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 a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one)Large accelerated filer X Accelerated filer __ Non-accelerated filer __
Indicate by check mark whether the Registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes __ No X
There were 167,889,098 shares of Common Stock outstanding as of July 31, 2006.
Crown Holdings, Inc.
FORM 10-QFOR QUARTER ENDED JUNE 30, 2006
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
The accompanying notes are an integral part of these consolidated financial statements.
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CONDENSED COMBINING STATEMENT OF OPERATIONS
For the three months ended June 30, 2006(in millions)
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For the three months ended June 30, 2005(in millions)
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For the six months ended June 30, 2006(in millions)
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For the six months ended June 30, 2005(in millions)
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CONDENSED COMBINING BALANCE SHEET
As of June 30, 2006(in millions)
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As of December 31, 2005(in millions)
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CONDENSED COMBINING STATEMENT OF CASH FLOWS
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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, 2006 compared to the corresponding periods in 2005 and the changes in financial condition and liquidity from December 31, 2005. 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, 2005, along with the consolidated financial statements and related notes included in and referred to within this report.
Executive Overview
As discussed in Note C to the consolidated financial statements, the Company completed the sale of its plastic closures business in October 2005 and during the second quarter of 2006 has either sold, or has committed to a plan to sell, its European plastics operations. The results of operations for prior periods used in the following discussion have been recast to report these businesses as discontinued operations.
The Company’s principal areas of focus include improving segment income, reducing debt and reducing asbestos-related costs. The Company may also repurchase Company common stock pursuant to Board approved repurchase authorizations, under which approximately $344 is available (subject, however, to compliance with the terms of the Company’s outstanding debt agreements). See Note Oto the consolidated financial statements for information regarding segment income.
Improving segment income is primarily dependent on the Company’s ability to increase revenues and manage costs. Key strategies for expanding revenue include targeting geographic markets with strong growth potential, such as the Middle East, Asia, Latin America and southern and central Europe, improving selling prices in certain product lines and developing innovative packaging products using proprietary technology. The Company’s cost control efforts focus on improving operating efficiencies and managing material and labor costs, including pension and benefit costs.
The reduction of debt remains a principal strategic goal of the Company and is primarily dependent upon the Company’s ability to generate cash flow from operations. In addition, the Company may consider divestitures from time to time, the proceeds of which may be used to reduce debt.
The Company seeks to reduce its asbestos-related costs through prudent case management. Asbestos-related payments were $29 for the full year of 2005 and $8 for the first six months of 2006, and the Company expects to pay approximately $25 for the full year of 2006.
Results of Operations
Net Sales
Net sales in the second quarter of 2006 were $1,805, an increase of $22 or 1.2% compared to net sales of $1,783 for the same period in 2005. Net sales in the first six months of 2006 were $3,353, an increase of $80 or 2.4% compared to net sales of $3,273 for the same period in 2005. Sales from U.S. operations accounted for 29.6% of consolidated net sales in the first six months of 2006 compared to 31.4% for the same period in 2005. Sales of beverage cans and ends accounted for 44.9% and sales of food cans and ends accounted for 33.1% of consolidated net sales in the first six months of 2006 compared to 43.3% and 33.9%, respectively, in 2005.
Net sales in the Americas Beverage segment in the second quarter decreased 8.0% from $463 in 2005 to $426 in 2006. Net sales in the first six months of 2006 decreased 7.2% from $833 in 2005 to $773 in 2006. The decreases in 2006 were primarily due to lower sales unit volumes.
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Net sales in the North America Food segment in the second quarter decreased from $199 in 2005 to $198 in 2006. Net sales in the first six months of 2006 increased 5.8% from $359 in 2005 to $380 in 2006, primarily due to increased sale unit volumes and $3 of foreign currency translation.
Net sales in the Europe Beverage segment increased 27.9% from $265 in the second quarter of 2005 to $339 in the same period in 2006. Net sales in the first six months of 2006 increased 28.5% from $449 in 2005 to $577 in 2006. The increases in the quarter and first six months of 2006 included increases of $44 and $77 due to the consolidation of certain Middle East operations, as discussed in Note D to the consolidated financial statements. The remaining increase in the second quarter and first six months was primarily due to increased sales unit volumes.
Net sales in the Europe Food segment decreased 3.2% from $465 in the second quarter of 2005 to $450 in the same period in 2006, primarily due to lower sales unit volumes. Net sales in the first six months of 2006 decreased 1.3% from $872 in 2005 to $861 in 2006, primarily due to $35 from the impact of foreign currency translation, partially offset by selling price increases from the pass-through of higher material costs.
