UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-50189
CROWN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
215-698-5100
(registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one)
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
There were 151,136,014 shares of Common Stock outstanding as of August 5, 2011.
Crown Holdings, Inc.
PART I – FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions except share and per share data)
(Unaudited)
Three months ended June 30
Net sales
Cost of products sold, excluding depreciation and amortization
Depreciation and amortization
Gross profit
Selling and administrative expense
Provision for restructuring
Asset impairments and sales
Loss from early extinguishment of debt
Interest expense
Interest income
Translation and foreign exchange
Income before income taxes and equity earnings
Provision for income taxes
Net income
Net income attributable to noncontrolling interests
Net income attributable to Crown Holdings
Earnings per common share attributable to Crown Holdings:
Basic
Diluted
Weighted average common shares outstanding:
The accompanying notes are an integral part of these consolidated financial statements.
2
Six months ended June 30
Earnings per share attributable to Crown Holdings common shareholders:
3
CONSOLIDATED BALANCE SHEETS (Condensed)
(In millions)
Assets
Current assets
Cash and cash equivalents
Restricted cash
Receivables, net
Inventories
Prepaid expenses and other current assets
Total current assets
Goodwill
Property, plant and equipment, net
Other non-current assets
Total
Liabilities and equity
Current liabilities
Short-term debt
Current maturities of long-term debt
Accounts payable and accrued liabilities
Total current liabilities
Long-term debt, excluding current maturities
Postretirement and pension liabilities
Other non-current liabilities
Commitments and contingent liabilities (Note I)
Noncontrolling interests
Crown Holdings shareholders’ deficit
Total equity
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Condensed)
Cash flows from operating activities
Adjustments to reconcile net income to net cash used for operating activities:
Pension expense
Pension contributions
Stock-based compensation
Changes in assets and liabilities:
Receivables
Other, net
Net cash used for operating activities
Cash flows from investing activities
Capital expenditures
Change in restricted cash
Proceeds from sale of property, plant and equipment
Other
Net cash used for investing activities
Cash flows from financing activities
Proceeds from long-term debt
Payments of long-term debt
Net change in revolving credit facility and short-term debt
Debt issue costs
Common stock issued
Common stock repurchased
Purchase of noncontrolling interests
Dividends paid to noncontrolling interests
Net cash provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents at January 1
Cash and cash equivalents at June 30
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In millions) (Unaudited)
Balance at January 1, 2010
Comprehensive income:
Translation adjustments
Amortization of net loss and prior service cost included in pension and postretirement cost
Derivatives qualifying as hedges
Total comprehensive income
Restricted stock awarded
Sale of business
Balance at June 30, 2010
Balance at January 1, 2011
Contribution from noncontrolling interests
Balance at June 30, 2011
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In millions, except per share and statistical data)
The consolidated financial statements include the accounts of Crown Holdings, Inc. and its consolidated subsidiaries (the “Company”). The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance with Form 10-Q instructions. In the opinion of management, these consolidated financial statements contain all adjustments of a normal and recurring nature necessary for a fair statement of the financial position of Crown Holdings, Inc. as of June 30, 2011 and the results of its operations for the three and six month periods ended June 30, 2011 and 2010 and of its cash flows for the six months ended June 30, 2011 and 2010. The results reported in these consolidated financial statements are not necessarily indicative of the results that may be expected for the entire year. These results have been determined on the basis of accounting principles generally accepted in the United States of America (“GAAP”).
Certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP have been condensed or omitted. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Certain reclassifications of prior years’ data have been made to conform to the current year presentation.
A summary of restricted stock transactions during the six months ended June 30, 2011 follows:
Nonvested shares outstanding at January 1, 2011
Awarded:
Time-vesting (grant date fair value of $33.70)
Performance-based (grant date fair value of $41.69)
Performance-based– achieved 200% level (grant date fair value of $33.87)
Released:
Time-vesting shares awarded in 2008 through 2010
Performance-based shares awarded in 2008
Performance-based awards – achieved 200% level
Nonvested shares outstanding at June 30, 2011
The time-vesting awards vest ratably over three years. The performance-based shares cliff vest at the end of three years based on the results of the market criterion. The number of performance-based shares that will ultimately vest is based on the level of market performance achieved, ranging between 0% and 200% of the shares awarded, and will be settled in stock. The estimated grant-date fair value of each performance-based share was calculated using a Monte Carlo valuation model. At June 30, 2011, unrecognized compensation cost related to unvested restricted stock was $8. The weighted average period over which the expense is expected to be recognized is 1.6 years.
The aggregate market value of the shares released and issued on the vesting dates was $18.
7
Inventories are stated at the lower of cost or market, with cost for U.S. inventories principally determined under the first-in, first-out (“FIFO”) method. Non-U.S. inventories are principally determined under the average cost method.
Finished goods
Work in process
Raw materials and supplies
Under GAAP a framework exists for measuring fair value, providing a three-tier hierarchy of pricing inputs used to report assets and liabilities that are adjusted to fair value. Level 1 includes inputs such as quoted prices which are available in active markets for identical assets or liabilities as of the report date. Level 2 includes inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the report date. Level 3 includes unobservable pricing inputs that are not corroborated by market data or other objective sources. The Company has no items valued using Level 3 inputs other than certain pension plan assets.
The following table sets forth the fair value hierarchy of the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, respectively.
Derivative instruments:
Foreign exchange
Commodities
Liabilities
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities measured at fair value and their placement within the fair value hierarchy.
The Company applies a market approach to value its commodity price hedge contracts. Prices from observable markets are used to develop the fair value of these financial instruments and they are reported under Level 1. The Company uses an income approach to value its foreign exchange forward contracts. These contracts are valued using a discounted cash flow model that calculates the present value of future cash flows under the terms of the contracts using market information as of the reporting date, such as foreign exchange spot and forward rates, and are reported under Level 2 of the fair value hierarchy.
Refer to Note E for further discussion of the Company’s use of derivative instruments and their fair values.
8
In the normal course of business the Company is subject to risk from adverse fluctuations in currency exchange rates, interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company does not use derivative instruments for trading or speculative purposes.
The Company’s objective in managing exposure to market risk is to limit the impact on earnings and cash flow. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales agreements that permit the pass-through of commodity price and foreign exchange rate risk to customers.
For derivative financial instruments accounted for as hedging instruments, the Company formally designates and documents, at inception, the financial instrument as a hedge of a specific underlying exposure, the risk management objective and the manner in which effectiveness will be assessed. The Company formally assesses, both at inception and at least quarterly thereafter, whether the derivative financial instruments used in hedging transactions are effective in offsetting changes in fair value or cash flows of the related underlying exposures. Any ineffective portion of the change in fair value of the instruments is recognized immediately in earnings.
Cash Flow Hedges
The Company designates certain derivative financial instruments as cash flow hedges. No components of the hedging instruments are excluded from the assessment of hedge effectiveness. Changes in fair value of outstanding derivatives accounted for as cash flow hedges, except any ineffective portion, are recorded in other comprehensive income until earnings are impacted by the hedged transaction. Classification of the gain or loss in the Consolidated Statements of Operations upon release from comprehensive income is the same as that of the underlying exposure. Contracts outstanding at June 30, 2011 mature between one and thirty-one months.
When the Company discontinues hedge accounting because it is no longer probable that an anticipated transaction will occur in the originally specified period, changes to fair value accumulated in other comprehensive income are recognized immediately in earnings.
The Company uses commodity forwards to hedge anticipated purchases of various commodities, including aluminum, fuel oil and natural gas and these exposures are hedged by a central treasury unit.
The Company also designates certain foreign exchange contracts as cash flow hedges of anticipated foreign-currency-denominated sales or purchases. The Company manages these risks at the operating unit level. Often the hedging of foreign currency risk is performed in concert with related commodity price hedges.
