these costs as a percentage to
net sales in 1999 reflects lower sales compared to 1998 as discussed
above.
12
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Operating Income
----------------
For the quarter ended June 30, 1999, consolidated operating income
decreased $42.1 to $246.4 from $288.5 at June 30, 1998. Operating
income as a percentage to net sales was 12.3% for the second quarter of
1999 as compared to 12.9% in 1998. An analysis of operating income by
operating division follows:
Operating Income Percentage Change
------------------------------------ ------------------
Second Quarter Six Months Ended Second Six
1999 1998 1999 1998 Quarter Months
---- ---- ---- ---- ------- ------
Divisions:
Americas $103.6 $107.7 $179.0 $177.6 (3.8%) .8%
Europe 153.7 201.0 240.0 309.7 (23.5%) (22.5%)
Asia-Pacific 10.7 .6 19.3 1.7
Other (21.6) (20.8) (40.3) (44.5) (3.8%) 9.4%
------ ------ ------ ------
$246.4 $288.5 $398.0 $444.5 (14.6%) (10.5%)
====== ====== ====== ======
As a percentage to net sales, Americas Division operating income was
10.6% in the second quarter of 1999 as compared to 9.8% for the same
period in 1998. The increase in second quarter 1999 operating margin as
a percentage to sales was primarily due to (i) cost savings from the
1998 restructuring program and (ii) unit volume gains in plastic
bottles and plastic closures; which offset sales unit volume declines
of beverage, food and aerosol cans. The decrease in second quarter
1999 operating margin compared to 1998 is directly a result of sales
unit volume declines of beverage, food and aerosol cans as well as
lower sales unit volumes of several health and beauty products.
European Division operating income as a percentage to net sales was
16.5% in the second quarter of 1999 as compared to 19.1% for the
comparable period of 1998. The decrease in second quarter operating
margins was primarily due to (i) sales unit volume decreases of food
cans, aerosol cans and plastic beverage containers, (ii) continued
weakness in Eastern Europe and (iii) the effect of competitive pricing
across many product lines, most notably food cans, which offset the
benefits of restructuring activities and sales unit volume increases of
beverage cans and plastic closures.
In the second quarter of 1999, operating income in the Asia-Pacific
Division was 12.4% of net sales as compared to .7% for the same period
in 1998. The increase in 1999 margins was due primarily to sales unit
volume increases of food and beverage cans in Thailand which offset (i)
sales unit volume decreases of beverage cans in Singapore and Malaysia
and (ii) competitive selling pressures across many product lines
throughout the region.
Net Interest Expense / Income
-----------------------------
Net interest expense was $83.9 in the second quarter, a decrease of
$7.8 or 8.5% compared to second quarter 1998 net interest expense of
$91.7. The decrease in net interest expense is due primarily to
generally lower interest rates and lower raw material costs which have
helped to reduce the early seasonal build-up of working capital.
13
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Taxes on Income
---------------
The effective tax rate at 33.8% in the second quarter of 1999 was
relatively unchanged from the second quarter 1998 effective rate of
33.7%. For the six months ended June 30, 1999, the effective tax rate
was 37.5% as compared to 35.7% for the same period in 1998. The
increase in the effective rate is due to lower pre-tax income whereby
the taxable effect of non-deductible goodwill amortization is
proportionately greater. Additionally, pre-tax income in the Company's
European operations was lower in the first six months of 1999 compared
to 1998. The Company's blended European tax rate is lower than the U.S.
statutory rate of 35%.
Minority Interests, Net of Equity in Earnings of Affiliates
-----------------------------------------------------------
The charge for minority interests, net of equity earnings, increased by
$7.3 in the second quarter of 1999 over 1998. This increase was due to
improved results in the Company's consolidated joint ventures in China,
Greece, Brazil and Thailand.
Liquidity and Capital Resources
-------------------------------
Cash from Operations
--------------------
Net cash used by operating activities during the six months ended June
30, 1999 of $133.4 was essentially the same as cash used of $133.8 for
the same period in 1998. Lower working capital was employed, a result
of lower raw material costs in 1999 compared to 1998 as well as
better working capital management which offset the decrease in
profits from operations.