Net sales in the Europe Specialty Packaging segment increased $1 from $105 in the second quarter of 2005 to $106 in the same period in 2006, primarily due to the impact of foreign currency translation. Net sales in the first six months of 2006 decreased 3.5% from $199 in 2005 to $192 in 2006, primarily due to the impact of foreign currency translation.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,500 and $2,810 for the second quarter and first six months of 2006, increases of $36 and $96 compared to $1,464 and $2,714 for the same periods in 2005. The increases were primarily due to the impact of higher material costs for aluminum and steel, offset by a decrease of $39 due to the impact of foreign currency translation for the six months.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 83.1% and 83.8% for the second quarter and first six months of 2006 compared to 82.1% and 82.9% for the same periods in 2005.
As a result of steel and aluminum price increases, the Company has implemented significant price increases to many of its customers. However, there can be no assurance that the Company will be able to fully recover from its customers the impact of price increases. In addition, if the Company is unable to purchase steel or aluminum for a significant period of time, the Company’s operations would be disrupted.
Depreciation and Amortization
Depreciation and amortization was $58 and $112 in the second quarter and first six months of 2006, decreases of $4 or 6.5% and $9 or 7.4%, respectively, from the prior year periods. The decreases were primarily due to lower capital spending in recent years, and also included $2 due to foreign currency translation for the six months. The effect of foreign currency translation was primarily due to the strengthening of the euro and sterling against the U.S. dollar.
Selling and Administrative Expense
Selling and administrative expense was $75 in the second quarter of 2006 compared to $88 for the same period in 2005. The decrease was primarily due to lower incentive compensation costs. As a percentage of net sales, selling and administrative expense was 4.2% in the second quarter of 2006 compared to 4.9% for the same period in 2005.
Selling and administrative expense was $156 in the first six months of 2006 compared to $170 for the same period in 2005. The decrease was primarily due to lower incentive compensation costs. As a percentage of net sales, selling and administrative expense was 4.7% for the six month period ended June 30, 2006 compared to 5.2% for the same period in 2005.
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Segment Income
Segment income in the Americas Beverage segment decreased $14 from $55 in the second quarter of 2005 to $41 in the second quarter of 2006. Segment income in the first six months decreased $26 from $92 in 2005 to $66 in 2006. The decreases in 2006 were primarily due to increased costs for freight, coatings and utilities, and also included decreases of $4 and $9 from lower sales unit volumes in the quarter and first six months, respectively.
Segment income in the North America Food segment increased $4 from $14 in the second quarter of 2005 to $18 in the second quarter of 2006. Segment income in the first six months increased $7 from $19 in 2005 to $26 in 2006. The increases in 2006 were primarily due to increased sales unit volumes.
Segment income in the Europe Beverage segment decreased $2 or 4.9% from $41 in the second quarter of 2005 to $39 in the second quarter of 2006. Segment income in the first six months decreased $3 or 4.5% from $67 in 2005 to $64 in 2006. These decreases were primarily due to increased aluminum costs, partially offset by the consolidation of certain Middle East operations, as discussed inNote D to the consolidated financial statements.
Segment income in the Europe Food segment decreased $10 from $59 in the second quarter of 2005 to $49 in the second quarter of 2006. Segment income in the first six months decreased $7 from $98 in 2005 to $91 in 2006. These decreases were primarily due to lower sales unit volumes.
Segment income in the Europe Specialty Packaging segment increased $4 from $8 in the second quarter of 2005 to $12 in the second quarter of 2006. Segment income in the first six months increased $2 from $12 in 2005 to $14 in 2006. The increases in the quarter and first six months were primarily due to operating efficiencies and cost reduction.
Provision for Restructuring
During the first six months of 2006, the Company recorded a restructuring charge of $14, including $5 in the second quarter, as discussed in Note Jto the consolidated financial statements.
Gain on Sale of Assets and Provision for Asset Impairments
During the first six months of 2005, the Company recognized a net gain of $22 relating to asset disposals and impairments. The gain of $22 included $16 for asset disposals and $7 for the reversal of a provision in Asia, offset by $1 for asset impairments in the U.S. In Asia, the Company received a waiver of a local requirement to divest a portion of one of its subsidiaries and, accordingly, reversed its provision for the expected loss on divestiture.
Gain / Loss from Early Extinguishments of Debt
During the second quarter of 2005, the Company recognized a loss of $2 in Europe in connection with the repurchase of certain unsecured notes.
Interest Expense
Interest expense decreased $25 and $52, respectively, for the three and six months ended June 30, 2006 versus the same periods in 2005. The decreases were due to decreased borrowing rates from the Company’s refinancing in October 2005.