The following table sets forth financial information about the impact on Accumulated Other Comprehensive Income (“AOCI”) and earnings from changes in fair value related to derivative instruments accounted for as cash flow hedges.
Derivatives in cash flow hedges
Foreign exchange contracts
Commodity contracts
9
Cross-currency swap
During the twelve months ending June 30, 2012, a net gain of $26 ($19, net of tax) is expected to be reclassified to earnings. No amounts were reclassified during the three and six months ended June 30, 2011 and 2010 in connection with anticipated transactions that were no longer considered probable and the ineffective portion recorded in earnings was less than $1.
Fair Value Hedges and Contracts Not Designated as Hedges
The Company designates certain derivative financial instruments as fair value hedges of recognized foreign-denominated assets and liabilities, generally trade accounts receivable and payable and unrecognized firm commitments. The notional values and maturity dates of the derivative instruments coincide with those of the hedged items. Changes in fair value of the derivative financial instruments, excluding time value, are offset by changes in fair value of the related hedged items. Other than for firm commitments, amounts related to time value are excluded from the assessment and measurement of hedge effectiveness and are reported in earnings. Less than $1 was reported in earnings for the six months ended June 30, 2011.
Certain derivative financial instruments, including foreign exchange contracts related to intercompany debt, were not designated or did not qualify for hedge accounting; however, they are effective economic hedges as the changes in their fair value, except for time value, are offset by changes in remeasurement of the related hedged items. The Company’s primary use of these derivative instruments is to offset the earnings impact that fluctuations in foreign exchange rates have on certain monetary assets and liabilities denominated in nonfunctional currencies. Changes in fair value of these derivative instruments are immediately recognized in earnings as foreign exchange adjustments.
10
The impact on earnings from foreign exchange contracts designated as fair value hedges were gains of $3 and $4 for the three and six months ended June 30, 2011 and losses of $6 and $8 for the same periods in 2010. The impact on earnings from foreign exchange contracts not designated as hedges were gains of $7 and $19 for the three and six months ended June 30, 2011 and gains of $8 and $25 for the same periods in 2010. These items were reported as translation and foreign exchange and were offset by changes in the fair values of the hedged items.
The fair values of outstanding derivative instruments in the Consolidated Balance Sheets at June 30, 2011 and December 31, 2010 were:
Derivatives designated as hedges:
Derivatives not designated as hedges:
Reported in other current assets.
$31 and $40 reported in other current assets at June 30, 2011 and December 31, 2010 and $5 and $13 reported in other non-current assets at June 30, 2011 and December 31, 2010.
Reported in accounts payable and accrued liabilities.
$3 reported in accounts payable and accrued liabilities and $2 reported in other non-current liabilities at June 30, 2011.
The aggregate U.S. dollar-equivalent notional values of outstanding derivative instruments in the Consolidated Balance Sheets at June 30, 2011 and December 31, 2010 were:
Derivatives in cash flow hedges:
Derivatives in fair value hedges:
During the first six months of 2011, the Company recorded a pre-tax charge of $25 for restructuring costs, including $19 related to the relocation of the Company’s European Division headquarters and management to Switzerland, $4 related to severance costs in the Company’s European Specialty Packaging segment and $2 related to prior restructuring actions in the Company’s North America Food segment.
During the first six months of 2010, the Company recorded a pre-tax charge of $24 for restructuring costs related to plant closures in the Company’s North America Food segment.
11
European Division Headquarters
In the third quarter of 2010, the Company determined that it would relocate its European Division headquarters and management to Switzerland effective January 1, 2011 in order to benefit from a more centralized management location and increased efficiencies. The relocation is expected to be completed in 2011.
During the first six months of 2011, the Company recorded a pre-tax charge of $19 related to the relocation which represents the estimated employee compensation costs resulting from an intercompany payment related to the relocation. The Company expects to pay these costs over the next one to three years. As of June 30, 2011, the Company incurred costs of $33 which are expected to be the total costs related to the relocation.
The following table summarizes the restructuring accrual balances and utilization by cost type for the relocation:
Provisions
Payments made
Foreign currency translation
North America Food
In 2010 and 2009, the Company closed certain Canadian food plants in an effort to reduce costs through consolidation of its U.S. and Canadian operations. The actions resulted in headcount reductions of approximately 400 and are expected to be completed in 2011.
During the first six months of 2011, the Company recorded a pre-tax charge of $2 for strip and clean costs related to the closures. As of June 30, 2011, the Company incurred total costs of $54 and expects to incur future additional charges of approximately $1 for strip and clean costs and may incur future additional charges for pension settlements of approximately $40 when the Company receives regulatory approval and settles the obligations. The Company expects the total cash cost related to the pension settlements to be approximately $15.
The following table summarizes the restructuring accrual balances and utilization by cost type for these actions:
Reclassified to other accounts
European Food
In 2009, the Company initiated a restructuring as part of ongoing cost reduction efforts in its European Food segment. The restructuring resulted in a headcount reduction of approximately 160 and is expected to be completed in 2011. The Company incurred total costs of $14 which are expected to be the total costs related to the restructuring.
12
The following table summarizes the restructuring accrual balances and utilization by cost type for this action:
In 2009, the Company initiated a restructuring as part of ongoing cost reduction efforts primarily in its European Specialty Packaging segment. The restructuring resulted in a headcount reduction of approximately 90 and is expected to be completed in 2011. The Company incurred costs of $5 which are expected to be the total costs related to the restructuring.
During the first six months of 2011, the Company initiated a restructuring as part of ongoing cost reduction efforts in its European Specialty Packaging segment. The restructuring resulted in a headcount reduction of approximately 32 and is expected to be completed in 2011. The Company incurred costs of $4 which are expected to be the total costs related to the restructuring.
In January, 2011, the Company sold $700 principal amount of 6.25% senior unsecured notes due 2021. The notes were issued at par by Crown Americas LLC and Crown Americas Capital Corp. III, each a subsidiary of the Company, and are unconditionally guaranteed by the Company and substantially all of its U.S. subsidiaries. The Company paid $11 in bond issue costs that will be amortized over the term of the debt.
In addition, concurrently with the offering of the notes, the Company commenced a tender offer for any and all of the $600 outstanding 7.75% senior secured notes due 2015 (the “2015 notes”). At the expiration of the tender offer approximately 90% of the 2015 notes had been repurchased. All 2015 notes that remained outstanding after the expiration of the tender offer were redeemed by the Company in February, 2011. The Company recorded a loss from early extinguishment of debt of $30 including $25 for premiums paid and $5 for the write off of deferred financing fees.
13
In June 2011, the Company amended its existing senior secured credit facilities to add a $200 term loan facility and a €274 ($397 at June 30, 2011) term loan facility, each of which will mature in June 2016 and bear interest at LIBOR or EURIBOR plus 1.75%. The Company paid $5 in bond issue costs that will be amortized over the term of the facilities The Company borrowed under the facilities to repay its existing $147 and €108 ($159) term loans, which were scheduled to mature in November 2012. In addition, the Company borrowed $125 under the facilities and irrevocably deposited the funds into an irrevocable trust to be used to redeem all €83 ($121) of the outstanding 6.25% first priority senior secured notes due September 2011 and to pay accrued interest and related fees. The funds were released from the trust in July 2011 to redeem the 2011 notes. As of June 30, 2011, the $125 deposited into the irrevocable trust was reported as restricted cash in the Company’s balance sheet. The Company recorded a loss from early extinguishment of debt of $2.
The Company’s outstanding debt at June 30, 2011 and December 31, 2010 was as follows.