Investing Activities
--------------------
Investing activities used cash of $210.9 during the six months ended
June 30, 1999 compared with cash used of $249.0 for the same period of
1998. Capital expenditures for the first six months of 1999 were
$177.6, a decrease of $59.7 as compared to capital expenditures of
$237.3 during the same period of 1998. The Company intends to limit
1999 capital spending to approximately $300.0 in 1999 as compared to
1998 capital expenditures of $487.0.
Financing Activities
--------------------
Financing activities provided cash of $291.3 in the first six months of
1999 compared with cash provided of $394.2 in the first six months of
1998. Lower raw material costs have held down the cost of pre-season
working capital build-ups in 1999 and, as such, the increase in
commercial paper borrowings in the first six months of 1999 is lower
than in the first six months of 1998.
Total debt, net of cash and cash equivalents, at June 30, 1999 was
$5,716.2 and represents an increase of $345.6 above the December 31,
1998 level of $5,370.6. Total debt, net of cash and cash equivalents,
as a percentage to total capitalization was 64.8% at June 30, 1999 as
compared to 62.3% at December 31, 1998. Total capitalization is defined
by the Company as total debt (net of cash and cash equivalents),
minority interests and shareholders' equity.
The increase in total debt, net of cash and cash equivalents, from
December 31, 1998 is due primarily to the funding of working capital
requirements on a short-term basis through the issuance of commercial
paper. The increase in total debt as a percentage to total
capitalization was also affected by a reduction in shareholders' equity
due to negative currency translation adjustments in the first six
months of 1999.
14
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Recent Accounting Developments
------------------------------
In June 1999, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 137,
an amendment of SFAS No. 133-Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 137 has deferred the effective date of
SFAS No. 133 from January 1, 2000 to January 1, 2001. SFAS No. 133
requires that the Company value all outstanding derivative instruments
at fair value and record those instruments on the balance sheet. The
standard also significantly changes the requirements for hedge
accounting. The Company continues to evaluate the requirements of the
standard and is preparing an implementation plan.
Market Risk
-----------
Since December 31, 1998, the notional value of outstanding foreign
exchange contracts has been reduced by approximately 35%. This decrease
is due primarily to the introduction of the Euro.
The following discussions related to the Year 2000 and Euro Conversion
are updated from the discussions included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
YEAR 2000
---------
Computers and computer dependent equipment are used throughout the
Company's operations. Certain computerized systems in use today were
designed using two digits rather than four digits to define the
applicable year, which could result in the systems recognizing a date
containing "00" as the year 1900 rather than the year 2000. This could
lead to miscalculations or system failures and is generally referred to
as the "Year 2000" or "Y2K" issue.
In order to address the Y2K issue, the Company established a steering
committee that reports to senior executive management and the Board of
Directors of the Company. The steering committee is responsible for the
formulation of the Company's Y2K global plan and oversight of strategy,
risk assessment, coordination and reporting. Project offices have also
been established within each division to roll out, monitor and manage
implementation of the Company's global plan.
The Company's global plan is divided into several major phases:
Inventory and Assessment, Remediation Analysis, Implementation, and
Contingency Planning.
Inventory and Assessment - The inventory phase was substantially
completed in June 1998 including the identification of internal
mission-critical business systems and vendor and other third party
relationships. The Company substantially completed its internal risk
assessment of potentially Y2K impacted information technology ("IT")
and non-IT equipment and facilities during October 1998. In that
regard, the Company has identified Y2K issues with various mid-range
IT systems, personal computers, servers, telephone systems and
embedded systems in manufacturing and related equipment. The
assessment of the Company's third-party risks involved the
identification of critical vendors, Y2K confirmation correspondence,
evaluations and selected vendor reviews. The Company has completed the
identification of its vendor relationships and has received
approximately 74% of its requested Y2K confirmation letters. Certain
top-critical vendors are being subjected to follow-up including
interviews, on-site visits and other available means. In addition, the
Company currently has an inadequate Y2K survey response from utility
suppliers and is in the process of evaluating its risk profile with
respect to utility service. Accordingly, the Company has initiated
alternate follow-up procedures and strategies to support its risk
evaluation and contingency planning efforts.
