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 163,042,995 shares of Common Stock outstanding as of October 31, 2006.
Crown Holdings, Inc.
FORM 10-QFOR QUARTER ENDED SEPTEMBER 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 September 30, 2006(in millions)
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For the three months ended September 30, 2005(in millions)
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For the nine months ended September 30, 2006(in millions)
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For the nine months ended September 30, 2005(in millions)
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CONDENSED COMBINING BALANCE SHEET
As of September 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 nine months ended September 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 Cto the consolidated financial statements, the Company completed the sale of its plastic closures business in October 2005 and during the second quarter of 2006 either sold, or 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. See Note P to 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 $15 for the first nine months of 2006, and the Company expects to pay approximately $25 for the full year of 2006.
The Company may also from time to time consider transactions such as acquisitions (which may increase the Company’s indebtedness or involve the issuance of Company securities), dispositions, refinancings or the repurchase of Company common stock pursuant to Board approved repurchase authorizations (under which $244 is available at September 30, 2006). Such transactions, including the repurchase of Company common stock, would be subject to compliance with the Company’s debt agreements.
Results of Operations
Net Sales
Net sales in the third quarter of 2006 were $2,022, an increase of $132 or 7.0% compared to net sales of $1,890 for the same period in 2005. Net sales in the first nine months of 2006 were $5,375, an increase of $212 or 4.1% compared to net sales of $5,163 for the same period in 2005. Sales from U.S. operations accounted for 28.8% of consolidated net sales in the first nine months of 2006 compared to 30.5% for the same period in 2005. Sales of beverage cans and ends accounted for 43.3% and sales of food cans and ends accounted for 34.4% of consolidated net sales in the first nine months of 2006 compared to 42.6% and 35.4%, respectively, in 2005.
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Net sales in the Americas Beverage segment in the third quarter decreased 0.2% from $438 in 2005 to $437 in 2006. Net sales in the first nine months of 2006 decreased 4.8% from $1,271 in 2005 to $1,210 in 2006. The decreases in 2006 were primarily due to lower sales unit volumes.
Net sales in the North America Food segment in the third quarter increased 10.6% from $226 in 2005 to $250 in 2006. Net sales in the first nine months of 2006 increased 7.7% from $585 in 2005 to $630 in 2006. The increases in the quarter and first nine months of 2006 were primarily due to increased sale unit volumes and $3 of foreign currency translation for the quarter and $6 for the first nine months.
Net sales in the Europe Beverage segment increased 25.3% from $273 in the third quarter of 2005 to $342 in the same period in 2006. Net sales in the first nine months of 2006 increased 27.3% from $722 in 2005 to $919 in 2006. The increases in the quarter and first nine months of 2006 included increases of $40 and $117 due to the consolidation of certain Middle East operations, as discussed in Note D to the consolidated financial statements. The remaining increase in the third quarter and first nine months was primarily due to increased sales unit volumes.
Net sales in the Europe Food segment increased 1.2% from $567 in the third quarter of 2005 to $574 in the same period in 2006, primarily due to the pass-through of higher material costs to customers. Net sales in the first nine months of 2006 decreased 0.3% from $1,439 in 2005 to $1,435 in 2006, primarily due to $21 from the impact of foreign currency translation, partially offset by selling price increases from the pass-through of higher material costs to customers.
Net sales in the Europe Specialty Packaging segment increased 7.1% from $112 in the third quarter of 2005 to $120 in the same period in 2006, primarily due to the impact of foreign currency translation. Net sales in the first nine months of 2006 increased 0.3% from $311 in 2005 to $312 in 2006.
Cost of Products Sold (Excluding Depreciation and Amortization)
Cost of products sold, excluding depreciation and amortization, was $1,702 and $4,512 for the third quarter and first nine months of 2006, increases of $147 and $243 compared to $1,555 and $4,269 for the same periods in 2005. The increases were primarily due to the impact of higher material costs for aluminum and steel, and included an increase of $34 and a decrease of $5 due to the impact of foreign currency translation for the third quarter and nine months, respectively. Cost of products sold for the quarter also included a charge of $6 relating to the expected settlement of a dispute with a European supplier regarding cost of materials supplied in 2006.
As a percentage of net sales, cost of products sold, excluding depreciation and amortization, was 84.2% and 83.9% for the third quarter and first nine months of 2006 compared to 82.3% and 82.7% 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 $170 in the third quarter and first nine months of 2006, decreases of $5 or 7.9% and $14 or 7.6%, respectively, from the prior year periods. The decreases were primarily due to lower capital spending in recent years.
Selling and Administrative Expense
Selling and administrative expense was $78 in the third quarter of 2006 compared to $87 for the same period in 2005. The decrease was primarily due to lower incentive compensation costs in 2006. As a percentage of net sales, selling and administrative expense was 3.9% in the third quarter of 2006 compared to 4.6% for the same period in 2005.
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Selling and administrative expense was $234 in the first nine months of 2006 compared to $257 for the same period in 2005. The decrease was primarily due to lower incentive compensation costs in 2006, partially offset by an increase of $6 for stock compensation costs. As a percentage of net sales, selling and administrative expense was 4.4% for the nine month period ended September 30, 2006 compared to 5.0% for the same period in 2005.