Long-term debt
Senior secured borrowings:
Revolving credit facilities
Term loan facilities
U.S. dollar at LIBOR plus 1.75% due 2012
Euro at EURIBOR plus 1.75% due 2012
U.S. dollar at LIBOR plus 1.75% due 2016
Euro (€274 at June 30, 2011) at EURIBOR plus 1.75% due 2016
Euro (€83 at June 30, 2011) 6.25% first priority notes due 2011
Senior notes and debentures:
U.S. dollar 7.75% due 2015
U.S. dollar 7.625% due 2017
Euro (€500 at June 30, 2011) 7.125% due 2018
U.S. dollar 6.25% due 2021
U.S. dollar 7.375% due 2026
U.S. dollar 7.50% due 2096
Other indebtedness in various currencies
Unamortized discounts
Total long-term debt
Less: current maturities
Total long-term debt, less current maturities
The estimated fair value of the Company’s long-term borrowings, based on quoted market prices for the same or similar issues, was $3,654 at June 30, 2011.
Crown Cork & Seal Company, Inc. (“Crown Cork”) is one of many defendants in a substantial number of lawsuits filed throughout the United States by persons alleging bodily injury as a result of exposure to asbestos. These claims arose from the insulation operations of a U.S. company, the majority of whose stock Crown Cork purchased in 1963. Approximately ninety days after the stock purchase, this U.S. company sold its insulation assets and was later merged into Crown Cork.
Prior to 1998, amounts paid to asbestos claimants were covered by a fund made available to Crown Cork under a 1985 settlement with carriers insuring Crown Cork through 1976, when Crown Cork became self-insured. The fund was depleted in 1998 and the Company has no remaining coverage for asbestos-related costs.
During 2010 and 2011, the states of Alabama, Nebraska, South Dakota and Wyoming enacted legislation that limits asbestos-related liabilities under state law of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos.
14
Similar legislation was enacted in Florida, Georgia, Indiana, Mississippi, North Dakota, Ohio, Oklahoma, South Carolina and Wisconsin in recent years. The legislation, which applies to future and, with the exception of Georgia, South Carolina and South Dakota, pending claims, caps asbestos-related liabilities at the fair market value of the predecessor’s total gross assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total value of its predecessor’s assets adjusted for inflation. Crown Cork has integrated the legislation into its claims defense strategy. The Company cautions, however, that the legislation may be challenged and there can be no assurance regarding the ultimate effect of the legislation on Crown Cork.
In June 2003, the State of Texas enacted legislation that limits the asbestos-related liabilities in Texas courts of companies such as Crown Cork that allegedly incurred these liabilities because they are successors by corporate merger to companies that had been involved with asbestos. The Texas legislation, which applies to future claims and pending claims, caps asbestos-related liabilities at the total gross value of the predecessor’s assets adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the total adjusted value of its predecessor’s assets.
On October 22, 2010, the Texas Supreme Court, in a 6-2 decision, reversed a lower court decision, Barbara Robinson v. Crown Cork & Seal Company, Inc., No. 14-04-00658-CV, Fourteenth Court of Appeals, Texas, which had upheld the dismissal of an asbestos-related case against Crown Cork. The Texas Supreme Court held that the Texas legislation was unconstitutional under the Texas Constitution when applied to asbestos-related claims pending against Crown Cork when the legislation was enacted in June of 2003. In 2010, the Company recorded a pre-tax charge of $15 including estimated legal fees to increase its accrual for asbestos related costs for claims pending in Texas on June 11, 2003. The Company believes that the decision of the Texas Supreme Court is limited to retroactive application of the Texas legislation to asbestos-related cases that were pending against Crown Cork in Texas on June 11, 2003 and therefore continues to assign no value to claims filed after June 11, 2003.
In December 2001, the Commonwealth of Pennsylvania enacted legislation that limits the asbestos-related liabilities of Pennsylvania corporations that are successors by corporate merger to companies involved with asbestos. The legislation limits the successor’s liability for asbestos to the acquired company’s asset value adjusted for inflation. Crown Cork has paid significantly more for asbestos-related claims than the acquired company’s adjusted asset value. In November 2004, the legislation was amended to address a Pennsylvania Supreme Court decision (Ieropoli v. AC&S Corporation, et. al., No. 117 EM 2002) which held that the statute violated the Pennsylvania Constitution due to retroactive application. The Company cautions that the limitations of the statute, as amended, are subject to litigation and may not be upheld. Adverse rulings in cases challenging the constitutionality of the Pennsylvania statute could have a material impact on the Company.
During the six months ended June 30, 2011, the Company paid $10 to settle outstanding claims and had claims activity as follows:
Beginning claims
New claims
Settlements or dismissals
Ending claims
As of December 31, 2010, the Company’s outstanding claims by year of exposure and state filed were:
Claimants alleging first exposure after 1964
Claimants alleging first exposure before or during 1964 filed in:
Texas
Pennsylvania
Other states that have enacted asbestos legislation
Other states
Total claims outstanding
15
The outstanding claims in each period exclude 3,100 pending claims involving plaintiffs who allege that they are, or were, maritime workers subject to exposure to asbestos, but whose claims the Company believes will not have a material effect on the Company’s consolidated results of operations, financial position or cash flow. The outstanding claims also exclude approximately 19,000 inactive claims. Due to the passage of time, the Company considers it unlikely that the plaintiffs in these cases will pursue further action against the Company. The exclusion of these inactive claims had no effect on the calculation of the Company’s accrual as the claims were filed in states, as described above, where the Company’s liability is limited by statute.
Historically (1977-2010), Crown Cork estimates that approximately one-quarter of all asbestos-related claims made against it have been asserted by claimants who claim first exposure to asbestos after 1964.
With respect to claimants alleging first exposure to asbestos before or during 1964, the Company does not include in its accrual any amounts for settlements in states where the Company’s liability is limited by statute except for certain pending claims in Texas as described earlier.
With respect to post-1964 claims, regardless of the existence of asbestos legislation, the Company does not include in its accrual any amounts for settlement of these claims because of increased difficulty of establishing identification of relevant insulation products as the cause of injury. Given our settlement experience with post-1964 claims, we do not believe that an adverse ruling in the Texas or Pennsylvania asbestos litigation cases, or in any other state that has enacted asbestos legislation, would have a material impact on the Company with respect to such claims.
As of December 31, 2010, the percentage of outstanding claims related to claimants alleging serious diseases (primarily mesothelioma and other malignancies) were as follows:
Total claims
Pre-1964 claims in states without asbestos legislation
Crown Cork has entered into arrangements with plaintiffs’ counsel in certain jurisdictions with respect to claims which are not yet filed, or asserted, against us. However, Crown Cork expects claims under these arrangements to be filed or asserted against Crown Cork in the future. The projected value of these claims is included in the Company’s estimated liability as of June 30, 2011.
As of June 30, 2011, the Company’s accrual for pending and future asbestos-related claims and related legal costs was $239, including $189 for unasserted claims. The Company’s accrual includes estimated probable costs for claims through the year 2020. The Company’s accrual excludes potential costs for claims beyond 2020 because the Company believes that the key assumptions underlying its accrual are subject to greater uncertainty as the projection period lengthens.
It is reasonably possible that the actual loss could be in excess of the Company’s accrual. However, the Company is unable to estimate the reasonably possible loss in excess of its accrual due to uncertainty in the following assumptions that underlie the Company’s accrual and the possibility of losses in excess of such accrual: the amount of damages sought by the claimant (which was not specified for approximately 96% of the claims outstanding at the end of 2010), the Company and claimant’s willingness to negotiate a settlement, the terms of settlements of other defendants with asbestos-related liabilities, the bankruptcy filings of other defendants (which may result in additional claims and higher settlements for non-bankrupt defendants), the nature of pending and future claims (including the seriousness of alleged disease, whether claimants allege first exposure to asbestos before or during 1964 and the claimant’s ability to demonstrate the alleged link to Crown Cork), the volatility of the litigation environment, the defense strategies available to the Company, the level of future claims, the rate of receipt of claims, the jurisdiction in which claims are filed, and the effect of state asbestos legislation (including the validity and applicability of the Pennsylvania legislation to non-Pennsylvania jurisdictions, where the substantial majority of the Company’s asbestos cases are filed).