15
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
These assessments and reviews are expected to be ongoing through the
third quarter of 1999. Despite these efforts, the Company can provide
no assurance that critical suppliers of important goods and services
(including, but not limited to, utility service and communications)
will complete their Y2K compliance plans in a timely manner.
Remediation Analysis - The Company substantially completed this project
phase in February 1999. During this stage of the project, remediation
strategies were evaluated and planned to correct identified Y2K
non-compliance. Correction strategies included vendor-supported
upgrades, system or asset replacements, and correction of non-compliant
code and systems consolidation.
Implementation - This phase involves the correction and testing of
identified internal Y2K risks in conjunction with the remediation
analysis phase. The Company's implementation plan established
priorities for remediation or replacement. The business systems
considered most critical to ongoing operations have been given the
highest priority. Such mission-critical systems include business and
operating systems such as sales order billing, production planning,
procurement and disbursements, logistics and embedded systems in
manufacturing and related equipment that, if shutdown or interrupted,
could have a material adverse impact on the Company. All other systems
include business support systems such as personal computer technology,
internal data transmission and voice communication that, if shutdown or
interrupted, may have a less material impact on the Company's
operations.
Mission Critical IT Systems - Approximately 90% of the Company's
locations that contain mission-critical IT systems require some form
of correction. Approximately 72% of mission-critical business systems
have been remediated and 28% are currently being remediated. The
Company has achieved implementation of Y2K-capable mission-critical
systems covering 85% of its operating revenues at this time versus a
previously disclosed target cover of 80%. The Company plans to
complete the remaining mission-critical implementations during the
second half of 1999. Certain of these projects are awaiting the
release of Y2K compliant software upgrades or have modestly extended
project timelines to maximize the use of internal resources.
The Company's mission-critical system testing methods include obtaining
hardware and software certifications from critical vendors and
consultants and performing Y2K compliance tests including data exchange
with critical vendors and customers. Testing of critical systems is
expected to be completed on an ongoing basis during the second half of
the year.
Embedded Systems - During 1998, the Company performed a comprehensive
evaluation of embedded systems within its manufacturing and facilities
infrastructure. This evaluation covered approximately 27,000
inventoried systems and over 1,000 machinery and systems manufacturers.
Assessment results indicate a very low non-compliant rate. Accordingly,
while the Company cannot rule out some potential impact, overall risk
in this area is believed to be low. Unit replacements or reprogramming
will occur as part of the Company's normal maintenance program in 1999.
Such costs are not expected to be significant. The Company has
conducted detailed testing of certain manufacturing processes. The
results of these tests confirm the current risk assessment.
Personal Computer Technology - The Company is currently implementing
replacement or correction methods to address Y2K non-compliance in both
hardware and software. Modest portions of these corrections pertain to
mission-critical systems. Due to recent advances in networking
technology which could offer significant on-going savings in personal
desktop computer operating costs, the Company is employing new
remediation alternatives which involved a delay in completion of some
mission-critical personal computer projects to September 1999. The
Company considers its overall risk in this area to be low.
16
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Telephone Exchange Systems - The Company has substantially completed
its assessment of telephone exchange systems within its facilities.
Approximately 20% of these systems will be remediated during 1999.
Notwithstanding these efforts, the Company believes that certain
countries in which it operates may be subject to broader regional
communication system failures. Accordingly, an extended assessment of
this risk is in process to both evaluate the reliability of the initial
assessment and identify contingency options including the utilization
of satellite phones.
Contingency Planning - The Company is developing contingency plans to
address potential disruptions that may result from unresolved Y2K
issues. Because Y2K is a date-driven risk, the Company is actively
identifying practicable prevention plans for its core operations to
mitigate disruption, especially in January 2000. This contingency plan
will also be used to address potential disruption caused by the leap
year day (February 29, 2000). Prevention plans may include temporary
deactivation of certain systems and equipment just prior to January 1,
2000, targeted supply-chain management measures to ensure supply of
certain key commodities as well as customer supply initiatives. For
instance, facility and manufacturing supplies may be procured in 1999
to support production requirements in early 2000. Additionally, in
order to address any isolated or wide spread disruptions, the Company
is considering help-desk and manufacturing support options as part of
its planning scenarios. Risks of a less controllable nature, such as
utility service outages and communication system failure are being
addressed in contingency planning. Alternate site manufacturing
scenarios, alternative vendors and other scenarios are under current
consideration. The Company substantially completed its prevention and
contingency plan development and design in June 1999. The rollout of
the contingency plan was initiated in the first quarter of 1999. The
Company is also considering potential seasonality effects of Year 2000
on consumer demand and operating and working capital, particularly in
the fourth quarter of 1999 and first quarter of 2000.