Segment Income
Segment income in the Americas Beverage segment decreased $5 from $56 in the third quarter of 2005 to $51 in the third quarter of 2006. Segment income in the first nine months decreased $31 from $148 in 2005 to $117 in 2006. The decreases in 2006 were primarily due to increased costs for freight, coatings and utilities, and also included a decrease of $12 from lower sales unit volumes in the first nine months.
Segment income in the North America Food segment increased $15 from $13 in the third quarter of 2005 to $28 in the third quarter of 2006. Segment income in the first nine months increased $22 from $32 in 2005 to $54 in 2006. The increases in 2006 were primarily due to increased sales unit volumes and product mix.
Segment income in the Europe Beverage segment decreased $11 from $43 in the third quarter of 2005 to $32 in the third quarter of 2006. Segment income in the first nine months decreased $14 from $110 in 2005 to $96 in 2006. These decreases were primarily due to increased aluminum costs, partially offset by the consolidation of certain Middle East operations, as discussed in Note D to the consolidated financial statements.
Segment income in the Europe Food segment decreased $15 from $70 in the third quarter of 2005 to $55 in the third quarter of 2006. Segment income in the first nine months decreased $22 from $168 in 2005 to $146 in 2006. These decreases were primarily due to higher costs for steel, utilities, and other costs of production.
Segment income in the Europe Specialty Packaging segment decreased $1 from $7 in the third quarter of 2005 to $6 in the third quarter of 2006. Segment income in the first nine months increased $1 from $19 in 2005 to $20 in 2006.
Provision for Restructuring
During the first nine months of 2006, the Company recorded a restructuring charge of $14 as discussed inNote K to the consolidated financial statements.
Gain on Sale of Assets
During the first nine months of 2005, the Company recognized a net gain of $22 relating to asset disposals and impairments. The gain of $22 included $17 for asset disposals and $7 for the reversal of a provision in Asia, offset by $2 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.
Loss from Early Extinguishments of Debt
During the first nine months 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 $21 and $73, respectively, for the three and nine months ended September 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 nine month period ended September 30, 2006 included net foreign exchange gains of $9 primarily due to 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 September 30, 2006.
Taxes on Income
The third quarter of 2006 included net tax charges of $16 on pre-tax income of $115 for an effective rate of 13.9%. The difference of $24 between the pre-tax income at the U.S. statutory rate of 35% or $40, and the tax charge of $16, was primarily due to benefits of $21 from valuation allowance adjustments, and $5 to reduce a provision for a European tax contingency due to a settlement with the tax authorities, partially offset by other net charges of $2, including $5 for withholding taxes.
The first nine months of 2006 included a tax charge of $42 on pre-tax income of $254 for an effective rate of 16.5%. The difference of $47 between the pre-tax income at the statutory rate of 35% or $89, and the tax charge of $42, was primarily due to benefits of (i) $26 from lower non-U.S. tax rates in certain jurisdictions, (ii) $22 from valuation allowance adjustments, (iii) $5 to reduce a provision for a European tax contingency due to a settlement with the tax authorities, and (iv) $4 to reduce a provision for U.S. state tax contingencies due to the completion of an audit with a minor assessment. These benefits, totaling $57, were partially offset by other net charges of $10, including $8 for withholding taxes.
The third quarter of 2005 included a tax charge of $17 on pre-tax income of $109 for an effective rate of 15.6%. The difference of $21 between the pre-tax income at the U.S. statutory rate of 35% or $38, and the total tax charge of $17 was primarily due to (i) benefits of $10 from lower non-U.S. tax rates in certain jurisdictions, (ii) a benefit of $4 from the partial release of a tax provision in Europe, (iii) a benefit of $6 from the carryback of a prior U.S. tax loss that had a valuation allowance, and (iv) a net benefit of $7 due to valuation allowance adjustments, offset by (v) charges of $6, including $2 for withholding taxes.
The first nine months of 2005 included a tax charge of $15 on pre-tax income of $117 for an effective rate of 12.8%. The difference of $26 between the pre-tax income at the U.S. statutory rate of 35%, or $41, and the total tax charge of $15 was primarily due to (i) benefits of $27 from lower non-U.S. tax rates in certain jurisdictions, (ii) a benefit of $4 for the partial release of a tax provision in Europe, and (iii) a benefit of $6 from the carryback of a prior U.S. tax loss that had a valuation allowance, partially offset by (iv) charges of $11, including $7 for withholding taxes.