16
The Company, along with others in most cases, has been identified by the EPA or a comparable state environmental agency as a Potentially Responsible Party (“PRP”) at a number of sites and has recorded aggregate accruals of $6 for its share of estimated future remediation costs at these sites. The Company has been identified as having either directly or indirectly disposed of commercial or industrial waste at the sites subject to the accrual, and where appropriate and supported by available information, generally has agreed to be responsible for a percentage of future remediation costs based on an estimated volume of materials disposed in proportion to the total materials disposed at each site. The Company has not had monetary sanctions imposed nor has the Company been notified of any potential monetary sanctions at any of the sites.
The Company has also recorded aggregate accruals of $9 for remediation activities at various worldwide locations that are owned by the Company and for which the Company is not a member of a PRP group. Although the Company believes its accruals are adequate to cover its portion of future remediation costs, there can be no assurance that the ultimate payments will not exceed the amount of the Company’s accruals and will not have a material effect on its results of operations, financial position and cash flow. Any possible loss or range of potential loss that may be incurred in excess of the recorded accruals cannot be estimated.
The Company is subject to antitrust investigations in Europe. In August 2010, the Spanish National Antitrust Commission issued a Proposal for Resolution (Propuesta de Resolución) alleging that Crown European Holdings SA, a wholly-owned subsidiary of the Company, and one of its subsidiaries violated Spanish and European competition law by coordinating certain commercial terms and exchanging information with competitors in Spain. The Proposal for Resolution does not constitute a decision on the merits and was replied to by the Company. In May 2011, the Antitrust Commission concluded that there was no violation and closed the investigation. There can be no assurance that the Antitrust Commission will not re-open its investigation against the Company’s subsidiary in the event new facts or other circumstances justify a new investigation.
In July 2010, a subsidiary of the Company became aware of an investigation by the Netherlands Competition Authority in relation to competition law matters. In April 2011, the Netherlands Competition Authority terminated its investigation having found no evidence to support any charges against the Company’s subsidiary. There can be no assurance that the Netherlands Competition Authority will not re-open its investigation against the Company’s subsidiary in the event new facts or other circumstances justify a new investigation.
The Company’s Italian subsidiaries have received or expect to receive assessments for value added taxes and related income taxes from the Italian tax authorities resulting from certain third party suppliers’ failures to remit required value added tax payments due by those suppliers under Italian law with respect to purchases for resale to the Company. The assessments cover tax periods 2004 and 2005 and additional assessments are expected to cover periods 2006 through 2009. The expected total assessments resulting from these third party suppliers failing to remit the tax payments are approximately €40 ($58 at June 30, 2011) plus any applicable interest and penalties. The Company intends to dispute these assessments and believes that, if necessary, it should be able to successfully demonstrate in the Italian courts that it has no additional liability for the asserted taxes. While the Company intends to dispute the assessments, there can be no assurance that it will be successful in such disputes or regarding the final amount of additional taxes, if any, payable to the Italian tax authorities.
The Company and its subsidiaries are also subject to various other lawsuits and claims with respect to labor, environmental, securities, vendor and other matters arising out of the Company’s normal course of business. While the impact on future financial results is not subject to reasonable estimation because considerable uncertainty exists, management believes that the ultimate liabilities resulting from such lawsuits and claims will not materially affect the Company’s consolidated results of operations, financial position or cash flow.
17
The Company has various commitments to purchase materials, supplies and utilities as part of the ordinary conduct of business. The Company’s basic raw materials for its products are steel and aluminum, both of which are purchased from multiple sources. The Company is subject to fluctuations in the cost of these raw materials and has periodically adjusted its selling prices to 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 also has commitments for standby letters of credit and for purchases of capital assets.
In January 2010, the Company received a net one time payment of $20 as part of an overall resolution of a long-time dispute unrelated to the Company’s ongoing operations and recorded as a gain in the first quarter of 2010 within selling and administrative expense.
At June 30, 2011, the Company was party to certain indemnification agreements covering environmental remediation, lease payments and other potential costs associated with properties sold or businesses divested. For agreements with defined liability limits the maximum potential amount of future liability was $14. The Company accrues for costs related to these items when it is probable that a liability has been incurred and the amount can be reasonably estimated. At June 30, 2011, the Company also had guarantees of $16 related to the residual values of leased assets.
The following table summarizes the computations of basic and diluted earnings per share attributable to Crown Holdings for the periods ended June 30, 2011 and 2010, respectively:
Weighted average shares outstanding:
Add: dilutive stock options and restricted stock
Basic earnings per share
Diluted earnings per share
For the three and six months ended June 30, 2010, 3.2 million and 3.3 million of contingently issuable common shares were excluded from the computation of diluted earnings per share because the effect would have been antidilutive.
The components of net periodic pension and other postretirement benefits costs for the three and six months ended June 30 were as follows:
Pension Benefits – U.S. Plans
Service cost
Interest cost
Expected return on plan assets
Recognized prior service cost
Recognized net loss
Net periodic cost
18
Pension Benefits – Non-U.S. Plans
Recognized prior service (credit)/cost
Other Postretirement Benefits
Recognized prior service credit
In December 2010, the Company entered into an agreement with Citigroup to purchase shares of its common stock under an accelerated share repurchase program. Pursuant to the agreement, the Company initially purchased 4,354,838 shares for $150. The purchase price of these shares was subject to an adjustment based on the Company’s volume-weighted average stock price during the term of the transaction. The purchase price adjustment was settled in April, 2011 and resulted in an additional cash payment of $6.
In May 2011, the Company entered into an agreement with Goldman, Sachs & Co. to purchase shares of its common stock under an accelerated share repurchase program. Pursuant to the agreement, the Company purchased 5,018,701 shares for $200.
The provision for income taxes differs from the amount of income tax determined by applying the U.S. statutory federal income tax rate to pre-tax income as a result of the following items:
U.S. statutory rate at 35%
Tax on foreign income
Valuation allowance
Nontaxable settlement of legal dispute
Tax law changes
Other items, net
Income tax provision
The other items caption for the six months ended June 30, 2011 includes $20 of increase due to tax charges in connection with the relocation of the Company’s European headquarters and management to Switzerland.
19
The Company evaluates performance and allocates resources based on segment income. Segment income, which is not a defined term under GAAP, is defined by the Company as gross profit less selling and administrative expenses. Segment income should not be considered in isolation or as a substitute for net income data prepared in accordance with GAAP and may not be comparable to calculations of similarly titled measures by other companies. Transactions between operating segments are not material.
The tables below present information about operating segments for the three and six months ended June 30, 2011 and 2010:
Americas Beverage
European Beverage
European Specialty Packaging
Total reportable segments
Non-reportable segments
The primary sources of revenue included in non-reportable segments are the Company’s aerosol can businesses in North America, Europe and Thailand, the Company’s beverage can businesses in Cambodia, China, Malaysia, Singapore, Thailand and Vietnam and the Company’s food can and closures business in Thailand.
Intersegment sales primarily include sales of components used to manufacture cans such as ends and printed and coated metal as well as parts and equipment used in the manufacturing process.
20
A reconciliation of segment income of reportable segments to income before income taxes and equity earnings for the three and six months ended June 30, 2011 and 2010 follows:
Segment income of reportable segments
Segment income of non-reportable segments
Corporate and unallocated items
For the three and six months ended June 30, 2011, intercompany profit of $1 and $2 related to non-reportable segments was eliminated within the segment income of non-reportable segments line. For the three and six months ended June 30, 2010, the intercompany profit elimination was less than $1.
“Corporate and unallocated items” includes corporate and division administrative costs, technology costs, and unallocated items such as the U.S. and U.K. pension plan costs.
