COMMISSION FILE NUMBER 0-50189
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___
Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes X No ___
There were 164,942,262 shares of Common Stock outstanding as of July 31, 2003.
Crown Holdings, Inc.
FORM 10-QFOR QUARTER ENDED JUNE 30, 2003
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
The accompanying notes are an integral part of these financial statements.
Certain prior year amounts have been reclassified to improve comparability. See Note A.
2
3
4
Certain prior year amounts have been reclassified to improve comparability.
5
6
7
8
9
10
11
12
13
14
15
CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2003(in millions)
16
For the three months ended June 30, 2002(in millions)
17
For the six months ended June 30, 2003(in millions)
18
For the six months ended June 30, 2002(in millions)
19
CONDENSED COMBINING BALANCE SHEET
As of June 30, 2003(in millions)
20
As of December 31, 2002(in millions)
21
CONDENSED COMBINING STATEMENT OF CASH FLOWS
22
23
24
25
26
27
28
29
30
31
PART I - FINANCIAL INFORMATION
Introduction
The following discussion presents management’s analysis of the results of operations for the three and six months ended June 30, 2003, compared to the corresponding periods in 2002 and the changes in financial condition and liquidity from December 31, 2002. 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, 2002, along with the consolidated financial statements and related notes included in and referred to within this report.
Results of Operations
Net Sales
Net sales in the second quarter of $1,726 were $63 or 3.5% below the prior year period due to divested operations, which accounted for $206 of net sales in the second quarter of 2002, partially offset by net favorable foreign currency translation of $138 due to the continued weakness of the U.S. dollar. Net sales in the first six months of 2003 of $3,186 were $170 or 5.1% below the prior year period sales of $3,356 primarily due to divested operations, which accounted for $400 of net sales during the six months ended June 30, 2002, partially offset by net favorable foreign currency translation of $258. Sales from U.S. operations accounted for approximately 31% of consolidated net sales in the second quarter and first six months of 2003 compared to 39% and 38%, respectively, for the same periods in 2002. The decrease in U.S. sales as a percentage of consolidated net sales was primarily due to the impact of divested operations. Sales of beverage cans and ends accounted for approximately 38% and 36%, respectively, of consolidated net sales in the second quarter and first six months of 2003 compared to 35% and 34%, respectively, for the same periods in 2002; and sales of food cans and ends accounted for approximately 30% and 31%, respectively, of consolidated net sales in the second quarter and first six months of 2003 compared to 27% for both prior year periods.
An analysis of comparative net sales by segment follows:
Net sales in the Americas decreased $148 in the second quarter of 2003 compared to 2002 primarily due to divested operations which accounted for $149 of net sales during the same period in 2002. Net sales for the six months decreased $331 primarily due to divested operations which accounted for $285 of net sales in 2002, net unfavorable foreign currency translation of $10 and declines in pricing and volumes in the U.S. food can operations.
32
Net sales in Europe increased $87 in the second quarter of 2003 compared to 2002 primarily due to favorable foreign currency translation of $146, partially offset by divested operations which accounted for $57 of net sales during the same period in 2002. Net sales for the six months increased $157 primarily due to favorable foreign currency translation of $266, partially offset by divested operations which accounted for $115 of net sales in 2002.
Net sales for Asia-Pacific decreased $2 in the second quarter primarily due to lower beverage can volumes in operations in China. Net sales for the six months increased $4 due to higher beverage can volumes in Southeast Asia.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,422 and $2,656, decreases of $33 and $104, for the three and six months ended June 30, 2003 compared to the same periods in 2002. As a percentage of net sales, cost of products sold was 82.4% and 83.4% for the three and six months ended June 30, 2003 compared to 81.3% and 82.2% for the same periods in 2002. The increase as a percentage of net sales was primarily due to increased pension expense.
Depreciation and Amortization
Depreciation and amortization was $85 and $163 for the three and six months ended June 30, 2003, decreases of $9, or 9.6%, and $22, or 11.9%, from amounts for the prior year periods. The decreases were primarily due to divested operations which accounted for $13 and $27 for the three and six months, respectively, partially offset by the impact of foreign currency translation.
Selling and Administration Expense
Selling and administrative expense was $81 in the second quarter of 2003, an increase of $5 or 6.6% above the prior year level of $76. The increase in 2003 was primarily due to foreign currency translation, partially offset by divested operations which accounted for $7 of expenses in 2002. As a percentage of net sales, selling and administrative expense was 4.7% in the second quarter of 2003 compared to 4.2% in the second quarter of 2002.