The Company's Y2K global plan could be adversely affected if any of the
Company's factors or assumptions are incorrect or if its ongoing review
discovers unanticipated problems. The Company cannot give assurance
that its global plan will be completed on schedule or that it will not
uncover Y2K issues that could create a material impact on its
performance.
The Company believes that the most reasonably likely worst-case
scenario for the Company with respect to the Y2K problem is the failure
of a critical vendor, such as a utility supplier, to provide required
goods or services after December 31, 1999. Such a failure could result
in temporary production outages and lost sales and profits. The Company
believes that because of the high degree of geographic dispersion of
its operations (with approximately 223 plants in 49 countries), it is
unlikely an isolated third-party failure would have a material adverse
effect on the Company's results of operations, financial condition, or
cash flow. The Company also believes that the formulation of
contingency plans should reduce the severity and length of any such
possible disruptions and losses. Nevertheless, because the Company's
Y2K compliance is dependent upon key third party Y2K readiness, there
can be no assurance that the Company's Y2K compliance efforts will
prevent a Y2K problem outside its direct control from adversely
affecting the results of its operations, financial condition or cash
flow. In addition, although not anticipated, any failure by the Company
to correct critical internal computer systems before Year 2000 could
have such an adverse effect.
Year 2000 Project Expenditures - The Company estimates that it will
spend approximately $22-$25 (pre-tax) for its Y2K compliance efforts.
To date, the Company has spent approximately $14, of which $6 has been
expensed. The Company anticipates that funding for its Y2K compliance
program will be from operating cash flows. These cost estimates do not
include labor costs of employees allocated to the Y2K compliance
effort, as it is not practicable to accumulate such costs. The
Company's total Y2K project cost estimate is based on presently
available information and does not necessarily include all potential
costs related to ongoing assessment and remediation or any execution
of contingency plans brought about by internal or external Y2K issues
or cost estimate changes related to replacement systems or code
remediation efforts. Actual results could differ from these estimates.
17
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
EURO CONVERSION
---------------
On January 1, 1999, eleven of the fifteen member nations ("the
participating countries") of the European Union ("EU") established
fixed conversion rates between their existing sovereign currencies
(the "legacy currencies") and the Euro. For a period of three years,
the transition period, both the Euro and the individual participants'
currencies will remain in circulation. Parties may pay for goods and
services using either the Euro or the participating country's sovereign
currency. Conversion rates will be computed through a "triangulation"
process which will convert one sovereign currency into an amount
denominated in the Euro and then convert the Euro-denominated amount
into the second legacy currency. After January 1, 2002, the Euro will
be the sole legal tender for these countries. During the transition
period, the adoption of the Euro will affect a multitude of financial
systems and business applications as the commerce of these nations will
be transacted in the Euro and the legacy currencies.
The Company is currently addressing Euro-related issues and their
impact on information systems, currency exchange rate risk, employment
and benefits, taxation, contracts, competition and pricing. Under the
action plan developed by the Company, teams have been formed to address
selling prices and costs, personnel and communications, finance,
administration and information technology. The Company has incurred
and expects to continue to incur expenses for the internal technology
and operations staff to implement its Euro conversion plan. These
costs, although not expected to be material, will be incurred through
2003 to cover the costs of preparing for and making operational change
to accommodate the introduction of the Euro. The costs for this
conversion involve updated technology and are being addressed in
conjunction with Year 2000 remediation.