21
Crown European Holdings SA (Issuer), a 100% owned subsidiary of the Company, has €83 ($121 at June 30, 2011) principal amount of 6.25% first priority notes due 2011 outstanding and €500 ($725 at June 30, 2011) principal amount of 7.125% senior notes due 2018 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent) and certain subsidiaries. The guarantors are 100% owned by the Company and the guarantees are made on a joint and several basis. The guarantor column includes financial information for all subsidiaries in the United States (except for an insurance subsidiary and a receivable securitization subsidiary), substantially all subsidiaries in Belgium, Canada, France, Germany, Mexico, Switzerland and the United Kingdom, and a subsidiary in the Netherlands. The following condensed combining financial statements:
statements of operations for the three and six months ended June 30, 2011 and 2010,
balance sheets as of June 30, 2011 and December 31, 2010, and
statements of cash flows for the six months ended June 30, 2011 and 2010
are presented on the following pages to comply with the Company’s requirements under Rule 3-10 of Regulation S-X.
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2011
(in millions)
Net interest expense
Technology royalty
Income/(loss) before income taxes
Equity earnings in affiliates
22
For the three months ended June 30, 2010
23
For the six months ended June 30, 2011
Equity earnings/(loss) in affiliates
24
For the six months ended June 30, 2010
Income before income taxes
25
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2011
Intercompany receivables
Intercompany debt receivables
Investments
Intercompany payables
Long-term intercompany debt
Commitments and contingent liabilities
Crown Holdings shareholders’ equity/(deficit)
Total equity/(deficit)
26
As of December 31, 2010
27
CONDENSED COMBINING STATEMENT OF CASH FLOWS
Net used for operating activities
Intercompany investing activities
Net cash provided by/(used for) investing activities
Net change in long-term intercompany balances
Dividends paid
Net cash provided by/(used for) financing activities
28
Net cash provided by/(used for) operating activities
29
Crown Cork & Seal Company, Inc. (Issuer), a 100% owned subsidiary, has $350 principal amount of 7.375% senior notes due 2026 and $64 principal amount of 7.5% senior notes due 2096 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent). No other subsidiary guarantees the debt. The following condensed combining financial statements:
30
Provision for/(benefit from) income taxes
31
32
33
34
35
Investment dividends
Purchase of noncontrollling interests
Dividend paid to noncontrolling interests
36
37
Crown Americas, LLC, Crown Americas Capital Corp. II and Crown Americas Capital Corp. III (collectively, the Issuers), 100% owned subsidiaries of the Company, have $400 principal amount of 7.625% senior notes due 2017 and $700 principal amount of 6.25% senior notes due 2021 outstanding that are fully and unconditionally guaranteed by Crown Holdings, Inc. (Parent) and substantially all subsidiaries in the United States. The guarantors are 100% owned by the Company and the guarantees are made on a joint and several basis. The following condensed combining financial statements:
38
39
40
41
42
43
Net provided by/(used for) operating activities
44
45
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following discussion presents management’s analysis of the results of operations for the three and six months ended June 30, 2011 compared to the corresponding periods in 2010 and the changes in financial condition and liquidity from December 31, 2010. 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, 2010, along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
The Company’s focus is to increase shareholder value by maximizing cash flow while investing in promising growth projects in emerging markets and generating sufficient returns which can be used to pay down debt and/or returned to shareholders. The Company’s current growth projects include expansion in the emerging markets of Brazil, China, Eastern Europe and Southeast Asia. When the current lineup of expansion projects is completed, the Company will have built seven new beverage can plants and added 14 new production lines with approximately 11 billion units of incremental capacity to its year-end 2010 levels, a 22% increase in annual beverage can capacity. In the mature, developed markets of North America and Western Europe, the Company continues to focus on improving productivity and efficiency while reducing material and resource use and waste.
The key performance measure used by the Company is segment income. Segment income, a non-GAAP measure, is defined by the Company as gross profit less selling and administrative expenses. Improving segment income is primarily dependent on the Company’s ability to increase revenues and manage costs. The Company’s key strategies for increasing revenues include investing in geographic markets with growth potential and developing innovative packaging products using proprietary technology. The Company’s cost control efforts focus on improving operating efficiencies and managing material and labor costs, including pension and other benefit costs.
The Company’s revenues and costs are impacted by the cost of aluminum and steel, the primary raw materials used to manufacture the Company’s products, which have been subject to significant volatility in recent years. The Company attempts to pass-through these costs to its customers either through provisions that adjust the selling prices to certain customers based on changes in the market price of the applicable raw material, or through surcharges where no such provision exists. However, there can be no assurance that the Company will be able to fully recover from its customers the impact of any increased aluminum and steel costs. In addition, if the Company is unable to purchase steel or aluminum for a significant period of time, its operations would be disrupted.
Results of Operations
The foreign currency translation impacts referred to below were primarily due to changes in the euro and pound sterling in the Company’s European segments, the Canadian dollar in the Company’s Americas segments and the Chinese renminbi and Thai baht in the Company’s Asian businesses included in non-reportable segments.
46
Item 2. Management’s Discussion and Analysis (Continued)
Net Sales and Segment Income
Net sales increased from $2,010 for the three months ended June 30, 2010 to $2,281 for the same period in 2011 primarily due to $55 from increased sales unit volumes primarily due to organic growth and increased customer demand, $97 from the pass-through of higher raw material costs and $119 from the impact of foreign currency translation. Net sales increased from $3,787 for the six months ended June 30, 2010 to $4,163 for the same period in 2011 primarily due to $91 from increased sales unit volumes primarily due to organic growth and increased customer demand, $162 from the pass-through of higher raw material costs and $132 from the impact of foreign currency translation.
Approximately 73% of net sales were generated outside the U.S. in the first six months of 2011 compared to 71% for the same period in 2010. Sales of beverage cans and ends accounted for 52.9% and sales of food cans and ends accounted for 29.2% of consolidated net sales in the first six months of 2011 compared to 52.6% and 29.6% for the same period in 2010.
Discussion and analysis of net sales and segment income by segment follows.
The Americas Beverage segment manufactures aluminum beverage cans and ends and steel crowns, commonly referred to as “bottle caps”, and supplies a variety of customers throughout the United States, Brazil, Canada, Colombia and Mexico. The Company completed construction of a new plant in Ponta Grossa, Brazil with the first line commencing commercial operations in the first quarter of 2011 and a second line commencing commercial operations in the second quarter of 2011. In addition, the Company commenced commercial operations at a second line in its plant in Estancia, Brazil in the second quarter of 2011. At full capacity and efficiency, these additions are expected to add capacity of 2.7 billion cans. The Company has also announced plans to construct a new beverage can plant in Belem, Brazil which is expected to be completed in 2012.
Three months ended June 30, 2011
Net sales in the Americas Beverage segment increased from $549 for the three months ended June 30, 2010 to $591 for the same period in 2011. The increase is primarily due to $29 from the pass-through of higher raw material costs, primarily aluminum, $5 from increased sales unit volumes and $8 from the impact of foreign currency translation. The increase in sales unit volumes is primarily due to the Company’s plant in Ponta Grossa, Brazil which began commercial operations in the first quarter of 2011.
Segment income in the Americas Beverage segment increased from $73 for the three months ended June 30, 2010 to $77 for the same period in 2011. The increase is primarily due to lower operating costs throughout the segment including $2 from lower post-retirement benefits resulting from plan amendments in 2010.
Six months ended June 30, 2011
Net sales in the Americas Beverage segment increased from $1,029 for the six months ended June 30, 2010 to $1,103 for the same period in 2011. The increase is primarily due to $52 from the pass-through of higher raw material costs, primarily aluminum, $9 from increased sales unit volumes and $13 from the impact of foreign currency translation. The increase in sales unit volumes is primarily due to the Company’s plant in Ponta Grossa, Brazil which began commercial operations in 2011.
Segment income in the Americas Beverage segment increased from $130 for the six months ended June 30, 2010 to $140 for the same period in 2011. The increase is primarily due to $9 from lower operating costs throughout the segment including $4 from lower post-retirement benefits resulting from plan amendments in 2010.