Selling and administrative expense was $162 for the six months ended June 30, 2003 compared to $152 for the six months ended June 30, 2002. The increase in 2003 was primarily due to foreign currency translation, partially offset by divested operations which accounted for $13 of expenses in 2002. As a percentage of net sales, selling and administrative expense was 5.1% for the six months ended June 30, 2003 compared to 4.5% for the same period in 2002.
Provision for Restructuring
During the first quarter of 2002, the Company provided $2 for severance costs in connection with the closing of a crown plant and the elimination of a crown operation in Europe.
Additional details about restructuring activities during the six months ended June 30, 2003 are provided in Note G to the consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.
Segment Income
Note K to the consolidated financial statements provides a reconciliation of consolidated segment income (net sales less cost of products sold, depreciation and amortization, selling and administrative expense and provision for restructuring) to income before income taxes, minority interests and cumulative effect of a change in accounting.
33
Consolidated segment income was $138 and $205 for the quarter and six months ended June 30, 2003 compared to $164 and $257 for the same periods in 2002. As a percentage of consolidated net sales, segment income for 2003 was 8.0% and 6.4% for the quarter and six months compared to 9.2% and 7.7% for the same periods in 2002.
An analysis of segment income follows:
Americas segment income, as a percentage of net sales, was 6.4% and 4.8% in the second quarter and first six months of 2003 compared to 8.7% and 7.2% for the same periods in 2002. The decrease in margins was partially due to increased pension expense of $5 and $10 for the quarter and six months, respectively, and declines in pricing and volumes in the U.S. food can operations. In addition to the increased pension expense, the decrease in segment income was due to the divestiture of Constar during 2002.
Segment income for Europe, as a percentage of net sales, was 10.9% and 9.6% in the quarter and six months ended June 30, 2003 compared to 11.6% and 10.3% for the same periods in 2002. The decrease in margin was primarily due to increased pension expense of $10 and $20 for the quarter and six months, respectively.
Asia-Pacific segment income was $13 and $22, or 15.7% and 13.3% of net sales, respectively, for the three and six months ended June 30, 2003 compared to $10 and $18, or 11.8% and 11.1% of net sales, respectively, for the same periods in 2002. The improvement was primarily due to increased margins for beverage cans throughout the region.
Provision for Asset Impairments and (Gain) / Loss on Sale of Assets
During the first six months of 2003, the Company sold various assets for $16 and recorded a net gain of $3 before tax.
During the first six months of 2002, the Company completed the sales of its U.S. fragrance pumps business, its European pharmaceutical packaging business, and its 15% shareholding in Crown Nampak (Pty) Ltd. for total net proceeds of $181. A net loss of $32 was recognized in connection with these sales, including a tax charge of $8. The loss was primarily in Europe from the sale of the pharmaceutical packaging business. During the first six months of 2002, the Company sold various other assets for $7 with no net gain or loss.
(Gain) / Loss from Early Extinguishment of Debt
During the first six months of 2003, the Company repurchased or retired $784 of unsecured notes. The Company also exchanged 5.4 million shares of its common stock for debt with a face value of $43 in privately negotiated debt-for-equity exchanges. In connection with the repurchases and exchanges and the write-off of unamortized financing fees and expenses from its previous credit facility, the Company recognized a pretax loss of $9 from the early extinguishment of debt for the six months ended June 30, 2003.
34
During the second quarter of 2002, the Company exchanged 24.4 million shares of its common stock with a market value of $190 for debt with face value of $210 and accrued interest of $5. In connection with the exchanges, the Company recorded a pretax gain of $25 from the early extinguishment of debt.
Net Interest Expense
Net interest expense increased $14 and $1, respectively, for the three and six months ended June 30, 2003 versus the same periods in 2002, primarily due to higher interest rates in Europe from the Company’s refinancing, partially offset by lower average debt outstanding. The lower average debt outstanding primarily reflects the Company’s reduction of its working capital, proceeds from sales of businesses in 2002 and the early extinguishment of debt through debt-for-equity exchanges.
Translation and Exchange Adjustments
The results for the six months ended June 30, 2003 included net foreign exchange gains of $69 compared to net losses of $18 for the same period in 2002. The improvement in foreign exchange adjustments was primarily due to a gain of $64 on the favorable translation of net U.S. dollar-denominated debt in Europe, and the recent improvement in economic conditions in Argentina in the Americas. A majority of the newly issued debt from the Company’s recent refinancing is in U.S. dollars and was issued by the Company’s European subsidiaries. As a result, the Company now has significant U.S. dollar exposure in Europe which may result in future material foreign exchange adjustments to earnings.