At June 30, 1999, approximately 61% of the contract notional value on
outstanding foreign exchange contracts involve the Euro, primarily with
sterling. Conversion to the Euro has reduced the amount of the
Company's exposure to exchange rate risk, due to the netting effect of
having assets and liabilities denominated in a single currency as
opposed to the various legacy currencies. The number of contracts
outstanding at the end of the quarter as compared to the end of the
year has been reduced by approximately 15% with a corresponding
reduction in notional value of approximately $925. This reduction in
outstanding foreign exchange contracts has generated approximately $.7
of transaction savings. Because there will be less diversity in the
Company's exposure to foreign currencies, movements of the Euro's value
in U.S. dollars could have a more pronounced effect, whether positive
or negative.
Although all key suppliers have committed that they will be
Euro-compliant, the Company can give no assurance that third parties on
whom it depends will have the systems necessary to process
Euro-denominated transactions. Moreover, disruption of activity in the
European markets because of the conversion could adversely affect the
Company's businesses in those markets, resulting in lost revenues and
increased costs.
As part of the conversion process the Company is developing contingency
plans. The contingency plans will include assessing and communicating
the impact of any delays. These plans will also address likely problems
in the aftermath of conversion with a view to maximizing the Company's
ability to avoid any disruption.
The Company does not expect the conversion to the Euro to have a
material adverse effect upon its results of operations, financial
condition or cash flow. However, the Company cannot guarantee that,
with respect to the Euro conversion, all problems, including long-term
competitive implications of the conversion, will be foreseen and
corrected, that no material disruption of the Company's business will
occur, or that there will be no delays in the dates targeted by the
Company for the Euro conversion process.
18
Crown Cork & Seal Company, Inc.
Item 2. Management's Discussion and Analysis (Continued)
Forward Looking Statements
--------------------------
Statements included herein in "Management's Discussion and Analysis of
Financial Condition and Results of Operations", including, but not
limited to, in the "Year 2000" and "Euro Conversion" sections, and in
the discussion of the restructuring plans in Note D 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, 1998, 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 affecting the Company
and therefore involve a number of risks and uncertainties. Management
cautions that forward-looking statements are not guarantees and that
actual results could differ materially from those expressed or implied
in the forward-looking statements.
While the Company periodically reassesses material trends and
uncertainties affecting the Company's results of operations and
financial condition in connection with the preparation of Management's
Discussion and Analysis of Financial Condition and Results of
Operations and certain other sections contained in the Company's
quarterly, annual or other reports filed with the Securities and
Exchange Commission ("SEC"), the Company does not intend to review or
revise any particular forward-looking statement in light of future
events.
A discussion of important factors that could cause the actual results
of operations or financial condition of the Company to differ from
expectations has been set forth in the Company's Annual Report on Form
10-K for the year ended December 31, 1998 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.
19
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 22,
1999. 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, 1999 and such Item 4 is incorporated herein by
reference.
Item 5. Other Information
On July 22, 1999, the Company announced that John B. Neff, a former
Portfolio Manager of the Wellington Management Company, and Arnold W.
Donald, Senior Vice President of Monsanto Company, were elected to its
Board of Directors. These additions have increased the number of
directors to fifteen.
On July 22, 1999, the Company's Board of Directors declared cash
dividends of $.25 per share on the Company's common stock and $.4712
per share on the Company's 4.5% convertible preferred stock. Both
dividends are payable on August 20, 1999 to shareholders of record on
August 4, 1999.
On July 22, 1999, The Company's Board of Directors approved an amended
and restated version of the Company's by-laws which, among other
things, amended the advance notice provisions with respect to
shareholder nominations and other business. See Item 6 below.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3. By-laws of Crown Cork & Seal Company, Inc.,
as amended
10.a Amendment No. 1 to the Crown Cork & Seal Company, Inc.
1990 Stock-Based Incentive Compensation Plan, dated as
of September 21, 1998
10.b Amendment No. 1 to the Crown Cork & Seal Company, Inc.
1994 Stock-Based Incentive Compensation Plan, dated as
of September 21, 1998
10.c Amendment No. 1 to the Crown Cork & Seal Company, Inc.
1997 Stock-Based Incentive Compensation Plan, dated as
of September 21, 1998
10.d Crown Cork & Seal Company, Inc. Senior Executive
Retirement Plan, as amended and restated as of
June 30, 1999
27. Financial Data Schedule
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.
20
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/ Timothy J. Donahue
Timothy J. Donahue
Senior Vice President
and Corporate Controller
Date: August 13, 1999
21