The North America Food segment manufactures steel and aluminum food cans and ends and metal vacuum closures and supplies a variety of customers in the United States and Canada.
47
Net sales in the North America Food segment increased from $214 for the three months ended June 30, 2010 to $217 for the same period in 2011. The increase is primarily due to $8 from the pass-through of higher raw material costs, primarily tinplate, and $2 from the impact of foreign currency translation, partially offset by $7 from lower sales unit volumes primarily due to decreased customer demand in the United States.
Segment income in the North America Food segment increased from $33 for the three months ended June 30, 2010 to $38 for the same period in 2011 primarily due to lower operating costs including the benefits from prior plant closures in Canada.
Net sales in the North America Food segment decreased from $411 for the six months ended June 30, 2010 to $405 for the same period in 2011. The decrease is primarily due to $26 from lower sales unit volumes due to decreased customer demand in the United States partially offset by $16 from the pass-through of higher raw material costs, primarily tinplate, and $4 from the impact of foreign currency translation.
Segment income in the North America Food segment increased from $49 for the six months ended June 30, 2010 to $66 for the same period in 2011. The increase is primarily due to $13 from lower operating costs including the benefits from prior plant closures in Canada and improved manufacturing performance associated with higher production, $5 from inventory holding gains from the sale of inventory on hand at the end of 2010 and $2 from lower post-retirement benefits in the U.S. resulting from plan amendments in 2010. The improvements associated with higher production levels were largely due to increased production in the early part of 2011 due to lower planned inventory levels at the end of 2010.
The Company’s European Beverage segment manufactures steel and aluminum beverage cans and ends and supplies a variety of customers throughout North Africa, Eastern and Western Europe and the Middle East. In the second quarter of 2011, the Company commenced commercial operations of the second line at its plant in Kechnec, Slovakia. The second line is expected to add full annualized capacity of 750 million cans. In 2012, the Company expects to complete construction of a new plant in Osmaniye, Turkey which is expected to add full annualized capacity of 700 million cans.
Net sales in the European Beverage segment increased from $439 for the three months ended June 30, 2010 to $500 for the same period in 2011. The increase is primarily due to $23 from increased sales unit volumes, $10 from the pass-through of higher raw material costs and $28 from the impact of foreign currency translation.
Segment income in the European Beverage segment decreased from $75 for the three months ended June 30, 2010 to $70 for the same period in 2011. The decrease is primarily due to $7 of increased costs which were not fully offset by increases in selling prices including the effects from two major conversions at one of the Company’s U.K. plants, partially offset by $2 from the impact of foreign currency translation.
The increased sales unit volumes are primarily attributable to increased customer demand in the Company’s beverage can operations in Saudi Arabia, Slovakia and the United Kingdom. In response to strong customer demand in the central and eastern European region, the Company constructed a plant in Kechnec, Slovakia which commenced commercial operations in the first quarter of 2010. The Company increased capacity at the plant by adding a second line which began commercial operations in the second quarter of 2011.
Net sales in the European Beverage segment increased from $753 for the six months ended June 30, 2010 to $840 for the same period in 2011. The increase is primarily due to $43 from increased sales unit volumes, $18 from the pass-through of higher raw material costs and $26 from the impact of foreign currency translation.
48
Segment income in the European Beverage segment decreased from $127 for the six months ended June 30, 2010 to $115 for the same period in 2011. The decrease is primarily due to $18 of increased costs which were not fully offset by increases in selling prices including the effects from two major conversions at one of the Company’s U.K. plants, partially offset by $4 from increased sales unit volumes and $2 from the impact of foreign currency translation.
The increased sales unit volumes are primarily attributable to increased customer demand in the Company’s beverage can operations in Saudi Arabia, Slovakia and Spain.
The European Food segment manufactures steel and aluminum food cans and ends, and metal vacuum closures and supplies a variety of customers throughout Northern, Southern and Western Africa and Eastern and Western Europe.
Net sales in the European Food segment increased from $421 for the three months ended June 30, 2010 to $509 for the same period in 2011. The increase is primarily due to $31 from the pass-through of higher raw material costs, primarily tinplate, $5 from product mix and $52 from the impact of foreign currency translation.
Segment income in the European Food segment increased from $59 for the three months ended June 30, 2010 to $63 for the same period in 2011. The increase is primarily due to $6 from the impact of foreign currency translation partially offset by $2 from lower sales unit volumes. The lower sales unit volumes were partly due to a fishermen strike in Morocco, which has ended, and political turmoil in the Ivory Coast.
Net sales in the European Food segment increased from $825 for the six months ended June 30, 2010 to $931 for the same period in 2011. The increase is primarily due to $45 from the pass-through of higher raw material costs, primarily tinplate, $10 from increased sales unit volumes and product mix and $51 from the impact of foreign currency translation.
Segment income in the European Food segment increased from $99 for the six months ended June 30, 2010 to $115 for the same period in 2011. The increase is primarily due to $7 from lower operating costs and $6 from the impact of foreign currency translation.
The European Specialty Packaging segment manufactures a wide variety of specialty containers, with numerous lid and closure variations and supplies a variety of customers throughout Europe.
Net sales in the European Specialty Packaging segment increased from $97 for the three months ended June 30, 2010 to $119 for the same period in 2011. The increase is primarily due to $9 from the pass-through of higher raw material costs and $13 from the impact of foreign currency translation.
Segment income in the European Specialty Packaging segment increased from $8 for the three months ended June 30, 2010 to $12 for the same period in 2011. The increase is primarily due to equal contributions from increased sales unit volumes, favorable product mix, cost reductions and the impact of foreign currency translation.
Net sales in the European Specialty Packaging segment increased from $188 for the six months ended June 30, 2010 to $219 for the same period in 2011. The increase is primarily due to $12 from the pass-through of higher raw material costs, $6 from increased sales unit volumes due to increased customer demand and $13 from the impact of foreign currency translation.
49
Segment income in the European Specialty Packaging segment increased from $11 for the six months ended June 30, 2010 to $19 for the same period in 2011. The increase is primarily due to $5 from increased sales unit volumes and favorable product mix and $2 from lower operating costs.
Non-reportable Segments
The Company’s non-reportable segments include its aerosol can businesses in North America, Europe and Thailand, its beverage can businesses in Cambodia, China, Malaysia, Singapore, Thailand and Vietnam, its food can and closures business in Thailand and its tooling and equipment operations.
In the second quarter of 2011, the Company commenced commercial operations at its new beverage can plant in Hangzhou, China. In the fourth quarter of 2011, the Company expects to complete and begin production on the second beverage can line in Phnom Penh, Cambodia and to commence commercial operations at its new beverage can plant in Putian, China. In 2012, the Company expects to complete new plants in Ziyang and Heshan, China and to expand capacity in both Ho Chi Minh City and Hanoi, Vietnam.
Net sales in non-reportable segments increased from $290 for the three months ended June 30, 2010 to $345 for the same period in 2011 primarily due to $20 from increased beverage can sales and the pass-through of higher raw material costs in Cambodia, China and Vietnam, $10 from increased beverage equipment sales to can manufacturers, $9 from increased sales in the Company’s aerosols businesses and $16 from the impact of foreign currency translation. Growth in sales unit volumes in Cambodia, China and Vietnam is primarily the result of increased regional demand driven by macroeconomic factors such as GDP growth and increased consumer spending.
Segment income in non-reportable segments increased from $47 for the three months ended June 30, 2010 to $55 for the same period in 2011 primarily due to $3 from increased beverage equipment sales, $2 from increased sales unit volumes and cost reductions in the Company’s aerosol businesses, $2 from increased sales unit volumes in Cambodia, China and Vietnam and $2 from the impact of foreign currency translation.