Taxes on Income
The first six months of 2003 included a tax charge of $39 on pre-tax income of $93 for an effective rate of 41.9%. The high effective rate was primarily due to U.S. losses where the benefit was fully reserved by an increase in the valuation allowance.
The first six months of 2002 included a tax charge of $46 on pre-tax income of $66, an effective rate of 69.7%, because (i) the pre-tax loss of $24 for asset disposals has a corresponding tax charge of $8 due to the non-deductible write-off of goodwill and (ii) there was no tax benefit recognized on U.S. losses as the current year benefit was fully reserved by an increase in the valuation allowance.
Minority Interests, Net of Equity Earnings
The charge for minority interests, net of equity earnings, increased $3 and $6, respectively, for the three and six months ended June 30, 2003 compared to the same periods in 2002. The increase was primarily due to increased profits in the Company’s joint venture beverage can operations in China.
Liquidity and Capital Resources
Operating Activities
Cash of $85 was used by operations in the first six months of 2003 versus $2 during the same period in 2002. The increase was primarily due to increased working capital in 2003, including reduced securitization of receivables. Cash flow from operations included $15 and $56 from the Company’s receivables securitization program during the first six months of 2003 and 2002, respectively. The Company’s North American program provides for the accelerated receipt of up to $350 of cash from an available pool of receivables.
35
Investing Activities
Investing activities used cash of $199 during the first six months of 2003 compared to cash provided of $129 in the prior year period. The reduction in cash from investing activities was primarily due to the proceeds received in 2002 from divestitures, and the restricted cash balances of $162 established in 2003 in connection with the refinancing.
During the second quarter of 2003, a wholly-owned subsidiary of the Company commenced a tender offer to purchase the minority-owned shares of Hellas Can Packaging Manufacturers, a majority-owned subsidiary of the Company, for € 5.50 per share or € 36 in total. The results of the offer are not yet known and there can be no assurance that the offer will be completed on these or any other terms.
Financing Activities
Financing activities provided cash of $180 during the six months ended June 30, 2003, compared to cash used of $255 during the same period in 2002. The increase in cash from financing activities was primarily due to increased borrowings in 2003. The increased borrowings in 2003 compared to 2002 were due to higher working capital in 2003, the funding of the restricted cash balances in 2002, and the decrease in proceeds from divestitures in 2003.
Refinancing
On February 26, 2003, Crown Cork & Seal Company, Inc. completed a refinancing and formed Crown Holdings, Inc. (“Crown” or the “Company”) as a new public holding company, as discussed in Note A to the consolidated financial statements.
To better match cash flows with debt service requirements and use available collateral, a majority of the newly issued debt was placed in the Company’s European subsidiaries.
The proceeds from the refinancing consisted of the sale of $1,085 of 9.5% second priority senior secured notes due in 2011, € 285 ($306 equivalent as of February 26, 2003) of 10.25% second priority senior secured notes due in 2011, $725 of 10.875% third priority senior secured notes due in 2013, and $504 of first priority term loans due in 2008 (which are accelerated to 2006 in the event that Crown’s unsecured public debt that matures in 2006 is not repaid, or funds are not set aside in a designated account to repay such debt, by September 15, 2006) and a new $550 first priority revolving credit facility due in 2006.
The proceeds of $2,620 from the senior secured notes and term loans, and $198 of borrowings under the new $550 credit facility, were used to repay the existing credit facility, to repurchase outstanding unsecured notes, and to pay fees and expenses associated with the refinancing. The remaining proceeds were placed in restricted cash accounts as collateral for the senior secured notes, the term loans and the revolving credit facility, and may only be used to repurchase or retire certain existing unsecured notes. As of June 30, 2003 the remaining balance of $162 in the collateral accounts was reported as restricted cash in the Consolidated Balance Sheet. The Company expects to use the remaining restricted cash balance to repay the remaining notes due in 2003.
During the first six months of 2003, the Company repurchased or retired $784 of unsecured notes. The Company also exchanged 5.4 million of its common stock for debt with a face value of $43 in privately negotiated debt-for-equity exchanges. In order to reduce leverage and future cash interest payments, the Company may from time to time exchange shares of its common stock for the Company’s outstanding notes and debentures. The Company will evaluate any such transactions in light of then existing market conditions and may determine not to pursue such transactions.
36
The interest rates on the new borrowings are higher than the rates on the debt that was repaid and will result in higher interest costs in the future.
In July of 2003, the Company refinanced the $450 of first priority term loan with the proceeds from a new first priority term loan on substantially the same terms except that the new term loan bears interest at LIBOR plus 3.00%, compared to LIBOR plus 4.25% for the refinanced term loan, and includes a prepayment premium of 1.00% if the new term loan is paid back in full within one year.