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Translation and Exchange Adjustments
The results for the three and six month periods ended June 30, 2006 included net foreign exchange gains of $8 for certain European subsidiaries that have unhedged currency exposures arising from external and intercompany debt obligations. These currency exposures may continue to result in future foreign exchange gains or losses. The Company may hedge or mitigate a portion of these exposures in the future through derivative instruments or intercompany loans. Further discussion of the potential impact on earnings from foreign currency exposure is provided in Item 3, “Quantitative and Qualitative Disclosures About Market Risk” of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
Taxes on Income
The second quarter of 2006 included net tax charges of $19 on pre-tax income of $108 for an effective rate of 17.6%. The difference of $19 between the pre-tax income at the U.S. statutory rate of 35% or $38, and the tax charge of $19, was primarily due to benefits of $12 from lower non-U.S. tax rates in certain jurisdictions, and $7 for income in jurisdictions where the Company has a full valuation allowance against its deferred taxes.
The first six months of 2006 included a tax charge of $26 on pre-tax income of $139 for an effective rate of 18.7%. The difference of $23 between the pre-tax income of the statutory rate of 35% or $49, and the tax charge of $26, was primarily due to benefits of $20 from lower non-U.S. tax rates in certain jurisdictions, and $5 to reduce a provision for U.S. state tax contingencies due to the completion of an audit with a minor assessment, partially offset by other net items of $2.
The second quarter of 2005 included a tax charge of $3 on pre-tax income of $26 for an effective rate of 11.5%. The difference of $6 between the pre-tax income at the U.S. statutory rate of 35% or $9, and the tax charge of $3, was primarily due to (i) benefits of $6 from lower non-U.S. tax rates in certain jurisdictions, and (ii) a benefit of $6 from the carryback of a prior U.S. tax loss that had a valuation allowance, partially offset by (iii) charges of $3 for withholding taxes, $1 for valuation allowance adjustments, and other net items of $2.
The first six months of 2005 included a tax benefit of $2 on pre-tax income of $8. The difference of $5 between the pre-tax income at the U.S. statutory rate of 35%, or $3, and the tax benefit of $2, was primarily due to (i) benefits of $13 from lower non-U.S. tax rates in certain jurisdictions, and (ii) a benefit $6 from the carryback of a prior U.S. tax loss that had a valuation allowance, partially offset by (iii) charges of $5 for withholding taxes, $7 for net valuation allowance adjustments, and other net items of $2.
Minority Interests, Net of Equity Earnings
The charge for minority interests, net of equity earnings, increased $8 and $18 in the second quarter and first six months of 2006, respectively, compared to the same periods in 2005. These increases were primarily due to the consolidation of the beverage can joint ventures in the Middle East, as discussed in Note D to the consolidated financial statements.
Liquidity and Capital Resources
Cash from Operations
Cash of $109 was used for operating activities in the first six months of 2006 compared to $53 during the same period in 2005. The primary cause of the increase in cash used for operating activities was a decrease of $107, from $127 in 2005 to $20 in 2006, in cash collected from receivables securitization programs. The first six months of 2005 included the addition of a new €120 securitzation facility in the U.K. and France. The decrease of $107 from securitization was partially offset by other net improvements of $51, including $57 of decreased pension contributions primarily due to the advanced funding of the U.S. plan with proceeds from the sale of the plastic closures business in the fourth quarter of 2005. Payments for interest decreased from $165 in 2005 to $119 in 2006 due to lower interest rates, but this improvement was offset by the lack of cash flow from the plastic closures business that was sold in October 2005.
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In its Annual Report on Form 10-K for the year ended December 31, 2005, the Company disclosed that it expected its 2006 pension plan contributions to be $23, excluding a potential additional contribution to its U.K. plan. The Company has now determined that an additional contribution of £31 will be made to its U.K. plan in 2006 and that the total pension plan contributions for 2006 will be approximately $80.
Investing Activities
Investing activities used cash of $85 during the first six months of 2006 compared to cash used of $56 in the prior year period, primarily due to an increase in capital expenditures for the expansion of the Middle East operations.
Financing Activities
Financing activities provided cash of $195 during the first six months of 2006 compared to cash used of $81 during the same period in 2005. The cash provided by financing activities in 2006, and used by financing activities in 2005, was primarily related to short-term borrowing and repayment activity. Dividends paid to minority interests decreased from $28 in 2005 to $12 in 2006 due to decreased payments from the Company’s joint venture beverage can operations in South America and China.
During all of 2005, the Company repurchased 2,100,000 shares of common stock at a total cost of $38. The Company purchased 983,500 additional shares for $17 during the first six months of 2006. As of June 30, 2006, and including an additional authorization of $200 in June 2006, the Company has Board authority to purchase $344 of additional shares subject to compliance with the terms of the Company’s outstanding debt agreements.
As of June 30, 2006, the Company had $272 of borrowing capacity available under its revolving credit facility, equal to the total facility of $800 less $456 of borrowings and $72 of outstanding standby letters of credit.