Net sales in non-reportable segments increased from $581 for the six months ended June 30, 2010 to $665 for the same period in 2011 primarily due to $46 from increased beverage can sales and the pass-through of higher raw material costs in Cambodia, China and Vietnam, $17 from increased beverage equipment sales to can manufacturers and $25 from the impact of foreign currency translation partially offset by $9 from the April 2010 sale of the Company’s plastic closures business in Brazil. Growth in sales unit volumes in Cambodia, China and Vietnam is primarily the result of increased regional demand driven by macroeconomic factors such as GDP growth and increased consumer spending.
Segment income in non-reportable segments increased from $92 for the six months ended June 30, 2010 to $112 for the same period in 2011 primarily due to $5 from increased sales unit volumes in Cambodia, China and Vietnam, $6 from the Company’s aerosol businesses which included $2 from inventory holding gains from the sale of inventory on hand at the end of 2010 and increased sales unit volumes which contributed to lower operating costs, $5 from increased beverage equipment sales and $4 from the impact of foreign currency translation.
Corporate and Unallocated Expense
Corporate and unallocated expenses decreased from $55 for the three months ended June 30, 2010 to $44 for the same period in 2011 primarily due to $6 from lower stock compensation costs, $3 from lower pension expense and $2 from other costs.
Corporate and unallocated expenses increased from $97 for the six months ended June 30, 2010 to $106 for the same period in 2011. The six months ended June 30, 2010 included a $20 benefit from the settlement of a legal dispute unrelated to the Company’s operations. The six months ended June 30, 2011 included $8 lower pension expense and $3 lower stock compensation costs compared to the same period in 2010.
50
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, increased from $1,631 for the three months ended June 30, 2010 to $1,865 for the same period in 2011 primarily due to increased aluminum and tinplate costs and $101 from the impact of foreign currency translation.
Cost of products sold, excluding depreciation and amortization, increased from $3,114 for the six months ended June 30, 2010 to $3,415 for the same period in 2011 primarily due to increased aluminum and tinplate costs and $111 from the impact of foreign currency translation.
Depreciation and Amortization
Depreciation and amortization increased from $44 for the three months ended June 30, 2010 to $45 for the same period in 2011 and decreased from $88 for the six months ended June 30, 2010 to $85 for the same period in 2011. The decrease is primarily due to lower capital expenditures in recent years. As the Company’s current capacity expansion projects are completed and depreciation commences, depreciation is expected to increase in future periods.
Selling and Administrative Expense
Selling and administrative expense increased from $95 for the three months ended June 30, 2010 to $100 for the same period in 2011. The increase is primarily due to increased research and development and other costs and $6 from the impact of foreign currency translation partially offset by $4 of lower salary and benefit costs.
Selling and administrative expense increased from $174 for the six months ended June 30, 2010 to $202 for the same period in 2011 partly due to $7 from the impact of foreign currency translation. In addition, selling and administrative expense in 2010 included a benefit of $20 from the settlement of a legal dispute unrelated to the Company’s ongoing operations.
Provision for Restructuring
For the six months ended June 30, 2011, the Company recorded a pre-tax charge of $25 for restructuring costs; including $19 related to the relocation of its European Division headquarters and management to Switzerland, $4 related to severance costs in its European Specialty Packaging segment and $2 related to prior restructurings in its North America Food segment. The charge of $19 in the Company’s European Division represents the estimated employee compensation costs resulting from an intercompany payment related to the relocation and is expected to be paid over the next one to three years. The Company expects that the restructuring in its European Specialty Packaging segment and the 2009 and 2010 restructurings in its North America Food segment, when fully implemented, may result in annual pre-tax savings of $3 and $25.
For the six months ended June 30, 2010, the Company recorded a pre-tax charge of $24 for restructuring costs; including $10 for asset writedowns, $5 for pension and postretirement plan curtailment charges and $5 for severance costs related to the closure of a Canadian plant in its North America Food segment and $4 for strip and clean costs from prior restructurings.
Loss from Early Extinguishment of Debt
For the three and six month periods ended June 30, 2011, the Company recorded pre-tax charges of $2 and $32, respectively, in connection with the repayment of its $600 outstanding 7.75% senior secured notes due 2015 and its €83 ($121) 6.25% first priority senior secured notes due 2011.
51
Interest Expense
Interest expense increased from $45 for the three months ended June 30, 2010 to $60 for the same period in 2011 due to $9 from higher borrowings, $4 from higher interest rates and $2 from the impact of foreign currency translation. Interest expense increased from $92 for the six months ended June 30, 2010 to $116 for the same period in 2011 due to $14 from higher borrowings, $8 from higher interest rates and $2 from the impact of foreign currency translation.
The higher borrowings were primarily to fund the Company’s capacity expansion projects, to repurchase shares of the Company’s stock and to purchase additional ownership interests from noncontrolling interests.
Provision for Income Taxes
The Company’s effective income tax rate decreased from 28% for the three months ended June 30, 2010 to 26% for the same period in 2011.
The Company’s effective income tax rate increased from 31% for the six months ended June 30, 2010 to 32% for the same period in 2011. The increase is partly due to a tax charge of $20 from the relocation of the Company’s European Division headquarters and management to Switzerland, partially offset by lower taxes on foreign income primarily due to an overall lower tax rate in Europe as a result of the relocation.
Net Income Attributable to Noncontrolling Interests
Net income attributable to noncontrolling interests decreased from $32 for the three months ended June 30, 2010 to $27 for the same period in 2011 and from $58 for the six months ended June 30, 2010 to $53 for the same period in 2011. The decreases were primarily due to the acquisition of additional ownership interests in certain operations in China and Vietnam from the noncontrolling interests.
Liquidity and Capital Resources
Operating Activities
Net cash used for operating activities increased from $194 for the six months ended June 30, 2010 to $247 for the same period in 2011 and included an increase of $243 for inventories partially offset by a decrease of $119 for receivables and other net changes.
Inventories increased from $1,060 at December 31, 2010 to $1,537 at June 30, 2011, including $46 from the impact of foreign currency translation, and impacted operating cash flows for the six months ended June 30, 2011 by $431 compared to $188 for the same period in 2010. The increase in inventories is primarily due to $90 from the pass through of higher raw material costs, $70 from capacity expansion and the remaining increase is primarily from seasonal build and anticipated customer demand. The food packaging business is seasonal with the first quarter tending to be the slowest period as the autumn packaging period has ended and new crops are not yet planted. The industry generally enters its busiest period in the third quarter when the majority of fruits and vegetables are harvested. Due to this seasonality, inventory levels increase in the first half of the year to meet peak demand in the second and third quarters.
Receivables increased from $936 at December 31, 2010 to $1,323 at June 30, 2011, including $40 from the impact of foreign currency translation, and impacted operating cash flows for the six months ended June 30, 2011 by $347 compared to $251 for the same period in 2010 after adjusting 2010 by $215 from the impact of adopting new accounting guidance related to securitizations. The increase in receivables is primarily due to the pass-through of higher raw material costs and increased sales unit volumes. Sales in the month of June 2011 were higher than sales in the month of December 2010. Sales generally increase each month of the year until peaking in the third quarter. As a result, receivables generally increase through the third quarter of each year. Days sales outstanding for trade receivables increased from 42 for the six months ended June 30, 2010 to 45 for the same period in 2011 primarily due to mix.
52
Investing Activities
Net cash used for investing activities increased from $85 for the six months ended June 30, 2010 to $307 for the same period in 2011 primarily due to increases in capital expenditures and restricted cash.
The increase in capital expenditures is due to the Company’s current beverage can capacity expansion projects in Brazil, China, Eastern Europe and Southeast Asia. The Company expects capital expenditures of approximately $425 in 2011 compared to $320 in 2010.
The increase in restricted cash is due to an irrevocable deposit into an irrevocable trust in June 2011 that was used in July 2011 to redeem all €83 ($121) of the Company’s 6.25% first priority senior secured notes due September 2011 and to pay accrued interest and related premiums.