The following table summarizes the changes in long-term debt, including the current portion, for the six months ended June 30, 2003.
(1) As of June 30, 2003, the Company had $260 of borrowing capacity available under the credit facility (equal to the total facility of $550, less $155 of direct borrowings and $135 of standby letters of credit).
(2) Expected to be paid with the cash of $162 in the restricted cash accounts.
(3) Payable in annual installments of 5.0% beginning January 2004 with a final payment in 2008 (which is accelerated to September 2006 in the event that the Company’s unsecured public debt that matures in 2006 is not repaid, or funds are not set aside in a designated account to repay such debt, by September 15, 2006).
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 to the consolidated financial statements, which information is incorporated herein by reference.
37
Recently Issued Accounting Standards
In April 2003, the FASB issued SFAS No. 149 (“FAS 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities within the scope of FAS 133. The standard is effective for contracts entered into or modified after June 30, 2003, with certain exceptions, and for hedging relationships designated after June 30. The guidance, with certain exceptions, is to be applied prospectively. The Company does not believe the adoption of FAS 149 will have a material effect on its consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS No. 150 (“FAS 150”), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). The Company does not believe that the adoption of FAS 150 will have a material effect on its consolidated results of operations or financial position.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States which require that management make numerous estimates and assumptions. Actual results could differ from these estimates and assumptions, impacting the reported results of operations and financial condition of the Company. Management’s Discussion and Analysis and Note A to the consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, incorporated by reference herein, 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 2003.
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 “Refinancing” and “Recently Issued Accounting Standards” sections and in the discussions of debt in Note E, and asbestos and other matters 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, 2002, which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward-looking statements” within the meaning of the federal securities laws. In addition, the Company and its representatives may from time to time make other oral or written statements which are also “forward-looking statements.”
These forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
38
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, 2002 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.
With the Company’s recent refinancing, the Company’s financial instrument portfolio and its market risk exposures have changed significantly from those reported in the Company’s balance sheet at December 31, 2002. A majority of the newly issued debt is in U.S. dollars and has been issued by the Company’s European subsidiaries. As a result, the Company now has significant U.S. dollar exposure in Europe which may result in future material foreign exchange adjustments to earnings. The Company believes that the cost of hedging this exposure would be a substantial cash cost and would reduce funds available to delever the Company. Therefore, the Company at this time does not intend to hedge this exposure. Foreign exchange adjustments from the local remeasurement of U.S. dollar debt are offset in shareholders’ equity by related translation adjustments. As of June 30, 2003, the Company had approximately $1,050 of U.S. dollar-denominated liability exposure in its European subsidiaries, including approximately $850 in subsidiaries with the euro as their functional currency and $200 in subsidiaries with the pound sterling as their functional currency. Based on the exposure at June 30, 2003, a one percent change in the U.S. dollar exchange rate against these currencies would create an exchange gain or loss of approximately $11 before tax. Further discussion of the potential impact on earnings and financial condition from the recent refinancing is provided in Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” within “Results of Operations” under the “Net Interest Expense” and “Translation and Exchange Adjustments” sections and within “Liquidity and Capital Resources” under the “Refinancing” section of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2003.
During the first quarter of 2003, two cross-currency swaps that had effectively converted U.S. dollar-denominated fixed rate debt into variable rate euro-denominated debt and fixed rate sterling-denominated debt were deemed ineffective due to the repurchase of a significant portion of the hedged debt. As such, hedge accounting for these derivatives was discontinued prospectively. The debt and related swaps had original maturity dates of December 2003 and notional values of $200 each. In April 2003, the sterling swap was settled prior to maturity at its fair value of $13.
In July 2003, the Company entered into three interest rate swaps with a combined notional value of $800. The swaps effectively convert $800 of 9.5% fixed rate debt into variable rate debt at LIBOR plus 5.48%. The swaps will be accounted for as fair value hedges of the second priority U. S. dollar notes due 2011.
39
During the ninety day period prior to the date of the filing of this report, the Company carried out an evaluation, under the supervision and with the participation of its principal executive officer and principal financial officer, of the effectiveness of the design and operation of its disclosure controls and procedures. Based upon, and as of the date of, that evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective, in all material respects, to provide reasonable assurance that information required to be disclosed in the Company’s periodic reports which the Company files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
In addition, the Company reviewed its internal controls, and there have been no significant changes in its internal controls or in other factors that could significantly affect those controls subsequent to the date of their last evaluation.
40
PART II - OTHER INFORMATION
41
42
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.
Date: August 8, 2002
43