In August 2006, the Company entered into an additional $200 first priority term loan facility due 2012. Proceeds from the new term loan facility were used to repay borrowings under the Company’s revolving credit facility (which may be subsequently reborrowed to redeem, repurchase or otherwise acquire or retire for value shares of Company common stock) and to pay fees and expenses incurred in connection with the term loan.
Further information relating to the Company’s liquidity and capital resources is set forth under Note H to the consolidated financial statements.
Contractual Obligations
Other than the expected increase in pension contributions discussed above, there were no material changes during the first six months of 2006 to the contractual obligations provided within Part I, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” including, but not limited to, in the “Liquidity and Capital Resources” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.
Commitments and Contingent Liabilities
Information regarding the Company’s commitments and contingent liabilities appears in Part I within Item 1 of this report under Notes K and L 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. 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, 2005 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 2006 other than as discussed below.
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During the first quarter of 2006, the Company adopted FAS 123(R), “Share Based Payment,” as discussed in Note B to the consolidated financial statements. The Company is using the modified prospective transition method in which compensation expense for all nonvested stock awards, measured by the grant-date fair value of the awards, will be charged to earnings prospectively over the remaining vesting period based on the estimated number of awards that are expected to vest. Similarly, compensation expense for all future awards will be recognized over the vesting period based on the grant-date fair value and the estimated number of awards that are expected to vest. Valuation of awards granted prior to the adoption of the standard were calculated using the Black-Scholes option pricing model.
Calculation of the estimated fair value of stock option awards requires the use of assumptions regarding a number of complex and subjective variables, including the expected term of the options, the annual risk-free interest rate over the options’ expected term, the expected annual dividend yield on the underlying stock over the options’ expected term, and the expected stock price volatility over the options’ expected term. The Company generally bases its assumptions of option term and expected price volatility on historical data, but also considers other factors, such as vesting or expiration provisions in new awards that are inconsistent with past awards, that would make the historical data unreliable as a basis for future assumptions. Estimates of the fair value of stock options are not intended to predict actual future events or the value ultimately realized by employees who receive stock option awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company under FAS 123(R). See Note E to the consolidated financial statements for additional disclosure of the Company’s assumptions related to stock-based compensation.
Recent Accounting Pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in tax positions. FIN 48 requires that the impact of a tax position be recognized if that position is more likely than not of being sustained on audit, based on the technical merits of the position. The tax position is measured at the largest amount of benefit that is greater than 50% likely of being realized upon the ultimate settlement. The provisions of FIN 48 are effective for fiscal years beginning after December 15, 2006, with any cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact that FIN 48 may have on its financial statements.
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 K, commitments and contingencies in Note L and pension and other postretirement benefits in Note N 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, 2005, which are not historical facts (including any statements concerning plans and objectives of management for future operations or economic performance, or assumptions related thereto), are “forward-looking statements” within the meaning of the federal securities laws. In addition, the Company and its representatives may from time to time, make oral or written statements which are also “forward-looking statements.”
These forward-looking statements are made based upon management’s expectations and beliefs concerning future events impacting the Company and, therefore, involve a number of risks and uncertainties. Management cautions that forward-looking statements are not guarantees and that actual results could differ materially from those expressed or implied in the forward-looking statements.
While the Company periodically reassesses material trends and uncertainties affecting the Company’s results of operations and financial condition in connection with the preparation of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and certain other sections contained in the Company’s quarterly, annual or other reports filed with the Securities and Exchange Commission (“SEC”), the Company does not intend to review or revise any particular forward-looking statement in light of future events.
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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, 2005 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.
The Company has significant foreign currency exposure in Europe which may result in future material foreign exchange adjustments to earnings. As of June 30, 2006, a euro functional currency subsidiary had a Canadian dollar asset exposure of approximately $316 Canadian dollars from an intercompany loan. As discussed in Note I to the consolidated financial statements, during the first quarter of 2006 the Company entered into foreign currency forward contracts with a combined notional value of $150 Canadian dollars to sell Canadian dollars against euro and partially mitigate this exposure. Based on the net exposure of $166 Canadian dollars at June 30, 2006, a one percentage change in the Canadian dollar against the euro would result in an exchange gain or loss of approximately $1 before tax.
Also during 2006, the Company entered into a foreign currency forward contract with a notional value of $107 to buy U.S. dollars against pound sterling. See Note I to the consolidated financial statements for additional information.
As of June 30, 2006, the Company had approximately $1.2 billion principal floating interest rate debt. A change of 0.25% in these floating interest rates would change annual interest expense by approximately $3 before tax.
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 to 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 to 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 quarter ended June 30 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II - OTHER INFORMATION
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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, 2006
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