Financing activities
Borrowings exceeded debt repayments by $300 for the six months ended June 30, 2010 compared to $742 for the same period in 2011. The increase is primarily due to $207 of incremental share repurchases, $125 of borrowings that were used in July 2011 to redeem the September 2011 notes and increased borrowings to fund the Company’s capacity expansion projects.
The share repurchases were made pursuant to the program authorized by the Company’s Board of Directors to repurchase up to $600 of the Company’s common stock through the end of 2012. As of June 30, 2011, $394 of the Company’s outstanding common stock may still be purchased under this program.
Liquidity
As of June 30, 2011, the Company had $728 of borrowing capacity available under its revolving credit facility, equal to the total facility of $1,200 less $410 of borrowings and $62 of outstanding standby letters of credit.
As of June 30, 2011, $383 of the Company’s $421 cash and cash equivalents was located outside the U.S. The Company is not currently aware of any legal restrictions under foreign law that materially impact its access to cash held outside the U.S.
The Company funds its cash needs in the U.S. through a combination of cash flows generated in the U.S. and dividends from certain foreign subsidiaries. The Company records current and/or deferred U.S. taxes for the earnings of these foreign subsidiaries. For certain other foreign subsidiaries, the Company considers earnings indefinitely reinvested and has not recorded any U.S. taxes. Of the $383 cash and cash equivalents located outside the U.S., $278 was held by subsidiaries for which earnings are considered indefinitely reinvested. While based on current operating plans the Company does not foresee a need to repatriate these funds, if such earnings were repatriated the Company would be required to record any incremental U.S. taxes on the repatriated funds.
The Company’s debt agreements contain covenants that provide limits on the ability of the Company and its subsidiaries to, among other things, incur additional debt, pay dividends or repurchase capital stock, make certain other restricted payments, create liens and engage in sale and leaseback transactions. These restrictions are subject to a number of exceptions, however, allowing the Company to incur additional debt or make otherwise restricted payments. The amount of restricted payments permitted to be made, including dividends and repurchases of the Company’s common stock, is generally limited to the cumulative excess of $200 plus 50% of adjusted net income plus proceeds from the exercise of employee stock options over the aggregate of restricted payments made since July 2004. Adjustments to net income may include, but are not limited to, items such as asset impairments, gains and losses from asset sales and early extinguishments of debt. The Company’s revolving credit facility and term loans also contain various financial covenants.
53
Capital Resources
As of June 30, 2011, the Company has approximately $107 of capital commitments primarily related to its expansion projects in Brazil, Cambodia, China, Turkey and Vietnam. The Company expects to fund these commitments primarily through cash flows generated from operations and to fund any excess needs over available cash through external borrowings.
Contractual Obligations
Purchase obligations related to raw materials and utilities increased $147 for 2012, $386 for 2013, $504 for 2014 and $117 for 2015, compared to amounts provided within Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
Commitments and Contingent Liabilities
Information regarding the Company’s commitments and contingent liabilities appears in Part I within Item 1 of this report under Note I, entitled “Commitments and Contingent Liabilities,” to the consolidated financial statements, which information is incorporated herein by reference.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require that management make numerous estimates and assumptions. Actual results could differ from these estimates and assumptions, impacting the reported results of operations and financial condition of the Company. Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note A to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 describe the significant accounting estimates and policies used in the preparation of the consolidated financial statements. There have been no significant changes in the Company’s critical accounting policies during the first six months of 2011.
Recently Issued Accounting Guidance
In June 2011, the FASB issued changes to the presentation of comprehensive income. These changes give companies the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The FASB eliminated the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The FASB did not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. Additionally, no changes were made to the calculation and presentation of earnings per share. These changes become effective for the Company on January 1, 2012. The Company is currently evaluating these changes to determine which option will be chosen for the presentation of comprehensive income.
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 discussions of asbestos in Note H and commitments and contingencies in Note I 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, 2010, which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward-looking statements” within the meaning of the federal securities laws. In addition, the Company and its representatives may, from time to time, make oral or written statements which are also “forward-looking statements.”
54
These forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with the preparation of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and certain other sections contained in the Company’s quarterly, annual or other reports filed with the Securities and Exchange Commission (“SEC”), the Company does not intend to review or revise any particular forward-looking statement in light of future events.
A discussion of important factors that could cause the actual results of operations or financial condition of the Company to differ from expectations has been set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 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.
In the normal course of business the Company is subject to risk from adverse fluctuations in foreign exchange and interest rates and commodity prices. The Company manages these risks through a program that includes the use of derivative financial instruments, primarily swaps and forwards. Counterparties to these contracts are major financial institutions. The Company is exposed to credit loss in the event of nonperformance by the counterparties. These instruments are not used for trading or speculative purposes. The extent to which the Company uses such instruments is dependent upon its access to these contracts in the financial markets and its success in using other methods, such as netting exposures in the same currencies to mitigate foreign exchange risk and using sales arrangements that permit the pass-through of commodity prices and foreign exchange rate risks to customers. The Company’s objective in managing its exposure to market risk is to limit the impact on earnings and cash flow. For further discussion of the Company’s use of derivative instruments and their fair values at June 30, 2011, see Note E to the consolidated financial statements included in this Quarterly Report on Form 10-Q.
As of June 30, 2011, the Company had approximately $1,330 principal floating interest rate debt. A change of 0.25% in these floating interest rates would change annual interest expense by approximately $3 before tax.
As of the end of the period covered by this Quarterly Report on Form 10-Q, management, including the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures. Based upon that evaluation and as of the end of the quarter for which this report is made, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective. Disclosure controls and procedures ensure that information to be disclosed in reports that the Company files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and terms of the Securities and Exchange Commission, and ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
There has been no change in internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
55
PART II – OTHER INFORMATION
For information regarding the Company’s potential asbestos-related liabilities and other litigation, see Note H entitled “Asbestos-Related Liabilities” and Note I entitled “Commitments and Contingent Liabilities,” respectively, to the consolidated financial statements within Item 1 of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.
In addition to the other information set forth in this report, carefully consider the factors discussed in Item 1A to Part I in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect the Company’s business, financial condition or future results. The risks described in the Company’s Quarterly Report on Form 10-Q are not the only risks facing the Company. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
The Company made no purchases of its equity securities during the first three months of 2011.
The following table provides information about the Company’s purchase of equity securities during the quarter ended June 30, 2011.
Total Number of
Shares
Purchased
Total Number of SharesPurchased as Part ofPublicly Announced
Programs
Approximate Dollar Value ofShares that May Yet BePurchased under the Programs
As of the end of the period
(millions of dollars)
May
In December 2010, the Company entered into an agreement with Citigroup to purchase shares of its common stock under an accelerated share repurchase program. Pursuant to the agreement, the Company initially purchased 4,354,838 shares for $150 million. The purchase price of these shares was subject to an adjustment based on the Company’s volume-weighted average stock price during the term of the transaction. The purchase price adjustment was settled in April, 2011 and resulted in an additional cash payment of $6 million.
In May 2011, the Company entered into an agreement with Goldman, Sachs & Co. to purchase shares of its common stock under an accelerated share repurchase program. Pursuant to the agreement, the Company purchased 5,018,701 shares for $200 million.
On December 9, 2010, the Company’s Board of Directors authorized the repurchase of up to $600 million of the Company’s common stock through the end of 2012. Stock repurchases under this program may be made in the open market or through privately negotiated transactions, and at times and in such amounts as management deems appropriate. The timing and actual number of shares repurchased will depend on a variety of factors including price, corporate and regulatory requirements and other market conditions. This repurchase authorization replaces all previous authorizations. As of August 5, 2011, $394 million of the Company’s outstanding common stock may still be purchased under this program.
None.
56
57
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.
/s/ Kevin C. Clothier
Date: August 9, 2011
58