Minority Interests, Net of Equity Earnings
The charge for minority interests, net of equity earnings, increased $2 and $20 in the third quarter and first nine 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 $14 was provided by operating activities in the first nine months of 2006 compared to $101 provided by operating activities during the same period in 2005. The primary cause of the decrease in cash provided by operating activities was a decrease of $129, from $204 in 2005 to $75 in 2006, in cash collected from receivables securitization programs. The first nine months of 2005 included the addition of a new €120 securitization facility in the U.K. and France. The decrease of $129 from securitization was partially offset by other net improvements of $42. The other net improvements of $42 included (i) a decrease of $139 in interest payments from $302 in 2005 to $163 in 2006 due to timing and lower interest rates from the 2005 refinancing and (ii) a decrease of $134 in pension contributions from $157 in 2005 to $23 in 2006, primarily due to the advanced funding of the U.S. plan in the fourth quarter of 2005, (iii) partially offset by uses of $231, including working capital changes.
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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 now expects that an additional contribution of £31 will be made to its U.K. plan in 2006 and that its total pension plan contributions for 2006 will be approximately $80.
Investing Activities
Investing activities used cash of $122 during the first nine months of 2006 compared to cash used of $145 in the prior year period. Investing activities in 2005 included a use of $51 for cash that was included in the net assets transferred as part of the sale of the plastic closures business.
Financing Activities
Financing activities provided cash of $89 during the first nine months of 2006 compared to cash used of $132 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 debt borrowing and repayment activity. Dividends paid to minority interests decreased from $35 in 2005 to $19 in 2006 due to decreased payments by the Company’s joint venture beverage can operations in South America and China.
During all of 2005, the Company repurchased 2.1 million shares of common stock at a total cost of $38. The Company purchased approximately 6.2 million additional shares for $117 during the first nine months of 2006. As of September 30, 2006, and including an additional authorization of $200 in June 2006, the Company has Board authority to purchase $244 of additional shares subject to compliance with the terms of the Company’s outstanding debt agreements.
As of September 30, 2006, the Company had $483 of borrowing capacity available under its revolving credit facility, equal to the total facility of $800 less $252 of borrowings and $65 of outstanding standby letters of credit.
In August 2006, the Company borrowed an additional $200 under its existing 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 or 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
In addition to the expected increase in pension contributions discussed above, purchase obligations covering new agreements for raw materials and other consumables, increased by $426 for 2007, $302 for 2008 and $294 for both 2009 and 2010, above amounts 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 Land M to the consolidated financial statements, which information is incorporated herein by reference.
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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 nine months of 2006 other than as discussed below.
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 and the Company expects to use the same model for valuing future awards.
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.” 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.
In September 2006, the FASB issued SFAS No. 157 (“FAS 157”), “Fair Value Measurements.” FAS 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. Expanded disclosures include a tabular presentation of the fair value of a company’s outstanding financial instruments according to a fair value hierarchy (i.e., levels 1, 2, 3 and 4, as defined) as well as enhanced disclosures regarding instruments in the level 3 category, including a reconciliation of the beginning and ending balances for each major category of assets and liabilities. FAS 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. FAS 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. The Company is currently evaluating the impact that FAS 157 may have on its financial statements.
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In September 2006, the FASB issued SFAS No. 158 (“FAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132 (R).” FAS 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. Specifically, it requires a company to (1) recognize on its balance sheet an asset for a plan’s overfunded status or a liability for a plan’s underfunded status, (2) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year, and (3) recognize changes in the funded status of a plan through comprehensive income in the year in which the changes occur. FAS 158 requires disclosure in a company’s notes to its financial statements of additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition assets or obligations. The requirement to recognize the funded status of a benefit plan and the disclosure requirements are effective for fiscal years ending after December 15, 2006. Full recognition of the funded status, using the discount rates, assumptions, and other information as disclosed in Note W to the Company’s consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2005, would increase the Company’s shareholders’ deficit by approximately $700. The adjustments to shareholders’ deficit on December 31, 2006 will depend on many factors, including but not limited to, the discount rates used to record the adjustment and amendments, if any, made to the Company’s pension and other postretirement plans prior to the adoption of the standard. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008.
In September 2006, the FASB issued FASB Staff Position No. AUG AIR-1 (“FSP AUG AIR-1”), “Accounting for Planned Major Maintenance Activities.” FSP AUG AIR-1 prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial statements, and permits the use of the direct expensing method and the deferral method. Under the deferral method, the actual cost of the major maintenance activity is capitalized and amortized to the next time that activity is performed. This FSP is effective for fiscal years beginning after December 15, 2006 and must be applied retrospectively for all financial statements presented. The Company is currently evaluating the impact that FSP AUG AIR-1 may have on its financial statements.
In September 2006, the U.S. Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” SAB 108 provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB 108 requires companies to quantify misstatements using a balance sheet and income statement approach and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. SAB 108 permits the reporting of the cumulative effect of the new policy as an adjustment to opening retained earnings. SAB 108 is effective for fiscal years ending after November 15, 2006, with early adoption encouraged. The Company is currently evaluating the impact that SAB 108 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 L, commitments and contingencies in Note M and pension and other postretirement benefits in Note O 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.”
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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, 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 September 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 J 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 September 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 contract with a notional value of £54 to buy pound sterling against euro, and a foreign currency forward contract with a notional value of $107 to buy U.S. dollars against pound sterling. See Note J to the consolidated financial statements for additional information.
As of September 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 September 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: November 1, 2006
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